204th Annual Report 2021
BMO Financial Group
2021 Annual Report
to Shareholders
Business Review
2
3
4
5
Financial Performance
2021 Highlights
Endings and Beginnings
Chair’s Message
6 A North American Bank
7
Chief Executive Officer’s
Message
10 Net-Zero Ambition
12 Digital First
14 Our Bold Commitments
16
Board of Directors and
Executive Committee
Financial Review
17 Enhanced Disclosure
Task Force
18 Management’s Discussion
and Analysis
122 Supplemental Information
139 Statement of Management’s
Responsibility for Financial
Information
140 Independent Auditors’ Report
143 Reports of Independent
Registered Public Accounting
Firm
146 Consolidated Financial
Statements
151 Notes to Consolidated
Financial Statements
Resources and Directories
136 Glossary of Financial Terms
212 Where to Find More
Information
IBC Shareholder Information
ABOUT BMO
A purpose-driven bank...
BMO is a diversified North American financial services
provider with a proud 204-year history and a clear
strategy for the future. Guided by our values and
driven by a deep sense of purpose, we serve more
than 12 million customers through three integrated
operating groups: Personal and Commercial Banking,
BMO Capital Markets and BMO Wealth Management.
Our bank is focused on being innovative, agile and
uniquely competitive in a fast-changing world. We’re
led by more than 12 million customers – individuals,
families, businesses, institutional clients and
communities – who inspire us to grow our own
business, create value for our shareholders and
advance positive social change.
12+
million
8th
largest
customers globally
bank in North America by assets
$988
billion
1817
in total assets
Canada’s first bank, established in 1817
A future-ready bank
As the world emerges from a transformative crisis and
the economy regains traction, BMO has never been better
positioned for continued growth. Strong operating momentum;
industry-leading customer loyalty; data-informed risk
management; the flexibility to leverage our capital strength
– these are the building blocks of a bank that’s ready for
the future.
We help our customers achieve their goals with digitally
enabled products and services designed for speed, convenience
and efficiency – and powered by human advice. And we
foster a winning culture in which people across BMO are
aligned in our decision-making, empowered to drive
long-term change and recognized for our efforts to advance
the bank’s strategic priorities.
BMO has bold ambitions to accelerate our
growth as a leading North American bank,
one that helps to further a more inclusive
society, a sustainable future, and a thriving
economy in which everyone benefits.
BMO Financial Group 204th Annual Report 2021 1
Financial Performance
Medium-term objectives
2021 financial performance
Reported1
Adjusted1
Adjusted EPS growth of 7% to 10%
Adjusted ROE of 15% or more
Adjusted net operating leverage of 2%
or more
53.3%
14.9%
0.4%
68.0%
16.7%
6.1%
Capital ratios that exceed
regulatory requirements
13.7%
CET1 Ratio2
Total shareholder return (%)
BMO
S&P/TSX Composite Index
75.9
38.8
15.7 15.4
14.0
10.6
1-year
3-year
5-year
Earnings per share growth (%)
Average annual ROE (%)
Common Equity Tier 1 Ratio (%)
Reported
Adjusted1
Reported
Adjusted1
68.0
53.3
(12.8)
(18.2)
14.3
10.3
6.0
8.3
3.3
4.9
16.7
14.9
13.7
12.6
10.1 10.3
2017
2018
2019
2020
2021
2019
2020
2021
Reported
13.7
11.4
11.9
2019
2020
2021
Reported Net Revenue1
by Geography
Net Revenue1 (C$ billions)
Net Income (C$ billions)
Reported / Adjusted
Reported
Adjusted1
25.8
8.7
7.8
23.5
22.8
6.2
5.8
5.1 5.2
U.S.
36%
Other
6%
Canada
58%
Canadian
P&C
34%
Reported Net Revenue1
by Operating Group3
BMO CM
23%
BMO WM
22%
U.S. P&C
21%
2019
2020
2021
2019
2020
2021
1 Net revenue and all adjusted measures are non-GAAP measures. For further information, see the Non-GAAP and
Other Financial Measures section of Management’s Discussion and Analysis (“MD&A”). Regarding the composition
of non-GAAP and other financial measures, including supplementary financial measures, refer to the Glossary of
Financial Terms in the MD&A.
2 The CET1 ratio is disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline.
3 Percentages determined excluding results in Corporate Services.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Bank of Montreal brands the organization’s member companies as BMO Financial Group. Note 26 of the financial
statements lists the intercorporate relationships among Bank of Montreal and its significant subsidiaries.
2 BMO Financial Group 204th Annual Report 2021
2021 Highlights
Business driven
A clear
BMO EMpower
by purpose
Four years in a row on Ethisphere’s World’s
Most Ethical Companies®; six years in a row
on Bloomberg’s Gender-Equality Index.
Leading the banking sector in
sustainability
BMO is one of only two North American
banks on the Dow Jones Sustainability
World Index, and Corporate Knights’ most
sustainable bank in North America.
Diversifying
our senior leadership
In the U.S., we’ve set a target of increasing
representation of People of Color in senior
roles to 30% – and we’re more than two-
thirds of the way there.
ambition
We’ve made a
commitment to a
sustainable future,
including the ambition
to be our clients’ lead
partner in the transition
to a net-zero world.
Finance for a
better
society
From leading the
City of Toronto’s $100
million Social Bond to
acting as sole agent for
Sandstorm Gold Royalties’
sustainability-linked loan,
we are Growing the Good
in finance.
US$5billion
for minority opportunity
By tackling barriers to financial
inclusion, we’re creating
opportunities for success among
minority businesses, communities
and families in the United States.
Affordable
housing
We’ve earmarked $12 billion
to finance housing that meets
accredited affordable housing
definitions across Canada –
supporting CMHC’s aspiration that
every Canadian be in a home they
can afford by 2030.
A 193-Year Dividend Record
BMO Financial Group has the longest-running dividend payout record
of any company in Canada, at 193 years. BMO common shares had
an annual dividend yield of 3.2% at October 31, 2021.
Compound annual growth rate
4.3%
BMO 15-year
4.5%
BMO 5-year
Dividends declared
($ per share)
2.71
2.80
2.80
2.80
2.80
2.26
2.82
2.94
3.08
3.24
3.40
3.56
4.06
3.78
4.24
4.24
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
BMO Financial Group 204th Annual Report 2021 3
We are at a special
moment in time.
As our lives return to
something more familiar,
our generation has the
chance to build something
new. We can end barriers
that hold others back. Turn
inequity into opportunity.
Exclusion into inclusion.
At BMO, we are all coming
together to ensure that
as the world rebuilds,
everyone benefits.
Vlatka Puljic
Ambassador, BMO Employee Giving
Director, Project Management
NA Business Banking
Chicago, IL
Photo: Jacob Hand Photography
4 BMO Financial Group 204th Annual Report 2021
4 BMO Financial Group 204th Annual Report 20
21
CHAIR’S MESSAGE
George A. Cope
Chair of the Board
RECENTLY, I CHAIRED A MEETING of your Board of Directors
that was extraordinary for almost being ordinary.
The directors met in person.
Though we observed the COVID-19 protocols – vaccinations and
testing, face coverings, physical distancing, frequent sanitizing –
and met safely in the spacious auditorium at the BMO Institute
For Learning, it was the first time in 18 months that we were all
together, face to face. I was just completing my first full fiscal year
as Chair and up to that point, since my appointment, all our
meetings had been held virtually.
I saw this as a marker of how far we had come and how our world
had begun to recover from the pandemic. While it is clearly far from
over, we regard the prospects for a strong economic recovery to be
good, and that is good for our employees, and good for our customers.
For some customers, however, we recognize that the recovery may
take longer – but rest assured that, as we did during the worst days
of the pandemic, we will be there to stand by BMO’s customers.
This too is part of Boldly Growing the Good in business and life.
Changing the way we work
Much has changed in the past year, but perhaps most significant
for BMO is the transformation in the way our customers choose
to do business with us. Long before the pandemic, we had
begun to establish the infrastructure to transform BMO into a
Digital First bank and, while the transformation isn’t yet complete,
it is certainly well advanced. The board is very pleased with the
energy of the management team and their relentless focus on
supporting our customers, changing the way we work, and
accelerating the digital transformation – as Darryl spells out
in his Message to Shareholders.
significantly in the past year, and we can expect it will be
ever-present as the world grapples with climate change and the
massive transition that will be required of all of us. BMO’s ambition
is to be our clients’ lead partner in the transition to a net-zero
world, and the board is well positioned to oversee this priority.
Adding strength to strength
There were three important changes to the makeup of the Board
of Directors in the past year. As I announced in last year’s Annual
Report, one of our longest-serving directors, Ron Farmer, retired
from the board at last year’s Annual Meeting. We continue to miss
his wise counsel and good humour.
At that same meeting, we welcomed two new directors to our
boardroom: Madhu Ranganathan from OpenText Corporation,
who brings not only more than 30 years of financial leadership,
but also deep understanding of the role of technology in the
workplace, which is so relevant to businesses today, and Stephen
Dent, from Birch Hill Equity Partners, who has more than 30 years
of experience in private equity and deep expertise in capital
allocation, strategic planning, accounting and finance. Madhu
and Steve have already proven to be excellent additions to our
Board of Directors.
Our 13-member board now comprises six women and seven men,
in keeping with our commitment to maintain a gender-balanced
board. In addition, as was the case last year, three of our four
standing committees are chaired by women. I should also note
that, as a reflection of our emphasis on competing vigorously on
both sides of the border, we now have balanced representation
on the board from both Canada and the United States – six of our
directors are American and seven are Canadian. BMO generates
about 40% of its earnings in the United States, which BMO continues
to regard as a market with significant potential for growth. As it
stands today, BMO is, by assets, the eighth largest bank on the
continent, and our U.S. lines of business are the fastest-growing
areas of the bank.
BMO’s strategy is succeeding, and our performance last year
reflects the strength of BMO’s greatest asset: its people. The
winning culture that prevails at BMO, grounded in our shared
Purpose, positions us well to achieve our bold ambitions.
All of us on the board thank you, as shareholders, for the trust
you have placed in us to represent your interests. Looking back
on the past year, we are very satisfied with the bank’s financial
results and the progress we have made to advance our commitment
to attain a sustainable future. These are a testament to the hard
work of our management team and our employees, and we thank
all of them for another successful year.
Our long-standing focus on sustainability – articulated when we
first set out our Sustainability Principles – has strengthened
George A. Cope
BMO Financial Group 204th Annual Report 2021 5
A North
American Bank
Since 1818, when we opened our first agency in New York, BMO
has embraced a North American view on our business and growth
opportunities. Today, our businesses are unified in strategy, Purpose
and brand, and we are the only bank that runs all of its operating
groups on an integrated basis on both sides of the border, driving
efficiencies, scale and speed to market.
Fully integrated North American
Treasury and Payments platform,
delivering cross-border solutions.
Digital deposit capabilities in all
50 states.
Refocusing the Wealth Management
business for North American growth.
Cloud-based architecture and
technologies, adopted on a North
American scale for our Transportation
Finance business, have allowed us
to innovate quickly, efficiently and
often. The success of this approach
is now being leveraged across our
businesses.
A culture of Growing the Good
With 90% participation across the bank,
employees pledged $23 million this
past year in support of United Way
and other charities.
8th
largest
bank in North America by assets.
Top 10
commercial lender
in North America with an integrated
platform and broad-based capabilities
to accelerate the growth of BMO’s
expertise and market presence in
key regions.
36%
of revenue comes from our U.S.
businesses, which represent BMO’s
fastest-growing geographic segment.
Over 50% of this revenue is from
outside our core Midwest footprint.
BMO Tower
790 N Water St, Milwaukee, Wisconsin
Photo: Marty Peters Photography
6 BMO Financial Group 204th Annual Report 2021
6 BMO Financial Group 204th Annual Report 2021
CHIEF EXECUTIVE OFFICER’S MESSAGE
Darryl White
Chief Executive Officer
WE’RE MOVING FORWARD with energy and confidence
as we continue to build our high-performing, digitally enabled,
future-ready bank with leading efficiency, profitability and loyalty
– all powered by a winning culture and driven by our Purpose.
We’re optimistic about that future. Around the world, economies
are reopening as safe and effective vaccines are steadily reaching
populations, slowing the spread of COVID-19. As the communities
we serve turn the corner from crisis to recovery, we’re focused on
helping our customers regain momentum and make real financial
progress. We’ve witnessed their resilience as they’ve adapted to
meet the challenges the pandemic has brought.
And now, the energy of the economic recovery brings with it an
unprecedented opportunity to make progress. It’s a unique moment,
and we can harness that energy to build a more equitable economy
and a fairer world. Every day, our employees are active in their
communities, supporting our customers through the recovery and
beyond, with bold ambitions for the future inspired by our Purpose
to Boldly Grow the Good in business and life for everyone.
Consistent strength through headwinds
To fulfill our Purpose, we need to be the strongest bank we can be.
Strong and sustainable long-term financial performance drives
our capability to grow the good. On this front, it has been an
encouraging year. BMO’s superior risk management and strong
capital position have strategically positioned us for the economic
recovery in 2021. Despite the volatility caused by the pandemic and
the extraordinary operational challenges it presented, we delivered
very competitive performance. Our diversified business mix across
personal and commercial banking, wealth management and capital
markets enabled us to deliver solid, well-balanced results. And our
ongoing investments in digital technology, product innovation and
advisory capabilities contributed to enhanced customer loyalty.
We took targeted actions to drive long-term profitability with
a disciplined approach to expense management and capital
allocation, and made meaningful investments to position
BMO for future growth. We’re proud of our achievements in
significantly improving our efficiency ratio, our return on equity
and our positive operating leverage over the past three years.
With continued outperformance in risk management and a
CET1 Ratio of 13.7%, we are poised for growth and for increasing
shareholder returns.
The tapering of monetary support and fiscal stimulus intended
to ease economic hardship is an encouraging sign of the
economic rebound. The global economy has shown remarkable
resilience in an evolving landscape of pandemic-related
restrictions – and so have our customers. With vaccination rates
climbing, the Canadian and U.S. economies are experiencing
their strongest growth in decades.
In Canada, small businesses – hardest hit by the pandemic – are
expected to lead the next leg of the recovery. And by the fall
of 2021, Canada had recovered the three million jobs lost in the
spring of 2020, with women’s labour force participation growth
leading the way; while the U.S. economy also saw job numbers
rebound and unemployment rates continue to decline.
In 2021, BMO’s U.S. footprint
is no longer defined as the
Midwest – it’s the U.S.
Despite the optimism, growth has also been tempered by
the pandemic’s effects on labour markets, global supply-chain
disruptions and surging energy prices. Even with pent-up
consumer demand and savings driving increased spending,
many businesses are still struggling to get back to pre-pandemic
levels of activity. However, as global economies show continued
resilience, there is reason for optimism as we move forward.
North American bank
We have been steadily growing our presence in the United States
since the acquisition of Harris Bank in 1984, with significant
acceleration over the past decade. We’ve expanded the breadth
of our commercial banking business on a national basis across
13 industry verticals while opening offices in Atlanta, Fort Worth,
Los Angeles, Denver and Orlando since 2019; all while growing to
rank among the top 10 commercial banking lenders on a North
American basis. We have grown our U.S. capital markets business
revenue by 47% since 2019 and expanded our digital banking
capabilities to serve customers in all 50 U.S. states.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP and Other Financial Measures section.
BMO Financial Group 204th Annual Report 2021 7
CHIEF EXECUTIVE OFFICER’S MESSAGE
In 2021, our U.S. operating segment generated 36% of BMO’s revenue,
with approximately half of that revenue originating outside the
U.S. Midwest. Our U.S. operations are our fastest growing segment
and are now generating returns and efficiency on par with the rest
of the bank, with the stage set for further growth as the economy
rebounds. In 2021, BMO’s U.S. footprint is no longer defined as the
Midwest – it’s the U.S.
Digitally enabled
BMO’s Digital First strategy enables greater integration between
business and technology, helping us provide our customers greater
convenience and take advantage of the benefits of digital scale.
As an early adopter of technology and innovation in banking,
we see digital as far more than a customer channel; it powers
everything we do to meet our customers’ needs. We’re well into
the next stage of digitalization across BMO, and it’s having a
profound effect as an enabler of both growth and client loyalty.
We’re embracing the future as a digital first bank, and we have
aligned our solid technology foundation and significant technology
investments with our digital agenda to drive efficiency, increase
our speed to market and enhance the customer experience. This
has led to faster customer growth, more secure data management,
and the deployment of leading cloud, data and artificial
intelligence capabilities.
In a digital world, customers expect a simple, secure and
convenient digital experience. We operate with speed and use
data to deliver a personalized customer experience with
easy-to-use tools and easy-to-access advice. We are well-recognized
for our industry-leading customer innovations, such as BMO
CashTrack, Online Banking for Business, BMO Payment Hub,
and BMO adviceDirect.
Our significant fintech and technology partnerships have helped
us enhance our competitive position, navigate disruption and drive
business outcomes. We are leveraging digital adoption to expand
the markets we serve across our lines of business with integrated
technology partnerships. Digital is how we do business.
While the future of banking is digital, a customer-centric approach
is key as we continue to advance our advisory services and delivery
channels for emerging North American open banking frameworks.
We know that an approach that prioritizes security, transparency
and customer control will enable all financial players to serve the
full range of banking needs seamlessly.
Purpose-driven: Growing the good
across every aspect of ESG
Our Purpose is why we do business. We’re committed to creating
a more inclusive and equitable society, especially for groups
facing systemic barriers, including Black, Latinx and Indigenous
colleagues, customers and communities. Last year we announced
BMO’s bold new diversity, equity and inclusion strategy, Zero
Barriers to Inclusion 2025, making significant commitments
to drive greater access to social and economic opportunities.
Our purpose commitment
to double the good
For a thriving economy
Increasing support for small businesses,
and women entrepreneurs and
Canadian Indigenous and military
customers
For a sustainable future
Being our clients’ lead partner in
the transition to a net-zero world,
delivering on our commitments
to sustainable financing and
responsible investing
For an inclusive society
Committing to zero barriers to
inclusion, supporting equal
access to opportunities for our
colleagues and customers, and
the communities we serve
BMO is building a high
performance, digitally
enabled bank that’s ready
for the future. Anchored in
our Purpose, we are driven
by our strategic priorities
for growth, strengthened
by our approach to
sustainability and guided
by our values to build a
foundation of trust with
our stakeholders and
achieve leading customer
loyalty.
See MD&A page 20 for a full description
of our strategy.
Our strategic priorities
Our group strategic priorities align
with and support our enterprise-
wide strategy, positioning us well
to drive competitive performance.
World-class client loyalty and
growth
Winning culture driven by
alignment, empowerment and
recognition
Digital first for speed, efficiency
and scale
Simplify work and eliminate
complexity
Superior management of risk
and capital performance
8 BMO Financial Group 204th Annual Report 2021
Just one year in, we’ve made impressive progress, launching
successful programs focused on increasing equity, including
BMO EMpower – our US$5 billion five-year commitment aimed at
breaking down barriers faced by minority businesses, communities
and families in the United States. In Canada, we announced a
$12 billion commitment to finance affordable housing over
10 years, including support for financing affordable housing
and infrastructure projects for Indigenous peoples, both on- and
off-reserve. And we expanded BMO for Women – a dedicated
enterprise-wide program that helps remove barriers to women’s
empowerment, while promoting an inclusive market – to a
North America scale.
We take pride in serving as a leading catalyst for change. The
challenge of climate change is one that impacts us all and gives
urgency to our bold commitment to create a sustainable future.
This past year, we declared our ambition to be our clients’ lead
partner in the transition to a net-zero world and laid out the steps
that will drive our financing activities and operations in support of
this transition. We introduced the BMO Climate Institute – a new
multi-disciplinary organization harnessing science and analytics,
powered by innovative technology and industry-leading expertise.
And reinforcing our commitment to finance the climate transition,
we joined the Net-Zero Banking Alliance. Convened by the United
Nations and including six of Canada’s largest banks, this alliance
supports collaborative approaches between the public and private
sectors to reach net zero by 2050.
We are proud to be consistently recognized as a global leader in
sustainability. Included in the Dow Jones Sustainability Index for
16 years, we reached new heights in 2021 as one of only five
companies in Canada – and only two North American banks – to
be named to the DJSI World Index. In 2020, we were recognized
by The Wall Street Journal as one of the 100 most sustainably
managed companies in the world and the only bank ranked
among the top 50. In addition, we have been named the most
sustainable bank in North America by Corporate Knights for the
past two years. This is sustainability in action, and this global
recognition of our progress strengthens our resolve and confirms
we are on the right path, enabling us to convene partners and
drive solutions on the world stage.
Future-ready
We’re investing in businesses well-positioned for growth, the
technologies that enable them, and the people who will deliver
our market-leading financial advice. It’s all part of our ambition
to foster a culture of winning and be the strongest, most
competitive organization we can be. Our winning culture drives
all of us at BMO to perform at our best; with greater alignment,
empowerment and recognition than ever before. With culture
fuelling our performance, it is also changing the way we work –
and that will accelerate our progress for the long term.
With a winning culture and a competitive employee value
proposition, we are well positioned to attract and retain top talent
in this environment. Our reputation as an employer of choice and
our focus on the strategic development of our people earned
BMO Harris Bank recognition as one of the World’s Best Employers
of 2021 by Forbes magazine. We’re proud of our globally respected
brand and our award-winning culture, which is inspiring our people
to live our Purpose, while achieving their goals.
Our reputation as an employer
of choice earned BMO Harris
Bank recognition as one of
the World’s Best Employers
of 2021 by Forbes magazine.
Energized by our winning culture, we are building greater
synergy and scale to deliver winning performance. Team BMO
has modelled these behaviours throughout the pandemic, as we
adapted the way we work to support our customers. Our front-line
employees, and those who support them, have delivered exceptional
service, while other teams adjusted to remote work and never
stopped serving our customers and communities.
In the face of challenging economic headwinds, we’ve maintained
our commitment to help our customers make real financial progress
and deliver on our purpose. As headwind becomes tailwind
and we transition from a post-pandemic economic reopening to
what comes next, we must use this moment to do our part to
strengthen the financial lives of our customers and communities.
By executing on our strategy and delivering the strong operational
performance that leads to exceptional financial results, we will
fuel our capability to grow the good for a thriving economy,
a sustainable future, and a more inclusive society.
Darryl White
BMO Financial Group 204th Annual Report 2021 9
Net-Zero Ambition
BMO’s commitment to climate action is long-standing. We understand the need to play
our part in driving change, and we were one of the first banks in Canada to become carbon
neutral in our operations. Our bold commitment to a sustainable future is embedded in
our Purpose, and we are delivering on that commitment through the BMO Climate Institute
and such initiatives as our sustainable finance strategy. Our ambition is clear and our
course has been set. We aim to be our clients’ lead partner in the transition to a net-zero
world, and we are targeting net zero financed emissions in our lending by 2050.
BMO’s Net-Zero Ambition
To be our clients’ lead partner in the transition to a net-zero world
Commitment
Capabilities
Client Partnership
Acting on our commitment
to a sustainable future,
we’re playing our part to
drive the transformation
toward a net-zero world.
This means setting targets
to reduce greenhouse
gas emissions from our
operations and financed
emissions to advance the
transition to a net-zero
world by 2050 and being
transparent on our progress.
The BMO Climate Institute
provides thought leadership
at the intersection of climate
adaptation and finance. We’re
leveraging our sophisticated
analytical capabilities to
understand the impacts
of climate change and
generate data-driven insights
that enable our business,
customers and partners to
adjust and flourish.
Across BMO’s operating
groups, we’re putting
customers at the centre
of our strategy, offering
a tailored suite of green
advisory, investment and
lending products and
services to support their
transition to a net-zero
global economy.
Convening for
Climate Action
As a global leader, BMO
is driving insights and
bringing together industry,
government, researchers
and investors to catalyze
the climate conversation,
collaborate on solutions and
accelerate a socially and
economically just net-zero
transition.
10 BMO Financial Group 204th Annual Report 2021
10 BMO Financial Group 204th Annual Report 2021
Energy Transition Group
BMO’s new Energy Transition Group
helps clients achieve decarbonization by
providing advisory and financing solutions
for business and the broader economy in
the drive to net zero.
Carbon neutral for
more than a decade
BMO first achieved net zero emissions in
our operations in 2010 – one of the first
banks in Canada to do so.
Setting meaningful targets
We have set a new target to reduce
greenhouse gas emissions from our
operations by 30% by 2030, compared to
a 2019 baseline. This target builds on our
commitment since 2020 to match 100%
of the electricity we use globally with
purchases of renewable electricity.
United Nations Sustainable
Development Goals (SDGs)
BMO became one of the first major
Canadian banks to sign the UN Principles
for Responsible Banking (PRB) in
February 2021 – a key initiative of the
United Nations Environment Programme
Finance Initiative (UNEP-FI) that
accelerates progress on SDGs in the
banking sector.
Global Asset Management
leadership
As a member of the Net Zero Asset
Managers initiative, BMO Global Asset
Management is committed to support
investing aligned with net zero emissions
by 2050 or sooner.
Environmental and
social risk management
We serve as North American representative
on the Equator Principles Association
Steering Committee and we chair the
Cross-Sector Biodiversity Initiative,
advancing strong environmental and social
risk management practices across the
financial sector and broader economy.
Mapping a
transparent path
We have targeted net zero financed
emissions in our lending by 2050 and
will be establishing intermediate targets
for 2030, applying the sophisticated
methodologies of the Partnership
for Carbon Accounting Financials and
Net-Zero Banking Alliance.
Thought leadership
for climate leadership
In 2021, BMO’s Sustainability Leaders
podcast won Gold at the annual
International Business Awards and
the American Business Awards. Our
podcasts are shaping the sustainability
conversation, especially with a
younger audience: our largest listener
demographics are the 28-34 and 35-44
age groups.
BMO Financial Group 204th Annual Report 2021 11
BMO Financial Group 204th Annual Report 2021 11
Digital First
BMO is future-ready. Our Digital First strategy is built for speed, efficiency
and scale, responding to the growth in demand for banking services
that meet customers where they are. Our significant investment enables
BMO to provide customers with simple, digital, personalized experiences
that put them in control. Yet digital isn’t just a channel. It’s the way we
operate every part of the business, driving loyalty, growth and efficiency,
enabling our employees to provide insightful service and freeing up
more time for them to do what they do best: give expert advice.
Active Mobile Users (000’s)
Canada
1,835
1,599
+37%
U.S.
2,183
2,014
+78%
572
507
464
322
2018
2019
2020
2021
2018
2019
2020
2021
12 BMO Financial Group 204th Annual Report 2021
12 BMO Financial Group 204th Annual Report 2021
Digital First is about
our customers.
Digital First drives loyalty,
efficiency and growth.
• Our investments in digital are
focused on meeting customers
where they are with simple,
digital experiences that meet their
needs. We drive progress through
continuous improvement and
value driven innovation.
-
• We use data and analytics to offer
a seamless and secure digital
experience, underpinned by
best-in-class personal financial advice.
• We are recognized for our
innovation – through capabilities
like BMO Insights, which helps our
customers achieve real financial
progress, BMO Online Banking for
Business and BMO Payment Hub – and
our online brokerage BMO InvestorLine
continues to be a market leader.
• We are relentlessly driving
simplification, personalization,
and speed by providing real-time
information through our North
American commercial banking
platforms. By helping clients
automate their processes, we let
them spend more time running
their businesses.
• BMO Business Xpress, which is now
available to customers on both sides
of the border, uses data analytics and
best-in-class automatic adjudication
strategies to reduce in-branch account
opening to a matter of minutes. Blend,
a cloud banking software firm, has
helped reposition our U.S. mortgage
business to be more profitable and
contributed to improving efficiency
in U.S. P&C Banking.
• We continue to drive self -service
capabilities and access to real-time
information through our API Developer
Platform and our single, North American
digital platform, supported by a state -
of -the -art payment infrastructure. And
BMO InvestorLine’s new adviceDirect
Preview assists online investors by
providing free access to investing
resources and features that enhance
our offer.
• By investing significantly in security,
people and platforms, BMO is able to
grow across businesses and throughout
North America.
• A smaller physical footprint, combined
with marketing outside our core area,
creates efficiencies and the opportunity
to expand our share of wallet. We are
now able to serve customers in all 50
U.S. states.
Digital First is not just
about systems. It’s how
we do business.
• We operate digitally. From internal
processes to client interfaces,
digital shapes everything we do.
It drives efficiencies and speed to
market, freeing up time for our
employees to provide advice and
create meaningful relationships.
• We are harnessing data and artificial
intelligence to deliver even more
personalized experiences. By
leveraging analytics, we can deliver
a more seamlessly integrated value
proposition to our customers.
• BMO is a leader in advancing the
way business customers make and
receive payments, providing more
options for risk-managed, real-time,
data-enriched transactions. We are
transforming clearing and settlement,
adding real-time payment systems –
such as Canadian Real-Time Rail and
FedNow – and adopting ISO 20022
data formatting for a better customer
experience.
BMO Financial Group 204th Annual Report 2021 13
BMO Financial Group 204th Annual Report 2021 13
60%10%JUN30%
Our Bold Commitments
BMO’s Purpose drives everything we do. It shapes our business strategies,
product development, customer relationships and community engagement.
From laying down the path to net zero emissions to breaking down the
barriers to economic inclusion, we recognize that social progress and our
progress are inextricably linked.
Tamara Littlelight, Branch Manager, Greater Calgary Market and
Chief Roy Whitney Onespot, Tsuut’ina Nation at the Tsuut’ina Trail
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Photo: Daniel Wood
14 BMO Financial Group 204th Annual Report 2021
14 BMO Financial Group 204th Annual Report 2021
For a
For a
For an
Thriving Economy
Sustainable Future
Inclusive Society
We are leveraging our expertise to
support different communities with
tailored initiatives, knowing that
when they flourish, we flourish.
BMO has set measurable targets for
driving climate-change solutions and
sustainable outcomes, and we are
leading the conversation on how to
get there.
Our continued commitment to a
more inclusive society is creating
opportunities for all, and ensuring
that we reflect the communities
that sustain us.
$8 billion in
Indigenous banking
We committed to doubling our book
of Indigenous business to $8 billion by
2025. By the fall of this year we had
already reached $6.4 billion – 80% of
the way there.
Support for
Small Business
We supported Canadian businesses
throughout the pandemic and in their
recovery. This resulted in over 54,000
approved CEBA and HASCAP applications
putting over $1.3B into the hands of
entrepreneurs in need of financial relief.
Serving those who serve
We’ve set ourselves a target of
doubling the number of Canadian
defence community customers by 2025,
to 100,000. In 2021 we served 81,100
men and women who serve us.
Grants for progress
We expanded our BMO Celebrating
Women Grant Program, empowering
women with $200,000 in grants for
projects that contribute to social,
environmental and/or economic
sustainability outcomes.
Catalyzing climate action
In March of this year, we launched the
BMO Climate Institute, a forum that
will bring together science, analytics,
expertise and partners to understand
and manage the financial risks and
opportunities related to climate change.
The Institute will be a resource for all
– business, government, academia – in
unlocking climate solutions.
$300 billion for
sustainable outcomes
We are well on our way to achieving BMO’s
2025 goal of mobilizing $300 billion in
capital for clients pursuing sustainable
outcomes, through sustainable lending,
underwriting, and investment and
advisory services.
$250 million
The $250 million BMO Impact
Investment Fund is aimed at driving
more sustainable outcomes by
backing technologies that will help
BMO and its clients proactively
address sustainability and create
positive impact for their stakeholders.
Zero barriers to inclusion
We’ve increased access to capital,
educational resources and partnerships
for Black and Latinx entrepreneurs. Forty
percent of our student opportunities
are directed to BIPOC youth. Over the
past year, we doubled our hiring of
Indigenous staff. Colleagues, customers
and communities are all benefiting from
our Zero Barriers to Inclusion 2025
strategy.
$600,000
Our Community Giving has always
been carefully shaped by intention.
In 2021, we committed $600,000 to
advance Truth and Reconciliation in
Canada, working with Indigenous
partners to move our whole society
along the road to greater social justice.
Women in
senior leadership
For the last six years, more than 40%
of our senior leaders have been women.
BMO Financial Group 204th Annual Report 2021 15
BMO Financial Group 204th Annual Report 2021 15
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,
Hydro-Québec
Board/Committees:
Governance and Nominating,
Human Resources
Director since: 2011
Craig W. Broderick
Corporate Director
Board/Committees:
Governance and Nominating,
Risk Review (Chair)
Director since: 2018
George A. Cope, C.M.
Board/Committees:
Board Chair,
Governance and Nominating,
Human Resources
Director since: 2006
Stephen Dent
Managing Director and Co-Founder,
Birch Hill Equity Partners
Board/Committees:
Risk Review
Director since: 2021
Christine A. Edwards
Corporate Director
Board/Committees:
Governance and Nominating (Chair),
Human Resources
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
David Harquail
Chair of the Board,
Franco-Nevada Corporation
Board/Committees:
Audit and Conduct Review,
Risk Review
Director since: 2018
Linda S. Huber
Chief Financial Officer,
FactSet Research Systems Inc.
Board/Committees:
Audit and Conduct Review,
Risk Review
Director since: 2017
Lorraine Mitchelmore
Corporate Director
Board/Committees:
Governance and Nominating,
Human Resources (Chair),
Risk Review
Director since: 2015
Madhu Ranganathan
Executive Vice-President
and Chief Financial Officer,
OpenText Corporation
Board/Committees:
Audit and Conduct Review
Director since: 2021
Eric R. La Flèche
President and Chief Executive Officer,
Metro Inc.
Board/Committees:
Human Resources
Director since: 2012
Darryl White
Chief Executive Officer,
BMO Financial Group
Board/Committees:
Attends all committee meetings
as an invitee
Director since: 2017
Executive Committee1
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
Cameron Fowler
Chief Strategy and
Operations Officer,
BMO Financial Group
Sharon Haward-Laird
General Counsel,
BMO Financial Group
Ernie (Erminia) Johannson
Group Head,
North American Personal
and Business Banking
Deland Kamanga
Group Head,
BMO Wealth Management
Mona Malone
Head,
People & Culture and Chief
Human Resources Officer,
BMO Financial Group
Steve Tennyson
Chief Technology
and Operations Officer,
BMO Financial Group
Tayfun Tuzun
Chief Financial Officer,
BMO Financial Group
1 As at November 1, 2021.
16 BMO Financial Group 204th Annual Report 2021
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 in the index below, as presented in this 2021 Annual Report, the Supplemental
Financial Information (SFI) or Supplemental Regulatory Capital Information (SRC). Information within the SFI or SRC is not, and should not be
considered incorporated by reference into this 2021 Annual Report.
Topic
EDTF Disclosure
Annual Report
Page Number
SFI
SRC
General
1. Present all risk-related information in each report, providing an index for
easy navigation
74-113
Index
Index
Risk Governance,
Risk Management &
Business Model
Capital Adequacy and
Risk-Weighted Assets
(RWA)
2. Define the bank’s risk terminology and risk measures and present key
parameters used
3. Discuss top and emerging risks for the bank
4. Outline plans to meet new key regulatory ratios once the applicable rules
84-113,136-138
74-76
are finalized
5. Summarize the bank’s risk management organization, processes, and key
functions
6. Describe the bank’s risk culture and procedures applied to support the culture
7. Describe key risks that arise from the bank’s business model and activities
8. Describe the use of stress testing within the bank’s risk governance and
capital frameworks
9. Provide minimum Pillar 1 capital requirements
10. Summarize information contained in the composition of capital templates
and reconciliation of the accounting balance sheet to the regulatory balance
sheet
• A Main Features template can also 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
12. Discuss capital planning within a more general discussion of management’s
strategic planning
13. Provide granular information to explain how RWA relate to business activities
14. Present a table showing the capital requirements for each method used for
calculating RWA
15. Tabulate credit risk in the banking book for Basel asset classes and major
portfolios
67
78-83
83
81
82
66-69
69
65
69-70
69-70,
84-87
16. Present a flow statement that reconciles movements in RWA by credit risk
and market risk
17. Describe the bank’s Basel validation and back-testing process. Included in
our SRC information is our estimated and actual loss parameter information
108
18. Describe how the bank manages its potential liquidity needs and the liquidity
reserve held to meet those needs
97-103
19. Summarize encumbered and unencumbered assets in a table by balance
sheet category
99
38
Liquidity
Funding
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3-4,10
3-5
6
11
11,17,18,21-30,
37-43
17-30,37-43
31,57
58-62
20. Tabulate consolidated total assets, liabilities and off-balance sheet
commitments by remaining contractual maturity
21. Discuss the bank’s sources of funding and describe the bank’s funding
strategy
Market Risk
22. Provide a breakdown of balance sheet positions into trading and non-trading
market risk measures
23. Provide qualitative and quantitative breakdowns of significant trading and
non-trading market risk measures
24. Describe significant market risk measurement model validation procedures
and back-testing and how these are used to enhance the parameters of the
model
25. Describe the primary risk management techniques employed by the bank
to measure and assess the risk of loss beyond reported risk measures
26. Provide information about the bank’s credit risk profile
27. Describe the bank’s policies related to impaired loans and renegotiated loans
28. Provide reconciliations of impaired loans and the allowance for credit losses
29. Provide a quantitative and qualitative analysis of the bank’s counterparty
credit risk that arises from its derivative transactions
30. Provide a discussion of credit risk mitigation
Credit Risk
Other Risks
31. Describe other risks and discuss how each is identified, governed, measured
and managed
32. Discuss publicly known risk events related to other risks, where material or
potentially material loss events have occurred
104-105
100-101
96
92-96
92-95,108
92-93
84-91,160-166
161,166
88-89,164
84-85,91
84-85,
171,177,205
78-82,
106-113
106-113
23-35
11-56
35-48
16,32,44
BMO Financial Group 204th Annual Report 2021 17
Management’s Discussion and Analysis
BMO’s Chief Executive Officer and 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 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 our operations and financial condition for the years ended October 31, 2021 and 2020. The MD&A should be read in
conjunction with the consolidated financial statements for the year ended October 31, 2021. The MD&A commentary is as at December 3, 2021.
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 2020, we adopted IFRS 16, Leases, recognizing the cumulative effect of adoption in opening retained earnings
with no changes to prior periods. Certain prior-period results and measures have been reclassified for methodology changes and transfers of certain
businesses between operating groups.
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19 Caution Regarding Forward-Looking Statements
58 Review of Fourth Quarter 2021 Performance
20 About BMO
59 Summary Quarterly Earnings Trends
21 Financial Objectives and Value Measures
61 2020 Financial Performance Review
23 Supporting a Sustainable and Inclusive Future
24 Financial Highlights
25 Non-GAAP and Other Financial Measures
29 Economic Developments and Outlook
30 2021 Financial Performance Review
Summary
Personal and Commercial Banking
38 2021 Operating Groups Performance Review
38
39
40
44
48
52
56
Canadian Personal and Commercial Banking
U.S. Personal and Commercial Banking
BMO Wealth Management
BMO Capital Markets
Corporate Services, including Technology and Operations
63 Financial Condition Review
63
65
72
Summary Balance Sheet
Enterprise-Wide Capital Management
Off-Balance Sheet Arrangements
74 Enterprise-Wide Risk Management
114 Accounting Matters and Disclosure and Internal Control
114
119
119
119
120
121
Critical Accounting Estimates
Changes in Accounting Policies in 2021
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
122 Supplemental Information
136 Glossary of Financial Terms
Regulatory Filings
BMO’s 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 U.S. Securities and Exchange Commission’s (SEC)
website at www.sec.gov. BMO’s Chief Executive Officer and 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. Information contained in or otherwise accessible through our website (www.bmo.com), or any
third-party websites mentioned herein, does not form part of this document.
Caution
The About BMO, Financial Objectives and Value Measures, and Economic Developments and Outlook sections 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 for a discussion of such risks and uncertainties and the material factors and assumptions related to the statements set forth in such sections.
18 BMO Financial Group 204th Annual Report 2021
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 describes a number of risks, including credit and
counterparty, market, insurance, liquidity and funding, operational non-financial, legal and regulatory, strategic, environmental and social, and
reputation risk. Should our risk management framework prove ineffective, there could be a material adverse impact on our financial position
and results.
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 2022 and beyond, our strategies or future actions, our targets and commitments (including with respect to net zero emissions),
expectations for our financial condition, capital position or share price, the regulatory environment in which we operate, the results of, or outlook for, our operations or for
the Canadian, U.S. and international economies, and the COVID-19 pandemic, and include statements made by our management. Forward-looking statements are typically
identified by words such as “will”, “would”, “should”, “believe”, “expect”, “anticipate”, “project”, “intend”, “estimate”, “plan”, “goal”, “commit”, “target”, “may”, “might”,
“schedule”, “forecast” and “could” or negative or grammatical variations thereof.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties, both general and specific in nature.
There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct, and that actual results
may differ materially from such predictions, forecasts, conclusions or projections. The uncertainty created by the COVID-19 pandemic has heightened this risk, given the
increased challenge in making assumptions, predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our
forward-looking statements, as a number of factors – many of which are beyond our control and the effects of which can be difficult to predict – could cause actual future
results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including, but not limited to: general economic and market
conditions in the countries in which we operate, including labour challenges; the severity, duration and spread of the COVID-19 pandemic, and possibly other outbreaks
of disease or illness, and its impact on local, national or international economies, as well as its heightening of certain risks that may affect our future results; information,
privacy and cyber security, including the threat of data breaches, hacking, identity theft and corporate espionage, as well as the possibility of denial of service resulting
from efforts targeted at causing system failure and service disruption; benchmark interest rate reforms; technological changes and technology resiliency; political
conditions, including changes relating to, or affecting, economic or trade matters; climate change and other environmental and social risk; the Canadian housing market
and consumer leverage; inflationary pressures; global supply-chain disruptions; changes in monetary, fiscal, or economic policy; changes in laws, including tax legislation
and interpretation, or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance, and the effect of such changes
on funding costs; weak, volatile or illiquid capital or credit markets; the level of competition in the geographic and business areas in which we operate; judicial or
regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; failure of third parties to comply
with their obligations to us; our ability to execute our strategic plans and to complete proposed acquisitions or dispositions, including obtaining regulatory approvals;
critical accounting estimates and the effects of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks,
including with respect to reliance on third parties; changes to our credit ratings; global capital markets activities; the possible effects on our business of war or terrorist
activities; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; and our ability to anticipate and
effectively manage risks arising from all of the foregoing factors.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please
refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding,
operational non-financial, legal and regulatory, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section, all of which
outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties
and potential events, and the inherent uncertainty of forward-looking statements. We do not undertake to update any forward-looking statements, whether written or
oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is
presented for the purpose of assisting shareholders and analysts in understanding our financial position as at and for the periods ended on the dates presented, as well as
our strategic priorities and objectives, and may not be appropriate for other purposes.
Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook
section, as well as in the Allowance for Credit Losses section. Assumptions about the performance of the Canadian and U.S. economies, as well as overall market
conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our
business. In determining our expectations for economic growth, we primarily consider historical economic data, past relationships between economic and financial
variables, changes in government policies, and the risks to the domestic and global economy.
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BMO Financial Group 204th Annual Report 2021 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
About BMO
Established in 1817, BMO Financial Group (BMO, Bank of Montreal, the bank, we, our, us) is a highly diversified provider of financial products and
services based in North America. We are the eighth largest bank in North America by assets, with total assets of $988.2 billion. Our employees are
engaged, our workforce is diverse, and our culture is award-winning. 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 segment, BMO Bank of Montreal. In the United States, we serve more than two million personal, business and
commercial banking customers nationally through BMO Harris Bank, based in the U.S. Midwest. 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 provides a full suite of financial products and services to North American and international corporate,
institutional and government clients through its Investment and Corporate Banking and Global Markets divisions.
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At BMO, we continue to build a high-performance, digitally-enabled, future-ready bank. Anchored in our Purpose, we are driven by our strategic
priorities for growth, strengthened by our approach to sustainability, and guided by our values to build a foundation of trust with our stakeholders
and achieve leading customer loyalty.
Our Purpose: Boldly Grow the Good in business and life
BMO has a deep sense of purpose – to be a champion for progress and a catalyst for change. We are leveraging our position as a leading financial
services provider to create opportunities for our communities and our stakeholders to make positive, sustainable change, in the belief that success
can and must be mutual. Our bold commitments for a sustainable future, a thriving economy and an inclusive society are reflected in our active direct
response to today’s most pressing challenges.
• Thriving economy – Increasing support for small businesses, women entrepreneurs and Canadian Indigenous and military customers.
• Sustainable future – Being our clients’ lead partner in the transition to a net zero world, delivering on our commitments to sustainable
financing and responsible investing.
•
Inclusive society – Working toward zero barriers to inclusion, supporting equal access to opportunities for our colleagues, customers and the
communities we serve.
Our Strategic Priorities
Consistent strong performance is essential to achieving our Purpose. 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:
• World-class client loyalty and growth
• Winning culture driven by alignment, empowerment and recognition
• Digital first for speed, efficiency and scale
• Simplify work and eliminate complexity
• Superior management of risk and capital performance.
Our group strategic priorities align with and support our enterprise-wide strategy, positioning us well to drive competitive performance. The group
strategies are outlined in the 2021 Operating Groups Performance Review.
Our Approach to Sustainability
Our commitment to sustainability is embedded in our strategy and is fundamental to our Purpose. We identify the most significant effects of our
business operations, products and services on our stakeholders and the communities in which we operate. We take steps to manage our business in a
manner that is consistent with our sustainability objectives, and we consider the interests of our stakeholders. We apply a variety of ESG practices to
capture opportunities and manage risks in key areas such as sustainable finance, climate change, human rights, and diversity, equity and inclusion.
Our Values
Four core values shape our culture and underpin our choices and actions:
•
Integrity – Do what is right
• Diversity – Learn from difference
• Responsibility – Make tomorrow better
• Empathy – Put others first.
20 BMO Financial Group 204th Annual Report 2021
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Financial Objectives and Value Measures
Results and measures in this section are presented on a reported and an adjusted basis, and management considers both to be useful in assessing
our performance. It 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 business performance.
Adjusted results and measures in this section, including earnings per share (EPS), EPS growth, return on equity (ROE), return on tangible common
equity (ROTCE), net income, revenue, non-interest expense, efficiency ratio and operating leverage, are non-GAAP amounts, measures and ratios, and
are discussed in the Non-GAAP and Other Financial Measures section.
We also present reported and adjusted revenue on a basis that is net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), and we calculate our efficiency ratio and operating leverage on a similar basis. Insurance revenue can experience variability arising from
fluctuations in the fair value of insurance assets, caused by movements in interest rates and equity markets, that is largely offset in CCPB. Presenting
our revenue, efficiency ratio and operating leverage on a net basis allows for a better assessment of operating results.
Measures and ratios on a net revenue basis are non-GAAP. For more information on CCPB, refer to the Non-GAAP and Other Financial Measures
section. Information regarding the composition of each of these measures is also provided in the Glossary of Financial Terms.
Financial Objectives
BMO’s business planning process is rigorous, sets ambitious goals and considers 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 our progress toward our strategic priorities.
We have established medium-term financial objectives for certain important performance measures, which are set out below. Medium-term is
generally defined as three to five years, and performance is measured on an adjusted basis. 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 banking peer group.
These objectives serve as guideposts as we execute on our strategic priorities, and they assume a normal business environment. Our ability to
meet these objectives in any single period may be adversely affected by extraordinary developments, such as the impacts of the COVID-19 pandemic.
We recognize that in managing our operations and our exposure to risk, current profitability and our ability to meet these objectives in a single period
must be balanced with the need to invest in our businesses for long-term sustainability and future growth.
Our financial objectives and our performance against these objectives are outlined in the table below and described in the sections that follow.
BMO’s financial results in 2021 reflected continued execution on our strategic priorities, as well as improving economic conditions. Performance in
fiscal 2020 reflected the negative impacts of the COVID-19 pandemic, including elevated provisions for credit losses.
Financial Objectives and Metrics
Financial objectives (adjusted)
Reported basis
Adjusted basis (1)
As at and for the periods ended October 31, 2021
1-year
3-year (2)
5-year (2)
1-year
3-year (2)
5-year (2)
Total shareholder return (%)
Earnings per share growth (%)
Average return on equity (%)
Net operating leverage (%) (3)
Common Equity Tier 1 Ratio (%)
Top-tier
7-10%
15% or more
2% or more
Exceed regulatory requirement
75.9
53.3
14.9
0.4
13.7
15.7
12.3
12.5
1.4
na
14.0
10.8
12.8
2.1
na
na
68.0
16.7
6.1
na
na
13.0
13.5
3.2
na
na
11.5
13.8
2.6
na
(1) Adjusted results and measures in this table are non-GAAP measures and are discussed in the Non-GAAP and Other Financial Measures section.
(2) The 3-year and 5-year EPS growth rate and net operating leverage reflect compound annual growth rates (CAGR).
(3) Net operating leverage on a reported and adjusted basis presented in this table are non-GAAP measures and are discussed in the Non-GAAP and Other Financial Measures section.
na – not applicable
Total Shareholder Return
The average annual total shareholder return (TSR) is a key measure of shareholder value, and over time, we expect that execution on our strategic
priorities will drive value creation for our shareholders. The one-year, three-year and five-year average annual TSR was 75.9%, 15.7% and 14.0%,
respectively, all above our Canadian peer group average (excluding BMO) of 56.1%, 15.3% and 13.6%, respectively.
The table below summarizes dividends paid on BMO’s common shares over the past five years and the movements in our share price.
An investment of $1,000 in BMO common shares made at the beginning of fiscal 2017 would have been worth $1,924 as at October 31, 2021,
assuming reinvestment of dividends, for a total return of 92.4%.
Dividends declared per common share in fiscal 2021 totalled $4.24, unchanged from the prior year, as the Office of the Superintendent of
Financial Institutions’ (OSFI’s) restriction on dividend increases by federally regulated financial institutions effective March 13, 2020, remained in place
throughout the year and was removed effective November 4, 2021. Dividends paid over a five-year period have increased at an average annual
compound rate of approximately 5%.
The average annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common shares
made at the beginning of a fixed period. The return includes the change in share price and assumes dividends received were reinvested in
additional common shares.
BMO Financial Group 204th Annual Report 2021 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total Shareholder Return
For the year ended October 31
2021
2020
2019
2018
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)
Increase (decrease) in share price (%)
Total annual shareholder return (%) (2)
134.37
4.24
3.2
69.4
75.9
79.33
4.21
5.3
(18.6)
(14.6)
97.50
3.99
4.2
(0.9)
3.2
98.43
3.72
3.8
(0.4)
3.3
2017
98.83
3.52
3.6
15.8
20.2
3-year
CAGR (1)
5-year
CAGR (1)
10.9
4.5
nm
nm
15.7
9.5
4.8
nm
nm
14.0
(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
A
&
D
M
Earnings per Share Growth
The year-over-year percentage change in earnings per share (EPS) and in adjusted EPS are our key measures for
analyzing earnings growth. All references to EPS are to diluted EPS, unless otherwise indicated.
EPS was $11.58, an increase of $4.03 or 53% from $7.55 in 2020. Adjusted EPS was $12.96, an increase of
$5.25 or 68% from $7.71 in 2020. The increase in EPS primarily reflected higher earnings. Reported net income
available to common shareholders increased 55% year-over-year, while the average number of diluted common
shares outstanding increased 1%.
Earnings per share (EPS) is calculated by dividing net income, after deducting preferred share dividends and
distributions on other equity instruments, by the average number of common shares outstanding. Adjusted EPS
is calculated in the same manner using adjusted net income. Diluted EPS, which is BMO’s 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 of the consolidated financial statements.
Return on Equity
Reported return on equity (ROE) was 14.9% in 2021 and adjusted ROE was 16.7%, compared with 10.1% and
10.3%, respectively, in 2020. Reported and adjusted ROE increased due to higher net income, partially offset by
growth in common equity. There was an increase of $2,660 million or 55% in reported net income available to
common shareholders and an increase of $3,453 million or 70% in adjusted net income available to common
shareholders in the current year. Average common shareholders’ equity increased $2.2 billion or 5% from 2020,
primarily due to growth in retained earnings, partially offset by a decrease in accumulated other comprehensive
income. The reported return on tangible common equity (ROTCE) was 17.0%, compared with 11.9% in 2020, and
adjusted ROTCE was 18.9%, compared with 11.9% in 2020. Book value per share increased 4% from the prior
year to $80.18, reflecting the increase in shareholders’ equity.
Return on common shareholders’ equity (ROE) is calculated as net income, less preferred dividends and
distributions on other equity instruments, as a percentage of average common shareholders’ equity. Common
shareholders’ equity comprises common share capital, contributed surplus, accumulated other comprehensive
income (loss) and retained earnings. Adjusted ROE is calculated using adjusted net income rather than net
income.
Return on tangible common equity (ROTCE) is calculated as net income available to common shareholders,
adjusted for the amortization of acquisition-related intangible assets, as a percentage of average tangible
common equity. Tangible common equity is calculated as common shareholders’ equity, less goodwill and
acquisition-related intangible assets, net of related deferred tax liabilities. Adjusted ROTCE is calculated using
adjusted net income rather than net income.
EPS ($)
12.96
11.58
9.43
8.66
7.55 7.71
2019
2020
2021
Reported EPS
Adjusted EPS
ROE (%)
13.7
12.6
16.7
14.9
10.1 10.3
2019
2020
2021
Reported ROE
Adjusted ROE
ROTCE (%)
16.1
15.1
18.9
17.0
11.9 11.9
2019
2020
2021
Reported ROTCE
Adjusted ROTCE
22 BMO Financial Group 204th Annual Report 2021
Efficiency Ratio and Operating Leverage
BMO’s reported gross efficiency ratio was 57.0%, compared with 56.3% in 2020. The adjusted gross efficiency
ratio was 53.6%, compared with 55.8% in 2020. On a net revenue basis (1), the reported efficiency ratio
was 60.1%, compared with 60.4% in 2020, and the adjusted efficiency ratio was 56.5%, compared with 59.8%
in 2020, an improvement of 330 basis points.
Reported operating leverage was negative 1.5%. On a net revenue basis, reported operating leverage was
positive 0.4%, and adjusted operating leverage was positive 6.1%.
(1) This ratio is calculated using revenue and non-interest expense. Refer to the Revenue section and the Non-Interest Expense section.
Operating leverage is the difference between revenue and non-interest expense growth rates.
Operating leverage, net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), is the difference between net revenue and non-interest expense growth rates, with net revenue
comprising revenue excluding CCPB.
Adjusted net operating leverage is the difference between adjusted revenue, net of adjusted CCPB, and
adjusted non-interest expense growth rates. The bank evaluates performance using adjusted revenue, net of
CCPB.
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.
Efficiency ratio, net of CCPB, is calculated as non-interest expense divided by total revenue, net of CCPB
(on a taxable equivalent basis in the operating groups), expressed as a percentage.
Adjusted net efficiency ratio is calculated in the same manner as efficiency ratio, net of CCPB, utilizing
adjusted revenue, net of adjusted CCPB, and adjusted non-interest expense.
Common Equity Tier 1 Ratio
Our Common Equity Tier 1 Ratio was 13.7% as at October 31, 2021, compared with 11.9% as at October 31, 2020.
The CET1 Ratio increased from the end of fiscal 2020, primarily driven by strong internal capital generation.
Common Equity Tier 1 (CET1) Ratio is calculated as CET1 capital, which comprises common shareholders’
equity, net of deductions for goodwill, intangible assets, pension assets, certain deferred tax assets and other
items (which may include a portion of expected credit loss provisions), divided by risk-weighted assets.
The CET1 Ratio is disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline.
M
D
&
A
Net Efficiency Ratio (%)
64.2
61.4
60.4
59.8
60.1
56.5
2019
2020
2021
Reported Net Efficiency Ratio
Adjusted Net Efficiency Ratio
Net Operating Leverage (%)
6.2
6.1
2.7
0.8
0.4
(2.9)
2019
2020
2021
Reported Net Operating Leverage
Adjusted Net Operating Leverage
CET1 Ratio (%)
13.7
11.4
11.9
2019
2020
2021
Supporting a Sustainable and Inclusive Future
At BMO, we have a long-standing commitment to support a sustainable future, a thriving economy and an inclusive society, and we are acting on this
commitment with purpose. In support of our customers, communities and employees, we recently:
• Deployed more than US$2 billion in loans and investments as part of BMO EMpowerTM, a five-year, US$5 billion commitment to advance an
inclusive economic recovery and address key barriers faced by minority businesses, communities and families in the United States.
• Assisted customers experiencing financial hardship caused by the COVID-19 pandemic, including facilitating access to relief programs introduced by
the Canadian and U.S. governments, such as the Canada Emergency Business Account (CEBA) program, the Highly Affected Sector Credit Availability
Program (HASCAP) and the Trade Expansion Lending Program (TELP) in Canada, and the Paycheck Protection Program (PPP) in the United States.
• Announced a 10-year, $12 billion commitment to finance affordable housing in Canada.
• Released Wîcihitowin
, our first annual Indigenous Partnerships and Progress Report, highlighting the partnership with Indigenous
communities and BMO’s Indigenous Advisory Council to further education, employment and economic empowerment.
• Declared our Climate Ambition, which is to be our clients’ lead partner in the transition to a net zero world; launched the BMO Climate Institute to
provide insights and best practices for climate solutions; joined the Net-Zero Banking Alliance; and established a new, innovative Energy Transition
Group.
•
• Ranked among the most sustainable companies on the Dow Jones Sustainability Indices (DJSI) – one of only five companies in Canada included in
the DJSI World Index, earning the highest score in Corporate Governance, Customer Relationship Management, Financial Inclusion, Environmental
Reporting and Social Reporting.
In addition, in 2021 we were:
• Named to Canada’s Best 50 Corporate Citizens Ranking by Corporate Knights
• Recognized as one of the World’s Most Ethical Companies for the fourth consecutive year by the Ethisphere Institute
• Recognized for the sixth consecutive year on the Bloomberg Gender-Equality Index.
BMO Financial Group 204th Annual Report 2021 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Highlights
(Canadian $ in millions, except as noted)
Summary Income Statement (1)
Net interest income
Non-interest revenue
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB (2)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for credit losses (PCL)
Non-interest expense
Provision for income taxes
A
&
D
M
Net income
Adjusted net income
Common Share Data ($, except as noted) (1)
Basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
Dividends declared per share
Book value per share
Closing share price
Number of common shares outstanding (in millions)
End of period
Average basic
Average diluted
Market capitalization ($ billions)
Dividend yield (%)
Dividend payout ratio (%)
Adjusted dividend payout ratio (%)
Financial Measures and Ratios (%) (1)
Return on equity
Adjusted return on equity
Return on tangible common equity
Adjusted return on tangible common equity
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
Adjusted effective tax rate
Total PCL-to-average net loans and acceptances
PCL on impaired loans-to-average net loans and acceptances
Liquidity coverage ratio (LCR) (3)
Net stable funding ratio (NSFR) (3)
Balance Sheet and Other Information (as at $ millions, except as noted)
Assets
Average earning assets
Gross loans and acceptances
Net loans and acceptances
Deposits
Common shareholders’ equity
Total risk-weighted assets (4)
Assets under administration
Assets under management
Capital Ratios (%) (4)
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
2021
2020
2019
14,310
12,876
27,186
1,399
25,787
525
(505)
20
15,509
2,504
7,754
8,651
11.60
11.58
12.96
4.24
80.18
134.37
648.1
647.2
648.7
87.1
3.2
36.5
32.6
14.9
16.7
17.0
18.9
60.1
56.5
0.4
6.1
1.59
24.4
22.7
–
0.11
125
118
988,175
897,302
474,847
472,283
685,631
51,965
325,433
634,713
523,270
13.7
15.4
17.6
5.1
13,971
11,215
25,186
1,708
23,478
1,522
1,431
2,953
14,177
1,251
5,097
5,201
7.56
7.55
7.71
4.24
77.40
79.33
645.9
641.4
642.1
51.2
5.3
56.1
54.9
10.1
10.3
11.9
11.9
60.4
59.8
6.2
2.7
1.64
19.7
19.8
0.63
0.33
131
na
949,261
853,336
464,216
460,913
659,034
49,995
336,607
653,319
482,554
11.9
13.6
16.2
4.8
12,888
12,595
25,483
2,709
22,774
751
121
872
14,630
1,514
5,758
6,249
8.68
8.66
9.43
4.06
71.54
97.50
639.2
638.9
640.4
62.3
4.2
46.8
43.0
12.6
13.7
15.1
16.1
64.2
61.4
(2.9)
0.8
1.70
20.8
21.1
0.20
0.17
138
na
852,195
759,395
452,427
450,577
568,143
45,728
317,029
632,193
471,160
11.4
13.0
15.2
4.3
1.2376
1.2554
1.3319
1.3441
1.3165
1.3290
(1) Adjusted results remove certain items from reported results and are used to calculate our adjusted measures as presented in the above table. Management assesses performance on a reported basis
and an adjusted basis, and considers both to be useful. Revenue, net of CCPB, and adjusted results, measures and ratios in this table are non-GAAP. For further information, refer to the Non-GAAP and
Other Financial Measures section and for a composition of non-GAAP amounts, measures and ratios, as well as supplementary financial measures, refer to the Glossary of Financial Terms.
(2) We present revenue, efficiency ratio and operating leverage on a basis that is net of CCPB, which reduces the variability in insurance revenue from changes in fair value that are largely offset by
changes in the fair value of policy benefit liabilities, the impact of which is reflected in CCPB.
(3) LCR and NSFR are disclosed in accordance with OSFI’s Liquidity Adequacy Requirements (LAR) Guideline, as applicable.
(4) Capital ratios and risk-weighted assets are disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline, as applicable.
na – not applicable
24 BMO Financial Group 204th Annual Report 2021
Non-GAAP and Other Financial Measures
Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have been
derived from our audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS).
References to GAAP mean IFRS. We use a number of financial measures to assess our performance, as well as the performance of our operating
businesses, including measures and ratios that are presented on a non-GAAP basis, as described below. We believe that these non-GAAP amounts,
measures and ratios, read together with our GAAP results, provide readers with a better understanding of how management assesses results.
Non-GAAP amounts, measures and ratios do not have standardized meanings under GAAP. They are unlikely to be comparable to similar
measures presented by other companies and should not be viewed in isolation from, or as a substitute for, GAAP results.
For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures,
refer to the Glossary of Financial terms.
Our non-GAAP measures broadly fall into the following categories:
Adjusted measures and ratios
Management considers both reported and adjusted results and measures useful in assessing underlying ongoing business performance. Adjusted
results and measures remove certain specified items from revenue, non-interest expense and income taxes, as detailed in the following table.
Adjusted results and measures presented in this document are non-GAAP. Presenting results on both a reported basis and an adjusted basis permits
readers to assess the impact of certain items on results for the periods presented, and to better assess results excluding those items that may not
be reflective of ongoing business performance. As such, the presentation may facilitate readers’ analysis of trends. Except as otherwise noted,
management’s discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results.
M
D
&
A
Measures net of insurance claims, commissions and changes in policy benefit liabilities (CCPB)
We also present reported and adjusted revenue on a basis that is net of insurance claims, commissions and changes in policy benefit liabilities (CCPB),
and our efficiency ratio and operating leverage are calculated on a similar basis, as reconciled in the Revenue section. Measures and ratios presented
on a basis net of CCPB are non-GAAP. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets,
caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities are predominantly fixed income
assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair value
changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in CCPB. The presentation and
discussion of revenue, efficiency ratios and operating leverage on a net basis reduces this variability, which allows for a better assessment of
operating results. For more information, refer to the Insurance Claims, Commissions and Changes in Policy Benefit Liabilities section.
Presenting results on a taxable equivalent basis (teb)
We analyze consolidated revenue on a reported basis. In addition, we analyze revenue on a taxable equivalent basis (teb) at the operating group
level, consistent with the Canadian peer group. Revenue and the provision for income taxes in BMO Capital Markets and U.S. P&C are increased on
tax-exempt securities to an equivalent pre-tax basis. These adjustments are offset in Corporate Services. Presenting results on a teb basis reflects how
our operating groups manage their business and is useful to facilitate comparisons of income between taxable and tax-exempt sources. The effective
tax rate is also analyzed on a teb basis for consistency of approach, with the offset to operating segment adjustments recorded in Corporate Services.
Tangible common equity and return on tangible common equity
Tangible common equity is calculated as common shareholders’ equity less goodwill and acquisition-related intangible assets, net of related deferred
tax liabilities. Return on tangible common equity is commonly used in the North American banking industry and is meaningful because it measures
the performance of businesses consistently, whether they were acquired or developed organically.
Presenting results on a U.S. dollar basis
Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on BMO’s U.S. segment are non-GAAP. Refer to the
Foreign Exchange section for a discussion of the effects of changes in exchange rates on our results.
We present our U.S. P&C business results, as well as select U.S. segment information for the bank, BMO Wealth Management, BMO Capital
Markets and Corporate Services, on a U.S. dollar basis. Presenting these results on a U.S. dollar basis is useful in assessing the underlying performance
without the variability caused by changes in foreign exchange rates.
BMO Financial Group 204th Annual Report 2021 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP and Other Financial Measures
(Canadian $ in millions, except as noted)
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 ($)
A
&
D
M
Adjusting Items Impacting Revenue (Pre-tax)
Impact of divestitures (1)
Adjusting Items Impacting CCPB (Pre-tax)
Reinsurance adjustment (2)
Adjusting Items Impacting Non-Interest Expense (Pre-tax)
Acquisition integration costs (3)
Amortization of acquisition-related intangible assets (4)
Impact of divestitures (1)
Restructuring (costs) reversals (5)
Impact of adjusting items on non-interest expense (pre-tax)
Impact of adjusting items on reported net income (pre-tax)
Adjusting Items Impacting Revenue (After-tax)
Impact of divestitures (1)
Adjusting Items Impacting CCPB (After-tax)
Reinsurance adjustment (2)
Adjusting Items Impacting Non-Interest Expense (After-tax)
Acquisition integration costs (3)
Amortization of acquisition-related intangible assets (4)
Impact of divestitures (1)
Restructuring (costs) reversals (5)
Impact of adjusting items on non-interest expense (after-tax)
Impact of adjusting items on reported net income (after-tax)
Impact on diluted EPS ($)
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 ($)
2021
2020
2019
27,186
(1,399)
25,787
(20)
(15,509)
10,258
(2,504)
7,754
11.58
25,186
(1,708)
23,478
(2,953)
(14,177)
6,348
(1,251)
5,097
7.55
25,483
(2,709)
22,774
(872)
(14,630)
7,272
(1,514)
5,758
8.66
29
–
(9)
(88)
(886)
24
(959)
(930)
22
–
(7)
(66)
(864)
18
(919)
(897)
(1.38)
–
–
(14)
(121)
–
–
(135)
(135)
–
–
(11)
(93)
–
–
(104)
(104)
(0.16)
–
(25)
(13)
(128)
–
(484)
(625)
(650)
–
(25)
(10)
(99)
–
(357)
(466)
(491)
(0.77)
27,157
(1,399)
25,758
(20)
(14,550)
11,188
(2,537)
8,651
12.96
25,186
(1,708)
23,478
(2,953)
(14,042)
6,483
(1,282)
5,201
7.71
25,483
(2,684)
22,799
(872)
(14,005)
7,922
(1,673)
6,249
9.43
(1) Fiscal 2021 reported net income included a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business recorded in non-interest expense,
a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue, and $85 million ($107 million pre-tax) of
divestiture-related costs for both transactions recorded in non-interest expense.
(2) 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 incurred after the announced wind-down of the reinsurance business. This reinsurance adjustment is included in BMO Wealth Management.
(3) Acquisition integration costs related to KGS-Alpha and Clearpool are recorded in non-interest expense in BMO Capital Markets.
(4) Amortization of acquisition-related intangible assets is recorded in non-interest expense in the related operating group.
(5) Fiscal 2019 reported net income included a $357 million ($484 million pre-tax) restructuring charge related to severance and a small amount of real estate-related costs. Fiscal 2021 reported net income
included a partial reversal of restructuring charges related to severance of $18 million ($24 million pre-tax). Restructuring charges and the reversal were recorded in non-interest expense in Corporate Services.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
26 BMO Financial Group 204th Annual Report 2021
Summary of Reported and Adjusted Results by Operating Segment
(Canadian $ in millions, except as noted)
Canadian P&C
U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
U.S. Segment (1)
(US$ in millions)
2021
Reported net income (loss)
Acquisition integration costs (2)
Amortization of acquisition-related
intangible assets (3)
Impact of divestitures (4)
Restructuring costs (reversals) (5)
Adjusted net income (loss)
2020
Reported net income (loss)
Acquisition integration costs (2)
Amortization of acquisition-related
intangible assets (3)
Adjusted net income (loss)
2019
Reported net income (loss)
Acquisition integration costs (2)
Amortization of acquisition-related
intangible assets (3)
Restructuring costs (reversals) (5)
Reinsurance adjustment (6)
3,237
–
2,189
–
5,426
–
1,474
–
2,140
7
(1,286)
–
7,754
7
1
–
–
24
–
–
25
–
–
24
–
–
17
–
–
–
842
(18)
66
842
(18)
2,593
6
37
27
(13)
3,238
2,213
5,451
1,498
2,164
(462)
8,651
2,650
2,027
–
1,277
–
3,304
–
1,096
–
1,087
11
(390)
–
5,097
11
2
39
41
34
18
–
93
2,029
1,316
3,345
1,130
1,116
(390)
5,201
2,624
–
1,611
–
4,235
–
2
–
–
43
–
–
45
–
–
1,059
–
37
–
25
1,121
1,091
10
(627)
–
5,758
10
17
–
–
–
357
–
99
357
25
M
D
&
A
1,163
8
49
1,220
1,432
7
53
–
86
Adjusted net income (loss)
2,626
1,654
4,280
1,118
(270)
6,249
1,578
(1) U.S. segment results presented in U.S. dollars are non-GAAP amounts.
(2) KGS-Alpha and Clearpool pre-tax acquisition integration costs of $9 million in fiscal 2021, $14 million in fiscal 2020 and $13 million in fiscal 2019 are recorded in non-interest expense in BMO Capital
Markets.
(3) Amortization of acquisition-related intangible assets is recorded in non-interest expense in the related operating group. Canadian P&C recorded pre-tax amounts of $2 million in each of fiscal 2021,
fiscal 2020 and fiscal 2019. U.S. P&C recorded pre-tax amounts of $33 million in fiscal 2021, $53 million in fiscal 2020 and $57 million in fiscal 2019. BMO Wealth Management recorded pre-tax
amounts of $31 million in fiscal 2021, $43 million in fiscal 2020 and $47 million in fiscal 2019. BMO Capital Markets recorded pre-tax amounts of $22 million in fiscal 2021, $23 million in fiscal 2020
and $22 million in fiscal 2019.
(4) Fiscal 2021 reported net income included a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business recorded in non-interest expense,
a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue, and $85 million ($107 million pre-tax) of
divestiture-related costs for both transactions recorded in non-interest expense.
(5) Fiscal 2019 reported net income included a $357 million ($484 million pre-tax) restructuring charge related to severance and a small amount of real estate-related costs. Fiscal 2021 reported net
income included a partial reversal of restructuring charges related to severance of $18 million ($24 million pre-tax). Restructuring charges and reversal were recorded in non-interest expense in
Corporate Services.
(6) 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 incurred after the announced wind-down of the reinsurance business. This reinsurance adjustment is included in BMO Wealth Management.
Net Revenue, Efficiency Ratio and Operating Leverage
(Canadian $ in millions, except as noted)
For the year ended October 31
Reported
Revenue
CCPB
Revenue, net of CCPB
Non-interest expense
Efficiency ratio (%)
Efficiency ratio, net of CCPB (%)
Revenue growth (%)
Revenue growth, net of CCPB (%)
Non-interest expense growth (%)
Operating leverage (%)
Operating leverage, net of CCPB (%)
Adjusted (1)
Revenue
Impact of adjusting items on revenue
Impact of adjusting items on CCPB
CCPB
Revenue, net of CCPB
Impact of adjusting items on non-interest expense
Non-interest expense
Efficiency ratio (%)
Efficiency ratio, net of CCPB (%)
Revenue growth, net of CCPB (%)
Non-interest expense growth (%)
Operating leverage, net of CCPB (%)
(1) Refer to footnotes (1) to (5) in the Non-GAAP and Other Financial Measures table for adjusting items.
