BMO Financial Group
2019 Annual Report
to Shareholders
202nd Annual Report 2019
Business Review
IFC About Us
1 Our Strategic Footprint
2
Financial Snapshot
3 Performance Highlights
4
5
Chair’s Message
Chief Executive Officer’s
Message
8 Boldly Grow the Good
9 Our Bold Commitments
10 Our Purpose in Action
12 Board of Directors and
Executive Committee
Financial Review
13
Management’s Discussion
and Analysis
116 Supplemental Information
130 Statement of Management’s
Responsibility for Financial
Information
131 Independent Auditors’
Report
134 Reports of Independent
Registered Public
Accounting Firm
137 Consolidated Financial
Statements
142 Notes to Consolidated
Financial Statements
Resources and Directories
208 Glossary of Financial Terms
210 Where to Find More
Information
IBC Shareholder Information
0 BMO Financial Group 202nd Annual Report 2019
A BMO Financial Group 202nd Annual Report 2019
About Us
North America’s eighth largest bank by assets, BMO
serves more than 12 million customers through three
integrated operating groups providing personal and
commercial banking, wealth management and investment
services. Everywhere we do business, we’re focused on
building, investing and transforming how we work to
drive performance and continue growing the good.
Building on 202 years of experience (and counting),
BMO has a strong brand and distinctive capabilities
aligned with a clear, well-defined strategy. As we execute
on our strategic priorities, balancing our commitments
to the bank’s diverse stakeholders, our aim over time is
to achieve our medium-term financial objectives while
creating sustainable shareholder value.
We’re proud of our highly engaged workforce and
award-winning culture. BMO employees are dedicated
to transparency, sound governance and the highest
standards of ethical conduct – values that form the
foundation of trust we create with our customers, our
communities and each other. Globally minded and socially
conscious, we strive to lead by example as we constantly
set our sights higher, inspired by our purpose and
energized by the opportunity to be champions for
progress that’s both good and bold.
We recognize that climate change is one of the major challenges of our time. That’s why BMO
was one of the first banks to publicly announce support for the Financial Stability Board’s Task
Force on Climate-related Financial Disclosures (TCFD), which developed voluntary, consistent
climate-related financial risk disclosures for companies to use when providing information to
their stakeholders. It’s also why we’re mobilizing $400 billion for sustainable finance by 2025.
You can find out more in our first stand-alone Climate Report, inside BMO’s 2019 Sustainability
Report and Public Accountability Statement.
Mobilizing
$400 billion
for sustainable finance by 2025
BMO Financial Group
2019 Sustainability Report and
Public Accountability Statement
Our Strategic Footprint
BMO’s strategic footprint spans strong regional economies. Our three operating groups – Personal and Commercial Banking, BMO Capital
Markets and BMO Wealth Management – serve individuals, businesses, governments and corporate customers across Canada and the United
States with a focus on 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, the Middle East and South America, allowing us to provide all our
customers with access to economies and markets around the world.
International offices
BMO Capital Markets
BMO Wealth Management
Other Americas
Rio de Janeiro
Europe and
Middle East
Abu Dhabi
Dublin
London
Paris
Zurich
Asia-Pacific
Beijing
Guangzhou
Hong Kong
Melbourne
Mumbai
Shanghai
Singapore
Taipei City
Asia-Pacific
Beijing
Guangzhou
Hong Kong
Shanghai
Singapore
Sydney
Europe and
Middle East
Abu Dhabi
Amsterdam
Edinburgh
Frankfurt
Geneva
Lisbon
London
Madrid
Milan
Munich
Paris
Stockholm
Zurich
Personal and Commercial Banking and
Wealth Management footprint
Additional Commercial Banking,
Wealth Management and/or Capital
Markets footprint
Additional Commercial Banking offices
Additional Wealth Management offices
BMO Capital Markets offices
BMO Financial Group 202nd Annual Report 2019 1
BCABSKMNWAORCAUTCOTXGAMDDEOHNYNJWIILINKSMOAZMBONQCNBPENSFLNLNTNUYKMexico CityMA
Financial Snapshot
As at or for the year ended October 31
(Canadian $ in millions, except as noted)
Revenue, net of CCPB2
Provision for credit losses
Non-interest expense
Net income
Earnings per share – diluted ($)
Return on equity (%)
Operating leverage, net of CCPB (%)
Common Equity Tier 1 Ratio (%)
Net Income by Segment3
Canadian P&C
U.S. P&C
Wealth Management
BMO Capital Markets
Corporate Services4
Reported
Adjusted 1
2019
2018
2019
2018
22,774
872
14,630
5,758
8.66
12.6%
(2.9%)
11.4%
2,626
1,611
1,060
1,086
(625)
21,553
662
13,477
5,453
8.17
13.3%
2.6%
11.3%
2,549
1,394
1,072
1,156
(718)
22,799
872
14,005
6,249
9.43
13.7%
0.8%
na
21,553
662
13,344
5,982
8.99
14.6%
1.3%
na
2,628
1,654
1,122
1,113
(268)
2,551
1,439
1,113
1,169
(290)
Net income
5,758
5,453
6,249
5,982
U.S. P&C (US$ in millions)
1,212
1,082
1,244
1,117
1 Results and measures are presented on a GAAP basis. Adjusted results and measures in this table are non-GAAP
amounts or non-GAAP measures and are discussed in the Non-GAAP Measures section on page 17. 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.
2 Net of insurance claims, commissions and changes in policy benefit liabilities (CCPB).
3 Refer to page 33 for an analysis of the financial results of our operating groups.
4 Corporate Services, including Technology and Operations.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
na – not applicable
Bank of Montreal brands the organization’s member companies as BMO Financial Group. Note 26 on page 203 of the
financial statements lists the intercorporate relationships among Bank of Montreal and its significant subsidiaries.
A 191-Year Dividend Record
BMO Financial Group has the longest-running dividend payout record
of any company in Canada, at 191 years. BMO common shares had an
annual dividend yield of 4.2% at October 31, 2019.
Compound annual growth rate
6.4%
BMO 15-year
5.7%
BMO 5-year
3.78
4.06
Dividends declared
($ per share)
2.71
2.80
2.80
2.80
2.80
2.82
2.94
3.08
3.24
3.40
3.56
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2 BMO Financial Group 202nd Annual Report 2019
Performance Highlights
Net Revenue (C$ billions)
Net Income (C$ billions)
Common Equity Tier 1 Ratio (%)
Reported / Adjusted
Reported & Adjusted
Reported
22.8
21.6
20.6
6.2
5.8
6.0
5.5
Adjusted
5.5
5.3
Reported
11.4
11.4
11.3
2017
2018
2019
2017
2018
2019
2017
2018
2019
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
Earnings per share growth (%)
Total shareholder return (%)
Medium-term
objectives
2019 financial
performance
BMO Reported
BMO Adjusted
10.3
6.0
4.9
3.3
BMO
S&P/TSX Composite Index
8.6
6.8
7.8
5.6
2018
2019
3-year
5-year
Adjusted EPS growth
of 7% to 10%
4.9%
Adjusted ROE
of 15% or more
13.7%
Adjusted net operating
leverage of 2% or more
0.8%
Capital ratios that
exceed regulatory
requirements
11.4%
CET1 Ratio
12 million
customers globally
8th
largest
$852 billion
bank in North America by assets
in total assets
BMO Financial Group 202nd Annual Report 2019 3
Chair’s Message
The Path Forward
Dear fellow shareholders,
This is my eighth and final letter to you as Chair of the Board of
Directors. My terms as Chair and as a director both end at the
annual general meeting. It has been one of the great privileges
of my life to serve you in these roles.
As I leave, your bank and its board are in excellent shape. As the
CEO’s message makes clear, we have completed another year of
strong performance in a challenging economic environment.
Management has simultaneously focused on delivering good
operating results and making the investments necessary for a
strong future.
We have a superb senior management team led by Darryl White,
our outstanding Chief Executive Officer. The team is united in its
determination to deliver sustained market-leading performance,
and they have a strong plan to do just that.
We have invested heavily in technology and digital solutions to
meet our customers’ needs, constantly innovating to be best in
class wherever we compete. Banking is changing, and we are
leaders in driving that change.
We have built a North American platform that now sees over a
third of our net income derived from the U.S., and through digital
channels we now operate in all 50 states, as well as from coast to
coast in Canada.
We have grown the bank, which now stands as the eighth largest
in North America. And we plan to continue that growth as
increased scale is increasing our competitive advantage.
We have a remarkable culture of engagement and commitment at
BMO among our employees. They make everything we do possible.
They are driven by purpose and are determined to Boldly Grow the
Good in business and life. It is such a privilege to count all of them
as our colleagues.
4 BMO Financial Group 202nd Annual Report 2019
J. Robert S. Prichard (right), who retires in March 2020 as Chair of
the Board, with his designated successor, George A. Cope, a board
member since 2006.
And despite all of this accomplishment, the best is yet to come.
We see growth and opportunity ahead. And we are accelerating our
performance to seize those opportunities and deliver that growth.
As we enter our 203rd year of continuous operations, we have never
been stronger, and our ambitions have never been bolder.
Your board of directors is also well positioned to oversee all of this.
This year marks the retirement of two of our longest-serving
directors, Phil Orsino and Don Wilson, as they have reached their
term limits. They have each given remarkable service to the bank.
Phil joined the board in 1999 and has been a towering strength ever
since. In addition to providing wise business advice, Phil chaired the
Audit and Conduct Review Committee for a dozen years, and was full
partner with management in establishing BMO’s enviable reputation
for financial reporting. We recruited Don Wilson to the board in 2008
to lead our Risk Review Committee, drawing on his record as one of
the banking world’s leading chief risk officers with broad global
banking experience. Don has brought remarkable leadership to the
board’s oversight of risk and raised our standards and vigilance.
On behalf of the board and indeed all shareholders, I extend our
deep gratitude to Phil and Don for their service.
After the annual meeting, with your support, we will have a board
of eleven independent directors. It is a strong board, with five
women and six men with a broad diversity of experience and
expertise. We anticipated this year’s retirements and recruited terrific
replacements over the past three years to ensure the board remains
strong. Three of the board’s four standing committees will be led by
women. This prominent leadership by women on the board reflects
the bank’s commitments as a whole, as we set and met a goal of
women representing at least forty percent of the bank’s executive
leadership – a distinctive competitive advantage for the bank.
George Cope will be the next Chair of the Board. We could not have
made a better choice. George is one of Canada’s most accomplished
and respected business leaders, with a record of delivering superior
performance everywhere he has served. He knows the bank well,
having served as a director for 13 years, and he enjoys the unanimous
support of the board. He will be a terrific leader for the board and a
strong partner and counsellor for our CEO. I have every confidence
that the board George leads will serve all shareholders in an
exemplary way.
BMO Financial Group has served Canada for over two centuries. It is
a great institution with a distinguished past, and an even stronger
future. As I leave the bank, I have never felt better about the board
and management – and our prospects for the future. I thank all of
you for the support of our work and for the special pride of
membership in the BMO family you have allowed me for the
past twenty years. I will always be grateful.
J. Robert S. Prichard
Chief Executive Officer’s Message
By intensifying our focus
on areas of competitive
strength, we continue
to grow long-term value
for all BMO stakeholders.
It’s how we drive the
bank forward.
Adjusted results in this section are non-GAAP and are discussed
in the Non-GAAP Measures section on page 17.
Driven by Purpose
Darryl White
Chief Executive Officer
In 2019, BMO showed clear progress against our strategy. We
delivered good revenue and income growth, reflecting the
strength and quality of our diversified businesses. We finished
the year with very strong performance and are well positioned
to accelerate through the coming year.
Adjusted net income was $6.2 billion, an increase of 4% over
the previous year; return on equity was 13.7%. Adjusted earnings
per share grew by 5% to $9.43. And we increased the declared
dividend by 7%, extending BMO’s unbroken dividend record
since 1829.
The bank’s capital position remains strong. With a Common Equity
Tier 1 Ratio of 11.4%, we’re well positioned to support long-term
performance in a changing economic environment, while staying
alert to opportunities for growth.
In the past year, we intensified our customer focus, generating
above-market growth in personal and commercial loans and
deposits across our footprint. In our U.S. segment, we achieved
double-digit growth, generating $2.1 billion in net income after
taxes. BMO is a top 15 U.S. bank by assets, as well as a top 10
commercial lender. In 2019, nearly 50% of our deposit growth
came from outside the Illinois and Wisconsin markets where BMO
has a dominant presence; this is 10 percentage points higher than
the previous year.
Our U.S. operations now represent 34% of the bank’s total net
income; we’ve achieved this ahead of our expectations by making
good strategic choices in a favourable environment. After a decade
of balance sheet growth and consistent customer loyalty gains in
each of our businesses, we’ve cemented our standing as a truly
North American bank – 8th largest on the continent by assets.
Across the organization, we’re investing in high-potential growth
areas that enable market-leading customer experiences, deeper
customer insights and world-class data security. At the same time,
we’re taking considered steps to ensure operational excellence in
all aspects of our business. The excellent results in our Canadian
BMO Financial Group 202nd Annual Report 2019 5
Chief Executive Officer’s Message
flagship business reflect this. Every change we make is intended
to keep us nimble and better able to execute against our stated
priorities.
By intensifying our focus on areas of competitive strength, we
continue to grow long-term value for all BMO stakeholders.
It’s how we drive the bank forward.
Our purpose inspires us to act decisively
in the face of change. It attaches intention
to our strategic priorities, grounds our
actions in a set of shared values and
gives direction to our growth.
Our Strategic Priorities
1. Drive leading growth in
priority areas by earning
customer loyalty
2. Simplify, speed up, and
improve productivity
3. Harness the power of
digital and data to grow
4. Be leaders in taking and
managing risk, consistent
with our overall risk
appetite
5. Activate a high-
performance culture
6 BMO Financial Group 202nd Annual Report 2019
Growing the good
Our progress in putting this strategy into action reflects the
conviction behind it. Over the past 12 months, we came together
as an organization to talk about the core beliefs that have driven
our bank’s success from the beginning. Many voices helped unlock
a simple, powerful statement of purpose: to Boldly Grow the Good
in business and life.
While the words are new, the spirit they convey is not. In fact,
everything BMO does is grounded in our purpose. It attaches
intention to our priorities and gives direction to our growth. It
informs all of our efforts to accelerate positive change – for our
customers, our employees and the communities where we do
business. And it amplifies the unique strengths we bring to
creating shared value with our stakeholders.
To underline this point, we’ve announced bold commitments to
grow the good in three areas: a sustainable future, a thriving
economy and an inclusive society. The initiatives we’ve
undertaken range from mobilizing capital for sustainable
investment, to doubling support for small business – particularly
women-owned enterprises – to promoting even greater diversity
in our own organization. And there’s much more to come.
Focusing on efficiency gains
Our purpose also requires us to be disciplined as we drive BMO
forward, building competitive strength by enabling operational
excellence to deliver greater value to our customers.
We’re making clear choices about where to focus the bank’s
resources in order to accelerate the execution of our strategy,
deliver earnings resilience in various environments and continue
growing our customer base. And as we maintain steady progress
in improving the efficiency of our processes and systems, we
uphold the strong risk controls that have always been
foundational for BMO’s continued growth.
Our bank is in motion, adjusting proactively to changing market
realities – and that means working harder than ever to realize the
full benefits of our technology architecture. The result includes
success stories like BMO Business Xpress, our lending platform for
small business, which takes an approval process that once
required up to 30 days and shrinks it to 30 minutes. Or the
mortgage program we’ve launched in partnership with digital
lender Blend, which helped double the number of home equity
applications while saving 100,000 hours of processing time annually.
Or the fact that we now have customers opening online accounts
in all 50 U.S. states, leveraging both our digital capabilities and our
ability to attract new customers through our North American scale
and the strength of the BMO brand.
into a central function, the Financial Crimes Unit, with a mandate
to protect against threats and strengthen the trust that customers
place in us. The unit’s state-of-the-art security management hub,
the BMO Fusion Centre, brings together experts from security, the
businesses and business functions, making it unique in our industry.
Creating shared value
The achievements outlined here, and throughout this annual
report, contribute to our momentum. But for a purpose-driven bank,
the real question is how these efforts come together and add up to
something more. And that’s where BMO’s employees set us apart.
Together, we’ve built an inclusive, collaborative culture anchored
by shared values and a level of engagement that ranks us among
leading global companies. We celebrate diversity and its power to
inspire innovative thinking and bolder decision-making. And we
hold ourselves to the highest ethical standards, because doing
what’s right – always, even when it’s not the easy choice – creates
loyal customers, stronger communities and a more equitable
society. Success can – and must – be mutual.
Those values are exemplified by Rob Prichard, who will retire on
March 31, 2020, after serving since 2012 as Chair of the Board. An
independent director for the past 20 years, Rob helped guide BMO
through a period of extraordinary change and growth, from the
2008 financial crisis, through the revolution in digital technology,
to multiple acquisitions and the economic shifts that have helped
accelerate our growth into a leading North American bank. On
behalf of the senior management team and everyone at BMO, I
want to thank Rob for his consistently astute judgment, wise
counsel and principled governance. And I’m pleased to welcome
his designated successor as Chair, George Cope, who has served on
our board since 2006. One of Canada’s most respected business
leaders – notably as President and CEO of BCE Inc. and Bell Canada
– George brings a clear understanding of how BMO can take
advantage of the opportunities ahead to continue growing.
We’ve set our priorities. We have energy, resilience and focus. We
see growth potential across all of our businesses. We know where
we’re heading and are accelerating how we’ll get there. And
importantly, we know why we come to work every day. Our
customers and all of our stakeholders count on us to act decisively
in the face of change, and to do something bigger. As we continue
doing our part to move things forward, BMO’s deep sense of purpose
fuels our collective ambition – and drives our shared success.
Darryl White
BMO Financial Group 202nd Annual Report 2019 7
Juanita Hardin, Treasury & Payments Solutions (TPS). Our TPS group
offers award-winning solutions that integrate into our customers’
day-to-day lives and work. TPS operates the bank’s primary payment
systems, making their work critical to our clients – and to BMO.
These are just three examples of meaningful new outcomes
across BMO that enhance productivity while building customer
loyalty – and therefore revenue. We’ve committed to lowering the
bank’s adjusted net expense-to-revenue ratio, a key metric of
efficiency. Progress has been steady, with an above-average
cumulative improvement since 2015. In the final quarter of fiscal
2019, we reached 60% – and we’re accelerating.
Efficiency is just one marker in a strategy that requires us to be
disciplined in all aspects of building competitive strength. Another
is our ability to cross-leverage our North American platform. BMO
is recognized as a leading North American bank for business – #2
in Canada, top 10 in the U.S. – and this is a true differentiator. We
have broad reach and incomparable experience in serving North
American companies, with the scale to be a dominant player on
both sides of the border.
Digitizing BMO
Integral to BMO’s efficiency goals and broader growth ambitions is
our investment in technology. The powerful platform we’ve built
gives us the resilience and scalability to sustain critical services
and keep pace with customers’ changing needs. And as new
opportunities arise, we’re ready to respond quickly, leveraging
artificial intelligence, robotics and the cloud.
It’s rewarding to see BMO’s digital and mobile offerings earn top
marks from customers, along with recognition from standard-
setters like Gartner and Forrester. And as customers entrust us
with the data we need to make banking simpler and more
personal, we’re intensifying vigilance in cyber security and fraud
protection. In 2019, we integrated the bank’s defensive capabilities
Great things can be achieved
with money and finance.
Growing the good requires
something more.
The shared value created by our bank extends far
beyond the bottom line. Working together with our
customers, our employees and our communities, we
look for opportunities to accelerate positive change,
united in the belief that success can be mutual.
We’ve never been clearer about why we do what we
do. As we move forward, acting with confidence in
the face of change, we sum up our convictions in a
simple statement of purpose:
Doug Bourque, VP, Indigenous Banking, BC and Yukon and
Ouray Crowfoot, Chief Financial Officer, Siksika Nation at
Blackfoot Crossing Historical Park in Alberta, Canada.
8 BMO Financial Group 202nd Annual Report 2019
8 BMO Financial Group 202nd Annual Report 2019
Our Bold Commitments
DOUBLE THE GOOD
We work every day to amplify the impact of BMO’s purpose,
leveraging the strength of our people, our platforms and our
partnerships. During the past year, we announced bold
commitments in three key areas:
A SUSTAINABLE
FUTURE
A THRIVING
ECONOMY
AN INCLUSIVE
SOCIETY
$400 billion Double
We’re mobilizing $400 billion in
capital and client investments,
providing innovative financial
products and advisory services,
and seeding an impact fund with
an initial $250 million – all to help
businesses pursue sustainable
outcomes.
We’re doubling small business
lending, adding more U.S.
customers and growing our
Canadian loan book to $10 billion
– while also doubling our support
for women-owned enterprises
with a team of dedicated business
development managers.
Zero barriers
We’re increasing representation
of diversity across the bank while
also investing in skills development
to equip BMO employees for the
workplace of the future. And we’re
partnering with public sector and
non-profit organizations to drive
inclusive economic development.
For example, we’ve committed
$10 million each to United Way
in Metro Chicago and Toronto, to
help reduce economic disparity and
create sustainable opportunities in
neighbourhoods across those cities.
BMO Financial Group 202nd Annual Report 2019 9
BMO Financial Group 202nd Annual Report 2019 9
Our Purpose in Action
BMO’s purpose informs everything we do. In addition to
business performance metrics, we tracked many other
measures of our progress throughout the 2019 fiscal year.
Here are just a few examples:
Business conduct
Productivity
2019 World’s Most Ethical Companies®
For the second year in a row, BMO was recognized by the
Ethisphere Institute, a global leader in defining and advancing
standards of ethical business practice. We were one of three
companies in Canada – and the only Canadian bank, among five
worldwide – named to the list in 2019.
From 30 days to 30 minutes:
loan assessment reimagined
BMO Business Xpress, our new lending platform for small
business, dramatically streamlines the approval process. The
result: happier customers, which translates into higher revenue
and increased market share.
America’s Best Employers for
Women 2019
Forbes magazine recognized BMO as an industry leader in
fostering diversity and inclusion. This ranking is based on an
independent nationwide survey of 60,000 employees working
for companies that employ at least 1,000 people in their
U.S. operations.
2019 Bloomberg Gender-Equality index
For the fourth consecutive year, BMO earned a place on this
leading global index that tracks how public companies are
advancing women’s equality in the workplace.
Doubled home equity applications
with digital processing
BMO’s new U.S. mortgage program, launched in partnership with
the digital lender Blend, doubled the number of home equity
applications and saved 100,000 hours of processing time on an
annual basis.
Onboarding time cut in half for
BMO InvestorLine clients
Enhancements to our award-winning digital trading platform,
BMO InvestorLine, have shortened the onboarding process by 50%
– and doubled the number of clients enrolling online.
10 BMO Financial Group 202nd Annual Report 2019
Data and digital
Customer experience
Top Digital Innovation Award
Best Commercial Bank in Canada 2019
BMO QuickPay, a simple new way for customers to pay their bills,
won the Top Digital Innovation category at the 2018 Banking
Technology Awards. QuickPay uses machine learning capabilities
and optical character recognition to enable fast, easy payments
via email.
For the fifth consecutive year, World Finance recognized our
commercial banking group at the magazine’s annual Banking
Awards, citing BMO’s strong regional and industry focus, as well as
our commitment to building customer relationships and providing
innovative solutions.
Two Celent Model Bank Awards
Top 10 U.S. commercial lender 1
In the 2019 Celent competition, the Payments Services Hub
Implementation award went to BMO Payment Hub, which builds
on our best-in-class cross-border banking capabilities to support
emerging payment solutions. We also won the Innovation
Enablement award for BMO InnoV8, a digital acceleration initiative
that develops and tests ideas aimed at transforming customers’
financial journeys.
Leader in cyber threat detection
In 2019, we launched the BMO Financial Crimes Unit (FCU),
a central function bringing together cyber security, fraud
management and physical security, as well as experts from our
lines of business, onto a unified team. This highly collaborative
group can detect, prevent and respond to security threats faster
and more effectively than ever before. The FCU is housed in our
new Fusion Centre, a cutting-edge security hub that’s unique
in our industry, bringing together experts from security, the
businesses and business functions.
In 2019, we reinforced BMO’s ranking among the U.S. leaders in
commercial lending – a position that reflects our deep expertise in
key industries and sectors. About two-thirds of our U.S. new loan
originations are in segments that we serve nationally.
Best Private Bank in Canada 2019
BMO Private Banking won the top spot for the ninth year in a
row in the annual ranking by World Finance magazine.
Unique customer feedback platform
During the past year, we implemented a robust customer feedback
and callback program across the enterprise that generates real-
time insights, helping to drive service excellence and strengthen
long-term loyalty.
1 Based upon publicly available U.S. regulatory filings (FR Y-9Cs and FFIEC 002s) and
internal analysis.
BMO Financial Group 202nd Annual Report 2019 11
Board of Directors1
Janice M. Babiak, CPA (US),
CA (UK), CISM, CISA
Corporate Director
Board/Committees:
Audit and Conduct Review (Chair),
Governance and Nominating
Director since: 2012
Sophie Brochu, C.M.
President and Chief Executive Officer,
Énergir
Board/Committees:
Audit and Conduct Review
Director since: 2011
Christine A. Edwards
Capital Partner, Winston & Strawn LLP
Board/Committees:
Governance and Nominating (Chair),
Human Resources,
Risk Review
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
Craig W. Broderick
Corporate Director
Board/Committees:
Risk Review
Director since: 2018
George A. Cope, C.M.
President and Chief Executive Officer,
Bell Canada and BCE Inc.
Board/Committees:
Governance and Nominating,
Human Resources
Director since: 2006
Ronald H. Farmer
Managing Director,
Mosaic Capital Partners
Board/Committees:
Governance and Nominating,
Human Resources (Chair),
Risk Review
Director since: 2003
David Harquail
Chief Executive Officer,
Franco-Nevada Corporation
Board/Committees:
Audit and Conduct Review
Director since: 2018
Linda S. Huber
Chief Financial Officer, MSCI Inc.
Board/Committees:
Audit and Conduct Review,
Risk Review
Director since: 2017
Eric R. La Flèche
President and Chief Executive Officer,
Metro Inc.
Board/Committees:
Human Resources
Director since: 2012
Lorraine Mitchelmore
Corporate Director
Board/Committees:
Human Resources,
Risk Review
Director since: 2015
Philip S. Orsino, O.C., F.C.P.A., F.C.A.
Corporate Director
Board/Committees:
Audit and Conduct Review,
Risk Review
Director since: 1999
J. Robert S. Prichard, O.C.,
O.Ont., FRSC, F.ICD
Non-Executive Chair of Torys LLP
Board/Committees:
Board Chair,
Governance and Nominating,
Human Resources,
Risk Review
Director since: 2000
Darryl White
Chief Executive Officer,
BMO Financial Group
Board/Committees:
Attends all committee meetings
as an invitee
Director since: 2017
Don M. Wilson III
Corporate Director
Board/Committees:
Governance and Nominating,
Human Resources,
Risk Review (Chair)
Director since: 2008
1 As at November 1, 2019.
Executive Committee2
Darryl White
Chief Executive Officer,
BMO Financial Group
Daniel Barclay
Group Head,
BMO Capital Markets
David Casper
Chief Executive Officer,
BMO Financial Corp. and
Group Head, North American
Commercial Banking
Patrick Cronin
Chief Risk Officer,
BMO Financial Group
Simon Fish
General Counsel,
BMO Financial Group
Thomas Flynn
Chief Financial Officer,
BMO Financial Group
Cameron Fowler
President,
North American Personal
and Business Banking
Catherine Roche
Head,
Marketing and Strategy,
BMO Financial Group
Luke Seabrook3
Group Head,
Enterprise Initiatives,
Infrastructure and Innovation
Ernie (Erminia) Johannson
Group Head,
North American Personal
and U.S. Business Banking
Mona Malone
Head, People & Culture and
Chief Human Resources Officer,
BMO Financial Group
Joanna Rotenberg
Group Head,
BMO Wealth Management
Richard Rudderham
Head, Business Technology
Integration and Interim
Head, Enterprise Initiatives,
Infrastructure & Innovation
Steve Tennyson
Chief Technology and
Operations Officer,
BMO Financial Group
2 As at November 1, 2019.
3 On personal leave
as of June 1, 2019.
12 BMO Financial Group 202nd Annual Report 2019
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 130,
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, 2019 and 2018. The MD&A should be read in
conjunction with our consolidated financial statements for the year ended October 31, 2019. The MD&A commentary is as at December 3, 2019.
Unless otherwise indicated, all amounts are stated in Canadian dollars and have been derived from consolidated financial statements prepared in
accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. We also comply with
interpretations of IFRS by our regulator, the Office of the Superintendent of Financial Institutions Canada. References to generally accepted accounting
principles (GAAP) mean IFRS.
Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and we elected to retrospectively
present prior periods as if IFRS 15 had always been applied. Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial
Instruments (IFRS 9). Prior periods have not been restated. 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 (CGAAP), as defined at that time.
As such, certain growth rates and compound annual growth rates (CAGR) may not be meaningful. Prior periods have been reclassified for
methodology changes and transfers of certain businesses between operating groups. Refer to page 33.
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Index
14
Caution Regarding Forward-Looking Statements advises readers
about the limitations and inherent risks and uncertainties of forward-
looking statements.
15 Who We Are provides an overview of BMO Financial Group, our financial
objectives and key performance data.
16
Financial Highlights
17 Non-GAAP Measures
18
20
Economic Developments and Outlook includes commentary on
the Canadian, U.S. and international economies in 2019 and our
expectations for 2020.
Enterprise-Wide Strategy outlines our enterprise-wide strategy and
the context in which it is developed.
21 Value Measures reviews financial performance on the four key
measures that assess or most directly influence shareholder return.
21
21
22
22
Total Shareholder Return
Earnings per Share Growth
Return on Equity
Common Equity Tier 1 Ratio
23 2019 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.
32 2019 Operating Groups Performance Review outlines the strategies
and key priorities of our operating groups and the challenges they face.
It also includes a summary of their achievements in 2019, their focus for
2020, and a review of their financial performance for the year and the
business environment in which they operate.
32
33
34
38
42
46
50
52
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
Summary Quarterly Earnings Trends, Review of Fourth Quarter
2019 Performance and 2018 Financial Performance Review provide
commentary on results for relevant periods other than fiscal 2019.
57
57
59
66
68
68
72
73
78
86
91
91
100
103
105
105
105
106
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.
Summary Balance Sheet
Enterprise-Wide Capital Management
Select Financial Instruments and Off-Balance Sheet Arrangements
Enterprise-Wide Risk Management outlines our approach to
managing key financial risks and other related risks we face.
Risks That May Affect Future Results
Risk Management Overview
Framework and Risks
Credit and Counterparty Risk
Market Risk
Insurance Risk
Liquidity and Funding Risk
Operational Risk
Legal and Regulatory Risk
Business Risk
Strategic Risk
Environmental and Social Risk
Reputation Risk
107 Accounting Matters and Disclosure and Internal Control reviews
critical accounting estimates and changes in accounting policies in
2019 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 2019
Future Changes in Accounting Policies
Transactions with Related Parties
Shareholders’ Auditors’ Services and Fees
Management’s Annual Report on Disclosure Controls and Procedures
and Internal Control over Financial Reporting
Enhanced Disclosure Task Force
Supplemental Information presents other useful financial tables and
more historical detail.
107
111
111
111
112
113
114
116
Regulatory Filings
Our continuous disclosure materials, including our interim consolidated financial statements and interim MD&A, audited annual 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.
BMO Financial Group 202nd Annual Report 2019 13
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 68 describes a number of risks, including
credit and counterparty, market, insurance, liquidity and funding, operational, legal and regulatory, business, strategic, environmental and social,
and reputation risk. Should our risk management framework prove ineffective, there could be a material adverse impact on our financial position
and results.
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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 in this document may include, but are not limited to, statements with respect to our
objectives and priorities for fiscal 2020 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, the regulatory
environment in which we operate and the results of or outlook for our operations or for the Canadian, U.S. and international economies, and include statements of our
management. Forward-looking statements are typically identified by words such as “will”, “would”, “should”, “believe”, “expect”, “anticipate”, “project”, “intend”,
“estimate”, “plan”, “goal”, “target”, “may” and “could”.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature.
There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct, and that actual results
may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking
statements, as a number of factors – many of which are beyond our control and the effects of which can be difficult to predict – could cause actual future results,
conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market
conditions in the countries in which we operate; the Canadian housing market; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value
fluctuations; changes in monetary, fiscal, or economic policy and tax legislation and interpretation; 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, and the effect of
such changes on funding costs; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and
counterparties; failure of third parties to comply with their obligations to us; our ability to execute our strategic plans and to complete and integrate acquisitions, including
obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational
and infrastructure risks, including with respect to reliance on third parties; changes to our credit ratings; political conditions, including changes relating to or affecting
economic or trade matters; 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; information, privacy and cyber security, including the threat of data breaches, hacking, identity theft and corporate espionage, as well as the
possibility of denial of service resulting from efforts targeted at causing system failure and service disruption; and our ability to anticipate and effectively manage risks
arising from all of the foregoing factors.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please
refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding,
operational, legal and regulatory, business, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section that begins on
page 68, all of which outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well
as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. We do not undertake to update any forward-looking statements,
whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained
in this document is presented for the purpose of assisting 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.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook
section on page 18. 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 governments, historical relationships
between economic and financial variables, and the risks to the domestic and global economy.
14 BMO Financial Group 202nd Annual Report 2019
Who We Are
Established in 1817, BMO Financial Group (BMO) is a highly diversified financial services provider based in North America. We are the eighth largest
bank in North America by assets, with total assets of $852 billion, and an engaged and diverse base of employees. BMO provides a broad range of
personal and commercial banking, wealth management, global markets and investment banking products and services, conducting business through
three operating groups: Personal and Commercial Banking, BMO Wealth Management and BMO Capital Markets. We serve eight million customers
across Canada through our Canadian personal and commercial banking arm, BMO Bank of Montreal. In the United States, we serve customers through
BMO Harris Bank, based in the U.S. Midwest, with more than two million personal, business and commercial banking customers. We also serve
customers through our wealth management businesses – BMO Private Wealth, BMO InvestorLine, BMO Wealth Management U.S., BMO Global Asset
Management and BMO Insurance. BMO Capital Markets, our Investment and Corporate Banking and Global Markets division, provides a full suite of
financial products and services to North American and international clients.
Our Financial Objectives
BMO’s medium-term financial objectives for certain important performance measures are set out below. These measures establish a range of
performance objectives over time. We aim to deliver top-tier total shareholder return and achieve our financial objectives by aligning our operations
with, and executing on, our strategic priorities. We consider top-tier returns to be top-quartile shareholder returns, relative to our Canadian and North
American peer groups.
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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.
Our medium-term 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 net operating leverage of 2% or more
and maintain capital ratios that exceed regulatory requirements. These objectives are guideposts as we execute against our strategic priorities.
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 one-year adjusted EPS growth rate in 2019 was 4.9%, and has averaged 7.9% over the past three years, in line with our target range of 7%
to 10%. Adjusted net operating leverage in 2019 was 0.8%, in part reflecting a severance expense in BMO Capital Markets. Adjusted net operating
leverage was positive in each of the past three years. Our one-year adjusted ROE was 13.7%, down from 14.6% in 2018, and has averaged 14% over
the past three years. In an environment of continued low interest rates and with expectations for increased capital requirements, a ROE of 15% will
be challenging to meet in the near term, although we believe it to be an appropriate objective as we continue to enhance the efficiency and
profitability of our business. We are well-capitalized with a Common Equity Tier 1 Ratio of 11.4%.
Key Performance Data
As at and for the periods ended October 31, 2019
Average annual total shareholder return
Average growth in annual EPS
Average growth in annual adjusted EPS
Average annual ROE
Average annual adjusted 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
* 5-year and 10-year growth rates reflect growth based on CGAAP in 2009 and IFRS in 2014 and 2019, respectively.
** 1-year measure as at October 31, 2019; 5-year and 10-year measures are the average of year-end values.
na – not applicable
1-year
5-year*
10-year*
3.2
6.0
4.9
12.6
13.7
7.4
4.2
11.3
1.36
11.4
7.8
6.3
7.4
12.7
13.7
5.7
4.0
11.9
1.45
na
11.6
11.9
9.0
13.8
14.4
3.8
4.2
11.9
1.53
na
The Our Financial Objectives section above and the Economic Developments and Outlook and Enterprise-Wide Strategy 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. Refer to the Caution
Regarding Forward-Looking Statements on page 14 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.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 15
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Highlights
(Canadian $ in millions, except as noted)
Summary Income Statement
Net interest income (1)
Non-interest revenue (1)(2)
Revenue (2)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for (recovery of) credit losses on impaired loans (3)
Provision for (recovery of) credit losses on performing loans (3)
Total provision for credit losses (3)
Non-interest expense (2)
Provision for income taxes (4)
Net income
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Attributable to bank shareholders
Attributable to non-controlling interest in subsidiaries
Adjusted net income
Common Share Data ($, except as noted)
Earnings per share
Adjusted earnings per share
Earnings per share growth (%)
Adjusted earnings per share growth (%)
Dividends declared per share
Book value per share
Closing share price
Number of common shares outstanding (in millions)
End of period
Average diluted
Total market value of common shares ($ billions)
Dividend yield (%)
Dividend payout ratio (%)
Adjusted dividend payout ratio (%)
Financial Measures and Ratios (%)
Return on equity
Adjusted return on equity
Return on tangible common equity
Adjusted return on tangible common equity
Net income growth
Adjusted net income growth
Revenue growth
Revenue growth, net of CCPB
Non-interest expense growth
Adjusted non-interest expense growth
Efficiency ratio, net of CCPB
Adjusted efficiency ratio, net of CCPB
Operating leverage, net of CCPB
Adjusted operating leverage, net of CCPB
Net interest margin on average earning assets
Effective tax rate (4)
Adjusted effective tax rate
Total PCL-to-average net loans and acceptances (annualized)
PCL on impaired loans-to-average net loans and acceptances (annualized)
Balance Sheet (as at $ millions, except as noted)
Assets
Gross loans and acceptances
Net loans and acceptances
Deposits
Common shareholders’ equity
Cash and securities-to-total assets ratio (%)
Capital Ratios (%)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
Foreign Exchange Rates ($)
As at Canadian/U.S. dollar
Average Canadian/U.S. dollar
2019
2018
2017
12,888
12,595
25,483
2,709
22,774
751
121
872
14,630
1,514
5,758
5,758
–
6,249
8.66
9.43
6.0
4.9
4.06
71.54
97.50
639.2
640.4
62.3
4.2
46.8
43.0
12.6
13.7
15.1
16.1
5.6
4.5
11.3
5.7
8.6
5.0
64.2
61.4
(2.9)
0.8
1.70
20.8
21.1
0.20
0.17
11,438
11,467
22,905
1,352
21,553
700
(38)
662
13,477
1,961
5,453
5,453
–
5,982
8.17
8.99
3.3
10.3
3.78
64.73
98.43
639.3
644.9
62.9
3.8
46.1
41.9
13.3
14.6
16.2
17.5
2.1
8.8
3.6
4.8
2.2
3.5
62.5
61.9
2.6
1.3
1.67
26.5
20.7
0.17
0.18
852,195
451,537
449,687
568,143
45,728
28.9
11.4
13.0
15.2
4.3
773,293
404,215
402,576
520,928
41,381
29.9
11.3
12.9
15.2
4.2
11,275
10,832
22,107
1,538
20,569
na
na
746
13,192
1,292
5,339
5,337
2
5,497
7.90
8.15
14.3
8.3
3.56
61.91
98.83
647.8
652.0
64.0
3.6
44.9
43.5
13.2
13.6
16.3
16.4
15.3
9.5
5.5
5.9
2.1
3.5
64.1
62.7
3.8
2.0
1.74
19.5
19.8
0.20
0.22
709,604
376,886
375,053
479,792
40,105
28.5
11.4
13.0
15.1
4.4
1.3165
1.3290
1.3169
1.2878
1.2895
1.3071
(1) Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related
ratios have been reclassified to conform with the current year’s presentation.
(2) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been
applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, certain
out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue. Refer to the Changes in Accounting Policies in
2019 section on page 111 for further details.
(3) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we record a provision for credit losses on impaired loans and a provision for
credit losses on performing loans. Prior periods have not been restated. The total provision for credit losses in prior periods includes both specific and collective provisions.
(4) Fiscal 2018 reported net income included a $425 million (US$339 million) charge related to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs
Act. For more information, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section on page 17.
na – not applicable
16 BMO Financial Group 202nd Annual Report 2019
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Non-GAAP Measures
Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have
been derived from consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to
GAAP mean IFRS. They are also presented on an adjusted basis that excludes the impact of certain items, as set out in the table below. Results and
measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on our U.S. segment are non-GAAP measures. Refer to the
Foreign Exchange section on page 23 for a discussion of the effects of changes in exchange rates on our results. 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 that may not be reflective of
ongoing results. As such, the presentation may facilitate readers’ analysis of trends. Except as otherwise noted, management’s discussion of changes
in reported results in this document applies equally to changes in the corresponding adjusted results. Adjusted results and measures are non-GAAP
and as such do not have standardized meanings under GAAP. They are unlikely to be comparable to similar measures presented by other companies
and should not be viewed in isolation from, or as a substitute for, GAAP results.
(Canadian $ in millions, except as noted)
2019
2018
2017
Reported Results
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net Income
Diluted EPS ($)
Adjusting Items (Pre-tax) (1)
Acquisition integration costs (2)
Amortization of acquisition-related intangible assets (3)
Restructuring costs (4)
Reinsurance adjustment (5)
Decrease in the collective allowance for credit losses (6)
Benefit from the remeasurement of an employee benefit liability (7)
Adjusting items included in reported pre-tax income
Adjusting Items (After tax) (1)
Acquisition integration costs (2)
Amortization of acquisition-related intangible assets (3)
Restructuring costs (4)
Reinsurance adjustment (5)
Decrease in the collective allowance for credit losses (6)
Benefit from the remeasurement of an employee benefit liability (7)
U.S. net deferred tax asset revaluation (8)
Adjusting items included in reported net income after tax
Impact on diluted EPS ($)
Adjusted Results
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net Income
Diluted EPS ($)
25,483
(2,709)
22,774
(872)
(14,630)
7,272
(1,514)
5,758
8.66
(13)
(128)
(484)
(25)
–
–
(650)
(10)
(99)
(357)
(25)
–
–
–
(491)
(0.77)
25,483
(2,684)
22,799
(872)
(14,005)
7,922
(1,673)
6,249
9.43
22,905
(1,352)
21,553
(662)
(13,477)
7,414
(1,961)
5,453
8.17
(34)
(116)
(260)
–
–
277
(133)
(25)
(90)
(192)
–
–
203
(425)
(529)
(0.82)
22,905
(1,352)
21,553
(662)
(13,344)
7,547
(1,565)
5,982
8.99
22,107
(1,538)
20,569
(746)
(13,192)
6,631
(1,292)
5,339
7.90
(87)
(149)
(59)
–
76
–
(219)
(55)
(116)
(41)
–
54
–
–
(158)
(0.25)
22,107
(1,538)
20,569
(822)
(12,897)
6,850
(1,353)
5,497
8.15
(1) Adjusting items are generally included in Corporate Services, with the exception of the amortization of acquisition-related intangible assets and certain acquisition integration costs, which are charged
to the operating groups, and the reinsurance adjustment, which is included in BMO Wealth Management.
(2) Acquisition integration costs related to the acquired BMO Transportation Finance business are charged to Corporate Services, since the acquisition impacts both Canadian and U.S. P&C businesses.
KGS–Alpha acquisition integration costs are reported in BMO Capital Markets. Acquisition integration costs are recorded in non-interest expense.
(3) These amounts were charged to the non-interest expense of the operating groups. Before-tax and after-tax amounts for each operating group are provided on pages 33, 36, 40, 44 and 48.
(4) Fiscal 2019 reported net income included a restructuring charge of $357 million after-tax ($484 million pre-tax), related to severance and a small amount of real estate-related costs, to continue to
improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. The restructuring
charges in 2018 and 2017 were a result of similar bank-wide programs. Restructuring costs are included in non-interest expense in Corporate Services.
(5) Fiscal 2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in claims, commissions and changes in policy benefit liabilities for the net impact of major
reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in BMO Wealth
Management.
(6) Adjustments to the collective allowance for credit losses are recorded in Corporate Services provision for credit losses in 2017.
(7) Fiscal 2018 reported net income included a benefit of $203 million after-tax ($277 million pre-tax) from the remeasurement of an employee benefit liability as a result of an amendment to our other
employee future benefits plan for certain employees that was announced in the fourth quarter of 2018. This amount has been included in non-interest expense in Corporate Services.
(8) Fiscal 2018 reported net income included a $425 million (US$339 million) charge related to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs
Act. For more information, refer to the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policy. For more information, refer to page 111.
Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.
BMO Financial Group 202nd Annual Report 2019 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Developments and Outlook
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Economic Developments in 2019 and Outlook for 2020
Growth in the Canadian economy moderated in 2019 in response to earlier increases in interest rates, reductions in oil output and weakness in global
economic activity. Despite robust employment gains, consumer spending has remained subdued due to elevated levels of household indebtedness.
Business investment weakened in the face of rising uncertainty related to global trade policies, including the delayed ratification of the United States-
Mexico-Canada Agreement. Despite the relatively low value of the Canadian dollar, exports weakened due to a slowdown in global demand.
However, after weakening in response to stricter mortgage rules in 2018, housing market activity strengthened as a result of lower mortgage rates
and population growth driven by immigration. After raising rates moderately since mid-2017, the Bank of Canada has held interest rates steady at
still-low levels since October 2018 to support the economy, and it is expected to keep rates stable in 2020. Low interest rates and some
encouragement from fiscal stimulus measures announced during the 2019 federal election campaign should support an improvement in real GDP
growth, which is expected to rise to 1.8% in 2020 from an estimated rate of 1.7% in 2019. Sales volumes and prices in the housing market are
expected to continue to rise moderately, supported by low borrowing costs and the First-Time Home Buyer Incentive. The unemployment rate is
expected to stay near the current four-decade low of 5.5%. The Canadian dollar will likely remain close to recent low levels, around US$0.76 in the
year ahead, due to the continuing trade deficit. Industry-wide consumer credit is anticipated to grow by 3.0% in 2020, while residential mortgage
demand is projected to rise by 3.6%. Non-financial business loan growth is expected to slow to 5.1% in 2020 from an estimated rate of 10.0% in
2019, reflecting weaker business investment.
U.S. real GDP growth slowed to an estimated 2.3% in 2019 from 2.9% in 2018, as a result of less supportive fiscal policies and the adverse
effects of trade protectionism on business investment. Exports weakened in the face of retaliatory tariffs, a strong U.S. dollar and a slowdown in
global demand. However, lower mortgage rates have led to an upturn in the housing market, while steady growth in personal income, record
household wealth and low debt servicing costs have supported consumer spending. Recent interest rate reductions by the Federal Reserve and a
planned increase in federal spending should support steadier growth in real GDP of 1.8% in 2020. With the economy likely to grow at a rate close to
its long-run potential, unemployment should remain near recent half-century lows. Growth in industry-wide consumer credit is expected to remain
moderate at 3.3% in 2020, while recent declines in interest rates should encourage some improvement in residential mortgage demand growth,
which is expected to rise to 4.0%. Restrained business investment is projected to result in industry-wide business credit growth moderating to 4.2%
in 2020 following very strong gains in the previous two years.
The average rate of economic expansion in the eight states in which BMO has both personal and commercial banking businesses (Illinois,
Wisconsin, Missouri, Kansas, Indiana, Minnesota, Florida and Arizona) is expected to moderate from an estimated rate of 2.5% in 2019 to 2.0% in
2020 in response to slower population growth in the U.S. Midwest region, trade-related declines in manufacturing output and continued budgetary
constraints in Illinois. We consider this rate of growth to be acceptable, given the record duration of the economic expansion.
The major risks affecting the North American economic outlook relate to a further escalation in trade disputes, in particular between the
United States and China and possibly between the United States and the European Union. Although trade tariffs have slowed economic growth
only moderately, new protectionist measures could send the unemployment rate higher. Heightened political uncertainty related to the presidential
impeachment inquiry, as well as rising geopolitical tensions, notably between the United States and Iran, could also destabilize global financial
markets and weaken the U.S. economy. Uncertainty related to the United Kingdom’s exit from the European Union is not expected to have a material
adverse impact on the North American economy.
This Economic Developments and Outlook section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking
Statements.
18 BMO Financial Group 202nd Annual Report 2019
Real Growth in Gross
Domestic Product
(%)
3.2
2.4
2.9
2.0
2.3
1.7
1.8 1.8
2017
2018
2019*
2020*
Canada
United States
*Forecast
The U.S. and Canadian
economies are expected to
grow modestly in 2020 amid
continued uncertainty
related to trade policies.
Consumer Price Index
Inflation (%)
2.4
2.3
2.2
1.9
2.0
1.8
2.1
1.6
2017
2018
2019*
2020*
Canada
United States
*Forecast
Inflation is expected to remain
near the central bank targets.
Canadian and U.S.
Unemployment Rates (%)
Housing Starts
(in thousands)
5.9
4.1
5.7
3.8
5.7
5.5
3.6
3.7
Jan
2018
Oct
2018
Canada
United States
Oct
2019
Oct
2020*
*Forecast
Unemployment rates in
Canada and the United States
are projected to hold fairly
steady.
Canadian and U.S.
Interest Rates (%)
2.13
1.75
1.75
1.75
1.63
1.63
1.38
1.25
250
200
150
100
1500
1000
500
0
13 14 15 16 17
18
19*
20*
Canada (left-hand scale)
United States (right-hand scale)
*Forecast
Housing market activity should
remain solid in both countries.
Canadian/U.S. Dollar
Exchange Rates
1.24
1.30
1.32 1.31
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Jan
2018
Oct
2018
Oct
2019
Oct
2020*
Jan
2018
Oct
2018
Oct
2019
Oct
2020*
Canadian overnight rate
U.S. federal funds rate
*Forecast
*Forecast
Central banks are expected
to keep rates steady in 2020.
The Canadian dollar is expected
to remain close to recent low
levels.
Data points are averages for the month, quarter or year, as appropriate, except for interest rates, which are for the period-end. References to years are calendar years.
BMO Financial Group 202nd Annual Report 2019 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Strategy
Our Purpose: Boldly Grow the Good in business and life
Our Strategic Priorities
‰ Drive leading growth in priority areas by earning customer loyalty
‰
Simplify, speed up, and improve productivity
‰ Harness the power of digital and data to grow
‰
Be leaders in taking and managing prudent risk, consistent with our overall risk appetite
‰ Activate a high-performance culture
Our operating group strategies are outlined in the 2019 Operating Groups Performance Review, which starts on page 32.
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Our Values
Integrity
Do what’s right
Empathy
Put others first
Diversity
Learn from difference
Responsibility
Make tomorrow better
Our Sustainability Principles
BMO is dedicated to pursuing growth in a responsible and sustainable manner. Our sustainability principles stand alongside our strategic
priorities – a demonstration of the inextricable connection between financial performance and corporate responsibility. Our success as a business
depends on meeting our commitments to our community and our planet, our employees and our customers. All of these intersect at the source
of sustainable growth.
Social Change
Help people adapt and thrive by embracing diversity and tailoring our products and services to meet changing expectations
Financial Resilience
Work with our customers to achieve their goals, and provide guidance and support to underserved communities
Community-Building
Foster social and economic well-being in the places where we live, work and give back
Environmental Impact
Reduce our environmental footprint while considering the impacts of our business
20 BMO Financial Group 202nd Annual Report 2019
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 was 3.2%, relatively unchanged from the prior year. Our three-year and five-year average annual TSR of 8.6%
and 7.8%, respectively, outperformed the overall market in Canada.
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 2015 would have been worth $1,454 as at October 31, 2019,
assuming reinvestment of dividends, for a total return of 45.4%.
On December 3, 2019, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, an
increase of $0.03 per share or 3% from the prior quarter and up $0.06 per share or 6% from a year ago. The dividend is payable on February 26, 2020,
to shareholders of record on February 3, 2020. We have increased our quarterly dividend declared four times and 14% over the past two years from
$0.93 per common share for the first quarter of 2018. Dividends paid over a five-year period have increased at an average annual compound rate of
approximately 6%.
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The average annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common
shares made at the beginning of a fixed period. The return includes the change in share price and assumes dividends received were reinvested
in additional common shares.
Total Shareholder Return
For the year ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)
Increase (decrease) in share price (%)
Total annual shareholder return (%) (2)
2019
97.50
3.99
4.2
(0.9)
3.2
2018
98.43
3.72
3.8
(0.4)
3.3
2017
98.83
3.52
3.6
15.8
20.2
2016
85.36
3.36
4.0
12.3
17.0
2015
76.04
3.20
4.3
(7.0)
(3.0)
3-year
CAGR (1)
5-year
CAGR (1)
4.5
5.9
nm
nm
8.6
3.6
5.6
nm
nm
7.8
(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
Earnings per Share Growth
The year-over-year percentage changes 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 otherwise indicated.
EPS was $8.66, up $0.49 or 6% from $8.17 in 2018. Adjusted EPS was $9.43, up $0.44 or 5% from $8.99 in
2018. EPS growth primarily reflected increased earnings. Reported net income available to common shareholders
was 5% higher year-over-year, while the average number of diluted common shares outstanding decreased by
1%, primarily due to share buybacks.
Earnings per share (EPS) is calculated by dividing net income attributable to bank shareholders, after
deducting preferred share dividends and distributions on other equity instruments, by the average number of
common shares outstanding. Diluted EPS, which is our basis for measuring performance, adjusts for possible
conversions of financial instruments into common shares if those conversions would reduce EPS, and is more
fully explained in Note 23 on page 197 of the consolidated financial statements. Adjusted EPS is calculated in
the same manner using adjusted net income.
EPS ($)
8.15
8.17
7.90
9.43
8.99
8.66
2017
2018
2019
EPS
Adjusted EPS
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
Return on Equity
Reported return on equity (ROE) was 12.6% in 2019 and adjusted ROE was 13.7%, compared with 13.3% and
14.6%, respectively, in 2018. Reported and adjusted ROE decreased in 2019, primarily due to growth in common
equity exceeding growth in net income. There was an increase of $278 million or 5% in net income available to
common shareholders and an increase of $240 million or 4% in adjusted net income available to common
shareholders in 2019. Average common shareholders’ equity increased $4.4 billion or 11% from 2018, primarily
due to growth in retained earnings and accumulated other comprehensive income. The reported return on
tangible common equity (ROTCE) was 15.1%, compared with 16.2% in 2018, and adjusted ROTCE was 16.1%,
compared with 17.5% in 2018. Book value per share increased 11% from the prior year to $71.54, largely
reflecting the increase in shareholders’ equity.
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.
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Return on tangible common equity (ROTCE) is calculated as net income available to common shareholders
adjusted for the amortization of acquisition-related intangible assets 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. Adjusted ROTCE is calculated using
adjusted net income rather than net income. ROTCE is commonly used in the North American banking industry
and is meaningful because it measures the performance of businesses consistently, whether they were
acquired or developed organically.
Return on Equity and Return on Tangible Common Equity
(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 (A)
After-tax amortization of acquisition-related intangible assets
Net income available to common shareholders after adjusting for amortization of acquisition-related intangible assets (B)
After-tax impact of other adjusting items (1)
Adjusted net income available to common shareholders (C)
Average common shareholders’ equity (D)
Return on equity (%) (= A/D)
Adjusted return on equity (%) (= C/D)
Average tangible common equity (E)
Return on tangible common equity (%) (= B/E)
Adjusted return on tangible common equity (%) (= C/E)
ROE (%)
16.3
16.4
17.5
16.2
13.213.6
14.6
13.3
16.1
15.1
13.7
12.6
2017
2018
2019
ROE
ROTCE
Adjusted ROE
Adjusted ROTCE
2019
5,758
–
(211)
5,547
99
5,646
392
6,038
44,170
12.6
13.7
2018
5,453
–
(184)
5,269
90
5,359
439
5,798
39,754
13.3
14.6
2017
5,339
(2)
(184)
5,153
116
5,269
42
5,311
38,962
13.2
13.6
37,456
33,125
32,303
15.1
16.1
16.2
17.5
16.3
16.4
(1) Other adjusting items included the reinsurance adjustment in 2019, a charge related to the revaluation of our U.S. net deferred tax asset and a benefit from the remeasurement of an employee
benefit liability in 2018, and a decrease in the collective allowance in 2017. All periods also include restructuring and acquisition integration costs.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Common Equity Tier 1 Ratio
BMO’s Common Equity Tier 1 (CET1) Ratio reflects a well-capitalized position relative to the risk in our business.
Our CET1 Ratio was 11.4% as at October 31, 2019, compared with 11.3% as at October 31, 2018. The CET1 Ratio
increased from the end of fiscal 2018, as higher CET1 capital, primarily from retained earnings growth, more than
offset higher risk-weighted assets, which were driven by business growth.
CET1 Ratio (%)
11.4
11.3
11.4
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, and certain deferred tax assets and other
items, divided by risk-weighted assets for CET1.
2017
2018
2019
22 BMO Financial Group 202nd Annual Report 2019
2019 Financial Performance Review
This section provides a review of our enterprise financial performance for 2019 that focuses on the Consolidated Statement of Income included in
our consolidated financial statements, which begin on page 137. A review of our operating groups’ strategies and performance follows the enterprise
review. A summary of the enterprise financial performance for 2018 begins on page 55.
Foreign Exchange
The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars increased relative to 2018 due to the stronger U.S. dollar.
The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on our U.S. segment
results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated amounts recorded outside of BMO’s
U.S. segment.
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 revenue, expenses and provisions for (recoveries of) credit losses arise. If future results are consistent with results in 2019, 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 our U.S. segment net income before income taxes for the year by $16 million, in
the absence of hedging transactions.
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Economically, our U.S. dollar income stream was unhedged to changes in foreign exchange rates during 2019, 2018 and 2017. We regularly
determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on net income.
Refer to the Enterprise-Wide Capital Management section on page 59 for a discussion of the impact that changes in foreign exchange rates
can have on our capital position.
Changes in foreign exchange rates will also affect accumulated other comprehensive income, primarily as a result of the translation of our
investment in foreign operations. 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 translation of our investment in foreign operations by
$159 million.
Effects of Changes in Exchange Rates on BMO’s U.S. Segment Reported and Adjusted Results
(Canadian $ in millions, except as noted)
Canadian/U.S. dollar exchange rate (average)
2019
2018
2017
Effects on U.S. segment reported results
Increased (decreased) net interest income
Increased (decreased) non-interest revenue
Increased (decreased) revenue
Decreased (increased) provision for credit losses
Decreased (increased) expenses
Decreased (increased) income taxes (1)
Increased (decreased) reported net income (1)
Effects on U.S. segment adjusted results
Increased (decreased) net interest income
Increased (decreased) non-interest revenue
Increased (decreased) revenue
Decreased (increased) provision for credit losses
Decreased (increased) expenses
Decreased (increased) income taxes (1)
Increased (decreased) adjusted net income (1)
2019 vs.
2018
1.3290
1.2878
140
94
234
(7)
(165)
(35)
27
140
94
234
(7)
(160)
(14)
53
2018 vs.
2017
1.2878
1.3071
(62)
(48)
(110)
2
77
28
(3)
(62)
(48)
(110)
2
75
6
(27)
(1) Reported net income in the first quarter of 2018 included a $425 million (US$339 million) charge due to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the
U.S. Tax Cuts and Jobs Act. Results reflect the impact of the foreign exchange revaluation of the tax charge. For more information, refer to the Critical Accounting Estimates – Income Taxes and
Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Caution
This Foreign Exchange section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 202nd Annual Report 2019 23
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Income
Reported net income was $5,758 million in 2019, an increase of $305 million or 6% from the prior year. Adjusted net income was $6,249 million,
an increase of $267 million or 4%, and also 4% excluding the impact of the stronger U.S. dollar. Adjusted net income in the current and prior year
excludes restructuring charges, amortization of acquisition-related intangible assets and acquisition-related costs. The current year excludes the net
impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business.
Adjusted net income in the prior year also excludes a one-time non-cash charge related to the revaluation of our U.S. net deferred tax asset due to
U.S. tax reform and a benefit from the remeasurement of an employee benefit liability. For more information, refer to the Non-GAAP Measures table
on page 17.
Reported and adjusted net income growth largely reflects good performance in our P&C businesses and an increase in Corporate Services,
partially offset by a decrease in BMO Capital Markets. Reported net income in BMO Wealth Management decreased, while adjusted net income
increased.
Canadian P&C reported net income of $2,626 million and adjusted net income of $2,628 million, which excludes the amortization of acquisition-
related intangible assets, both increased $77 million, or 3% from the prior year, due to higher revenue, partially offset by higher expenses and higher
provision for credit losses. The prior year included a gain related to the restructuring of Interac Corporation.
U.S. P&C reported net income of $1,611 million increased $217 million or 16%, and adjusted net income of $1,654 million increased $215 million
or 15% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. On a U.S. dollar basis, reported net
income of $1,212 million increased $130 million or 12%, and adjusted net income of $1,244 million increased $127 million or 11% from the prior
year, primarily due to good revenue performance and lower provision for credit losses, partially offset by higher expenses.
BMO Wealth Management reported net income was $1,060 million, compared with $1,072 million in the prior year. Adjusted net income, which
excludes the fourth-quarter reinsurance adjustment and the amortization of acquisition-related intangible assets, was $1,122 million, an increase of
$9 million or 1% from the prior year. Traditional Wealth reported net income was $862 million, an increase of $57 million or 7% from the prior year,
and adjusted net income was $899 million, an increase of $53 million or 6%, primarily due to higher deposit and loan revenue. Insurance reported
net income was $198 million, compared with $267 million in the prior year, and adjusted net income was $223 million, compared with $267 million,
primarily due to lower reinsurance revenue.
BMO Capital Markets reported net income was $1,086 million, compared with $1,156 million in the prior year, and adjusted net income, which
excludes the amortization of acquisition-related intangible assets and acquisition integration costs, was $1,113 million, compared with $1,169 million.
Higher revenue was more than offset by higher expenses, including a severance expense in the second quarter of 2019, and higher provisions for
credit losses.
Corporate Services reported net loss was $625 million, compared with a reported net loss of $718 million in the prior year. Adjusted net loss
was $268 million, compared with an adjusted net loss of $290 million in the prior year. Adjusted results in both the current and prior year exclude
restructuring charges. The prior year also excludes a one-time non-cash charge due to the revaluation of our U.S. net deferred tax asset, a benefit
from the remeasurement of an employee benefit liability and acquisition integration costs. The adjusted net loss improved, primarily due to lower
expenses, while revenue excluding the taxable equivalent basis (teb) adjustment was relatively unchanged. Reported results increased, primarily due
to the impact of the adjusting items noted above.
Further discussion is provided in the 2019 Operating Groups Performance Review section on pages 32 to 51.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
24 BMO Financial Group 202nd Annual Report 2019
Revenue (1)
Reported revenue of $25,483 million increased $2,578 million or 11% from the prior year, or 10% excluding the impact of the stronger U.S. dollar.
On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue
was $22,774 million, an increase of $1,221 million or 6%, or 5% excluding the impact of the stronger U.S. dollar, driven by good performance in our
P&C businesses and BMO Capital Markets, including the impact of the acquisition of KGS-Alpha. BMO Wealth Management and Corporate Services
revenue also increased.
BMO analyzes revenue at the consolidated level based on GAAP revenue as reported in the consolidated financial statements, and on an adjusted
basis. Consistent with our Canadian peer group, we analyze revenue on a teb at the operating group level. The teb adjustments for 2019 totalled
$296 million, a decrease from $313 million in 2018.
Canadian P&C revenue increased $396 million or 5% from the prior year, reflecting higher balances across most products, increased non-interest
revenue and higher margins. The prior year included a gain related to the restructuring of Interac Corporation.
U.S. P&C revenue increased $441 million or 9% from the prior year on a Canadian dollar basis. On a U.S. dollar basis, revenue of $4,049 million
increased $215 million or 6%, primarily reflecting higher balances across most products and increased non-interest revenue, partially offset by a
lower net interest margin.
BMO Wealth Management revenue, net of reported CCPB, was $4,953 million, relatively unchanged from the prior year. Revenue, net of adjusted
CCPB, was $4,978 million, an increase of $29 million or 1%. Revenue in Traditional Wealth was $4,555 million, an increase of $85 million or 2%,
primarily due to higher deposit and loan revenue and the impact of a legal provision in the prior year, partially offset by lower fee-based revenue,
including lower performance fees from our asset management business. Insurance revenue, net of reported CCPB, was $398 million, compared with
$479 million in the prior year, primarily due to lower reinsurance revenue. Insurance revenue, net of adjusted CCPB, which excludes the reinsurance
adjustment, was $423 million, compared with $479 million in the prior year.
BMO Capital Markets revenue increased $371 million or 9% from the prior year, or 7% excluding the impact of the stronger U.S. dollar.
Investment and Corporate Banking revenue increased, primarily due to higher corporate banking-related revenue and underwriting and advisory
revenue. Global Markets revenue increased, primarily due to higher interest rate trading revenue, including the significant contribution from the
acquisition of KGS-Alpha, and higher commodities trading revenue, partially offset by lower equity trading revenue.
Corporate Services revenue increased $9 million from the prior year.
Further discussion is provided in the 2019 Operating Groups Performance Review section on pages 32 to 51.
(1) Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets, caused by movements in interest rates and equities markets. The investments which support
policy benefit liabilities are predominantly fixed income assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair value
changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in insurance claims, commissions and changes in policy benefit liabilities. The discussion
of revenue on a net basis reduces this variability in results, which allows for a better discussion of operating results. For additional discussion of insurance claims, commissions and changes in policy
benefit liabilities, refer to page 28.
Taxable equivalent basis (teb) Revenues of operating groups are presented in our MD&A on a taxable equivalent basis (teb). Revenue and the
provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to facilitate comparisons of income between
taxable and tax-exempt sources. This adjustment is offset in Corporate Services.
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Revenue
(Canadian $ in millions, except as noted)
For the year ended October 31
Net interest income
Non-interest revenue
Total revenue
Total revenue, net of CCPB
Total revenue, net of adjusted CCPB
2019
2018
2017
12,888
12,595
25,483
22,774
22,799
11,438
11,467
22,905
21,553
21,553
11,275
10,832
22,107
20,569
20,569
Change
from 2018
(%)
13
10
11
6
6
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Net Interest Income
Net interest income was $12,888 million, an increase of $1,450 million or 13%, or 11% excluding the impact of the stronger U.S. dollar.
On a basis that excludes trading revenue, net interest income was $11,665 million, an increase of $943 million or 9%, or 8% excluding the
impact of the stronger U.S. dollar, largely due to higher loan and deposit balances, partially offset by a lower net interest margin.
Average earning assets were $758.9 billion, an increase of $75.9 billion or 11%, or 10% excluding the impact of the stronger U.S. dollar, due
to loan growth, higher securities, and higher securities borrowed or purchased under resale agreements.
BMO’s overall net interest margin increased 3 basis points, primarily due to higher net interest income from trading activities and a higher
margin in Canadian P&C, partially offset by a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than
the bank. On a basis that excludes trading revenue, BMO’s net interest margin decreased 4 basis points, primarily due to a higher volume of assets in
BMO Capital Markets and Corporate Services, which have a lower spread than the bank, partially offset by a higher margin in Canadian P&C and a
positive contribution from growth in U.S. P&C.
Table 3 on page 118 provides further details on net interest income and net interest margin.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net interest income is comprised of earnings on assets, such as loans and securities, including interest and certain dividend income, less interest
expense paid on liabilities, such as deposits.
Net interest margin is the ratio of net interest income to average earning assets, expressed as a percentage or in basis points.
Net non-interest revenue is non-interest revenue, net of insurance claims, commissions and changes in policy benefit liabilities (CCPB).
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Average Earning Assets
and Net Interest Margin
Net Revenue*
($ billions)
647
1.74
683
1.67
759
1.70
20.6
9.3
21.6
10.1
11.3
11.4
22.8
9.9
12.9
2017
2018
2019
2017
2018
2019
Average Earning Assets ($ billions)
Net Interest Margin (%)
Net Interest Income
Net Non-Interest Revenue
*Numbers may not add due to rounding.
Change in Net Interest Income, Average Earning Assets and Net Interest Margin (1)
(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)
All other operating groups and Corporate Services
Total BMO reported
U.S. P&C (US$ in millions)
Net interest income (teb)
Average earning assets
Change
Change
2019
2018
5,878
4,218
10,096
2,792
5,541
3,843
9,384
2,054
12,888
11,438
3,174
2,983
%
6
10
8
36
13
6
2019
2018
222,513 212,965
119,640 103,394
342,153 316,359
416,710 366,586
758,863 682,945
90,035
80,255
%
4
16
8
14
11
12
Net interest margin
(in basis points)
2019
2018
Change
264
353
295
67
170
353
260
372
297
56
167
372
4
(19)
(2)
11
3
(19)
(1) Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior years and related
ratios have been reclassified to conform with the current year’s presentation.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Non-Interest Revenue
Non-interest revenue, which comprises all revenues other than net interest income, was $12,595 million, an increase of $1,128 million or 10%, or 9%
excluding the impact of the stronger U.S. dollar. Non-interest revenue, net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), was $9,886 million, compared with $10,115 million in the prior year.
Non-interest revenue, net of CCPB, decreased, as higher lending fee revenue, deposit and payment service revenue and underwriting and
advisory fee revenue were more than offset by lower trading and mutual fund revenue, as well as lower revenue from foreign exchange, other
than trading, and investments in associates and joint ventures. Trading revenue is discussed in the Trading-Related Revenue section that follows.
On a basis that excludes trading revenue, non-interest revenue, net of CCPB, increased $178 million or 2%.
Gross insurance revenue increased from the prior year, primarily due to decreases in long-term interest rates that increased the fair value of
insurance investments in the current year, compared with increases in long-term interest rates that decreased the fair value of insurance investments
in the prior year, the impact of stronger equity markets and business growth. Insurance revenue can experience variability arising from fluctuations in
the fair value of insurance assets, caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities
are predominantly fixed income and equity assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated
Statement of Income. The impact of these fair value changes was largely offset by changes in the fair value of policy benefit liabilities, which is
reflected in CCPB, as discussed on page 28.
We generally focus on analyzing revenue net of CCPB, given the extent to which insurance revenue can vary and that this variability is largely
offset in CCPB.
Table 3 on page 118 provides further details on revenue and revenue growth.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
26 BMO Financial Group 202nd Annual Report 2019
Non-Interest Revenue
(Canadian $ in millions)
For the year ended October 31
Securities commissions and fees
Deposit and payment service charges
Trading revenue
Lending fees
Card fees
Investment management and custodial fees
Mutual fund revenue
Underwriting and advisory fees
Securities gains, other than trading
Foreign exchange, other than trading
Insurance revenue
Investments in associates and joint ventures
Other
Total reported
Reported, net of CCPB
Insurance revenue, net of CCPB
Insurance revenue, net of adjusted CCPB
2019
1,023
1,204
298
1,181
437
1,747
1,419
986
249
166
3,183
151
551
12,595
9,886
474
499
2018
1,025
1,134
705
997
428
1,749
1,473
943
239
182
1,879
167
546
11,467
10,115
527
527
Change
from 2018
(%)
–
6
(58)
18
2
–
(4)
5
4
(9)
69
(10)
1
10
(2)
(10)
(5)
2017
964
1,109
84
917
329
1,627
1,411
1,044
171
191
2,070
386
529
10,832
9,294
532
532
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Certain comparative figures have been reclassified to conform with the current year’s presentation.
Trading-Related Revenue
Trading-related revenue is 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, and market conditions. BMO earns a spread or profit on the net sum of its client positions by profitably managing,
within prescribed limits, the overall risk of its net positions. On a limited basis, BMO also earns revenue from principal trading positions.
Interest and non-interest trading-related revenue on a taxable equivalent basis (teb) increased $97 million or 6% to $1,778 million. Interest rate
trading-related revenue increased $263 million or 60%, primarily due to a significant contribution from the acquisition of KGS-Alpha and a fair value
gain. Foreign exchange trading-related revenue increased $24 million or 6%, driven by increased client activity. Equities trading-related revenue
decreased $183 million or 26%, largely due to lower activity with corporate clients and a fair value loss. Commodities trading-related revenue
increased $82 million or 130%, due to increased client hedging activity and an expansion of the business. Other trading-related revenue decreased
$89 million or 94%, primarily due to fair value gains associated with hedging exposures on our structural balance sheet in the prior year.
The Market Risk section on page 86 provides more information on trading-related revenue.
Trading-related revenue includes net interest income and non-interest revenue earned from on-balance sheet 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
revenue also includes income (expense) and gains (losses) from both on-balance sheet instruments and interest rate, foreign exchange
(including spot positions), equity, commodity and credit contracts.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest and Non-Interest Trading-Related Revenue (1) (2)
(Canadian $ in millions)
(taxable equivalent basis)
For the year ended October 31
Interest rates
Foreign exchange
Equities
Commodities
Other
Total (teb)
Teb offset
Reported total
Reported as:
Net interest income
Non-interest revenue – trading revenue
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Total (teb)
Teb offset
Reported total, net of teb offset
2019
700
401
526
145
6
1,778
257
1,521
1,480
298
1,778
257
1,521
2018
437
377
709
63
95
1,681
260
1,421
976
705
1,681
260
1,421
Change
from 2018
(%)
60
6
(26)
+100
(94)
6
(1)
7
52
(58)
6
(1)
7
2017
480
369
727
84
39
1,699
488
1,211
1,615
84
1,699
488
1,211
(1) Trading-related revenue is presented on a taxable equivalent basis.
(2) Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior years and related
ratios have been reclassified to conform with the current year’s presentation.
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 17.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Reported insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $2,709 million in 2019, an increase of $1,357 million
from the prior year, and adjusted CCPB, which excludes the net impact of major reinsurance claims that were incurred after our announced decision to
wind down our reinsurance business, was $2,684 million, an increase of $1,332 million. CCPB increased due to the impact of decreases in long-term
interest rates that increased the fair value of policy benefit liabilities in the current year, compared with increases in long-term interest rates that
decreased the fair value of policy benefit liabilities in the prior year, underlying business growth and stronger equity markets, which increase
the fair value of policy benefit liabilities. The increase related to the fair value of policy benefit liabilities was largely offset in revenue, as discussed
on page 26.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
28 BMO Financial Group 202nd Annual Report 2019
Provision for Credit Losses
The total provision for credit losses (PCL) was $872 million, compared with $662 million in 2018. Total PCL as a
percentage of average net loans and acceptances was 20 basis points in 2019, compared with 17 basis points in the
prior year. The provision for credit losses on impaired loans was $751 million, compared with $700 million in the prior
year, reflecting higher provisions in Canadian P&C, BMO Capital Markets and Corporate Services, partially offset by
lower provisions in U.S. P&C, which had higher recoveries compared with the prior year. Total PCL on impaired loans
as a percentage of average net loans and acceptances was 17 basis points in 2019, compared with 18 basis points in
the prior year. There was a $121 million provision for credit losses on performing loans in the current year, with the
increase primarily driven by balance growth and changes to our scenario weights. In the prior year, there was a
$38 million recovery of credit losses on performing loans. A provision was recorded for performing loans in the
current year, compared with a recovery in the prior year, reflecting higher loan growth in the current year, as well as
higher provisions resulting from portfolio migration and changes in the economic outlook and scenario weights during
2019.
Total PCL in Canadian P&C increased $138 million to $607 million, due to higher consumer and commercial
provisions on impaired loans, as well as an increase in PCL on performing loans. Total PCL in U.S. P&C was
$197 million, a decrease of $23 million from the prior year, largely due to higher consumer and commercial
recoveries on impaired loans, partially offset by an increase in PCL on performing loans. BMO Capital Markets PCL
was $80 million, compared with net recoveries of $18 million in the prior year, reflecting increases in PCL on both
impaired loans and performing loans. Corporate Services recoveries of credit losses was $12 million, compared with
$15 million in the prior year.
On a geographic basis, the majority of our provisions relate to our Canadian loan portfolio, reflecting the larger
size of this portfolio, compared with our loan portfolios in the United States and other countries. Total PCL in Canada
was $564 million, compared with $443 million in 2018. Total PCL in the United States was $300 million, up from
$238 million in 2018. Total PCL in other countries was $8 million, compared with a recovery of $19 million in the prior
year. Note 4 on page 151 of the consolidated financial statements provides information on PCL on a geographic basis.
Table 15 on page 128 provides further segmented PCL information.
Provision for
Credit Losses ($ millions)
872
746
662
2017
2018
2019
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Provision for Credit Losses by Operating Group (1)
(Canadian $ in millions)
2019
Provision for (recovery of) credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
2018
Provision for (recovery of) credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
2017
Total specific and collective provision for (recovery of) credit losses
Canadian P&C U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services (2)
Total Bank
544
63
607
466
3
469
160
37
197
258
(38)
220
704
100
804
724
(35)
689
483
289
772
2
(2)
–
6
–
6
8
52
28
80
(17)
(1)
(18)
(7)
(5)
(12)
(13)
(2)
(15)
751
121
872
700
(38)
662
44
(78)
746
(1) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9. Under IFRS 9, we record a provision for credit losses on impaired loans and a provision for credit losses on performing loans.
The provision for credit losses on impaired loans under IFRS 9 is consistent with the specific provision under IAS 39 in prior years. The provision for credit losses on performing loans replaces the
collective provision under IAS 39. Prior periods have not been restated. The provision for credit losses in periods prior to 2018 is comprised of specific provisions for operating groups and includes both
specific and collective provisions for Corporate Services.
(2) Prior to 2018, the reduction in the collective provision for credit losses was recorded in Corporate Services.
Provision for Credit Losses Performance Ratios
Total PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances (annualized) (%)
2019
0.20
0.17
2018
0.17
0.18
2017
0.20
0.22
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 29
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Expense
Non-interest expense was $14,630 million in 2019, an increase of $1,153 million or 9% from the prior year.
Adjusted non-interest expense in both years excludes restructuring costs, the amortization of acquisition-related
intangible assets and acquisition integration costs. The prior year also excludes a $277 million benefit from the
remeasurement of an employee benefit liability. Restructuring costs were $484 million in 2019 and $260 million in
2018, and related to bank-wide initiatives to improve efficiency. The amortization of acquisition-related intangible
assets was $128 million and $116 million in 2019 and 2018, respectively. Acquisition integration costs were
$13 million and $34 million in 2019 and 2018, respectively.
Adjusted non-interest expense was $14,005 million in 2019, an increase of $661 million or 5%, or 4% excluding
the impact of the stronger U.S. dollar, largely reflecting higher employee-related costs, including severance expense
in BMO Capital Markets in the second quarter of 2019 and the impact of the acquisition of KGS-Alpha, and higher
technology costs, partially offset by lower other expenses. Reported non-interest expense was $14,630 million, an
increase of $1,153 million or 9%, due to the drivers and adjusting items noted above.
The dollar and percentage changes in expense by category are outlined in the Non-Interest Expense and Adjusted
Non-Interest Expense tables below. Table 4 on page 119 provides more detail on expenses and expense growth.
Performance-based compensation on a reported basis increased $100 million or 4%, or 3% excluding the impact of
the stronger U.S. dollar, due in part to the impact of the acquisition of KGS-Alpha. On a reported basis, other employee
compensation, which includes salaries, benefits and severance, increased $862 million or 17%, or 16% excluding the
impact of the stronger U.S. dollar. On an adjusted basis, other employee compensation increased $365 million or 7%, or
6% excluding the impact of the stronger U.S. dollar. Severance expense and the impact of the KGS-Alpha acquisition,
both recorded in BMO Capital Markets, accounted for approximately half of the year-over-year increase.
Premises and equipment costs on a reported basis increased $235 million or 9%, and on an adjusted basis
increased $209 million or 8%, or 7% excluding the impact of the stronger U.S. dollar, primarily due to an increase in
technology investments. Reported other expenses decreased $95 million or 3%, and adjusted other expenses
decreased $51 million or 2%.
