BMO Financial Group
2022 Annual Report
to Shareholders
205th Annual Report
ABOUT BMO
Who we are
Established in 1817, BMO Financial Group is the eighth largest bank in North
America by assets, with total assets of $1.14 trillion. We are highly diversified,
providing a broad range of personal and commercial banking, wealth
management, global markets and investment banking products and services.
We serve twelve million customers across Canada and the United States, and in
select markets globally, through three integrated operating groups.
Personal and Commercial (P&C) Banking
Provides financial products and services to customers across North America.
Personal and Business Banking helps customers make real financial progress
through a network of branches, contact centres, digital banking platforms and
automated teller machines. Commercial Banking serves clients as a trusted
advisor, offering industry expertise, a local presence and a comprehensive range
of commercial products and services.
BMO Wealth Management (WM)
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 delivering
innovative client solutions and strategies.
BMO Capital Markets (CM)
A North America-based financial services provider offering a complete range
of products and services to corporate, institutional and government clients.
BMO Capital Markets has approximately 2,800 professionals in 32 locations
around the world, including 18 offices in North America.
Business Review
Financial Review
2
3
4
5
Financial Performance
15
Enhanced Disclosure Task Force
Digital Awards and Recognition
Highlights
Chair’s Message
16
Management’s Discussion
and Analysis
121 Supplemental Information
Chief Executive Officer’s Message
134 Statement of Management’s
8 A Thriving Economy
10
A Sustainable Future
12 An Inclusive Society
14
Board of Directors and Executive
Committee
Responsibility for Financial Information
135 Independent Auditors’ Report
138 Reports of Independent Registered
Public Accounting Firm
141 Consolidated Financial Statements
146 Notes to Consolidated Financial
Statements
Resources and Directories
131 Glossary of Financial Terms
210 Where to Find More Information
IBC Shareholder Information
ABOUT BMO
12 million
customers globally
$1.14 trillion
in total assets
8th largest
bank in North America
by assets
1817
serving customers for
205 years and counting
Our Purpose comprises three bold commitments:
For a
For a
For an
thriving economy
sustainable future
inclusive society
Providing access to capital and valuable
financial advice – investing in businesses,
supporting home ownership and strengthening
the communities we serve, while driving
innovation that makes banking easier
Being our clients’ lead partner in the
transition to a net-zero world, delivering on
our commitments to sustainable financing
and responsible investing
Committing to zero barriers to inclusion through
investments, products, services and partnerships
that remove systemic barriers for under-represented
customers, employees and communities – and drive
inclusion and equitable growth for everyone
Our Strategy
BMO is building a digitally enabled, future-ready
bank with leading efficiency, profitability and
loyalty – all powered by a winning culture and
driven by our Purpose. Our strategy connects our
growth to driving positive, lasting change in the
world. We are committed to progress for a thriving
economy, a sustainable future and a more
inclusive society with zero barriers.
BMO Financial Group 205th Annual Report 2022 1
Financial Performance
Medium-term objectives1
2022 financial performance
Reported
Adjusted2
A 194-year
dividend record
EPS growth of 7% to 10%
ROE of 15% or more
Net operating leverage of 2% or more
72.7%
22.9%
29.0%
2.1%
15.2%
1.3%
Capital ratios that exceed regulatory requirements
16.7% CET1 Ratio3
BMO Financial Group has the
longest-running dividend payout
record of any company in Canada,
at 194 years. BMO common shares
had an annual dividend yield of
4.3% at October 31, 2022.
Earnings Per Share Growth (%)
Return on Equity (%)
Compound annual growth rate
Reported
Adjusted2
Reported
Adjusted2
72.7
68.0
53.3
22.9
16.7
14.9
15.2
4.8%
BMO 15-year
8.9%
BMO 5-year
2.1
10.1 10.3
Net Income by Geography
(12.8)
(18.2)
Reported
Reported
Adjusted²
Adjusted²
2020
2021
2022
2020
2021
2022
Net Income (C$ billions)
Total Shareholder Return (%)
4
Reported
Adjusted2
BMO
S&P/TSX Composite Index
13.5
13.4
8.7
7.8
9.0
5.1 5.2
8.8
9.2
7.1
2020
2021
2022
1-year
3-year
5-year
(3.1)
(4.9)
1 We have established medium-term financial objectives for certain important performance measures. Medium-term
is generally defined as three to five years, and performance is measured on an adjusted basis.
2 Net revenue measures 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.
3 The CET1 Ratio is disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline.
4 As of October 31, 2022.
5 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 consolidated
financial statements lists the intercorporate relationships among Bank of Montreal and its significant subsidiaries.
2 BMO Financial Group 205th Annual Report 2022
Canada
Canada
U.S.
U.S.