2021
2020
2019
27,186
1,399
25,787
15,509
57.0
60.1
7.9
9.8
9.4
(1.5)
0.4
27,157
(29)
–
1,399
25,758
(959)
14,550
53.6
56.5
9.7
3.6
6.1
25,186
1,708
23,478
14,177
56.3
60.4
(1.2)
3.1
(3.1)
1.9
6.2
25,186
–
–
1,708
23,478
(135)
14,042
55.8
59.8
3.0
0.3
2.7
25,483
2,709
22,774
14,630
57.4
64.2
11.3
5.7
8.6
2.7
(2.9)
25,483
–
25
2,684
22,799
(625)
14,005
55.0
61.4
5.8
5.0
0.8
BMO Financial Group 204th Annual Report 2021 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Return on Equity and Return on Tangible Common Equity
(Canadian $ in millions, except as noted)
For the year ended October 31
Reported net income
Dividends on preferred shares and distributions on other equity instruments
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) (2) (3) (4)
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) (5)
Return on tangible common equity (%) (= B/E)
Adjusted return on tangible common equity (%) (= C/E)
A
&
D
M
2021
2020
2019
7,754
(244)
7,510
66
7,576
831
8,407
50,451
14.9
16.7
5,097
(247)
4,850
93
4,943
11
4,954
48,235
10.1
10.3
5,758
(211)
5,547
99
5,646
392
6,038
44,170
12.6
13.7
44,505
41,484
37,456
17.0
18.9
11.9
11.9
15.1
16.1
(1) Fiscal 2021 reported net income included a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business recorded in non-interest expense, a
$22 million ($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue, and $85 million ($107 million pre-tax) of
divestiture-related costs for both transactions recorded in non-interest expense.
(2) Fiscal 2019 reported net income included a $357 million ($484 million pre-tax) restructuring charge related to severance and a small amount of real estate-related costs. Fiscal 2021 reported net
income included a partial reversal of restructuring charges related to severance of $18 million ($24 million pre-tax). Restructuring charges and the reversal were recorded in non-interest expense in
Corporate Services.
(3) Acquisition integration costs related to KGS-Alpha and Clearpool are recorded in non-interest expense in BMO Capital Markets.
(4) Amortization of acquisition-related intangible assets is recorded in non-interest expense in the related operating group.
(5) Common shareholders’ equity (D above) adjusted for goodwill of $5,836 million ($6,530 million in 2020 and $6,417 million in 2019) and acquisition-related intangible assets of $381 million
($495 million in 2020 and $573 million in 2019), net of related deferred tax liabilities of $271 million ($274 million in 2020 and $276 million in 2019).
Capital is allocated to the operating segments based on the amount of regulatory capital required to support business activities. Unallocated capital is
reported in Corporate Services. Capital allocation methodologies are reviewed annually.
Return on Equity by Operating Segment
(Canadian $ in millions, except as noted)
Canadian P&C
U.S. P&C
Total P&C
2021
2020
2019
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
Total Bank
Total Bank
Reported
Net income available to common shareholders
Total average common equity
Return on equity (%)
Adjusted
Net income available to common shareholders
Total average common equity
Return on equity (%)
na – not applicable
3,195
2,150
11,147 13,522
5,345
24,669
28.7
15.9
21.7
3,196
2,174
11,147 13,522
5,370
24,669
28.7
16.1
21.8
1,466
5,899
24.9
1,490
5,899
25.3
2,101
10,913
(1,402)
8,970
7,510
50,451
4,850
48,235
5,547
44,170
19.2
na
14.9
10.1
12.6
2,125
10,913
(578)
8,970
8,407
50,451
4,954
48,235
6,038
44,170
19.5
na
16.7
10.3
13.7
28 BMO Financial Group 204th Annual Report 2021
M
D
&
A
Economic Developments and Outlook
Economic Developments in 2021 and Outlook for 2022 (1)
After contracting by 5.2% in 2020, Canada’s economy is expected to grow by 4.5% in 2021, despite supply-chain disruptions and public health
restrictions that were put in place through the year to suppress a resurgence in COVID-19 cases. The recovery has been supported by substantial fiscal
and monetary policy stimulus, high levels of household savings, elevated prices for energy and other commodities, robust U.S. demand and strong
housing market activity. Despite a rise in COVID-19 case counts and a decline in agricultural production due to the severe drought in Western Canada,
real GDP grew strongly in the third quarter of 2021 after contracting in the previous quarter. While disruptions to transportation and supply chains
arising from floods in British Columbia and concerns about new virus variants will restrain activity in the near term, the economy is expected to
experience growth of 4.0% in 2022. Growth will be supported by substantial pent-up demand for travel and in-person activities, and by additional
government spending. Exports should benefit from rising prices for commodities and a recovering global economy, with the U.S. and Eurozone
economies expected to strengthen. Housing market activity will likely remain elevated, although some moderation in sales is expected due to the
continued erosion of affordability. The unemployment rate is projected to fall from 6.7% in October 2021 to below 6.0% at the end of 2022, returning
to pre-pandemic levels. To support the economic recovery, the Bank of Canada is expected to hold the overnight policy rate near zero for several
months, before shifting to a tighter policy stance by the middle of 2022. The annual rate of consumer inflation rose to an 18-year high of 4.7% in
October 2021, due to significant price increases for gasoline, food, motor vehicles and housing. The increase in inflation reflects a temporary rebound
in prices during the reopening of the economy, as well as supply-chain disruptions and rising commodity prices. Inflation is expected to subside
in 2022 as supply-chain disruptions abate and energy prices moderate, but will likely remain above pre-pandemic levels. Inflation could remain high
for longer than expected if wages accelerate in response to labour shortages. The Canadian dollar strengthened in 2021 on rising commodity prices,
and it is projected to appreciate moderately further in 2022 in response to tighter monetary policy. Industry-wide, residential mortgage balances are
expected to experience continued robust growth in response to low mortgage rates, higher housing prices and steady gains in employment, although
the rate of growth will likely moderate alongside housing activity in the coming quarters. While growth in consumer credit balances (excluding
mortgages) has been limited by restrained consumer spending, it is anticipated to increase in step with spending as most of the remaining pandemic-
related restrictions are lifted. Industry-wide, growth in non-financial corporate credit has moderated as a result of the elevated balances built up early
in the pandemic, but is expected to increase moderately in the year ahead as business investment rises along with a return of confidence.
The U.S. economy is expected to grow by 5.5% in 2021 after contracting by 3.4% in 2020, and growth is expected to reach 3.5% in 2022.
The resurgence in COVID-19 case counts in the summer and a reduction in motor vehicle production due to microchip shortages slowed real GDP
growth in the third quarter of 2021. However, the economic expansion is well-supported by elevated household savings, higher levels of personal
wealth and a robust housing market. Federal spending on infrastructure projects, along with proposed spending on childcare, education and climate
measures, would (if the latter measures are enacted) provide ongoing support to the economy, although this will be partially offset by related tax
increases and the winding down of income-support programs. Housing market activity is expected to remain healthy in 2022, as a result of low
interest rates and rising employment. In addition, business spending is on the rise, with non-residential investment surpassing pre-pandemic levels.
The unemployment rate is projected to fall from 4.6% in October 2021 to 3.5% in late 2022, returning to pre-pandemic levels. To further support the
recovery in labour markets, the Federal Reserve is expected to hold interest rates steady before raising them in the fall of 2022. After falling through
mid-2021, longer-term interest rates are projected to rise in response to strong economic growth and a shift toward tighter monetary policy. Rising
commodity prices, supply-chain bottlenecks and a rebound in travel-related costs and spending propelled the annual consumer price index to a three-
decade high of 6.2% in October 2021. We expect the inflation rate to remain elevated through the turn of the year, before falling below 3% in
late 2022, as supply shortages subside and energy prices moderate. Industry-wide, residential mortgage growth will likely remain healthy due to
ongoing housing market activity. Consumer credit growth has been constrained by fiscal support programs, elevated levels of household savings
and limited consumption of in-person services, but it should benefit from the expected growth in personal spending. Industry-wide, non-financial
corporate credit growth has been subdued, but is anticipated to pick up as business confidence strengthens.
The unpredictable course of the COVID-19 pandemic subjects the economic outlook to a high degree of uncertainty, which is likely to persist
until vaccines are more widely accessible and used across the global population. The Delta variant led to an upturn in COVID-19 case counts in many
countries, and the emergence of other variants could lead to increased hospitalizations and renewed shutdowns of business activity, potentially
resulting in a sustained economic contraction. Other risks to the economy stem from recent concerns about the solvency of a large property developer
in China, a potential flare-up in U.S./China trade tensions, possible turbulence in some emerging market economies as interest rates rise, and the
possibility of higher inflation due to persistent supply shortages and rising energy costs. Escalating housing prices in Canada and the United States
could also leave either economy vulnerable to a correction in the housing market.
This Economic Developments and Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking
Statements.
(1) All periods in this section refer to the calendar year rather than fiscal year.
BMO Financial Group 204th Annual Report 2021 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
2021 Financial Performance Review
This section provides a review of BMO’s enterprise financial performance for 2021 that focuses on the Consolidated Statement of Income in BMO’s
consolidated financial statements. A review of the operating groups’ strategies and performance follows the enterprise review.
We use a number of financial measures to assess our performance, as well as the performance of our operating segments, including amounts,
measures and ratios that are presented on a non-GAAP basis. We believe that these non-GAAP amounts, measures and ratios, read together with
our GAAP results, provide readers with a better understanding of how management assesses results.
Non-GAAP amounts, measures and ratios do not have standardized meanings under GAAP. They are unlikely to be comparable to similar
measures presented by other companies and should not be viewed in isolation from, or as a substitute for, GAAP results.
Further discussion of the non-GAAP amounts, measures and ratios is provided in the Non-GAAP and Other Financial Measures section.
For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures,
refer to the Glossary of Financial Terms.
A
&
D
M
Foreign Exchange
The Canadian dollar equivalents of BMO’s U.S. segment results that are denominated in U.S. dollars decreased relative to 2020 due to changes in the
Canadian/U.S. dollar exchange rate. The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in
those rates on BMO’s U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated
amounts recorded outside of BMO’s U.S. segment.
Economically, our U.S. dollar income stream was not hedged against the risk of changes in foreign exchange rates during 2021, 2020 and 2019.
We regularly determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on our net
income. Changes in exchange rates will affect future results measured in Canadian dollars, and the impact on those results is a function of the periods
in which revenue, expenses, provisions for (recoveries of) credit losses and income taxes arise.
Refer to the Enterprise-Wide Capital Management section for a discussion of the impact that changes in foreign exchange rates can have on
BMO’s capital position.
Effects of Changes in Exchange Rates on BMO’s U.S. Segment Reported and Adjusted Results
(Canadian $ in millions, except as noted)
Canadian/U.S. dollar exchange rate (average)
2021
2020
2019
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
Increased (Decreased) reported net income
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
Increased (Decreased) adjusted net income
Adjusted results in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
2021 vs.
2020
2020 vs.
2019
1.2554
1.3441
1.3441
1.3290
(374)
(196)
(570)
(95)
(358)
(21)
(96)
(374)
(196)
(570)
(95)
(351)
(23)
(101)
83
29
112
83
43
(5)
(9)
83
29
112
83
51
(7)
(15)
30 BMO Financial Group 204th Annual Report 2021
Net Income
Reported net income was $7,754 million, an increase of $2,657 million or 52% from the prior year, and adjusted net income was $8,651 million, an
increase of $3,450 million or 66%, reflecting a recovery from the significant adverse impacts of the COVID-19 pandemic on the global economy, our
customers and our 2020 financial results. Adjusted results in the current year excluded a $779 million pre-tax and after-tax write-down of goodwill
related to the sale of our EMEA Asset Management business, a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business
in Hong Kong and Singapore, and $85 million ($107 million pre-tax) of divestiture-related costs for both transactions, partially offset by an $18 million
($24 million pre-tax) partial reversal of restructuring charges from 2019 related to severance. In addition, adjusted net income in the current and prior
years excluded the amortization of acquisition-related intangible assets and acquisition-related integration costs. For further information, refer to the
Non-GAAP and Other Financial Measures section.
The increase in net income reflects the impact of lower provisions for credit losses, which were elevated in the prior year due to the impact
of the COVID-19 pandemic, and revenue growth, partially offset by an increase in expenses and the impact of the weaker U.S. dollar. Net income
increased in all operating groups, partially offset by a higher net loss in Corporate Services.
Canadian P&C reported net income increased $1,210 million or 60% from the prior year, and adjusted net income increased $1,209 million
or 60%, driven by lower provisions for credit losses and strong revenue growth, partially offset by an increase in expenses. U.S. P&C reported net
income increased $912 million or 71%, and adjusted net income increased $897 million or 68%, primarily driven by lower provisions for credit losses,
strong revenue growth and a reduction in expenses. BMO Wealth Management reported net income increased $378 million or 34%, and adjusted net
income increased $368 million or 32%, driven by higher revenue, partially offset by an increase in expenses. BMO Capital Markets reported net
income increased $1,053 million or 97%, and adjusted net income increased $1,048 million or 94%, with recoveries of provisions for credit losses
and higher revenue, partially offset by an increase in expenses. Corporate Services reported net loss was $1,286 million and adjusted net loss was
$462 million, compared with a reported and adjusted net loss of $390 million in the prior year. The higher reported and adjusted net loss reflected
an increase in expenses, partially offset by higher revenue, driven by higher securities gains and treasury-related activities, and the impact of a less
favourable tax rate in the prior year.
Further discussion is provided in the 2021 Operating Groups Performance Review section.
For further information on non-GAAP amounts, measures and ratios in this Net Income section, refer to the Non-GAAP and Other Financial
Measures section.
M
D
&
A
Revenue
Reported revenue was $27,186 million, an increase of $2,000 million from the prior year, and adjusted revenue
was $27,157 million, an increase of $1,971 million, both increasing 8% from the prior year. On a basis that nets
insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net
revenue), reported net revenue was $25,787 million, an increase of $2,309 million, and adjusted net revenue was
$25,758 million, an increase of $2,280 million, both increasing 10% from the prior year. Adjusted revenue and
adjusted net revenue in the current year excluded the $29 million ($22 million after-tax) net gain on the sale of our
Private Banking business in Hong Kong and Singapore. The impact of the weaker U.S. dollar reduced revenue by 2%.
Revenue increased in BMO Capital Markets due to higher Investment and Corporate Banking revenue and higher
Global Markets revenue; in Canadian P&C due to higher net interest income and non-interest revenue; and in
BMO Wealth Management primarily due to growth in client assets, including stronger global markets and strong loan
and deposit growth, partially offset by lower margins. Revenue decreased in U.S. P&C due to the weaker U.S. dollar,
and increased on a source-currency basis due to higher net interest income and non-interest revenue. Corporate
Services revenue increased from the prior year, driven by higher securities gains and treasury-related activities.
BMO analyzes revenue at the consolidated level based on GAAP revenue as reported in the consolidated
financial statements, and on an adjusted basis. Operating group revenue is presented on a taxable equivalent basis
(teb), with revenue and the provision for income taxes increased on tax-exempt securities to an equivalent pre-tax
basis. These teb adjustments for 2021 totalled $315 million, and were $335 million in 2020.
Further discussion is provided in the 2021 Operating Groups Performance Review section.
For further information on non-GAAP amounts, measures and ratios, and results presented on a net revenue
basis in this Revenue section, refer to the Non-GAAP and Other Financial Measures section.
Reported Net Revenue*
($ billions)
22.8
9.9
23.5
9.5
25.8
11.5
12.9
14.0
14.3
2019
2020
2021
Reported Net Interest Income
Reported Net Non-Interest Revenue
*Numbers may not add due to rounding.
Net interest income comprises 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).
Average earning assets represents the daily average balance of deposits at central banks, deposits with other banks, securities borrowed or
purchased under resale agreements, securities, and loans over a one-year period.
Taxable equivalent basis (teb) Revenues of operating groups are presented in the MD&A on a taxable equivalent basis (teb). Revenue and the
provision for income taxes are increased on tax-exempt securities to an equivalent pre-tax basis to facilitate comparisons of income between
taxable and tax-exempt sources. This adjustment is offset in Corporate Services.
BMO Financial Group 204th Annual Report 2021 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Revenue
(Canadian $ in millions, except as noted)
For the year ended October 31
Net interest income
Non-interest revenue
Total revenue
CCPB (1)
Revenue, net of CCPB (1)
Adjusted revenue (2) (3)
Adjusted CCPB (1) (2) (3)
Adjusted revenue, net of CCPB (1) (2) (3)
2021
2020
2019
14,310
12,876
27,186
1,399
25,787
27,157
1,399
25,758
13,971
11,215
25,186
1,708
23,478
25,186
1,708
23,478
12,888
12,595
25,483
2,709
22,774
25,483
2,684
22,799
Change
from 2020
(%)
2
15
8
(18)
10
8
(18)
10
A
&
D
M
(1) Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets caused by movements in interest rates and equity markets. The investments that support
policy benefit liabilities are predominantly fixed income assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair
value changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in CCPB. The discussion of revenue on a net of CCPB basis reduces variability in
results, which allows for a better discussion of operating results. For additional discussion refer to the Insurance Claims, Commissions and Changes in Policy Benefits section.
(2) Fiscal 2021 reported revenue included a $29 million ($22 million after-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue.
(3) Fiscal 2019 reported revenue included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB for the net impact of major reinsurance claims incurred after the announced
wind-down of the reinsurance business. This reinsurance adjustment is recorded in BMO Wealth Management.
Revenue, net of CCPB, and adjusted results in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
Net Interest Income
Net interest income was $14,310 million, an increase of $339 million or 2% from the prior year. Non-trading net
interest income was $12,457 million, an increase of $417 million or 3%, largely due to higher net interest income
in Canadian P&C and BMO Wealth Management, primarily reflecting higher balances, and in Corporate Services,
partially offset by lower net interest income in BMO Capital Markets. Higher source-currency net interest income in
U.S. P&C was more than offset by the impact of the weaker U.S. dollar. Trading-related interest income was
$1,853 million, a decrease of $78 million or 4%.
Average earning assets were $897.3 billion, an increase of $44.0 billion or 5% from the prior year, primarily
due to higher cash and securities balances and loan growth, partially offset by the impact of the weaker U.S. dollar.
BMO’s overall net interest margin of 159 basis points decreased 5 basis points from the prior year, primarily
driven by higher liquidity levels and lower trading-related interest income, partially offset by higher net interest
margins in our P&C businesses. On a basis that excludes trading-related interest income and earning assets, net
interest margin of 166 basis points increased 2 basis points, primarily driven by lower balances of low-yielding
assets in BMO Capital Markets and higher net interest margins in our P&C businesses, partially offset by higher
liquidity levels.
Table 3 in the Supplemental Information provides further details on net interest income and net interest
Average Earning Assets
and Net Interest Margin
759.4
1.83
1.70
853.3
897.3
1.64
1.64
1.66
1.59
2019
2020
2021
Average Earning Assets ($ billions)
Net Interest Margin (%)
Net Interest Margin Excluding Trading Net
Interest Income and Trading Assets (%)
margin.
Change in Net Interest Income, Average Earning Assets and Net Interest Margin
(Canadian $ in millions, except as noted)
For the year ended October 31
Canadian P&C
U.S. P&C
Net interest income (teb) (1)
Average earning assets (2)
Change
Change
2021
2020
6,561
4,268
6,105
4,345
%
7
(2)
4
(1)
2021
2020
248,215
122,166
370,381
526,921
234,953
130,190
365,143
488,193
%
6
(6)
1
8
5
Personal and Commercial Banking (P&C)
All other operating groups and Corporate Services (3)
10,829
3,481
10,450
3,521
Total reported
14,310
13,971
2
897,302
853,336
Trading net interest income and earning assets
Total excluding trading net interest income and earning
assets
U.S. P&C (US$ in millions)
1,853
1,931
(4)
144,865
121,205
20
12,457
12,040
3,400
3,231
3
5
752,437
732,131
97,321
96,810
3
1
Net interest margin
(in basis points)
2021
2020
Change
264
349
292
na
159
na
166
260
334
286
na
164
na
164
349
334
4
15
6
na
(5)
na
2
15
(1) Operating group revenue is presented on a taxable equivalent basis (teb) in net interest income and is non-GAAP. For further information, refer to the Non-GAAP and Other Financial Measures and
How BMO Reports Operating Group Results sections.
(2) Average earning assets represents the daily average balance of deposits with central banks, deposits with other banks, securities borrowed or purchased under resale agreements, securities, and
loans, over a one-year period.
(3) For further information on net interest income for these other operating groups and Corporate Services, refer to the Review of Operating Groups’ Performance section.
na – not applicable
Certain comparative figures have been reclassified to conform with the current year’s presentation.
32 BMO Financial Group 204th Annual Report 2021
Non-Interest Revenue
Non-interest revenue, which comprises all revenue other than net interest income, was $12,876 million on a reported basis, an increase
of $1,661 million or 15% from the prior year. Adjusted non-interest revenue was $12,847 million, an increase of $1,632 million or 15%, and excluded
the $29 million net gain on the sale of our Private Banking business in Hong Kong and Singapore. Reported non-interest revenue, net of CCPB,
was $11,477 million, an increase of $1,970 million or 21% from the prior year, and adjusted non-interest revenue, net of CCPB, was $11,448 million,
an increase of $1,941 million or 20%.
Non-interest revenue increased across all categories, including higher securities gains, other than trading, underwriting and advisory fee revenue,
trading revenue, investment management and custodial fee revenue, mutual fund revenue and lending fee revenue, partially offset by the impact of
the weaker U.S. dollar. Trading revenue is discussed in the Trading Revenue section that follows.
Gross insurance revenue decreased from the prior year, primarily due to changes in the fair value of investments, partially offset by higher
annuity sales. 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 are reflected in the Insurance Claims, Commissions and Changes in
Policy Benefits section.
We generally focus on analyzing revenue net of CCPB, given the extent to which insurance revenue can vary, and given that this variability is
largely offset in CCPB.
Table 3 in the Supplemental Information provides further details on revenue and revenue growth.
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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
CCPB
Reported non-interest revenue, net of CCPB
Impact of divestitures (1)
Adjusted non-interest revenue
Reinsurance adjustment (2)
Adjusted CCPB
Adjusted non-interest revenue, net of CCPB
Insurance revenue, net of CCPB
Insurance revenue, net of adjusted CCPB
2021
1,107
1,243
296
1,391
442
1,982
1,595
1,421
591
167
1,941
248
452
12,876
(1,399)
11,477
(29)
12,847
–
(1,399)
2020
1,036
1,221
15
1,295
358
1,807
1,417
1,070
124
127
2,178
161
406
2019
1,023
1,204
298
1,192
437
1,747
1,419
975
249
166
3,183
151
551
11,215
(1,708)
9,507
–
11,215
12,595
(2,709)
9,886
–
12,595
–
25
(1,708)
(2,684)
11,448
9,507
9,911
542
542
470
470
474
499
Change
from 2020
(%)
7
2
+100
7
23
10
13
33
+100
31
(11)
54
11
15
(18)
21
na
15
–
(18)
20
15
15
(1) Fiscal 2021 included a $29 million ($22 million after-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue.
(2) Fiscal 2019 reported revenue 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 incurred after the announced wind-down of the reinsurance business. This reinsurance adjustment is recorded in BMO Wealth Management.
Reported and adjusted revenue measures, net of CCPB, in this section are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
BMO Financial Group 204th Annual Report 2021 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
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. We earn a spread or profit on the net sum of our client positions by profitably managing,
within prescribed limits, the overall risk of our net positions. On a limited basis, we also earn revenue from our principal trading positions.
Interest and non-interest trading-related revenue on a teb basis increased $182 million or 8% to $2,434 million in 2021. Equities trading-related
revenue increased $578 million, due to favourable market conditions. The prior year included negative impacts related to equity linked notes-related
businesses in the volatile second quarter of 2020. Interest rate trading-related revenue decreased $182 million or 15% and foreign exchange trading-
related revenue decreased $58 million or 12%, as the prior year benefitted from higher levels of client activity driven by the reaction of market
participants to the COVID-19 pandemic. Commodities trading-related revenue decreased $124 million or 46%, reflecting a decline in client hedging
activity in the energy sector. Other trading-related revenue decreased $32 million, primarily due to lower fair value gains associated with hedging
exposures on the structural balance sheet in the current year.
The Market Risk section provides more information on trading-related revenue.
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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. BMO analyzes 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. This adjustment is offset in Corporate Services.
Interest and Non-Interest Trading-Related Revenue
(1)
(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
Total (teb)
Teb offset
Reported total, net of teb offset
2021
1,017
416
852
147
2
2,434
285
2,149
2,138
296
2,434
285
2,149
2020
1,199
474
274
271
34
2,252
306
1,946
2,237
15
2,252
306
1,946
Change
from 2020
(%)
(15)
(12)
+100
(46)
(94)
8
(7)
10
(4)
+100
8
(7)
10
2019
700
401
526
145
6
1,778
257
1,521
1,480
298
1,778
257
1,521
(1) Trading-related revenue is presented on a taxable equivalent basis and is a non-GAAP measure, and is discussed in the Non-GAAP and Other Financial Measures section.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $1,399 million in 2021, compared with $1,708 million in the
prior year. CCPB decreased, primarily due to changes in the fair value of policy benefit liabilities, partially offset by the impact of higher annuity sales.
The changes were largely offset in revenue.
34 BMO Financial Group 204th Annual Report 2021
Total Provision for Credit Losses
The total provision for credit losses (PCL) was $20 million, compared with $2,953 million in the prior year, primarily
due to an improving economic outlook and more favourable credit conditions. Total PCL as a percentage of average
net loans and acceptances was nil basis points, compared with 63 basis points in the prior year. PCL on impaired
loans was $525 million, a decrease of $997 million from the prior year, largely due to lower provisions in our P&C
businesses and BMO Capital Markets. PCL on impaired loans as a percentage of average net loans and acceptances
was 11 basis points, compared with 33 basis points in the prior year. There was a $505 million recovery of the
provision for credit losses on performing loans in the current year, compared with a $1,431 million provision in the
prior year. The recovery in the current year largely reflected an improving economic outlook and positive credit
migration, partially offset by growth in loan balances.
Provision for
Credit Losses
($ millions)
2,953
872
20
PCL on impaired loans decreased $294 million in Canadian P&C, reflecting lower commercial and consumer
2019
2020
2021
provisions, and $396 million in U.S. P&C, primarily due to lower commercial provisions. In BMO Capital Markets, PCL on
impaired loans decreased $299 million from the prior year. All operating groups recorded recoveries of provisions for
credit losses on performing loans in the current year, compared with the provisions recorded in the prior year.
Note 4 of the consolidated financial statements provides additional information on PCL, including on a geographic
basis. Table 15 in the Supplemental Information provides further segmented PCL information.
For additional information, please refer to the Allowance for Credit Losses section.
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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. PCL can comprise both a provision for credit losses on
impaired loans and a provision for credit losses on performing loans. For further information, refer to the Credit and Counterparty Risk – Provision
for Credit Losses and Allowance for Credit Losses sections and Note 4 of the consolidated financial statements.
Average Net Loans and Acceptances is the daily or monthly average balance of loans and customers’ liability under acceptances, net of the
allowance for credit losses, over a one-year period.
Provision for Credit Losses by Operating Group
(Canadian $ in millions)
Canadian P&C
U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
2021
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
2020
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
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
493
(116)
377
22
(166)
(144)
515
(282)
233
787
623
1,410
544
63
607
418
441
859
160
37
197
1,205
1,064
2,269
704
100
804
4
(16)
(12)
4
18
22
2
(2)
–
11
(205)
(194)
310
349
659
52
28
80
(5)
(2)
(7)
3
–
3
(7)
(5)
(12)
525
(505)
20
1,522
1,431
2,953
751
121
872
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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) (%)
Certain comparative figures have been reclassified to conform with the current year’s presentation.
2021
–
0.11
2020
0.63
0.33
2019
0.20
0.17
BMO Financial Group 204th Annual Report 2021 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Expense
Reported non-interest expense was $15,509 million, an increase of $1,332 million or 9% from the prior year, primarily
due to the impact of divestitures, including a $779 million write-down of goodwill related to the sale of our EMEA
Asset Management business and $107 million of divestiture-related costs in the current year.
Adjusted non-interest expense was $14,550 million, an increase of $508 million or 4% from the prior year.
Adjusted non-interest expense excluded the impact of divestitures in the current year and a $24 million partial
reversal of the restructuring charge, as well as the amortization of acquisition-related intangible assets and
acquisition-related costs in both the current and prior years. The amortization of acquisition-related intangible assets
was $88 million and $121 million in 2021 and 2020, respectively. Acquisition integration costs were $9 million and
$14 million in 2021 and 2020, respectively.
Reported and adjusted non-interest expense increased, due to higher performance-based compensation,
computer and equipment costs and professional fees, partially offset by the benefits of a continued disciplined
approach to expense management and the impact of the weaker U.S. dollar, which reduced expenses by 3%.
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 in the Supplemental Information provides more detail on expenses.
Performance-based compensation increased $520 million or 20% on a reported basis, and $505 million
or 19% on an adjusted basis, reflecting improved business performance. Other employee compensation, which
includes salaries, benefits and severance, decreased $142 million or 3% on a reported basis, and $165 million
or 3% on an adjusted basis, primarily due to the impact of the weaker U.S. dollar.
Premises and equipment costs increased $194 million or 6% on a reported basis, and $176 million or 5% on
an adjusted basis, primarily due to higher technology and real estate costs. Amortization of intangible assets on a
reported basis increased $14 million or 2%, and increased $37 million or 7% on an adjusted basis, reflecting an
increase in software amortization. Other expenses increased $746 million or 31% on a reported basis, reflecting
the impact of divestitures, and decreased $45 million or 2% on an adjusted basis.
For further information on non-GAAP amounts, measures and ratios in this Non-Interest Expense section, refer to
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Non-Interest Expense
($ billions)
14.6
14.0
14.2 14.0
15.5
14.6
2019
2020
2021
Reported Non-Interest Expense
Adjusted Non-Interest Expense
the Non-GAAP and Other Financial Measures section.
Non-Interest Expense
(Canadian $ in millions, on a pre-tax basis)
For the year ended October 31
Performance-based compensation
Acquisition integration costs
Impact of divestitures
Restructuring costs
Adjusted performance-based compensation
Other employee compensation
Acquisition integration costs
Impact of divestitures
Restructuring costs
Adjusted other employee compensation
Premises and equipment
Impact of divestitures
Restructuring costs
Adjusted premises and equipment
Amortization of intangible assets
Amortization of acquisition-related intangible assets
Impact of divestitures
Adjusted amortization of intangible assets
Other
Acquisition integration costs
Impact of divestitures
Restructuring costs
Adjusted other
Total reported non-interest expense
Total adjusted non-interest expense
Adjusted results in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
36 BMO Financial Group 204th Annual Report 2021
2021
2020
2019
Change
from 2020
(%)
3,152
(4)
(14)
–
3,134
5,170
(5)
(48)
24
5,141
3,396
(18)
–
3,378
634
(88)
(10)
536
3,157
–
(796)
–
2,361
2,632
(3)
–
–
2,629
5,312
(6)
–
–
5,306
3,202
–
–
3,202
620
(121)
–
499
2,411
(5)
–
–
2,406
2,610
–
–
(3)
2,607
5,813
(13)
–
(439)
5,361
2,988
–
(41)
2,947
554
(128)
–
426
2,665
–
–
(1)
2,664
15,509
14,550
14,177
14,042
14,630
14,005
20
33
na
na
19
(3)
(17)
na
na
(3)
6
na
na
5
2
(27)
na
7
31
+100
na
na
(2)
9
4
Provision for Income Taxes and Other Taxes
(Canadian $ in millions, except as noted)
For the year ended October 31
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 (other taxes) (1)
Provision for income taxes
Provision for income taxes and other taxes
Provision for income taxes and other taxes as a % of income before provision for income taxes and other taxes
Effective tax rate (%)
Adjusted effective tax rate (%)
2021
355
36
36
10
382
1
820
2,504
3,324
30.0
24.4
22.7
2020
362
42
33
9
397
1
844
1,251
2,095
29.1
19.7
19.8
2019
354
37
35
9
384
1
820
1,514
2,334
28.8
20.8
21.1
(1) Other taxes are included in various non-interest expense categories.
Provision for income taxes and other taxes and the adjusted effective tax rate in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
The provision for income taxes and other taxes was $3,324 million in the current year. Of this amount, $2,060 million was incurred in Canada, with
$1,450 million included in the provision for income taxes, while the remaining $610 million was recorded in total government levies other than
income taxes (other taxes). The increase from $2,095 million in the prior year primarily reflected a higher provision for income taxes.
The provision for income taxes presented 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 of the consolidated financial statements.
Management assesses BMO’s consolidated results and the associated provision for income taxes on a GAAP basis. We assess the performance
of our operating groups and associated income taxes on a taxable equivalent basis, and we report accordingly.
The provision for income taxes was $2,504 million, compared with $1,251 million in the prior year. The effective tax rate was 24.4%, compared
with 19.7% in the prior year. The adjusted provision for income taxes was $2,537 million, compared with $1,282 million in the prior year.
The adjusted effective tax rate was 22.7%, compared with 19.8% in the prior year. The effective tax rate and adjusted effective tax rate were lower
in the prior year primarily due to earnings mix, including the impact of lower pre-tax income in the prior year. The effective tax rate in the current
year is higher than the adjusted effective tax rate due to the write-down of goodwill related to the sale of our EMEA Asset Management business in
the current year.
(1)
BMO partially hedges, for accounting purposes, the foreign exchange risk arising from investments in foreign operations by funding the
investments in the corresponding foreign currency. A gain or loss on hedging activities 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
investments in 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 investments in foreign operations has given
rise to an income tax expense in other comprehensive income of $180 million in the current year, compared with a recovery of $35 million in the
prior year. Refer to Note 22 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 for additional details. In the table above we disclose provision for income taxes and other
taxes as a percentage of income before the provision for income taxes and other taxes, which is a non-GAAP financial ratio, to reflect the full impact
of all government levies and taxes as a percentage of our income.
For further information on non-GAAP amounts, measures and ratios in this Provision for Income Taxes and Other Taxes section, refer to the
Non-GAAP and Other Financial Measures section.
(1) The adjusted effective tax rate is computed using adjusted net income and adjusted provision for income taxes rather than reported net income in the determination of income subject to income tax.
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BMO Financial Group 204th Annual Report 2021 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
2021 Operating Groups Performance Review
Summary
This section includes an analysis of the financial results of BMO’s 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
Corporate Services, including Technology and Operations
BMO’s business mix is well diversified by operating segment and by geography.
Reported Net Income
by Operating Group*
2021
Reported Net Revenue
by Operating Group*
2021
Reported Net Revenue
by Geography
2021
Canadian P&C 36%
U.S. P&C 24%
BMO Wealth Management 16%
BMO Capital Markets 24%
Canadian P&C 34%
U.S. P&C 21%
BMO Wealth Management 22%
BMO Capital Markets 23%
Canada 58%
United States 36%
Other Countries 6%
* Percentages determined excluding results in Corporate Services.
Revenue, net of CCPB, is on a non-GAAP basis and is discussed in the Non-GAAP and Other Financial Measures section.
38 BMO Financial Group 204th Annual Report 2021
How BMO Reports Operating Group Results
BMO reports financial results for its three operating groups, one of which comprises two operating segments, all of which are supported by Corporate
Units and Technology and Operations within Corporate Services. Operating group results include treasury-related allocations in revenue, non-interest
expense allocations from Corporate Units and Technology and Operations (T&O) and allocated capital.
BMO employs funds transfer pricing and liquidity transfer pricing between Treasury and the operating groups to assign the appropriate cost
and credit to funds for the appropriate pricing of loans and deposits, and to help assess the profitability performance of each line of business.
These practices also capture the cost of holding supplemental liquid assets to meet contingent liquidity requirements and facilitate the management
of interest rate risk and liquidity risk within our risk appetite framework and regulatory requirements. We review our transfer pricing methodologies
at least annually, to align with our interest rate, liquidity and funding risk management practices.
The costs of Corporate Units and Technology and Operations services are largely allocated to the four operating segments, with any remaining
amounts retained in Corporate Services. Costs directly incurred to support a specific operating group are generally allocated to that operating group.
Other costs that are not directly attributable to a specific operating group are allocated across the operating groups, reasonably reflective of the level
of support provided to each operating group. Cost allocation methodologies are reviewed annually.
Capital is allocated to the operating segments based on the amount of regulatory capital required to support business activities. Unallocated
capital is reported in Corporate Services. Capital allocation methodologies are reviewed annually.
Periodically, certain lines of business and units within our organizational structure are realigned to support our strategic priorities. In addition,
allocations of revenue, provisions for credit losses, expenses and capital are updated periodically to better align with current experience.
We analyze revenue at the consolidated level based on GAAP revenue as reported in the audited annual consolidated financial statements, rather
than on a taxable equivalent basis (teb), which is consistent with our Canadian banking peer group. Like many banks, BMO analyzes 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 pre-tax basis
in order 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 (1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue
(2)
Total revenue (teb)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets
(3)
Canadian P&C
U.S. P&C
Total P&C
2021
2020
2019
2021
2020
2019
2021
2020
2019
6,561
2,225
8,786
493
(116)
377
4,037
4,372
1,135
3,237
1
6,105
1,930
8,035
787
623
1,410
3,892
2,733
706
2,027
2
5,885
2,099
7,984
544
63
607
3,836
3,541
917
2,624
2
4,268
1,243
5,511
22
(166)
(144)
2,797
2,858
669
2,189
24
4,345
1,186
5,531
418
441
859
3,075
1,597
320
1,277
39
4,216
1,162
5,378
160
37
197
3,136
2,045
434
1,611
43
10,829
3,468
14,297
515
(282)
10,450
3,116
13,566
1,205
1,064
233
6,834
7,230
1,804
5,426
25
2,269
6,967
4,330
1,026
3,304
41
10,101
3,261
13,362
704
100
804
6,972
5,586
1,351
4,235
45
4,280
Adjusted net income
3,238
2,029
2,626
2,213
1,316
1,654
5,451
3,345
(1) Adjusted results and teb amounts in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Taxable equivalent basis amounts of $24 million in fiscal 2021, $28 million in fiscal 2020 and $34 million in fiscal 2019 are recorded in net interest income.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $35 million in 2021, $55 million in 2020 and $59 million in 2019 are recorded in non-interest expense.
The Personal and Commercial Banking (P&C) operating group comprises 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
$5,426 million, an increase of $2,122 million or 64% from the prior year. Adjusted net income, which excludes the amortization of acquisition-related
intangible assets, was $5,451 million, an increase of $2,106 million or 63% from the prior year. Increases in reported and adjusted net income were
primarily driven by lower provisions for credit losses, revenue growth and a reduction in expenses, partially offset by the impact of the weaker U.S.
dollar. These operating segments are reviewed separately in the sections that follow.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 204th Annual Report 2021 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking provides financial products and services to eight million customers.
Personal Banking helps customers make real financial progress through a network of almost 900 branches, contact
centres, digital banking platforms and more than 3,300 automated teller machines. Commercial Banking serves clients
across Canada, and our commercial bankers are trusted advisors and partners to their clients, offering sector and
industry expertise, local presence and a comprehensive range of commercial products and services.
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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, small business lending and everyday financial
and investment advice, with an overall focus on providing customers
with an exceptional experience in every interaction and helping them
make real financial progress.
Commercial Banking provides clients with a wide range of commercial
products and services, including multiple financing options and treasury
and payment solutions, as well as risk management products.
Commercial bankers partner with clients to anticipate their financial
needs, and share expertise and knowledge to help them manage and
grow their businesses.
Strategy and Key Priorities
2021 Priorities and Achievements
Key Priority: Continue to improve customer loyalty, deepen primary relationships and support
customers in the new operating environment
Achievements
• Continued to maintain strong customer loyalty in Personal Banking and
leading customer loyalty in Commercial Banking, as measured by Net
Promoter Score
• Supported customers experiencing financial hardship since the onset
of the COVID-19 pandemic through multiple programs
• Assisted more than 82,000 small businesses with access to
approximately $4.5 billion in loans through the Canada Emergency
Business Account (CEBA) program
• Assisted nearly 1,500 clients with access to approximately
$500 million in non-revolving loans through the Highly Affected
Sectors Credit Availability Program (HASCAP), in collaboration with
the Business Development Bank of Canada
• Partnered with Export Development Canada to launch the Trade
Expansion Lending Program (TELP), which assists export-oriented
small and medium-sized businesses with faster access to working
capital so that they can expand outside of Canada
• Made BMO’s employee Wellness Services program available to
Canadian business owners and entrepreneurs, offering services and
resources that support mental, physical, social and financial health,
at no additional cost
Key Priority: In Personal Banking, drive customer acquisition, build share of wallet, enhance digital
capabilities and deliver a leading customer experience
Achievements
• Gained market share in key focus areas, including personal loans, retail
deposits and credit cards
• Introduced a new tailored Small Business Banking bundle as part of our
Canadian Defence Community Banking Program, aimed at supporting
entrepreneurs from the Canadian Defence Community from start-up to
succession planning
• Attracted new customers to BMO with the launch of BMO eclipse Visa
InfiniteTM and Visa Infinite PrivilegeTM credit cards, designed to meet
the everyday lifestyle needs of Canadians, offering greater earning
potential and more flexible rewards
• Introduced BMO Family BundleTM, a unique offering in the Canadian
market, allowing customers and their family members to save on fees
on their Canadian-dollar or U.S.-dollar chequing accounts
• Strengthened our digital sales and service capabilities, with
more than a third of core banking products now purchased and
delivered digitally, and more than 90% of service transactions
completed through self-serve channels, enabling employees to
focus on providing leading advisory services
• Introduced an Automated Digital Enrolment solution to help
customers enrol quickly and seamlessly for commonly used mobile
banking features, a first for a major Canadian financial institution.
This new solution was enhanced with the launch of Selfie ID, which
enables a simple digital onboarding experience
• Launched BMO CashTrackTM Insights, an artificial intelligence-driven
capability that to date has offered more than 180,000 insights to
customers through our mobile banking app, helping them avoid cash
shortfalls or overdraft fees and make real financial progress
40 BMO Financial Group 204th Annual Report 2021
Key Priority: In Commercial Banking, target opportunities for growth and diversification across key
sectors and businesses, invest in digital and payment capabilities and continue to leverage cross-bank
collaboration
Achievements
• Named Best Commercial Bank in Canada for the seventh consecutive
year by World Finance magazine at its 2021 Banking Awards, in
recognition of our strong regional and industry focus, as well as
our commitment to building customer relationships and providing
innovative solutions
• Co-led the first labelled Green Loan in Canada to support the
•
construction of a new 100% recycled containerboard facility in Ontario
Continued to enhance our industry-leading Business Banking XpressTM
(BBX) platform, which has facilitated $1.8 billion in lending
authorizations, while building out multi-journey functionality to provide
solutions to business owners quickly, in a single intuitive experience
• Launched a new Business Property Finance group to build scale and
market presence rapidly in this sector
• Launched the first commercial real estate synthetic securitization
offered by a Canadian bank
• Continued to advance payments modernization by deploying LynxTM,
in collaboration with Payments Canada, enabling faster, simpler
data-rich transactions
• Fully integrated our North American wire transfer platform, with
95% of payments processed without human intervention, resulting
in higher speed, lower risk of error and a better experience for
customers and employees
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Key Priority: Drive efficiencies by simplifying and streamlining operations and investing in digital
capabilities, while activating and driving an inclusive, high-performance culture
Achievements
• Recognized for digital innovation with the 2021 Celent Model Bank
Award for financial wellness; and recognized as a category winner by
BAI Canada at its 2020 Global Innovation Awards for BMO CashTrackTM
• Ranked #1 by Insider Intelligence in its inaugural mobile banking ratings
for digital money management, security and alerts, and in recognition of
the positive effects of our digital-first approach on our customers’
banking experience
• Significantly increased the capacity of our front-line branch
employees by transforming the cash ecosystem and eliminating,
simplifying or centralizing key administrative activities
• Continued to grow our advice-based roles, strengthening our ability
to engage with customers on the financial issues that are important
to them
2022 Focus
• Build on our strong franchise to drive growth and customer loyalty by continuing to invest in differentiating
capabilities and delivering enhanced client experiences
• In Personal Banking, drive top-tier customer acquisition, build leading share of wallet, and enhance the digital
experience to help customers make real financial progress
• In Commercial Banking, strengthen core market presence, accelerate growth in key sectors and continue to build
share of wallet with strengthened digital capabilities
• Drive efficiencies by simplifying and streamlining operations, investing in digital capabilities and through cross-bank
collaboration
• Foster an inclusive, winning culture, focused on alignment, empowerment and recognition, with a commitment
to a diverse and inclusive workplace
BMO Financial Group 204th Annual Report 2021 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian P&C
(1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income
Non-interest revenue
Total revenue
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets
(2)
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Adjusted net income
Adjusted non-interest expense
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 (%)
(3)
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
(3)
2021
6,561
2,225
8,786
493
(116)
377
4,037
4,372
1,135
3,237
1
3,238
4,035
2020
6,105
1,930
8,035
787
623
1,410
3,892
2,733
706
2,027
2
2,029
3,890
5,325
3,461
59.7
9.4
3.7
3.7
28.7
28.7
5.7
5.7
45.9
2.64
248,215
261,869
260,359
225,555
14,697
4,986
3,049
(22.7)
0.6
1.4
1.5
18.1
18.1
(0.8)
(0.9)
48.4
2.60
234,953
250,223
248,972
204,942
13,701
2019
5,885
2,099
7,984
544
63
607
3,836
3,541
917
2,624
2
2,626
3,834
5,016
2,968
2.8
5.2
4.1
4.1
27.3
27.3
1.1
1.1
48.1
2.65
222,260
236,889
236,000
175,125
14,638
(1) Adjusted results and ratios in this table are non-GAAP amounts or ratios and are discussed in the Non-GAAP and Other
Financial Measures section.
(2) Amortization of acquisition-related intangible assets pre-tax amounts of $2 million in each of fiscal 2021, fiscal 2020 and
fiscal 2019 are recorded in non-interest expense.
(3) Return on equity is based on allocated capital. For further information, refer to the Non-GAAP and Other Financial Measures
section.
Revenue by Line of Business
($ millions)
Personal
Commercial
7,984
2,968
8,035
3,049
8,786
3,461
5,016
4,986
5,325
2019
2020
2021
Average Deposits*
($ billions)
112.5
Personal
Commercial
126.6
130.1
95.4
78.3
62.7
2019
2020
2021
*Numbers may not add due to rounding.
Average Gross Loans and Acceptances *
($ billions)
236.9
80.5
9.0
46.7
250.2
88.7
8.7
48.4
100.8
104.3
261.9
90.8
8.2
51.0
111.9
2019
2020
2021
Commercial
Credit Cards
Consumer Instalment and Other Personal
Residential Mortgages
*Numbers may not add due to rounding.
42 BMO Financial Group 204th Annual Report 2021
Financial Review
Canadian P&C reported net income was $3,237 million, an increase of $1,210 million or 60% from the prior year, driven by lower provisions for credit
losses compared with elevated levels in the prior year and strong revenue growth, partially offset by an increase in expenses.
Total revenue was $8,786 million, an increase of $751 million or 9% from the prior year. Net interest income increased $456 million or 7%, due
to higher balances and higher loan margins, partially offset by lower deposit margins. Non-interest revenue increased $295 million or 15%, with
higher revenue across most categories, including higher gains on investments in our commercial business and higher card-related revenue. Personal
revenue increased $339 million or 7% from the prior year and commercial revenue increased $412 million or 14%, both due to higher net interest
income and higher non-interest revenue.
Net interest margin of 2.64% increased 4 basis points, primarily driven by higher loan margins and deposits growing faster than loans, partially
offset by lower deposit margins that reflect the impact of the lower interest rate environment.
Total provision for credit losses was $377 million, a decrease of $1,033 million from the prior year. The provision for credit losses on impaired
loans was $493 million, a decrease of $294 million due to lower commercial and consumer provisions. There was a $116 million recovery of the
provision for credit losses on performing loans in the current year, compared with a $623 million provision in the prior year.
Reported non-interest expense was $4,037 million, an increase of $145 million or 4% from the prior year, reflecting investments in the business,
including employee-related costs, as well as technology and marketing costs.
Average gross loans and acceptances increased $11.6 billion or 5% from the prior year to $261.9 billion. Personal loan balances increased 7%
and commercial loan balances increased 2%, while credit card balances decreased 6%. Average deposits increased $20.6 billion or 10% to
$225.6 billion, reflecting higher levels of liquidity retained by customers, as well as strong customer acquisition. Personal deposits increased 3%,
with strong growth in chequing and savings account deposits, partially offset by a decline in term deposits. Commercial deposits increased 22%.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
Canadian P&C recorded strong results in fiscal 2021, demonstrating resilience during the pandemic and an ability to adapt quickly as the economy
recovers. Our focus on supporting our customers in times of need, delivering exceptional customer service, leveraging digital capabilities by investing
in new technologies, and diversifying our customer base are all key to successfully delivering on our strategy.
Canadian banking customers continued to feel the effects of the COVID-19 pandemic, with ongoing lockdowns in the first half of the year and the
extension of government support programs intended to ease financial hardship. We continued to support our customers as the Canadian economy
began to recover in fiscal 2021, driven by sharp increases in vaccination rates and the relaxation of public health restrictions. Deposits have continued
to grow despite rising levels of customer spending, and unsecured consumer and business borrowing volumes began to grow through the year,
reflected in improved loan growth across our diverse portfolio of credit products. The housing market has experienced elevated activity, resulting
in strong mortgage growth, further supported by investments in our sales force. The economic recovery is expected to continue in fiscal 2022,
notwithstanding the ongoing uncertainty surrounding the course of the COVID-19 pandemic and the emergence of variants, with rising levels of
consumer spending and business investment supporting further growth in our personal and commercial businesses. Housing market activity is
expected to moderate but remain robust, while supply-chain disruptions, labour shortages and higher inflation rates continue to generate headwinds
for the industry. Interest rates are expected to remain low in the near term, which could put modest pressure on margins, before rising in the
medium term and supporting margin improvement.
The Canadian financial services landscape remains highly competitive, with traditional and non-traditional competitors offering a wide range of
banking products and services across physical and digital channels. Canadian P&C is well-positioned to compete in this rapidly-evolving landscape.
With strong market share for our personal and commercial products and services, we continue to focus on building best-in-class customer loyalty by
enhancing the customer experience with innovative products, services and digital solutions, while also improving efficiency.
The Canadian economic environment in fiscal 2021 and the outlook for fiscal 2022 are discussed in more detail in the Economic Developments
and Outlook section.
Caution
This Canadian Personal and Commercial Banking section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 204th Annual Report 2021 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking serves more than two million customers by providing a banking experience with a
human touch, while delivering a broad range of financial products and services. U.S. Personal Banking serves customers
seamlessly across an extensive network of more than 520 branches, dedicated contact centres, digital banking platforms,
and nationwide access to more than 40,000 automated teller machines. U.S. Commercial Banking serves clients across
the United States, and our commercial bankers are trusted advisors and partners to their clients, offering sector and
industry expertise, local presence and a comprehensive range 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, with an overall focus on providing
customers with an exceptional experience in every interaction and helping
them make real financial progress.
Commercial Banking provides clients with a wide range of commercial
products and services, including multiple financing options and treasury
and payment solutions, as well as risk management products.
Commercial bankers partner with clients to anticipate their financial
needs, and share expertise and knowledge to help them manage and
grow their businesses.
Strategy and Key Priorities
2021 Priorities and Achievements
Key Priority: Continue to improve customer loyalty, deepen primary relationships and support
customers in the new operating environment
Achievements
• Continued to strengthen customer loyalty in Personal Banking and
maintained best-in-class customer loyalty in Commercial Banking, as
measured by Net Promoter Score
• Supported customers experiencing financial hardship since the onset
of the COVID-19 pandemic, and provided a total of US$6.5 billion in
funding for more than 36,000 businesses through the SBA Paycheck
Protection Program
• Reinforced our second-place ranking in market share for deposits in
the core Chicago and Milwaukee markets, with a top-three position
across our Midwest footprint
• Recognized on Forbes magazine’s World’s Best Banks 2021 list, based
on a survey of consumers on key attributes, including trust, fees, digital
services and financial advice
• Continued our partnership with 1871, a Chicago-based fintech private
business incubator, in the WMN•FINtech program for a second year,
focusing on mentoring women-led start-ups and reflecting our
commitment to support an entrepreneurial innovation ecosystem
• Rated Outstanding by the Office of the Comptroller of the Currency
on Community Reinvestment Act performance, recognizing our
commitment to help support low- and moderate-income
communities
• Deployed more than US$2 billion in loans and investments as part
of BMO EMpowerTM, a five-year US$5 billion commitment to address
key barriers faced by minority businesses and communities in the
United States
Key Priority: In Personal Banking, continue to drive new customer acquisition and deposit growth,
build a flagship franchise in Small Business Banking and increase digital engagement
Achievements
• Delivered strong core deposit growth, with 25% of transactions
conducted through digital channels, supported by a robust product
offering and pricing optimization
• Continued to enhance our Business Banking XpressTM (BBX) platform with
more than 14,000 deposit and credit accounts opened across branch and
digital channels since its launch
• Launched myFinancial CompassTM, a guided conversation tool that has
seamlessly supported more than 275,000 advice-based conversations
with high levels of customer satisfaction
• BMO Harris Smart MoneyTM account awarded Bank OnTM certification by
the Cities for Financial Empowerment Fund, recognizing it as a safe and
affordable banking service for financially underserved customers
44 BMO Financial Group 204th Annual Report 2021
• Continued to increase digital engagement with customers, with the
adoption rate rising by more than 300 basis points year-over-year and
more than 75% of service transactions conducted through self-serve
channels
• Introduced Savings BuilderTM, a rewards-based program for consumers
and small businesses to help them build strong and consistent
savings habits, with more than 90,000 new accounts opened to date
• Supported the removal of systemic barriers for small businesses, and
empowered communities by introducing Black and Latinx and Women
in Business programs
Key Priority: In Commercial Banking, strengthen core market presence and continue to build share
of wallet, strengthen digital capabilities and continue to leverage cross-bank collaboration
Achievements
• Expanded our national presence with the opening of new offices in
Florida and Colorado, and continued to grow in Texas, Georgia and
other new markets
• Enhanced our offerings in high-value verticals such as healthcare
by introducing asset-based lending and launching a multi-specialty
Healthcare Council
• Continued to strengthen cross-border capabilities in order to improve
the customer experience through technology platform changes
related to wire transfers, receivables and billing processes
• Migrated our Transportation Finance business to Amazon Web
Services (AWS), executing on our digital first strategy and our
commitment to unlocking the power of machine learning to digitize
and humanize the employee and customer experience
Key Priority: Drive efficiencies by simplifying and streamlining operations and investing in digital
capabilities, while activating and driving an inclusive, high-performance culture
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Achievements
• Expanded our relationship with financial technology leader FIS in a
major multi-year modernization program that accelerates mobile digital
solutions, supporting continued growth across our U.S. market
• Partnered with Lively, Inc. to introduce a new Health Savings Account
experience for our customers, offering multiple investment options and
providing financial tools that address rising healthcare costs
• Optimized our sales and service model to leverage cross-channel
capacity across branches and contact centres
• Named one of the Best Places to Work for Disability Inclusion for
the sixth consecutive year, achieving a maximum score of 100 on
the Disability Equality Index
• Recognized by Forbes magazine as one of the Best Employers for
Diversity for the third consecutive year, based on an independent
survey of more than 50,000 U.S.-based employees
2022 Focus
• Build on our strong franchise to drive growth and customer loyalty by continuing to invest in differentiating
capabilities and delivering enhanced client experiences
• In Personal Banking, continue to drive new customer acquisition, increase digital engagement, and help customers
make real financial progress
• In Commercial Banking, strengthen core market presence, drive growth in expansion markets and continue to build
share of wallet with strengthened digital capabilities
• Drive efficiencies by simplifying and streamlining operations, investing in digital capabilities and through cross-bank
collaboration
• Foster an inclusive, winning culture, focused on alignment, empowerment and recognition, with a commitment
to a diverse and inclusive workplace
BMO Financial Group 204th Annual Report 2021 45
Revenue by Line of Business
(US$ millions)
Personal
Commercial
4,048
4,113
2,689
2,820
4,390
3,077
1,359
1,293
1,313
2019
2020
2021
Average Deposits
(US$ billions)
Personal
Commercial
62.9
48.8 49.4
48.0
45.1
35.2
2019
2020
2021
Average Gross Loans and Acceptances*
(US$ billions)
85.5
8.5
6.5
70.5
92.2
10.1
5.7
92.4
10.6
4.5
76.4
77.3
2019
2020
2021
Personal Other Loans
Personal Mortgages
Commercial
*Personal Other Loans includes Business Banking, Indirect Auto,
Credit Cards, Home Equity, Non-Strategic and other personal loans.
MANAGEMENT’S DISCUSSION AND ANALYSIS
U.S. P&C
(1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue
(2)
Total revenue (teb)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets
(3)
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Adjusted net income
Adjusted non-interest expense
Average earning assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
(US$ in millions, except as noted)
Net interest income (teb)
Non-interest revenue
(4)
Total revenue (teb)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Amortization of acquisition-related intangible assets
(5)
Adjusted net income
Adjusted non-interest expense
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 (%)
(6)
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
(6)
2021
4,268
1,243
5,511
22
(166)
(144)
2,797
2,858
669
2,189
24
2,213
2,764
2020
4,345
1,186
5,531
418
441
859
3,075
1,597
320
1,277
39
1,316
3,022
2019
4,216
1,162
5,378
160
37
197
3,136
2,045
434
1,611
43
1,654
3,079
122,166
115,025
116,039
139,197
130,190
123,002
123,953
132,041
119,640
112,904
113,620
106,733
3,400
990
4,390
15
(132)
(117)
2,229
2,278
534
1,744
19
1,763
2,203
1,313
3,077
83.5
80.0
6.7
(2.5)
(2.0)
15.9
16.1
9.2
8.7
50.8
50.2
3.49
97,321
92,439
91,631
110,910
6,449
3,231
882
4,113
310
328
638
2,287
1,188
237
951
30
981
2,248
1,293
2,820
(21.6)
(21.2)
1.6
(3.1)
(3.0)
8.3
8.5
4.7
4.6
55.6
54.6
3.34
96,810
92,170
91,462
98,203
6,388
3,173
875
4,048
121
28
149
2,360
1,539
327
1,212
32
1,244
2,317
1,359
2,689
11.7
11.1
5.6
2.6
2.8
11.0
11.3
3.0
2.8
58.3
57.3
3.53
90,035
85,505
84,966
80,316
6,831
(1) Adjusted results and ratios, teb amounts and U.S. dollar amounts and ratios in this table are on a non-GAAP basis and are
discussed in the Non-GAAP and Other Financial Measures section.
(2) Taxable equivalent basis amounts of $24 million in fiscal 2021, $28 million in fiscal 2020 and $34 million in fiscal 2019 are
recorded in net interest income.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $33 million in 2021, $53 million in 2020 and
$57 million in 2019 are recorded in non-interest expense.
(4) Taxable equivalent basis amounts of US$25 million in fiscal 2021, US$20 million in fiscal 2020 and US$25 million in
fiscal 2019 are recorded in net interest income.
(5) Amortization of acquisition-related intangible assets pre-tax amounts of US$26 million in 2021, US$39 million in 2020 and
US$43 million in 2019 are recorded in non-interest expense.
(6) Return on equity is based on allocated capital. For further information, refer to the Non-GAAP and Other Financial Measures
section.
46 BMO Financial Group 204th Annual Report 2021
Financial Review
U.S. P&C reported net income was $2,189 million, an increase of $912 million or 71% from the prior year. The impact of the weaker U.S. dollar
reduced net income growth by 12%, revenue growth by 7% and expense growth by 6%. U.S. P&C performance and metrics are presented and
discussed on a U.S. dollar basis, which management views as useful in assessing the underlying performance due to the variability caused by changes
in the U.S. dollar. All amounts in the remainder of this section are on a U.S. dollar basis.
Reported net income was $1,744 million, an increase of $793 million or 84% from the prior year, primarily driven by lower provisions for credit
losses compared with elevated levels in the prior year, strong revenue growth and reduced expenses.
Total revenue was $4,390 million, an increase of $277 million or 7% from the prior year. Net interest income increased $169 million or 5% due
to higher loan margins, growth in deposits and accelerated Paycheck Protection Program (PPP) revenue resulting from loan forgiveness, partially
offset by lower deposit product margins. The PPP was a U.S. government relief program implemented in fiscal 2020 to reduce the financial hardship
caused by the COVID-19 pandemic. Non-interest revenue increased $108 million or 12%, with higher revenue across most categories, primarily
reflecting higher commercial lending-related fee revenue, advisory fee revenue and deposit fee revenue. Commercial revenue increased $257 million
or 9% due to higher net interest income and non-interest income. Personal revenue increased $20 million or 2% due to higher net interest income.
Net interest margin of 3.49% increased 15 basis points from the prior year, primarily due to higher loan margins, deposits growing faster than
loans, and accelerated PPP revenue resulting from loan forgiveness, partially offset by lower deposit margins that reflected the impact of the lower
interest rate environment.
Total recovery of credit losses was $117 million, compared with a provision of $638 million in the prior year. The provision for credit losses on
impaired loans decreased $295 million, largely due to lower commercial provisions in the current year. There was a $132 million recovery of the
provision for credit losses on performing loans in the current year, compared with a $328 million provision in the prior year.
Reported non-interest expense was $2,229 million, a decrease of $58 million or 3%, primarily due to lower operational costs in line with a
continued focus on expense management, partially offset by higher employee-related costs, largely reflecting performance-based compensation.
Average gross loans and acceptances were relatively unchanged at $92.4 billion, with commercial loan growth of 1%, offset by lower personal
loan balances of 4%. The impact of the reduction in PPP loans reduced average loans and acceptances by $0.6 billion or 1%. Average deposits
increased $12.7 billion or 13% to $110.9 billion, reflecting higher levels of liquidity retained by customers. Commercial deposits increased 27%, while
personal deposits decreased 1%, as continued growth in chequing and savings account deposits was more than offset by a decline in term deposits.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
The footprint of our U.S. P&C core branch network spans eight states (Illinois, Wisconsin, Missouri, Indiana, Minnesota, Kansas, Arizona and Florida).
In addition, commercial banking offers targeted nationwide coverage of key specialty sectors and has offices in select regional markets, while the
personal banking digital platform delivers our financial products and services nationally.
Although still impacted by the COVID-19 pandemic, the U.S. economy began to recover in fiscal 2021, gaining strength as public health
restrictions were gradually lifted. Consumers and businesses continued to add to their savings, aided by government support programs and rising
employment rates. Borrowing remained muted, as high levels of savings led to continued strength in deposit growth and slower loan growth.
The economy is expected to grow at a robust pace in the year ahead, although ongoing uncertainty surrounding the course of the COVID-19
pandemic, labour shortages and supply-chain disruptions are still a concern. Consumers are benefiting from elevated levels of savings and growing
employment, and some additional fiscal policy stimulus is also expected. Housing market activity is expected to remain healthy in fiscal 2022,
supported by rising employment rates. Corporate credit growth is expected to accelerate, as rising business confidence leads to new investments.
U.S. P&C remains committed to its customers, employees and local communities, and is well-positioned to grow despite a highly competitive
environment. In commercial banking, our bankers have been working with our clients throughout the pandemic, providing them with a full range of
deposit, lending and advisory solutions that are timely, relevant and supportive of their business. In personal banking, investments in technology
continue to deliver improvements in speed, scale and efficiency, and are fuelling growth in digital and mobile adoption.
The U.S. economic environment in fiscal 2021 and the outlook for fiscal 2022 are discussed in more detail in the Economic Developments and
Outlook section.
Caution
This U.S. Personal and Commercial Banking section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 204th Annual Report 2021 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Wealth Management
BMO Wealth Management serves a full range of clients, from individuals and families to business owners and
institutions, offering a wide spectrum of wealth, asset management and insurance products and services aimed
at helping clients plan, grow, protect and transition their wealth. Our asset management business is focused on
making a positive impact and delivering innovative client solutions.
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Lines of Business
BMO Private Wealth provides full-service investing, banking and wealth
advisory services to high net worth and ultra-high net worth clients,
leveraging individualized financial planning and advice-based solutions
such as investment management, business succession planning, trust and
estate services, and philanthropy.
BMO InvestorLine leads Wealth Management’s digital investing services,
offering three ways for Canadian clients to invest: BMO InvestorLine’s self-
directed online trading platform for investors who want to be in control of
their investments; BMO InvestorLine’s adviceDirect™ for investors who
want the freedom to make their own investment decisions with
personalized advice and support; and SmartFolio™ for investors who want
low-fee, professionally managed portfolios aligned with their investment
objectives.
BMO Wealth Management U.S. offers financial solutions to mass
affluent, high net worth and ultra-high net worth families and
businesses.
BMO Global Asset Management provides investment management
services to institutional, retail and high net worth investors, offering a
wide range of innovative, client-focused solutions and strategies to
help clients meet their investment objectives.
BMO Insurance is a diversified insurance and wealth solutions provider
and a leader in pension de-risking solutions. It manufactures individual
life, critical illness and annuity products, as well as segregated funds.
Group creditor and travel insurance is also available to bank customers
in Canada through Bank of Montreal.
Strategy and Key Priorities
2021 Priorities and Achievements
Key Priority: Deliver a differentiated client experience, providing outstanding support and working
together to plan, grow, protect and transition their wealth with confidence
Achievements
• Achieved overall record-high client loyalty scores, affirming the
responsiveness and expertise of our teams, the value of our holistic
approach and the results of our proactive outreach in support of clients
• BMO Private Banking was named Best Private Bank in Canada by World
Finance magazine for the 11th consecutive year, in recognition of our
client-centric approach to navigating the complexity of managing our
clients’ wealth during times of uncertainty
• Continued to evolve our digital capabilities, introducing a new facial
recognition option in the account opening process for BMO Nesbitt Burns
clients and simplifying the digital onboarding experience for BMO
InvestorLine clients, tripling our self-serve application completion rate
since 2018
• BMO Wealth Management U.S. deepened its presence in the Bay Area
(California), Atlanta and Dallas, continuing to expand its national reach
• Integrated our North American ultra-high net worth offerings and
infrastructure with the bespoke capabilities of the BMO Family Office,
a focus on alternative investments and curated client experiences
• Expanded our digital advisory capabilities with the launch of
adviceDirect™ Preview and Premium, and offered access to more
Canadian online investors by lowering minimum balances, allowing
more commission-free trades and changing our fee structure for
advisory services
• Enhanced our self-directed and adviceDirect™ trading platforms,
including extended capabilities in research, education and portfolio
management support, as well as simplified trading procedures
• Launched commission-free trading for self-directed clients on more
than 80 exchange traded funds (ETFs)
48 BMO Financial Group 204th Annual Report 2021
Key Priority: Extend advantage as a solutions provider, delivering innovative asset management
and insurance offerings that anticipate clients’ evolving needs and exceed their expectations
Achievements
• Maintained our leadership position in Canadian ETFs, continuing to rank
#1 in net new asset growth, launched a suite of Innovation Index ETFs
and added to our Environmental, Social and Governance (ESG) ETF line-up
• Recognized for the sustained performance of 25 BMO funds and ETFs at
the annual FundGrade A+® Awards, including 18 ETFs and seven mutual
funds
• Refreshed our Global Asset Management Trading platform with
improved process automation to enhance overall client experience and
satisfaction
• Enhanced BMO Insurance products and services with a suite of
ESG investment options for Universal Life Insurance and Segregated
Funds policyholders and an accelerated underwriting process that
offers important life insurance protection without requiring tests or
examinations
• Reinforced our leadership position in pension de-risking, securing
two of our largest transactions to date and doubling total annual
premiums from the prior year
Key Priority: Build on a strong foundation and continue to evolve, simplify and digitize our businesses
to drive value and efficiencies
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Achievements
• Finalized the sale of our Private Banking business in Hong Kong and
Singapore and the sale of EMEA Asset Management as we reposition
and grow our operations across our core North American footprint
• Streamlined money management by digitizing the set-up and use of
electronic fund transfers and introducing real-time cash transfers from
Personal Banking accounts to BMO Nesbitt Burns accounts
• BMO Wealth Management U.S. completed the outsourcing of middle-
and back-office broker dealer functions through a partnership with
LPL Financial, enhancing our premium brokerage and advisory
services with a more robust digital platform and innovative solutions
to meet the evolving needs of our clients
• BMO InvestorLine launched a new self-serve option for opening
margin and registered retirement income fund accounts
Key Priority: Activate and drive an inclusive, high-performance culture, with a commitment to building
diverse and inclusive teams to bring the best of BMO to all clients
Achievements
• Launched a collaborative Wealth Sponsorship Program with insights
from the chairs of the Black Professionals Network and the Latino
Alliance, as part of the Wealth Racial Equity Action Plan
• Ranked first in the Stewardship and Market Education categories at the
Responsible Investment Association’s 2021 Leadership Awards for our
efforts to extend Canadian diversity and inclusion beyond gender, as
well as the development and launch of the MyESGTM analytics tool
• BMO Family Office received the 2021 Diversity in Wealth
Management Award from the Family Wealth Report, recognizing our
commitment to diversity in the workplace
• Solidified BMO’s position as a premium wealth advisor for business
owners by continuing the collaboration between Advisory and
Commercial Banking teams to help clients navigate the uncertainty
around proposed tax changes in the United States, which led to a
year-over-year increase of more than 70% in revenue from clients
referred by Commercial Banking
2022 Focus
• Deliver a top-tier digital wealth management offering, building on our differentiated digital advisory capabilities
to provide an enhanced client experience
• Scale our leadership position in private wealth advisory services across North America to plan, grow, protect and
transition our clients’ wealth with confidence
• Extend our advantage as a solutions provider, expanding asset management and insurance offerings in key
growth areas
• Enhance efficiencies by continuing to evolve, simplify and streamline our businesses to drive value
• Foster an inclusive, winning culture, focused on alignment, empowerment and recognition, with a commitment
to a diverse and inclusive workplace
BMO Financial Group 204th Annual Report 2021 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Wealth Management
(1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income
Non-interest revenue
Total revenue
Insurance claims, commissions and changes in policy benefit
liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets
Reinsurance adjustment
(3)
(2)
Adjusted net income
Adjusted non-interest expense
Key Performance Metrics and Drivers
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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 (%)
(4)
Adjusted return on equity (%)
Operating leverage, net of CCPB (%)
Adjusted operating leverage, net of CCPB (%)
Efficiency ratio, net of CCPB (%)
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 (AUA)
Assets under management (AUM)
Full-time equivalent employees
(5)
(4)
U.S. Business Select Financial Data (US$ in millions)
Total revenue
Non-interest expense
Reported net income
Adjusted non-interest expense
Adjusted net income
Average net loans and acceptances
Average deposits
2021
2020
2019
1,474
Reported Net Income
($ millions)
AUA and AUM *
($ billions)
1,059
1,096
2019
2020
2021
864.7
471.2
894.5
482.6
950.7
523.3
393.6
412.0
427.4
2019
2020
2021
AUA
AUM
*Numbers may not add due to rounding.
2021 Net Revenue by Line of Business
(%)
11% BMO Wealth
Management U.S.
8% BMO Insurance
29% BMO Global Asset
Management
44% BMO Private Wealth
8% BMO InvestorLine
982
6,071
7,053
1,399
5,654
4
(16)
(12)
3,716
1,950
476
1,474
24
–
1,498
3,685
1,228
1,252
246
246
34.4
32.5
5.1
13.1
1,399
13.1
5.6
6.1
24.9
25.3
7.5
7.0
65.7
65.2
5,899
48,232
28,920
28,880
51,030
427,446
523,270
6,329
625
489
104
482
109
4,878
7,321
900
5,808
6,708
1,708
5,000
4
18
22
3,519
1,459
363
1,096
34
–
1,130
3,476
893
927
203
203
3.5
0.8
(12.4)
1.0
1,708
0.5
(0.1)
–
17.1
17.7
1.1
0.5
70.4
69.5
6,364
45,573
26,585
26,547
43,660
411,959
482,554
6,193
935
6,727
7,662
2,709
4,953
2
(2)
–
3,523
1,430
371
1,059
37
25
1,121
3,476
861
898
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
69.8
6,321
40,951
23,519
23,487
36,419
393,576
471,160
6,374
583
504
61
495
68
4,540
6,471
613
512
77
501
85
4,156
5,794
(1) Revenue measures, net of CCPB, adjusted results and ratios, including operating leverage and efficiency ratio, and U.S. dollar
amounts in this table are on a non-GAAP basis and discussed in the Non-GAAP and Other Financial Measures section.
(2) Amortization of acquisition-related intangible assets pre-tax amounts of $31 million in 2021, $43 million in 2020 and
$47 million in 2019 are recorded in non-interest expense.
(3) 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 incurred after the wind-down of the reinsurance business. This reinsurance adjustment is
included in CCPB.
(4) Return on equity is based on allocated capital. For further information, refer to the Non-GAAP and Other Financial Measures
section.
(5) Certain assets under management that are also administered by BMO are included in assets under administration.
50 BMO Financial Group 204th Annual Report 2021
Financial Review
BMO Wealth Management reported net income was $1,474 million, an increase of $378 million or 34% from the prior year, primarily driven by revenue
growth, partially offset by an increase in expenses.
Traditional Wealth reported net income was $1,228 million, an increase of $335 million or 38% from the prior year. Insurance net income was
$246 million, an increase of $43 million or 21% from the prior year.
We also present reported and adjusted revenue on a basis that is net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), and we calculate our efficiency ratio and operating leverage on a similar basis. Insurance revenue can experience variability arising from
fluctuations in the fair value of insurance assets, caused by movements in interest rates and equity markets, that is largely offset in CCPB. Presenting
our revenue, efficiency ratio and operating leverage on a net basis allows for a better assessment of operating results.