BMO’s reported efficiency ratio improved 140 basis points to 57.4%, and the adjusted efficiency ratio improved
330 basis points to 55.0% in 2019. On a net revenue basis(1), the reported efficiency ratio was 64.2%, compared with
62.5% a year ago, and the adjusted efficiency ratio improved 50 basis points to 61.4% in 2019.
On a net revenue basis (1), reported operating leverage was negative 2.9%, and adjusted operating leverage was
positive 0.8%.
(1) This ratio is calculated excluding insurance claims, commissions and changes in policy benefit liabilities (CCPB). For more information, refer to the Insurance
Claims, Commissions and Changes in Policy Benefit Liabilities section on page 28.
Non-Interest Expense
($ millions)
14,630
14,005
13,477 13,344
13,192
12,897
2017
2018
2019
Reported Non-Interest Expense
Adjusted Non-Interest Expense
Net Efficiency Ratio (%)
64.1 62.7
62.5 61.9
64.2
61.4
2017
2018
2019
Net Efficiency Ratio
Adjusted Net Efficiency Ratio
The efficiency ratio (or expense-to-revenue ratio) is a 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 calculated in the same
manner, utilizing adjusted revenue and adjusted non-interest expense.
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.
Non-Interest Expense
(Canadian $ in millions)
For the year ended October 31
Performance-based compensation
Other employee compensation
Total employee compensation
Premises and equipment
Other
Amortization of intangible assets
Total non-interest expense
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Adjusted Non-Interest Expense (1)
(Canadian $ in millions)
For the year ended October 31
Performance-based compensation
Other employee compensation
Total employee compensation
Premises and equipment
Other
Amortization of intangible assets
Total adjusted non-interest expense
2019
2,610
5,813
8,423
2,988
2,665
554
2018
2,510
4,951
7,461
2,753
2,760
503
2017
2,386
5,082
7,468
2,491
2,748
485
14,630
13,477
13,192
2019
2,607
5,361
7,968
2,947
2,664
426
2018
2,508
4,996
7,504
2,738
2,715
387
2017
2,381
5,008
7,389
2,430
2,742
336
14,005
13,344
12,897
Change
from 2018
(%)
4
17
13
9
(3)
10
9
Change
from 2018
(%)
4
7
6
8
(2)
10
5
(1) Adjusted non-interest expense excludes restructuring costs, the amortization of acquisition-related intangible assets, acquisition integration costs, and a benefit from the remeasurement of an
employee future benefit liability.
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 17.
30 BMO Financial Group 202nd Annual Report 2019
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 subsidiaries, as
outlined in Note 22 on page 194 of the consolidated financial statements.
Management assesses BMO’s consolidated results and associated provision 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 $1,514 million in 2019, compared with $1,961 million in 2018. The reported effective tax rate in 2019 was
20.8%, compared with 26.5% in 2018. The higher reported effective tax rate in the prior year was due to the $425 million charge related to the
revaluation of our U.S. net deferred tax asset as a result of U.S. tax reform. The adjusted provision for income taxes(1) was $1,673 million in 2019,
compared with $1,565 million in 2018. The adjusted effective tax rate in 2019 was 21.1%, compared with 20.7% in 2018.
BMO partially hedges, for accounting purposes, the foreign exchange risk arising from its foreign operations by funding the investments in the
corresponding foreign currency. A gain or loss on hedging and an unrealized gain or loss on translation of foreign operations are charged or credited
to other comprehensive income. For income tax purposes, a gain or loss on hedging activities results in an income tax charge or credit in the current
period that is charged or credited to other comprehensive income, 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 foreign operations has given rise to an income tax recovery in other comprehensive
income of $4 million in the current year, compared with a recovery of $56 million in 2018. Refer to the Consolidated Statement of Changes in Equity
on page 140 of the consolidated financial statements for further details.
Legislative changes and changes in tax policy, including their interpretation by tax authorities and the courts, may impact our earnings.
Refer to the discussion in the Critical Accounting Estimates section on page 107 for additional details.
Table 4 on page 119 details the $2,334 million of total government levies and taxes incurred by BMO in 2019. Of this amount, $1,434 million was
incurred in Canada, with $830 million recorded in our provision for income taxes, while the remaining $604 million was recorded in total government
levies other than income taxes. The decrease from $2,715 million in 2018 was primarily due to a lower provision for income taxes.
(1) The adjusted rate is computed using adjusted net income rather than reported net income in the determination of income subject to tax.
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Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
2019 Operating Groups Performance Review
Summary
This section includes an analysis of the financial results of our operating groups and descriptions of their operating segments, businesses, strategies,
challenges, achievements and outlooks.
BMO Financial Group
Operating Groups
Personal and Commercial (P&C) Banking
BMO Wealth
Management
BMO Capital
Markets
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Operating Segments
Canadian P&C
U.S. P&C
Lines of Business
‰ Personal Banking
‰
Commercial Banking
‰ Personal Banking
‰
Commercial Banking
‰ BMO Private Wealth
‰ BMO InvestorLine
‰ BMO Wealth Management U.S.
‰ BMO Global Asset Management
‰ BMO Insurance
‰
Investment and Corporate
Banking
‰ Global Markets*
*Previously known as Trading Products.
Corporate Services, including Technology and Operations
BMO’s business mix is well diversified by operating segment and by geography, comprising the key geographies and customer segments that are
critical to our strategic plans for sustaining growth and delivering value to our shareholders.
Reported Net Income
by Operating Segment*
Adjusted Net Income
by Operating Segment*
Reported Net Income
by Country
Adjusted Net Income
by Country
2019
2019
2019
2019
Canadian P&C 41%
U.S. P&C 25%
BMO Wealth Management 17%
BMO Capital Markets 17%
Canadian P&C 40%
U.S. P&C 25%
BMO Wealth Management 17%
BMO Capital Markets 17%
Canada 59%
United States 33%
Other Countries 8%
Canada 58%
United States 34%
Other Countries 9%
Numbers may not add due to rounding.
*Percentages determined excluding results in Corporate Services.
32 BMO Financial Group 202nd Annual Report 2019
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, allocations of revenue, provisions for credit losses and expenses are
updated to better align with current experience. Results for prior periods are reclassified to conform with the current period’s presentation.
Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to
net interest income. Results for prior periods and related ratios have been reclassified to conform with the current period’s presentation.
The bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15), effective the first quarter of 2019, and we elected to
retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously
recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, when customers reimburse us for certain
out-of-pocket expenses incurred on their behalf, we record the reimbursement in revenue. Previously, these reimbursements were recorded as
a reduction in the related expense.
BMO analyzes revenue at the consolidated level based on GAAP revenue as reported 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. Revenue and the provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to
facilitate comparisons of income between taxable and tax-exempt sources. The offset to the group teb adjustments is reflected in Corporate Services
revenue and provision for income taxes.
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Personal and Commercial Banking
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue (1)
Total revenue (teb) (1)
Provision for (recovery of) credit losses on impaired loans (2)
Provision for (recovery of) credit losses on performing loans (2)
Total provision for credit losses (2)
Non-interest expense (1)
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets (3)
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 gross loans and acceptances
Average net loans and acceptances
Average deposits
Full-time equivalent employees
Canadian P&C
U.S. P&C
Total P&C
2019
2018
2017
2019
2018
2017
2019
2018
5,878
2,128
8,006
544
63
607
3,854
3,545
919
2,626
2
2,628
5,541
2,069
7,610
466
3
469
3,710
3,431
882
2,549
2
2,551
5,261
2,079
7,340
na
na
483
3,534
3,323
823
2,500
3
2,503
4,218
1,162
5,380
160
37
197
3,139
2,044
433
1,611
43
1,654
3,843
1,096
4,939
258
(38)
220
2,968
1,751
357
1,394
45
1,439
3.0
3.0
5.2
3.9
3.9
27.3
27.3
1.3
1.3
48.1
48.1
2.64
9,545
2.0
2.0
3.7
5.0
5.0
30.5
30.6
(1.3)
(1.3)
48.7
48.7
2.60
8,222
13.2
13.1
6.4
3.3
3.3
29.8
29.8
3.1
3.1
48.2
48.1
2.53
8,268
222,513 212,965 207,815
237,142 223,536 215,848
236,253 222,673 215,667
175,125 159,483 152,492
14,648
14,740
14,728
15.6
15.0
8.9
5.8
5.9
11.0
11.3
3.1
3.0
58.3
57.3
3.53
14,418
36.9
35.1
8.4
2.7
2.9
10.8
11.1
5.7
5.5
60.1
58.9
3.72
12,692
119,640 103,394
113,620
98,001
112,904
97,346
106,733
90,738
7,013
7,248
3,551
1,005
4,556
na
na
289
2,891
1,376
358
1,018
46
1,064
(3.0)
(3.2)
(0.2)
0.9
1.0
7.9
8.3
(1.1)
(1.2)
63.4
62.0
3.68
12,581
96,363
90,533
90,572
85,927
7,197
10,096
3,290
13,386
704
100
804
6,993
5,589
1,352
4,237
45
4,282
9,384
3,165
12,549
724
(35)
689
6,678
5,182
1,239
3,943
47
3,990
7.5
7.3
6.7
4.7
4.8
17.5
17.7
2.0
1.9
52.2
51.8
2.95
23,963
12.1
11.9
5.5
3.9
4.0
18.5
18.8
1.6
1.5
53.2
52.7
2.97
20,914
342,153 316,359
350,762 321,537
349,157 320,019
281,858 250,221
21,988
21,741
2017
8,812
3,084
11,896
na
na
772
6,425
4,699
1,181
3,518
49
3,567
7.9
7.7
3.8
2.2
2.3
16.6
16.8
1.6
1.5
54.0
53.5
2.90
20,849
304,178
306,381
306,239
238,419
21,845
(1) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been
applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. Refer to the Changes in
Accounting Policies in 2019 section on page 111 for further details.
(2) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we record a provision for credit losses on impaired loans and a provision for
credit losses on performing loans. Prior periods have not been restated. The total provision for credit losses in periods prior to 2018 is comprised of specific provisions.
(3) Total P&C before tax amounts of $59 million in 2019, $61 million in 2018 and $66 million in 2017 are included in non-interest expense.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and commercial banking operating segments,
Canadian Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The combined P&C banking business
net income was $4,237 million, an increase of $294 million or 7% from the prior year. Adjusted net income, which excludes the amortization of
acquisition-related intangible assets, was $4,282 million, an increase of $292 million or 7%. These operating segments are reviewed separately in
the sections that follow.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
BMO Financial Group 202nd Annual Report 2019 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking provides financial products and services to eight million customers.
We’re here to help our customers make the right financial decisions as they bank with us across our network of
900 branches, contact centres, digital banking platforms and over 3,300 automated teller machines. Our top-tier
commercial franchise serves as an advisor and trusted partner to our clients across multiple industry sectors
throughout Canada.
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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, personal loans and everyday financial and investment advice.
Our employees are focused on providing all of our customers with an
exceptional experience every time they interact with us.
Commercial Banking serves businesses with a comprehensive suite of
commercial products and services, including business deposit accounts,
commercial credit cards, business loans and commercial mortgages,
cash management solutions, foreign exchange services and specialized
banking programs. Our commercial bankers partner with our customers
to help them grow and manage their businesses.
Strategy and Key Priorities
2019 Priorities and Achievements
Key Priority: Continue our focus on customer loyalty and growth
Achievements
‰ Gained market share in personal deposits, credit cards, commercial
loans and commercial deposits
‰ Achieved strong employee engagement survey results, above leading
company benchmarks, demonstrating our employees’ ongoing
commitment to deliver a leading customer experience
‰ Ran effective campaigns in support of key offerings, ranging from
home financing and credit cards to Everyday Banking, which helped
to increase our new-to-BMO customer base and deepen existing
relationships
‰ Continued to grow our mix of advice-based roles, strengthening our
ability to engage with customers on the financial issues that are
important to them, whenever and however they choose to interact
with us
Implemented a new measurement methodology, a customer insights
platform and a disciplined customer callback program with robust
training and coaching in order to understand and address customer
concerns and continuously improve the customer experience
‰
‰ Upgraded 50 branches across Canada and opened three new
branches – including a flagship branch in Laval, a new concept branch
at Stackt Market in downtown Toronto, and a new Smart Branch in
Cochrane, Alberta
Improved processes and increased efficiencies in our Business
Banking Express platform, allowing our sales force to spend more
time engaging directly with customers
‰
‰ Created a new Technology and Innovation Banking Group to help
companies compete and grow in Canada’s burgeoning technology
sector
‰ Proud to be named Best Commercial Bank in Canada for the fifth
consecutive year by World Finance Magazine at its 2019 Banking
Awards, in recognition of our strong regional and industry focus, as
well as our commitment to building customer relationships and
providing innovative solutions
34 BMO Financial Group 202nd Annual Report 2019
Key Priority: Deliver a leading digital experience
Achievements
‰ Expanded lending account opening capabilities with the roll-out of a
new mobile digital line of credit application and mobile pre-approved
mortgage application
‰ Grew the total number of retail chequing, savings, credit card, home
financing, loans and line of credit accounts acquired digitally by 6%
in Canada
‰ First financial institution in Canada to launch a full range of biometric
authenticators via our mobile app for commercial banking customers.
Recognized with the Aite Group 2019 Cash Management & Payments
Innovation Award for Digital Channel Capabilities for reimagining the
online commercial customer experience
2020 Focus
‰ Launched BMO InnoV8, a digital innovation program that fosters
digital ideation and has generated two patent applications in its
first year
‰ Continued to improve the mobile experience, which resulted in a
13% increase in the number of active mobile users and recognition
as a Strong Performer in The Forrester Banking WaveTM: Canadian
Mobile Apps Q2 2019 report
‰ Recognized with the Celent Model Bank 2019 Award for Innovation
Enablement and nominated as a finalist for PwC Canada’s Vision to
Reality Award
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&
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‰ Continue to improve customer loyalty by deepening primary relationships
‰ In Personal Banking, deliver a leading customer experience by leveraging new digital channels and enhancing
existing networks
‰ In Commercial Banking, focus on maintaining our core strengths, while targeting opportunities for growth and
diversification across high-value sectors and businesses
‰ Continue to enhance the digital experience through sales and service transactions
‰ Continue to build efficiencies in our business by streamlining operations, investing in digital capabilities and through
cross-bank collaboration
BMO Financial Group 202nd Annual Report 2019 35
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian P&C
(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)
Provision for (recovery of) credit losses on impaired loans (2)
Provision for (recovery of) credit losses on performing loans (2)
Total provision for credit losses (2)
Non-interest expense (1)
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets (3)
Adjusted net income
Key Performance Metrics and Drivers
Personal revenue
Commercial revenue
Net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Return on equity (%)
Adjusted return on equity (%)
Operating leverage (%)
Adjusted operating leverage (%)
Efficiency ratio (%)
Net interest margin on average earning assets (%)
Average earning assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Full-time equivalent employees
2019
5,878
2,128
8,006
544
63
607
3,854
3,545
919
2,626
2
2,628
4,998
3,008
3.0
5.2
3.9
3.9
27.3
27.3
1.3
1.3
48.1
2.64
222,513
237,142
236,253
175,125
14,728
2018
5,541
2,069
7,610
466
3
469
3,710
3,431
882
2,549
2
2,551
4,921
2,689
2.0
3.7
5.0
5.0
30.5
30.6
(1.3)
(1.3)
48.7
2.60
212,965
223,536
222,673
159,483
14,740
2017
5,261
2,079
7,340
na
na
483
3,534
3,323
823
2,500
3
2,503
4,625
2,715
13.2
6.4
3.3
3.3
29.8
29.8
3.1
3.1
48.2
2.53
207,815
215,848
215,667
152,492
14,648
(1) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to
retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion
costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. Refer to the
Changes in Accounting Policies in 2019 section on page 111 for further details.
Reported Net Income
($ millions)
2,500
2,549
2,626
2017
2018
2019
Average Deposits
($ billions)
97.0
99.3
Personal
Commercial
109.6
55.5
60.2
65.5
2017
2018
2019
Average Gross Loans and Acceptances*
($ billions)
237.1
223.5
215.8
63.1
8.6
45.1
99.1
69.4
8.8
45.4
99.9
80.1
9.2
46.7
101.2
2017
2018
2019
Business and Government
Credit Cards
Consumer Instalment and Other Personal
Residential Mortgages
(2) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we
*Numbers may not add due to rounding.
record a provision for credit losses on impaired loans and a provision for credit losses on performing loans. Prior periods have
not been restated. The total provision for credit losses in periods prior to 2018 is comprised of specific provisions.
(3) Before tax amounts of $2 million in each of 2019 and 2018, and $3 million in 2017 are included in non-interest expense.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
36 BMO Financial Group 202nd Annual Report 2019
Financial Review
Canadian P&C reported net income was $2,626 million and adjusted net income was $2,628 million, an increase of $77 million or 3% from the
prior year for both reported and adjusted net income. Adjusted net income excludes the amortization of acquisition-related intangible assets.
Higher revenue was partially offset by higher expenses and higher provisions for credit losses.
Revenue was $8,006 million, an increase of $396 million or 5% from the prior year. In our personal banking business, revenue increased
$77 million or 2%, due to higher balances across most products and higher margins, partially offset by lower non-interest revenue. The prior year
included a $39 million gain related to the restructuring of Interac Corporation, which impacted personal banking revenue growth by 1%. In our
commercial banking business, revenue increased $319 million or 12%, due to higher balances across most products, increased non-interest revenue
and higher margins.
Net interest margin was 2.64%, an increase of 4 basis points, due to a favourable product mix and the benefit of higher rates.
The total provision for credit losses was $607 million, an increase of $138 million from the prior year. The provision for credit losses on impaired
loans increased $78 million, due to higher consumer and commercial provisions in the current year. There was a $63 million provision for credit losses
on performing loans in the current year, compared with a $3 million provision for credit losses on performing loans in the prior year.
Non-interest expense was $3,854 million, an increase of $144 million or 4% from a year ago, largely reflecting continued investment in the
business, including higher technology and sales force investments.
Average gross loans and acceptances increased $13.6 billion or 6% from a year ago to $237.1 billion. Total personal lending balances (excluding
retail cards) increased $2.5 billion or 2% from the prior year, and included growth of 4% in proprietary mortgages and amortizing home equity line
of credit loans. Commercial loan balances (excluding corporate cards) increased $10.7 billion or 15%, with good growth across a number of
industry sectors.
Average deposits increased $15.6 billion or 10% to $175.1 billion. Personal deposit balances increased 10%. Commercial deposit balance growth
was broad-based, with balances up 9% from the prior year.
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Business Environment, Outlook and Challenges
The personal and commercial banking business in Canada is highly competitive in a rapidly changing environment. Traditional competitors continue
to invest in innovative technologies that allow them to serve customers in new ways and focus more effectively on the customer experience.
Non-traditional competitors have continued to gain momentum and are deepening their connections with banks, in order to enhance their
products and build customer relationships.
Growth in the Canadian economy slowed further in 2019, in part because high household debt levels restrained consumer spending, while
business investment was impacted by trade-related uncertainties. Despite lower borrowing costs, growth in consumer loans, mortgages and credit
cards is projected to be modest as a result of high debt levels. Business lending also faces downward pressure due to trade-related uncertainties and
concerns over a potential economic slowdown. On the deposit side, growth in personal deposits is expected to rebound slightly given solid labour
market conditions, while growth in personal term deposits is expected to decelerate from the strong growth recorded in 2019 given the lower
interest rate environment. Growth in business deposits is projected to trend upwards.
We are committed to building out our commercial banking business by continuing to expand our advisory sales force and targeting commercial
opportunities across geographic regions, market segments and industry sectors, especially in high-value sectors and businesses.
We continue to enhance our personal banking business by deepening primary customer relationships, while leveraging digital technologies to
deliver an exceptional customer experience. We continue to position ourselves to thrive in a digital future by investing in new technologies and
enhancing existing networks.
Technology will continue to play a leading role in delivering exceptional experiences for all our customers, while enhancing the efficiency of
our operations.
The Canadian economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Developments and Outlook
section on page 18.
Caution
This Canadian Personal and Commercial Banking section contains forward-looking statements. Please refer to 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 17.
BMO Financial Group 202nd Annual Report 2019 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
U.S. Personal and Commercial Banking
We serve more than two million customers by providing a banking experience with a human touch, while delivering
a broad range of financial services. We serve our personal banking customers seamlessly across our extensive
network of more than 560 branches, our dedicated contact centres, our digital banking platforms, and nationwide
access to more than 40,000 automated teller machines. Our commercial bankers act as trusted advisors and partners
for our commercial clients, delivering sector and industry expertise, local presence, and a full suite of commercial
products and services.
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Lines of Business
Personal Banking offers a variety of products and services, including
deposits, home lending, consumer credit, small business lending, credit
cards and other banking services. Our goal in everything we do is to help
our customers make real financial progress.
Commercial Banking provides clients with a broad range of products
and services, including multiple financing options and treasury
solutions, as well as risk management products. Our commercial
bankers partner with our clients, anticipating their financial needs and
sharing our expertise and knowledge to help them grow and manage
their businesses.
Strategy and Key Priorities
2019 Priorities and Achievements
Key Priority: Deliver a great experience for our customers and employees
Achievements
‰ Further improved customer loyalty in Personal Banking, as measured
by Net Promoter Score, and continued to have best-in-class Net
Promoter Score in Commercial Banking
‰ Maintained robust customer growth, continuing to lead in total
household account origination for retail deposits, and increasing
growth in commercial net customer acquisition
‰ Solidified our second-place ranking in deposit market share in our core
Chicago and Wisconsin markets and our top-five ranking across our
Midwest footprint
‰ For an unprecedented tenth consecutive year, recognized by
‰
American Banker for our team of women leaders as the “Most
Powerful Women in Banking and Finance”
Included in the Bloomberg Gender-Equality Index, which recognizes
commitment to gender equality and inclusivity in the workplace, for
the fourth consecutive year, and featured in Forbes Magazine as one
of America’s Best Employers for Diversity in 2019, based on an
independent survey of more than 50,000 U.S.-based employees
‰ Recognized for the third consecutive year as a Best Place to Work for
LGBTQ Equality by the Human Rights Campaign Foundation in its 2019
Corporate Equality Index
Key Priority: In Personal Banking, accelerate digitization and guidance delivery, drive deposit growth,
and optimize our lending portfolio
Achievements
‰ Launched a new mobile banking platform to better enable our
customers to bank whenever and however they want
‰ Delivered market-leading deposit growth, outpacing our peers, with
our robust deposit product offering
‰ Advanced digital customer acquisition, with account opening
capabilities now covering all 50 states and with a majority of digital
deposits originating outside of our physical footprint
‰ Continued to enhance the customer and employee experience with a
new digital home lending account application process, as well as
through process simplification and centralization
‰ Strengthened our lending portfolio with a continued focus on non-real
estate assets, such as credit card loans and other unsecured lending
Invested in branch automation capabilities to allow a more proactive
focus on customer conversations
‰
38 BMO Financial Group 202nd Annual Report 2019
Key Priority: In Commercial Banking, accelerate growth in high-potential geographies, invest in
national specialty businesses, and increase deposit capture and share of wallet
Achievements
‰ Continued to expand our geographic footprint, opening our second
office in North Texas and building out our team in Atlanta, with greater
emphasis on going to market with BMO’s full suite of products,
solutions, and capabilities to drive organic growth
‰ Strengthened our presence in our core Illinois market by significantly
expanding our middle-market team
‰ Enhanced our national franchise with new specialty businesses,
including the addition of asset-based retail and health care
lending platforms
‰ Delivered peer-leading deposit growth by launching new sales
initiatives and further differentiating our product and service offering,
such as our hybrid chequing account
‰ Launched new digital capabilities, including the Online Banking for
Business mobile app with biometric authentication and a redesigned
online Business Self-Service Centre
‰ Recognized with a Celent Model Bank 2019 Award for the launch
of BMO Payment Hub, a cross-border initiative to modernize our
payments infrastructure to deliver faster and more efficient payment
experiences for our customers
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2020 Focus
‰ Continue to strengthen our competitive position by investing in key capabilities, such as digital and talent, while
leveraging BMO’s full suite of products, solutions and capabilities, and our unique cross-border advantage to deliver
a great customer experience
‰ In Personal Banking, continue to drive strong deposit growth, new customer acquisition, and a larger share of
wallet through more holistic customer conversations and digital engagement
‰ In Commercial Banking, continue to build our national presence through growth in high-potential geographies and
specialty businesses, invest in digital and payment capabilities, and strengthen cross-bank collaboration
‰ Continue to focus on managing structural costs and expenses to improve productivity and strengthen our operating
position
BMO Financial Group 202nd Annual Report 2019 39
Reported Net Income
($ millions)
U.S. dollar
Canadian dollar
1,018
1,082
781
1,611
1,394
1,212
2017
2018
2019
Average Deposits*
(US$ billions)
Personal
Commercial
37.2
40.5
28.6
29.9
45.1
35.2
2017
2018
2019
*Numbers may not add due to rounding.
Average Gross Loans and Acceptances*
(US$ billions)
69.3
1.9
3.4
7.6
56.4
76.1
1.7
3.5
9.3
61.6
85.5
1.6
4.3
9.1
Personal
Loans
70.5
Commercial
Loans
2017
2018
2019
Other Loans
Indirect Auto
Mortgage and Home Equity
Commercial
*Numbers may not add due to rounding.
MANAGEMENT’S DISCUSSION AND ANALYSIS
U.S. P&C
(Canadian $ equivalent in millions, except as noted)
As at or for the year ended October 31
Reported net income
Adjusted net income
Net income growth (%)
Adjusted net income growth (%)
(US$ in millions, except as noted)
Net interest income (teb)
Non-interest revenue (1)
Total revenue (teb) (1)
Provision for (recovery of) credit losses on impaired loans (2)
Provision for (recovery of) credit losses on performing loans (2)
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Total provision for credit losses (2)
Non-interest expense (1)
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets (3)
Adjusted net income
Key Performance Metrics and Drivers (US$ basis)
Personal revenue
Commercial revenue
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 earning assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Full-time equivalent employees
2019
1,611
1,654
15.6
15.0
3,174
875
4,049
121
28
149
2,362
1,538
326
1,212
32
1,244
1,362
2,687
12.0
11.4
5.6
2.6
2.7
11.0
11.3
3.0
2.9
58.3
57.3
3.53
90,035
85,505
84,966
80,316
7,013
2018
1,394
1,439
36.9
35.1
2,983
851
3,834
201
(31)
170
2,303
1,361
279
1,082
35
1,117
1,257
2,577
38.7
36.9
9.9
4.1
4.3
10.8
11.1
5.8
5.6
60.1
58.9
3.72
80,255
76,067
75,558
70,431
7,248
2017
1,018
1,064
(3.0)
(3.2)
2,718
770
3,488
na
na
221
2,213
1,054
273
781
36
817
1,085
2,403
(1.6)
(1.7)
1.3
2.3
2.5
7.9
8.3
(1.0)
(1.2)
63.4
62.0
3.69
73,752
69,294
69,324
65,724
7,197
(1) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to
retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion
costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. Refer to the
Changes in Accounting Policies in 2019 section on page 111 for further details.
(2) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we
record a provision for credit losses on impaired loans and a provision for credit losses on performing loans. Prior periods have
not been restated. The total provision for credit losses in periods prior to 2018 is comprised of specific provisions.
(3) Before tax amounts of US$43 million in 2019, US$45 million in 2018 and US$49 million in 2017 are included in non-interest
expense.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
40 BMO Financial Group 202nd Annual Report 2019
Financial Review
U.S. P&C reported net income was $1,611 million, an increase of $217 million or 16%, and adjusted net income was $1,654 million, an increase of
$215 million or 15% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the
remainder of this section are on a U.S. dollar basis.
Reported net income was $1,212 million, an increase of $130 million or 12%, and adjusted net income was $1,244 million, an increase of
$127 million or 11%, primarily due to good revenue performance and lower provision for credit losses, partially offset by higher expense.
Revenue was $4,049 million, an increase of $215 million or 6%, primarily reflecting higher balances across most products and increased non-
interest revenue, partially offset by a lower net interest margin. In our personal banking business, revenue increased $105 million or 8%, largely due
to higher deposit revenue. In our commercial banking business, revenue increased $110 million or 4%, primarily due to higher loan balances and
deposit revenue, net of loan margin compression.
Net interest margin was 3.53%, a decrease of 19 basis points, due to loan margin compression and changes in deposit product mix, net of
improved deposit product margins and the impact of deposits growing faster than loans.
The total provision for credit losses was $149 million, a decrease of $21 million from the prior year. The provision for credit losses on impaired
loans decreased $80 million, largely due to higher consumer and commercial recoveries in the current year. There was a $28 million provision for
credit losses on performing loans in the current year, compared with a $31 million recovery of credit losses on performing loans in the prior year.
Non-interest expense was $2,362 million, an increase of $59 million or 3%, and adjusted non-interest expense was $2,319 million, an increase
of $61 million or 3%, primarily due to continued investment in the business, including higher technology and employee-related costs, partially offset
by lower Federal Deposit Insurance Corporation insurance expense and the impact of non-recurring items in the current and prior year.
Average gross loans and acceptances increased $9.4 billion or 12% from a year ago to $85.5 billion, driven by commercial loan growth of 14%
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and higher personal loan balances of 4%.
Average deposits increased $9.9 billion or 14% to $80.3 billion, with 18% growth in commercial balances and 11% growth in personal balances.
Business Environment, Outlook and Challenges
The U.S. P&C business operates in a rapidly changing environment and is primarily based in eight states (Illinois, Wisconsin, Missouri, Indiana,
Minnesota, Kansas, Arizona and Florida). In addition, our commercial business provides targeted nationwide coverage for key specialty sectors and
has offices in select regional markets.
The environment for growing our personal and commercial banking customer base remains highly competitive, and the declining interest rate
environment will result in added pressure on both margins and customer acquisition. After weakening in 2019, the U.S. economy is expected to grow
at a steadier rate in 2020, in response to recent declines in interest rates and a modest expansion of fiscal policy. The major risks affecting the U.S.
economic outlook relate to an escalation in trade disputes, domestic political uncertainty and geopolitical tensions.
We continue to monitor the competitive landscape in order to effectively price our products and services and invest in building a seamless
human-digital interface in banking, enabling our customers to bank whenever and however they want.
Peer-leading performance in our commercial lending business has allowed us to build a strong presence in our diversified and specialized
sectors and establish a position of strength in our core footprint and chosen markets. In our personal lending business, we are focused on improving
efficiency in order to create a better experience for our customers and bankers.
The personal and commercial businesses are well equipped and remain committed to pursuing a customer-focused growth strategy with an
emphasis on high-growth sectors, increasing share in new markets and deepening our relationships with existing customers.
The U.S. economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Developments and Outlook
section on page 18.
Caution
This U.S. Personal and Commercial Banking section contains forward-looking statements. Please refer to 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 17.
BMO Financial Group 202nd Annual Report 2019 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Wealth Management
BMO Wealth Management serves a full range of client segments, from mainstream to ultra-high net worth and
institutional. Our businesses offer a broad range of wealth management products and services, including insurance,
with an active presence in markets across Canada, the United States, EMEA and Asia.
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Lines of Business
BMO Private Wealth offers client-focused investment, wealth
management and financial services and solutions. In Canada, BMO Nesbitt
Burns provides full-service investing and wealth advisory services,
leveraging strong financial planning and high-quality solutions. BMO
Private Banking Canada & Asia serves high net worth and ultra-high net
worth clients and families through innovative advice-based solutions,
including investment management, tax planning, business succession
planning, trust and estate services, and philanthropy. Together as one
team, we are helping clients grow, protect and transition their wealth.
BMO InvestorLine is a digital investing service that offers clients three
ways to invest: our top-ranked self-directed service; adviceDirect™, which
provides personalized advice and support from registered investment
advisors while allowing clients to control trading; and SmartFolio™, a
digital solution that matches a portfolio to a client’s goals while our
professional investment team handles day-to-day investment
management.
Strategy and Key Priorities
2019 Priorities and Achievements
BMO Wealth Management U.S. offers financial solutions to high net
worth and ultra-high net worth families and businesses, and under
BMO Harris Financial Advisors, to mass affluent clients.
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.
Our BMO Mutual Funds and BMO Exchange Traded Funds offer our
clients innovative investment solutions across a range of channels.
BMO Insurance provides insurance and wealth solutions. We
manufacture life insurance, accident and sickness insurance, annuity
products and segregated funds that are marketed to brokers and
directly to individuals and group pension customers. We also offer
group creditor and travel insurance to bank customers in Canada.
Key Priority: Deliver on our clients’ current and evolving personal wealth management and insurance
needs, with an exceptional client experience
Achievements
‰ Continued to drive stronger client loyalty scores across all our
businesses with our focus on delivering great client experiences and
comprehensive wealth planning
‰ Strengthened our deposit and lending capabilities, including product
development and expansion of tailored financing solutions for our
ultra-high net worth clients
‰ Recognized in the 2019 Brokerage Report Card, issued by Investment
Executive, which reported that over 90% of our BMO Nesbitt Burns
investment advisors surveyed would recommend their firm
‰ Rebranded our U.S. ultra-high net worth business as BMO Family Office,
providing integrated solutions and tailored advice designed to help
meet the unique needs of ultra-affluent individuals and families
‰ Transformed the client onboarding journey, making it easier for new
clients to open an account
‰ Continued to address the unique needs of women business owners
and clients with our industry-leading BMO for Women program
‰ Maintained and reinforced our leading position in pension de-risking,
supported by a prudent approach to underwriting
42 BMO Financial Group 202nd Annual Report 2019
Key Priority: Build on our leadership position in key asset management markets through enhanced
investment and distribution capabilities
Achievements
‰ Further sharpened our focus on products, channels and markets where
we have a competitive advantage, such as responsible investment,
alternatives, and liability-driven investment
‰ Launched the BMO Sustainable Development Goal Engagement Global
Equity Fund, combining expertise in active equity management with a
deep commitment to responsible investing
‰ Maintained our exchange traded funds leadership position in Canada,
ranking #1 in net new asset growth for the ninth consecutive year
and #2 in market share
‰ Continued to successfully build out our strong real estate business,
particularly in Europe
Key Priority: Bring the best of BMO to our clients through effective collaboration
‰
Introduced a holistic health care banking program, providing a full
suite of tailored banking and wealth management services designed
to support health care professionals through every stage of their
life cycle
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Achievements
‰ Unified our BMO Nesbitt Burns and BMO Private Banking teams
in Canada to become BMO Private Wealth, allowing us to take
collaboration to the next level and bringing together the best of
two strong businesses for our clients
‰ Continued to make progress toward our goal of building a world-class
partnership for business owner clients with Business and Commercial
banking by increasing the number of integrated deal teams across
Canada to more than 70 and establishing three new integrated
Wealth/Commercial teams in Chicago, Milwaukee and Dallas
2020 Focus
‰ Deliver a differentiated client experience, providing outstanding support and working together to grow, protect and
transition their wealth with confidence
‰ Extend our advantage as a solutions provider, delivering innovative asset management and insurance offerings that
anticipate clients’ evolving needs and exceed their expectations
‰ Build on our strong foundation and continue to evolve, simplify and streamline our businesses to drive value,
efficiency and returns
‰ Continue to strengthen collaboration across BMO Wealth Management, the enterprise and borders to bring the best
of BMO to all clients
BMO Financial Group 202nd Annual Report 2019 43
Reported Net Income
($ millions)
967
1,072
1,060
2017
2018
2019
2019 Net Revenue by Line of Business
(%)
13% BMO Wealth
Management U.S.
8% BMO Insurance
29% BMO Global Asset
Management
44% BMO Private Wealth
6% BMO InvestorLine
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO 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)
Revenue, net of CCPB
Provision for (recovery of) credit losses on impaired loans (2)
Provision for (recovery of) credit losses on performing loans (2)
Total provision for credit losses (2)
Non-interest expense (1)
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets (3)
Reinsurance adjustment (4)
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Adjusted net income
Key Performance Metrics and Drivers
Traditional Wealth businesses net income
Traditional Wealth businesses adjusted net income
Insurance net income
Insurance adjusted net income
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%)
Revenue growth, net of CCPB (%)
Adjusted CCPB
Revenue growth, net of adjusted CCPB (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Return on equity (%)
Adjusted return on equity (%)
Operating leverage, net of CCPB (%)
Adjusted operating leverage, net of CCPB (%)
Efficiency ratio, net of CCPB (%)
Adjusted efficiency ratio (%)
Adjusted efficiency ratio, net of CCPB (%)
Average common equity
Average assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Assets under administration (5)
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 net loans and acceptances
Average deposits
2019
2018
2017
935
6,727
7,662
2,709
4,953
2
(2)
–
3,522
1,431
371
1,060
37
25
1,122
826
5,475
6,301
1,352
4,949
6
–
6
3,515
1,428
356
1,072
41
–
1,113
722
5,496
6,218
1,538
4,680
na
na
8
3,355
1,317
350
967
65
–
1,032
862
899
198
223
(1.1)
0.8
21.6
0.1
2,684
0.6
0.2
0.3
16.7
17.7
(0.1)
0.3
71.1
45.3
69.8
6,321
40,951
23,519
23,487
36,419
393,576
471,160
6,459
805
846
267
267
11.0
8.0
1.3
5.7
1,352
5.7
4.8
5.8
17.8
18.5
0.9
(0.1)
71.0
55.0
70.0
5,989
35,913
20,290
20,260
34,251
382,839
438,274
6,440
729
794
238
238
24.5
17.6
5.1
7.1
1,538
7.1
0.4
1.9
15.9
17.0
6.7
5.2
71.7
52.7
70.0
6,040
32,562
18,068
18,063
33,289
359,773
429,448
6,304
613
512
77
85
4,156
5,794
600
532
50
60
3,619
5,748
650
546
76
88
3,300
5,783
(1) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected
to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, certain out-of-pocket expenses
reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.
Refer to the Changes in Accounting Policies in 2019 section on page 111 for further details.
(2) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we
record a provision for credit losses on impaired loans and a provision for credit losses on performing loans. Prior periods have
not been restated. The total provision for credit losses in periods prior to 2018 is comprised of specific provisions.
(3) Before tax amounts of $47 million in 2019, $52 million in 2018 and $80 million in 2017 are included in non-interest expense.
(4) Fiscal 2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) for the net impact
of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our
reinsurance business. This reinsurance adjustment is included in CCPB.
(5) Certain assets under management that are also administered by us are included in assets under administration.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
44 BMO Financial Group 202nd Annual Report 2019
Financial Review
BMO Wealth Management reported net income was $1,060 million, compared with $1,072 million in the prior year. Adjusted net income of
$1,122 million, which excludes the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision
to wind down our reinsurance business and the amortization of acquisition-related intangible assets, increased $9 million or 1%. The performance of
the reinsurance business did not meet our risk and return expectations, and we made the strategic decision to wind down the business during 2019.
Traditional Wealth reported net income was $862 million, an increase of $57 million or 7% from the prior year, and adjusted net income was
$899 million, an increase of $53 million or 6%, primarily driven by higher deposit and loan revenue and the impact of a legal provision in the prior
year, partially offset by lower fee-based revenue and higher expenses. Insurance reported net income was $198 million, compared with $267 million
in the prior year, and adjusted net income was $223 million, compared with $267 million, primarily due to lower reinsurance revenue.
Revenue of $7,662 million increased $1,361 million or 22% from the prior year. Revenue, net of reported CCPB, was $4,953 million, relatively
unchanged from the prior year. Revenue, net of adjusted CCPB, was $4,978 million, an increase of $29 million or 1%. Revenue in Traditional Wealth
was $4,555 million, an increase of $85 million or 2%, primarily due to higher deposit and loan revenue and the impact of a legal provision in the prior
year, partially offset by lower fee-based revenue, including lower performance fees from our asset management business. Insurance revenue, net of
reported CCPB, was $398 million, compared with $479 million in the prior year. Insurance revenue, net of adjusted CCPB, was $423 million, compared
with $479 million, primarily due to lower reinsurance revenue.
There was a decrease of $6 million from the prior year in the total provision for credit losses. The provision for credit losses on impaired loans
decreased $4 million, reflecting lower consumer provisions. There was a $2 million recovery of credit losses on performing loans in the current year.
Non-interest expense was $3,522 million, an increase of $7 million from the prior year. Adjusted non-interest expense was $3,475 million, an
increase of $12 million from the prior year, mainly due to select investments in the business.
Assets under management increased $32.9 billion or 8% from the prior year to $471.2 billion, primarily driven by stronger equity markets.
Assets under administration increased $10.7 billion or 3% from the prior year to $393.6 billion, primarily driven by stronger equity markets and
underlying business growth.
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Business Environment, Outlook and Challenges
BMO Wealth Management is a global financial services provider. The operating environment within the wealth management industry, which includes
major banks, insurance companies, brokers, and independent mutual fund and asset management companies, is highly competitive. All peer group
competitors are focused on differentiating the customer experience by leveraging new technologies, products and services to meet their clients’
evolving needs and goals.
Growth in the Canadian economy slowed in 2019 and is expected to pick up only modestly in 2020, while the U.S. economy is expected to
experience lower growth, in part due to trade protectionism. However, we anticipate good growth in net new assets, while market appreciation is
expected to be moderate in 2020. Short-term interest rates are expected to remain historically low in both Canada and the United States, and this
will have a negative impact on our brokerage businesses. Long-term interest rates in Canada and the United States are expected to remain close to
current levels. Ongoing changes in the competitive environment and client preferences will continue to exert downward pressure on fees for products
and services. We expect to maintain our disciplined expense management approach by achieving efficiencies through digitization and by simplifying
the way we work and serve our clients.
The Canadian and U.S. economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Developments
and Outlook section on page 18.
Caution
This BMO Wealth Management section contains forward-looking statements. Please refer to 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 17.
BMO Financial Group 202nd Annual Report 2019 45
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 2,800
professionals in 33 locations around the world, including 19 offices in North America.
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Lines of Business
Investment and Corporate Banking offers debt and equity capital-raising
services to clients, as well as loan origination and syndication, balance
sheet management solutions and treasury management services. We
provide strategic advice on mergers and acquisitions (M&A), 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.
Global Markets offers research and access to financial 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 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.
Strategy and Key Priorities
2019 Priorities and Achievements
Key Priority: Maintain our leadership position in Canada through our top-tier coverage team
Achievements
‰ Continued to support our clients and win notable mandates across a
diverse set of industries, including: completing four transactions for
Ensign Energy Services and acting as left-lead bookrunner in its
acquisition of Trinidad Drilling; acting as lead underwriter, joint lead
arranger and joint bookrunner for Searchlight Capital Partners in its
$2 billion acquisition of Mitel Networks Corporation; and acting as
exclusive financial advisor to Canada Pension Plan Investment Board in
its equity private placement in Premium Brands Holdings Corporation
‰ Continued to drive strong and increasing client loyalty scores across
our Corporate Banking business, resulting in new acquisitions of lead
lending relationships and continued growth of our loan book to support
our clients’ goals
‰ Established an enterprise Sustainable Finance Group in BMO Capital
Markets to raise capital and financing directed toward sustainable
outcomes, provide advisory services and manage a new impact
investment fund
‰
‰ Acted as lead manager in the largest-ever supranational bond issue in
the Canadian market with the World Bank’s $1.5 billion Sustainable
Development Bond, which raised awareness of the benefits of
investing in the health and nutrition of women, children and
adolescents around the world
Invested strategically in technology in our Global Markets business to
enhance the way we serve our clients; continued our partnership with
Clearpool Group to help our clients execute customizable algorithmic
trading strategies; launched an FX algorithm execution platform;
digitized our Research and Analytics platform; and continued to invest
in our machine learning and artificial intelligence capabilities
‰ Recognized as a Greenwich Quality and Share Leader in Canadian
Fixed Income by Greenwich Associates: Quality Leader in Canadian
Fixed Income Research and #3 Share Leader in Overall Canadian Fixed
Income. We were also recognized as a leading dealer in Canadian
Investment Grade Credit
46 BMO Financial Group 202nd Annual Report 2019
Key Priority: Drive performance in our U.S. platform with a focused strategy and selectively
expand our U.S. corporate bank where we are competitively advantaged
Achievements
‰ Successfully integrated KGS-Alpha Capital Markets, a New York-based
fixed income broker-dealer specializing in U.S. mortgage-backed
and asset-backed securities in the institutional investor market.
The transaction aligns with our U.S. strategy and positions BMO
as a top-tier dealer in securitized products with an emphasis on
agency-backed residential and commercial mortgage-backed
securities products
‰ Acted as financial advisor to Newmont Goldcorp Corporation in two key
transactions: as a financial advisor to Newmont Mining Corporation in
connection with its acquisition of Goldcorp Inc., which created the
world’s leading gold company; and in its subsequent joint venture with
Barrick Gold Corporation to combine their respective operations in
Nevada, resulting in the world’s largest gold producing complex
‰ Continued to build on our collaboration with our U.S. P&C business
to deliver for our clients in key middle-market M&A transactions,
including our exclusive financial advisory role with Mar-Cone
Appliance Parts in its recapitalization by Sterling Investment Partners
‰ Executed one of our largest financing commitments while also
acting as financial advisor to Brookfield Asset Management in its
US$13.2 billion acquisition of Johnson Controls International’s Power
Solutions business
‰ Completed our inaugural Sustainability Bond issuance of US$500 million
to support the bank’s commitment to sustainable finance
‰ Ranked #1 in the Institutional Investor 2019 Global Fixed Income
Research Team Survey for U.S. Rates Strategy, Technical Analysis,
and Federal Agency Debt Strategy
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Key Priority: Leverage our strong North American capabilities and presence in select international
markets
Achievements
‰ Named World’s Best Metals & Mining Investment Bank for the tenth
consecutive year by Global Finance, and hosted the 28th Annual Global
Metals & Mining Conference, with nearly 2,000 attendees from 38
countries
‰ Won notable mandates for our international clients, including: acting
as left-lead joint arranger, joint bookrunner and administrative agent
on senior credit facilities for Nuvei Technologies in its US$889 million
acquisition of U.K.-based SafeCharge International; and advised
and financed the Chrysaor group of companies in its US$2.7 billion
acquisition of the ConocoPhillips U.K. oil and gas business
‰ Launched infrastructure sector coverage in London, providing a third
vertical to complement our existing metals and mining and energy
platforms in this key market
2020 Focus
‰ Awarded the Lead Manager Sustainability Bond Award by
Environmental Finance for our influential role in the supranational,
sub-sovereigns and agency sector and our industry-defining
sustainability bonds
‰ Simplified our structure by establishing a single International Capital
Markets division and announced Bank of Montreal Europe as our
new European hub, to better align our operations within our global
footprint and enable us to operate more efficiently across our
network of international offices
‰ Continue to earn leading market share in Canada by strengthening our client relationships and driving incremental
market share growth
‰ Continue to leverage our key strategic investment to accelerate growth from our U.S. platform, and selectively
expand our U.S. corporate bank where we are competitively advantaged
‰ Continue to leverage our strong North American and global capabilities to grow our contribution from international
markets
‰ Continue to focus on working smarter and simplifying how we do business to enhance overall efficiency
BMO Financial Group 202nd Annual Report 2019 47
Reported Net Income
($ millions)
1,275
1,156
1,086
2017
2018
2019
Revenue by Line of Business
($ millions)
Global Markets
Investment and
Corporate Banking
4,576
1,880
4,363
1,822
4,734
2,030
2,696
2,541
2,704
2017
2018
2019
Revenue by Geography
(%)
Canada and
other countries
United States
38%
37%
62%
63%
45%
55%
2017
2018
2019
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BMO Capital Markets
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb) (1)
Non-interest revenue (1)(2)
Total revenue (teb) (1)(2)
Provision for (recovery of) credit losses on impaired loans (3)
Provision for (recovery of) credit losses on performing loans (3)
Total provision for (recovery of) credit losses (3)
Non-interest expense (2)
Income before income taxes
Provision for income taxes (teb)
Reported net income
Acquisition integration costs (4)
Amortization of acquisition-related intangible assets (5)
Adjusted net income
Key Performance Metrics and Drivers
Global Markets revenue (6)
Investment and Corporate Banking revenue
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) (%)
Average common equity
Average assets
Average gross loans and acceptances
Average net loans and acceptances
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb)
Non-interest expense
Reported net income
Adjusted net income
Average assets
Average net loans and acceptances
2019
2,394
2,340
4,734
52
28
80
3,261
1,393
307
1,086
10
17
1,113
2,704
2,030
(6.0)
(4.8)
8.5
14.1
13.5
9.8
10.1
(5.6)
(5.0)
68.9
68.2
10,430
342,347
60,034
59,946
2,776
1,609
1,197
292
312
107,185
21,260
2018
1,784
2,579
4,363
(17)
(1)
(18)
2,859
1,522
366
1,156
11
2
1,169
2,541
1,822
(9.4)
(8.5)
(4.7)
2.6
2.1
12.8
13.0
(7.3)
(6.8)
65.5
65.1
8,464
307,087
46,724
46,658
2,714
1,252
987
196
205
98,265
15,249
2017
2,501
2,075
4,576
na
na
44
2,786
1,746
471
1,275
–
2
1,277
2,696
1,880
3.2
3.3
6.0
8.0
8.0
15.3
15.4
(2.0)
(2.0)
60.9
60.8
7,900
302,518
48,217
48,191
2,502
1,320
929
267
268
93,253
15,359
(1) Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from
non-interest revenue to net interest income. Results for prior years and related ratios have been reclassified to conform with
the current year’s presentation.
(2) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to
retrospectively present prior periods as if IFRS 15 had always been applied. As a result, certain out-of-pocket expenses
reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.
Refer to the Changes in Accounting Policies in 2019 section on page 111 for further details.
(3) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we
record a provision for credit losses on impaired loans and a provision for credit losses on performing loans. Prior periods have
not been restated. The total provision for credit losses in periods prior to 2018 is comprised of specific provisions.
(4) KGS-Alpha acquisition integration costs before tax amounts of $13 million in 2019 and $14 million in 2018 are included in
non-interest expense.
(5) Before tax amounts of $22 million in 2019 and $3 million in both 2018 and 2017 are included in non-interest expense.
(6) Global Markets was previously known as Trading Products.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
48 BMO Financial Group 202nd Annual Report 2019
Financial Review
BMO Capital Markets reported net income was $1,086 million, compared with $1,156 million in the prior year, and adjusted net income was
$1,113 million, compared with $1,169 million. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition
integration costs. Higher revenue was more than offset by higher expenses, including a severance expense in the second quarter of 2019, and higher
provisions for credit losses.
Revenue was $4,734 million, an increase of $371 million or 9% from the prior year, or 7% excluding the impact of the stronger U.S. dollar.
Investment and Corporate Banking revenue increased $208 million to $2,030 million or 11% from the prior year, primarily due to higher corporate
banking-related revenue and higher underwriting and advisory revenue. Global Markets revenue increased $163 million to $2,704 million or 6%,
primarily due to higher interest rate trading revenue and higher commodities trading revenue, partially offset by lower equities trading revenue.
Global Markets revenue growth benefited from a significant contribution from the acquisition of KGS-Alpha and a fair value gain in the current year.
The total provision for credit losses was $80 million, compared with an $18 million recovery of credit losses in the prior year. The provision for
credit losses on impaired loans was $52 million, compared with a $17 million recovery on impaired loans in the prior year. There was a $28 million
provision for credit losses on performing loans in the current year, compared with a $1 million recovery of credit losses on performing loans in the
prior year.
Non-interest expense was $3,261 million, an increase of $402 million or 14%, and adjusted non-interest expense was $3,226 million, an
increase of $384 million or 14%, or 12% excluding the impact of the stronger U.S. dollar, largely due to higher employee-related costs, including the
impact of a severance expense in the second quarter of 2019 and the acquisition of KGS-Alpha. The severance expense and the KGS-Alpha acquisition
accounted for approximately two-thirds of the full-year increase.
Average assets increased $35.3 billion or 11% to $342.3 billion from the prior year. Excluding the impact of the stronger U.S. dollar, average
assets increased $31.0 billion, primarily due to higher net loans and acceptances, higher levels of securities and higher reverse repos.
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Business Environment, Outlook and Challenges
In fiscal 2019, the global operating landscape was characterized by uncertainty, which reflected escalating trade tensions, an unsettled interest rate
environment and a slower global economy. BMO Capital Markets navigated these challenging market conditions by continuing to execute on a
strategy that leveraged our balanced, diversified and client-focused business model.
Looking ahead to fiscal 2020, we will continue to strive to be a top 10 North American investment bank with a global reach. The United States
is our largest market opportunity, and we expect our business to benefit from the investments made in our U.S. platform, as well as our overall
franchise and capital position. In Canada, we expect our established business to maintain leading market share positions across all products and
sectors while providing a strong foundation for future growth. We continue to selectively expand our capabilities and product offerings to better serve
North American-based clients that have a global presence. Our disciplined and integrated approach to risk management, along with our continued
investments in regulatory technology infrastructure, will enable us to meet risk management requirements in the coming years. Stability in the
markets could be challenged by macroeconomic concerns, such as protracted trade tensions, an uncertain interest rate environment and slower global
economic growth. Assuming little further deterioration in the macroeconomic environment, we are confident that we will be able to maintain our
strong market position and achieve our strategic objectives.
The Canadian and U.S. economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Developments and
Outlook section on page 18.
Caution
This BMO Capital Markets section contains forward-looking statements. Please refer to 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 17.
BMO Financial Group 202nd Annual Report 2019 49
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, governance
and support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, human resources,
communications, marketing, real estate, procurement, data and analytics, and innovation. T&O develops, monitors, manages and maintains
governance of information technology, and also provides cyber security and operations services.
The costs of these Corporate Units and T&O services are largely transferred to the three operating groups (Personal and Commercial Banking,
BMO Wealth Management and BMO Capital Markets), with any remaining amounts retained in Corporate Services results. As such, Corporate Services
results largely reflect the impact of residual treasury-related activities, the elimination of taxable equivalent adjustments, and residual unallocated
expenses.
Corporate Services focuses on enterprise-wide priorities related to maintaining a sound risk and control environment and efficiency, while
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supporting our businesses in meeting their customer experience objectives. Notable achievements during the year included:
‰ Established the Chief Information and Operations Officer role, in a new operating model that aligns technology and operations with business groups
across the enterprise. This dual reporting structure allows for end-to-end accountability to ensure integrated business technology solutions, which
are facilitated by integrated teams.
‰ Launched the Financial Crimes Unit (FCU) to enhance security capabilities across the bank. The FCU represents evolving best practice in Canada,
bringing together cyber, fraud and physical security functions, as well as subject matter experts across the lines of business and business functional
groups. The FCU capabilities are complemented by advanced analytics and methodologies, including artificial intelligence (AI), to enable accelerated
detection, prevention, response and recovery capabilities to safeguard customer, employee and bank data.
‰ Continued to accelerate the deployment of digital technology to transform our business, including the launch of BMO Digital Banking for the
Personal and Business Banking business, Wealth operations digitization, expansion of BMO Capital Markets’ international capabilities and
digitization of Corporate and Commercial Banking operations, in line with the bank’s stated priorities.
‰ Advanced our data and analytics platform to build out analytics and robotics capabilities, supporting business initiatives and enabling further gains
in efficiency. Solidified cloud partnerships, driving innovative technology capabilities in the areas of robotics and AI, and continued to explore
opportunities to leverage quantum computing through the execution of proofs of concept with third-party providers and research institutions.
‰ Delivered a Technology Critical Service focus across the enterprise, to ensure resilience, scale and integration capabilities to reduce risk and costs,
and enhance technology-enabled experiences for our customers and employees.
Financial Review
Corporate Services reported net loss for the year was $625 million, compared with a reported net loss of $718 million in the prior year. Adjusted net
loss for the year was $268 million, compared with an adjusted net loss of $290 million in the prior year. Adjusted results in both the current and prior
year exclude restructuring charges of $357 million in 2019 and $192 million in 2018. The prior year also excludes a $425 million one-time non-cash
charge due to a revaluation of our U.S. net deferred tax asset, a $203 million benefit from the remeasurement of an employee benefit liability and
acquisition integration costs of $14 million. The adjusted net loss improved, primarily due to lower expenses, while revenue excluding teb was
relatively unchanged. Reported results increased, primarily due to the impact of the adjusting items noted above.
50 BMO Financial Group 202nd Annual Report 2019
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)
Provision for (recovery of) credit losses on impaired loans (1)
Provision for (recovery of) credit losses on performing loans (1)
Total provision for (recovery of) credit losses (1)
Non-interest expense
Income (loss) before income taxes
Recovery of income taxes (teb)
Reported net loss
Acquisition integration costs (2)
Restructuring costs (3)
Decrease in the collective allowance for credit losses (4)
U.S. net deferred tax asset revaluation (5)
Benefit from the remeasurement of an employee benefit liability (6)
Adjusted net loss
Adjusted total revenue (teb)
Total adjusted provision for (recovery of) credit losses (1)
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 (1)
Non-interest expense
Provision for (recovery of) income taxes (teb)
Reported net loss
Adjusted total revenue (teb)
Adjusted recovery of credit losses (1)
Adjusted non-interest expense
Adjusted net loss
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2019
(241)
(296)
(537)
238
(299)
(7)
(5)
(12)
854
(1,141)
(516)
(625)
–
357
–
–
–
(268)
(299)
(12)
370
(268)
14,537
(38)
(4)
190
(75)
(149)
(38)
(4)
74
(63)
2018
(243)
(313)
(556)
248
(308)
(13)
(2)
(15)
425
(718)
–
(718)
14
192
–
425
(203)
(290)
(308)
(15)
422
(290)
14,312
(40)
(12)
193
263
(484)
(40)
(12)
138
(104)
2017
(193)
(567)
(760)
177
(583)
na
na
(78)
626
(1,131)
(710)
(421)
55
41
(54)
–
–
(379)
(583)
(2)
480
(379)
14,549
(90)
(23)
245
(108)
(204)
(90)
(2)
171
(171)
(1) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we record a provision for credit losses on impaired loans and a provision
for credit losses on performing loans. Prior periods have not been restated. The total provision for credit losses in the periods prior to 2018 is comprised of both specific and collective provisions.
Changes in the provision for credit losses on performing loans under this methodology will not be considered an adjusting item.
(2) Acquisition integration costs related to the acquired BMO Transportation Finance business are included in non-interest expense.
(3) Restructuring charges before tax amounts of $484 million in 2019, $260 million in 2018 and $59 million in 2017. Restructuring costs are included in non-interest expense.
(4) Decrease in the collective allowance for credit losses before tax amount of $76 million in 2017.
(5) Charge due to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act. For more information, refer to the Critical Accounting Estimates –
Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.
(6) Results for 2018 included a benefit of $203 million after tax ($277 million pre-tax) from the remeasurement of an employee benefit liability as a result of an amendment to our other employee future
benefits plan for certain employees that was announced in the fourth quarter of 2018. This amount has been included in Corporate Services in non-interest expense.
Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.
na – not applicable
BMO Financial Group 202nd Annual Report 2019 51
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary Quarterly Earnings Trends
BMO’s underlying results have generally trended upwards over the past eight quarters, largely reflecting continued growth in the P&C businesses,
while market-sensitive businesses have been impacted by market variability.
Reported results were impacted by a restructuring charge, primarily related to severance, and a reinsurance adjustment, both in the fourth
quarter of 2019, a benefit from the remeasurement of an employee benefit liability in the fourth quarter of 2018, a restructuring charge in the second
quarter of 2018, and a charge related to a revaluation of our U.S. net deferred tax asset in the first quarter of 2018. In the third quarter of 2019,
BMO Wealth Management announced its decision to wind down its reinsurance business.
Canadian P&C delivered positive net income growth in seven of the past eight quarters, largely reflecting revenue growth driven by higher
balances and increases in non-interest revenue. U.S. P&C net income reflected good revenue growth over the past eight quarters, due to steady
growth in loans and deposits, partially offset by a declining net interest margin beginning in the fourth quarter of 2018, as well as good expense
management. Traditional Wealth results in BMO Wealth Management have generally seen moderate increases, largely due to growth in its diversified
businesses, including higher loan and deposit revenue. Results over the course of the past eight quarters were also impacted by market variability.
Insurance results are subject to variability resulting from the impact of changes in interest rates, equity markets and reinsurance claims, and were
also affected by elevated reinsurance claims in four of the past eight quarters. BMO Capital Markets recorded relatively solid revenue performance,
with year-over-year growth in the most recent six quarters, reflecting strong U.S. segment performance and benefits from our diversified businesses,
including the acquisition of KGS-Alpha. Quarterly net income has experienced variability due to market conditions. Results in the second quarter of
2019 included a severance expense. Corporate Services results can vary from quarter to quarter, in large part due to the inclusion of adjusting items,
which are largely recorded in Corporate Services.
The bank’s results reflect the impact of IFRS 15, Revenue from Contracts with Customers (IFRS 15), which was adopted retrospectively in
the first quarter of 2019 as though IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously
recorded in non-interest expense, as well as reimbursements from customers for certain expenses incurred on their behalf, are presented as
non-interest revenue.
BMO’s total provision for credit losses measured as a percentage of net loans and acceptances has ranged between 13 basis points and
28 basis points since the first quarter of 2018, and was 20 basis points in 2019. The bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9)
in the first quarter of 2018, and as a result of the forward-looking nature of IFRS 9, we anticipate there will be increased variability in the bank’s
provision for credit losses on performing loans, over time.
The effective income tax rate has varied, as it depends on legislative changes; changes in tax policy, including their interpretation by tax
authorities and the courts; earnings mix, including the relative proportion of earnings attributable to the different jurisdictions in which we operate;
and the amount of tax-exempt income from securities.
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Adjusted results in this Summary Quarterly Earnings Trends section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
52 BMO Financial Group 202nd Annual Report 2019
Summarized Statement of Income and Quarterly Financial Measures
(Canadian $ in millions, except as noted)
Q4-2019
Q3-2019
Q2-2019
Q1-2019
Q4-2018
Q3-2018
Q2-2018
Q1-2018
Net interest income (1)
Non-interest revenue (1)(2)
Revenue (1)(2)
Insurance claims, commissions and changes in policy benefit
liabilities (CCPB)
Revenue, net of CCPB (1)
Provision for (recovery of) credit losses on impaired loans (3)
Provision for (recovery of) credit losses on performing loans (3)
Total provision for credit losses (3)
Non-interest expense (2)
Income before provision for income taxes
Provision for income taxes
Reported net income (see below)
Acquisition integration costs (4)
Amortization of acquisition-related intangible assets (5)
Restructuring costs (6)
Reinsurance adjustment (7)
U.S. net deferred tax asset revaluation (8)
Benefit from the remeasurement of an employee benefit
liability (9)
Adjusted net income (see below)
Operating group reported net income
Canadian P&C reported net income
Amortization of acquisition-related intangible assets (5)
Canadian P&C adjusted net income
U.S. P&C reported net income
Amortization of acquisition-related intangible assets (5)
U.S. P&C adjusted net income
BMO Wealth Management reported net income
Amortization of acquisition-related intangible assets (5)
Reinsurance adjustment (7)
BMO Wealth Management adjusted net income
BMO Capital Markets reported net income
Acquisition integration costs (4)
Amortization of acquisition-related intangible assets (5)
BMO Capital Markets adjusted net income
Corporate Services reported net income
Acquisition integration costs (4)
Restructuring costs (6)
U.S. net deferred tax asset revaluation (8)
Benefit from the remeasurement of an employee benefit
liability (9)
Corporate Services adjusted net income
Basic earnings per share ($) (10)
Diluted earnings per share ($) (10)
Adjusted diluted earnings per share ($) (10)
Net interest margin on average earning assets (%)
PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances
(annualized) (%)
Effective tax rate (%)
Adjusted effective tax rate (%)
Canadian/U.S. dollar average exchange rate ($)
3,364
2,723
6,087
335
5,752
231
22
253
3,987
1,512
318
1,194
2
29
357
25
–
–
3,217
3,449
6,666
887
5,779
243
63
306
3,491
1,982
425
1,557
2
23
–
–
–
–
3,135
3,078
6,213
561
5,652
150
26
176
3,595
1,881
384
1,497
2
23
–
–
–
–
3,172
3,345
6,517
926
5,591
127
10
137
3,557
1,897
387
1,510
4
24
–
–
–
–
1,607
1,582
1,522
1,538
716
–
716
393
11
404
267
9
25
301
269
2
9
280
(451)
–
357
–
–
(94)
1.79
1.78
2.43
1.71
0.23
648
1
649
368
11
379
249
8
–
257
313
2
3
318
(21)
–
–
–
–
(21)
2.34
2.34
2.38
1.67
0.28
615
–
615
406
11
417
305
10
–
315
249
2
2
253
(78)
–
–
–
–
(78)
2.27
2.26
2.30
1.72
0.16
647
1
648
444
10
454
239
10
–
249
255
4
3
262
(75)
–
–
–
–
(75)
2.28
2.28
2.32
1.69
0.13
3,015
2,878
5,893
390
5,503
177
(2)
175
3,193
2,135
438
1,697
13
24
–
–
–
(203)
1,531
674
1
675
372
11
383
219
10
–
229
298
9
2
309
134
4
–
–
(203)
(65)
2.58
2.58
2.32
1.68
0.18
2,882
2,912
5,794
269
5,525
177
9
186
3,359
1,980
443
1,537
7
22
–
–
–
–
2,666
2,914
5,580
332
5,248
172
(12)
160
3,525
1,563
317
1,246
2
23
192
–
–
–
2,875
2,763
5,638
361
5,277
174
(33)
141
3,400
1,736
763
973
3
21
–
–
425
–
1,566
1,463
1,422
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641
–
641
364
12
376
291
10
–
301
301
2
–
303
(60)
5
–
–
–
(55)
2.32
2.31
2.36
1.65
0.19
588
1
589
348
11
359
296
11
–
307
286
–
–
286
(272)
2
192
–
–
(78)
1.87
1.86
2.20
1.63
0.17
646
–
646
310
11
321
266
10
–
276
271
–
–
271
(520)
3
–
425
–
(92)
1.43
1.43
2.12
1.74
0.15
0.21
21.0
22.0
1.3240
0.22
21.5
21.5
1.3270
0.14
20.4
20.5
1.3299
0.12
20.4
20.4
1.3351
0.18
20.6
19.7
1.3047
0.18
22.4
22.4
1.3032
0.18
20.3
21.2
1.2858
0.19
43.9
19.5
1.2575
(1) Effective the first quarter of 2019, certain dividend income in our Global Markets business has been reclassified from non-interest revenue to net interest income. Results for prior periods and related
ratios have been reclassified to conform with the current period’s presentation.
(2) Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been
applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, certain
out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue. Refer to the Changes in Accounting Policies in
2019 section on page 111 for further details.
(3) Effective the first quarter of 2018, the bank prospectively adopted IFRS 9, Financial Instruments (IFRS 9). Under IFRS 9, we record a provision for credit losses on impaired loans and a provision for
credit losses on performing loans. Changes in the provision for credit losses on performing loans under this methodology will not be considered an adjusting item. The provision for credit losses in
periods prior to the first quarter of 2018 is comprised of both specific and collective provisions.
(4) Acquisition integration costs are included in non-interest expense. BMO Capital Markets amounts of $2 million in Q4-2019, $3 million in Q3-2019, $2 million in Q2-2019, $6 million in Q1-2019,
$12 million in Q4-2018, and $2 million in Q3-2018. Corporate Services amounts of $6 million in each of Q4-2018 and Q3-2018, and $4 million in each of Q2-2018 and Q1-2018.
(5) Amortization of acquisition-related intangible assets before tax is charged to the non-interest expense of the operating groups. Canadian P&C amounts of $nil in Q4-2019, $1 million in Q3-2019, $nil in
Q2-2019, $1 million in each of Q1-2019 and Q4-2018, $nil in Q3-2018, $1 million in Q2-2018, and $nil in Q1-2018. U.S. P&C amounts of $15 million in Q4-2019, $14 million in each of Q3-2019,
Q2-2019 and Q1-2019, $15 million in each of Q4-2018 and Q3-2018, $14 million in Q2-2018, and $15 million in Q1-2018. BMO Wealth Management amounts of $11 million in each of Q4-2019 and
Q3-2019, $12 million in Q2-2019, $13 million in Q1-2019, and $13 million in each of Q4-2018, Q3-2018, Q2-2018 and Q1-2018. BMO Capital Markets amounts of $12 million in Q4-2019, $3 million in
Q3-2019, $4 million in Q2-2019, $3 million in Q1-2019, $2 million in Q4-2018, $nil in Q3-2018, $1 million in Q2-2018, and $nil in Q1-2018.
(6) Q4-2019 reported net income included a $357 million after-tax ($484 million pre-tax) restructuring charge, related to severance and a small amount of real estate-related costs, to improve our
efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business, and Q2-18 included a $260
million pre-tax ($192 million after-tax) restructuring charge. Restructuring charges are included in non-interest expense in Corporate Services.
(7) Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB, related to the net impact of major reinsurance claims from Japanese typhoons that
were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in CCPB in BMO Wealth Management.
(8) Q1-2018 reported net income included a charge due to the revaluation of our U.S. net deferred tax asset as a result of the enactment of the U.S. Tax Cuts and Jobs Act. For more information, refer to
the Critical Accounting Estimates – Income Taxes and Deferred Tax Assets section on page 119 of BMO’s 2018 Annual Report.
(9) Q4-2018 reported net income included a benefit of $203 million after tax ($277 million pre-tax) from the remeasurement of an employee benefit liability as a result of an amendment to our other
employee future benefits plan for certain employees that was announced in the fourth quarter of 2018. This amount has been included in non-interest expense in Corporate Services.
(10) Earnings per share (EPS) is calculated using net income after deducting total dividends on preferred shares and distributions on other equity instruments. For more information on EPS, refer to Note 23
on page 197 of the consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current period’s presentation.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
na – not applicable
Caution
This Summary Quarterly Earnings Trends section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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.
BMO Financial Group 202nd Annual Report 2019 53
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Review of Fourth Quarter 2019 Performance
Reported net income was $1,194 million for the fourth quarter of 2019, compared with $1,697 million in the prior year, and adjusted net income was
$1,607 million, an increase of $76 million or 5% from the prior year. Adjusted net income excludes a $357 million restructuring charge, related to
severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-
wide initiatives focused on digitization, organizational redesign and simplification of the way we do business, as well as a $25 million reinsurance
adjustment for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our
reinsurance business in the current quarter, the amortization of acquisition-related intangible assets and acquisition integration costs in both periods,
and a $203 million benefit from the remeasurement of an employee benefit liability in the prior year. Results reflect good performance in our P&C
businesses and higher net income in BMO Wealth Management, partially offset by a decrease in BMO Capital Markets and a higher net loss in
Corporate Services. Prior year results included a favourable tax item in our U.S. segment. A full list of adjusting items is disclosed in the Non-GAAP
Measures section on page 17.
Reported EPS of $1.78 decreased $0.80 or 31% and adjusted EPS of $2.43 increased $0.11 or 5% from the prior year.
Summary income statements and data for the quarter and comparative quarters are outlined on page 53.
The combined Personal and Commercial Banking business reported net income was $1,109 million and adjusted net income was $1,120 million,
and both increased 6% from the fourth quarter in the prior year, or 5% excluding the impact of the stronger U.S. dollar. Canadian P&C reported net
income was $716 million, an increase of $42 million, and adjusted net income was $716 million, an increase of $41 million or 6% from the prior year.
Results reflect strong revenue growth, partially offset by higher provisions for credit losses and higher expenses. On a Canadian dollar basis, U.S. P&C
reported net income was $393 million, an increase of $21 million or 6%, and adjusted net income was $404 million, an increase of $21 million or 5%
from the prior year. On a U.S. dollar basis, U.S. P&C reported net income was US$297 million, an increase of US$12 million or 4%, and adjusted net
income was US$305 million, an increase of US$11 million or 4%, primarily due to higher revenue and lower provisions for credit losses, partially
offset by a favourable U.S. tax item in the prior year and higher expenses. BMO Wealth Management reported net income was $267 million, an
increase of $48 million or 22%, and adjusted net income was $301 million, an increase of $72 million or 31% from the prior year. Adjusted net
income in the current quarter excludes the net impact of major reinsurance claims. Traditional Wealth reported net income was $237 million, an
increase of $45 million or 24%, and adjusted net income was $246 million, an increase of $44 million or 22%, due to the impact of a legal provision
in the prior year, higher deposit and loan revenue and higher fee-based revenue. Insurance reported net income was $30 million, an increase of
$3 million or 9%, and adjusted net income was $55 million, an increase of $28 million, primarily due to changes in investments to improve asset-
liability management. BMO Capital Markets reported net income was $269 million, compared with $298 million, and adjusted net income was
$280 million, compared with $309 million in the prior year. Higher revenue was more than offset by higher provisions for credit losses and higher
expenses. Corporate Services reported net loss was $451 million, compared with reported net income of $134 million in the fourth quarter of the
prior year. Adjusted net loss was $94 million, compared with an adjusted net loss of $65 million. Adjusted results in the current quarter exclude the
restructuring charge of $357 million and adjusted results in the prior year exclude the $203 million after-tax benefit from the remeasurement of an
employee benefit liability. Adjusted results decreased, primarily due to lower revenue excluding taxable equivalent basis (teb) adjustments, partially
offset by lower expenses.
Total revenue was $6,087 million, an increase of $194 million or 3% from the fourth quarter a year ago. Total revenue, net of insurance claims,
commissions and changes in policy benefit liabilities (CCPB), was $5,752 million, an increase of $249 million or 5%. Canadian P&C revenue increased
7%, due to higher balances across all products, higher margins and increased non-interest revenue. U.S. P&C revenue increased 6% on a Canadian
dollar basis and increased 4% on a U.S. dollar basis, with higher loan and deposit balances, partially offset by lower net interest margin. BMO Wealth
Management revenue was relatively unchanged compared with the prior year. Revenue, net of reported CCPB, increased 4%. Revenue in Traditional
Wealth increased 5%, due to the impact of a legal provision in the prior year, higher deposit and loan, and fee-based revenue. Insurance revenue, net
of reported CCPB, was relatively unchanged, compared with the prior year. Insurance revenue, net of adjusted CCPB, increased $24 million, due to
changes in investments to improve asset-liability management. BMO Capital Markets revenue increased 4%. Global Markets revenue increased, while
Investment and Corporate Banking revenue decreased slightly from the prior year. Corporate Services revenue decreased, primarily due to below
trend revenue excluding teb adjustments.
Net interest income was $3,364 million, an increase of $349 million or 12%, or 11% excluding the impact of the stronger U.S. dollar. On an
excluding trading basis, net interest income was $2,979 million, an increase of $210 million or 8%, or 7% excluding the impact of the stronger U.S.
dollar, largely due to higher loan and deposit balances across all operating groups, partially offset by lower loan margins.
Average earning assets were $778.4 billion, an increase of $66.7 billion or 9%, or $62.7 billion or 9% excluding the impact of the stronger U.S.
dollar, due to loan growth, higher securities and higher securities borrowed or purchased under resale agreements. BMO’s overall net interest margin
increased 3 basis points, primarily due to higher net interest income from trading activities and higher margin in Canadian P&C, partially offset by a
higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, as well as a lower margin in U.S.
P&C. On an excluding trading basis, net interest margin decreased 5 basis points, primarily due to a higher volume of assets in BMO Capital Markets and
Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.
Non-interest revenue, net of CCPB, was $2,388 million, a decrease of $100 million or 4%, or 5% excluding the impact of the stronger U.S. dollar,
largely due to lower trading non-interest revenue, partially offset by higher lending revenue. Non-interest revenue, net of adjusted CCPB, was
$2,413 million, a decrease of $75 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar. On an excluding trading basis, net of
adjusted CCPB, non-interest revenue was $2,434 million, an increase of $77 million or 3%, and also 3% excluding the impact of the stronger U.S. dollar.
Gross insurance revenue decreased $50 million from the fourth quarter in the prior year, due to lower annuity sales, offset by relatively
unchanged long-term interest rates in the current quarter, compared with increases in long-term interest rates that decreased the fair value of
investments in the prior year and stronger equity markets in the current quarter. These changes relate to annuity sales and fair value investments,
which are largely offset by changes in policy benefit liabilities, the impact of which is reflected in CCPB, as discussed below.
The total provision for credit losses was $253 million, an increase of $78 million from the fourth quarter a year ago. The provision for credit losses
ratio was 23 basis points, compared with 18 basis points in the prior year. The provision for credit losses on impaired loans of $231 million increased
$54 million from $177 million in the prior year, primarily due to higher provisions in BMO Capital Markets and our P&C businesses. The provision for
credit losses on impaired loans ratio was 21 basis points, compared with 18 basis points in the prior year. There was a $22 million provision for credit
losses on performing loans in the current quarter, compared with a $2 million recovery of credit losses on performing loans in the prior year. The
$22 million provision for credit losses on performing loans in the current quarter was due to portfolio growth, a moderating economic outlook and
negative migration. The year-over-year increase in the provision for credit losses on performing loans was a result of negative migration in the
54 BMO Financial Group 202nd Annual Report 2019
current quarter, compared with positive migration in the prior year, and higher provisions in the current quarter from changes in scenario weights,
partially offset by lower provisions in the current quarter from changes in the economic outlook.
Reported CCPB was $335 million in the fourth quarter of 2019, a decrease of $55 million from $390 million in the prior year, and adjusted CCPB,
which excludes the net impact of major reinsurance claims, was $310 million, a decrease of $80 million. Adjusted CCPB decreased, due to the impact
of lower annuity sales, offset by relatively unchanged long-term interest rates in the current year, compared with increases in long-term interest
rates that decreased the fair value of policy benefit liabilities in the prior year and the impact of stronger equity markets in the current year.
Reported non-interest expense was $3,987 million, an increase of $794 million or 25% from the fourth quarter in the prior year, and adjusted
non-interest expense was $3,463 million, an increase of $42 million or 1%, and also 1% excluding the impact of the stronger U.S. dollar. Adjusted
non-interest expense excludes the restructuring charge in the current quarter, the amortization of acquisition-related intangible assets and acquisition
integration costs in both periods, as well as a benefit from the remeasurement of an employee benefit liability in the prior year. The increase largely
reflected higher technology and employee-related costs, partially offset by lower premises costs.
The provision for income taxes was $318 million, a decrease of $120 million from the fourth quarter of 2018. The effective tax rate for the
current quarter was 21.0%, compared with 20.6% a year ago. The adjusted provision for income taxes was $454 million, an increase of $78 million
from the fourth quarter of 2018. The adjusted effective tax rate was 22.0% in the current quarter, compared with 19.7% in the fourth quarter of 2018.
The higher reported and adjusted effective tax rate in the current quarter relative to the fourth quarter of 2018 was primarily due to a favourable U.S.
tax item in the prior year.
Adjusted results in this Review of Fourth Quarter 2019 Performance section are non-GAAP and are discussed in the Non-GAAP Measures section
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2018 Financial Performance Review
The preceding discussions in the MD&A focused on our performance in fiscal 2019. This section summarizes our performance in fiscal 2018 relative
to fiscal 2017. As noted on page 13, certain prior-year data has been reclassified to conform with the presentation in 2019, including restatements
resulting from transfers between operating groups. Further information on these restatements is provided on page 33.
Net Income
Net income of $5,453 million increased $114 million or 2% from 2017, and adjusted net income of $5,982 million increased $485 million or 9% from
the prior year. Adjusted net income excludes a $425 million one-time non-cash charge related to the revaluation of our U.S. net deferred tax asset
due to U.S. tax reform and a $203 million benefit from the remeasurement of an employee benefit liability in 2018, restructuring costs and acquisition
integration costs and the amortization of acquisition-related intangible assets in both years, and a decrease in the collective allowance in 2017.
The impact of the weaker U.S. dollar on net income was not significant. Reported and adjusted net income growth largely reflected the benefit of
good performance in U.S. P&C, BMO Wealth Management and Canadian P&C. BMO Capital Markets results declined, while Corporate Services net loss
was higher on a reported basis, but lower on an adjusted basis.
Return on Equity
Return on equity (ROE) was 13.3% and adjusted ROE was 14.6% in 2018, compared with 13.2% and 13.6%, respectively, in 2017. ROE increased
in 2018, primarily due to growth in net income exceeding growth in common equity. Reported results in 2018 included the impact of the one-time
non-cash charge related to the revaluation of our U.S. net deferred tax asset on net income in 2018. There was an increase of $116 million or 2%
from the prior year in net income available to common shareholders in 2018, and an increase of $487 million or 9% in adjusted net income available
to common shareholders. Average common shareholders’ equity increased $792 million or 2% from 2017, primarily due to increased retained
earnings, partially offset by lower accumulated other comprehensive income. The reported return on tangible common equity (ROTCE) was 16.2% in
2018, compared with 16.3% in 2017, and adjusted ROTCE was 17.5% in 2018, compared with 16.4% in 2017.