Other
Other
41%
41%
58%
58%
1%
1%
63%
63%
36%
36%
1%
1%
Reported Net Income
by Operating Group5
BMO CM
19%
BMO WM
13%
U.S. P&C
27%
Canadian
P&C
41%
Digital Awards and
Recognition Highlights
BMO is digitally enabled and ready for the future. Across our operations, we put digital first – delivering speed and
scale to enable progress for our customers, unlock the power of our people, leverage data and analytics, harness
the potential of emerging technologies – and drive leading loyalty, growth and efficiency.
We’re proud to be consistently recognized for our leadership and achievements. It’s a testament to our employees,
our innovative culture, and our ongoing commitment to creating excellent digital experiences for our customers,
colleagues and communities.
The Forrester Digital Experience
Review™ (2022)
BMO was named the overall leader in The Forrester
Digital Experience Review™: Canadian Mobile
Banking Apps, Q4 2022, with the highest scores in
the areas of money movement, self-service features,
marketing/sales, content, error avoidance/recovery,
and progress and workflow.
Brandon Hall Group Human Capital
Management Excellence Awards (2022)
BMO was recognized by Brandon Hall Group’s HCM
Excellence Awards in the category of Best Unique or
Innovative Learning Program for its Financial Crimes
Unit Academy, highlighting BMO’s commitment to
employee training and developing top talent.
Insider Intelligence: 2022 Canada
Mobile Emerging Features Benchmark
(2022 | 2021)
In 2022, BMO ranked first overall in this prestigious
benchmark, with top rankings for digital money
management, account management and alerts. We
also received top rankings in security and control,
digital money management and alerts in 2021.
Finovate Awards (2022)
BMO is making digital banking simpler – and better –
for customers. Our Innov8 program ranked first in
the Best Fintech Accelerator and Incubator category
at the 2022 Finovate Awards for delivering leading
digital experiences to help customers make real
financial progress.
Javelin Strategy & Research mobile and
online banking scorecards (2022 | 2021)
In 2022, Javelin ranked BMO among the top five U.S.
banks for online money movement, and the top 10
for ease of use and financial fitness functionality
in both mobile and online banking. BMO was also
ranked as an Overall Leader in mobile banking and
won three category leader awards in Javelin’s 2021
Canadian Digital Banking Scorecard.
Keynova Group Online & Mobile
Banker Scorecard (2022)
BMO was listed in the top 10 banks for online and
mobile banking in the Keynova Group Q4 2022
Online Banker and Q3 2022 Mobile Banker Scorecards.
For online banking we were among the top 10 banks
in two scorecard categories and four scorecard tasks,
including account opening – for which BMO was
ranked as most improved.
BMO Financial Group 205th Annual Report 2022 3
Chair’s Message
George A. Cope
Chair of the Board
The past year has been challenging – the war in Ukraine, inflation
and the lingering effects of the pandemic factored in all our lives –
but 2022 was also the year that we started to get back to “normal.”
As the year ended, people began to return to the workplace, and,
as economic activity picked up, grew hopeful that 2023 would be
a better year. I am confident that will be the case.
At BMO Financial Group, there are many encouraging signs.
Topping the list for the bank is our announced plan to acquire
Bank of the West. Once completed, this acquisition will expand
the bank’s franchise into several important U.S. markets, including
California – not only the state with the largest economy in the U.S.,
but one with an economy larger than Canada’s as a whole. We are
enthusiastic about what this means for BMO’s future, and we have
great confidence in the abilities of Darryl and his team to complete
a smooth integration of the two organizations.
Five years of performance
This past year marked the completion of Darryl’s fifth year as CEO.
As a board, as we look back over Darryl’s tenure, we continue to
be impressed by how well the leadership team is performing,
despite the many challenges they have faced – challenges they
have met thoughtfully, with deliberation and with care. The bank’s
performance over the past five years, both in absolute terms and
relative to its peers, has been strong – and 2022 proved to be
another good year.
The Board of Directors is particularly supportive of the leadership
team’s focus on removing all barriers to inclusion, and on its
efforts to make the bank a leader in sustainability. These are also
the board’s priorities.
An effective board
There were no changes to the board over the year, and none are
immediately anticipated. Our 13-member board comprises six
women and seven men, in keeping with our commitment to
maintain a gender-balanced board, and three of our board
committee chairs are women. We also continue to have balanced
representation on the board from both Canada and the United
States – six of our directors are American and seven are Canadian.
Our adherence to age and term limits for directors ensures
ongoing renewal, allowing us to plan chair selection, committee
representation and board composition thoughtfully and
strategically. We continually look for opportunities to shape a
diverse board to ensure that we have the full benefit of the varied
talents, knowledge, and work and life experiences that only
diversity can bring.