Revenue was $7,053 million, an increase of $345 million or 5% from the prior year. Revenue, net of CCPB, was $5,654 million, an increase of
$654 million or 13%. Revenue in Traditional Wealth was $5,178 million, an increase of $585 million or 13% from the prior year, due to higher non-
interest revenue of $503 million resulting from growth in client assets, including the favourable effects of stronger global markets, an increase in
online brokerage revenue and the impact of a legal provision in the prior year, partially offset by the impact of the weaker U.S. dollar. Net interest
income increased $82 million, primarily due to strong deposit and loan growth and the impact of a legal provision in the prior year, partially offset by
lower margins and the impact of the weaker U.S. dollar. Reported insurance revenue was $1,875 million, a decrease of $240 million or 11% from the
prior year. Insurance revenue, net of CCPB, was $476 million, an increase of $69 million or 17%, primarily due to the impact of more favourable
market movements in the current year, and business growth, partially offset by lower benefits from changes in investments to improve asset liability
management and the unfavourable impact of actuarial assumption changes in the current year.
The total recovery of provisions for credit losses was $12 million, compared with a provision of $22 million in the prior year. The provision for
credit losses on impaired loans was unchanged from the prior year. There was a $16 million recovery of the provision for credit losses on performing
loans in the current year, compared with an $18 million provision in the prior year.
Reported non-interest expense was $3,716 million, an increase of $197 million or 6% from the prior year, primarily due to higher revenue-based
costs, technology-related investments and a legal provision in the current year, partially offset by the impact of the weaker U.S. dollar.
Assets under management increased $40.7 billion or 8%, and assets under administration increased $15.5 billion or 4% from the prior year,
primarily due to higher client assets, including stronger global markets, partially offset by attrition resulting from low-yielding assets and foreign
exchange rate movements. Average gross loans and average deposits increased 9% and 17%, respectively.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
The wealth management business remains attractive and highly competitive. We are well-positioned to benefit from emerging industry trends,
including the accelerated adoption of digital channels, by leveraging our planning and advisory offerings, our integrated business model, strong client
loyalty and investments in our digital capabilities and sales force. Traditional competitors continue to expand their advisory sales forces and product
offerings, including exchange traded funds and alternative investment solutions, to meet customers’ evolving needs. Non-traditional competitors
have continued to gain momentum and are differentiating their offerings by delivering an enhanced digital experience, while also entering niche
markets. In fiscal 2021, BMO Wealth Management benefitted from growing momentum in both the equity markets and the economy, as continued
high levels of client trading activity drove robust volume growth. Results were also impacted by the continued low interest rate environment, which
has put pressure on margins, as well as clients’ preference for investments that carry lower management fees. We continue to provide our clients
with expert advice, as we assist them in navigating through volatile and uncertain market conditions. We have introduced new and differentiated
products and enhanced our digital advisory capabilities, all of which led to strong growth in net new assets, deposits, loans and our online brokerage
client base.
The outlook for equity markets could shift quickly if the economy is further impacted by supply-chain disruptions, labour shortages, rising
inflation rates and geopolitical factors, including ongoing uncertainty relating to public health restrictions. Interest rates are expected to remain
historically low in the near term before rising slowly, which would positively affect margins and insurance revenue. Online brokerage transaction
levels moderated in the second half of fiscal 2021, but are expected to remain above pre-pandemic levels. BMO InvestorLine continues to attract new
clients through digital platform enhancements, as well as the launch of adviceDirect™ Preview and Premium, and is expanding access to adviceDirect™
for more Canadians with a lower minimum investment balance required for entry.
The divestiture of our Private Banking business in Hong Kong and Singapore and the sale of our EMEA Asset Management business, which closed
on November 8, 2021, will reduce revenue and expenses, improve efficiency and return on equity, and are expected to have a modest impact on our
income in fiscal 2022.
The Canadian and U.S. economic environment in fiscal 2021 and the outlook for fiscal 2022 are discussed in more detail in the Economic
Developments and Outlook section.
Caution
This BMO Wealth Management section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 204th Annual Report 2021 51
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 2,600
professionals in 32 locations around the world, including 18 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.
The division also provides clients with strategic advice on mergers and
acquisitions (M&A), restructurings and recapitalizations, trade finance and
risk mitigation services to support international business activities, and 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. New product
development and origination services are also offered, 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, Global Markets provides funding and liquidity management
to clients.
Strategy and Key Priorities
2021 Priorities and Achievements
Key Priority: Expand on our strengths and capabilities to deliver value-added solutions and meet client
needs
Achievements
• Continued a leadership role in M&A with strong global expertise
across sectors and deep client relationships, advising on landmark
transactions such as the US$2.5 billion acquisition of Core-Mark by
Performance Food Group
• Supported clients with top-tier market insights and facilitated
groundbreaking initial public offerings, including Magnet Forensics and
*
Alphawave IP; ranked #1 in Canadian Equity Capital Markets, leading
high-profile financings such as Algonquin Power
• Advanced our commitment of people and capital to serve as
our clients’ lead partner in the transition to a net zero world by:
• Establishing an Energy Transition Group
• Providing expertise and support across industries
• Delivering industry-leading, innovative sustainable financing
solutions, including the first labelled Green Loan and the first
sustainability-linked bond in Canada, and ranked #1 in Canadian
sustainable bond underwriting
*
• Built out a U.S. Commercial Mortgage-Backed Securities team,
• Recognized as a leader with top rankings in U.S. sovereign,
*
leveraging both our securitized products platform and our North
American Real Estate banking coverage, and originated and securitized
more than US$1.2 billion in commercial real estate loans
• Maintained a long-standing global leadership position in the Metals
& Mining sector, earning recognition as the Best Metals & Mining
Investment Bank by Global Finance magazine for the 12th consecutive
year
supranational and agency (SSA) issuances, Canadian options and
Canadian structured rates, and maintained BMO’s position at the
forefront of U.S. secured overnight financing rate (SOFR) debt
underwriting, ranking #1 since the offering was launched in 2018
*
• Recognized at the International Business Awards 2021 for the
marketing campaigns for our digital series Road to Recovery and
our podcast series Sustainability Leaders
* Rankings as in Bloomberg Professional Services’ league tables.
52 BMO Financial Group 204th Annual Report 2021
Key Priority: Build on a solid foundation to work smarter, simplify and digitize to enhance efficiencies
Achievements
• Expanded electronic foreign exchange (eFX) capabilities, introducing
new foreign-exchange functionality in our Commercial Banking
platform and launching an eFX retail platform
• With the 2020 acquisition of Clearpool Group, Inc., doubled our
algorithmic trading market share in Canada, simplified workflow,
provided clients with a highly differentiated and customized trading
experience, and expanded electronic trading capabilities to Europe
• Partnered with Riskfuel Analytics Inc. to deliver innovative artificial
intelligence-based solutions that support clients as they prepare to
make faster, smarter investment decisions
• Deployed technology enhancements, workflow tools and process
automation to increase employee productivity. Over three years,
our employees achieved real-time efficiencies that led to time
savings totalling approximately three-quarters of our Million Hour
Challenge objective
• Pivoted conferences to fully digital platforms, with corporate
attendance at 18 conferences up more than 100%
Key Priority: Activate an inclusive, high-performance culture focused on clients, strong partnerships
and alignment, and a commitment to diversity, equity and inclusion
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Achievements
• Leveraged improvements in technology and real estate to transform
our workplaces and enhance the client and employee experience
across our global footprint
• Launched innovative programs and sponsorships to drive greater
equity and inclusion across our workforce, industry and communities
• Launched the inaugural BMO Women in Business bond offering, the
first of its kind in the Canadian market, with proceeds allocated to
women-owned business lending, including financing for micro, small
and medium-sized enterprises
2022 Focus
• Accelerate growth in areas where we are well-positioned and have the expertise and capabilities to deliver
value-added solutions and provide an enhanced client experience
• Deploy digital-first capabilities with an increased focus on data, analytics and artificial intelligence to drive
simplification and scale
• Become an industry leader in sustainable finance, providing advice and innovative solutions to help our clients
reach their environmental, social and governance objectives
• Foster and drive an inclusive, winning culture, focused on alignment, empowerment and recognition, with
a commitment to a diverse and inclusive workplace
BMO Financial Group 204th Annual Report 2021 53
Reported Net Income
($ millions)
2,140
1,091
1,087
2019
2020
2021
Revenue by Line of Business
($ millions)
Global Markets
Investment and
Corporate Banking
6,126
2,521
5,326
2,104
3,222
3,605
4,759
2,055
2,704
2019
2020
2021
Revenue by Geography
(%)
Canada and
Other Countries
United States
45%
47%
49%
55%
53%
51%
2019
2020
2021
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MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Capital Markets
(1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income (teb)
Non-interest revenue
(2)
Total revenue (teb)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (teb)
Reported net income
Acquisition integration costs
Amortization of acquisition-related intangible assets
(3)
(4)
Adjusted net income
Adjusted non-interest expense
Key Performance Metrics and Drivers
Global Markets revenue
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 (%)
(5)
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
(5)
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb)
Non-interest expense
Reported net income
Adjusted net income
Adjusted non-interest expense
Average assets
Average net loans and acceptances
2021
3,115
3,011
6,126
11
(205)
(194)
3,436
2,884
744
2,140
7
17
2,164
3,405
3,605
2,521
96.9
94.1
15.0
6.2
6.4
19.2
19.5
8.8
8.6
56.1
55.6
10,913
372,475
59,385
58,909
2,597
2,373
1,288
857
876
1,263
127,619
25,249
2020
3,320
2,006
5,326
310
349
659
3,236
1,431
344
1,087
11
18
1,116
3,199
3,222
2,104
(0.4)
(0.2)
11.9
(1.3)
(1.4)
9.2
9.5
13.2
13.3
60.8
60.1
11,353
369,518
68,698
68,303
2,678
1,865
1,152
279
299
1,125
116,307
26,161
2019
2,390
2,369
4,759
52
28
80
3,279
1,400
309
1,091
10
17
1,118
3,244
2,704
2,055
(5.9)
(4.7)
8.5
13.9
13.4
9.9
10.1
(5.4)
(4.9)
68.9
68.2
10,430
342,626
60,819
60,731
2,772
1,609
1,197
292
312
1,171
107,185
21,662
(1) Adjusted results and ratios, teb amounts and U.S. dollar amounts in this table are on a non-GAAP basis and are discussed in
the Non-GAAP and Other Financial Measures section.
(2) Taxable equivalent basis amounts of $291 million in fiscal 2021, $307 million in fiscal 2020 and $262 million in fiscal 2019
are recorded in net interest income.
(3) KGS-Alpha and Clearpool pre-tax acquisition integration costs of $9 million in 2021, $14 million in 2020 and $13 million
in 2019 are recorded in non-interest expense.
(4) Amortization of acquisition-related intangible assets pre-tax amounts of $22 million in 2021, $23 million in 2020
and $22 million in 2019 are recorded in non-interest expense.
(5) Return on equity is based on allocated capital. For further information, refer to the Non-GAAP and Other Financial Measures
section.
54 BMO Financial Group 204th Annual Report 2021
Financial Review
BMO Capital Markets reported net income was $2,140 million, an increase of $1,053 million or 97% from the prior year. Recoveries of provisions for
credit losses and revenue growth were partially offset by an increase in expenses.
Revenue was $6,126 million, an increase of $800 million or 15% from the prior year. Global Markets revenue increased $383 million or 12%,
primarily due to higher equities trading revenue, as well as higher levels of new equity and debt issuances, partially offset by lower interest rate and
commodities trading revenue and the impact of the weaker U.S. dollar. The prior year included negative impacts from equity linked notes-related
businesses. Investment and Corporate Banking revenue increased $417 million or 20%, primarily due to higher net securities gains and underwriting
and advisory revenue, partially offset by lower corporate banking-related revenue and the impact of the weaker U.S. dollar. The prior year was
impacted by markdowns on the held-for-sale loan portfolio.
Total recovery of credit losses was $194 million, compared with a provision for credit losses of $659 million in the prior year. The provision for
credit losses on impaired loans was $11 million, a decrease of $299 million from the prior year. There was a recovery of the provision for credit losses
on performing loans of $205 million in the current year, compared with a provision of $349 million in the prior year.
Reported non-interest expense was $3,436 million, an increase of $200 million or 6% from the prior year. The increase was largely due to higher
performance-based compensation, partially offset by the impact of the weaker U.S. dollar and lower travel and business development costs.
Average gross loans and acceptances decreased $9.3 billion or 14% from the prior year to $59.4 billion, primarily due to lower loan utilizations,
the impact of the weaker U.S. dollar and the announced wind-down of our non-Canadian energy portfolio.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
M
D
&
A
Business Environment and Outlook
In fiscal 2021, BMO Capital Markets continued to execute on a strategy that leverages its balanced, diversified and client-focused business model,
while maintaining disciplined risk management. The business benefitted from ongoing high levels of client activity, robust equity prices and
favourable conditions for investment banking services, all of which contributed to strong results, despite lingering uncertainty surrounding the
COVID-19 pandemic and the emergence of new variants, the normalization of market volatility, the low interest rate environment and muted loan
demand.
BMO Capital Markets is emerging from the pandemic as a stronger, more efficient and better-integrated organization. Looking ahead to
fiscal 2022, the pace of economic recovery remains uncertain, despite high rates of vaccination in certain regions. Supply-chain disruptions, labour
shortages and higher inflation rates continue to generate headwinds for our business. However, mergers and acquisitions activity is expected to
remain robust, as it benefits from active private equity funds and supportive debt and equity markets. BMO Capital Markets’ strategy remains
unchanged: a sharp focus on clients, aiming to be their valued financial partner – leveraging talent, innovative solutions and capital to help them
achieve their goals while deploying digital-first solutions that drive simplification and scale. With a leading position in Canada and strong momentum
in the United States, our investments in product offerings and capabilities that help us serve clients, particularly where BMO has core strengths and
opportunities, are building a solid foundation for profitable growth and sustainable returns. In addition, BMO Capital Markets’ disciplined and
integrated approach to risk management, along with continued investments in technology infrastructure, is expected to position the business well to
adapt to evolving regulatory and compliance requirements in the coming years. BMO Capital Markets has also made sustainability and sustainable
finance a core part of its strategy, providing innovative financing solutions and advice to support clients in the accelerating shift to a more sustainable
economy.
The Canadian and U.S. economic environment in fiscal 2021 and the outlook for fiscal 2022 are discussed in more detail in the Economic
Developments and Outlook section.
Caution
This BMO Capital Markets section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 204th Annual Report 2021 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporate Services, including Technology and Operations
A
&
D
M
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, treasury, finance, legal and regulatory compliance, human resources,
communications, marketing, real estate and procurement. T&O develops, monitors, manages and maintains governance of information technology,
including data and analytics, and provides cyber security and operations services.
Corporate Services focuses on enterprise-wide priorities related to maintaining a sound risk and control environment and regulatory compliance,
including the management, assessment and monitoring of BMO’s investment portfolios, funding, liquidity and capital activities, and credit, foreign
exchange and interest rate risks. In support of the operating segments, Corporate Services develops and implements enterprise-wide processes,
systems and controls to maintain operating efficiency and enable our businesses to adapt and meet their customer experience objectives.
The costs of Corporate Units and T&O services are largely allocated to the four operating segments (Canadian P&C, U.S. P&C, 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.
Achievements
• Advanced BMO’s digital first operating model by delivering digitally
driven customer experiences through various initiatives
• Continued to advance the capabilities of our Financial Crimes Unit (FCU)
to respond to a heightened and evolving threat landscape by further
integrating our cyber, fraud, physical security and crisis management
functions into a single cohesive security team. Technology, people and
process areas of focus included enhancing detection and response
capabilities, improving identity and access management, and ensuring
resilience against virtual and physical attacks
• Supported an accelerated adoption of cloud-based solutions,
strengthened cloud service delivery partnerships and built out a
foundational platform to equip BMO with a new generation of security
and monitoring capabilities and the flexibility to adapt in an ever-
changing security landscape
• Further enhanced our artificial intelligence and data and analytics
capabilities across the bank, and supported business initiatives
that have earned global recognition and awards. Research and
exploration focused on emerging technology innovation is
continuing, as new opportunities are identified
• Sustained delivery of critical technology services and operations
across the enterprise, continuously improving foundational
capabilities to build resilience and scalability and elevate the overall
technology-enabled experience for customers and employees
• Continued to focus on elevating the employee experience through
enterprise digital technology tools, and on facilitating a prudent
return to the workplace
56 BMO Financial Group 204th Annual Report 2021
Corporate Services, including Technology and Operations
(1)
(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
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income (loss) before income taxes
Recovery of income taxes (teb)
Reported net loss
Impact of divestitures
Restructuring costs (reversals)
(2)
(3)
Adjusted net loss
(4)
Adjusted total revenue (teb)
(4)
Adjusted non-interest expense
Full-time equivalent employees
(4)
U.S. Business Select Financial Data (US$ in millions)
Total revenue
Total provision for (recovery of) credit losses
Non-interest expense
Recovery of income taxes
Reported net loss
Adjusted total revenue
Adjusted non-interest expense
Adjusted net loss
2021
(301)
(315)
(616)
326
(290)
(5)
(2)
(7)
1,523
(1,806)
(520)
(1,286)
842
(18)
(462)
(319)
661
13,791
(26)
(6)
182
(90)
(112)
(26)
164
(98)
2020
(364)
(335)
(699)
285
(414)
3
–
3
455
(872)
(482)
(390)
–
–
(390)
(414)
455
14,400
(116)
3
97
(88)
(128)
(116)
97
(128)
2019
(242)
(296)
(538)
238
(300)
(7)
(5)
(12)
856
(1,144)
(517)
(627)
–
357
(270)
(300)
372
14,898
(37)
(4)
192
(76)
(149)
(37)
76
(63)
M
D
&
A
(1) Adjusted results and ratios, teb amounts and U.S. dollar amounts in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Fiscal 2021 reported net income included a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business recorded in non-interest expense,
a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue, and $85 million ($107 million pre-tax) of
divestiture-related costs for both transactions recorded in non-interest expense.
(3) Fiscal 2019 reported net income included a $357 million ($484 million pre-tax) restructuring charge related to severance and a small amount of real estate-related costs. Fiscal 2021 reported net
income included a partial reversal of restructuring charges related to severance of $18 million ($24 million pre-tax). Restructuring charges and the partial reversal were recorded in non-interest
expense.
(4) Adjusted results exclude the impact of the items described in footnotes (2) and (3).
Financial Review
Corporate Services reported net loss was $1,286 million and adjusted net loss was $462 million, compared with a reported and adjusted net loss
of $390 million in the prior year. Adjusted results in the current year excluded the impact of divestitures of $842 million ($857 million pre-tax),
including a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business, a $22 million
($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore, and $85 million ($107 million pre-tax) of
divestiture-related costs for both transactions, as well as an $18 million ($24 million pre-tax) partial reversal of restructuring charges recorded in 2019
related to severance. The higher reported and adjusted net loss reflected an increase in expenses, partially offset by higher revenue that was driven
by higher securities gains and treasury-related activities, and the impact of a less favourable tax rate in the prior year.
For further information on non-GAAP amounts, measures and ratios in this 2021 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 204th Annual Report 2021 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
Review of Fourth Quarter 2021 Performance
Q4 2021 vs. Q4 2020
Net Income
Reported net income was $2,159 million, an increase of $575 million or 36% from the prior year, and adjusted net income was $2,226 million, an
increase of $616 million or 38%. Adjusted results in the current quarter excluded expenses of $52 million ($62 million pre-tax) from the impact of
divestitures related to the sale of our EMEA Asset Management business and the sale of our Private Banking business in Hong Kong and Singapore.
Adjusted results also excluded the amortization of acquisition-related intangible assets and acquisition integration costs in both the current and prior
years. Reported EPS was $3.23, an increase of $0.86 from the prior year, and adjusted EPS was $3.33, an increase of $0.92.
Results were driven by strong revenue growth and the impact of lower provisions for credit losses, partially offset by an increase in expenses. All
operating groups recorded higher net income, while Corporate Services recorded a higher net loss.
A
&
D
M
Revenue
Reported revenue was $6,573 million, an increase of $587 million or 10% from the prior year. On a basis that nets insurance claims, commissions and
changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue was $6,476 million, an increase of $490 million or 8%
from the prior year.
Revenue increased in Canadian P&C due to higher net interest income and higher non-interest revenue, in BMO Wealth Management, largely
from growth in client assets, including stronger global markets, partially offset by lower insurance revenue, in BMO Capital Markets due to higher
Investment and Corporate Banking revenue, partially offset by lower Global Markets revenue, and in U.S. P&C due to higher net interest income and
higher non-interest revenue. Corporate Services revenue decreased from the prior year. The impact of the weaker U.S. dollar decreased total revenue
by 2%.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $97 million, compared with $nil in the prior year. The increase
was largely due to changes in the fair value of policy benefit liabilities. CCPB decreased $887 million from the prior quarter due to changes in the fair
value of policy benefit liabilities. The changes were largely offset in revenue.
Provision for Credit Losses
Total recovery of the provision for credit losses was $126 million, compared with a provision for credit losses of $432 million in the prior year.
The total recovery of the provision for credit losses as a percentage of average net loans and acceptances ratio was 11 basis points, compared with
a provision for credit losses ratio of 37 basis points in the prior year. The provision for credit losses on impaired loans was $84 million, a decrease
of $255 million from $339 million in the prior year. The provision for credit losses on impaired loans as a percentage of average net loans and
acceptances ratio was 7 basis points, compared with 29 basis points in the prior year. There was a $210 million recovery of the provision for credit
losses on performing loans in the current quarter, compared with a $93 million provision in the prior year. The $210 million recovery in the current
quarter largely reflected an improving economic outlook and positive credit migration, partially offset by growth in loan balances, while the
$93 million provision in the prior year reflected a more severe adverse scenario, partially offset by an improving economic outlook and reduced
balances.
Non-Interest Expense
Reported non-interest expense was $3,803 million, an increase of $255 million or 7% from the prior year, including $62 million of expenses from
the impact of divestitures in the current year. Adjusted non-interest expense was $3,720 million, an increase of $205 million or 6%. The increase in
expenses was primarily due to higher employee-related costs, including performance-based costs, travel and business development costs, computer
and equipment costs, and professional fees, partially offset by the impact of the weaker U.S. dollar that decreased expenses by 2%.
Provision for Income Taxes
The provision for income taxes was $640 million, an increase of $218 million from the prior year, and the effective tax rate was 22.9%, compared
with 21.1% in the prior year. The adjusted provision for income taxes was $656 million, an increase of $227 million from the prior year, and the
adjusted effective tax rate was 22.7%, compared with 21.1% in the prior year. The effective tax rate and adjusted effective tax rate were lower in
the prior year primarily due to earnings mix, including the impact of lower pre-tax income in the prior year.
Q4 2021 vs. Q3 2021
Reported net income decreased $116 million or 5% from the prior quarter, and adjusted net income decreased $66 million or 3%. Adjusted results
in the prior quarter excluded divestiture costs of $18 million ($24 million pre-tax) and a partial reversal of previously recorded restructuring charges
related to severance of $18 million ($24 million pre-tax), as well as the amortization of acquisition-related intangible assets and acquisition
integration costs. Results were primarily driven by lower revenue and an increase in expenses, partially offset by the impact of a larger recovery of
the provision for credit losses. Net income increased in Canadian P&C and was partially offset by decreases in U.S. P&C, BMO Wealth Management and
BMO Capital Markets. Corporate Services recorded a higher net loss.
Revenue was $6,573 million, a decrease of $989 million or 13% from the prior quarter. Revenue, net of CCPB, was $6,476 million, a decrease of
$102 million or 2%. Reported non-interest expense increased $119 million or 3% from the prior quarter. Adjusted non-interest expense increased
$58 million or 2%. Total recovery of the provision for credit losses was $126 million, compared with a recovery of $70 million in the prior quarter.
For further information on non-GAAP amounts, measures and ratios in this Review of Fourth Quarter 2021 Performance section, refer to the
Non-GAAP and Other Financial Measures section.
58 BMO Financial Group 204th Annual Report 2021
Summary Quarterly Earnings Trends
Summarized Statement of Income and Quarterly Financial Measures
(1)
(Canadian $ in millions, except as noted)
Q4-2021
Q3-2021
Q2-2021
Q1-2021
Q4-2020
Q3-2020
Q2-2020
Q1-2020
Net interest income (teb)
Non-interest revenue
Revenue (teb)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB (teb)
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before provision for income taxes
Provision for income taxes (teb)
Reported net income (see below)
Acquisition integration costs
Amortization of acquisition-related intangible assets
Impact of divestitures
Restructuring costs (reversals)
(2)
(5)
(4)
(3)
Adjusted net income (see below)
Operating group reported net income
Canadian P&C reported net income
Amortization of acquisition-related intangible assets
(3)
Canadian P&C adjusted net income
U.S. P&C reported net income
Amortization of acquisition-related intangible assets
(3)
U.S. P&C adjusted net income
BMO Wealth Management reported net income
Amortization of acquisition-related intangible assets
(3)
BMO Wealth Management adjusted net income
BMO Capital Markets reported net income
Acquisition integration costs
Amortization of acquisition-related intangible assets
(2)
(3)
BMO Capital Markets adjusted net income
Corporate Services reported net loss
Impact of divestitures
Restructuring costs (reversals)
Corporate Services adjusted net loss
(5)
(4)
(7)
(7)
(6)
Basic earnings per share ($)
(6)
Diluted earnings per share ($)
Adjusted diluted earnings per share ($)
Net interest margin on average earning assets (%)
PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances (annualized) (%)
Effective tax rate (%)
Adjusted effective tax rate (%)
Canadian/U.S. dollar average exchange rate ($)
M
D
&
A
3,756
2,817
6,573
97
6,476
84
(210)
(126)
3,803
2,799
640
2,159
1
14
52
–
3,521
4,041
7,562
984
6,578
71
(141)
(70)
3,684
2,964
689
2,275
2
15
18
(18)
3,455
2,621
6,076
(283)
6,359
155
(95)
60
4,409
1,890
587
1,303
2
18
772
–
3,578
3,397
6,975
601
6,374
215
(59)
156
3,613
2,605
588
2,017
2
19
–
–
3,530
2,456
5,986
–
5,986
339
93
432
3,548
2,006
422
1,584
3
23
–
–
3,535
3,654
7,189
1,189
6,000
446
608
1,054
3,444
1,502
270
1,232
4
23
–
–
2,226
2,292
2,095
2,038
1,610
1,259
921
–
921
512
6
518
369
4
373
536
1
4
541
815
–
815
553
6
559
401
5
406
558
2
4
564
764
1
765
542
5
547
346
7
353
563
2
5
570
737
–
737
582
7
589
358
8
366
483
2
4
489
647
1
648
324
9
333
320
8
328
379
3
5
387
319
–
319
263
10
273
341
8
349
426
4
5
435
(179)
52
–
(127)
(52)
18
(18)
(52)
(912)
772
–
(140)
(143)
–
–
(143)
(86)
–
–
(86)
(117)
–
–
(117)
3,518
1,746
5,264
(197)
5,461
413
705
1,118
3,516
827
138
689
2
24
–
–
715
362
1
363
339
10
349
144
9
153
(74)
2
4
(68)
(82)
–
–
(82)
3,388
3,359
6,747
716
6,031
324
25
349
3,669
2,013
421
1,592
2
23
–
–
1,617
699
–
699
351
10
361
291
9
300
356
2
4
362
(105)
–
–
(105)
3.24
3.23
3.33
1.62
(0.11)
0.07
22.9
22.7
3.03
3.03
3.06
1.59
0.14
0.19
22.6
22.6
1.2546 1.2316 1.2512 1.2841
3.42
3.41
3.44
1.57
(0.06)
0.06
23.2
23.2
1.91
1.91
3.13
1.59
0.05
0.13
31.1
22.1
2.37
2.37
2.41
1.60
0.37
0.29
21.1
21.1
2.38
2.37
2.41
1.67
0.31
0.29
20.9
21.0
1.3217 1.3584 1.3811 1.3161
1.00
1.00
1.04
1.69
0.94
0.35
16.6
16.7
1.81
1.81
1.85
1.59
0.89
0.38
18.0
18.2
(1) Revenue measures, net of CCPB, adjusted results and ratios teb amounts, and U.S. dollar amounts in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial
Measures section.
(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.
Acquisition integration costs related to KGS-Alpha and Clearpool are reported in BMO Capital Markets. Acquisition integration costs are recorded in non-interest expense.
(3) Amortization of acquisition-related intangible assets is charged to non-interest expense in the related operating group.
(4) Q2-2021 reported net income included the impact of divestitures, comprising a $747 million pre-tax and after-tax write-down of goodwill related to the sale of our EMEA Asset Management business
recorded in non-interest expense, a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business in Hong Kong and Singapore recorded in non-interest revenue, and
$47 million ($53 million pre-tax) of divestiture-related costs for both transactions recorded in non-interest expense. The impact of divestitures for these transactions was $18 million ($24 million
pre-tax) in Q3-2021 and $52 million ($62 million pre-tax) in Q4-2021 recorded in non-interest expense in Corporate Services.
(5) Q3-2021 reported net income included a partial reversal of restructuring charges related to severance of $18 million ($24 million pre-tax). Restructuring charges and reversal were recorded in
non-interest expense in Corporate Services.
(6) 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
of the consolidated financial statements.
(7) Net income and earnings from our business operations are attributable to shareholders by way of EPS and diluted EPS. Adjusted EPS and adjusted diluted EPS are non-GAAP measures. For further
information, refer to the Non-GAAP and Other Financial Measures section.
BMO Financial Group 204th Annual Report 2021 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
A
&
D
M
Financial performance in recent quarters has generally been trending upward, due to improving economic conditions and good operating momentum
across our businesses, including lower provisions for credit losses, strong revenue growth and improved efficiency. While results in 2020 were
negatively impacted by the significant adverse effects of the COVID-19 pandemic on the global economy, a reduction in interest rates and lower
levels of consumer and business activity and borrowing, economic conditions subsequently rebounded and continue to improve. However, the
unpredictable course of the COVID-19 pandemic, including the emergence of variants and a possible resurgence of cases globally, contributes to
ongoing economic uncertainty.
Reported results in the second quarter of 2021 included a write-down of goodwill related to the sale of our EMEA Asset Management business
and a net gain on the sale of our Private Banking business in Hong Kong and Singapore. The last three quarters of 2021 reflected the impact of
divestitures related to these transactions. The third quarter of 2021 also included a partial reversal of a restructuring charge recorded in 2019.
All periods included the amortization of acquisition-related intangible assets and acquisition integration costs.
Total revenue growth reflects the benefits of our diversified businesses. Revenue growth in the P&C businesses was initially negatively impacted
by the COVID-19 pandemic, the low interest rate environment and lower non-interest revenue due to lower levels of client activity, which have been
rising in the most recent quarters as public health restrictions have been relaxed. Canadian P&C benefitted from strong growth in residential
mortgages and home equity lines of credit, reflecting higher levels of housing market activity. Revenue in U.S. P&C on a source-currency basis
rebounded in 2021, driven by higher loan spreads and Paycheck Protection Program revenue, and has remained relatively stable over the last four
quarters due to more muted industry loan growth. In BMO Wealth Management, Traditional Wealth revenue performance has been supported by
stronger global markets. Insurance revenue, net of CCPB, is subject to variability, primarily resulting from changes in interest rates and equity
markets. BMO Capital Markets recorded year-over-year revenue growth in seven of the past eight quarters, primarily reflecting higher trading and
underwriting revenue due to robust client activity, while the second quarter of 2020 was negatively impacted by volatile market conditions resulting
from the COVID-19 pandemic. Revenue in the fourth quarter of 2021 reflected good performance in all operating groups. Revenue growth has also
been impacted by changes in the strength of the U.S. dollar.
In 2020, we recorded higher provisions for credit losses in all businesses, primarily due to the impact of the COVID-19 pandemic, including higher
provisions for credit losses on performing loans in the wake of the economic downturn brought on by the pandemic. In 2021, we recorded lower
provisions for credit losses on impaired loans, as well as recoveries of provisions for credit losses on performing loans, which reflected the improving
economic outlook and more favourable credit conditions.
Non-interest expense reflected our focus on expense management and efficiency improvement. In recent quarters, non-interest expense growth
has been driven by higher performance-based compensation reflecting improved revenue performance, and higher technology and marketing costs,
partially offset by lower net COVID-19 related costs, as well as lower travel costs due to the continued impact of the pandemic. Expenses were also
impacted by changes in the strength of the U.S. dollar.
The effective tax rate has varied with 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, the level of pre-tax income,
and the level of tax-exempt income from securities. The effective tax rate in 2021 was impacted by the write-down of goodwill related to the sale of
our EMEA Asset Management business.
For further information on non-GAAP amounts, measures and ratios in this Summary Quarterly Earnings Trends section, refer to the Non-GAAP
and Other Financial Measures section.
60 BMO Financial Group 204th Annual Report 2021
2020 Financial Performance Review
The preceding discussions in the MD&A focused on BMO’s performance in fiscal 2021. This section summarizes BMO’s performance in fiscal 2020,
relative to fiscal 2019. Certain prior-year data has been reclassified to conform with the presentation in 2021, including changes resulting from
transfers between operating groups. Further information on these reclassifications is provided in the How BMO Reports Operating Group Results
section.
(Canadian $ in millions)
2020
Net interest income (teb)
Non-interest revenue
(1)
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income (loss) before income taxes (teb)
Provision for (recovery of) income taxes
(1)
Net income (loss)
Acquisition integration costs
Amortization of acquisition-related intangible assets
Restructuring costs
Reinsurance adjustment
Adjusted net income (loss)
2019
Net interest income (teb)
Non-interest revenue
(1)
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for (recovery of) credit losses
Non-interest expense
Income (loss) before income taxes (teb)
Provision for (recovery of) income taxes
(1)
Net income (loss)
Acquisition integration costs
Amortization of acquisition-related intangible assets
Restructuring costs
Reinsurance adjustment
M
D
&
A
Canadian P&C U.S. P&C Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
6,105
1,930
8,035
–
4,345 10,450
3,116
1,186
5,531 13,566
–
–
8,035
5,531 13,566
1,410
3,892
2,733
706
859
3,075
1,597
320
2,269
6,967
4,330
1,026
2,027
1,277
3,304
–
2
–
–
–
39
–
–
–
41
–
–
900
5,808
6,708
1,708
5,000
22
3,519
1,459
363
1,096
–
34
–
–
3,320
2,006
5,326
–
(699)
285
(414)
–
13,971
11,215
25,186
1,708
5,326
(414)
23,478
659
3,236
1,431
344
3
455
2,953
14,177
(872)
(482)
6,348
1,251
1,087
(390)
5,097
11
18
–
–
–
–
–
–
11
93
–
–
2,029
1,316
3,345
1,130
1,116
(390)
5,201
5,885
2,099
7,984
–
4,216 10,101
3,261
1,162
5,378 13,362
–
–
7,984
5,378 13,362
607
3,836
3,541
917
197
3,136
2,045
434
804
6,972
5,586
1,351
2,624
1,611
4,235
–
2
–
–
–
43
–
–
–
45
–
–
935
6,727
7,662
2,709
4,953
–
3,523
1,430
371
1,059
–
37
–
25
2,390
2,369
4,759
–
(538)
238
(300)
–
12,888
12,595
25,483
2,709
4,759
(300)
22,774
80
3,279
1,400
309
(12)
856
872
14,630
(1,144)
(517)
7,272
1,514
1,091
(627)
5,758
10
17
–
–
–
–
357
–
10
99
357
25
Adjusted net income (loss)
2,626
1,654
4,280
1,121
1,118
(270)
6,249
(1) BMO analyzes revenue on a teb basis at the operating group level, with the offset to the group teb adjustments recorded in Corporate Services non-interest revenue and provision for income taxes.
Revenue measures, net of CCPB, adjusted results and ratios, teb amounts and U.S. dollar amounts in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial
Measures section.
Net Income
Reported net income in 2020 was $5,097 million, a decrease of $661 million or 11% from $5,758 million in 2019. Adjusted net income
was $5,201 million, a decrease of $1,048 million or 17% from $6,249 million in 2019. Adjusted net income in both 2020 and 2019 excluded the
amortization of acquisition-related intangible assets and acquisition-related costs. Adjusted net income in 2019 also excluded a restructuring charge,
primarily severance-related, and the net impact of major reinsurance claims resulting from Japanese typhoons incurred after the announced wind-
down of the reinsurance business. The decline in adjusted net income reflected the impact of higher provisions for credit losses, which increased
$2,081 million pre-tax or $1,531 million after tax, partially offset by higher revenue, while adjusted expenses were relatively unchanged. Decreases
in net income were recorded in the P&C businesses, while net income in BMO Capital Markets and BMO Wealth Management was largely unchanged
from 2019. In Corporate Services, the reported net loss decreased from 2019, while the adjusted net loss increased.
Return on Equity
Reported return on equity (ROE) in 2020 was 10.1% and adjusted ROE was 10.3%, compared with 12.6% and 13.7%, respectively, in 2019. Reported
and adjusted ROE decreased in 2020, primarily due to lower net income and higher common equity. There was a decrease of $697 million or 13% in
reported net income available to common shareholders, and a decrease of $1,084 million or 18% in adjusted net income available to common
shareholders from 2019. Average common shareholders’ equity increased $4.1 billion or 9% from 2019, primarily due to growth in retained earnings
and accumulated other comprehensive income.
BMO Financial Group 204th Annual Report 2021 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
Revenue
Reported revenue in 2020 was $25,186 million, a decrease of $297 million from $25,483 million in 2019. On a basis that nets insurance claims,
commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue was $23,478 million, an increase
of $704 million or 3%. Revenue, net of adjusted CCPB, increased $679 million or 3% from the prior year, and excluded the $25 million net impact
of major reinsurance claims in 2019. The increase in revenue was largely driven by strong performance in BMO Capital Markets, primarily due to
increased trading revenue, and revenue growth in the P&C businesses and BMO Wealth Management, partially offset by a decrease in Corporate
Services revenue.
Canadian P&C
Revenue increased $51 million or 1% from 2019, due to higher average balances across most products, partially offset by lower margins reflecting
the low interest rate environment, and lower non-interest revenue, largely due to lower credit card fee revenue and deposit fee revenue.
A
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M
U.S. P&C
Revenue increased $153 million or 3% from 2019 on a Canadian dollar basis. On a U.S. dollar basis, revenue increased $65 million or 2%, primarily
due to growth in average deposit and loan balances, as well as higher loan margins and higher non-interest revenue, partially offset by lower deposit
product margins, reflecting the impact of lower interest rates.
BMO Wealth Management
Revenue, net of reported and adjusted CCPB, increased $47 million or 1% on a reported basis and $22 million on an adjusted basis from 2019.
Revenue in Traditional Wealth increased $38 million, primarily due to higher elevated online brokerage revenue and growth in client assets, net of
fee pressure, partially offset by a legal provision in 2020 and lower net interest income, as the benefits of strong loan and deposit growth were more
than offset by lower margins. Insurance revenue, net of reported and adjusted CCPB, increased $9 million on a reported basis and decreased
$16 million on an adjusted basis, primarily due to higher creditor insurance claims.
BMO Capital Markets
Revenue increased $567 million or 12% from 2019. Global Markets revenue increased, primarily due to higher revenue from interest rate trading,
commodities trading and foreign exchange trading, partially offset by a decrease in equities trading revenue. Investment and Corporate Banking
revenue increased, primarily due to higher corporate banking-related revenue and equity underwriting revenue, partially offset by lower net
securities gains and advisory revenue, as well as markdowns on the held-for-sale loan portfolio.
Corporate Services
Revenue decreased $114 million from 2019, primarily due to lower treasury-related revenue, reflecting the impact of elevated levels of customer
deposits.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Reported and adjusted insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $1,708 million in 2020, compared with
reported CCPB of $2,709 million and adjusted CCPB of $2,684 million in the prior year. Adjusted CCPB excluded the $25 million net impact of major
reinsurance claims in the prior year. CCPB decreased, primarily due to lower increases in the fair value of policy benefit liabilities in 2020 as a result
of a smaller decrease in long-term interest rates compared with 2019, lower annuity sales, lower underlying business growth and weaker equity
markets. The decrease related to the fair value of policy benefit liabilities was largely offset in revenue.
Provision for Credit Losses
The total provision for credit losses was $2,953 million in 2020, an increase of $2,081 million from $872 million in 2019. The provision for credit
losses on impaired loans was $1,522 million in 2020, an increase of $771 million from $751 million in 2019, reflecting higher provisions in all of our
businesses, primarily due to the economic impact of the COVID-19 pandemic. There was a $1,431 million provision for credit losses on performing
loans in 2020, an increase of $1,310 million from $121 million in 2019. The increase in the provision for credit losses on performing loans in 2020
largely reflected the impact of the COVID-19 pandemic on the macroeconomic outlook and the impact of a more difficult and uncertain environment
on credit conditions, as well as a more severe adverse scenario and an increase in the adverse scenario weighting.
Non-Interest Expense
Non-interest expense was $14,177 million in 2020, a decrease of $453 million from 2019, primarily due to the impact of the $484 million
($357 million after-tax) restructuring charge in 2019. Adjusted non-interest expense in 2020 was $14,042 million, relatively unchanged from 2019,
with the benefits of a disciplined approach to expense management, including the net impact of the COVID-19 pandemic on expenses, and lower
employee-related expenses largely offsetting higher premises and equipment costs. Adjusted non-interest expense excluded the restructuring charge
in 2019, as well as the amortization of acquisition-related intangible assets and acquisition integration costs in both 2020 and 2019. The amortization
of acquisition-related intangible assets was $121 million and $128 million in 2020 and 2019, respectively, and acquisition integration costs
were $14 million and $13 million in 2020 and 2019, respectively.
Provision for Income Taxes
The provision for income taxes was $1,251 million in 2020, compared with $1,514 million in 2019. The effective tax rate in 2020 was 19.7%,
compared with 20.8% in 2019. The adjusted provision for income taxes was $1,282 million in 2020, compared with $1,673 million in 2019.
The adjusted effective tax rate in 2020 was 19.8%, compared with 21.1% in 2019. The lower effective tax rate and adjusted effective tax rate in 2020
were due to earnings mix, including lower pre-tax income.
For further information on non-GAAP amounts, measures and ratios in this 2020 Financial Performance Review section, refer to the Non-GAAP
and Other Financial Measures section.
62 BMO Financial Group 204th Annual Report 2021
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
2021
2020
2019
101,564
232,849
107,382
458,262
36,713
51,405
988,175
685,631
30,815
97,556
109,757
6,893
57,523
988,175
66,443
234,260
111,878
447,420
36,815
52,445
949,261
659,034
30,375
88,658
106,185
8,416
56,593
949,261
56,790
189,438
104,004
426,984
22,144
52,835
852,195
568,143
23,598
86,656
115,727
6,995
51,076
852,195
M
D
&
A
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Overview
Total assets of $988.2 billion increased $38.9 billion from October 31, 2020. The weaker U.S. dollar decreased assets by $30.6 billion, excluding the
impact on derivative assets. Total liabilities of $930.7 billion increased $38.0 billion from the prior year. The weaker U.S. dollar decreased liabilities by
$28.4 billion, excluding the impact on derivative liabilities. Total equity of $57.5 billion increased $0.9 billion from October 31, 2020.
Cash and Interest Bearing Deposits with Banks
Cash and interest bearing deposits with banks increased $35.1 billion, primarily due to higher balances held with central banks, driven by customer
deposit growth in excess of loan growth, and a change in the mix of liquid assets, with lower securities borrowed or purchased under resale
agreements and lower securities balances, partially offset by the impact of the weaker U.S. dollar.
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
Amortized cost
Investments in associates and joint ventures
(3)
(2)
Total securities
2021
104,411
14,210
63,123
49,970
1,135
232,849
2020
97,834
13,568
73,407
48,466
985
2019
85,903
13,704
64,515
24,472
844
234,260
189,438
(1) Comprises $3,038 million mandatorily measured at FVTPL ($2,420 million as at October 31, 2020 and $2,899 million as at October 31, 2019) and $11,172 million designated at fair value
($11,148 million as at October 31, 2020 and $10,805 million as at October 31, 2019).
(2) Includes allowances for credit losses on debt securities recorded at fair value through other comprehensive income of $2 million as at October 31, 2021 ($4 million as at October 31, 2020 and
$2 million as at October 31, 2019).
(3) Net of allowances for credit losses of $2 million ($1 million as at both October 31, 2020 and October 31, 2019).
Securities decreased $1.4 billion, as higher levels of client activity in BMO Capital Markets were more than offset by the impact of the weaker U.S.
dollar and treasury activities in Corporate Services.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements decreased $4.5 billion, primarily driven by a change in the mix of liquid assets, which
included an increase in cash and interest bearing deposits with banks, and the impact of the weaker U.S. dollar, partially offset by higher balances in
BMO Capital Markets as a result of client activity.
Net Loans
(Canadian $ in millions)
As at October 31
Residential mortgages
Non-residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and government
Gross loans
Allowance for credit losses
Total net loans
Certain comparative figures have been reclassified to conform with the current year’s presentation.
2021
135,750
17,195
77,164
8,103
222,614
460,826
(2,564)
458,262
2020
127,024
16,741
70,148
7,889
228,921
450,723
(3,303)
447,420
2019
123,740
15,731
67,736
8,859
212,768
428,834
(1,850)
426,984
BMO Financial Group 204th Annual Report 2021 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net loans increased $10.8 billion. Residential mortgages increased $8.7 billion, with growth in Canadian P&C driven by an active housing market,
partially offset by lower balances in U.S. P&C, including the impact of the weaker U.S. dollar. Consumer instalment and other personal loans increased
$7.0 billion, with growth in the P&C businesses and BMO Wealth Management partially offset by the impact of the weaker U.S. dollar. Business and
government loans decreased $6.3 billion, as growth in the P&C businesses was more than offset by the impact of the weaker U.S. dollar and lower
balances in BMO Capital Markets, including the impact of declining balances in the non-Canadian energy portfolio. Non-residential mortgages
increased $0.5 billion, due to growth in BMO Capital Markets and U.S. P&C, partially offset by the impact of the weaker U.S. dollar. Credit cards
increased $0.2 billion, reflecting higher balances in Canadian P&C.
Table 7 in the Supplemental Information provides a comparative summary of loans by geographic location and product. Table 9 provides a
comparative summary of net loans in Canada by province and industry. Loan quality is discussed in the Credit Quality Information section, and further
details on loans are provided in Notes 4, 6 and 24 of the consolidated financial statements.
Derivative Financial Assets
Derivative financial assets decreased $0.1 billion, due to a decrease in the fair value of interest rate and equity contracts, largely offset by an increase
in the fair value of commodities and foreign exchange contracts. Further details on derivative financial assets are provided in Note 8 of the
consolidated financial statements.
Other Assets
Other assets primarily includes customers’ liability under acceptances, goodwill and intangible assets, precious metals, premises and equipment,
current and deferred tax assets, accounts receivable and prepaid expenses. Other assets decreased $1.0 billion, due to a reduction in precious metals
balances resulting from client activity in BMO Capital Markets, the impact of the weaker U.S. dollar and the write-down of goodwill related to the
sale of our EMEA Asset Management business, partially offset by an increase in pension assets, as well as growth in insurance-related assets and
customers’ liability under acceptances. Certain comparative figures have been reclassified to conform with the current year’s presentation.
Further details on other assets are provided in Notes 11 and 12 of the consolidated financial statements.
A
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M
Deposits
(Canadian $ in millions)
As at October 31
Banks
Businesses and government
Individuals
Total deposits
2021
26,611
442,248
216,772
685,631
2020
38,825
400,679
219,530
659,034
2019
23,816
343,157
201,170
568,143
Deposits increased $26.6 billion. Business and government deposits increased $41.6 billion, reflecting growth in customer deposits across all
operating groups and higher levels of funding requirements for client-driven activity in our trading businesses, partially offset by the impact of the
weaker U.S. dollar. Deposits by banks decreased $12.2 billion, primarily due to Bank of Canada term repo funding maturities. Deposits by individuals
decreased $2.8 billion, due to the impact of the weaker U.S. dollar and lower balances in U.S. P&C, partially offset by growth in BMO Wealth
Management and Canadian P&C. Further details on the composition of deposits are provided in Note 13 of the consolidated financial statements
and in the Liquidity and Funding Risk section.
Derivative Financial Liabilities
Derivative financial liabilities increased $0.4 billion, due to an increase in the fair value of equity and foreign exchange contracts, partially offset by a
decrease in the fair value of interest rate and commodities contracts.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements increased $8.9 billion, driven by higher levels of client activity in BMO Capital Markets, partially
offset by the impact of the weaker U.S. dollar and Bank of Canada term repo funding maturities.
Other Liabilities
Other liabilities primarily include securities sold but not yet purchased, securitization and structured entities liabilities, acceptances, insurance-related
liabilities and accounts payable. Other liabilities increased $3.6 billion, primarily reflecting an increase in securities sold but not yet purchased due to
higher levels of client activity in BMO Capital Markets, and increases in cash collateral received, acceptances and insurance-related liabilities, partially
offset by the impact of the weaker U.S. dollar and lower securitization liabilities.
Further details on the composition of other liabilities are provided in Note 14 of the consolidated financial statements.
Subordinated Debt
Subordinated debt decreased $1.5 billion from the prior year, reflecting redemptions, net of a new issuance. Further details on the composition of
subordinated debt are provided in Note 15 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
64 BMO Financial Group 204th Annual Report 2021
2021
2020
2019
5,558
13,599
313
35,497
2,556
57,523
6,598
13,430
302
30,745
5,518
56,593
5,348
12,971
303
28,725
3,729
51,076
Total equity increased $0.9 billion, with a $4.8 billion increase in retained earnings and a $0.2 billion increase in common shares, largely offset by
a $3.0 billion decrease in accumulated other comprehensive income and a $1.0 billion decrease 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 distributions on other equity instruments.
Accumulated other comprehensive income decreased, primarily due to the impact of higher interest rates on cash flow hedges and the impact of the
weaker U.S. dollar on the translation of net foreign operations, partially offset by an improvement in the position of our pension and other employee
future benefit plans due to an increase in the value of pension plan assets and the impact of higher interest rates on the pension liability. Preferred
shares and other equity instruments decreased due to redemptions in the year.
The Consolidated Statement of Changes in Equity in the consolidated financial statements provides a summary of items that increase or reduce
total equity, while Note 16 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 below.
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:
• Is appropriate given BMO’s target regulatory capital ratios and internal assessment of required economic capital
• Underpins BMO’s operating groups’ business strategies
• Supports depositor, investor and regulator confidence, while building long-term shareholder value
• Is consistent with BMO’s target credit ratings.
Framework
M
D
&
A
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
The principles and key elements of our capital management framework are outlined in our Capital Management Corporate Policy and in the annual
capital plan, which includes the results of the 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 ICAAP
and in conjunction with the annual business plan, promoting alignment between 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 our risk profile and capital requirements. The capital management framework seeks to ensure that the bank is adequately
capitalized given the risks it takes in the normal course of business, as well as under stress, and 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. We evaluate assessments of actual and forecast capital adequacy against our capital plan throughout the year, and we update
the plan to reflect changes in business activities, risk profile, the operating environment or regulatory expectations.
We allocate capital to operating groups in order to evaluate business performance, and we consider capital implications in our strategic, tactical
and transactional decision-making. By allocating 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 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 the operating groups.
Refer to the Enterprise-Wide Risk Management section 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 the bank’s Capital Management Corporate Policy framework, capital plan and capital adequacy assessments. The Board of
Directors regularly reviews the bank’s capital position and key capital management activities, and the Risk Review Committee reviews the capital
adequacy assessment results determined by ICAAP. The 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 adherence to controls and identifies opportunities to strengthen the bank’s processes. Refer to the Enterprise-Wide Risk Management
Framework section for further discussion.
BMO Financial Group 204th Annual Report 2021 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
Regulatory Capital Requirements
Regulatory capital requirements for BMO are determined in accordance with guidelines issued by the Office of the Superintendent of Financial
Institutions (OSFI), which are based on the Basel III framework developed by the Basel Committee on Banking Supervision (BCBS). The minimum
risk-based capital ratios set out in OSFI’s Capital Adequacy Requirements (CAR) 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 requires 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 response in periods of stress. Pillar 1 buffers
include a Capital Conservation Buffer of 2.5%, a D-SIB Common Equity Tier 1 surcharge of 1.0%, and a Countercyclical Buffer (which can range
from 0% to 2.5%, depending on a bank’s exposure to jurisdictions that have activated the buffer). The Domestic Stability Buffer (DSB), a Pillar 2 buffer
that can range from 0% to 2.5%, is currently set at 2.5% as of October 31, 2021. The minimum Leverage Ratio set out in OSFI’s Leverage
Requirements (LR) Guideline is 3.0%. OSFI’s capital requirements are summarized in the following table.
(% of risk-weighted assets or leverage exposures)
Common Equity Tier 1 Ratio
A
&
D
M
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, 2021
4.5%
6.0%
8.0%
3.0%
3.5%
3.5%
3.5%
na
2.5%
2.5%
2.5%
na
10.5%
12.0%
14.0%
3.0%
13.7%
15.4%
17.6%
5.1%
(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. 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 2021). 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 DSB against Pillar 2 risks associated with systemic vulnerabilities. The DSB can range from 0% to 2.5% of total RWA and was set at 2.5% as at October 31, 2021.
Breaches of the DSB will not result in a bank being subject to automatic constraints on capital distributions.
na – not applicable
Regulatory Capital and Total Loss Absorbing Capacity 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 leverage exposures (LE), which consist of on-balance sheet items and specified off-balance
sheet items, net of specified adjustments.
The Total Loss Absorbing Capacity (TLAC) Ratio reflects TLAC divided by RWA.
The TLAC Leverage Ratio reflects TLAC divided by LE.
Refer to the Glossary of Financial Terms for definitions of ratios and their components.
Regulatory Capital and Total Loss Absorbing Capacity Elements
BMO maintains a capital structure that is diversified across instruments and tiers to provide an appropriate mix of loss absorbency. The major
components of regulatory capital and total loss absorbing capacity are summarized as follows:
Tier 1 Capital
Total Capital
TLAC
CET1 Capital
• Common Shareholders’ Equity
• May include portion of expected credit loss provisions
• 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
• Preferred shares
• Other AT1 capital instruments
• Less regulatory deductions
Tier 2 Capital
• Subordinated debentures
• May include portion of expected credit loss provisions
• Less regulatory deductions
Other Total Loss Absorbing Capacity (TLAC)
• Other TLAC instruments (including eligible Bail-in debt)
• Less regulatory deductions
66 BMO Financial Group 204th Annual Report 2021
OSFI’s CAR Guideline implemented the non-viability contingent capital (NVCC) provisions set out by the BCBS, which 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 the federal or a provincial government in Canada publicly announces that the bank has accepted, or has 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. The impact on the bank will be nominal.
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. The minimum
TLAC requirements set by OSFI are a risk-based TLAC Ratio of 24.0% of RWA, including a 2.5% DSB, and a TLAC Leverage Ratio of 6.75%, effective
November 1, 2021. As at October 31, 2021, our TLAC Ratio was 27.8% and our TLAC Leverage Ratio was 9.3%, disclosed in accordance with OSFI’s
TLAC Guideline.
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.
We primarily use 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 loss given default and exposure at default risk parameters, term to maturity and asset class type, as prescribed by the OSFI rules.
These risk parameters are determined using historical portfolio data supplemented by benchmarking, as appropriate, and are updated periodically.
Validation procedures related to these parameters are in place in order to quantify and differentiate risks appropriately. 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.
Our market risk RWA are primarily determined using the more advanced Internal Models Approach, but the Standardized Approach is used for
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some exposures.
Beginning in fiscal 2020, OSFI required BMO, along with the other banks that have been approved to use the Advanced Measurement Approach,
to change to the Basel II Standardized Approach for determining enterprise operational risk regulatory capital requirements in the interim period prior
to implementation of the new Basel III Standardized Measurement Approach, part of the Basel III reforms.
We are subject to 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 2021 and fiscal 2020.
Regulatory Capital Developments
Domestic Implementation of the Basel III Reforms
On March 11, 2021, OSFI restarted the implementation of the Basel III reforms by launching an industry consultation on proposed regulatory changes
reflecting the latest and final round of Basel III reforms in its capital, leverage and related disclosure guidelines for banks. Proposals in the
consultation include a three-year phase-in of the capital floor factor, starting at 65% in 2023 and increasing 2.5% per year to 72.5% in 2026, and a
leverage ratio buffer for D-SIBs, set at 50% of the D-SIB Common Equity Tier 1 Surcharge, currently 1.0%, for a minimum Leverage Ratio requirement
of 3.5% and a minimum TLAC Leverage Ratio requirement of 7.25% when the leverage ratio buffer comes into effect.
On June 18, 2021, OSFI launched an industry consultation on proposed regulatory changes to the treatment of credit valuation adjustments (CVA)
and market risk hedges of other valuation adjustments, as part of the ongoing Basel III reforms.
On November 29, 2021, OSFI announced a deferral in the timing for the domestic implementation of the final Basel III reforms and changes to
Pillar 3 disclosure requirements by one quarter from the first quarter to the second quarter of fiscal 2023.
COVID-19 Related Modifications
As part of a coordinated effort by federal agencies to address the market disruptions posed by the COVID-19 pandemic, OSFI announced a suite of
modifications to capital requirements, effective the second quarter of 2020, to afford institutions further flexibility in addressing the disruptions, while
promoting financial resilience and economic stability. During fiscal 2021, OSFI has either unwound, or provided guidance on the unwinding, of these
temporary modifications.
Regulatory Expectations on Dividend Increases and Share Repurchases
Effective November 4, 2021, OSFI announced that institutions may resume regular dividend increases and common share repurchases that have been
restricted since March 13, 2020.
Leverage Ratio
On August 12, 2021, OSFI confirmed that the temporary exclusion of sovereign-issued securities from the leverage ratio exposure measure for
deposit-taking institutions (DTIs) will end on December 31, 2021. Central bank reserves will continue to be excluded.
BMO Financial Group 204th Annual Report 2021 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Domestic Stability Buffer
On June 17, 2021, OSFI set the level of the Domestic Stability Buffer (DSB) at 2.5%, an increase from 1.0%, effective October 31, 2021. The increase
reflects OSFI’s view that key vulnerabilities, such as household and corporate debt levels, remain elevated and in some cases have increased since
March 2020, while the economic and market disruptions stemming from the COVID-19 pandemic have abated and banks’ capital levels have
remained resilient.
Stressed Value-at-Risk (VaR) Multipliers under Market Risk
Effective May 1, 2021, the SVaR multiplier for market risk capital requirements, which was temporarily reduced to a minimum value of one, returned
to the pre-pandemic minimum value of three.
Government of Canada’s Highly Affected Sectors Credit Availability Program
On January 27, 2021, OSFI advised that loans to businesses through the Government of Canada’s Highly Affected Sectors Credit Availability Program
(HASCAP) can be treated as exposures to the Government of Canada. DTIs must include the entire amount of the loan in the leverage ratio calculation.
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Regulatory Capital Review
BMO is well capitalized, with capital ratios that exceed OSFI’s published requirements for large Canadian banks, including a 2.5% DSB. Our CET1 Ratio
was 13.7% as at October 31, 2021, compared with 11.9% as at October 31, 2020. The CET1 Ratio increased from the end of fiscal 2020, primarily
driven by strong internal capital generation.
Our Tier 1 Capital and Total Capital Ratios were 15.4% and 17.6%, respectively, as at October 31, 2021, compared with 13.6% and 16.2%,
respectively, as at October 31, 2020. The Tier 1 Capital and Total Capital Ratios were higher, primarily due to the factors impacting the CET1 Ratio,
partially offset by the redemptions of Additional Tier 1 and Tier 2 capital instruments, respectively.
The impact of foreign exchange rate movements on capital ratios was largely offset. Our 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. We may manage the impact of foreign exchange rate movements on our capital ratios, and did so during fiscal 2021. Any such
activities could also impact BMO’s book value and return on equity.
Our Leverage Ratio was 5.1% as at October 31, 2021, an increase from 4.8% as at October 31, 2020, as higher Tier 1 Capital was partially offset
by higher leverage exposures. Leverage exposures increased from the prior year, driven by business growth, partially offset by the impact from
foreign exchange rate movements.
While the ratios discussed above reflect our consolidated capital base, we conduct 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.
As a U.S. bank intermediate holding company classified as a Category IV institution, our subsidiary BMO Financial Corp. (BFC) is subject to the
Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST) requirements of the Federal Reserve Board (FRB) on a
biennial basis, beginning with CCAR 2020.
BFC elected to participate in the FRB’s 2021 CCAR exercise, even though it was not required to as a Category IV institution. On June 24, 2021, the
FRB released its 2021 CCAR and DFAST results, and on August 5, 2021, announced individual large bank capital requirements, which were effective
October 1, 2021. The capital requirement for BFC determined by the FRB was a CET1 Ratio of 7.5%, including the 4.5% minimum CET1 Ratio and
a 3.0% stress capital buffer (SCB), which is significantly reduced from the previous 6.0%. BFC is well capitalized, with a strong CET1 Ratio of 13.9% as
at September 30, 2021.
68 BMO Financial Group 204th Annual Report 2021
Regulatory Capital (1)
(Canadian $ in millions)
As at October 31
Common Equity Tier 1 Capital: instruments and reserves
Directly issued qualifying common share capital plus related stock surplus
Retained earnings
Accumulated other comprehensive income (and other reserves)
Goodwill and other intangibles (net of related tax liability)
Other common equity Tier 1 capital deductions
Common Equity Tier 1 Capital (CET1)
Additional Tier 1 Capital: instruments
Directly issued qualifying Additional Tier 1 instruments plus related stock surplus
Directly issued capital instruments subject to phase-out from Additional Tier 1 Capital
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
Risk-Weighted Assets
Leverage Ratio Exposures
Capital Ratios (%)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
2021
2020
13,912
35,497
2,556
(7,130)
(344)
44,491
5,558
–
–
–
(83)
5,475
49,966
6,747
141
–
–
398
(51)
7,235
57,201
325,433
976,690
13.7
15.4
17.6
5.1
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13,732
30,745
5,518
(8,402)
(1,516)
40,077
5,558
290
–
–
(85)
5,763
45,840
8,270
146
–
–
458
(53)
8,821
54,661
336,607
953,640
11.9
13.6
16.2
4.8
(1) Disclosed in accordance with OSFI’s CAR Guideline and LR Guideline, as applicable. 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 was $44.5 billion as at October 31, 2021, compared with $40.1 billion as at October 31, 2020. CET1 Capital increased, driven by
retained earnings growth and a lower goodwill deduction due to the write-down in the second quarter of fiscal 2021 related to the sale of our EMEA
Asset Management business, partially offset by a decline in accumulated other comprehensive income, primarily from the impact of foreign exchange
rate movements.
Tier 1 Capital and Total Capital were $50.0 billion and $57.2 billion, respectively, as at October 31, 2021, compared with $45.8 billion and
$54.7 billion, respectively, as at October 31, 2020. The increase in Tier 1 Capital was primarily due to the factors impacting CET1 Capital, partially offset
by preferred share redemptions. Total Capital was higher, primarily due to the factors impacting Tier 1 Capital and an issuance of subordinated notes,
which was partially offset by redemptions.
Risk-Weighted Assets
RWA were $325.4 billion as at October 31, 2021, a decrease from $336.6 billion as at October 31, 2020. Credit Risk RWA were $272.9 billion as at
October 31, 2021, a decrease from $289.0 billion as at October 31, 2020, primarily due to positive asset quality changes and the impact of foreign
exchange rate movements, partially offset by increased asset size. As noted above, the impact of foreign exchange rate movements is largely offset
in the CET1 Ratio. Market Risk RWA were $12.1 billion as at October 31, 2021, an increase from $9.3 billion as at October 31, 2020, primarily
attributable to the removal of OSFI’s regulatory measures in response to the COVID-19 pandemic, as well as changes in portfolio composition during
the year. Operational Risk RWA were $40.5 billion as at October 31, 2021, an increase from $38.3 billion as at October 31, 2020, primarily from
growth in our average gross income.
BMO Financial Group 204th Annual Report 2021 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
(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)
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Total Credit Risk
Market Risk
Operational Risk
Risk-Weighted Assets
2021
2020
117,876
43,562
5,369
4,345
8,712
5,241
6,515
15,406
9,544
3,741
13,066
4,570
22,587
12,324
272,858
12,066
40,509
325,433
131,396
45,121
6,259
4,264
9,275
5,430
5,917
14,507
9,689
2,773
15,567
5,761
20,050
12,908
288,917
9,348
38,342
336,607
(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. 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.
Economic Capital and RWA by Operating Group and Risk Type
(As at October 31, 2021)
BMO Financial Group
Operating Groups
Personal and
Commercial
Banking
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Economic Capital by Risk Type (%)
Credit
Market
Operational/Other
RWA by Risk Type
(Canadian $ in millions)
Credit
Market
Operational
76%
7%
17%
172,892
–
22,243
36%
20%
44%
17,563
42
6,749
60%
25%
15%
67,904
12,024
11,517
86%
14%
–
14,499
–
–
Capital Management Activities
On December 3, 2021, we announced our intention, subject to the approval of OSFI and the Toronto Stock Exchange, to establish a new normal course
issuer bid (NCIB) for up to 22.5 million common shares. The NCIB is a regular part of our capital management strategy. Once approvals are obtained,
the share repurchase program will permit us to purchase BMO common shares for the purpose of cancellation. The timing and amount of purchases
under the NCIB are subject to regulatory approvals and to management discretion, based on factors such as market conditions and capital levels. We
will consult with OSFI before making purchases under the NCIB.
During fiscal 2021, we issued approximately 1.6 million common shares through the exercise of stock options.
During fiscal 2021, we completed Tier 1 and Tier 2 Capital instrument issuances and redemptions, as outlined in the table below.
70 BMO Financial Group 204th Annual Report 2021
Capital Instrument Issuances and Redemptions
(in millions)
As at October 31, 2021
Common shares issued
Stock options exercised
Tier 1 Capital
Redemption of Non-Cumulative Perpetual Class B Preferred Shares, Series 35
Redemption of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 36
Redemption of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 25
Redemption of Non-Cumulative Floating Rate Class B Preferred Shares, Series 26
Tier 2 Capital
Redemption of Series H Medium-Term Notes, Second Tranche
Redemption of Series I Medium-Term Notes, First Tranche
Issuance of Series K Medium-Term Notes, First Tranche
Issuance
or redemption date
Number
of shares
Amount
November 25, 2020
November 25, 2020
August 25, 2021
August 25, 2021
December 8, 2020
June 1, 2021
July 22, 2021
1.6
$ 122
6.0
0.6
9.4
2.6
$ 150
$ 600
$ 236
$ 54
$1,000
$1,250
$1,000
If an NVCC trigger event were to occur, 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 BMO 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 3.2 billion BMO common shares, assuming no accrued interest and no declared and unpaid dividends.
Further details on subordinated debt and share capital are provided in Notes 15 and 16 of the consolidated financial statements.
Outstanding Shares and NVCC Capital Instruments
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As at October 31
Common shares
Class B Preferred shares
Series 25 (1)
Series 26 (1)
Series 27*
Series 29*
Series 31*
Series 33*
Series 35* (2)
Series 36* (2)
Series 38*
Series 40*
Series 42*
Series 44*
Series 46*
Additional Tier 1 Capital Notes*
4.8% Additional Tier 1 Capital Notes
4.3% Limited Recourse Capital Notes, Series 1 (3)
Medium-Term Notes* (4)
Series I – Second Tranche
3.803% Subordinated Notes
4.338% Subordinated Notes
Series J – First Tranche
Series J – Second Tranche
Series K – First Tranche
Stock options
Vested
Non-vested
Number of shares
or dollar amount
(in millions)
Dividends declared per share
2021
2020
2019
648
$ 4.24
$ 4.24
$ 4.06
$ 0.34
$ 0.23
$ 0.96
$ 0.91
$ 0.96
$ 0.76
–
–
$ 1.21
$ 1.13
$ 1.10
$ 1.21
$ 1.28
na
na
na
na
na
na
na
na
$ 0.45
$ 0.52
$ 0.96
$ 0.91
$ 0.96
$ 0.90
$ 1.25
$58.50
$ 1.21
$ 1.13
$ 1.10
$ 1.21
$ 1.28
na
na
na
na
na
na
na
na
$ 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
na
–
–
$ 500
$ 400
$ 300
$ 200
–
–
$ 600
$ 500
$ 400
$ 400
$ 350
US$ 500
$1,250
$ 850
US$1,250
US$ 850
$1,000
$1,250
$1,000
2.6
3.1
Convertible into common shares.
*
(1) Redeemed in August 2021.
(2) Redeemed in November 2020.
(3) Convertible into common shares by virtue of recourse to the Preferred Shares Series 48. Refer to Note 16 of the consolidated financial statements for conversion details.
(4) Note 15 of the consolidated financial statements includes details on the NVCC Medium-Term Notes.
na – not applicable
Note 16 of the consolidated financial statements includes details on share capital and other equity instruments.
BMO Financial Group 204th Annual Report 2021 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
Dividends
Dividends declared per common share in fiscal 2021 totalled $4.24, unchanged from the prior year. Annual dividends declared represented 36.5%
of reported net income and 32.6% of adjusted net income available to common shareholders on a last twelve-month basis.
Our target dividend payout range (common share dividends as a percentage of net income available to shareholders, less preferred share
dividends and distributions on other equity instruments, based on earnings over the last twelve months) is 40% to 50%, providing shareholders with
a competitive dividend yield. Our target dividend payout range seeks to provide shareholders with stable income, while retaining sufficient earnings
to support anticipated business growth, fund strategic investments and support capital adequacy. OSFI’s restriction on dividend increases effective
March 13, 2020 remained in place throughout the year. Effective November 4, 2021, OSFI advised that institutions may resume regular dividend
increases and common share repurchases.
At year-end, our common shares provided a 3.2% annualized dividend yield based on the year-end closing share price. On December 3, 2021, we
announced that the Board of Directors had declared a quarterly dividend on common shares of $1.33 per share, an increase of $0.27 per share or 25%
from the prior quarter and prior year. The dividend is payable on February 28, 2022 to shareholders of record on February 1, 2022.
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Shareholder Dividend Reinvestment and Share Purchase Plan
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).
During fiscal 2021, common shares to supply the DRIP were purchased on the open market. In the first and second quarters of fiscal 2020,
common shares to supply the DRIP were purchased on the open market. In the third and fourth quarters of fiscal 2020, common shares to supply the
dividend reinvestment feature of the DRIP were issued from treasury at a 2% discount from their then-current market price.
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.
Off-Balance Sheet Arrangements
We enter into a number of off-balance sheet arrangements in the normal course of operations, which include Structured Entities (SEs),
Credit Instruments and Guarantees.
Structured Entities and Securitization
We carry out certain business activities through arrangements involving SEs, using them to obtain sources of liquidity by securitizing certain of our
financial assets, secure customer transactions, or pass our credit risk to holders of the vehicles’ securities. For example, we enter into transactions
with SEs in which we transfer assets, including mortgage loans, mortgage-backed securities, credit card loans, real estate lines of credit, auto
loans and equipment loans, in order to obtain alternate sources of funding or as part of our trading activities. Note 6 of the consolidated financial
statements describes the loan securitization activities carried out through third-party programs such as the Canada Mortgage Bond Program. Note 7 of
the consolidated financial statements provides further details of our interests in both consolidated and unconsolidated SEs. Under IFRS, we consolidate
a SE if we control the entity. We consolidate our own securitization vehicles and certain capital and funding vehicles. We do not consolidate our
Canadian customer securitization vehicles, certain capital vehicles, various BMO-managed funds or various other structured entities where
investments are held. Effective October 31, 2021, we concluded that we no longer control our U.S. Customer Securitization Vehicle and have therefore
deconsolidated this vehicle. Further details on U.S. and Canadian customer securitization vehicles are provided below.
BMO-Sponsored Securitization Vehicles
We sponsor various vehicles that fund assets originated either by us (which are then securitized through a bank securitization vehicle) or by our
customers (which are then securitized through three Canadian customer securitization vehicles and one U.S. customer securitization vehicle). The bank
earns 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 $132 million in 2021 ($117 million in 2020).
Canadian Customer Securitization Vehicles
The customer securitization vehicles we sponsor in Canada provide customers with access to financing either from us or from the asset-backed
commercial paper (ABCP) markets. Customers sell either their assets or an interest in their assets into these vehicles, which then issue ABCP to either
investors or us in order to fund the purchases. The sellers remain responsible for servicing the transferred assets and are first to absorb any losses
realized on those assets. We are not responsible for servicing or absorbing the first loss and none of the sellers are affiliated with BMO.
Our exposure to potential losses arises from the purchase of ABCP issued by the vehicles, any related derivative contracts entered into with the
vehicles, and the liquidity support provided to the market-funded vehicles. We use the credit adjudication process in deciding whether to enter into
these arrangements, just as 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 the bank. We do not control these entities
and therefore they are not consolidated. Further information on the consolidation of customer securitization vehicles is provided in Note 7 of the
consolidated financial statements. No losses were recorded on any of our exposures to these vehicles in 2021 and 2020.