Revenue
Revenue of $22,905 million increased $798 million or 4% from the prior year. Revenue, net of insurance claims, commissions and changes in policy
benefit liabilities (CCPB), increased $984 million or 5% to $21,553 million in 2018, driven by good performance in U.S. P&C, Canadian P&C and BMO
Wealth Management, and higher Corporate Services revenue, partially offset by a decrease in revenue in BMO Capital Markets. The impact of the
weaker U.S. dollar on revenue growth was not significant.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities were $1,352 million in 2018, a decrease of $186 million from $1,538 million
in 2017, due to the impact of higher increases in long-term interest rates decreasing the fair value of policy benefit liabilities in 2018, stronger equity
markets in 2017 and less elevated reinsurance claims in 2018, partially offset by higher annuity sales and underlying business growth in 2018.
The decrease related to the fair value of policy benefit liabilities and the increase related to annuity sales were largely offset in revenue.
Provision for Credit Losses
In 2018, we prospectively adopted IFRS 9. Under IFRS 9, we record a provision for credit losses on impaired loans and a provision for credit losses on
performing loans. The provision for credit losses on impaired loans under IFRS 9 is consistent with the specific provision under IAS 39 in prior years,
and the provision for credit losses on performing loans replaces the collective provision for credit losses under IAS 39. The provision for credit losses
(PCL) was $662 million in 2018, a decrease from $746 million in 2017. The PCL on impaired loans of $700 million decreased from $822 million in
2017, reflecting a net recovery of credit losses in BMO Capital Markets in 2018, compared with net provisions in 2017, lower provisions in Canadian
and U.S. P&C and BMO Wealth Management, and higher recoveries in Corporate Services. There was a $38 million net recovery of credit losses on
performing loans in 2018, primarily in U.S. P&C, compared with a $76 million pre-tax decrease in the collective allowance in 2017. Adjustments to the
collective allowance for credit losses were recorded in Corporate Services reported results in 2017. Prior periods under IAS 39 have not been restated.
Non-Interest Expense
Non-interest expense increased $285 million or 2% to $13,477 million in 2018, and adjusted non-interest expense increased $447 million or 3% to
$13,344 million. Adjusted non-interest expense excludes a $277 million benefit from the remeasurement of an employee benefit liability in 2018, as
BMO Financial Group 202nd Annual Report 2019 55
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well as restructuring costs, the amortization of acquisition-related intangible assets and acquisition integration costs in both years. Reported and
adjusted expenses increased, primarily due to increases in technology investments and higher employee-related expenses, partially offset by the
benefits of disciplined expense management.
Provision for Income Taxes
The provision for income taxes was $1,961 million in 2018, compared with $1,292 million in 2017. The reported effective tax rate in 2018 was 26.5%,
compared with 19.5% in 2017. The adjusted provision for income taxes was $1,565 million in 2018, compared with $1,353 million in 2017.
The adjusted effective tax rate in 2018 was 20.7%, compared with 19.8% in 2017. The higher reported tax rate in 2018 was due to the $425 million
one-time non-cash charge related to the revaluation of our U.S. net deferred tax asset as a result of U.S. tax reform.
Canadian P&C
Reported net income of $2,549 million increased $49 million or 2% during the year, and adjusted net income of $2,551 million, which excludes the
amortization of acquisition-related intangible assets, increased $48 million or 2% from 2017. Revenue increased $270 million or 4% to $7,610 million,
due to higher balances across most products and higher margins. In our personal banking business, revenue increased due to an increase in
non-interest revenue, including a $39 million gain related to the restructuring of Interac Corporation, higher margins and higher balances across most
products. In our commercial banking business, revenue decreased, as the benefit from higher balances and higher margins was more than offset by
lower non-interest revenue, due to the $187 million gain on the sale of Moneris US in 2017. The gain on the sale of Moneris US had a negative
impact of approximately 7% on net income growth and 3% on revenue growth in 2018. The provision for credit losses decreased $14 million or 3%
to $469 million. The provision for credit losses on impaired loans decreased $17 million in 2018, due to lower commercial provisions, partially offset
by higher consumer provisions. There was a $3 million provision for credit losses on performing loans in 2018. Non-interest expense was
$3,710 million, an increase of $176 million or 5% from 2017, largely reflecting continued investment in the business, including increases in
technology and sales force investments.
U.S. P&C
Reported net income of $1,394 million increased $376 million or 37% from the prior year, and adjusted net income of $1,439 million increased
$375 million or 35%. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the remainder of this
section are on a U.S. dollar basis.
Reported net income of $1,082 million increased $301 million or 39%, and adjusted net income of $1,117 million increased $300 million or 37%,
due to higher revenue, the benefit of U.S. tax reform in 2018 and lower provisions for credit losses, partially offset by higher expenses. The benefit of
U.S. tax reform added $91 million to reported net income and $95 million to adjusted net income. Results in 2017 included a $27 million after-tax
($43 million pre-tax) loss on a loan sale, which had a favourable impact of approximately 4% on reported net income growth, and 3% on an adjusted
basis. Revenue of $3,834 million increased $346 million or 10%, mainly due to higher deposit revenue and loan balances in 2018, and the impact of
the loss on a loan sale in 2017, net of loan margin compression. The provision for credit losses decreased $51 million or 23% to $170 million in 2018.
The provision for credit losses on impaired loans decreased $20 million in 2018, reflecting lower consumer and commercial provisions. There was a
$31 million net recovery of credit losses on performing loans in 2018. Non-interest expense of $2,303 million and adjusted non-interest expense of
$2,258 million both increased 4%, primarily due to investments in technology and other investments in the business.
BMO Wealth Management
Reported net income of $1,072 million increased $105 million or 11% from 2017. Adjusted net income, which excludes the amortization of
acquisition-related intangible assets, was $1,113 million, an increase of $81 million or 8% from the prior year. Traditional Wealth reported net income
of $805 million increased $76 million or 10% from 2017. Adjusted net income in Traditional Wealth of $846 million increased $52 million or 7%,
primarily due to growth from our diversified businesses and higher equity markets on average, partially offset by higher expenses and a legal
provision. Insurance net income was $267 million, an increase of $29 million or 12%, primarily driven by less elevated reinsurance claims in 2018 and
business growth, partially offset by unfavourable market movements in 2018 relative to favourable market movements in 2017. Revenue of
$6,301 million increased $83 million or 1% from 2017. Revenue, net of CCPB, of $4,949 million increased $269 million or 6%. Revenue in Traditional
Wealth of $4,470 million increased $260 million or 6%, due to growth in client assets, including a benefit from higher equity markets on average, and
higher deposit and loan revenue, partially offset by the impact of the divestiture of a non-core business in 2017. Insurance revenue, net of CCPB, of
$479 million increased $9 million or 2%, due to less elevated reinsurance claims in 2018 and business growth, partially offset by market movements
as noted above. The provision for credit losses was $6 million, compared with $8 million in 2017. The provision for credit losses on impaired loans
decreased $2 million, reflecting lower consumer provisions. There was no provision for credit losses on performing loans in 2018. Non-interest
expense was $3,515 million, an increase of $160 million or 5%. Adjusted non-interest expense was $3,463 million, an increase of $188 million or 6%
from 2017, reflecting higher revenue-based costs, technology investments and strategic growth in the sales force, partially offset by the impact of
the divestiture.
BMO Capital Markets
Reported net income of $1,156 million decreased $119 million or 9% from 2017. Adjusted net income, which excludes the amortization of
acquisition-related intangible assets and acquisition integration costs, was $1,169 million, a decrease of $108 million or 8%, primarily due to lower
revenue. Revenue of $4,363 million decreased $213 million or 5% from 2017. Excluding the impact of the weaker U.S. dollar, revenue decreased
$188 million or 4%. Global Markets revenue decreased $155 million or 6% from 2017, due to lower interest rate trading revenues, lower equity-
related activity with corporate clients and lower net securities gains. Investment and Corporate Banking revenue decreased $58 million or 3% from
2017, primarily due to lower underwriting and advisory revenue, partially offset by higher corporate banking-related revenue. Total net recovery of
credit losses was $18 million, compared with net provisions of $44 million in 2017. The net recovery of credit losses on impaired loans was
$17 million, and there was a $1 million net recovery of credit losses on performing loans in 2018. Non-interest expense of $2,859 million increased
$73 million or 3%, and adjusted non-interest expense of $2,842 million increased $59 million or 2%, or 3% excluding the impact of the weaker U.S.
dollar, mainly driven by continued investment in the business.
Corporate Services
Corporate Services reported net loss was $718 million in 2018, compared with a reported net loss of $421 million in 2017, and adjusted net loss was
$290 million, compared with an adjusted net loss of $379 million in 2017. Adjusted net loss excludes the one-time non-cash charge related to the
revaluation of our U.S. net deferred tax asset and the benefit resulting from the remeasurement of an employee benefit liability in 2018, restructuring
costs and acquisition integration costs in both years, with higher costs incurred in 2018, and a $54 million decrease in the collective allowance for
credit losses in 2017. The adjusted net loss improved, primarily due to lower expenses and higher revenue, excluding the taxable equivalent basis
adjustment. The reported net loss increased $297 million from 2017 due to the impact of the adjusting items and other drivers noted above.
Adjusted results in this 2018 Financial Performance Review section are non-GAAP and are discussed in the Non-GAAP Measures section on page 17.
56 BMO Financial Group 202nd Annual Report 2019
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
Derivative instruments
Other assets
Total assets
Liabilities and Equity
Deposits
Derivative instruments
Securities lent or sold under repurchase agreements
Other liabilities
Subordinated debt
Equity
Total liabilities and equity
2019
2018
2017
56,790
189,438
104,004
426,094
22,144
53,725
852,195
568,143
23,598
86,656
115,727
6,995
51,076
852,195
50,447
180,935
85,051
383,991
25,422
47,447
773,293
520,928
23,629
66,684
109,549
6,782
45,721
773,293
39,089
163,198
75,047
358,507
28,951
44,812
709,604
479,792
27,804
55,119
97,515
5,029
44,345
709,604
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Certain comparative figures have been reclassified to conform with the current year’s presentation.
Overview
Total assets of $852.2 billion increased $78.9 billion from October 31, 2018. Total liabilities of $801.1 billion increased $73.5 billion from
October 31, 2018. Total equity of $51.1 billion increased $5.4 billion from October 31, 2018. The U.S. dollar at October 31, 2019 was largely
unchanged from the prior year and did not meaningfully impact balance sheet growth.
Cash and Interest Bearing Deposits with Banks
Cash and interest bearing deposits with banks increased $6.3 billion, due to higher balances held with central banks.
Securities
(Canadian $ in millions)
As at October 31
Trading
Fair value through profit or loss (1)
Fair value through other comprehensive income – Debt and equity (2)
Available-for-sale
Amortized cost (3)
Held-to-maturity
Other
2019
85,903
13,704
64,515
na
24,472
na
844
2018
99,697
11,611
62,440
na
6,485
na
702
2017
99,069
na
na
54,075
na
9,094
960
Total securities
189,438
180,935
163,198
(1) Comprised of $2,899 million mandatorily measured at fair value and $10,805 million designated at fair value.
(2) Includes allowances for credit losses on fair value through other comprehensive income debt securities of $2 million as at October 31, 2019 ($2 million as at October 31, 2018 and na as at
October 31, 2017).
(3) Net of allowances for credit losses of $1 million ($1 million as at October 31, 2018 and na as at October 31, 2017).
na – Not applicable due to IFRS 9 adoption.
Securities increased $8.5 billion, primarily due to liquidity management activities in Corporate Services and an increase in our insurance business,
partially offset by lower balances in BMO Capital Markets.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements increased $19.0 billion, driven by higher client activity in BMO Capital Markets, partially
offset by lower balances in Corporate Services.
Net Loans
(Canadian $ in millions)
As at October 31
Residential mortgages
Non-residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Gross loans
Allowance for credit losses
Total net loans
2019
123,740
15,731
67,736
8,859
211,878
427,944
(1,850)
426,094
2018
119,620
14,017
63,225
8,329
180,439
385,630
(1,639)
383,991
2017
115,258
11,744
61,944
8,071
163,323
360,340
(1,833)
358,507
BMO Financial Group 202nd Annual Report 2019 57
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Net loans increased $42.1 billion, largely driven by an increase of $31.4 billion in business and government loans, primarily due to growth in our
P&C businesses and BMO Capital Markets. Consumer instalment and other personal loans increased $4.5 billion, due to growth in our P&C businesses
and BMO Wealth Management. Residential mortgages increased $4.1 billion, mainly due to growth in Canadian P&C, and non-residential mortgages
increased $1.7 billion, mainly due to growth in U.S. P&C.
Table 7 on page 122 of the Supplemental Information section provides a comparative summary of loans by geographic location and product.
Table 9 on page 123 provides a comparative summary of net loans in Canada by province and industry. Loan quality is discussed on page 81, and
further details on loans are provided in Notes 4, 6 and 24 on pages 151, 159 and 197 of the consolidated financial statements.
Derivative Financial Assets
Derivative financial assets decreased $3.3 billion, primarily due to a decrease in the fair value of foreign exchange, equity and commodity contracts,
partially offset by an increase in the fair value of interest rate contracts.
Other Assets
Other assets include customers’ liability under acceptances, goodwill and intangible assets, premises and equipment, current and deferred tax assets,
accounts receivable and prepaid expenses. Other assets increased $6.3 billion, primarily due to a $5.0 billion increase in customers’ liability under
acceptances, mainly in Canadian P&C.
Deposits
(Canadian $ in millions)
As at October 31
Banks
Businesses and governments
Individuals
Total deposits
2019
23,816
343,157
201,170
568,143
2018
27,907
312,177
180,844
520,928
2017
28,205
283,276
168,311
479,792
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Deposits increased $47.2 billion, reflecting higher levels of customer deposits across the operating groups. Deposits by businesses and governments
increased $31.0 billion, reflecting growth in customer balances and higher wholesale funding for loan and liquid asset growth. Deposits by individuals
increased $20.3 billion, due to growth in the P&C businesses and BMO Wealth Management. Deposits by banks decreased $4.1 billion. Further details
on the composition of deposits are provided in Note 13 on page 174 of the consolidated financial statements and in the Liquidity and Funding Risk
section on page 91.
Derivative Financial Liabilities
Derivative financial liabilities were relatively unchanged. A decrease in the fair value of foreign exchange contracts was largely offset by an increase
in the fair value of equity, commodity and interest rate contracts.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements increased $20.0 billion, driven by client activity in BMO Capital Markets.
Other Liabilities
Other liabilities primarily include securities sold but not yet purchased, securitization and structured entities liabilities, acceptances, insurance-related
liabilities and Federal Home Loan Bank (FHLB) advances. Other liabilities increased $6.2 billion, primarily reflecting a $5.0 billion increase in
acceptances, mainly in Canadian P&C. Securitization and structured entities liabilities increased $2.1 billion to fund loan and liquid asset growth.
Insurance liabilities increased $2.0 billion, primarily due to the impact of lower interest rates and annuity sales. Securities sold but not yet purchased
decreased $2.6 billion, due to lower levels of client activity in BMO Capital Markets. Further details on the composition of other liabilities are provided
in Note 14 on page 175 of the consolidated financial statements.
Subordinated Debt
Subordinated debt increased $0.2 billion from the prior year. A new issuance was offset by a redemption in 2019. Further details on the composition
of subordinated debt are provided in Note 15 on page 176 of the consolidated financial statements.
Equity
(Canadian $ in millions)
As at October 31
Share capital
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total equity
2019
2018
2017
5,348
12,971
303
28,725
3,729
51,076
4,340
12,929
300
25,850
2,302
45,721
4,240
13,032
307
23,700
3,066
44,345
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Total equity increased $5.4 billion, due to a $2.9 billion increase in retained earnings, a $1.4 billion increase in accumulated other comprehensive
income and a $1.0 billion increase in preferred shares and other equity instruments. Retained earnings increased as a result of net income earned
in the year, partially offset by dividends and common shares repurchased for cancellation. Accumulated other comprehensive income increased,
primarily due to the impact of lower interest rates on both cash flow hedges and fair value through other comprehensive income debt securities, net
of a decrease in accumulated other comprehensive income on pension and other employee future benefit plans. Preferred shares and other equity
instruments increased due to new issuances in 2019.
Our Consolidated Statement of Changes in Equity on page 140 of the consolidated financial statements provides a summary of items that
increase or reduce total equity, while Note 16 on page 177 of the consolidated financial statements provides details on the components of, and
changes in, share capital. Details on our enterprise-wide capital management practices and strategies can be found on the following page.
58 BMO Financial Group 202nd Annual Report 2019
Enterprise-Wide Capital Management
Capital Management
Objective
BMO is committed to a disciplined approach to capital management that balances the interests and requirements of shareholders, regulators,
depositors, fixed income investors and rating agencies. Our objective is to maintain a strong capital position in a cost-effective structure that:
‰
‰ underpins our operating groups’ business strategies;
‰ supports depositor, investor and regulator confidence, while building long-term shareholder value; and
‰
is appropriate given our target regulatory capital ratios and internal assessment of required economic capital;
is consistent with our target credit ratings.
Capital Management Framework
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
M
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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 comprehensive Internal Capital Adequacy Assessment Process (ICAAP).
ICAAP is an integrated process that involves the application of stress testing and other tools to evaluate capital adequacy on both a regulatory
and an economic capital basis. The results of this process are used in the establishment of capital targets and the implementation of 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 conducted in order to assess the impact of
various stress conditions on BMO’s risk profile and capital requirements. The capital management framework seeks to ensure that we are adequately
capitalized given the risks we take in the normal course of business, as well as under stress, and it supports the determination of limits, targets and
performance measures that are used to manage balance sheet positions, risk levels and capital requirements at both the consolidated entity and
operating group levels. BMO evaluates assessments of actual and forecast capital adequacy against the capital plan throughout the year, and updates
the plan to reflect changes in business activities, risk profile, operating environment or regulatory expectations.
BMO uses 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, setting and monitoring capital limits and metrics, and measuring the
groups’ performance against these limits and metrics, 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 in support of the strategic growth activities of our operating groups.
Refer to the Enterprise-Wide Risk Management section on page 68 for further discussion of the risks underlying our business activities.
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
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 frameworks related to capital and risk management, as well as the ICAAP. The Corporate Audit Division, as the third line of defence, verifies our
adherence to controls and identifies opportunities to strengthen our processes.
Regulatory Capital Requirements
Regulatory capital requirements for BMO are determined in accordance with guidelines issued by the Office of the Superintendent of Financial
Institutions Canada (OSFI), which are based on the capital standards developed by the Basel Committee on Banking Supervision (BCBS). The minimum
risk-based capital ratios set out in OSFI’s Capital Adequacy Requirements Guideline are a 4.5% Common Equity Tier 1 (CET1) Ratio, 6% Tier 1 Capital
Ratio and 8% Total Capital Ratio. In addition to the minimum capital requirements, OSFI also expects domestic systemically important banks (D-SIBs),
including BMO, to hold Pillar 1 and Pillar 2 buffers, which are meant to be used as a normal first step in periods of stress. The Pillar 1 buffers include
a Capital Conservation Buffer of 2.5%, a D-SIB Common Equity Tier 1 surcharge of 1%, and the Countercyclical Buffer (which can range from 0% to
2.5%, depending on the bank’s exposure to jurisdictions that have activated the buffer). The Domestic Stability Buffer (DSB) is a Pillar 2 buffer
that can range from 0% to 2.5% and is set at 2.0% as of the fourth quarter of fiscal 2019. The minimum leverage ratio set out in OSFI’s Leverage
Requirements Guideline is 3%. OSFI’s capital requirements are summarized in the following table.
BMO Financial Group 202nd Annual Report 2019 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
(% of risk-weighted assets)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
Minimum capital
requirements
Pillar 1 Capital
Buffers (1)
Domestic Stability
Buffer (2)
OSFI capital requirements
including capital buffers
BMO Capital and Leverage
Ratios as at October 31, 2019
4.5%
6.0%
8.0%
3.0%
3.5%
3.5%
3.5%
na
2.0%
2.0%
2.0%
na
10.0%
11.5%
13.5%
3.0%
11.4%
13.0%
15.2%
4.3%
(1) The minimum 4.5% CET1 Ratio requirement is augmented by 3.5% in Pillar 1 Capital Buffers, which can absorb losses during periods of stress. The Pillar 1 Capital Buffers include a 2.5% Capital
Conservation Buffer, a 1.0% Common Equity Tier 1 Surcharge for D-SIBs and a Countercyclical Buffer, as prescribed by OSFI (immaterial for the fourth quarter of 2019). If a bank’s capital ratios fall
within the range of this combined buffer, restrictions on discretionary distributions of earnings (such as dividends, share 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) OSFI requires all D-SIBs to maintain a Domestic Stability Buffer (DSB) against Pillar 2 risks associated with systemic vulnerabilities. The DSB can range from 0% to 2.5% of total RWA and is set at 2.0%
effective October 31, 2019. Breaches of the DSB will not result in a bank being subject to automatic constraints on capital distributions.
A
&
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M
na – not applicable
Regulatory Capital Ratios
The Common Equity Tier 1 Ratio reflects CET1 capital divided by Risk-Weighted Assets (RWA).
The Tier 1 Capital Ratio reflects Tier 1 capital divided by RWA.
The Total Capital Ratio reflects Total capital divided by RWA.
The Leverage Ratio reflects Tier 1 capital divided by the sum of on-balance sheet items and specified off-balance sheet items, net of specified
adjustments.
Regulatory Capital Elements
BMO maintains a capital structure that is diversified across instruments and tiers to ensure an appropriate mix of loss absorbency. The major
components of our regulatory capital are summarized as follows:
CET1 Capital
• Common Shareholders’ Equity
(cid:129) Less regulatory deductions for items such as:
o Goodwill
o Intangible assets
o Defined benefit pension assets
o Certain deferred tax assets
o Certain other items
Additional Tier 1 (AT1) Capital
(cid:129) Preferred shares
(cid:129) Other AT1 capital instruments
(cid:129) Less regulatory deductions
Tier 2 Capital
(cid:129) Subordinated debentures
(cid:129) May include certain loan loss allowances
(cid:129) Less regulatory deductions
Tier 1 Capital
Total Capital
OSFI’s Capital Adequacy Requirements (CAR) Guideline also requires the implementation of BCBS guidance on non-viability contingent capital (NVCC).
NVCC provisions require the conversion of certain capital instruments into a variable number of common shares in the event that OSFI announces that
a 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 CAR Guideline, non-common share capital instruments that do not meet Basel III requirements, including NVCC requirements,
will be fully phased out by 2022.
Under Canada’s Bank Recapitalization (Bail-In) Regime, eligible senior debt issued on or after September 23, 2018 is subject to statutory
conversion requirements. Canada Deposit Insurance Corporation has the power to trigger the conversion of bail-in debt into common shares.
This statutory conversion supplements NVCC securities, which must be converted, in full, prior to the conversion of bail-in debt. As of the fourth
quarter of fiscal 2019, the minimum requirements for Total Loss Absorbing Capacity (TLAC) were set at a risk-based TLAC ratio of 23.5% RWA,
including a 2.0% DSB, and a TLAC leverage ratio of 6.75%, which we expect to meet when the minimum requirements come into effect on
November 1, 2021. At October 31, 2019, our risk-based TLAC ratio was 20.4% and our TLAC leverage ratio was 6.75%.
Risk-Weighted Assets
Risk-Weighted Assets (RWA) measure a bank’s exposures, weighted for their relative risk and calculated in accordance with OSFI’s regulatory capital
rules. RWA are calculated for credit, market and operational risks based on OSFI’s prescribed rules.
BMO primarily uses the Advanced Internal Ratings Based (AIRB) Approach to determine credit RWA in our portfolio. The AIRB Approach utilizes
sophisticated techniques to measure RWA at the exposure level based on sound risk management principles, including estimates of the probability of
default, the downturn loss given default and exposure at default risk parameters, term to maturity and asset class type, as prescribed by the OSFI rules.
60 BMO Financial Group 202nd Annual Report 2019
M
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&
A
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 quantify and differentiate risks appropriately to reflect
changes in economic and credit conditions. Credit RWA related to certain Canadian and U.S. portfolios are determined under the Standardized
Approach using prescribed risk weights based on external ratings, counterparty type or product type.
BMO’s market risk RWA are primarily determined using the more advanced Internal Models Approach, but the Standardized Approach is used for
some exposures.
BMO uses the Advanced Measurement Approach, a risk-sensitive capital model, along with the Standardized Approach in certain areas permitted
under OSFI rules, to determine capital requirements for operational risk.
For institutions using advanced approaches for credit risk or operational risk, there is a capital floor as prescribed in OSFI’s CAR Guideline.
In calculating regulatory capital ratios, there is a requirement to increase RWA when an amount calculated under the Standardized Approach
(covering RWA and allowances) is higher than the result of a similar calculation under the more risk-sensitive modelled approach. The capital floor
was not operative for the bank in fiscal 2019.
Capital Regulatory Developments
A number of regulatory capital changes, some finalized and some under development, are expected to put upward pressure on the amount of capital
BMO is required to hold over time. The nature of these changes is outlined below.
In December 2017, the BCBS finalized the Basel III reforms to be implemented on January 1, 2022. The reforms included: revised standardized
and internal ratings-based approaches for credit risk; revisions to the credit valuation adjustment (CVA) framework; a revised standardized approach
for operational risk, which replaces the existing standardized and advanced measurement approaches; a revised leverage ratio framework; and an
output floor for RWA, to be phased in over a five-year period. In July 2018, OSFI issued for consultation a discussion paper on the proposed domestic
implementation of the final Basel III reforms. The discussion paper set out OSFI’s preliminary views on the scope and timing of the implementation
of the final Basel III reforms in Canada. While the BCBS outlined a five-year transition period for the RWA output floor from 50% in 2022 to 72.5% in
2027, OSFI’s discussion paper proposes to set the output floor at 72.5% upon implementation of the reforms in the first quarter of fiscal 2022.
In January 2019, the BCBS issued final standards on the Minimum Capital Requirements for Market Risk (the Final Market Risk Framework), part
of the Basel III reforms, to address the outstanding design and calibration issues of the 2016 framework and to provide further clarity that will
facilitate its implementation. The proposed implementation date is January 1, 2022.
The Basel III reforms are expected to increase the amount of capital we are required to hold. We continue to engage with OSFI as it works to
finalize the timing and approach to domestic implementation.
In June 2019, OSFI set the level of the Domestic Stability Buffer (DSB), a Pillar 2 buffer applicable to D-SIBs, at 2.0%, up from 1.75%, effective
October 31, 2019. The increase reflects OSFI’s assessment of identified systemic vulnerabilities, including Canadian consumer indebtedness, asset
imbalances in the Canadian market, and Canadian institutional indebtedness. The DSB, which is met with CET1 capital, can be set between 0% and
2.5% of total RWA.
In April 2019, OSFI released the final version of the Large Exposure Limits Guideline for implementation by Canadian D-SIBs in the first quarter
of fiscal 2020, which is not expected to have a significant impact on our operations.
In November 2018, OSFI implemented its revised CAR Guideline. The main revisions included the domestic implementation of the standardized
approach for counterparty credit risk (SA-CCR) and the revised capital requirements for bank exposures to central counterparties, as well as a revised
securitization framework. These changes resulted in a modest increase in the amount of capital we are required to hold due to transitional
arrangements provided by OSFI for fiscal 2019. In November 2018, OSFI also implemented the revised Leverage Requirements Guideline to align
with the changes related to counterparty credit risk and the securitization framework in the revised CAR Guideline.
IFRS 16, Leases is effective November 1, 2019 and will result in a downward adjustment to opening retained earnings on adoption. The main
impact on BMO will be recording real estate leases on the balance sheet. Refer to Future Changes in Accounting Policies on page 111 and Note 1 of
the consolidated financial statements for further information.
We expect a combined impact of approximately 15 to 20 basis points on our CET1 Ratio in the first quarter of fiscal 2020 from the adoption of
IFRS 16 and the expiry of transitional arrangements for SA-CCR and the revised securitization framework.
In October 2019, the U.S. Federal Reserve Board issued final rules on tailoring the prudential standards for foreign banking organizations (FBOs),
which establish four categories of capital and liquidity requirements based on an individual firm’s risk profile. The rules are expected to have a neutral
to a slightly positive impact on our subsidiary BMO Financial Corp. (BFC).
2019 Regulatory Capital Review
BMO is well capitalized, with capital ratios that exceed OSFI’s published requirements for large Canadian banks, including the 2.0% DSB. Our CET1
Ratio was 11.4% as at October 31, 2019, compared with 11.3% as at October 31, 2018. The CET1 Ratio increased from the end of fiscal 2018, as
higher CET1 capital, primarily from retained earnings growth, more than offset higher RWA, which was driven by business growth.
Our Tier 1 Capital and Total Capital Ratios were 13.0% and 15.2%, respectively, as at October 31, 2019, compared with 12.9% and 15.2%,
respectively, as at October 31, 2018. The Tier 1 Capital Ratio was higher mainly due to the factors impacting the CET1 Ratio discussed above and the
net increase in Additional Tier 1 (AT1) capital from issuances, net of the redemption of a non-NVCC instrument. The Total Capital Ratio was consistent
with the prior year, as higher total capital, mainly from higher Tier 1 capital, was offset by higher RWA.
The impact of foreign exchange rate movements on capital ratios was largely offset. BMO’s investments in foreign operations are primarily
denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated RWA and capital deductions may result in variability in the
bank’s capital ratios. BMO may manage the impact of foreign exchange rate movements on its capital ratios, and did so during 2019. Any such
activities could also impact our book value and return on equity.
BMO’s Leverage Ratio was 4.3% as at October 31, 2019, up from 4.2% as at October 31, 2018, due to higher Tier 1 capital, mainly from retained
earnings growth and the net new issuance of AT1 capital discussed above, partially offset by higher leverage exposures, which were driven by strong
business growth.
While the ratios discussed above reflect the bank’s consolidated capital base, BMO conducts business through a variety of corporate structures,
including subsidiaries. A framework is in place such that capital and funding are managed appropriately at the subsidiary level.
BMO Financial Group 202nd Annual Report 2019 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
As a U.S. bank holding company with total consolidated assets less than US$250 billion, our subsidiary BFC continues to be subject to the Federal
Reserve Board’s (FRB) Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST) requirements, on a biennial basis
beginning with CCAR 2020, although it will not be required to conduct any company-run stress tests. CCAR is an exercise conducted by the FRB to
assess whether the largest bank holding companies and FBOs operating in the United States have sufficient capital to support their operations
throughout periods of economic and financial stress and have robust, forward-looking capital planning processes that address their unique risks.
DFAST is a forward-looking exercise complementary to CCAR and conducted by the FRB to assess whether the financial companies that it supervises
have sufficient capital to absorb losses and support operations during adverse economic conditions. BFC will continue to be required to create and
maintain a capital plan, which indicates that its capital ratios, under the firm severely adverse scenario, will remain above well-capitalized levels.
Regulatory Capital (1)
(Canadian $ in millions, except as noted)
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
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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 capital
Tier 2 instruments (and CET1 and AT1 instruments not otherwise 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
General allowance
Total regulatory adjustments to Tier 2 capital
Tier 2 capital (T2)
Total capital (TC = T1 + T2)
Risk-Weighted Assets and Leverage Ratio exposures
CET1 Capital Risk-Weighted Assets
Tier 1 Capital Risk-Weighted Assets
Total Capital Risk-Weighted Assets
Leverage Exposures
Capital ratios (%)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
2019
2018
13,274
28,725
3,729
(8,331)
(1,326)
36,071
5,058
290
–
–
(218)
5,130
41,201
6,850
145
–
–
194
(50)
7,139
48,340
317,029
317,029
317,029
956,493
11.4
13.0
15.2
4.3
13,229
25,856
2,302
(8,261)
(405)
32,721
4,050
740
–
–
(291)
4,499
37,220
6,639
143
–
–
235
(121)
6,896
44,116
289,237
289,420
289,604
876,106
11.3
12.9
15.2
4.2
(1) Non-qualifying Additional Tier 1 and Tier 2 capital instruments are being phased out at a rate of 10% per year from January 1, 2013 to January 1, 2022.
Our CET1 capital and Tier 1 capital levels were $36.1 billion and $41.2 billion, respectively, as at October 31, 2019, up from $32.7 billion and
$37.2 billion, respectively, as at October 31, 2018. CET1 capital increased, mainly driven by retained earnings growth, and to a lesser degree from a
lower deduction for deferred tax assets and higher unrealized gains from securities fair valued through other comprehensive income, partially offset
by an increase in the deduction for a shortfall of provisions to expected losses and the net impact of higher pension and other post-employment
benefit obligations due to lower discount rates. The increase in Tier 1 capital was mainly due to CET1 capital growth and the net new issuances of
AT1 capital discussed above.
Total capital was $48.3 billion as at October 31, 2019, up from $44.1 billion as at October 31, 2018, mainly attributable to the growth in Tier 1
capital discussed above.
62 BMO Financial Group 202nd Annual Report 2019
Changes in Risk-Weighted Assets
Total CET1 Capital RWA were $317.0 billion as at October 31, 2019, up from $289.2 billion as at October 31, 2018. Credit Risk RWA were $269.3 billion
as at October 31, 2019, up from $240.5 billion as at October 31, 2018, due to strong business growth, partially offset by lower RWA from changes in
book quality and methodology, net of the impact of regulatory changes. As noted above, the impact of foreign exchange rate movements is largely
offset in the CET1 Ratio. Market Risk RWA were $11.2 billion as at October 31, 2019, down from $13.5 billion as at October 31, 2018, attributable to
broadly lower general market risk levels and methodology changes. Operational Risk RWA were $36.6 billion as at October 31, 2019, up from
$35.2 billion as at October 31, 2018, primarily due to growth in the bank’s average gross income. There was no capital floor RWA adjustment as at
October 31, 2019, and October 31, 2018.
(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
2019
2018
127,355
42,981
4,552
3,928
9,512
5,605
6,482
14,163
8,063
2,407
12,410
2,722
17,210
11,891
269,281
11,183
36,565
317,029
–
317,029
–
317,029
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A
112,394
39,496
3,323
4,790
9,527
4,846
5,452
12,078
7,264
1,971
9,693
2,295
16,776
10,595
240,500
13,532
35,205
289,237
183
289,420
184
289,604
(1) The scaling factor is applied to RWA amounts for credit risk under the Advanced Internal Ratings Based (AIRB) Approach.
Economic Capital
Economic capital is an expression of the enterprise’s capital demand requirement relative to its view of the economic risks in its underlying 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 consistent basis across such risks. Economic loss is the loss in economic or market value incurred over a
specified time horizon at a defined confidence level, relative to the expected loss over the same time horizon. Economic capital is calculated for
various types of risk, including credit, market (trading and non-trading), operational, business and insurance, based on a one-year time horizon using
a defined confidence level.
BMO Financial Group 202nd Annual Report 2019 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Capital and RWA by Operating Group and Risk Type
(As at October 31, 2019)
BMO Financial Group
Operating Groups
Personal and
Commercial
Banking
BMO 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
78%
8%
14%
175,111
–
20,133
34%
18%
48%
14,938
28
6,347
65%
19%
16%
67,705
11,155
10,085
65%
16%
19%
11,527
–
–
Capital Management Activities
On June 3, 2019, we renewed our normal course issuer bid (NCIB) effective for one year. Under this NCIB, we may purchase up to 15 million of our
common shares for cancellation. The NCIB is a regular component of BMO’s capital management strategy. The timing and amount of purchases under
the NCIB are subject to management discretion based on factors such as market conditions and capital levels. The bank will consult with OSFI before
making purchases under the NCIB. During 2019, we repurchased and cancelled 1 million of our common shares as part of the NCIB at an average cost
of $90.00 per share, totalling $90 million. During 2018, we repurchased and cancelled 10 million of our common shares as part of the NCIB, totalling
$991 million.
During 2019, BMO issued approximately 0.9 million common shares through the exercise of stock options.
During 2019, BMO completed Tier 1 and Tier 2 capital instrument issuances, redemptions and resets, as outlined in the table below.
Share Issuances, Redemptions, Resets and Conversions
(in millions)
As at October 31, 2019
Common shares issued
Stock options exercised
Tier 1 Capital
Issuance of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 46
Rate reset of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 27
Rate reset of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 29
Redemption of BMO Capital Trust II Tier 1 Notes – Series A
Issuance of 4.800% Additional Tier 1 Capital Notes
Tier 2 Capital
Redemption of Series H Medium-Term Notes, First Tranche
Issuance of Series J Medium-Term Notes, First Tranche
Issuance, redemption
or reset date
Number
of shares
Amount
April 17, 2019
May 25, 2019
August 25, 2019
December 31, 2018
July 30, 2019
September 19, 2019
September 16, 2019
0.9
$
62
14.0
20.0
16.0
350
$
500
$
$
400
$ (450)
500
US$
$(1,000)
$ 1,000
If an NVCC trigger event were to occur, our NVCC capital instruments 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 (calculated using a 10-day weighted average). Based on a floor price of $5.00, these NVCC capital instruments would be
converted into approximately 3.07 billion BMO common shares, assuming no accrued interest and no declared and unpaid dividends.
On November 14, 2019, BMO announced the conversion results of its Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 31
(Preferred Shares Series 31). During the conversion period, which ran from October 28, 2019 to November 12, 2019, 69,570 Preferred Shares Series 31
were tendered for conversion into Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 32 (Preferred Shares Series 32), which is less than
the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 31 prospectus supplement dated
July 23, 2014. As a result, no Preferred Shares Series 32 will be issued and holders of Preferred Shares Series 31 will retain their shares; the dividend
rate for the Preferred Shares Series 31 will be 3.851% for the five-year period commencing on November 25, 2019 and ending on November 24, 2024.
Further details on subordinated debt and share capital are provided in Notes 15 and 16, respectively, of the consolidated financial statements.
64 BMO Financial Group 202nd Annual Report 2019
Outstanding Shares and NVCC Capital Instruments
As at October 31, 2019
Common shares
Class B Preferred shares
Series 14 (1)
Series 15 (1)
Series 16 (2)
Series 17 (2)
Series 25 (3)
Series 26 (3)
Series 27*
Series 29*
Series 31*
Series 33*
Series 35*
Series 36*
Series 38*
Series 40*
Series 42*
Series 44*
Series 46*
Additional Tier 1 Capital Notes
4.800% Additional Tier 1 Capital Notes
Medium-Term Notes* (4)
Series H – Second Tranche
Series I – First Tranche
Series I – Second Tranche
3.803% Subordinated Notes
4.338% Subordinated Notes
Series J – First Tranche
Stock options
Vested
Non-vested
Dividends declared per share
2019
$ 4.06
–
–
–
–
$ 0.45
$ 0.70
$ 0.98
$ 0.96
$ 0.95
$ 0.95
$ 1.25
$58.50
$ 1.21
$ 1.13
$ 1.10
$ 1.44
$ 0.77
na
na
na
na
na
na
na
2018
$ 3.78
–
–
$ 0.64
$ 0.52
$ 0.45
$ 0.59
$ 1.00
$ 0.98
$ 0.95
$ 0.95
$ 1.25
$58.50
$ 1.21
$ 1.13
$ 1.10
–
–
na
na
na
na
na
na
na
2017
$ 3.56
$ 0.66
$ 0.73
$ 0.85
$ 0.55
$ 0.45
$ 0.43
$ 1.00
$ 0.98
$ 0.95
$ 0.95
$ 1.25
$58.50
$ 1.33
$ 0.80
$ 0.45
–
–
na
na
na
na
na
na
na
M
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A
Number of shares
or dollar amount
(in millions)
639
–
–
–
–
$ 236
$
54
$ 500
$ 400
$ 300
$ 200
$ 150
$ 600
$ 600
$ 500
$ 400
$ 400
$ 350
US$ 500
$1,000
$1,250
$ 850
US$1,250
US$ 850
$1,000
3.5
2.6
Convertible into common shares
*
(1) Redeemed in May 2017.
(2) Redeemed in August 2018.
(3) In August 2016, approximately 2.2 million Series 25 Preferred Shares were converted into Series 26 Preferred Shares on a one-for-one basis.
(4) Note 15 of the consolidated financial statements includes details on the Series H Medium-Term Notes, Second Tranche, Series I Medium-Term Notes, First Tranche and Second Tranche, USD 3.803%
Subordinated Notes, USD 4.338% Subordinated Notes and Series J Medium-Term Notes, First Tranche.
na – not applicable
Note 16 of the consolidated financial statements includes details on share capital and other equity instruments.
Dividends
Dividends declared per common share in fiscal 2019 totalled $4.06, up 7% from the prior year. Annual dividends declared represented 46.8% of
reported net income and 43.0% 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 earnings over the last twelve months) is 40% to 50%, providing shareholders with a competitive dividend yield. 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 support capital adequacy.
At year end, BMO’s common shares provided a 4.2% annualized dividend yield based on year-end closing share price. On December 3, 2019,
BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, up $0.03 per share or 3% from
the prior quarter and up $0.06 per share or 6% from a year ago. The dividend is payable on February 26, 2020 to shareholders of record on
February 3, 2020.
Common shareholders may elect to have their cash dividends reinvested in common shares of BMO in accordance with the Shareholder Dividend
Reinvestment and Share Purchase Plan (DRIP). In fiscal 2019, common shares to supply 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 refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 202nd Annual Report 2019 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
Select Financial Instruments and Off-Balance Sheet Arrangements
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. As such, we have included discussion below on our consumer loans portfolio, leveraged finance and our
BMO-sponsored securitization vehicles. An index of the disclosures recommended by the Enhanced Disclosure Task Force of the FSB and the pages on
which these disclosures appear in our Annual Report or Supplementary Financial Information is provided on page 116. We also enter into a number of
off-balance sheet arrangements in the normal course of operations, which are discussed further below, and include Credit Instruments, Structured
Entities and Guarantees.
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 and 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.
In the United States (U.S.), our Consumer Lending portfolio is primarily comprised of three asset classes: residential first mortgages, home equity
products and indirect automobile loans.
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In both Canada and the U.S., consumer lending products are underwritten to prudent standards relative to credit scores, loan-to-value ratios and
capacity assessment. Our lending practices consider the ability of our borrowers to repay and the underlying collateral value.
Further discussion of the Consumer Lending portfolio related to the Canadian housing market is provided in the Top and Emerging Risks That May
Affect Future Results section on page 68.
Leveraged Finance
Leveraged finance loans are defined by BMO as loans and mezzanine financing provided to private equity-owned businesses for which our
assessment indicates a higher level of credit risk. BMO has some exposure to leveraged finance loans, which represented 1.8% of total assets, with
$15.1 billion outstanding as at October 31, 2019 (1.7% and $13.5 billion, respectively, in 2018). Of this amount, 27% of leveraged finance loans, with
$4.1 billion outstanding as at October 31, 2019 (30% and $4.0 billion, respectively, in 2018), are well secured by high-quality assets. In addition,
$207 million or 1.4% of all leveraged finance loans were classified as impaired as at October 31, 2019 ($129 million or 1.0% in 2018).
BMO-Sponsored Securitization Vehicles
BMO sponsors various vehicles that fund assets originated by either BMO (which are then securitized through a bank securitization vehicle) or its
customers (which are then securitized through three Canadian customer securitization vehicles and one U.S. customer securitization vehicle). We earn
fees for providing services related to these customer securitization vehicles, including liquidity, distribution and financial arrangement fees for
supporting the ongoing operations of the vehicles. These fees totalled approximately $113 million in 2019 ($97 million in 2018).
Canadian Customer Securitization Vehicles
The customer securitization vehicles we sponsor in Canada provide our customers with access to financing either from BMO or in the asset-backed
commercial paper (ABCP) markets. Customers sell their assets either directly into these vehicles, or indirectly by selling an interest in the securitized
assets into these vehicles, which then issue ABCP to either investors or BMO in order to fund the purchases. In all cases, the sellers remain
responsible for servicing the transferred assets and are first to absorb any losses realized on those assets. None of the sellers are affiliated with BMO.
Our exposure to potential losses arises from our purchase of ABCP issued by the vehicles, any related derivative contracts we have entered into
with the vehicles, and the liquidity support we provide to the market-funded vehicles. 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 market-funded, while the 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 160 of the consolidated financial statements. No losses were recorded on any of BMO’s exposures to these vehicles in 2019 and 2018.
The market-funded vehicles had a total of $3.5 billion of ABCP outstanding as at October 31, 2019 ($4.1 billion in 2018). The ABCP issued by the
market-funded vehicles is rated R-1(high) by DBRS and P1 by Moody’s. BMO’s purchases of ABCP, as distributing agent of ABCP issued by the market-
funded vehicles, totalled $8 million as at October 31, 2019 ($12 million in 2018).
BMO provides committed liquidity support facilities for the market-funded vehicles totalling $5.5 billion as at October 31, 2019 ($5.6 billion in
2018). This amount comprised part of our commitments outlined in Note 24 on page 197 of the consolidated financial statements. All of these
facilities remain undrawn. The assets of each of these market-funded vehicles consist primarily of exposure to diversified pools of Canadian
automobile-related receivables and Canadian insured and conventional residential mortgages. These two asset classes represent 79% (82% in 2018)
of the aggregate assets of these vehicles.
U.S. Customer Securitization Vehicle
We sponsor one customer securitization vehicle in the U.S. that we consolidate under IFRS. Further information on the consolidation of customer
securitization vehicles is provided in Note 7 on page 160 of the consolidated financial statements. This market-funded customer securitization vehicle
provides our customers, the sellers of the assets, with access to financing in the U.S. ABCP markets. The sellers remain responsible for servicing the
assets involved in the related financing and are first to absorb any losses realized on those assets. None of the sellers are affiliated with BMO.
Our exposure to potential losses arises from our purchase of ABCP issued by the vehicle, any related derivative contracts we have entered into
with the vehicle, and the liquidity support we provide to the vehicle. 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. No losses were recorded on any of BMO’s exposures to the vehicle in 2019
and 2018.
66 BMO Financial Group 202nd Annual Report 2019
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The vehicle had US$2.6 billion of ABCP outstanding as at October 31, 2019 (US$2.9 billion in 2018). The ABCP issued by the vehicle is rated A1 by
S&P and P1 by Moody’s. In order to comply with U.S. risk retention rules that came into effect in 2017, BMO held US$145 million of the vehicle’s ABCP
as at October 31, 2019 (US$159 million in 2018).
BMO provides a committed liquidity support facility to the vehicle, with the undrawn amount totalling US$5.1 billion as at October 31, 2019
(US$5.4 billion in 2018). This amount comprised part of our commitments outlined in Note 24 on page 197 of the consolidated financial statements.
The assets of this customer securitization vehicle consist primarily of exposure to diversified pools of U.S. automobile-related receivables and U.S.
government-guaranteed Federal Family Education Loan Program loans. These two asset classes represent 74% (74% in 2018) of the aggregate assets
of the vehicle.
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 credit instruments in order to avoid undue concentrations in any geographic region or industry.
The maximum amount payable by BMO in relation to these credit instruments was approximately $185 billion as at October 31, 2019
($163 billion in 2018). However, this amount is not representative of our likely credit exposure or the liquidity requirements for these instruments, as
it does not take into account customer behaviour, which suggests that only a portion of our customers would utilize the facilities related to these
instruments, nor does it take into account any amounts that could be recovered under recourse and collateral provisions.
Further information on these instruments can be found in Note 24 on page 197 of the consolidated 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)
We carry out certain business activities through arrangements involving SEs, using them to secure customer transactions, obtain sources of liquidity
by securitizing certain of our financial assets or pass our credit risk to securities holders of the vehicles. Note 6 on page 159 of the consolidated
financial statements describes our loan securitization activities carried out through third-party programs. Under IFRS, we consolidate SEs if we
control the entity.
Our interests in SEs are discussed in detail in the BMO-Sponsored Securitization Vehicles section above and in Note 7 on page 160 of the
consolidated financial statements, which discusses our interests in both consolidated and unconsolidated SEs. We consolidate the bank’s securitization
vehicles, our U.S. customer securitization vehicle, and certain capital and funding vehicles. We do not consolidate our Canadian customer securitization
vehicles, certain capital vehicles, various BMO managed funds and various other structured entities where we hold investments.
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 approximately $29 billion as at October 31, 2019 ($25 billion in
2018). 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 would require us to make any payments, nor does it take into account any amounts that could be recovered under
recourse and collateral provisions.
For a more detailed discussion of these arrangements, refer to Note 24 on page 197 of the consolidated financial statements.
Caution
This Select Financial Instruments and Off-Balance Sheet Arrangements section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 202nd Annual Report 2019 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Risk Management
As a diversified financial services company providing banking, wealth management, capital market and insurance services,
we are exposed to a variety of risks that are inherent in our business activities. A disciplined and integrated approach to
managing risk is fundamental to the success of our operations. Our risk management framework provides independent risk
oversight across the enterprise and is integral to building competitive advantage.
Enterprise-Wide Risk Management outlines our approach to managing the key financial risks and other related risks that we face, as discussed in
the following sections:
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Risks That May Affect Future Results
Risk Management Overview
Framework and Risks
Credit and Counterparty Risk
Market Risk
Insurance Risk
Liquidity and Funding Risk
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103
105
105
105
106
Operational Risk
Legal and Regulatory Risk
Business Risk
Strategic Risk
Environmental and Social Risk
Reputation Risk
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 2019 audited 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 consolidated financial statements and the MD&A. Refer to Note 1 on page 142 and Note 5 on page 158 of the
consolidated financial statements.
Risks That May Affect Future Results
Top and Emerging Risks That May Affect Future Results
BMO is exposed to a variety of evolving risks that have the potential to affect our business, the results of our operations and our financial condition.
The integral tasks in our risk management process are to proactively identify, assess, monitor and manage a broad spectrum of top and emerging
risks. Our top and emerging risk identification process involves several forums for discussion with the Board, senior management and business
thought leaders, and combines both bottom-up and top-down approaches in considering risk. Our assessment of top and emerging risks informs
the development of action plans and stress tests related to our exposure to certain events.
Particular attention has been given to the following:
General Economic Conditions
Our earnings are affected by the general economic conditions prevailing in Canada, the United States and other jurisdictions in which we conduct
business. In the past year, growth in real gross domestic product in both Canada and the United States has slowed. In addition, parts of the yield
curves in both countries were inverted at various times during the year and the U.S. Federal Reserve lowered the target range of the federal funds
rate three times. These events, as well as rising global trade protectionism (described in Escalating Trade Disputes below), point to the risk that
growth in the two countries will slow further in the coming year or that they may enter an economic recession.
Management continually reviews the economic environment in which the bank operates, looking for any indication of significant changes in
key economic variables. In the event of a significant change in economic conditions, management assesses its portfolio and business strategies and
develops contingency plans to address any adverse developments.
Cyber Security, Information Security and Privacy Risk
The pervasive use of the internet and the reliance on advanced digital technologies by the bank, by our suppliers and by our customers expose us
to a heightened risk of service interruptions, digital fraud and breaches of privacy. The evolving cyber threat landscape and increasing sophistication
of attackers using artificial intelligence have been significant concerns across all industries, including banking, making this a top risk for BMO.
Information security is integral to BMO’s business activities, brand and reputation. We face common banking information security risks, including the
threat of hacking, loss or exposure of customer or employee information, 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. We continue to evolve our capabilities and invest in our
Financial Crimes Unit, which is the first of its kind among our Canadian peers, bringing together cyber defences, fraud and physical security functions,
as well as subject matter experts across the lines of business and business functional groups. This will enhance our ability to prevent, detect and
manage cyber security threats. In addition, we continue to benchmark and review best practices across the banking and cyber security industries,
conduct external reviews of incidents related to cyber security, evaluate the effectiveness of our key controls and develop new controls, and invest
in both technology and human resources. BMO performs assessments of our third-party service providers to monitor their alignment with standards,
and we actively participate in thought leadership forums to learn about emerging threats. We also work with information security and industry groups
to bolster our internal resources and technology capabilities in order to improve our ability to remain resilient in a rapidly evolving threat landscape.
68 BMO Financial Group 202nd Annual Report 2019
Escalating Trade Disputes
Rising protectionism and anti-globalization sentiment in the United States and other countries may lead to slower global growth. In particular, a
protracted and wide-ranging trade dispute between the United States and China could adversely affect business investment, and could be especially
problematic for commodity-producing countries, such as Canada. Trade disputes also arose between Canada and China over the course of the year,
with China banning the importation of Canadian canola and temporarily banning certain meat products. In addition, there remains some uncertainty
with respect to ratification of the United States-Mexico-Canada Agreement (USMCA) in the U.S. Congress.
Although it is difficult to predict and mitigate the potential economic and financial consequences of trade-related events on the Canadian and
U.S. economies, we actively monitor global and North American trends and continually assess our portfolio and business strategies in the context of
these trends. We stress test our portfolios, business plans and capital adequacy against severely adverse scenarios arising from trade-related shocks,
and we establish contingency plans and mitigation strategies to address and offset the consequences of possible adverse political and/or economic
developments.
Our credit exposure by geographic region is set out in Tables 7, 8 and 11 to 13 on pages 122 and 124 to 127 and in Note 4 on page 151 of the
consolidated financial statements.
Technology Disruption, Competition and Resiliency
The financial services industry continues to undergo rapid change, as technology enables new non-traditional entrants to compete in certain
segments of banking, including retail payments, consumer and commercial lending, foreign exchange and investment advisory services.
New entrants may leverage new technologies, advanced data and analytical tools, and in some cases, less stringent regulatory requirements and
oversight, allowing them to provide services to their customers more quickly and at a lower cost. Failure to keep pace with these new technologies
and the competition they enable could impact our revenues and earnings over time, if customers choose the services of these new market entrants.
While we closely monitor technology disruptors and regulatory changes that may impact the competitive landscape, including potential new
regulations related to open banking, we are also making further investments in technology and innovation in order to keep pace with evolving
customer expectations. Given the extent to which our operations rely on technology and technology vendors, it is important to maintain a technology
platform that provides a high level of operational reliability and resilience. We have processes and initiatives in place to ensure an appropriate level
of resiliency in our technology platform, particularly with respect to critical systems.
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Geopolitical Risk
Geopolitical risk remains elevated as a result of strained relations among many countries, including between the United States and China and Iran.
Heightened geopolitical risk can give rise to shifts in global capital flows, which may lead to market disruptions and a decrease in investment, trade
and global economic growth. Our core banking portfolio has limited direct exposure outside North America; however, our core customers and our
international strategy depend on continued growth and trade. To mitigate our exposure to geopolitical risk, we maintain a diversified portfolio that
we continually monitor and test, in addition to contingency plans that we may establish to address any possible adverse developments.
Low or Negative Interest Rates
In the second half of 2019, the U.S. Federal Reserve lowered its target range for the U.S. federal funds rate three times. In the event of a recession,
the Bank of Canada and the U.S. Federal Reserve will likely continue to reduce rates and, depending on the depth and length of the recession, may
consider using negative rates to stimulate their respective economies.
Low or negative interest rates could expose the bank to a number of financial, operational and technology risks. The most significant financial
impact would result from compression of the bank’s net interest margin and likely lower net interest income. In terms of operational and technology
risks in a negative interest rate environment, the bank may need to adapt its operations to fully accommodate the assessment of negative rates on
its loans and deposits.
In the event of low or negative interest rates, the bank would look to other sources of income in order to offset the likely decrease in net
interest income.
Canadian Housing Market and Consumer Leverage
While recent data indicates that Canadian housing market activity has rebounded from its low in early 2019, in part due to the decrease in market
interest rates over the past year, there are a range of factors that could potentially weigh on sales activity and home prices in the near future.
These factors include historically elevated levels of household debt and an associated slower pace of mortgage credit growth, low housing
affordability in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), and the possibility of a broader economic downturn, although the
latter is not expected in the near term. Although the Canadian household debt-to-disposable income ratio has been relatively stable over the past few
years, it remains near record highs. If households were to place a greater emphasis on reducing debt, it could be expected to weigh broadly on
consumer spending and housing market activity. Further reductions in home sales activity, particularly in the GTA and GVA, would impact mortgage
origination volumes and, if property values were to decline, would reduce the value of collateral backing of our loans and could result in higher
provisions for credit losses. It is not possible to accurately predict the full impact of recent economic and policy changes or any potential future
changes, but robust economic conditions in these regions, including sustained economic growth, low unemployment and ongoing population growth,
support our expectation of continued low delinquency rates for real estate loans. Our prudent lending practices, which include the application of
additional underwriting scrutiny on higher-value and higher loan-to-value transactions and the setting and close monitoring of regional, property type
and customer segment concentration limits, support the soundness of our Canadian real estate lending portfolio. Further, our stress test analysis
suggests that even significant price declines and recessionary economic conditions would result in manageable losses, mainly due to insurance
coverage and the significant level of equity built up in seasoned loans.
BMO Financial Group 202nd Annual Report 2019 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
Oil and Gas Industry Outlook
Oil and gas prices decreased over the course of the year, reflecting increased supply and moderating economic conditions. Should these factors
deteriorate further, leading to oil and gas prices moving to a new lower range, this will pose a challenge for exploration and production companies.
In addition, exploration companies that are able to generate positive cash flows in this low-price environment may further reduce servicing costs and
instead focus on strengthening their balance sheet and/or increasing returns to shareholders, which would impact the oil and gas services sector.
The bank remains focused on taking risks within its approved risk appetite, while seeking appropriate returns on those risks. In the exploration
and production sector, we have maintained our focus on borrowers with high-quality assets and enhanced our analysis of the potential volatility of
cash flows and market values. We also maintain an internal limit that caps our exposure to this sector. In the oil and gas services sector, we are
focused on borrowers that are heavily weighted to providing maintenance and servicing to the largest producers.
Other Factors That May Affect Future Results
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Fiscal and Monetary Policies and Other Economic Conditions in the Countries in which We Conduct Business
Our earnings are affected by the fiscal and monetary policies and other economic conditions prevailing in Canada, the United States and other
jurisdictions in which we conduct business. These policies and conditions may have the effect of reducing competition, profitability and certainty
in some specific businesses and markets, which may affect our customers and counterparties, potentially contributing to a greater risk of default.
Changes in fiscal and monetary policies are difficult to anticipate. Fluctuations in interest rates can have an impact on our earnings, the value of
our investments, the credit quality of lending to our customers and counterparty exposure, and the capital markets that we access.
Changes in the value of the Canadian dollar relative to the U.S. dollar have affected, and could in future affect, the results of our clients with
significant foreign earnings or input costs in either Canadian dollars or U.S. dollars. BMO’s investments in foreign operations are primarily
denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated risk-weighted assets and capital deductions may result in
variability in the bank’s capital ratios. BMO may take steps to manage the impact of foreign exchange rate movements on its capital ratios, and did so
during 2019. Refer to the Enterprise-Wide Capital Management section on page 59. The value of the Canadian dollar relative to the U.S. dollar will also
affect the contribution of our U.S. operations to our Canadian-dollar profitability.
Hedging positions may be taken to manage interest rate exposures and partially offset the effects of Canadian dollar/U.S. dollar exchange rate
fluctuations on our financial results. Refer to the Foreign Exchange section on page 23 and the Market Risk section on page 86 for a more complete
discussion of our foreign exchange and interest rate risk exposures.
Environmental Risks
We face risks arising from environmental events, such as drought, floods, wildfires, earthquakes, and hurricanes and other storms. These events
could potentially disrupt our operations, impact our customers and counterparties, and result in lower earnings and higher losses. Factors contributing
to heightened environmental risks include the impacts of climate change and the continued intensification of development in areas of greater
environmental sensitivity. Our business continuity management preparations provide us with the capability to restore, maintain and manage critical
operations and processes in the event of a business disruption.
BMO also faces risks in relation to borrowers that experience losses or increases in their operating costs as a result of climate-related policies,
such as carbon emissions pricing, or that experience lower revenue as new and emerging technologies displace or disrupt demand for certain
commodities, products and services.
Legal, regulatory, business or reputation risks could arise from BMO’s actual or perceived actions, or inaction, in relation to climate change and
other environmental and social risk issues, or our disclosures on these matters. Legal, regulatory or reputation risks related to environmental matters
could also impact our customers, suppliers or other stakeholders, giving rise to business or reputation risks for BMO. We monitor environmental, legal
and regulatory developments on an ongoing basis as part of our overall assessment of operational, business and reputation risks.
We support the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and we employ
the TCFD framework to enhance our understanding of the evolving impact of risks associated with climate change, together with possible mitigation
strategies. We are building an internal capacity at BMO to conduct climate change scenario analysis, in line with the TCFD recommendations, and we
will apply these results across the enterprise. These efforts will help us to identify potential material financial risks, and will inform our business
strategy in relation to climate change going forward.
Refer to the Environmental and Social Risk section on page 105 for further discussion of these risks.
Regulatory Requirements
The financial services industry is highly regulated, and we have experienced changes and increasing complexity in regulatory requirements, as
governments and regulators around the world continue to pursue major reforms intended to strengthen the stability of the financial system and
protect key markets and participants. As a result, there is the potential for higher capital requirements and additional regulatory compliance costs,
which could lower our returns and affect our growth. These reforms could also affect the cost and availability of funding and the extent of our
market-making activities. Regulatory reforms may also impact fees and other revenues for certain of our operating groups. In addition, differences in
laws and regulations enacted by various national regulatory authorities may provide advantages to our international competitors that could affect our
ability to compete, and lead to loss of market share. We monitor such developments, and other potential changes, so that BMO is well-positioned to
respond and implement any necessary changes.
Failure to comply with applicable legal and regulatory requirements could result in legal proceedings, financial losses, regulatory sanctions,
enforcement actions, an inability to execute our business strategies, a decline in investor and customer confidence, and damage to our reputation.
Refer to the Legal and Regulatory Risk and Enterprise-Wide Capital Management sections on pages 103 and 59, respectively, for a more complete
discussion of our exposure to legal and regulatory risk.
70 BMO Financial Group 202nd Annual Report 2019
Tax Legislation and Interpretations
Legislative changes and changes in tax policy, including their interpretation by tax authorities and the courts, may impact our earnings. Tax laws, as
well as interpretations of tax laws and policy by tax authorities, may change as a result of efforts by the G20 and the Organisation for Economic
Co-operation and Development to broaden the tax base globally and improve tax-related reporting. Refer to the Critical Accounting Estimates section
on page 107 for further discussion of income taxes and deferred tax assets.
Acquisitions
We conduct thorough due diligence before completing business or portfolio acquisitions. However, it is possible that we could complete an acquisition
that subsequently does not perform in line with our financial or strategic objectives or expectations. 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 reductions in 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 regulatory costs related to an acquisition, other 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. Successful post-acquisition performance depends on retaining the clients and key employees of
acquired companies and on integrating key systems and processes without disruption, and there can be no assurance that we will always succeed in
doing so.
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Brexit
Negotiations regarding the exit of the United Kingdom (U.K.) from the European Union (EU) (Brexit) are ongoing, with continued uncertainty about
whether the U.K. will be able to negotiate a smooth transition out of the EU, or whether there will be a no-deal Brexit. A no-deal Brexit would impact
the ability of U.K. financial institutions to provide services within the EU, as well as the ability of EU financial institutions to provide services within the
U.K. BMO has operations and clients across the EU, including in the U.K. We are prepared to serve our clients, counterparties, employees and suppliers
under any scenario, including a no-deal Brexit.
Benchmark Interest Rate Reform
Interbank offered rates (IBORs) have been the subject of numerous global regulatory proposals and reforms over the past few years. Most
significantly, the U.K. Financial Conduct Authority has announced that it would no longer compel banks to submit to the London Interbank Offered
Rate (LIBOR) after 2021. As a result, the industry must transition from LIBOR and other IBORs to alternative rates in multiple jurisdictions, a shift that
will impact financial market participants globally, across many products and asset classes.
Transition efforts in connection with these reforms are complex, with significant risks and challenges. The transition from IBORs to alternative
rates could result in increased volatility, pricing changes and/or illiquidity in markets for instruments that currently rely on IBORs. The transition could
have adverse consequences for all market participants, including BMO as both holder and issuer of IBOR-based instruments, such as the potential for
increased financial, operational, legal, reputational and/or compliance risks. We have established an enterprise-wide IBOR Transition Office to oversee
our transition from IBORs to alternative rates. The Transition Office, which includes sponsorship and involvement from BMO’s senior leadership, has a
global mandate spanning all of BMO’s lines of business, and oversees multiple different work streams, including all of our corporate function areas.
We are evaluating potential changes to market infrastructures on our risk framework, models, systems and processes, as well as reviewing legal
documents and establishing a risk framework, to ensure that BMO, as well as our clients, are prepared through education and outreach prior to the
cessation of LIBOR and/or other IBORs.
Critical Accounting Estimates and Accounting Standards
We prepare our consolidated financial statements in accordance with IFRS. Changes that the International Accounting Standards Board makes from time
to time to these standards 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 on page 111, as well as in Note 1 on page 142 of the consolidated financial statements.
The application of IFRS requires management to make significant judgments and estimates that affect the carrying amounts of certain assets and
liabilities, certain amounts reported in net income, and other related disclosures. In making these judgments and estimates, we rely on the best
information available at the time. However, it is possible that circumstances may change, that new information may become available or that our
models may prove to be imprecise.
Our financial results could be affected for the period during which any such new information or change in circumstances becomes apparent, and
the extent of the impact could be significant. More information is included in the Critical Accounting Estimates section on page 107.
Caution
The Risks That May Affect Future Results section and the remainder of this Enterprise-Wide Risk Management section contain forward-looking statements.
Please refer to the Caution Regarding 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 14.
We caution that the preceding discussion of risks that may affect future results is not exhaustive.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management Overview
At BMO, we believe that risk management is every employee’s responsibility. We are guided by five key principles on risk that drive our approach
to managing risk across the enterprise and comprise our Enterprise Risk Appetite Statement.
Understand and Manage Risk
‰ We will only take those risks that are transparent and understood, and can be measured, monitored and managed, supported by effective
information systems, processes, governance and controls
‰ We will embrace a culture of constructive challenge, personal accountability, and timely and transparent information-sharing at all levels of
the enterprise, with rapid escalation of threats and concerns
‰ We will incorporate risk measures into our performance management system and compensation decisions will include performance
assessment against risk appetite
‰ We will protect customer and enterprise assets, including data and systems, and manage any exposures by maintaining an effective system
of limits and controls to manage all risks
Protect our Reputation
‰ Everything we do will be guided by principles of honesty, integrity and respect, and high ethical standards in alignment with our Code
of Conduct
‰ We will protect the enterprise’s reputation, and strive to adhere to all regulatory and legal obligations by maintaining effective policies,
procedures, guidelines, compliance standards and controls, and by providing training and management oversight to guide the business
practices and risk-taking activities of all employees
‰ We will establish frameworks to identify, assess and manage the potential loss or damage resulting from environmental and social issues,
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including climate change
Diversify. Limit Tail Risk
‰ We will target a business mix that limits earnings volatility to acceptable levels throughout the business cycle, and limits exposure to
low-probability, high-impact events that could jeopardize the enterprise’s debt rating, capital position or reputation
‰ We will use risk measurement and stress testing methodologies in the assessment of risk, risk-taking capacity and sustainable risk-adjusted
returns to guide management action and to prepare for extreme events
Maintain Strong Capital and Liquidity
‰ We will maintain a strong capital position and a sound liquidity and funding position, which meet or exceed regulatory requirements and
the expectations of the market (rating agencies, investors and depositors)
‰ We will maintain an investment grade debt rating at a level that allows competitive access to funding
‰ We will maintain a robust recovery and resolution framework that enables an effective and efficient response in an extreme crisis
Optimize Risk Return
‰ We will set capital limits and manage our exposures based on our risk appetite and strategy and require our businesses to optimize
risk-adjusted returns
‰ We will target new products, initiatives and acquisition opportunities that provide a good strategic and cultural fit, and a high likelihood
of creating value for our shareholders
Our integrated and disciplined approach to risk management is fundamental to the success of our business. All elements of our risk management
framework function 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 oversees the implementation and operation of our risk appetite, risk policies and limits,
and provides independent review and oversight across the enterprise on risk-related issues in order to achieve prudent and measured risk-taking
that is integrated with our business strategy.
72 BMO Financial Group 202nd Annual Report 2019
Framework and Risks
Enterprise-Wide Risk Management Framework
BMO’s Risk Management Framework (RMF) guides our risk-taking activities in order to align them with our risk appetite, client needs, shareholder
expectations and regulatory requirements. The RMF provides for not only the direct management of each individual risk type, but also the
management of risks on an integrated basis, with three lines of defence in the management of risk.
Risk Culture
Policy
Framework
Risk
Appetite
Framework
Risk
Indicators
and Limits
Risk Management Tools
• Risk Identification
• Threat Identification
• Risk Assessment
• Stress Testing
and Scenario Analysis
• Risk Mitigation
• Risk Monitoring
• Risk Reporting
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Risk Appetite Framework
Our Risk Appetite Framework consists of our Risk Appetite Statement and key risk metrics, and is supported by 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, thereby supporting 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 Risk Management Committee (RMC), the Risk Review
Committee of the Board of Directors (RRC) and the Board of Directors for approval. Our Risk Appetite Statement is articulated and applied consistently
across the enterprise, with key businesses and entities developing their own respective risk appetite statements within this framework.
Risk Governance
Our enterprise-wide RMF 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 each significant risk type, so that risks to which the enterprise is exposed are
appropriately identified, measured, managed, monitored, mitigated and reported. A Risk Taxonomy is maintained to comprehensively identify and
manage key risks. The Risk Taxonomy reflects the bank’s Tier 1 risks, as set out in the diagram below.
BMO Financial Group
Credit and
Counterparty
Risk
Market
Risk
Insurance
Risk
Liquidity and
Funding Risk
Operational
Risk
Legal and
Regulatory Risk
Business
Risk
Strategic
Risk
Environmental
and Social Risk
Reputation
Risk
Specific Board-approved policies govern our key risks, such as credit and counterparty, market, insurance, liquidity and funding, and operational risks.
This enterprise-wide RMF is governed at all levels through a hierarchy of committees and individual responsibilities, as outlined in the following
diagram. The Board oversees that the bank’s corporate objectives are supported by a sound risk strategy and an effective risk management
framework that is appropriate to the nature, scale, complexity and risk profile of the bank’s activities. The Board also has overall responsibility for the
bank’s governance framework and corporate culture.
Our RMF is reviewed on a regular basis by the RRC, in order to provide oversight and guide our risk-taking activities. In each of our operating
groups, management, as the first line of defence, is responsible for governance activities and controls, and the implementation and operation of risk
management processes and procedures that provide effective risk management. ERPM, as the primary second line of defence, oversees the
implementation and operation of our risk management processes and procedures, and aligns, monitors and tests risk outcomes against our risk
appetite and management expectations, ensuring that risk outcomes are consistent with return expectations. Individual governance committees
establish and monitor further risk limits, consistent with Board-approved limits.
BMO Financial Group 202nd Annual Report 2019 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
The diagram below outlines our risk governance framework, including both the direct and administrative reporting lines.
Risk Governance Framework
Board of Directors
Risk Review
Committee (RRC)
Risk Management
Committee (RMC)
Chief Executive Officer
Audit and Conduct Review
Committee
Balance Sheet
and Capital
Management*
Model
Risk
Management
Operational
Risk
Management
Reputation
Risk
Management
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Chief Risk Officer
First Line of Defence
Second Line of Defence
Third Line of Defence
Operating
Groups
Technology &
Operations
(T&O)
Enterprise Risk and
Portfolio Management
(ERPM)
Corporate Support
Areas (CSAs)
Corporate Audit Division
*
With respect to matters related to structural market risk, liquidity risk, and the Internal Capital Adequacy Assessment Process (ICAAP), the Balance Sheet and Capital
Management Committee (BSCMC) reports to the Risk Management Committee (RMC).
In addition to the enterprise-level risk governance framework, appropriate risk governance frameworks, supported by our three lines of defence,
are in place in all of 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 risk management oversight responsibilities.
This includes overseeing the identification and management of BMO’s
risks, leading our risk culture, adherence by operating groups to risk
management corporate policies and procedures, compliance with risk-
related regulatory requirements and the evaluation of the Chief Risk
Officer (CRO), including input into succession planning for the CRO.
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; the independent auditors’ qualifications,
independence and performance; BMO’s compliance with legal and
regulatory requirements; transactions involving related parties;
conflicts of interest and confidential information; and standards of
business conduct and ethics.
Chief Executive Officer (CEO) is directly accountable to the Board for
all of BMO’s risk-taking activities. The CEO is supported by the CRO and
the ERPM group.
Chief Risk Officer (CRO) reports directly to the CEO and is head of ERPM
and chair of RMC. 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.
74 BMO Financial Group 202nd Annual Report 2019
Risk Management Committee (RMC) is BMO management’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, the CEO and the Chief
Financial Officer (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 undertaken across the enterprise
are identified, measured, managed, monitored, mitigated 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 and risk
education. This approach seeks to meet enterprise objectives and to
verify that any accepted risks are consistent with BMO’s risk appetite.
Operating Groups are responsible for effectively managing risk
by identifying, measuring, managing, monitoring, mitigating 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 limits that are consistent
with and subordinate to the Board-approved limits.
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Three-Lines-of-Defence Operating Model
Our risk management framework is anchored in the three-lines-of-defence approach to managing risk, which is fundamental to our operating model,
as described below:
‰ Our operating groups are the bank’s first line of defence. They are accountable for the risks arising from their businesses, activities and exposures.
They are expected to pursue business opportunities within our established risk appetite and to identify, measure, manage, monitor, mitigate and
report all risks in or arising from their businesses, activities and exposures. The first line discharges its responsibilities by using risk management
and reporting methodologies and processes developed by the business and by the ERPM group and other Corporate Support Areas, and may call
on corporate functions or other service providers to help discharge these responsibilities. Businesses are responsible for establishing appropriate
internal controls in accordance with our risk management framework and for monitoring the effectiveness of such controls. These processes
and controls help ensure businesses act within their delegated risk-taking authority and risk limits as set out in corporate policies and our Risk
Appetite Framework.
‰ The second line of defence is comprised of the ERPM group and, in certain targeted areas, Corporate Support Areas. The second line provides
independent oversight, effective challenge and independent assessment of risks and risk management practices, including transaction, product
and portfolio risk management decisions, processes and controls in the first line of defence. The second line establishes enterprise-wide risk
management policies, infrastructure, processes, methodologies and practices that the first and second lines use to identify, assess, manage and
monitor risks across the enterprise.
‰ Corporate Audit Division is the third line of defence. It provides an independent assessment of the effectiveness of internal controls across the
enterprise, including controls that support our risk management and governance processes.
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
corporate culture and is evident in the actions and behaviours of our employees and leaders as they identify, interpret and discuss risks, and make
decisions that seek to balance risks and opportunities and optimize risk-adjusted returns. Each member of our senior management plays a critical role
in fostering a strong risk culture among all employees, by effectively communicating this responsibility, by the example of their own actions, and
by establishing and maintaining compensation plans and other incentives that are designed to encourage and reward appropriate behaviours.
Our Compensation Oversight Committee reviews and assesses risk events, such as violations of BMO’s Code of Conduct, inappropriate risk-taking
and breaches of our risk appetite, and recommends changes in compensation, if necessary. Our risk culture is deeply embedded within our policies,
business processes, risk management framework, risk appetite, limits and tolerances, capital management and compensation practices, and is
evident in every aspect of the way we operate across the enterprise. We actively solicit feedback on the effectiveness of our risk culture, including
through standardized and anonymous employee surveys.
Our risk culture is grounded in a “Being BMO” approach to risk management that encourages openness, constructive challenge and personal
accountability. “Being BMO” values include integrity and a responsibility to make tomorrow better, and “Being BMO” behaviours include balancing
risk and opportunity, taking ownership, following through on commitments, speaking up and being candid. Timely and transparent sharing of
information is also integral in engaging stakeholders in key decisions and strategy discussions, thereby bringing added rigour and discipline to our
decision-making. This not only leads to the timely identification, escalation and resolution of issues, but also encourages open communication,
independent challenge and an 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, learning curriculums and proactive communication also reinforce and support our risk culture.
Certain elements of our risk culture are embedded across the enterprise, and these include:
‰ Risk appetite – promotes a clear understanding of the most prevalent risks that our businesses face, shapes and informs business strategies to
align them with our risk appetite, and provides a control and early warning framework through our key risk metrics, thereby enabling sound
business decision-making and execution, supported by a strong monitoring framework.
‰ Communication and escalation channels – encourage engagement and sharing of information between ERPM and the operating groups, leading
to greater transparency and open and effective communication. Our risk culture also encourages the escalation of concerns associated with
potential or emerging risks to senior management, so that they can be evaluated and appropriately addressed.
‰ Compensation philosophy – pay is aligned with prudent risk-taking, so that compensation and other incentives reward the appropriate use of
capital and respect for the rules and principles of our enterprise-wide risk management framework and do not encourage excessive risk-taking.
Our risk managers have input into the design of incentive programs that may have an effect on risk-taking, and provide input into the performance
assessment of employees who take material risks or who are responsible for losses or events that give rise to an unexpected risk of loss.
‰ 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 role 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, effectively embedding our
strong risk culture across the enterprise and ensuring that many of our risk management professionals have a practical grounding in our
business activities.
BMO Financial Group 202nd Annual Report 2019 75
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise Culture and Conduct Framework
Our strong culture supports us as we deliver positive outcomes for our customers and contribute to the orderly operation of financial markets.
Our Enterprise Culture and Conduct Framework sets out our approach to managing and mitigating potential misconduct. Misconduct is behaviour
that falls short of legal, professional, internal conduct and ethical standards. Similar to our approach to other non-financial risks, this framework is
supported by our enterprise Risk Management Framework and our focus on maintaining a strong risk culture. We report on various metrics related
to culture and conduct and we engage with other control frameworks across the enterprise and in all of the jurisdictions in which we operate.
Risk Limits
We set our risk limits so that our risk-taking activities remain within our risk appetite, and these limits 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, as appropriate, based on the level and granularity of the limits, 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 and significant movements, as well as limits on value at risk
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and stress related to trading and underwriting activities
Insurance Risk – limits on policy exposures and reinsurance arrangements
‰
‰ Liquidity and Funding Risk – minimum limits on our governing internal liquidity stress testing scenario, minimum regulatory liquidity ratio
requirements, and maximum levels of asset pledging and wholesale funding, as well as limits related to liability diversification and credit and
liquidity facility exposures
‰ Operational Risk – limits on specific operational risks and key risk metrics for measuring operational risks
The Board of Directors, after considering recommendations from the RRC and the RMC, annually reviews and approves key risk limits and then
delegates overall authority for these limits to the CEO. The CEO in turn 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 to the CRO (second line of defence).
These delegated authorities allow risk 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 under which more specific
authorities may be delegated across the organization, as well as the requirements relating to documentation, communication and monitoring of those
specific delegated authorities, are set out in corporate policies and standards.
Risk Identification, Review and Approval
Risk identification is an integral step in recognizing the key inherent risks that we face, understanding the potential for loss and then acting to
mitigate this potential. As noted above, a Risk Taxonomy 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 stress capital consumption
is estimated. Our enterprise-wide and targeted (industry/portfolio-specific or 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 that is 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 and regulatory, accounting, tax or reputation risk are
reviewed by the Reputation Risk Management Committee or the Global Markets Risk Committee, as appropriate, and are also reviewed through
our operational risk management process if they involve structural or operational complexity that may give rise to operational risk.
Investment initiatives – documentation of risk assessments is formalized through our investment spending approval process, and is reviewed
and approved by Corporate Support Areas based on the initiative’s investment spend and inherent risk.
‰
‰ New products and services – policies and procedures for the approval of new or modified products and services offered to our customers are the
responsibility of the first line of defence, including appropriate senior business leaders, and are reviewed and approved by subject matter experts
and senior managers in Corporate Support Areas, as well as by other senior management committees.
Risk Monitoring
Enterprise-level risk transparency and monitoring and associated reporting are critical components of our risk management framework and corporate
culture that allow senior management, committees and the Board of Directors to exercise their business management, risk management and
oversight responsibilities at the enterprise, operating group and key legal entity levels. Internal reporting includes a synthesis of the key risks that the
enterprise currently faces, along with associated metrics. 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 materials to facilitate assessment of these risks
relative to our risk appetite and the relevant limits established within our Risk Appetite Framework.