On behalf of you, the shareholders, we extend our thanks to all
the employees of BMO who were behind our successful
performance. And on behalf of the board, we extend our thanks to
you, our fellow shareholders, for the trust you continue to place in
us to represent your interests. The year ahead promises to be one
full of opportunity. We are confident that your company has the
right strategy and the right team to take full advantage of these
opportunities as they present themselves.
George A. Cope
4 BMO Financial Group 205th Annual Report 2022
Chief Executive
Officer’s Message
Darryl White
Chief Executive Officer
2022 marked a significant year of progress in our proud 205-year
history, as we continued to Boldly Grow the Good in business and
life for our clients and the communities we serve – while building
a high-performing, digitally enabled, future-ready bank.
Our competitive performance in 2022 was driven by our leading
Winning Culture, and an empowered team aligned to achieving
our strategic priorities. With their focus on helping our clients
make real financial progress throughout a dynamic operating
environment, our bankers are partnering across our businesses
to deliver the exceptional experiences that deepen client loyalty.
As global economic momentum slows in the post-pandemic
recovery, our bank has a critical role in helping economies and
communities to thrive and our clients to maintain – and strengthen
– their progress for the future.
The North American economy has faced headwinds throughout
2022, impacted by a dramatic escalation of geopolitical tensions
beyond our borders, weakening financial conditions, and
continued supply-chain disruptions. Looking forward, to curb
high inflation growth, tightening monetary policy has increased
the cost of borrowing and should dampen demand, weakening
GDP growth in both Canada and the U.S. For Team BMO, this
reinforces the imperative to sustain our efficiency performance
and profitability that position us to best support our clients,
while driving value for our shareholders.
Diversified business mix built
for the long run
Our diversified and advantaged business mix enables us to
deliver resilient revenue performance through economic cycles.
With operations across personal and commercial banking,
wealth management and capital markets, coupled with our
geographic diversification, our bank delivered very good revenue
performance again this year.
We continued to execute on our strategy to strengthen and
grow our businesses with targeted investments in technology
to drive efficiency, speed and scale, as well as talent to deliver
the award-winning customer experiences we’re known for.
With robust, high-quality growth in loans and deposits, and
expanding net interest margins, we met our commitments to
positive operating leverage, improved efficiency and achieved
above-target return on equity.
Our leading risk management approach and dynamic
management of capital and resources enable us to grow our
businesses and support our customers in the years ahead.
With the longest-running dividend payout record of any
company in Canada at 194 years, we aim to deliver top-tier
returns for our shareholders.
North American strength
BMO’s three operating groups are deeply integrated between
Canada and the United States, with a supportive global presence.
Our geographic diversification is a differentiator and a major
source of strength – and our footprint lays the optimal foundation
for the natural next step in our North American growth strategy.
We’ve operated in the United States since 1818, and we’ve
meaningfully grown our presence since the 1984 acquisition of
Harris Bank, through strong organic growth supplemented by
successive acquisitions, including M&I, GE Transportation Finance
and KGS. In short order, we plan to expand our reach once again
with the announced acquisition of California-based Bank of
the West – the largest bank acquisition in Canadian history. This
combination with Bank of the West deepens BMO’s position as
a leading North American bank with a strong – and growing –
U.S. franchise.
Adjusted results in this section are non-GAAP and are discussed in the Non-GAAP and Other Financial Measures section.
BMO Financial Group 205th Annual Report 2022 5
CHIEF EXECUTIVE OFFICER’S MESSAGE
Our strategic priorities
Our group strategic priorities align with
and support our enterprise-wide strategy,
positioning us well to drive competitive
performance.
Upon closing, we will significantly increase our U.S. footprint,
providing access to major new markets for our commercial
banking expansion, and doubling our U.S. retail branch network.
We look forward to welcoming nearly 1.8 million Bank of the West
commercial, retail, wealth management and business banking
customers to our organization.
With a shared focus on progress for our clients, communities and
planet, we’ll combine our strengths and solidify our position as a
leading North American bank.
Digital first for speed, scale and simplicity
BMO has consistently focused on meeting customers where they
are with leading digital experiences that help them make real
financial progress. These efforts are core to our Digital First
journey and are complemented by a focus on driving efficiency
and freeing up human capacity to give expert advice.
Our investments over the past year have driven growth, loyalty
and efficiency, enabled by new ways of working. Our newly
enhanced Canadian online banking platform enables customers
to navigate their digital banking more easily, while our mobile
banking app is consistently recognized as best-in-class thanks to
AI-powered features like BMO Insights that help customers better
manage their day-to-day finances.
Our Digital First mindset reaches beyond our doors and into
the communities we serve. To help drive data and analytics
innovation in Canada, we partnered with Next AI – a world-class
program for AI-based ventures and technology commercialization.
By supporting innovators and early-stage teams with the capital
they need to grow and create jobs, it’s one of many ways we’re
supporting businesses and accelerating progress.