The market-funded vehicles had a total of $3.6 billion of ABCP outstanding as at October 31, 2021 ($4.7 billion in 2020). The ABCP issued by the
market-funded vehicles is rated R-1(high) by DBRS and P1 by Moody’s. Our purchases of ABCP, as distributing agent of ABCP issued by the market-
funded vehicles, totalled $24 million during the year ended October 31, 2021 ($75 million in 2020).
We provide committed liquidity support facilities for the market-funded vehicles totalling $4.8 billion as at October 31, 2021 ($5.6 billion
in 2020). This amount comprises part of the commitments outlined in Note 24 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 62% (76% in 2020) of the aggregate
assets of these vehicles.
72 BMO Financial Group 204th Annual Report 2021
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U.S. Customer Securitization Vehicle
We sponsor one market-funded customer securitization vehicle in the United States that provides customers with access to financing in the U.S. ABCP
market. Customers sell either their assets or an interest in their assets into this vehicle, which then issues ABCP to investors in order to fund the
purchases. The sellers remain responsible for servicing the assets involved in the related financing and are first to absorb any losses realized on those
assets. We are not responsible for servicing or absorbing the first loss and none of the sellers are affiliated with BMO.
Our exposure to potential losses arises from the purchase of ABCP issued by the vehicle, any related derivative contracts entered into with
the vehicle, and the liquidity support provided to the vehicle. We use the credit adjudication process in deciding whether to enter into these
arrangements, just as when extending credit in the form of a loan. No losses were recorded on any of our exposures to the vehicle in 2021 and 2020.
Effective October 31, 2021, we concluded that we no longer control this vehicle, and therefore deconsolidated this vehicle, as our involvement
has changed from principal to agent, as reflected primarily by the change in our exposure to its variable returns. We derecognized US$3,148 million
($3,896 million) of assets and US$2,967 million ($3,672 million) of liabilities from our consolidated balance sheet on loss of control. We concurrently
recognized US$176 million ($218 million) in securities, representing the carrying value of our interest in the vehicle’s ABCP (we held US$140 million
as at October 31, 2020, which was previously eliminated upon consolidation), and US$5 million ($6 million) in other assets. No gain or loss was
recognized in our consolidated income statement as a result of deconsolidating this vehicle. Further information on the consolidation of customer
securitization vehicles is provided in Note 7 of the consolidated financial statements.
The vehicle had US$3.1 billion of ABCP outstanding as at October 31, 2021 (US$2.5 billion in 2020). The ABCP issued by the vehicle is rated A1
by S&P and P1 by Moody’s.
We provide committed liquidity support facilities to the vehicle, with the undrawn amount totalling US$6.5 billion as at October 31, 2021
(US$5.5 billion in 2020). This amount comprises part of the commitments outlined in Note 24 of the consolidated financial statements. The assets of
this vehicle consist primarily of exposure to diversified pools of U.S. automobile-related receivables and equipment loans and leases. These two asset
classes represent 82% (85% in 2020) 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 agreements
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 customers to fail to perform in accordance with the terms of their contracts. We use the credit
adjudication process in deciding whether to enter into these arrangements, just as 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 $202 billion as at October 31, 2021
($209 billion in 2020). 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 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.
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.
Further information on these instruments can be found in Note 24 of the consolidated financial statements.
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 $40 billion as at October 31, 2021 ($31 billion
in 2020). 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 of the consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Caution
This Off-Balance Sheet Arrangements section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 204th Annual Report 2021 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Risk Management
As a diversified financial services company providing banking, wealth management, capital markets and insurance services,
BMO is exposed to a variety of risks that are inherent in its business activities. A disciplined and integrated approach to
managing risk is fundamental to the success of its operations. Our risk management framework provides independent risk
oversight across the enterprise and is integral to building competitive advantage.
Enterprise-Wide Risk Management outlines BMO’s approach to managing the key financial risks and other related risks that it faces, as discussed in
the following sections:
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Risks That May Affect Future Results
Risk Management Overview
Enterprise-Wide Risk Management Framework
Credit and Counterparty Risk
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78
78
84
92 Market Risk
97
Insurance Risk
97
106
109
111
111
113
Liquidity and Funding Risk
Operational Non-Financial Risk
Legal and Regulatory 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 2021 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 and Note 5 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 internal and external events which can have an impact on our overall risk profile. These events can have the
potential to affect our business, the results of our operations and our financial condition. The integral tasks in the risk management process are to
proactively identify, assess, manage, monitor and report on a broad spectrum of risks arising from these events. The identification of specific types
of risk involves several forums for discussion with the Board of Directors, senior management and business thought leaders, and combines both
bottom-up and top-down approaches. The assessment of risks is supported by scenario analysis and can inform the development of action plans
related to our exposure to certain events.
Particular attention has been given to the following risks, reflecting their potential to materially impact the bank’s financial results, strategic
direction or reputation.
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, as global economies continue to recover from the effects of the COVID-19 pandemic, growth in real GDP in both Canada
and the United States has been strong, although growth in Canadian GDP in the second quarter of 2021 was hampered by new public health
restrictions. Businesses and individuals have benefitted from the support of government programs intended to lessen the economic impact of the
pandemic, and these programs, along with a reopening of the economies, have resulted in positive credit migration. The recovery faces headwinds
generated by ongoing disruptions to global supply chains, trade and travel, as well as price and wage inflation and labour market challenges.
The emergence of new variants of the COVID-19 virus also poses a threat to economic recovery. While vaccine efficacy remains high against most
COVID-19 variants, particularly in limiting more severe cases, vaccination rates in North America are below the level required for general immunity.
These factors, as well as rising geopolitical tensions (described in Geopolitical Risk and Escalating Trade Disputes below), could cause growth
rates in North American economies to decline through the coming year. Management continues to review the economic environment in which we
operate, to identify significant changes in key economic variables. In the event of a significant change in economic conditions, management will
assess our portfolio and business strategies and develop contingency plans to address any adverse developments.
Cyber Security Risk
We are exposed to common banking security risks, given our ever-increasing reliance on internet and cloud technologies, coupled with the remote
work environment and extensive dependence on advanced digital technologies to process data. Cyber security risks include the threat of data loss
resulting in potential exposure of customer or employee information, identity theft and fraud. Ransomware or denial of service attacks could result in
system failure and service disruption. Threat campaigns are becoming increasingly organized and sophisticated, with reported data breaches, often
through third-party suppliers, that negatively impact the company’s brand and reputation. BMO is keeping pace by investing in the Financial Crimes
Unit and technological infrastructure. These include a state-of-the-art security hub and a “follow-the-sun” operating model, equipping our team to
detect and address security threats across North America, Europe and Asia in order to keep our customers’ and employees’ data secure.
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 (FCA) has announced that it will 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 reference rates (ARRs) in multiple
jurisdictions, a shift that will impact financial market participants globally across many products and asset classes.
74 BMO Financial Group 204th Annual Report 2021
Transition efforts in connection with these reforms are complex, with significant risks and challenges that could result in increased volatility,
pricing changes 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 a holder and an issuer of IBOR-based instruments, such as the potential for heightened exposure to financial,
operational non-financial, legal and regulatory, and reputation risks.
BMO has established an enterprise IBOR Transition Office (ITO) to coordinate and oversee the transition from IBORs to ARRs, with a focus on
managing and mitigating internal risks, while maintaining a positive client experience. The ITO, sponsored and supported by senior management,
is responsible for running the enterprise-wide transition program across all lines of business and corporate areas. The ITO has a global mandate to
properly prepare BMO for the discontinuation or unavailability of LIBOR and other IBORs.
As part of its mandate, the ITO is tracking client, industry and regulatory engagement, financial contract changes, internal and external
communications, technology and operations modifications, introduction of new products, migration of existing clients, and program strategy and
governance. In addition, the ITO continues to monitor the development and usage of ARRs across the industry, including the Secured Overnight
Financing Rate (SOFR). As the market has developed, we have begun to add ARR-based products to our suite of offerings.
On March 5, 2021, the FCA confirmed that LIBOR settings will no longer be provided by any administrator after December 31, 2021 for all sterling,
euro, Swiss franc and Japanese yen settings, as well as the one-week and two-month USD LIBOR settings. The remaining USD LIBOR settings will no
longer be provided after June 30, 2023. The extension of certain USD LIBOR settings to June 30, 2023 applies only to legacy contracts, with new
issuances transitioning from LIBOR and other IBORs to alternative reference rates by December 31, 2021. This announcement followed the completion
of the ICE Benchmark Administration consultation regarding the process and timing for the orderly wind-down of LIBOR for legacy contracts. The ITO
has adjusted the project plan accordingly to align with these extended timelines, and continues to monitor changes and updates from regulators and
industry working groups in order to facilitate a smooth and timely transition for BMO and its clients.
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Technology Resiliency
We continue to innovate and invest in enhancing our technological capabilities in order to keep customers’ data secure and to meet and exceed their
expectations, as the adoption of digital banking continues to grow. In addition to existing technology risks, the COVID-19 pandemic has introduced
new challenges, as our customers, employees and suppliers have come to rely on technology platforms and the Internet of Things to manage and
support their personal, business and investment banking activities. Given the extent to which BMO’s operations rely on technology, it is important to
maintain platforms that provide high levels of operational reliability and resiliency, particularly with respect to business-critical systems. Technology
innovations, such as advanced data management, analytical tools and artificial intelligence, are being leveraged to provide insights that will improve
the way we do business and serve our customers.
Geopolitical Risk and Escalating Trade Disputes
Geopolitical risk remains elevated as a result of strained relations among many countries, including 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 lower levels of investment, trade and global
economic growth. Our core banking portfolio has limited direct exposure outside North America; however, our core customers depend on sustained
economic growth and trade. To mitigate exposure to geopolitical risk, we maintain a diversified portfolio that is continually monitored and tested, in
addition to contingency plans that we may establish to address any possible adverse developments.
Rising protectionism and anti-globalization sentiment in the United States and other countries have compounded supply-chain disruptions,
and may hinder global growth. In particular, despite the Phase One trade agreement between the United States and China reached in early 2020,
trade tensions between the two countries have remained elevated, which could adversely affect business investment and could prove especially
problematic for commodity-producing countries such as Canada. Trade disputes have also arisen between Canada and China over the past several
years. Within North America, the Canada-United States-Mexico Agreement (CUSMA) has reduced, but not eliminated, uncertainty about continental
trading arrangements and disputes between those nations.
Although it is difficult to predict and mitigate the potential economic and financial effects of trade-related events on the Canadian and U.S. economies,
we actively monitor global and North American trends and continually assess our businesses 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 economic developments.
BMO’s credit exposure by geographic region is set out in Tables 7, 8 and 11 to 13 in the Supplemental Information and in Note 4 of the
consolidated financial statements.
Climate Change and Other Environmental and Social Risks
BMO faces risks related to environmental events and extreme weather conditions that could potentially disrupt our operations, impact 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. Business continuity management plans
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 related to borrowers that experience losses or increases in their operating costs as a result of climate-related litigation or
policies, such as carbon emissions pricing, or that experience lower revenue as new and emerging technologies disrupt or displace demand for certain
commodities, products and services. We are playing an active role in helping our clients transition to a net zero world, in part through our new BMO
Climate Institute and our dedicated Energy Transition Group.
BMO supports the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and employs the
TCFD framework to enhance its understanding and disclosure of the evolving impact of risks associated with climate change, together with possible
mitigation strategies. In October 2021, we joined the Net-Zero Banking Alliance, an industry-led global initiative to support and accelerate concerted
efforts to address climate change, facilitating collaborative approaches between the public and private sectors. We continue to build our internal
capacity to conduct climate change scenario analysis in line with the TCFD recommendations, and we are expanding this program to evaluate both
physical and transition risks across a selection of climate-sensitive portfolios. These efforts will help identify potential material financial risks and will
inform our business strategy in relation to climate change going forward.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 75
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Legal and regulatory, business or reputation risks could arise from actual or perceived actions, or inaction, in our operations and those of our
customers in relation to climate change and other environmental and social risk issues, or our disclosures related to these matters. Risks related to
these issues could also affect our customers, suppliers or other stakeholders, which could heighten business or reputation risks. Globally, climate-
related litigation or enforcement measures could arise from new and more detailed obligations to manage and report climate-related risks.
Refer to the Environmental and Social Risk section for further discussion of these risks.
Canadian Housing Market and Consumer Leverage
Risks related to household debt and housing affordability have increased with a sharp rise in home prices as the housing market rebounded strongly
in early 2021, following a decline in activity in the initial phase of the COVID-19 pandemic. The lower interest rate environment should underpin the
continuing strong demand in housing markets. However, several factors, such as higher unemployment rates and limited affordability, could
potentially weigh on sales activity and home prices in the future. The housing market is also at risk of a correction if prices continue to rise faster than
incomes, especially when interest rates begin to move upward. In addition, the pandemic has the potential to drive permanent changes in consumer
behaviours and preferences, as well as changes in how and where work is performed, including more widespread adoption of remote working
arrangements. Such changes have the potential to cause structural shifts in the demand for housing based on geographic and other characteristics,
and could affect the viability of income-generating investment properties. These changes could dampen sales activity, home prices and property
values within the existing portfolio.
Household debt levels are at record highs, which could impede new borrowing and increase our exposure to risk across personal lending
products. In addition, housing affordability continues to be a challenge, especially in the Greater Toronto Area (GTA) and Greater Vancouver Area
(GVA) and their surrounding regions, which represents an ongoing barrier to entry for potential first-time home buyers. Moderately higher levels of
unemployment will also weigh on household incomes, especially if current government support programs are wound down or eliminated, which
would reduce overall household purchasing power. The heightened level of economic uncertainty could also cause households to continue to focus
on building savings.
Potential reductions in home sales activity, particularly in the GTA and GVA, would impact mortgage origination volumes and, if property values
were to decline, reduce the value of collateral backing loans, which 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 BMO’s 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 the bank’s Canadian real estate lending portfolio. Further, stress
test analysis suggests that even significant price declines and extremely challenging economic conditions would result in manageable losses, mainly
due to insurance coverage and the significant level of equity built up in seasoned loans.
Inflation
As the economic recovery from the COVID-19 pandemic continues, inflation rates have seen significant increases in North America, rising above the
target ranges for the Bank of Canada and the Federal Reserve during 2021. A significant portion of the upward pressure on prices is attributable to the
rising costs of energy, food, motor vehicles and housing, as well as the challenges involved in reopening the economy and persistent supply-chain
disruptions. Inflation increases are expected to be largely transitory, assuming supply-chain disruptions ease and commodity prices moderate.
However, a sustained upward trajectory in the inflation rate would have an impact on BMO’s operations and our clients, and could impact our
earnings due to higher provisions for credit losses and higher operating costs. We continue to monitor inflationary pressures in North America and
assess any potential effects on our portfolios, interest margins and operating costs.
Other Factors That May Affect Future Results
Fiscal and Monetary Policies and Other Economic Conditions in the Countries in which BMO Conducts Business
BMO’s 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 do business. These policies and conditions may have the effect of reducing profitability and increasing uncertainty in specific
businesses and markets, which may affect customers and counterparties, and potentially contribute to a greater risk of default. Changes in fiscal and
monetary policies are difficult to anticipate. Higher levels of government and business debt resulting from the pandemic have the potential to create
future vulnerabilities that could impact our markets and our business. Fluctuations in interest rates could have an impact on our earnings, the value of
our investments, the credit quality of our loans to 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 the future continue to affect, the results of
clients with significant foreign earnings or input costs. Our 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 our capital ratios.
Refer to the Enterprise-Wide Capital Management section. The value of the Canadian dollar relative to the U.S. dollar will also affect the contribution
of U.S. operations to 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 the bank’s financial results. Refer to the Foreign Exchange section and the Market Risk section for a more complete discussion of
foreign exchange and interest rate risk exposures.
Regulatory Requirements
The financial services industry is highly regulated, and BMO has 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 returns and affect growth. These reforms could also affect the cost and availability of funding and the extent of the bank’s market-
making activities. Regulatory reforms may also impact fees and other revenues for certain operating groups. In addition, differences in laws and
regulations enacted by various national regulatory authorities may provide advantages to 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 we are well-positioned to respond
and implement any necessary changes.
76 BMO Financial Group 204th Annual Report 2021
Failure to comply with applicable legal and regulatory requirements could result in legal proceedings, financial losses, regulatory sanctions,
enforcement actions, an inability to execute business strategies, a decline in investor and customer confidence, and damage to our reputation.
Refer to the Legal and Regulatory Risk section for a more complete discussion of BMO’s management of legal and regulatory risk.
Tax Legislation and Interpretations
Legislative changes and changes in tax policy, including their interpretation by tax authorities and the courts, may impact earnings. Tax laws, as well
as interpretations of tax laws and policy by tax authorities, may change as a result of efforts by the Canadian federal government, other G20
governments, and the Organisation for Economic Co-operation and Development to increase taxes, broaden the tax base globally and improve
tax-related reporting. Refer to the Critical Accounting Estimates section for further discussion of income taxes and deferred taxes.
Changes to Business Portfolio
BMO may, from time to time, acquire companies, businesses and assets as part of its overall business strategy. We conduct thorough due diligence
before completing such acquisitions. However, some acquisitions may 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 it may not be possible 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 or profitability, while higher than anticipated integration costs and failure to realize expected cost savings after
an acquisition could also adversely affect 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 businesses and on integrating key systems
and processes without disruption, and there can be no assurance that we will always succeed in doing so.
BMO also evaluates potential dispositions of assets and businesses that may no longer meet strategic objectives. When we sell assets or
withdraw from a business, we may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms or in a timely manner,
which could delay the achievement of strategic objectives. We may also dispose of assets or a business on terms that are less desirable than
anticipated or result in adverse operational or financial impacts, or greater disruption than expected, and the impact of the divestiture on revenue
growth may be larger than projected. Dispositions may be subject to the satisfaction of conditions and the granting of governmental or regulatory
approvals on acceptable terms, which, if not satisfied or obtained, may prevent the completion of a disposition as intended, or at all.
Critical Accounting Estimates and Accounting Standards
BMO prepares its consolidated financial statements in accordance with IFRS. Changes that the International Accounting Standards Board makes from
time to time may materially affect the way we record and report financial results. Significant accounting policies and future changes in accounting
policies are discussed in the Changes in Accounting Policies in 2021 and Future Changes in Accounting Policies sections, as well as in Note 1 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, new information may become available or models may
prove to be imprecise.
BMO’s 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.
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 BMO’s control that may affect its future results are noted in the Caution Regarding Forward-Looking Statements. BMO cautions that the preceding discussion of risks
that may affect future results is not exhaustive.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management Overview
BMO’s integrated and disciplined approach to risk management is fundamental to the success of our business. Our Enterprise Risk and Portfolio
Management (ERPM) group oversees the implementation and operation of the Enterprise-Wide Risk Management Framework (ERMF), 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 business strategy. All elements of the ERMF function together to support informed and effective risk management, while striking an appropriate
balance between risk and return.
Enterprise-Wide Risk Management Framework
The ERMF guides risk-taking activities in order to align them with customer needs, shareholder expectations and regulatory requirements. The ERMF
also sets out our approach to risk management: maintain strong capital and liquidity, diversify and limit tail risk, optimize risk return, understand
and manage the risks we face, and protect our reputation. Our approach to risk governance is outlined in the ERMF, which incorporates our Risk
Management Life Cycle, guiding our efforts to identify, assess, manage, monitor and report on our material risks. The ERMF is supported by our
people, processes and technology, leveraging tools, including modelling and analytics, stress testing and scenario analysis, and our Risk Taxonomy.
All elements of the ERMF are supported by our risk culture. The ERMF provides for the direct management of each individual risk type, as well as the
management of risk on an integrated basis.
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Enterprise-Wide Risk Management Framework
Risk
Management
Approach
Maintain Strong
Capital and
Liquidity
Risk Governance
Diversify. Limit Tail
Risk
Optimize Risk
Return
Understand and
Manage
Protect our
Reputation
Board
(RRC*, ACRC*)
Senior Management
(RMC*, ERC* & Sub-Committees)
Risk Appetite Framework
(Statement and Limits)
Enterprise Policy Framework
Three-Lines-of-Defence Operating Model
1st Line
2nd Line
Operating Groups, Technology &
Operations, Corporate Services
Enterprise Risk & Portfolio Management,
Legal & Regulatory Compliance
3rd Line
Corporate Audit Division
Risk
Management
Life Cycle
IDENTIFY
ASSESS
MANAGE
MONITOR
REPORT
Risk Management Enablement
People
Process
Technology
Risk Management Tools
(For example: Stress Testing & Scenario Analysis,
Modelling & Analytics, Risk Taxonomy)
Risk Culture
Tone from the Top
Accountability
Effective Communication and Challenge
Incentives
* RRC: Risk Review Committee, ACRC: Audit and Conduct Review Committee, RMC: Risk Management Committee, ERC: Enterprise Regulatory Committee
Risk Governance
The ERMF outlines a governance approach that includes robust Board of Directors and senior management oversight, a Risk Appetite Framework,
the Enterprise Policy Framework and the corresponding roles in the three-lines-of-defence operating model.
Board of Directors and Senior Management Oversight
Specific Board-approved policies govern our approach to the management of material risks, and oversight is provided at all levels of the enterprise
through a hierarchy of committees and individual responsibilities, as outlined in the following diagram. The Board seeks to ensure that corporate
objectives are supported by a sound risk strategy and an effective ERMF that is appropriate to the nature, scale, complexity and risk profile of our
operations. The Board also has overall responsibility for the bank’s governance framework and corporate culture. Senior management reviews and
discusses significant risk issues and action plans as they arise in the implementation of the enterprise-wide strategy, providing risk oversight and
governance of the risks taken across the enterprise and the processes through which such risks are identified, assessed, managed (and mitigated),
monitored and reported in accordance with policies, and held within limits and risk tolerances.
78 BMO Financial Group 204th Annual Report 2021
The ERMF is reviewed on a regular basis by the Risk Review Committee (RRC) of the Board, in order to provide oversight and guide risk-taking
activities.
Board & Senior Management Oversight
Board of Directors
Risk Review Committee (RRC)
Audit and Conduct Review
Committee (ACRC)
Chief Executive Officer
Chief Risk Officer
Risk Management Committee (RMC)
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General Counsel
Enterprise Regulatory
Committee (ERC)***
Balance Sheet
Committee*
Capital
Management
Committee*
Reputation
Risk
Management
Committee**
Operational
Risk
Management
Committee
Model Risk
Management
Committee
* The Balance Sheet Committee (BSC) and Capital Management Committee (CMC) are sub-committees of the Asset and Liability Management
Committee (ALCO). However, in matters related to Structural Market Risk, Liquidity & Funding Risk, and the Internal Capital Adequacy
Assessment Process (ICAAP), BSC and CMC report to RMC.
** Committee is chaired by the General Counsel.
*** Committee is co-chaired by the General Counsel and Chief Risk Officer.
In addition to the Board of Directors and senior management oversight, appropriate risk governance, supported by the three lines of defence, is in
place in all material businesses and entities. In each of the operating groups and in Corporate Services, which includes Technology and Operations,
management is the first line of defence, responsible for governance and controls, and the implementation and operation of risk management
processes and procedures that provide effective risk management. ERPM and Legal & Regulatory Compliance, as the second line of defence, oversee
the implementation and operation of risk management processes and procedures, and monitor and test risk outcomes against our risk appetite and
management expectations, in order to determine whether risk outcomes are consistent with return expectations. Corporate Audit Division, as the
third line of defence, provides independent assessment of the effectiveness of internal controls that support the risk management and governance
processes. Individual governance committees establish and monitor further risk limits, consistent with Board-approved limits.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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; identifying and managing
risk; managing capital; fostering a culture of integrity; internal
controls; succession planning and evaluation of senior management;
communication; public disclosure; and corporate governance.
Risk Management Committee (RMC) is BMO management’s senior risk
committee. RMC reviews and discusses significant risk issues and action
plans as they arise in the implementation of 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 the operating groups, the CEO, the Chief
Financial Officer (CFO) and the General Counsel.
Risk Review Committee of the Board of Directors (RRC) assists the
Board in fulfilling its risk management oversight responsibilities.
This includes leading BMO’s risk culture; overseeing the identification
and management of BMO’s risks; adherence by operating groups to
risk management corporate policies and standards; compliance with
risk-related regulatory requirements; and evaluating the Chief Risk
Officer (CRO), including input into succession planning for the CRO. The
ERMF is reviewed on a regular basis by the RRC in order to provide
guidance for the governance of risk-taking activities.
Audit and Conduct Review Committee of the Board of Directors
(ACRC) assists the Board in fulfilling its oversight responsibilities for
the integrity of BMO’s financial reporting; the effectiveness of BMO’s
internal controls; the qualifications, independence and performance of
the independent auditors; BMO’s compliance with laws and
regulations; 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 the RMF and
fostering a strong risk culture across the enterprise.
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 risks taken across the enterprise and the processes
through which such risks are identified, assessed, managed, monitored,
mitigated and reported in accordance with policies, and held within
limits and risk tolerances.
Enterprise Risk and Portfolio Management (ERPM), as the risk
management second line of defence, provides risk management
oversight, effective challenge and independent assessment of risk
and risk-taking activities. ERPM supports a disciplined approach to
risk-taking by fulfilling its responsibilities for independent transactional
approval and portfolio management, policy formulation, risk reporting,
stress testing, modelling and risk education. This approach promotes
consistency in risk management practices and standards across the
enterprise, and verifies that any accepted risks are consistent with
BMO’s risk appetite.
Operating Groups and Corporate Services, including Technology and
Operations, are responsible for effectively managing risks by
identifying, assessing, managing, monitoring, mitigating and reporting
on risk within their respective operations and lines of business in
accordance with their established risk appetite. They exercise business
judgment and maintain effective policies, processes and internal
controls, so that significant risk issues are escalated and reviewed by
ERPM. Individual governance committees and ERPM establish and
monitor risk limits that are consistent with, and subordinate to, the
Board-approved limits.
Risk Appetite Framework
BMO’s Risk Appetite Framework consists of its Risk Appetite Statement and the delineation of roles and responsibilities of senior management and
the Board of Directors, and is supported by corporate policies, standards and guidelines, including related risk limits, concentration levels and controls
defined therein. Risk appetite defines the amount of risk that the bank is willing to assume given its guiding principles, thereby supporting the pursuit
of sound business initiatives, appropriate returns and targeted growth. Risk appetite is integrated with strategic and capital planning and performance
management. The Risk Appetite Statement consists of both qualitative and quantitative specifications of our appetite for material risks. Key risk
metrics are outlined for material risks, which include specific thresholds that allow senior management and the Board of Directors to monitor the
current risk profile relative to risk appetite. On an annual basis, the RMC submits the Risk Appetite Statement and key risk metrics to the RRC, which
in turn reviews and recommends them to the Board of Directors for approval. The Risk Appetite Statement is articulated and applied consistently
across the enterprise, with operating groups and key businesses and entities developing their own respective risk appetite statements within this
framework.
We believe that risk management is every employee’s responsibility. This is guided by five key principles that drive our approach to managing
risk across the enterprise and comprise our Risk Appetite Statement.
• Understand and Manage by only taking risks that are transparent and understood.
• Protect BMO’s Reputation by adhering to principles of honesty, integrity, respect and high ethical standards in line with our Code of Conduct.
• Diversify. Limit Tail Risk by targeting a business mix that minimizes earnings volatility and exposure to low-probability, high-impact events.
• Maintain Strong Capital and Liquidity that meet, or exceed, regulatory requirements and market expectations.
• Optimize Risk Return by managing risk-adjusted exposures and making decisions that create value for shareholders.
80 BMO Financial Group 204th Annual Report 2021
Risk Limits
Risk limits are set so that risk-taking activities remain within BMO’s risk appetite, and balance risk diversification, exposure to loss and risk-adjusted
returns. These limits inform business strategies and decisions, and are reviewed and approved by the Board of Directors or management committees,
as appropriate, based on the level and granularity of the limits. They 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 market movements, as well as limits on value
at risk and stress related to trading and underwriting activities.
Insurance Risk – limits on policy exposures and reinsurance arrangements.
•
• Liquidity and Funding Risk – minimum limits governing the 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 – key metrics for measuring operational and other non-financial 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 operations, and to the CRO. 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 the documentation, communication and monitoring of those specific delegated
authorities, are set out in corporate policies and standards.
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Enterprise Policy Framework
The Enterprise Policy Framework includes a comprehensive set of corporate policies, each of which is approved by the RRC, as well as corporate
standards issued pursuant to those corporate policies that have been reviewed by the RMC and approved by senior management. Corporate policies
and standards collectively outline the principles, expectations, and roles and responsibilities of senior management for ensuring that key risks are
identified, assessed, managed (including mitigation), monitored and reported. Corporate policies and standards are reviewed and updated at a
minimum every two years.
The Enterprise Policy Framework also includes supporting directives and procedures that apply across the first and second lines of defence to
operationalize the requirements, roles and responsibilities, and activities outlined in those corporate policies and standards.
Three-Lines-of-Defence Operating Model
Our ERMF is operationalized through the three-lines-of-defence approach to managing risk, as described below:
• Operating groups and Corporate Services, which includes Technology and Operations, are our first line of defence. They are accountable for the
risks arising from their businesses, operations and exposures. They are expected to pursue business opportunities within their established risk
appetite and to identify, assess, manage (including mitigation), monitor and report on all risks in, or arising from, their businesses, operations
and exposures. The first line discharges its responsibilities by applying risk management and reporting methodologies, and is responsible for
establishing appropriate internal controls in accordance with the ERMF 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 the Risk Appetite
Framework. Corporate Services, which includes Technology and Operations, while part of our first line of defence, may also operate in a governance
capacity when specific roles and responsibilities are assigned to individuals or groups under the Enterprise Policy Framework.
• The second line of defence comprises ERPM and Legal & Regulatory Compliance. 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 (including mitigation), monitor and report
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 the risk management and governance processes.
Risk Taxonomy
A Risk Taxonomy is maintained to document the key risks to which BMO is exposed. As a key risk management tool, the Risk Taxonomy reflects our
Tier 1 risks, as set out in the diagram below, and provides foundational support across the risk management life cycle in relation to each of these key
risks. Our Risk Taxonomy incorporates exposures to financial risks (Credit and Counterparty Risk, Market Risk, Insurance Risk and Liquidity and Funding
Risk), non-financial risks (Operational Risk and Legal and Regulatory Risk) and transverse risks, which intersect with both financial and non-financial
risks (Strategic Risk, Environmental and Social Risk and Reputation Risk). We maintain sub-categories under each Tier 1 risk in order to support
effective risk management practices as part of the overall ERMF.
Financial Risk
Non-Financial Risk
Transverse Risk
Credit and
Counterparty
Risk
Market
Risk
Insurance
Risk
Liquidity and
Funding Risk
Operational
Risk
Legal and
Regulatory Risk
Strategic
Risk
Environmental
and Social Risk
Reputation
Risk
BMO Financial Group 204th Annual Report 2021 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management Life Cycle
Risk Identification, Assessment and Management
Risk identification is an integral step in recognizing the key inherent risks that BMO faces, assessing the potential for loss and then acting to mitigate
this potential. Our Risk Taxonomy identifies key risks, supporting the implementation of our Risk Appetite Framework and assisting in identifying the
primary risk categories for which stress capital consumption is estimated. Risk review and approval processes are established based on the nature,
size and complexity of the risks involved. Generally, these involve 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 or tax implications are
reviewed by the Global Markets Risk Committee, as appropriate, and are also reviewed through the operational risk management process if they
involve structural or operational complexity that may give rise to significant operational risk. Transactions that may give rise to reputation risk are
reviewed by the Reputation Risk Management Committee.
• Investment initiatives – documentation of risk assessments is formalized through the investment spending approval process, and is reviewed and
approved by Corporate Services based on the initiative’s investment spend and inherent risk.
• New products and services – procedures for the approval of new or modified products and services offered to 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 Services, as well as by other senior management committees.
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Risk Monitoring and Reporting
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 the bank assumes in pursuit of its financial objectives, and they enable the evaluation of 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 updated as appropriate. The risk-based capital models provide a forward-looking estimate of the difference between
the maximum potential loss in economic (or market) value and expected loss, measured over a specified time interval and using a defined confidence
level.
Stress Testing
Stress testing is a key element of the risk and capital management frameworks. It is integrated into our enterprise and group risk appetite statements
and embedded in our management processes. To evaluate risks, we regularly test a range of scenarios, which vary in frequency, severity and
complexity, in portfolios and businesses 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
comprises 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 Horizontal Capital Review (HCR), which is a U.S. regulatory requirement for BMO Financial
Corp. (BFC), is similarly governed at the BFC level.
Quantitative models and tools, along with qualitative approaches, are utilized to assess the impact of changes in the macroeconomic
environment on the income statement and balance sheet and the resilience of the bank’s 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 BMO’s ICAAP and target-setting through analysis of the potential effects of low-frequency, high-severity events on
earnings, the balance sheet, and liquidity and capital positions. Scenario selection is a multi-step process that considers material and idiosyncratic
risks and the potential impact of new or emerging trends on risk profiles, as well as the macroeconomic environment. Scenarios may be defined by
senior management or regulators. The economic impacts are determined by the Economics group, which translates 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 stress loss models, tools and qualitative assessments that are applied
to determine estimated stress impacts. The scenarios are used by operating, risk and finance groups to assess a broad range of financial impacts that
could arise under a specific stress, as well as 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
the Enterprise Stress Testing Committee.
Targeted Portfolio and Ad Hoc Stress Testing
BMO’s 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 ERPM and 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
in order to assess business strategies.
82 BMO Financial Group 204th Annual Report 2021
Climate-Related Scenario Analysis
We have established a climate-related scenario analysis program to explore climate-specific vulnerabilities in order to enhance our resilience
to climate-related risks, in line with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations.
The climate-related scenario analysis program leverages existing risk capabilities in combination with climate-specific expertise. Evolving industry
practices are examined and used to inform this work, with the goal of strengthening our ability to evaluate climate-related risks. In the past year,
we have applied scenario analysis to certain sectors in our portfolios to determine the potential impacts of physical and transition risks. BMO is also
participating in Phase III of the United Nations Environment Programme Finance Initiative (UNEP-FI) to evaluate and test climate scenario analysis
methodologies.
Risk Culture
The Enterprise Culture and Conduct Framework sets out BMO’s approach to managing and mitigating potential misconduct. Misconduct is behaviour
that falls short of legal, professional, internal conduct and ethical standards. Similar to BMO’s approach to other non-financial risks, this framework is
supported by the ERMF and our focus on maintaining a strong risk culture. BMO reports on various metrics related to culture and conduct, and
engages with other control frameworks across the enterprise and in all of the jurisdictions in which it operates.
Risk culture is the set of shared norms, attitudes and behaviours related to risk awareness, risk-taking and risk management at BMO. Sound risk
culture consistently supports appropriate behaviours and judgments about risk-taking and promotes effective risk management and alignment of risk-
taking activities with BMO’s Risk Appetite. Our risk culture informs and supports our overall culture. We have a long-standing commitment to high
ethical standards, grounded in values of integrity, empathy, diversity and responsibility. Our Purpose – to Boldly Grow the Good in business and life –
is underpinned by our values. The Purpose defines BMO as an organization and is the foundation of our position and our operations. ERPM is
responsible for the development and promotion of a healthy, strong risk culture across the enterprise. In pursuing this mandate, ERPM works
closely with Legal & Regulatory Compliance and its Ethics & Conduct Office, as well as People & Culture. BMO’s risk culture is founded on four guiding
principles that together reinforce its effectiveness across the bank: Tone from the Top, Accountability, Effective Communication and Challenge, and
Incentives:
• Tone from the Top: Our risk culture is grounded in an approach to risk management that encourages openness, constructive challenge and
personal accountability. Each member of senior management plays a critical role in fostering this strong risk culture among all employees, by
effectively communicating this responsibility and by the example of their own actions. The Board of Directors oversees BMO’s corporate objectives,
and seeks to ensure they are supported by a sound risk strategy and an effective ERMF that is appropriate to the nature, scale, complexity and risk
profile of our operations.
• Accountability: BMO’s ERMF is anchored in the three-lines-of-defence approach to managing risk. 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.
BMO encourages and supports an environment in which concerns can be raised without retaliation.
• Effective Communication and Challenge: Timely and transparent sharing of information is integral to engaging stakeholders in key decisions
and strategy discussions, bringing added rigour and discipline to BMO’s 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 the
organization, so that 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.
• Incentives: Compensation and other incentives are aligned with prudent risk-taking. These are designed to reward the appropriate use of capital
and respect for the rules and principles of the ERMF, and do not encourage excessive risk-taking. Risk managers have input into the design of
incentive programs that may have an effect on risk-taking. We also maintain training programs that 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 insights they
need to fulfill their responsibilities for independent oversight, regardless of their role in the organization.
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BMO Financial Group 204th Annual Report 2021 83
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit and Counterparty Risk
Credit and counterparty risk is the potential for credit loss due to the failure of an obligor (i.e., 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 we enter 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 and counterparty risk comprise the most
significant measurable risk we face. 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 earnings, financial condition and reputation.
Credit and Counterparty Risk Governance
The objective of the 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 Risk Review Committee (RRC) has oversight of the management of all material risks that we face
at BMO, including the Credit Risk Management Framework. The 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 as necessary to keep them current and consistent with our risk appetite. The structure, limits (both notional and capital-
based), collateral requirements, monitoring, reporting and ongoing management of 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. In some instances, relatively small transactions may be assessed by automated
decision-making, or they may be approved by first-line underwriters with appropriate training, independence and oversight. Credit officers in
Enterprise Risk Portfolio Management (ERPM) approve larger or higher risk 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 individuals in the first and second
lines of defence are subject to a lending qualification process and operate in a disciplined environment with clear delegation of decision-making
authority, including individually delegated lending limits where appropriate, which are reviewed annually or more frequently, as needed. The Board
of Directors annually delegates to the CEO discretionary lending limits for further specific delegation to senior officers. Credit decision-makin g is
conducted at the management level appropriate to the size and risk of each transaction, in accordance with an extensive range of 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 BMO’s Risk Appetite
Statement, 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 the 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 application of
judgment by the 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 internal monitoring triggers that, if breached, result 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, as appropriate. In addition, regular portfolio and sector reviews are
carried out, including stress testing and scenario analysis based on current, emerging or prospective risks, such as the COVID-19 pandemic. 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 credit and investment 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 any related decisions they may make.
Counterparty credit risk (CCR) involves a bilateral risk of loss because the market value of a transaction can be positive or negative for either
counterparty. CCR exposures are subject to the credit oversight, limit framework and approval process outlined above. However, given the nature of
the risk, CCR exposures are monitored under the market risk framework. In order to reduce our exposure to CCR, exposures are often collateralized,
and trades may be cleared 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 provisions. 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, BMO may enter into legally enforceable
netting agreements for on-balance sheet credit exposures, when possible. In the securities financing transaction business (including repurchase
agreements and securities lending), we take eligible financial collateral that we control and can readily liquidate.
Collateral for BMO’s derivatives trading counterparty exposures primarily comprises 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 counterparties for over-the-counter (OTC) derivatives that are not centrally cleared.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
84 BMO Financial Group 204th Annual Report 2021
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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 to be transferred can include variation margin or initial and variation margin. Credit Support Annexes
contain, among 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 continue to implement new regulations that require certain counterparties with significant exposures to OTC derivatives
to post or collect prescribed types and amounts of collateral for uncleared OTC derivatives transactions. For additional discussion, refer to Derivatives
Reform.
To document our contractual securities financing relationships with 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 based on the specific asset type. For loans, the value of collateral is initially establishe d 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 12 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 from a third-party appraisal management provider to assist with
determining either the current value of a property or the need for a full property appraisal.
For insured residential mortgages in Canada with an LTV ratio greater than 80%, the default insurer is responsible for confirming the lending
value.
Portfolio Management and Concentrations of Credit and Counterparty Risk
Our 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, 2021
was to individual consumers, comprising $280,087 million ($259,289 million in 2020).
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 heightened level of exposure.
Credit and Counterparty Risk Measurement
BMO quantifies 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 BMO’s 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.
Under Basel III, the Office of the Superintendent of Financial Institutions (OSFI) permits three approaches for the measurement of credit risk:
Standardized, Foundation Internal Ratings Based and Advanced Internal Ratings Based (AIRB). BMO primarily uses the AIRB Approach to determine
credit risk-weighted assets (RWA) in its portfolios, including portfolios of the bank’s subsidiary BMO Financial Corp. Refer to the Supplementary
Regulatory Capital Information disclosure for details regarding the total EAD of Retail and Wholesale exposures under AIRB capital treatment.
The remaining exposures reflect waivers and exemptions to the AIRB Approach and are measured under the Standardized Approach, subject to
OSFI’s approval. We continue to transition all material exposures in this category 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 Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 85
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO’s regulatory capital and economic capital frameworks both use EAD to assess credit and counterparty risk. Exposures are classified as follows:
• Drawn exposures 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 proprietary accounts that result in exposure to credit risk in addition to market risk. EAD for OTC derivatives is
calculated inclusive of collateral.
• 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 or 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.
Total credit exposures at default by industry sector, as at October 31, 2021 and 2020, based on the Basel III classifications, are as follows:
(Canadian $ in millions)
Drawn (3)
Commitments
(undrawn) (3)
OTC derivatives (4)
Other off-balance
sheet items (3)
Repo-style
transactions (4) (5)
Total (1)
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
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Financial institutions 187,011 142,254
78,506
Governments
27,789
Manufacturing
40,202
Real estate
19,835
Retail trade
47,468
Service industries
15,295
Wholesale trade
9,659
Oil and gas
224,348 206,370
Individual
8,869
Utilities
36,446
Others (2)
67,207
27,002
43,524
16,270
44,367
14,372
6,075
7,412
37,071
26,933
1,606
16,470
9,830
4,646
16,126
5,199
5,468
55,655
10,864
17,177
24,302
1,579
16,696
9,735
4,809
15,443
5,455
7,212
52,829
11,779
14,900
16,331
4,011
1,649
1,032
289
1,238
282
10,281
–
1,273
1,588
19,611
4,892
1,741
1,383
487
2,033
423
4,753
–
2,259
1,001
6,808
400
1,784
1,189
592
2,998
694
1,377
84
2,950
4,732
6,520
590
1,714
973
604
3,116
600
1,792
90
2,805
5,295
28,968
3,226
–
–
–
–
–
–
–
–
–
22,866
2,624
–
–
–
–
–
–
–
–
–
76,450
46,905
55,575
21,797
64,729
20,547
23,201
266,051 215,553
88,191
47,940
52,293
25,735
68,060
21,773
23,416
280,087 259,289
25,712
57,642
22,499
60,568
Total exposure at
default (6)
674,659 632,693
169,974 164,739
37,974
38,583
23,608
24,099
32,194
25,490
938,409 885,604
(1) Credit exposure excluding equity, securitization 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%.
(3) Represents gross credit exposures without accounting for any collateral.
(4) Credit exposure at default is inclusive of collateral.
(5) Impact of collateral on the credit exposure for repo-style transactions is $208,635 million ($205,212 million in 2020).
(6) Excludes exposures arising from derivative and repo-style transactions that are cleared through CCPs totalling $18,440 million ($16,901 million in 2020).
Prior-period amounts for certain sectors have been adjusted to align with the current year’s presentation, which better classifies the realigned sectors.
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 the Model Risk section for a discussion of model risk mitigation processes. Since the onset of the COVID-19 pandemic, the bank
has performed proactive reviews to assess the impact of the pandemic on the retail portfolios and on certain sectors in the wholesale portfolios.
Retail (Consumer and Small Business)
The retail portfolios comprise 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. We have 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 portfolios 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 historical data recorded over a
multi-year period that includes at least one full economic cycle, in compliance with regulatory requirements. Adjustments are incorporated into the
parameters, as appropriate, to account for uncertainties. The retail parameters are tested and calibrated on an annual basis, if required, to incorporate
additional data points and recent experience in the parameter estimation process. Our largest retail portfolios are the Canadian mortgage, Canadian
home equity line of credit and Canadian retail credit card portfolios. Risk drivers used in the retail capital models may include customer attributes such
as delinquency status and credit scores, and account attributes such as loan amount and utilization.
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 Note 5 to the 2021 audited annual consolidated financial statements.
86 BMO Financial Group 204th Annual Report 2021
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, an enterprise-wide risk rating framework is applied to all sovereign, bank, corporate and commercial counterparties.
One key element of this framework is the assignment of appropriate borrower or counterparty risk ratings (BRRs). We have 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 order 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 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 reflecting the likelihood of default
over a one-year time horizon. As a borrower migrates between risk ratings, the PD associated with the borrower changes.
We employ 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.
M
D
&
A
LGD estimates are at the facility level.
An EAD estimate captures the facility type, sector and 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 amounts drawn 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 multi-year period that includes at least one
full economic cycle, in compliance with regulatory requirements. Results are benchmarked using external data when necessary and adjustments are
incorporated into the parameters, as appropriate, to account for uncertainties. For capital purposes, the LGD and EAD parameters are calibrated to
reflect downturn conditions. 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 can be aligned with those of external rating agencies.
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
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 $938.4 billion as at October 31, 2021,
with $505.7 billion recorded in Canada, $381.7 billion in the United States and $51.0 billion in
other jurisdictions. This represents an increase of $52.8 billion or 6% from the prior year (1).
BMO’s loan book continues to be well-diversified by industry and geographic region. Gross
loans and acceptances increased $10.6 billion or 2% from the prior year to $474.8 billion as at
October 31, 2021. The geographic mix of BMO’s Canadian and U.S. portfolios represented 66.0%
and 32.4% of total loans, respectively, compared with 62.5% and 34.9% in the prior year. The loan
portfolio is well-diversified, with the consumer loan portfolio representing 46.5% of the total
portfolio, an increase from 44.2% in the prior year, and business and government loans
representing 53.5% of the total portfolio, a decrease from 55.8% in the prior year.
(1) Certain comparative figures have been reclassified to conform with the current year’s presentation.
Loans by Geography and Operating Group
($ billions)
198.2
98.4
102.8
24.6
21.4
29.4
Canada and Other Countries
United States
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 Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 87
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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
2021
2020
2021
2020
2021
2020
2021
2020
Canada
Consumer
Commercial and corporate
(excluding real estate)
Commercial real estate
United States
Other countries
Total
45,592
52,346
146,158
122,938
7,836
7,381
199,586
182,665
59,141
11,101
54,896
5,449
71,350
7,397
45,575
10,846
25,786
15,050
72,585
1,762
16,724
10,142
88,143
999
1,508
1,571
26,170
242
723
1,275
28,171
206
86,435
27,722
153,651
7,453
88,797
18,814
161,889
12,051
176,179
187,514
261,341
238,946
37,327
37,756
474,847
464,216
The following table presents net loans and acceptances by interest rate sensitivity:
(Canadian $ in millions)
Fixed rate
Floating rate
Non-interest sensitive (1)
Total
2021
2020
234,697
223,565
14,021
237,596
209,824
13,493
472,283
460,913
(1) Non-interest sensitive comprises customers’ liability under acceptances.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Further details on BMO’s loan book, including detailed breakdowns by industry and geographic region, can be found in Tables 7 to 15 in the
Supplemental Information. Details of our credit exposures are presented in Note 4 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. We regularly perform
stress testing on our 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
currently considered to be manageable.
Leveraged Finance
We define leveraged finance loans as loans and mezzanine financing provided to private equity-owned businesses for which our assessment
indicates a higher level of credit risk. We have some exposure to leveraged finance loans, which represented 1.9% of total assets, with $19.0 billion
outstanding as at October 31, 2021 (1.7% and $16.4 billion, respectively, in 2020). Of this amount, 27.0% of leveraged finance loans, with $5.2 billion
outstanding as at October 31, 2021 (26% and $4.3 billion, respectively, in 2020), were well-secured by high-quality assets. In addition, $417 million
or 2.2% of all leveraged finance loans were classified as impaired as at October 31, 2021 ($786 million or 4.8% in 2020).
Provision for Credit Losses
Total provision for credit losses was $20 million in the current year, compared with $2,953 million in the prior year, reflecting an improved
economic outlook and more favourable credit conditions. Detailed discussions of PCL, including historical PCL trends, are provided in Table 15 in
the Supplemental Information and in Note 4 of the consolidated financial statements.
Gross Impaired Loans
Total gross impaired loans and acceptances (GIL) were $2,169 million in 2021, a decrease of 40% from $3,638 million in 2020. The largest decreases
in impaired loans were recorded in the oil and gas and retail trade industries. GIL as a percentage of gross loans and acceptances was 0.46% in 2021,
compared with 0.78% in the prior year.
Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the year decreased to $1,775 million
from $4,649 million in 2020, reflecting lower impaired loan formations in the oil and gas, retail trade and service industries. On a geographic basis,
Canada accounted for most impaired loan formations, comprising 75% of total formations in 2021, compared with 39% in 2020.
Detailed breakdowns of impaired loans by geographic region and industry can be found in Table 11 in the Supplemental Information and in
Note 4 of the consolidated financial statements.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
88 BMO Financial Group 204th Annual Report 2021
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
2021
2020
3,638
1,775
(821)
(1,618)
(584)
–
(79)
(142)
2,169
0.46
2,629
4,649
(719)
(1,728)
(1,047)
–
(147)
1
3,638
0.78
2019
1,936
2,686
(604)
(800)
(528)
–
(57)
(4)
2,629
0.58
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D
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(1) GIL excludes purchased credit impaired loans.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Allowance for Credit Losses
We employ 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. We maintain both an allowance on impaired loans and an allowance on performing loans, in accordance with
IFRS. 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 the 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 record ECL over the
remaining life of performing financial assets that are considered to have experienced a significant increase in credit risk (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 estimates
calibrated to meet the requirements for calculating ECL for a specific financial asset. The timing of the loss is also considered, and ECL is estimated
by incorporating forward-looking economic information and by applying 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.
We maintain an allowance for credit losses (ACL) at a level that we consider appropriate to absorb credit-related losses. As at October 31, 2021,
the total ACL was $2,958 million, a decrease of $856 million from the prior year, reflecting lower allowances on both performing loans and impaired
loans. The allowance on impaired loans was $511 million as at October 31, 2021, and the allowance on performing loans was $2,447 million.
These amounts included an allowance on impaired loans of $13 million and an allowance on performing loans of $381 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
decreased $228 million from $739 million in the prior year, and our coverage ratio remained adequate, with ACL on impaired loans as a percentage of
GIL of 23.0%, compared with 20.0% in 2020. 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 decreased $628 million to $2,447 million from $3,075 million in the prior year, primarily driven by an
improving economic outlook, positive credit migration and movements in foreign exchange rates, partially offset by the impact of the uncertain
environment on future credit conditions, including adoption of a higher adverse scenario weight, as well as a more severe adverse scenario and
portfolio growth.
Further details on the continuity in ACL by each product type can be found in Tables 12 and 13 in the Supplemental Information, and in Note 4 of
the consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2021, 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 following tables.
European Exposure by Country and Counterparty (1)
Funded lending (2)
Securities (3) (4)
Repo-style transactions and derivatives (5) (6)
Total
Bank
Corporate
Sovereign
Total
Bank
Corporate
Sovereign
Total
(Canadian $ in millions)
As at October 31, 2021
Country
GIIPS
Greece
Ireland (7)
Italy
Portugal
Spain
A
&
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M
Total – GIIPS
Eurozone (excluding GIIPS)
France
Germany
Netherlands
Other (8)
Total – Eurozone (excluding GIIPS)
Rest of Europe
Norway
Sweden
Switzerland
United Kingdom
Other (8)
Total – Rest of Europe
Total – All of Europe (9)
–
483
13
–
432
928
136
259
397
425
1,217
341
18
371
1,773
–
2,503
4,648
–
–
–
–
49
49
19
532
338
–
889
–
156
–
112
41
309
1,247
–
–
–
–
3
3
–
44
–
1
45
–
4
–
246
–
250
298
–
–
–
–
–
–
–
–
–
–
52
52
596
772
–
74
615
1,348
338
75
1,442
2,376
123
336
–
4,396
15
123
496
–
4,754
56
4,870
5,429
–
8
1
–
6
15
14
212
659
16
901
–
3
36
135
9
183
6,312
7,857
1,099
–
52
–
–
2
54
5
2
149
16
172
4
–
15
620
5
644
870
Total net
exposure
–
543
14
–
492
1,049
775
1,821
1,543
536
–
60
1
–
8
69
24
214
808
36
1,082
4,675
34
3
51
814
18
920
498
517
422
7,341
74
8,852
102
2,071
14,576
–
–
–
–
–
–
5
–
–
4
9
30
–
–
59
4
93
As at October 31, 2020
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
611
1,329
3,185
5,125
Bank
Corporate
Sovereign
Total
Bank
Corporate
Sovereign
Total
53
944
622
1,619
1
77
710
788
–
54
1,038
2,059
7,212
8,544
8,250
10,657
8
111
779
898
225
306
593
1,124
3
10
58
71
236
427
1,430
2,093
Total net
exposure
901
3,815
13,159
17,875
(1) BMO has the following indirect exposures to Europe as at October 31, 2021:
– Collateral of €976 million to support trading activity in securities (€79 million from GIIPS) and €284 million of cash collateral held.
– Guarantees of $11 billion ($248 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 $167 million, with no net single-name* CDS exposure to GIIPS as at October 29, 2021
(*includes a net position of $131 million (bought protection) on a CDS Index, of which 12% comprises GIIPS domiciled entities).
(5) Repo-style transactions are primarily with bank counterparties for which BMO holds collateral ($41 billion for Europe as at October 31, 2021).
(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 the bank is required to maintain with the Irish Central Bank of $104 million as at October 31, 2021.
(8) Other Eurozone exposure includes five countries with less than $300 million net exposure. Other European exposure is distributed across four countries as at October 31, 2021.
(9) Of BMO’s total net direct exposure to Europe, approximately 93% was to counterparties in countries with a rating of Aa2/AAA from at least one of Moody’s or S&P.
90 BMO Financial Group 204th Annual Report 2021
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)
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 above.
Funded lending as at October 31, 2021
As at October 31, 2021
As at October 31, 2020
Bank
Corporate
Sovereign
Commitments
Funded
Commitments
Funded
Lending (2)
–
–
13
–
91
104
134
157
73
93
457
27
16
19
9
–
71
632
–
483
–
–
341
824
2
102
324
332
760
314
2
352
1,764
–
2,432
4,016
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
641
13
–
505
1,159
264
406
436
425
–
483
13
–
432
928
136
259
397
425
–
531
15
–
206
752
386
607
397
403
–
474
15
–
122
611
240
391
374
324
1,531
1,217
1,793
1,329
665
76
429
2,668
31
341
18
371
1,773
–
3,869
2,503
6,559
4,648
1,158
117
602
4,809
100
6,786
9,331
638
16
505
1,959
67
3,185
5,125
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Derivative Transactions
The following table presents the notional amounts of BMO’s over-the-counter (OTC) derivative contracts, comprising 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, we acquire 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.
We may also be called on to make additional contributions or provide other support in the event another member defaults.
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 the Consolidated
Balance Sheet. The fair values of OTC derivative contracts are recorded in the Consolidated Balance Sheet.
Over-the-Counter Derivative Contracts (Notional amounts)
(Canadian $ in millions)
As at October 31
Interest Rate Contracts
Swaps
Forward rate agreements
Purchased options
Written options
Total interest rate contracts
Foreign Exchange Contracts
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Written options
Total commodity contracts
Equity Contracts
Credit Default Swaps
Purchased
Written
Total credit default swaps
Total
Non-centrally cleared
Centrally cleared
Total
2021
2020
2021
2020
2021
2020
379,117
2,919
69,491
68,155
442,727
2,890
57,833
64,728
3,772,174
144,738
–
–
3,892,564
514,442
–
–
4,151,291
147,657
69,491
68,155
4,335,291
517,332
57,833
64,728
519,682
568,178
3,916,912
4,407,006
4,436,594
4,975,184
85,912
513,421
441,107
54,051
54,045
96,813
540,688
449,701
38,985
41,286
1,148,536
1,167,473
–
–
48,319
94
102
48,515
–
–
44,939
82
41
85,912
513,421
489,426
54,145
54,147
96,813
540,688
494,640
39,067
41,327
45,062
1,197,051
1,212,535
28,892
4,526
3,132
36,550
99,471
778
179
957
30,613
5,728
3,704
40,045
60,502
1,386
510
1,896
–
–
–
–
7
–
–
–
–
2
11,580
4,979
16,559
6,021
1,285
7,306
28,892
4,526
3,132
36,550
99,478
12,358
5,158
17,516
30,613
5,728
3,704
40,045
60,504
7,407
1,795
9,202
1,805,196
1,838,094
3,981,993
4,459,376
5,787,189
6,297,470
BMO Financial Group 204th Annual Report 2021 91
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Market risk arises from our trading and underwriting activities, as well as our 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 seeks to provide effective identification, measurement, reporting and control of market risk exposures.
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Trading and Underwriting Market Risk Governance
Our market risk-taking activities are subject to an extensive governance framework. The Risk Review Committee (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 Risk Management Committee (RMC) regularly reviews and discusses significant market risk exposures and positions, and provides
ongoing senior management oversight of our risk-taking activities. Both of these committees are kept apprised of specific market risk exposures and
other factors that could expose us 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 our 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 our risk governance framework, our market risk management framework comprises processes, infrastructure and supporting documentation, which
together support the identification, assessment, independent monitoring and control of our market risk exposures.
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 needs, including market-making and related financing activities, and assisting clients to raise funds by way of securities issuance.
Identification and Assessment 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 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.
Selection of the period of significant financial stress for SVaR incorporates historical events, including the COVID-19 pandemic.
Probabilistic stress testing and scenario analysis are used to determine the potential impact of low-frequency, high-severity events on our
portfolios. The scenarios incorporate hypothetical and historical events, and consider the performance of our portfolios under a variety of market
conditions. Scenarios are amended, added or removed to refine our risk measurement, for example to reflect the market volatility in 2020 and 2021
due to the COVID-19 pandemic, 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 Note 5 to the 2021 audited annual consolidated financial statements.
92 BMO Financial Group 204th Annual Report 2021
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. Our 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 useful indicator of risk, as with any model-driven metric, VaR has limitations, including 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
Limits are applied to VaR, SVaR and other risk metrics, and the limits are subject to regular monitoring and reporting, with breaches 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.
Trading Market Risk Measures
Trading VaR and SVaR
Average Total Trading VaR was marginally higher year-over-year, as the market impact of the COVID-19 pandemic remained within the historical
period used for VaR for most of the year, and growth in mortgage trading increased interest rate risk. VaR declined in the second half of 2021, as the
historical period used for VaR moved past the second and third quarters of 2020 and the market volatility prevailing at that time. Average Total SVaR
declined year-over-year due to reduced exposure to risk in our equity option books.
Total Trading Value at Risk (VaR) Summary (1) (2) (3)
As at or for the year ended October 31
(pre-tax Canadian $ equivalent in millions)
2021
2020
Year-end
Average
High
Low
Year-end
Average
High
Low
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Commodity VaR
Equity VaR
Foreign exchange VaR
Interest rate VaR (4)
Debt-specific risk
Diversification
Total Trading VaR
Total Trading SVaR
1.8
10.8
0.5
15.2
3.0
(12.8)
18.5
55.8
2.7
2.2
1.1
6.2
14.9 24.9 10.0
0.5
6.4
9.8
27.1 52.5
1.9
5.4
nm
nm
3.3
(19.7)
30.5 53.5 15.3
45.7 65.4 36.3
5.5
16.4
4.2
40.7
3.9
(25.5)
45.2
45.2
2.5
16.0
3.4
23.1
3.8
(20.3)
5.8
37.2
6.8
42.0
7.6
nm
28.5
53.4
0.6
4.2
0.8
5.4
1.6
nm
8.1
50.8
87.1
29.2
(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.
(3) In Q1-2020, a new measurement approach was introduced for VaR and SVaR, which separated the previously reported credit VaR into interest rate VaR for general credit spread risk and for
debt-specific risk. Total Trading VaR and SVaR no longer reflect diversification benefits from debt-specific risk.
(4) Interest rate VaR includes general credit spread risk.
nm – not meaningful
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 93
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 2021,
net trading losses were incurred on two days, and we experienced the largest loss on October 19, 2021. A combination of high market volatility,
which had a negative impact on some of our positions, and lower than usual customer activity contributed to the losses for the two days.
Trading Net Revenues versus Value at Risk
November 1, 2020 to October 31, 2021 (pre-tax basis, Canadian $ in millions)
A
&
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60
40
20
0
(20)
(40)
(60)
0
2
-
v
o
N
-
5
0
2
-
v
o
N
-
3
1
0
2
-
v
o
N
-
0
2
0
2
-
v
o
N
-
7
2
0
2
-
c
e
D
-
4
0
2
-
c
e
D
-
1
1
0
2
-
c
e
D
-
8
1
0
2
-
c
e
D
-
9
2
1
2
-
n
a
J
-
6
1
2
-
n
a
J
-
3
1
1
2
-
n
a
J
-
0
2
1
2
-
n
a
J
-
7
2
1
2
-
b
e
F
-
3
1
2
-
b
e
F
-
0
1
1
2
-
b
e
F
-
8
1
1
2
-
b
e
F
-
5
2
1
2
-
r
a
M
-
4
1
2
-
r
a
M
-
1
1
1
2
-
r
a
M
-
8
1
1
2
-
r
a
M
-
5
2
1
2
-
r
p
A
-
1
1
2
-
r
p
A
-
9
1
2
-
r
p
A
-
6
1
1
2
-
r
p
A
-
3
2
1
2
-
r
p
A
-
0
3
1
2
-
y
a
M
-
7
1
2
-
y
a
M
-
4
1
1
2
-
y
a
M
-
1
2
1
2
-
y
a
M
-
1
3
1
2
-
n
u
J
-
7
1
2
-
n
u
J
-
4
1
1
2
-
n
u
J
-
1
2
1
2
-
n
u
J
-
8
2
1
2
-
l
u
J
-
6
1
2
-
l
u
J
-
3
1
1
2
-
l
u
J
-
0
2
1
2
-
l
u
J
-
7
2
1
2
-
g
u
A
-
4
1
2
-
g
u
A
-
1
1
1
2
-
g
u
A
-
8
1
1
2
-
g
u
A
-
5
2
1
2
-
p
e
S
-
1
1
2
-
p
e
S
-
9
1
2
-
p
e
S
-
6
1
1
2
-
p
e
S
-
3
2
1
2
-
p
e
S
-
0
3
1
2
-
t
c
O
-
7
1
2
-
t
c
O
-
5
1
1
2
-
t
c
O
-
2
2
1
2
-
t
c
O
-
9
2
Daily Revenue
Total Trading VaR
Frequency Distribution of Daily Net Revenues
November 1, 2020 to October 31, 2021 (Canadian $ in millions)
s
y
a
d
f
o
r
e
b
m
u
n
n
i
y
c
n
e
u
q
e
r
F
80
70
60
50
40
30
20
10
0
-5
0
5
10
15
20
25
30
35
53
Daily net revenues (pre-tax $ millions)
Structural (Non-Trading) Market Risk
Structural market risk comprises interest rate risk arising from our banking activities (such as 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 oversees structural market risk management, regularly reviews structural market risk positions and annually approves the structural
market risk plan and limits. The RMC and Asset Liability Committee provide regular ongoing senior management oversight of risk positions and
activity.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
94 BMO Financial Group 204th Annual Report 2021
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 net assets arising from changes in interest rates.
Structural interest rate risk primarily comprises 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.
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.
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The models that measure structural interest rate risk incorporate projected changes in interest rates and predict the likely reaction of our customers
to these changes. For customer loans and deposits with scheduled maturity and repricing dates (such as mortgages and term deposits), the 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), exposure is measured 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 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 BMO’s Model Risk Management Framework, which is described in more detail in the Enterprise-Wide Risk
Management Framework section.
Structural interest rate earnings sensitivity and economic value sensitivity to an immediate parallel increase or decrease in the yield curve are
disclosed in the table below. As a result of the low interest rate environment, earnings and economic value sensitivities to declining interest rates
commencing as at April 30, 2020 are measured using a 25 basis point decline.
There were no significant changes in the structural market risk management framework during the year.
Structural economic value sensitivity 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 and the benefits of falling interest rates increased relative to October 31, 2020,
primarily due to modelled deposit pricing being more rate-sensitive at higher projected interest rate levels, following the increase in term market
rates during the year. 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 sensitivity 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. Structural earnings exposure to falling interest rates
increased in 2021 relative to 2020, largely due to customer deposit growth. The benefits to structural earnings of rising interest rates primarily reflect
the positive impact of widening deposit margins as interest rates rise, and this exposure increased in 2021 relative to 2020, largely due to customer
deposit growth.
Structural Interest Rate Sensitivity (1)
(Pre-tax Canadian $
equivalent in millions)
100 basis point increase
25 or 100 basis point decrease (2)
Economic value sensitivity
Earnings sensitivity over the next 12 months
October 31, 2021
October 31, 2020
October 31, 2021
October 31, 2020
Canada (3) (4) United States
Total (4)
Total (4)
Canada (3) (4) United States Total (4) Total (4)
(894.0)
202.0
(565.1)
62.9
(1,459.1)
264.9
(1,085.1)
100.0
51.9
(59.2)
331.8 383.7
(82.4) (141.6)
285.8
(98.2)
(1) Losses are presented in brackets and gains are presented as positive numbers.
(2) Due to the low interest rate environment, starting April 30, 2020, economic value sensitivity and earnings sensitivity to declining interest rates are measured using a 25 basis point decline.
(3) Includes Canadian dollar and other currencies.
(4) Measures reflect revised modelling assumptions effective January 31, 2021. Prior periods have been updated to reflect the revised approach and to conform with the current year’s presentation.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
Insurance Market Risk
Insurance market risk includes interest rate and equity market risk arising from our insurance business activities. A 100 basis point increase in interest
rates as at October 31, 2021 would result in an increase in earnings before tax of $48 million ($39 million as at October 31, 2020). A 25 basis point
decrease in interest rates as at October 31, 2021 would result in a decrease in earnings before tax of $12 million ($9 million as at October 31, 2020).
A 10% increase in equity market values as at October 31, 2021 would result in an increase in earnings before tax of $22 million ($51 million as at
October 31, 2020). A 10% decrease in equity market values as at October 31, 2021 would result in a decrease in earnings before tax of $22 million
($53 million as at October 31, 2020). We may enter into hedging arrangements to offset the impact of changes in equity market values on our earnings,
and we did so during the 2021 fiscal year. The impact of insurance market risk on earnings is reflected in insurance claims, commissions and changes in
policy benefit liabilities in our Consolidated Statement of Income, and the corresponding change in the fair value of BMO’s policy benefit liabilities is
reflected in other liabilities in our Consolidated Balance Sheet. The impact of insurance market risk is not reflected in the table above.
Foreign Exchange Risk
Structural foreign exchange risk arises primarily from translation risk related to our net investment in U.S. operations and from transaction risk
associated with U.S.-dollar-denominated net income.
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Translation risk represents the impact that changes in foreign exchange rates could have on our reported shareholders’ equity and capital ratios.
We may enter into arrangements to offset the impact of foreign exchange rate movements on our capital ratios, and we did so during the 2021 fiscal
year. Refer to the Enterprise-Wide Capital Management section for further discussion.
Transaction risk represents the impact that fluctuations in the Canadian dollar/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 dollar/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 2021, each one cent increase (decrease) in the Canadian dollar/U.S.
dollar exchange rate would be expected to increase (decrease) the Canadian dollar equivalent of U.S. segment net income before income taxes for
the year by $34 million, in the absence of hedging transactions. Refer to the Foreign Exchange section for a more complete discussion of the effects
of changes in foreign exchange rates on our results.
Linkages between Balance Sheet Items and Market Risk Disclosures
The table below presents items reported on the Consolidated Balance Sheet that are subject to market risk, comprising balances that are subject to
either traded risk or non-traded risk measurement techniques.
As at October 31, 2021
Subject to market risk
As at October 31, 2020
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
93,261
8,303
–
94
232,849 104,412
93,261
8,209
128,437
Securities borrowed or purchased under
resale agreements
Loans (net of allowance for credit losses)
107,382
458,262
–
3,665
107,382
454,597
Derivative instruments
36,713
34,350
2,363
–
–
–
–
–
–
57,408
9,035
–
217
234,260 97,723
57,408
8,818
136,537
111,878
447,420
–
2,416
111,878
445,004
36,815 32,457
4,358
–
–
–
–
–
–
Customers’ liability under acceptances
Other assets
Total Assets
Liabilities Subject to Market Risk
Deposits
14,021
37,384
–
3,359
14,021
16,970
988,175 145,880
825,240
–
17,055
17,055
13,493
38,952
–
5,446
13,493
16,105
949,261 138,259
793,601
–
17,401
17,401
685,631
22,665
662,966
Derivative instruments
30,815
27,875
2,940
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Other liabilities
Subordinated debt
Total Liabilities
14,021
32,073
–
32,073
97,556
63,663
6,893
–
85
–
14,021
–
97,556
63,165
6,893
930,652
82,698
847,541
–
–
–
–
–
413
–
413
659,034 18,074
640,960
30,375 26,355
4,020
13,493
–
29,376 29,376
88,658
63,316
8,416
–
118
–
13,493
–
88,658
62,964
8,416
892,668 73,923
818,511
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate
Interest rate
Interest rate
–
–
–
–
–
234
–
234
Primary 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
(1) Primarily comprises 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 comprises balance sheet items that are subject to the structural balance sheet insurance risk management framework and secured financing transactions.
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 Note 5 to the 2021 audited annual consolidated financial statements.
96 BMO Financial Group 204th Annual Report 2021
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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, and comprises claims risk, policyholder behaviour risk and expense risk.
Insurance risk generally entails the inherent unpredictability that can arise from the assumption of long-term policy liabilities or from uncertainty regarding
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: life insurance, annuities (which includ e the
pension risk transfer business), accident and sickness insurance, and creditor insurance, as well as the 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.
Our 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; the 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 Chief Risk Officer, 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 of 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 the 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, assessment and management of insurance risk. Reinsurance transactions that transfer
insurance risk from BMO Insurance to independent reinsurance companies also mitigate exposure to insurance risk by diversifying risk and limiting
claims. BMO Insurance has exited the Property & Casualty Reinsurance market, with the last remaining treaty having terminated in January 2021, and
this has significantly reduced our exposure to catastrophic claims. However, a certain portion of our exposure to the risk of catastrophic claims
remains as the portfolio runs off and until all outstanding claims that were made prior to the treaty termination dates are settled and paid.
Given that much of the life insurance portfolio is reinsured and that we have a well-balanced portfolio of life insurance products and annuities
forming a natural hedge for exposures to insurance risk, claims related to the COVID-19 pandemic have not had a material impact on BMO Insurance’s
financial results to date. As part of our overall Risk Management Framework within BMO Insurance, claims related to the COVID-19 pandemic continue
to be tracked separately from other types of claims.
Caution
This Insurance Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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. 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 maintain sufficient liquid assets and funding capacity to meet our 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 identification, assessment and
management of liquidity and funding risk. The Corporate Treasury group is responsible for monitoring and reporting liquidity and funding risk acros s the
enterprise, and develops and recommends for approval the Liquidity and Funding Risk Management Framework and the related risk appetite and limits,
monitors compliance with 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 Committee (BSC) provide senior management oversight and also review and discuss
significant liquidity and funding policies, issues and developments that arise in the pursuit of BMO’s strategic priorities. The Risk Review Committee
(RRC) provides oversight of the management of liquidity and funding risk, annually approves the applicable policies, limits and contingency plan, and
regularly reviews liquidity and funding positions.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 set out 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.
We have a robust limit structure in place in order to manage liquidity and funding risk. Limits define the risk appetite for the 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, as well as 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.
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 rising levels of 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
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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 laws and regulations 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 laws and regulations.
We managed liquidity and funding risk appropriately during 2021, as customer deposit flows were robust throughout the year, while loan
volumes increased in the second half of the year, reflecting an increase in our customers’ borrowing activities. Our liquidity metrics, including the
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), exceeded internal and regulatory requirements throughout 2021.
Liquidity and Funding Risk Measurement
A key component of liquidity risk management is the measurement of liquidity risk under stress. We use Stress NLP as a key measure of liquidity risk.
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, as well as from obligations to pledge collateral due to ratings downgrades or
market volatility, along with the continuing need to fund new assets and 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 var y by
deposit or 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 our stated risk tolerance and are considered in management decisions on limit-setting 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 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 LCR, Net Cumulative Cash Flow and 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 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
BMO’s risk management framework reflects management’s assessment of the liquidity value of those assets under a severe stress scenario. Liquid
assets held in our trading businesses include cash on deposit with central banks, short-term deposits with other financial institutions, highly-rated
debt securities, equity securities and short-term reverse repurchase agreements. Supplemental liquidity pool assets predominantly comprise cas h 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 65% of the supplemental liquidity pool is held at the parent bank level in assets denominated in Canadian dollars or
U.S. dollars, with the majority of the remaining supplemental liquidity pool held at our U.S. bank entity, BMO Harris Bank, in U.S.-dollar-denominated
assets. The size of the supplemental liquidity pool is integrated with our assessment of liquidity risk. To meet local regulatory requirements, certain
legal entities maintain their own minimum liquidity positions. There may be legal and regulatory restrictions on BMO’s 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, we 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, we 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 $317.3 billion as at October 31, 2021, compared with $306.1 billion as at October 31, 2020. The increase
in unencumbered liquid assets was primarily due to higher cash balances, partially offset by lower securities balances. Net unencumbered liquid
assets are primarily held at the parent bank level, at BMO Harris Bank, and in our broker/dealer operations. In addition to liquid assets, we have
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 our
liquidity position.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
98 BMO Financial Group 204th Annual Report 2021
In addition to cash and securities holdings, we 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 of the consolidated
financial statements for further information on pledged assets.