Risk-Based Capital Assessment
Two measures of risk-based capital are used by BMO: economic capital and advanced-approach regulatory capital. Both are aggregate measures of
the risk that we take on in pursuit of our financial objectives, and they enable us to evaluate returns on a risk-adjusted basis. Our operating model
provides for the direct management of each type of risk, as well as the management of all material risks on an integrated basis. Measuring the
economic profitability of transactions or portfolios involves 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, its credit quality. Risk-based capital methods and material models are
reviewed at least annually and, if appropriate, are recalibrated or revalidated. 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.
76 BMO Financial Group 202nd Annual Report 2019
Stress Testing
Stress testing is a key element of our risk and capital management frameworks. It is integrated into our enterprise and group risk appetite statements
and embedded in our management processes. To evaluate our risks, we regularly test a range of scenarios, which vary in frequency, severity and
complexity, in our portfolios and businesses and across the enterprise. In addition, we participate in regulatory stress tests in multiple jurisdictions.
Governance of the stress testing framework resides with senior management, including the Enterprise Stress Testing Committee. This committee is
comprised of business, risk and finance executives, and is accountable for reviewing and challenging enterprise-wide scenarios and stress test results.
Stress testing and enterprise-wide scenarios associated with the Internal Capital Adequacy Assessment Process (ICAAP), including recommendations
for actions that the enterprise could take in order to manage the impact of a stress event, are established by senior management and presented to
the Board of Directors. Stress testing associated with the Comprehensive Capital Analysis and Review (CCAR), which is a U.S. regulatory requirement
for our subsidiary BMO Financial Corp. (BFC), is similarly governed at the BFC level.
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. Models utilized for stress testing are approved and governed
under the Model Risk Management framework, and are used to establish a better understanding of our risks and to test our capital adequacy.
Enterprise Stress Testing
Enterprise stress testing supports our ICAAP and target-setting through analysis of the potential effects of low-frequency, high-severity events on our
balance sheet, earnings, and 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 on our risk profile, as well as the macroeconomic environment. Scenarios may
be defined by senior management or regulators. The economic impacts are determined by our Economics group. The Economics group does this by
translating the scenarios into macroeconomic and market variables that include, but are not limited to, GDP growth, yield curve estimates,
unemployment rates, real estate prices, stock index growth and changes in corporate profits. These macroeconomic variables drive our stress loss
models and the qualitative assessments that determine our estimated stress impacts. The scenarios are used by our operating, risk and finance
groups to assess a broad range of financial impacts that could arise under a specific stress and the ordinary course and extraordinary actions that
would be anticipated in response to that stress.
Stress test results, including mitigating actions, are benchmarked and challenged by relevant business units and senior management, including
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the Enterprise Stress Testing Committee.
Targeted Portfolio and Ad Hoc Stress Testing
Our stress testing framework integrates stress testing at the line of business, portfolio, industry, geographic and product level and embeds it in
strategy, business planning and decision-making. Targeted portfolio, industry and geographic analysis is conducted by risk management and by the
lines of business to test risk appetite, limits, concentration and strategy. Ad hoc stress testing is conducted in response to changing economic or
market conditions and to assess business strategies.
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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 holding of investment securities, transactions
related to trading and other capital markets products and activities related to securitization. Credit risk is the most significant measurable risk BMO
faces. Proper management of credit risk is integral to our success, since 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 that 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 material risks that we face, including the credit risk
management framework. BMO’s credit risk management framework incorporates governing principles that are defined in a series of corporate
policies and standards and are applied to specific operating procedures. These policies and standards are reviewed on a regular basis and modified
when necessary to keep them current and consistent with BMO’s risk appetite. The structure, limits (both notional and capital-based), 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 responsible for recommending credit decisions based on the completion of appropriate due
diligence, and they assume accountability for the related risks. With limited exceptions, credit officers in ERPM approve all credit transactions
and are accountable for providing an objective independent assessment of the lending recommendations and risks assumed by the lending officers.
All of these skilled and experienced individuals in the first and second lines of defence 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. The Board annually reviews our Credit Risk Management Policy and delegates to the CEO discretionary lending limits for further
specific delegation to senior officers. 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 activities in which credit
risk arises. Corporate Audit Division reviews and tests management processes and controls and samples credit transactions in order to assess
adherence to acceptable lending standards as set out in the enterprise risk appetite, as well as compliance with all applicable governing policies,
standards and procedures.
For corporate and commercial obligors presenting a higher than normal risk of default, we have in place formal policies that outline the
framework for managing such accounts and specialized groups that manage them. We strive to identify borrowers in financial difficulty early,
and every effort is made to bring such accounts back to an acceptable level of risk through the exercise of good business judgment and the
implementation of sound and constructive workout solutions. Obligors are managed on a case-by-case basis, which involves the use of judgment
by our specialized groups.
All credit risk exposures are subject to regular monitoring. Performing corporate and commercial accounts are reviewed on a regular basis, no
less frequently than annually, with most subject to a set of internal monitoring triggers that, if breached, results in an interim review. The frequency
of review increases in accordance with the likelihood and size of potential credit losses and deteriorating higher-risk situations are 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, and more
frequently where appropriate, to RRC and senior management committees in order to keep them informed of credit risk developments in our
portfolios, including changes in credit risk concentrations, watchlist accounts, impaired loans, provisions for credit losses, negative credit migration
and significant emerging credit risk issues. This supports RRC and senior management committees in giving effect to any measures they may decide
to take.
Counterparty credit risk (CCR) creates a bilateral risk of loss because the market value of a transaction can be positive or negative for either
counterparty. CCR exposures are also subject to the credit oversight, limit framework and approval process outlined above. However, given the nature
of the risk, CCR exposures are collateralized and monitored under the market risk framework. In order to reduce our exposure to CCR, we may clear
trades through a regulated central counterparty (CCP), which reduces overall systemic risk by standing between counterparties, maximizing netting
across trades and insulating counterparties from each other’s defaults. CCPs mitigate default risk of any member through the use of margin
requirements (both initial and variation) and a default management process, including a default fund and other resources. Our exposures to CCPs
are subject to the same credit risk governance, monitoring and rating framework we apply to all other corporate accounts.
Credit and Counterparty Risk Management
Collateral Management
Collateral is used for credit risk mitigation purposes to minimize losses that would otherwise be incurred in the event of a default. Depending on
the type of borrower or counterparty, 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 or real estate, or personal assets pledged in support of guarantees. For trading counterparties, we may enter into legally
enforceable netting agreements for on-balance sheet credit exposures, when possible. In our securities financing transaction business (including
repurchase agreements and securities lending), we take eligible financial collateral that we control and can readily liquidate.
Collateral for our derivatives trading counterparty exposures is primarily comprised of cash and eligible liquid securities that are monitored
and revalued 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. Master Agreement, frequently with a Credit Support Annex, to document our
collateralized trading relationships with our counterparties for over-the-counter (OTC) derivatives that are not centrally cleared. Credit Support
Annexes entitle a party to demand a transfer of collateral (or other credit support) when its OTC derivatives exposure to the other party exceeds an
agreed threshold. Collateral transferred can include an independent initial margin and/or variation margin. Credit Support Annexes contain, among
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
78 BMO Financial Group 202nd Annual Report 2019
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other measures, provisions setting out acceptable types of collateral and a method for their valuation (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.
Many G20 jurisdictions have new regulations in place that require certain counterparties with significant OTC derivatives exposures to post or
collect prescribed types and amounts of collateral for uncleared OTC derivatives transactions. For additional discussion, refer to Legal and Regulatory
Risk – Derivatives Reform on page 104.
To document our contractual securities financing relationships with our counterparties, we utilize master repurchase agreements for repurchase
transactions, and master securities lending agreements for securities lending transactions.
On a periodic basis, collateral is subject to 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. For commercial real estate collateral, a full external appraisal of
the property is typically obtained at the time of loan origination, unless the exposure is below a specified threshold amount, in which case an internal
evaluation and a site inspection are conducted. Internal evaluations may consider property tax assessments, purchase prices, real estate listings or
realtor opinions. 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, and depending on its size, a current external appraisal, evaluation or restricted use appraisal is
obtained and updated every twelve months while the loan is classified as impaired. In Canada, 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. We may use an external service
provided by Canada Mortgage and Housing Corporation or an automated valuation model provided by a third-party appraisal management company
to assist with determining either the current value of a property or the need for a full property appraisal.
For insured mortgages in Canada with a high LTV ratio (greater than 80%), the default insurer is responsible for confirming the lending value.
Portfolio Management and Concentrations of Credit and Counterparty Risk
BMO’s credit risk governance policies require an acceptable level of diversification to help ensure we avoid undue concentrations of credit risk.
Concentrations of credit risk may 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. Limits may be specified for several portfolio dimensions, including industry, specialty segment (e.g., hedge funds and leveraged
lending), country, product and single-name concentrations. The diversification of our credit exposure may be supplemented by the purchase or sale
of credit protection through guarantees, insurance or credit default swaps.
Our credit assets consist of a well-diversified portfolio representing millions of clients, the majority of them individual consumers and small to
medium-sized businesses. From an industry viewpoint, on a drawn loans and commitments basis, our most significant exposure as at October 31, 2019
was to individual consumers, comprising $249,762 million ($238,400 million in 2018).
Wrong-Way Risk
Wrong-way risk occurs when our exposure to a counterparty or the magnitude of our potential loss is highly correlated with the counterparty’s
probability of default. Specific wrong-way risk arises when the credit quality of the counterparty and the market risk factors affecting collateral or
other risk mitigants display a high correlation, and general wrong-way risk 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 risk mitigant. Our procedures require that specific
wrong-way risk be identified in transactions and accounted for in the assessment of risk, including any elevated measure of exposure. Stress testing
of replacement risk is conducted monthly and can be used to identify existing or 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 level 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:
‰ Exposure at Default (EAD) represents an estimate of the outstanding amount of a credit exposure at the time a default may occur.
‰ Loss Given Default (LGD) is a measure of our economic loss, such as 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.
‰ 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.
For inclusion in regulatory capital calculations, OSFI permits three approaches for the measurement of credit risk: Standardized, Foundation Internal
Ratings Based and Advanced Internal Ratings Based (AIRB). We primarily use the AIRB Approach to determine credit RWA in our portfolios, including
portfolios of our subsidiary BMO Financial Corp. Exposures under AIRB capital treatment account for 93% of total EAD of our Wholesale and Retail
portfolios, and the remaining exposures are considered under the Standardized Approach. Waivers and exemptions to existing AIRB models are
subject to OSFI’s approval. The Basel III Standardized Approach is currently being used for regulatory capital calculations related to the acquired
Marshall & Isley Corporation and BMO Transportation Finance portfolios, and for certain other exposures that are considered to be immaterial.
We continue to transition all material exposures in these portfolios to the AIRB Approach. For securitization exposures, we apply the Basel
hierarchy of approaches, including the Securitization Internal Ratings-based Approach and the External Ratings-based Approach, as well as the
Standardized Approach.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 79
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our regulatory capital and economic capital frameworks both use EAD to assess credit and counterparty risk. Exposures are classified as follows:
‰ Drawn loans include loans, acceptances, deposits with regulated financial institutions, and certain securities. 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.
‰ 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 calculated exposure, net of collateral.
‰ Capital is calculated based on exposures that, where applicable, have been redistributed to a more favourable PD band, LGD measure or a different
Basel asset class as a result of the application of credit risk mitigation and a consideration of credit risk mitigants, including collateral and netting.
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Total non-trading exposures at default by industry sector, excluding the impact of collateral, as at October 31, 2019 and 2018, based on the Basel III
classifications, are as follows:
(Canadian $ in millions)
Drawn
Commitments
(undrawn)
OTC derivatives
Other off-balance
sheet items
Repo-style transactions
Total (1)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Financial institutions 117,959
58,051
Governments
26,266
Manufacturing
37,146
Real estate
22,529
Retail trade
46,612
Service industries
16,843
Wholesale trade
13,406
Oil and gas
198,214
Individual
40,573
Others (2)
102,552
44,552
22,580
31,534
19,961
39,067
14,659
9,131
190,688
35,617
Total exposure at
24,010
1,665
16,581
8,948
3,974
13,304
5,273
11,302
51,433
19,814
21,741
2,118
13,490
8,170
3,617
12,666
4,531
10,410
47,586
18,197
974
9
12
1
–
12
1
–
–
68
1,649
1
10
1
–
1
2
–
–
88
6,402
894
1,494
861
601
2,996
564
1,802
115
6,866
5,016
667
1,396
820
559
2,389
436
1,804
126
6,474
203,084
8,452
–
–
–
–
–
–
–
–
177,094
8,401
–
–
–
–
–
–
–
–
352,429
69,071
44,353
46,956
27,104
62,924
22,681
26,510
249,762
67,321
308,052
55,739
37,476
40,525
24,137
54,123
19,628
21,345
238,400
60,376
default
577,599
510,341
156,304
142,526
1,077
1,752
22,595
19,687
211,536
185,495
969,111
859,801
(1) Credit exposure excluding equity, securitization, trading book and other assets such as non-significant investments, goodwill, deferred tax asset and intangibles.
(2) Includes industries having a total exposure of less than 2%.
Risk Rating Systems
BMO’s risk rating systems are designed to assess and measure the risk of any exposure.
Credit risk-based parameters are reviewed, validated and monitored regularly. The monitoring is on a quarterly basis for both the wholesale
and retail models. Refer to page 102 for a discussion of our model risk mitigation processes.
Retail (Consumer and Small Business)
The retail portfolios are comprised of a diversified group of individual customer accounts and include residential mortgages, personal loans,
credit cards, auto loans and small business loans. These loans are managed in pools of homogeneous risk exposures for risk rating purposes.
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 generate optimal credit decisions in a
centralized and automated environment.
The retail risk rating system assesses risk based on individual loan characteristics. BMO has a range of internally developed PD, LGD and EAD
models for each of the major retail portfolios. The major product lines within each of the retail risk areas are modelled separately, so that the risk-based
parameters capture the distinct nature of each product. The models, in general, are designed based on internal data recorded over a period of more
than seven years, and adjustments are made at the parameter level to account for any uncertainty. The retail parameters are tested and calibrated on
an annual basis, if required, to incorporate additional data points in the parameter estimation process, ensuring that the most recent experience is
incorporated. Our largest retail portfolios are the Canadian mortgage, Canadian home equity line of credit and Canadian retail credit card portfolios.
A PD estimate is assigned to each homogeneous pool to reflect the long-run average of one-year default rates over the economic cycle.
An LGD estimate is calculated by discounting future recovery payments to the time of default, including collection costs.
An EAD estimate is calculated as the balance at default divided by the credit limit at the beginning of the year. For non-revolving products, such as
mortgages, EAD is equal to 100% of the current outstanding balance and has no undrawn component.
For capital purposes, the LGD and EAD estimates are calibrated to reflect a downturn scenario. The PD, LGD and EAD estimates are updated
annually and recalibrated as required, by comparing the estimates to observed historical experience.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
80 BMO Financial Group 202nd Annual Report 2019
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, Bank and Sovereign)
Within our wholesale portfolios, we utilize an enterprise-wide risk rating framework that is applied to all our sovereign, bank, corporate and
commercial counterparties. One key element of this framework is the assignment of appropriate borrower or counterparty risk ratings (BRRs).
BMO has a range of internally designed general and sector-specific BRR models, as well as portfolio-level LGD and EAD models for each of the
corporate, commercial, bank and sovereign portfolios.
The BRR models capture the key financial and non-financial characteristics of the borrowers and generate a borrower-level rating that reflects
the rank ordering of the default risk. The models are primarily designed by using internal data, supplemented with judgment as necessary, for low
default portfolios.
BRRs are assessed and assigned at the time of loan origination, and reassessed when borrowers request changes to credit facilities or when
events trigger a review, such as an external rating change or covenant breach. BRRs are reviewed no less frequently than annually, and more
frequent reviews are conducted for borrowers with less acceptable risk ratings. 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 rating within an asset class to reflect the long-run
average of one-year default rates over the economic cycle, supplemented by external benchmarking, as necessary.
An LGD estimate captures the priority of claim, collateral, product and sector characteristics of the credit facility extended to a borrower.
LGD estimates are at the facility level.
An EAD estimate captures the facility type, sector and facility utilization rate characteristics of the credit facility extended to a borrower.
EAD estimates are at the facility level. The EAD credit conversion factor is calculated for eligible facilities by comparing usage amounts at the
time of default and one year prior to default. The authorization and the drawn amount, one year prior to default, are used to split each facility
into its respective drawn and undrawn portion, where applicable.
LGD and EAD models have been developed for each asset class using internal data recorded over a period of more than seven years, which
includes at least one full economic cycle, and results are benchmarked using external data, when necessary. For capital purposes, the parameters
are calibrated to reflect a downturn scenario. The PD, LGD and EAD estimates are updated annually and recalibrated as required, by comparing the
estimates to observed historical experience.
As demonstrated in the table below, our internal risk rating system corresponds in a logical manner to those of external rating agencies.
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Wholesale Borrower Risk Rating Scale
BMO rating
Acceptable
I-1 to I-7
S-1 to S-4
Watchlist
P-1 to P-3
Default / Impaired
T1, D-1 to D-4
Moody’s Investors Service
implied equivalent
Standard & Poor’s
implied equivalent
Aaa to Baa3
Ba1 to B1
B2 to Ca
C
AAA to BBB-
BB+ to B+
B to CC
C to D
Credit Quality Information
Portfolio Review
Total enterprise-wide outstanding credit risk exposures were $969.1 billion as at October 31, 2019,
comprised of $467.9 billion in Canada, $415.8 billion in the United States and $85.4 billion in other
jurisdictions. This represents an increase of $109.3 billion or 13% from the prior year.
BMO’s loan book continues to be well diversified by industry and geographic region.
Gross loans and acceptances increased $47.3 billion or 12% from the prior year to $451.5 billion
as at October 31, 2019. The geographic mix of our Canadian and U.S. portfolios represented 62.4%
and 35.2% of total loans, respectively, compared with 64.7% and 32.9% in 2018. Our loan
portfolio is well-diversified, with the consumer loan portfolio representing 44.4% of the total
portfolio, a decrease from 47.3% in 2018, and business and government loans representing
55.6% of the total portfolio, up from 52.7% in 2018.
Loans by Geography and Operating Group
($ billions)
175.3
87.2
105.1
30.3
23.6
30.0
Canada and Other Countries
U.S.
P&C/Wealth Management – Consumer
P&C/Wealth Management – Commercial
BMO Capital Markets
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
to 5 years
Over 5 years
Total
2019
2018
2019
2018
2019
2018
2019
2018
Canada
Consumer
Commercial and corporate
(excluding real estate)
Commercial real estate
United States
Other countries
Total
58,580
54,375
113,162
109,991
4,432
4,199
176,174
168,565
65,534
7,928
37,867
9,214
57,530
7,397
33,688
8,628
16,591
11,647
87,443
996
14,862
10,143
73,470
658
179,123
161,618
229,839
209,124
1,973
2,298
33,423
449
42,575
1,750
1,275
25,955
294
33,473
84,098
21,873
158,733
10,659
74,142
18,815
133,113
9,580
451,537
404,215
The following table presents net loans and acceptances by interest rate sensitivity:
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(Canadian $ in millions)
Fixed rate
Floating rate
Non-interest sensitive (1)
Total
2019
2018
217,002
209,092
23,593
193,661
190,330
18,585
449,687
402,576
(1) Non-interest sensitive is comprised of customers’ liability under acceptances.
Further details of our loan book, including detailed breakdowns by industry and geographic region, can be found in Tables 7 to 15 on pages 122 to
128. Details of our credit exposures are presented in Note 4 on page 151 of the consolidated 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 $872 million in 2019, compared with $662 million in 2018. Detailed discussions of our PCL, including historical PCL trends, are provided
on page 29, in Table 15 on page 128 and in Note 4 on page 151 of the consolidated financial statements.
Gross Impaired Loans (GIL)
Total GIL was $2,629 million in 2019, an increase of 36% from $1,936 million in 2018. The largest increase in impaired loans was recorded in the oil
and gas sector. GIL as a percentage of gross loans and acceptances was 0.58% in 2019, compared with 0.48% in the prior year.
Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the year increased to $2,686 million
from $2,078 million in 2018, reflecting higher impaired loan formations in the oil and gas and manufacturing industries. On a geographic basis,
Canada accounted for less than half of impaired loan formations, comprising 45.3% of total formations in 2019, compared with 55.7% in 2018.
Detailed breakdowns of impaired loans by geographic region and industry can be found in Table 11 on page 124 and in Note 4 on page 151 of the
consolidated financial statements.
Changes in Gross Impaired Loans (1) and Acceptances
(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.
2019
1,936
2,686
(604)
(800)
(528)
–
(57)
(4)
2,629
0.58
2018
2,220
2,078
(708)
(1,051)
(618)
–
(11)
26
1,936
0.48
2017
2,383
2,193
(607)
(1,017)
(618)
–
(46)
(68)
2,220
0.59
Allowance for Credit Losses
BMO employs a disciplined approach to provisioning and loan loss evaluation across all loan portfolios, with the prompt identification of problem
loans being a key risk management objective. BMO maintains both an allowance on impaired loans and an allowance on performing loans, in
accordance with applicable accounting standards. An allowance on performing loans is maintained to cover impairment in the existing portfolio for
loans that have not yet been individually identified as impaired. Our approach to establishing and maintaining the allowance on performing loans is
based on the requirements of IFRS, considering the guideline issued by our regulator, OSFI. Under IFRS 9 expected credit loss (ECL) methodology, an
allowance is recorded for ECL on financial assets regardless of whether there has been an actual loss event. We recognize a loss allowance at an
amount generally based on 12 months of ECL, if the credit risk at the reporting date has not increased significantly since initial recognition (Stage 1).
We will record ECL over the remaining life of performing financial assets that are considered to have experienced a significant increase in credit risk
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
82 BMO Financial Group 202nd Annual Report 2019
(Stage 2). ECL is calculated on a probability-weighted basis, based on three different economic scenarios, and is a function of PD, EAD and LGD.
The timing of the loss is also considered, and ECL is estimated by incorporating forward-looking economic information, and by using experienced
credit judgment to reflect factors not captured in ECL models. An allowance on impaired loans is maintained to reduce the carrying value of
individually identified impaired loans (Stage 3) to the expected recoverable amount.
BMO maintains an allowance for credit losses (ACL) at a level that we consider appropriate to absorb credit-related losses. As at
October 31, 2019, our ACL was $2,094 million, an increase of $224 million from the prior year, reflecting higher allowances on both performing
loans and impaired loans. The allowance on impaired loans was $485 million as at October 31, 2019, and the allowance on performing loans was
$1,609 million. These amounts include an allowance on impaired loans of $22 million and an allowance on performing loans of $222 million related
to undrawn commitments and letters of credit that are considered other credit instruments and recorded in other liabilities. The allowance on
impaired loans increased $88 million from $397 million in the prior year. Our coverage ratio remains adequate, with ACL on impaired loans as a
percentage of GIL of 17.6%, compared with 19.1% in 2018. This ratio can change quarter-over-quarter, due to variability in the write-down of loans
and the related allowance. The allowance on performing loans increased $136 million from $1,473 million in the prior year, primarily driven by
portfolio growth, a moderating economic outlook and changes in scenario weighting.
Further details on the continuity in ACL by each product type can be found in Tables 12 and 13 on pages 126 and 127, and in Note 4 on page 151
of the consolidated financial statements.
European Exposures
BMO’s geographic exposures are subject to a country risk management framework that incorporates economic and political assessments and
management of exposures within limits based on product, entity and country of ultimate risk. Our exposure to European countries, as at
October 31, 2019, 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 (including credit default swap (CDS) activity), repo-style
transactions and derivatives. Funded lending is detailed by counterparty type, as well as by total commitments compared with the funded amount,
in the table on page 84.
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European Exposure by Country and Counterparty (1)
(Canadian $ in millions)
As at October 31, 2019
Country
GIIPS
Greece
Ireland (7)
Italy
Portugal
Spain
Total – GIIPS
Eurozone (excluding GIIPS)
France
Germany
Netherlands
Other (8)
Funded lending (2)
Securities (3)(4)
Repo-style transactions and derivatives (5)(6)
Total
Bank
Corporate
Sovereign
Total
Bank
Corporate
Sovereign
Total
–
323
14
–
162
499
244
515
354
233
–
–
–
–
–
–
–
785
743
–
–
–
–
–
–
–
–
48
3
1
52
1
–
400
–
401
453
–
–
–
–
–
–
–
–
–
–
–
–
63
758
–
211
63
1,591
746
212
1,032
2,612
–
327
7,550
–
256
588
7,958
147
7,877
8,949
8,909
11,561
–
3
4
–
–
7
20
18
4
3
45
1
2
122
22
147
199
–
240
–
–
–
240
2
5
153
15
175
6
–
219
35
260
675
–
–
–
–
–
–
–
2
–
2
4
–
–
34
1
35
39
–
243
4
–
–
247
22
25
157
20
224
7
2
375
58
442
913
Total – Eurozone (excluding GIIPS)
1,346
1,528
Rest of Europe
Norway
Sweden
United Kingdom
Other (8)
Total – Rest of Europe
Total – All of Europe (9)
581
–
1,677
255
2,513
4,358
255
261
8
147
671
2,199
As at October 31, 2018
Funded lending (2)
Securities (3)
Repo-style transactions and derivatives (5)(6)
Country
Total – GIIPS
Total – Eurozone (excluding GIIPS)
Total – Rest of Europe
Total – All of Europe (9)
Total
321
1,081
1,566
2,968
Bank
Corporate
Sovereign
–
738
673
1,411
44
47
646
737
Total
44
5,880
5,551
–
5,095
4,232
9,327
11,475
Bank
Corporate
Sovereign
27
61
112
200
138
153
161
452
–
30
76
106
Total
165
244
349
758
(1) BMO has the following indirect exposures to Europe as at October 31, 2019:
– Collateral of €770 million to support trading activity in securities (€168 million from GIIPS) and €42 million of cash collateral held.
– Guarantees of $10.5 billion ($307 million to GIIPS).
(2) Funded lending includes loans.
(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 $166 million, with no net single-name* CDS exposure to GIIPS countries as at
October 31, 2019 (*includes a net position of $100 million (bought protection) on a CDS Index, of which 8% is comprised of GIIPS domiciled entities).
(5) Repo-style transactions are primarily with bank counterparties for which BMO holds collateral ($32.0 billion for Europe as at October 31, 2019).
(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 $213 million as at October 31, 2019.
(8) Other Eurozone exposure includes five countries with less than $300 million net exposure. Other European exposure is distributed across six countries as at October 31, 2019.
(9) Of our total net direct exposure to Europe, approximately 95% was to counterparties in countries with a rating of Aa2/AAA from at least one of Moody’s or S&P.
BMO Financial Group 202nd Annual Report 2019 83
Total net
exposure
–
566
18
–
162
746
329
2,131
1,257
465
4,182
844
590
10,010
460
11,904
16,832
Total net
exposure
530
7,205
7,466
15,201
MANAGEMENT’S DISCUSSION AND ANALYSIS
European Lending Exposure by Country and Counterparty (9)
(Canadian $ in millions)
Country
GIIPS
Greece
Ireland (7)
Italy
Portugal
Spain
Total – GIIPS
Eurozone (excluding GIIPS)
France
Germany
Netherlands
Other (8)
Total – Eurozone (excluding GIIPS)
A
&
D
M
Rest of Europe
Norway
Sweden
Switzerland
United Kingdom
Other (8)
Total – Rest of Europe
Total – All of Europe (9)
Refer to footnotes in the table on page 83.
Funded lending as at October 31, 2019
As at October 31, 2019
As at October 31, 2018
Bank
Corporate
Sovereign
Commitments
Funded
Commitments
Funded
Lending (2)
–
2
14
–
138
154
172
283
123
80
658
36
–
–
23
12
71
883
–
321
–
–
24
345
72
232
231
153
688
545
–
–
1,654
243
2,442
3,475
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
343
14
–
237
594
376
707
377
396
–
323
14
–
162
499
244
515
354
233
–
5
15
–
318
338
186
522
443
313
–
5
15
–
301
321
136
461
298
186
1,856
1,346
1,464
1,081
1,100
69
–
2,671
475
4,315
6,765
581
–
–
1,677
255
2,513
4,358
687
87
303
1,638
548
3,263
5,065
323
28
244
942
29
1,566
2,968
84 BMO Financial Group 202nd Annual Report 2019
Derivative Transactions
The following table presents 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 or central counterparty (CCP) and those which are non-centrally cleared.
CCPs are established under the supervision of central banks or other similar regulatory authorities and, as financial market infrastructure, must
satisfy certain financial resilience requirements. Generally speaking, to centrally clear, BMO acquires a membership in the CCP and, in addition to
providing collateral to protect the CCP against risk related to BMO, we are exposed to risk as a member for our contribution to a default fund, and
we may be called on to make additional contributions, or to provide other support in the event another member defaults. As part of BMO’s Brexit
preparations, we are closely monitoring the implications of the United Kingdom’s exit from the European Union and the potential impact on CCPs
in both jurisdictions.
Margin requirements for non-centrally cleared derivatives, specifically the requirement for the exchange of regulatory initial margin, became
effective for BMO and BMO Europe plc on September 1, 2019. This global regulatory change applies to certain OTC derivative contracts that BMO has
entered into with other in-scope counterparties. The exchange of margin reduces counterparty credit risk and has the potential to mitigate systemic
risk, although there may be additional funding costs related to the sourcing of eligible collateral.
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 each 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 Derivative Contracts (Notional amounts)
M
D
&
A
(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
Non-centrally cleared
Centrally cleared
Total
2019
2018
2019
2018
2019
2018
467,428
7,106
42,084
49,487
453,976
10,031
35,023
48,721
3,928,844
484,331
–
–
3,378,021
401,542
–
–
4,396,272
491,437
42,084
49,487
3,831,997
411,573
35,023
48,721
566,105
547,751
4,413,175
3,779,563
4,979,280
4,327,314
97,507
507,221
415,367
37,306
42,035
92,916
455,232
438,754
21,093
23,622
1,099,436
1,031,617
–
–
38,344
92
39
38,475
–
–
33,569
375
396
97,507
507,221
453,711
37,398
42,074
92,916
455,232
472,323
21,468
24,018
34,340
1,137,911
1,065,957
24,722
6,608
4,371
35,701
51,226
973
129
1,102
24,366
6,182
4,233
34,781
53,107
1,448
23
1,471
–
–
–
–
–
–
–
–
–
–
4,388
1,939
6,327
1,599
420
2,019
24,722
6,608
4,371
35,701
51,226
5,361
2,068
7,429
24,366
6,182
4,233
34,781
53,107
3,047
443
3,490
1,753,570
1,668,727
4,457,977
3,815,922
6,211,547
5,484,649
BMO Financial Group 202nd Annual Report 2019 85
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.
Market risk arises from BMO’s trading and underwriting activities, as well as its structural banking activities. The magnitude and importance of these
activities to the enterprise, along with the potential volatility of market variables, call for diligent governance and a robust market risk management
framework that ensures effective identification, measurement, reporting and control of market risk exposures.
A
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Trading and Underwriting Market Risk Governance
BMO’s market risk-taking activities are subject to a comprehensive governance framework. The RRC provides oversight of the management of market
risk on behalf of the Board of Directors and approves limits governing market risk exposures that are consistent with our risk appetite. The RMC
regularly reviews and discusses significant market risk exposures and positions, and provides ongoing senior management oversight of BMO’s risk-
taking activities. Both of these committees are kept apprised of specific market risk exposures and other factors that could expose BMO to unusual,
unexpected or unquantified risks associated with market exposures, as well as other current and emerging market risks. In addition, all businesses
and individuals authorized to conduct trading and underwriting activities on behalf of BMO are required to work within BMO’s risk governance
framework and, as part of their first-line-of-defence responsibilities, they must adhere to all relevant corporate policies, standards and procedures
and maintain and manage market risk exposures within specified limits and risk tolerances. In support of BMO’s risk governance framework, our
market risk management framework is comprised of the processes, infrastructure and supporting documentation which, together, ensure that the
bank’s market risk exposures are appropriately identified, accurately measured, and independently monitored and controlled on an ongoing basis.
Trading and Underwriting Market Risk
Our trading and underwriting businesses give rise to market risk associated with buying and selling financial products in the course of meeting
customer requirements, including market making and related financing activities, and assisting clients to raise funds by way of securities issuance.
Identification and Measurement of Trading and Underwriting Market Risk
As the first step in the management of market risk, thorough assessment processes are in place to identify market risk exposures associated with
both new products and the evolving risk profile of existing products, including on- and off-balance sheet positions, trading and non-trading positions
and market risk exposures arising from the domestic and foreign operations of our operating groups.
Reflecting the multi-dimensional nature of market risk, various metrics and techniques are then employed to measure identified market risk
exposures. These metrics primarily include Value at Risk, Stressed Value at Risk, and regulatory and economic capital attribution, as well as stress
testing. Other techniques include the analysis of the sensitivity of our trading and underwriting portfolios to various market risk factors and the
review of position concentrations, notional values and trading losses.
Value at Risk (VaR) measures the maximum loss likely to be experienced in the trading and underwriting portfolios, measured at a 99%
confidence level over a one-day holding period. VaR is calculated 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.
Stressed Value at Risk (SVaR) measures the maximum loss likely to be experienced in the trading and underwriting portfolios, measured at a
99% confidence level over a one-day holding period, with model inputs calibrated to historical data from a period of significant financial stress.
SVaR is calculated 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.
Incremental Risk Charge (IRC) complements the VaR and SVaR metrics and represents an estimate of the default and migration risks
of non-securitization products held in the trading book with exposure to interest rate risk, measured over a one-year horizon at a 99.9%
confidence level.
A consistent set of VaR and SVaR models is used for both management and regulatory purposes across all BMO Financial Group legal entities in which
trading and/or underwriting activities are conducted.
We use a variety of methods to verify the integrity of our risk models, including the application of back-testing against hypothetical losses and
approval by an independent model validation team. This testing is aligned with defined regulatory expectations, and its results confirm the reliability
of our models. The volatility data and correlations that underpin our models are updated frequently, so that risk metrics reflect current conditions.
Probabilistic stress testing and scenario analysis are used daily to determine the potential impact of plausible but severe market changes on our
portfolios. In addition, historical 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. Targeted analyses of risks and portfolios, along with other ad hoc analyses, are also conducted to determine
our sensitivity to hypothetical, low-frequency, high-severity scenarios. Scenarios are amended, added or removed to better reflect changes in
underlying market conditions and the results are reported to the lines of business, the RMC and the RRC on a regular basis.
VaR, SVaR, IRC and stress testing should not be viewed as definitive predictors of the maximum amount of losses that could occur in any one
day, as their results are based on models and estimates and are subject to confidence levels, and the estimates could be exceeded under unforeseen
market conditions.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
86 BMO Financial Group 202nd Annual Report 2019
Back-testing 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. The bank’s VaR model is back-tested daily, and the one-day 99% confidence level VaR at the local and consolidated
BMO levels is compared with the estimated daily profit and loss (P&L) that would be recorded if the portfolio composition remained unchanged. If this
P&L result 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 senior management and reported to our regulators.
Although it is a valuable indicator of risk, as with any model-driven metric, VaR has limitations. Among these limitations is the assumption
that all positions can be liquidated within the assumed one-day holding period, which may not be the case under illiquid market conditions.
Generally, market liquidity horizons are reviewed for suitability and updated where appropriate for relevant risk metrics. Further limitations of the
VaR metric include the assumption that historical data can be used as a proxy to forecast future market events, and the fact that VaR calculations
are based upon portfolio positions at the close of business and do not reflect the impact of intra-day trading activity.
Monitoring and Control of Trading and Underwriting Market Risk
A comprehensive set of limits is applied to these metrics, and these limits are subject to regular monitoring and reporting, with any breach of the
limits escalated to the appropriate level of management. Risk profiles of our trading and underwriting activities are maintained within our risk
appetite and supporting limits, and are monitored and reported to traders, management, senior executives and Board committees. Other significant
controls include the independent valuation of financial assets and liabilities, as well as compliance with our Model Risk Management Framework to
mitigate model risk.
M
D
&
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Trading Market Risk Measures
Trading VaR and SVaR
Average Total Trading VaR increased year-over-year, driven by higher client facilitation in credit products after the acquisition of KGS-Alpha in 2018
and reflecting an increase in the volatility of historical data used in the calculation, partly offset by the effects of increased diversification. Changes in
total trading SVaR are also attributable to the increase in client facilitation activities, along with changes in equity and interest rate exposures, partly
offset by the effects of increased diversification.
Total Trading Value at Risk (VaR) Summary (1) (2)
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 SVaR
2019
2018
Year-end
Average
High
Year-end
Average
High
1.4
4.6
0.5
6.5
5.8
(9.8)
4.9
12.6
1.4
10.6
9.2
nm
9.0
17.2
Low
0.6
2.5
0.2
4.3
4.0
nm
5.8
1.0
3.0
0.5
9.9
5.1
(10.9)
8.6
19.2
0.9
4.4
0.6
5.9
2.6
(6.8)
13.6
7.8
2.2
8.7
7.4
nm
7.6
17.5
Low
0.3
2.9
0.1
3.6
1.5
nm
4.7
0.7
4.4
0.5
6.1
7.4
(8.3)
10.8
56.3
31.7
69.6
16.5
26.8
56.3
16.6
(1) One-day measure using a 99% confidence interval. Gains are presented in brackets and losses 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 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
Trading Net Revenue
The charts below present daily net revenues plotted against Total Trading VaR, along with a representation of daily net revenue distribution. In 2019,
we incurred net trading losses on five days totalling $5.9 million. These losses did not exceed VaR. The largest loss occurred on January 30, 2019.
Trading Net Revenues versus Value at Risk
(pre-tax basis and in millions of Canadian dollars)
November 1, 2018 to October 31, 2019 ($ millions)
A
&
D
M
100
80
60
40
20
0
(20)
(40)
1
0
v
o
N
5
1
v
o
N
9
2
v
o
N
3
1
c
e
D
1
3
c
e
D
5
1
n
a
J
9
2
n
a
J
2
1
b
e
F
7
2
b
e
F
3
1
r
a
M
7
2
r
a
M
0
1
r
p
A
5
2
r
p
A
9
0
y
a
M
4
2
y
a
M
7
0
n
u
J
1
2
n
u
J
8
0
l
u
J
2
2
l
u
J
6
0
g
u
A
0
2
g
u
A
4
0
p
e
S
8
1
p
e
S
2
0
t
c
O
7
1
t
c
O
1
3
t
c
O
Daily Revenue
Total Trading VaR
Frequency Distribution of Daily Net Revenues
November 1, 2018 to October 31, 2019 ($ millions)
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
-3
-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 24 25 31 52 87
Daily net revenues (pre-tax)
88 BMO Financial Group 202nd Annual Report 2019
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 and exposures.
Structural Market Risk Governance
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. In addition to Board-approved limits on earnings at risk and economic value sensitivities to changes
in interest rates, more granular management limits are in place to guide the daily management of this risk.
The RRC has oversight of the management of structural market risk, annually approves the structural market risk plan and limits, and regularly
reviews structural market risk positions. The RMC and Balance Sheet and Capital Management Committee regularly review structural market risk
positions and provide senior management oversight.
Structural Market Risk Measurement
Interest Rate Risk
Structural interest rate risk arises when changes in interest rates affect the market value, cash flows and earnings of assets and liabilities related
to our banking activities. The objective of structural interest rate risk management is to maintain high-quality earnings and maximize sustainable
product spreads, while managing the risk to the economic value of our assets arising from changes in interest rates.
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 and associated customer behaviours are captured in risk modelling, and
hedging programs may be used to manage this risk to low levels.
Structural interest rate risk is measured using simulations, earnings sensitivity and economic value sensitivity analysis, stress testing and gap
analysis, in addition to other treasury risk metrics.
M
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Earnings Sensitivity is a measure of the impact of potential changes in interest rates on the projected 12-month pre-tax net income of a
portfolio of assets, liabilities and off-balance sheet positions in response to prescribed parallel interest rate movements, with interest rates
floored at zero.
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, with interest rates floored at zero.
The models used to measure structural interest rate risk use projected 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. The results of these 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. These models
have been developed using statistical analysis and are independently validated and periodically updated through regular model performance
assessment, back-testing processes and ongoing dialogue with the lines of business. Models developed to predict customer behaviour are also used
to support product pricing. All models are subject to our Model Risk Management Framework, which is described in more detail on page 102.
Structural interest rate earnings and economic value sensitivity to an immediate parallel increase or decrease of 100 basis points in the yield
curve is disclosed in the table below.
There were no significant changes in our structural market risk management framework during the year.
Structural economic value exposure to rising interest rates primarily reflects a lower market value for fixed rate loans. Structural economic value
sensitivity to falling interest rates primarily reflects the impact of a higher market value for fixed rate loans and minimum modelled client deposit
rates. Structural economic value exposure to rising interest rates decreased relative to October 31, 2018, primarily due to modelled deposit pricing
being less rate-sensitive at lower interest rate levels following the decrease in market rates during the year. The structural economic value benefit of
falling interest rates decreased relative to October 31, 2018, due to the reduced extent to which interest rates can now fall. Structural earnings
sensitivity quantifies the potential impact of interest rate changes on structural balance sheet pre-tax net income over the next 12 months.
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 structural earnings exposure to falling interest rates decreased relative to October 31, 2018,
as fewer net assets are scheduled to reprice over the next 12 months as at October 31, 2019. The structural earnings benefit of rising interest rates
primarily reflects the benefit of widening deposit margins as interest rates rise, and this decreased relative to October 31, 2018, as fewer net assets
are scheduled to reprice over the next 12 months as at October 31, 2019.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
Structural Interest Rate Sensitivity (1)
(Pre-tax Canadian $ equivalent in millions)
100 basis point increase
100 basis point decrease
(1) Losses are presented in brackets and gains are presented as positive numbers.
As at October 31, 2019
As at October 31, 2018
Economic value
sensitivity
Earnings sensitivity
over the next
12 months
Economic value
sensitivity
Earnings sensitivity
over the next
12 months
(883.4)
215.6
46.6
(80.3)
(1,079.2)
626.5
136.5
(304.1)
Insurance Market Risk
Insurance market risk includes interest rate and equity market risk arising from BMO’s insurance business activities. A 100 basis point increase
in interest rates as at October 31, 2019 would result in an increase in earnings before tax of $27 million ($37 million as at October 31, 2018).
A 100 basis point decrease in interest rates as at October 31, 2019 would result in a decrease in earnings before tax of $25 million ($37 million as at
October 31, 2018). On an unhedged basis, a 10% decrease in equity market values as at October 31, 2019 would result in a decrease in earnings
before tax of $57 million ($44 million as at October 31, 2018). A 10% increase in equity market values as at October 31, 2019 would result in an
increase in earnings before tax of $54 million ($42 million as at October 31, 2018). BMO may enter into hedging arrangements to offset the impact of
changes in equity market values on its earnings, and did so during the 2019 fiscal year. The impact of insurance market risk on earnings is reflected in
insurance claims, commissions and changes in policy benefit liabilities on the Consolidated Statement of Income, and the corresponding change in the
fair value of our policy benefit liabilities is reflected in other liabilities on the Consolidated Balance Sheet. The impact of insurance market risk is not
reflected in the table above.
A
&
D
M
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 could have on BMO’s reported shareholders’ equity and capital
ratios. BMO may enter into arrangements to offset the impact of foreign exchange rate movements on its capital ratios, and did so during the 2019
fiscal year. Refer to the Enterprise-Wide Capital Management section on page 59 for further discussion.
Transaction risk represents the impact that fluctuations in the Canadian/U.S. dollar exchange rate could have on the Canadian dollar equivalent of
BMO’s U.S.-dollar-denominated financial 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 on financial results, although no hedges were executed in the
current or prior year. If future results are consistent with results in 2019, each one cent increase (decrease) in the Canadian/U.S. dollar exchange rate
would be expected to increase (decrease) the Canadian dollar equivalent of our U.S. segment net income before income taxes for the year by
$16 million, in the absence of hedging transactions. Refer to the Foreign Exchange section on page 23 for a more complete discussion of the effects
of changes in exchange rates on the bank’s results.
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, 2019
Subject to market risk
As at October 31, 2018
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
48,803
7,987
189,438
–
242
85,739
48,803
7,745
103,699
Securities borrowed or purchased under
resale agreements
Loans (net of allowance for credit losses)
104,004
426,094
–
–
104,004
426,094
Derivative instruments
22,144
19,508
2,636
–
–
–
–
–
–
42,142
8,305
180,935
–
250
99,561
42,142
8,055
81,374
85,051
383,991
–
–
85,051
383,991
25,422
23,619
1,803
–
–
–
–
–
–
Main risk factors
for non-traded
risk balances
Interest rate
Interest rate
Interest rate, credit
spread, equity
Interest rate
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate
Customers’ liability under acceptances
Other assets
23,593
30,132
–
–
23,593
15,417
Total Assets
852,195 105,489
731,991
–
14,715
14,715
18,585
28,862
–
–
18,585
13,856
773,293 123,430
634,857
–
15,006
15,006
Liabilities Subject to Market Risk
Deposits
568,143
15,829
552,314
Derivative instruments
23,598
20,094
3,504
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Other liabilities
Subordinated debt
Total Liabilities
23,593
26,253
–
26,253
86,656
65,881
6,995
–
–
–
23,593
–
86,656
65,766
6,995
801,119
62,176
738,828
–
–
–
–
–
115
–
115
520,928
14,186
506,742
23,629
20,598
3,031
18,585
28,804
–
28,804
66,684
62,160
6,782
–
–
–
18,585
–
66,684
62,037
6,782
727,572
63,588
663,861
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate
Interest rate
Interest rate
–
–
–
–
–
123
–
123
(1) Primarily comprised of balance sheet items that are subject to the trading and underwriting risk management framework and recorded at fair value through profit or loss.
(2) Primarily comprised of balance sheet items that are subject to the structural balance sheet and insurance risk management framework.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
90 BMO Financial Group 202nd Annual Report 2019
Insurance Risk
Insurance risk is the potential for loss as a result of actual experience differing from that assumed when an insurance product was designed and
priced. It generally entails the inherent unpredictability that can arise from assuming long-term policy liabilities or from the uncertainty of future
events. Insurance provides protection against the financial consequences of insured risks by transferring those risks to the insurer (under specific
terms and conditions) in exchange for premiums. Insurance risk is inherent in all of our insurance products, including annuities and life, accident
and sickness, and creditor insurance, as well as in our reinsurance business.
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 in regard to premium payments, withdrawals or loans, policy lapses
and surrenders, and other voluntary terminations will differ from the behaviour assumed in the pricing process; and
‰ Expense risk – the risk that actual expenses arising from acquiring and administering policies and processing claims will exceed the expenses
assumed in the pricing process.
BMO’s risk governance practices provide effective independent oversight and control of risk within BMO Insurance. BMO Insurance’s risk management
framework addresses 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; Own Risk and Solvency
Assessment; and ongoing monitoring of experience. Senior management within the various lines of business uses this framework as the first line of
defence, and has the primary responsibility for managing insurance risk. Second-line-of-defence oversight is provided by the CRO, BMO Insurance,
who reports to the Head of Market Risk and CRO, BMO Capital Markets. Internal risk committees, the boards of directors of the BMO Insurance
subsidiaries and senior management provide senior governance and review. In particular, the Risk Committee, BMO Insurance, oversees and reports
on risk management activities on a quarterly basis to the insurance companies’ boards of directors. In addition, the Audit and Conduct Review
Committee of the Board acts as the Audit and Conduct Review Committee for BMO Life Insurance Company.
A robust product approval process is a cornerstone of our BMO Insurance risk management framework, as it identifies, assesses and mitigates
risks associated with new insurance products or changes to existing products. This process, along with guidelines and practices for underwriting and
claims management, promotes the effective identification, measurement and management of insurance risk. Reinsurance transactions that transfer
insurance risk from BMO Insurance to independent reinsurance companies are also used to mitigate our exposure to insurance risk by diversifying risk
and limiting claims. Our reinsurance business, in turn, assumes property catastrophe and other reinsurance risks from independent reinsurers in
various jurisdictions worldwide in order to diversify our geographic reinsurance exposures in accordance with our BMO Insurance risk management
framework. BMO Insurance will be exiting the Property & Casualty Reinsurance market, with all treaties terminating by March 2021, significantly
reducing our exposure to catastrophic claims. However, some exposure to catastrophic claims will remain until all outstanding claims that occurred
prior to the treaty termination dates are settled and paid.
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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 become due. Financial commitments include liabilities to depositors and suppliers, and lending, investment and pledging commitments.
Managing liquidity and funding risk is integral to maintaining enterprise soundness and safety, 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 Corporate Treasury group and the operating groups, as the first line of defence, are responsible for the ongoing management of liquidity and
funding risk across the enterprise. The Corporate Treasury group is responsible for identifying, assessing, managing, monitoring, mitigating and
reporting on liquidity and funding risks. The group develops and recommends for approval the Liquidity and Funding Risk Management Framework
and the related risk appetite and limits, monitors compliance with the relevant corporate policies and assesses the impact of market events on
liquidity and funding requirements on an ongoing basis.
Enterprise Risk and Portfolio Management, as the second line of defence, provides oversight, independent risk assessment and effective
challenge of liquidity and funding management frameworks, policies, limits, monitoring and reporting across the enterprise. The Risk Management
Committee (RMC) and Balance Sheet and Capital Management Committee (BSCMC) provide senior management oversight and also review and discuss
significant liquidity and funding policies, issues and developments that arise in the pursuit of our strategic priorities. The Risk Review Committee
(RRC) provides 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.
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, as well as roles
and responsibilities for the management of liquidity and funding risk across the enterprise.
BMO has a robust limit structure in place in order to manage liquidity and funding risk. Limits define the enterprise-level risk appetite for our key
Stress Net Liquidity Position (Stress NLP) measure, regulatory liquidity ratios, secured and unsecured funding appetite (for both trading and structural
activities), and enterprise collateral pledging. Limits also establish the tolerance for concentrations of maturities, requirements for counterparty liability
diversification, business pledging activity, and the size and type of uncommitted and committed credit and liquidity facilities that may be outstanding.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68)
BMO Financial Group 202nd Annual Report 2019 91
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating within these limits helps to confirm that liquidity and funding risk is appropriately managed. An enterprise-wide contingency plan
designed to facilitate effective management in the event of a disruption is also in place. Early warning indicators identified in the contingency plan
are regularly monitored in order to detect any signs of growing liquidity or funding risk in the market or other risks specific to BMO.
BMO legal entities include regulated and foreign subsidiaries and branches, and as a result, movements of funds between entities in the
corporate group are subject to, among other things, the liquidity, funding and capital adequacy requirements of these entities. 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, which
are informed by the legal and regulatory requirements that apply to each entity, are in place for key legal entities, and positions are regularly
reviewed at the key legal entity level to confirm compliance with applicable requirements.
BMO employs practices related to funds transfer pricing and liquidity transfer pricing in order to ensure that 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 holding supplemental liquid assets to
meet 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 Stress NLP as a key measure of
liquidity risk. The Stress 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 or to fund drawdowns on available credit and liquidity lines, obligations to pledge collateral due to ratings downgrades or
market volatility, and the continuing need to fund new assets or strategic investments. Potential funding needs are quantified by applying factors to
various business activities based on management’s view of the relative level of liquidity risk related to 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 management’s assessment of the liquidity value
of those assets under conditions of market stress. These funding needs are assessed under severe systemic and enterprise-specific stress scenarios,
and a combination thereof.
Stress testing results are evaluated against BMO’s stated risk tolerance and are considered in management decisions on setting limits and
internal liquidity transfer pricing, and they also help to inform and shape the design of business plans and contingency plans. The Liquidity and
Funding Risk Management Framework is integrated with enterprise-wide stress testing.
In addition to the Stress NLP, we regularly monitor positions in relation to the limits and liquidity ratios noted in the Liquidity and Funding Risk
Management section above. These include regulatory metrics such as the Liquidity Coverage Ratio (LCR) and Net Cumulative Cash Flow and, beginning
in 2020, the Net Stable Funding Ratio (NSFR).
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 liquidity value recognized for different asset
classes under our management framework reflects management’s assessment of the liquidity value of those assets under a severe stress scenario.
Liquid assets held in the trading businesses include cash on deposit with central banks, 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, securities, and short-term reverse repurchase agreements of highly-rated Canadian federal and provincial
government debt and U.S. federal government and agency debt. Substantially all supplemental liquidity pool assets meet the definition of high-
quality liquid assets under Basel III. Approximately 75% of the supplemental liquidity pool is held at the parent bank level in Canadian-dollar- 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 integrated with our measurement of liquidity risk. 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 at 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
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 in support of 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 $249.7 billion at October 31, 2019, compared with $242.6 billion at October 31, 2018.
The increase in unencumbered liquid assets was mainly due to higher cash and securities balances. Net unencumbered liquid assets are primarily held
at the parent bank level, at our U.S. bank entity BMO Harris Bank, and in our 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 rely on central bank facilities as a source of available liquidity when assessing the soundness of 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 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. Refer to Note 24 on page 197 of the
consolidated financial statements for further information on pledged assets.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
92 BMO Financial Group 202nd Annual Report 2019
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 banks
NHA mortgage-backed securities and U.S. agency mortgage-backed
securities and collateralized mortgage obligations
Corporate and other debt
Corporate equity
Carrying
value/on-
balance sheet
assets (1)
48,803
7,987
As at October 31, 2019
As at October 31, 2018
Other cash
and securities
received
Total gross
assets (2)
Encumbered
assets
Net
unencumbered
assets (3)
Net
unencumbered
assets (3)
–
–
48,803
7,987
1,895
–
46,908
7,987
170,219
22,838
193,057
102,694
90,363
39,393
25,271
58,559
743
12,486
22,808
40,136
37,757
81,367
18,730
5,645
52,931
21,406
32,112
28,436
Total securities and securities borrowed or purchased under resale
agreements
293,442
58,875
352,317
180,000
172,317
NHA mortgage-backed securities (reported as loans at amortized
cost) (4)
Total liquid assets
26,126
–
26,126
3,688
22,438
376,358
58,875
435,233
185,583
249,650
Other eligible assets at central banks (not included above) (5)
Undrawn credit lines granted by central banks
69,011
–
–
–
69,011
–
765
–
68,246
–
Total liquid assets and other sources
445,369
58,875
504,244
186,348
317,896
40,487
8,305
78,158
19,767
27,972
42,805
168,702
25,118
242,612
63,369
–
305,981
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(1) The carrying values outlined in this table are consistent with the carrying values reported in BMO’s consolidated balance sheet as at October 31, 2019.
(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, National Housing Authority (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 bank’s loan portfolio, including incremental securitization, covered bond issuances and Federal Home Loan Bank (FHLB) advances.
BMO Financial Group 202nd Annual Report 2019 93
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Asset Encumbrance
(Canadian $ in millions)
As at October 31, 2019
Cash and deposits with other banks
Securities (5)
Loans and acceptances
Other assets
Derivative instruments
Customers’ liability under acceptances
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax asset
Other assets
Total other assets
Total assets
(Canadian $ in millions)
As at October 31, 2018
Cash and deposits with other banks
Securities (5)
Loans and acceptances
Other assets
Derivative instruments
Customers’ liability under acceptances
Premises and equipment
Goodwill
Intangible assets
Current tax assets
Deferred tax asset
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)
56,790
378,443
399,968
–
153,269
73,073
1,895
30,419
765
–
12,107
257,884
54,895
182,648
68,246
22,144
23,593
2,055
6,340
2,424
1,165
1,568
16,580
75,869
–
–
–
–
–
–
–
3,722
3,722
–
–
–
–
–
–
–
–
–
22,144
23,593
2,055
6,340
2,424
1,165
1,568
12,858
72,147
–
–
–
–
–
–
–
–
–
911,070
230,064
33,079
342,138
305,789
Total gross
assets (1)
50,447
352,884
356,126
25,422
18,585
1,986
6,373
2,272
1,515
2,039
14,677
72,869
Encumbered (2)
Net unencumbered
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
–
127,211
73,553
1,655
31,853
660
–
10,580
218,544
48,792
183,240
63,369
–
–
–
–
–
–
–
2,509
2,509
–
–
–
–
–
–
–
–
–
25,422
18,585
1,986
6,373
2,272
1,515
2,039
12,168
70,360
–
–
–
–
–
–
–
–
–
832,326
203,273
34,168
299,484
295,401
(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 that is pledged through repurchase agreements, securities lending, derivative contracts, minimum
required deposits at central banks, and requirements associated with participation in clearing houses and payment systems. Other encumbered assets include assets that are restricted 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
$12.1 billion as at October 31, 2019, which include securities held at BMO’s insurance subsidiary, significant equity investments, and certain investments held at our merchant banking business.
Other unencumbered assets also include mortgages and loans that may be securitized to access secured funding.
(4) Loans included in 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 bank’s loan portfolio, such as 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).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO’s Liquidity Coverage Ratio (LCR) is summarized in the following table. The average daily LCR for the quarter ended October 31, 2019 was 138%.
The LCR is calculated on a daily basis as the ratio of the stock of High-Quality Liquid Assets (HQLA) held to total net stressed cash outflows over the
next 30 calendar days. The average LCR was down from 145% last year. The increase in net cash outflows was partially offset by 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 HQLA during
a period of stress, which may result in an LCR of less than 100% during such a 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 available during a period of stress.
BMO’s total liquid assets are shown in the Liquid Assets table on page 93.
94 BMO Financial Group 202nd Annual Report 2019
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:
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, 2018
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
For the quarter ended October 31, 2019
Total unweighted value
(average) (1) (2)
Total weighted value
(average) (2) (3)
*
200.4
96.0
104.4
165.3
62.4
68.1
34.8
*
156.3
10.5
1.8
144.0
1.0
402.7
*
149.2
10.2
8.7
168.1
163.2
13.8
2.9
10.9
91.2
15.5
40.9
34.8
20.8
32.7
4.4
1.8
26.5
–
7.0
165.5
33.2
5.5
8.7
47.4
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Total adjusted value (4)
163.2
118.1
138
Total adjusted value (4)
155.0
106.9
145
* 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) Values are calculated based on the simple average of the daily LCR over 63 business days in the fourth quarter of 2019.
(3) Weighted values are calculated after the application of the weightings 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 in the LAR Guideline.
BMO Financial Group 202nd Annual Report 2019 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
Funding Strategy
Our funding strategy requires that secured and unsecured wholesale funding used to support loans and less liquid assets must have a term (typically
maturing in two to ten years) that will support the effective term to maturity of these assets. Secured and unsecured wholesale funding for liquid
trading assets is largely 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 periods. Supplemental liquidity pools are funded largely with 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 $378.8 billion
as at October 31, 2019, and increased from $329.2 billion in 2018, due to strong deposit growth. BMO also receives non-marketable deposits
from corporate and institutional customers in support of certain trading activities. These deposits totalled $22.1 billion as at October 31, 2019,
down from $29.5 billion as at October 31, 2018.
A
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Customer Deposits and
Capital-to-Customer Loans
Ratio (%)
97.7
99.2
102.1
Customer Deposits
($ billions)
379
303
329
2017
2018
2019
2017
2018
2019
Our large customer base and
strong capital position reduce our
reliance on wholesale funding.
Customer deposits provide a
strong funding base.
Total wholesale funding outstanding, which largely consists of negotiable marketable securities, was $207.6 billion as at October 31, 2019,
with $63.9 billion sourced as secured funding and $143.7 billion sourced as unsecured funding. Wholesale funding outstanding increased from
$203.3 billion as at October 31, 2018, primarily due to net wholesale funding issuance. The mix and maturities of BMO’s wholesale term funding
are outlined in the table below. Additional information on deposit maturities can be found on page 98. BMO maintains a sizeable portfolio of
unencumbered liquid assets, totalling $249.7 billion as at October 31, 2019 and $242.6 billion as at October 31, 2018, that can be monetized to
meet potential funding requirements, as described in the Unencumbered Liquid Assets section on page 92.
In April 2018, the Government of Canada published the final regulations on Canada’s Bank Recapitalization (Bail-In) Regime, which became
effective on September 23, 2018. Bail-in debt includes senior unsecured debt issued directly by the bank on or after September 23, 2018 that has an
original term greater than 400 days and is marketable, subject to certain exceptions. BMO is required to meet minimum Total Loss Absorbing Capacity
(TLAC) ratio requirements by November 1, 2021. We do not expect a material impact on our funding plan as a result of Canada’s Bail-In Regime and
TLAC requirements. For more information on Canada’s Bail-In Regime and TLAC requirements, refer to Capital Regulatory Developments under
Enterprise-Wide Capital Management on page 59.
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 type and maturity profile. BMO maintains ready access to
long-term wholesale funding through various borrowing programs, including a European Note Issuance Program, Canadian, Australian and U.S.
Medium-Term Note programs, Canadian and U.S. mortgage securitizations, Canadian credit card loans, auto loans, transportation finance (TF) loans
and home equity line of credit (HELOC) securitizations, covered bonds, and Canadian and U.S. senior unsecured deposits.
Wholesale Capital Market Term Funding Composition (%)
2019
2018
31%
21%
29%
22%
20%
28%
19%
30%
Covered Bonds
Mortgage, Credit Card, Auto Loan, TF and HELOC Securitizations, and FHLB Advances
Senior Debt (Canadian dollar)
Senior Debt (Global issuances)
BMO’s wholesale funding plan seeks to ensure sufficient funding capacity is available to execute our business strategies. The funding plan
considers expected maturities, as well as asset and liability growth projected for our businesses in our forecasting and planning processes, and
assesses funding needs in relation to the sources available. The funding plan is reviewed annually by the BSCMC and RMC and approved by the RRC,
and is regularly updated to reflect actual results and incorporate updated forecast information.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
96 BMO Financial Group 202nd Annual Report 2019
Wholesale Funding Maturities (1)
(Canadian $ in millions)
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 and HELOC securitizations
Covered bonds
Other asset-backed securitizations (3)
Subordinated debt
Other (4)
Total
Of which:
Secured
Unsecured
Total (5)
As at October 31, 2019
As at October 31, 2018
Less than
1 month
3,521
11,391
24
683
–
6
–
–
–
–
–
1 to 3
months
480
19,286
63
1,524
1,711
7
544
2,201
1,045
–
4,970
3 to 6
months
10
14,918
–
1,069
751
–
1,384
–
–
–
–
6 to 12
months
291
18,528
30
–
10,690
5
1,288
3,563
173
–
–
Subtotal
less than
1 year
4,302
64,123
117
3,276
13,152
18
3,216
5,764
1,218
–
4,970
1 to 2
years
–
367
–
–
15,910
–
3,604
4,176
351
–
–
Over
2 years
10
–
–
–
34,727
3,789
12,782
15,557
6,059
7,189
2,896
Total
4,312
64,490
117
3,276
63,789
3,807
19,602
25,497
7,628
7,189
7,866
Total
4,977
68,318
576
3,586
55,753
3,693
18,203
25,263
6,930
6,841
9,185
15,625
31,831
18,132
34,568
100,156
24,408
83,009
207,573
203,325
683
14,942
10,284
21,547
2,453
15,679
5,024
29,544
18,444
81,712
8,131
16,277
37,294
45,715
63,869
143,704
15,625
31,831
18,132
34,568
100,156
24,408
83,009
207,573
63,167
140,158
203,325
M
D
&
A
(1) Wholesale unsecured funding primarily includes funding raised through the issuance of marketable, negotiable instruments. Wholesale funding excludes repo transactions and bankers’ acceptances,
which are disclosed in the contractual maturity table on page 98, and also excludes ABCP issued by certain ABCP conduits that are not consolidated for financial reporting purposes.
(2) Primarily issued to institutional investors.
(3) Includes credit card, auto and transportation finance loan securitizations.
(4) Refers to FHLB advances.
(5) Total wholesale funding consists of Canadian-dollar-denominated funding totalling $51.7 billion and U.S.-dollar-denominated and other foreign-currency-denominated funding totalling $155.9 billion
as at October 31, 2019.
Regulatory Developments
The Net Stable Funding Ratio (NSFR) is a regulatory liquidity metric that assesses the stability of a bank’s funding profile in relation to the liquidity
value of a bank’s assets. OSFI finalized the domestic implementation of the NSFR in the second quarter of 2019. Canadian domestic systemically
important banks (D-SIBs), including BMO, will be required to maintain a minimum NSFR of 100%, effective January 1, 2020, and to publicly disclose
their NSFR, effective for the quarter ending January 31, 2021. In addition, in April 2019, OSFI finalized revisions to the LCR and other liquidity metrics
under the Liquidity Adequacy Requirements (LAR) Guideline, with an implementation date of January 1, 2020. We do not expect a material impact on
our liquidity and funding management approach as a result of these changes.
Credit Ratings
The credit ratings assigned to BMO’s short-term and senior long-term debt securities by external rating agencies are important for the bank to
raise both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access the wholesale markets at
competitive pricing levels. Should our credit ratings experience a downgrade, our cost of funding would likely increase and our access to funding and
capital through the wholesale markets could be reduced. A material downgrade of our ratings could also have other consequences, including those
set out in Note 8 starting on page 162 of the consolidated 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), Fitch and DBRS have a stable outlook on BMO.
On February 1, 2019, in response to the implementation of bail-in rules in Canada, Fitch downgraded its Support Ratings for Canadian D-SIBs
to “5” from “2” and its Support Ratings Floors to “No Floor” from “BBB-”. Fitch’s lowered outlook for sovereign support had no impact on the Issuer
Default Ratings, Viability Ratings, or issue-level ratings for D-SIBs, including BMO. Fitch’s ratings for BMO’s senior debt and legacy senior debt are
unchanged at AA-.
As at October 31, 2019
Rating agency
Moody’s
S&P
Fitch
DBRS
Short-term debt
Senior debt (1)
P-1
A-1
F1+
R-1 (high)
A2
A-
AA-
AA (low)
Long-term
deposits /
Legacy senior
debt (2)
Aa2
A+
AA-
AA
Subordinated
debt (NVCC)
Baa1
BBB+
A+
A (low)
Outlook
Stable
Stable
Stable
Stable
(1) Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(2) Long-term deposits / Legacy senior debt includes senior debt issued prior to September 23, 2018 and senior debt issued on or after September 23, 2018 that is excluded from the Bank
Recapitalization (Bail-In) Regime.
We are required to deliver collateral to certain counterparties in the event of a downgrade of our current credit rating. The incremental collateral
required is based on mark-to-market exposure, collateral valuations and collateral threshold arrangements, as applicable. As at October 31, 2019,
we would be required to provide additional collateral to counterparties totalling $95 million, $392 million and $614 million as a result of a one-notch,
two-notch and three-notch downgrade, respectively.
BMO Financial Group 202nd Annual Report 2019 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
(Canadian $ in millions)
On-Balance Sheet Financial Instruments
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Securities borrowed or purchased under
resale agreements
Loans
A
&
D
M
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
2019
Total
47,844
4,088
2,680
–
1,893
3,420
–
1,081
2,797
–
714
–
211
–
–
–
–
–
–
959
48,803
–
7,987
3,508
4,670
15,001
46,687
66,005
44,670
189,438
75,936
21,562
4,819
859
518
–
310
–
–
104,004
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
1,691
645
–
12,490
–
2,059
519
–
7,072
–
5,285
991
–
6,168
–
6,818
1,272
–
7,760
–
7,138
1,502
–
6,547
–
22,309
4,823
–
24,687
–
68,143
22,391
–
87,486
–
10,297
11,947
–
20,331
–
–
23,646
8,859
55,068
(1,850)
123,740
67,736
8,859
227,609
(1,850)
Total loans and acceptances, net of
allowance
Other Assets
Derivative instruments
Customers’ liability under acceptances
Other
Total other assets
Total Assets
(Canadian $ in millions)
Liabilities and Equity
Deposits (1)
Banks
Business and government
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 structured entities’
liabilities
Other
Total other liabilities
Subordinated debt
Total Equity
14,826
9,650
12,444
15,850
15,187
51,819
178,020
42,575
85,723
426,094
1,209
20,694
1,951
23,854
1,867
2,562
593
5,022
877
173
245
830
159
12
1,295
1,001
911
5
5
921
2,375
–
7
2,382
5,095
–
5
5,100
8,980
–
4,475
–
–
22,839
22,144
23,593
30,132
13,455
22,839
75,869
169,228
41,547
22,436
21,932
21,507
69,202
230,117
122,035
154,191
852,195
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
2019
Total
12,177
21,088
3,607
4,187
28,511
8,932
1,215
21,209
12,080
319
22,334
13,390
1,174
18,023
15,706
–
22,983
11,418
–
49,292
13,257
201
11,759
2,031
4,543
147,958
120,749
23,816
343,157
201,170
36,872
41,630
34,504
36,043
34,903
34,401
62,549
13,991
273,250
568,143
1,329
20,694
26,253
83,681
–
–
1
12,325
2,574
2,562
–
1,459
–
–
1,655
3,188
144,283
11,438
–
–
–
–
1,240
173
–
760
–
–
1,340
33
3,546
–
–
970
159
–
450
–
–
1,033
29
2,641
–
–
1,032
5
–
2,985
–
–
–
–
–
1,038
74
2,149
–
–
–
–
–
5,350
537
8,872
–
–
6,798
–
–
306
–
–
6,670
–
–
–
–
–
–
–
–
–
55
60
23,598
23,593
26,253
86,656
55
60
13,779
3,596
2,963
2,406
–
16,419
27,159
38,607
24,479
12,039
16,534
225,981
–
–
6,995
–
6,995
–
51,076
51,076
Total Liabilities and Equity
181,155
53,068
38,050
38,684
37,052
43,273
87,028
33,025
340,860
852,195
(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)
Backstop liquidity facilities
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
2019
Total
1,868
–
32
4,102
53
3,777
–
66
–
98
5,698
–
98
–
138
8,832
–
97
–
133
12,511
–
96
–
137
21,574
–
361
–
111
102,113
5,550
931
–
187
5,643
–
2,119
–
69
–
–
–
–
–
162,016
5,550
3,800
4,102
926
(1) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion. 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.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
98 BMO Financial Group 202nd Annual Report 2019
M
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(Canadian $ in millions)
On-Balance Sheet Financial Instruments
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Securities borrowed or purchased under
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
2018
Total
41,162
4,964
4,522
–
1,717
4,283
–
1,037
5,049
–
457
–
112
–
18
–
–
–
–
980
42,142
–
8,305
7,749
4,943
11,854
32,480
56,004
54,051
180,935
resale agreements
67,804
12,732
2,490
1,781
191
53
–
–
–
85,051
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
1,782
607
–
13,088
–
1,848
440
–
5,921
–
4,343
1,026
–
7,126
–
6,306
1,143
–
6,779
–
4,769
943
–
6,218
–
24,522
5,414
–
19,543
–
64,636
19,910
–
75,099
–
11,414
9,812
–
12,247
–
–
23,930
8,329
48,435
(1,639)
119,620
63,225
8,329
194,456
(1,639)
Total loans and acceptances, net of
allowance
Other Assets
Derivative instruments
Customers’ liability under acceptances
Other
Total other assets
Total Assets
(Canadian $ in millions)
Liabilities and Equity
Deposits (1)
Banks
Business and government
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 structured entities’
liabilities
Other
Total other liabilities
Subordinated debt
Total Equity
15,477
8,209
12,495
14,228
11,930
49,479
159,645
33,473
79,055
383,991
2,033
16,529
1,740
20,302
3,379
1,988
506
5,873
1,638
65
189
1,892
1,002
3
26
1,031
797
–
6
803
3,333
–
17
3,350
5,816
–
20
5,836
7,424
–
4,824
–
–
21,534
25,422
18,585
28,862
12,248
21,534
72,869
154,231
32,814
22,963
25,246
17,979
64,754
197,961
101,725
155,620
773,293
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
2018
Total
16,966
23,524
2,582
43,072
1,496
16,529
28,804
63,496
–
–
1,044
8,548
6,032
32,231
6,455
44,718
2,445
1,988
–
2,249
–
–
1,084
5,568
1,200
22,713
7,953
31,866
1,610
65
–
8
–
–
475
44
227
15,893
7,619
23,739
106
8,629
10,536
19,271
904
3
–
931
–
–
512
34
631
–
–
–
–
–
588
184
119,917
13,334
2,202
2,384
1,403
–
–
–
–
–
–
–
–
–
–
–
22,418
11,736
34,154
3,741
–
–
–
–
–
4,912
789
9,442
–
–
–
48,684
16,327
65,011
6,092
–
–
–
–
–
13,398
4,455
23,945
–
–
–
11,809
2,582
3,376
126,276
115,054
27,907
312,177
180,844
14,391
244,706
520,928
6,710
–
–
–
–
–
–
–
–
–
50
74
23,629
18,585
28,804
66,684
50
74
3,038
1,905
–
15,458
25,051
36,985
11,653
15,582
199,862
6,782
–
6,782
–
45,721
45,721
Total Liabilities and Equity
162,989
58,052
34,068
26,123
20,674
43,596
88,956
32,826
306,009
773,293
(1) Deposits payable on demand and payable after notice have been included under no maturity.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
(Canadian $ in millions)
Off-Balance Sheet Commitments
Commitments to extend credit (1)
Backstop liquidity facilities
Operating leases
Securities lending
Purchase obligations
0 to 1
month
1,472
–
34
4,939
56
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
2018
Total
3,610
–
70
–
388
6,892
–
99
–
153
9,620
–
101
–
155
11,345
–
100
–
158
21,056
–
358
–
615
84,295
5,627
770
–
186
3,144
–
1,210
–
82
–
–
–
–
–
141,434
5,627
2,742
4,939
1,793
(1) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion. 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.
Caution
This Liquidity and Funding Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Material presented in a blue-tinted font above is an integral part of the 2019 audited annual consolidated financial statements (refer to page 68).
BMO Financial Group 202nd Annual Report 2019 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operational Risk
Operational risk is the potential for loss or harm resulting from inadequate or failed internal processes or systems, human errors or misconduct
or external events, but excludes business risk, credit risk, market risk, liquidity risk and other financial risk.
Operational risk is inherent in all of our business and banking activities and can lead to significant impacts on our business and financial results,
including financial loss, restatements and damage to our reputation. Like other financial services organizations that operate in multiple jurisdictions,
BMO is exposed to a variety of operational risks arising from the potential for failures of our internal processes, employees and technology systems,
as well as from external threats. Potential losses may result from process and control failures, theft and fraud, unauthorized transactions by
employees, regulatory non-compliance, business disruption, information security breaches, cyber security threats and exposure to risks related to
outsourcing and damage to physical assets. Given the large volume of transactions we process on a daily basis, and the complexity and speed of our
business operations, there is a possibility that certain operational or human errors may be repeated or compounded before they are discovered and
rectified.
Operational risk is not only inherent in our business and banking activities, it is also inherent in the processes and controls we use to manage our
A
&
D
M
risks. There is the possibility that errors will occur, as well as the possibility of a failure in our internal processes or systems, which could lead to
financial loss and reputational harm. 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 or restatements and damage
our reputation.
The nature of our business also exposes us to the risk of theft and fraud when we enter into credit transactions with customers or counterparties.
In extending credit, we rely on the accuracy and completeness of any information provided by, and any other representations made by, customers
and counterparties. While we conduct appropriate due diligence on such customer information and, where practicable and economically feasible,
engage valuation experts and other experts or sources of information to assist in assessing the value of collateral and other customer risks, our
financial results may be adversely impacted if the information provided by customers or counterparties is materially misleading and this is not
discovered during the due diligence process.
We apply various risk management frameworks to manage and mitigate all of these risks, including internal controls, limits and governance
processes. However, despite the contingency plans we have in place to maintain our ability to serve our clients and minimize disruptions and adverse
impacts, and the contingency plans our third-party service providers 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.
We regularly review our top and emerging risks, and assess our preparedness to proactively manage the risks that we face or could face in the
future. For more information on these and other factors that may affect future results, please refer to the discussion on page 70.
Consistent with the management of risk across the enterprise, we employ a three-lines-of-defence approach in managing operational risk.
Operational risk is managed by the operating groups and corporate functions as the first line of defence. This is overseen by ERPM Operational Risk
Management (ORM), along with Corporate Support Areas for specialized risks, as the second line of defence, governed by a robust committee
structure and supported by a comprehensive Operational Risk Management Framework (ORMF). The Corporate Audit Division, as the third line of
defence, assesses our adherence to internal controls and limits, and identifies opportunities to strengthen our processes.
Operational Risk Governance
The Operational Risk Committee (ORC), a sub-committee of the RMC, is the primary governance committee exercising oversight of all operational risk
management matters. As part of its governance responsibilities, the ORC provides effective challenge to the policies, standards, operating guidelines,
methodologies and tools that comprise the governing principles of the ORMF. The documentation that gives effect to these governing principles is
reviewed on a regular basis to ensure it incorporates sound practices and is 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 risk governance framework.
Enterprise reporting provides an integrated view of top and emerging risks, trends in loss data, capital consumption, key risk indicators and operating
group profiles. We continue to invest in our reporting platforms and support timely and comprehensive reporting capabilities in order to enhance risk
transparency and facilitate the proactive management of operational risk exposures.
Operational Risk Management
The operating groups, as the first line of defence, are accountable for the day-to-day management of operational risk, with the CROs of businesses
providing governance and oversight for their respective business units, and Corporate Support Areas providing additional governance and oversight in
certain targeted areas. Independent risk management oversight is provided by the ORM team, which is responsible for operational risk strategy, tools
and policies, and for second-line oversight, effective challenge and governance. ORM establishes and maintains the ORMF, which defines the
processes to be used by the first line of defence to identify, measure, manage, mitigate, monitor and report on key operational risk exposures, losses
and near-miss operational risk events with significant potential impact. In addition, the ORMF defines the processes by which ORM, as the second line
of defence, guides, supports, monitors, assesses and communicates with the first line in its management of operational risk. Operational Risk Officers
(OROs) within ORM independently assess group operational risk profiles, identify material exposures and potential weaknesses in processes and
controls, and recommend appropriate mitigation strategies and actions. Executing our ORMF strategy also involves continuing to strengthen our risk
culture by promoting greater awareness and understanding of operational risk across all three lines of defence, learning from loss events and near-
misses and providing other training and communication, as well as day-to-day execution and oversight of the ORMF. We also continue to strengthen
our second-line-of-defence support and oversight.
The following are the key programs, methodologies and processes set out in the ORMF that assist us in the ongoing review of our operational
risk profile:
‰ Risk Control Self-Assessment (RCSA) 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 RCSA 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.
100 BMO Financial Group 202nd Annual Report 2019
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‰ ORM provides an independent enterprise-level view of operational risk relative to our risk appetite, so that key risks can be appropriately identified,
documented, managed and mitigated.
‰ Process Risk Assessments (PRAs) and ORM reviews take a deeper view by identifying key risks and controls in our critical business processes, which
may span multiple business and functional units. PRAs and ORM reviews enable a greater understanding of our key processes, issues and risk
mitigation activities, which facilitates more effective oversight and appropriate risk management.
‰ BMO’s initiative assessment and approval process is used to assess, document and approve qualifying initiatives when a new business, service or
product is developed or existing services and products are enhanced. The process seeks to ensure 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 functions identify
specific metrics related to their material operational risks. KRIs are used in monitoring operational risk profiles and their overall relation to our risk
appetite, are subject to review and challenge by ORM, and are linked to thresholds that trigger management intervention.
‰ The Operational Risk Issue Management program identifies and proactively manages and mitigates issues that may prevent the bank from meeting
‰
its objectives, and is an indicator of a mature risk culture. Issue severity assessments provide management with the information necessary to
prioritize resources in a risk-based manner. Issues can be identified by management, as well as by other risk frameworks, Corporate Audit or
external regulators.
Internal loss data serves as an important means of assessing our operational risk exposure and identifying opportunities for future risk prevention.
In these assessments, internal loss data is analyzed and benchmarked against available external data. Material trends are regularly reported to
the ORC, RMC and RRC so that preventative or corrective action can be taken where appropriate. BMO is a member of the Operational Risk Data
Exchange Association, the American Bankers Association and other national and international associations of banks that share loss data information
anonymously to assist in risk identification, assessment and modelling.