Bold commitments for a better tomorrow
By living our Purpose to Boldly Grow the Good in business and life,
BMO is driving progress for a thriving economy, a sustainable
future and an inclusive society. Three years ago, we committed to
“Double the Good” in each of those areas by 2025 – and we’re well
on our way to achieving our goals.
A thriving economy is resilient and helps drive equitable financial
progress. BMO helps enable that progress through lending,
investing, giving and engagement in our local communities.
In the past year, we announced commitments of $5 billion to
support women entrepreneurs in Canada and up to $100 million
to launch Business Within Reach: BMO for Black Entrepreneurs.
In the U.S., we introduced BMO for Native-Owned Businesses as
part of our five-year, US$5 billion BMO EMpower initiative, and
achieved US$66 million in lending for our Black, Latinx and
women small business pillar.
Crucially, we’re focusing on the future by addressing the pressing
need of climate change. To achieve net-zero emissions targets,
many businesses are looking for informed advice and financing
solutions. That’s why BMO collaborated with Export Development
Canada to provide capital to help Canadian businesses transition
away from carbon-intensive operations. It’s part of our ambition
to be our clients’ lead partner in the transition to a net zero world.
We’re also leading the way in the clean energy economy with
initiatives like the BMO Climate Institute – a centre of expertise
bridging science, policy and finance to help shape the market for
climate solutions. We’re considered a trusted advisor supporting
the actions being taken by companies and governments as they
pursue energy transition opportunities. For our peer-leading
accomplishments, we were ranked the most sustainable bank
in North America for the third year in a row by Corporate Knights.
6 BMO Financial Group 205th Annual Report 2022
World-class
loyalty and
growth,
powered by
One Client
leadership
Winning
Culture driven
by alignment,
empowerment
and recognition
Digital First
for speed,
scale and the
elimination of
complexity
Lead partner
in our clients’
transition to a
net zero world
Superior
management
of risk, capital
and funding
performance
BMO’s future focus is also reflected in our Zero Barriers to Inclusion
strategy, which aims to actively remove barriers while helping
groups that face systemic hurdles overcome them – and thrive.
This past year, we launched an innovative product empowering
our Canadian transgender and non-binary customers to use their
preferred first name on their Mastercard. Acceptance and
understanding are key to advancing an inclusive society, which
is why we’re supporting grassroots Indigenous reconciliation
initiatives by making our ground-breaking Indigenous e-learning
platform, Nisitohtamowin ᓂᓯᑐᐦᑕᒧᐃᐧᐣ, free to the public for the
next three years.
As one of the Best Employers for Diversity, according to Forbes,
we know the advantages of fielding a diverse and inclusive team.
This year, BMO launched a recruitment program helping immigrants,
refugees and displaced persons – including Ukrainians fleeing
conflict and resettling in North America – to find new employment
opportunities. We also continued to focus on increasing
representation of Black, Indigenous, People of Colour, Latinx and
LGBTQ2+ minority groups among our workforce, while sustaining
our strong gender equity position.
Our employees are the best representation of BMO in our
communities, and supporting their personal and professional
growth has a measurable impact on our performance. To attract
and retain the best people, we offer highly competitive wellness
and learning and development programs. We’ve been focused on
activating our Winning Culture, and have made significant progress
in a short period of time. And according to an independent
third-party assessment, BMO’s performance culture now ranks
among the best financial institutions surveyed globally.
The passion and commitment of Team BMO are apparent in all
the ways we show up for our communities. Last year, we reached
a major milestone, achieving $200 million in employee pledges
to United Way and other charitable causes over the course of a
decade, with a remarkable recent employee participation rate
of 90%. Together, we’re helping to shape the future by growing
more of the good.
Financial progress
As we go forward, the factors that have contributed to our
success for 205 years will continue to propel our growth through
uncertain economic conditions. With a dedicated team, a growing
U.S. footprint, and an increasingly diverse client base, we have
more opportunities than ever to grow the good and support
financial progress for our clients and communities. The strength of
our diversified business mix and solid operational performance
will see us through market cycles, as we execute on our strategy
and deliver consistently strong returns for our shareholders.
Darryl White
BMO Financial Group 205th Annual Report 2022 7
A THRIVING ECONOMY
Fuelling economic
progress
Zócalo Food Truck Park
Milwaukee, Wisconsin
“We wanted to build a community that
allowed creativity to thrive,” says BMO
customer Jesus Gonzalez. Jesus is the
co-founder and operator of Milwaukee’s
Zócalo, a collective of food vendors.
After attending The Culinary Institute of
America in Hyde Park, New York, Jesus
came home eager to celebrate two
passions – his hometown, and food –
and opened Mazorca, a taco truck.
“I started seeing like-minded people,”
says Jesus. Inspired, Jesus and business
partner Sean Phelan created a community
space for vendors to join together, selling
food from all over the world.