Liquid Assets
(Canadian $ in millions)
Cash and cash equivalents
Deposits with other banks
Securities and securities borrowed or purchased under resale agreements
Sovereigns / Central banks / Multilateral development banks
NHA mortgage-backed securities and U.S. agency mortgage-backed
securities and collateralized mortgage obligations
Corporate and other debt
Corporate equity
Total securities and securities borrowed or purchased under
resale agreements
NHA mortgage-backed securities (reported as loans at amortized cost) (3)
Total liquid assets
As at October 31, 2021
As at October 31, 2020
Bank-owned
assets
93,261
8,303
Other cash
and securities
received
Total gross
assets (1)
Encumbered
assets
Net
unencumbered
assets (2)
–
–
93,261
8,303
110
–
93,151
8,303
Net
unencumbered
assets (2)
57,297
9,035
95,213
98,488 193,701
117,291
76,410
105,295
54,757
22,557
60,322
60,398
5,641
21,513
44,070
55,063 115,385
19,976
8,740
66,876
40,422
35,330
48,509
232,849
19,645
180,705 413,554
19,645
–
212,883
4,519
200,671
15,126
354,058
180,705 534,763
217,512
317,251
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36,844
33,985
47,465
223,589
16,199
306,120
(1) Gross assets include bank-owned assets and cash and securities received from third parties.
(2) Net unencumbered liquid assets are defined as total gross assets less encumbered assets.
(3) Under IFRS, National Housing Act (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.
Asset Encumbrance
(Canadian $ in millions)
As at October 31, 2021
Cash and deposits with other banks
Securities (5)
Loans
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, 2020
Cash and deposits with other banks
Securities (5)
Loans
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
Total gross
assets (1)
101,564
433,199
438,617
36,713
14,021
4,454
5,378
2,266
1,588
1,287
22,411
88,118
Encumbered (2)
Net unencumbered
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
–
180,955
53,485
110
36,447
1,171
–
13,064
238,283
101,454
202,733
145,678
–
–
–
–
–
–
–
6,436
6,436
–
–
–
–
–
–
–
–
–
36,713
14,021
4,454
5,378
2,266
1,588
1,287
15,975
81,682
–
–
–
–
–
–
–
–
–
1,061,498
240,876
37,728
333,029
449,865
Total gross
assets (1)
66,443
425,777
425,100
36,815
13,493
4,183
6,535
2,442
1,260
1,473
23,059
89,260
Encumbered (2)
Net unencumbered
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
–
149,955
58,168
111
36,034
806
–
12,766
227,830
66,332
227,022
138,296
–
–
–
–
–
–
–
6,344
6,344
–
–
–
–
–
–
–
–
–
36,815
13,493
4,183
6,535
2,442
1,260
1,473
16,715
82,916
–
–
–
–
–
–
–
–
–
1,006,580
214,467
36,951
323,512
431,650
(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 securities of $13.1 billion
as at October 31, 2021, which include securities held at BMO’s insurance subsidiary, significant equity investments and certain investments held at BMO’s merchant banking business. Other
unencumbered assets 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 BMO’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.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
Funding Strategy
BMO’s 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.
We maintain a large and stable base of customer deposits that, in combination with our strong capital base, is a source of strength. This supports
the maintenance of a sound liquidity position and reduces reliance on wholesale funding. Customer deposits totalled $498.9 billion as at
October 31, 2021, increasing from $468.0 billion in 2020, with strong growth across both retail and commercial deposits. We also receive
non-marketable deposits from corporate and institutional customers in support of certain trading activities. These deposits totalled $26.0 billion
as at October 31, 2021, an increase from $22.8 billion as at October 31, 2020.
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Customer Deposits and
Capital-to-Customer Loans
Ratio (%)
120.0
124.8
102.1
Customer Deposits
($ billions)
468
499
379
2019
2020
2021
2019
2020
2021
Our large customer base and
strong capital position reduce
our reliance on wholesale
funding.
Customer deposits provide a
strong funding base.
Total secured and unsecured wholesale funding outstanding, which largely consists of negotiable marketable securities, was $190.4 billion as at
October 31, 2021, with $48.8 billion sourced as secured funding and $141.6 billion sourced as unsecured funding. Total wholesale funding outstanding
was largely unchanged from the prior year. The mix and maturities of BMO’s wholesale term funding are outlined later in this section. Additional
information on deposit maturities can be found. We maintain a sizeable portfolio of unencumbered liquid assets, totalling $317.3 billion as at
October 31, 2021 and $306.1 billion as at October 31, 2020, that can be monetized to meet potential funding requirements, as described in the
Unencumbered Liquid Assets section.
Wholesale Funding Maturities (1)
As at October 31, 2021
As at October 31, 2020
(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
Less than
1 month
1 to 3
months
3 to 6
months
6 to 12
months
Subtotal less
than 1 year
1 to 2
years
Over
2 years
2,861
6,812
705
–
1,430
–
–
–
–
–
463
18,006
659
–
593
–
352
2,166
1,313
–
95
22,399
1,000
–
4,923
2
1,275
–
–
–
2
24,650
–
–
5,079
–
892
3,596
73
–
3,421
71,867
2,364
–
12,025
2
2,519
5,762
1,386
–
–
31
–
–
11,292
65
4,466
10,677
2,019
–
–
–
–
–
28,520
5,115
13,143
6,966
1,911
6,892
Total
3,421
71,898
2,364
–
51,837
5,182
20,128
23,405
5,316
6,892
Total
6,760
59,298
2,502
3,167
56,480
3,221
20,394
24,632
6,255
8,416
Total
Of which:
Secured
Unsecured
Total (4)
11,808
23,552
29,694
34,292
99,346
28,550
62,547 190,443
191,125
–
11,808
3,831
19,721
1,275
28,419
4,561
29,731
9,667
89,679
17,162
11,388
48,849
22,020
40,527 141,594
11,808
23,552
29,694
34,292
99,346
28,550
62,547 190,443
54,448
136,677
191,125
(1) Wholesale unsecured funding primarily includes funding raised through the issuance of marketable, negotiable instruments. Wholesale funding excludes deposits and covered bonds issued to access
central bank programs, repo transactions and bankers’ acceptances, which are disclosed in the Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments section, and also
excludes ABCP issued by certain ABCP conduits that are not consolidated for financial reporting purposes. Effective Q4-2021, one of the ABCP conduits that we had previously consolidated is no longer
consolidated and therefore is not included in this table.
(2) Primarily issued to institutional investors.
(3) Includes credit card, auto and transportation finance loan securitizations.
(4) Total wholesale funding consists of Canadian-dollar-denominated funding totalling $47.3 billion and U.S.-dollar-denominated and other foreign-currency-denominated funding totalling $143.1 billion
as at October 31, 2021.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
100 BMO Financial Group 204th Annual Report 2021
Diversification of our wholesale term funding sources is an important part of our overall liquidity management strategy. Our wholesale term
funding activities are well-diversified by jurisdiction, currency, investor segment, instrument type and maturity profile. We maintain 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 and home equity line of credit
(HELOC) securitizations, U.S. transportation finance loans, covered bonds, and Canadian and U.S. senior unsecured deposits.
Wholesale Capital Market Term Funding Composition (%)
2021
2020
33%
23%
25%
19%
31%
24%
21%
24%
Covered Bonds
Mortgage, Credit Card, Auto Loan, TF and HELOC Securitization, and FHLB Advances
Senior Debt (Canadian dollar)
Senior Debt (Global issuances)
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Our wholesale term funding plan seeks to ensure sufficient funding capacity is available to execute business strategies. The funding plan
considers expected maturities, as well as asset and liability growth projected for 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 BSC and RMC and approved by the RRC, and is
regularly updated to reflect actual results and incorporate updated forecast information.
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 BMO, on or after September 23, 2018, that has an
original term greater than 400 days and is marketable, subject to certain exceptions. We are required to meet minimum Total Loss Absorbing Capacity
(TLAC) Ratio requirements effective November 1, 2021. Our TLAC Ratio exceeds the regulatory minimum as at October 31, 2021. For more information
on Canada’s Bail-In Regime and TLAC requirements, refer to Regulatory Capital Developments under Enterprise-Wide Capital Management.
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 in
raising both capital and funding to support its business operations. Maintaining strong credit ratings allows us to access the wholesale markets at
competitive pricing levels. Should BMO’s 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 BMO’s ratings could also have other consequences, including
those set out in Note 8 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. During the third quarter of
fiscal 2021, Moody’s, Standard & Poor’s (S&P), DBRS and Fitch affirmed their ratings for BMO. Moody’s, S&P and DBRS have a stable outlook on BMO
and Fitch has a negative outlook.
As at October 31, 2021
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)
Subordinated
debt (NVCC)
Aa2
A+
AA
AA
Baa1(hyb)
BBB+
A
A (low)
Outlook
Stable
Stable
Negative
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 BMO’s 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, 2021,
we would be required to provide additional collateral to counterparties totalling $142 million, $354 million and $762 million as a result of a
one-notch, two-notch and three-notch downgrade, respectively.
BMO Financial Group 204th Annual Report 2021 101
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) is calculated in accordance with OSFI’s Liquidity Adequacy Requirements Guideline and is summarized in the
following table. The average daily LCR for the quarter ended October 31, 2021 was 125%. 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 daily LCR in fiscal
2021 decreased from 131% in the fourth quarter of the prior year, primarily due to a decrease in HQLA and higher net cash outflows. While banks
are required to maintain an LCR greater than 100% in normal conditions, they 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 primarily comprise 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. Weightings prescribed by
the Office of the Superintendent of Financial Institutions (OSFI) 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 its 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.
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(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, 2020
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
For the quarter ended October 31, 2021
Total unweighted value
(average) (1) (2)
Total weighted value
(average) (2) (3)
*
231.3
114.3
117.0
259.2
128.9
103.1
27.2
*
178.8
11.7
1.9
165.2
1.2
425.0
*
138.9
8.6
10.6
158.1
194.4
15.4
3.4
12.0
124.0
32.1
64.7
27.2
22.5
34.7
4.4
1.9
28.4
–
8.1
204.7
33.4
4.7
10.6
48.7
Total adjusted value (4)
194.4
156.0
125
Total adjusted value (4)
197.5
150.7
131
* 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 61 business days in the fourth quarter of 2021.
(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.
102 BMO Financial Group 204th Annual Report 2021
Net Stable Funding Ratio
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 its assets and is calculated in accordance with OSFI’s Liquidity Adequacy Requirements Guideline. The NSFR is defined as the ratio between
the amount of available stable funding (ASF) and the amount of required stable funding (RSF). ASF represents the proportion of own and third-party
resources that are expected to be reliably available over a one-year horizon (including customer deposits and long-term wholesale funding). Unlike
the LCR, which is a short-term metric, the NSFR assesses a bank’s medium-term and long-term resilience. The stable funding requirements for each
institution are set by OSFI based on the liquidity and maturity characteristics of its balance sheet assets and off-balance sheet exposures. Weightings
prescribed by OSFI are applied to notional asset and liability balances to determine ASF and RSF and the NSFR. Canadian domestic systemically
important banks (D-SIBs), including BMO, are required to maintain a minimum NSFR of 100%, effective January 1, 2020, and to publicly disclose
their NSFR, effective in the quarter ended January 31, 2021. BMO’s NSFR was 118% as at October 31, 2021, exceeding the regulatory minimum.
(Canadian $ in billions, except as noted)
Available Stable Funding (ASF) Item
Capital:
Regulatory capital
Other capital instruments
Retail deposits and deposits from small business customers:
Stable deposits
Less stable deposits
Wholesale funding:
Operational deposits
Other wholesale funding
Liabilities with matching interdependent assets
Other liabilities:
NSFR derivative liabilities
All other liabilities and equity not included in the above categories
Total ASF
Required Stable Funding (RSF) Item
Total NSFR high-quality liquid assets (HQLA)
Deposits held at other financial institutions for operational purposes
Performing loans and securities:
Performing loans to financial institutions secured by Level 1 HQLA
Performing loans to financial institutions secured by non-Level 1 HQLA and unsecured
M
D
&
A
For the quarter ended October 31, 2021
Unweighted value by residual maturity
No
maturity (1)
Less than 6
months
6 to 12
months Over 1 year
Weighted
value (2)
–
–
–
211.3
105.4
105.9
237.8
131.4
106.4
–
2.0
*
2.0
*
*
–
147.1
–
–
–
–
28.4
13.9
14.5
184.9
–
184.9
1.6
*
*
32.6
*
*
–
133.4
50.8
–
–
–
12.1
6.1
6.0
39.3
–
39.3
0.9
*
*
0.2
*
*
–
46.0
1.9
65.2
65.1
0.1
31.0
6.3
24.7
72.3
–
72.3
14.3
45.8
8.1
4.9
*
*
–
251.8
–
65.2
65.1
0.1
263.2
125.4
137.8
201.8
65.7
136.1
–
5.0
*
5.0
535.2
22.9
–
372.2
3.5
performing loans to financial institutions
24.3
51.0
7.7
10.8
44.7
Performing loans to non-financial corporate clients, loans to retail and small business
customers, and loans to sovereigns, central banks and PSEs, of which:
With a risk weight of less than or equal to 35% under the Basel II standardized approach for
credit risk
Performing residential mortgages, of which:
With a risk weight of less than or equal to 35% under the Basel II standardized approach for
credit risk
Securities that are not in default and do not qualify as HQLA, including exchange-traded equities
Assets with matching interdependent liabilities
Other assets:
Physical traded commodities, including gold
Assets posted as initial margin for derivative contracts and contributions to default funds
of CCPs
NSFR derivative assets
NSFR derivative liabilities before deduction of variation margin posted
All other assets not included in the above categories
Off-balance sheet items
Total RSF
Net Stable Funding Ratio (%)
87.0
25.6
25.0
119.0
196.7
–
12.6
12.6
23.2
–
15.7
3.4
*
*
*
12.3
*
*
*
–
5.0
4.7
1.0
1.6
*
*
*
*
*
2.4
*
*
*
–
11.3
11.0
0.1
0.9
*
*
*
*
*
0.2
*
*
*
–
111.2
108.5
10.8
14.3
36.3
*
10.6
9.8
0.6
12.7
469.7
–
97.9
95.0
29.4
–
41.7
2.9
9.0
1.7
0.6
27.5
16.6
*
*
453.4
118
* Disclosure is not required under the NSFR disclosure standard.
(1) Items to be reported in the “no maturity” column do not have a stated maturity. These may include, but are not limited to, items such as non-maturity deposits, short positions, open maturity
positions, non-HQLA equities, physical traded commodities and demand loans.
(2) Weighted values are calculated after the application of the weights prescribed under the OSFI LAR Guideline for ASF and RSF.
BMO Financial Group 204th Annual Report 2021 103
A
&
D
M
MANAGEMENT’S DISCUSSION AND ANALYSIS
Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments
The tables below show the remaining contractual maturities 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, under both normal market
conditions and 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 discounts (“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 (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
Total loans, net of allowance
Other Assets
Derivative instruments
Customers’ liability under acceptances
Other
Total other assets
Total Assets
(Canadian $ in millions)
Liabilities and Equity
Deposits (2)(3)
Banks
Business and government
Individuals
Total deposits
Other liabilities
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
2021
Total
91,736
3,529
5,286
–
1,440
4,742
–
1,172
5,116
–
1,753
3,383
–
409
–
–
–
–
–
–
1,525
93,261
–
8,303
2,692
17,512
43,571
90,225
60,322
232,849
70,080
22,873
11,362
1,602
766
699
–
–
–
107,382
458
215
–
12,082
–
12,755
2,752
11,574
2,002
16,328
1,081
419
–
7,667
–
2,109
639
–
7,697
–
4,373
1,166
–
10,496
–
4,879
1,110
–
10,213
–
22,170
5,732
–
29,303
–
91,146
31,613
–
81,377
–
9,396
13,518
–
14,413
–
138
22,752
8,103
66,561
(2,564)
135,750
77,164
8,103
239,809
(2,564)
9,167
10,445
16,035
16,202
57,205
204,136
37,327
94,990
458,262
4,924
2,428
461
7,813
2,187
19
140
2,346
1,809
–
4
1,813
1,634
–
3
1,637
7,525
–
5
7,530
8,787
–
1
7,095
–
5,097
–
–
29,671
36,713
14,021
37,384
8,788
12,192
29,671
88,118
199,714
46,035
30,441
24,586
21,706
82,946
256,495
139,744
186,508
988,175
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
2021
Total
9,047
16,894
3,944
4,581
26,861
6,399
4,193
29,665
8,630
746
21,345
6,766
389
16,213
7,697
–
24,249
9,529
–
35,707
10,022
26
17,113
2,786
7,629
254,201
160,999
26,611
442,248
216,772
29,885
37,841
42,488
28,857
24,299
33,778
45,729
19,925
422,829
685,631
Derivative instruments
Acceptances
Securities sold but not yet purchased (4)
Securities lent or sold under repurchase
agreements (4)
Securitization and structured entities’
2,771
11,574
32,073
3,651
2,428
–
2,379
19
–
1,508
–
–
73,190
17,199
3,994
3,103
liabilities
Other
Total other liabilities
Subordinated debt
Total Equity
21
10,121
1,737
1,632
129,750
26,647
–
–
–
–
1,527
116
8,035
–
–
648
109
1,444
–
–
70
486
162
5,723
–
–
7,140
–
–
6,199
–
–
–
–
–
–
–
–
–
30,815
14,021
32,073
97,556
7,240
944
9,791
1,277
4,036
3,509
–
20,307
25,486
38,177
5,368
2,162
13,907
18,208
13,744
20,307
238,128
–
–
–
–
–
–
25
–
6,868
–
6,893
–
57,523
57,523
Total Liabilities and Equity
159,635
64,488
50,523
34,225
26,461
47,685
63,962
40,537
500,659
988,175
(1) Loans receivable on demand have been included under no maturity.
(2) Deposits payable on demand and payable after notice have been included under no maturity.
(3) Deposits totalling $20,991 million as at October 31, 2021 have a fixed maturity date; however, they can be redeemed early (either fully or partially) by customers without penalty. These are classified
as payable on a fixed date due to their stated contractual maturity date. BMO does not expect a significant amount to be redeemed before maturity.
(4) Presented based on their earliest maturity date.
(Canadian $ in millions)
Off-Balance Sheet Commitments
Commitments to extend credit (1)
Letters of credit (2)
Backstop liquidity facilities
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
2021
Total
1,674
1,196
189
–
3,909
16
4,935
4,083
137
–
–
38
8,374
4,358
293
–
–
47
13,308
3,815
1,073
–
–
44
14,498
4,806
1,578
1
–
60
33,749
1,980
2,709
3
–
139
99,639
3,304
6,088
22
–
217
4,571
104
828
222
–
41
–
–
–
–
–
–
180,748
23,646
12,895
248
3,909
602
(1) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at BMO’s 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.
(2) Letters of credit can be drawn down at any time. These are classified based on their stated contractual maturity date.
Material presented in a blue-tinted font above is an integral part of Note 5 to the 2021 audited annual consolidated financial statements.
104 BMO Financial Group 204th Annual Report 2021
(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
2020
Total
56,434
3,901
4,838
–
1,673
5,804
–
1,266
7,817
–
1,204
6,263
–
991
–
–
–
–
–
–
974
57,408
–
9,035
4,678
15,730
54,846
85,949
48,335
234,260
resale agreements
79,354
17,030
12,111
2,172
708
503
–
–
–
111,878
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
984
646
–
13,708
–
2,082
511
–
10,000
–
3,500
963
–
9,083
–
5,957
1,107
–
15,951
–
5,168
1,014
–
9,465
–
18,929
4,642
–
34,171
–
79,503
25,538
–
76,163
–
10,726
12,211
–
14,819
–
175
23,516
7,889
62,302
(3,303)
127,024
70,148
7,889
245,662
(3,303)
Total loans, net of allowance
15,338
12,593
13,546
23,015
15,647
57,742
181,204
37,756
90,579
447,420
M
D
&
A
Other Assets
Derivative instruments
Customers’ liability under acceptances
Other
Total other assets
Total Assets
(Canadian $ in millions)
Liabilities and Equity
Deposits (2)(3)
Banks
Business and government
Individuals
Total deposits
Other liabilities
3,400
9,609
1,873
14,882
5,472
3,633
580
9,685
2,111
251
188
2,550
1,140
–
20
1,160
915
–
13
928
4,369
–
16
4,385
9,393
–
4
9,397
10,015
–
4,530
–
–
31,728
36,815
13,493
38,952
14,545
31,728
89,260
174,747
46,785
37,290
33,814
22,952
78,360
245,447
138,250
171,616
949,261
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
2020
Total
13,499
24,056
4,295
3,982
21,813
11,509
13,106
33,713
13,019
455
13,862
11,086
463
17,567
10,192
7
20,070
7,778
–
45,287
12,709
28
11,129
2,007
7,285
213,182
146,935
38,825
400,679
219,530
41,850
37,304
59,838
25,403
28,222
27,855
57,996
13,164
367,402
659,034
Derivative instruments
Acceptances
Securities sold but not yet purchased (4)
Securities lent or sold under repurchase
1,374
9,609
29,376
4,499
3,633
–
1,684
251
–
1,171
–
–
1,088
–
–
3,911
–
–
8,588
–
–
8,060
–
–
agreements (4)
69,142
10,747
7,439
878
–
452
–
–
Securitization and structured entities’
–
–
–
–
30,375
13,493
29,376
88,658
liabilities
Other
Total other liabilities
Subordinated debt
Total Equity
30
10,301
1,656
804
334
102
119,832
21,339
9,810
–
–
–
–
–
–
2,810
109
4,968
–
–
1,169
181
2,438
–
–
4,946
798
12,577
1,326
3,367
3,706
–
19,100
26,889
36,427
10,107
22,491
15,133
19,100
225,218
–
–
–
–
8,416
–
8,416
–
56,593
56,593
Total Liabilities and Equity
161,682
58,643
69,648
30,371
30,660
37,962
80,487
36,713
443,095
949,261
(1) Loans receivable on demand have been included under no maturity
(2) Deposits payable on demand and payable after notice have been included under no maturity.
(3) Deposits totalling $27,353 million as at October 31, 2020 have a fixed maturity date; however, they can be redeemed early (either fully or partially) by customers without penalty. These are classified
as payable on a fixed date due to their stated contractual maturity date. BMO does not expect a significant amount to be redeemed before maturity.
(4) Presented based on their earliest maturity date.
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)
Letters of credit (2)
Backstop liquidity facilities
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
2020
Total
1,859
1,019
–
–
4,349
14
5,662
3,793
–
–
–
27
11,251
4,355
–
3
–
38
12,499
3,708
–
3
–
38
14,681
4,861
–
3
–
56
33,239
2,481
–
38
–
162
101,078
3,849
5,601
158
–
179
3,654
112
–
786
–
62
–
–
–
–
–
–
183,923
24,178
5,601
991
4,349
576
(1) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at BMO’s 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.
(2) Letters of credit can be drawn down at any time. These are classified based on their stated contractual maturity date.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 Note 5 to the 2021 audited annual consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 105
A
&
D
M
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operational Non-Financial Risk
Operational non-financial risk (ONFR) encompasses a wide range of non-financial risks, including those related to business change, customer
trust, reputation, and data that can result in financial loss. These losses can stem from inadequate or failed internal processes or systems, human
error or misconduct, and external events that may directly or indirectly impact our credit or investment portfolios. These risks include technology
risk, fraud risk, business continuity risk and human resources risk, but exclude legal and regulatory risk, credit risk, market risk, liquidity risk and
other types of financial risk.
Operational non-financial risk is inherent in all of our business and banking activities and can lead to significant impacts on our operating and financial
results, including financial loss, restatements and damage to BMO’s reputation. Like other financial services organizations that operate in multiple
jurisdictions, we are exposed to a variety of operational risks arising from the potential for failures of our internal processes, technology systems and
employees, 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, exposure to risks related to
third-party relationships, and damage to physical assets. Given the large volume of transactions that 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.
ONFR is not only inherent in our business and banking activities, it is also inherent in the processes and controls used to manage risks.
There is the possibility that errors will occur, as well as the possibility that a failure in our internal processes or systems could lead to financial loss
and reputational harm. Shortcomings or failures of internal processes, systems or employees, 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 BMO’s reputation.
The nature of the business also exposes us to the risk of theft and fraud when we enter into credit transactions with customers or counterparties.
In extending credit, BMO relies 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 have established various risk management frameworks to manage and mitigate these risks, including internal controls, limits and
governance processes. However, despite the contingency plans we have in place to maintain the 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 we face or could face in the future.
Consistent with the management of risk across the enterprise, we employ a three-lines-of-defence approach in managing our non-financial risk.
Refer to the Top and Emerging Risks That May Affect Future Results section for further discussion of these and other risks.
Operational Non-Financial Risk Governance
The Operational Risk Committee (ORC), a sub-committee of the Risk Management Committee (RMC), is the primary governance committee exercising
oversight of all ONFR management matters. As part of its governance responsibilities, the ORC provides effective challenge to the corporate policies,
standards, directives, operating guidelines, methodologies and tools that comprise the governing principles of the Non-Financial Risk Management
Framework (NFRMF). The documentation that gives effect to these governing principles is reviewed on a regular basis in order to confirm that it
incorporates sound governance practices and is consistent with BMO’s risk appetite. Regular analysis and reporting of our enterprise operational risk
profile to the various committees (ORC, RMC and Risk Review Committee (RRC)) are important elements of our risk governance framework. Enterprise
operational risk 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 Non-Financial Risk Management
As the first line of defence, the operating groups and Corporate Services, including Technology and Operations, are accountable for the day-to-day
management of non-financial risk, including the Chief Risk Officers of our businesses, who provide governance and oversight for their respective
business units, together with Corporate Services, which provides additional governance and oversight in certain targeted areas. Independent risk
management oversight is provided by the Operational Non-Financial Risk Management (ONFRM) team, which is responsible for ONFR strategy, tools
and policies, and for second-line oversight, effective challenge and governance. ONFRM establishes and maintains the NFRMF, which defines the
processes to be used by the first line of defence to identify, assess, manage, mitigate, monitor and report on key operational risk exposures, losses
and near-miss operational risk events with significant potential impact. In addition, the NFRMF defines the processes by which ONFRM, as the second
line of defence, guides, supports, monitors, assesses and communicates with the first line in its management of ONFR. Operational Risk Officers
within ONFRM independently assess group operational risk profiles, identify material exposures and potential weaknesses in processes and controls,
and recommend appropriate mitigation strategies and actions. Executing the NFRMF strategy also involves continuing to strengthen our risk culture by
promoting greater awareness and understanding of non-financial risk across all three lines of defence, learning from loss events and near-misses, and
providing related training and communication, as well as day-to-day execution and oversight of the NFRMF. We also continue to strengthen our
second-line-of-defence support and oversight with an enhanced Non-Financial Risk Operating Model, which takes a differentiated approach based
on the nature of the underlying risk and existing organizational structures.
Through the implementation and oversight of the NFRMF, we seek to maintain an operational risk profile that is consistent with our risk
appetite and supported by adequate capital, while continuing to adapt to ongoing changes by focusing on enhanced operational resilience.
Operational resilience is more than recovery from a disaster, it is the ability to identify and monitor risks in order to either prevent any related
incidents or minimize their impact. It involves BMO’s ability to deal with unpredictable events and adapt to changes in external circumstances.
106 BMO Financial Group 204th Annual Report 2021
Operational resilience is not a defensive strategy, but a positive, forward-looking strategic posture, which allows us to take measured risks with
confidence and prepares us to withstand challenges in the market arising from both expected and unexpected events.
The following are the key programs, methodologies and processes set out in the NFRMF that assist us in the ongoing review of our operational
risk profile:
• Risk Control Self-Assessment 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. It provides a forward-looking view of the impact of the business environment and internal controls on
operating group risk profiles, supporting the proactive prevention, mitigation and management of risk.
• BMO’s Initiative Assessment and Approval Process (IAAP) 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 addresses requirements for due diligence, approval,
monitoring and reporting at all levels of the organization.
• Material trends, metrics and risk assessments comprising Key Risk Indicators, Issues Management and Internal Loss Data Events are integral
components of the operational risk profile and are utilized to assess specific risk exposures in relation to BMO’s overall risk appetite.
• Scenario analysis assesses the potential impact of severe negative events on key risks and critical business processes in order to inform 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, and develop mitigation measures or controls that will help manage tail
risk.
• Effective business continuity management prepares us to recover, maintain and manage critical operations and processes in the event of a
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business disruption, thereby minimizing any adverse effects on our customers and other stakeholders.
• BMO’s Corporate Risk & Insurance team provides a second layer 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.
The following are examples of ONFR that may adversely affect BMO’s business and financial results. As a result of the COVID-19 pandemic and the
new remote working arrangements that have emerged for employees and third parties, a number of risks remain elevated, such as cyber security,
information security and privacy risks. For more information, refer to the Top and Emerging Risks That May Affect Future Results section.
Cyber Security Risk
Information security is integral to BMO’s business activities, brand and reputation. As technology rapidly evolves and the connectivity of devices
expands, cyber threats and risks change. These threats and risks include breaches of, or disruptions to, our systems or operations, as well as
unauthorized access, use or dissemination of our information or information pertaining to our customers or employees. We continue to build out the
capabilities of our Financial Crimes Unit, demonstrating a commitment to bringing together cyber defence and fraud and physical security functions.
In addition, we are enhancing processes to make them more resilient, while strengthening our ability to prevent, detect and recover from cyber
security threats in order to keep our customers’ and employees’ data secure. We continue to examine and benchmark practices across our peer groups
and other industries, conduct third-party assessments, develop and evaluate the effectiveness of our key controls, and invest in both technology
and human resources. We also work with various third-party security and software suppliers to bolster our internal resources and technology
capabilities in order to strengthen our resiliency in a rapidly evolving threat landscape.
Technology Disruption and Resiliency
Technology is the backbone of our operations, and we continue to innovate and invest in enhancing our technological capabilities in order to keep
customers’ data secure and to meet and exceed their expectations, as the adoption of digital banking continues to grow. In addition to existing
technology risks, the COVID-19 pandemic has introduced unprecedented challenges and new emerging risks, as our clients, employees and suppliers
have come to rely on technology platforms and the Internet of Things to manage and support their personal, business and investment banking
activities. Given the extent to which BMO’s operations rely on technology, it is important to maintain platforms that provide high levels of operational
reliability and resiliency, particularly with respect to business-critical systems. Technology innovations, such as advanced data management, analytical
tools and artificial intelligence, are being leveraged to provide insights that will improve the way we do business and serve our customers.
Third-Party Risk
BMO continues to use third parties in order to gain rapid access to new technologies, increase efficiencies, and improve competitiveness and
performance. This increases our reliance on third parties and sub-contractors to effectively deliver products and services to our customers, and
exposes us to the risk of business disruption and financial loss stemming from the breakdown of processes and controls at third parties and their
sub-contractors. To manage this risk, we have in place an enterprise-wide risk management program designed to identify, assess, manage and report
on risks stemming from the use of third parties through all stages of the third-party life cycle. This program is underpinned by a robust Third-Party
Risk Management Framework that establishes minimum requirements for the identification, assessment, management, monitoring and reporting of
this risk, in line with our organizational strategy and risk appetite. We continue to enhance our third-party risk management capabilities to help
maintain robust risk management, operational resiliency and compliance with relevant regulatory requirements.
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. We are committed to managing AML/ATF and sanctions risks effectively, and complying with all
relevant laws and regulations. Risks related to non-compliance with these requirements can include enforcement action, legal action and damage to
our reputation. Under the direction of the Chief Anti-Money Laundering Officer (CAMLO), BMO’s AML/ATF and sanctions compliance program promotes
effective governance and oversight across all of our businesses, and establishes appropriate policies, risk assessments and training, including
mandatory annual training for all employees. BMO’s AML/ATF and sanctions compliance program applies analytics, technology and professional
expertise in order to deter, detect and report suspicious activity. The CAMLO regularly reports to the Audit and Conduct Review Committee (ACRC)
of the Board of Directors and to senior management on the effectiveness of the AML compliance program. Amendments to Canada’s AML/ATF
regulations that came into effect in June 2021 are intended to improve the effectiveness of Canada’s AML/ATF regime and further align it with
international standards. We remain committed to effective compliance and the ongoing effort to protect the financial system and the communities
in which we operate.
BMO Financial Group 204th Annual Report 2021 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
Model Risk
Model risk is the potential for adverse consequences resulting from decisions that are based on incorrect or misused model results.
These adverse consequences can include financial loss, poor business decision-making and damage to reputation.
Model risk arises from the use of quantitative analytical tools that apply statistical, mathematical, economic, algorithmic or other advanced
techniques, such as artificial intelligence (AI) and machine learning (ML), to process input data and generate quantitative estimates. We use these
analytical tools, which range 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. These models produce results that 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 analytical 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, we mitigate
model risk by maintaining strong controls over the development, validation, implementation and use of all our models across the enterprise. We also
seek 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 deliver reasonable results.
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
or model results. Model risk is governed at BMO by the enterprise-wide Model Risk Management Framework.
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The Model Risk Management Framework sets out an end-to-end approach for model risk governance across the model life cycle and helps manage
model risk within the limits of our 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 serve as the first line of defence, while the Model
Risk group is the second line of defence, and the Corporate Audit Division is the third line of defence.
Our Model Risk group is responsible for developing and maintaining a risk-based Model Risk Management Framework that meets regulatory
expectations, as well as for oversight of the effectiveness of model processes, model inventory and the overall aggregation, assessment and
reporting of model risk. This framework incorporates the management of risks arising from advances in automated decision-making, such as
algorithmic trading, as well as AI and ML. Our 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 BMO’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, including 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 and tolerance ranges, which may result in actions
such as model review and parameter recalibration, as appropriate. This analysis serves to confirm the validity of a model’s performance over time.
Controls are in place to address identified issues and enhance our models’ overall performance.
All models used within BMO are subject to validation and ongoing monitoring to confirm that they are being used in accordance with our
framework. This framework applies to a wide variety of models, ranging from market, credit and non-financial risk models to stress testing, pricing
and valuation, and anti-money laundering models.
Non-Financial Risk Measurement
Beginning in fiscal 2020, the Office of the Superintendent of Financial Institutions permitted BMO, along with other AMA-approved banks, to use
the Basel II Standardized Approach for determining regulatory capital requirements for enterprise operational risk in the interim period prior to
implementation of the new Standardized Measurement Approach, as part of the final Basel III reforms. We expect to transition to the new Basel III
Standardized Measurement Approach for regulatory capital reporting in February 2023.
Caution
This Operational Non-Financial Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
108 BMO Financial Group 204th Annual Report 2021
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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 risk of failure to: comply with the law (in letter or in spirit) or maintain standards of care; implement
legal 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. The financial services industry is highly
regulated and subject to strict enforcement of legal and regulatory requirements. Banks globally continue to be subject to fines and penalties for a
number of regulatory and conduct issues, and we are exposed to risks in connection with regulatory and governmental inquiries, investigations and
enforcement actions. As rulemaking and supervisory expectations continue to evolve, we monitor developments to enable BMO to respond and
implement changes as required.
Under the direction of BMO’s General Counsel, our Legal & Regulatory Compliance group maintains enterprise-wide frameworks that identify,
assess, 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. BMO is subject to legal
proceedings, including investigations by regulators, arising in the ordinary course of business, and the unfavourable resolution of any such legal
proceedings could have a material adverse effect on our business, financial condition, results of operations, cash flows, capital position or credit
ratings; require material changes in our operations; result in loss of customers; and damage our reputation. The volume of legal proceedings and
the amount of damages and penalties assessed in such legal proceedings could increase in the future. 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. However, some legal proceedings may be highly complex, and include novel or untested legal claims
or theories. The outcome of such proceedings may be difficult to anticipate until late in the proceedings, which may last several years. Certain
businesses are also subject to fiduciary requirements, including policies and practices that address the responsibilities of a business to a customer
(such as 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, which could include 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.
BMO’s Anti-Corruption Office, through its global program, has articulated key principles and procedures necessary for the effective oversight of
compliance with anti-corruption legislation in the jurisdictions in which we operate. 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 (CAMLO), BMO’s Anti-Money Laundering Office is responsible for the governance, oversight and
assessment of principles and procedures designed to help ensure compliance with laws and regulations and internal risk parameters related to anti-
money laundering, anti-terrorist financing and sanctions measures. For additional discussion regarding BMO’s operational non-financial risk
management practices with respect to anti-money laundering measures, refer to the Anti-Money Laundering section.
All of these frameworks reflect the three-lines-of-defence operating model described previously. The operating groups and Corporate Services,
including Technology and Operations, 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 Corporate Services, including Technology and Operations, 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,
which may also help 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.
We recognize that our business is built on BMO’s reputation for good conduct. In recognition of this, we have adopted a wide range of practices
beyond BMO’s Code of Conduct to support the ethical conduct of our employees. BMO’s Ethical 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-Wide Risk Management Framework
and our focus on maintaining a strong risk culture. For further discussion, refer to the Risk Culture section.
We continue to respond to other global regulatory developments, including capital and liquidity requirements. Other global regulatory
developments include over-the-counter (OTC) derivatives reform, consumer protection measures and specific financial reforms, including proposed
reforms in respect of the assessment, management and disclosure of climate-related financial risk, 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 and the Liquidity and Funding Risk section. For a discussion of the impact of certain other regulatory developments, refer
to: Critical Accounting Estimates – Income Taxes and Deferred Tax Assets; Tax Legislation and Interpretations; Fiscal and Monetary Policies and Other
Economic Conditions in the Countries in which BMO Conducts Business; and Benchmark Interest Rate Reform.
BMO Financial Group 204th Annual Report 2021 109
MANAGEMENT’S DISCUSSION AND ANALYSIS
Consumer and Investor Protection – Regulators around the world continue to focus on consumer protection measures, including with respect to
seniors and other vulnerable customers, interactions with consumers, and standards of conduct for individuals in the financial services industry. In
Canada, these measures include amending the Bank Act to implement the Financial Consumer Protection Framework and amending the Financial
Consumer Agency of Canada Act to strengthen the mandate and powers of the Financial Consumer Agency of Canada. Additionally, investor protection
reforms to the Canadian securities regulatory regime are also proceeding. Canadian securities regulatory reforms include: client-focused reforms,
which enhance requirements regarding conflict of interest disclosure, suitability, know-your-product, know-your-client, relationship disclosure,
training and record-keeping; a ban on trailing commissions paid to dealers that do not make a suitability determination and a ban on deferred sales
charges; and enhanced protection for older and vulnerable clients. In the United States, banking regulators have heightened focus on matters
pertaining to racial equity and consumer protection, especially as they relate to the economic recovery of the communities we serve in the aftermath
of the COVID-19 pandemic. Key consumer concerns, including fair lending, and unfair, deceptive or abusive acts or practices (UDAAP) issues, are the
subject of heightened regulatory scrutiny in bank examination programs.
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U.S. Regulatory Reform – In May 2018, the U.S. Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP),
which made changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act, including raising the threshold for heightened prudential
standards. 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 prudential standards for bank holding companies and foreign banking organizations, including BMO. In two
separate rulemakings, in November 2019 and June 2020, the U.S. federal banking agencies finalized rules amending the restrictions on proprietary
trading and the ownership and sponsorship of private investment funds by banks and their affiliates. In 2021, the new U.S. administration appointed
new leadership at several U.S. federal agencies, and additional appointments are expected. Each such new appointee may initiate or modify future
regulatory reforms. Furthermore, due to congressional leadership changes as a result of the 2020 U.S. election, there is the possibility that new
legislation could result in further regulatory changes. We continue to monitor the rulemaking activities at all relevant agencies.
Other Regulatory Initiatives Impacting Financial Services in Canada – 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. Effective
August 31, 2021, a new Pay Equity Act and related regulations require banks to establish a functional pay equity plan within three years.
Implementing regulations are required for other earlier amendments to the Bank Act that will allow banks to undertake broader financial technology
activities. As part of the 2021 federal budget process, the Department of Finance Canada launched consultations regarding the reduction of
interchange fees that would benefit small businesses. These consultations precede any legislative modification to interchange fees, which were
previously reduced by legislation in 2018.
Climate Change and Environmental, Social and Governance (ESG) Matters – We continue to monitor rulemaking activities of securities regulatory
authorities and engage in programs and consultations in respect of risk management and disclosures related to ESG matters, as well as climate-
related litigation trends. Globally, we are also monitoring the emergence of formal supervisory regulatory frameworks governing climate change risk
analysis and reporting, including in Canada, the United States, the United Kingdom and the European Union.
Privacy – There is an increasing focus on data privacy regulation related to the use and safeguarding of personal information, and we continue to
advance our privacy program to comply with these evolving requirements. In Canada, significant reform to federal privacy laws is expected, including
new regulatory powers and penalties for breaching the digital privacy rights of individuals. In Quebec, Bill 64 has been adopted and will modernize
the province’s private-sector privacy regime and give new powers to privacy regulators to impose administrative monetary penalties. Ontario is also
considering private-sector privacy legislation. Outside of Canada, large fines and settlements have been imposed for breaches of privacy rights and for
failures to comply with regulatory privacy requirements, demonstrating heightened regulatory vigilance and enforcement. The California Consumer
Privacy Act (CCPA) came into effect on January 1, 2020, and is currently the most comprehensive privacy law at the state level in the United States.
The CCPA includes new and expanded privacy rights for California residents, including access and deletion rights with respect to their personal
information. Other states have introduced privacy legislation, leading to a growing patchwork of privacy laws in the United States. In the European
Union, new standard contractual clauses have been introduced to address the EU Commission’s concerns regarding the transfer of personal data to
countries lacking adequate privacy protection. In China, data localization and cross-border transfer rules remain complex. For additional discussion
regarding privacy, refer to the Cyber Security, Information Security and Privacy Risk section and the Operational Non-Financial Risk – Cyber Security
Risk section.
Derivatives Reform – G20 jurisdictions continue to implement new regulations as part of the OTC derivatives regulatory reform program. We
continue to monitor and prepare for the impact of OTC derivatives regulatory changes relating to margin, clearing, execution and business conduct
rules.
COVID-19 Pandemic – The COVID-19 pandemic has caused unprecedented disruption to global economies. There have been wide-ranging responses
to support individuals, businesses and local and national economies through governmental and regulatory actions, emergency orders and regulatory
relief. We have been engaged with our regulators around the world on the pandemic response, including our participation in various relief programs.
For additional discussion, refer to the General Economic Conditions section, and the Regulatory Capital Developments – COVID-19 Related Modifications
section.
The General Counsel and the Chief Compliance Officer regularly report to the Audit and Conduct Review Committee (ACRC) of the Board of Directors
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 laws and regulations. The program directs operating groups and Corporate Services to maintain policies,
procedures and controls that address these laws and regulations. Under the direction of the Chief Compliance Officer, we identify and report on
gaps and deficiencies, and we track remedial action plans. The CAMLO also regularly reports to the ACRC.
All BMO employees must regularly complete 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.
110 BMO Financial Group 204th Annual Report 2021
Strategic Risk
Strategic risk is the potential for loss or harm due to changes in the external business environment and failure to respond appropriately to these
changes as a result of inaction, ineffective strategies or poor implementation of strategies. Strategic risk also includes business risk, which arises
from the specific business activities of the enterprise, and the effects these could have on its earnings.
Strategic risk arises from external risks inherent in the business environment within which BMO operates, as well as from the potential for loss if we
are 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 Corporate Strategy team oversees the strategic planning process and works with the lines of business, along with ERPM, Finance and
Corporate Services, to identify, monitor and mitigate strategic risk across the enterprise. Our rigorous strategic risk management framework
encourages a consistent approach to developing strategies and incorporates information related to financial commitments.
The Corporate Strategy team 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, including macroeconomic developments, broad industry
trends and the actions of existing and new competitors, are considered in this process and inform strategic decisions within each line 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.
Business risk, as a component of strategic risk, encompasses the potential causes of earnings volatility that are distinct from credit, market or
non-financial risk factors. BMO’s profitability, and hence value, may be eroded by changes in the business environment or by failures of strategy or
execution due to changing client expectations or relatively ineffective responses to industry changes. Within BMO, each operating group is responsible
for controlling its respective business risk by assessing, managing and mitigating any risks arising from changes in its business volumes, cost
structures and potential competitor actions, among other factors.
The ability to implement the strategic plans developed by management influences our financial performance. 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 reviewed closely
in order to identify any significant emerging risk issues.
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Environmental and Social Risk
Environmental and social risk (E&S risk) is the potential for loss or harm, directly or indirectly, resulting from environmental or social impacts or
concerns, including climate change, related to BMO, our customers, suppliers or clients, and our impact on the environment and society.
Environmental and social factors may give rise to the risk of direct and indirect impacts over both the short and long term, including but not limited
to: climate change; pollution and waste; energy, water and other resource usage; biodiversity and land use; human rights; diversity, equity and
inclusion; labour standards; community health, safety and security; land acquisition and involuntary resettlement; Indigenous peoples’ rights and
consultation; and cultural heritage. We may be indirectly exposed to the risk of financial loss or reputational harm if our customers, suppliers or clients
are affected by environmental or social factors such that they are unable to meet their financial or other obligations to us. Environmental and social
factors may also give rise to the risk of reputational harm, for instance if we are perceived to not effectively respond to those factors.
We continue to monitor and respond to the rapidly evolving E&S risk-related regulatory and supervisory frameworks, guidance and consultation,
including developments in respect of the assessment, management and disclosure of climate-related financial risk in applicable jurisdictions, among
them Canada, the United States, the United Kingdom and the European Union. For further discussion, refer to the Legal and Regulatory Risk section.
Governance
At the Board of Directors level, the Risk Review Committee (RRC) and the Audit and Conduct Review Committee (ACRC) provide oversight of our
strategic E&S objectives and risk management. The Board meets with the Chief Sustainability Officer and General Counsel as necessary, to review
key sustainability issues and trends as they relate to us and the financial services industry in general. Climate change risk and disclosure training is
available to all Board of Directors members, including members of our subsidiaries’ boards.
The ACRC charter includes a duty to assess the effectiveness of our governance of sustainability issues. The ACRC meets with the Chief
Sustainability Officer and General Counsel to review and discuss key sustainability topics. A key role of the ACRC is to review and approve our
Sustainability Report and Public Accountability Statement. The ACRC also provides guidance on the strategy, action plans, performance objectives
and targets related to our operational footprint and sustainable finance commitments, and works to ensure management is adequately addressing
opportunities associated with the transition to a lower-carbon economy.
The RRC assists the Board of Directors in fulfilling its risk management oversight responsibilities, including overseeing the identification,
assessment and management of our E&S risks. Upon recommendation from the RRC, the Board of Directors annually approves our enterprise E&S risk
appetite statement and associated key risk metrics.
BMO’s General Counsel is responsible for our Sustainability program and sits on BMO’s Executive Committee. Our Sustainability Council comprises
senior leaders from the lines of business and Corporate Services across the organization, and provides oversight and leadership for our sustainability
strategy, including our Net Zero Ambition (described under E&S Risk Management below). The Sustainability team is responsible for coordinating the
development and maintenance of an enterprise-wide strategy that meets our overarching environmental and social responsibilities.
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The Chief Risk Officer (CRO) reports to the RRC on E&S risk matters, including climate change. Enterprise Risk and Portfolio Management (ERPM)
provides risk management oversight, supporting a disciplined approach to risk-taking in independent transaction approval and portfolio management,
policy formulation, risk reporting, scenario analysis, modelling and risk education. The CRO and the Risk Management team report to the RRC
periodically on E&S risk matters, including climate change.
E&S Risk Management
In recognition of its unique characteristics, E&S risk is classified in BMO’s Risk Taxonomy as a transverse risk. As part of our Enterprise-Wide Risk
Management Framework and Credit Risk Management Framework, we include provisions for governance and accountabilities, enhanced due
diligence, and provisions for escalations and exceptions. We have also developed a qualitative risk appetite statement on E&S risks, including climate
change.
Led by BMO’s Chief Sustainability Officer, the Sustainability team works in partnership with the lines of business (including the BMO Capital
Markets Sustainable Finance team and the BMO Global Asset Management team) and Corporate Services (including Risk Management) to manage E&S
risk within our organization and to make progress toward achieving our sustainability goals. BMO’s Net Zero Ambition is one of those goals. Our Net
Zero Ambition is to be our clients’ lead partner in the transition to a net zero world, and is supported by four pillars: Commitment, Capabilities, Client
Partnership and Convening for Climate Action. The team reports quarterly to the Sustainability Council on key developments in sustainability and
climate change and engages with external stakeholders to better understand the social consequences and environmental impacts of our operations
and financing decisions.
BMO is a signatory to the Equator Principles, the United Nations (UN) Principles for Responsible Banking (UNPRB) and the UN Principles for
Responsible Investment (UNPRI), and is a member of the Partnership for Carbon Accounting Financials (PCAF), as well as the Net-Zero Banking
Alliance (NZBA). These voluntary frameworks may include process and reporting requirements that are intended to be voluntary, or they may adopt a
“comply-or-explain” approach. We may also be exposed to reputation risk in the event that we do not fully implement these frameworks, either
as a result of our own actions or due to external factors.
• The Equator Principles serve as a common baseline and framework for financial institutions to identify, assess and manage E&S risks that may arise
in project financing. We apply this credit risk management framework to identify, assess and manage the E&S risk in these transactions.
• UNPRB provides a framework for a sustainable banking system and is the only sustainability framework for banks that is applicable across the
enterprise, providing guidance at the strategic, portfolio and transaction levels across all lines of business. The UNPRB enables any financial
institution genuinely committed to sustainable and responsible banking to set targets that are within the context of its capabilities and current
financial and operational position.
• UNPRI is a framework that encourages sustainable investing through the integration of environmental, social and governance considerations into
investment decision-making and ownership practices.
• PCAF is a global partnership of financial institutions working together to develop and implement a harmonized approach to assessing and disclosing
the greenhouse gas (GHG) emissions associated with loans and investments.
• NZBA is an industry-led, UN-convened organization of banks supporting the implementation of decarbonization strategies and the development
of an internationally coherent framework and guidelines for banks committed to aligning their lending and investment portfolios with net zero
emissions by 2050.
E&S factors continue to be integrated into existing risk management frameworks. We evaluate the E&S risks associated with credit and
counterparty transactions and exposures, and we apply enhanced due diligence processes to transactions with clients operating in higher risk sectors.
We also avoid doing business with borrowers that have poor track records in E&S risk management. Transactions with significant environmental or
social concerns may be escalated to BMO’s Reputation Risk Management Committee for consideration.
Our Sustainability team also partners with the Procurement and Corporate Real Estate groups on operational sustainability. Together these groups
are responsible for establishing and maintaining an operational environmental management approach, including the application of the framework set
out in ISO 14001, and for setting objectives and targets that are intended to align our operations with our sustainability performance goals.
To keep informed of emerging environmental and social risks, we participate in global forums with our peers and maintain an open dialogue
with our external stakeholders. BMO is a member of, and actively engaged in, sustainability-focused working groups of the United Nations
Environment Programme – Finance Initiative (UNEP-FI), serves on the Steering Committee of the Equator Principles Association, and chairs the
Cross-Sector Biodiversity Initiative.
Climate Change
We recognize that climate change poses potential risks to our organization, our clients and the communities in which we operate. In response, in
March 2021, we announced the establishment of the BMO Climate Institute. It brings together our existing internal capabilities and external experts
and provides a platform for collaboration to accelerate progress in our respective areas of work and to develop climate mitigation and adaptation
solutions for our clients.
In line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we recognize that climate change exposes
the world to physical risks and transition risks.
Physical risks are risks associated with a changing climate, resulting in both acute and chronic physical effects. These risks may include an
increase in the frequency and intensity of weather-related events, such as storms, floods, wildfires and heatwaves, or longer-term changes, such as
temperature changes, rising sea levels and changes in soil productivity. To date, key climate change indicators, weather-related events and
associated scientific research indicate that global exposure to climate change risks may be accelerating.
Transition risks are risks associated with the shift to a net zero carbon economy. These risks may arise from climate-related policy changes,
technological changes and behavioural changes involving carbon-pricing mechanisms or a shift in consumer preferences toward lower-carbon
products and services. We continue to closely monitor policy, technological and behavioural changes, some of which may unfold more rapidly than
others as consumers, clients, investors, governments and communities act to enhance their resiliency to climate-related risks.
112 BMO Financial Group 204th Annual Report 2021
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We consider the physical and transition risks arising from climate change to be transverse risk drivers that impact all of the material risks in our
Risk Taxonomy, namely credit and counterparty risk, market risk, insurance risk, liquidity and funding risk, operational non-financial risk, legal and
regulatory risk, reputation risk and strategic risk. Accordingly, we are integrating climate change considerations into our Enterprise-Wide Risk
Management Framework.
To identify, assess and manage specific climate-related risks arising from our customer and client relationships, we follow internal guidelines that
outline the scope of E&S risk and establish procedures, including enhanced due diligence, to determine the extent of our exposure to any such risk.
Our Environmental and Social Risk Financing Guideline includes direction on developing an understanding of specific climate change impacts on
borrowers and their operations, including regulatory and/or legislative changes. To avoid over-exposure to any one sector or geographic region
that might be exposed to climate-related risks, we maintain a diversified lending portfolio. We continue to conduct sector-specific reviews across
our lending portfolio to assess exposure to climate-sensitive industries. As a signatory to the Equator Principles, we have implemented the EP4
framework, which includes requirements related to climate change for transactions within its scope.
We are developing a climate change scenario analysis program, in line with the TCFD recommendations, analyzing both physical and transition
risks for a selection of climate-sensitive lending portfolios. We plan to continue expanding such analyses across sectors and risk types, in line with
internal policies and any applicable regulatory requirements. Going forward, this evolving scenario analysis program will inform our process for
climate-related risk assessment.
The GHG Protocol Corporate Standard classifies a company’s greenhouse gas (GHG) emissions under three scopes. Scope 1 emissions are direct
emissions from owned or controlled sources, Scope 2 emissions are indirect emissions from the generation of purchased energy and Scope 3
emissions are indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company. We track and analyze our Scope 1
and Scope 2 emissions, as well as Scope 3 emissions associated with our waste generation and business travel. We also have an ongoing operational
approach to GHG emissions quantification and energy efficiency.
We continue to assess the credibility, reliability, comparability and decision-making usefulness of various measurement, assessment and
reporting approaches, as well as how they could be incorporated into our climate risk management program and associated disclosures.
Codes of Conduct and Statement on Human Rights
BMO’s Board-approved Code of Conduct reflects our commitment to manage our business responsibly. Our Statement on Human Rights describes our
approach to human rights in the context of the UN Guiding Principles on Business and Human Rights. We report publicly under the United Kingdom
Modern Slavery Act 2015, and we have in place a Supplier Code of Conduct, which outlines our standards for integrity, fair dealing and sustainability.
We expect our suppliers to be aware of, understand and respect the principles of our Supplier Code of Conduct.
Reporting
We have supported the TCFD since 2018, and we have adopted the framework of the TCFD to guide climate-related financial disclosures, as set out in
our Climate Report. Our Sustainability Report is prepared in accordance with the Global Reporting Initiative (GRI) Standards (core option) and the GRI
Financial Services Sector Disclosure, and integrates the disclosure frameworks of the TCFD and the Sustainability Accounting Standards Board. This
report includes the Public Accountability Statements for Bank of Montreal, Bank of Montreal Mortgage Corporation, BMO Life Assurance Company and
BMO Life Insurance Company, outlining certain aspects of Bank of Montreal’s contributions, and the contributions of its affiliates with operations in
Canada, to the Canadian economy and society. These statements meet the requirements of the Canadian federal government’s Public Accountability
Statement regulations. Selected environmental and social indicators in the Sustainability Report are assured by the shareholders’ auditors.
Caution
This Environmental and Social Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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.
Our reputation is built on our commitment to high standards of business conduct 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
preserve our customers’ 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
have a negative effect that is as significant as the effect of financial risks, we actively promote a culture which encourages employees to raise
concerns and supports them in doing so, with zero tolerance for retaliation.
In our corporate governance practices and Enterprise-Wide Risk Management Framework, we have put specific controls in place to manage
risks to our reputation. We seek to identify activities or events that could impact our reputation with customers, regulators or other stakeholders.
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 employee conduct, escalates instances of misconduct involving
significant reputation risk to BMO’s Reputation Risk Management Committee, as appropriate.
BMO Financial Group 204th Annual Report 2021 113
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 of the consolidated financial statements. Note 17 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 estimates, the impact
would be recorded in future periods.
The extent of the continuing impact of the COVID-19 pandemic on the Canadian and U.S. economies remains uncertain and difficult to predict,
including government and regulatory responses to the pandemic, which could vary by country and region. By their very nature, the judgments and
estimates that we make for the purposes of preparing financial statements relate to matters that are inherently uncertain. However, we have
detailed policies and control procedures that are intended to ensure the judgments made in estimating these amounts are well controlled,
independently reviewed and consistently applied from period to period. We believe that the estimates of the value of our assets and liabilities are
appropriate.
For a more detailed discussion of the use of estimates, refer to Note 1 of the consolidated financial statements.
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Allowance for Credit Losses
The allowance for credit losses 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 the Office of the Superintendent of Financial Institutions. 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.
The determination of a significant increase in credit risk considers 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, as we deem necessary.
We applied experienced credit judgment to reflect the continuing impact of the uncertain environment on credit conditions and the economy as a
result of the COVID-19 pandemic. 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 any such
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 economic and market conditions – a base scenario, which in our view represents the most probable outcome, as well as benign and adverse
scenarios, all developed by our Economics group. The adverse scenario is also described below, with the focus on such a scenario, given continued
economic uncertainty. The allowance on performing loans is sensitive to changes in economic forecasts and the probability weight assigned to each
forecast scenario. When changes in economic performance in the forecasts are measured, 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 the 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 the 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 or a deterioration in the credit quality
of the loan portfolio would both drive an increase in the allowance on performing loans.
Our total allowance for credit losses as at October 31, 2021 was $2,958 million ($3,814 million as at October 31, 2020) and comprises an
allowance on performing loans of $2,447 million and an allowance on impaired loans of $511 million ($3,075 million and $739 million, respectively,
as at October 31, 2020). The allowance on performing loans decreased $628 million year-over-year, primarily driven by an improving economic
outlook, positive credit migration and movements in foreign exchange rates, partially offset by the impact of the uncertain environment on future
credit conditions, including adoption of a higher adverse scenario weighting as well as a more severe adverse scenario, and portfolio growth.
As at October 31, 2021, our base case scenario depicts a stronger economic forecast in both Canada and the United States. In Canada, annual real
GDP growth averages 4.0% over the next 12 months as a result of policy stimulus, easing of pandemic restrictions, and a reduction in supply-chain
disruptions, combined with a wave of pent-up demand. Annual real GDP growth is expected to average 3.9% over the following 12 months, as the
economic recovery continues and spending returns to more normal levels. The Canadian unemployment rate is forecasted to decline steadily, though
remains elevated, averaging 6.6% over the next 12 months and 5.7% over the following year. The U.S. economy is expected to follow a similar
trajectory over the next 12 months, albeit with a higher level of growth compared with Canada at 4.8%, given a larger policy stimulus and an initially
faster vaccine rollout. Real GDP is expected to grow 2.7% in the following 12 months. The U.S. unemployment rate is forecasted to average 4.7% over
the next 12 months and then fall to 3.7% in the following year. Our base case economic forecast as at October 31, 2020 depicted more moderate
economic growth in both Canada and the United States over the near-term projection period. 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 $1,725 million as at October 31, 2021 ($2,375 million as at October 31, 2020), compared
with the reported allowance on performing loans of $2,447 million ($3,075 million as at October 31, 2020).
114 BMO Financial Group 204th Annual Report 2021
As at October 31, 2021, our adverse case economic forecast depicts a contracting economy, with annual average real GDP declining in both
Canada and the United States over the next 12 months by 2.7% and 1.2%, respectively, with both contracting at a rate of 1.1% in the following
12 months. The adverse case scenario assumes a sustained large increase in COVID-19 cases, accompanied by renewed restrictions on a broad range
of activities leading to a decline in consumer and business confidence, and prolonged supply-chain disruptions. Unemployment rates remain elevated
in both Canada and the United States, increasing from an average of 10.8% over the next 12 months to an average of 12.7% in the following year in
Canada, and from 8.5% to 11.0% in the United States over the same period. Despite adopting a more severe adverse scenario during fiscal 2021, the
adverse case economic outlook as at October 31, 2020 depicted a more severe economic contraction in Canada and the United States compared with
the adverse case as at October 31, 2021, due to the improvement in economic conditions year-over-year. 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 $3,825 million as at October 31, 2021 ($4,875 million as at October 31, 2020),
compared with the reported allowance on performing loans of $2,447 million ($3,075 million as at October 31, 2020).
The following tables show the key economic variables used to estimate the allowance on performing loans during the forecast period. The values
shown represent the national annual average levels or growth rates for the next 12 months and the subsequent 12 months following each reporting
period for all scenarios. While the values disclosed below are national variables, we use regional variables in the underlying models where
appropriate.
All figures are annual average values
First 12 months Subsequent 12 months
First 12 months Subsequent 12 months
First 12 months Subsequent 12 months
Benign scenario
As at October 31, 2021
Base scenario
Adverse scenario
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Real GDP growth rates (1)
Canada
United States
Corporate BBB 10-year spread
Canada
United States
Unemployment rates
Canada
United States
Housing price index (1)
Canada (2)
United States (3)
6.3%
7.1%
1.4%
0.9%
6.0%
4.2%
18.2%
14.6%
5.5%
4.0%
1.7%
1.1%
4.9%
3.2%
10.2%
6.7%
4.0%
4.8%
1.8%
1.2%
6.6%
4.7%
15.1%
12.3%
3.9%
2.7%
2.0%
1.5%
5.7%
3.7%
5.2%
4.3%
(2.7)%
(1.2)%
3.6%
4.2%
10.8%
8.5%
(6.4)%
(6.1)%
(1.1)%
(1.1)%
4.4%
4.5%
12.7%
11.0%
(18.0)%
(15.5)%
Benign scenario
As at October 31, 2020
Base scenario
Adverse scenario
All figures are annual average values
First 12 months
Subsequent 12 months
First 12 months
Subsequent 12 months
First 12 months
Subsequent 12 months
Real GDP growth rates (1)
Canada
United States
Corporate BBB 10-year spread
Canada
United States
Unemployment rates
Canada
United States
Housing price index (1)
Canada (2)
United States (3)
3.7%
1.6%
1.8%
1.7%
7.4%
6.4%
10.3%
4.6%
6.4%
6.0%
1.9%
1.7%
6.1%
4.8%
7.7%
4.5%
1.8%
(0.4)%
2.2%
2.0%
8.9%
8.0%
7.2%
2.4%
4.2%
4.0%
2.2%
2.0%
7.5%
6.0%
2.8%
2.1%
(4.4)%
(5.1)%
3.6%
3.9%
12.7%
11.5%
(1.2)%
(2.4)%
(1.1)%
(1.2)%
4.5%
4.1%
13.9%
12.8%
(8.7)%
(6.2)%
(1) Real gross domestic product and housing price index are four-quarter averages of year-over-year growth rates.
(2) In Canada, we use the HPI Benchmark Composite.
(3) In the United States, we use the National Case-Shiller House Price Index.
The table below shows our expectations for the real GDP year-over-year growth rates for the base case in Canada and the United States to trend by
calendar quarter. In addition, the table includes the real GDP level compared with calendar Q4 2019, which marked the quarterly peak in real GDP
prior to the beginning of the pandemic in calendar Q1 2020, expressed as a percentage.
Calendar quarter ended
Real GDP growth rates year-over-year
Canada
United States
Real GDP level compared to calendar Q4 2019
Canada
United States
December 31,
2021
March 31,
2022
June 30,
2022
September 30,
2022
December 31,
2022
March 31,
2023
June 30,
2023
September 30,
2023
3.4%
5.5%
3.4%
4.6%
5.1%
3.7%
5.2%
3.1%
4.4%
2.7%
3.5%
2.5%
2.6%
2.4%
2.1%
2.3%
100.2%
103.1%
101.6%
103.8%
103.0%
104.6%
104.0%
105.3%
104.6%
105.9%
105.1%
106.5%
105.6%
107.0%
106.1%
107.6%
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 the current probability-weighted scenarios and based on the current risk profile of loan exposures, if all performing loans were in Stage 1, our
models would generate an allowance on performing loans of approximately $1,775 million ($2,300 million in 2020), compared with the reported
allowance on performing loans of $2,447 million ($3,075 million in 2020).
BMO Financial Group 204th Annual Report 2021 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
Information on the Provision for Credit Losses for the years ended October 31, 2021 and 2020 can be found in the Total Provision for Credit
Losses section. Additional information on the process and methodology for determining the allowance for credit losses can be found in the discussion
of Credit and Counterparty Risk, as well as in Note 4 of the consolidated financial statements.
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 an 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, 2021, as well as a sensitivity analysis of Level 3 financial
instruments, is disclosed in Note 17 of the consolidated financial statements. For instruments that are valued using models, we consider all
reasonable available information and maximize the use of observable market data.
Valuation Product Control (VPC), a group independent of the trading lines of business, seeks to ensure that the fair values at which financial
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instruments are recorded are materially accurate by:
• Developing and maintaining valuation policies, procedures and methodologies in accordance with regulatory requirements and IFRS
• Establishing official rate sources for valuation data inputs, and
• Providing independent review of portfolios for which prices supplied by traders are used for valuation
When VPC determines that adjustments to valuations are needed to better reflect fair value estimates based on data inputs from its official rate
sources, the adjustments are subject to review and approval by the Valuation Steering Committee (VSC).
The VSC is our senior management valuation committee. It meets at least monthly to address the more challenging valuation issues related to
our portfolios, approves valuation methodology changes as needed to enhance fair value estimates, and acts as a key forum for the discussion of
sources of valuation uncertainty and how these have been addressed by management.
As at October 31, 2021, the total valuation adjustments were a net decrease in value of $124 million for financial instruments carried at fair
value on the Consolidated Balance Sheet (a net decrease of $117 million as at October 31, 2020).
Pension and Other Employee Future Benefits
Our pension and other employee future benefits expense is calculated by independent actuaries using assumptions determined by management.
Differences between actual experience and the assumptions used are 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 plans, using high-quality corporate bonds with terms matching the plans’ specific cash flows.
Additional information regarding accounting for pension and other employee future benefits, including a sensitivity analysis for key assumptions,
is included in Note 21 of the consolidated financial statements.
Impairment of Securities
We have investments in associates and joint ventures, which we review at each quarter-end reporting period in order to identify and evaluate those
that show indications of possible impairment. For these investments, 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 accounting for debt securities measured at amortized cost or FVOCI, other securities, the related allowance for
credit losses and the determination of fair value is included in Note 3 and Note 17 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 reputation risks.
We actively seek to identify, assess, manage (including mitigation), monitor and report any tax risks that may arise in order to understand our financial
exposure. Our intention is to comply fully with tax laws. We consider all applicable laws in connection with commercial activities, and where tax laws
change in our business or for our customers, we adapt and make changes 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 we 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.
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in either the Consolidated Statement
of Income or the 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, we record the 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 the interpretations and
assumptions differ from those of tax authorities or if the timing of reversals is not as expected, the 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 deferred
income tax assets will be realized. Factors used to assess the probability of realization are past experience of income and capital gains, forecasts of
future net income before taxes, and the remaining expiration period of tax loss carry forwards and tax credits. Changes in assessment of these factors
could increase or decrease the provision for income taxes in future periods.
116 BMO Financial Group 204th Annual Report 2021
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If income tax rates increase or decrease in future periods in a jurisdiction, the provision for income taxes for future periods will increase or
decrease accordingly. Furthermore, 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, an increase in the Canadian or U.S. federal tax rate would increase our respective net deferred
tax asset, which would result in one-time corresponding tax benefits to net income. In addition, an increase in the Canadian or U.S federal tax rate
would decrease our annual net income. The size of this annual net income decrease and any impact on the respective net deferred tax asset is
uncertain at this point and will be dependent on many factors, including the tax rates enacted and their timing, phase-in provisions and details
regarding any legislation and its interpretation.
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,210 million, to date, in
respect of certain 2011-2016 Canadian corporate dividends. Those reassessments denied certain dividend deductions on the basis that the dividends
were received as part of a “dividend rental arrangement”. The tax rules raised by the Canadian tax authorities were prospectively addressed in the
2015 and 2018 Canadian federal budgets. In October 2021, we filed Notices of Appeal with the Tax Court of Canada and the matter is now in
litigation. We expect to be reassessed in future years for significant additional income tax for similar activities. We remain of the view that our tax
filing positions were appropriate and intend to challenge all reassessments. However, if such challenges are unsuccessful, the additional expense
would negatively impact net income.
Additional information regarding accounting for income taxes is included in Note 22 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 a business is acquired. 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. In particular, we have considered the impact of the COVID-19 pandemic in the current year by updating key assumptions
accordingly, including the estimated cost of capital, discount rates and actual and future business performance of our CGUs. Differences in judgments
and assumptions could affect the determination of fair value and any resulting impairment write-down.
During the year, we recognized a goodwill write-down of $779 million ($nil in 2020) due to the implied valuation from the definitive agreement
to sell our EMEA Asset Management business (part of our Wealth Management CGU) to Ameriprise and our allocation of goodwill to the business
being sold. As at October 31, 2021, no goodwill impairment was recorded for the other CGUs as the estimated fair value of the CGUs was greater than
their 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, it will be written
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 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 result from a change in the assumptions for interest rates and equity market values. If the assumed future interest rates were
to increase by one percentage point, earnings before tax would increase by approximately $48 million. A reduction of one percentage point would
lower earnings before tax by approximately $48 million. If the assumed equity market value increased by 10%, earnings before tax would increase
by approximately $22 million. A reduction of 10% would lower earnings before tax by approximately $22 million.
Additional information on insurance-related liabilities is provided in Note 14 of the consolidated financial statements, and information on
insurance risk is provided in the Insurance Risk section.
BMO Financial Group 204th Annual Report 2021 117
MANAGEMENT’S DISCUSSION AND ANALYSIS
Provisions
A provision is recognized if, as a result of a past event, we have 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 amount
required to settle any obligation as at the balance sheet date, considering the risks and uncertainties surrounding the obligation. For example, BMO
and its subsidiaries are involved in various legal actions in the ordinary course of business. Factors considered in making the estimate for any
obligation related to these legal actions include a case-by-case assessment of specific facts and circumstances, past experience and the opinions of
legal experts. Management and internal and external experts are involved in estimating any amounts that may be required. Certain provisions also
relate to restructuring initiatives that we have undertaken. These restructuring provisions are recorded at management’s best estimate of the
amounts that will ultimately be paid out.
The actual costs of settling some obligations may be substantially higher or lower than the amount of the provisions.
Additional information regarding provisions is included in the Legal and Regulatory Risk section and in Note 24 of the consolidated financial
statements.
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Leases
We enter into leases as a lessee for which we recognize a lease liability and a corresponding right-of-use asset. In calculating our lease liability and
corresponding right-of-use asset, we assess whether a contract is a lease by determining if we have the right to control the asset based on our ability
to make decisions or direct how and for what purpose the asset is used. In accounting for leases, we must evaluate the lease term based on the
terms of the lease contract, including any extension or termination options that we are reasonably certain to exercise based on the economic
rationale underlying the decision. In addition, for leases where the interest cost is explicitly stated, we must estimate our incremental borrowing
rate to discount the related lease liabilities, based on our expected costs of secured borrowing for the lease term.
Additional information on leases is provided in Note 9 of the consolidated financial statements.
Transfer of Financial Assets
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. During 2020, we also participated in programs offered by
the Canadian and U.S. governments in response to the COVID-19 pandemic to support businesses facing economic hardship, including the Canada
Emergency Business Account (CEBA) program and the Business Development Bank of Canada (BDC) Co-Lending 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. Where 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 on our Consolidated
Balance Sheet.
Additional information concerning the transfer of financial assets is included in the Off-Balance Sheet Arrangements section, as well as in Note 6
of the consolidated financial statements.
Consolidation of Structured Entities
In the normal course of business, we enter into arrangements with SEs, using them to secure customer transactions or transfer assets to obtain
sources of liquidity by securitizing financial assets, or pass our credit risk to holders of the vehicles’ securities. For example, we enter into transactions
with SEs where we transfer assets, including mortgage loans, mortgage-backed securities, credit card loans, real estate lines of credit, auto loans and
equipment loans, in order to obtain alternate sources of funding, or as part of our trading activities. We are required to consolidate a SE if we control
the SE. We control a SE when we have power over the SE, exposure or rights to variable returns as a result of our involvement, and the ability to
exercise power to affect the amount of those returns.