‰ The Top and Emerging Operational Risks program identifies the internal and external operational risks for the bank, informed by both bottom-up
and top-down inputs. The program provides a baseline for discussion that complements knowledge and discussion at the senior leader level,
resulting in actions determined by an alignment of strategic direction and prioritized top and emerging risks.
‰ BMO’s Scenario Analysis program assesses key risks and critical business processes to inform risk measurement and risk management. Scenarios
help management identify and understand the impact of large-scale events, including events that have a low frequency of occurrence but a
high severity of impact, as well as environmental stresses on the business, and identify any mitigation actions or controls that will help manage
tail risks.
‰ BMO’s operational risk management training programs seek to ensure that our employees are qualified and equipped to execute the ORMF
consistently, effectively and efficiently.
‰ Effective business continuity management prepares us to maintain, 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 when
required by law, regulation or contractual agreement, and when it is economically attractive and practicable to mitigate our risks, in order to
provide adequate protection against unexpected material loss.
A primary objective of the ORMF, and our implementation and oversight of this framework and its provisions, is to ensure that our operational risk
profile is consistent with our risk appetite and supported by adequate capital.
Cyber Security Risk
Information security is integral to BMO’s business activities, brand and reputation. We face common banking information security risks, given our
reliance on the internet and our pervasive use of advanced digital technologies to process data, including the threat of potential data loss, hacking,
loss or exposure of customer or employee information, 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. We continue to evolve our capabilities and increase our ongoing investments in
our Financial Crimes Unit, which is the first of its kind among our Canadian peers, bringing together cyber defences, fraud and physical security
functions, as well as subject matter experts across the lines of business and business functional groups. In addition, we are enhancing our processes
to make them more cyber resilient, while also enhancing our ability to prevent, detect and manage cyber security threats. We continue to benchmark
and review best practices across peer companies and other industries, conduct third-party assessments of our controls, evaluate the effectiveness of
our key controls, develop new controls, and invest in both technology and human resources. We also work with information security and software
suppliers to bolster our internal resources and technology capabilities in order to improve our ability to remain resilient in a rapidly evolving threat
landscape.
Anti-Money Laundering
Compliance with all Anti-Money Laundering, Anti-Terrorist Financing (AML/ATF) and Sanctions Measures is an integral part of safeguarding BMO, our
customers and the communities in which we operate. BMO is committed to managing AML/ATF and sanctions risks prudently, and complying with all
legal and regulatory requirements. Risks related to non-compliance with these requirements can include enforcement action, legal action and damage
to our reputation. Our AML/ATF and sanctions compliance program promotes effective governance and oversight across all BMO businesses, so that
we are able to take appropriate measures to prevent money laundering, terrorist financing and sanctioned activity, which include the use of analytics,
technology and professional expertise in order to deter, detect and report suspicious activity. Recent amendments to Canada’s AML/ATF regime
that come into effect in June 2021 are intended to improve the regime’s effectiveness and further align it with international standards. These
amendments increase the amount of data required to be collected and expand mandatory reporting, which requires modifications to customer,
transaction, and record management systems and processes. BMO is committed to making the changes necessary to comply with these new
regulatory requirements.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Model Risk
Model risk is the potential for adverse consequences following from decisions that are based on incorrect or misused model results. These adverse
consequences can include financial loss, poor business decision-making or damage to reputation.
Model risk arises from the use of quantitative tools that apply statistical, mathematical, economic or other quantitative techniques to process
input data and generate quantitative estimates. BMO uses models ranging from very simple models that produce straightforward estimates to highly
sophisticated models that value complex transactions or generate a broad range of forward-looking estimates. The results 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.
These quantitative tools provide important insights and are effective when used within a framework that identifies key assumptions and
limitations, while controlling and mitigating model risk. In addition to applying judgment to evaluate the reliability of model results, BMO mitigates
model risk by maintaining strong controls over the development, validation, implementation and use of models across all model categories.
BMO also takes steps to ensure that qualitative model overlays and non-statistical approaches to evaluating risks are intuitive, experience-based,
well-documented and subject to effective challenge by those with sufficient expertise and knowledge, in order to provide reasonable results.
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Model Risk Management Framework
Risk is inherent in models because model results are estimates which rely on statistical, mathematical or other quantitative techniques that
approximate reality to transform data into estimates or forecasts of future outcomes. Model risk also arises from the potential for misuse of models.
Model risk is governed at BMO by the enterprise-wide Model Risk Management Framework, which covers the model life cycle.
1
Model
Initiation &
Identification
Model
Life Cycle
2
Model
Development
3
Model
Validation
7
Model
Decommission
6
Ongoing
Monitoring &
Validation
5
Model Use &
Maintenance
4
Implementation
This framework sets out an end-to-end approach for model risk governance across the model life cycle and helps to ensure that model risk
remains within the limits of BMO’s enterprise-wide risk appetite. The framework includes BMO’s Model Risk Corporate Policy, Model Risk Guidelines
and supporting operating procedures, which outline explicit principles for managing model risk, detail model risk management processes, and define
the roles and responsibilities of all stakeholders across the model life cycle. Model owners, developers and users are the first line of defence, the
Model Risk group is the second line of defence, and the Corporate Audit Division is the third line of defence.
The Model Risk group is responsible for the development and maintenance of the Model Risk Management Framework, and for ensuring that the
framework is compliant with regulatory expectations, as well as for oversight of the effectiveness of our model processes, our model inventory, and
the overall aggregation, assessment and reporting of model risk. The Model Risk Management Committee (MRMC), a sub-committee of the RMC, is a
cross-functional group representing all key stakeholders across the enterprise. The MRMC meets regularly to help direct the bank’s use of models, to
oversee the development, implementation and maintenance of the Model Risk Management Framework, to provide effective challenge and to
discuss governance of the enterprise’s models.
Outcomes Analysis and Back-Testing
Once models are validated, approved and in use, they are subject to ongoing monitoring and outcomes analysis at varying frequencies. As a key
component of outcomes analysis, back-testing compares model results against actual observed outcomes. Variances between model forecasts and
actual observed outcomes are measured against defined risk materiality thresholds. To ensure that variances remain within the defined 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. This analysis serves to confirm the validity of a model’s performance over time, which helps to ensure that
appropriate controls are in place in order to address identified issues and enhances a model’s overall performance.
All models used within BMO are subject to validation and ongoing monitoring, and are used in accordance with our framework. The framework
applies to a wide variety of models, ranging from market, credit and operational risk models to stress testing, pricing and valuation, and anti-money
laundering models.
Operational Risk Measurement
BMO currently uses the Advanced Measurement Approach (AMA), a risk-sensitive capital model, in conjunction with the Standardized Approach in
certain areas, to determine both regulatory capital and economic capital requirements for managing operational risk. The AMA Capital Model employs
a loss distribution approach along with four elements that support the measurement of our operational risk exposure, as required by OSFI. Internal
and external loss data are used as inputs for the AMA Capital Model and, based on shared attributes, are grouped into cells that include operating
group, business activity and event type. Minimum enterprise operational risk capital is determined at a specific upper confidence limit of the
enterprise total loss distribution. Business environment and internal control factors are used for post-modelling adjustments, and these are subject to
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regular review in order to identify and understand risk drivers and to confirm consistency in application across the enterprise. Scenarios are applied to
verify the distributions and correlations used to model capital. Beginning in fiscal 2020, BMO, along with the other AMA-approved banks, will transition
to the Standardized Approach for determining enterprise operational risk regulatory capital requirements, and BMO does not expect any impact on
capital requirements related to this transition. It is expected that BMO will implement the new Standardized Measurement Approach as part of the final
Basel III reforms, which will replace the current Advanced and Standardized Approaches for operational risk regulatory capital requirements.
Caution
This Operational Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Legal and Regulatory Risk
Legal and regulatory risk is the potential for loss or harm resulting from a failure to comply with laws or satisfy contractual obligations or
regulatory requirements. This includes the risks of failure 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; or
act in a manner so as to maintain our reputation.
The success of BMO’s business relies in part on our ability to manage our exposure to legal and regulatory risk prudently. The financial services
industry is highly regulated, and we anticipate intense ongoing scrutiny from our supervisors and strict enforcement of legal and regulatory
requirements as governments and regulators around the world continue to implement reforms intended to strengthen the stability of the financial
system. Banks globally continue to be subject to fines and penalties for a number of regulatory and conduct issues. As rulemaking and supervisory
expectations evolve, we monitor developments to enable BMO to respond to and implement any required changes.
Under the direction of BMO’s General Counsel, our Legal & Regulatory Compliance Group maintains enterprise-wide frameworks that identify,
measure, manage, monitor and report on legal and regulatory issues. We identify applicable laws and regulations and potential risks, recommend
mitigation strategies and actions, conduct internal investigations, and oversee legal proceedings and enforcement actions. We are subject to legal
proceedings arising in the ordinary course of business, and the unfavourable resolution of any such legal proceedings could have a material adverse
effect on our financial results and damage our reputation. We are required to disclose material legal proceedings to which we are a party. Our
disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior
management on a timely basis so that appropriate decisions can be made regarding public disclosure. In assessing the materiality of legal
proceedings, factors considered include a case-by-case assessment of specific facts and circumstances, our past experience and the opinions of legal
experts. Another area of focus is the oversight of fiduciary risk related to any of BMO’s businesses that provide products or services giving rise to
fiduciary duties, as well as policies and practices that address the responsibilities of a business to a customer (including service requirements and
expectations, customer suitability determinations, disclosure obligations and communications).
Safeguarding our customers, employees, information and assets from exposure to criminal risk is an important priority. Criminal risk is the
potential for loss or harm resulting from a failure to comply with criminal laws and includes acts by employees against BMO, acts by external parties
against BMO and acts by external parties using BMO to engage in unlawful conduct, such as fraud, theft, money laundering, violence, cyber-crime,
bribery and corruption.
As governments globally seek to curb corruption and counter its negative effects on political stability, sustainable economic development,
international trade and investment and other areas, BMO’s Anti-Corruption Office, through its global program, has articulated a set of key principles
and activities necessary for the effective oversight of compliance with anti-corruption legislation in jurisdictions in which BMO operates. These include
guidance on both identifying and avoiding corrupt practices and rigorously investigating allegations of corrupt activity.
Governments and regulators around the world continue to focus on anti-money laundering and related concerns, raising their expectations
concerning the quality and efficacy of anti-money laundering programs and penalizing institutions that fail to meet these expectations. Under the
direction of the Chief Anti-Money Laundering Officer, BMO’s Anti-Money Laundering Office is responsible for the governance, oversight and
assessment of principles and procedures designed to help ensure compliance with legal and regulatory requirements and internal risk parameters
related to anti-money laundering, anti-terrorist financing and sanctions measures. For additional discussion regarding BMO’s operational risk
management practices with respect to anti-money laundering, refer to the Anti-Money Laundering section on page 101.
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 by complying with corporate policies and standards, while Legal & Regulatory Compliance units specifically aligned
with each of the operating groups provide advice and independent legal and regulatory risk management oversight.
Heightened regulatory and supervisory scrutiny has a significant impact on the way we conduct business. Working with the operating groups
and other Corporate Support Areas, Legal & Regulatory Compliance assesses and analyzes the implications of regulatory and supervisory changes.
We devote substantial resources to the implementation of systems and processes required to comply with new regulations while also helping us
meet the needs and demands of our customers. Failure to comply with applicable legal and regulatory requirements may result in legal proceedings,
financial losses, regulatory sanctions, enforcement actions, an inability to execute our business strategies, a decline in investor and customer
confidence, and damage to our reputation.
BMO recognizes that our business is built on our reputation for good conduct. In recognition of this, BMO has adopted a wide range of practices
beyond our Code of Conduct to support the ethical conduct of our employees. We strive to deliver positive outcomes for our customers and contribute
to the orderly operation of financial markets, while also maintaining a diverse and inclusive environment for our employees. Our Enterprise Culture
and Conduct Framework sets out our approach to managing and mitigating potential misconduct. Misconduct is behaviour that falls short of legal,
professional, internal conduct and ethical standards. Similar to our approach to other non-financial risks, this framework is supported by our enterprise
Risk Management Framework and our focus on maintaining a strong risk culture. We report on various metrics related to culture and conduct and we
engage with other control frameworks across the organization and in all of the jurisdictions in which we operate.
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), which we expect will put upward pressure on the amount of capital we are required to hold
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MANAGEMENT’S DISCUSSION AND ANALYSIS
over time. Other global regulatory developments include over-the-counter (OTC) derivatives reform, consumer protection measures and specific
financial reforms, which are discussed in further detail below. For additional discussion of the regulatory developments relating to capital
management and liquidity and funding risk, refer to the Enterprise-Wide Capital Management section starting on page 59 and the Liquidity
and Funding Risk section starting on page 91. For a discussion of the impact of certain other regulatory developments, refer to: Critical Accounting
Estimates – Income Taxes and Deferred Tax Assets on page 109; Tax Legislation and Interpretations on page 71 and Fiscal and Monetary Policies and
Other Economic Conditions in the Countries in which We Conduct Business on page 70 regarding certain potential changes in fiscal policy and tax
legislation; Risks That May Affect Future Results – Other Factors That May Affect Future Results – Brexit on page 71 regarding the impact of the United
Kingdom’s withdrawal from the European Union; and Risks That May Affect Future Results – Other Factors That May Affect Future Results – Benchmark
Interest Rate Reform on page 71 regarding benchmark reform.
Bank Resolution and Bail-In – In June 2016, legislation required to implement a Bank Recapitalization (Bail-In) Regime was passed by the Canadian
government in order to enhance Canada’s bank resolution capabilities, in line with international efforts in this area. Final regulations implementing
the Bail-In Regime took effect in September 2018. The related total loss-absorbing capacity (TLAC) requirements take effect in November 2021.
For additional discussion of the Bail-In Regime and TLAC requirements, refer to the Enterprise-Wide Capital Management section starting on
page 59 and the Liquidity and Funding Risk section starting on page 91.
Federal Financial Sector Legislation – In December 2018, the government of Canada passed legislation: amending the Bank Act to strengthen the financial
consumer protection framework, with enhancements in the areas of corporate governance, responsible business conduct, complaints and customer redress
(no effective date as yet); amending the Financial Consumer Agency of Canada Act to strengthen the mandate and powers of the Financial Consumer
Agency of Canada (no effective date as yet); and enacting the Pay Equity Act to redress systemic gender-based discrimination by requiring federal public and
private-sector employers to establish and maintain a pay equity plan within set time frames (no effective date as yet). Implementing regulations are
required for other earlier amendments to the Bank Act to allow banks to undertake broader financial technology activities.
U.S. Regulatory Reform – In May 2018, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP),
which made reforms to the Dodd-Frank Wall Street Reform and Consumer Protection Act, including raising the threshold for heightened prudential
standards, and introduced changes to certain exemptions to restrictions on proprietary trading and the ownership and sponsorship of private
investment funds by banks and their affiliates. In October 2019, the U.S. federal banking agencies finalized rules pursuant to EGRRCP that modify
capital and liquidity requirements, single counterparty credit limits and enhanced prudential standards for bank holding companies and foreign
banking organizations, including BMO. The bank continues to monitor EGRRCP rulemaking activities by applicable agencies.
Other Regulatory Initiatives Impacting Financial Services in Canada – Federal and provincial regulators continue to focus on issues relating to
consumer protection, including with respect to seniors and retail investors, OTC derivatives and advisor conduct. The Department of Finance Canada
is undertaking a consultation process regarding the merits of open banking, which would allow Canadian consumers and small businesses to direct
federally regulated financial institutions to disclose their banking information through a secure mechanism to entities that meet information security
and other requirements. Recent amendments to federal privacy legislation set out privacy breach reporting and notification requirements.
For additional discussion regarding privacy, refer to the Risks That May Affect Future Results – Top and Emerging Risks That May Affect Future Results –
Cyber Security, Information Security and Privacy Risk section in the Enterprise-Wide Risk Management section on page 68.
Derivatives Reform – G20 jurisdictions continue to implement new regulations as part of the OTC derivatives regulatory reform program.
Margin requirements for non-centrally cleared derivatives have been adopted in a number of jurisdictions, including Canada, the European Union,
Hong Kong, Singapore and the United States. Margin rules require the exchange of variation margin and initial margin, both of which are designed to
secure performance on non-centrally cleared derivatives transactions between covered entities. BMO has been subject to variation margin rules since
March 1, 2017, and to initial margin rules since September 1, 2019. BMO continues to monitor and prepare for the impact of other OTC derivatives
regulatory changes relating to clearing, execution and business conduct rules.
The General Counsel and the Chief Compliance Officer regularly report to the Audit and Conduct Review Committee (ACRC) of the Board and senior
management on the effectiveness of our Enterprise Compliance Program. The program uses a risk-based approach to identify, assess and manage
compliance with applicable legal and regulatory requirements. The program directs operating groups and Corporate Support Areas to maintain
compliance policies, procedures and controls that meet these requirements. Under the direction of the Chief Compliance Officer, we identify and
report on gaps and deficiencies, and we track remedial action plans. The Chief Anti-Money Laundering Officer also regularly reports to the ACRC.
All BMO employees must complete annual legal and regulatory training on topics such as anti-corruption, anti-money laundering and privacy
policies, standards and procedures. This is done in conjunction with our Code of Conduct training, which tests employees’ knowledge and
understanding of the behaviour required of employees of BMO.
Caution
This Legal and Regulatory Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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Business Risk
Business risk is the potential for loss or harm as a result of the specific business activities of an enterprise and the effects these could have on
its earnings.
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 enterprise having the
ability to compensate for these developments 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, heightened competition, technology-driven changes, adverse business developments and relatively ineffective responses to industry
changes. For example, client retention can be influenced by a number of factors, including service levels, prices for products and services, delivery
platforms, ease of access to products and services, the quality of the customer experience, our reputation and the actions of our competitors.
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 or harm due to changes in the external business environment and/or failure to respond appropriately to
these changes 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 from the potential for loss if BMO
is unable to address those external risks effectively. While external strategic risks – including economic, geopolitical, regulatory, technological, social
and competitive risks – cannot be controlled, the likelihood and magnitude of their impact can be limited through an effective strategic management
framework, and certain of these risks, including economic, geopolitical and regulatory risks, can be assessed through stress testing.
BMO’s Office of Strategic Management (OSM) oversees our strategic planning process and works with the lines of business, along with ERPM,
Finance and Corporate Support Areas, to identify, monitor and mitigate strategic risk across the enterprise. Our rigorous strategic management
framework encourages a consistent approach to developing strategies and incorporates 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 a consideration of the results of stress testing as an input into strategic decision-making.
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 both the current
and the potential future business environment.
Our ability to execute on the strategic plans developed by management influences our financial performance. If these strategic plans do not meet
with success or if there is a change in the strategic plans, our earnings could grow at a slower pace or decline. Performance objectives established
through the strategic management process are monitored regularly and reported on 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
in order to identify any significant emerging risk issues.
Environmental and Social Risk
Environmental and social risk is the potential for loss or harm resulting from environmental or social impacts or concerns, including climate
change, related to BMO or its customers.
Environmental and social risk is often associated with credit, operational and reputation risk. Environmental and social risk involves a broad spectrum
of topics and issues, such as: pollution and waste; energy, water and other resource usage; climate change; biodiversity; human rights; labour
standards; community health, safety and security; land acquisition and involuntary resettlement; Indigenous peoples’ rights and consultation; and
cultural heritage.
Governance
BMO’s Sustainability Council, chaired by BMO’s General Counsel, is comprised of senior leaders from the lines of business and Corporate Support Areas
across our organization, and provides oversight and leadership for our sustainability strategy. The Sustainability team is responsible for coordinating
the development and maintenance of an enterprise-wide strategy that meets BMO’s overarching environmental and social responsibilities.
The Sustainability team works in partnership with the lines of business and Corporate Support Areas, including Risk, the Capital Markets Sustainable
Finance team, and the BMO Global Asset Management Responsible Investment team, to manage environmental and social risk within our business,
and works with external stakeholders to better understand the consequences and impacts of our operations and financing decisions.
BMO’s Sustainability team also partners with the Procurement and Corporate Real Estate groups to establish environmental management
processes. These groups are responsible for establishing and maintaining an operational environmental management system that is aligned with the
framework set out in ISO 14001, and for setting objectives and targets that are related to aligning the bank’s operations with its Environmental Policy.
To keep informed of emerging issues, we participate in global forums with our peers, maintain an open dialogue with our internal and external
stakeholders, and monitor and evaluate policy and legislative changes in the jurisdictions in which we operate. BMO is a member of, and actively
engaged in, sustainability-focused working groups of the United Nations Environment Programme – Finance Initiative (UNEP-FI), the Equator Principles
Association and Canadian Bankers’ Association.
BMO is a signatory to the United Nations Principles for Responsible Investment, a framework that encourages sustainable investing through the
integration of environmental, social and governance considerations into investment decision-making and ownership practices.
BMO Financial Group 202nd Annual Report 2019 105
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management
As part of our enterprise risk management framework and credit risk management framework, we evaluate the environmental and social risks
associated with credit and counterparty transactions and exposures. We have developed and implemented financing guidelines to address
environmental and social risks for specific lines of business. To limit our potential exposure to clients’ environmental risks, we apply enhanced due
diligence to transactions with clients operating in environmentally sensitive industry sectors, and we avoid doing business with borrowers that have
poor track records in environmental and social risk management. Transactions with significant associated environmental or social concerns may be
escalated to BMO’s Reputation Risk Management Committee for consideration. BMO has been a signatory to the Equator Principles since 2005 and
applies its credit risk management framework to identify, assess and manage the environmental and social risk of transactions within its scope.
We also apply environmental and social screening procedures to categorize and assess projects based on the magnitude of their potential impacts
and risks. These principles have been integrated into our credit risk management framework.
Codes of Conduct and Human Rights
Our Board-approved Code of Conduct reflects our commitment to manage our business responsibly. We expect our suppliers to be aware of,
understand and respect the principles of our Supplier Code of Conduct, which outlines our standards for integrity, fair dealing and sustainability.
We publicly report under the United Kingdom Modern Slavery Act 2015, and our Supplier Code of Conduct reflects this legislation.
Climate Change
BMO supports the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). BMO tracks and
analyzes its own Scope 1 and Scope 2 greenhouse gas (GHG) emissions, as well as Scope 3 GHG emissions associated with our waste generation
and business travel.
BMO has initiated a climate change scenario analysis program, in line with the TCFD recommendations. In fiscal 2019, we conducted a climate
scenario analysis pilot project focused on transition risk analysis, and we plan to expand such analysis to other sectors and risk types, including
physical risk. Further information can be found in BMO’s Sustainability Report (1).
Reporting
We publicly report on our environmental and social performance and targets in our annual Sustainability Report, and on our website. Selected
environmental and social indicators in the Sustainability Report are assured by a third party. BMO also provides climate-related disclosures in line
with the TCFD framework in our Sustainability Report and related public disclosures, which can be found on our website.
(1) In previous years, the title of the Sustainability Report was the BMO Environmental, Social and Governance Report.
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Reputation Risk
Reputation risk is the potential for loss or harm to the BMO brand. It can arise even if other risks are managed effectively.
BMO’s reputation is built on our commitment to high standards of business conduct and ethics, and is one of our most valuable assets. By protecting
and maintaining our reputation, we safeguard our brand, increase shareholder value, reduce our cost of capital, improve employee engagement, and
maintain customer loyalty and trust.
We manage risks to our reputation by considering the potential reputational impact of all business activities, including strategy development
and implementation, transactions and initiatives, product and service offerings, and events or incidents impacting BMO, as well as day-to-day
decision-making and conduct. We consider our reputation in everything that we do.
BMO’s Code of Conduct is the foundation of our ethical culture and it provides employees with guidance on the behaviour that is expected of
them, so that they can make the right choice in decisions that affect our customers and stakeholders. Continual reinforcement of the principles set
out in the Code of Conduct minimizes risks to our reputation that may result from poor decisions or behaviour. Recognizing that non-financial risks can
negatively affect BMO as significantly as financial risks, we actively promote a culture which encourages employees to raise concerns and supports
them when they do so, with zero tolerance for retaliation.
Our corporate governance practices and enterprise risk management framework have various controls in place that support the management of
risks to our reputation. We seek to identify activities or events that could impact our reputation, including large-scale impact through the media or
otherwise. Where we identify a potential risk to our reputation, we take steps to assess and manage that risk. Instances of significant or heightened
exposure to reputation risk are escalated to BMO’s Reputation Risk Management Committee for review. As misconduct can impact our reputation,
the Chief Ethics and Conduct Officer, who is responsible for enterprise-wide reporting on corporate culture and our employees’ conduct, escalates
instances of misconduct involving significant reputation risk to BMO’s Reputation Risk Management Committee, as appropriate.
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Accounting Matters and Disclosure and Internal Control
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; insurance-related liabilities; and provisions, including legal provisions. 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 structured entities (SEs). These judgments are
discussed in Notes 6 and 7 on pages 159 and 160, respectively, of the consolidated financial statements. Note 17 on page 179 of the consolidated
financial statements provides further details on the estimates and judgments made in determining the fair value of financial instruments. If actual
results were to differ from our estimates, 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 estimating these amounts 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, refer to Note 1 on page 142 of the consolidated financial statements.
Allowance for Credit Losses
The allowance for credit losses (ACL) consists of allowances on impaired loans, which represent estimated losses related to impaired loans in the
portfolio provided for but not yet written off, and allowances on performing loans, which is our best estimate of impairment in the existing portfolio
for loans that have not yet been individually identified as impaired. Our approach to establishing and maintaining the allowance on performing loans
is based on the requirements of IFRS, considering the guideline issued by OSFI. Under the IFRS 9 expected credit loss (ECL) methodology, an allowance
is recorded for expected credit losses on financial assets regardless of whether there has been actual impairment. ECL is calculated on a probability-
weighted basis, based on the economic scenarios described below, and is calculated for each exposure in the portfolio as a function of the probability
of default (PD), exposure at default (EAD) and loss given default (LGD), with the timing of the loss also considered. Where there has been a significant
increase in credit risk, lifetime ECL is recorded; otherwise 12 months of ECL is generally recorded. Significant increase in credit risk takes into account
many different factors and will vary by product and risk segment. The main factors considered in making this determination are the change in PD
since origination and certain other criteria, such as 30-day past due and watchlist status. We may apply experienced credit judgment to reflect factors
not captured in the results produced by the ECL models. We have controls and processes in place to govern the ECL process, including judgments and
assumptions used in the determination of the allowance on performing loans. These judgments and assumptions will change over time, and the
impact of the change will be recorded in future periods.
In establishing our allowance on performing loans, we attach probability weightings to three economic scenarios, which are representative of our
view of possible forecast economic conditions – a base case scenario, which in our view represents the most probable outcome, and is described
below, as well as benign and adverse scenarios - all developed by our Economics group. The adverse scenario is also described below, given the
focus on such a scenario at this point in the economic cycle. The allowance on performing loans is sensitive to changes in economic forecasts and the
probability weight assigned to each forecast scenario. When we measure changes in economic performance in our forecasts, we use real GDP as the
basis, which acts as the key driver for movements in many of the other economic and market variables used, including VIX equity volatility index
(VIX), corporate BBB credit spreads, unemployment rates, housing price indices and consumer credit. In addition, we also consider industry-specific
variables, where applicable. Many of the variables have a high degree of interdependency and as such, there is no one single factor to which loan
impairment allowances as a whole are sensitive. Holding all else equal, as economic variables worsen, the allowance on performing loans would
increase and conversely, as they improve, the allowance would decrease. In addition, assuming all variables are held constant, an increase in loan
balances and/or a deterioration in the credit quality of our loan portfolio would drive an increase in the allowance on performing loans.
Our total allowance on credit losses as at October 31, 2019 was $2,094 million ($1,870 million as at October 31, 2018), comprised of an
allowance on performing loans of $1,609 million and an allowance on impaired loans of $485 million ($1,473 million and $397 million, respectively,
as at October 31, 2018). The allowance on performing loans increased $136 million year over year, primarily driven by portfolio growth and changes
in scenario weighting, partially offset by changes in the economic outlook.
As at October 31, 2019, our base case economic forecast depicts a Canadian economy that grows by a moderate 1.6% on average over the
forecast period, slightly below long-run potential growth, raising the unemployment rate modestly to 6.0% in 2021. The U.S. economy grows slightly
faster than the Canadian economy, averaging 1.8% over the forecast period, supported by healthier consumer spending but challenged by restrictive
and uncertain trade policies. Overall, the base case forecast is modestly weaker than a year ago. If we assume a 100% base case economic forecast
and include the impact of loan migration by restaging, with other assumptions held constant, including the application of experienced credit
judgment, the allowance on performing loans would be approximately $1,325 million as at October 31, 2019 ($1,250 million as at October 31, 2018),
compared with the reported allowance on performing loans of $1,609 million ($1,473 million as at October 31, 2018).
As at October 31, 2019, our adverse case economic forecast depicts a typical recession in Canada and the United States occurring in the first year
of our forecast horizon, with the economy contracting approximately 3% over four quarters and the unemployment rate rising more than 3% to 9.1%
in Canada and 6.8% in the United States. This is initially followed by a steady recovery through the end of the projection period. The adverse case
forecast is largely consistent with the adverse forecast used a year ago, with the exception of unemployment rates in Canada and the United States,
which are forecasted to be moderately lower compared to last year’s scenario. If we assume a 100% adverse economic forecast and include the
impact of loan migration by restaging, with other assumptions held constant, including the application of experienced credit judgment, the allowance
on performing loans would be approximately $2,800 million as at October 31, 2019 ($2,650 million as at October 31, 2018), compared with the
reported allowance on performing loans of $1,609 million ($1,473 million as at October 31, 2018).
Actual results in a recession will differ, as our portfolio will change through time due to migration, growth, risk mitigation actions and other
factors. In addition, our allowance will reflect the three economic scenarios used in assessing the allowance, with weightings attached to adverse and
benign scenarios that are often unequally weighted, and those weightings will change over time.
BMO Financial Group 202nd Annual Report 2019 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table shows the key economic variables we use to estimate our allowance on performing loans during the forecast period.
The values shown represent the end-of-period national average values for the first 12 months and then the national average for the remaining
horizon. While the values disclosed below are national variables, we use regional variables in our underlying models where considered appropriate.
As at October 31
Real gross domestic product growth rates (2)
Canada
United States
Corporate BBB 10-year spread
Canada
United States
Unemployment rates
Canada
United States
Housing price index
Canada (3)
United States (4)
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(1) The remaining forecast period is two years.
(2) Real gross domestic product is based on year-over-year growth.
(3) In Canada, we use the HPI Benchmark Composite.
(4) In the United States, we use the National Case-Shiller House Price Index.
Benign scenario
Base scenario
Adverse scenario
First 12 months
Remaining
horizon (1)
First 12 months
Remaining
horizon (1)
First 12 months
Remaining
horizon (1)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2.9% 3.1% 2.3% 2.4%
2.4% 2.9% 2.3% 1.9%
1.6% 1.8% 1.6% 1.6% (3.2)% (3.2)% 0.8% 0.8%
1.8% 2.4% 1.9% 1.6% (2.9)% (2.9)% 0.9% 0.9%
2.0% 2.0% 2.1% 2.1%
1.8% 1.8% 2.0% 2.0%
2.3% 2.3% 2.3% 2.3%
2.4% 2.2% 2.4% 2.3%
5.1% 5.4% 4.9% 5.2%
3.3% 3.2% 3.2% 3.1%
5.7% 5.6% 5.9% 5.6%
3.7% 3.6% 3.8% 3.7%
4.7%
4.3%
8.9%
6.5%
4.7% 3.9% 3.9%
4.3% 3.4% 3.5%
9.3% 8.9% 9.3%
6.7% 6.6% 6.8%
3.7% 2.4% 3.6% 2.6%
4.5% 5.1% 4.1% 4.3%
1.8% 1.4% 2.5% 1.8% (12.8)% (12.8)% (3.2)% (3.2)%
3.0% 3.6% 2.7% 3.0% (7.3)% (7.3)% (1.2)% (1.2)%
As an additional example of how the allowance could vary under different circumstances, a scenario in which we forecast a moderate decline in the
economy is produced, in conjunction with the benign, base and adverse cases used in our calculation of ECL. In this illustrative scenario, we assume
that the Canadian economy grows by an average of 0.8% over the forecast period, resulting in the unemployment rate peaking at 7.5% in late 2021.
In this modest recession, real GDP contracts moderately for three quarters because of weak global demand and lower commodity prices, before
staging a steady recovery in response to lower interest rates, a weaker currency and fiscal stimulus. In addition, the U.S. economy grows a modest
1.5% on average over the forecast period with only one quarter of zero growth, less than long-run potential, lifting the unemployment rate to 4.9%
in early 2021. If we assume a 100% moderate economic decline forecast and include the impact of loan migration by restaging, with other
assumptions held constant, including the application of experienced credit judgment, the allowance on performing loans would be approximately
$1,775 million as at October 31, 2019. This compares with the reported allowance on performing loans of $1,609 million.
As discussed above, real GDP is the basis for measuring changes in our economic forecasts, acting as an important determinant for many of the
other key economic and market variables, although the allowance is not sensitive to this variable alone. The charts below plot the change in the GDP
forecast for Canada and the United States. to illustrate how it moves over the forecast horizon under different economic scenarios, including the
illustrative moderate economic decline scenario.
Canada Real GDP Year-over-Year (%)
U.S. Real GDP Year-over-Year (%)
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
4.0
3.0
2.0
1.0
0.0
18Q1 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4 22Q1 22Q2
18Q1 18Q2 18Q3 18Q4 19Q1 19Q2 19Q3 19Q4 20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4 22Q1 22Q2
-1.0
-2.0
-3.0
-4.0
Realized
Base
Benign
Moderate Decline
Adverse
Realized
Base
Benign
Moderate Decline
Adverse
The ECL approach requires the recognition of credit losses generally based on 12 months of expected losses for performing loans (Stage 1) and the
recognition of lifetime expected losses for performing loans that have experienced a significant increase in credit risk since origination (Stage 2).
Under our current probability-weighted scenarios and based on the current risk profile of our loan exposures, if all our performing loans were in
Stage 1, our models would generate an allowance on performing loans of approximately $1,050 million ($1,000 million in 2018), compared with
the reported allowance on performing loans of $1,609 million ($1,473 million in 2018).
Our provision for credit losses (PCL) in 2019 was $872 million ($662 million in 2018), comprised of a $751 million provision ($700 million in 2018)
on impaired loans and a provision of $121 million (recovery of $38 million in 2018) on performing loans. The PCL on performing loans in the current
year was primarily driven by balance growth and changes to scenario weights. A provision was recorded for performing loans in the current year,
compared with a recovery in the prior year, reflecting higher loan growth, as well as higher provisions from portfolio migration, changes in the
economic outlook and scenario weights during 2019, compared with the prior year. Additional information on the process and methodology for
determining the allowance on credit losses can be found in the discussion of Credit and Counterparty Risk on page 78, as well as in Note 4 on page 151
of the consolidated financial statements.
108 BMO Financial Group 202nd Annual Report 2019
Financial Instruments Measured at Fair Value
We record assets and liabilities classified as trading, assets and liabilities designated at fair value, derivatives, certain equity and debt securities and
securities sold but not yet purchased 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 an orderly transaction between willing parties at the measurement date. 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 with observable
market information (Level 2) and internal models without observable market information (Level 3) in the valuation of loans, securities, derivative
assets and liabilities, and liabilities recorded at fair value as at October 31, 2019, as well as a sensitivity analysis of our Level 3 financial instruments,
is disclosed in Note 17 on page 179 of the consolidated financial statements.
Valuation Product Control (VPC), a group independent of the trading lines of business, ensures that the fair values at which financial instruments
are recorded are materially accurate by:
‰ Developing and maintaining valuation policies and procedures in accordance with regulatory requirements and IFRS
‰ Establishing official rate sources for valuation of all portfolios, and
‰ Providing independent review of portfolios for which prices supplied by traders are used for valuation
For instruments that are valued using models, we consider all reasonable available information and maximize the use of observable market data.
When VPC determines that the model estimates do not reflect fair value, we incorporate certain adjustments 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
valuation 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. Changes in
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methodologies are made only when we believe that a change will result in better estimates of fair value.
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 adjustments and methodology changes, and acts as a key forum for the
discussion of positions categorized as Level 3 for financial reporting purposes and their inherent uncertainty.
Valuation Adjustments
(Canadian $ in millions)
As at October 31
Credit risk
Funding risk
Liquidity risk
Total
2019
91
40
56
187
2018
55
19
79
153
Valuation adjustments increased in 2019, primarily due to the increased size of the trading book.
Pension and Other Employee Future Benefits
Our pension and other employee future benefits expense is calculated by independent actuaries using assumptions determined by management.
If actual experience were to differ from the assumptions used, the difference would be 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 21 on page 190 of the consolidated financial statements.
Impairment of Securities
We have investments in associates and joint ventures, which are classified as other securities. We review these investments at each quarter-end
reporting period to identify and evaluate instruments that show indications of possible impairment.
For these other securities, a significant or prolonged decline in the fair value of a security to an amount below its cost is objective evidence of
impairment.
Debt securities measured at amortized cost or fair value through other comprehensive income (FVOCI) are assessed for impairment using the expected
credit loss model. For securities determined to have low credit risk, the allowance for credit losses is measured at a 12-month expected credit loss.
Additional information regarding our accounting for debt securities measured at amortized cost or FVOCI, other securities, allowance for credit
losses and the determination of fair value is included in Note 3 on page 147 and Note 17 on page 179 of the consolidated financial statements.
Income Taxes and Deferred Tax Assets
Our approach to tax is guided by our Statement on Tax Principles, elements of which are described below, and governed by our tax risk management
framework, which is implemented through internal controls and processes. We operate with due regard to risks, including tax and reputational risks.
We actively seek to identify, evaluate, monitor, manage and mitigate any tax risks that may arise to ensure our financial exposure is well understood
and is within a range consistent with our objectives for the management of tax risk, as set out in our tax risk management framework. Our intention
is to comply fully with tax laws. We consider all applicable laws in connection with our commercial activities, and where tax laws change in our
business or for our customers, we adapt and change accordingly. We monitor applicable tax-related developments, including legislative proposals,
case law and guidance from tax authorities. When an interpretation or application of tax laws is not clear, we take well-reasoned positions based on
available case law and administrative positions of tax authorities, and engage external advisors when necessary. We do not engage in tax planning
that does not have commercial substance. We do not knowingly work with customers we believe use tax strategies to evade taxes. We are
committed to maintaining productive relationships and cooperating with tax authorities on all tax matters. We seek to resolve disputes in a
collaborative manner; however, when our interpretation of tax law differs from that of tax authorities, we are prepared to defend our position.
BMO Financial Group 202nd Annual Report 2019 109
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MANAGEMENT’S DISCUSSION AND ANALYSIS
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in either our Consolidated Statement
of Income or our Consolidated Statement of Changes in Equity. In determining the provision for income taxes, we interpret tax legislation, case law
and administrative positions in numerous jurisdictions and, based on our judgment, record our estimate of the amount required to settle tax
obligations. We also make assumptions about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations and
assumptions 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 or unused tax losses and tax credits may be utilized. We are required to assess whether it is probable that our
deferred income tax assets will be realized. The factors we use to assess the probability of realization are our past experience of income and capital
gains, our forecast of future net income before taxes, and the remaining expiration period of tax loss carryforwards and tax credits. 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 increase or decrease,
respectively, and will result in an income tax impact. For example, the reduction in the U.S. federal tax rate from 35% to 21% as a result of the
enactment of the U.S. Tax Cuts and Jobs Act in 2018 resulted in a $425 million one-time non-cash tax charge to our net income in 2018 and a
corresponding reduction in our net deferred tax assets.
In fiscal 2019, we were reassessed by the Canada Revenue Agency (CRA) for additional income taxes and interest in an amount of approximately
$250 million in respect of certain 2014 Canadian corporate dividends. In prior fiscal years, we were reassessed by the CRA for additional income
taxes and interest of approximately $361 million for certain Canadian corporate dividends from 2011 to 2013. In its reassessments, the CRA denied
dividend deductions on the basis that the dividends were received as part of a “dividend rental arrangement”. The tax rules cited by the CRA in the
reassessments were prospectively addressed in the 2015 and 2018 Canadian federal budgets. In the future, we expect to be reassessed for significant
additional taxes for similar activities in 2015 and subsequent years. We remain of the view that our tax filing positions were appropriate and intend
to challenge any reassessment. If our challenge is unsuccessful, the additional expense would negatively impact our net income.
Additional information regarding our accounting for income taxes is included in Note 22 on page 194 of the consolidated 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 of our cash-generating units (CGUs) in order to verify that the recoverable amount of the CGU is greater than its carrying value. If the carrying
value were to exceed the recoverable amount of the CGU, an impairment calculation would be performed. The recoverable amount of a CGU 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 our CGUs 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. As at October 31, 2019, the estimated fair value of each of our CGUs was greater than carrying value.
Intangible assets with definite lives 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 intangible assets with definite lives for impairment when circumstances indicate that the
carrying value may not be recoverable.
Intangible assets with indefinite lives are tested annually for impairment. If an intangible asset is determined to be impaired, we write it down
to its recoverable amount, the higher of value in use and fair value less costs to sell, when this is less than the carrying value.
Additional information regarding the composition of goodwill and intangible assets is included in Note 11 on page 172 of the consolidated
financial statements.
Insurance-Related Liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates of future insurance policy obligation liabilities. 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 potential impact on the valuation of
these liabilities would be the result of a change in the assumptions for interest rates and equity market values. If the assumed future interest rates
was to increase by one percentage point, earnings before tax would increase by approximately $27 million. A reduction of one percentage point
would lower earnings before tax by approximately $25 million. If the assumed equity market value increased by 10%, earnings before tax would
increase by approximately $54 million. A reduction of 10% would lower earnings before tax by approximately $57 million.
Additional information on insurance-related liabilities is provided in Note 14 on page 175 of the consolidated financial statements, and
information on insurance risk is provided in the Insurance Risk section on page 91.
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 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 considered in making the estimate include a case-by-case
assessment of specific facts and circumstances, our past experience and the 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 amounts of the provisions.
Additional information regarding provisions is included in the Legal and Regulatory Risk section on pages 103 to 104 and in Note 24 on page 197
of the consolidated financial statements.
110 BMO Financial Group 202nd Annual Report 2019
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Transfers of Financial Assets and Consolidation of Structured Entities
We sell Canadian mortgage loans to third-party Canadian securitization programs, including the Canada 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 in order 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 we 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 66, as well as in Note 6 on page 159 of the consolidated financial statements.
In the normal course of business, the bank enters into arrangements with SEs. We are required to consolidate an SE if we determine that we
control the SE. 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 our interests in SEs is included on page 67, as well as in Note 7 on page 160 of the consolidated financial
statements.
Caution
This Critical Accounting Estimates section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Changes in Accounting Policies in 2019
Effective November 1, 2018, we adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15), which addresses revenue recognition principles,
and provides a robust framework for recognizing and measuring revenue arising from contracts with customers. We elected to present prior periods,
as if IFRS 15 had always been applied. IFRS 15 also introduces new disclosure requirements related to the recognition of IFRS 15 revenues by
operating segment. Note 1 on page 142 of the consolidated financial statements provides details on the impact of the new standard.
Future Changes in Accounting Policies
Effective November 1, 2019, we will adopt IFRS 16, Leases (IFRS 16), which provides guidance whereby lessees will recognize a liability for the
present value of the future lease payments and record a corresponding asset on the balance sheet for most leases. When we adopt IFRS 16, we will
recognize the cumulative effect of any changes in opening retained earnings, with no changes to prior periods. The impact of IFRS 16 will increase our
assets by approximately $2.0 billion, liabilities by approximately $2.1 billion and will decrease equity by approximately $100 million ($75 million after
tax). We estimate that the adoption of IFRS 16 will also decrease our CET1 Ratio by up to approximately 10 bps. Further information on the adoption
of IFRS 16 is provided in Note 1 on page 142 of the consolidated financial statements.
The IASB published Phase I of its amendments to IFRS 9, Financial Instruments and IAS 39, Financial Instruments: Recognition and Measurement,
as well as IFRS 7, Financial Instruments: Disclosures in September 2019, to provide relief from the potential effects of the uncertainty arising from
Interbank Offered Rate (IBOR) reform, focusing in particular on the period prior to replacement of interbank offered rates. The amendments modify
hedge accounting requirements, allowing us to assume that the interest rate benchmark on which the cash flows of the hedged item and the
hedging instrument are based are not altered as a result of IBOR reform, thereby allowing hedge accounting to continue. Mandatory application of the
amendments ends at the earlier of when the uncertainty regarding the timing and amount of interest rate benchmark-based cash flow is no longer
present and the discontinuation of the hedging relationship. Phase II of the IASB’s project on IBOR is underway and will address the transition to IBOR
reform. The Phase I amendments are effective for our fiscal year beginning November 1, 2020, with early adoption permitted. We are in the process
of assessing our inventory of IBOR-based instruments and related hedge accounting relationships to evaluate the impact of these amendments on our
financial results. We provide disclosure on our current hedging relationships in Note 8 on page 162 of the consolidated financial statements.
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17), which provides a comprehensive approach to accounting for all types of
insurance contracts and will replace the existing IFRS 4, Insurance Contracts. In June 2019, the IASB published an Exposure Draft that proposes to defer
the effective date by one year, which would change the anticipated effective date for the bank to November 1, 2022. We are currently assessing the
impact of the standard on our future financial results.
Further information on the new standards and amendments to existing standards that will be effective for the bank in future reporting periods is
described in Note 1 on page 142 of the consolidated financial statements.
Caution
This Future Changes in Accounting Policy section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our key management personnel on the same terms that we offer these services to
our preferred customers. 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 the most senior executives of the bank. We provide banking services to our joint
ventures and equity-accounted investees on the same terms offered to our customers for these services. We also offer employees a subsidy on
annual credit card fees.
Details of our investments in joint ventures and associates and the compensation of key management personnel are disclosed in Note 27 on
page 204 of the consolidated financial statements.
BMO Financial Group 202nd Annual Report 2019 111
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 performance and effectiveness of the shareholders’ auditors, considering factors such as: the quality of
the services provided by the engagement team of the shareholders’ auditors during the audit period; the relevant qualifications, experience and
geographical reach to serve BMO Financial Group; the quality of communications received from the shareholders’ auditors; and the independence,
objectivity and professional skepticism of the shareholders’ auditors.
The ACRC believes that it has a robust review process in place to monitor audit quality and oversee the work of the shareholders’ auditors,
including the lead audit partner, which includes:
‰ Annually reviewing the audit plan in two separate meetings, including a consideration of the impact of business risks on the audit plan and
an assessment of the reasonableness of the audit fee
‰ Reviewing the qualifications of the senior engagement team members
‰ Monitoring the execution of the audit plan of the shareholders’ auditors, with emphasis on the more complex and risky areas of the audit
‰ Reviewing and evaluating the audit findings, including in camera sessions
‰ Evaluating audit quality and performance, including recent Canadian Public Accountability Board (CPAB) and Public Company Accounting Oversight
Board (PCAOB) inspection reports on the shareholders’ auditors and their peer firms
‰ At a minimum, holding quarterly meetings with the chair of the ACRC and the lead audit partner to discuss audit-related issues independently
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of management
‰ Performing a comprehensive review of the shareholders’ auditors every five years, and performing an annual review between these
comprehensive reviews, following the guidelines set out by the Chartered Professional Accountants of Canada (CPA of Canada) and the CPAB
In 2019, an annual review of the shareholders’ auditors was completed. Input was sought from ACRC members and management on areas such as
communication effectiveness, industry insights, audit performance, independence and skepticism. In addition, the ACRC performs a comprehensive
review of the shareholders’ auditors every five years, with the last review performed in 2015. The comprehensive review was based on the
recommendations of the CPA of Canada and the CPAB. These reviews focused on: (i) the independence, objectivity and professional skepticism of
the shareholders’ auditors; (ii) the quality of the engagement team; and (iii) the quality of communications and interactions with the shareholders’
auditors. As a result of these reviews, the ACRC was satisfied with the performance of the shareholders’ auditors.
Independence of the shareholders’ auditors is overseen by the ACRC in accordance with our Auditor Independence Standard. 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 our 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, approval 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 Standard, 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, 2019 and 2018 were as follows:
(Canadian $ in millions)
Fees (1)
Audit fees
Audit-related fees (2)
All other fees (3)
Total
2019
19.6
2.8
1.9
24.3
2018
18.2
2.2
2.1
22.5
(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 2019 and 2018 relate to fees paid for accounting advice, specified procedures
on our Proxy Circular and other specified procedures.
(3) All other fees for 2019 and 2018 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 the costs of translation
services.
112 BMO Financial Group 202nd Annual Report 2019
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.
As at October 31, 2019, under the supervision of the CEO and the CFO, BMO Financial Group’s (BMO) management evaluated the effectiveness of
the design and operation of 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).
Based on this evaluation, the CEO and the CFO have concluded that our disclosure controls and procedures were effective, as at October 31, 2019.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed under the supervision of the bank’s CEO and CFO, in order to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated 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 BMO.
Internal control over financial reporting at BMO includes policies and procedures that:
‰ Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
M
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&
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of Bank of Montreal
‰ Are designed to provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial
statements in accordance with IFRS and the requirements of the SEC in the United States, as applicable, and 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
‰ Are designed to provide reasonable assurance that any unauthorized acquisition, use or disposition of BMO’s assets which could have
a material effect on the consolidated 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 and procedures may deteriorate.
BMO’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, 2019.
At the request of BMO’s Audit and Conduct Review Committee, KPMG LLP (the shareholders’ auditors), an independent registered public
accounting firm, has conducted an audit of the effectiveness of our internal control over financial reporting. The audit report states in its conclusion
that, in KPMG’s opinion, BMO maintained, in all material respects, effective internal control over financial reporting as at October 31, 2019, in
accordance with the criteria established in the 2013 COSO Framework. This audit report appears on page 136.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended October 31, 2019 that have materially affected, or are
reasonably likely to materially affect, the adequacy and effectiveness of our internal control over financial reporting.
BMO Financial Group 202nd Annual Report 2019 113
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 EDTF for the provision of high-quality, transparent risk
disclosures.
Disclosures related to the EDTF recommendations are detailed below.
General
1
2
3
4
A
&
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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 68 to 106.
Supplementary Financial Information: A general index is provided in our Supplementary Financial Information.
Regulatory Supplementary Capital Information: A general index is provided in our Supplementary Capital 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 78 to 106.
A glossary of financial terms (including risk terminology) can be found on pages 208 to 209.
Discuss top and emerging risks for the bank.
Annual Report: BMO’s top and emerging risks are discussed on pages 68 to 71.
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 61 and 97.
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 72 to 77.
Describe the bank’s risk culture.
Annual Report: BMO’s risk culture is described on page 75.
Describe key risks that arise from the bank’s business model and activities.
Annual Report: Descriptions of key risks arising from the bank’s business models and activities are provided on pages 73 and 76.
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 77.
Capital Adequacy and Risk-Weighted Assets (RWA)
9
Provide minimum Pillar 1 capital requirements.
Annual Report: Pillar 1 capital requirements are described on pages 59 to 63.
10 Summarize information contained in the composition of capital templates adopted by the Basel Committee.
Annual Report: An abridged version of the regulatory capital template is provided on page 62.
Regulatory Supplementary Capital Information: Pillar 3 disclosure is provided on pages 3 to 5. 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.
Regulatory Supplementary Capital Information: Flow Statement of Basel III Regulatory Capital is provided on page 6.
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 59.
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 64.
Regulatory Supplementary Capital Information: RWA by operating group is provided on page 11.
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 pages 60 to 61.
Information about significant models used to determine RWA is provided on pages 78 to 81.
Regulatory Supplementary Capital Information: A table showing RWA by model approach and by risk type is provided on page 11.
15 Tabulate credit risk in the banking book for Basel asset classes.
Regulatory Supplementary Capital Information: Credit exposures by internal rating grades are provided on pages 21 to 30. Wholesale and retail credit
exposures by model, geography and asset class are provided on pages 33 to 35.
16 Present a flow statement that reconciles movements in RWA by credit risk and market risk.
Regulatory Supplementary Capital Information: RWA flow statements are provided on pages 32 and 57.
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 102.
Regulatory Supplementary Capital Information: Estimated and actual loss parameter information is provided on page 58. Back-testing of probability of
default by risk profile is provided on pages 59 to 62.
114 BMO Financial Group 202nd Annual Report 2019
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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 91 to 97.
Funding
19 Summarize encumbered and unencumbered assets in a table by balance sheet category.
Annual Report: An Asset Encumbrance table is provided on page 94.
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: Contractual Maturities information and tables are provided on pages 98 to 99.
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 96 to 97.
A table showing the composition and maturity of wholesale funding is provided on page 97.
Market Risk
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 90.
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 86 to 88.
Structural (non-trading) market risk exposures are described and quantified on pages 89 to 90.
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 pages 86, 87, 89 and 102.
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 86 to 87.
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 78 to 85 and in Note 4 on pages 151 to 158 of the consolidated financial
statements.
Supplementary Financial Information: Tables detailing credit risk information are provided on pages 18 to 30.
Regulatory Supplementary Capital Information: Tables detailing credit risk information are provided on pages 14 to 35 and 59 to 62.
27 Describe the bank’s policies related to impaired loans and renegotiated loans.
Annual Report: Impaired loan and renegotiated loan policies are described in Note 4 on pages 151 and 158, respectively of the consolidated financial
statements.
28 Provide reconciliations of impaired loans and the allowance for credit losses.
Annual Report: Continuity schedules for gross impaired loans and acceptances, and allowance for credit losses are provided on pages 82 to 83 and Note 4
on pages 155 to 156 of the consolidated financial statements, respectively.
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 85 and qualitative
disclosures are provided on pages 78 to 79.
Regulatory Supplementary Capital Information: Quantitative disclosures for derivative instruments are provided on pages 36 to 48.
30 Provide a discussion of credit risk mitigation.
Annual Report: A discussion of BMO’s credit and counterparty risk management is provided on pages 78 to 79. Collateral management discussions are
provided on pages 78 to 79 and in Note 8 on pages 163 and 168 and in Note 24 on page 199 of the consolidated financial statements.
Regulatory Supplementary Capital Information: Information on credit risk mitigation techniques is provided on pages 16 to 18 and on collateral for
counter-party credit risk is provided on page 45.
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 74. Other risks are discussed on
pages 100 to 106.
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 100 to 106.
BMO Financial Group 202nd Annual Report 2019 115
SUPPLEMENTAL INFORMATION
Supplemental Information
Certain comparative figures have been reclassified to conform to the current year’s presentation and for changes in accounting policies. Refer to
Note 1 of the consolidated financial statements. In addition, since 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 17.
Table 1: Shareholder Value and Other Statistical Information
As at or for the year ended October 31
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
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
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 ($ millions)
Total assets
Average assets
Average net loans and acceptances
n
o
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t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
106.51
86.25
97.50
109.00
93.60
98.43
104.15
83.58
98.83
4.06
46.8
4.2
2,594
7.8
8.6
3.2
3.78
46.1
3.8
2,424
10.5
13.3
3.3
3.56
44.9
3.6
2,312
15.5
10.9
20.2
87.92
68.65
85.36
3.40
49.0
4.0
2,191
12.5
9.9
17.0
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
639,232 639,330
638,881 642,930
640,360 644,913
64.73
62.9
12.0
10.9
1.52
71.54
62.3
11.3
10.3
1.36
647,816
649,650
651,961
61.91
64.0
12.5
12.1
1.60
645,761
644,049
646,126
59.57
55.1
12.3
11.4
1.43
642,583
644,916
647,141
56.31
48.9
11.6
10.9
1.35
649,050
645,860
648,475
48.18
53.0
12.8
12.4
1.70
644,130
648,476
649,806
43.22
46.8
11.8
11.7
1.66
650,730
644,407
648,615
39.41
38.4
9.7
9.9
1.47
639,000
591,403
607,068
36.76
37.6
12.2
11.5
1.49
566,468
559,822
563,125
34.09
34.1
12.7
12.5
1.77
853,950 774,075
833,252 754,295
432,638 386,959
709,604
722,626
370,899
687,960
707,122
356,528
641,881
664,391
318,823
588,659
593,928
290,621
537,044
555,431
263,596
524,684
543,931
246,129
500,575
469,934
215,414
411,640
398,474
171,554
Return on Equity and Assets
Return on equity (%)
Adjusted return on equity (%)
Return on tangible common equity (%)
Adjusted return on tangible common equity (%)
Return on average assets (%)
Adjusted return on average assets (%)
Return on average risk-weighted assets (%)
Adjusted return on average risk-weighted assets (%)
Average equity to average total assets (%)
12.6
13.7
15.1
16.1
0.69
0.75
1.86
2.01
0.05
13.3
14.6
16.2
17.5
0.72
0.79
1.97
2.16
0.05
13.2
13.6
16.3
16.4
0.74
0.76
1.98
2.04
0.05
12.1
13.1
15.3
16.1
0.65
0.71
1.71
1.85
0.05
12.5
13.3
15.8
16.4
0.66
0.70
1.84
1.96
0.05
14.0
14.4
17.3
17.4
0.72
0.74
1.85
1.91
0.05
14.9
15.0
17.9
17.7
0.74
0.75
1.93
1.94
0.05
15.9
15.5
19.4
18.5
0.75
0.73
1.96
1.92
0.05
15.1
16.0
17.6
18.2
0.65
0.68
1.70
1.79
0.04
14.9
15.0
16.6
16.6
0.71
0.71
1.74
1.76
0.05
Other Statistical Information
Employees (1)
Canada
United States
Other
Total
Bank branches
Canada
United States
Other
Total
Automated banking machines
Canada
United States
Total
2010 based on CGAAP.
30,438
13,487
1,588
29,982
13,943
1,529
29,647
14,071
1,482
29,643
14,147
1,444
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
45,513
45,454
45,200
45,234
46,353
46,778
45,631
46,272
46,975
37,629
891
561
4
908
571
4
926
573
4
942
576
4
939
592
4
934
615
4
933
626
4
930
638
3
920
688
3
910
321
3
1,456
1,483
1,503
1,522
1,535
1,553
1,563
1,571
1,611
1,234
3,370
1,597
4,967
3,387
1,441
4,828
3,315
1,416
4,731
3,285
1,314
4,599
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
2011 has not been restated to reflect the new IFRS standards adopted in 2014. The adoption of new IFRS standards in 2015 and 2018 only impacted our results prospectively.
(1) Reflects full-time equivalent number of employees, comprising full-time and part-time employees and adjustments for overtime hours.
116 BMO Financial Group 202nd Annual Report 2019
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
Five-year and ten-year CAGR based on CGAAP in 2009 and IFRS in 2014 and 2019.
The adoption of new IFRS standards in 2015 and 2018 only impacted our results prospectively.
2019
2018
2017
2016
2015
5-year
CAGR
10-year
CAGR
12,888
12,595
25,483
2,709
22,774
872
14,630
7,272
1,514
5,758
5,758
–
5,758
12,888
12,595
25,483
2,684
22,799
872
14,005
7,922
1,673
6,249
6,249
–
6,249
8.68
8.66
9.43
5.6
4.5
6.0
4.9
11,438
11,467
22,905
1,352
21,553
662
13,477
7,414
1,961
5,453
5,453
–
5,453
11,438
11,467
22,905
1,352
21,553
662
13,344
7,547
1,565
5,982
5,982
–
5,982
8.19
8.17
8.99
2.1
8.8
3.3
10.3
11,275
10,832
22,107
1,538
20,569
746
13,192
6,631
1,292
5,339
5,337
2
5,339
11,275
10,832
22,107
1,538
20,569
822
12,897
6,850
1,353
5,497
5,495
2
5,497
7.93
7.90
8.15
15.3
9.5
14.3
8.3
10,945
10,015
20,960
1,543
19,417
771
12,916
5,730
1,100
4,630
4,621
9
4,630
10,945
10,099
21,044
1,543
19,501
771
12,463
6,267
1,248
5,019
5,010
9
5,019
6.94
6.92
7.52
5.1
7.2
5.3
7.4
9,796
9,593
19,389
1,254
18,135
544
12,250
5,341
936
4,405
4,370
35
4,405
9,797
9,594
19,391
1,254
18,137
544
11,887
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
9.2
4.9
6.9
12.5
6.4
nm
6.0
6.8
10.9
5.9
6.1
nm
5.9
9.2
4.9
6.9
12.3
6.4
nm
5.3
8.0
19.3
7.0
7.0
nm
7.0
6.2
6.2
7.4
na
na
na
na
8.7
7.0
7.8
11.5
7.5
nm
7.0
13.3
21.4
11.9
12.4
nm
12.4
8.7
6.2
7.4
11.4
7.0
nm
6.8
10.9
14.0
10.2
10.2
nm
10.2
10.9
10.9
7.0
na
na
na
na
(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.
nm – not meaningful
na – not applicable
S
u
p
p
l
e
m
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f
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m
a
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i
o
n
BMO Financial Group 202nd Annual Report 2019 117
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 (%)
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 revenue (2)
Investments in associates and joint ventures
Other revenues
n
o
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a
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o
f
n
I
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a
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n
e
m
e
l
p
p
u
S
Total Non-Interest Revenue
Year-over-year non-interest revenue 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 (%)
Five-year and ten-year CAGR based on CGAAP in 2009 and IFRS in 2014 and 2019.
The adoption of new IFRS standards in 2015 and 2018 only impacted our results prospectively.
2019
2018
2017
2016
12,888
12.7
12,888
12.7
11,438
1.4
11,438
1.4
11,275
3.0
11,275
3.0
10,945
11.7
10,945
11.7
2015
9,796
18.2
9,797
18.2
758,863
1.70
1.70
682,945
1.67
1.67
646,799
1.74
1.74
622,732
1.76
1.76
579,471
1.69
1.69
1,023
1,204
298
1,181
437
1,747
1,419
986
249
166
3,183
151
551
12,595
9.8
49.4
12,595
9.8
49.4
25,483
11.3
22,774
5.7
25,483
11.3
22,799
5.8
1,025
1,134
705
997
428
1,749
1,473
943
239
182
1,879
167
546
11,467
5.9
50.1
11,467
5.9
50.1
22,905
3.6
21,553
4.8
22,905
3.6
21,553
4.8
964
1,109
84
917
329
1,627
1,411
1,044
171
191
2,070
386
529
10,832
8.2
49.0
10,832
7.3
49.0
22,107
5.5
20,569
5.9
22,107
5.1
20,569
5.5
921
1,069
118
859
397
1,560
1,364
824
84
162
2,023
140
494
10,015
4.4
47.8
10,099
5.3
48.0
20,960
8.1
19,417
7.1
21,044
8.5
19,501
7.5
901
1,005
(46)
737
532
1,552
1,377
706
171
172
1,762
207
517
9,593
(3.4)
49.5
9,594
(3.4)
49.5
19,389
6.4
18,135
8.5
19,391
6.4
18,137
8.5
5-year
CAGR
10-year
CAGR
9.2
na
9.2
na
7.5
na
na
2.7
3.7
(20.7)
11.7
(1.1)
6.3
5.9
5.8
9.0
(1.5)
9.7
(2.3)
10.7
4.9
na
na
4.9
na
na
6.9
na
6.4
na
6.9
na
6.4
na
8.7
na
8.7
na
8.3
na
na
0.5
3.9
(8.5)
7.8
13.7
17.7
11.8
9.5
nm
12.2
10.2
nm
12.5
7.0
na
na
6.2
na
na
7.8
na
7.5
na
7.4
na
7.0
na
(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.
na – not applicable
nm – not meaningful
118 BMO Financial Group 202nd Annual Report 2019
Table 4: Non-Interest Expense, Expense-to-Revenue Ratio
and Government Levies and Taxes
($ millions, except as noted)
For the year ended October 31
Non-Interest Expense(1)
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
Total premises and equipment
Other expenses
Amortization of intangible assets
Communications
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 (Adjusted efficiency ratio) (%)
Efficiency ratio, net of CCPB (%)
Adjusted efficiency ratio, net of CCPB (%)
Government Levies and Taxes (1)
Government levies other than income taxes
Payroll levies
Property taxes
Provincial capital taxes
Business taxes
Harmonized sales tax, GST, VAT 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 before total
government levies and taxes
Effective income tax rate (%)
Adjusted effective income tax rate (%)
Five-year and ten-year CAGR based on CGAAP in 2009 and IFRS in 2014 and 2019.
The adoption of new IFRS standards in 2015 and 2018 only impacted our results prospectively.
(1) Government levies are included in various non-interest expense categories.
na – not applicable
nm – not meaningful
2019
2018
2017
2016
2015
5-year
CAGR
10-year
CAGR
4,762
2,610
1,051
8,423
595
283
37
2,073
2,988
554
296
568
545
1,256
3,219
14,630
8.6
14,005
5.0
57.4
55.0
64.2
61.4
354
37
35
9
384
1
820
1,514
2,334
28.8
20.8
21.1
4,176
2,510
775
7,461
526
345
38
1,844
2,753
503
282
572
519
1,387
3,263
13,477
2.2
13,344
3.5
58.8
58.3
62.5
61.9
328
38
29
8
350
1
754
1,961
2,715
33.2
26.5
20.7
3,996
2,386
1,086
7,468
494
282
39
1,676
2,491
485
286
569
540
1,353
3,233
13,192
2.1
12,897
3.5
59.7
58.3
64.1
62.7
322
39
29
8
330
1
729
1,292
2,021
27.5
19.5
19.8
4,084
2,278
1,022
7,384
486
337
42
1,528
2,393
444
294
528
509
1,364
3,139
12,916
5.4
12,463
4.8
61.6
59.2
66.5
63.9
324
42
30
9
318
3
726
1,100
1,826
28.3
19.2
19.9
3,910
2,102
1,069
7,081
462
287
39
1,349
2,137
411
314
595
605
1,107
3,032
12,250
11.8
11,887
10.1
63.2
61.3
67.5
65.5
312
39
33
10
288
2
684
936
1,620
26.9
17.5
18.0
7.0
6.0
3.0
6.2
7.5
1.6
(1.2)
11.7
9.4
7.7
0.5
(1.8)
0.1
5.3
2.8
6.0
na
5.3
na
na
na
na
na
7.1
(1.2)
5.1
(5.6)
7.1
nm
6.3
10.9
9.1
na
na
na
7.1
6.9
4.9
6.7
6.9
0.4
2.3
11.9
8.8
10.6
3.0
4.6
5.9
6.1
6.1
7.0
na
6.9
na
na
na
na
na
7.5
2.3
(0.3)
(1.0)
12.7
nm
8.4
21.4
14.9
na
na
na
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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 and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Business and government
Total loans
Total Canadian dollar
U.S. Dollar and Other Currencies
Deposits with other banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Business and government
Total loans
Average
balances
Average
interest
rate (%)
2019
Interest
income/
expense
Average
balances
Average
interest
rate (%)
2018
Interest
income/
expense
Average
balances
Average
interest
rate (%)
2017
Interest
income/
expense
2,972
83,042
39,074
109,289
5,637
60,680
62,965
238,571
2.03
2.66
2.10
3.04
3.43
5.49
4.10
3.95
60
2,210
820
3,317
194
3,333
2,580
2,374
79,187
36,325
106,610
5,873
58,612
56,427
9,424
227,522
1.83
2.33
1.56
2.79
3.28
5.15
3.98
3.71
43
1,844
566
2,973
193
3,021
2,248
1,643
84,985
32,528
104,529
6,114
57,675
52,668
8,435
220,986
363,659
3.44
12,514
345,408
3.15
10,888
340,142
47,001
109,072
65,943
11,554
9,356
11,907
138,660
171,477
1.72
3.05
2.11
3.67
4.75
4.91
4.80
4.73
808
3,331
1,391
424
445
585
6,654
46,607
91,198
55,647
11,218
6,652
10,799
113,772
8,108
142,441
1.40
2.49
1.81
3.60
4.48
4.41
4.42
4.36
654
2,275
1,010
404
298
476
5,030
39,660
74,991
54,766
8,548
5,159
11,513
110,166
6,208
135,386
0.51
2.07
0.95
2.61
3.23
4.77
3.48
3.40
2.82
0.86
2.35
0.93
3.55
3.88
3.90
3.87
3.85
2.57
8
1,762
309
2,729
197
2,752
1,831
7,509
9,588
340
1,763
508
304
200
449
4,261
5,214
7,825
Total U.S. dollar and other currencies
393,493
3.47
13,638
335,893
3.02
10,147
304,803
Other non-interest bearing assets
Total All Currencies
Total assets and interest income
Liabilities
Canadian Dollar
Deposits
Banks
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements (1)
Subordinated debt and other interest bearing liabilities
Total Canadian dollar
U.S. Dollar and Other Currencies
Deposits
Banks
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements (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
76,100
72,994
77,681
833,252
3.14
26,152
754,295
2.79
21,035
722,626
2.41
17,413
4,905
113,502
120,852
239,259
44,815
25,099
309,173
24,534
211,970
71,005
307,509
76,889
19,896
404,294
70,916
784,383
48,869
1.02
1.88
1.05
1.44
2.56
2.70
1.71
2.41
1.79
1.08
1.68
2.91
2.96
1.98
50
2,133
1,269
3,607
103,986
111,081
3,452
218,674
1,146
677
40,640
25,359
5,275
284,673
592
3,802
770
26,282
191,739
61,651
5,164
279,672
2,235
590
63,940
16,798
7,989
360,410
0.59
1.61
0.80
1.18
2.09
2.48
1.43
1.93
1.37
0.59
1.25
2.60
2.26
1.54
21
1,673
891
6,267
103,109
108,200
2,585
217,576
849
628
34,300
25,334
4,062
277,210
506
2,622
367
24,416
181,732
57,245
3,495
263,393
1,661
379
59,154
10,776
5,535
333,323
0.44
1.20
0.70
0.93
1.74
2.02
1.13
1.10
0.78
0.33
0.71
1.65
1.51
0.90
27
1,237
754
2,018
596
512
3,126
269
1,417
190
1,876
974
162
3,012
1.69
13,264
65,223
710,306
43,989
1.35
9,597
69,049
679,582
43,044
0.90
6,138
Total Liabilities, Interest Expense and Shareholders’ Equity
833,252
1.59
13,264
754,295
1.27
9,597
722,626
0.85
6,138
Net interest margin
– based on earning assets
– based on total assets
Net interest income
1.70
1.55
1.67
1.52
1.74
1.56
12,888
11,438
11,275
(1) For the years ended October 31, 2019, 2018 and 2017, the maximum amount of securities lent or sold under repurchase agreements at any month end amounted to $96,399 million, $85,489 million
and $72,826 million, respectively.
120 BMO Financial Group 202nd Annual Report 2019
Table 6: Volume/Rate Analysis of Changes in Net Interest Income
2019/2018
2018/2017
Increase (decrease) due to change in
Increase (decrease) due to change in
($ millions)
For the year ended October 31
Average
balance
Average
rate
Average
balance
Average
rate
Assets
Canadian Dollar
Deposits with other banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Business and government
Total loans
Change in Canadian dollar interest income
U.S. Dollar and Other Currencies
Deposits with other banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Non-residential mortgages
Personal and credit cards
Business and government
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
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements
Subordinated debt and other interest bearing liabilities
Change in Canadian dollar interest expense
U.S. Dollar and Other Currencies
Deposits
Banks
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements
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)
S
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Total
17
366
254
344
1
312
332
989
6
276
211
269
9
205
72
555
1,048
1,626
148
611
195
8
26
60
523
617
1,571
154
1,056
381
20
147
109
1,624
1,900
3,491
11
90
43
75
(8)
107
260
434
578
6
445
186
12
121
49
1,101
1,283
1,920
Total
35
82
257
244
(4)
269
417
926
31
202
221
190
4
224
287
705
1,159
1,300
255
130
494
5
40
55
629
729
314
512
502
100
98
27
769
994
1,608
2,322
4
(120)
36
54
(8)
45
130
221
141
59
382
8
95
58
(28)
140
265
714
2,498
2,619
5,117
855
2,767
3,622
8
153
78
239
87
(6)
320
(33)
277
55
299
336
70
705
21
307
300
628
210
55
893
119
903
348
1,370
238
141
29
460
378
867
297
49
1,213
86
1,180
403
1,669
574
211
(12)
11
20
19
110
1
130
20
78
15
113
79
91
6
425
117
548
143
115
806
217
1,127
162
1,506
608
126
(6)
436
137
567
253
116
936
237
1,205
177
1,619
687
217
1,749
2,454
283
2,240
2,523
1,025
1,473
2,642
(23)
3,667
1,450
413
442
3,046
(279)
3,459
163
BMO Financial Group 202nd Annual Report 2019 121
SUPPLEMENTAL INFORMATION
Table 7: Net Loans and Acceptances –
Segmented Information (1) (2)
($ millions)
As at October 31
Consumer
Residential mortgages
Credit cards
Consumer instalment and
other personal loans
Total consumer
Total business and
government
Total loans and acceptances,
net of allowance for credit
losses on impaired loans
Allowance for credit losses
on performing loans (3)
Total net loans and
acceptances
Canada
United States
Other countries
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
112,448 107,956 106,647 103,558
7,541
8,289
7,550
7,788
96,975 11,275
570
7,427
11,645
541
8,587
521
8,686
560
8,905
553
55,311
52,706 51,637
50,368
49,181 11,752
9,918
9,798
13,974
16,098
176,048 168,450 165,834 161,467 153,583 23,597
22,104
18,906
23,220
25,556
–
–
537
537
–
–
458
458
–
–
373
373
–
–
215
215
–
–
206
206
105,890
92,883 82,632
78,884
69,044 134,880 110,828
97,478
98,236
75,336 10,122 9,122 11,270 10,037 10,611
281,938 261,333 248,466 240,351 222,627 158,477 132,932 116,384 121,456 100,892 10,659 9,580 11,643 10,252 10,817
(740)
(689)
(799)
(833)
(816)
(630)
(574)
(641)
(687)
(682)
(17)
(6)
–
–
–
281,198 260,644 247,667 239,518 221,811 157,847 132,358 115,743 120,769 100,210 10,642 9,574 11,643 10,252 10,817
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Table 8: Net Impaired Loans and Acceptances (NIL) –
Segmented Information (2) (4)
($ millions, except as noted)
Canada
United States
Other countries
As at October 31
Consumer
Residential mortgages
Consumer instalment and
other personal loans
Total consumer
Business and government
Total impaired loans and
acceptances, net of
allowance for credit losses
on impaired loans
Condition Ratios (1)
NIL as a % of net loans
and acceptances
NIL as a % of net loans
and acceptances
Consumer
Business and government
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
233
138
371
336
185
206
195
204
164
171
161
175
173
126
311
235
127
333
248
121
316
298
117
321
220
194
358
1,101
252
423
597
293
454
762
345
520
843
316
489
613
707
546
581
614
541
1,459
1,020
1,216
1,363
1,102
0.25
0.21
0.23
0.26
0.24
0.92
0.77
1.05
1.13
1.10
0.21
0.32
0.18
0.25
0.20
0.30
0.20
0.38
0.21
0.32
1.52
0.82
1.91
0.54
2.40
0.78
2.24
0.86
1.91
0.81
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
30
30
–
–
–
1
1
–
–
–
4
4
0.26
0.01
0.04
–
0.27
–
0.01
–
0.04
(1) Aggregate Net Loans and Acceptances balances are net of allowance for credit losses on performing loans and impaired loans (excluding those related to off-balance sheet instruments and undrawn
commitments). The Consumer and Business and government Net Loans and Acceptances balances are net of allowance for credit losses on impaired loans only (excluding those related to off-balance
sheet instruments and undrawn commitments).
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Prior periods have not been restated to reflect the adoption of IFRS 9 in 2018. The adoption of IFRS 9 has been applied prospectively.
(4) Net Impaired Loans and Acceptances are net of allowance for credit losses on impaired loans (excluding those related to off-balance sheet instruments and undrawn commitments).
122 BMO Financial Group 202nd Annual Report 2019
Table 9: Net Loans and Acceptances –
Segmented Information (1) (2)
Total
($ millions)
As at October 31
2019
2018
2017
2016
2015
123,723 119,601 115,234 112,244 105,880
7,980
8,071
8,859
8,329
8,101
67,600 63,082
61,808
64,557
65,485
Net Loans and Acceptances by Province
Atlantic provinces
Quebec
Ontario
Prairie provinces
British Columbia and territories
2019
2018
2017
2016
2015
14,601
42,985
119,499
51,639
52,474
13,925
40,177
109,531
48,634
48,377
13,686
38,802
103,152
46,853
45,174
13,736
38,263
97,991
46,411
43,117
13,364
36,493
88,850
43,519
39,585
200,182 191,012 185,113 184,902 179,345
Total net loans and acceptances in Canada
281,198
260,644
247,667
239,518
221,811
250,892 212,833 191,380 187,157 154,991
451,074 403,845 376,493 372,059 334,336
(1,387) (1,269)
(1,440)
(1,520)
(1,498)
449,687 402,576 375,053 370,539 332,838
Total
2019
2018
2017
2016
2015
397
356
367
370
377
332
729
1,437
378
734
832
420
466
787
1,040
836
1,142
433
810
837
2,166
1,566
1,827
1,978
1,647
0.48
0.39
0.49
0.53
0.50
0.36
0.57
0.38
0.39
0.43
0.54
0.45
0.61
0.45
0.54
Net Business and Government Loans by Industry
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
36,707
4,943
23,085
16,933
13,268
840
4,124
26,541
2,474
13,421
12,390
4,783
1,152
45,730
40,839
1,801
1,861
31,028
3,916
20,403
14,814
12,321
729
4,439
22,839
1,916
9,168
10,973
3,911
840
38,348
32,463
1,436
3,289
26,479
3,916
18,496
11,612
11,114
625
5,060
19,824
1,344
8,167
10,496
2,776
835
33,705
32,265
1,470
3,196
24,126
3,563
16,430
12,157
10,951
905
6,093
18,587
1,867
7,930
10,695
2,697
889
32,659
32,076
1,326
4,206
20,509
3,544
13,538
10,172
9,891
815
6,454
16,064
1,309
6,667
3,735
1,984
859
26,778
27,430
1,488
3,754
250,892
212,833
191,380
187,157
154,991
Table 10: Net Impaired Loans and Acceptances –
Segmented Information (3)
($ millions)
As at October 31
Net Impaired Business and Government Loans
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
2019
2018
2017
2016
2015
49
21
56
76
291
6
–
191
–
356
119
2
2
240
28
–
–
1,437
45
18
50
42
193
–
–
77
1
57
90
2
–
191
66
–
–
832
45
39
36
97
238
–
–
70
1
145
156
4
2
181
2
3
21
60
45
13
51
221
1
–
106
2
408
88
12
7
82
39
6
1
1,040
1,142
87
83
55
47
129
13
–
102
3
100
30
14
9
107
48
–
10
837
(1) Aggregate Net Loans and Acceptances are net of allowance for credit losses on performing loans and impaired loans (excluding those related to
off-balance sheet instruments and undrawn commitments). The Consumer and Business and government Net Loans and Acceptances balances
are net of allowance for credit losses on impaired loans only (excluding those related to off-balance sheet instruments and undrawn
commitments).
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Net Impaired Loans and Acceptances balances are net of allowance for credit losses on impaired loans (excluding those related to off-balance
sheet instruments and undrawn commitments).