Zócalo also serves as an incubator for
aspiring food vendors, offering a starter
food truck and business coaching. As a
successful entrepreneur with a growing
portfolio of projects, Jesus is a strong
believer in mentoring and empowering
others. “Impacting my community,” he
says, “that’s how I measure my success.”
Read more about Zócalo later in
December 2022 at about.bmo.com/blog/
Photography: Kevin Netz
8 BMO Financial Group 205th Annual Report 2022
We’re powering economic
progress by helping
individuals, families and
businesses succeed.
One Client leadership
U.S. expansion
*
BMO has a clear One Client focus, which was recognized
this year when we received the highest customer
satisfaction ranking in retail banking advice in the J.D.
Power 2022 Canada Retail Banking Advice Satisfaction
Study . The study analyzes direct feedback from thousands
of retail bank customers across Canada. BMO scored
top marks in categories demonstrating our continued
commitment to helping customers make real financial
progress, including clarity of advice and concern for
customer needs.
BMO’s planned acquisition of Bank of the West will
enable expansion in attractive markets, and capabilities
that will drive greater growth, returns and efficiencies.
The transaction also provides significant opportunities for
collaboration in environmental, social and governance
investing and product innovation.
A winning bank
BMO was named Best Private Bank for the 12th year
in a row, Best Commercial Bank in Canada for the eighth
consecutive year, and Best Retail Bank in Canada by
World Finance.
Banking excellence
BMO was recognized by customers as one of the best
banks in North America in Forbes’ ranking of the World’s
Best Banks.
Enabling entrepreneurs
Leading advice
BMO EMpower, our five-year, US$5 billion commitment to
inclusive economic recovery in the U.S., has already exceeded
its early targets, with more than US$5.5 billion committed
in just two years. And in Canada, BMO has committed
$100 million to launch Business Within Reach: BMO for Black
Entrepreneurs. The program provides business owners with
greater access to working capital, educational resources and
professional partnerships to start up, scale up and grow.
BMO has long been a global leader in the metals and
mining sector. In 2022, we advised on the largest gold
M&A transaction in history. BMO was also recognized by
Global Finance magazine as the World’s Best Metals &
Mining Investment Bank for the 13th consecutive year.
* BMO Bank of Montreal received the highest score in the J.D. Power 2020 and 2022 (tied) Canada Retail Banking Advice Satisfaction Studies of customers’ satisfaction with advice and
guidance from their primary bank. Visit jdpower.com/awards for more details.
BMO Financial Group 205th Annual Report 2022 9
A SUSTAINABLE FUTURE
Powering sustainable
solutions
We’re committed to making meaningful progress
by supporting climate change solutions.
Digital First mindset
Cleantech innovation
To help unlock climate solutions for clients and enable our
Net Zero Ambition, BMO’s sustainability team has partnered
with our technology and operations group to develop a
unique digital platform leveraging geospatial technology
to better understand climate impacts and opportunities.
BMO partnered with Breakthrough Energy Catalyst to
accelerate the development of clean technologies and
climate solutions essential for a net-zero world, committing
$50 million over five years and leveraging our project
finance and energy transition expertise.
A global first
Most sustainable bank
BMO Capital Markets launched the world’s first nuclear
green financing framework for Bruce Power, and supported
Capital Power with their green hybrid transaction issuance,
a first in Canada.
BMO was named to Corporate Knights’ 2022 ranking of
the World’s 100 Most Sustainable Corporations and, for the
third year in a row, ranked as the most sustainable bank
in North America.
Green finance
Advancing our goal to mobilize $300 billion in sustainable
finance by 2025, in 2022 BMO acted as joint lead manager
for the Government of Canada’s inaugural Green Bond
transaction, a landmark achievement. The $5 billion
transaction demonstrates Canada’s environmental
leadership, ensures government expenditures align with
Canada’s ESG goals and principles, and acts as a catalyst
for the continued development of the sustainable finance
market in Canada.
Financing the transition
BMO and Export Development Canada (EDC) are working
together to help large and mid-sized Canadian businesses
in carbon-intensive sectors transition to more sustainable
business models, aligned with Canada’s commitment to
net-zero emissions by 2050. BMO is also the first financial
institution to offer EDC’s new Sustainable Financing
Guarantee, which provides an initial $1 billion in financing
over three years to support sustainable initiatives across
nine carbon-intensive sectors.
10 BMO Financial Group 205th Annual Report 2022
Nature Fresh Farms
Leamington, Ontario
Greenhouse farming is essential to
feeding the world. Nature Fresh Farms, a
family-owned and managed company, is
one of the largest vertically integrated
leaders in greenhouse-grown produce in
North America. Committed to sustainable
farming, they’re continuously developing
and improving their technology and
practices to grow more environmentally
friendly food.
“We’ve grown with Nature Fresh since
their inception,” says Brendan O’Connor,
Managing Director, BMO Commercial
Bank, Agriculture & Agri-Business.