Additional information concerning interests in SEs is included in the Off-Balance Sheet Arrangements section, as well as in Note 7 of the
consolidated financial statements.
Caution
This Critical Accounting Estimates section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
118 BMO Financial Group 204th Annual Report 2021
Changes in Accounting Policies in 2021
IBOR Reform — Phase 2 amendments
Effective November 1, 2020, we early adopted Phase 2 amendments to IFRS 9, Financial Instruments, IAS 39, Financial Instruments: Recognition and
Measurement (IAS 39), IFRS 7, Financial Instruments: Disclosures, and IFRS 4, Insurance Contracts, as well as IFRS 16, Leases. These amendments
address issues that arise from the implementation of IBOR reform, where IBORs are replaced with alternative benchmark rates.
For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is
as a result of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate
with no immediate gain or loss recognized. The amendments also provide additional temporary relief from the application of specific IAS 39 hedge
accounting requirements to hedging relationships affected by IBOR reform. For example, there is an exception from the requirement to discontinue
hedge accounting as a result of changes to hedge documentation required solely by IBOR reform. The amendments also require additional disclosure
that allows users to understand the impact of IBOR reform on our financial instruments and risk management strategy.
Further details are provided in Note 1 of the consolidated financial statements.
Conceptual Framework
Effective November 1, 2020, we adopted 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 had no impact on our accounting policies.
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Future Changes in Accounting Policies
IFRS 17, Insurance Contracts (IFRS 17)
In June 2020, the IASB issued amendments to IFRS 17, Insurance Contracts (IFRS 17). The amendments include a deferral of the effective date for
IFRS 17, resulting in a new adoption date for the bank of November 1, 2023 instead of November 1, 2022. They also include amendments to simplify
and revise certain requirements, and provide additional transition relief. We continue to assess the impact of the standard on our future financial
results. Further information on these amendments can be found in Note 1 of the consolidated financial statements.
Caution
This Future Changes in Accounting Policies 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 key management personnel on the same terms that we offer these services to
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. Banking services are provided to joint ventures
and equity-accounted investees on the same terms offered to 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 of the
consolidated financial statements.
BMO Financial Group 204th Annual Report 2021 119
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 qualifications, experience and geographical
reach relevant to serving 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 challenging 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 Canada) and the CPAB.
In 2021, 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 professional skepticism. In addition, the most recent
comprehensive review was completed in 2020, based on the latest recommendations of CPA Canada and 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 the review, the ACRC was satisfied with the
performance of the shareholders’ auditors.
Independence of the shareholders’ auditors is overseen by the ACRC in accordance with BMO’s 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 its policy limiting the services provided by
the shareholders’ auditors that are not related to their role as auditors. All services must comply with our Auditor Independence Standard, as well as
professional standards and securities regulations governing auditor independence. 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 in accordance with our
Auditor Independence Standard.
Shareholders’ Auditors’ Fees
(Canadian $ in millions)
Fees (1)
Audit fees
Audit-related fees (2)
Tax services fees (3)
All other fees (4)
Total
2021
25.2
3.4
0.1
1.3
30.0
2020
22.3
2.9
0.1
1.5
26.8
(1) The classification of fees is based on applicable Canadian securities laws and U.S. Securities and
Exchange Commission definitions.
(2) Includes fees paid for specified procedures on BMO’s Proxy Circular and other services, and French
translation of financial statements, related continuous disclosures and other public documents
containing financial information.
(3) Includes fees paid for tax compliance services provided to various BMO-managed investment company
complexes.
(4) Includes other fees paid by BMO-managed investment company complexes.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
120 BMO Financial Group 204th Annual Report 2021
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, 2021, under the supervision of the CEO and the CFO, BMO Financial Group’s (BMO) management evaluated the effectiveness of
the design and operation of its 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 the bank’s disclosure controls and procedures were effective as at October 31, 2021.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed under the supervision of the bank’s CEO and CFO, 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.
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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 of
BMO
• 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
BMO are being made only in accordance with authorizations by management and directors of BMO, and
• Are designed to provide reasonable assurance that any unauthorized acquisition, use or disposition of BMO’s assets that 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, 2021.
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, 2021, in
accordance with the criteria established in the 2013 COSO Framework.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the year ended October 31, 2021 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 204th Annual Report 2021 121
SUPPLEMENTAL INFORMATION
Supplemental Information
Certain comparative figures have been reclassified to conform with the current year’s presentation and for changes in accounting policies. Refer to Note 1 of the
consolidated financial statements.
Certain measures and ratios as provided in this section are non-GAAP as indicated. For further information on non-GAAP measures and ratios, please refer to the
Non-GAAP and Other Financial Measures section.
For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures, refer to the Glossary of
Financial Terms.
Table 1: Shareholder Value and Other Statistical Information
As at or for the year ended October 31
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
Market Price per Common Share ($)
High
Low
Close
Common Share Dividends
Dividends declared per share ($)
Dividend payout ratio (%) (1)
Dividend yield (%)
Dividends on common shares ($ 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 ($)
Market capitalization ($ 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
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
138.67
78.82
134.37
104.75
55.76
79.33
106.51
86.25
97.50
109.00
93.60
98.43
104.15
83.58
98.83
4.24
36.5
3.2
2,746
4.24
56.1
5.3
2,723
14.0
15.7
75.9
5.1
(3.1)
(14.6)
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
648,136
647,163
648,676
80.18
87.1
11.6
10.4
1.68
645,889
641,424
642,128
77.40
51.2
10.5
10.3
1.02
639,232
638,881
640,360
71.54
62.3
11.3
10.3
1.36
639,330
642,930
644,913
64.73
62.9
12.0
10.9
1.52
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
644,130 650,730
648,476 644,407
649,806 648,615
39.41
38.4
9.7
9.9
1.47
43.22
46.8
11.8
11.7
1.66
988,175
981,140
463,235
949,261
942,450
466,886
852,195
833,252
433,170
773,293
754,295
387,005
709,604
722,626
370,899
687,960
707,122
356,528
641,881
664,391
318,823
588,659
593,928
290,621
537,044 524,684
555,431 543,931
263,596 246,129
Average common shareholders’ equity (1)
Goodwill and acquisition-related intangible assets
50,451
(5,946)
48,235
(6,750)
44,170
(6,714)
39,754
(6,628)
38,962
(6,818)
36,997
(7,101)
34,135
(6,720)
29,680
(5,303)
26,956
(4,097)
24,863
(4,066)
Average tangible common equity (1) (2)
44,505
41,485
37,456
33,126
32,144
29,896
27,415
24,377
22,859
20,797
Return on Equity and Assets
Return on equity (%) (1)
Adjusted return on equity (%) (1) (2)
Return on tangible common equity (%) (1) (2)
Adjusted return on tangible common equity (%) (1) (2)
Return on average assets (%) (1)
Adjusted return on average assets (%) (1) (2)
Return on average risk-weighted assets (%) (3)
Adjusted return on average risk-weighted assets (%) (3)
14.9
16.7
17.0
18.9
0.79
0.88
2.38
2.66
10.1
10.3
11.9
11.9
0.54
0.55
1.51
1.54
12.6
13.7
15.1
16.1
0.69
0.75
1.86
2.01
13.3
14.6
16.2
17.5
0.72
0.79
1.97
2.16
13.2
13.6
16.3
16.4
0.74
0.76
1.98
2.04
12.1
13.1
15.3
16.1
0.65
0.71
1.71
1.85
12.5
13.3
15.8
16.4
0.66
0.70
1.84
1.96
14.0
14.4
17.3
17.4
0.72
0.74
1.85
1.91
14.9
15.0
17.9
17.7
0.74
0.75
1.93
1.94
15.9
15.5
19.4
18.5
0.75
0.73
1.96
1.92
Other Statistical Information
Employees (4)
Canada
United States
Other
Total
Bank branches
Canada
United States
Other
Total
Automated banking machines
Canada
United States
Total
30,350
12,090
1,423
29,296
12,492
1,572
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
43,863
43,360
45,513
45,454
45,200
45,234
46,353
46,778
45,631
46,272
877
524
4
877
528
4
891
561
4
908
571
4
926
573
4
942
576
4
939
592
4
934
615
4
933
626
4
930
638
3
1,405
1,409
1,456
1,483
1,503
1,522
1,535
1,553
1,563
1,571
3,312
1,539
4,851
3,268
1,552
4,820
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
2,596
1,375
4,225
3,971
The adoption of new IFRS standards in 2014, 2015, 2018 and 2020 only impacted our results prospectively.
(1) For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures, refer to the Glossary of Financial Terms.
(2) These measures are non-GAAP. Further information on the use of non-GAAP measures and ratios is provided in the Non-GAAP and Other Financial Measures section.
(3) Risk-weighted assets are disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline.
(4) Reflects full-time equivalent number of employees, comprising full-time and part-time employees and adjustments for overtime hours.
122 BMO Financial Group 204th Annual Report 2021
Table 2: Summary Income Statement and Growth Statistics
($ millions, except as noted)
For the year ended October 31
2021
2020
2019
2018
2017
5-year
CAGR
10-year
CAGR
Reported Results
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB (1)
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
Attributable to equity holders of the bank
Attributable to non-controlling interest in subsidiaries
Net income
Adjusting Items impacting Revenue (Pre-tax)
Impact of divestitures
Adjusting Items impacting Provision for Credit Losses (Pre-tax)
Decrease in the collective allowance for credit losses
Adjusting Items impacting CCPB (Pre-tax)
Reinsurance adjustment
Adjusting Items impacting Non-Interest Expense (Pre-tax)
Acquisition integration costs
Amortization of acquisition-related intangible assets
Impact of divestitures
Restructuring (costs) reversals
Benefit from the remeasurement of an employee benefit liability
Adjusting items included in reported pre-tax income
Impact on tax of adjusting items
Total of adjusting items included in reported net income after tax
Impact on diluted EPS ($)
Adjusted Results (1)
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
Attributable to equity holders of the bank
Attributable to non-controlling interest in subsidiaries
Adjusted net income
Earnings per Share (EPS) ($)
Basic
Diluted
Adjusted diluted (1)
Year-over-Year Growth-Based Statistical Information (%)
Net income growth
Adjusted net income growth (1)
Diluted EPS growth
Adjusted diluted EPS growth (1)
Five-year and ten-year CAGR based on CGAAP in 2011 and IFRS in 2016 and 2021.
The adoption of new IFRS standards in 2018 and 2020 only impacted our results prospectively.
27,186
(1,399)
25,787
(20)
(15,509)
10,258
(2,504)
7,754
7,754
–
7,754
25,186
(1,708)
23,478
(2,953)
(14,177)
6,348
(1,251)
5,097
5,097
–
5,097
25,483
(2,709)
22,774
(872)
(14,630)
7,272
(1,514)
5,758
5,758
–
5,758
22,905
(1,352)
21,553
(662)
(13,477)
7,414
(1,961)
5,453
5,453
–
5,453
22,107
(1,538)
20,569
(746)
(13,192)
6,631
(1,292)
5,339
5,337
2
5,339
5.3
(1.9)
5.8
nm
3.7
12.4
17.9
10.9
10.9
nm
10.9
6.1
2.3
6.3
nm
5.9
9.9
11.1
9.6
9.8
nm
9.8
–
na
na
76
na
na
–
na
29
–
–
(9)
(88)
(886)
24
–
(930)
33
(897)
(1.38)
27,157
(1,399)
25,758
(20)
(14,550)
11,188
(2,537)
8,651
8,651
–
8,651
11.60
11.58
12.96
52.1
66.3
53.3
68.0
–
–
–
(14)
(121)
–
–
–
(135)
31
(104)
(0.16)
25,186
(1,708)
23,478
(2,953)
(14,042)
6,483
(1,282)
5,201
5,201
–
5,201
7.56
7.55
7.71
(11.5)
(16.8)
(12.8)
(18.2)
–
–
(25)
(13)
(128)
–
(484)
–
(650)
159
(491)
(0.77)
–
–
–
(34)
(116)
–
(260)
277
(133)
(396)
(529)
(0.82)
(87)
(149)
–
(59)
–
(219)
61
(158)
(0.25)
25,483
(2,684)
22,799
(872)
(14,005)
7,922
(1,673)
6,249
6,249
–
6,249
22,905
(1,352)
21,553
(662)
(13,344)
7,547
(1,565)
5,982
5,982
–
5,982
22,107
(1,538)
20,569
(822)
(12,897)
6,850
(1,353)
5,497
5,495
2
5,497
8.68
8.66
9.43
5.6
4.5
6.0
4.9
8.19
8.17
8.99
2.1
8.8
3.3
10.3
7.93
7.90
8.15
15.3
9.5
14.3
8.3
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
na
na
na
na
na
na
na
na
na
na
6.2
2.3
6.5
nm
5.6
10.3
10.8
10.2
10.2
nm
10.2
9.0
9.1
9.8
na
na
na
na
na
na
na
na
na
na
na
na
na
5.2
(1.9)
5.7
nm
3.1
12.3
15.2
11.5
11.5
nm
11.5
10.8
10.8
11.5
na
na
na
na
(1) These measures are non-GAAP. Further information on the use of non-GAAP measures and ratios is provided in the Non-GAAP and Other Financial Measures section.
nm – not meaningful
na – not applicable
BMO Financial Group 204th Annual Report 2021 123
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 (%)
Net Interest Margin (1)
Average earning assets
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
Investments in associates and joint ventures
Other revenues
Total Non-Interest Revenue
Year-over-year non-interest revenue growth (%)
Non-interest revenue as a % of total revenue
Adjusted Non-Interest Revenue (2)
Year-over-year adjusted non-interest revenue growth (%)
Adjusted non-interest revenue as a % of total adjusted revenue (2)
2021
2020
2019
2018
2017
14,310
2.4
13,971
8.4
12,888
12.7
11,438
1.4
11,275
3.0
897,302
1.59
853,336
1.64
759,395
1.70
682,991
1.67
646,799
1.74
1,107
1,243
296
1,391
442
1,982
1,595
1,421
591
167
1,941
248
452
12,876
14.8
47.4
12,847
14.5
47.3
1,036
1,221
15
1,295
358
1,807
1,417
1,070
124
127
2,178
161
406
11,215
(11.0)
44.5
11,215
(11.0)
44.5
1,023
1,204
298
1,192
437
1,747
1,419
975
249
166
3,183
151
551
12,595
9.8
49.4
12,595
9.8
49.4
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
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
Total Revenue
Year-over-year total revenue growth (%)
27,186
7.9
25,186
(1.2)
25,483
11.3
22,905
3.6
22,107
5.5
Total Revenue, net of CCPB (2)
Year-over-year total revenue growth, net of CCPB (%) (2)
25,787
9.8
23,478
3.1
22,774
5.7
Total Adjusted Revenue (2)
Year-over-year total adjusted revenue growth (%) (2)
27,157
7.8
25,186
(1.2)
25,483
11.3
Total Adjusted Revenue, net of CCPB (2)
Year-over-year total adjusted revenue growth, net of CCPB (%) (2)
25,758
9.7
23,478
3.0
22,799
5.8
21,553
4.8
22,905
3.6
21,553
4.8
20,569
5.9
22,107
5.1
20,569
5.5
5-year
CAGR
10-year
CAGR
5.5
na
7.6
na
3.8
3.1
20.2
10.1
2.2
4.9
3.2
11.5
47.8
0.6
(0.8)
12.1
(1.7)
5.2
na
na
4.9
na
na
5.3
na
5.8
na
5.2
na
5.7
na
6.7
na
8.3
na
(0.9)
4.1
(6.0)
8.9
(4.3)
14.9
9.7
10.7
12.1
2.6
3.3
nm
2.6
5.4
na
na
5.4
na
na
6.1
na
6.3
na
6.2
na
6.5
na
Five-year and ten-year CAGR based on CGAAP in 2011 and IFRS in 2016 and 2021.
The adoption of new IFRS standards in 2018 and 2020 only impacted our results prospectively.
(1) Net interest margin is calculated based on average earning assets, which represents the daily average balance of deposits at central banks, deposits with other banks, securities borrowed or
purchased under resale agreements, securities, and loans, over a one-year period.
(2) These measures are non-GAAP. Further information on the use of non-GAAP measures is provided in the Non-GAAP and Other Financial Measures section.
na – not applicable
nm – not meaningful
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
124 BMO Financial Group 204th Annual Report 2021
Table 4: Non-Interest Expense, Expense-to-Revenue Ratio
and Provision for Income Taxes and Other 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 (2)
Rental of real estate
Premises, furniture and fixtures
Property taxes
Computers and equipment
Total premises and equipment
Other expenses
Travel and business development
Communications
Professional fees
Other
Total other expenses
Amortization of intangible assets
Total Non-Interest Expense
Year-over-year total non-interest expense growth (%)
Total Adjusted Non-Interest Expense (3)
Year-over-year total adjusted non-interest expense growth (%)
Non-interest expense-to-revenue ratio (Efficiency ratio) (%) (4)
Adjusted non-interest expense-to-revenue ratio (Adjusted efficiency ratio) (%) (3) (4)
Efficiency ratio, net of CCPB (%) (3) (4)
Adjusted efficiency ratio, net of CCPB (%) (3) (4)
Provision for Income Taxes and Other 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 (other taxes) (1)
Provision for income taxes
Provision for Income Taxes and Other Taxes
Provision for income taxes and other taxes as a % of income before total
government levies and taxes (1) (3)
Effective tax rate (%)
Adjusted effective tax rate (%) (3)
Five-year and ten-year CAGR based on CGAAP in 2011 and IFRS in 2016 and 2021.
The adoption of new IFRS standards in 2018 and 2020 only impacted our results prospectively.
2021
2020
2019
2018
2017
5-year
CAGR
10-year
CAGR
4,041
3,152
1,129
8,322
231
794
36
2,335
3,396
397
264
607
1,889
3,157
634
4,163
2,632
1,149
7,944
225
771
42
2,164
3,202
384
304
555
1,168
2,411
620
4,762
2,610
1,051
8,423
595
283
37
2,073
2,988
545
296
568
1,256
2,665
554
4,176
2,510
775
7,461
526
345
38
1,844
2,753
519
282
572
1,387
2,760
503
3,996
2,386
1,086
7,468
494
282
39
1,676
2,491
540
286
569
1,353
2,748
485
15,509
9.4
14,550
3.6
14,177
(3.1)
14,042
0.3
14,630
8.6
14,005
5.0
13,477
2.2
13,344
3.5
13,192
2.1
12,897
3.5
57.0
53.6
60.1
56.5
355
36
36
10
382
1
820
56.3
55.8
60.4
59.8
362
42
33
9
397
1
844
57.4
55.0
64.2
61.4
354
37
35
9
384
1
820
58.8
58.3
62.5
61.9
328
38
29
8
350
1
754
59.7
58.3
64.1
62.7
322
39
29
8
330
1
729
2,504
3,324
1,251
2,095
1,514
2,334
1,961
2,715
1,292
2,021
30.0
24.4
22.7
29.1
19.7
19.8
28.8
20.8
21.1
33.3
26.5
20.7
27.5
19.5
19.8
(0.2)
6.7
2.0
2.4
(13.9)
18.7
(3.0)
8.9
7.3
(4.9)
(2.1)
2.8
6.7
3.2
7.4
3.7
na
3.1
na
na
na
na
na
1.9
(3.0)
3.3
6.9
3.8
nm
2.5
17.9
12.7
na
na
na
4.3
7.3
6.2
5.6
(4.4)
9.9
1.9
10.3
8.0
0.4
0.2
(0.3)
8.0
4.0
10.6
5.9
na
5.6
na
na
na
na
na
5.7
1.9
(2.1)
4.0
5.0
nm
4.6
11.1
9.0
na
na
na
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
(1) Other taxes are included in various non-interest expense categories. Total provision for income taxes and other taxes is a non-GAAP financial measure. Information regarding the usefulness of this
measure is provided in the Provision for Income and Other Taxes section of the annual MD&A.
(2) Effective 2020, the bank adopted IFRS 16. Prior periods have not been restated. Depreciation on the right-of-use assets has been recorded in premises, furniture and fixtures. Previously most of our
real estate leases were classified as operating leases, with rent expense recorded in rental of real estate.
(3) These measures and ratios are non-GAAP. Further information is provided in the Non-GAAP and Other Financial Measures section. A quantitative reconciliation of revenue net of CCPB and all adjusted
results for all years presented is provided in Table 2.
(4) For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures, refer to the Glossary of Financial Terms.
na – not applicable
nm – not meaningful
BMO Financial Group 204th Annual Report 2021 125
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
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
2021
2020
2019
Average
balances
Average
interest
rate (%)
Interest
income/
expense
Average
balances
Average
interest
rate (%)
Interest
income/
expense
Average
balances
Average
interest
rate (%)
Interest
income/
expense
34,255
90,140
43,375
122,661
5,368
66,247
82,858
0.23
1.79
0.44
2.58
3.19
4.26
3.37
79
1,618
190
13,605
94,343
44,460
3,168 114,374
5,556
62,920
73,596
171
2,823
2,796
0.33
2.32
1.05
2.88
3.38
4.95
3.79
45
2,186
468
2,972
83,042
39,074
3,296 109,289
5,637
60,680
62,965
188
3,116
2,787
2.03
2.66
2.10
3.04
3.43
5.49
4.10
60
2,210
820
3,317
194
3,333
2,580
277,134
3.23
8,958 256,446
3.66
9,387 238,571
3.95
9,424
444,904
2.44 10,845 408,854
2.96 12,086 363,659
3.44 12,514
68,612
145,504
62,250
8,055
10,684
13,344
141,003
0.18
1.61
0.39
3.02
3.18
3.86
3.71
124
61,050
2,345 124,567
66,109
245
243
339
516
10,499
10,792
13,659
5,230 155,229
0.62
2.24
0.85
3.35
3.71
4.37
3.96
376
47,001
2,794 109,072
65,943
560
352
401
597
11,554
9,356
11,907
6,149 139,192
1.72
3.05
2.11
3.67
4.75
4.91
4.78
808
3,331
1,391
424
445
585
6,654
173,086
3.66
6,328 190,179
3.94
7,499 172,009
4.71
8,108
Total U.S. dollar and other currencies
449,452
2.01
9,042 441,905
2.54 11,229 394,025
3.46 13,638
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
86,784
91,691
75,568
981,140
2.03 19,887 942,450
2.47 23,315 833,252
3.14 26,152
9,616
157,226
142,833
0.35
0.69
0.44
33
11,715
1,091 136,976
622 135,175
0.68
1.24
0.87
80
4,905
1,704 113,502
1,181 120,852
1.02
1.88
1.05
50
2,133
1,269
309,675
0.56
1,746 283,866
1.04
2,965 239,259
1.44
3,452
55,415
26,704
0.91
2.23
506
597
49,676
26,387
1.50
2.69
747
711
44,815
25,099
2.56
2.70
1,146
677
391,794
0.73
2,849 359,929
1.23
4,423 309,173
1.71
5,275
24,200
272,380
71,795
0.33
0.45
0.22
80
22,856
1,234 244,449
77,930
160
1.05
0.99
0.78
241
24,534
2,424 211,970
71,005
609
2.41
1.79
1.08
592
3,802
770
368,375
0.40
1,474 345,235
0.95
3,274 307,509
1.68
5,164
74,376
13,593
1.35
1.83
1,005
249
80,656
18,207
1.54
2.22
1,243
404
76,889
19,896
2.91
2.96
2,235
590
456,344
0.60
2,728 444,098
1.11
4,921 404,294
1.98
7,989
76,708
84,683
70,916
924,846
56,294
0.60
5,577 888,710
53,740
1.05
9,344 784,383
48,869
1.69 13,264
Total Liabilities, Interest Expense and Shareholders’ Equity
981,140
0.57
5,577 942,450
0.99
9,344 833,252
1.59 13,264
Net interest margin
– based on earning assets
– based on total assets
Net interest income
1.59
1.46
1.64
1.48
1.70
1.55
14,310
13,971
12,888
(1) For the years ended October 31, 2021, 2020 and 2019, the maximum amount of securities lent or sold under repurchase agreements at any month end amounted to $102,567 million,
$106,695 million and $96,399 million, respectively.
126 BMO Financial Group 204th Annual Report 2021
Table 6: Volume/Rate Analysis of Changes in Net Interest Income
($ millions)
For the year ended October 31
Assets
Canadian Dollar
Deposits with other banks 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
2021/2020
2020/2019
Increase (decrease) due to change in
Increase (decrease) due to change in
Average
balance
Average
rate
Total
Average
balance
Average
rate
Total
69
(98)
(11)
239
(6)
165
350
748
708
46
469
(32)
(82)
(4)
(13)
(564)
(35)
(470)
(267)
(367)
(11)
(458)
(341)
(1,177)
34
(568)
(278)
(128)
(17)
(293)
9
(429)
216
301
113
154
(3)
123
436
710
(231)
(325)
(465)
(175)
(3)
(340)
(229)
(747)
(1,949)
(1,241)
1,340
(1,768)
(298)
(918)
(283)
(27)
(58)
(68)
(355)
(252)
(449)
(315)
(109)
(62)
(81)
(919)
242
473
3
(39)
68
86
767
(674)
(1,010)
(834)
(33)
(112)
(74)
(1,272)
(663)
(508)
(1,171)
882
(1,491)
(15)
(24)
(352)
(21)
(6)
(217)
207
(37)
(428)
(432)
(537)
(831)
(72)
(44)
12
(505)
(609)
Change in U.S. dollar and other currencies interest income
(180)
(2,007)
(2,187)
1,600
(4,009)
(2,409)
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
528
(3,956)
(3,428)
2,940
(5,777)
(2,837)
(15)
252
67
(32)
(865)
(626)
(47)
(613)
(559)
304
(1,523)
(1,219)
86
9
(327)
(123)
(241)
(114)
399
(1,973)
(1,574)
70
441
150
661
125
35
821
(40)
(870)
(238)
(1,148)
(524)
(1)
(1,673)
30
(429)
(88)
(487)
(399)
34
(852)
14
277
(48)
(175)
(1,467)
(401)
(161)
(1,190)
(449)
(40)
582
75
(311)
(1,960)
(236)
(351)
(1,378)
(161)
243
(2,043)
(1,800)
617
(2,507)
(1,890)
(97)
(102)
(141)
(53)
(238)
(155)
109
(50)
(1,101)
(136)
(992)
(186)
Change in U.S. dollar and other currencies interest expense
44
(2,237)
(2,193)
676
(3,744)
(3,068)
Total All Currencies
Change in total interest expense (b)
Change in total net interest income (a – b)
443
(4,210)
(3,767)
1,497
(5,417)
(3,920)
85
254
339
1,443
(360)
1,083
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BMO Financial Group 204th Annual Report 2021 127
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
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
128,020 117,886 112,448 107,956 106,647
7,550
7,642
7,788
7,391
8,289
7,718
461
9,122 11,275 11,645
541
570
498
8,587
521
63,841
57,288 55,311 52,706 51,637 13,232 12,286 11,752
9,918
9,798
199,503 182,565 176,048 168,450 165,834 21,411 21,906 23,597 22,104 18,906
–
–
–
–
–
–
–
–
–
–
–
–
469
469
537
458
537
458
373
373
113,895 107,408 106,020 92,927 82,632 132,087 139,573 135,550 110,934 97,478 7,453 11,568 10,212 9,153 11,270
313,398 289,973 282,068 261,377 248,466 153,498 161,479 159,147 133,038 116,384 7,453 12,037 10,749 9,611 11,643
(1,143)
(1,323)
(740)
(689)
(799)
(910)
(1,225)
(630)
(574)
(641)
(13)
(28)
(17)
(6)
–
312,255 288,650 281,328 260,688 247,667 152,588 160,254 158,517 132,464 115,743 7,440 12,009 10,732 9,605 11,643
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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
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
216
225
233
185
206
123
168
164
171
161
83
299
551
89
314
726
138
371
336
126
311
235
127
333
248
113
236
585
146
194
314
1,487
358
1,101
252
423
597
293
454
762
–
–
–
–
–
–
–
70
850
1,040
707
546
581
821
1,801
1,459
1,020
1,216
–
70
0.27
0.36
0.25
0.21
0.23
0.54
1.12
0.92
0.77
1.05
–
0.58
0.15
0.48
0.17
0.68
0.21
0.32
0.18
0.25
0.20
0.30
1.10
0.44
1.43
1.07
1.52
0.81
1.91
0.54
2.40
0.78
–
–
–
0.61
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
30
–
30
–
0.26
–
–
–
0.27
(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. 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).
128 BMO Financial Group 204th Annual Report 2021
Table 9: Net Loans and Acceptances –
Segmented Information (1) (2) (3)
Total
($ millions)
As at October 31
2021
2020
2019
2018
2017
135,738 127,008 123,723 119,601 115,234
8,071
8,103
8,329
8,859
7,889
77,073 70,043 67,600 63,082 61,808
Net Loans and Acceptances by Province
Atlantic provinces
Quebec
Ontario
Prairie provinces
British Columbia and territories
2021
2020
2019
2018
2017
15,996
48,090
136,638
51,460
60,071
15,105
43,859
124,526
50,634
54,526
14,601
42,985
119,629
51,639
52,474
13,925
40,177
109,575
48,634
48,377
13,686
38,802
103,152
46,853
45,174
S
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220,914 204,940 200,182 191,012 185,113
Total net loans and acceptances in Canada
312,255
288,650
281,328
260,688
247,667
253,435 258,549 251,782 213,014 191,380
474,349 463,489 451,964 404,026 376,493
(2,066)
(2,576)
(1,387)
(1,269)
(1,440)
472,283 460,913 450,577 402,757 375,053
Total
2021
2020
2019
2018
2017
339
393
397
356
367
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
43,259
4,367
16,924
14,727
13,739
787
1,084
28,034
1,832
5,905
12,952
7,263
780
45,019
52,531
1,720
2,512
39,990
4,799
20,480
15,715
13,549
771
3,927
28,171
2,496
9,445
12,921
8,496
1,012
47,769
44,986
2,121
1,901
36,707
4,943
23,085
16,939
13,268
840
4,124
27,334
2,524
10,051
12,390
8,153
1,152
45,730
40,880
1,801
1,861
31,028
3,916
20,403
14,814
12,321
729
4,439
22,870
1,936
7,227
10,973
5,958
840
38,348
32,463
1,460
3,289
26,479
3,916
18,496
11,612
11,114
625
5,060
19,824
1,344
6,551
10,496
4,392
835
33,705
32,265
1,470
3,196
253,435
258,549
251,782
213,014
191,380
196
235
332
535
1,136
628
2,283
729
1,437
378
734
832
420
787
1,040
Table 10: Net Impaired Loans and Acceptances –
Segmented Information (3) (4)
1,671
2,911
2,166
1,566
1,827
0.35
0.63
0.48
0.39
0.49
0.24
0.45
0.31
0.88
0.36
0.57
0.38
0.39
0.43
0.54
($ 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
2021
2020
2019
2018
2017
56
58
143
38
190
1
–
130
2
63
73
2
2
344
12
2
20
78
86
407
69
313
9
147
225
30
366
112
1
7
387
41
3
2
49
21
56
76
291
6
–
191
–
356
119
2
2
240
28
–
–
1,136
2,283
1,437
45
18
50
42
193
–
–
77
1
57
90
2
–
191
66
–
–
832
45
39
36
97
238
–
–
70
1
143
156
6
2
181
2
3
21
1,040
(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) Prior period information for certain sectors has been adjusted to align with the current year’s presentation, which better classifies the realigned
sectors.
(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).
BMO Financial Group 204th Annual Report 2021 129
–
–
–
–
93
93
–
–
–
–
–
–
–
–
–
–
84
84
–
–
–
–
–
–
–
–
–
50
50
–
2
2
–
–
–
–
56
56
–
(49)
–
(7)
–
–
–
–
–
–
–
–
–
–
(1)
(1)
–
(1)
(1)
–
–
–
–
50
50
–
–
– 0.44
– 0.43
SUPPLEMENTAL INFORMATION
Table 11: Changes in Gross Impaired Loans –
Segmented Information (1) (2)
($ millions, except as noted)
Canada
United States
Other countries
As at October 31
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
414
929
1,343
497
417
914
426
309
735
439
354
407
380
335
1,876
385
1,330
470
731
585
508
869 1,009
793
787
2,211
1,715 1,201 1,377 1,594
–
84
84
–
–
–
Total additions
1,328 1,820 1,218 1,157
978
447
2,736 1,468
921 1,159
712
723
616 1,097
895
323
836
321
697
281
134
313
165
244
2,571 1,224
274
647
360
799
(547)
(636)
(554)
(366)
(586)
(171)
(628) (479)
(136)
(282) (259) (1,231) (1,528)
(162)
(242)
(466)
(212)
(573)
(301)
(692)
–
(84)
–
(9)
(1,183)
(920)
(757)
(910) (738) (1,393) (1,664)
(708)
(785)
(993)
(84)
(9)
–
(49)
(7)
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
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
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
n
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n
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Total write-offs
(293)
(471)
(282)
(305) (234)
(291)
(576)
(246)
(312)
(383)
(197)
(96)
(252)
(219)
(238)
(44)
(221) (186)
(48)
(84)
(51)
(240)
(79)
(497)
(87)
(159)
(100)
(212)
(136)
(247)
382
813
414
929
1,195 1,343
497
417
914
426
309
439
354
256
718
335
385
1,876 1,330
470
731
508
869
735
793
974
2,211 1,715 1,201 1,377
Total Loans and Acceptances
0.38
0.46
0.32
0.28 0.32
0.19
0.71
0.23
0.86
0.28
0.39
0.25 0.26
0.33 0.43
1.19
0.54
0.63
1.53
1.34
1.63
0.98
2.12
0.67
2.69
0.89
–
–
– 0.73
1.37
1.08
0.91
1.18
– 0.70
(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.
130 BMO Financial Group 204th Annual Report 2021
Total
2021
2020
2019
2018
2017
749
2,889
882
1,747
896
1,040
947
992
1,273 1,391
3,638
2,629
1,936
2,220 2,383
846
929
888
3,761
1,139
1,547
1,110 1,057
968 1,136
1,775
4,649
2,686
2,078 2,193
(709)
(690)
(1,951) (1,903)
(828)
(637)
(840)
(904)
(780)
(958)
(2,660) (2,593) (1,465) (1,744) (1,738)
(248)
(336)
(331)
(716)
(325)
(203)
(321)
(297)
(322)
(296)
(584) (1,047)
(528)
(618)
(618)
638
1,531
749
2,889
882
1,747
896
947
1,040 1,273
2,169
3,638
2,629
1,936 2,220
0.29
0.60
0.37
1.11
0.44
0.69
0.47
0.49
0.51
0.66
0.46
0.78
0.58
0.48
0.59
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BMO Financial Group 204th Annual Report 2021 131
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
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
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
n
o
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a
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f
n
I
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a
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e
m
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p
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S
Allowance for credit losses (ACL),
beginning of year
Consumer
Business and government
1,073
782
749
303
725
255
705
317
217
595
471 1,696
200
821
Total ACL, beginning of year
1,855
1,052
980 1,022 1,066 1,913 1,021
Provision for credit losses (3)
Consumer
Business and government
Total provision for credit losses
Recoveries
Consumer
Business and government
Total recoveries
Write-offs
201
117
801
685
318
1,486
127
23
150
117
20
137
470
93
563
120
4
124
416
28
444
127
5
132
394
37
(48)
86
(211) 1,336
431
(259) 1,422
134
10
144
64
19
83
63
52
115
230
648
878
1
302
303
104
62
166
301
566
254
793
867 1,047
(9)
243
234
75
51
74
220
294
81
40
126
121
Consumer
Business and government
(442)
(96)
(556)
(219)
(551)
(44)
(515)
(84)
(501)
(48)
(72)
(240)
(108)
(497)
(113)
(159)
(125)
(212)
(157)
(247)
Total write-offs
(538)
(775)
(595)
(599)
(549)
(312)
(605)
(272)
(337)
(404)
(52)
(34)
(38)
(7)
(15)
(5)
(8)
(11)
(10)
(27)
(28)
(153)
(24)
(16)
(22)
(32)
(12)
–
(23)
(114)
(86)
(45)
(20)
(19)
(37)
(181)
(40)
(54)
(12)
(137)
–
46
46
–
(32)
(32)
–
–
–
–
–
–
–
1
1
–
21
21
–
29
29
–
–
–
–
–
–
–
(4)
(4)
–
46
46
–
12
12
–
9
9
–
–
–
–
–
–
–
–
–
–
21
21
–
29
29
–
(21)
(21)
–
3
3
–
(1)
(1)
–
2
2
–
12
12
–
1
1
–
21
21
–
–
–
–
(1)
(1)
–
(1)
(1)
–
20
20
Total ACL, end of year
1,699
1,855 1,052
980 1,055 1,244 1,913 1,021
907
792
1,073
782
749
303
725
255
133
612
217
443 1,111 1,696
200
821
230
648
878
229
692
921
–
15
15
Net write-offs as a % of average
loans and acceptances (4)
un
un
un
un
un
un
un
un
un
un
un
un
un
un
un
Table 13: Allocation of Allowance for Credit Losses –
Segmented Information (1) (5)
($ 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
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
2021
2020
2019
2018
2017
7
76
83
262
11
89
100
203
10
116
126
81
9
106
115
74
12
94
106
106
5
5
7
15
20
133
16
21
389
20
27
229
10
37
47
134
12
42
54
107
345
303
207
189
212
153
410
256
181
161
–
–
–
–
–
1,143
1,323
1,488
1,626
740
947
689
799
910 1,225
878 1,011 1,063 1,635
630
886
574
755
641
802
13
13
–
–
–
14
14
28
42
–
–
–
–
–
17
17
–
–
–
–
–
6
6
–
–
–
20
20
–
20
28.9
21.7
32.2
22.6
24.2
21.9
22.6
25.4
19.4
25.7
27.0
23.9
26.7
24.1
29.9
15.7
7.8
18.5
18.5
6.3
20.7
14.9
7.0
17.2
15.1
10.0
18.3
11.7
10.6
12.3
–
–
–
16.7
–
16.7
–
–
–
–
–
–
40.0
–
40.0
(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. IFRS 9 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
132 BMO Financial Group 204th Annual Report 2021
Total
2021
2020
2019
2018
2017
1,290
949
2,524 1,145
955 1,006
915
849
912 1,265
3,814 2,094 1,870 1,918 2,114
153
887
(126) 2,050
27 2,937
191
42
233
180
72
252
471
404
875
224
66
290
407
250
657
202
59
261
468
278
746
215
50
265
(514)
(336)
(664)
(716)
(664)
(203)
(640)
(297)
(658)
(296)
(850) (1,380)
(867)
(937)
(954)
(80)
(186)
(62)
(27)
(37)
(37)
(20)
(9)
(33)
(142)
(266)
(89)
(74)
(29)
(175)
1,040 1,290
949
1,918 2,524 1,145
955
841
915 1,155
2,958 3,814 2,094 1,870 1,996
0.13
0.24
0.13
0.17
0.19
Total
2021
2020
2019
2018
2017
12
91
103
395
16
17
19
24
105
121
606
136
153
310
143
162
208
136
160
233
498
727
463
370
393
2,066 2,576 1,387 1,269 1,440
2,564 3,303 1,850 1,639 1,833
23.0
16.1
25.8
20.0
16.2
21.0
17.6
17.3
17.7
19.1
18.1
20.0
17.7
16.9
18.3
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BMO Financial Group 204th Annual Report 2021 133
SUPPLEMENTAL INFORMATION
Table 14: Allowance for Credit Losses on Impaired Loans –
Segmented Information
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($ 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
Total business and government (1)
Table 15: Provision for Credit Losses –
Segmented Information (2)
($ millions)
For the year ended October 31
Consumer
Residential mortgages
Cards
Consumer instalment and other personal loans
Total consumer
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 (3)
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
2021
2020
2019
2018
2017
11
9
90
36
23
5
–
47
–
77
17
1
2
73
3
–
1
395
11
18
53
35
36
8
–
67
10
184
32
–
5
132
7
1
7
606
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
–
–
310
208
233
2021
2020
2019
2018
2017
16
194
158
368
7
3
38
18
2
(2)
–
41
(9)
18
11
1
2
30
(4)
–
1
17
261
226
504
6
70
73
22
30
1
–
128
10
293
116
1
6
243
(6)
–
25
157
525
(505)
20
1,018
1,522
1,431
2,953
16
246
201
463
5
1
(2)
54
27
7
–
25
–
51
67
1
–
68
(35)
1
18
288
751
121
872
19
216
231
466
(2)
–
10
18
37
–
–
20
–
(24)
74
(3)
(1)
87
(4)
–
22
234
700
(38)
662
11
232
232
475
(4)
25
29
24
31
(1)
–
28
–
9
108
–
–
102
(3)
–
(1)
347
822
(76)
746
0.00
0.63
0.20
0.17
0.20
0.17
0.06
0.11
0.25
0.39
0.33
0.24
0.12
0.17
0.25
0.12
0.18
0.26
0.18
0.22
(1) Amounts exclude allowance for credit losses included in Other Liabilities.
(2) Prior period information for certain sectors has been adjusted to align with the current year’s presentation, which better classifies the realigned sectors.
(3) Prior periods have not been restated to reflect the adoption of IFRS 9 in 2018. IFRS 9 has been applied prospectively.
134 BMO Financial Group 204th Annual Report 2021
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
2021
2020
2019
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
Average
balance
Average
rate paid (%)
48,372
74,505
122,916
173,030
418,823
21,237
8,705
17,778
211,507
259,227
678,050
0.58
–
0.20
1.31
35,643
56,936
101,870
194,456
0.82
–
0.63
1.86
24,211
47,849
86,531
173,337
0.67
388,905
1.17 331,928
0.36
0.16
0.08
0.15
20,927
8,852
16,321
194,096
1.07
0.91
0.27
0.69
23,563
12,253
14,484
164,540
0.16
240,196
0.70
214,840
0.47
629,101
0.99
546,768
1.18
–
1.24
2.33
1.63
2.41
1.97
0.86
1.38
1.49
1.58
As at October 31, 2021, 2020 and 2019, deposits by foreign depositors in our Canadian bank offices amounted to $58,396 million, $52,433 million and $46,766 million, respectively.
(1) Net interest margin is calculated based on average earning assets, which represents the daily average balance of deposits at central banks, deposits with other banks, securities borrowed or
purchased under resale agreements, securities, and loans, over a one-year period.
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BMO Financial Group 204th Annual Report 2021 135
GLOSSARY OF FINANCIAL TERMS
Glossary of Financial Terms
Adjusted Earnings and Measures
• Adjusted Revenue – calculated as revenue
excluding the impact of certain non-recurring
items, as set out in the Non-GAAP and Other
Financial Measures section.
• Adjusted Non-Interest Expense – calculated as
non-interest expense excluding the impact of
certain non-recurring items, as set out in the
Non-GAAP and Other Financial Measures
section.
• Adjusted Net Income – calculated as net
income excluding the impact of certain non-
recurring items, as set out in the Non-GAAP
and Other Financial Measures section.
Management considers both reported and
adjusted results to be useful in assessing
underlying ongoing business performance.
Adjusted Effective Tax Rate is calculated as
adjusted provision for income taxes divided by
adjusted income before provision for income
taxes.
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.
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.
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.
Average Earning Assets represents the daily
average balance of deposits at central banks,
deposits with other banks, securities borrowed
or purchased under resale agreements,
securities, and loans 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,
136 BMO Financial Group 204th Annual Report 2021
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.
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.
Common Equity Tier 1 (CET1) Capital
comprises common shareholders’ equity less
deductions for goodwill, intangible assets,
pension assets, certain deferred tax assets and
other items, which may include a portion of
expected credit loss provisions.
Common Equity Tier 1 (CET1) Ratio is
calculated as CET1 Capital, which comprises
common shareholders’ equity, net of deductions
for goodwill, intangible assets, pension assets,
certain deferred tax assets and other items,
which may include a portion of expected credit
loss provisions, divided by risk-weighted assets.
The CET1 Ratio is calculated in accordance with
OSFI’s Capital Adequacy Requirements (CAR)
Guideline.
Common Shareholders’ Equity is the most
permanent form of capital. For regulatory capital
purposes, common shareholders’ equity
comprises 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 and regulatory compliance,
human resources, communications, marketing,
real estate and procurement. T&O develops,
monitors, manages and maintains governance
of information technology, including data and
analytics, and also provides cyber security and
operations services.
Credit and Counterparty Risk is the potential
for credit loss due to the failure of an obligor
(i.e., a borrower, endorser, guarantor or
counterparty) to repay a loan or honour another
predetermined financial obligation.
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. Adjusted dividend
payout ratio is calculated in the same manner,
using adjusted net income.
Earnings per Share (EPS) is calculated by
dividing net income, after deducting preferred
share dividends and distributions on other
equity instruments, by the average number of
common shares outstanding. Adjusted EPS is
calculated in the same manner, using adjusted
net income. Diluted EPS, which is BMO’s 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 of the consolidated financial statements.
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 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.
Economic capital is calculated for various types
of risk, including credit, market (trading and
non-trading), operational non-financial, business
and insurance, based on a one-year time
horizon using a defined confidence level.
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.
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.
Efficiency Ratio, net of CCPB, is calculated as
non-interest expense divided by total revenue,
net of insurance claims, commissions and
changes in policy benefit liabilities (CCPB),
expressed as a percentage. The adjusted
efficiency ratio, net of CCPB, is calculated in the
same manner, utilizing adjusted total revenue,
net of CCPB, and non-interest expense.
Environmental and Social Risk (E&S risk) is
the potential for loss or harm, directly or
indirectly, resulting from environmental or social
impacts or concerns, including climate change,
related to BMO, our customers, suppliers or
clients, and our impact on the environment and
society.
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.
Gross impaired loans and acceptances(GIL)
are calculated as the credit impaired balance of
loans and customers’ liability under
acceptances, excluding purchased credit
impaired loans.
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.
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, and comprises claims risk,
policyholder behaviour risk and expense risk.
Insurance Revenue, net of CCPB, is insurance
revenue, net of insurance claims, commissions
and changes in policy benefit liabilities (CCPB).
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 risk
of failure to: comply with the law (in letter or in
spirit) or maintain standards of care; implement
legal 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.
Leverage Exposures (LE) consist of on-balance
sheet items and specified off-balance sheet
items, net of specified adjustments.
Leverage Ratio reflects Tier 1 Capital divided
by LE.
and suppliers, and lending, investment and
pledging commitments.
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 stress
scenario prescribed by OSFI.
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.
Mark-to-Market represents the valuation of
financial instruments at fair value (as defined
above) as of the balance sheet date.
Model Risk is the potential for adverse
consequences resulting from decisions that are
based on incorrect or misused model results.
These adverse consequences can include
financial loss, poor business decision-making
and damage to reputation.
Net Interest Income comprises 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 income excluding trading,
is on a basis that excludes trading-related
interest income and earning assets.
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 average
total assets. Net interest margin excluding
trading, is computed in the same manner
excluding trading related interest income and
earning assets.
Net Non-Interest Revenue is non-interest
revenue, net of insurance claims, commissions
and changes in policy benefit liabilities (CCPB).
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.
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. Financial
commitments include liabilities to depositors
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.
Operating Leverage, net of CCPB, is the
difference between revenue, net of CCPB (net
revenue), and expense growth rates. Adjusted
net operating leverage is the difference
between adjusted revenue, net of CCPB, and
adjusted expense growth rates.
Operational Non-Financial Risk (ONFR)
encompasses a wide range of non-financial risks,
including those related to business change,
customer trust, reputation and data that can
result in financial loss. These losses can stem
from inadequate or failed internal processes or
systems, human error or misconduct, and
external events that may directly or indirectly
impact our credit or investment portfolios. These
risks include technology risk, fraud risk, business
continuity risk and human resources risk, but
exclude legal and regulatory risk, credit risk,
market risk, liquidity risk and other types of
financial risk.
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.
Pre-Provision, Pre-Tax Earnings (PPPT) is
calculated as income before income taxes and
provision for credit losses. We use PPPT on both
a reported and adjusted basis to assess our
ability to generate sustained earnings growth
excluding credit losses, which are impacted by
the cyclical nature of a credit cycle.
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.
PCL can comprise both a provision for credit
losses on impaired loans and a provision for
credit losses on performing loans. For more
information, refer to the Provision for Credit
Losses and Allowance for Credit Losses sections
and Note 4 of the consolidated financial
statements.
Reputation Risk is the potential for loss or
harm to the BMO brand. It can arise even if
other risks are managed effectively.
Return on Equity or Return on Common
Shareholders’ Equity (ROE) is calculated as net
income, less preferred dividends and
distributions on other equity instruments, as a
percentage of average common shareholders’
equity. Common shareholders’ equity comprises
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.
BMO Financial Group 204th Annual Report 2021 137
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.
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 measure is
used for capital management and regulatory
reporting purposes.
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.
Strategic Risk is the potential for loss or harm
due to changes in the external business
environment and failure to respond
appropriately to these changes as a result of
inaction, ineffective strategies or poor
implementation of strategies. Strategic risk also
includes business risk, which arises from the
specific business activities of the enterprise, and
the effects these could have on its earnings.
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.
Structured Entities (SEs) include entities for
which voting or similar rights are not the
dominant factor in determining control of the
entity. BMO is required to consolidate a SE if it
controls the entity by having power over the
entity, exposure to variable returns as a result
of its involvement and the ability to exercise
power to affect the amount of those returns.
Structural (Non-Trading) Market Risk comprises
interest rate risk arising from banking activities
(loans and deposits) and foreign exchange risk
arising from foreign currency operations and
exposures.
Swaps are contractual agreements between
two parties to exchange a series of cash flows.
The various swap agreements that BMO enters
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.
Tangible Common Equity is calculated as
common shareholders’ equity, less goodwill and
acquisition-related intangible assets, net of
related deferred tax liabilities.
Taxable Equivalent Basis (teb): Revenues of
operating groups are presented in the MD&A on
a taxable equivalent basis (teb). Revenue and
the provision for income taxes are increased on
tax-exempt securities to an equivalent pre-tax
basis to facilitate comparisons of income
between taxable and tax-exempt sources. The
effective tax rate is also analyzed on a teb basis
for consistency of approach, with the offset to
operating segment adjustments recorded in
Corporate Services.
Tier 1 Capital comprises CET1 Capital and
Additional Tier 1 (AT1) Capital. AT1 Capital
consists of preferred shares and other AT1
Capital instruments, less regulatory deductions.
Tier 1 Capital Ratio reflects Tier 1 Capital
divided by risk-weighted assets.
Tier 2 Capital comprises subordinated
debentures and may include certain credit loss
provisions, less regulatory deductions.
Total Capital includes Tier 1 and Tier 2 Capital.
Total Capital Ratio reflects Total Capital divided
by risk-weighted assets.
Total Loss Absorbing Capacity (TLAC)
comprises Total Capital and senior unsecured
debt subject to the Canadian Bail-In Regime,
less regulatory deductions. The largest Canadian
banks are required to meet the minimum TLAC
Ratio and TLAC Leverage Ratio effective
November 1, 2021, as calculated under OSFI’s
TLAC Guideline.
Total Loss Absorbing Capacity (TLAC) Ratio
reflects TLAC divided by risk-weighted assets.
Total Loss Absorbing Capacity (TLAC)
Leverage Ratio reflects TLAC divided by
leverage exposures.
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.
Trading and Underwriting Market Risk is
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.
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.
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.
138 BMO Financial Group 204th Annual Report 2021
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, 2021, 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, 2021 is set forth on page 145.
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
Tayfun Tuzun
Chief Financial Officer
Toronto, Canada
December 3, 2021
BMO Financial Group 204th Annual Report 2021 139
INDEPENDENT AUDITORS’ REPORT
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:
• the consolidated balance sheets as at October 31, 2021 and October 31, 2020;
• the consolidated statements of income for each of the years in the three-year period ended October 31, 2021;
• the consolidated statements of comprehensive income for each of the years in the three-year period ended October 31, 2021;
• the consolidated statements of changes in equity for each of the years in the three-year period ended October 31, 2021;
• the consolidated statements of cash flows for each of the years in the three-year period ended October 31, 2021;
• and notes to the consolidated financial statements, including a summary of significant accounting policies
(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, 2021 and October 31, 2020, and its consolidated financial performance and its consolidated cash flows for each of the years in the
three-year period ended October 31, 2021 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, 2021. 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.
We have determined the matters described below to be the key audit matters to be communicated in our auditors’ report.
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, 2021 was $2,958 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
for each exposure in the loan portfolio as a function of the key modeled inputs being probability of default (PD), exposure at default (EAD) and loss
given default (LGD). In establishing APL, the Bank’s methodology attaches probability weightings to three economic scenarios, which represent the
Bank’s judgment about a range of forecast economic variables – 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 Bank’s methodology for determining significant increase in credit risk 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 for loans as a key audit matter. Significant auditor judgment was required because there was a high
degree of measurement uncertainty in the Bank’s key modeled inputs, methodology and judgments and their resulting impact on the APL, as
described above, including impacts of the COVID-19 pandemic. Assessing the APL also required significant auditor attention and complex auditor
judgment to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required
to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating
effectiveness of 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. This included internal controls related to (1) monitoring and
periodic validation of the models used to derive the key modeled inputs, (2) monitoring of the methodology for identifying significant increase in
credit risk, and (3) review of the economic 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 and economics professionals with
specialized skills, industry knowledge and relevant experience, who assisted in evaluating the (1) key modeled inputs and APL methodology including
the determination of significant increases in credit risk by evaluating the methodology for compliance with IFRS 9 and re-calculating model
monitoring tests in respect of the key modeled inputs and thresholds used for significant increases in credit risk, (2) economic variables and
probability weighting of scenarios used in the models by assessing the variables and scenarios against external economic data, and (3) ECJ overlays
to the APL used by the Bank by applying our knowledge of the industry and credit judgment to assess management’s judgments. For a selection of
wholesale loans, we developed an independent estimate of the loan risk grades using the Bank’s borrower risk rating scale, and compared that to
the Bank’s assigned loan risk grade.
140 BMO Financial Group 204th Annual Report 2021
Assessment of the Measurement of the Fair Value of Certain Securities
Refer to Notes 1, 3 and 17 to the consolidated financial statements.
The Bank’s securities portfolio included $181,744 million of securities as at October 31, 2021 that are measured at fair value. Included in these
amounts are certain 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. Certain of the significant unobservable inputs use d in
the valuation of such securities are NAVs and prepayment rates.
We identified the assessment of the measurement of the fair value of certain securities as a key audit matter. Significant auditor judgment
was required because there was a high degree of measurement uncertainty in the significant unobservable inputs. Significant auditor attention and
complex auditor judgment was required to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experienc e in
the industry, were required to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls over the Bank’s process to determine the fair value of certain securities with the involvement of valuation
and information technology professionals with specialized skills, industry knowledge and relevant experience. This included controls related to (1) the
assessment of rate sources used in independent price verification, and (2) segregation of duties and access controls. We also evaluated the design
and tested the operating effectiveness of the controls related to the 1) review of third-party NAVs, and 2) independent price verification. We tested,
with involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, the fair value of a selection of
securities, for which prepayment rates are used in valuation, by developing an independent estimate of fair value and comparing it to the fair value
determined by the Bank. For a selection of securities, we compared the NAVs to external information.
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 a provision for an estimate of the amount required to settle tax obligations.
We identified the assessment of income tax uncertainties as a key audit matter. Significant auditor judgment was required because there was
a high degree of subjectivity in assessing the need to record a provision, based on interpretation of tax legislation, case law and administrative
positions, for these uncertainties and estimating the amount of such provision, if necessary. This required significant auditor attention and complex
auditor judgment to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were
required to apply audit procedures and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this key audit matter. We evaluated the design and tested the operating
effectiveness of 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. This included controls related to the 1) identification of tax uncertainties based
on interpretation of tax legislation, case law and administrative positions, and 2) determination of the best estimate of the provision required, if any,
to settle these uncertainties. We involved tax professionals with specialized skills, industry knowledge and relevant experience, who assisted in
1) evaluating, based on their knowledge and experience, the Bank’s interpretations of tax legislation, case law and administrative positions 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 evaluating its impact on the Bank’s provision, if necessary, and 3) reading correspondence with taxation
authorities and evaluating its impact on the Bank’s provision, if necessary.
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, 2021 were $12,845 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. Certain significant
assumptions include mortality, policy lapses and future investment yields.
We identified the assessment of insurance-related liabilities as a key audit matter. Significant auditor judgment was required because there was
a high degree of measurement uncertainty in the significant assumptions. Significant and complex auditor judgment was required to evaluate the
results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit procedures
and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this key audit matter. With the assistance of actuarial professionals with
specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of internal controls
over assessment of the significant assumptions. We involved these actuarial professionals also in testing the significant assumptions by examining
the Bank’s internal and external experience studies for policy lapses and mortality, and examining management’s calculations and comparing certain
inputs into the future investment yields to externally available data.
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.
BMO Financial Group 204th Annual Report 2021 141
INDEPENDENT AUDITORS’ REPORT
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.
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
The engagement partner on the audit resulting in this auditors’ report is Reinhard Dotzlaw.
Toronto, Canada
December 3, 2021
142 BMO Financial Group 204th Annual Report 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and its financial performance and its cash
flows for each of the years in the three-year period ended October 31, 2021, 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, 2021, 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, 2021 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, 2021 was
$2,958 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 for each exposure in the loan portfolio as a function of the key modeled
inputs being probability of default (PD), exposure at default (EAD) and loss given default (LGD). In establishing APL, the Bank’s methodology attaches
probability weightings to three economic scenarios, which represent the Bank’s judgment about a range of forecast economic variables – 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 Bank’s methodology for determining significant increase
in credit risk 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 for loans as a critical audit matter. Significant auditor judgment was required because there was a
high degree of measurement uncertainty in the Bank’s key modeled inputs, methodology and judgments and their resulting impact on the APL,
as described above, including impacts of the COVID-19 pandemic. Assessing the APL also required significant auditor attention and complex auditor
judgment to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required
to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of 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. This included internal controls related to (1) monitoring and
periodic validation of the models used to derive the key modeled inputs, (2) monitoring of the methodology for identifying significant increase in
credit risk, and (3) review of the economic 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 and economics professionals with
specialized skills, industry knowledge and relevant experience, who assisted in evaluating the (1) key modeled inputs and APL methodology including
the determination of significant increases in credit risk by evaluating the methodology for compliance with IFRS 9 and re-calculating model
monitoring tests in respect of the key modeled inputs and thresholds used for significant increases in credit risk, (2) economic variables and
probability weighting of scenarios used in the models by assessing the variables and scenarios against external economic data, and (3) ECJ overlays
to the APL used by the Bank by applying our knowledge of the industry and credit judgment to assess management’s judgments. For a selection of
wholesale loans, we developed an independent estimate of the loan risk grades using the Bank’s borrower risk rating scale, and compared that to
the Bank’s assigned loan risk grade.
BMO Financial Group 204th Annual Report 2021 143
Assessment of the Measurement of the Fair Value of Certain Securities
As discussed in Notes 1, 3 and 17 to the consolidated financial statements, the Bank’s securities portfolio included $181,744 million of securities as
at October 31, 2021 that are measured at fair value. Included in these amounts are certain 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. Certain of the significant unobservable inputs used in the valuation of such securities are NAVs and prepayment rates.
We identified the assessment of the measurement of the fair value of certain securities as a critical audit matter. Significant auditor judgment
was required because there was a high degree of measurement uncertainty in the significant unobservable inputs. Significant auditor attention and
complex auditor judgment was required to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experienc e in
the industry, were required to apply audit procedures and evaluate the results of those procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls over the Bank’s process to determine the fair value of certain securities with the involvement of valuation
and information technology professionals with specialized skills, industry knowledge and relevant experience. This included controls related to (1) the
assessment of rate sources used in independent price verification, and (2) segregation of duties and access controls. We also evaluated the design
and tested the operating effectiveness of the controls related to the 1) review of third-party NAVs, and 2) independent price verification. We tested,
with involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, the fair value of a selection of
securities, for which prepayment rates are used in valuation, by developing an independent estimate of fair value and comparing it to the fair value
determined by the Bank. For a selection of securities, we compared the NAVs to external information.
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 a provision for an estimate of the amount required to settle
tax obligations.
We identified the assessment of income tax uncertainties as a critical audit matter. Significant auditor judgment was required because there
was a high degree of subjectivity in assessing the need to record a provision, based on interpretation of tax legislation, case law and administrative
positions, for these uncertainties and estimating the amount of such provision, if necessary. This required significant auditor attention and complex
auditor judgment to evaluate the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were
required to apply audit procedures and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of 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. This included controls related to the 1) identification of tax uncertainties based
on interpretation of tax legislation, case law and administrative positions, and 2) determination of the best estimate of the provision required, if
any, to settle these uncertainties. We involved tax professionals with specialized skills, industry knowledge and relevant experience, who assisted in
1) evaluating, based on their knowledge and experience, the Bank’s interpretations of tax legislation, case law and administrative positions 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 evaluating its impact on the Bank’s provision, if necessary, and 3) reading correspondence with taxation
authorities and evaluating its impact on the Bank’s provision, if necessary.
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, 2021 were
$12,845 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. Certain significant assumptions include mortality, policy lapses and future
investment yields.
We identified the assessment of insurance-related liabilities as a critical audit matter. Significant auditor judgment was required because there
was a high degree of measurement uncertainty in the significant assumptions. Significant and complex auditor judgment was required to evaluate
the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit
procedures and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this critical audit matter. With the assistance of actuarial professionals with
specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of internal controls
over assessment of the significant assumptions. We involved these actuarial professionals also in testing the significant assumptions by examining
the Bank’s internal and external experience studies for policy lapses and mortality, and examining management’s calculations and comparing certain
inputs into the future investment yields to externally available data.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Bank’s auditor since 2004 and as joint auditor for the prior 14 years.
Toronto, Canada
December 3, 2021
144 BMO Financial Group 204th Annual Report 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors 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, 2021, 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, 2021, 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, 2021 and 2020, 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, 2021, and the related notes (collectively, the
consolidated financial statements) and our report dated December 3, 2021 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 121 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, 2021
BMO Financial Group 204th Annual Report 2021 145
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the Year Ended October 31 (Canadian $ in millions, except as noted)
2021
2020
2019
Interest, Dividend and Fee Income
Loans
Securities (Note 3) (1)
Deposits with banks
Interest Expense
Deposits
Subordinated debt
Other liabilities (Note 14)
Net Interest Income
Non-Interest Revenue
Securities commissions and fees
Deposit and payment service charges
Trading revenues (Note 17)
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 (Note 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 (Note 10)
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Income Before Provision for Income Taxes
Provision for income taxes (Note 22)
Net Income
Earnings Per Common Share (Canadian $) (Note 23)
Basic
Diluted
Dividends per common share
$
$
$
15,727
3,963
197
19,887
3,220
195
2,162
5,577
17,945
4,980
390
23,315
6,239
265
2,840
9,344
14,310
13,971
1,107
1,243
296
1,391
442
1,982
1,595
1,421
591
167
1,941
248
452
12,876
27,186
20
1,399
8,322
3,396
634
397
264
607
1,889
15,509
10,258
2,504
7,754
11.60
11.58
4.24
$
$
1,036
1,221
15
1,295
358
1,807
1,417
1,070
124
127
2,178
161
406
11,215
25,186
2,953
1,708
7,944
3,202
620
384
304
555
1,168
14,177
6,348
1,251
5,097
7.56
7.55
4.24
$
$
$
$
19,824
5,541
787
26,152
8,616
279
4,369
13,264
12,888
1,023
1,204
298
1,192
437
1,747
1,419
975
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
8.68
8.66
4.06
(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 $889 million for the
year ended October 31, 2021 ($1,532 million in 2020 and $1,853 million in 2019).
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.
Darryl White
Chief Executive Officer
Jan Babiak
Chair, Audit and Conduct Review Committee
146 BMO Financial Group 204th Annual Report 2021
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
Reclassification to earnings of (gains) in the year
Net change in unrealized gains (losses) on cash flow hedges
Gains (losses) on derivatives designated as cash flow hedges arising during the year
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges
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
Items that will not be reclassified to net income
Unrealized gains on fair value through OCI equity securities arising during the year
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
Other Comprehensive Income (Loss), net of taxes (Note 22)
Total Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
2021
2020
2019
$
7,754
$
5,097
$
5,758
(161)
(43)
(204)
(1,380)
(414)
(1,794)
(2,207)
496
(1,711)
20
923
(196)
747
(2,962)
$
4,792
$
410
(81)
329
1,513
(47)
1,466
373
(96)
277
–
(255)
(28)
(283)
1,789
6,886
$
412
(72)
340
1,444
143
1,587
(11)
(13)
(24)
1
(552)
75
(476)
1,427
7,185
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BMO Financial Group 204th Annual Report 2021 147
CONSOLIDATED FINANCIAL STATEMENTS
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
Investments in associates and joint ventures
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 (Note 4)
Other Assets
Derivative instruments (Note 8)
Customers’ liability under acceptances (Note 12)
Premises and equipment (Notes 1 and 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 (Notes 1 and 14)
Subordinated Debt (Note 15)
Total Liabilities
Equity
Preferred shares and other equity instruments (Note 16)
Common shares (Note 16)
Contributed surplus
Retained earnings (Note 1)
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.
148 BMO Financial Group 204th Annual Report 2021
2021
2020
$
93,261
$
57,408
8,303
9,035
104,411
14,210
63,123
49,970
1,135
232,849
107,382
135,750
77,164
8,103
239,809
460,826
(2,564)
458,262
36,713
14,021
4,454
5,378
2,266
1,588
1,287
22,411
88,118
97,834
13,568
73,407
48,466
985
234,260
111,878
127,024
70,148
7,889
245,662
450,723
(3,303)
447,420
36,815
13,493
4,183
6,535
2,442
1,260
1,473
23,059
89,260
$
988,175
$
685,631
$
$
949,261
659,034
30,815
14,021
32,073
97,556
25,486
221
192
37,764
238,128
6,893
930,652
5,558
13,599
313
35,497
2,556
57,523
30,375
13,493
29,376
88,658
26,889
126
108
36,193
225,218
8,416
892,668
6,598
13,430
302
30,745
5,518
56,593
$
988,175
$
949,261
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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 and/or treasury shares sold/purchased
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 16 (Note 1)
Net income
Dividends on preferred shares and distributions payable on other equity instruments (Note 16)
Dividends on common shares (Note 16)
Equity issue expense and premium paid on redemption of preferred shares
Common shares repurchased for cancellation (Note 16)
Net discount on sale of treasury shares
Balance at End of Year
Accumulated Other Comprehensive Income on Fair Value through OCI Securities, net of taxes (Note 22)
Balance at beginning of year
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
Reclassification to earnings of (gains) during the year
Balance at End of Year
Accumulated Other Comprehensive Income on Cash Flow Hedges, net of taxes (Note 22)
Balance at beginning of year
Gains (losses) on derivatives designated as cash flow hedges arising during the year (Note 8)
Reclassification to earnings of (gains) 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 (Note 22)
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 (Note 22)
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 (Note 22)
Balance at beginning of year
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value
Balance at End of Year
Total Accumulated Other Comprehensive Income
Total Equity
na – not applicable due to IFRS 16 adoption on November 1, 2019.
The accompanying notes are an integral part of these consolidated financial statements.
2021
2020
2019
$
6,598 $
–
(1,040)
5,348 $
1,250
–
5,558
6,598
13,430
–
122
47
13,599
302
10
1
313
30,745
–
7,754
(244)
(2,746)
(6)
–
(6)
35,497
355
(161)
20
(43)
171
1,979
(1,380)
(414)
185
3,980
(2,207)
496
2,269
(638)
923
285
(158)
(196)
(354)
12,971
471
40
(52)
13,430
303
(1)
–
302
28,725
(59)
5,097
(247)
(2,723)
(3)
–
(45)
30,745
26
410
–
(81)
355
513
1,513
(47)
1,979
3,703
373
(96)
3,980
(383)
(255)
(638)
(130)
(28)
(158)
4,340
1,008
–
5,348
12,929
–
62
(20)
12,971
300
–
3
303
25,850
na
5,758
(211)
(2,594)
(8)
(70)
–
28,725
(315)
412
1
(72)
26
(1,074)
1,444
143
513
3,727
(11)
(13)
3,703
169
(552)
(383)
(205)
75
(130)
2,556
5,518
3,729
$
57,523 $
56,593 $
51,076
BMO Financial Group 204th Annual Report 2021 149
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Cash Flows
For the Year Ended October 31 (Canadian $ in millions)
2021
2020
2019
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 – (Increase) decrease in derivative asset
– Increase (decrease) in derivative liability
Amortization of premises and equipment (Note 9)
Amortization of other assets
Amortization of intangible assets (Note 11)
Write-down of goodwill (Notes 10 and 11)
Net decrease in deferred tax asset (Note 22)
Net increase (decrease) in deferred tax liability (Note 22)
Net (increase) decrease in current tax asset
Net increase in current tax liability
Change in accrued interest – (Increase) decrease in interest receivable
– Increase (decrease) in interest payable
Changes in other items and accruals, net
Net increase in deposits
Net (increase) in loans
Net increase (decrease) in securities sold but not yet purchased
Net increase in securities lent or sold under repurchase agreements
Net (increase) in securities borrowed or purchased under resale agreements
Net increase (decrease) in securitization and structured entities’ liabilities
Net Cash Provided by Operating Activities
Cash Flows from Financing Activities
Net increase (decrease) in liabilities of subsidiaries
Proceeds from issuance of covered bonds (Note 13)
Redemption/buyback 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 net of issuance cost (Note 16)
Redemption of preferred shares (Note 16)
Net proceeds from issuance (repurchase) of common shares and sale (purchase) of treasury shares
Common shares repurchased for cancellation (Note 16)
Cash dividends and distributions paid
Repayment of lease liabilities (1)
Net Cash (Used in) Financing Activities
Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with banks
Purchases of securities, other than trading
Maturities of securities, other than trading
Proceeds from sales of securities, other than trading
Premises and equipment – net (purchases) (Note 9)
Purchased and developed software – net (purchases) (Note 11)
Acquisitions (Note 10)
Net proceeds from divestitures (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 (2)
Income taxes paid in the year
Interest received in the year
Dividends received in the year
(1) Prior to adoption of IFRS 16, repayments of lease liabilities were included in Net Cash Provided by Operating Activities.
(2)
na – not applicable
Includes dividends paid on securities sold but not yet purchased.
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.
150 BMO Financial Group 204th Annual Report 2021
$
7,754
$
5,097
$
5,758
1
(592)
(10,447)
20
542
529
791
140
634
779
127
85
(539)
143
75
(366)
723
52,244
(23,748)
3,545
12,866
(289)
(968)
44,049
–
4,396
(4,074)
1,000
(2,250)
–
(1,046)
159
–
(2,980)
(327)
(5,122)
144
(49,620)
27,377
22,720
(484)
(499)
–
63
(299)
(2,775)
35,853
57,408
2
(126)
(10,276)
2,953
(12,229)
5,614
801
197
620
–
111
26
(55)
62
178
(352)
(4,501)
88,341
(21,941)
2,972
824
(7,104)
(378)
50,836
(8,113)
4,425
(6,231)
1,250
–
1,247
–
(76)
–
(2,475)
(331)
(10,304)
(979)
(86,659)
19,982
36,900
(399)
(633)
(186)
–
(31,974)
47
8,605
48,803
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
29,303
(1,227)
4,168
(3,765)
1,000
(1,000)
1,000
–
54
(90)
(2,752)
na
(2,612)
329
(63,496)
13,154
31,561
(478)
(650)
–
–
(19,580)
(450)
6,661
42,142
$
93,261
$
57,408
$
48,803
$
$
$
$
5,864
2,167
18,323
1,732
$
$
$
$
9,679
1,537
21,576
1,856
$
$
$
$
12,956
1,209
23,966
1,740
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Note 1: Basis of Presentation
Bank of Montreal (the bank or BMO) 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 of 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, 2021.
Basis of Consolidation
These consolidated financial statements are inclusive of the financial statements of our subsidiaries as at October 31, 2021. 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. Additional information regarding accounting for investments in associates and joint
ventures is included in Note 3.
Significant 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
Basis of Presentation
Cash and Interest Bearing Deposits with Banks
Securities
Loans and Allowance for Credit Losses
Risk Management
Transfers of Financial Assets
Structured Entities
Derivative Instruments
Premises and Equipment
Acquisitions and Divestitures
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Subordinated Debt
Page
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157
157
160
167
167
168
171
179
180
181
182
183
184
185
Note Topic
Equity
16
Fair Value of Financial Instruments and Trading-Related
17
Revenue
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
18
19
20
21
22
23
24
25
26
27
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195
195
196
198
201
204
204
207
210
211
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.
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BMO Financial Group 204th Annual Report 2021 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 BMO Wealth Management and BMO Capital Markets on brokerage transactions executed for
customers, generally as a fixed fee per share traded, and 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 when account maintenance and cash
management services are provided, or at a point in time 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 our cards are recorded as a reduction in card fees.
Investment management and custodial fees are earned in BMO 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 BMO 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 BMO 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 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.
Refer to Note 9 for our policy on lessee accounting.
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.