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BMO Financial Group 202nd Annual Report 2019 123
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
50
50
–
–
–
–
2
2
–
56
56
–
4
4
–
2
2
–
5
5
–
5
5
–
(49)
–
(7)
–
(4)
–
(5)
(49)
(7)
(4)
(5)
–
(1)
(1)
–
–
–
–
–
–
–
(1)
(1)
–
50
50
–
–
–
–
2
2
–
(1)
(1)
–
4
4
–
0.44
–
0.02
–
0.04
0.43
0.02
0.04
SUPPLEMENTAL INFORMATION
Table 11: Changes in Gross Impaired Loans –
Segmented Information (1) (2)
Canada
United States
Other countries
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
($ millions, except as noted)
As at October 31
Gross impaired loans and acceptances
(GIL), beginning of year
Consumer
Business and government
Total GIL, beginning of year
Additions to impaired loans
and acceptances
Consumer
Business and government
426
309
735
439
354
793
407
380
787
404
282
686
438
344
470
731
508
869
585
1,009
557
757
678
623
782
1,201
1,377
1,594
1,314
1,301
895
323
836
321
697
281
631
453
617
231
244
1,224
274
647
360
799
473
953
526
542
Total additions
1,218
1,157
978
1,084
848
1,468
921
1,159
1,426
1,068
Reductions to impaired loans
and acceptances (3)
Consumer
Business and government
Total reductions due to net
repayments and other
Write-offs (4)
Consumer
Business and government
(586)
(171)
(628)
(282)
(479)
(259)
(446)
(251)
(474)
(164)
(242)
(466)
(212)
(573)
(301)
(692)
(282)
(456)
(432)
(246)
(757)
(910)
(738)
(697)
(638)
(708)
(785)
(993)
(738)
(678)
(238)
(44)
(221)
(84)
(186)
(48)
(182)
(104)
(177)
(129)
(87)
(159)
(100)
(212)
(136)
(247)
(163)
(245)
(215)
(162)
Total write-offs
(282)
(305)
(234)
(286)
(306)
(246)
(312)
(383)
(408)
(377)
Gross impaired loans and acceptances,
end of year
Consumer
Business and government
Total GIL, end of year
Condition Ratios
GIL as a % of Gross Loans
Consumer
Business and government
Total Loans and Acceptances
497
417
914
0.28
0.39
0.32
426
309
735
439
354
793
407
380
787
404
282
385
1,330
470
731
508
869
585
1,009
557
757
686
1,715
1,201
1,377
1,594
1,314
0.25
0.33
0.26
0.43
0.25
0.48
0.26
0.41
0.28
0.32
0.33
0.31
1.63
0.98
1.08
2.12
0.66
0.90
2.69
0.89
1.18
2.52
1.03
1.31
2.18
1.01
1.31
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(1) GIL excludes Purchased Credit Impaired Loans.
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) 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.
(4) Excludes certain loans that are written off directly and not classified as new formations.
124 BMO Financial Group 202nd Annual Report 2019
Total
2019
2018
2017
2016
2015
896
1,040
947
1,273
992
1,391
961
1,043
1,116
972
1,936
2,220
2,383
2,004
2,088
1,139
1,547
1,110
968
1,057
1,136
1,104
1,408
1,143
778
2,686
2,078
2,193
2,512
1,921
(828)
(637)
(840)
(904)
(780)
(958)
(728)
(711)
(906)
(415)
(1,465) (1,744) (1,738) (1,439) (1,321)
(325)
(203)
(321)
(297)
(322)
(296)
(345)
(349)
(392)
(292)
(528)
(618)
(618)
(694)
(684)
882
1,747
896
1,040
947
1,273
992
1,391
961
1,043
2,629
1,936
2,220
2,383
2,004
0.44
0.70
0.58
0.47
0.49
0.48
0.51
0.66
0.59
0.54
0.74
0.64
0.54
0.67
0.60
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SUPPLEMENTAL INFORMATION
Table 12: Changes in Allowance for Credit Losses –
Segmented Information (1) (2)
($ millions, except as noted)
Canada
United States
Other countries
As at October 31
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
Allowance for credit losses (ACL),
beginning of year
Consumer
Business and government
Total ACL, beginning of year
Provision for credit losses (3)
Consumer
Business and government
Total provision for credit losses
Recoveries
Consumer
Business and government
Total recoveries
Write-offs
725
255
980
470
93
563
120
4
124
705
317
595
471
614
388
1,022
1,066
1,002
416
28
444
127
5
132
394
37
431
134
10
144
373
174
547
102
14
116
615
371
986
373
135
508
111
13
124
230
648
878
1
302
303
104
62
166
301
566
867
(9)
243
234
75
51
254
793
393
657
1,047
1,050
74
220
294
81
40
(33)
257
224
87
140
227
126
121
333
646
979
113
(76)
37
151
181
332
Consumer
Business and government
(551)
(44)
(515)
(84)
(501)
(48)
(481)
(104)
(482)
(129)
(113)
(159)
(125)
(212)
(157)
(247)
(173)
(245)
(223)
(162)
Total write-offs
(595)
(599)
(549)
(585)
(611)
(272)
(337)
(404)
(418)
(385)
Other, including foreign exchange
rate changes
Consumer
Business and government
Total Other, including foreign
exchange rate changes
ACL, end of year
Consumer
Business and government
Total ACL, end of year
Net write-offs as a % of average
loans and acceptances (4)
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(15)
(5)
(8)
(11)
(10)
(27)
(13)
(1)
(3)
(2)
(22)
(32)
(12)
–
(23)
(114)
(20)
(16)
(20)
(19)
(37)
(14)
(5)
(54)
(12)
(137)
(36)
19
68
87
749
303
1,052
725
255
980
612
443
595
471
614
388
200
821
1,055
1,066
1,002 1,021
230
648
878
229
692
921
254
793
393
657
1,047
1,050
un
un
un
un
un
un
un
un
un
un
Table 13: Allocation of Allowance for Credit Losses –
Segmented Information (1) (5)
–
12
12
–
9
9
–
–
–
–
–
–
–
–
–
–
21
21
un
–
29
29
–
(21)
(21)
–
3
3
–
(1)
(1)
–
2
2
–
12
12
un
–
1
1
–
21
21
–
–
–
–
(1)
(1)
–
(1)
(1)
–
20
20
un
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1
–
1
1
–
1
1
–
(1)
(1)
–
–
–
–
(1)
(1)
–
1
1
–
–
–
un
un
($ millions, except as noted)
Canada
United States
Other countries
As at October 31
Consumer
Residential mortgages
Consumer instalment and other
personal loans
Total consumer
Business and government
Total allowance for credit losses
on impaired loans
Allowance for credit losses
on performing loans (3)
Allowance for credit losses
Coverage Ratios
Allowance for credit losses on
impaired loans as a % of gross
impaired loans and acceptances
Total
Consumer
Business and government
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
2019
2018
2017
2016
2015
10
116
126
81
207
740
947
9
106
115
74
189
689
878
12
94
106
106
212
799
15
76
91
82
173
833
1,011
1,006
17
66
83
62
7
20
27
229
10
37
47
134
12
42
54
107
18
47
65
166
21
47
68
144
145
256
181
161
231
212
–
–
–
–
–
816
961
630
886
574
755
641
802
687
918
682
894
17
17
22.6
25.4
19.4
25.7
27.0
23.9
26.7
24.1
29.9
22.0
22.4
21.6
21.1
20.5
22.0
14.9
7.0
17.2
15.1
10.0
18.3
11.7
10.6
12.3
14.5
11.1
16.5
16.1
12.2
19.0
–
–
–
–
–
–
–
–
6
6
–
–
–
–
–
–
20
20
–
20
–
–
–
1
1
–
1
40.0
–
40.0
50.0
–
50.0
–
–
–
–
–
–
–
–
–
–
(1) Segmented credit information by geographic area is based upon country of ultimate risk.
(2) Prior periods have not been restated to reflect the adoption of IFRS 9 in 2018. The adoption of IFRS 9 in 2018 has been applied prospectively.
(3) Excludes provision for credit losses on other assets.
(4) Aggregate Net Loans and Acceptances balances are net of allowance for credit losses on performing loans and impaired loans (excluding those related to off-balance sheet instruments).
(5) Amounts exclude allowance for credit losses included in Other Liabilities.
un – unavailable
126 BMO Financial Group 202nd Annual Report 2019
Total
2019
2018
2017
2016
2015
955
915
1,006
912
849
1,265
1,007
1,045
948
1,018
1,870
1,918
2,114
2,052
1,966
471
404
875
224
66
290
407
250
657
202
59
261
468
278
746
215
50
265
340
431
771
189
154
343
486
58
544
262
194
456
(664)
(203)
(640)
(297)
(658)
(296)
(654)
(349)
(705)
(292)
(867)
(937)
(954) (1,003)
(997)
(37)
(37)
(20)
(9)
(33)
(142)
(33)
(16)
(74)
(29)
(175)
(49)
16
67
83
949
1,145
955
915
841
1,155
849
1,265
1,007
1,045
2,094
1,870
1,996
2,114
2,052
0.13
0.17
0.19
0.19
0.17
Total
2019
2018
2017
2016
2015
17
136
153
310
19
143
162
208
24
136
160
233
33
123
156
249
38
113
151
206
463
370
393
405
357
1,387
1,269
1,440
1,520
1,498
1,850
1,639
1,833
1,925
1,855
17.6
17.3
17.7
19.1
18.1
20.0
17.7
16.9
18.3
17.0
15.7
17.9
17.8
15.7
19.8
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BMO Financial Group 202nd Annual Report 2019 127
SUPPLEMENTAL INFORMATION
Table 14: Allowance for Credit Losses on Impaired Loans –
Segmented Information
($ millions)
As at October 31
Business and Government
Allowance for Credit Losses on Impaired Loans by Industry
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
2019
2018
2017
2016
2015
9
8
11
52
22
7
–
35
–
48
30
–
–
79
3
1
5
8
16
17
23
16
–
–
20
–
17
31
–
1
46
1
–
12
15
14
14
17
11
–
–
51
–
42
13
2
1
51
2
–
–
13
4
12
31
19
1
–
36
1
45
9
3
1
50
10
–
14
17
8
23
19
6
9
–
38
1
2
5
–
2
33
3
–
40
Total business and government (1)
310
208
233
249
206
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Table 15: Provision for Credit Losses –
Segmented Information
($ millions)
For the year ended October 31
Consumer
Residential mortgages
Cards
Consumer instalment and other personal loans
Total consumer
Business and Government
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
Total business and government
Total provision for credit losses on impaired loans
Provision for credit losses on performing loans (2)
Performance Ratios (%)
PCL to average net loans and acceptances
PCL on impaired loans to segmented average net loans and acceptances
Consumer
Business and government
PCL on impaired loans to average net loans and acceptances
2019
2018
2017
2016
2015
16
246
201
463
5
1
(2)
54
27
7
–
25
–
51
67
1
–
68
(35)
1
18
288
751
121
872
0.20
0.24
0.12
0.17
19
216
231
466
(2)
–
10
18
37
–
–
20
–
(25)
74
(2)
(1)
87
(4)
–
22
234
700
(38)
662
0.17
0.25
0.12
0.18
11
232
232
475
(4)
25
29
24
31
(1)
–
28
–
9
108
–
–
102
(3)
–
(1)
347
822
(76)
746
0.20
0.26
0.18
0.22
24
232
246
502
(16)
15
13
11
56
2
–
29
20
105
56
3
(1)
21
(7)
–
(38)
269
771
–
771
0.22
0.28
0.15
0.22
11
224
225
460
(37)
–
8
19
3
13
–
67
2
25
(4)
–
–
(29)
8
(2)
11
84
544
–
544
0.17
0.26
0.06
0.17
(1) Amounts exclude allowance for credit losses included in Other Liabilities.
(2) Prior periods have not been restated to reflect the adoption of IFRS 9 in 2018. The adoption of IFRS 9 in 2018 has been applied prospectively.
128 BMO Financial Group 202nd Annual Report 2019
Table 16: 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 (1)
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
2019
2018
2017
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
24,211
47,849
86,531
173,337
331,928
23,563
12,253
14,484
164,540
214,840
546,768
1.18
–
1.24
2.33
20,874
45,967
81,941
150,583
0.86
–
0.84
1.97
21,253
41,985
79,963
147,097
1.63
299,365
1.28
290,298
2.41
1.97
0.86
1.38
24,596
10,014
13,858
150,513
1.92
1.49
0.30
1.05
23,520
9,196
14,327
143,628
1.49
198,981
1.13
190,671
1.58
498,346
1.22
480,969
0.44
–
0.49
1.50
0.93
1.10
0.76
0.04
0.61
0.63
0.81
As at October 31, 2019, 2018 and 2017: deposits by foreign depositors in our Canadian bank offices amounted to $46,766 million, $48,592 million and $44,722 million, respectively; total deposits payable
after notice included $39,382 million, $34,754 million and $33,561 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 $25,098 million, $28,927 million and $30,648 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.
(1) Includes regulated and central banks.
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BMO Financial Group 202nd Annual Report 2019 129
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.
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, 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, which conducts periodic audits of all aspects of our operations.
As of October 31, 2019, 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, 2019 is set forth on page 136.
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 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.
Darryl White
Chief Executive Officer
Thomas E. Flynn
Chief Financial Officer
Toronto, Canada
December 3, 2019
130 BMO Financial Group 202nd Annual Report 2019
Independent Auditors’ Report
To the Shareholders of Bank of Montreal
Opinion
We have audited the consolidated financial statements of Bank of Montreal (the Bank), which comprise:
‰
‰
‰
‰
‰
‰ and notes to the consolidated financial statements, including a summary of significant accounting policies
the consolidated balance sheets as at October 31, 2019 and October 31, 2018
the consolidated statements of income for each of the years in the three-year period ended October 31, 2019
the consolidated statements of comprehensive income for each of the years in the three-year period ended October 31, 2019
the consolidated statements of changes in equity for each of the years in the three-year period ended October 31, 2019
the consolidated statements of cash flows for each of the years in the three-year period ended October 31, 2019
(Hereinafter referred to as the consolidated financial statements).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as at
October 31, 2019 and October 31, 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the
three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further
described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our auditors’ report.
We are independent of the Bank in accordance with the ethical requirements that are relevant to our audit of the consolidated financial
statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial
statements for the year ended October 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements
as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
The key audit matters for the consolidated financial statements are set out below.
Assessment of the Allowances for Credit Losses for Loans
Refer to Notes 1 and 4 to the consolidated financial statements.
The Bank’s allowance for credit losses (ACL) as at October 31, 2019 was $2,094 million. The Bank’s ACL consists of allowances for impaired loans
and allowances for performing loans (APL), both calculated under the IFRS 9 Financial Instruments expected credit losses framework. APL is calculated
on a probability-weighted basis, based on the Bank’s forecast of future economic scenarios, for each exposure in the loan portfolio as a function of
the probability of default (PD), exposure at default (EAD) and loss given default (LGD). In establishing APL, the Bank attaches probability weightings to
three economic scenarios, which represent the Bank’s view of a range of forecast economic conditions – a base case scenario being the Bank’s view
of the most probable outcome, as well as benign and adverse scenarios. Where there has been a significant increase in credit risk, lifetime APL is
recorded; otherwise 12 months of APL is generally recorded. The significant increase in credit risk assessment is based on the change in PD between
the origination date and reporting date and is assessed using probability weighted scenarios. The Bank uses experienced credit judgment (ECJ) to
reflect factors not captured in the results produced by the APL models.
We identified the assessment of the ACL as a key audit matter because there was a high degree of measurement uncertainty in the key inputs,
methodologies and judgments and their resulting impact on credit losses, as described above. Assessing the APL required significant auditor attention
and complex auditor judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the
Bank’s APL process with the involvement of credit risk, economics, and information technology professionals with specialized skills, industry
knowledge and relevant experience. These included controls related to (1) the monitoring of the PD, LGD and EAD parameters and model validation,
(2) technology controls over the data used in the APL models and the APL calculation, (3) the assessment to identify significant increases in credit
risk, and (4) the review of the macroeconomic variables, probability weighting of scenarios and ECJ. We also tested the controls over the Bank’s APL
process related to loan reviews for determination of loan risk grades for wholesale loans. We involved credit risk, economics, and information
technology professionals with specialized skills, industry knowledge and relevant experience, who assisted in evaluating the (1) PD, LGD and EAD
parameters produced by the models and the methodology for compliance with IFRS including the determination of significant increases in credit risk,
and (2) key data inputs including historical data used in monitoring of model parameters, and the macroeconomic variables and probability weighting
of scenarios used in the models, including consideration of alternative inputs for certain macroeconomic variables. For a sample of wholesale loans
we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating scale. We assessed the ECJ overlays applied by
the Bank to the APL through the application of our knowledge of the industry and credit judgment.
Assessment of the Measurement of the Fair Value of Difficult-to-value Securities
Refer to Notes 1, 3 and 17 to the consolidated financial statements.
The Bank’s securities portfolio included $164,122 million of securities as at October 31, 2019 that are measured at fair value. Included in these
amounts are certain difficult-to-value securities for which the Bank determines fair value using models and third party net asset valuations (NAVs)
that use significant unobservable market information. Unobservable inputs require the use of significant judgment. The key unobservable inputs used
in the valuation of such difficult-to-value securities are NAVs, discount margins, prepayment rates and EV/EBITDA multiples.
BMO Financial Group 202nd Annual Report 2019 131
INDEPENDENT AUDITORS’ REPORT
We identified the assessment of the measurement of the fair value of difficult-to-value securities as a key audit matter because there was a high
degree of measurement uncertainty in the prepayment rates and NAVs that required significant auditor attention and complex auditor judgment, and
knowledge and experience in the industry.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the
Bank’s process to determine the fair value of its difficult-to-value securities with the involvement of valuation and information technology
professionals with specialized skills, industry knowledge and relevant experience. These included controls related to the (1) development and
ongoing validation of valuation models and methodologies, (2) review of third party NAVs and other key inputs, (3) independent price verification,
and (4) segregation of duties and access controls. We also tested the controls related to the assessment of fair value hierarchy classification. We
tested, with involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, the fair value of a sample of
difficult-to-value securities. Depending on the nature of the security, we did this by comparing the key unobservable inputs noted above to external
information or by developing an independent estimate of fair value and comparing it to the fair value determined by the Bank.
Assessment of Income Tax Uncertainties
Refer to Notes 1 and 22 to the consolidated financial statements.
In determining the provision for income taxes, the Bank interprets tax legislation, case law and administrative positions, and, based on its
judgment, records an estimate of the amount required to settle tax obligations.
We identified the assessment of income tax uncertainties as a key audit matter. There was a high degree of subjectivity and judgment required
in assessing the need to record a provision, based on interpretation of tax law, for these uncertainties and estimating the amount of such provision, if
necessary. This required significant auditor attention and complex auditor judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the
Bank’s process for evaluating income tax uncertainties with the involvement of tax professionals with specialized skills, industry knowledge and
relevant experience. These included controls related to the 1) identification of tax uncertainties based on interpretation of tax law, and
2) determination of the best estimate of the provision required, if any. We involved tax professionals with specialized skills, industry knowledge and
relevant experience, who assisted in 1) evaluating the Bank’s interpretations of tax laws and the assessment of certain tax uncertainties and
expected outcomes, including, if applicable, the measurement thereof, 2) reading advice obtained by the Bank from external specialists, and
3) reading correspondence with taxation authorities.
Assessment of Insurance-related Liabilities
Refer to Notes 1 and 14 to the consolidated financial statements.
The Bank’s insurance-related liabilities as at October 31, 2019 were $11,581 million. The Bank determines the liabilities for life insurance
contracts by applying the Canadian Asset Liability Method for Insurance Contracts, which incorporates best-estimate assumptions for mortality,
morbidity, policy lapses, surrenders, future investment yields, policy dividends, administration costs and margins for adverse deviation.
We identified the assessment of insurance-related liabilities as a key audit matter, because there was a high degree of measurement uncertainty
in the key assumptions, being mortality, policy lapses and future investment yields, that required significant auditor attention and complex auditor
judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this key audit matter included the following. We tested certain internal controls over the
Bank’s process for the measurement of insurance-related liabilities, including controls over 1) the assessment of the key assumptions noted above,
and 2) contract data used in the calculation of the insurance-related liabilities. Actuarial professionals with specialized skills, industry knowledge and
relevant experience were involved in testing the controls over the key assumptions. We involved actuarial professionals with specialized skills,
industry knowledge and relevant experience in testing the key assumptions noted above by examining the internal and external experience studies
conducted by the Bank to support these estimates. We tested a sample of the underlying policyholder data used in the measurement of the liability
to source documentation.
Other Information
Management is responsible for the other information. Other information comprises:
‰
‰
the information included in Management’s Discussion and Analysis filed with the relevant Canadian Securities Commissions.
the information, other than the consolidated financial statements and the auditors’ report thereon, included in a document entitled the Annual
Report.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in
doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in
the audit and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis and the Annual Report filed with the relevant Canadian
Securities Commissions as at the date of this auditors’ report. If, based on the work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that fact in the auditors’ report. We have nothing to report in this
regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS 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.
In preparing the consolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
132 BMO Financial Group 202nd Annual Report 2019
Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally
accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of the consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
‰
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform
audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
‰ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control.
‰ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by
management.
‰ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the
consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence
obtained up to the date of our auditors’ report. However, future events or conditions may cause the Bank to cease to continue as a going concern.
‰ Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the
consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
‰ Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit
findings, including any significant deficiencies in internal control that we identify during our audit.
‰ Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and
communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable,
related safeguards.
‰ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Bank to express an
opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain
solely responsible for our audit opinion.
‰ Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the
consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report
unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should
not be communicated in our auditors’ report because the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 3, 2019
BMO Financial Group 202nd Annual Report 2019 133
Report of Independent Registered Public Accounting Firm
To the Shareholders of Bank of Montreal
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Bank of Montreal (the Bank) as at October 31, 2019 and 2018, the related
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, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Bank as at October 31, 2019 and 2018, and its financial performance and its cash
flows for each of the years in the three-year period ended October 31, 2019, in conformity with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Bank’s
internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 3, 2019 expressed an unqualified
opinion on the effectiveness of the Bank’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the Audit and Conduct Review Committee and that: (1) relate to accounts or disclosures that are
material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication
of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which
they relate.
Assessment of the Allowances for Credit Losses for Loans
As discussed in Notes 1 and 4 to the consolidated financial statements, the Bank’s allowance for credit losses (ACL) as at October 31, 2019 was
$2,094 million. The Bank’s ACL consists of allowances for impaired loans and allowances for performing loans (APL), both calculated under the IFRS 9
Financial Instruments expected credit losses framework. APL is calculated on a probability-weighted basis, based on the Bank’s forecast of future
economic scenarios, for each exposure in the loan portfolio as a function of the probability of default (PD), exposure at default (EAD) and loss given
default (LGD). In establishing APL, the Bank attaches probability weightings to three economic scenarios, which represent the Bank’s view of a range
of forecast economic conditions – a base case scenario being the Bank’s view of the most probable outcome, as well as benign and adverse scenarios.
Where there has been a significant increase in credit risk, lifetime APL is recorded; otherwise 12 months of APL is generally recorded. The significant
increase in credit risk assessment is based on the change in PD between the origination date and reporting date and is assessed using probability
weighted scenarios. The Bank uses experienced credit judgment (ECJ) to reflect factors not captured in the results produced by the APL models.
We identified the assessment of the ACL as a critical audit matter because there was a high degree of measurement uncertainty in the key
inputs, methodologies and judgments and their resulting impact on credit losses, as described above. Assessing the APL required significant auditor
attention and complex auditor judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s APL process with the involvement of credit risk, economics, and information technology professionals with specialized skills, industry
knowledge and relevant experience. These included controls related to (1) the monitoring of the PD, LGD and EAD parameters and model validation,
(2) technology controls over the data used in the APL models and the APL calculation, (3) the assessment to identify significant increases in credit
risk, and (4) the review of the macroeconomic variables, probability weighting of scenarios and ECJ. We also tested the controls over the Bank’s APL
process related to loan reviews for determination of loan risk grades for wholesale loans. We involved credit risk, economics, and information
technology professionals with specialized skills, industry knowledge and relevant experience, who assisted in evaluating the (1) PD, LGD and EAD
parameters produced by the models and the methodology for compliance with IFRS including the determination of significant increases in credit risk,
and (2) key data inputs including historical data used in monitoring of model parameters, and the macroeconomic variables and probability weighting
of scenarios used in the models, including consideration of alternative inputs for certain macroeconomic variables. For a sample of wholesale loans
we evaluated the Bank’s assigned credit risk ratings to loans against the Bank’s borrower risk rating scale. We assessed the ECJ overlays applied by
the Bank to the APL through the application of our knowledge of the industry and credit judgment.
134 BMO Financial Group 202nd Annual Report 2019
Assessment of the Measurement of the Fair Value of Difficult-to-value Securities
As discussed in Notes 1, 3 and 17 to the consolidated financial statements, the Bank’s securities portfolio included $164,122 million of securities as at
October 31, 2019 that are measured at fair value. Included in these amounts are certain difficult-to-value securities for which the Bank determines fair
value using models and third party net asset valuations (NAVs) that use significant unobservable market information. Unobservable inputs require the
use of significant judgment. The key unobservable inputs used in the valuation of such difficult-to-value securities are NAVs, discount margins,
prepayment rates and EV/EBITDA multiples.
We identified the assessment of the measurement of the fair value of difficult-to-value securities as a critical audit matter because there was a
high degree of measurement uncertainty in the prepayment rates and NAVs, that required significant auditor attention and complex auditor
judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s process to determine the fair value of its difficult-to-value securities with the involvement of valuation and information technology
professionals with specialized skills, industry knowledge and relevant experience. These included controls related to the (1) development and
ongoing validation of valuation models and methodologies, (2) review of third party NAVs and other key inputs, (3) independent price verification,
and (4) segregation of duties and access controls. We also tested the controls related to the assessment of fair value hierarchy classification. We
tested, with the involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, the fair value of a sample
of difficult-to-value securities. Depending on the nature of the security, we did this by comparing the key unobservable inputs noted above to
external information or by developing an independent estimate of fair value and comparing it to the fair value determined by the Bank.
Assessment of Income Tax Uncertainties
As discussed in Notes 1 and 22 to the consolidated financial statements, in determining the provision for income taxes, the Bank interprets tax
legislation, case law and administrative positions, and, based on its judgment, records an estimate of the amount required to settle tax obligations.
We identified the assessment of income tax uncertainties as a critical audit matter. There was a high degree of subjectivity and judgment
required in assessing the need to record a provision, based on interpretation of tax law, for these uncertainties and estimating the amount of such
provision, if necessary. This required significant auditor attention and complex auditor judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s process for evaluating income tax uncertainties with the involvement of tax professionals with specialized skills, industry knowledge and
relevant experience. These included controls related to the 1) identification of tax uncertainties based on interpretation of tax law and
2) determination of the best estimate of the provision required, if any. We involved tax professionals with specialized skills, industry knowledge and
relevant experience, who assisted in 1) evaluating the Bank’s interpretations of tax laws and the assessment of certain tax uncertainties and
expected outcomes, including, if applicable, the measurement thereof, 2) reading advice obtained by the Bank from external specialists, and
3) reading correspondence with taxation authorities.
Assessment of Insurance-related Liabilities
As discussed in Notes 1 and 14 to the consolidated financial statements, the Bank’s insurance-related liabilities as at October 31, 2019 were
$11,581 million. The Bank determines the liabilities for life insurance contracts by applying the Canadian Asset Liability Method for Insurance
Contracts, which incorporates best-estimate assumptions for mortality, policy lapses, surrenders, future investment yields, policy dividends,
administration costs and margins for adverse deviation.
We identified the assessment of insurance-related liabilities as a critical audit matter, because there was a high degree of measurement
uncertainty in the key assumptions, being mortality, policy lapses and future investment yields, that required significant auditor attention and
complex auditor judgment, and knowledge and experience in the industry.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the
Bank’s process for the measurement of insurance-related liabilities, including controls over 1) the assessment of the key assumptions noted above,
and 2) contract data used in the calculation of the insurance-related liabilities. Actuarial professionals with specialized skills, industry knowledge and
relevant experience were involved in testing the controls over the key assumptions. We involved actuarial professionals with specialized skills,
industry knowledge and relevant experience in testing the key assumptions noted above by examining the internal and external experience studies
conducted by the Bank to support these estimates. We tested a sample of the underlying policyholder data used in the measurement of the liability
to source documentation.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Bank’s auditor since 2004 and as joint auditor for the prior 11 years.
Toronto, Canada
December 3, 2019
BMO Financial Group 202nd Annual Report 2019 135
Report of Independent Registered Public Accounting Firm
To the Shareholders of Bank of Montreal
Opinion on Internal Control over Financial Reporting
We have audited Bank of Montreal’s internal control over financial reporting as of October 31, 2019, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, Bank of Montreal (the Bank) maintained, in all material respects, effective internal control over financial reporting as of
October 31, 2019, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Bank as at October 31, 2019, and 2018, the related 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, 2019, and the related notes (collectively, the
consolidated financial statements) and our report dated December 3, 2019 expressed an unqualified opinion on those consolidated financial
statements.
Basis for Opinion
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 in the accompanying Management’s Annual Report on Disclosure Controls and Procedures and
Internal Control over Financial Reporting, on page 113 of 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal
control over financial reporting 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
December 3, 2019
136 BMO Financial Group 202nd Annual Report 2019
Consolidated Statement of Income
For the Year Ended October 31 (Canadian $ in millions, except as noted)
2019
2018
2017
Interest, Dividend and Fee Income
Loans
Securities (Note 3) (1)
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 gains, other than trading
Insurance revenue
Investments in associates and joint ventures
Other
Total Revenue
Provision for Credit Losses (Notes 1 and 4)
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities (Note 14)
Non-Interest Expense
Employee compensation (Notes 20 and 21)
Premises and equipment (Note 9)
Amortization of intangible assets (Note 11)
Travel and business development
Communications
Professional fees
Other
Income Before Provision for Income Taxes
Provision for income taxes (Note 22)
Net Income
Attributable to:
Equity holders of the bank
Non-controlling interest in subsidiaries
Net Income
Earnings Per Common Share (Canadian $) (Note 23)
Basic
Diluted
Dividends per common share
$
$
$
$
19,824
5,541
787
26,152
8,616
279
4,369
13,264
12,888
1,023
1,204
298
1,181
437
1,747
1,419
986
249
166
3,183
151
551
12,595
25,483
872
2,709
8,423
2,988
554
545
296
568
1,256
14,630
7,272
1,514
5,758
$
5,758
–
5,758
8.68
8.66
4.06
$
$
$
$
16,275
4,119
641
21,035
6,080
226
3,291
9,597
13,564
3,525
324
17,413
3,894
155
2,089
6,138
11,438
11,275
1,025
1,134
705
997
428
1,749
1,473
943
239
182
1,879
167
546
11,467
22,905
662
1,352
7,461
2,753
503
519
282
572
1,387
13,477
7,414
1,961
5,453
5,453
–
5,453
8.19
8.17
3.78
$
$
$
964
1,109
84
917
329
1,627
1,411
1,044
171
191
2,070
386
529
10,832
22,107
746
1,538
7,468
2,491
485
540
286
569
1,353
13,192
6,631
1,292
5,339
5,337
2
5,339
7.93
7.90
3.56
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(1)
Includes interest income on securities measured at fair value through other comprehensive income and amortized cost, calculated using the effective interest rate method, of $1,853 million for the
year ended October 31, 2019 ($1,290 million for the year ended October 31, 2018).
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 and for changes in accounting policy (Note 1).
Darryl White
Chief Executive Officer
Jan Babiak
Chair, Audit and Conduct Review Committee
BMO Financial Group 202nd Annual Report 2019 137
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the Year Ended October 31 (Canadian $ in millions)
Net Income
Other Comprehensive Income (Loss), net of taxes (Note 22)
Items that may subsequently be reclassified to net income
Net change in unrealized gains (losses) on fair value through OCI debt securities
Unrealized gains (losses) on fair value through OCI debt securities arising during the year (1)
Unrealized gains on available-for-sale securities arising during the year (2)
Reclassification to earnings of (gains) in the year (3)
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on derivatives designated as cash flow hedges arising during the year (4)
Reclassification to earnings of losses on derivatives designated as cash flow hedges (5)
Net gains (losses) on translation of net foreign operations
Unrealized gains (losses) on translation of net foreign operations
Unrealized gains (losses) on hedges of net foreign operations (6)
Items that will not be reclassified to net income
Gains (losses) on remeasurement of pension and other employee future benefit plans (7)
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value (8)
Unrealized gains on fair value through OCI equity securities arising during the year (9)
Other Comprehensive Income (Loss), net of taxes (Note 22)
Total Comprehensive Income
Attributable to:
Equity holders of the bank
Non-controlling interest in subsidiaries
Total Comprehensive Income
2019
2018
2017
$
5,758
$
5,453
$
5,339
412
na
(72)
340
1,444
143
1,587
(11)
(13)
(24)
(552)
75
1
(476)
(251)
na
(65)
(316)
(1,228)
336
(892)
417
(155)
262
261
(24)
–
237
na
95
(87)
8
(839)
61
(778)
(885)
23
(862)
420
(148)
na
272
1,427
(709)
(1,360)
$
7,185
$
4,744
$
3,979
7,185
–
4,744
–
$
7,185
$
4,744
$
3,977
2
3,979
(1) Net of income tax (provision) recovery of $(140) million, $69 million and na for the year ended, respectively.
(2) Net of income tax (provision) of na, na and $(21) million for the year ended, respectively.
(3) Net of income tax provision of $26 million, $23 million and $36 million for the year ended, respectively.
(4) Net of income tax (provision) recovery of $(521) million, $432 million and $322 million for the year ended, respectively.
(5) Net of income tax (recovery) of $(51) million, $(121) million and $(21) million for the year ended, respectively.
(6) Net of income tax (provision) recovery of $4 million, $56 million and $(8) million for the year ended, respectively.
(7) Net of income tax (provision) recovery of $196 million, $(111) million and $(157) million for the year ended, respectively.
(8) Net of income tax (provision) recovery of $(27) million, $6 million and $53 million for the year ended, respectively.
(9) Net of income tax (provision) of $(1) million, $nil and na for the year ended, respectively.
na – not applicable due to IFRS 9 adoption.
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 and for changes in accounting policy (Note 1).
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138 BMO Financial Group 202nd Annual Report 2019
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
Fair value through profit or loss
Fair value through other comprehensive income
Debt securities at amortized cost
Other
Securities Borrowed or Purchased Under Resale Agreements (Note 4)
Loans (Notes 4 and 6)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses (Notes 1 and 4)
Other Assets
Derivative instruments (Note 8)
Customers’ liability under acceptances (Note 12)
Premises and equipment (Note 9)
Goodwill (Note 11)
Intangible assets (Note 11)
Current tax assets
Deferred tax assets (Note 22)
Other (Note 12)
Total Assets
Liabilities and Equity
Deposits (Note 13)
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 6)
Securitization and structured entities’ liabilities (Notes 6 and 7)
Current tax liabilities
Deferred tax liabilities (Note 22)
Other (Note 14)
Subordinated Debt (Note 15)
Equity
Preferred shares and other equity instruments (Note 16)
Common shares (Note 16)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total Equity
Total Liabilities and Equity
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 and for changes in accounting policy (Note 1).
2019
2018
$
48,803
$
42,142
7,987
8,305
85,903
13,704
64,515
24,472
844
189,438
104,004
123,740
67,736
8,859
227,609
427,944
(1,850)
426,094
22,144
23,593
2,055
6,340
2,424
1,165
1,568
16,580
75,869
$
$
852,195
568,143
$
$
23,598
23,593
26,253
86,656
27,159
55
60
38,607
225,981
6,995
5,348
12,971
303
28,725
3,729
51,076
99,697
11,611
62,440
6,485
702
180,935
85,051
119,620
63,225
8,329
194,456
385,630
(1,639)
383,991
25,422
18,585
1,986
6,373
2,272
1,515
2,039
14,677
72,869
773,293
520,928
23,629
18,585
28,804
66,684
25,051
50
74
36,985
199,862
6,782
4,340
12,929
300
25,850
2,302
45,721
$
852,195
$
773,293
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BMO Financial Group 202nd Annual Report 2019 139
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Changes in Equity
For the Year Ended October 31 (Canadian $ in millions)
Preferred Shares and Other Equity Instruments (Note 16)
Balance at beginning of year
Issued during the year
Redeemed during the year
Balance at End of Year
Common Shares (Note 16)
Balance at beginning of year
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan
Issued under the Stock Option Plan
Repurchased for cancellation
Balance at End of Year
Contributed Surplus
Balance at beginning of year
Stock option expense, net of options exercised (Note 20)
Other
Balance at End of Year
Retained Earnings
Balance at beginning of year
Impact from adopting IFRS 9 (Note 28)
Net income attributable to equity holders of the bank
Dividends – Preferred shares (Note 16)
– Common shares (Note 16)
Equity issue expense
Common shares repurchased for cancellation (Note 16)
Balance at End of Year
Accumulated Other Comprehensive Income (Loss) on Fair Value through OCI Securities, net of taxes (1)
Balance at beginning of year
Impact from adopting IFRS 9 (Note 28)
Unrealized gains (losses) on fair value through OCI debt securities arising during the year
Unrealized gains on fair value through OCI equity securities arising during the year
Unrealized gains on available-for-sale securities arising during the year
Reclassification to earnings of (gains) during the year
Balance at End of Year
Accumulated Other Comprehensive Income (Loss) on Cash Flow Hedges, net of taxes
Balance at beginning of year
Gains (losses) on derivatives designated as cash flow hedges arising during the year (Note 8)
Reclassification to earnings of losses on derivatives designated as cash flow hedges in the year
Balance at End of Year
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes
Balance at beginning of year
Unrealized gains (losses) on translation of net foreign operations
Unrealized gains (losses) on hedges of net foreign operations
Balance at End of Year
Accumulated Other Comprehensive Income (Loss) on Pension and Other Employee Future Benefit Plans,
net of taxes
Balance at beginning of year
Gains (losses) on remeasurement of pension and other employee future benefit plans (Note 21)
Balance at End of Year
Accumulated Other Comprehensive Loss on Own Credit Risk on Financial Liabilities Designated at Fair Value,
net of taxes
Balance at beginning of year
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value
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Balance at End of Year
Total Accumulated Other Comprehensive Income
Total Equity
Non-controlling Interest in Subsidiaries
Balance at beginning of year
Net income attributable to non-controlling interest
Redemption/purchase of non-controlling interest
Other
Balance at End of Year
Total Equity
(1) Fiscal 2017 represents available-for-sale securities (Note 1).
na – not applicable due to IFRS 9 adoption.
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 and for changes in accounting policy (Note 1).
140 BMO Financial Group 202nd Annual Report 2019
2019
2018
2017
$
$
4,340
1,008
–
5,348
$
4,240
400
(300)
4,340
12,929
–
62
(20)
12,971
300
–
3
303
25,850
–
5,758
(211)
(2,594)
(8)
(70)
28,725
(315)
–
412
1
na
(72)
26
(1,074)
1,444
143
513
3,727
(11)
(13)
3,703
169
(552)
(383)
(205)
75
(130)
3,729
13,032
–
99
(202)
12,929
307
(12)
5
300
23,700
99
5,453
(184)
(2,424)
(5)
(789)
25,850
56
(55)
(251)
–
na
(65)
(315)
(182)
(1,228)
336
(1,074)
3,465
417
(155)
3,727
(92)
261
169
(181)
(24)
(205)
2,302
3,840
900
(500)
4,240
12,539
448
146
(101)
13,032
294
6
7
307
21,207
na
5,337
(184)
(2,312)
(9)
(339)
23,700
48
na
na
na
95
(87)
56
596
(839)
61
(182)
4,327
(885)
23
3,465
(512)
420
(92)
(33)
(148)
(181)
3,066
$
51,076
$
45,721
$
44,345
–
–
–
–
–
–
–
–
–
–
24
2
(25)
(1)
–
$
51,076
$
45,721
$
44,345
Consolidated Statement of Cash Flows
For the Year Ended October 31 (Canadian $ in millions)
2019
2018
2017
Cash Flows from Operating Activities
Net Income
Adjustments to determine net cash flows provided by (used in) operating activities
Provision on 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 – Decrease in derivative asset
– (Decrease) in derivative liability
Depreciation of premises and equipment (Note 9)
Amortization of other assets
Amortization of intangible assets (Note 11)
Net decrease in deferred income tax asset
Net increase (decrease) in deferred income tax liability
Net (increase) decrease in current income tax asset
Net increase (decrease) in current income tax liability
Change in accrued interest – (Increase) in interest receivable
– Increase 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 in securities lent or sold under repurchase agreements
Net (increase) in securities borrowed or purchased under resale agreements
Net increase in securitization and structured entities’ liabilities
$
5,758
$ 5,453
$ 5,339
1
(250)
13,816
872
6,902
(3,774)
435
216
554
483
(15)
354
6
(299)
313
(1,255)
48,009
(43,381)
(2,524)
20,358
(19,396)
2,120
1
(240)
(2,650)
662
6,069
(7,481)
400
224
503
832
2
(232)
(87)
(366)
337
2,078
34,138
(23,089)
2,004
452
(2,958)
1,860
7
(178)
(16,237)
746
15,544
(14,923)
391
227
485
156
(12)
(497)
52
(130)
15
(3,405)
15,409
(6,823)
336
16,535
(10,891)
762
Net Cash Provided by Operating Activities
29,303
17,912
2,908
Cash Flows from Financing Activities
Net increase (decrease) in liabilities of subsidiaries
Proceeds from issuance of covered bonds (Note 13)
Redemption of covered bonds (Note 13)
Proceeds from issuance of subordinated debt (Note 15)
Repayment of subordinated debt (Note 15)
Proceeds from issuance of preferred shares and other equity instruments (Note 16)
Redemption of preferred shares (Note 16)
Equity issue expense
Proceeds from issuance of common shares (Note 16)
Common shares repurchased for cancellation (Note 16)
Cash dividends and distributions paid
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
Purchase of non-controlling interest
Premises and equipment – net (purchases) (Note 9)
Purchased and developed software – net (purchases) (Note 11)
Acquisitions (Note 10)
Net Cash (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 (Note 2)
Supplemental Disclosure of Cash Flow Information
Net cash provided by operating activities includes:
Interest paid in the year
Income taxes paid in the year
Interest received in the year
Dividends 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 and for changes in accounting policy (Note 1).
(1,227)
4,168
(3,765)
1,000
(1,000)
1,008
–
(8)
54
(90)
(2,752)
(2,612)
329
(63,496)
13,154
31,561
–
(478)
(650)
–
2,203
2,706
(567)
2,685
(900)
400
(300)
(5)
88
(991)
(2,582)
2,737
(1,648)
(46,749)
14,754
23,561
–
(330)
(556)
(365)
(87)
5,845
(2,602)
850
(100)
900
(500)
(9)
149
(440)
(2,010)
1,996
(2,245)
(30,424)
5,930
24,400
(25)
(301)
(490)
–
(19,580)
(11,333)
(3,155)
(450)
6,661
42,142
227
9,543
32,599
(803)
946
31,653
$
48,803
$ 42,142
$ 32,599
$
$
$
$
12,956
1,209
23,966
1,740
$ 8,790
$ 1,261
$ 18,867
$ 1,736
$ 5,826
$ 1,338
$ 15,553
$ 2,063
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BMO Financial Group 202nd Annual Report 2019 141
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, providing 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. Our executive offices are at 100 King Street West, 1 First
Canadian Place, Toronto, Ontario. Our common shares are listed on the Toronto Stock Exchange (“TSX”) 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 for the revaluation of the following items: assets and
liabilities held for trading; financial assets and liabilities measured or designated at fair value through profit or loss (“FVTPL”); financial assets
measured or designated at fair value through other comprehensive income (“FVOCI”); 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 3, 2019.
Basis of Consolidation
These consolidated financial statements are inclusive of the financial statements of our subsidiaries as at October 31, 2019. We conduct business
through a variety of corporate structures, including subsidiaries, structured entities (“SEs”), associates and joint ventures. Subsidiaries are those
entities where we exercise control through our ownership of the majority of the voting shares. We also hold interests in SEs, which we consolidate
when we control the SEs. 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 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, which are entities where we exercise joint control through an agreement with other shareholders. 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. Our equity accounted investments are recorded as other securities and our share of
the net income or loss is recorded in investments in associates and joint ventures, in our Consolidated Statement of Income. Any other
comprehensive income amounts are reflected in the relevant section of our Consolidated Statement of Comprehensive Income. Additional information
regarding accounting for other securities is included in Note 3.
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
5
6
7
8
9
10
11
12
13
14
15
16
Basis of Presentation
Cash and Interest Bearing Deposits with Banks
Securities
Loans 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
Equity
Note Topic
17
Fair Value of Financial Instruments and Trading-Related
Revenue
18
19
20
21
22
23
24
25
26
27
28
Offsetting of Financial Assets and Financial Liabilities
Capital Management
Employee Compensation – Share-Based Compensation
Employee Compensation – Pension and Other Employee Future
Benefits
Income Taxes
Earnings Per Share
Commitments, Guarantees, Pledged Assets, Provisions and
Contingent Liabilities
Operating and Geographic Segmentation
Significant Subsidiaries
Related Party Transactions
Transition to IFRS 9
Page
179
187
187
188
190
194
197
197
199
203
204
205
Page
142
147
147
151
158
159
160
162
171
172
172
173
174
175
176
177
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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 gains (losses) 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 is reclassified to our Consolidated Statement of
Income as part of the gain or loss on disposition.
Foreign currency translation gains and losses on equity securities measured at FVOCI that are denominated in foreign currencies are included in
accumulated other comprehensive income on FVOCI equity securities, net of taxes, in our Consolidated Statement of Changes in Equity. All other foreign
currency translation gains and losses are included in foreign exchange gains, other than trading, in our Consolidated Statement of Income as they arise.
142 BMO Financial Group 202nd Annual Report 2019
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 derivative contracts that qualify as accounting hedges are
recorded in our Consolidated Statement of Comprehensive Income within net change in unrealized gains (losses) on derivatives designated as 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.
Revenue
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
Securities commissions and fees are earned in Wealth Management and Capital Markets on brokerage transactions executed for customers,
generally as a fixed fee per share traded, where the commissions and related clearing expense are recognized on trade date. There are also fees
based on a percentage of the customer’s portfolio holdings that entitle clients to investment advice and a certain number of trades which are
recorded over the period to which they relate.
Deposit and payment service charges are primarily earned in Personal and Commercial Banking and include monthly account maintenance fees and
other activity-based fees earned on deposit and cash management services. Fees are recognized over time or at a point in time, i.e. over the period
that account maintenance and cash management services are provided, or when an income-generating activity is performed.
Card fees arise in Personal and Commercial Banking and primarily include interchange income, late fees and annual fees. Card fees are recorded
when the related services are provided, except for annual fees, which are recorded evenly throughout the year. Interchange income is calculated as a
percentage of the transaction amount and/or a fixed price per transaction as established by the payment network and is recognized when the card
transaction is settled. Reward costs for certain of our cards are recorded as a reduction in card fees.
Investment management and custodial fees are earned in Wealth Management and are based primarily on the balance of assets under
management or assets under administration, as at the period end, for investment management, custodial, estate and trustee services provided. Fees
are recorded over the period the services are performed.
Mutual fund revenues arise in Wealth Management and are earned on fund management services which are primarily calculated and recorded
based on a percentage of the fund’s net asset value. The fees are recorded over the period the services are performed.
Underwriting and advisory fees are earned in Capital Markets and arise from securities offerings in which we act as an underwriter or agent,
structuring and administering loan syndications and fees earned from providing merger-and-acquisition services and structuring advice. Underwriting
and advisory fees are generally recognized when the services or milestones are completed.
Leases
We are lessors in both financing leases and operating leases. Leases are classified as financing leases if they transfer substantially all the risks and
rewards incidental to ownership of the leased asset to the lessee. Otherwise they are classified as operating leases, as we retain substantially all the
risks and rewards of asset ownership.
As lessor in a financing lease, a loan is recognized equal to the investment in the lease, which is calculated as the present value of the minimum
payments to be received from the lessee, discounted at the interest rate implicit in the lease, plus any unguaranteed residual value we expect to
recover at the end of the lease. Finance lease income is recognized in interest, dividend and fee income, loans, in our Consolidated Statement of
Income.
Assets under operating leases are recorded in other assets in our Consolidated Balance Sheet. Rental income is recognized on a straight-line basis
over the term of the lease in non-interest revenue, other, in our Consolidated Statement of Income. Depreciation on these assets is recognized on a
straight-line basis over the life of the lease in non-interest expense, other, in our Consolidated Statement of Income.
Assets Held-for-Sale
Non-current non-financial assets classified as held-for-sale are measured at the lower of their carrying amount and fair value less costs to sell and are
presented within other assets in our Consolidated Balance Sheet. Subsequent to its initial classification, a non-current asset is no longer depreciated
or amortized, and any subsequent write-down in fair value less costs to sell is recognized in non-interest revenue, other, in our Consolidated
Statement of Income.
Changes in Accounting Policies
Revenue
Effective November 1, 2018, we adopted IFRS 15 Revenue from Contracts with Customers (“IFRS 15”). We elected to retrospectively present prior
periods as if IFRS 15 had always been applied. Under the new standard, the primary impact is the reclassification of amounts within the Consolidated
Statement of Income. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a
reduction in non-interest revenue. In addition, when customers reimburse us for certain out-of-pocket expenses incurred on their behalf, we now
record the reimbursement in non-interest revenue. Previously, these reimbursements were recorded as a reduction in the related expense. There is
minimal impact to net income as IFRS 15 does not require discounting of loyalty reward liabilities and we now amortize the costs to obtain card
customers, which were previously expensed as incurred.
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BMO Financial Group 202nd Annual Report 2019 143
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the impacts of applying IFRS 15 on our prior period Consolidated Statement of Income:
(Canadian $ in millions)
Increase (decrease) in
Non-Interest Revenue
Securities commissions and fees
Deposit and payment service charges
Card fees
Investment management and custodial fees
Underwriting and advisory fees
Other
Non-Interest Expense
Employee compensation
Travel and business development
Professional fees
Other
Provision for income taxes
Net Income
2018
2017
(4)
(10)
(136)
7
7
4
(132)
2
(154)
8
8
(136)
1
3
(5)
(14)
(150)
5
8
3
(153)
1
(153)
6
8
(138)
(4)
(11)
Share-based Payment
Effective November 1, 2018, we adopted amendments to IFRS 2 Share-based Payment in relation to the classification and measurement of share-
based payment transactions. There was no impact to our consolidated financial statements.
Financial Instruments
Effective November 1, 2017, we adopted IFRS 9 Financial Instruments (“IFRS 9”), which replaced IAS 39 Financial Instruments: Recognition and
Measurement (“IAS 39”). IFRS 9 addresses impairment, classification and measurement, and hedge accounting. 2017 amounts in our Consolidated
Statement of Income and Consolidated Statement of Comprehensive Income have not been restated. The impact to equity at November 1, 2017 was
an increase of $70 million ($44 million after tax) related to the impairment requirements of the standard. Refer to Note 28, Transition to IFRS 9 for
the impact on the opening balance sheet at November 1, 2017 and for accounting policies under IAS 39, which were applicable in the year ended
October 31, 2017.
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 tax assets; goodwill and intangible
assets; insurance-related liabilities; and provisions. We make judgments in assessing the business model for financial assets as well as whether
substantially all risks and rewards have been transferred in respect of transfers of financial assets and whether we control SEs, as 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 expected credit loss (“ECL”) model requires the recognition of credit losses generally based on 12 months of expected losses for performing loans
and the recognition of lifetime losses on performing loans that have experienced a significant increase in credit risk since origination.
The determination of a significant increase in credit risk takes into account many different factors and varies by product and risk segment. The
main factors considered in making this determination are relative changes in probability of default since origination, and certain other criteria, such as
30-day past due and watchlist status. The assessment of a significant increase in credit risk requires experienced credit judgment.
In determining whether there has been a significant increase in credit risk and in calculating the amount of expected credit losses, we must rely
on estimates and exercise judgment regarding matters for which the ultimate outcome is unknown. These judgments include changes in
circumstances that 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.
The calculation of expected credit losses includes the explicit incorporation of forecasts of future economic conditions. We have developed
models incorporating specific macroeconomic variables that are relevant to each portfolio. Key economic variables for our retail portfolios include
primary operating markets of Canada, the United States (U.S.) and regional markets where considered significant. Forecasts are developed internally
by our Economics group, considering external data and our view of future economic conditions. We exercise experienced credit judgment to
incorporate multiple economic forecasts which are probability-weighted in the determination of the final expected credit loss. The allowance is
sensitive to changes in both economic forecasts and the probability weight assigned to each forecast scenario.
Additional information regarding the allowance for credit losses is included in Note 4.
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144 BMO Financial Group 202nd Annual Report 2019
Financial Instruments Measured at Fair Value
Fair value measurement techniques are used to value various financial assets and financial liabilities, and are also used in performing impairment
testing on certain non-financial assets.
Additional information regarding our fair value measurement techniques is included in Note 17.
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 for all of our plans using high-quality AA rated corporate bond yields with terms matching the plans’ specific cash flows.
Additional information regarding our accounting for pension and other employee future benefits is included in Note 21.
Impairment of Securities
We review other securities at each quarter-end reporting period to identify and evaluate investments that show indications of possible impairment.
For these equity securities, a significant or prolonged decline in the fair value of a security below its cost is objective evidence of impairment.
Debt securities measured at amortized cost or FVOCI are assessed for impairment using the expected credit loss model. For securities determined
to have low credit risk, the allowance for credit losses is measured at a 12-month expected credit loss.
Additional information regarding our accounting for debt securities measured at amortized cost or FVOCI and other securities, allowance for credit
losses and the determination of fair value is included in Notes 3 and 17.
Income Taxes and Deferred Tax Assets
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in either our Consolidated Statement of
Income or Consolidated Statement of Changes in Equity. In determining the provision for income taxes, we interpret tax legislation, case law and
administrative positions in numerous jurisdictions and, based on our judgment, record our estimate of the amount required to settle tax obligations.
We also make assumptions about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations and assumptions
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 or unused tax losses and tax credits may be utilized. We are required to assess whether it is probable that our
deferred income tax assets will be realized. 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, and the remaining expiration period of tax loss carryforwards and tax credits. 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 22.
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 value in use.
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 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.
Intangible assets with a definite life 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.
Additional information regarding goodwill and intangible assets is included in Note 11.
Insurance-Related Liabilities
Insurance claims and policy benefit liabilities represent current claims and estimates of future insurance policy benefit liabilities. 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
A provision, including for restructuring, is recognized if, as a result of a past event, the bank has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded at the best
estimate of the amounts required to settle the obligation as at the balance sheet date, taking into account the risks and uncertainties associated with
the obligation. Management and external experts are involved in estimating any provision, as necessary. The actual costs of settling some obligations
may be substantially higher or lower than the amounts of the provisions.
Additional information regarding provisions is included in Note 24.
BMO Financial Group 202nd Annual Report 2019 145
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfer of Financial Assets and Consolidation of Structured Entities
We enter into transactions in which we transfer assets, typically mortgage loans and credit card loans, to a structured entity or third party to obtain
alternate sources of funding. We assess whether substantially all of the risks and rewards of or control over 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 financings in our Consolidated Balance Sheet.
For securitization vehicles sponsored by the bank, the vehicles typically have limited decision-making authority. The structure of these vehicles
limits the activities they can undertake, the types of assets they can hold and how activities are funded. We control and consolidate these vehicles
when we have the key decision-making powers necessary to obtain the majority of the benefits of their activities.
For certain investments in limited partnerships, we exercise judgment in determining whether 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.
Transferred assets are discussed in greater detail in Note 6 and structured entities are discussed in greater detail in Notes 7 and 20.
Future Changes in IFRS
Leases
In January 2016, the IASB issued IFRS 16 Leases (“IFRS 16”), which provides guidance whereby for most leases, lessees will recognize a liability for
the present value of future lease payments and record a corresponding asset on the balance sheet. There are minimal changes to lessor accounting.
IFRS 16 is effective for our fiscal year beginning November 1, 2019.
The main impact for the bank will be recording real estate leases on the balance sheet. Currently, most of our real estate leases are classified as
operating leases, whereby we record lease expense over the lease term with no asset or liability recorded on the balance sheet other than any
related leasehold improvements. Under IFRS 16, we will recognize right-of-use assets, which will depreciate, and lease liabilities, which will accrete
interest, over the lease term.
On transition, we will recalculate the right-of-use asset as if we had always applied IFRS 16 for a selection of leases, and for the remaining
leases, we will set the right-of-use asset equal to the lease liability. We will continue to account for low-dollar-value leases as executory contracts,
with lease expense recorded over the lease term and no corresponding right-of-use asset or lease liability for certain types of leases. In addition, we
have elected to exclude intangibles from the scope of lease accounting, and we will combine lease and non-lease components (for example,
maintenance and utilities that have fixed payments) in the calculation of right-of-use assets and lease liabilities.
When we adopt IFRS 16, we will recognize the cumulative effect of any changes in opening retained earnings with no changes to prior years. The
impact will be an increase in assets of approximately $2.0 billion, an increase in liabilities of approximately $2.1 billion, a decrease in equity of
approximately $100 million ($75 million after tax) and a decrease in our CET1 capital ratio by up to approximately 10 bps.
Uncertainty Over Income Tax Treatments
On June 7, 2017, the IASB issued IFRIC Interpretation 23 Uncertainty over Income Tax Treatments, effective for the bank beginning November 1, 2019.
The Interpretation clarifies the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax
treatments. We do not expect the Interpretation to have a significant impact on our financial results.
Interbank Offered Rate (“IBOR”) Reform
The IASB published Phase 1 of its amendments to IFRS 9 Financial Instruments and IAS 39 Financial Instruments: Recognition and Measurement, as
well as IFRS 7 Financial Instruments: Disclosures in September 2019, to provide relief from the potential effects of the uncertainty arising from
Interbank Offered Rate (IBOR) reform, focusing in particular on the period prior to replacement of interbank offered rates. These amendments modify
hedge accounting requirements, allowing us to assume that the interest rate benchmark on which the cash flows of the hedged item and the
hedging instrument are based are not altered as a result of IBOR reform, thereby allowing hedge accounting to continue. Mandatory application of the
amendments ends at the earlier of when the uncertainty regarding the timing and amount of interest rate benchmark-based cash flows is no longer
present and the discontinuation of the hedging relationship. Phase 2 of the IASB’s project on IBOR is underway and will address transition to IBOR.
The Phase 1 amendments are effective for our fiscal year beginning November 1, 2020, with early adoption permitted. We are in the process of
assessing our inventory of IBOR-based instruments and related hedge accounting relationships to evaluate the impact of these amendments on our
financial results. We provide disclosure on our current hedging relationships in Note 8.
Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts (“IFRS 17”), which provides a comprehensive approach to accounting for all types of
insurance contracts and will replace the existing IFRS 4 Insurance Contracts. In June 2019, the IASB published an Exposure Draft which proposes to
defer the effective date by one year, which would change the anticipated effective date for the bank to November 1, 2022. We will continue to
closely monitor the ongoing developments related to the standard. In order to meet the requirements of IFRS 17, we have established a project and
are currently assessing the impact of the standard on our future financial results.
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Conceptual Framework
In March 2018, the IASB issued the revised Conceptual Framework (“Framework”), which sets out the fundamental concepts for financial reporting to
ensure consistency in standard-setting decisions and that similar transactions are treated in a similar way, so as to provide useful information to users
of financial statements. The revised Framework, which is effective for our fiscal year beginning November 1, 2020, will inform future standard-setting
decisions but does not impact existing IFRS. We do not expect the Framework to have a significant impact on our accounting policies.
146 BMO Financial Group 202nd Annual Report 2019
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
2019
47,598
1,205
48,803
2018
40,738
1,404
42,142
(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
Certain of our foreign operations are required to maintain reserves or minimum balances with central banks in their respective countries of operation,
totalling $1,896 million as at October 31, 2019 ($1,655 million in 2018).
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 six types, each with a different purpose and accounting treatment. The types of securities we hold are as follows:
Trading securities are securities purchased for resale over a short period of time. Trading securities are recorded at fair value through profit or loss.
Transaction costs and changes in fair value are recorded in our Consolidated Statement of Income in trading revenues.
Fair value through profit or loss securities are measured at fair value, with changes in fair value and related transaction costs recorded in our
Consolidated Statement of Income in securities gains, other than trading, except as noted below. This category includes the following:
Securities Designated at FVTPL
In order to qualify for this designation, the security must have reliably measurable fair values, and the designation eliminates or significantly reduces
the inconsistent treatment that would otherwise arise from measuring the gains and losses on a different basis. Securities must be designated on
initial recognition, and the designation is irrevocable. If these securities were not designated at FVTPL, they would be accounted for at either FVOCI or
amortized cost.
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 of $10,805 million as at October 31, 2019 ($8,783 million as at October 31, 2018) is recorded in securities in our
Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was an increase of $1,006 million in
non-interest revenue, insurance revenue, for the year ended October 31, 2019 (decrease of $372 million for the year ended October 31, 2018).
Securities Mandatorily Measured at FVTPL
Securities managed on a fair value basis, but not held for trading, or debt securities with cash flows that do not represent solely payments of principal
and interest and equity securities not held for trading or designated at FVOCI are classified as FVTPL.
The bank’s FVTPL securities of $13,704 million as at October 31, 2019 ($11,611 million as at October 31, 2018) include $2,899 million of securities
mandatorily measured at fair value as at October 31, 2019 ($2,828 million as at October 31, 2018).
Debt securities at amortized cost are debt securities purchased with the objective of collecting contractual cash flows, and those cash flows
represent solely payments of principal and interest. These securities are initially recorded at fair value plus transaction costs and are subsequently
measured at amortized cost using the effective interest method. Impairment losses (recoveries) are recorded in our Consolidated Statement of
Income in securities gains, other than trading. Interest income earned and amortization of premiums, discounts and transaction costs are recorded in
our Consolidated Statement of Income in interest, dividend and fee income, securities.
Debt securities at FVOCI are debt securities purchased with the objective of both collecting contractual cash flows and selling the securities. The
securities’ cash flows represent solely payments of principal and interest. These securities may be sold in response to or in anticipation of changes in
interest rates and any resulting prepayment risk, changes in credit risk, changes in foreign currency risk or changes in funding sources or terms, or in
order to meet liquidity needs.
Debt securities measured at FVOCI are initially recorded at fair value plus transaction costs. They are subsequently measured at fair value, with
unrealized gains and losses recorded in our Consolidated Statement of Comprehensive Income until the security is sold or impaired. Gains and losses
on disposal and impairment losses (recoveries) are recorded in our Consolidated Statement of Income in non-interest revenue, securities gains, other
than trading. Interest income earned is recorded in our Consolidated Statement of Income in interest, dividend and fee income, securities, using the
effective interest method.
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Equity securities at FVOCI are equity securities for which we have elected to record changes in the fair value of the instrument in other
comprehensive income as opposed to fair value through profit or loss. Gains or losses recorded on these instruments will never be recognized in
profit or loss. Equity securities measured at FVOCI are not subject to an impairment assessment.
BMO Financial Group 202nd Annual Report 2019 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other securities are investments in associates and joint ventures. Investments in associates are where we exert significant influence over operating
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 of accounting. The equity method is also applied to our interests in joint ventures over which we have joint control. Our share of the
net income or loss is recorded in investments in associates and joint ventures in our Consolidated Statement of Income. Any other comprehensive
income amounts are reflected in the relevant sections of our Consolidated Statement of Comprehensive Income.
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 securities measured at FVOCI, which are recorded in other
comprehensive income.
Impairment Review
Debt securities at amortized cost or FVOCI are assessed for impairment using the ECL model, with the exception of securities determined to have low
credit risk, where the allowance for credit losses is measured at a 12 month expected credit loss. A financial asset is considered to have low credit
risk if the financial asset has a low risk of default, the borrower has a strong capacity to meet its contractual cash flow obligations in the near term
and adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfill
its contractual cash flow obligations.
Debt securities at amortized cost totalling $24,472 million as at October 31, 2019 ($6,485 million as at October 31, 2018) are net of allowances
for credit losses of $1 million as at October 31, 2019 ($1 million as at October 31, 2018).
Debt securities at FVOCI totalling $64,434 million as at October 31, 2019 ($62,378 million as at October 31, 2018) are net of allowances for credit
losses of $2 million as at October 31, 2019 ($2 million as at October 31, 2018).
Equity securities at FVOCI totalling $81 million as at October 31, 2019 ($62 million as at October 31, 2018) are not subject to an impairment
assessment.
Fair Value Measurement
For traded securities, quoted market value is considered to be fair value. Quoted market value is based on bid or ask prices, depending on which is
the most appropriate to measure fair value. Where market quotes are not available, we use estimation techniques to determine fair value. Additional
information regarding fair value measurement techniques is included in Note 17.
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148 BMO Financial Group 202nd Annual Report 2019
Remaining Term to Maturity of Securities
(Canadian $ in millions, except as noted)
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
No
maturity
Term to maturity
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
NHA MBS, U.S. agency MBS and CMO (1)
Corporate debt
Trading loans
Corporate equity
Total trading securities
FVTPL Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
Other governments
NHA MBS, U.S. agency MBS and CMO (1)
Corporate debt
Corporate equity
Total FVTPL securities
FVOCI 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 (%)
NHA MBS (1)
Amortized cost
Fair value
Yield (%)
U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Yield (%)
Corporate debt
Amortized cost
Fair value
Yield (%)
Corporate equity
Cost
Fair value
Total cost or amortized cost
Total fair value
Yield (%)
Amortized Cost Securities
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Canadian provincial and municipal governments
Amortized cost
Fair value
U.S. federal government
Amortized cost
Fair value
Other governments
Amortized cost
Fair value
NHA MBS, U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Corporate debt
Amortized cost
Fair value
Total cost or amortized cost
Total fair value
Other Securities
Carrying value
Total carrying value or amortized cost of securities
Total value of securities
Total by Currency (in Canadian $ equivalent)
Canadian dollar
U.S. dollar
Other currencies
Total securities
1,860
921
859
232
437
226
1,293
7
–
5,835
392
12
48
–
–
578
–
1,030
5,618
5,617
1.60
1,406
1,406
1.67
5
8
1.90
389
389
1.93
947
951
1.27
29
30
2.13
12
13
2.16
1,196
1,197
1.28
–
–
9,602
9,611
1.55
–
–
290
291
–
–
3
3
131
131
175
175
599
600
–
17,066
17,075
13,507
2,691
877
17,075
3,302
1,122
3,677
124
719
171
1,613
31
–
10,759
4
10
–
–
5
71
–
90
2,090
2,098
1.48
1,720
1,740
2.32
3,770
3,820
2.23
703
709
2.21
2,691
2,727
2.53
409
411
1.71
58
58
2.28
2,336
2,378
2.76
–
–
13,777
13,941
2.26
701
701
399
399
2,236
2,245
667
667
366
368
306
305
4,675
4,685
–
29,301
29,465
10,843
18,392
230
29,465
1,414
735
2,432
52
296
208
1,408
41
–
6,586
2
5
–
49
–
128
–
184
3,059
3,106
2.01
2,428
2,503
2.63
5,095
5,222
2.15
961
991
2.57
3,466
3,582
2.56
1,515
1,529
2.31
146
150
2.95
1,312
1,374
3.06
–
–
17,982
18,457
2.38
3,018
3,021
1,460
1,481
1,339
1,339
334
334
642
654
201
202
6,994
7,031
–
31,746
32,221
13,417
18,656
148
32,221
829
1,170
1,620
195
133
203
1,297
24
–
5,471
3
53
–
–
–
1,083
–
1,139
1,109
1,123
1.97
353
363
3.05
6,493
6,925
2.74
1,036
1,065
2.67
75
75
3.17
–
–
–
2,361
2,416
2.81
35
37
3.09
–
–
11,462
12,004
2.69
813
812
1,404
1,405
2,638
2,630
45
45
2,073
2,116
110
110
7,083
7,118
–
25,155
25,697
7,314
18,373
10
25,697
925
3,579
175
71
–
10,238
2,107
–
–
17,095
116
1,199
–
–
–
6,357
–
7,672
–
–
–
–
–
–
–
–
–
1,002
1,007
3.00
–
–
–
–
–
–
9,389
9,393
1.96
20
21
3.32
–
–
10,411
10,421
2.06
–
–
–
–
–
–
–
–
5,062
5,129
59
59
5,121
5,188
–
40,299
40,309
14,102
26,204
3
40,309
–
–
–
–
–
–
–
–
40,157
40,157
–
–
–
–
–
–
3,589
3,589
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
79
81
79
81
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
844
44,669
44,671
26,722
16,257
1,692
44,671
2019
Total
8,330
7,527
8,763
674
1,585
11,046
7,718
103
40,157
85,903
517
1,279
48
49
5
8,217
3,589
2018
Total
10,320
8,702
9,517
1,216
1,412
9,184
9,198
199
49,949
99,697
431
946
69
–
7
6,820
3,338
13,704
11,611
11,876
11,944
1.72
5,907
6,012
2.34
15,363
15,975
2.42
4,091
4,161
2.58
7,179
7,335
2.38
1,953
1,970
2.18
11,966
12,030
2.14
4,899
5,007
2.48
79
81
63,313
64,515
2.23
4,532
4,534
3,553
3,576
6,213
6,214
1,049
1,049
8,274
8,398
851
851
24,472
24,622
844
188,236
189,438
85,905
100,573
2,960
189,438
12,884
12,805
1.64
6,896
6,862
1.90
17,403
16,823
2.22
3,694
3,655
2.42
4,818
4,790
2.39
2,382
2,370
1.98
11,811
11,317
2.33
3,783
3,756
2.67
62
62
63,733
62,440
2.13
–
–
832
841
–
–
10
10
5,552
5,346
91
91
6,485
6,288
702
182,228
180,935
82,767
96,266
1,902
180,935
N
o
t
e
s
(1) These amounts are supported by insured mortgages or issued by U.S. agencies and government-sponsored enterprises. NHA refers to the National Housing Act, MBS refers to mortgage-backed
securities and CMO refers to collateralized mortgage obligations.
Yields in the table above are calculated using the cost of the security and the contractual interest rate 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.
BMO Financial Group 202nd Annual Report 2019 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrealized Gains and Losses on FVOCI Securities
The following table summarizes the unrealized gains and losses:
(Canadian $ in millions)
2019
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
NHA MBS
U.S. agency MBS and CMO
Corporate debt
Corporate equity
Total
11,876
5,907
15,363
4,091
7,179
1,953
11,966
4,899
79
63,313
72
106
617
74
158
18
106
110
2
4 11,944
6,012
1
5 15,975
4,161
4
7,335
2
1,970
1
42 12,030
5,007
81
2
–
12,884
6,896
17,403
3,694
4,818
2,382
11,811
3,783
62
1,263
61 64,515
63,733
1
8
4
16
2
6
2
6
–
45
2018
Fair
value
12,805
6,862
16,823
3,655
4,790
2,370
11,317
3,756
62
80
42
584
55
30
18
496
33
–
1,338
62,440
Unrealized gains (losses) may be offset by related (losses) gains on hedge contracts.
Interest, Dividend and Fee Income
Interest, dividend and fee income has been included in our Consolidated Statement of Income as follows, excluding other securities and trading
securities. Related income for trading securities is included under Trading-Related Revenue in Note 17.
(Canadian $ in millions)
FVTPL
FVOCI
Amortized cost
Available-for-sale securities
Held-to-maturity securities
Total
na – not applicable due to IFRS 9 adoption.
2019
34
1,585
268
na
na
1,887
2018
16
1,118
172
na
na
1,306
Non-Interest Revenue
Net gains and losses from securities, excluding net realized and unrealized gains on trading securities, have been included in our Consolidated
Statement of Income as follows:
(Canadian $ in millions)
Non-Interest Revenue
FVTPL securities
FVOCI securities (1)
Gross realized gains
Gross realized (losses)
Other securities, net realized and unrealized gains
Impairment losses
Securities gains, other than trading (2)
2019
164
209
(123)
–
(1)
249
2018
93
363
(216)
–
(1)
239
2017
na
na
na
662
150
812
2017
na
228
(99)
49
(7)
171
(1) Realized gains (losses) are net of unrealized gains (losses) on related hedge contracts. Fiscal 2017 represents available-for-sale securities.
(2) The following amounts of income related to our insurance operations were included in non-interest revenue, insurance revenue, in our Consolidated Statement of Income: Interest, dividend and fee
income of $407 million for the year ended October 31, 2019 ($354 million in 2018); and securities gains, other than trading, of $11 million for the year ended October 31, 2019 ($1 million in 2018).
Unrealized gains and losses on trading securities are included in trading-related revenue in Note 17.
na – not applicable due to IFRS 9 adoption.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
s
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150 BMO Financial Group 202nd Annual Report 2019
Note 4: Loans 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 where the cash flows of those loans represent solely payments of principal and interest, otherwise those loans are measured at FVTPL. 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 return or resell
securities that we have borrowed or purchased, back to the original lender or seller, on a specified date at a specified price. We account for these
instruments as if they were loans.
Lending Fees
Lending fees arise in Personal and Commercial Banking and Capital Markets. 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 calculated as a percentage of the facility balance at the end
of the period. The 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 earned over the commitment period. Loan syndication fees are payable and 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.
Impaired Loans
We classify a loan as impaired (Stage 3) when one or more loss events have occurred, such as bankruptcy, default or delinquency. 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 generally written off when they are 180 days past due,
except for non-real estate term loans, which are generally written off when they are 120 days past due. 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 their entirety on a timely basis. Generally, we consider corporate and commercial loans to be impaired when payments are
90 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.
Loans are in default when the borrower is unlikely to pay its credit obligations in full without recourse by the bank, such as realizing security, or
when the borrower’s payments are past due more than 90 days (180 days for credit card loans). Overdrafts are considered to be past due once the
customer has breached an advised limit or has been advised of a limit smaller than currently outstanding or, in the case of retail overdrafts, has not
brought the overdraft down to a $nil balance within a specified time period.
Our average gross impaired loans were $2,285 million for the year ended October 31, 2019 ($2,115 million in 2018). Our average impaired loans,
net of the specific allowance, were $1,864 million for the year ended October 31, 2019 ($1,706 million in 2018).
Once a loan is identified as impaired, we continue to recognize interest income based on the original effective interest rate on the loan amount
net of its related allowance. In the periods following the recognition of impairment, adjustments to the allowance for these loans reflecting the time
value of money are recognized as interest income. Interest income on impaired loans of $80 million was recognized for the year ended October 31,
2019 ($67 million in 2018 and $75 million in 2017).
During the year ended October 31, 2019, we recorded a net gain of $11 million before tax ($4 million in 2018 and $28 million in 2017) 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 and other credit instruments. The allowance for credit losses amounted to $2,094 million as at October 31, 2019 ($1,870 million in
2018), of which $1,850 million ($1,639 million in 2018) was recorded in loans and $244 million ($231 million in 2018) was recorded in other
liabilities in our Consolidated Balance Sheet.
Significant changes in the gross balances, including originations, maturities and repayments in the normal course of operations, impact the
allowance for credit losses.
Allowance on Performing Loans
We maintain an allowance in order to cover impairment in the existing portfolio for loans that have not yet been individually identified as impaired.
Our approach to establishing and maintaining the allowance on performing loans is based on the requirements of IFRS, considering guidelines issued
by OSFI.
Under the IFRS 9 ECL methodology, an allowance is recorded for expected credit losses on financial assets regardless of whether there has been
an actual impairment. We recognize a loss allowance at an amount generally equal to 12 month expected credit losses, if the credit risk at the
reporting date has not increased significantly since initial recognition (Stage 1). We will record expected credit losses over the remaining life of
performing financial assets which are considered to have experienced a significant increase in credit risk (Stage 2).
BMO Financial Group 202nd Annual Report 2019 151
N
o
t
e
s
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The determination of a significant increase in credit risk takes into account many different factors and varies by product and risk segment. The
main factors considered in making this determination are relative changes in probability-weighted probability of default (“PD”) since origination and
certain other criteria, such as 30-day past due and watchlist status.
For each exposure, ECL is a function of the PD, exposure at default (“EAD”) and loss given default (“LGD”), with the timing of the loss also
considered, and is estimated by incorporating forward-looking economic information and through the use of experienced credit judgment to reflect
factors not captured in ECL models.
PD represents the likelihood that a loan will not be repaid and will go into default in either a 12 month horizon for Stage 1 or a lifetime horizon
for Stage 2. The PD for each individual instrument is modelled based on historical data and is estimated based on current market conditions and
reasonable and supportable information about future economic conditions.
EAD is modelled based on historical data and represents an estimate of the outstanding amount of credit exposure at the time a default may
occur. For off-balance sheet and undrawn amounts, EAD includes an estimate of any further amounts to be drawn at the time of default.
LGD is the amount that may not be recovered in the event of default and is modelled based on historical data and reasonable and supportable
information about future economic conditions, where appropriate. LGD takes into consideration the amount and quality of any collateral held.
We consider past events, current market conditions and reasonable forward-looking supportable information about future economic conditions in
calculating the amount of expected losses. In assessing information about possible future economic conditions, we utilize multiple economic
scenarios, including our base case, which represents, in our view, the most probable outcome, as well as benign and adverse forecasts, all of which
are developed by our Economics group. Key economic variables used in the determination of the allowance for credit losses reflect the geographic
diversity of our portfolios, where appropriate.
In considering the lifetime of a loan, the contractual period of the loan, including prepayment, extension and other options, is generally used. For
revolving instruments, such as credit cards, which may not have a defined contractual period, the lifetime is based on historical behaviour.
Our ECL methodology also requires the use of experienced credit judgment to incorporate the estimated impact of factors that are not captured in
the modelled ECL results.
Allowance on Impaired Loans
We maintain an allowance on individually identified impaired loans (Stage 3) of $463 million as at October 31, 2019 ($370 million as at October 31,
2018) on our gross impaired loans of $2,629 million as at October 31, 2019 ($1,936 million as at October 31, 2018), to reduce their carrying value to
an expected recoverable amount of $2,166 million as at October 31, 2019 ($1,566 million as at October 31, 2018).
We review our loans 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). 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 reviewed and approved by an independent credit officer.
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 estate properties, accounts receivable, guarantees, inventory or other capital assets.
Individually Insignificant Impaired Loans
Residential mortgages and consumer instalment and other personal loans are individually insignificant and may be assessed individually or
collectively for losses at the time of impairment, taking into account historical loss experience and expectations of future economic conditions.
Collectively assessed loans are grouped together by similar risk characteristics, such as type of instrument, geographic location, industry, type of
collateral and term to maturity.
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152 BMO Financial Group 202nd Annual Report 2019
Loans: Credit Risk Exposure
The following tables set out our credit risk exposure for all loans carried at amortized cost, FVOCI or FVTPL as at October 31, 2019 and October 31,
2018. Stage 1 represents those performing loans carried with up to a 12 month expected credit loss, Stage 2 represents those performing loans
carried with a lifetime expected credit loss, and Stage 3 represents those loans with a lifetime credit loss that are credit impaired.
(Canadian $ in millions)
Loans: Residential mortgages
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Consumer instalment and other personal
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Credit cards
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Business and government (1)
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount
Commitments and financial guarantee contracts
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount (2)
(1) Includes customers’ liability under acceptances.
Stage 1
Stage 2
Stage 3
Total
October 31, 2019
–
79,011
20,853
13,651
124
1,531
–
15
115,155
21,023
16,491
9,894
10,510
397
2,594
–
82
60,827
2,418
1,214
970
2,020
140
606
–
43
7,325
134,587
96,731
–
–
263
–
242
2,821
4,578
397
118
–
32
8,124
25
194
346
4,264
1,423
107
–
318
6,041
–
16
158
876
440
1
–
193
1,298
1,028
11,553
5,556
–
441
–
–
–
–
–
–
414
17
397
–
–
–
–
–
–
468
136
332
–
–
–
–
–
–
–
–
–
–
79,253
23,674
18,229
521
1,649
414
64
123,676
21,048
16,685
10,240
14,774
1,820
2,701
468
536
67,200
2,418
1,230
1,128
2,896
580
607
–
236
8,623
–
–
–
1,747
310
135,615
108,284
5,556
1,747
1,014
231,055
17,696
1,437
250,188
134,920
45,178
–
–
119
179,979
884
6,435
2,133
–
103
9,349
–
–
–
324
22
302
135,804
51,613
2,133
324
244
189,630
(2) Represents the total contractual amounts of undrawn credit facilities and other off-balance sheet exposures, excluding personal lines of credit and credit cards that are unconditionally cancellable at
our discretion.