“They’re the future of food production.”
Headquartered in Ontario, with
greenhouses in Canada and the United
States, Nature Fresh makes sustainable
farming practices central to their
operations; they recycle their nutrient
water using a closed-loop system, use
bumblebees to pollinate their crops and
“good bugs” to reduce pesticides, grow
plants in coconut husks and practice
vertical growing, enabling them to grow
more produce in a smaller space.
Nature Fresh also conducts research
through their Research & Development
and Discovery Centers, committed to
advancing greenhouse innovation and
sustainable food security. That innovative
spirit is behind one of their cornerstone
beliefs: “Doing things differently is what
truly makes a difference.”
Read more about Nature Fresh later in
December 2022 at about.bmo.com/blog/
Photography: Matthew Liteplo
BMO Financial Group 205th Annual Report 2022 11
AN INCLUSIVE SOCIETY
A more equitable
future
A passion for change
New York City, NY
For sixteen years, Brandi Snape, Executive
Assistant, BMO Capital Markets, has
volunteered as a motivational speaker
and mentor in the New York City and New
York State departments of correction.
Her passion for criminal justice reform
was sparked in her childhood, when her
parents were incarcerated. “I know that
each prisoner has a story – and represents
a family,” she says.
Brandi is inspired by BMO’s commitment
to equity – and she’s found new outlets
for her passion through her job. “Brad
Rothbaum, my manager, sits on the board
of United Way of New York City. Through
his partnership, I was able to connect
with United Way on Project Atlas, a prison
reform initiative.” The desire to make
positive change is common to many of
Brandi’s colleagues. “A motivating factor is
having leadership that embodies the idea
of Boldly Grow the Good in business and
life,” she says. “Giving, and reaching
beyond, is what BMO does, and I’m so
happy to be part of the team.”
Read more about Brandi later in
December 2022 at about.bmo.com/blog/
Photography: Christian Fleury
12 BMO Financial Group 205th Annual Report 2022
We’re building a more inclusive
society for all by removing barriers
for our colleagues, clients and
communities.
Diversity leadership
Eradicating poverty
BMO’s commitment to diversity and inclusion in the
workplace was recognized once again by Forbes, which
named BMO as one of America’s Best Employers for
Diversity for the fourth year in a row. And for the fifth
consecutive year, we were recognized by the Human
Rights Campaign Foundation as an industry leader in
LGBTQ+ workplace equality, receiving a score of 100 on
the 2022 Corporate Equality Index (CEI).
We’re committed to working with our communities to build
a more equitable society. For 14 years, we’ve partnered
with Cara Collective, a workforce development organization
dedicated to eradicating poverty. In 2022, Cara Collective
recognized BMO with its Good Neighbor Award for the
BMORE program, which was co-created by BMO and Cara
Collective two years ago to remove barriers to employment
and increase access to careers in banking and finance.
Breaking down barriers
A fresh start
To help address barriers facing minority businesses,
communities and families, we’ve committed $5 billion
to support women entrepreneurs in Canada, and an
additional US$5 billion over five years to address key
barriers faced by minority businesses, communities and
families in the United States, through the BMO EMpower
program.
All our customers have unique needs and experiences,
and we’re focused on expanding financial inclusion with
innovative banking products, services and resources.
Through our BMO NewStart Program, we offer discounted
or free banking products and services for permanent
residents and foreign workers. This program is designed to
help make setting up a new life in Canada easier.
Supporting newcomers
Gender equality
Helping to create a more equitable and inclusive society is
core to BMO’s Purpose. We’ve launched the BMO Newcomer
Talent Program to help immigrants, refugees and displaced
persons find new employment opportunities in Canada
and the United States.
For seven consecutive years, BMO has been named to
the prestigious Bloomberg Gender-Equality Index, in
recognition of our commitment to gender equality, as
well as our role as a global leader in gender inclusion.
BMO Financial Group 205th Annual Report 2022 13
Board of Directors1
George A. Cope, C.M.
Corporate Director
Board/Committees:
Board Chair,
Governance and Nominating,
Human Resources
Director since: 2006
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
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
Eric R. La Flèche
President and Chief Executive Officer,
Metro Inc.
Board/Committees:
Human Resources
Director since: 2012
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
Darryl White
Chief Executive Officer,
BMO Financial Group
Director since: 2017
Executive Committee1
Darryl White
Chief Executive Officer,
BMO Financial Group
Piyush Agrawal
Chief Risk 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
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, 2022.
14 BMO Financial Group 205th Annual Report 2022
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 2022 Annual Report, the Supplementary
Financial Information (SFI) or Supplementary Regulatory Capital Information (SRCI). Information on BMO’s website, including information within
the SFI or SRCI, is not, and should not be considered to be incorporated by reference into this 2022 Annual Report.