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Changes in Accounting Policies
Interbank Offered Rate (IBOR) Reform – Phase 2 Amendments
Effective November 1, 2020, we early adopted the IASB’s IBOR Phase 2 amendments to IFRS 9 Financial Instruments (IFRS 9), IAS 39 Financial
Instruments: Recognition and Measurement (IAS 39), IFRS 7 Financial Instruments: Disclosures (IFRS 7) and IFRS 4 Insurance Contracts, as well as
IFRS 16 Leases. These amendments address issues that arise from implementation of IBOR reform, where IBORs will be replaced with alternative
benchmark rates.
For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is
as a direct consequence of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective
interest rate with no immediate gain or loss recognized. The amendments also provide additional temporary relief from applying specific IAS 39
hedge accounting requirements to hedging relationships affected by IBOR reform. For example, there is an exemption from the requirement to
discontinue hedge accounting when changes to hedge documentation are solely the result of IBOR reform.
152 BMO Financial Group 204th Annual Report 2021
With the cessation dates for London Interbank Offered Rate (LIBOR) determined and the transition from IBORs to alternative reference rates
(ARRs) well underway, and as both a holder and an issuer of IBOR-based instruments, BMO is exposed to increased financial, operational, legal and
regulatory, and reputational risks. Additionally, other IBORs may be subject to discontinuance, changes in methodology, increased volatility or
decreased liquidity. These risks arise principally from updating systems and processes to capture new ARRs, amending contracts or existing fallback
clauses for new ARRs, managing the client transition to ARRs and the resulting impact on economic risk management, as well as updating hedge
designations as the new ARRs emerge. In order to manage those risks, an enterprise IBOR Transition Office (ITO) has been established to coordinate
and oversee the transition from IBORs to ARRs, with a focus on managing and mitigating internal risks, as well as managing our client relationships.
The ITO, sponsored and supported by senior management, is responsible for running the enterprise-wide program, covering all of BMO’s lines of
business and corporate areas. The ITO has a global mandate to ensure that we properly prepare for the discontinuation or unavailability of LIBOR and
other IBORs. As part of its mandate, the ITO continues to address the bank’s industry and regulatory engagement, client and financial contract
changes, internal and external communications, technology and operations modifications, introduction of new products, migration of existing clients,
program strategy and governance, and to evaluate financial reporting impacts, including impacts on hedge accounting. In addition, the ITO continues
to monitor the development and usage of ARRs across the industry, including the Alternative Reference Rate Committee’s formal recommendation of
the CME Group’s forward-looking Secured Overnight Financing Rate (SOFR) Term Rates. As the market continues to develop, we have added and will
continue to add ARR-based products to our suite of offerings.
We adhered to the International Swaps and Derivatives Association Fallbacks Protocol (ISDA Protocol), which took effect on January 25, 2021.
The ISDA Protocol provides specific fallbacks depending on whether the relevant IBOR (for example, USD LIBOR or GBP LIBOR) has been permanently
discontinued or is temporarily unavailable. It provides an efficient amendment mechanism that allows mutually adhering counterparties to
incorporate these fallback provisions into legacy derivative contracts. Also, we continue to incorporate contractual fallback provisions in new
IBOR-based cash products in order to ensure there is an alternative benchmark rate at the time of the relevant IBOR cessation.
The table below presents quantitative information for financial instruments that referenced certain IBORs as at November 1, 2020, the date of
adoption for Phase 2 relief, and either were due to mature after December 31, 2021 or are demand facilities that will be subject to remediation to
amend the benchmark interest rate. Financial instruments that reference rates in multi-rate jurisdictions, including the Canadian Dollar Offered Rate
(CDOR), the EURO Interbank Offered Rate and Australian Bank Bill Swap Rate, are excluded from both tables below. In the case of CDOR, financial
instruments indexed to 6-month and 12-month CDOR tenors were discontinued on May 17, 2021, while other tenors of CDOR will continue as a
benchmark rate. As at November 1, 2020, we did not hold any material positions in either of these CDOR tenors.
(Canadian $ in millions)
Non-derivative assets (2)
Non-derivative liabilities (2)
Derivative notional amounts (3)(4)
Authorized and committed loan commitments (5)(6)
USD LIBOR
GBP LIBOR
100,521
7,435
1,570,534
68,449
868
692
20,972
194
November 1, 2020
Other (1)
1,225
–
6,702
23,633
(1) Includes CHF LIBOR, EONIA and JPY LIBOR.
(2) All amounts are presented based on contractual amounts outstanding with the exception of securities, recorded in non-derivative assets, which are presented based on carrying value.
(3) Notionals amounts 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.
(4) Includes certain cross-currency swap positions where both the pay and receive legs currently reference an IBOR. For those derivatives, the table above includes the notional amounts for both the pay
and receive legs in the relevant columns aligning with the IBOR exposure.
(5) Excludes 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.
(6) Other includes loan commitments where our customers have the option to draw from their facility in multiple currencies. Amounts drawn will be subject to prevailing IBORs for the foreign currency,
including those that are in scope of IBOR reform.
On March 5, 2021, the Financial Conduct Authority (FCA) confirmed that LIBOR settings will cease to be provided by any administrator
immediately after December 31, 2021 for all sterling, euro, Swiss franc and Japanese yen settings as well as the 1-week and 2-month USD LIBOR
settings. The remaining USD LIBOR settings will cease to be provided immediately after June 30, 2023. U.S. prudential regulators have issued
supervisory guidance that the extension of these certain USD LIBOR settings to June 30, 2023 applies only to legacy contracts; new issuances of
LIBOR-based instruments must cease by December 31, 2021. The ITO adjusted all impacted project plans to align with these extended timelines.
As a result of the extension of the cessation date for certain USD LIBOR settings, more contracts will expire prior to cessation and therefore the
number and value of contracts that will be subject to remediation efforts have been reduced.
On November 16, 2021, the FCA confirmed that it will allow the temporary use of synthetic sterling and yen LIBOR rates in all legacy LIBOR
contracts, excluding cleared derivatives, that have not been changed before December 31, 2021. We are still in the process of remediating our
contracts but do not expect any material exposure to synthetic LIBOR rates at this time.
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BMO Financial Group 204th Annual Report 2021 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents quantitative information for financial instruments that referenced certain IBORs as at October 31, 2021, which were
either due to mature after June 30, 2023 for USD LIBOR settings other than 1-week and 2-month US LIBOR, or after December 31, 2021 for all other
in-scope IBORs, or are demand facilities with no maturity date. Changes in our exposures during fiscal 2021 did not result in significant changes to the
risks arising from transition since adoption of these Phase 2 amendments. In the normal course of business, our exposures may continue to fluctuate
with no significant impact expected on our IBOR conversion plans.
(Canadian $ in millions)
Non-derivative assets (2)
Non-derivative liabilities (2)
Derivative notional amounts (3)(4)
Authorized and committed loan commitments (5)(6)(7)
USD LIBOR
GBP LIBOR
91,991
3,043
1,340,121
62,174
730
678
28,385
241
October 31, 2021
Other (1)
844
–
4,898
15,047
(1) Includes CHF LIBOR, EONIA and JPY LIBOR.
(2) All amounts are presented based on contractual amounts outstanding with the exception of securities, recorded in non-derivative assets, which are presented based on carrying value.
(3) Notional amounts 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.
(4) Includes certain cross-currency swap positions where both the pay and receive legs currently reference an IBOR. For those derivatives, the table above includes the notional amounts for both the pay
and receive legs in the relevant columns aligning with the IBOR exposure.
(5) Excludes 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.
(6) Other includes loan commitments where our customers have the option to draw from their facility in multiple currencies. Amounts drawn will be subject to prevailing IBORs for the foreign currency,
including those that are in scope of IBOR reform.
(7) Commitments also include backstop liquidity facilities provided by the bank to external parties.
Conceptual Framework
Effective November 1, 2020, we adopted 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 had no impact on our accounting policies.
Leases
Effective November 1, 2019, we adopted IFRS 16 Leases (IFRS 16), whereby lessees are required to recognize a liability for the present value of future
lease payments and record a corresponding asset on the balance sheet for most leases. There were minimal changes to the accounting from the
lessor’s perspective.
The main impact for the bank is that leases related to real estate are now recorded on the balance sheet. Previously, most of our real estate
leases were classified as operating leases, and we recorded the lease expense over the lease term with no asset or liability recorded on the balance
sheet other than related leasehold improvements.
On transition, we calculated the right-of-use asset as if we had always applied IFRS 16 for a selection of leases; for the remaining leases, we set
the right-of-use asset equal to the lease liability. We will continue to record lease expense for low dollar value leases over the lease term with no
corresponding right-of-use asset or lease liability. In addition, we combined 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 applicable. We elected to exclude intangibles from the
scope of lease accounting.
On transition, we recognized the cumulative effect of adopting IFRS 16 in opening retained earnings as at November 1, 2019 with no changes to
prior periods. The impact to the Consolidated Balance Sheet as at November 1, 2019 was an increase in premises and equipment of $1,965 million,
an increase in other liabilities of $2,024 million, and a decrease in retained earnings of $80 million ($59 million after tax).
The following table sets out a reconciliation of our operating lease commitments as disclosed under IAS 17 Leases as at October 31, 2019, which
were used to derive the lease liabilities as at November 1, 2019.
(Canadian $ in millions)
Operating lease commitments at October 31, 2019 as disclosed in our consolidated financial statements
Discounted using the incremental borrowing rate at November 1, 2019
Finance lease liabilities recognized as at October 31, 2019
Exemption for low-value asset leases
Extension and termination options reasonably certain to be exercised
Executory costs not included in the lease liability
Leases signed but not yet started
Lease liabilities recognized at November 1, 2019
November 1, 2019
3,800
(310)
41
(13)
37
(166)
(1,222)
2,167
When measuring lease liabilities, we discounted lease payments using our incremental borrowing rate at November 1, 2019. The weighted-
average rate applied was 2.52%.
Uncertainty Over Income Tax Treatments
Effective November 1, 2019, we adopted IFRIC 23 Uncertainty Over Income Tax Treatments. The interpretation clarifies the recognition and
measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The interpretation had no impact on our
financial results on adoption.
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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 IFRS 15, 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
154 BMO Financial Group 204th Annual Report 2021
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.
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 and judgments include the 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; provisions, including legal proceedings and restructuring charges; transfers of financial
assets and consolidation of structured entities; and leases. 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.
The extent of the continuing impact of the COVID-19 pandemic on the Canadian and U.S. economies remains uncertain and difficult to predict,
including government and regulatory responses to the pandemic, which could vary by country and region. The pandemic’s impact on BMO’s business,
results of operations, reputation, financial performance and condition, including the potential for credit, counterparty and mark-to-market losses, its
credit ratings and regulatory capital and liquidity ratios, as well as impacts to its customers and competitors, will depend on future developments,
which remain uncertain. By their very nature, the judgments and estimates we make for the purposes of preparing our financial statements relate to
matters that are inherently uncertain. However, we have detailed policies and internal controls that are intended to ensure that these judgments and
estimates are well controlled and independently reviewed, and that our policies are consistently applied from period to period. We believe that our
estimates of the value of our assets and liabilities are appropriate as at October 31, 2021.
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 bank’s methodology for determining significant increase in credit risk is based on the change in probability of default (PD) between origination
and reporting date, assessed using probability-weighted scenarios as well as 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.
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 benefit 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 benefit 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 investments in associates and joint ventures 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 investments in associates and joint
ventures, allowance for credit losses and the determination of fair value is included in Notes 3 and 17.
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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
BMO Financial Group 204th Annual Report 2021 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 legal proceedings and restructuring charges, 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.
Transfer of Assets and Consolidation of Structured Entities
We enter into transactions in which we transfer assets, typically mortgage loans, mortgage-backed securities, and credit card loans, to a structured
entity or third party to obtain alternate sources of funding or as part of our trading activities. We assess whether substantially all of the risks and
rewards of or control over the assets have been transferred to determine if they qualify for derecognition. Where we continue to be exposed to
substantially all of the repayment, interest rate and/or credit risk associated with the securitized assets, they do not qualify for derecognition.
We continue to recognize the assets 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 the funding of their activities. We control and consolidate these vehicles
when we have the key decision-making powers necessary to obtain the majority of the benefits from 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 of 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.
Leases
We enter into leases as a lessee for which we recognize a lease liability and a corresponding right-of-use asset. In calculating our lease liability and
corresponding right-of-use asset, we assess whether a contract is a lease by determining if we have the right to control the asset based on our ability
to make decisions or direct how and for what purpose the asset is used. We evaluate the lease term based on the terms of the lease contract,
including any extension or termination options that we are reasonably certain to exercise based on the economic rationale underlying the decision.
We make estimates in determining the incremental borrowing rate that is used to discount lease liabilities, based on our expected costs of secured
borrowing for the lease term.
156 BMO Financial Group 204th Annual Report 2021
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Future Changes in IFRS
Insurance Contracts
In June 2020, the IASB issued amendments to IFRS 17 Insurance Contracts (IFRS 17), which included a deferral of the effective date, resulting in a new
adoption date for the bank of November 1, 2023 instead of November 1, 2022. The amendments also simplify some requirements, such as excluding
certain credit cards from the scope of IFRS 17 and providing a policy choice to exclude certain loan contracts from IFRS 17, allowing us to continue
accounting for them as we do today. We continue to assess the impact of the standard on our future financial results.
Note 2: Cash and Interest Bearing Deposits with Banks
Cash and Cash Equivalents
(Canadian $ in millions)
Cash and deposits with banks (1)
Cheques and other items in transit, net
Total cash and cash equivalents
2021
91,377
1,884
93,261
2020
55,926
1,482
57,408
(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 $110 million as at October 31, 2021 ($111 million as at October 31, 2020).
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 a reliably measurable fair value, 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 FVOC I 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 $11,172 million as at October 31, 2021 ($11,148 million as at October 31, 2020) is recorded in securities in our
Consolidated Balance Sheet. The impact of recording these investments at fair value through profit or loss was a decrease of $202 million in
non-interest revenue, insurance revenue, for the year ended October 31, 2021 (an increase of $281 million and an increase of $1,006 million in 2020
and 2019, respectively).
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 fair value of these investments
of $3,038 million as at October 31, 2021 ($2,420 million as at October 31, 2020) is recorded in securities in our Consolidated Balance Sheet.
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.
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BMO Financial Group 204th Annual Report 2021 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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 non-interest revenue, 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.
Investments in associates and joint ventures are accounted for using the equity method of accounting. Investments in associates are those in
which we exert significant influence over operating and financing decisions; generally companies in which we own between 20% and 50% of the
voting shares. Investments in joint ventures are where we have joint control. Our share of the net income or loss, including any impairment losses,
is recorded in non-interest revenue, 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 those determined to have low
credit risk, where the allowance for credit losses is measured at a 12-month expected credit loss. A debt security is considered to have low credit risk
if it 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 $49,970 million as at October 31, 2021 ($48,466 million as at October 31, 2020) are net of allowances
for credit losses of $2 million as at October 31, 2021 ($1 million as at October 31, 2020).
Debt securities at FVOCI totalling $62,991 million as at October 31, 2021 ($73,314 million as at October 31, 2020) are net of allowances for credit
losses of $2 million as at October 31, 2021 ($4 million as at October 31, 2020).
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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158 BMO Financial Group 204th Annual Report 2021
Remaining Term to Maturity of Securities
The following table shows the remaining term to maturities of securities.
(Canadian $ in millions, except as noted)
Term to maturity
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
No
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
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Other governments
Amortized cost
Fair value
Yield (%)
NHA MBS (1)
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Corporate debt
Amortized cost
Fair value
Yield (%)
Corporate equity
Cost
Fair value
U.S. agency MBS and CMO (1)
Total cost or amortized cost
Total fair value
Yield (%)
Amortized Cost Securities
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Amortized cost
Fair value
U.S. federal government
Amortized cost
Fair value
Other governments
Amortized cost
Fair value
Canadian provincial and municipal governments
NHA MBS, U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Corporate debt
Amortized cost
Fair value
Total amortized cost
Total fair value
Investments in associates and joint ventures
Carrying value
Total carrying value or amortized cost of securities
Total carrying value of securities
Total by Currency (in Canadian $ equivalent)
Canadian dollar
U.S. dollar
Other currencies
Total securities
1,292
894
1,733
259
525
23
1,940
–
–
6,666
679
–
38
–
–
226
–
943
4,073
4,073
1.40
1,329
1,334
1.02
997
1,008
2.16
635
640
2.06
2,807
2,814
0.89
87
87
1.18
43
44
2.28
1,231
1,234
0.85
–
–
11,202
11,234
1.27
277
283
527
539
851
857
375
388
90
93
256
257
2,376
2,417
–
21,187
21,219
10,341
9,034
1,844
21,219
2,039
843
3,620
24
520
140
1,955
87
–
9,228
28
47
–
66
–
67
–
208
4,714
4,740
1.71
1,168
1,189
1.82
1,458
1,477
1.94
1,144
1,171
2.05
2,406
2,443
1.48
411
415
1.74
135
139
2.56
683
706
2.26
–
–
12,119
12,280
1.78
4,781
4,799
1,644
1,654
2,278
2,261
689
690
740
752
603
608
10,735
10,764
–
32,290
32,451
15,845
16,268
338
32,451
1,669
583
1,849
11
534
183
2,245
35
–
7,109
–
5
–
26
–
310
–
341
4,175
4,131
1.29
166
163
1.28
3,817
3,951
2.08
784
806
2.08
735
728
0.93
603
602
0.88
527
555
3.04
907
901
1.04
–
–
11,714
11,837
1.62
1,966
1,981
2,230
2,304
1,613
1,576
283
278
2,665
2,657
588
591
9,345
9,387
–
28,509
28,632
13,510
14,775
347
28,632
1,603
701
1,803
106
247
243
2,695
38
–
7,436
10
84
–
–
9
969
–
1,072
75
73
1.10
300
291
1.95
12,827
12,652
1.12
707
724
2.03
528
517
1.85
–
–
–
2,040
2,082
1.66
268
264
2.14
–
–
16,745
16,603
1.28
60
57
1,241
1,226
891
895
66
64
4,031
4,044
145
146
6,434
6,432
–
31,687
31,545
6,225
25,034
286
31,545
993
2,817
577
58
72
13,465
1,059
–
–
19,041
146
1,244
–
–
–
6,132
–
7,522
50
48
1.60
10
10
2.75
1,942
1,938
1.95
764
773
1.28
–
–
–
21
21
1.56
8,149
8,191
0.96
58
56
3.35
–
–
10,994
11,037
1.18
–
–
–
–
–
–
–
–
21,031
20,761
49
49
21,080
20,810
–
58,637
58,680
12,351
46,207
122
58,680
2021
Total
7,596
5,838
9,582
458
1,898
14,054
9,894
160
54,931
104,411
863
1,380
38
92
9
7,704
4,124
14,210
13,087
13,065
1.48
2,973
2,987
1.45
21,041
21,026
1.48
4,034
4,114
1.91
6,476
6,502
1.19
1,122
1,125
1.23
10,894
11,011
1.22
3,147
3,161
1.37
103
132
62,877
63,123
1.42
7,084
7,120
5,642
5,723
5,633
5,589
1,413
1,420
28,557
28,307
1,641
1,651
49,970
49,810
2020
Total
10,900
8,335
8,418
503
2,516
12,297
11,041
67
43,757
97,834
601
1,429
44
94
3
7,897
3,500
13,568
22,240
22,450
1.44
4,628
4,747
1.46
16,881
17,694
1.73
5,132
5,276
1.96
7,222
7,381
1.63
1,583
1,629
1.79
10,600
10,903
1.62
3,153
3,234
1.72
90
93
71,529
73,407
1.61
6,238
6,260
5,650
5,706
8,785
8,805
1,480
1,485
24,769
25,198
1,544
1,555
48,466
49,009
–
–
–
–
–
–
–
–
54,931
54,931
–
–
–
–
–
–
4,124
4,124
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
103
132
103
132
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,135
60,293
60,322
27,661
29,104
3,557
60,322
1,135
232,603
232,849
85,933
140,422
6,494
232,849
985
232,382
234,260
100,544
125,795
7,921
234,260
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(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 204th Annual Report 2021 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unrealized Gains and Losses on FVOCI Securities
The following table summarizes unrealized gains and losses:
(Canadian $ in millions)
Cost or
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
13,087
2,973
21,041
4,034
6,476
1,122
10,894
3,147
103
62,877
62
29
282
85
55
6
151
34
29
733
2021
Fair
value
13,065
2,987
21,026
4,114
6,502
1,125
11,011
3,161
132
Cost or
amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
22,240
4,628
16,881
5,132
7,222
1,583
10,600
3,153
90
71,529
211
119
844
147
168
46
307
91
3
1,936
1
–
31
3
9
–
4
10
–
58
2020
Fair
value
22,450
4,747
17,694
5,276
7,381
1,629
10,903
3,234
93
73,407
84
15
297
5
29
3
34
20
–
487
63,123
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 investments in associates and
joint ventures and trading securities. Related income for trading securities is included under Trading-Related Revenue in Note 17.
(Canadian $ in millions)
FVTPL
FVOCI
Amortized cost
Total
2021
22
470
419
911
2020
17
959
573
1,549
2019
34
1,585
268
1,887
Non-Interest Revenue
Net gains and losses from securities, excluding gains and losses on trading securities, have been included in our Consolidated Statement of Income as
follows:
(Canadian $ in millions)
FVTPL securities
FVOCI securities (1)
Gross realized gains
Gross realized (losses)
Impairment losses
Securities gains, other than trading (2)
2021
535
170
(113)
(1)
591
2020
30
109
(13)
(2)
124
2019
164
209
(123)
(1)
249
(1) Gains (losses) are net of (losses) gains on hedge contracts.
(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 $379 million, $416 million and $407 million for the years ended October 31, 2021, 2020 and 2019, respectively; securities gains, other than trading, from FVOCI securities of $1 million,
$19 million and $11 million for the years ended October 31, 2021, 2020 and 2019, respectively; and securities gains (losses), other than trading, from securities designated at FVTPL of $(202) million,
$281 million and $1,006 million for the years ended October 31, 2021, 2020 and 2019, respectively.
Gains and losses on trading securities are included in trading-related revenue in Note 17.
Note 4: Loans and Allowance for Credit Losses
Loans
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.
Where the loans are held with the objective of both collecting contractual cash flows and selling the loans, and the cash flows represent solely
payments of principal and interest, these loans are measured at FVOCI. 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.
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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.
160 BMO Financial Group 204th Annual Report 2021
Lending Fees
Lending fees primarily arise in Personal and Commercial Banking and BMO 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
each 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, payment default or when collection of the
full amount of principal and interest is no longer reasonably assured. 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 reasonable 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 continues
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 more than 90 days past due (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 lower 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.
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 $71 million was recognized for the year ended October 31,
2021 ($96 million in 2020 and $80 million in 2019).
During the year ended October 31, 2021, we recorded a net loss of $10 million before tax (loss of $46 million in 2020 and gain of $11 million in
2019) 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 $2,958 million as at October 31, 2021 ($3,814 million in
2020), of which $2,564 million ($3,303 million in 2020) was recorded in loans and $394 million ($511 million in 2020) 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).
The determination of a significant increase in credit risk takes into account many different factors and varies by product and risk segment.
The bank’s methodology for determining significant increase in credit risk is based on the change in probability of default (PD) between origination
and reporting date, assessed using probability-weighted scenarios as well as certain other criteria, such as 30-days past due and watchlist status.
For each exposure, ECL is a function of 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. 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 amount of credit exposure outstanding 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.
BMO Financial Group 204th Annual Report 2021 161
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We consider past events, current market conditions and reasonable supportable forward-looking information about future economic conditions
in determining the amount of expected losses. In assessing information about possible future economic conditions, we utilize multiple economic
scenarios, including our base case scenario, which in our view represents the most probable outcome, as well as benign and adverse scenarios, 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. We applied experienced credit judgment to reflect the continuing impact of the uncertain environment on credit conditions
and the economy as a result of the COVID-19 pandemic.
Allowance on Impaired Loans
We maintain an allowance on individually identified impaired loans (Stage 3) of $498 million as at October 31, 2021 ($727 million as at October 31,
2020) on our gross impaired loans of $2,169 million as at October 31, 2021 ($3,638 million as at October 31, 2020), to reduce their carrying value to
an expected recoverable amount of $1,671 million as at October 31, 2021 ($2,911 million as at October 31, 2020).
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 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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162 BMO Financial Group 204th Annual Report 2021
Loans: Credit Risk Exposure
The following table sets out our credit risk exposure for all loans carried at amortized cost, FVOCI or FVTPL as at October 31, 2021 and 2020.
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 expected credit loss that are credit impaired.
(Canadian $ in millions)
Loans: Residential mortgages
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Gross residential mortgages
Allowance for credit losses
Carrying amount
Loans: Consumer instalment and other personal
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Gross consumer instalment and other personal
Allowance for credit losses
Carrying amount
Loans: Credit cards (1)
Exceptionally low
Very low
Low
Medium
High
Not rated
Impaired
Gross credit cards
Allowance for credit losses
Carrying amount
Loans: Business and government (2)
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Gross business and government
Allowance for credit losses
Carrying amount
Gross total loans and acceptances
Net total loans and acceptances
Commitments and financial guarantee contracts
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount (3)(4)
Stage 1
Stage 2
Stage 3
Stage 1
Stage 2
Stage 3
2021
Total
4
94,745
24,764
14,316
473
1,097
351
–
–
–
–
–
–
351
1
79,295
24,490
11,560
172
1,132
–
351
135,750
116,650
12
97
51
–
429
2,481
6,461
446
148
–
9,965
75
4
94,566
23,471
12,066
167
1,051
–
131,325
46
–
179
1,293
2,250
306
46
–
4,074
39
131,279
4,035
339
135,653
116,599
9,890
1,487
30,672
21,660
13,336
661
3,450
–
71,266
113
37
8
534
3,607
1,375
50
–
5,611
333
–
–
–
–
–
–
287
287
91
1,524
30,680
22,194
16,943
2,036
3,500
287
77,164
537
1,550
26,645
20,935
10,324
429
3,372
–
63,255
134
71,153
5,278
196
76,627
63,121
2,532
450
1,801
1,743
75
486
–
7,087
67
7,020
–
–
66
663
287
–
–
1,016
209
807
–
–
–
–
–
–
–
–
–
–
2,532
450
1,867
2,406
362
486
–
8,103
276
7,827
2,252
1,106
899
1,611
58
524
–
6,450
61
6,389
144,807
85,375
–
–
1,446
14,534
6,137
–
–
–
–
1,531
146,253
99,909
6,137
1,531
230,182
22,117
1,531
253,830
529
730
395
1,654
229,653
21,387
1,136
252,176
439,860
32,818
2,169
474,847
439,105
31,507
1,671
472,283
125,216
88,745
–
–
213,961
510
213,451
400,316
399,560
154,975
46,827
–
–
195
2,367
8,164
2,453
–
186
–
–
–
682
13
157,342
54,991
2,453
682
139,732
44,443
–
–
394
211
31
37
585
4,334
1,470
96
–
6,553
429
6,124
–
15
148
899
377
–
–
1,439
272
1,167
3,576
30,108
8,621
–
42,305
1,044
41,261
60,262
58,442
1,935
20,421
4,861
–
288
2020
Total
1
79,724
26,971
18,021
618
1,280
409
127,024
142
126,882
1,581
26,682
21,520
14,658
1,899
3,468
340
70,148
668
69,480
2,252
1,121
1,047
2,510
435
524
–
7,889
333
7,556
128,792
118,853
8,621
2,889
259,155
2,160
256,995
464,216
460,913
141,667
64,864
4,861
1,261
511
–
–
–
–
–
–
409
409
16
393
–
–
–
–
–
–
340
340
105
235
–
–
–
–
–
–
–
–
–
–
–
–
–
2,889
2,889
606
2,283
3,638
2,911
–
–
–
1,261
12
201,607
12,798
669
215,074
183,964
26,929
1,249
212,142
(1) Credit card loans are immediately written off when principal or interest payments are 180 days past due, and as a result are not reported as impaired in Stage 3.
(2) Includes customers’ liability under acceptances.
(3) 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.
(4) Certain commercial borrower commitments are conditional and may include recourse to parties.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO Financial Group 204th Annual Report 2021 163
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the continuity in the loss allowance, by product type, for the years ended October 31, 2021 and 2020. Transfers represent
the amount of ECL that moved between stages during the year, for example, moving from a 12-month (Stage 1) to a lifetime (Stage 2) ECL
measurement basis. Net remeasurements represent the ECL impact due to transfers between stages, as well as changes in economic forecasts and
credit quality. Model changes include new calculation models or methodologies.
(Canadian $ in millions)
Loans: Residential mortgages
Balance as at beginning of year
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement of loss allowance
Loan originations
Derecognitions and maturities
Model changes
Total Provision for Credit Losses (PCL) (1)
Write-offs (2)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at end of year
Loans: Consumer instalment and other personal
Balance as at beginning of year
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement of loss allowance
Loan originations
Derecognitions and maturities
Model changes
Total PCL (1)
Write-offs (2)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at end of year
Loans: Credit cards
Balance as at beginning of year
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement of loss allowance
Loan originations
Derecognitions and maturities
Model changes
Total PCL (1)
Write-offs (2)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at end of year
Loans: Business and government
Balance as at beginning of year
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement of loss allowance
Loan originations
Derecognitions and maturities
Model changes
Total PCL (1)
Write-offs (2)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at end of year
Total as at end of year
Comprised of: Loans
Other credit instruments (3)
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Stage 1
Stage 2
Stage 3
51
62
(4)
–
(93)
38
(7)
–
(4)
–
–
(1)
46
148
297
(30)
(7)
(289)
86
(27)
(48)
(18)
–
–
(2)
128
110
194
(28)
(1)
(191)
39
(7)
–
6
–
–
(2)
114
658
505
(101)
(2)
(549)
329
(140)
(5)
37
–
–
(33)
662
950
755
195
75
(53)
21
(13)
24
–
(12)
–
(33)
–
–
(2)
40
454
(287)
66
(94)
247
–
(49)
26
(91)
–
–
(6)
357
321
(194)
28
(172)
292
–
(29)
–
(75)
–
–
(1)
245
1,258
(496)
172
(97)
334
–
(214)
(19)
(320)
–
–
(83)
855
1,497
1,311
186
26
(9)
(17)
13
29
–
–
–
16
(12)
11
(22)
19
105
(10)
(36)
101
103
–
–
–
158
(236)
86
(22)
91
–
–
–
173
21
–
–
–
194
(266)
94
(22)
–
608
(9)
(71)
99
138
–
–
–
157
(336)
42
(70)
401
511
498
13
2021
Total
152
–
–
–
(40)
38
(19)
–
(21)
(12)
11
(25)
105
707
–
–
–
61
86
(76)
(22)
49
(236)
86
(30)
576
431
–
–
–
122
39
(36)
–
125
(266)
94
(25)
359
2,524
–
–
–
(77)
329
(354)
(24)
(126)
(336)
42
(186)
1,918
2,958
2,564
394
Stage 1
Stage 2
Stage 3
15
25
(3)
–
6
14–
(3)
(3)
36
–
–
–
51
89
189
(25)
(4)
(148)
49
(18)
16
59
–
–
–
148
80
152
(32)
(1)
(100)
18–
(6)
(1)
30
–
–
–
110
338
180
(184)
(8)
227
208
(85)
(30)
308
–
–
12
658
967
756
211
33
(22)
10
(5)
70
(6)
(5)
42
–
–
–
75
333
(180)
86
(96)
315
–
(38)
33
120
–
–
1
454
225
(152)
32
(178)
429
(25)
(10)
96
–
–
–
321
496
(172)
195
(285)
1,106
–
(128)
8
724
–
–
38
1,258
2,108
1,820
288
38
(3)
(7)
5
2298
–
–
–
17
(11)
8
(26)
26
136
(9)
(61)
100
196
–
–
–
226
(320)
87
(24)
105
–
–
–
179
82
–
–
–
261
(333)
85
(13)
–
311
(8)
(11)
293
744
–
–
–
1,018
(716)
72
(77)
608
739
727
12
2020
Total
86
–
–
–
14
(9)
(8)
95
(11)
8
(26)
152
558
–
–
–
363
49
(56)
49
405
(320)
87
(23)
707
305
–
–
–
411
18
(31)
(11)
387
(333)
85
(13)
431
1,145
–
–
–
2,077
208
(213)
(22)
2,050
(716)
72
(27)
2,524
3,814
3,303
511
(1) Excludes PCL on other assets of $(7) million for the year ended October 31, 2021 ($16 million in 2020).
(2) 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.
(3) Other credit instruments, including off-balance sheet items, are recorded in other liabilities in our Consolidated Balance Sheet.
164 BMO Financial Group 204th Annual Report 2021
Loans and allowance for credit losses by geographic region as at October 31, 2021 and 2020 are as follows:
(Canadian $ in millions)
2021
Gross
amount
Allowance for
credit losses on
impaired loans (2)
Allowance for
credit losses on
performing loans (3)
Net
amount
Gross
amount
Allowance for
credit losses on
impaired loans (2)
Allowance for
credit losses on
performing loans (3)
2020
Net
amount
By geographic region (1):
Canada
United States
Other countries
Total
299,905
153,479
7,442
460,826
345
153
–
498
1,143 298,417
910 152,416
7,429
13
276,975
161,725
12,023
2,066 458,262
450,723
303
410
14
727
1,323
1,225
28
275,349
160,090
11,981
2,576
447,420
(1) Geographic region is based upon the country of ultimate risk.
(2) Excludes allowance for credit losses on impaired loans of $13 million for other credit instruments, which is included in other liabilities ($12 million as at October 31, 2020).
(3) Excludes allowance for credit losses on performing loans of $381 million for other credit instruments, which is included in other liabilities ($499 million as at October 31, 2020).
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, 2021 and 2020 are as follows:
(Canadian $ in millions)
2021
2020
Residential mortgages
Consumer instalment and other personal
Business and government (1)
Total
By geographic region (2):
Canada
United States
Other countries
Total
Gross impaired
amount (3)
Allowance for
credit losses on
impaired loans (4)
Net impaired
amount (3)
Gross impaired
amount (3)
Allowance for
credit losses on
impaired loans (4)
Net impaired
amount (3)
351
287
1,531
2,169
1,195
974
–
2,169
12
91
395
498
345
153
–
498
339
196
1,136
1,671
850
821
–
1,671
409
340
2,889
3,638
1,343
2,211
84
3,638
16
105
606
727
303
410
14
727
393
235
2,283
2,911
1,040
1,801
70
2,911
(1) Includes customers’ liability under acceptances.
(2) Geographic region is based upon the country of ultimate risk.
(3) Gross impaired loans and net impaired loans exclude purchased credit impaired loans.
(4) Excludes allowance for credit losses on impaired loans of $13 million for other credit instruments, which is included in other liabilities ($12 million as at October 31, 2020).
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, 2021 and 2020. Loans less than 30 days past due are excluded as they are not
generally representative of the borrowers’ ability to meet their payment obligations.
(Canadian $ in millions)
Residential mortgages
Credit card, consumer instalment and other personal
Business and government
Total
30 to 89 days
90 days or more
30 to 89 days
90 days or more
2021
Total
418
338
297
14
59
33
543
345
330
1,218
404
279
264
947
2020
Total
586
410
352
43
65
22
106
1,053
130
1,348
Fully secured loans with amounts between 90 and 180 days past due that we have not classified as impaired totalled $36 million and $53 million as at October 31, 2021 and 2020, respectively.
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.
As at October 31, 2021, our base case scenario depicts a stronger economic forecast in both Canada and the United States compared to the base
case economic forecast as at October 31, 2020, which depicted more moderate economic growth over the near-term projection period. 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 $1,725 million as at October 31, 2021
($2,375 million as at October 31, 2020) compared to the reported allowance for performing loans of $2,447 million ($3,075 million as at October 31,
2020).
As at October 31, 2021, our adverse case economic forecast depicts a contracting economy with annual average real GDP declining in both
Canada and the United States. Despite adopting a more severe adverse scenario during fiscal 2021, the adverse case economic outlook as at
October 31, 2020 depicted a more severe economic contraction in Canada and the United States compared with the adverse case as at October 31,
2021 due to the improvement in economic conditions year over year. 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 $3,825 million as at October 31, 2021 ($4,875 million as at October 31, 2020) compared to the reported
allowance for performing loans of $2,447 million ($3,075 million as at October 31, 2020).
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BMO Financial Group 204th Annual Report 2021 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table shows the key economic variables used to estimate the allowance on performing loans during the forecast period. The values
shown represent the national annual average levels or growth rates for the next 12 months and subsequent 12 months following each reporting
period for all scenarios. While the values disclosed below are national variables, we use regional variables in the underlying models and consider
factors impacting particular industries where appropriate.
As at October 31, 2021
As at October 31, 2020
All figures are average
annual values
Real GDP growth rates (1)
Canada
United States
Corporate BBB 10-year
spread
Canada
United States
Unemployment rates
Canada
United States
Housing Price Index
Canada (2)
United States (3)
Benign scenario
Base scenario
Adverse scenario
Benign scenario
Base scenario
Adverse scenario
First 12
months
Subsequent
12 months
First 12
months
Subsequent
12 months
First 12
months
Subsequent
12 months
First 12
months
Subsequent
12 months
First 12
months
Subsequent
12 months
First 12
months
Subsequent
12 months
6.3%
7.1%
5.5%
4.0%
4.0%
4.8%
3.9%
2.7%
(2.7)%
(1.2)%
(1.1)%
(1.1)%
3.7%
1.6%
6.4%
6.0%
1.8%
(0.4)%
4.2%
4.0%
(4.4)%
(5.1)%
(1.1)%
(1.2)%
1.4%
0.9%
6.0%
4.2%
1.7%
1.1%
4.9%
3.2%
1.8%
1.2%
6.6%
4.7%
2.0%
1.5%
3.6%
4.2%
4.4%
4.5%
5.7%
3.7%
10.8%
8.5%
12.7%
11.0%
1.8%
1.7%
7.4%
6.4%
18.2%
14.6%
10.2%
6.7%
15.1%
12.3%
5.2%
4.3%
(6.4)%
(6.1)%
(18.0)%
(15.5)%
10.3%
4.6%
1.9%
1.7%
6.1%
4.8%
7.7%
4.5%
2.2%
2.0%
8.9%
8.0%
7.2%
2.4%
2.2%
2.0%
7.5%
6.0%
3.6%
3.9%
4.5%
4.1%
12.7%
11.5%
13.9%
12.8%
2.8%
2.1%
(1.2)%
(2.4)%
(8.7)%
(6.2)%
(1) Real gross domestic product (GDP) and housing price index are four quarter averages of year-over-year growth rates.
(2) In Canada, we use the HPI Benchmark Composite.
(3) In the United States, 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 $1,775 million compared to the reported allowance for performing loans of $2,447 million as at October 31, 2021
($2,300 million compared to the reported allowance for performing loans of $3,075 million as at October 31, 2020).
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 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 continues to apply.
The carrying value of loans with lifetime allowance for credit losses modified during the year ended October 31, 2021 was $37 million
($8,649 million in 2020, which included modifications for COVID-19 payment deferrals of $8,485). Modified loans of $21 million ($49 million in
2020 and $36 million in 2019) were written off during the year ended October 31, 2021. As at October 31, 2021, $29 million ($1,469 million as
at October 31, 2020) of loans previously modified saw their loss allowance during the year change 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 own use or held for sale
according to management’s intention, recorded initially at fair value for assets held for own use and at the lower of carrying value or fair value less
costs to sell for any assets held for sale. Assets held for own use are subsequently accounted for in accordance with the relevant asset classification
and assets held for sale are assessed for impairment.
During the year ended October 31, 2021, we foreclosed on impaired loans and received $27 million of real estate properties that we classified
as held for sale ($44 million in 2020). As at October 31, 2021, real estate properties held for sale totalled $11 million ($27 million as at October 31,
2020). These properties are disposed of when considered appropriate.
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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 within this
report.
166 BMO Financial Group 204th Annual Report 2021
Note 5: Risk Management
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. The COVID-19
pandemic continues to impact certain risks as outlined in the Enterprise Wide Risk Management section of our Management’s Discussion and Analysis
and where those risks are related to financial instruments, they have been included in the blue-tinted font as referenced below.
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 within this report. Additional information on credit risk related to loans and derivatives is included in Note s 4
and 8, respectively.
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, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities, and includes the risk of credit migration and
default in our trading book. We incur market risk in our trading and underwriting activities, as well as in our structural banking 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 within 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, as well as 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 within this report.
Note 6: Transfers of Financial 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. In 2020, we also
participated in the Government of Canada’s Insured Mortgage Purchase Program, launched as part of its response to COVID-19. 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 Canada Mortgage Bond holders and receive the interest on the underlying
mortgages, which are converted into MBS through the NHA MBS program and sold to 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, 2021,
we sold $7,614 million of mortgages to these programs ($6,644 million in 2020).
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
Trading securities (2)
Residential mortgages
Other related assets (3)
Total
Associated liabilities (4)
Carrying amount (1)
Fair value
Carrying amount (1)
Fair value
2021
2020
997
7,847
10,009
18,853
18,208
18,859
18,323
345
8,453
10,363
19,161
18,617
19,357
19,213
(1) Carrying amount of loans is net of allowance, where applicable.
(2) Trading securities represent collateralized mortgage obligations issued by third-party sponsored vehicles, where we do not substantially transfer all the risks and rewards of ownership to third-party
investors.
(3) 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.
(4) Associated liabilities are recognized in Securitization and structured entities’ liabilities in our Consolidated Balance Sheet.
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Continuing Involvement in Transferred Financial Assets that Qualify for Derecognition
We retain the mortgage servicing rights, representing our continuing involvement, for certain mortgage loans purchased or originated in the U.S.
which are sold and derecognized. During the year ended October 31, 2021, we sold and derecognized $631 million of these loans ($720 million in
BMO Financial Group 204th Annual Report 2021 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 and $460 million in 2019) and recognized a $32 million gain ($33 million in 2020 and $15 million in 2019) in non-interest revenue, other.
As at October 31, 2021, the carrying value of the mortgage servicing rights was $29 million ($29 million as at October 31, 2020) and the fair value
was $28 million ($30 million as at October 31, 2020).
We retain the residual interests, representing our continuing involvement, for certain commercial mortgage loans purchased or originated in the
U.S. which are sold and derecognized. During the year ended October 31, 2021, we sold and derecognized $1,252 million of these loans ($56 million
in 2020 and $nil in 2019) and recognized a gain of $3 million upon transfer ($nil in 2020 and $nil in 2019). The carrying values of our retained
interests classified as debt securities at amortized cost and loans were $7 million and $7 million, respectively, as at October 31, 2021 ($2 million and
$nil as at October 31, 2020). Fair value was equal to carrying value on these dates.
In addition, we hold U.S. government agency collateralized mortgage obligations (CMOs) issued by third-party sponsored vehicles, which we may
further securitize by packaging them into new CMOs prior to selling to third-party investors. Where we do not substantially transfer all the risks and
rewards of ownership to third-party investors, we continue to recognize these CMOs and the related cash proceeds as secured financing in our
Consolidated Balance Sheet. During the year, we sold CMOs that qualified for derecognition, where retained interests represent our continuing
involvement and are managed as part of larger portfolios held for either trading, liquidity or hedging purposes. Where we sold these CMOs, the
associated gains and losses are recognized in non-interest revenue, trading revenues. As at October 31, 2021, the fair value of our retained interests
in these CMOs was $3 million, classified as trading securities in our Consolidated Balance Sheet ($28 million as at October 31, 2020). Refer to Note 3
for further information.
Other Transferred Financial Assets
In the second quarter of 2020, the Canadian Government launched the Canada Emergency Business Account Program as part of its response to
COVID-19, in which we issued loans that are funded by the government. We determined these loans qualify for derecognition, as substantially all the
risks and rewards were transferred; therefore, we do not recognize these loans in our Consolidated Balance Sheet.
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 due to their short-term nature. As at October 31, 2021, the carrying values of securities lent and securities sold under
repurchase agreements were $9,662 million and $87,894 million, respectively ($7,696 million and $80,962 million, respectively, as at October 31,
2021). The interest expense related to these liabilities is recorded on an accrual basis in interest expense, other liabilities, in our Consolidated
Statement of Income.
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 a SE if we control the entity. We control a 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 a 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. In the event such reassessment results in a loss of control, we will de-recognize the related assets (including goodwill), liabilities,
and non-controlling interest at their carrying amounts and recognize any consideration received or retained interest at fair value with any differential
recognized as gain or loss in our Consolidated Statement of Income. 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 U.S.
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 (ABS) 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:
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(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
2021
2020
7,106
5,228
250
7,106
5,238
253
6,825
6,291
484
6,825
6,312
484
12,584
12,597
13,600
13,621
7,278
7,341
8,272
8,416
(1) Carrying amount of loans is net of allowance.
(2) Includes real estate lines of credit and auto loans.
(3) Associated liabilities are recognized in Securitization and structured entities’ liabilities in our Consolidated Balance Sheet.
168 BMO Financial Group 204th Annual Report 2021
U.S. Customer Securitization Vehicle
We sponsor one customer securitization vehicle, Fairway Financial Company LLC, (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. The sellers remain responsibl e for
servicing the transferred assets and are first to absorb any losses realized on those assets. We are not responsible for servicing or absorbing the first
loss and none of the sellers are affiliated with BMO. 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. Effective October 31, 2021, we concluded we no longer control this
vehicle and have deconsolidated our investment, as our relationship has changed from principal to agent as reflected primarily in the change to our
exposure to variable returns. We derecognized $3,896 million of assets and $3,672 million of liabilities from our consolidated balance sheet on loss of
control. We concurrently recognized $218 million in Securities, representing the carrying value of our interest in the vehicle, and $6 million in Other
Assets. No gain or loss was recognized in our consolidated income statement as a result of deconsolidating this entity.
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 as at October 31, 2021 was $8,095 million
($7,340 million as at October 31, 2020).
Our interest in this vehicle as at October 31, 2021 has been included in the Unconsolidated Structured Entities table below.
Capital and Funding Vehicles
We sponsor the Trust established in connection with the issuance of $1,250 million 4.3% Limited Recourse Capital Notes Series 1 (LRCN), which holds
$1,250 million of BMO issued Non-cumulative, 5-year Rate Reset Class B Preferred Shares, Series 48 (Non-Viability Contingent Capital (NVCC)), issued
concurrently with the LRCN. We determined that we control and therefore consolidate this vehicle as we are exposed to its variable returns and have
key decision-making powers over its activities. Refer to Note 16 for further information.
We have a funding vehicle, created under the covered bond program, that was established to guarantee payments due to bondholders on bonds
issued by us. We sell assets to this funding vehicle in exchange for an intercompany loan. Refer to Note 13 for further information on our covered
bond deposit liabilities.
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. During the year, we redeemed all guaranteed linked notes issued by these
vehicles. Consequently, as at October 31, 2021, $nil of guaranteed linked notes issued by these vehicles were included in deposits in our Consolidated
Balance Sheet ($120 million at October 31, 2020).
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 Notes 13 and 24,
respectively.
Other
We have other consolidated structured entities, created to meet the bank’s and customers needs. Aside from the exposure resulting from our
involvement as a sponsor, the bank does not have other contractual or non-contractual arrangements to provide financial support to these
consolidated structured entities.
Unconsolidated Structured Entities
The table below presents amounts related to our interests in unconsolidated SEs:
(Canadian $ in millions)
2021
2020
Interests recorded on our Consolidated Balance Sheet
Cash and cash equivalents
Trading securities
FVTPL securities
FVOCI securities
Amortized cost securities
Derivatives
Other
Deposits
Other
Exposure to loss (2)
Total assets of the entities
Canadian and
U.S. customer
securitization
vehicles (1) (3)
Capital vehicles
Other
securitization
vehicles
Canadian customer
securitization
vehicles (1)
Capital vehicles
Securitization
vehicles
63
24
218
464
–
2
5
776
63
–
14,208
8,116
1,210
–
–
–
–
–
–
1,210
1,210
22
–
1,234
–
58
–
–
93
–
–
151
–
–
151
5,686
46
75
158
291
–
22
–
592
46
–
7,015
5,265
1,173
–
–
–
–
–
39
1,212
1,173
25
1
1,198
–
72
–
–
102
–
–
174
–
–
174
2,560
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(1) Securities held that are issued by our Canadian and U.S. customer securitization vehicles are comprised of asset-backed commercial paper and are classified as trading securities, FVTPL securities and
FVOCI securities.
(2) Exposure to loss represents securities held, undrawn liquidity facilities, any remaining unfunded committed amounts to the BMO funded vehicle, derivative assets and other assets.
(3) Includes the U.S. customer securitization vehicle, Fairway Financial Company LLC, which was deconsolidated on a prospective basis during fiscal 2021.
BMO Financial Group 204th Annual Report 2021 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The sellers remain responsible for servicing the transferred assets
and are first to absorb any losses realized on those assets. We are not responsible for servicing or absorbing the first loss and none of the sellers are
affiliated with BMO. 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 as at October 31, 2021 was $5,400 million ($6,469 million as at October 31, 2020).
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.
Other Securitization Vehicles
Other securitization vehicles include holdings in asset-backed securitizations. Where we sponsor SEs that securitize MBS into CMOs, we may have
interests through our holdings of CMOs but do not consolidate the SEs as we do not have power to direct their relevant activities. These include
government-sponsored agency securities such as U.S. government agency issuances. In determining whether we are a sponsor of a SE, we consider
both qualitative and quantitative factors, including the purpose and nature of the entity, and our initial and continuing involvement. Subsequent to
the securitization, we sell the CMOs to third parties. Our maximum exposure to loss is limited to our on-balance sheet investments in these entities,
included in the table above.
Where the asset-backed instruments in these securitizations are transferred to third parties, but we retain substantially all risks and rewards
related to the transferred assets, we continue to recognize the transferred assets with the related cash proceeds recognized as secured financing in
our Consolidated Balance Sheet. As at October 31, 2021, these transferred assets were carried at fair value totalling $53 million ($69 million as at
October 31, 2020) with $nil million ($nil million as at October 31, 2020) recognized in securitization and structured entities’ liabilities, also carried at
fair value.
Where the asset-backed instruments in these securitizations are transferred to third parties and qualify for derecognition, we record the
related gains or losses in non-interest revenue, trading revenues. We may also retain an interest in the CMOs sold, which represents our continuing
involvement. As at October 31, 2021, we held retained interests of $5 million ($3 million as at October 31, 2020) carried at fair value on our
Consolidated Balance Sheet.
During the year ended October 31, 2021, we sold $2,549 million of MBS to these sponsored securitization vehicles ($5,797 million in 2020),
where we divested all interests in the securitized MBSs and any gains and losses were recorded in non-interest revenue, trading revenues.
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. We only consolidate those funds that we control. Our total interest in unconsolidated BMO managed funds was $1,345 million
at October 31, 2021 ($1,718 million in 2020), with $321 million included in FVTPL securities and $1,024 million included in trading securities as at
October 31, 2021 ($444 million and $1,274 million, respectively, in 2020) in our Consolidated Balance Sheet.
Other Structured Entities
We purchase and hold investments in a variety of third-party SEs, including exchange-traded funds, mutual funds, limited partnerships investment
trusts and government-sponsored ABS vehicles, 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 a SE if we are involved in its design, legal set-up or marketing. We may also be deemed to be the sponsor
of a SE if market participants would reasonably associate the entity with us. Any interests in securitization vehicles we have sponsored are disclosed
in the interests in unconsolidated structured entities table above.
Financial Support Provided to Structured Entities
During the years ended October 31, 2021 and 2020, we did not provide any financial or non-financial support to any consolidated or unconsolidated
SEs when we were not contractually obligated to do so. Furthermore, we have no intention of providing such support in the future.
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170 BMO Financial Group 204th Annual Report 2021
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 futures 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 as at October 31, 2021 was $4,537 million
($6,560 million as at October 31, 2020), for which we have posted collateral of $3,921 million ($5,967 million in 2020).
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.
BMO Financial Group 204th Annual Report 2021 171
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tha t 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 losses 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
Purchased options
Written options
Futures
Foreign Exchange Contracts (1)
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Commodity Contracts
Swaps
Purchased options
Written options
Futures
Equity Contracts
Credit Contracts
Purchased
Written
Total fair value – trading derivatives
Hedging
Interest Rate Contracts (2)
Cash flow hedges – swaps
Fair value hedges – swaps
Total swaps
Foreign Exchange Contracts
Cash flow hedges
Fair value hedges
Net investment hedges
Total foreign exchange contracts
Equity Contracts
Cash flow hedges
Total equity contracts
Total fair value – hedging derivatives (3)
Total fair value – trading and hedging derivatives
Less: impact of master netting agreements
Total
s
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Gross
assets
Gross
liabilities
6,132
42
641
–
–
1,438
8,595
3,505
381
–
5,916
1,383
–
319
5,998
–
–
(4,323)
(105)
–
(520)
(3)
(1,207)
(5,827)
(3,925)
–
(384)
(1,256)
–
(815)
(120)
(9,383)
(3)
(4)
2021
Net
1,809
(63)
641
(520)
(3)
231
2,768
(420)
381
(384)
4,660
1,383
(815)
199
(3,385)
(3)
(4)
34,350
(27,875)
6,475
354
903
1,257
1,020
–
46
1,066
40
40
2,363
36,713
(20,952)
15,761
(1,166)
(662)
(1,828)
(1,112)
–
–
(1,112)
–
–
(2,940)
(30,815)
20,952
(9,863)
(812)
241
(571)
(92)
–
46
(46)
40
40
(577)
5,898
–
5,898
Gross
assets
Gross
liabilities
10,510
29
667
–
3
2,080
4,151
3,611
346
–
2,162
373
–
53
8,461
11
–
32,457
2,602
1,118
3,720
638
–
–
638
–
–
4,358
36,815
(19,302)
17,513
(7,585)
(276)
–
(714)
(18)
(1,428)
(4,207)
(2,954)
–
(312)
(1,733)
–
(456)
(144)
(6,514)
(6)
(8)
(26,355)
(43)
(2,257)
(2,300)
(1,710)
(1)
–
(1,711)
(9)
(9)
(4,020)
(30,375)
19,302
(11,073)
2020
Net
2,925
(247)
667
(714)
(15)
652
(56)
657
346
(312)
429
373
(456)
(91)
1,947
5
(8)
6,102
2,559
(1,139)
1,420
(1,072)
(1)
–
(1,073)
(9)
(9)
338
6,440
–
6,440
(1) Gold contracts are included with foreign exchange contracts.
(2) We held no bond futures as at October 31, 2021 (the fair value of bond futures designated in fair value hedge relationships rounded down to $nil as at October 31, 2020).
(3) The fair values of hedging derivatives wholly or partially offset the changes in fair values of the related on-balance sheet financial instruments.
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.
172 BMO Financial Group 204th Annual Report 2021
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.
Exchange traded
Over-the-counter
2021
Total
Exchange traded
Over-the-counter
2020
Total
(Canadian $ in millions)
Interest Rate Contracts
Swaps
Forward rate agreements
Purchased options
Written options
Futures
Total interest rate contracts
Foreign Exchange Contracts (1)
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
–
–
10,611
3,621
232,972
247,204
–
–
–
1,762
4,735
222
6,719
–
10,020
11,000
39,448
60,468
106,302
–
–
3,976,428
147,657
69,491
68,155
–
3,976,428
147,657
80,102
71,776
232,972
4,261,731
4,508,935
45,482
506,791
489,081
54,145
54,147
–
45,482
506,791
489,081
55,907
58,882
222
1,149,646
1,156,365
28,892
14,546
14,132
39,448
97,018
28,892
4,526
3,132
–
36,550
98,962
12,358
5,158
205,264
110,274
12,358
5,158
–
–
–
–
24,683
3,796
297,578
326,057
–
–
–
1,673
2,346
1,608
5,627
–
4,846
6,514
39,011
50,371
4,148,257
517,332
57,833
64,728
–
4,148,257
517,332
82,516
68,524
297,578
4,788,150
5,114,207
47,805
534,752
494,640
39,067
41,327
–
47,805
534,752
494,640
40,740
43,673
1,608
1,157,591
1,163,218
30,613
5,728
3,704
–
40,045
60,202
7,407
1,795
30,613
10,574
10,218
39,011
90,416
170,476
7,407
1,795
420,693
5,564,405
5,985,098
492,329
6,055,190
6,547,519
(1) Gold contracts are included with foreign exchange contracts.
Table excludes loan commitment derivatives with notionals of $5,613 million ($2,603 million as at October 31, 2020).
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. We also use deposits, cross-currency swaps and foreign exchange forwards to hedge foreign currency exposure in our net
investment in foreign operations.
When the hedged item is accounted for at FVTPL, there is a natural offset within the income statement with the related derivative. However,
when we manage risks incumbent in instruments that are accounted for at amortized cost, including loans and deposits, or FVOCI debt securities we
use hedge accounting in order to eliminate the mismatch between the hedged item and the mark to market derivative.
To the extent these instruments used to manage risk 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 within 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. 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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BMO Financial Group 204th Annual Report 2021 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the IASB’s Phase 1 Amendments to IAS 39 and IFRS 7, certain hedge accounting requirements were modified to provide relief from the
uncertainty arising from IBOR reform during the period prior to replacement of IBORs. These amendments include allowing us to assume the interest
rate benchmarks which are the basis for cash flows of the hedged item and hedging instrument are not altered as a result of IBOR reform, thereby
allowing hedge accounting to continue. They also provide an exception from the requirement to discontinue hedge accounting if a hedging
relationship does not meet the effectiveness requirements solely as a result of IBOR reform. We continue to apply these amendments as at
October 31, 2021, with application ending at the earlier of the discontinuation of the impacted hedging relationship and when there is no longer
uncertainty arising from IBOR reform over the timing and amount of IBOR-based cash flows.
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
2021
Total
2020
Total
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Notional amount (1)
Average fixed interest rate
Foreign exchange risk – Cross-currency swaps
and foreign exchange forwards (2)
CAD-USD pair (3)
CAD-EUR pair
Other currency pairs
Notional amount
Average fixed interest rate
Average exchange rate: CAD-USD
Notional amount
Average fixed interest rate
Average exchange rate: CAD-EUR
Notional amount (4)
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 (5)
Average fixed interest rate
Interest rate risk – Bond futures (exchange-traded
derivatives)
Notional amount
Average price in dollars
Foreign exchange risk – Cross-currency swaps
USD-GBP pair
Notional amount (6)
Average fixed interest rate
Average exchange rate: USD-GBP
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps
and foreign exchange forwards
Notional amount
CAD-GBP pair
Foreign exchange risk – Deposit liabilities
USD denominated deposit – carrying amount
GBP denominated deposit – carrying amount
24,639
24,172
18,145
25,733
0.60%
1.20%
1.15%
1.26%
1,463
1.68%
94,152
1.06%
92,296
1.39%
6,668
1.67%
1.3031
3,843
17,446
2.33%
1.3283
8,634
2.60%
1.91%
1.5382
1,908
1.5025
3,673
7,091
1.43%
1.2606
–
–
–
4,474
2.51%
2.76%
2.03%
6,836
1.53%
1.3420
1,839
1.89%
1.4711
–
–
251
3.02%
1.3122
201
2.97%
1.4870
–
–
38,292
1.91%
1.3137
14,517
2.10%
1.5078
10,055
2.39%
43,381
1.92%
1.3219
17,299
2.17%
1.5008
7,104
2.63%
1.4245
1.2229
1.6710
515
–
–
–
–
–
–
1.4606
1.2923
515
302
11,740
30,534
19,555
16,777
0.97%
1.30%
1.18%
1.20%
2,105
1.71%
80,711
1.21%
94,738
1.47%
–
–
–
–
–
–
–
–
–
–
153
1,132
5,964
728
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
48
126
39
0.66%
1.3024
1,285
5,964
728
–
8,219
892
(1) The notional amount of the interest rate swaps likely subject to IBOR reform that mature after June 30, 2023 was $35,519 million of USD LIBOR as at October 31, 2021. We had a notional amount of
$48,825 million as at October 31, 2020, likely subject to IBOR reform that were to mature after December 31, 2021, the cessation date at the time of adoption of the Phase 1 amendments.
(2) 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.
(3) Includes CAD-AUD, CAD-CHF, CAD-CNH, CAD-GBP or CAD-HKD cross-currency swaps where applicable.
(4) The notional amount of the cross-currency swaps likely subject to IBOR reform that mature after December 31, 2021 was $718 million of GBP LIBOR as at October 31, 2021 ($718 million as at
October 31, 2020).
(5) The notional amount of the interest rate swaps likely subject to IBOR reform that mature after June 30, 2023 was $43,642 million of USD LIBOR. We had a notional amount of $55,130 million of
USD LIBOR as at October 31, 2020, likely subject to IBOR reform that were to mature after December 31, 2021, the cessation date at the time of adoption of the Phase 1 amendments. The notional
amount of GBP LIBOR interest rate swaps that mature after December 31, 2021 was $nil million as at October 31, 2021 ($41 million as at October 31, 2020).
(6) The notional amount of the cross-currency swaps likely subject to IBOR reform that mature after June 30, 2023 was $nil million of USD LIBOR as at October 31, 2021. We had a notional amount of
$39 million of USD LIBOR as at October 31, 2020, likely subject to IBOR reform that were to mature after December 31, 2021, the cessation date at the time of adoption of the Phase 1 amendments.
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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 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.
174 BMO Financial Group 204th Annual Report 2021
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.
The accounting mismatch that would otherwise occur is eliminated by recording changes in the fair value of the derivative that offset changes in
the fair value of the hedged item for the designated hedged risk 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, cross-currency swaps and foreign exchange forwards are designated as a hedging instrument for
a portion of the net investment in foreign operations. We designate the spot rate component of our hedging instrument in net investment hedge.
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, instead of through the income
statement in the case of the hedging instrument if hedge accounting were not elected.
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 hedging instruments 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, 2021 and October 31, 2020.
(Canadian $ in millions)
2021
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 – Cross–currency swaps
and foreign exchange forwards
Foreign exchange risk – Deposit liabilities
Total
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 – Cross-currency swaps
and foreign exchange forwards
Foreign exchange risk – Deposit liabilities
Total
Carrying amount of
hedging instruments (1)
Hedge ineffectiveness
Gains (losses) on
hedging derivatives
used to calculate hedge
ineffectiveness (2)
Gains (losses) on
hypothetical derivatives
used to calculate hedge
ineffectiveness (2)
Ineffectiveness
recorded in
non-interest
revenue – other
Asset
Liability
354
(1,166)
(2,467)
1,020
40
(1,112)
–
276
313
1,414
(2,278)
(1,878)
46
–
–
(6,692)
29
647
1,460
(8,970)
(1,202)
2,602
638
–
3,240
(43)
(1,710)
(9)
(1,762)
–
(9,111)
3,240
(10,873)
2,516
(315)
(108)
2,093
(131)
1,962
2,447
(276)
(313)
1,858
(29)
(647)
1,182
(2,520)
315
108
(2,097)
131
(1,966)
(5)
–
–
(5)
–
–
(5)
2020
4
–
–
4
–
4
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(1) Represents the unrealized gains (losses) recorded as part of the derivative instruments in assets and liabilities, respectively, in our Consolidated Balance Sheet.
(2) Represents life to date amounts.
BMO Financial Group 204th Annual Report 2021 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For cash flow hedges and net investment hedges, the following tables contain information related to impacts in our Consolidated Statement of
Comprehensive Income, on a pre-tax basis for the years ended October 31, 2021 and October 31, 2020.
(Canadian $ in millions)
Cash Flow Hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
(Canadian $ in millions)
Cash Flow Hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
Balance
October 31, 2020
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance
October 31, 2021 (1)
Active hedges
Discontinued hedges
2021
Balance in cash flow hedge AOCI /
net foreign operations AOCI
3,529
(759)
(50)
2,720
(2,462)
266
313
(1,883)
(1,939)
676
781
(1,207)
(489)
10
(84)
(563)
–
(563)
578
(483)
179
274
(921)
(483)
179
(1,225)
(1,263)
(1,263)
(989)
(2,488)
1,499
–
–
1,499
–
1,499
2020
Balance
October 31, 2019
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance
October 31, 2020 (1)
Active hedges
Discontinued hedges
Balance in cash flow hedge AOCI /
net foreign operations AOCI
1,156
(444)
17
729
(1,808)
(1,079)
2,512
(350)
(108)
2,054
(131)
1,923
(139)
35
41
(63)
–
(63)
3,529
(759)
(50)
2,720
(1,939)
781
2,359
(759)
(50)
1,550
(1,939)
(389)
1,170
–
–
1,170
–
1,170
(1) Tax balance related to cash flow hedge accumulated other comprehensive income was $(89) million, and $(741) million as at October 31, 2020.
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 cross-currency swaps, interest rate swaps, and bond futures to hedge interest rate risk,
including benchmark interest rates, inherent in fixed rate securities, a portfolio of mortgages, deposits and subordinated debt and other liabilities.
The carrying value of 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 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.
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176 BMO Financial Group 204th Annual Report 2021
The amounts relating to derivatives designated as fair value hedging instruments, hedged items and hedge ineffectiveness for the years ended
October 31, 2021 and 2020 are as follows:
(Canadian $ in millions)
Carrying amount of
hedging derivatives (1)
Hedge ineffectiveness
2021
Accumulated amount of fair value
hedge gains (losses) on hedged items
Fair Value Hedge (3)
Interest rate swaps
Cross-currency swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
Asset
Liability
903
–
–
–
903
(662)
–
–
–
(662)
Fair Value Hedge (3)
Interest rate swaps
Cross-currency swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
1,118
–
–
(2,257)
(1)
–
–
–
1,118
(2,258)
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
–
–
1,649
(644)
1,005
–
–
(1,791)
622
(1,169)
–
–
(1,654)
638
(1,016)
–
–
1,794
(620)
1,174
–
–
(5)
(6)
(11)
–
–
49,789
–
–
156
(31,530)
(121)
18,259
35
–
–
3
2
5
–
–
58,608
(39,950)
18,658
–
–
2,762
(943)
1,819
–
–
62
(91)
(29)
2020
–
–
25
8
33
(1) Represents the unrealized gains (losses) within derivative instruments in assets and liabilities, respectively, in the Consolidated Balance Sheet.
(2) Represents the carrying value in 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.
(3) $nil for bond futures designated in fair value hedge relationships as at October 31, 2021 (all amounts in the table round down to $nil as at October 31, 2020).
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, credit spreads, foreign exchange rates, equity and commodity prices and their implied volatilities, 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 expos e 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, 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 in 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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BMO Financial Group 204th Annual Report 2021 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian $ in millions)
2021
2020
Replacement
cost (1)
Credit risk
equivalent (1)
Risk-weighted
assets
Replacement
cost (1)
Credit risk
equivalent (1)
Risk-weighted
assets
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 (2)
Over-the-counter
Swaps
Forward foreign exchange contracts
Purchased options
Written options
Exchange traded
Futures
Purchased options
Written options
2,636
667
16
20
3,339
71
2
2
75
6,936
2,545
72
105
9,658
141
4
4
149
1,422
826
81
70
2,399
3
–
–
3
5,228
1,153
2
68
6,451
22
45
3
70
10,713
3,332
55
206
14,306
83
66
4
153
3,380
1,479
12
150
5,021
2
1
–
3
3,414
9,807
2,402
6,521
14,459
5,024
1,087
769
93
11
1,960
1
15
26
42
4,609
6,649
270
115
987
883
104
38
11,643
2,012
2
22
37
61
–
–
1
1
872
1,032
68
5
1,977
1
12
12
25
5,581
7,859
196
76
794
823
95
27
13,712
1,739
2
17
18
37
–
–
–
–
Total foreign exchange contracts
2,002
11,704
2,013
2,002
13,749
1,739
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
4,357
1,537
6
5,900
1,829
474
463
2,766
8,666
467
3,873
4,340
277
8,183
2,601
175
10,959
3,244
721
727
4,692
2,148
457
51
2,656
65
14
15
94
15,651
2,750
9,754
7,938
17,692
721
2,663
159
2,822
79
1,424
117
1
1,542
635
373
221
1,229
2,771
563
5,958
6,521
272
4,215
746
234
5,195
1,612
562
363
2,537
7,732
8,010
10,135
18,145
741
2,119
257
74
2,450
33
11
7
51
2,501
2,399
203
2,602
75
18,699
55,575
10,066
18,087
54,826
11,941
(1) Replacement cost and credit risk equivalent are presented after the impact of master netting agreements and calculated using the Standardized Approach for Counterparty Credit Risk (SA-CCR) in
accordance with the Capital Adequacy Requirements (CAR) Guideline issued by OSFI. Table therefore excludes loan commitment derivatives.
(2) Gold contracts are included in foreign exchange contracts.
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178 BMO Financial Group 204th Annual Report 2021
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
2021
2020
Interest Rate Contracts
Swaps
Forward rate agreements, futures and options
Total interest rate contracts
Foreign Exchange Contracts (1)
Swaps
Forward foreign exchange contracts
Futures
Options
Total foreign exchange contracts
Commodity Contracts
Swaps
Futures
Options
Total commodity contracts
Equity Contracts
Credit Contracts (2)
Total notional amount
(1) Gold contracts are included with foreign exchange contracts.
(2) Under the SA-CCR, excludes loan commitment derivatives.
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
Total notional
amounts
Total notional
amounts
1,421,335
350,532
1,162,256
138,390
710,856
25,879
657,830
14,969
199,014
2,737
4,151,291
532,507
1,771,867
1,300,646
736,735
672,799
201,751
4,683,798
137,841
474,834
213
104,031
196,488
13,016
9
8,799
121,635
1,341
–
1,959
110,545
208
–
–
32,824
27
–
–
599,333
489,426
222
114,789
4,335,291
965,998
5,301,289
637,501
494,640
1,608
84,413
716,919
218,312
124,935
110,753
32,851
1,203,770
1,218,162
12,709
20,577
16,358
49,644
14,622
17,258
11,936
43,816
1,495
1,540
384
3,419
141,028
48,206
14,534
298
866
9,635
66
73
–
139
1,780
6,325
–
–
–
–
232
392
28,892
39,448
28,678
97,018
205,780
17,516
2,679,756
1,611,846
889,258
791,796
235,226
6,207,882
30,613
39,011
20,792
90,416
170,778
9,202
6,789,847
Note 9: Premises and Equipment
We record all owned 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 write-downs of premises and equipment of $36 million due to impairment during the year ended October 31, 2021
($4 million in 2020 and $nil in 2019). Gains and losses on disposal are included in non-interest expense, premises and equipment, in our Consolidated
Statement of Income.
Leases
When we enter into a new arrangement as a lessee, a right-of-use asset is recognized equal to the lease liability, which is calculated based on the
future lease payments discounted at our incremental borrowing rate over the lease term. The lease term is based on the non-cancellable period and
includes any options to extend or terminate which we are reasonably certain to exercise.
The right-of-use asset is depreciated on a straight-line basis, based on the shorter of the useful life of the underlying asset or the lease term, and
is adjusted for impairment losses, if any.
The lease liability accretes interest over the lease term, using the effective interest method, with the associated interest expense recognized in
interest expense, other liabilities, in our Consolidated Statement of Income. The lease liability is remeasured when decisions are made to exercise
options under the lease arrangement or when the likelihood of exercising an option within the lease changes. Refer to Note 14 for further
information.
Amounts relating to leases of low value are expensed when incurred in non-interest expense, premises and equipment, in our Consolidated
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Statement of Income.
BMO Financial Group 204th Annual Report 2021 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the adoption of IFRS 16, net rent expense reported in non-interest expense, premises and equipment, in our Consolidated Statement of
Income for the year ended October 31, 2019 was $600 million.
The total cost and associated accumulated depreciation for premises and equipment owned and leased are set out below:
(Canadian $ in millions)
2021
2020
Land Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Right-of-use
assets (1)
Total Land Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Right-of-use
assets (1) Total
Cost
Balance at beginning of year
Impact from adopting IFRS 16 (1) (2)
Additions/lease modifications
Disposals (3)
Foreign exchange and other
112
–
–
(6)
(7)
1,454
–
52
(44)
(108)
2,481
–
193
(349)
(33)
904
–
53
(245)
(27)
Balance at end of year
99
1,354
2,292
685
Accumulated Depreciation and
Impairment
Balance at beginning of year
Impact from adopting IFRS 16 (1) (2)
Disposals (3)
Depreciation
Foreign exchange and other (4)
Balance at end of year
Net carrying value
–
–
–
–
–
–
99
936
–
(46)
52
(75)
867
487
1,888
–
(345)
217
(36)
1,724
568
680
–
(245)
51
(15)
471
214
1,769
–
192
(44)
24
1,941
1,250
–
(41)
105
24
1,338
–
2,580 9,300 109
–
8
(6)
1
–
731 1,221
(29) (717)
(81) (232)
1,534
(23)
53
(116)
6
2,470
(65)
168
(104)
12
3,201 9,572 112
1,454
2,481
–
363 5,117
–
(29) (706)
366 791
(84)
18
718 5,118
–
–
–
–
–
–
961
–
(93)
64
4
936
518
1,786
(27)
(100)
218
11
1,888
593
603
2,483 4,454 112
973
–
41
(122)
12
904
742
–
(120)
52
6
680
224
1,615
–
167
(28)
15
1,769
1,157
–
(25)
107
11
1,250
na 6,701
2,053 1,965
559
996
(22) (398)
36
(10)
2,580 9,300
na 4,646
27
–
(22) (360)
801
360
30
(2)
363 5,117
519
2,217 4,183
(1) Effective November 1, 2019, we adopted IFRS 16 Leases, recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods (refer to Note 1).