N
o
t
e
s
BMO Financial Group 202nd Annual Report 2019 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions)
Loans: Residential mortgages
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Consumer instalment and other personal
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Credit cards
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Allowance for credit losses
Carrying amount
Loans: Business and government (1)
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount
Commitments and financial guarantee contracts
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount (2)
Stage 1
Stage 2
Stage 3
Total
October 31, 2018
–
76,314
18,975
12,621
90
4,250
–
20
112,230
20,236
13,364
12,581
7,707
357
2,105
–
83
56,267
2,403
1,140
943
1,742
108
568
–
39
6,865
109,774
88,348
–
–
232
–
125
2,479
3,765
445
181
–
37
6,958
20
222
364
4,153
1,427
168
–
312
6,042
4
11
107
874
428
1
–
191
1,234
2,148
7,308
4,423
–
355
197,890
13,524
116,108
44,895
–
–
108
160,895
1,722
3,426
1,650
–
96
6,702
–
–
–
–
–
–
375
19
356
–
–
–
–
–
–
521
143
378
–
–
–
–
–
–
–
–
–
–
–
–
1,040
208
832
–
–
–
242
27
215
–
76,439
21,454
16,386
535
4,431
375
76
119,544
20,256
13,586
12,945
11,860
1,784
2,273
521
538
62,687
2,407
1,151
1,050
2,616
536
569
–
230
8,099
111,922
95,656
4,423
1,040
795
212,246
117,830
48,321
1,650
242
231
167,812
(1) Includes customers’ liability under acceptances.
(2) Represents the total contractual amounts of undrawn credit facilities and other off-balance sheet exposures, excluding 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.
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154 BMO Financial Group 202nd Annual Report 2019
The following table shows the continuity in the loss allowance, by product type, for the year ended October 31, 2019:
(Canadian $ in millions)
For the year ended
Loans: Residential mortgages
Balance as at October 31, 2018
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total provision for credit losses (“PCL”) (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2019
Loans: Consumer instalment and other personal
Balance as at October 31, 2018
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2019
Loans: Credit cards
Balance as at October 31, 2018
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2019
Loans: Business and government
Balance as at October 31, 2018
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2019
Total as at October 31, 2019
Comprised of: Loans
Other credit instruments (5)
Stage 1
Stage 2
Stage 3
Total
20
27
(2)
–
(35)
7
(2)
(5)
–
–
–
15
90
174
(18)
(5)
(183)
48
(16)
–
–
–
(1)
89
74
107
(21)
(1)
(96)
20
(4)
5
–
–
1
80
298
201
(50)
(1)
(214)
199
(102)
33
–
–
7
338
522
403
119
38
(25)
7
(8)
26
–
(4)
(4)
–
–
(1)
33
326
(161)
85
(109)
232
–
(40)
7
–
–
–
333
219
(107)
21
(173)
288
–
(24)
5
–
–
1
225
408
(187)
65
(66)
353
–
(82)
83
–
–
5
496
1,087
984
103
44
(2)
(5)
8
15
–
–
16
(19)
13
(16)
38
144
(13)
(67)
114
167
–
–
201
(306)
118
(21)
136
–
–
–
174
72
–
–
246
(339)
93
–
–
209
(14)
(15)
67
250
–
–
288
(203)
66
(49)
311
485
463
22
102
–
–
–
6
7
(6)
7
(19)
13
(17)
86
560
–
–
–
216
48
(56)
208
(306)
118
(22)
558
293
–
–
–
264
20
(28)
256
(339)
93
2
305
915
–
–
–
389
199
(184)
404
(203)
66
(37)
1,145
2,094
1,850
244
(1) Transfers represent the amount of ECL that moved between stages during the period, for example, moving from a 12-month (Stage 1) to lifetime (Stage 2) ECL measurement basis.
(2) Net remeasurements represent the ECL impact due to stage transfers, changes in economic forecasts and credit quality.
(3) Excludes PCL on other assets of $(3) million.
(4) Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts
to collect.
(5) Recorded in other liabilities on the Consolidated Balance Sheet.
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BMO Financial Group 202nd Annual Report 2019 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the continuity in the loss allowance, by product type, for the year ended October 31, 2018:
(Canadian $ in millions)
For the year ended
Loans: Residential mortgages
Balance as at November 1, 2017
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2018
Loans: Consumer instalment and other personal
Balance as at November 1, 2017
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2018
Loans: Credit cards
Balance as at November 1, 2017
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Balance as at October 31, 2018
Loans: Business and government
Balance as at November 1, 2017
Transfer to Stage 1 (1)
Transfer to Stage 2 (1)
Transfer to Stage 3 (1)
Net remeasurement of loss allowance (2)
Loan originations
Derecognitions and maturities
Model changes (5)
Total PCL (3)
Write-offs (4)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at October 31, 2018
Total as at October 31, 2018
Comprised of: Loans
Other credit instruments (6)
Stage 1
Stage 2
Stage 3
Total
16
34
(1)
–
(37)
10
(2)
4
–
–
–
20
76
214
(22)
(4)
(196)
39
(18)
13
–
–
1
90
83
177
(37)
(1)
(164)
19
(3)
(9)
–
–
74
268
136
(31)
(1)
(155)
163
(80)
(7)
25
–
–
5
298
482
374
108
34
(31)
7
(9)
42
–
(6)
3
–
–
1
38
357
(200)
105
(162)
272
–
(50)
(35)
–
–
4
326
254
(177)
37
(195)
342
–
(42)
(35)
–
–
219
410
(128)
66
(61)
203
–
(86)
(3)
(9)
–
–
7
408
991
895
96
49
(3)
(6)
9
19
–
–
19
(20)
7
(11)
44
137
(14)
(83)
166
162
–
–
231
(301)
92
(15)
144
–
–
–
196
20
–
–
216
(319)
103
–
234
(8)
(35)
62
215
–
–
–
234
(297)
59
(21)
209
397
370
27
99
–
–
–
24
10
(8)
26
(20)
7
(10)
102
570
–
–
–
238
39
(68)
209
(301)
92
(10)
560
337
–
–
–
198
19
(45)
172
(319)
103
293
912
–
–
–
263
163
(166)
(10)
250
(297)
59
(9)
915
1,870
1,639
231
(1) Transfers represent the amount of ECL that moved between stages during the period, for example, moving from a 12-month (Stage 1) to lifetime (Stage 2) ECL measurement basis.
(2) Net remeasurements represent the ECL impact due to stage transfers, changes in economic forecasts and credit quality.
(3) Excludes PCL on other assets of $5 million.
(4) Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts
to collect.
(5) Model changes represent calibration of models to forward-looking information and changes due to regulatory reform.
(6) Recorded in other liabilities on the Consolidated Balance Sheet.
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156 BMO Financial Group 202nd Annual Report 2019
Loans and allowance for credit losses by geographic region as at October 31, 2019 and 2018 are as follows:
(Canadian $ in millions)
By geographic region: (1)
Canada
United States
Other countries
Total
Gross
amount
Allowance on
impaired loans (2)
Allowance on
performing loans (3)
2019
Net
amount
Gross
amount
Allowance on
impaired loans (2)
Allowance on
performing loans (3)
2018
Net
amount
258,842
158,454
10,648
427,944
207
256
–
463
740
630
17
257,895
157,568
10,631
243,261
132,789
9,580
1,387
426,094
385,630
189
181
–
370
689
574
6
242,383
132,034
9,574
1,269
383,991
(1) Geographic region is based upon the country of ultimate risk.
(2) Excludes allowance for credit losses on impaired loans of $22 million for other credit instruments, which is included in other liabilities ($27 million in 2018).
(3) Excludes allowance for credit losses on performing loans of $222 million for other credit instruments, which is included in other liabilities ($204 million in 2018).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Impaired (Stage 3) loans, including the related allowances, as at October 31, 2019 and 2018 are as follows:
(Canadian $ in millions)
Gross impaired amount
Allowance on impaired loans (2)
Net impaired amount
Residential mortgages
Consumer instalment and other personal loans
Business and government loans
Total
By geographic region: (1)
Canada
United States
Other countries
Total
2019
414
468
1,747
2,629
914
1,715
–
2,629
2018
375
521
1,040
1,936
735
1,201
–
1,936
2019
17
136
310
463
207
256
–
463
2018
19
143
208
370
189
181
–
370
2019
397
332
1,437
2,166
707
1,459
–
2,166
2018
356
378
832
1,566
546
1,020
–
1,566
(1) Geographic region is based upon the country of ultimate risk.
(2) Excludes allowance for credit losses on impaired loans of $22 million for other credit instruments, which is included in other liabilities ($27 million in 2018).
Fully secured loans with amounts past due between 90 and 180 days that we have not classified as impaired totalled $54 million and $49 million as at October 31, 2019 and 2018, respectively.
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, or loans which are held at fair value. The following table presents
loans that are past due but not classified as impaired as at October 31, 2019 and 2018.
(Canadian $ in millions)
1 to 29 days
30 to 89 days
90 days or more
Total
Residential mortgages
Credit card, consumer instalment and other personal loans
Business and government loans
Total
2019
2018
806
1,590
351
2,747
660
1,431
611
2,702
2019
465
426
207
2018
513
415
268
2019
2018
2019
2018
16
87
59
21
88
55
164
1,287
2,103
617
4,007
1,194
1,934
934
4,062
1,098
1,196
162
ECL Sensitivity and Key Economic Variables
The allowance for performing loans is sensitive to changes in both economic forecasts and the probability-weight assigned to each forecast scenario.
Many of the factors have a high degree of interdependency, although there is no single factor to which loan impairment allowances as a whole are
sensitive.
If we assumed a 100% base case economic forecast and included the impact of loan migration by restaging, with other assumptions held
constant including the application of experienced credit judgment, the allowance for performing loans would be approximately $1,325 million as at
October 31, 2019 ($1,250 million in 2018) compared to the reported allowance for performing loans of $1,609 million ($1,473 million in 2018).
If we assumed a 100% adverse economic forecast and included the impact of loan migration by restaging, with other assumptions held constant
including the application of experienced credit judgment, the allowance for performing loans would be approximately $2,800 million as at October 31,
2019 ($2,650 million in 2018) compared to the reported allowance for performing loans of $1,609 million ($1,473 million in 2018).
Actual results in a recession will differ as our portfolio will change through time due to migration, growth, risk mitigation actions and other
factors. In addition, our allowance will reflect the three economic scenarios used in assessing the allowance, with weightings attached to adverse and
benign scenarios often unequally weighted, and the weightings will change through time.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the key economic variables we use to estimate our allowance on performing loans during the forecast period. The
values shown represent the end of period national average values for the first 12 months and then the national average for the remaining horizon.
While the values disclosed below are national variables, in our underlying models we use regional variables where considered appropriate.
Benign scenario
Base scenario
Adverse scenario
As at October 31
First 12 months Remaining horizon (1)
First 12 months Remaining horizon (1)
First 12 months Remaining horizon (1)
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Real gross domestic product (2)
Canada
U.S.
Corporate BBB 10-year spread
Canada
U.S.
Unemployment rates
Canada
U.S.
Housing Price Index
Canada (3)
U.S. (4)
2.9% 3.1%
2.4% 2.9%
2.0% 2.0%
1.8% 1.8%
5.1% 5.4%
3.3% 3.2%
3.7% 2.4%
4.5% 5.1%
2.3%
2.3%
2.1%
2.0%
4.9%
3.2%
3.6%
4.1%
2.4% 1.6% 1.8%
1.9% 1.8% 2.4%
2.1% 2.3% 2.3%
2.0% 2.4% 2.2%
5.2% 5.7% 5.6%
3.1% 3.7% 3.6%
2.6% 1.8% 1.4%
4.3% 3.0% 3.6%
1.6%
1.9%
2.3%
2.4%
5.9%
3.8%
2.5%
2.7%
1.6%
1.6%
2.3%
2.3%
5.6%
3.7%
(3.2)%
(2.9)%
(3.2)%
(2.9)%
4.7%
4.3%
8.9%
6.5%
4.7%
4.3%
9.3%
6.7%
0.8%
0.9%
3.9%
3.4%
8.9%
6.6%
0.8%
0.9%
3.9%
3.5%
9.3%
6.8%
1.8% (12.8)%
(7.3)%
3.0%
(12.8)% (3.2)% (3.2)%
(7.3)% (1.2)% (1.2)%
(1) The remaining forecast period is two years.
(2) Real gross domestic product is based on year over year growth.
(3) In Canada, we use the HPI Benchmark Composite.
(4) In the U.S., we use the National Case-Shiller House Price Index.
The ECL approach requires the recognition of credit losses generally based on 12 months of expected losses for performing loans (Stage 1) and the
recognition of lifetime expected losses on performing loans that have experienced a significant increase in credit risk since origination (Stage 2).
Under our current probability-weighted scenarios, if all our performing loans were in Stage 1, our models would generate an allowance for
performing loans of approximately $1,050 million compared to the reported allowance for performing loans of $1,609 million as at October 31, 2019
($1,000 million compared to the reported allowance for performing loans of $1,473 million as at October 31, 2018).
Renegotiated Loans
From time to time we modify the contractual terms of a loan 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 modified during the year was $229 million as at October 31, 2019 ($253 million as at October 31,
2018). Renegotiated loans of $36 million ($53 million in 2018 and $36 million in 2017) were written off during the year ended October 31, 2019. As
at October 31, 2019, $66 million ($93 million as at October 31, 2018) of loans previously renegotiated saw their loss allowance change during the
year from lifetime to 12-month expected credit loss.
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 initially recorded at their carrying amount.
During the year ended October 31, 2019, we foreclosed on impaired loans and received $125 million of real estate properties that we classified
as held for sale ($117 million in 2018).
As at October 31, 2019, real estate properties held for sale totalled $62 million ($58 million in 2018). These properties are disposed of when
considered appropriate.
Collateral
Collateral is used to manage credit risk related to securities borrowed or purchased under resale agreements, residential mortgages, consumer
instalment and other personal loans and business and government loans. Additional information on our collateral requirements is included in
Notes 14 and 24, as well as in the blue-tinted font in the Enterprise-Wide Risk Management section of Management’s Discussion and Analysis on
pages 78 to 80 of this report.
Note 5: Risk Management
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We have an enterprise-wide approach to the identification, measurement, monitoring and control 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 and centrally cleared 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 blue-tinted font in the Enterprise-Wide Risk Management section of
Management’s Discussion and Analysis on pages 78 to 82 of this report. Additional information on credit risk related to loans and derivatives is
included in Notes 4 and 8, respectively.
158 BMO Financial Group 202nd Annual Report 2019
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, and includes the risk of credit migration
and default in our trading book. 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 blue-tinted font in the Enterprise-Wide Risk Management section
of Management’s Discussion and Analysis on pages 86 to 90 of this report.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet our financial commitments in a timely manner at reasonable prices as they
become 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 enterprise soundness and safety, depositor confidence and earnings stability.
Our liquidity and funding risk management practices and key measures are disclosed in the blue-tinted font in the Enterprise-Wide Risk
Management section of Management’s Discussion and Analysis on pages 91 to 99 of this report.
Note 6: Transfer of Assets
Loan Securitization
We sell Canadian residential mortgages to third-party Canadian securitization programs, including the Canada Mortgage Bond program, directly to
third-party investors under the National Housing Act Mortgage-Backed Securities (“NHA-MBS”) program and under our own program. We assess
whether substantially all of the risks and rewards of or control over the loans have been transferred to determine whether 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 mortgages that were sold, over the yield paid to investors, less credit losses and other costs. We also act as counterparty in
interest rate swap agreements where we pay the interest due to Canadian Mortgage Bond holders and receive the interest on the underlying
mortgages, which are converted into MBS through the NHA-MBS program and sold to the Canada Housing Trust. Since we continue to be exposed to
substantially all the prepayment, interest rate and credit risk associated with the securitized mortgages, they do not qualify for derecognition. We
continue to recognize the mortgages 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, are recorded in net interest income using the effective interest method over the term of the
securitization. Credit losses associated with the mortgages are recorded in the provision for credit losses. During the year ended October 31, 2019, we
sold $6,692 million of mortgages to these programs ($8,062 million in 2018).
The following table presents the carrying amounts and fair values of transferred assets that did not qualify for derecognition and the associated
liabilities:
(Canadian $ in millions)
Assets
Residential mortgages
Other related assets (2)
Total
Associated liabilities (3)
Carrying amount (1)
Fair value
Carrying amount (1)
Fair value
2019
2018
6,357
10,872
17,229
16,993
17,253
17,202
5,569
11,640
17,209
16,925
17,105
16,763
(1) Carrying amount of loans is net of allowance.
(2) Other related assets represent payments received on account of mortgages pledged under securitization programs that have not yet been applied against the associated liabilities. The payments
received are held in permitted instruments 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 amount of the securitized assets in the table above.
(3) Associated liabilities are recognized in Securitization and structured entities’ liabilities in our Consolidated Balance Sheet.
Transferred Financial Assets that Qualified for Derecognition
We retain the mortgage servicing rights for certain mortgage loans purchased or originated in the U.S. which are sold and derecognized. During the
year ended October 31, 2019, we sold and derecognized $460 million ($936 million in 2018) and recognized a $15 million gain ($21 million in 2018)
in non-interest revenue. We retain mortgage servicing rights for these loans, which represent our continuing involvement. As at October 31, 2019, the
carrying value of the mortgage servicing right was $43 million ($52 million as at October 31, 2018).
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 the risks 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 carrying value of these securities approximates the carrying value of
the associated liabilities, which total $86,656 million as at October 31, 2019 ($66,684 million as at October 31, 2018), due to the short-term nature.
The interest expense related to these liabilities is recorded on an accrual basis in interest expense, other liabilities, in our Consolidated Statement of
Income.
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BMO Financial Group 202nd Annual Report 2019 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7: Structured Entities
We enter into certain transactions in the ordinary course of business which involve the establishment of SEs to facilitate or secure customer
transactions and to obtain alternate 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 principal or agent.
We perform a reassessment of consolidation if facts and circumstances indicate that there have been changes to one or more of the elements of
control over the SE. Information regarding our basis of consolidation is included in Note 1.
Consolidated Structured Entities
Bank Securitization Vehicles
We use securitization vehicles to securitize our Canadian credit card loans, Canadian real estate lines of credit, Canadian auto loans and equipment
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.
The following table presents the carrying amounts and fair values of transferred assets that did not qualify for derecognition and the associated
liabilities issued by our bank securitization vehicles:
(Canadian $ in millions)
Assets
Credit cards
Consumer instalment and other personal (2)
Business and government
Total
Associated liabilities (3)
Carrying amount (1)
Fair value
Carrying amount (1)
Fair value
2019
2018
7,747
5,872
716
7,747
5,876
721
7,246
6,827
–
7,246
6,799
–
14,335
14,344
14,073
14,045
10,166
10,209
8,179
8,134
(1) Carrying amount of loans is net of allowance.
(2) Includes Canadian real estate lines of credit and Canadian auto loans.
(3) Associated liabilities are recognized in Securitization and structured entities’ liabilities in our Consolidated Balance Sheet.
U.S. Customer Securitization Vehicle
We sponsor one 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 either sell their assets directly into the vehicle or indirectly by selling an interest in the securitized assets into the
vehicle, which then issues ABCP to investors in order 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 committed liquidity support 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, 2019 was $6,733 million ($7,100 million at
October 31, 2018).
Capital and Funding Vehicles
We have a funding vehicle, created under the covered bond program, that was created to guarantee payments due to bondholders on bonds issued
by us. We sell assets to this funding vehicle in exchange for an intercompany loan.
We may also use capital vehicles to transfer our credit exposure on certain loan assets. We purchase credit protection against eligible credit
events from these vehicles. The vehicles collateralize their obligation through the issuance of guarantee-linked notes. Loan assets are not sold or
assigned to the vehicles and remain on our Consolidated Balance Sheet. As at October 31, 2019, $325 million of guarantee-linked notes issued by
these vehicles were included in deposits in our Consolidated Balance Sheet ($325 million as at October 31, 2018).
For those vehicles that purchase assets from us or are designed to pass on our credit risk, we have determined that, based on the rights of the
arrangements or through our equity interest, we have significant exposure to the variable returns of the vehicles, and we control and therefore
consolidate these vehicles. Additional information related to notes issued by, and assets sold to, these vehicles is provided in Note 13 and Note 24,
respectively.
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160 BMO Financial Group 202nd Annual Report 2019
Unconsolidated Structured Entities
The table below presents amounts related to our interests in unconsolidated SEs:
(Canadian $ in millions)
Interests recorded on the balance sheet
Cash and cash equivalents
Trading securities
FVTPL securities
FVOCI securities
Trading loans
Other
Deposits
Other
Exposure to loss (2)
Total assets of the entities
2019
Canadian customer
securitization
vehicles (1)
Capital vehicles
2018
Canadian customer
securitization
vehicles (1)
Capital vehicles
547
–
–
–
–
15
562
547
9
556
–
556
66
8
567
616
–
–
1,257
66
–
66
7,453
4,854
118
–
–
2
7
3
130
570
17
587
28
587
53
12
582
242
–
13
902
53
–
53
7,135
5,033
(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, FVTPL securities and FVOCI
securities. All assets held by these vehicles relate to assets in Canada.
(2) Exposure to loss represents securities held, undrawn liquidity facilities, total committed amounts of the BMO funded vehicle, derivative assets and loans.
Capital Vehicles
We also use capital vehicles to pass our credit risk to security holders of the vehicles. 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 in these vehicles, who are exposed to our default and
credit risk. We are not required to consolidate these vehicles. In 2019, one of our capital vehicles redeemed a note issued by us. Additional
information is provided in Note 16.
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 either from BMO or in the ABCP
markets by allowing them to either sell their assets directly into the vehicle or indirectly by selling an interest in the securitized assets into the
vehicle, which then issues ABCP to either investors or BMO 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 control these entities, as their key relevant activity, the servicing of program
assets, does not reside with us.
We provide liquidity facilities to the market-funded vehicles, which may require that we provide additional financing to the vehicles in the event
that certain events occur. The total committed and undrawn amount under these liquidity facilities and any undrawn amounts of the BMO funded
vehicle at October 31, 2019 was $6,262 million ($6,286 million at October 31, 2018).
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 interest in unconsolidated BMO
managed funds was $1,728 million at October 31, 2019 ($1,612 million in 2018), which is included in securities in our Consolidated Balance Sheet.
Other Structured Entities
We purchase and hold investments in a variety of third-party structured entities, including exchange-traded funds, mutual funds, limited partnerships
and investment trusts which are recorded in securities in our Consolidated Balance Sheet. We are considered to have an interest in these investments
through our holdings and because we may act as a counterparty in certain derivatives contracts. We are not the investment manager or the sponsor
of any of these investments. We are generally a passive investor and do not have power over the key decision-making activities of these
investments. Our maximum exposure to loss from our investments is limited to the carrying amounts of our investments and any unutilized
commitment we have provided.
Sponsored Structured Entities
We may be deemed to be the sponsor of an SE if we are involved in the design, legal set-up or its marketing. 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 SEs that we have sponsored.
Additional information on our compensation trusts is provided in Note 20.
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BMO Financial Group 202nd Annual Report 2019 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 foreign 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.
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.
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 derivative 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.
Embedded Derivatives
From time to time, we purchase or issue financial instruments containing embedded derivatives. The embedded derivative in a financial liability 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 measured 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.
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 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, 2019 was $5,736 million
($2,860 million in 2018), for which we have posted collateral of $5,660 million ($2,963 million in 2018).
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Risks Hedged
Interest Rate Risk
We manage interest rate risk through 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, foreign exchange spot transactions,
forward contracts and deposits denominated in foreign currencies.
Equity Price Risk
We manage equity price risk through total return swaps.
162 BMO Financial Group 202nd Annual Report 2019
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 we enter into 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 exposure to 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 generally recorded in non-interest revenue, trading
revenues, in our Consolidated Statement of Income. Unrealized gains and loses on derivatives used to economically hedge certain exposures may be
recorded in the Consolidated Statement of Income in the same line as the unrealized gains and losses arising from the exposures. 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.
We may also economically hedge a portion of our U.S. dollar earnings through forward foreign exchange contracts and/or options 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, trading revenues, in our Consolidated Statement of Income.
Fair Value of Trading and Hedging Derivatives
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 17.
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
Futures
Purchased options
Written options
Equity Contracts
Credit Contracts
Purchased
Written
Total fair value – trading derivatives
Hedging
Interest Rate Contracts
Cash flow hedges – swaps
Fair value hedges – swaps
Total swaps
Foreign Exchange Contracts
Cash flow hedges
Total foreign exchange contracts
Equity Contracts
Cash flow hedges
Total equity contracts
Gross
assets
Gross
liabilities
7,588
44
1
632
–
2,394
3,471
2,796
188
–
754
122
270
–
1,199
2
47
(5,834)
(157)
(4)
–
(403)
(1,383)
(4,950)
(2,379)
–
(203)
(1,273)
(40)
–
(367)
(2,999)
(98)
(4)
19,508
(20,094)
1,393
799
2,192
420
420
24
24
(121)
(1,435)
(1,556)
(1,948)
(1,948)
–
–
2019
Net
1,754
(113)
(3)
632
(403)
1,011
(1,479)
417
188
(203)
(519)
82
270
(367)
(1,800)
(96)
43
(586)
1,272
(636)
636
(1,528)
(1,528)
24
24
Total fair value – hedging derivatives (1)
Total fair value – trading and hedging derivatives
2,636
22,144
(3,504)
(868)
(23,598)
(1,454)
Gross
assets
Gross
liabilities
7,013
36
2
425
–
2,362
4,977
4,335
241
–
1,559
17
484
–
2,158
1
9
(5,637)
(10)
(3)
–
(273)
(1,678)
(6,057)
(2,817)
–
(228)
(1,084)
–
–
(372)
(2,402)
(36)
(1)
2018
Net
1,376
26
(1)
425
(273)
684
(1,080)
1,518
241
(228)
475
17
484
(372)
(244)
(35)
8
23,619
(20,598)
3,021
18
701
719
1,084
1,084
–
–
1,803
25,422
(1,261)
(668)
(1,929)
(1,074)
(1,074)
(28)
(28)
(3,031)
(23,629)
15,575
(8,054)
(1,243)
33
(1,210)
10
10
(28)
(28)
(1,228)
1,793
–
1,793
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Less: impact of master netting agreements
(13,538)
13,538
–
(15,575)
Total
8,606
(10,060)
(1,454)
9,847
(1) The fair values of hedging derivatives wholly or partially offset the changes in fair values of the related on-balance sheet financial instruments.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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.
BMO Financial Group 202nd Annual Report 2019 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional Amounts of Trading Derivatives
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
Swaps
Forward rate agreements
Purchased options
Written options
Futures
Total interest rate contracts
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Futures
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Written options
Futures
Total commodity contracts
Equity Contracts
Credit Contracts
Purchased
Written
Total
Exchange traded
Over-the-counter
2019
Total
Exchange traded
Over-the-counter
2018
Total
–
–
13,737
16,446
225,747
255,930
–
–
–
3,295
2,502
882
6,679
–
3,615
5,230
32,422
41,267
39,952
–
–
4,209,193
491,437
42,084
49,487
–
4,209,193
491,437
55,821
65,933
225,747
4,792,201
5,048,131
47,977
499,571
453,711
37,397
42,075
–
47,977
499,571
453,711
40,692
44,577
882
1,080,731
1,087,410
24,722
6,608
4,371
–
35,701
50,910
5,361
2,068
24,722
10,223
9,601
32,422
76,968
90,862
5,361
2,068
–
–
26,629
16,511
192,482
235,622
–
–
–
2,625
1,420
739
4,784
–
3,303
4,909
33,104
41,316
33,687
–
–
3,684,763
411,573
35,023
48,721
–
3,684,763
411,573
61,652
65,232
192,482
4,180,080
4,415,702
57,226
449,187
463,743
21,468
24,018
–
57,226
449,187
463,743
24,093
25,438
739
1,015,642
1,020,426
24,366
6,182
4,233
–
34,781
52,725
3,047
443
24,366
9,485
9,142
33,104
76,097
86,412
3,047
443
343,828
5,966,972
6,310,800
315,409
5,286,718
5,602,127
Derivatives Used in Hedge Accounting
In accordance with our risk management strategy, we enter into various derivative contracts to hedge our interest rate, foreign currency and equity
price exposures. In addition, we use deposits to hedge foreign currency exposure in our net investment in foreign operations. To the extent these
instruments qualify for hedge accounting, we designate them in accounting hedge relationships. Our structural market risk strategies, including our
approach to managing interest rate and foreign exchange risk, are included in the blue-tinted font in the Structural (Non-Trading) Market Risk section
of Management’s Discussion and Analysis on page 89 of this report. In addition, our exposure to foreign exchange rate risk is discussed in the Foreign
Exchange Risk section of Management’s Discussion and Analysis on page 90. Our exposure to equity price risk and our approach to managing it are
discussed in the “Other Share-Based Compensation, Mid-Term Incentive Plans” section of Note 20.
By using derivatives to hedge exposures to interest rates, foreign currency exchange rates, and equity prices, we are also exposed to the credit
risk of the derivative counterparty. We mitigate credit risk by entering into transactions with high-quality counterparties, requiring the counterparties
to post collateral, entering into master netting agreements, or settling through centrally cleared counterparties.
In order 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
effectiveness is to be 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. We evaluate hedge effectiveness at the inception of the hedging relationship and on an
ongoing basis, retrospectively and prospectively, primarily using a quantitative statistical regression analysis. We consider a hedging relationship
highly effective when all of the following criteria are met: correlation between the variables in the regression is at least 0.8; the slope of the
regression is within a 0.8 to 1.25 range; and the confidence level of the slope is at least 95%. The practice is different for our net investment hedge,
discussed in the Net Investment Hedges section below.
Any ineffectiveness in the hedging relationship is recognized as it arises in non-interest revenue, other, in our Consolidated Statement of Income.
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164 BMO Financial Group 202nd Annual Report 2019
The following table outlines the notional amounts and average rates of derivatives and the carrying amounts of deposits designated as hedging
instruments, by term to maturity, hedge type, and risk type, where applicable.
(Canadian $ in millions, except as noted)
Within 1 year
1 to 3 years
3 to 5 years
5 to 10 years
Over 10 years
Remaining term to maturity
2019
Total
2018
Total
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Notional amount
Average fixed interest rate
Foreign exchange risk – Cross-currency swaps and
foreign exchange forwards (1)
CAD-USD pair
CAD-EUR pair
Notional amount
Average fixed interest rate
Average exchange rate: CAD-USD
Notional amount
Average fixed interest rate
Average exchange rate: CAD-EUR
Other currency pairs (2) Notional amount
Average fixed interest rate
Average exchange rate: CAD-Non
USD/EUR
Equity price risk – Total return swap
Notional amount
Fair Value Hedges
Interest rate risk – Interest rate swaps
Notional amount
Average fixed interest rate
Net Investment Hedges
Foreign exchange risk
USD denominated deposit – carrying amount
GBP denominated deposit – carrying amount
18,151
27,369
32,852
15,239
1.78%
2.06%
2.19%
1.83%
–
–
93,611
2.01%
73,769
2.21%
5,666
1.01%
1.2938
4,993
13,671
15,039
1.86%
2.48%
1.3127
8,464
1.3121
6,699
1.98%
2.42%
2.11%
1.4719
1,453
1.4994
2,272
1.4894
3,202
1.86%
2.56%
2.92%
5,527
1.59%
1.2659
–
–
–
922
2.54%
251
3.02%
1.3122
201
2.97%
1.4870
–
–
40,154
1.95%
1.3034
20,357
2.21%
1.4892
7,849
2.57%
29,119
1.57%
1.2930
21,349
2.11%
1.4908
6,353
2.59%
1.6026
1.3199
1.1895
1.4539
316
–
–
–
–
–
1.3348
1.3430
316
381
13,300
32,633
30,708
16,809
2.26%
2.18%
2.22%
2.30%
17
2.36%
93,467
2.23%
73,464
2.17%
6,495
685
–
–
–
–
–
–
–
–
6,495
685
6,596
473
(1) Under certain hedge strategies using cross-currency swaps, a CAD leg is inserted to create two swaps designated as separate hedges (for example, a EURO-USD cross-currency swap split into
EURO-CAD and CAD-USD cross-currency swaps). The relevant notional amount is grossed up in this table, as the cross-currency swaps are disclosed by CAD-foreign currency pair.
(2) Includes CAD-AUD, CAD-CHF, CAD-CNH, CAD-GBP or CAD-HKD cross-currency swaps where applicable.
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. We use interest rate swaps with or without embedded
options, cross-currency swaps, and total return swaps to hedge this variability. We hedge the full amount of foreign exchange risk, but interest rate
risk is hedged only to the extent of benchmark interest rates. The benchmark interest rate is a component of interest rate risk that is observable in
the relevant financial markets, for example London Interbank Offered Rate (“LIBOR”) or Bankers’ Acceptances (“BA”) rate.
We determine the amount of the exposure to which hedge accounting is applied by assessing the potential impact of changes in interest rates,
foreign exchange rates, and equity prices on the future cash flows of floating rate loans and deposits, foreign currency denominated assets and
liabilities and certain cash-settled share-based payments. This assessment is performed using analytical techniques, such as simulation, sensitivity
analysis, stress testing and gap analysis.
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 offsets changes in the fair value of the hedged item for the designated hedged risk,
they are recorded in other comprehensive income. Hedge ineffectiveness, the portion of the change in fair value of the derivative that does not offset
changes in the fair value of the hedged item, is recorded directly in non-interest revenue, other, in our Consolidated Statement of Income as it arises.
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. The entire unrealized gain or loss is recognized immediately in net
interest income in our Consolidated Statement of Income, if the hedged item is sold or settled. In general, we do not terminate our foreign exchange
hedges before maturity.
For cash flow hedges, we use a hypothetical derivative to measure the hedged risk of floating rate loans, deposits, foreign currency denominated
assets and liabilities, or share-based payment grants. This hypothetical derivative matches the critical terms of the hedged items identically, and it
perfectly offsets the hedged cash flow.
In our cash flow hedge relationships, the main sources of ineffectiveness are differences in interest rate indices, tenor and reset/settlement
frequencies between the hedging instrument and the hedged item.
Net Investment Hedges
Net investment hedges mitigate our exposure to foreign currency exchange rate fluctuations related to our net investment in foreign operations.
Deposits denominated in foreign currencies are designated as a hedging instrument for a portion of the net investment in foreign operations. The
foreign currency translation of our net investment in foreign operations and the effective portion of the corresponding hedging instrument are
recorded in unrealized gains (losses) on translation of net foreign operations in other comprehensive income.
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BMO Financial Group 202nd Annual Report 2019 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effectiveness of our net investment hedge is determined using the dollar offset method with spot foreign currency rates. As the notional
amount of the deposits and the hedged net investment in foreign operations are the same, there is no source of ineffectiveness in these hedging
relationships.
For cash flow hedges and net investment hedges, the following tables contain information related to items designated as hedging instruments,
hedged items and hedge ineffectiveness for the years ended October 31, 2019 and October 31, 2018.
Carrying amount of
hedging instruments (1)
Hedge ineffectiveness
2019
(Canadian $ in millions)
Cash flow hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps and foreign exchange
forwards
Equity price risk – Total return swaps
Net investment hedges
Foreign exchange risk – Deposit liabilities
Total
Asset
Liability
1,393
(121)
420
24
(1,948)
–
1,837
(2,069)
–
(7,180)
1,837
(9,249)
(1) Represents the unrealized gains (losses) within derivative financial instruments in assets and liabilities, respectively, in the Consolidated Balance Sheet.
Gains (losses) on
hedging derivatives
used to calculate
hedge ineffectiveness
Gains (losses) on
hypothetical derivatives
used to calculate hedge
ineffectiveness
Ineffectiveness
recorded in
non-interest
revenue – other
3,142
(1,195)
15
1,962
(17)
1,945
(3,118)
1,195
(15)
(1,938)
17
(1,921)
15
–
–
15
–
15
2018
(Canadian $ in millions)
Cash flow hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps and foreign exchange forwards
Equity price risk – Total return swaps
Net investment hedges
Foreign exchange risk – Deposit liabilities
Total
Carrying amount of
hedging instruments (1)
Hedge ineffectiveness
Gains (losses) on
hedging derivatives
used to calculate
hedge ineffectiveness
Gains (losses) on
hypothetical derivatives
used to calculate hedge
ineffectiveness
Ineffectiveness
recorded in
non-interest
revenue – other
(1,685)
(459)
24
(2,120)
(211)
(2,331)
1,687
459
(24)
2,122
211
2,333
(4)
–
–
(4)
–
(4)
Asset
Liability
18
1,084
–
1,102
(1,261)
(1,074)
(28)
(2,363)
–
(7,069)
1,102
(9,432)
(1) Represents the unrealized gains (losses) within derivative financial instruments in assets and liabilities, respectively, in the Consolidated Balance Sheet.
For cash flow hedges and net investment hedges, the following tables contain information related to impacts on the Consolidated Statement of Other
Comprehensive Income, on a pre-tax basis for the years ended October 31, 2019 and October 31, 2018.
2019
Balance in cash flow hedge AOCI /
net foreign operations AOCI
Balance
October 31,
2018
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance
October 31, 2019 (1)
Active hedges
Discontinued hedges
(2,211)
751
30
3,127
(1,177)
15
(1,430)
1,965
(1,791)
(17)
(3,221)
1,948
240
(18)
(28)
194
–
194
1,156
(444)
17
729
1,150
(444)
17
723
(1,808)
(1,079)
(1,808)
(1,085)
6
–
–
6
–
6
(Canadian $ in millions)
Cash flow hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net investment hedges
Foreign exchange risk
Total
(1) Tax balance related to cash flow hedge AOCI is $(216) million.
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166 BMO Financial Group 202nd Annual Report 2019
(Canadian $ in millions)
Cash flow hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net investment hedges
Foreign exchange risk
Total
2018
Balance in cash flow hedge AOCI /
net foreign operations AOCI
Balance
November 1, 2017
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance
October 31, 2018 (1)
Active hedges
Discontinued hedges
(597)
298
72
(227)
(1,681)
(3)
24
(1,660)
(1,580)
(211)
(1,807)
(1,871)
67
456
(66)
457
–
457
(2,211)
751
30
(1,430)
(1,348)
751
30
(567)
(1,791)
(3,221)
(1,791)
(2,358)
(863)
–
–
(863)
–
(863)
(1) Tax balance related to cash flow hedge AOCI is $356 million.
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 economically
convert fixed rate assets and liabilities to floating rate. We use interest rate swaps to hedge interest rate risk, including benchmark interest rates,
inherent in fixed rate securities, a portfolio of mortgages, deposits and subordinated debt.
Any fixed rate assets or liabilities that are part of a hedging relationship are adjusted for the change in value of the risk being hedged. 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 for the risk being hedged, the
net amount (hedge ineffectiveness) 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. The cumulative fair value adjustment of the hedged item is
then amortized to net interest income over the hedged item’s remaining term to maturity. If the hedged item is sold or settled, the cumulative fair
value adjustment is included in the gain or loss on sale or settlement.
In our fair value hedge relationships, the main sources of ineffectiveness are the counterparty effect and our own credit risk on the fair value of
the swap, and the difference in terms such as fixed interest rate or reset/settlement frequency between the swap and the hedged item.
The amounts relating to derivatives designated as fair value hedging instruments, hedged items and hedge ineffectiveness for the years ended
October 31, 2019 and October 31, 2018 are as follows:
(Canadian $ in millions)
Carrying amount of
hedging derivatives (1)
Hedge ineffectiveness
2019
Accumulated amount of fair value
hedge gains (losses) on hedged items
Fair value hedge
Interest rate swaps
Securities and loans
Deposits and subordinated debt
Total
Asset
Liability
799
–
–
799
(1,435)
–
–
(1,435)
Gains (losses) on
hedging derivatives
used to calculate
hedge ineffectiveness
Gains (losses) on
hedged item used
to calculate hedge
ineffectiveness
Ineffectiveness
recorded in
non-interest
revenue – other
Carrying amount
of the hedged
item (2) Active hedges
Discontinued
hedges
(2,072)
1,269
(803)
2,058
(1,255)
803
(14)
14
–
53,672
(41,277)
12,395
1,249
(609)
640
8
308
316
(1) Represents the unrealized gains (losses) within derivative financial instruments in assets and liabilities, respectively, in the Consolidated Balance Sheet.
(2) Represents the carrying value on the Consolidated Balance Sheet and includes amortized cost, before allowance for credit losses, plus fair value hedge adjustments, except for FVOCI securities that are
carried at fair value.
(Canadian $ in millions)
Carrying amount of
hedging derivatives (1)
Hedge ineffectiveness
2018
Accumulated amount of fair value
hedge gains (losses) on hedged items
Fair value hedge
Interest rate swaps
Securities and loans
Deposits and subordinated debt
Total
Asset
Liability
701
–
–
701
(668)
–
–
(668)
Gains (losses) on
hedging derivatives
used to calculate
hedge ineffectiveness
Gains (losses) on
hedged item used
to calculate hedge
ineffectiveness
Ineffectiveness
recorded in
non-interest
revenue – other
Carrying amount
of the hedged
item (2)
Active
hedges
Discontinued
hedges
850
(764)
86
(843)
761
(82)
7
(3)
4
36,722
(34,375)
2,347
(1,160)
719
(441)
–
436
436
(1) Represents the unrealized gains (losses) within derivative financial instruments in assets and liabilities, respectively, in the Consolidated Balance Sheet.
(2) Represents the carrying value on the Consolidated Balance Sheet and includes amortized cost, before allowance for credit losses, plus fair value hedge adjustments, except for FVOCI securities that are
carried at fair value.
Comparative Information
During 2017, net losses of $1,161 million related to the effective portion of cash flow hedges were recognized in OCI. A gain of $188 million related
to cash flow hedges was transferred from equity to interest income or interest expense. Net ineffectiveness recognized on cash flow hedges during
2017 was a loss of $7 million.
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BMO Financial Group 202nd Annual Report 2019 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included within non-interest revenue, other, is a fair value loss of $200 million on derivatives held in qualifying fair value hedging relationships,
and a gain of $193 million representing net increases in the fair value of the hedged item attributable to the hedged risk.
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 statement
of income 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.
Derivative-Related Credit Risk
Derivative instruments are subject to credit risk arising from the possibility that counterparties may default on their obligations. The credit risk
associated with a derivative 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 the 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 mitigated 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 tables below are as follows:
Replacement cost captures the loss that would occur if a counterparty were to default at the present or at a future time, assuming that the closeout
and replacement of transactions occur instantaneously, assuming no recovery on the value of those transactions in bankruptcy.
Credit risk equivalent represents the total replacement cost plus an amount representing the potential future credit exposure adjusted by a
multiplier 1.4, 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, and considering
collateral, netting and other credit risk mitigants, as prescribed by OSFI.
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168 BMO Financial Group 202nd Annual Report 2019
(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
Swaps
Forward foreign exchange contracts
Purchased options
Written options
Exchange traded
Futures
Purchased options
Written options
Replacement
cost (1)
Credit risk
equivalent (1)
Risk-weighted
assets
2019
3,233
102
11
38
3,384
90
28
3
121
3,505
1,184
1,753
40
10
2,987
13
13
–
26
8,114
1,162
62
154
9,492
161
40
6
207
2,300
236
39
98
2,673
3
1
–
4
9,699
2,677
6,248
7,225
167
119
13,759
20
24
2
46
989
1,260
46
29
2,324
–
–
–
–
Total foreign exchange contracts
3,013
13,805
2,324
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 Contracts
Total
213
98
116
427
393
378
1
772
1,199
197
1,083
1,280
277
2,154
472
370
2,996
1,079
567
52
1,698
4,694
4,572
2,580
7,152
496
9,274
35,846
629
125
204
958
22
11
1
34
992
1,246
52
1,298
34
7,325
(1) In 2019, Replacement Cost and Credit Risk Equivalent are presented after the impact of master netting agreements and calculated using the Standardized Approach Counterparty Risk (“SA-CCR“) in
accordance with the Capital Adequacy Requirements (“CAR“) Guideline issued by OSFI on October 30, 2018, effective for fiscal year 2019. Prior periods have not been restated as they conform with
previous OSFI requirements.
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BMO Financial Group 202nd Annual Report 2019 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions)
Interest Rate Contracts
Over-the-counter
Swaps
Forward rate agreements
Purchased options
Exchange traded
Futures
Purchased options
Written options
Total interest rate contracts
Foreign Exchange Contracts
Over-the-counter
Swaps
Forward foreign exchange contracts
Purchased options
Exchange traded
Futures
Purchased options
Written options
Total foreign exchange contracts
Commodity Contracts
Over-the-counter
Swaps
Purchased options
Exchange traded
Futures
Purchased options
Written options
Total commodity contracts
Equity Contracts
Over-the-counter
Exchange traded
Total equity contracts
Credit Contracts
Total derivatives
Less: impact of master netting agreements
Total (2)
Replacement
cost (1)
Credit risk
equivalent (1)
Risk-weighted
assets
2018
7,732
36
409
8,177
2
16
–
18
9,917
34
393
10,344
29
250
–
279
–
–
–
704
–
–
–
8,195
10,623
704
8,305
4,453
225
12,983
–
16
–
16
22,741
8,373
424
31,538
8
36
–
44
–
–
–
2,544
–
–
–
12,999
31,582
2,544
1,559
335
1,894
17
149
–
166
2,060
1,585
573
2,158
10
4,450
1,108
5,558
770
305
–
1,075
6,633
4,332
1,646
5,978
55
25,422
54,871
(15,575)
(29,589)
9,847
25,282
–
–
1,188
–
–
–
1,188
431
83
4,950
–
4,950
(1) In 2019, Replacement Cost and Credit Risk Equivalent are presented after the impact of master netting agreements and calculated using the SA-CCR in accordance with the CAR Guideline issued by
OSFI on October 30, 2018, effective for fiscal year 2019. Prior periods have not been restated as they conform with previous OSFI requirements.
(2) The total derivatives and the impact of master netting agreements for replacement cost and credit risk equivalent do not include over-the-counter cleared derivatives with a fair value of $846 million
as at October 31, 2018.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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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
2019
2018
Interest Rate Contracts
Swaps
Forward rate agreements, futures and options
1,652,793
723,117
1,321,286
89,440
771,362
15,942
510,596
9,446
140,235
993
4,396,272
838,938
3,831,997
730,939
Total interest rate contracts
2,375,910
1,410,726
787,304
520,042
141,228
5,235,210
4,562,936
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
Total notional
amounts
Total notional
amounts
Foreign Exchange Contracts
Swaps
Forward foreign exchange contracts
Futures
Options
Total foreign exchange contracts
Commodity Contracts
Swaps
Futures
Options
Total commodity contracts
Equity Contracts
Credit Contracts
Total notional amount
169,935
442,750
862
79,719
693,266
6,374
12,120
8,646
27,140
69,854
204
187,893
9,590
18
4,445
126,074
1,226
2
636
97,154
119
–
469
23,672
26
–
–
604,728
453,711
882
85,269
548,148
472,323
739
49,531
201,946
127,938
97,742
23,698
1,144,590
1,070,741
15,899
16,782
10,497
43,178
13,875
444
2,132
3,096
613
5,841
5,494
4,152
317
424
68
809
1,636
2,451
–
–
–
–
319
178
24,722
32,422
19,824
76,968
91,178
7,429
24,366
33,104
18,627
76,097
86,794
3,490
3,166,374
1,670,169
930,729
622,680
165,423
6,555,375
5,800,058
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Note 9: Premises and Equipment
We record all premises and equipment at cost less accumulated depreciation, and less any accumulated impairment, except land, which is recorded at
cost. Buildings, computer equipment and operating system software, other equipment and leasehold improvements are depreciated 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
depreciated over each component’s estimated useful life. The maximum estimated useful lives we use to depreciate our assets are as follows:
Buildings
Computer equipment and operating system software
Other equipment
Leasehold improvements
10 to 40 years
5 to 7 years
10 years
Lease term to a maximum of 10 years
Depreciation 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 each reporting period, 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, 2019, 2018
and 2017. 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 non-interest expense, premises and equipment, in our Consolidated Statement of
Income for the years ended October 31, 2019, 2018 and 2017 was $600 million, $530 million and $501 million, respectively.
(Canadian $ in millions)
2019
Land
Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Total
Land
Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
2018
Total
Cost
Balance at beginning of year
Additions
Disposals (1)
Foreign exchange and other
145
10
(45)
(1)
1,627
86
(179)
–
2,229
343
(102)
–
Balance at end of year
109
1,534
2,470
Accumulated Depreciation and
Impairment
Balance at beginning of year
Disposals (1)
Depreciation
Foreign exchange and other
Balance at end of year
–
–
–
–
–
Net carrying value
109
(1) Includes fully depreciated assets written off.
1,016
(114)
59
–
961
573
1,662
(101)
227
(2)
1,786
684
933
57
(15)
(2)
973
704
(12)
51
(1)
742
231
1,514 6,448 174
4
(32)
(1)
620
(365)
(2)
124
(24)
1
1,726
66
(163)
(2)
1,994
236
(11)
10
1,615 6,701 145
1,627
2,229
1,080 4,462
(247)
435
(4)
(20)
98
(1)
1,157 4,646
–
–
–
–
–
1,063
(116)
60
9
1,465
(9)
201
5
1,016
1,662
458 2,055 145
611
567
913
40
(27)
7
933
674
(24)
48
6
704
229
1,429
87
(20)
18
6,236
433
(253)
32
1,514
6,448
1,001
(15)
91
3
4,203
(164)
400
23
1,080
4,462
434
1,986
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10: Acquisitions
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 fair value 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.
KGS-Alpha Capital Markets (“KGS”)
On September 1, 2018, we completed the acquisition of the business of KGS, a U.S. fixed income broker-dealer specializing in U.S. mortgage and
asset-backed securities in the institutional investor market, for cash consideration of US$304 million (CAD$397 million). The acquisition was accounted
for as a business combination, and the acquired business and corresponding goodwill are included in our Capital Markets reporting segment. During
the year ended October 31, 2019, the purchase price decreased to US$303 million (CAD$396 million) due to a post-closing adjustment based upon
working capital. We also finalized our purchase price allocation and refined the valuation of intangible assets acquired, resulting in an intangible asset
value of $102 million on acquisition and a goodwill balance of $6 million.
The intangible assets are being amortized over three to fourteen years on an accelerated basis. Goodwill of $4 million related to this acquisition
is deductible for tax purposes.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
Securities – trading
Securities borrowed or purchased under resale agreements
Goodwill and intangible assets
Other assets
Total assets
Securities lent or sold under repurchase agreements
Securities sold but not yet purchased
Other liabilities
Purchase price
The purchase price allocation for KGS has been completed.
KGS
5,193
5,669
108
583
11,553
9,563
1,431
163
396
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 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
10 years, cash flows were assumed to grow at perpetual annual rates of up to 2.5% (3.0% in 2018). The discount rates we applied in determining the
recoverable amounts in 2019 ranged from 8.0% to 11.0% (8.6% to 11.4% in 2018), 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, 2019, 2018 and 2017.
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 the recoverable amounts of our CGUs to decline below their carrying amounts.
A continuity of our goodwill by group of CGUs for the years ended October 31, 2019 and 2018 is as follows:
(Canadian $ in millions)
Personal and
Commercial Banking
Wealth
Management
BMO
Capital Markets
Total
Balance – October 31, 2017
Acquisitions (disposals) during the year
Foreign exchange and other (1)
Balance – October 31, 2018
Acquisitions (disposals) during the year
Foreign exchange and other (1)
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Canadian
P&C
97
–
–
97
–
–
U.S.
P&C
3,719
–
78
3,797
–
(1)
Traditional
Wealth
Management
Insurance
2,137
–
(8)
2,129
–
16
2
–
–
2
–
–
Total
3,816
–
78
3,894
–
(1)
Total
2,139
–
(8)
2,131
–
16
289
54
5
348
–
(48)
6,244
54
75
6,373
–
(33)
Balance – October 31, 2019
97 (2) 3,796 (3)
3,893
2,145 (4)
2 (5)
2,147
300 (6)
6,340
(1) Other changes in goodwill included the effects of translating goodwill denominated in foreign currencies into Canadian dollars and purchase accounting adjustments related to prior-year purchases.
(2) Relates primarily to bcpbank Canada, Diners Club, Aver Media LP and GE Transportation Finance.
(3) Relates primarily to First National Bank & Trust, Ozaukee Bank, Merchants and Manufacturers Bancorporation, Inc., Diners Club, AMCORE, M&I and GE Transportation Finance.
(4) Relates to BMO Nesbitt Burns Inc., Guardian Group of Funds Ltd., Pyrford International Limited, LGM Investments Limited, M&I, 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, BMO Nesbitt Burns Inc., Paloma Securities L.L.C., M&I, Greene Holcomb Fisher and KGS.
172 BMO Financial Group 202nd Annual Report 2019
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 in our
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, 2017
Additions (disposals)
Foreign exchange and other
Cost as at October 31, 2018
Additions (disposals)
Foreign exchange and other
Cost as at October 31, 2019
Customer
relationships
Core
deposits
Branch distribution
networks
Software –
amortizing (1)
Software under
development
Other
Total
654
35
(1)
688
–
72
760
931
–
20
951
–
–
951
187
–
4
191
–
–
191
3,696
422
9
4,127
718
(9)
4,836
398
94
4
496
(91)
(3)
402
376
12
(4)
384
30
33
447
6,242
563
32
6,837
657
93
7,587
(1) Includes $679 million of internally generated software ($416 as at October 31, 2018).
The following table presents the accumulated amortization of our intangible assets:
(Canadian $ in millions)
Accumulated amortization at October 31, 2017
Amortization
Disposals
Foreign exchange and other
Accumulated amortization at October 31, 2018
Amortization
Disposals
Foreign exchange and other
Accumulated amortization at October 31, 2019
Carrying value at October 31, 2019
Carrying value at October 31, 2018
Customer
relationships
Core
deposits
Branch distribution
networks
Software –
amortizing
Software under
development
Other
Total
431
46
–
(2)
475
60
–
16
551
209
213
762
51
–
17
830
48
–
–
878
73
121
187
–
–
4
191
–
–
–
191
–
–
2,618
387
(20)
(15)
2,970
395
(11)
7
3,361
1,475
1,157
–
–
–
–
–
–
–
–
–
402
496
85
19
–
(5)
99
51
–
32
182
265
285
4,083
503
(20)
(1)
4,565
554
(11)
55
5,163
2,424
2,272
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 $168 million as at October 31, 2019 ($165 million as at October 31, 2018) 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 definite-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.
There were write-downs of software-related intangible assets of $10 million during the year ended October 31, 2019 ($13 million in 2018 and
$5 million in 2017).
Note 12: Other Assets
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. The fees earned are
recorded in lending fees in our Consolidated Statement of Income over the term of the acceptance. The amount potentially due under acceptances is
recorded in other liabilities on our Consolidated Balance Sheet. We record the bank’s equivalent claim against our customers in the event of a call on
these commitments in other assets on our Consolidated Balance Sheet.
Other
The components of other within other assets are as follows:
(Canadian $ in millions)
Accounts receivable, prepaid expenses and other items
Accrued interest receivable
Bank owned life insurance policies
Leased vehicles
Cash collateral
Due from clients, dealers and brokers
Insurance-related assets
Other employee future benefits assets (Note 21)
Pension asset (Note 21)
Precious metals (1)
Total
2019
2,905
1,755
4,242
870
3,517
177
1,163
46
186
1,719
2018
2,781
1,461
4,154
937
2,019
236
822
–
664
1,603
16,580
14,677
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(1) Precious metals are recorded at their fair value based on quoted prices in active markets.
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policies (Note 1).
BMO Financial Group 202nd Annual Report 2019 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13: Deposits
(Canadian $ in millions)
Interest bearing
Non-interest bearing
Payable
after notice
Payable on
a fixed date (3)
Total
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Payable on demand
Deposits by:
Banks (1)
Business and government
Individuals
Total (2) (4)
Booked in:
Canada
United States
Other countries
Total
1,996
29,083
3,361
1,450
25,266
3,476
1,530
33,853
23,084
1,400
33,984
21,345
1,017
85,022
94,304
526
67,026
90,233
19,273
195,199
80,421
24,531
185,901
65,790
23,816
343,157
201,170
27,907
312,177
180,844
34,440
30,192
58,467
56,729
180,343
157,785
294,893
276,222
568,143
520,928
27,338
6,043
1,059
21,735
7,395
1,062
49,911
8,531
25
47,231
9,477
21
90,630
88,604
1,109
82,091
74,476
1,218
181,835
86,368
26,690
160,069
86,805
29,348
349,714
189,546
28,883
311,126
178,153
31,649
34,440
30,192
58,467
56,729
180,343
157,785
294,893
276,222
568,143
520,928
(1) Includes regulated and central banks.
(2) Includes structured notes designated at fair value through profit or loss.
(3) Includes $16,248 million of senior unsecured debt as at October 31, 2019 subject to the Bank Recapitalization (Bail-In) regime ($37 million as at October 31, 2018). The Bail-In regime provides certain
statutory powers to the Canada Deposit Insurance Corporation, including the ability to convert specified eligible shares and liabilities into common shares if the bank becomes non-viable.
(4) As at October 31, 2019 and 2018, total deposits payable on a fixed date included $25,438 million and $29,673 million, respectively, of federal funds purchased, commercial paper issued and other
deposit liabilities. Included in deposits as at October 31, 2019 and 2018 are $279,860 million and $259,747 million, respectively, of deposits denominated in U.S. dollars, and $36,680 million and
$37,427 million, respectively, of deposits denominated in other foreign currencies.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 the United States Federal Reserve Bank. As at
October 31, 2019, we had borrowed $59 million of federal funds ($55 million in 2018).
‰ Commercial paper, which totalled $9,495 million as at October 31, 2019 ($9,121 million in 2018).
‰ Covered bonds, which totalled $25,465 million as at October 31, 2019 ($25,045 million in 2018).
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)
2019
2018
183,952
34,401
23,855
21,735
16,959
13,991
294,893
162,666
34,154
26,107
16,708
22,196
14,391
276,222
(1) Includes $273,657 million of deposits, each greater than one hundred thousand dollars, of which $167,294 million were booked in Canada, $79,682 million were booked in the United States and
$26,681 million were booked in other countries ($246,685 million, $145,574 million, $71,770 million and $29,341 million, respectively, in 2018). Of the $167,294 million of deposits booked in Canada,
$73,027 million mature in less than three months, $4,312 million mature in three to six months, $22,814 million mature in six to twelve months and $67,141 million mature after 12 months
($145,574 million, $55,190 million, $3,836 million, $12,909 million and $73,639 million, respectively, in 2018). We have unencumbered liquid assets of $249,650 million to support these and other
deposit liabilities ($242,612 million in 2018).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Most of our structured note liabilities included in deposits have been designated at fair value through profit or loss, which aligns the accounting result
with the way the portfolio is managed. The fair value and notional amount due at contractual maturity of these notes as at October 31, 2019 were
$15,829 million and $15,431 million, respectively ($14,186 million and $15,088 million, respectively, in 2018). The change in fair value of these
structured notes was recorded as a decrease of $1,414 million in non-interest revenue, trading revenues, and an increase of $114 million before tax
was recorded in other comprehensive income related to changes in our own credit spread for the year ended October 31, 2019 (an increase of $1,038
million recorded in non-interest revenue, trading revenues, and a decrease of $28 million related to changes in our own credit spread in 2018). 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 in other comprehensive income since the
notes were designated at fair value to October 31, 2019 was an unrealized loss of approximately $141 million (unrealized loss of $255 million in 2018).
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174 BMO Financial Group 202nd Annual Report 2019
Note 14: Other Liabilities
Acceptances
Acceptances represent a form of negotiable short-term debt that is issued by our customers, which we guarantee for a fee. The fees earned are
recorded in lending fees in our Consolidated Statement of Income over the term of the acceptance. The amount potentially due under acceptances is
recorded in other liabilities on our Consolidated Balance Sheet. We record the bank’s equivalent claim against our customers in the event of a call on
these commitments in other assets on 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. Interest earned on cash collateral is recorded in interest, dividend and fee income in our Consolidated
Statement of Income, and interest expense on cash collateral is recorded in interest expense, other liabilities, in our Consolidated Statement of
Income. 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 at fair value in securities sold but not yet purchased, with any gains or losses recorded in
non-interest revenue, trading revenues.
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.
Securitization and Structured Entities’ Liabilities
Securitization and structured entities’ liabilities include notes issued by our consolidated bank securitization vehicles and liabilities associated with the
securitization of our Canadian mortgage loans as part of the Canada Mortgage Bond program, the National Housing Act Mortgage-Backed Securities
program and our own programs. Additional information on our securitization programs and associated liabilities is provided in Notes 6 and 7. These
liabilities are initially measured at fair value plus any directly attributable costs and are subsequently measured at amortized cost. The interest
expense related to these liabilities is recorded in interest expense, other liabilities, in our Consolidated Statement of Income.
Other
The components of other within other liabilities are as follows:
(Canadian $ in millions)
Accounts payable, accrued expenses and other items
Accrued interest payable
Cash collateral
Insurance-related liabilities
Liabilities of subsidiaries, other than deposits
Other employee future benefits liability (Note 21)
Payable to brokers, dealers and clients
Pension liability (Note 21)
Total
2019
8,613
1,693
5,128
11,581
7,934
1,125
2,204
329
2018
8,152
1,385
5,466
9,585
9,283
960
1,898
256
38,607
36,985
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Insurance-Related Liabilities
We are engaged in insurance businesses related to life and health insurance, annuities and reinsurance.
We designate the obligation related to certain investment contracts in our insurance business 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, 2019 of
$1,043 million ($800 million as at October 31, 2018) 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 $119 million in insurance claims, commissions and changes in policy benefit liabilities
for the year ended October 31, 2019 (decrease of $28 million in 2018). For the year ended October 31, 2019, a loss of $12 million was recorded in
other comprehensive income related to changes in our own credit spread (loss of $2 million in 2018). The impact of changes in our own credit spread
is measured based on movements in our own credit spread year over year. Changes in the fair value of investments backing these investment
contract liabilities are recorded in non-interest revenue, insurance revenue. The cumulative change in fair value related to changes in our own credit
spread that has been recognized in other comprehensive income since the investment contracts were designated at fair value to October 31, 2019
was an unrealized loss of approximately $33 million ($21 million in 2018).
Insurance claims and policy benefit liabilities represent current claims and estimates of future insurance policy benefit liabilities. 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.
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BMO Financial Group 202nd Annual Report 2019 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Net increase in life insurance policy benefit liabilities
Change in other insurance-related liabilities
Insurance-related liabilities, end of year
2019
9,585
706
906
23
1,635
361
2018
8,959
742
(400)
3
345
281
11,581
9,585
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 insured parties. 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 recorded net against direct premium income and are included in non-interest revenue, insurance revenue, in
our Consolidated Statement of Income for the years ended October 31, 2019, 2018 and 2017, as shown in the table below:
(Canadian $ in millions)
Direct premium income
Ceded premiums
Note 15: Subordinated Debt
2019
2018
2017
1,944
(158)
1,786
1,976
(148)
1,828
1,750
(157)
1,593
Subordinated debt represents our direct unsecured obligations to our debt holders, in the form of notes and debentures, and forms part of our
regulatory capital. Subordinated debt is recorded at amortized cost using the effective interest rate method. Where appropriate, we enter into fair value
hedges to hedge the risks caused by changes in interest rates (see Note 8). 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.
The face values, terms to maturity and carrying values of our subordinated debt are as follows:
(Canadian $ in millions, except as noted)
Face value
Maturity date
Interest rate (%)
Redeemable at our option
Debentures Series 20
Series H Medium-Term Notes, First Tranche (8)
Series H Medium-Term Notes, Second Tranche (8)
Series I Medium-Term Notes, First Tranche (8)
Series I Medium-Term Notes, Second Tranche (8)
3.803% Subordinated Notes due 2032 (8)
4.338% Subordinated Notes due 2028 (8)
Series J Medium-Term Notes, First Tranche (8)(9)
Total (10)
150
1,000
1,000
1,250
850
US 1,250
US 850
1,000
December 2025 to 2040
September 2024
December 2025
June 2026
June 2027
December 2032
October 2028
September 2029
8.25
3.12
3.34
3.32
2.57
3.80
4.34
2.88
Not redeemable
September 2019 (1)
December 2020 (2)
June 2021 (3)
June 2022 (4)
December 2027 (5)
October 2023 (6)
September 2024 (7)
2019
Total
145
–
983
1,230
820
1,646
1,180
991
2018
Total
143
1,003
916
1,222
813
1,573
1,112
–
6,995
6,782
(1) All $1,000 million Series H Medium-Term Notes, First Tranche were redeemed on September 19, 2019 for 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the
redemption date.
(2) Redeemable at the greater of par and the Canada Yield Price prior to December 8, 2020, and redeemable at par together with accrued and unpaid interest to, but excluding, their redemption date
commencing December 8, 2020.
(3) Redeemable at the greater of par and the Canada Yield Price prior to June 1, 2021, and redeemable at par together with accrued and unpaid interest to, but excluding, their redemption date
commencing June 1, 2021.
(4) Redeemable at the greater of par and the Canada Yield Price prior to June 1, 2022, and redeemable at par together with accrued and unpaid interest to, but excluding, their redemption date
commencing June 1, 2022.
(5) Redeemable at par on December 15, 2027 together with accrued and unpaid interest to, but excluding, the redemption date.
(6) Redeemable at par on October 5, 2023 together with accrued and unpaid interest to, but excluding, the redemption date.
(7) Redeemable at par on September 17, 2024 together with accrued and unpaid interest to, but excluding, the redemption date.
(8) These notes include a non-viability contingent capital provision, which is necessary for notes issued after a certain date to qualify as regulatory capital under Basel III. As such, they 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. In such an event, each note is convertible into common shares pursuant to an automatic
conversion formula with a multiplier and 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 based on the volume weighted
average trading price of our common shares on the TSX. The number of common shares issued is determined by dividing the par value of the note (including accrued and unpaid interest on such
note) by the conversion price and then applying the multiplier.
(9) On September 16, 2019, we issued $1,000 million of Series J Medium — Term Notes, First Tranche.
(10) Certain amounts of subordinated debt were issued at a premium or discount and include fair value hedge adjustments, which together decreased their carrying value as at October 31, 2019 by
$20 million (decreased by $233 million in 2018); see Note 8 for further details for hedge adjustments. The carrying value is also adjusted for our subordinated debt holdings, held for market making
purposes.
The aggregate remaining maturities of our subordinated debt, based on the maturity dates under the terms of issue, can be found in the blue-tinted
font in the Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments section of Management’s Discussion and Analysis on
pages 98 to 99 of this report.
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176 BMO Financial Group 202nd Annual Report 2019
Note 16: Equity
Preferred and Common Shares Outstanding and Other Equity Instruments
(Canadian $ in millions, except as noted)
2019
2018
Number of
shares
Amount
Dividends declared
per share
Number of
shares
Amount
Dividends declared
per share
Preferred Shares – Classified as Equity
Class B – Series 16 (1)
Class B – Series 17 (2)
Class B – Series 25
Class B – Series 26
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 35
Class B – Series 36
Class B – Series 38
Class B – Series 40
Class B – Series 42
Class B – Series 44 (3)
Class B – Series 46 (4)
Preferred Shares – Classified as Equity
Other Equity Instruments (5)
Preferred Shares and Other Equity Instruments
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 20)
Repurchased for cancellation
Balance at End of Year
–
–
9,425,607
2,174,393
20,000,000
16,000,000
12,000,000
8,000,000
6,000,000
600,000
24,000,000
20,000,000
16,000,000
16,000,000
14,000,000
–
–
236
54
500
400
300
200
150
600
600
500
400
400
350
4,690
658
5,348
–
–
0.45
0.70
0.98
0.96
0.95
0.95
1.25
58.50
1.21
1.13
1.10
1.44
0.77
–
–
9,425,607
2,174,393
20,000,000
16,000,000
12,000,000
8,000,000
6,000,000
600,000
24,000,000
20,000,000
16,000,000
16,000,000
–
–
–
236
54
500
400
300
200
150
600
600
500
400
400
–
4,340
–
4,340
0.64
0.52
0.45
0.59
1.00
0.98
0.95
0.95
1.25
58.50
1.21
1.13
1.10
–
–
639,329,625
12,929
647,816,318
13,032
–
902,651
(1,000,000)
–
62
(20)
–
–
1,513,307
(10,000,000)
99
(202)
639,232,276
12,971
4.06
639,329,625
12,929
3.78
(1) On August 25, 2018, we redeemed all 6,267,391 Non-Cumulative Perpetual Class B Preferred Shares, Series 16, at a price of $25.00 cash per share plus all declared and unpaid dividends. Dividends
declared for the year ended October 31, 2018 were $0.64 per share and 6,267,391 shares were outstanding at the time of the dividend declaration.
(2) On August 25, 2018, we redeemed all 5,732,609 Non-Cumulative Perpetual Class B Preferred Shares, Series 17, at a price of $25.00 cash per share plus all declared and unpaid dividends. Dividends
declared for the year ended October 31, 2018 were $0.52 per share and 5,732,609 shares were outstanding at the time of the dividend declaration.
(3) On September 17, 2018, we issued 16 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 44, at a price of $25.00 cash per share for gross proceeds of $400 million.
(4) On April 17, 2019, we issued 14 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 46, at a price of $25.00 cash per share for gross proceeds of $350 million.
(5) On July 30, 2019, we issued US$500 million 4.800% Additional Tier 1 Capital Notes.
Preferred Share Rights and Privileges
(Canadian $, except as noted)
Redemption amount
Quarterly non-cumulative dividend (1)
Reset premium
Date redeemable / convertible
Convertible to
Class B – Series 25
Class B – Series 26
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 35
Class B – Series 36
Class B – Series 38
Class B – Series 40
Class B – Series 42
Class B – Series 44
Class B – Series 46
25.00
25.00
25.00
25.00
25.00
25.00
25.00
1,000.00
25.00
25.00
25.00
25.00
25.00
$0.112813 (2)
Floating (7)
$ 0.24075 (2)
$ 0.2265 (2)
$ 0.2375 (2)
$ 0.2375 (2)
$ 0.3125
$ 14.6250 (2)
$0.303125 (2)
$ 0.28125 (2)
$ 0.2750 (2)
$0.303125 (2)
$ 0.31875 (2)
1.15%
1.15%
2.33%
2.24%
2.22%
2.71%
Does not reset
4.97%
4.06%
3.33%
3.17%
2.68%
3.51%
August 25, 2021 (3)(4)
August 25, 2021 (3)(5)
May 25, 2024 (3)(4)
August 25, 2024 (3)(4)
November 25, 2019 (3)(4)
August 25, 2020 (3)(4)
August 25, 2020 (6)
November 25, 2020 (3)(4)
February 25, 2022 (3)(4)
May 25, 2022 (3)(4)
August 25, 2022 (3)(4)
November 25, 2023 (3)(4)
May 25, 2024 (3)(4)
Class B – Series 26 (8)
Class B – Series 25 (8)
Class B – Series 28 (8)(9)
Class B – Series 30 (8)(9)
Class B – Series 32 (8)(9)
Class B – Series 34 (8)(9)
Not convertible (9)
Class B – Series 37 (8)(9)
Class B – Series 39 (8)(9)
Class B – Series 41 (8)(9)
Class B – Series 43 (8)(9)
Class B – Series 45 (8)(9)
Class B – Series 47 (8)(9)
(1) Non-cumulative dividends are payable quarterly as and when declared by the Board of Directors.
(2) 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, at the 3-month Government of Canada treasury bill yield plus the reset premium noted.
(3) Redeemable on the date noted and every five years thereafter.
(4) Convertible on the date noted and every five years thereafter if not redeemed. If converted, the shares will become floating rate preferred shares.
(5) Convertible on the date noted and every five years thereafter if not redeemed. If converted, the shares will become fixed rate preferred shares.
(6) Series 35 is subject to a redemption premium if redeemed prior to August 25, 2024.
(7) Floating rate will be set as, and when declared, at the 3-month Government of Canada treasury bill yield plus a reset premium.
(8) If converted, the holders have the option to convert back to the original preferred shares on subsequent redemption dates.
(9) The shares issued include a non-viability contingent capital provision, which is necessary for the shares to qualify as regulatory capital under Basel III. Refer to the Non-Viability Contingent Capital
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paragraph below for details.
BMO Financial Group 202nd Annual Report 2019 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 27, 2019, we announced that we did not intend to exercise our right to redeem the currently outstanding Non-Cumulative 5-Year Rate
Reset Class B Preferred Shares Series 31 (“Preferred Shares Series 31”) on November 25, 2019. As a result, subject to certain conditions, the holders
of Preferred Shares Series 31 had the right, at their option, by November 12, 2019, to convert any or all of their Preferred Shares Series 31 on a one-
for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 32 (“Preferred Shares Series 32”). During the conversion period, which
ran from October 28, 2019 to November 12, 2019, 69,570 Preferred Shares Series 31 were tendered for conversion into Preferred Shares Series 32,
which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 31 prospectus
supplement dated July 23, 2014. As a result, no Preferred Shares Series 32 were issued and holders of Preferred Shares Series 31 retained their
shares. The dividend rate for the Preferred Shares Series 31 for the five-year period commencing on November 25, 2019, and ending on November
24, 2024, will be 3.851%.
On June 27, 2019, we announced that we did not intend to exercise our right to redeem the currently outstanding Non-Cumulative 5-Year Rate
Reset Class B Preferred Shares Series 29 (“Preferred Shares Series 29”) on August 25, 2019. As a result, subject to certain conditions, the holders of
Preferred Shares Series 29 had the right, at their option, by August 12, 2019, to convert any or all of their Preferred Shares Series 29 on a one-for-one
basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 30 (“Preferred Shares Series 30”). During the conversion period, which ran
from July 26, 2019 to August 12, 2019, 223,098 Preferred Shares Series 29 were tendered for conversion into Preferred Shares Series 30, which is less
than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 29 prospectus supplement dated
May 30, 2014. As a result, no Preferred Shares Series 30 were issued and holders of Preferred Shares Series 29 retained their shares. The dividend
rate for the Preferred Shares Series 29 for the five-year period commencing on August 25, 2019, and ending on August 24, 2024, will be 3.624%.
On April 17, 2019, we issued 14 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 46 (Non-Viability Contingent Capital
(“NVCC”)), at a price of $25 per share, for gross proceeds of $350 million. For the initial five-year period to the earliest redemption date of May 25,
2024, the shares pay quarterly cash dividends, if declared, at a rate of 5.1% per annum. The dividend rate will reset on the earliest redemption date
and every fifth year thereafter at a rate equal to the 5-year Government of Canada bond yield plus a premium of 3.51%. Holders have the option to
convert their shares into an equal number of Non-Cumulative Floating Rate Class B Preferred Shares Series 47 (“Preferred Shares Series 47”), subject
to certain conditions, on the earliest redemption date and every fifth year thereafter. Holders of Preferred Shares Series 47 will be entitled to receive
non-cumulative preferential floating rate quarterly dividends, as and when declared, equal to the 3-month Government of Canada Treasury Bill yield
plus 3.51%.
On March 29, 2019, we announced that we did not intend to exercise our right to redeem the currently outstanding Non-Cumulative 5-Year Rate
Reset Class B Preferred Shares Series 27 (“Preferred Shares Series 27”) on May 25, 2019. As a result, subject to certain conditions, the holders of
Preferred Shares Series 27 had the right, at their option, by May 10, 2019, to convert any or all of their Preferred Shares Series 27 on a one-for-one
basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 28 (“Preferred Shares Series 28”). During the conversion period, which ran
from April 25, 2019 to May 10, 2019, 412,564 Preferred Shares Series 27 were tendered for conversion into Preferred Shares Series 28, which is less
than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 27 prospectus supplement dated
April 16, 2014. As a result, no Preferred Shares Series 28 were issued and holders of Preferred Shares Series 27 retained their shares. The dividend
rate for the Preferred Shares Series 27 for the five-year period commencing on May 25, 2019, and ending on May 24, 2024, will be 3.852%.
Other Equity Instruments
On July 30, 2019, we issued US$500 million 4.800% Additional Tier 1 Capital Notes (Non-Viability Contingent Capital (“NVCC”)) (“notes”), which are
classified as equity and form part of our additional Tier 1 non-viability contingent capital. The notes are compound financial instruments that have
both equity and liability features. On the date of issuance, we assigned an insignificant value to the liability component of the notes and, as a result,
the full amount of proceeds has been classified as equity. Semi-annual distributions on the notes will be recorded when payable. The rights of the
holders of our notes are subordinate to the claims of the depositors and certain other creditors, but rank above our common and preferred shares.
(Canadian $, in millions, except as noted)
4.800% Additional Tier 1 Capital Notes
US$500
4.800 (1)
August 2024 (2)
Variable number of
common shares (3)
Face value
Interest rate (%)
Redeemable at our option
Convertible to
Total
2019
Total
658
658
2018
Total
–
–
(1) Non-cumulative interest is payable semi-annually in arrears, at the bank’s discretion.
(2) The notes are redeemable at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest, in whole or in part, at our option on any interest payment date on or
after the first interest reset date in 2024 or following certain regulatory or tax events. The bank may, at any time, purchase the notes at any price in the open market.
(3) The notes issued include a non-viability contingent capital provision, which is necessary for the notes to qualify as regulatory capital under Basel III. Refer to the Non-Viability Contingent Capital
paragraph below for details.
Authorized Share Capital
We classify financial instruments that we issue as financial liabilities, equity instruments or compound instruments. Financial instruments that will be
settled by a variable number of our common shares upon conversion by the holders are classified as liabilities on our Consolidated Balance Sheet.
Dividends and interest payments on financial liabilities are classified as interest expense in our Consolidated Statement of Income. Financial
instruments are classified as equity instruments when there is no contractual obligation to transfer cash or other financial assets. Further, issued
instruments that are not mandatorily redeemable, or that are not convertible into a variable number of our common shares at the holder’s option,
are classified as equity and presented in share capital. Dividend payments on equity instruments are recognized as a reduction in equity.
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 at their discretion. Historically, the Board of
Directors has declared dividends on a quarterly basis and the amount can vary from quarter to quarter.
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178 BMO Financial Group 202nd Annual Report 2019
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.
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
the total contributed surplus related to treasury shares.
Non-Viability Contingent Capital
Class B – Series 27, Class B – Series 29, Class B – Series 31, Class B – Series 33, Class B – Series 35, Class B – Series 36, Class B – Series 38, Class B –
Series 40, Class B – Series 42, Class B – Series 44 and Class B – Series 46 preferred share issues and the other equity instruments include a
non-viability contingent capital provision, which is necessary for them to qualify as regulatory capital under Basel III. As such, they 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. In such an event, each preferred share or other equity instrument is convertible into common shares pursuant to an automatic
conversion formula and 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
based on the volume weighted average trading price of our common shares on the TSX. The number of common shares issued is determined by
dividing the value of the preferred share or other equity instrument issuance (including declared and unpaid dividends on such preferred share or
other equity instrument issuance) by the conversion price and then applying the multiplier.
Normal Course Issuer Bid
We renewed our normal course issuer bid (“NCIB”), effective June 3, 2019 for one year. Under this NCIB, we may purchase up to 15 million of our
common shares for cancellation. The timing and amount of purchases under the NCIB are subject to management discretion based on factors such as
market conditions and capital levels. The bank will consult with OSFI before making purchases under the NCIB.
During the year ended October 31, 2019, we purchased for cancellation 1 million of our common shares (10 million in 2018).
Share Redemption and Dividend Restrictions
OSFI must approve any plan to redeem any of our preferred share issues or other equity instruments 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 (Canada). 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, if the bank does not pay the interest in full on the Additional Tier 1 Capital Notes, the bank will not declare dividends on its common
shares or preferred shares or redeem, purchase or otherwise retire such shares until the month commencing after the bank resumes full interest
payments on the Additional Tier 1 Capital Notes.
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 dividends paid in fiscal 2019 and 2018, common shares to supply the DRIP were purchased in the open market.
During the year ended October 31, 2019, we did not issue any common shares from treasury (nil in 2018) and purchased 2,198,109 common
shares in the open market (1,995,353 in 2018) for delivery to shareholders under the DRIP.
Potential Share Issuances
As at October 31, 2019, we had reserved 39,947,147 common shares (39,947,147 in 2018) for potential issuance in respect of the DRIP. We have also
reserved 6,108,307 common shares (6,095,201 in 2018) for the potential exercise of stock options, as further described in Note 20.
Capital Trust Securities
On December 31, 2018, BMO Capital Trust II redeemed all of its issued and outstanding BMO Tier 1 Notes – Series A at a redemption amount equal to
$1,000 for an aggregate redemption of $450 million, plus accrued and unpaid interest to but excluding the redemption date.
Note 17: Fair Value of Financial Instruments and Trading-Related Revenue
We record trading assets and liabilities, derivatives, certain equity and debt 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. For certain portfolios of financial instruments where we manage exposures to
similar and offsetting risks, fair value is determined on the basis of our net exposure to that risk.