Topic
EDTF Disclosure
Annual Report
Page number
SFI
SRCI
General
1. Present all risk-related information in each report, providing an index for
Risk Governance,
Risk Management and
Business Model
Capital Adequacy and
Risk-Weighted Assets
(RWA)
Liquidity
Funding
easy navigation
2. Define the bank’s risk terminology and risk measures and present key
parameters used
3. Discuss top and emerging risks for the bank and changes in risk exposure
4. Outline plans to meet new key regulatory ratios once the applicable rules
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 disclose a reconciliation of the accounting balance sheet to the
regulatory balance sheet
• A Main Features template can be found at https://www.bmo.com/main/
about-bmo/investor-relations/regulatory-disclosure
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, including management’s capital targets
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
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 SRCI is our estimated and actual loss parameter information
18. Describe how the bank manages its potential liquidity needs and the
liquidity reserve held to meet those needs
19. Summarize encumbered and unencumbered assets in a table by balance
sheet category
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
Credit Risk
26. Provide information about the bank’s credit risk profile and credit risk
concentrations
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
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
Index
Index
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3-4,10
3-5
6
11
11,17-30,37-43
17-30,
37-43
31,57
58-62
73-113
83-113,
131-133
73-75
67
77-82
82
80
81-82
66-68
68
65
69
69,83-87
106-107
95-101
97
37-38
102-103
98-99
94
90-94
90-93,
106-107
90-91
83-89,
155-161
156,161
88,159
83-84,89
83-84,
167,173,204
77-81,
104-113
104-113
24-34
11-56
35-48
16,32,44
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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, 2022 and 2021. The MD&A should be read in
conjunction with the consolidated financial statements for the year ended October 31, 2022. The MD&A commentary is as at December 1, 2022.
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 (OSFI) Canada. References to generally accepted
accounting principles (GAAP) mean IFRS.
Index
17 Caution Regarding Forward-Looking Statements
59 Review of Fourth Quarter 2022 Performance
18 About BMO
19 Financial Objectives and Value Measures
22 Supporting a Sustainable and Inclusive Future
23 Financial Highlights
24 Non-GAAP and Other Financial Measures
28 Significant Events
29 Economic Developments and Outlook
30 2022 Financial Performance Review
Summary
Personal and Commercial Banking
38 2022 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
61 2021 Financial Performance Review
63 Financial Condition Review
63
65
71
Summary Balance Sheet
Enterprise-Wide Capital Management
Off-Balance Sheet Arrangements
73 Enterprise-Wide Risk Management
114 Accounting Matters and Disclosure and Internal Control
114
117
118
118
118
119
120
Critical Accounting Estimates and Judgments
Changes in Accounting Policies in 2022
Future Changes in Accounting Policies
Other Regulatory Developments
Transactions with Related Parties
Shareholders’ Auditors’ Services and Fees
and
Management’s Annual Report on Disclosure Controls
Procedures and Internal Control over Financial Reporting
121 Supplemental Information
131 Glossary of Financial Terms
58 Summary Quarterly Earnings Trends
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, annual 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, Supporting a Sustainable and Inclusive Future, Significant Events, Economic Developments and Outlook, 2023 Focus,
Business Environment and Outlook, Enterprise-Wide Capital Management, Off-Balance Sheet Arrangements, Enterprise-Wide Risk Management, Future Changes in Accounting
Policies and Other Regulatory Developments 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.
16 BMO Financial Group 205th Annual Report 2022
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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 2023 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, the closing of our proposed acquisition of Bank of the West, including plans for the combined operations of BMO and Bank
of the West and the financial, operational and capital impacts of the transaction, 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”, “outlook”, “timeline”, “suggest”, “seek” 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. 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 their impact on local, national or international economies, as well as their heightening of certain risks that may affect our future results;
information, privacy and cybersecurity, 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; exposure to, and the
resolution of, significant litigation or regulatory matters, our ability to successfully appeal adverse outcomes of such matters and the timing, determination and recovery of
amounts related to such matters; 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, complete proposed acquisitions or dispositions and integrate acquisitions, including obtaining
regulatory approvals; critical accounting estimates and judgments, 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; the possibility that our proposed acquisitions, including our acquisition of Bank of the
West, do not close when expected, or at all, because required regulatory approvals and other conditions to closing are not received or satisfied on a timely basis, or at all, or
are received subject to adverse conditions or requirements; the anticipated benefits from proposed acquisitions, including Bank of the West, such as potential synergies and
operational efficiencies, are not realized; our ability to manage exposure to capital arising from changes in fair value of assets and liabilities between signing and closing;
our ability to perform effective fair value management actions and unforeseen consequences arising from such actions; 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, as updated by
quarterly reports, 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 include those set out in the Economic Developments and
Outlook section, as updated by quarterly reports, as well as in the Allowance for Credit Losses section, as updated by quarterly reports. 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. Assumptions about Bank of the West’s balance sheet, product mix and margins, and
interest rate sensitivity were material factors we considered in estimating the fair value and goodwill and intangibles amounts at closing, and assumptions about our
integration plan, the efficiency and duration of integration and the alignment of organizational responsibilities were material factors we considered in estimating pre-tax
cost synergies. 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.