(2) Includes net book value of buildings transferred to right-of-use assets.
(3) Includes fully depreciated assets written off.
(4) Includes impairment charges.
na - not applicable due to IFRS 16 adoption.
Note 10: Acquisitions and Divestitures
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.
Clearpool Group Inc.
On April 6, 2020, we completed the acquisition of Clearpool Group Inc. (Clearpool), a New York-based provider of electronic trading solutions,
operating in the United States and Canada, for cash consideration of US$139 million (CAD$196 million) plus contingent consideration of approximately
US$7 million (CAD$11 million) based on meeting certain revenue targets over four years. The acquisition was accounted for as a business
combination, and the acquired business and corresponding goodwill are included in our Capital Markets reporting segment.
As part of this acquisition, we acquired intangible assets of $85 million and goodwill of $132 million. The intangible assets are being amortized
over three to eight years. Goodwill related to this acquisition is not 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)
Goodwill and intangible assets
Other assets
Total assets
Liabilities
Purchase price
The purchase price allocation for Clearpool has been completed.
Clearpool
217
44
261
54
207
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Divestitures
Non-current non-financial assets (and disposal groups) are classified as held-for-sale if their carrying amount will be recovered principally through
a sale transaction rather than through continuing use. These assets meet the criteria for classification as held-for-sale if they are available for
immediate sale in their present condition and their sale is considered highly probable to occur within one year. 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. Any subsequent write-down to fair
value less costs to sell is recognized in non-interest expense in our Consolidated Statement of Income. Any subsequent increase in the fair value
less costs to sell, to the extent this does not exceed the cumulative write-down or impact the impairment previously allocated to goodwill, is also
recognized in non-interest expense. Gains on disposals are recognized in non-interest income.
180 BMO Financial Group 204th Annual Report 2021
Private Bank, Asia
On April 30, 2021, we completed the sale of our Private Banking business in Hong Kong and Singapore, part of our BMO Wealth Management
operating segment, to J. Safra Sarasin Group. The business sold is not considered material to the bank.
EMEA and U.S. Asset Management
On November 8, 2021, we completed the sale of our EMEA asset management business, part of our BMO Wealth Management operating segment,
to Ameriprise Financial Inc. (Ameriprise) for £615 million (CAD$1,042 million) in an all-cash transaction. The transaction with Ameriprise includes the
opportunity for certain BMO asset management clients in the U.S. to move to Ameriprise, with the transfers expected to be completed in the first
calendar quarter of fiscal 2022, subject to client consent. As this transaction met the accounting requirements of assets held-for-sale, whereby the
assets and liabilities are measured at lower of fair value, less costs to sell, and carrying value at each reporting period end until disposal, we
recognized a write-down of goodwill related to these businesses of $779 million in fiscal 2021. The write-down was included in non-interest expense,
other, in our Consolidated Statement of Income and was reported in the Corporate Services segment. As at November 8, 2021, assets and liabilities
of approximately $1,696 million and $527 million, respectively, in relation to our EMEA asset management business have been derecognized.
In connection with the completion of the sale, we will recognize a loss of $28 million in the first quarter of fiscal 2022 relating to foreign currency
translation reclassified from accumulated other comprehensive income in equity to net income.
Taplin, Canida & Habacht LLC
On July 27, 2021, we entered into an agreement to sell Taplin, Canida & Habacht, LLC, part of our U.S. asset management business to Loop Capital.
The transaction is expected to close in the first quarter of fiscal 2022, subject to customary closing conditions. The business sold is not considered
material to the bank.
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 3.0% (2.5% in 2020). The discount rates we applied in determining the
recoverable amounts in 2021 ranged from 6.8% to 11.0% (6.0% to 10.3% in 2020), 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. We use significant judgment to determine inputs to the discounted cash flow model, which are most
sensitive to changes in future cash flows, discount rates and terminal growth rates applied to cash flows beyond the forecast period.
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.
We recognized a write-down of goodwill of $779 million during the year ended October 31, 2021 ($nil in 2020) due to the valuation implied from
the definitive agreement to sell our EMEA asset management business to Ameriprise and management’s allocation of goodwill to the business being
sold. Refer to Note 10 for further information.
A continuity of our goodwill by group of CGUs for the years ended October 31, 2020 and 2021 is as follows:
(Canadian $ in millions)
Personal and
Commercial Banking
BMO Wealth
Management
BMO
Capital Markets
Total
Balance – October 31, 2019
Acquisitions during the year
Foreign exchange and other (1)
Balance – October 31, 2020
Dispositions during the year
Foreign exchange and other (1)
Balance – October 31, 2021
Canadian
P&C
97
–
–
97
–
–
U.S.
P&C
3,796
–
45
3,841
–
(274)
Traditional
Wealth
Management
Insurance
2,145
–
23
2,168
(21)
(837)
2
–
–
2
–
–
Total
3,893
–
45
3,938
–
(274)
Total
2,147
–
23
2,170
(21)
(837)
300
132
(5)
427
–
(25)
6,340
132
63
6,535
(21)
(1,136)
97 (2)
3,567 (3)
3,664
1,310 (4)
2 (5)
1,312
402 (6)
5,378
(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, and
F&C Asset Management plc. Included in Foreign exchange and other is a write-down of $779 million of goodwill attributable to the sale of our EMEA asset management business. Refer to Note 10.
(5) Relates to AIG.
(6) Relates to Gerard Klauer Mattison, BMO Nesbitt Burns Inc., Paloma Securities L.L.C., M&I, Greene Holcomb Fisher, KGS-Alpha Capital Markets and Clearpool.
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BMO Financial Group 204th Annual Report 2021 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2019
Additions (disposals)
Transfers
Foreign exchange and other
Cost as at October 31, 2020
Additions (disposals)
Transfers
Foreign exchange and other
Cost as at October 31, 2021
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
Other
Total
760
–
–
7
767
(9)
–
(39)
951
–
–
11
962
–
–
(68)
4,836 (1)
(20)
582
18 (1)
5,416
(248)
498
(118)
402
458
(582)
2
280
426
(498)
(4)
638
(17)
–
–
621
2
–
(22)
7,587
421
–
38
8,046
171
–
(251)
719
894
5,548 (1)
204
601
7,966
(1) Includes $4,798 million of internally generated software as at October 31, 2021 ($4,458 million as at October 31, 2020).
The following table presents the accumulated amortization of our intangible assets:
(Canadian $ in millions)
Accumulated amortization at October 31, 2019
Amortization
Disposals
Foreign exchange and other
Accumulated amortization at October 31, 2020
Amortization
Disposals
Foreign exchange and other
Accumulated amortization at October 31, 2021
Carrying value at October 31, 2021
Carrying value at October 31, 2020
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
Other
Total
551
52
–
13
616
35
(5)
(30)
616
103
151
878
46
–
9
933
27
–
(66)
894
–
29
3,361 (1)
478
(173)
15
3,681 (1)
530
(308)
(82)
3,821 (1)
1,727
1,735
–
–
–
–
–
–
–
–
–
204
280
373
44
(38)
(5)
374
42
(28)
(19)
369
232
247
5,163
620
(211)
32
5,604
634
(341)
(197)
5,700
2,266
2,442
(1) Includes $3,231 million of internally generated software as at October 31, 2021 ($2,909 million as at October 31, 2020).
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 $166 million as at October 31, 2021 ($172 million as at October 31, 2020) 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 $9 million during the year ended October 31, 2021 ($5 million in 2020 and
$10 million in 2019).
Note 12: Other Assets
Customers’ Liability Under Acceptances
Acceptances represent a form of negotiable short-term debt issued by our customers, which we guarantee for a fee. The fees earned are recorded
in non-interest revenue, 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 in 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 in our Consolidated Balance Sheet.
Other
The components of other within other assets are as follows:
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(Canadian $ in millions)
Accounts receivable, prepaid expenses and other items
Accrued interest receivable
Bank owned life insurance policies
Leased vehicles, net of accumulated amortization
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
(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.
182 BMO Financial Group 204th Annual Report 2021
2021
3,302
1,452
4,096
415
6,436
353
2,080
40
947
3,290
2020
2,942
1,586
4,352
677
6,344
161
1,507
38
124
5,328
22,411
23,059
Note 13: Deposits
Payable on demand
(Canadian $ in millions)
Interest bearing
Non-interest
bearing
Payable
after notice
Payable on
a fixed date (3)
2021
2020
Deposits by:
Banks (1)
Business and government
Individuals
Total (2) (4)
Booked in:
Canada
United States
Other countries
Total
5,009
50,779
4,895
60,683
51,465
8,929
289
60,683
1,887
54,740
36,679
93,306
83,952
9,284
70
93,306
733
148,682
119,425
268,840
129,370
138,267
1,203
268,840
18,982
188,047
55,773
262,802
162,529
76,350
23,923
262,802
26,611
442,248
216,772
685,631
427,316
232,830
25,485
685,631
38,825
400,679
219,530
659,034
407,926
220,292
30,816
659,034
(1) Includes regulated and central banks.
(2) Includes structured notes and metal deposits designated at FVTPL.
(3) Includes $35,959 million of senior unsecured debt as at October 31, 2021 subject to the Bank Recapitalization (Bail-In) regime ($25,651 million as at October 31, 2020). 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) Included in deposits as at October 31, 2021 and 2020 are $342,967 million and $322,951 million, respectively, of deposits denominated in U.S. dollars, and $29,937 million and $32,254 million,
respectively, of deposits denominated in other foreign currencies.
Deposits payable on demand are comprised primarily of our customers’ chequing accounts, on some of which we pay interest. 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 retail and small business term deposits,
wholesale funding, and guaranteed investment certificates. Deposits totalling $20,991 million as at October 31, 2021 ($27,353 million as at
October 31, 2020) can be early redeemed (either fully or partially) by customers without penalty. As we do not expect a significant amount to
be redeemed before maturity, we have classified them as payable on a fixed date, based on their remaining contractual maturities.
• Commercial paper, which totalled $13,834 million as at October 31, 2021 ($8,358 million as at October 31, 2020).
• Covered bonds, which totalled $23,495 million as at October 31, 2021 ($24,699 million as at October 31 2020).
The following table presents the maturity schedule for deposits payable on a fixed date:
(Canadian $ in millions)
As at October 31, 2021
As at October 31, 2020
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
163,370
192,617
33,778
27,855
24,826
30,053
8,908
18,260
11,995
9,683
19,925 262,802
291,632
13,164
We have unencumbered liquid assets of $317,251 million to support these and other deposit liabilities ($306,120 million as at October 31, 2020).
The following table presents deposits payable on a fixed date and greater than one hundred thousand dollars:
(Canadian $ in millions)
As at October 31, 2021
As at October 31, 2020
Canada
United States
Other
Total
140,002
158,475
72,399
72,186
23,921
27,799
236,322
258,460
The following table presents the maturity schedule for deposits payable on a fixed date and greater than one hundred thousand dollars, which are
booked in Canada:
(Canadian $ in millions)
As at October 31, 2021
As at October 31, 2020
Less than 3 months
3 to 6 months
6 to 12 months
Over 12 months
Total
20,626
18,081
12,761
29,679
20,933
28,109
85,682 140,002
158,475
82,606
Structured Note Liabilities
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 change in fair value of these structured notes is recorded in non-interest revenue, trading revenues with
the changes in fair value due to own credit risk recognized in other comprehensive income. The impact of changes in our own credit risk is measured
based on movements in our own credit spread year over year.
The following table presents fair value and changes in fair value of structured note liabilities:
(Canadian $ in millions)
As at October 31, 2021
As at October 31, 2020
Notional amount
due at contractual
maturity
22,448
19,175
Fair value
22,665
18,073
Change in
fair value
recorded in the
Consolidated
Statement of Income (1)
Change in
fair value due to own
credit risk recorded in
OCI (before tax)
Cumulative change in
fair value due to own
credit risk recorded in
AOCI (before tax)
(1,310)
1,319
(240)
(26)
(408)
(168)
N
o
t
e
s
(1) Change in fair value may be offset by related change in fair value on hedge contracts.
BMO Financial Group 204th Annual Report 2021 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 non-interest revenue, 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 in 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 in our Consolidated Balance Sheet.
Securities Lending and Borrowing
Securities lending and borrowing transactions are generally collateralized by securities or cash. Cash advanced or received as collateral is recorded in
securities borrowed or purchased under resale agreements, or other liabilities, securities lent or sold under repurchase agreements, 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
Allowance for credit losses on off-balance sheet items
Cash collateral
Insurance-related liabilities
Lease liabilities
Other employee future benefits liability (Note 21)
Payable to brokers, dealers and clients
Pension liability (Note 21)
(1)
Total
2021
2020
9,444
960
394
6,733
12,845
2,743
1,094
3,413
138
37,764
8,208
1,359
511
6,596
12,441
2,409
1,147
2,969
553
36,193
(1) Effective November 1, 2019, we adopted IFRS 16 Leases, recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods (Note 1).
Insurance-Related Liabilities
We are engaged in insurance businesses related to life insurance, annuities, which includes pension risk, accident and sickness, creditor insurance,
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 change in fair value of these investment contract liabilities is recorded
in insurance claims, commissions and changes in policy benefit liabilities with the exception of changes in our own credit risk recognized in other
comprehensive income. The impact of changes in our own credit risk 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 following table presents fair value and changes in fair value in our investment contract liabilities.
s
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(Canadian $ in millions)
As at October 31, 2021
As at October 31, 2020
Notional amount due at
contractual maturity
Change in
fair value
recorded in the
Consolidated
Statement of Income
Change in
fair value due to own
credit risk recorded
in OCI (before tax)
Cumulative change in
fair value due to own
credit risk recognized
in AOCI (before tax)
1,526
1,594
(81)
88
(26)
(12)
(72)
(46)
Fair value
1,046
1,168
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.
184 BMO Financial Group 204th Annual Report 2021
A reconciliation of the change in insurance-related liabilities is as follows:
(Canadian $ in millions)
Insurance-related liabilities, beginning of year
Increase (decrease) in life insurance policy benefit liabilities from:
New business
In-force policies
Changes in actuarial assumptions and methodology
Foreign currency
Net increase in life insurance policy benefit liabilities
Change in other insurance-related liabilities
Insurance-related liabilities, end of year
2021
2020
12,441
11,581
765
(306)
(72)
(2)
385
19
476
182
(58)
–
600
260
12,845
12,441
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, 2021, 2020 and 2019, as shown in the table below:
(Canadian $ in millions)
Direct premium income
Ceded premiums
2021
2020
2019
2,050
(408)
1,642
1,582
(154)
1,428
1,944
(158)
1,786
Lease Liabilities
Beginning November 1, 2019, when we enter into leases we record lease liabilities representing the present value of future lease payments over the
lease term. Interest expense recorded on lease liabilities for the year ended October 31, 2021 was $56 million ($53 million in 2020). Total cash outflow
for lease liabilities for the year ended October 31, 2021 was $383 million ($384 million in 2020). Variable lease payments (for example maintenance,
utilities and property taxes) not included in the measurement of lease liabilities for the year ended October 31, 2021 were $236 million ($219 million
in 2020).
The maturity profile of our undiscounted lease liabilities is $344 million for 2022, $325 million for 2023, $315 million for 2024, $287 million for
2025, $252 million for 2026 and $1,600 million for 2027 and thereafter.
Note 15: Subordinated Debt
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, Second Tranche (1)
Series I Medium-Term Notes, First Tranche (1)
Series I Medium-Term Notes, Second Tranche (1)
3.803% Subordinated Notes due 2032 (1)
4.338% Subordinated Notes due 2028 (1)
Series J Medium-Term Notes, First Tranche (1)
Series J Medium-Term Notes, Second Tranche (1)
Series K Medium-Term Notes, First Tranche (1)(9)
Total (10)
150
1,000
1,250
850
US 1,250
US 850
1,000
1,250
1,000
December 2025 to 2040
December 2025
June 2026
June 2027
December 2032
October 2028
September 2029
June 2030
July 2031
8.25
3.34
3.32
2.57
3.80
4.34
2.88
2.08
1.93
Not redeemable
December 2020 (2)
June 2021 (3)
June 2022 (4)
December 2027 (5)
October 2023 (6)
September 2024 (7)
June 2025 (8)
July 2026 (9)
2021
Total
146
–
–
843
1,567
1,096
998
1,248
995
2020
Total
146
961
1,242
833
1,771
1,219
996
1,248
–
6,893
8,416
(1) 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.
(2) All $1,000 million Series H Medium-Term Notes Second Tranche were redeemed on December 8, 2020 for 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the
redemption date.
(3) All $1,250 million Series I Medium-Term Notes First Tranche were redeemed on June 1, 2021 for 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the
redemption date.
(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) Redeemable at par on June 17, 2025 together with accrued and unpaid interest to, but excluding, the redemption date.
(9) On July 22, 2021, we issued $1,000 million of Series K Medium-Term Notes, First Tranche. These notes are redeemable at par on July 22, 2026 together with accrued and unpaid interest to, but
excluding, the redemption date.
(10) Certain amounts of subordinated debt were issued at a premium or discount and include fair value hedge adjustments, which together increased their carrying value as at October 31, 2021 by
$44 million (increased by $119 million in 2020); see Note 8 for further details on hedge adjustments. The carrying value is also adjusted for our subordinated debt holdings, held for market-making
purposes.
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BMO Financial Group 204th Annual Report 2021 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
within this report.
Note 16: Equity
Preferred and Common Shares Outstanding and Other Equity Instruments
(Canadian $ in millions, except as noted)
2021
2020
Number of
shares
Amount
Dividends declared
per share
Number of
shares
Amount
Dividends declared
per share
Preferred Shares – Classified as Equity
Class B – Series 25
(1)
Class B – Series 26 (1)
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 35
(2)
Class B – Series 36 (2)
Class B – Series 38
Class B – Series 40
Class B – Series 42
Class B – Series 44
Class B – Series 46
Preferred Shares – Classified as Equity
Other Equity Instruments
4.8% Additional Tier 1 Capital Notes
4.3% Limited Recourse Capital Notes, Series 1
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 and/or treasury shares
sold/purchased (3)(4)
Balance at End of Year
–
–
20,000,000
16,000,000
12,000,000
8,000,000
–
–
24,000,000
20,000,000
16,000,000
16,000,000
14,000,000
–
–
500
400
300
200
–
–
600
500
400
400
350
3,650
658
1,250
5,558
0.45
0.52
0.96
0.91
0.96
0.90
1.25
58.50
1.21
1.13
1.10
1.21
1.28
0.34
0.23
0.96
0.91
0.96
0.76
–
–
1.21
1.13
1.10
1.21
1.28
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
1,250
6,598
645,889,396
13,430
639,232,276
12,971
–
–
1,630,867
122
6,746,237
563,613
471
40
616,209
47
(652,730)
(52)
648,136,472
13,599
4.24
645,889,396
13,430
4.24
(1) Series 25 and Series 26 were redeemed and final dividends were paid on August 25, 2021.
(2) Series 35 and Series 36 were redeemed and final dividends were paid on November 25, 2020.
(3) Common shares are net of 36,521 treasury shares as at October 31, 2021 (652,730 treasury shares as at October 31, 2020).
(4) During fiscal 2021 and 2020, we did not purchase any of our common shares under the normal course issuer bid.
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 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
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
25.00
25.00
$ 0.24075
$ 0.2265
$0.240688
$0.190875
$0.303125
$ 0.28125
$ 0.2750
$0.303125
$ 0.31875
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
2.33%
2.24%
2.22%
2.71%
4.06%
3.33%
3.17%
2.68%
3.51%
May 25, 2024
(3)(4)
August 25, 2024 (3)(4)
November 25, 2024 (3)(4)
August 25, 2025 (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 28 (5)(6)
Class B – Series 30 (5)(6)
Class B – Series 32 (5)(6)
Class B – Series 34 (5)(6)
Class B – Series 39 (5)(6)
Class B – Series 41 (5)(6)
Class B – Series 43 (5)(6)
Class B – Series 45 (5)(6)
Class B – Series 47 (5)(6)
(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) If converted, the holders have the option to convert back to the original preferred shares on subsequent redemption dates.
(6) 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
paragraph below for details.
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On August 25, 2021, we redeemed all of our 9,425,607 issued and outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 25
for an aggregate total of approximately $236 million and all of our 2,174,393 issued and outstanding Non-Cumulative Floating Rate Class B Preferred
Shares, Series 26 for an aggregate total of approximately $54 million.
186 BMO Financial Group 204th Annual Report 2021
On November 25, 2020, we redeemed all of our 6 million issued and outstanding Non-Cumulative Perpetual Class B Preferred Shares, Series 35
(Non-Viability Contingent Capital (NVCC)) for an aggregate total of $156 million and all of our 600,000 issued and outstanding Non-Cumulative 5-Year
Rate Reset Class B Preferred Shares, Series 36 (NVCC) for an aggregate total of $600 million.
Other Equity Instruments
The $1,250 million 4.3% Limited Recourse Capital Notes Series 1 (LRCN) (NVCC), are classified as equity and form part of our Additional Tier 1 capital.
Upon the occurrence of a recourse event, the noteholders will have recourse to assets held in a consolidated trust managed by a third-party trustee.
The trust assets are currently comprised of $1,250 million of BMO issued Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 48 (NVCC)
(Preferred Shares Series 48) issued concurrently with the LRCN. As the Preferred Shares Series 48 eliminate on consolidation, they do not currently
form part of our Additional Tier 1 capital.
The US$500 million 4.8% Additional Tier 1 Capital Notes (AT1 Notes) (NVCC), are also classified as equity and form part of our Additional Tier 1 capital.
The LRCN and AT1 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 components of both types of instrument and, as a result, the full amount of proceeds have been classified as
equity. Semi-annual distributions on the LRCN and AT1 Notes will be recorded when payable. The LRCN and AT1 Notes are subordinate to the claims
of the depositors and certain other creditors in right of payment. The following table shows the details of our AT1 Notes and LRCN as at October 31,
2021 and 2020.
(Canadian $ in millions, except as noted)
4.8% Additional Tier 1 Capital Notes
4.3% Limited Recourse Capital Notes
Total
Face value
Interest rate (%)
Redeemable at our option
Convertible to
US$500
$1,250
4.8
(1)
August 2024
(2)
4.3
(4)
November 2025
(2)
Variable number of
common shares
(3)
Variable number of
common shares
(4)
2021
Total
658
2020
Total
658
1,250
1,250
1,908
1,908
(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 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.
(4) Non-deferrable interest is payable semi-annually on these notes, at the bank’s discretion. Non-payment of interest will result in a recourse event, with the noteholders’ sole remedy being the
holders’ proportionate share of trust assets comprised of our NVCC Preferred Shares Series 48. In such an event, the delivery of the trust assets will represent the full and complete extinguishment of
our obligations under the LRCN. In circumstances under which non-viability contingent capital, including the Preferred Shares Series 48, would be converted into common shares of the bank
(described below), the LRCN would be redeemed, and the noteholders’ sole remedy would be their proportionate share of trust assets, then comprised of common shares of the bank received by the
trust on conversion of the Preferred Shares Series 48.
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 in 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. 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.
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 38, Class B – Series 40, Class B – Series 42, Class B –
Series 44 and Class B – Series 46 preferred share issues, the AT1 Notes and, by virtue of the recourse to the Preferred Shares Series 48 the LRCN,
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.
BMO Financial Group 204th Annual Report 2021 187
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Normal Course Issuer Bid
On December 3, 2021, we announced our intention, subject to the approval of OSFI and the Toronto Stock Exchange, to establish a new normal course
issuer bid (NCIB) for up to 22.5 million common shares. The NCIB is a regular part of our capital management strategy. Once approvals are obtained,
the share repurchase program will permit us to purchase BMO common shares for the purpose of cancellation. The timing and amount of purchases
under the NCIB are subject to regulatory approvals and to management discretion, based on factors such as market conditions and capital levels. We
will consult with OSFI before making purchases under the NCIB.
We did not renew our NCIB in 2021 as OSFI’s restriction on common share purchases, effective since March 13, 2020, remained in place until
November 4, 2021. During fiscal 2021, we did not purchase any of our common shares under the prior NCIB.
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 and, in certain circumstances Class B Preferred Share dividends cannot be paid unless dividends on our Preferred Shares Series 48 have been
paid.
In addition, if the bank does not pay the interest in full on the AT1 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
AT1 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.
During fiscal 2021 and the first half of fiscal 2020, common shares to supply the DRIP were purchased on the open market. In the second half of
fiscal 2020, common shares to supply the dividend reinvestment feature of the DRIP were issued from treasury at a 2% discount from their then-
current market price.
Potential Share Issuances
As at October 31, 2021, we had reserved 33,200,910 common shares (33,200,910 as at October 31, 2020) for potential issuance in respect of the
DRIP. We have also reserved 5,682,206 common shares (6,446,110 as at October 31, 2020) for the potential exercise of stock options, as further
described in Note 20.
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.
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.
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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.
188 BMO Financial Group 204th Annual Report 2021
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.
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, default 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 third-party vendors.
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 our privately issued securities includes net asset values published by third-party
fund managers as applicable.
Prices from dealers, brokers and third-party vendors 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 credit 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
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.
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 models calculate 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 credit risk that the bank’s counterparty may not ultimately be able to fulfill its
derivative 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 our own 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
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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.
BMO Financial Group 204th Annual Report 2021 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. These
items are therefore excluded from the below table.
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.
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 in our Consolidated Balance Sheet.
(Canadian $ in millions)
Securities
Amortized cost
(1)
(1)
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
(2)
(3)
Deposits
Securitization and structured entities’ liabilities (4)
Subordinated debt
Carrying
value
2021
Fair
(5)
value
Carrying
value
2020
Fair
value (5)
49,970
49,810
48,466
49,009
135,653
76,627
7,827
233,066
453,173
662,827
24,631
6,893
135,461
76,791
7,827
233,670
453,749
663,558
24,809
7,087
126,882
69,480
7,556
238,239
442,157
640,961
26,889
8,416
128,815
70,192
7,556
239,929
446,492
643,156
27,506
8,727
(1) Carrying value is net of allowances for credit losses.
(2) Excludes $5,022 million of loans classified as FVTPL ($5,306 million as at October 31, 2020) and $134 million of loans classified as FVOCI ($51 million as at October 31, 2020).
(3) Excludes $22,665 million of structured note liabilities ($18,073 million as at October 31, 2020) and $139 million of metal deposits ($nil as at October 31, 2020) designated at FVTPL.
(4) Excludes $855 million of securitization and structured entities’ liabilities classified at FVTPL ($nil as at October 31, 2020).
(5) If financial instruments not carried at fair value were categorized based on the fair value hierarchy, all of these financial instruments would be categorized as Level 2, except for amortized cost
securities, which would have $14,117 million categorized as Level 1 ($18,831 million as at October 31, 2020), and $35,693 million categorized as Level 2 ($30,178 million as at October 31, 2020).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 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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190 BMO Financial Group 204th Annual Report 2021
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, and
FVOCI, other assets, fair value liabilities, derivative assets and derivative liabilities is presented in the following table:
(Canadian $ in millions)
2021
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)
2020
Total
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
Other Assets (1)
Fair Value Liabilities
Securities sold but not yet purchased
Structured note liabilities (2)
Other liabilities (3)
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
3,123
4,473
–
7,596
6,529
4,371
–
10,900
2,183
6,050
–
1,307
–
2,231
–
54,931
69,825
3,655
3,532
458
591
13,379
7,656
160
–
33,904
–
–
–
–
675
7
–
–
5,838
9,582
458
1,898
14,054
9,894
160
54,931
682 104,411
1,868
5,702
16
1,021
7
3,767
–
43,757
62,667
6,467
2,716
487
1,495
11,487
7,274
67
–
34,364
–
–
–
–
803
–
–
–
8,335
8,418
503
2,516
12,297
11,041
67
43,757
803
97,834
704
159
–
863
452
149
–
601
137
–
–
–
160
1,670
2,671
1,243
38
92
9
7,544
12
9,097
–
–
–
–
–
2,442
1,380
38
92
9
7,704
4,124
2,442
14,210
180
–
–
–
70
1,587
2,289
1,249
44
94
3
7,827
10
9,376
–
–
–
–
–
1,903
1,429
44
94
3
7,897
3,500
1,903
13,568
9,138
3,927
–
13,065
20,765
1,685
–
22,450
1,438
18,873
–
2,803
–
812
–
33,064
–
4,392
17,424
–
1,106
18,530
6
3
642
1,381
–
2,032
6
4
746
1,581
–
2,337
1,549
2,153
4,113
3,699
12,136
2,349
–
29,926
5,150
85
14,649
22,665
2,125
39,439
8,066
14,982
6,976
4,657
–
34,681
6,773
12,451
1,445
7,802
5
28,476
–
–
1
–
–
–
132
133
6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
2
2,987
21,026
4,114
6,502
12,136
3,161
132
63,123
5,156
4,477
32,073
22,665
3,231
57,969
8,072
14,985
7,618
6,038
–
36,713
6,779
12,455
2,191
9,383
7
30,815
2,604
14,852
8
3,643
–
792
–
42,664
–
6,117
19,740
–
789
20,529
13
1
123
750
–
887
22
3
350
456
–
831
2,143
2,842
5,267
3,738
12,532
2,442
–
30,649
3,412
117
9,636
18,073
1,285
28,994
14,916
10,825
2,465
7,711
11
35,928
10,871
10,609
1,983
6,067
10
29,540
–
–
1
–
–
–
93
94
1,945
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4
4
4,747
17,694
5,276
7,381
12,532
3,234
93
73,407
5,357
6,234
29,376
18,073
2,074
49,523
14,929
10,826
2,588
8,461
11
36,815
10,893
10,612
2,333
6,523
14
30,375
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(1) Other assets include precious metals, segregated fund assets in our insurance business and certain receivables measured at fair value.
(2) These structured note liabilities included in deposits have been designated at FVTPL.
(3) Other liabilities include investment contract and segregated fund liabilities in our insurance business, certain payables and metals deposits that have been designated at FVTPL as well as certain
securitization and structured entities’ liabilities measured at FVTPL.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO Financial Group 204th Annual Report 2021 191
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
assumptions to the significant Level 3 categories of private equity investments, as the net asset values are provided by the investment or fund
managers.
(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
2,442
Net asset value
EV/EBITDA
6 Discounted cash flows
675 Discounted cash flows
Significant
unobservable inputs
Net asset value
Multiple
Discount margin
Prepayment rate
Market Comparable Comparability Adjustment (4)
Private equity (2)
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
1,903
Net asset value
EV/EBITDA
1,945 Discounted cash flows
803 Discounted cash flows
Net asset value
Multiple
Discount margin
Prepayment rate
Market Comparable Comparability Adjustment (4)
2021
Range of input values (1)
Low
na
6x
40bps
4%
(5.56)
na
5x
65bps
6%
(4.93)
High
na
19x
40bps
47%
5.85
2020
na
17x
141bps
62%
5.74
(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 $453 million of U.S. Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost ($487 million in 2020), which approximates fair value, and are
held 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 $nil ($3 million in 2020).
(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 certain 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.
Prepayment Rates
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. Prepayment rates impact our estimate of future cash flows.
Changes in the prepayment rate tend to be negatively correlated with interest rates. In other words, an increase in the prepayment rate will result in
a higher fair value when the asset interest rate is lower than the current reinvestment rate. A decrease in the prepayment rate will result in a lower
fair value when the asset interest rate is higher than the current reinvestment rate.
Comparability Adjustment
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. Transfers from Level 1 to Level 2 were due to
reduced observability of the inputs used to value the securities. Transfers from Level 2 to Level 1 were due to increased availability of quoted prices
in active markets.
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192 BMO Financial Group 204th Annual Report 2021
The following table presents significant transfers between Level 1 and Level 2 for the years ended October 31, 2021 and October 31, 2020.
(Canadian $ in millions)
Trading Securities
FVTPL Securities
FVOCI Securities
Securities sold but not yet purchased
Level 1 to Level 2
Level 2 to Level 1
Level 1 to Level 2
Level 2 to Level 1
2021
2020
7,863
871
11,028
7,764
11,421
902
13,542
5,950
6,582
667
12,193
7,781
5,930
334
13,425
3,871
Changes in Level 3 Fair Value Measurements
The tables below present a reconciliation of all changes in Level 3 financial instruments for the years ended October 31, 2021 and 2020, including
realized and unrealized gains (losses) included in earnings and other comprehensive income as well as transfers into and out of Level 3. Transfers
from Level 2 to Level 3 were due to an increase in unobservable market inputs used in pricing the securities. Transfers out of Level 3 to Level 2 were
due to an increase in observable market inputs used in pricing the securities.
Change in fair value
Movements
Transfers
Balance
October 31,
2020
Included in
earnings
Included
in other
compre-
hensive
(1)
income
Purchases/
Issuances
Sales
(2)
Maturities/
Settlement
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2021
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (3)
803
–
803
1,903
1,903
1
93
94
1,945
–
4
4
(222)
–
(222)
315
315
(56)
–
1,465
10
(1,253)
(3)
(56)
1,475
(1,256)
(92)
(92)
628
628
(276)
(276)
––
–
–
–
–
–
–
26
26
–
13
13
(150)
1,812
–
–
–
–
–
–
–
–
–
–
(13)
–
–
–
–
–
(4)
(4)
–
–
–
169
–
169
–
–
–
–
–
(231)
–
(231)
(32)
(32)
–
–
–
(1,302)
–
(2,299)
–
–
–
13
–
–
–
(2)
(2)
675
7
682
2,442
2,442
1
132
133
6
–
2
2
38
–
38
374
374
na
na
na
–
–
–
–
For the year ended October
(Canadian $ in millions)
31, 2021
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate equity
Total FVOCI securities
Business and Government
Loans
Other Liabilities
Derivative Liabilities
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) Includes proceeds received on securities sold but not yet purchased.
(3) Changes in unrealized gains (losses) on FVTPL securities still held on October 31, 2021 are included in earnings for the year.
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by (losses) gains on economic hedge contracts.
na – not applicable
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BMO Financial Group 204th Annual Report 2021 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in fair value
Movements
Transfers
Balance
October 31,
2019
Included in
earnings
Included
in other
compre-
hensive
(1)
income
Purchases/
Issuances
Sales (2)
Maturities/
Settlement
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2020
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (3)
For the year ended October 31, 2020
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate equity
Total FVOCI securities
538
7
545
1,984
1,984
1
81
82
(351)
10
(341)
4
4
–
–
–
9
(2)
7
17
17
–
1
1
1,338
50
1,388
356
356
(715)
(68)
(783)
(459)
(459)
–
11
11
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1,747)
–
–
–
225
3
228
(241)
–
(241)
1
1
–
–
–
–
–
4
4
–
–
–
–
–
–
–
(1)
(1)
803
–
803
1,903
1,903
1
93
94
1,945
–
4
4
(232)
(1)
(233)
35
35
na
na
na
–
–
–
–
Business and Government Loans
1,736
(3)
156
1,803
Other Liabilities
Derivative Liabilities
Credit default swaps
Total derivative liabilities
–
1
1
–
–
–
–
–
–
–
–
–
(1) Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations.
(2) Includes proceeds received on securities sold but not yet purchased.
(3) Changes in unrealized gains (losses) on trading securities, derivative assets and derivative liabilities still held on October 31, 2020 are included in earnings for the year.
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by (losses) gains on economic hedge contracts.
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 our 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 our 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.
2021
1,017
416
567
147
2
2,149
1,853
296
2,149
2020
1,199
474
(32)
271
34
1,946
1,931
15
1,946
2019
700
401
269
145
6
1,521
1,223
298
1,521
(Canadian $ in millions)
Interest rates
Foreign exchange
Equities
Commodities
Other
Total trading-related revenue
Reported as:
Net interest income
Non-interest revenue – trading revenues
Total trading-related revenue
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194 BMO Financial Group 204th Annual Report 2021
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
2021
Financial Assets
Securities borrowed or purchased under resale
agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
Financial Assets
Securities borrowed or purchased under resale
agreements
Derivative instruments
Financial Liabilities
Derivative instruments
Securities lent or sold under repurchase agreements
108,799
37,054
145,853
31,156
98,973
130,129
115,863
37,164
153,027
30,724
92,643
123,367
1,417
341
1,758
341
1,417
1,758
3,985
349
4,334
349
3,985
4,334
107,382
36,713
144,095
30,815
97,556
128,371
111,878
36,815
148,693
30,375
88,658
119,033
15,779
20,952
36,731
20,952
15,779
36,731
17,302
19,302
36,604
19,302
17,302
36,604
90,389
2,377
9
4,823
92,766
4,832
1,865
81,411
1,906
108
83,276
2,014
92,889
2,816
95,705
1,889
70,693
72,582
194
4,148
4,342
3,108
263
3,371
1,205
8,561
9,766
6,092
258
6,350
2020
1,493
10,549
12,042
6,076
400
6,476
(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 for the bank are determined in accordance with guidelines issued by OSFI, which are based on the Basel III
framework developed by the Basel Committee on Banking Supervision. To address the market disruption posed by the COVID-19 pandemic, OSFI
announced a suite of modifications to capital requirements in fiscal 2020, with those that were temporary in nature being unwound during the course
of fiscal 2021, except for the temporary exclusion of certain exposures from the Leverage Ratio exposure measures which expires on December 31,
2021. Refer to the Enterprise-Wide Capital Management section of Management’s Discussion and Analysis within this report for more details.
Common Equity Tier 1 (CET1) capital is the most permanent form of capital. It is comprised of common shareholders’ equity and may include a
portion of expected credit loss provisions, less deductions for goodwill, intangible assets and certain other items. Tier 1 capital is primarily comprised
of CET1 capital, preferred shares and other equity instruments, less regulatory deductions.
Tier 2 capital is primarily comprised of subordinated debentures and may include a portion of expected credit loss provisions, 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.
The primary regulatory capital measures are the CET1 Ratio, Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio.
• Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by their respective risk-weighted assets.
• The Leverage Ratio is defined as Tier 1 capital divided by leverage exposures, which consists of on-balance sheet items and specified off-balance
sheet items, net of specified adjustments.
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BMO Financial Group 204th Annual Report 2021 195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As at October 31, 2021, 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 2.5% Domestic Stability Buffer.
Regulatory Capital Measures, Risk-Weighted Assets and Leverage Exposures (1)
(Canadian $ in millions, except as noted)
CET1 Capital
Tier 1 Capital
Total Capital
Risk-Weighted Assets
Leverage Exposures
CET1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
2021
2020
44,491
49,966
57,201
325,433
976,690
13.7%
15.4%
17.6%
5.1%
40,077
45,840
54,661
336,607
953,640
11.9%
13.6%
16.2%
4.8%
(1) Disclosed in accordance with, as applicable, OSFI’s Capital Adequacy Requirements Guideline and Leverage Requirements Guideline. Reflects modifications to capital requirements announced by OSFI
in response to the COVID-19 pandemic in fiscal 2020, some of which remain in effect in 2021.
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 vest in equal tranches of 50% on the third and fourth anniversaries of 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
2021
Weighted-
average
(1)
exercise price
81.50
97.14
67.88
97.03
–
87.79
77.34
2020
Weighted-
average
exercise price (1)
76.59
101.47
61.89
97.10
82.78
81.50
69.16
2019
Weighted-
average
exercise price (1)
72.19
89.90
60.21
98.96
103.79
76.59
64.57
Number of
stock options
6,095,201
931,047
902,651
4,756
10,534
6,108,307
3,507,803
2,487,645
Number of
stock options
6,108,307
976,087
563,613
34,052
40,619
6,446,110
3,595,744
13,575,259
Number of
stock options
6,446,110
984,943
1,630,867
117,980
–
5,682,206
2,616,750
12,708,296
(1) The weighted-average exercise prices reflect the conversion of foreign currency denominated options at the exchange rate as at October 31, 2021, 2020 and 2019, 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, 2021, 2020 and 2019 was $10 million, $9 million and
$9 million, respectively.
Options outstanding and exercisable at October 31, 2021 by range of exercise price were as follows:
Options outstanding
Weighted-
average remaining
contractual life (years)
2021
Options exercisable
Weighted-average
exercise price
Number of
stock options
Weighted-average
exercise price
0.1
1.6
3.7
7.1
7.6
56.00
64.58
77.57
89.90
99.16
107,888
1,065,947
691,456
–
751,459
56.00
64.58
77.57
–
98.27
Number of
stock options
107,888
1,065,947
691,456
878,372
2,938,543
(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
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196 BMO Financial Group 204th Annual Report 2021
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
Cash proceeds from stock options exercised
Weighted-average share price for stock options exercised (in dollars)
2021
7
111
115.42
2020
7
35
94.44
2019
6
54
99.84
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, 2021, 2020 and 2019 was $10.75, $9.46 and $10.23, 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)
2021
2020
2019
4.9%
20.6% – 20.7%
1.0%
6.5 – 7.0
4.3%
15.4%
1.9% – 2.0%
6.5 – 7.0
5.7%
20.0% – 20.1%
2.5%
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, 2021, 2020 and 2019 was $97.14, $101.47 and $89.90, 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 $75,000 ($100,000 prior to December 31, 2020). 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, 2021, 2020 and 2019 was $46 million, $58 million and
$54 million, respectively. There were 18.0 million, 19.2 million and 18.0 million common shares held in these plans for the years ended
October 31, 2021, 2020 and 2019, 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 $2,425 million as at October 31, 2021 ($1,523 million as at October 31,
2020).
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, 2021, 2020 and 2019 totalled 6.4 million, 5.7 million and 6.3 million,
respectively.
The weighted-average fair value of these units granted during the years ended 0ctober 31, 2021, 2020 and 2019 was $91.62, $99.59 and
$98.52, respectively, and we recorded employee compensation expense of $1,234 million, $363 million and $610 million, 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 (losses) on total return swaps and foreign currency swaps recognized for
the years ended October 31, 2021, 2020 and 2019 were $719 million, $(175) million and $20 million, respectively, resulting in net employee
compensation expense of $515 million, $538 million and $590 million, respectively.
A total of 17.6 million, 17.0 million and 17.2 million mid-term incentive plan units were outstanding as at October 31, 2021, 2020 and 2019,
respectively, and the intrinsic value of those awards which had vested was $1,679 million, $1,019 million and $1,251 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.
BMO Financial Group 204th Annual Report 2021 197
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred incentive plan units granted during the years ended October 31, 2021, 2020 and 2019 totalled 0.4 million, 0.3 million and 0.3 million,
respectively, and the weighted-average fair value of these units granted during the years ended October 31, 2021, 2020 and 2019 was $113.08,
$85.47 and $97.27, respectively.
Liabilities related to these plans are recorded in other liabilities in our Consolidated Balance Sheet and totalled $609 million and $379 million as
at October 31, 2021 and 2020, respectively.
Employee compensation expense related to these plans for the years ended October 31, 2021, 2020 and 2019 was $279 million, $(62) million
and $17 million, respectively. We have entered into derivative instruments to hedge our exposure related to these plans. Changes in the fair value of
these derivatives are recorded as employee compensation expense in the period in which they arise. Gains (losses) on these derivatives recognized
for the years ended October 31, 2021, 2020 and 2019 were $271 million, $(67) million and $4 million, respectively. These gains (losses) resulted in
net employee compensation expense for the years ended October 31, 2021, 2020 and 2019 of $8 million, $5 million and $13 million, respectively.
A total of 4.6 million, 4.7 million and 4.8 million deferred incentive plan units were outstanding as at October 31, 2021, 2020 and 2019,
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 our employees. The costs of these plans, recorded in employee compensation expense, are equal to our contributions
to the plans.
Effective December 31, 2020, the primary defined benefit pension plan for employees in Canada was closed to new employees hired after that
date. Employees hired or transferred to BMO Canada on or after January 1, 2021 are eligible to participate in a defined contribution pension plan once
they have completed the waiting period of six months of continuous service.
We also provide other employee future benefits, including health and dental care benefits and life insurance, for eligible current and retired
employees.
Short-term employee benefits, such as salaries, paid absences, bonuses and other benefits, are accounted for on an accrual basis over the period
in which the employees provide the related services.
Investment Policy
The 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
2021
20% – 40%
40% – 55%
10% – 35%
Pension benefit plans
Actual
2021
30%
47%
23%
Actual
2020
30%
47%
23%
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis.
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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.
198 BMO Financial Group 204th Annual Report 2021
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 expenses 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
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, 2021 and the most
recent funding valuation for our primary U.S. pension plan was performed as at January 1, 2021.
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)
2021
9,716
10,525
809
939
(130)
809
2020
10,493
10,064
2019
9,866
9,723
2021
1,220
166
2020
1,290
181
2019
1,254
175
(429)
(143)
(1,054)
(1,109)
(1,079)
(266)
(163)
(429)
36
(179)
(143)
40
(1,094)
(1,054)
38
(1,147)
(1,109)
46
(1,125)
(1,079)
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
Pension benefit plans
Other employee future benefit plans
2021
2020
2019
2021
2020
2019
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
Total annual pension and other employee future benefit expenses
recognized in the Consolidated Statement of Income
268
7
–
5
–
280
90
160
530
249
1
–
5
–
255
87
169
511
193
(20)
(5)
5
–
173
82
170
425
9
30
–
–
(11)
28
–
–
28
11
32
–
–
10
53
–
–
53
9
37
–
–
6
52
–
–
52
N
o
t
e
s
BMO Financial Group 204th Annual Report 2021 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2021
2020
2019
2021
2020
2019
2.7%
2.1%
na
3.2%
2.2%
na
3.0%
2.1%
na
2.7%
2.1%
na
4.0%
2.4%
na
3.0%
2.1%
na
2.7%
2.0%
4.8% (2)
3.3%
na (5)
4.8% (2)
3.0%
2.0%
4.9% (1)
2.7%
2.0%
4.8% (1)
4.1%
2.0%
4.9% (1)
3.0%
2.0%
4.9% (1)
(1) Trending to 4.1% in 2040 and remaining at that level thereafter.
(2) Trending to 4.0% in 2041 and remaining at that level thereafter.
(3) The pension benefit current service cost was calculated using a separate discount rate of 3.00%, 3.10% and 4.10% for 2021, 2020 and 2019, respectively.
(4) The other employee future benefit plans current service cost was calculated using a separate discount rate of 3.00%, 3.20% and 4.20% for 2021, 2020 and 2019, respectively.
(5) Rate of compensation increase is na due to new flat dollar retiree plan benefit no longer being dependent on compensation.
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
2021
23.8
24.2
24.8
25.1
2020
23.8
24.1
24.7
25.1
2021
21.8
23.2
23.0
24.4
2020
21.7
23.1
22.9
24.3
Changes in the estimated financial positions of our defined benefit pension plans and other employee future benefit plans are as follows:
Pension benefit plans
Other employee future benefit plans
2021
2020
2021
2020
(Canadian $ in millions, except as noted)
Defined benefit obligation
Defined benefit obligation at beginning of year
Current service cost
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
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
s
e
t
o
N
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
10,493
268
269
(525)
17
11
(700)
29
(146)
9,716
9,586
130
9,716
10,064
262
542
298
17
(525)
(5)
(128)
10,525
809
947
(138)
809
542
(11)
700
(29)
20
9,866
249
286
(516)
17
16
484
59
32
10,493
10,330
163
10,493
9,723
285
235
296
17
(516)
(5)
29
10,064
(429)
124
(553)
(429)
235
(16)
(484)
(59)
(6)
(330)
1,290
9
34
(50)
5
(4)
(89)
39
(14)
1,220
126
1,094
1,220
181
4
(1)
40
5
(50)
–
(13)
166
1,254
11
37
(48)
5
14
50
(35)
2
1,290
143
1,147
1,290
175
5
6
36
5
(48)
–
2
181
(1,054)
(1,109)
40
(1,094)
(1,054)
38
(1,147)
(1,109)
(1)
4
84
(45)
–
42
6
(12)
(45)
38
–
(13)
Actuarial gains (losses) recognized in other comprehensive income for the year
1,222
200 BMO Financial Group 204th Annual Report 2021
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, 2021 and 2020 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
Pooled funds
Derivative instruments
Corporate debt
Corporate equity
Quoted
Unquoted
144
26
191
297
1,071
–
3
1,655
3,387
1
41
364
4
4,014
43
1,391
–
5,858
2021
Total
145
67
555
301
5,085
43
1,394
1,655
9,245
Quoted
Unquoted
208
17
308
393
1,331
1
2
1,255
3,515
–
54
404
7
3,442
(16)
1,363
–
5,254
2020
Total
208
71
712
400
4,773
(15)
1,365
1,255
8,769
No plan assets are directly invested in the bank’s or related parties’ securities as at October 31, 2021 and 2020. As at October 31, 2021 our primary
Canadian plan indirectly held, through pooled funds, approximately $11 million ($9 million as at October 31, 2020) of our common shares and fixed
income securities. The plans do not hold any property we occupy or other assets we use.
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 4.0% in 2041 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
3.2
(1,019)
1,287
2.2
47
(46)
(179)
176
na
na
na
3.3
(111)
133
na
– (1)
– (1)
(29)
29
4.8 (2)
49
(49)
2021
14.5
9.5
13.7
2020
15.4
9.9
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
2021
254
160
44
458
2020
251
169
45
465
2019
203
170
53
426
2021
2020
2019
–
–
40
40
–
–
36
36
–
–
40
40
Our best estimate of the contributions and benefits to be paid directly to pensioners for the year ending October 31, 2022 is approximately $86 million for our defined benefit pension plans and
$48 million for our other employee future benefit plans. Benefit payments for the year ending October 31, 2022 are estimated to be $542 million.
N
o
t
e
s
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.
BMO Financial Group 204th Annual Report 2021 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 tax assets and liabilities are
measured at the tax rates expected to apply when temporary differences reverse. Changes in deferred 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 tax assets is $nil million ($20 million as at October 31, 2020) related to Canadian tax loss carryforwards and $9 million
($75 million as at October 31, 2020) related to both U.S. tax loss carryforwards and tax credits that will expire in various amounts in U.S. taxation
years from 2021 through 2040. 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, 2021 is
$118 million ($113 million in 2020), of which $7 million ($7 million in 2020) 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.
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 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 $17 billion as at
October 31, 2021 ($16 billion in 2020).
Provision for Income Taxes
(Canadian $ in millions)
Consolidated Statement of Income
Current
Provision for income taxes for the current period
Adjustments for prior periods
Deferred
Origination and reversal of temporary differences
Effect of changes in tax rates
Other Comprehensive Income and Equity
Income tax expense (recovery) related to:
Unrealized gains (losses) on FVOCI debt securities
Reclassification to earnings of (gains) on FVOCI debt securities
Gains (losses) on derivatives designated as cash flow hedges
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges
Unrealized gains (losses) on hedges 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
Components of Total Provision for Income Taxes
(Canadian $ in millions)
s
e
t
o
N
Canada: Current taxes
Federal
Provincial
Canada: Deferred taxes
Federal
Provincial
Total Canadian
Foreign: Current taxes
Deferred taxes
Total foreign
Total provision for income taxes
202 BMO Financial Group 204th Annual Report 2021
2021
2020
2019
2,334
(14)
173
11
2,504
(58)
(14)
(504)
(149)
180
341
(70)
6
(10)
(278)
1,154
10
91
(4)
1,251
143
(25)
541
(16)
(35)
(88)
(10)
–
3
513
1,198
(14)
327
3
1,514
140
(26)
521
51
(4)
(196)
27
1
–
514
2,226
1,764
2,028
2021
2020
2019
650
373
1,023
233
134
367
694
402
1,096
(11)
(6)
(17)
1,390
1,079
940
(104)
836
450
235
685
791
465
1,256
(113)
(66)
(179)
1,077
308
643
951
2,226
1,764
2,028
Set out below is a reconciliation of our statutory tax rates and income taxes that would be payable at these rates to the effective tax rates and
provision for income taxes that we have recorded in our Consolidated Statement of Income:
(Canadian $ in millions, except as noted)
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
Write-down of goodwill
Change in tax rate for deferred taxes
Income attributable to investments in associates and joint ventures
Other
Provision for income taxes in the Consolidated Statement of Income
and effective tax rate
2021
2020
2019
2,729
26.6%
1,688
26.6%
1,934
26.6%
(232)
(137)
202
11
(56)
(13)
(2.3)
(1.3)
2.0
0.1
(0.6)
(0.1)
(247)
(175)
–
(4)
(39)
28
(3.9)
(2.8)
–
(0.1)
(0.6)
0.5
(220)
(158)
–
3
(37)
(8)
(3.0)
(2.2)
–
–
(0.5)
(0.1)
2,504
24.4%
1,251
19.7%
1,514
20.8%
Components of Deferred Tax Balances
(Canadian $ in millions)
Deferred Tax Asset (Liability)
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
Net deferred tax assets (liabilities)
Comprising
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
(Canadian $ in millions)
Deferred Tax Asset (Liability)
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
Net deferred tax assets (liabilities)
Comprising
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
Net asset,
October 31, 2020
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2021
849
337
416
(358)
87
31
(361)
78
(237)
11
512
1,365
1,473
(108)
1,365
(194)
2
270
–
(53)
(31)
(39)
104
(6)
(62)
(175)
(184)
–
(9)
–
250
–
–
–
(330)
–
–
10
(79)
(4)
–
(1)
–
–
–
–
–
2
–
(4)
(7)
–
–
–
651
330
685
(108)
34
–
(400)
(148)
(241)
(51)
343
1,095
1,287
(192)
1,095
Net asset,
November 1, 2019 (1)
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2020
511
325
483
(143)
145
189
(282)
27
(217)
50
441
1,529
1,589
(60)
1,529
334
11
(69)
–
(59)
(189)
(78)
(35)
(18)
(39)
55
(87)
–
1
–
(218)
–
–
–
86
–
–
–
(131)
4
–
2
3
1
31
(1)
–
(2)
–
16
54
–
–
–
849
337
416
(358)
87
31
(361)
78
(237)
11
512
1,365
1,473
(108)
1,365
(1) Includes IFRS 16 adoption adjustment of $21 million (refer to Note 1).
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,210 million, to date, in respect
of certain 2011 – 2016 Canadian corporate dividends. Those reassessments denied certain dividend deductions on the basis that the dividends were
received as part of a “dividend rental arrangement”. The tax rules raised by the Canadian tax authorities were prospectively addressed in the 2015
and 2018 Canadian federal budgets. In October 2021, we filed Notices of Appeal with the Tax Court of Canada and the matter is now in litigation.
In the future, we expect to be reassessed for significant income tax for similar activities. We remain of the view that our tax filing positions were
appropriate and intend to challenge all reassessments. However, if such challenges are unsuccessful, the additional expense would negatively impact
our net income.
N
o
t
e
s
BMO Financial Group 204th Annual Report 2021 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 23: Earnings Per Share
Basic earnings per share is calculated by dividing net income, after deducting dividends payable on preferred shares and distributions payable 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
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 $)
2021
7,754
(244)
7,510
2020
5,097
(247)
4,850
2019
5,758
(211)
5,547
647,163
641,424
638,881
11.60
7.56
8.68
7,510
647,163
4,850
641,424
5,547
638,881
6,403
(4,890)
3,433
(2,729)
5,326
(3,847)
648,676
642,128
640,360
11.58
7.55
8.66
(1) In computing diluted earnings per share, we did not exclude any stock options outstanding for the year ended October 31, 2021 as the average share price for the year exceeded the exercise price.
For the years ended October 31, 2020 and 2019, we excluded average stock options outstanding 3,146,040 and 1,177,152 with a weighted-average exercise price of $99.57 and $101.83, respectively,
as the average share price for the year did not exceed the exercise price.
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 (refer to 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 (2)
Securities lending
Documentary and commercial letters of credit
Commitments to extend credit (3)
Other commitments (4)
Total
s
e
t
o
N
2021
2020
22,165
5,158
12,895
3,909
1,481
174,327
8,070
228,005
23,144
1,795
5,601
4,349
1,034
180,384
5,302
221,609
(1) The fair value of the related derivatives included in our Consolidated Balance Sheet was $(4) million as at October 31, 2021 ($(8) million as at October 31, 2020).
(2) Effective October 31, 2021, we deconsolidated our investment in Fairway Financial Company LLC and the total committed undrawn liquidity facility provided to the vehicle was $8,095 million as at
October 31, 2021.
(3) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion.
(4) Other commitments include $1,649 million as at October 31, 2021 ($1,763 million as at October 31, 2020) of underwriting commitments that are extended but not yet accepted by the borrower.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
204 BMO Financial Group 204th Annual Report 2021
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 ABCP programs administered by us 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. The average term of these liquidity facilities is approximately 2 to 5 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 occu r in
connection with sales of assets, securities offerings, service contracts, director 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 material loss to be remote.
Pledged Assets and Collateral
In the ordinary course of business, we enter into trading, lending and borrowing activities that require us to pledge assets or provide collateral.
Pledging and collateral transactions are typically conducted under terms and conditions that are usual and customary to these activities. If there i s no
default, the securities or their equivalents must be returned by the pledgee upon satisfaction of the obligation.
The following table summarizes our pledged assets and collateral, and the activities to which they relate:
(Canadian $ in millions)
Bank Assets
Cash and due from banks
Securities (1)
Loans
Other assets
Third-party Assets (2)
Collateral received and available for sale or re-pledging
Less: Collateral not sold or re-pledged
(Canadian $ in millions)
Uses of pledged assets and collateral
Clearing systems, payment systems and depositories
Foreign governments and central banks
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
Securities borrowing and lending (3)
Derivatives transactions
Securitization
Covered bonds
Other
Total pledged assets and collateral
2021
2020
110
82,975
54,656
6,436
111
75,104
58,974
6,344
144,177
140,533
180,705
(46,278)
134,427
278,604
169,197
(58,312)
110,885
251,418
2021
2020
9,464
110
32,073
87,894
77,456
11,439
26,075
26,340
7,753
7,550
111
29,376
80,962
58,791
9,613
31,417
25,948
7,650
278,604
251,418
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(1) Includes NHA mortgage-backed securities of $4,519 million, which are included in loans in our Consolidated Balance Sheet ($6,121 million as at October 31, 2020).
(2) Includes on-balance sheet securities borrowed or purchased under resale agreements and off-balance sheet collateral received.
(3) Includes off-balance sheet securities borrowing and lending.
BMO Financial Group 204th Annual Report 2021 205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Leases that we have signed but have not yet taken possession of, were $248 million as at October 31, 2021 ($991 million as at
October 31, 2020).
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.
Legal Proceedings
The bank and its subsidiaries are party to legal proceedings, including regulatory investigations, in the ordinary course of business. We review the
status of these proceedings regularly and establish provisions when in our judgment it becomes probable that we will incur a loss and the amount
can be reliably estimated. The bank’s provisions represent our best estimates based upon currently available information for proceedings for which
estimates can be made. However, the bank’s provisions may differ significantly from actual losses as a result of, for example, the inherent
uncertainty of the various potential outcomes of such proceedings; the varying stages of the proceedings; the existence of multiple defendants whose
share of liability may not yet be determined; unresolved issues in such proceedings, some of which involve novel legal theories and interpretations;
the fact that the underlying matters will change from time to time; and such proceedings may involve very large or indeterminate damages. While it
is inherently difficult to predict the ultimate outcome of these proceedings, based on our current knowledge, we do 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. However, because of the factors listed above, as well as other uncertainties inherent in litigation and regulatory matters,
there is a possibility that the ultimate resolution of legal or regulatory investigations may be material to the bank’s consolidated financial position or
its results of operations for any particular reporting period.
BMO and its subsidiaries are named as defendants or are otherwise involved in a substantial number of legal proceedings. BMO Harris Bank N.A.
(BMO Harris), as successor to M&I Marshall and Ilsley Bank (M&I), has been named as the defendant in a lawsuit filed in the U.S. Bankruptcy Court for
the District of Minnesota (Bankruptcy Court) in connection with a Ponzi scheme carried out by Thomas J. Petters and certain affiliated individuals and
entities (collectively, Petters) between 1994 and 2008. The lawsuit, brought by a Trustee in bankruptcy proceedings for certain Petters entities,
alleges that between 1999 and 2008, M&I (and a predecessor bank) facilitated the Ponzi scheme operated by Petters. BMO denies these allegations
and continues to defend itself vigorously. The Trustee seeks US$1.9 billion in compensatory damages, plus prejudgment interest, punitive damages,
and attorneys’ fees. The Bankruptcy Court: (i) denied BMO Harris’s motion for summary judgement; (ii) granted the Trustee’s motion for sanctions
based on the alleged spoliation of evidence; and (iii) transferred the case to the U.S. District Court for the District of Minnesota (District Court) for trial.
BMO Harris filed an objection to the spoliation sanctions, which is still pending before the District Court. BMO Harris anticipates that the trial in this
case will take place no earlier than late 2022.
In June 2021, the Ontario Superior Court approved the settlement of $100 million relating to a class action involving BMO Nesbitt Burns Inc.,
BMO Investorline Inc. and BMO Trust Company regarding disclosures of foreign exchange conversion spreads when converting foreign exchange in
registered accounts prior to a system change in 2011.
Restructuring Charges
Provisions for restructuring charges as at October 31, 2021 are $136 million ($336 million as at October 31, 2020), which include severance-related
costs to improve efficiency, and accelerate delivery against key bank-wide initiatives focused on digitization, organizational redesign and
simplification of the way we do business. This represents our best estimate of the amount that will ultimately be paid out.
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.
2021
472
166
(340)
(44)
(6)
248
2020
680
141
(334)
(16)
1
472
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206 BMO Financial Group 204th Annual Report 2021
Note 25: Operating and Geographic Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a distinct mandate. We determine our operating groups based on our
management structure and therefore these groups, and the results attributed to them, may not be comparable with those of other financial services
companies. We evaluate the performance of our groups using reported and adjusted measures, such as net income, revenue growth, return on equity,
and non-interest expense-to-revenue (efficiency) ratio, as well as operating leverage.
Personal and Commercial Banking
Personal and Commercial Banking (P&C) is comprised of two operating segments: Canadian Personal and Commercial Banking and U.S. Personal and
Commercial Banking.
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking (Canadian P&C) provides a full range of financial products and services to eight million customers.
Personal Banking provides financial solutions through a network of almost 900 branches, contact centres, digital banking platforms and over 3,300
automated teller machines. Commercial Banking serves clients across Canada and delivers sector and industry expertise, as well as a local presence.
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. Commercial Banking serves clients across the United States and delivers sector and industry expertise and local presence.
BMO Wealth Management
BMO’s group of wealth management businesses (BMO WM) 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.
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 32 locations
around the world, including 18 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 and procurement. T&O develops, monitors, manages and maintains governance of information technology
including data and analytics, 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 (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 and residual unallocated expenses.
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 operating segments’ teb adjustments is reflected in Corporate Services revenue and provision for income taxes. The teb adjustment for the year
ended October 31, 2021 was $315 million ($335 million in 2020 and $296 million in 2019).
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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BMO Financial Group 204th Annual Report 2021 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions)
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
Provision for (recovery of) income taxes
Reported net income (loss)
Average assets (3)
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for credit losses on impaired loans
Provision for credit losses on performing loans
Total provision for credit losses
Insurance claims, commissions and changes in policy benefit liabilities
Depreciation and amortization
Non-interest expense
Income (loss) before taxes
Provision for (recovery of) income taxes
Reported net income (loss)
Average assets (3)
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
Provision for (recovery of) income taxes
Reported net income (loss)
Average assets (3)
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
Canadian
P&C
6,561
2,225
8,786
493
(116)
377
–
526
3,511
4,372
1,135
3,237
4,268
1,243
5,511
22
(166)
(144)
–
487
2,310
2,858
669
2,189
982
6,071
7,053
4
(16)
(12)
1,399
283
3,433
1,950
476
1,474
3,115
3,011
6,126
11
(205)
(194)
–
269
3,167
2,884
744
2,140
2021
Total
14,310
12,876
27,186
525
(505)
20
1,399
1,565
13,944
10,258
2,504
(616)
326
(290)
(5)
(2)
(7)
–
–
1,523
(1,806)
(520)
(1,286)
7,754
262,953
129,009
48,232 372,475
168,471
981,140
Canadian
P&C
6,105
1,930
8,035
787
623
1,410
–
517
3,375
2,733
706
2,027
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
4,345
1,186
5,531
418
441
859
–
563
2,512
1,597
320
1,277
900
5,808
6,708
4
18
22
1,708
295
3,224
1,459
363
1,096
3,320
2,006
5,326
310
349
659
–
243
2,993
1,431
344
1,087
(699)
285
(414)
3
–
3
–
–
455
(872)
(482)
(390)
2020
Total
13,971
11,215
25,186
1,522
1,431
2,953
1,708
1,618
12,559
6,348
1,251
5,097
251,471
137,644
45,573
369,518
138,244
942,450
Canadian
P&C
5,885
2,099
7,984
544
63
607
–
355
3,481
3,541
917
2,624
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
4,216
1,162
5,378
160
37
197
–
459
2,677
2,045
434
1,611
935
6,727
7,662
2
(2)
–
2,709
230
3,293
1,430
371
1,059
2,390
2,369
4,759
52
28
80
–
161
3,118
1,400
309
1,091
(538)
238
(300)
(7)
(5)
(12)
–
–
856
(1,144)
(517)
(627)
2019
Total
12,888
12,595
25,483
751
121
872
2,709
1,205
13,425
7,272
1,514
5,758
237,742
126,539
40,951
342,626
85,394
833,252
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis – see Basis of Presentation section.
(3) Included within average assets are average earning assets, which are comprised of deposits with other banks, deposits at central banks, reverse repos, loans and securities. Total average earning
assets for 2021 are $897,302, including $248,215 for Canadian P&C, $122,166 for U.S. P&C, and $526,921 for all other operating segments including Corporate (2020 - Total: $853,336, Canadian P&C:
$234,953, U.S. P&C: $130,190 and all other operating segments: $488,193; 2019 - Total: $759,395, Canadian P&C: $222,260, U.S. P&C: $119,640 and all other operating segments: $417,495).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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208 BMO Financial Group 204th Annual Report 2021
Geographic Information
We operate primarily in Canada and the United States, but we also have operations in the United Kingdom, Europe, the Caribbean and Asia, which are
grouped in other countries 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)
Total Revenue
Income (loss) before taxes
Reported net income (loss)
Average Assets
Total Revenue
Income before taxes
Reported net income
Average Assets
Total Revenue
Income before taxes
Reported net income
Average Assets
Canada
United States
Other countries
2021
Total
15,983
6,242
4,809
544,652
14,515
3,815
3,021
522,155
14,998
4,218
3,313
462,427
9,242
4,224
3,254
376,102
8,659
1,891
1,554
361,651
8,282
2,367
1,903
316,983
1,961
(208)
(309)
60,386
27,186
10,258
7,754
981,140
2,012
642
522
58,644
2,203
687
542
53,842
2020
25,186
6,348
5,097
942,450
2019
25,483
7,272
5,758
833,252
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BMO Financial Group 204th Annual Report 2021 209
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 26: Significant Subsidiaries
As at October 31, 2021, the bank, either directly or indirectly through its subsidiaries, controls the following significant operating subsidiaries.
Significant subsidiaries (1)(2)
Bank of Montreal (China) Co. Ltd.
Bank of Montreal Europe plc
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 Capital Markets Limited
BMO Financial Corp. and subsidiaries, including:
BMO Asset Management Corp. and subsidiaries
BMO Capital Markets Corp.
BMO Family Office, LLC
BMO Harris Bank National Association and subsidiaries, including:
BMO Harris Investment Company LLC
BMO Harris Financing, Inc. and subsidiaries
BMO Global Asset Management (Asia) Limited (3)
BMO Global Asset Management (Europe) Limited and subsidiaries (3), including:
BMO Asset Management (Holdings) plc and subsidiaries (3)
BMO Life Insurance Company and subsidiaries, including:
BMO Life Holdings (Canada), ULC
BMO Life Assurance Company
BMO Trust Company
LGM Investments Limited (3)
Pyrford International Limited (3)
Head or principal office
Beijing, China
Dublin, Ireland
Toronto, Canada
Calgary, Canada
Vancouver, Canada
Hamilton, Bermuda
St. Michael, Barbados
Toronto, Canada
Toronto, Canada
Toronto, Canada
Toronto, Canada
London, England
Chicago, United States
Chicago, United States
New York, United States
Palo Alto, United States
Chicago, United States
Chicago, United States
Chicago, United States
Hong Kong, China
London, England
London, England
Toronto, Canada
Halifax, Canada
Toronto, Canada
Toronto, Canada
London, England
London, England
Book value of shares owned by the
bank (Canadian $ in millions)
411
1,001
35,384
310
26,775
395
1,369
589
39
73
(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 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. BMO Harris Investment Company LLC is organized under the laws of the state of Nevada, United States.
(2) Unless otherwise noted, the bank, either directly or indirectly through its subsidiaries, owns 100% of the outstanding voting shares of each subsidiary.
(3) These subsidiaries are part of the sale of our EMEA asset management business which was completed on November 8, 2021. Refer to Note 10 for further information.
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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210 BMO Financial Group 204th Annual Report 2021
Note 27: Related Party Transactions
Related parties include subsidiaries, joint ventures, associates, 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 activitie s 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.
2021
2020
2019
22
3
32
57
20
3
32
55
22
2
43
67
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, 2021, loans to key management personnel
totalled $22 million ($19 million in 2020). We have no provision for credit losses related to these amounts as at October 31, 2021 and 2020.
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. Once the shareholding requirements have been met, directors 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 associates accounted for under the equity method as well as
our share of the income of those entities:
(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
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Joint ventures
Associates
2021
474
107
2020
412
99
2021
661
141
2021
791
117
59
73
2020
573
62
2020
560
124
63
57
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BMO Financial Group 204th Annual Report 2021 211
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 2022 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 for 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) outlines
the way 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 2021 Sustainability
Report/PAS will be available on our website
in March 2022.
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 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.
212 BMO Financial Group 204th Annual Report 2021
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
100 King Street West, 28th floor
Toronto, ON M5X 1A1
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; Harris Bank; BMO Wealth Management; Boldly Grow the Good; BMO CashTrack; BMO Institute for
Learning; BMO Payment Hub; BMO Insights; Online Banking for Business; BMO Climate Institute; BMO Business
Xpress; adviceDirect; BMO EMpower; and InvestorLine.
The following are trademarks owned by other parties:
Bloomberg is a trademark of Bloomberg Finance L.P.; The Wall Street Journal is a trademark of Dow Jones &
Company, Inc.; World’s Most Ethical Companies is a trademark of Ethisphere, LLC; Corporate Knights is a trademark
of Corporate Knights Inc.; Dow Jones Sustainability is a trademark of S&P Dow Jones Indices LLC; Forbes is a
trademark of Forbes LLC; Blend is a trademark of Blend Labs, Inc.; FedNow is a service mark of the Federal Reserve
Banks; The American Business Awards is a trademark of Stevie Awards, Inc.; International Business Awards is a
trademark of Stevie Awards, Inc.; Sandstorm Gold Royalties is a trademark of Sandstorm Gold Ltd.
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 2021
Primary stock
exchanges
TSX
NYSE
Ticker
BMO
BMO
Closing price
October 31, 2021
High
Low
$134.37
US$108.51
$137.98
US$111.48
$76.03
US$57.25
Total volume of
shares traded
615.6 million
50.8 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
April 13, 2022 | 9:30 a.m. ET
Further details will be made available on our website:
www.bmo.com/investorrelations
2022 Dividend Payment Dates*
Common and preferred
shares record dates
February 1
May 2
August 2
November 1
Common shares
payment dates
February 28
May 26
August 26
November 28
Preferred shares
payment dates
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 Office of the Superintendent of Financial Institutions
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, respect ively. 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.
Watch for your
proxy circular
in March and
remember to
vote.
Employee Ownership*
84.7% of our Canadian employees
participate in the BMO Employee Share
Ownership Plan – a clear indication of
their commitment to BMO.
*As at October 31, 2021.
Credit Ratings
Credit rating information appears on page 101
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 services.
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
To find out more
about who we are,
what we do, and
what matters to us,
visit us at:
bmo.com/about
@BMO
@lifeatBMO
Recognition means
we’re on the right path
Forbes Magazine:
The World’s Best
Banks
2021 | 2020
Recognized by customers
as one of the best banks
in North America.
Ethisphere®:
World’s Most Ethical
Companies®
2021 | 2020 | 2019 | 2018
Included for four years in
a row, and one of just five
banks worldwide on the
2021 list.
Bloomberg
Gender-Equality
Index
2021 | 2020 | 2019 | 2018 |
2017 | 2016
Six consecutive years
on this prestigious list
in recognition of our
commitment to gender
equality.
Dow Jones
Sustainability Index
2006 to 2021
Included for 16 years,
in 2021 we were one of
only five companies in
Canada to appear in the
DJSI World Index.
Insider Intelligence:
2021 Canada Mobile
Banking Benchmark
2021
Ranked #1 for digital
money management,
security and card controls,
mobile banking alerts.
Corporate Knights:
Global 100
Most Sustainable
Corporations in
the World
2021 | 2020
Recognized as the most
sustainable bank in North
America two years in a row.