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.
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BMO Financial Group 202nd Annual Report 2019 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or loss attribution analysis (“PAA”),
consistent with industry practice. These controls are applied independently of the relevant operating groups.
We establish 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 carried out 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 or ask prices, depending on which is
the most appropriate to measure fair value. 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 value of securities that are not traded in an active market is 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 prices obtained from independent third-
party vendors, 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.
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.
Trading Loans
The fair value of trading loans is determined by referring to current market prices for the same or similar instruments.
Corporate Equity Securities
The fair value of corporate 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 either quoted market prices for similar securities or using valuation techniques, which include
discounted cash flow analysis and earnings multiples.
Privately Issued Securities
Privately issued debt and equity securities are valued using prices observed in recent 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 on 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 vendors
employ a valuation model that 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 performing loans, other than credit card loans, we discount the remaining contractual cash flows,
adjusted for estimated prepayment, at market interest rates currently offered for loans with similar terms and risks. For credit card performing loans,
fair value is considered to be equal to carrying value, due to their short-term nature.
For floating rate performing loans, changes in interest rates have minimal impact on fair value since interest rates are repriced or reset
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frequently. On that basis, fair value is assumed to be equal to carrying value.
The fair value of loans is not adjusted for the value of any credit protection purchased to mitigate credit risk.
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 independently validated models incorporate current market data for interest rates, foreign
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.
180 BMO Financial Group 202nd Annual Report 2019
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 currency exchange rates, yield
curves and volatilities.
We calculate a credit valuation adjustment (“CVA”) to recognize the bilateral risk that either counterparty to a given derivative 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 novation to central
counterparties. 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 by 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 related to these deposits, adjusted for expected
redemptions, at market interest rates currently offered for deposits with similar terms and risks. The fair value of our senior note liabilities and
covered bonds is determined by referring to current market prices for similar instruments or using valuation techniques, such as discounted cash
flow models that use market interest rate yield curves and funding spreads.
‰ For fixed rate deposits with no defined maturities, we consider fair value to equal carrying value, since carrying value is 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 considered to equal carrying value.
Certain 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 validated 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.
Securitization and Structured Entities’ Liabilities
The determination of the fair value of our securitization and structured entities’ 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 flow models that maximize the use of observable inputs.
Subordinated Debt
The fair value of our subordinated debt 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 and Other Financial Instruments
Carrying value is considered to be a reasonable estimate of fair value for our cash and cash equivalents.
The carrying value of certain financial assets and liabilities, such as interest bearing deposits with banks, securities borrowed or purchased under
resale agreements, customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and 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.
Certain assets, including premises and equipment, goodwill and intangible assets, as well as shareholders’ equity, are not financial instruments
and therefore no fair value has been determined for these items.
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.
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BMO Financial Group 202nd Annual Report 2019 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments Not Carried at Fair Value on the Balance Sheet
Set out in the following tables are the fair values of financial instruments not carried at fair value on our Consolidated Balance Sheet.
(Canadian $ in millions)
Securities
Amortized cost
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government (2)
Deposits (3)
Securitization and structured entities’ liabilities
Subordinated debt
Carrying
value
Fair
value
Valued using
quoted market
prices
Valued using
models (with
observable inputs)
Valued using
models (without
observable inputs)
2019
24,472
24,622
13,612
11,010
123,676
67,200
8,623
224,442
124,093
67,516
8,623
225,145
423,941
425,377
552,314
27,159
6,995
553,444
27,342
7,223
–
–
–
–
–
–
–
–
124,093
67,516
8,623
225,145
425,377
553,444
27,342
7,223
–
–
–
–
–
–
–
–
–
(1) Carrying value of loans is net of allowance.
(2) Excludes $2,156 million of loans classified as FVTPL and $22 million of loans classified as FVOCI.
(3) Excludes $15,829 million of structured note liabilities designated at FVTPL and accounted for at fair value.
This table excludes certain financial instruments with a carrying value approximating fair value, such as cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased
under resale agreements, customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and other liabilities.
(Canadian $ in millions)
Securities
Amortized cost
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government (2)
Deposits (3)
Securitization and structured entities’ liabilities
Subordinated debt
Carrying
value
Fair
value
Valued using
quoted market
prices
Valued using
models (with
observable inputs)
Valued using
models (without
observable inputs)
2018
6,485
6,288
429
5,795
64
119,544
62,687
8,099
192,225
118,609
62,618
8,099
191,989
382,555
381,315
506,742
25,051
6,782
506,581
24,838
6,834
–
–
–
–
–
–
–
–
118,609
62,618
8,099
191,989
381,315
506,581
24,838
6,834
–
–
–
–
–
–
–
–
(1) Carrying value of loans is net of allowance.
(2) Excludes $1,450 million of loans classified as FVTPL.
(3) Excludes $14,186 million of structured note liabilities designated at FVTPL and accounted for at fair value.
This table excludes certain financial instruments with a carrying value approximating fair value, such as cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased
under resale agreements, customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and other liabilities.
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 FVOCI 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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182 BMO Financial Group 202nd Annual Report 2019
The extent of our use of actively quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and
models without observable market information as inputs (Level 3) in the valuation of securities, business and government loans classified as FVTPL,
fair value liabilities, derivative assets and derivative liabilities is presented in the following table:
(Canadian $ in millions)
2019
Valued using
quoted
market
prices
Valued using
models (with
observable
inputs)
Valued using
models (without
observable
inputs)
Valued using
quoted market
prices
Total
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
NHA MBS and U.S. agency MBS and CMO
Corporate debt
Trading loans
Corporate equity
FVTPL Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
Other governments
NHA MBS and U.S. agency MBS and CMO
Corporate debt
Corporate equity
FVOCI 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
NHA MBS and U.S. agency MBS and CMO
Corporate debt
Corporate equity
Business and Government Loans
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
6,959
3,871
8,001
48
888
14
2,620
–
40,155
62,556
410
364
–
–
–
146
1,536
2,456
11,168
3,798
15,068
1
4,396
–
2,205
–
36,636
–
22,393
–
–
22,393
14
7
329
226
–
576
11
20
218
103
–
352
1,371
3,656
762
626
697
10,494
5,091
103
2
22,802
107
915
48
49
5
8,071
69
9,264
776
2,214
907
4,159
2,939
14,000
2,802
–
27,797
442
3,860
15,829
1,043
20,732
10,443
9,262
817
997
49
21,568
7,943
10,843
1,462
2,896
101
23,245
–
–
–
–
–
538
7
–
–
545
–
–
–
–
–
–
1,984
1,984
–
–
–
1
–
–
–
81
82
8,330
7,527
8,763
674
1,585
11,046
7,718
103
40,157
85,903
517
1,279
48
49
5
8,217
3,589
13,704
11,944
6,012
15,975
4,161
7,335
14,000
5,007
81
64,515
1,736
2,178
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1
26,253
15,829
1,043
43,125
10,457
9,269
1,146
1,223
49
22,144
7,954
10,863
1,680
2,999
102
23,598
9,107
4,013
9,465
78
1,210
60
2,973
–
49,946
76,852
328
219
69
–
–
178
1,378
2,172
11,978
3,315
16,823
14
3,143
–
1,959
–
37,232
–
26,336
–
–
26,336
18
16
166
286
–
486
14
2
295
246
–
557
2018
Total
10,320
8,702
9,517
1,216
1,411
9,184
9,198
199
49,950
99,697
431
946
69
–
7
6,821
3,337
–
–
–
–
–
255
7
–
–
262
–
–
–
–
–
–
1,825
1,825
11,611
–
–
–
1
–
–
–
62
63
12,805
6,862
16,823
3,655
4,790
13,687
3,756
62
62,440
1,213
4,689
52
1,138
201
8,869
6,218
199
4
22,583
103
727
–
–
7
6,643
134
7,614
827
3,547
–
3,640
1,647
13,687
1,797
–
25,145
–
1,450
1,450
2,468
14,186
800
17,454
8,177
12,983
1,894
1,872
10
24,936
7,838
11,852
1,161
2,183
36
23,070
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1
2
28,804
14,186
800
43,790
8,195
12,999
2,060
2,158
10
25,422
7,852
11,854
1,456
2,430
37
23,629
N
o
t
e
s
BMO Financial Group 202nd Annual Report 2019 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. We have not applied any other reasonably possible alternative
assumption to the significant Level 3 categories of private equity investments, as the net asset values are provided by the investment or fund
managers.
As at October 31, 2019
(Canadian $ in millions, except as noted)
Private equity (2)
Reporting line in fair value hierarchy table
Corporate equity
Loans (3)
NHA MBS and U.S. agency MBS and CMO
Business and government loans
NHA MBS and U.S. agency MBS and CMO
Fair value
of assets
Valuation techniques
1,984
Net asset value
EV/EBITDA
1,736 Discounted cash flows
538 Discounted cash flows
Significant
unobservable inputs
Net asset value
Multiple
Discount margin
Prepayment rate
Market comparable Comparability adjustment (4)
(5.91)
Range of input values (1)
Low
High
na
5x
70 bps
2%
na
16x
115 bps
30%
8.57
(1) The low and high input values represent the highest and lowest actual 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 each 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 $829 million of Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost, which approximates fair value, and hold to meet regulatory
requirements.
(3) The impact of assuming a 10 basis point increase or decrease in discount margin for business and government loans is $3 million.
(4) Range of input values represents price per security adjustment.
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 we derive 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.
Discount Margin
Loan and corporate debt yield is the interest rate used to discount expected future cash flows in the valuation model. The discount margin is the
difference between an instrument’s yield and a benchmark instrument’s yield. Benchmark instruments, such as government bonds, have high credit
quality ratings and similar maturities. The discount margin therefore represents a market return that accounts for uncertainty in future cash flows.
Generally, a higher or lower discount margin will result in a lower or higher fair value.
Discounted Cash Flow
Discounted cash flow models are used to fair value our NHA MBS and U.S. agency MBS and CMOs. The cash flow model includes assumptions related
to conditional prepayment rates, constant default rates and percentage loss on default.
Market Comparable Pricing
Market comparable pricing is used to evaluate the fair value of NHA MBS and U.S. agency MBS and CMOs. This technique involves sourcing prices from
third parties for similar instruments and applying adjustments to reflect recent transaction prices and instrument specific characteristics.
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 changes in 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, 2019.
During the year ended October 31, 2019, we refined our judgment of whether quoted prices for fixed income securities were obtained from
markets that were active or not in the determination of whether a security should be classified as Level 1 or Level 2, with the result that certain
securities were transferred to Level 2 in the year. During the year ended October 31, 2019, $5,831 million of trading securities, $715 million of FVTPL
securities, $11,014 million of FVOCI securities and $9,973 million of securities sold but not yet purchased ($2,578 million of trading securities,
$714 million of FVTPL securities, $2,266 million of FVOCI securities and $3,971 million of securities sold but not yet purchased respectively, in 2018)
were transferred from Level 1 to Level 2 due to our refined approach and reduced observability of the inputs used to value these securities. During
the year ended October 31, 2019, $7,985 million of trading securities, $808 million of FVTPL securities, $7,309 million of FVOCI securities and
$7,898 million of securities sold but not yet purchased ($4,122 million of trading securities, $742 million of FVTPL securities, $4,044 million of FVOCI
securities and $4,210 million of securities sold but not yet purchased respectively, in 2018) were transferred from Level 2 to Level 1 due to increased
availability of quoted prices in active markets.
During the year ended October 31, 2019, $159 million ($nil in 2018) of trading securities were transferred from Level 2 to Level 3 due to changes
in the market observability of inputs used in pricing these securities, and $87 million ($nil in 2018) were transferred from Level 3 to Level 2 due to
the availability of observable price inputs used to value these securities.
s
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184 BMO Financial Group 202nd Annual Report 2019
Changes in Level 3 Fair Value Measurements
The tables below present a reconciliation of all changes in Level 3 financial instruments during the years ended October 31, 2019 and 2018, including
realized and unrealized gains (losses) included in earnings and other comprehensive income.
Change in fair value
Balance
October 31,
2018
Included in
earnings
Included
in other
compre-
hensive
income (1)
Purchases
Sales (2)
Maturities/
Settlement
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2019
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (3)
For the year ended October 31, 2019
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate debt
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Corporate equity
Total FVOCI securities
255
7
262
–
1,825
1,825
1
–
62
63
Business and Government Loans
1,450
Fair Value Liabilities
Securities sold but not yet
purchased
Total fair value liabilities
Derivative Liabilities
Equity contracts
Credit default swaps
Total derivative liabilities
–
–
1
1
2
(46)
–
(46)
–
21
21
–
–
–
–
7
–
–
–
–
–
1
–
1
–
(2)
(2)
–
–
2
2
8
–
–
–
–
–
654
44
698
–
421
421
–
–
17
17
1,410
(7)
(7)
–
–
–
(399)
(43)
(442)
–
(280)
(280)
–
–
–
–
–
7
7
–
–
–
–
–
–
–
(1)
(1)
–
–
–
–
(1,139)
–
–
–
–
–
159
–
159
(86)
(1)
(87)
–
–
–
–
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
–
–
–
(1)
(1)
(2)
538
7
545
–
1,984
1,984
1
–
81
82
1,736
–
–
–
1
1
(16)
–
(16)
–
58
58
na
na
na
na
–
–
–
–
–
–
(1) Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations.
(2) Includes proceeds recovered on securities sold but not yet purchased.
(3) Changes in unrealized gains (losses) on FVTPL securities still held on October 31, 2019 are included in earnings for the year.
na – not applicable
N
o
t
e
s
BMO Financial Group 202nd Annual Report 2019 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended October 31, 2018
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate debt
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate debt
Corporate equity
Total FVOCI securities
Change in fair value
Balance
November 1,
2017
Included in
earnings
Included
in other
compre-
hensive
income (1)
Purchases
Sales
Maturities/
Settlement
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2018
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (2)
–
–
–
73
1,701
1,774
1
2
–
3
(1)
–
(1)
–
12
12
–
–
–
–
4
–
4
(4)
31
27
–
–
–
–
306
7
313
5
307
312
–
–
62
62
(54)
–
(54)
–
(161)
(161)
–
–
–
–
–
–
–
–
–
–
–
–
(2)
(2)
–
(2)
–
(2)
(1,548)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1
1
2
–
–
–
(74)
(63)
(137)
–
–
–
–
–
–
–
–
255
7
262
–
1,825
1,825
1
–
62
63
1,450
1
1
2
(5)
–
(5)
–
5
5
na
na
na
na
–
–
–
–
Business and Government Loans
2,372
(2)
24
604
Derivative Liabilities
Equity contracts
Credit default swaps
Total derivative liabilities
–
–
–
–
–
–
–
–
–
–
–
–
(1) Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations.
(2) Changes in unrealized gains (losses) on trading securities, derivative assets and derivative liabilities still held on October 31, 2018 are included in earnings for the year.
na – not applicable
Trading-Related Revenue
Trading assets and liabilities, including derivatives, securities and financial instruments designated at fair value through profit or loss, are measured at
fair value, with gains and losses recognized in trading revenues, non-interest revenue, in the Consolidated Statement of Income. Trading-related
revenue includes net interest income and non-interest revenue and excludes underwriting fees and commissions on securities transactions, which are
shown separately in the Consolidated Statement of Income. Net interest income arises from interest and dividends related to trading assets and
liabilities and is reported net of interest expense associated with funding these assets and liabilities in the following table.
(Canadian $ in millions)
Interest rates
Foreign exchange
Equities
Commodities
Other
Total trading revenue
Reported as:
Net interest income
Non-interest revenue – trading revenue
Total trading revenue
Certain comparative figures have been reclassified to conform with the current year’s presentation.
2019
700
401
269
145
6
2018
437
377
449
63
95
2017
480
369
239
84
39
1,521
1,421
1,211
1,223
298
1,521
716
705
1,421
1,127
84
1,211
s
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186 BMO Financial Group 202nd Annual Report 2019
Note 18: Offsetting of Financial Assets and Financial Liabilities
Financial assets and financial liabilities are offset and the net amount is reported in our 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 to offset the amounts only in the event of default, insolvency or bankruptcy, or where the offset criteria
are otherwise not met.
(Canadian $ in millions)
Gross
amounts
Amounts offset in
the balance sheet
Net amounts
presented in the
balance sheet
Impact of
master netting
agreements
Securities
received/pledged
as collateral (1)(2)
Cash
collateral
Net
amount (3)
Amounts not offset in the balance sheet
2019
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
104,949
22,423
127,372
23,877
87,601
111,478
945
279
1,224
279
945
104,004
22,144
126,148
23,598
86,656
1,224
110,254
9,919
13,538
23,457
13,538
9,919
23,457
93,062
1,740
94,802
1,940
76,501
78,441
82
2,750
2,832
2,971
4
2,975
941
4,116
5,057
5,149
232
5,381
2018
Gross
amounts
Amounts offset in
the balance sheet
Net amounts
presented in the
balance sheet
Impact of
master netting
agreements
Securities
received/pledged
as collateral (1)(2)
Cash
collateral
Net
amount (3)
Amounts not offset in the balance sheet
86,635
25,721
112,356
23,928
68,268
92,196
1,584
299
1,883
299
1,584
1,883
85,051
25,422
110,473
23,629
66,684
90,313
13,516
15,575
29,091
15,575
13,516
29,091
70,479
505
70,984
600
52,910
53,510
–
3,576
3,576
1,492
–
1,492
1,056
5,766
6,822
5,962
258
6,220
(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 repledged except in the event of default or the occurrence of other predetermined events.
(3) Not intended to represent our actual exposure to credit risk.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Note 19: Capital Management
Our objective is to maintain a strong capital position in a cost-effective structure that: is appropriate given our target regulatory capital ratios and
internal assessment of required economic capital; underpins our operating groups’ business strategies; supports depositor, investor and regulator
confidence, while building long-term shareholder value; and is consistent with our target credit ratings.
Our approach includes establishing limits, targets and performance measures that are used to manage balance sheet positions, risk levels and
capital requirements, as well as issuing and redeeming capital instruments to achieve a cost-effective capital structure.
Regulatory capital requirements and risk-weighted assets for the consolidated entity are determined in accordance with OSFI’s Capital Adequacy
Requirements Guideline.
Common Equity Tier 1 (“CET1”) capital is the most permanent form of capital. It is comprised of common shareholders’ equity less deductions for
goodwill, intangible assets and certain other items. Tier 1 capital is primarily comprised of CET1, preferred shares and other equity instruments, less
regulatory deductions.
Tier 2 capital is primarily comprised of subordinated debentures and may include certain loan loss allowances, less regulatory deductions. Total
capital includes Tier 1 and Tier 2 capital. Details of the components of our capital position are presented in Notes 11, 12, 15 and 16.
CET1 Capital Ratio, Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio are the primary regulatory capital measures.
‰ The CET1 Capital Ratio is defined as CET1 capital divided by CET1 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
N
o
t
e
s
adjustments (leverage exposures).
BMO Financial Group 202nd Annual Report 2019 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2019, we met OSFI’s required target capital ratios, which include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Tier 1
Surcharge for domestic systemically important banks, a Countercyclical Buffer and a 2.0% Domestic Stability Buffer.
Regulatory Capital Measures, Risk-Weighted Assets and Leverage Exposures
(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
Leverage Exposures
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
2019
2018
36,071
41,201
48,340
317,029
317,029
317,029
956,493
11.4%
13.0%
15.2%
4.3%
32,721
37,220
44,116
289,237
289,420
289,604
876,106
11.3%
12.9%
15.2%
4.2%
Note 20: 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 is treated as a separate award with a different vesting period. In general, 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
2019
Weighted-
average
exercise price (1)
72.19
89.90
60.21
98.96
103.79
76.59
64.57
2018
Weighted-
average
exercise price (1)
72.05
100.63
58.40
86.85
153.40
72.19
61.39
Number of
stock options
9,805,299
723,431
2,233,801
13,243
756,390
7,525,296
4,584,375
3,811,157
2017
Weighted-
average
exercise price (1)
77.41
96.90
57.80
66.89
195.02
72.05
67.42
Number of
stock options
7,525,296
705,398
1,513,307
152,417
469,769
6,095,201
3,782,481
3,405,239
Number of
stock options
6,095,201
931,047
902,651
4,756
10,534
6,108,307
3,507,803
2,487,645
(1) The weighted-average exercise prices reflect the conversion of foreign currency denominated options at the exchange rate as at October 31, 2019, October 31, 2018 and October 31, 2017,
respectively. For foreign currency denominated options exercised or expired during the year, the weighted-average exercise prices are translated using the exchange rates as at the settlement date
and expiry date, respectively.
Employee compensation expense related to this plan for the years ended October 31, 2019, 2018 and 2017 was $9 million, $7 million and $8 million
before tax, respectively ($8 million, $7 million and $7 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
option. The aggregate intrinsic value of stock options outstanding at October 31, 2019, 2018 and 2017 was $130 million, $162 million and
$232 million, respectively. The aggregate intrinsic value of stock options exercisable at October 31, 2019, 2018 and 2017 was $116 million,
$140 million and $174 million, respectively.
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188 BMO Financial Group 202nd Annual Report 2019
Options outstanding and exercisable at October 31, 2019 by range of exercise price were as follows:
(Canadian $, except as noted)
Range of exercise prices
$50.01 to $60.00
$60.01 to $70.00
$70.01 to $80.00
$80.01 to $90.00
$90.01 and over (1)
Number of
stock options
1,229,196
1,535,630
1,082,146
928,566
1,332,769
Options outstanding
2019
Options exercisable
Weighted-
average remaining
contractual life (years)
Weighted-average
exercise price (2)
Number of
stock options
Weighted-
average remaining
contractual life (years)
Weighted-average
exercise price (2)
1.7
3.7
5.7
9.1
7.6
56.42
64.71
77.59
89.89
98.81
1,229,196
1,535,630
741,659
753
565
(1) Certain options were issued as part of the acquisition of M&I.
(2) The weighted-average exercise prices reflect the conversion of foreign currency denominated options at the exchange rate as at October 31, 2019.
The following table summarizes additional 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
Weighted-average share price for stock options exercised (in dollars)
2019
6
2.6
36
54
99.84
1.7
3.7
5.5
0.5
0.5
2018
5
2.6
67
88
102.55
56.42
64.71
77.75
81.77
99.02
2017
5
2.7
90
129
98.05
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, 2019, 2018 and 2017 was $10.23, $11.30 and $11.62, 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)
2019
2018
2017
5.7%
20.0% – 20.1%
2.5%
6.5 – 7.0
4.1%
17.0% – 17.3%
2.1%
6.5 – 7.0
4.3%
18.4% – 18.8%
1.7% – 1.8%
6.5 – 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, 2019, 2018 and 2017 was $89.90, $100.63 and $96.90, respectively.
Other Share-Based Compensation
Share Purchase Plans
We offer various employee share purchase plans. The largest of these plans provides employees with 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 to a maximum
of $100,000. Our contributions during the first two years vest after two years of 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 contributions as employee compensation expense when they are contributed to the plan.
Employee compensation expense related to these plans for the years ended October 31, 2019, 2018 and 2017 was $54 million, $51 million and
$53 million, respectively. There were 18.0 million, 17.8 million and 18.3 million common shares held in these plans for the years ended October 31,
2019, 2018 and 2017, respectively.
Compensation Trusts
We sponsor various share ownership arrangements, certain of which are administered through trusts into which our matching contributions are paid.
We are not required to consolidate our compensation trusts. The assets held by the trusts are not included in our consolidated financial statements.
Total assets held under our share ownership arrangements amounted to $1,752 million as at October 31, 2019 ($1,752 million in 2018).
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.
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.
Mid-term incentive plan units granted during the years ended October 31, 2019, 2018 and 2017 totalled 6.3 million, 5.9 million and 5.9 million,
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respectively.
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
BMO Financial Group 202nd Annual Report 2019 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related to these awards. All cash payments made under such arrangements are deferred in the Consolidated Balance Sheet as other assets and are
recognized on a straight-line basis over the vesting period. Subsequent changes in the market value of our common shares do not affect the amount
of compensation expense related to these awards. During the year ended October 31, 2017, all remaining deferred compensation related to these
arrangements was recognized.
Employee compensation expense related to plans where we entered into agreements with third parties for the years ended October 31, 2019,
2018 and 2017 was $nil, $nil and $(7) million before tax, respectively ($nil, $nil and $(5) 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, 2019, 2018 and
2017 totalled 6.3 million, 5.9 million and 5.9 million units, respectively. The grant date fair value of these awards as at 0ctober 31, 2019, 2018 and
2017 was $616 million, $581 million and $515 million, respectively, for which we recorded employee compensation expense of $610 million,
$595 million and $703 million before tax, respectively ($448 million, $437 million and $516 million after tax, respectively). We hedge the impact of
the change in market value of our common shares by entering into total return swaps. We also enter into foreign currency swaps to manage the
foreign exchange translation from our U.S. businesses. Gains on total return swaps and foreign currency swaps recognized for the years ended
October 31, 2019, 2018 and 2017 were $20 million, $51 million and $183 million, respectively, resulting in net employee compensation expense of
$590 million, $544 million and $520 million, respectively.
A total of 17.2 million, 17.1 million and 17.0 million mid-term incentive plan units were outstanding as at October 31, 2019, 2018 and 2017,
respectively, and the intrinsic value of those awards which had vested was $1,251 million, $1,269 million and $1,253 million, respectively. Cash
payments made in relation to these liabilities were $642 million, $598 million and $343 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 in cash 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, 2019, 2018 and 2017 totalled 0.3 million, 0.3 million and 0.3 million,
respectively, and the grant date fair value of these units was $32 million, $33 million and $32 million, respectively.
Liabilities related to these plans are recorded in other liabilities in our Consolidated Balance Sheet and totalled $478 million and $485 million as
at October 31, 2019 and 2018, respectively. Payments made under these plans for the years ended October 31, 2019, 2018 and 2017 were $59
million, $60 million and $32 million, respectively.
Employee compensation expense related to these plans for the years ended October 31, 2019, 2018 and 2017 was $17 million, $27 million and
$91 million before tax, respectively ($12 million, $20 million and $67 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 on these derivatives recognized for the years ended October 31, 2019, 2018 and 2017 were $4 million, $8 million
and $78 million before tax, respectively. These gains resulted in net employee compensation expense for the years ended October 31, 2019, 2018
and 2017 of $13 million, $19 million and $13 million before tax, respectively ($10 million, $14 million and $10 million after tax, respectively).
A total of 4.8 million, 4.9 million and 5.0 million deferred incentive plan units were outstanding as at October 31, 2019, 2018 and 2017,
respectively.
Note 21: Employee Compensation – Pension and Other Employee Future Benefits
Pension and Other Employee Future Benefit Plans
We sponsor a number of arrangements globally that provide pension and 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.
During the year ended October 31, 2018, we announced changes to our other employee future benefit plan for Canadian employees that will
become mandatory for new retirees beginning January 1, 2021. Plan changes include an increase in the service requirement for eligibility and flexible
benefits with employer premium caps. In 2018, we recorded a $277 million benefit from the remeasurement of the benefit liability in non-interest
expense, employee compensation, in our Consolidated Statement of Income.
We also provide other employee future benefits, including health and dental care benefits and life insurance, for eligible current and retired
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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.
190 BMO Financial Group 202nd Annual Report 2019
Investment Policy
The defined benefit pension plans are administered under a defined governance structure, with oversight 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. Over the past several years, we have implemented a liability-driven investment strategy for the primary Canadian plan to enhance
risk-adjusted returns while reducing the plan’s surplus volatility. This strategy has reduced the impact of the plan on our regulatory capital.
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 fair market values at October 31,
are as follows:
Equities
Fixed income investments
Alternative strategies
Target range
2019
20% – 50%
25% – 55%
15% – 45%
Pension benefit plans
Actual
2019
32%
51%
17%
Actual
2018
37%
46%
17%
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis.
Risk Management
The defined benefit pension 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 of debt securities, 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 based on the yields of 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:
Current service cost represents benefits earned in the current year. The cost is 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 the supplementary pension plan in the U.S. is unfunded.
Our other employee future benefit plans in Canada and the United States are either funded or unfunded. Benefit payments related to these plans
are paid either through the respective plan or 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
BMO Financial Group 202nd Annual Report 2019 191
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 pension plan was performed as at October 31, 2019 and the most
recent funding valuation for our primary U.S. pension plan was performed as at January 1, 2019.
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)
2019
9,866
9,723
(143)
36
(179)
(143)
2018
8,311
8,719
408
573
(165)
408
2017
8,846
8,990
144
339
(195)
144
2019
1,254
175
2018
1,113
153
2017
1,460
157
(1,079)
(960)
(1,303)
46
(1,125)
(1,079)
37
(997)
(960)
28
(1,331)
(1,303)
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
2019
2018
2017
2019
2018
2017
Annual benefits expense
Current service cost
Net interest (income) expense on net defined benefit (asset) liability
Past service cost (income)
Administrative expenses
Remeasurement of other long-term benefits
Benefits expense
Canada and Quebec pension plan expense
Defined contribution expense
193
(20)
(5)
5
–
173
82
170
210
(10)
7
5
–
212
76
153
Total annual pension and other employee future benefit expenses recognized
in the Consolidated Statement of Income
425
441
254
7
–
5
–
266
75
123
464
9
37
–
–
6
52
–
–
52
26
45
(277)
–
(10)
(216)
–
–
(216)
32
47
–
–
(6)
73
–
–
73
Weighted-Average Assumptions
Defined Benefit Expenses
Discount rate at beginning of year (3)(4)
Rate of compensation increase
Assumed overall health care cost trend rate
Defined Benefit Obligation
Discount rate at end of year
Rate of compensation increase
Assumed overall health care cost trend rate
Pension benefit plans
Other employee future benefit plans
2019
2018
2017
2019
2018
2017
4.0%
2.4%
na
3.0%
2.1%
na
3.5%
2.4%
na
4.0%
2.4%
na
3.4%
2.8%
na
3.5%
2.4%
na
4.1%
2.0%
4.9% (1)
3.0%
2.0%
4.9% (1)
3.6%
2.0%
4.9% (1)
4.1%
2.0%
4.9% (1)
3.6%
2.4%
5.2% (2)
3.6%
2.0%
5.2% (2)
(1) Trending to 4.1% in 2040 and remaining at that level thereafter.
(2) Trending to 4.5% in 2031 and remaining at that level thereafter.
(3) The pension benefit current service cost was calculated using a separate discount rate of 4.10%, 3.70% and 3.68% for 2019, 2018 and 2017, respectively.
(4) The other employee future benefit plans current service cost was calculated using a separate discount rate of 4.20%, 3.76% and 3.78% for 2019, 2018 and 2017, respectively.
na – not applicable
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
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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192 BMO Financial Group 202nd Annual Report 2019
2019
23.7
24.1
24.7
25.0
2018
23.7
24.0
24.6
25.0
2019
2018
21.7
23.0
22.8
24.2
21.9
23.4
23.1
24.5
Changes in the estimated financial positions of our defined benefit pension 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
U.S. plan merger (1)
Current service cost
Past service cost (income)
Interest cost
Benefits paid
Employee contributions
Actuarial (gains) losses due to:
Changes in demographic assumptions
Changes in financial assumptions
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
Fair value of plan assets
Fair value of plan assets at beginning of year
U.S. plan merger (1)
Interest income
Return on plan assets (excluding interest income)
Employer contributions
Employee contributions
Benefits paid
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 (losses) on plan assets
Actuarial gains (losses) on defined benefit obligation due to:
Changes in demographic assumptions
Changes in financial assumptions
Plan member experience
Foreign exchange and other
Actuarial gains (losses) recognized in other comprehensive income for the year
Pension benefit plans
Other employee future benefit plans
2019
2018
2019
2018
8,311
46
193
(5)
324
(456)
17
(9)
1,345
92
8
9,866
9,687
179
9,866
8,719
43
344
795
256
17
(456)
(5)
10
9,723
(143)
186
(329)
(143)
795
9
(1,345)
(92)
(9)
(642)
8,846
–
210
7
299
(492)
15
(50)
(562)
16
22
8,311
8,146
165
8,311
8,990
–
309
(323)
213
15
(492)
(5)
12
8,719
408
664
(256)
408
(323)
50
562
(16)
6
279
1,113
–
9
–
44
(53)
5
(22)
161
(3)
–
1,254
129
1,125
1,254
153
–
7
23
40
5
(53)
–
–
175
(1,079)
46
(1,125)
(1,079)
23
21
(153)
3
–
(106)
1,460
–
26
(277)
51
(43)
5
(31)
(77)
(4)
3
1,113
116
997
1,113
157
–
6
(10)
35
5
(43)
–
3
153
(960)
–
(960)
(960)
(10)
30
72
1
–
93
(1) In 2019, the benefit obligation and assets related to employees formerly included in a multi-employer plan, which was accounted for as a defined contribution plan, merged with the U.S. defined
benefit pension plan. The impact of the merger was recognized as a remeasurement of the U.S. defined benefit pension plan.
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)
Cash and money market funds
Securities issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Pooled funds
Derivative instruments
Corporate debt
Corporate equity
2019
Quoted
Unquoted
156
1
334
345
–
1,450
–
–
1,219
3,505
6
57
368
–
–
3,204
8
1,354
–
4,997
Total
162
58
702
345
–
4,654
8
1,354
1,219
8,502
Quoted
114
108
219
297
–
1,591
1
6
1,105
3,441
2018
Unquoted
–
41
309
–
12
2,715
(14)
1,055
–
4,118
Total
114
149
528
297
12
4,306
(13)
1,061
1,105
7,559
No plan assets are directly invested in the bank’s or related parties’ securities as at October 31, 2019 and 2018. As at October 31, 2019, our primary
Canadian plan indirectly held, through pooled funds, approximately $10 million ($15 million in 2018) of our common shares and fixed income
securities. The plans do not hold any property we occupy or other assets we use.
The plans paid $3 million in the year ended October 31, 2019 ($4 million in 2018) to the bank and certain of our subsidiaries for investment
management, record-keeping, custodial and administrative services rendered.
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BMO Financial Group 202nd Annual Report 2019 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, which would amplify or reduce certain sensitivities.
(Canadian $ in millions, except as noted)
Discount rate (%)
Impact of: 1% increase ($)
1% decrease ($)
Rate of compensation increase (%)
Impact of: 0.25% increase ($)
0.25% decrease ($)
Mortality
Impact of: 1 year shorter life expectancy ($)
1 year longer life expectancy ($)
Assumed overall health care cost trend rate (%)
Impact of: 1% increase ($)
1% decrease ($)
(1) The change in this assumption is immaterial.
(2) Trending to 4.1% in 2040 and remaining at that level thereafter.
na – not applicable
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
Defined benefit obligation
Pension benefit plans
Other employee future benefit plans
3.0
(1,041)
1,324
2.1
51
(49)
(185)
182
na
na
na
3.0
(122)
153
2.0
– (1)
– (1)
(28)
29
4.9 (2)
49
(51)
2019
15.2
7.9
14.5
2018
14.0
7.2
14.3
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
2019
203
170
53
426
2018
154
153
59
366
2017
187
123
32
342
2019
2018
2017
–
–
40
40
–
–
35
35
–
–
40
40
Our best estimate of the contributions and benefits paid directly to pensioners we expect to make for the year ending October 31, 2020 is approximately $277 million to our defined benefit pension plans
and $43 million to our other employee future benefit plans. Benefit payments for fiscal 2020 are estimated to be $536 million.
Note 22: 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
subsidiaries, as noted below.
In addition, we record an income tax expense or benefit in other comprehensive income or directly in equity when the taxes relate to amounts
recorded in other comprehensive income or 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 net 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 tax is recognized on
temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. 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 equity. Current and deferred taxes are offset only
when they are levied by the same tax authority, on the same entity or group of entities, and when there is a legal right to offset.
Included in deferred income tax assets is $26 million ($42 million in 2018) related to Canadian tax loss carryforwards that will expire in 2037,
$289 million ($962 million in 2018) related to both U.S. tax loss carryforwards and tax credits that will expire in various amounts in U.S. taxation years
from 2020 through 2039 and $19 million ($17 million in 2018) related to United Kingdom (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 it
is probable 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, 2019 is $127 million ($132 million in 2018), of which $3 million ($8 million in 2018) is scheduled to expire within five years. Deferred tax
assets have not been recognized in respect of these items because it is not probable that these assets will be realized.
194 BMO Financial Group 202nd Annual Report 2019
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Income that we earn through our foreign subsidiaries is generally taxed in the foreign country in which they operate. Income that we earn
through our foreign branches is also generally taxed in the foreign country in which they operate. Canada also taxes the income we earn through
foreign branches and a credit is allowed for certain foreign taxes paid on such income. Repatriation of earnings from certain foreign subsidiaries
would require us to pay tax on certain of these earnings. As repatriation of such earnings is not planned in the foreseeable future, we have not
recorded a related deferred income tax liability. The taxable temporary differences associated with the repatriation of earnings from investments in
certain subsidiaries, branches, associates and interests in joint ventures for which deferred tax liabilities have not been recognized totalled $15 billion
as at October 31, 2019 ($13 billion in 2018).
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
Previously unrecognized tax loss, tax credit or temporary difference for a prior period
Other Comprehensive Income and Equity
Income tax expense (recovery) related to:
Unrealized gains (losses) on FVOCI debt securities (1)
Reclassification to earnings of (gains) on FVOCI debt securities (1)
Gains (losses) on derivatives designated as cash flow hedges
Reclassification to earnings of losses on derivatives designated as cash flow hedges
Hedging of unrealized (gains) losses on translation of net foreign operations
Gains (losses) on remeasurement of pension and other employee future benefit plans
Gains (Losses) on remeasurement of own credit risk on financial liabilities designated at fair value
Unrealized gains on FVOCI equity securities
Share-based compensation
Total provision for income taxes
(1) Fiscal 2017 represents available-for-sale securities (Note 3).
na – not applicable due to IFRS 9 adoption.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 provision for income taxes
Certain comparative figures have been reclassified to conform with the current year’s presentation.
2019
2018
2017
1,198
(14)
327
3
–
1,340
20
268
425
(92)
1,159
18
171
(2)
(54)
1,514
1,961
1,292
140
(26)
521
51
(4)
(196)
27
1
–
514
(69)
(23)
(432)
121
(56)
111
(6)
–
10
(344)
21
(36)
(322)
21
8
157
(53)
na
(12)
(216)
2,028
1,617
1,076
2019
2018
2017
791
465
1,256
(113)
(66)
(179)
1,077
308
643
951
501
299
800
(44)
(27)
(71)
729
233
655
888
470
272
742
(2)
–
(2)
740
186
150
336
2,028
1,617
1,076
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BMO Financial Group 202nd Annual Report 2019 195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
2019
2018
Combined Canadian federal and provincial income taxes at the statutory tax rate
Increase (decrease) resulting from:
Tax-exempt income from securities
Foreign operations subject to different tax rates
Change in tax rate for deferred income taxes
Previously unrecognized tax loss, tax credit or temporary difference for a prior
period
Income attributable to investments in associates and joint ventures
Adjustments in respect of current tax for prior periods
Other
Provision for income taxes in the Consolidated Statement of Income and effective
1,934
26.6%
1,972
26.6%
1,764
(220)
(158)
3
–
(37)
(14)
6
(3.0)
(2.2)
–
–
(0.5)
(0.2)
0.1
(226)
(110)
425
(92)
(39)
20
11
(3.0)
(1.5)
5.7
(1.2)
(0.5)
0.3
0.1
(409)
22
(2)
(54)
(103)
18
56
2017
26.6%
(6.2)
0.3
–
(0.8)
(1.5)
0.2
0.9
tax rate
1,514
20.8%
1,961
26.5%
1,292
19.5%
Components of Deferred Income Tax Balances
(Canadian $ in millions)
Deferred Income Tax Asset (Liability) (1)
Allowance for credit losses
Employee future benefits
Deferred compensation benefits
Other comprehensive income
Tax loss carryforwards
Tax credits
Premises and equipment
Pension benefits
Goodwill and intangible assets
Securities
Other
Total
(Canadian $ in millions)
Net asset,
October 31, 2018
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2019
484
282
494
195
606
415
(515)
(121)
(201)
38
288
1,965
23
12
(12)
–
(462)
(228)
234
(18)
(14)
12
123
(330)
–
31
–
(331)
–
–
–
166
–
–
–
(134)
4
–
1
(7)
1
2
(1)
–
(2)
–
9
7
511
325
483
(143)
145
189
(282)
27
(217)
50
420
1,508
Deferred Income Tax Asset (Liability) (1)
Net asset,
November 1, 2017 (2)
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2018
Allowance for credit losses
Employee future benefits
Deferred compensation benefits
Other comprehensive income
Tax loss carryforwards
Tax credits
Premises and equipment
Pension benefits
Goodwill and intangible assets
Securities
Other
Total
684
416
545
50
1,233
454
(664)
(52)
(261)
21
180
2,606
(150)
(111)
(50)
–
(628)
(39)
148
19
60
17
133
(601)
–
(23)
–
138
–
–
–
(88)
–
–
(10)
17
(50)
–
(1)
7
1
–
1
–
–
–
(15)
(57)
484
282
494
195
606
415
(515)
(121)
(201)
38
288
1,965
(1) Deferred tax assets of $1,568 million and $2,039 million and deferred tax liabilities of $60 million and $74 million as at October 31, 2019 and 2018, respectively, are presented on the balance sheet
net by legal jurisdiction.
(2) Includes IFRS 9 adoption (refer to Note 28).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
In fiscal 2019, we were reassessed by the Canada Revenue Agency (``CRA``) for additional income taxes and interest in an amount of approximately
$250 million in respect of certain 2014 Canadian corporate dividends. In prior fiscal years, we were reassessed for additional income taxes and
interest of approximately $361 million, for certain 2011 to 2013 Canadian corporate dividends. In its reassessments, the CRA denied dividend
deductions on the basis that the dividends were received as part of a “dividend rental arrangement.” The tax rules raised by the CRA in the
reassessments were prospectively addressed in the 2015 and 2018 Canadian federal budgets. In the future, we expect to be reassessed for significant
income tax for similar activities in 2015 and subsequent years. We remain of the view that our tax filing positions were appropriate and intend to
challenge any reassessment.
On December 22, 2017, the U.S. government enacted new tax legislation that became effective on January 1, 2018. Under the new legislation,
our U.S. net deferred tax asset was revalued by $483 million because of the lower income tax rate. The $483 million revaluation is comprised of a
$425 million income tax expense recorded in our Consolidated Statement of Income, and a $58 million income tax charge recorded in other
comprehensive income and equity for the year ended October 31, 2018.
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196 BMO Financial Group 202nd Annual Report 2019
Note 23: Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to equity holders of the bank, after deducting dividends on preferred shares
and distributions on other equity instruments, 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 Common Share
(Canadian $ in millions, except as noted)
Net income attributable to equity holders of the bank
Dividends on preferred shares and distributions on other equity instruments
Net income available to common shareholders
Weighted-average number of common shares outstanding (in thousands)
Basic earnings per common share (Canadian $)
Diluted Earnings Per Common Share
Net income available to common shareholders adjusted for impact of dilutive instruments
Weighted-average number of common shares outstanding (in thousands)
Effect of dilutive instruments
Stock options potentially exercisable (1)
Common shares potentially repurchased
Weighted-average number of diluted common shares outstanding (in thousands)
Diluted earnings per common share (Canadian $)
2019
5,758
(211)
5,547
2018
5,453
(184)
5,269
2017
5,337
(184)
5,153
638,881
642,930
649,650
8.68
8.19
7.93
5,547
638,881
5,269
642,930
5,153
649,650
5,326
(3,847)
5,876
(3,893)
6,859
(4,548)
640,360
644,913
651,961
8.66
8.17
7.90
(1) In computing diluted earnings per share, we excluded average stock options outstanding of 1,177,152, 1,101,938 and 1,330,564 with weighted-average exercise prices of $101.83, $127.45 and
$182.70 for the years ended October 31, 2019, 2018 and 2017, respectively, as the average share price for the period did not exceed the exercise price.
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policy (Note 1).
Note 24: 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 a
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 our best estimate of the
amount required to settle the obligation. Any change in the liability is reported in our Consolidated Statement of Income.
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 our 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 these
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
Credit default swaps (1)
Other Credit Instruments
Backstop liquidity facilities
Securities lending
Documentary and commercial letters of credit
Commitments to extend credit (2)
Other commitments
Total
2019
2018
21,395
2,068
5,550
4,102
1,272
158,533
5,181
198,101
18,458
443
5,627
4,939
1,263
137,995
8,935
177,660
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(1) The fair value of the related derivatives included in our Consolidated Balance Sheet was $43 million as at October 31, 2019 ($8 million in 2018).
(2) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion.
BMO Financial Group 202nd Annual Report 2019 197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 when ABCP markets cannot be accessed. The terms of the backstop liquidity facilities do not require us to advance
money to these programs in the event of insolvency of the borrower and generally do not require us to advance money against non-performing or
defaulted assets. The average term of these liquidity facilities is approximately 2 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 may provide 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 that 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.
Other commitments include 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.
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 central counterparties. 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 in relation to:
Central counterparties, payment systems and depositories
Bank of Canada
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)
(1) Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
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198 BMO Financial Group 202nd Annual Report 2019
2019
2018
5,633
5,465
75,076
125,035
211,209
7,784
7,143
60,812
115,256
190,995
2019
2018
2,098
467
3
73,696
48,892
9,614
30,120
27,208
19,111
2,403
525
3
54,606
50,388
6,120
28,710
26,721
21,519
211,209
190,995
Collateral
When entering into trading activities, such as purchases under resale agreements, securities borrowing and lending activities or financing 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
$163,929 million as at October 31, 2019 ($123,782 million as at October 31, 2018). The fair value of collateral that we have sold or repledged was
$101,665 million as at October 31, 2019 ($82,392 million as at October 31, 2018).
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, 2019 were
$3,800 million. The commitments for each of the next five years and thereafter are $389 million for 2020, $361 million for 2021, $337 million for
2022, $305 million for 2023, $289 million for 2024 and $2,119 million thereafter. Included in these amounts are commitments related to 1,165
leased branch locations as at October 31, 2019.
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 for which we can reliably estimate the obligation, and it is probable we will be required to settle the obligation. We recognize as a
provision our 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. Provisions are recorded in other liabilities on the Consolidated Balance Sheet. 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, and are not included in the table below.
Restructuring Charges
Provisions for restructuring charges as at October 31, 2019 are $603 million ($176 million as at October 31, 2018), which includes $484 million related
to severance and a small amount of real estate-related costs, to continue to improve efficiency, including accelerating delivery against key bank-wide
initiatives focused on digitization, organizational redesign and simplification of the way we do our business. This represents our best estimate of the
amount that will ultimately be paid out.
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 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.
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
Foreign exchange and other
Balance at end of year (1)
(1) Balance includes severance obligations, restructuring charges and legal provisions.
Note 25: Operating and Geographic Segmentation
2019
284
666
(251)
(32)
13
680
2018
170
375
(250)
(11)
–
284
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.
Effective with the adoption of IFRS 9, we allocate the provision for credit losses on performing loans and the related allowance to operating
groups. In 2017 and prior years, the collective provision and allowance were held in Corporate Services.
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 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.
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BMO Financial Group 202nd Annual Report 2019 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Our commercial banking customers are offered in-depth specific industry knowledge, as well as strategic capital markets solutions.
BMO 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 (“BMO WM”) is a global
business with an active presence in markets across Canada, the United States, EMEA 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 Global Markets lines of business, we operate in
33 locations around the world, including 19 offices in North America.
Corporate Services
Corporate Services consists of Corporate Units and Technology and Operations (“T&O”). Corporate Units provide enterprise-wide expertise, governance
and support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, human resources,
communications, marketing, real estate, procurement, data and analytics, and innovation. T&O manages, maintains and provides governance of
information technology, cyber security and operations services for the bank.
The costs of these Corporate Units and T&O services are largely transferred to the three operating groups (P&C, BMO WM and BMO CM), with any
remaining amounts retained in Corporate Services results. As such, Corporate Services results largely reflect the impact of residual treasury-related
activities, the elimination of taxable equivalent adjustments, residual unallocated expenses and certain acquisition integration costs and restructuring
costs.
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. Income taxes presented below may not be reflective of taxes paid in each jurisdiction in which we operate. Income
taxes are generally applied to each segment based on a statutory tax rate and may be adjusted for items and activities specific to each segment. 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 with the current year’s presentation.
Taxable Equivalent Basis
We analyze revenue on a taxable equivalent basis (“teb”) at the operating group level. Revenue and the provision for income taxes are increased on
tax-exempt securities to an equivalent before-tax basis to facilitate comparisons of income between taxable and tax-exempt sources. The offset to
the groups’ teb adjustments is reflected in Corporate Services revenue and provision for income taxes. The teb adjustment for the year ended
October 31, 2019 was $296 million ($313 million in 2018 and $567 million in 2017).
Inter-Group Allocations
Various estimates and allocation methodologies are used in the preparation of the operating groups’ financial information. 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. These inter-group allocations are also applied to the
geographic segmentation.
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200 BMO Financial Group 202nd Annual Report 2019
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions)
2019
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for (recovery of) credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Insurance claims, commissions and changes in policy benefit liabilities
Depreciation and amortization
Non-interest expense
Income (loss) before taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Reported net income (loss)
Average Assets
(Canadian $ in millions)
2018
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for (recovery of) credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Insurance claims, commissions and changes in policy benefit liabilities
Depreciation and amortization
Non-interest expense
Income (loss) before taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Reported net income (loss)
Average Assets
(Canadian $ in millions)
2017
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for (recovery of) credit losses (3)
Insurance claims, commissions and changes in policy benefit liabilities
Depreciation and amortization
Non-interest expense
Income (loss) before taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Reported net income (loss)
Non-controlling interest in subsidiaries
Canadian
P&C
U.S. P&C
Wealth
Management
BMO CM
Corporate
Services (1)
5,878
2,128
8,006
544
63
607
–
338
3,516
3,545
919
2,626
4,218
1,162
5,380
160
37
197
–
456
2,683
2,044
433
1,611
935
6,727
7,662
2
(2)
–
2,709
262
3,260
1,431
371
1,060
2,394
2,340
4,734
52
28
80
–
149
3,112
1,393
307
1,086
(537)
238
(299)
(7)
(5)
(12)
–
–
854
(1,141)
(516)
(625)
Total
12,888
12,595
25,483
751
121
872
2,709
1,205
13,425
7,272
1,514
5,758
237,995
126,584
40,951 342,347
85,375
833,252
Canadian
P&C
U.S. P&C
Wealth
Management
BMO CM
Corporate
Services (1)
5,541
2,069
7,610
466
3
469
–
317
3,393
3,431
882
2,549
3,843
1,096
4,939
258
(38)
220
–
454
2,514
1,751
357
1,394
826
5,475
6,301
6
–
6
1,352
231
3,284
1,428
356
1,072
1,784
2,579
4,363
(17)
(1)
(18)
–
125
2,734
1,522
366
1,156
(556)
248
(308)
(13)
(2)
(15)
–
–
425
(718)
–
(718)
Total
11,438
11,467
22,905
700
(38)
662
1,352
1,127
12,350
7,414
1,961
5,453
224,554
110,351
35,913
307,087
76,390
754,295
Canadian
P&C
U.S. P&C
Wealth
Management
BMO CM
Corporate
Services (1)
5,261
2,079
7,340
483
–
308
3,226
3,323
823
2,500
–
3,551
1,005
4,556
289
–
433
2,458
1,376
358
1,018
–
2,501
2,075
4,576
44
–
120
2,666
1,746
471
1,275
–
(760)
177
(583)
(78)
–
–
626
(1,131)
(710)
(421)
–
722
5,496
6,218
8
1,538
242
3,113
1,317
350
967
2
965
Total
11,275
10,832
22,107
746
1,538
1,103
12,089
6,631
1,292
5,339
2
Net Income (loss) attributable to equity holders of the bank
2,500
1,018
1,275
(421)
5,337
Average Assets
217,685
104,209
32,562
302,518
65,652
722,626
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis – see Basis of Presentation section.
(3) 2017 has not been restated to reflect the adoption of IFRS 9.
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policy (Note 1).
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BMO Financial Group 202nd Annual Report 2019 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Geographic Information
We operate primarily in Canada and the United States, but we also have operations in the U.K., Europe, the Caribbean and Asia, which are grouped in
other countries in the table below. We allocate our results by geographic region based on the location of the unit responsible for managing the
related assets, liabilities, revenues and expenses.
Our results and average assets, grouped by geographic region, are as follows:
(Canadian $ in millions)
2019
Total Revenue
Income before taxes
Reported net income
Average Assets
(Canadian $ in millions)
2018
Total Revenue
Income before taxes
Reported net income
Average Assets
(Canadian $ in millions)
2017
Total Revenue
Income before taxes and non-controlling interest in subsidiaries
Reported net income
Average Assets
Canada
United States
Other countries
Total
15,134
4,324
3,391
469,032
8,282
2,367
1,903
316,983
2,067
581
464
47,237
25,483
7,272
5,758
833,252
Canada
United States
Other countries
Total
13,632
4,840
3,797
441,376
7,273
1,871
1,100
277,764
2,000
703
556
35,155
22,905
7,414
5,453
754,295
Canada
United States
Other countries
Total
13,365
4,589
3,816
430,570
7,015
1,580
1,200
264,473
1,727
462
323
27,583
22,107
6,631
5,339
722,626
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policy (Note 1).
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202 BMO Financial Group 202nd Annual Report 2019
Note 26: Significant Subsidiaries
As at October 31, 2019, the bank, either directly or indirectly through its subsidiaries, controls the following significant operating subsidiaries.
Significant subsidiaries (1)(2)
Bank of Montreal Capital Markets (Holdings) Limited and subsidiaries, including:
BMO Capital Markets Limited
Pyrford International Limited
Bank of Montreal (China) Co. Ltd.
Bank of Montreal Europe plc (3)
Bank of Montreal Holding Inc. and subsidiaries, including:
Bank of Montreal Mortgage Corporation
BMO Mortgage Corp.
BMO Investments Limited
BMO Reinsurance Limited
BMO Nesbitt Burns Holdings Corporation
BMO Nesbitt Burns Inc.
BMO Investments Inc.
BMO InvestorLine Inc.
BMO Financial Corp. and subsidiaries, including:
BMO Asset Management Corp. and subsidiaries
BMO Capital Markets Corp.
BMO Family Office, LLC (4)
BMO Harris Bank National Association and subsidiaries, including:
BMO Harris Investment Company LLC
BMO Harris Financial Advisors, Inc.
BMO Harris Financing, Inc. and subsidiaries
BMO Global Asset Management (Europe) Limited and subsidiaries, including:
BMO Asset Management (Holdings) plc and subsidiaries
BMO Life Insurance Company and subsidiaries, including:
BMO Life Holdings (Canada), ULC
BMO Life Assurance Company
BMO Trust Company
BMO Trustee Asia Limited
LGM (Bermuda) Limited and subsidiaries, including:
BMO Global Asset Management (Asia) Limited
LGM Investments Limited
Head or principal office
London, England
London, England
London, England
Beijing, China
Dublin, Ireland
Toronto, Canada
Calgary, Canada
Vancouver, Canada
Hamilton, Bermuda
St. Michaels, Barbados
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
Chicago, United States
Chicago, United States
New York, United States
Palo Alto, United States
Chicago, United States
Las Vegas, United States
Chicago, United States
Chicago, United States
London, England
London, England
Toronto, Canada
Halifax, Canada
Toronto, Canada
Toronto, Canada
Hong Kong, China
Hamilton, Bermuda
Hong Kong, China
London, England
Book value of shares owned by the
bank (Canadian $ in millions)
364
449
1,042
31,175
23,396
677
1,285
774
2
154
(1) Each subsidiary is incorporated or organized under the laws of the state or country in which the principal office is situated, except for BMO Financial Corp., BMO Asset Management Corp., BMO Capital
Markets Corp., BMO Harris Financial Advisors, Inc., BMO Harris Financing, Inc., and BMO Family Office, LLC, which are incorporated under the laws of the state of Delaware, United States. BMO Asset
Management (Holdings) plc is incorporated under the laws of Scotland.
(2) Unless otherwise noted, the bank, either directly or indirectly through its subsidiaries, owns 100% of the outstanding voting shares of each subsidiary.
(3) Effective September 2, 2019, Bank of Montreal Ireland Public Limited Company changed its name to Bank of Montreal Europe Public Limited Company.
(4) Effective January 1, 2019, CTC MyCFO, LLC changed its name to BMO Family Office, LLC.
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 24 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.
‰ Funds required to be held with central banks. Refer to Note 2 for details.
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BMO Financial Group 202nd Annual Report 2019 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 27: Related Party Transactions
Related parties include subsidiaries, associates, joint ventures, employee future benefit plans and key management personnel and their close family
members. Close family members include spouses, common-law partners and dependent minors. 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 our 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.
2019
2018
2017
22
2
43
67
21
2
31
54
23
1
38
62
We offer senior executives market 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, 2019, loans to key management personnel
totalled $21 million ($16 million in 2018). We have no provision for credit losses related to these amounts as at October 31, 2019 and 2018.
Directors receive a specified amount of their annual retainer 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 retainer 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 fees 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 retainer 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.
The following table presents the carrying amount of our interests in joint ventures and associated companies accounted for under the equity method
as well as our share of the income of those entities:
Joint ventures
Associates
2019
343
99
2018
231
107
2019
501
52
2019
169
106
69
76
2018
471
60
2018
195
114
71
65
(Canadian $ in millions)
Carrying amount
Share of net income
We do not have any joint ventures or associates that are individually material to our consolidated financial statements.
The following table presents transactions with our joint ventures and associates:
(Canadian $ in millions)
Loans
Deposits
Fees paid for services received
Guarantees and commitments
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204 BMO Financial Group 202nd Annual Report 2019
Note 28: Transition to IFRS 9
The following table shows the pre-transition IAS 39 and corresponding IFRS 9 classification and measurement categories, and reconciles the IAS 39
and IFRS 9 carrying amounts for loans, securities and other financial assets as at November 1, 2017 as a result of adopting IFRS 9. There were no
changes to the measurement basis of other financial asset categories or any financial liabilities.
IAS 39 measurement
category
IFRS 9 measurement
category
IAS 39 carrying
amount
Reclassification
Remeasurement
IFRS 9 carrying
amount
Trading
Available-for-sale
Held-to-maturity
Other
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Trading
FVTPL
na
FVOCI
FVTPL
Amortized cost
Amortized cost
Other
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
FVTPL
(Canadian $ in millions)
Financial Assets
Securities
Total Securities
Loans
Residential mortgages
Consumer instalment and other
Credit cards
Business and government
Total Loans
Allowance for credit losses
Remaining financial assets (1)
Financial Liabilities
Allowance for credit losses on off-balance sheet
exposures
Total pre-tax impact of IFRS 9 adoption
Total after-tax Accumulated Other Comprehensive Income
Total after-tax Retained Earnings (2)(3)
Total after-tax Equity
99,069
–
54,075
–
–
–
9,094
960
–
163,198
115,258
61,944
8,071
175,067
–
360,340
(1,833)
358,507
127,706
163
na
3,066
23,709
44,354
(8,534)
8,534
(54,075)
51,909
2,081
85
–
(333)
333
–
–
–
–
(2,372)
2,372
–
–
–
–
–
–
(55)
55
–
–
–
–
–
–
–
(2)
–
–
(2)
–
–
–
–
–
–
154
154
90,535
8,534
–
51,909
2,081
85
9,092
627
333
163,196
115,258
61,944
8,071
172,695
2,372
360,340
(1,679)
358,661
(6)
127,700
76
70
–
44
44
239
na
3,011
23,808
44,398
(1) Represents cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased under resale agreements and other assets. Remeasurement represents the impact of
the impairment provisions of IFRS 9 on these remaining financial assets.
(2) Reclassification amount represents the after-tax impact ($105 million pre-tax) that resulted from the reclassification of equity securities from available-for-sale under IAS 39 to fair value through profit
or loss under IFRS 9.
(3) Remeasurement represents the after-tax impact ($70 million pre-tax) of the adoption of the impairment provisions of IFRS 9.
na – not applicable due to IFRS 9 adoption.
The securities balances by measurement category following the adoption of IFRS 9 as at November 1, 2017 were:
(Canadian $ in millions)
Trading
FVTPL
FVOCI
Amortized cost
Other
Total
November 1, 2017
90,535
10,948
51,909
9,177
627
163,196
The primary impact as a result of adopting the classification and measurement provisions of IFRS 9 relates to securities held by the bank.
On transition, our existing held-to-maturity securities continued to qualify for amortized cost treatment, as they are held with the intent to collect
contractual cash flows and those cash flows represent solely payments of principal and interest.
Our available-for-sale portfolio was reclassified based on the result of the business model and contractual cash flow tests. All available-for-sale
securities that represented equity instruments were reclassified as fair value through profit or loss. Available-for-sale securities that represented
investments in debt instruments were generally classified as fair value through other comprehensive income. Certain available-for-sale debt securities
were classified as fair value through profit or loss, as their contractual cash flows did not represent solely payments of principal and interest. Certain
available-for-sale debt securities were classified as amortized cost, as they are held with the intent to collect contractual cash flows and those cash
flows represent solely payments of principal and interest. On transition, investments held in our merchant banking business are classified as fair value
through profit or loss and no longer require designation under the fair value option.
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BMO Financial Group 202nd Annual Report 2019 205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our lending portfolios continue to be recorded at amortized cost, with the exception of certain business and government loans with contractual
cash flows that did not represent solely payments of principal and interest, and were classified as fair value through profit or loss.
The following table illustrates the impact of transition to IFRS 9 on the allowance for credit losses as of November 1, 2017.
(Canadian $ in millions)
Loans
Residential mortgages
Consumer instalment and other
Credit cards
Business and government
Total allowance for credit losses
Allowance for credit losses on remaining
financial assets (1)
Allowance for credit losses on
off-balance sheet exposures
Total
IAS 39 collective
allowance
IAS 39 specific
allowance
IAS 39
allowance
Remeasurement
IFRS 9
allowance
IFRS 9 Stage 1
IFRS 9 Stage 2
IFRS 9 Stage 3
69
343
243
785
1,440
–
136
1,576
24
136
–
233
393
–
27
420
93
479
243
1,018
1,833
–
163
1,996
(20)
71
41
(246)
(154)
8
76
(70)
73
550
284
772
1,679
8
239
1,926
16
70
63
205
354
7
89
450
33
344
221
334
932
1
123
1,056
24
136
–
233
393
–
27
420
(1) Represents cash and cash equivalents, interest bearing deposits with banks, securities, securities borrowed or purchased under resale agreements and other assets.
Accounting Policies for Financial Instruments under IAS 39, Financial Instruments: Recognition and Measurement
The following accounting policies apply to comparative information for 2017 in our consolidated financial statements as we did not restate prior
periods on adoption of IFRS 9.
Classification and Measurement of Securities
Securities are divided into four types: trading securities designated at FVTPL, available-for-sale securities, held-to-maturity securities and other
securities.
Trading securities are securities that we purchase for resale over a short period of time. We classify trading securities and securities designated
under the fair value option at fair value through profit or loss.
We record the transaction costs, gains and losses realized on disposal and unrealized gains and losses due to changes in fair value in our
Consolidated Statement of Income in trading revenues. Securities designated at FVTPL are financial instruments that are accounted for at fair value,
with changes in fair value recorded in income provided they meet certain criteria.
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 in order 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 (recoveries) 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.
Held-to-maturity securities are debt securities that we have the intention and ability to hold to maturity and that do not meet the definition of a
loan. These securities are initially recorded at fair value plus transaction costs and subsequently measured at amortized cost using the effective
interest method. Impairment losses are recorded in our Consolidated Statement of Income in securities gains (losses), other than trading. Interest
income earned and amortization of premiums or discounts on these 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). We account for these other securities using the equity method of
accounting. Other securities also include certain securities held by our merchant banking business.
Impairment of 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.
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.
The impairment loss on available-for-sale securities is the difference between the security’s amortized cost and its current fair value, less any
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previously recognized impairment losses. If there is objective evidence of impairment, a write-down is transferred from our Consolidated Statement
of Comprehensive Income, unrealized gains (losses) on available-for-sale securities, to our Consolidated Statement of Income in securities gains,
other than trading.
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.
206 BMO Financial Group 202nd Annual Report 2019
For available-for-sale 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. For available-for-sale
equity securities, previous impairment losses are not reversed through net income, and any subsequent increases in fair value are recorded in other
comprehensive income. 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.
Loans
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 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.
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 result in an increase or decrease in the allowance
for credit losses.
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 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 reviewed and approved by an independent credit officer.
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 estate properties, accounts receivable, guarantees, inventory or other capital assets.
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 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 IAS 39, 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.
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BMO Financial Group 202nd Annual Report 2019 207
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 business
performance.
Page 17
Allowance for Credit Losses
represents an amount deemed
appropriate by management to absorb
credit-related losses on loans and
acceptances and other credit
instruments, in accordance with
applicable accounting standards.
Allowance on Performing Loans is
maintained to cover impairment in the
existing portfolio for loans that have
not yet been individually identified as
impaired. Allowance on Impaired
Loans is maintained to reduce the
carrying value of individually identified
impaired loans to the expected
recoverable amount.
Pages 82, 107
Assets under Administration and
Assets under Management refers
to assets administered or managed
by a financial 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
assets such as trade receivables, and
is generally used for short-term
financing needs.
Pages 66, 97
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and loans
and securities, over a one-year period.
Bail-In Debt is senior unsecured
debt subject to the Canadian Bail-In
Regime. Bail-in debt includes senior
unsecured debt issued directly by the
bank on or after September 23, 2018,
which has an original term greater
than 400 days and is marketable,
subject to certain exceptions. Some
or all of this debt may be statutorily
converted into common shares of the
bank under the Bail-In Regime if the
bank enters resolution.
Pages 60, 61, 96, 97
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 is the potential for
loss or harm as a result of the specific
business activities of an enterprise and
the effects these could have on its
earnings.
Page 105
Common Equity Tier 1 (CET1) capital
is comprised of common shareholders’
equity less deductions for goodwill,
intangible assets, pension assets,
certain deferred tax assets and certain
other items.
Pages 62, 187
Common Equity Tier 1 Ratio reflects
CET1 capital divided by risk-weighted
assets.
Pages 22, 59, 60, 61, 63, 187
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.
Corporate Services consists of
Corporate Units and Technology and
Operations (T&O). Corporate Units
provide enterprise-wide expertise,
governance and support in a variety
of areas, including strategic planning,
risk management, finance, legal &
regulatory compliance, human
resources, communications,
marketing, real estate, procurement,
data and analytics and innovation.
T&O develops, monitors, manages and
maintains governance of information
technology, and also provides cyber
security and operations services.
Page 50
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.
Pages 78, 158
Derivatives are contracts with a
value that is derived from movements
in underlying 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 calculated
by dividing net income attributable to
bank shareholders, after deducting
preferred share dividends and
distributions on other equity
instruments, 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.
Adjusted EPS is calculated in the same
manner using adjusted net income.
Pages 21, 197
Earnings Sensitivity is a measure
of the impact of potential changes
in interest rates on the projected
12-month pre-tax net income of a
portfolio of assets, liabilities and
off-balance sheet positions in
response to prescribed parallel interest
rate movements, with interest rates
floored at zero.
Page 89
208 BMO Financial Group 202nd Annual Report 2019
Economic Capital is an expression
of the enterprise’s capital demand
requirement relative to its view of
the economic risks in its underlying
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 consistent basis
across such risks. Economic capital is
calculated for various types of risk,
including credit, market (trading and
non-trading), operational, business
and insurance, based on a one-year
time horizon using a defined
confidence level.
Pages 63, 64
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, with
interest rates floored at zero.
Page 89
Efficiency Ratio (or Expense-to-
Revenue Ratio) is a measure of
productivity. It is calculated as
non-interest expense divided by total
revenue, expressed as a percentage.
The adjusted efficiency ratio is
calculated in the same manner,
utilizing adjusted total revenue and
non-interest expense.
Page 30
Environmental and Social Risk is
the potential for loss or harm resulting
from environmental or social impacts
or concerns, including climate change,
related to BMO or its customers.
Page 105
Fair Value is the amount of
consideration that would be agreed
upon in an arm’s-length transaction
between knowledgeable, willing
parties who are under no compulsion
to act in an orderly market transaction.
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 margin requirements.
Page 162
Hedging is a risk management
technique used to neutralize, manage
or offset interest rate, foreign
currency, equity, commodity or credit
risk exposures arising from normal
banking activities.
Impaired Loans are loans for
which there is no longer reasonable
assurance of the timely collection of
principal or interest.
Incremental Risk Charge (IRC)
complements the VaR and SVaR
metrics and represents an estimate
of the default and migration risks of
non-securitization products held in the
trading book with exposure to interest
rate risk, measured over a one-year
horizon at a 99.9% confidence level.
Page 86
Insurance Risk is the potential for
loss as a result of actual experience
differing from that assumed when an
insurance product was designed and
priced. It generally entails the inherent
unpredictability that can arise from
assuming long-term policy liabilities or
from the uncertainty of future events.
Insurance provides protection against
the financial consequences of insured
risks by transferring those risks to the
insurer (under specific terms and
conditions) in exchange for premiums.
Insurance risk is inherent in all of our
insurance products, including annuities
and life, accident and sickness, and
creditor insurance, as well as in our
reinsurance business.
Page 91
Legal and Regulatory Risk is the
potential for loss or harm resulting
from a failure to comply with laws or
satisfy contractual obligations or
regulatory requirements. This includes
the risks of failure 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; or act in
a manner so as to maintain our
reputation.
Page 103
Leverage Ratio reflects Tier 1 capital
divided by the sum of on-balance
sheet items and specified off-balance
sheet items, net of specified
adjustments.
Page 60
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 become due. Financial
commitments include liabilities to
depositors and suppliers, and lending,
investment and pledging
commitments.
Page 91
Liquidity Coverage Ratio (LCR) is a
Basel III regulatory metric calculated
as the ratio of high-quality liquid
assets to total net stressed cash
outflows over a thirty-day period
under a regulatory-prescribed stress
scenario.
Pages 94, 95
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 86, 159
Mark-to-Market represents the
valuation of financial instruments
at market rates as of the balance
sheet date, where required by
accounting rules.
Net Interest Income is comprised of
earnings on assets, such as loans and
securities, including interest and
certain dividend income, less interest
expense paid on liabilities, such as
deposits.
Page 26
Net Interest Margin is the ratio of net
interest income to average earning
assets, expressed as a percentage or
in basis points. Net interest margin is
sometimes computed using total
assets.
Page 26
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
Instruments 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 30
Operational Risk is the potential for
loss or harm resulting from inadequate
or failed internal processes or systems,
human errors or misconduct or
external events, but excludes business
risk, credit risk, market risk, liquidity
risk and other financial risk.
Page 100
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 162
Provision for Credit Losses (PCL)
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
instruments, given the composition of
the portfolio, the probability of default,
the economic environment and the
allowance for credit losses already
established. The PCL can be comprised
of both a provision for credit losses on
impaired loans and a provision for
credit losses on performing loans.
Pages 29, 55, 82
Reputation Risk is the potential for
loss or harm to the BMO brand. It can
arise even if other risks are managed
effectively.
Page 106
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.
Pages 22, 55
Return on Tangible Common Equity
(ROTCE) is calculated as net income
available to common shareholders
adjusted for the amortization of
acquisition-related intangible assets
as a percentage of average tangible
common equity. Adjusted ROTCE is
calculated using adjusted net income
rather than net income.
Pages 22, 55
Risk-Weighted Assets (RWA) are
defined as on-balance sheet and
off-balance sheet exposures that are
risk-weighted based on guidelines
established by OSFI. The term is used
for capital management and
regulatory reporting purposes.
Page 60
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
supported 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, auto loans and
credit card debt obligations, to third
parties or trusts, which then typically
issue a series of asset-backed
securities to investors to fund the
purchase of the contractual debts.
Page 66
Strategic Risk is the potential for loss
or harm due to changes in the external
business environment and/or failure to
respond appropriately to these
changes as a result of inaction,
ineffective strategies or poor
implementation of strategies.
Page 105
Stressed Value at Risk (SVaR)
measures the maximum loss likely
to be experienced in the trading and
underwriting portfolios, measured at a
99% confidence level over a one-day
holding period, with model inputs
calibrated to historical data from a
period of significant financial stress.
SVaR is calculated 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.
Page 86
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.
Page 67
Structural (Non-Trading) Market
Risk is comprised of interest rate risk
arising from banking activities (loans
and deposits) and foreign exchange
risk arising from our foreign currency
operations and exposures.
Page 89
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
counterparty pays the other a fee in
exchange for an agreement by the
other counterparty 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
securities for a 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.
• 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.
Page 162
Tangible Common Equity is
calculated as common shareholders’
equity less goodwill and acquisition-
related intangible assets, net of
related deferred tax liabilities.
Page 22
Taxable Equivalent Basis (teb):
Revenues of operating groups are
presented in our MD&A on a taxable
equivalent basis (teb). Revenue and
the provision for income taxes are
increased on tax-exempt securities
to an equivalent before-tax basis to
facilitate comparisons of income
between taxable and tax-exempt
sources.
Pages 25, 200
Tier 1 Capital is comprised of CET1
and Additional Tier 1 (AT1) Capital.
AT1 capital consists of preferred shares
and other AT1 capital instruments, less
regulatory deductions.
Pages 60, 187
Tier 1 Capital Ratio reflects Tier 1
capital divided by risk-weighted
assets.
Pages 60, 187
Tier 2 capital is comprised of
subordinated debentures and may
include certain loan loss allowances
less regulatory deductions.
Pages 60, 187
Total Loss Absorbing Capacity (TLAC)
is comprised of total capital and senior
unsecured debt subject to the
Canadian Bail-In Regime. The largest
Canadian banks are required to meet
minimum TLAC RWA-based and
leverage-based ratios effective
November 1, 2021, as calculated
under OSFI’s TLAC Guideline.
Pages 60, 96, 104
Total Capital includes Tier 1 and Tier 2
capital.
Pages 60, 187
Total Capital Ratio reflects Total
capital divided by risk-weighted
assets.
Pages 60, 187
Total Shareholder Return: The three-
year and five-year 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 three-year and five-
year period, respectively. The return
includes the change in share price and
assumes dividends received were
reinvested in additional common
shares. The one-year TSR also assumes
that dividends were reinvested in
shares.
Page 21
Trading and Underwriting Market
Risk gives rise to market risk
associated with buying and selling
financial products in the course of
meeting customer requirements,
including market making and related
financing activities, and assisting
clients to raise funds by way of
securities issuance.
Page 86
Trading-Related Revenue includes
net interest income and non-interest
revenue earned from on-balance sheet
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 revenue includes 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 27
Value-at-Risk (VaR) measures
the maximum loss likely to be
experienced in the trading and
underwriting portfolios, measured at a
99% confidence level over a one-day
holding period. VaR is calculated 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.
Pages 86, 87
BMO Financial Group 202nd Annual Report 2019 209
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 2020 and will be available on our website.
www.bmo.com/corporategovernance
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 and NASDAQ Stock Market
Rules is posted on our website.
www.bmo.com/corporategovernance
Sustainability Performance
BMO’s Sustainability Report and Public
Accountability Statement (PAS)1 outlines how
we govern, manage, measure and disclose the
environmental and social risks and
opportunities related to our business while
creating value for our many stakeholders.
We use the Global Reporting Initiative (GRI)
Standards as a framework for reporting on our
sustainability performance, along with other
internationally recognized standards, including
those issued by the Sustainability Accounting
Standards Board (SASB). The 2019 Sustainability
Report/PAS will be available on our website in
December 2019.
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 by emailing corp.secretary@bmo.com.
1 In previous years, the title of the Sustainability Report was
the Environmental, Social and Governance Report.
210 BMO Financial Group 202nd Annual Report 2019
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/ca/en
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.)
Computershare Investor Services PLC is the
Transfer Agent and Registrar for common shares
in Bristol, United Kingdom
Online filing information:
BMO filings in Canada
Canadian Securities Administrators
www.sedar.com
BMO filings in the United States
Securities and Exchange Commission
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
and Research Analysts
To obtain additional financial information:
Investor Relations Department
BMO Financial Group
10th Floor, 1 First Canadian Place
Toronto, ON M5X 1A1
Email: investor.relations@bmo.com
Employees
For information on BMO’s Employee Share
Ownership Plan:
Call: 1-877-266-6789
General
To obtain printed copies of the
annual report or make inquiries
about company news and initiatives:
Corporate Communications Department
BMO Financial Group
176 Yonge Street, 7th Floor
Toronto, ON M5B 1M4
On peut obtenir sur demande
un exemplaire en français.
www.bmo.com
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
BMO InvestorLine: 1-888-776-6886
www.bmoinvestorline.com
BMO Harris Bank
United States: 1-888-340-2265
Outside the United States: 1-847-238-2265
www.bmoharris.com
BMO Nesbitt Burns: 416-359-4000
www.bmonesbittburns.com
The following are trademarks of Bank of Montreal or its subsidiaries:
BMO and the M-bar roundel symbol; BMO Capital Markets; BMO Financial Group; BMO Global Asset Management;
BMO Harris Bank; BMO Private Banking; BMO Private Wealth; BMO Wealth Management; Boldly Grow the Good;
and InvestorLine.
The following are trademarks owned by other parties:
Bloomberg is a trademark of Bloomberg Finance L.P.
The Forrester Banking Wave is a trademark of Forrester Research.
Global Finance is a trademark of Keller International Publishing Corporation.
World’s Most Ethical Companies is a trademark of Ethisphere Institute.
Shareholder Information
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 2019
Primary stock
exchanges
TSX
NYSE
Ticker
BMO
BMO
Closing price
October 31, 2019
High
Low
$97.50
US$73.99
$106.41
US$79.14
$86.32
US$63.51
Total volume of
shares traded
424.2 million
137.0 million
Common Share History
Date
March 14, 2001
March 20, 1993
June 23, 1967
Action
Common share effect
100% stock dividend
100% stock dividend
Stock split
Equivalent to a 2-for-1 stock split
Equivalent to a 2-for-1 stock split
5-for-1 stock split
Important Dates
Fiscal Year End
Annual Meeting
October 31
March 31, 2020 | 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
2020 Dividend Payment Dates*
Common and preferred
shares record dates
Common shares
payment dates
Preferred shares
payment dates
February 3
May 1
August 4
November 2
February 26
May 26
August 26
November 26
February 25
May 25
August 25
November 25
*Subject to approval by the Board of Directors.
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
Montreal, Toronto, Calgary and Vancouver.
Computershare Investor Services PLC and
Computershare Trust Company, N.A. serve as
Transfer Agents and Registrars for common
shares in Bristol, United Kingdom and Canton,
Massachusetts, respec tively. See previous
page for contact information.
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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.
Your vote
matters.
Look out for
your proxy
circular in March
and remember
to vote.
Employee Ownership*
83.5% of Canadian employees participate
in the BMO Employee Share Ownership
Plan – a clear indication of their
commitment to the company.
*As at October 31, 2019.
Credit Ratings
Credit rating information appears on page 97
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
Auditors KPMG LLP
Layout_191104
Women
Empowered
In 2019, BMO made a bold commitment to strengthen
our support for women-owned enterprises, with
focused, wrap-around support from bankers dedicated
to the needs of female entrepreneurs and investors.
This commitment was the natural next step following
our 2018 pledge to make $3 billion in capital available
to Canadian women entrepreneurs over a three-year
period. And it’s part of a broader set of initiatives within
the BMO for Women program, including partnerships
with leading organizations offering support and
advocacy for women business owners; an online
platform providing them with education, tool kits and
research; and BMO Celebrating Women, a unique
program recognizing women who’ve achieved success
in business and/or given back to their communities.
We’ve long focused on advancing gender equality
within BMO as we work to foster diversity and
inclusion across the bank. We lead our competitors
in the representation of women on our board and in
senior management. And we’re proud to have received
honours like the Catalyst award – twice – for our support
of women in the workplace. But BMO employees are
even prouder of what we do together every day to help
women take charge of their financial futures and realize
the potential of their businesses to transform the
marketplace and strengthen our economy.
#bmoforwomen
bmoforwomen.com
Anna Belanger, founder of an Ottawa-area
chain of massage therapy clinics and BMO
Celebrating Women honoree. The program
has recognized more than 170 women across
North America since 2012 for their success in
business and community-building.