BMO Financial Group 205th Annual Report 2022 17
MANAGEMENT’S DISCUSSION AND ANALYSIS
About BMO
Established in 1817, BMO Financial Group (BMO, Bank of Montreal, the bank, we, our, us) is the eighth largest bank in North America by assets, with
total assets of $1.14 trillion. We are highly diversified, providing a broad range of personal and commercial banking, wealth management, global
markets and investment banking products and services. We serve twelve million customers across Canada and the United States, and in select
markets globally, through three integrated operating groups: Personal and Commercial Banking, BMO Wealth Management and BMO Capital Markets.
At BMO, we continue to build a high-performing, digitally-enabled, future-ready bank with highly engaged employees and a winning culture. We
are focused on helping our customers make real financial progress and financing our clients’ growth and innovation while investing in our workforce.
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.
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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, because we believe that
success can and must be mutual. Our bold commitments for a thriving economy, a sustainable future and an inclusive society are reflected in our
active, direct response to today’s most pressing challenges.
• Thriving economy – Providing access to capital and valuable financial advice – investing in businesses, supporting home ownership and
strengthening the communities we serve, while driving innovation that makes banking easier
• 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 – Committing to zero barriers to inclusion through investments, products, services and partnerships that remove systemic barriers
for under-represented customers, employees and communities – and drive inclusion and equitable growth for everyone
Our Strategic Priorities
Consistent strong performance is essential to realizing 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. Keeping the fundamentals of our strategy consistent, we
renewed our priorities for fiscal 2023 to reflect our strong momentum and the changing environment:
• World-class loyalty and growth, powered by One Client leadership, bringing the full suite of BMO’s products, services and advice to our clients
• Winning culture driven by alignment, empowerment and recognition
• Digital First for speed, scale and the elimination of complexity
• Lead partner in our clients’ transition to a net zero world
• Superior management of risk, capital and funding 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 2022 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, while also considering the interests of our stakeholders. We apply a variety of
environmental, social and governance (ESG) practices and benchmarks 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
• Diversity
• Responsibility
• Empathy
Caution
This About BMO section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
18 BMO Financial Group 205th Annual Report 2022
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. We believe that the non-GAAP measures and ratios presented here, read together with our GAAP results, provide readers with a
better understanding of how management assesses results and are a better reflection 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.
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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 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 assessed 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.
These objectives serve as guideposts and they assume a normal business environment. Our ability to meet these objectives in any single period
may be adversely affected by extraordinary developments. 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.
Financial Objectives and Metrics
As at and for the periods ended October 31, 2022
Total shareholder return (%)
Earnings per share growth (%)
Average return on equity (%)
Operating leverage, net of CCPB (%) (3)
Common Equity Tier 1 Ratio (%)
Financial objectives (adjusted)
Reported basis
Adjusted basis (1)
1-year
3-year (2)
5-year (2)
1-year
3-year (2)
5-year (2)
Top-tier
7-10%
15% or more
2% or more
Exceed regulatory requirement
(3.1)
72.7
22.9
29.0
16.7
13.4
32.1
16.0
11.3
na
9.2
20.4
14.7
6.6
na
na
2.1
15.2
1.3
na
na
12.0
14.0
3.3
na
na
10.2
14.1
2.5
na
(1) Adjusted results and measures in this table are non-GAAP amounts and measures and are discussed in the Non-GAAP and Other Financial Measures section.
(2) The 3-year and 5-year EPS growth rate and operating leverage, net of CCPB, reflect compound annual growth rates (CAGR).
(3) Operating leverage, net of CCPB, 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 negative 3.1%, positive 13.4%
and positive 9.2%, respectively, all above our Canadian peer group average (excluding BMO) of negative 6.2%, positive 8.9% and positive 7.2%,
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 2018 would have been worth $1,552 as at October 31, 2022,
assuming reinvestment of dividends, for a total return of 55.2%.
Dividends declared per common share in fiscal 2022 totalled $5.44, an increase of $1.20 from $4.24 in the prior year, as the restriction put in
place on March 13, 2020 by the Office of the Superintendent of Financial Institutions (OSFI) on dividend increases by federally regulated financial
institutions was removed effective November 4, 2021. Dividends paid over a five-year period have increased at an average annual compound rate of
approximately 8%.
The annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common shares made at
the beginning of the respective period. The return includes the change in share price and assumes dividends received were reinvested in
additional common shares.
BMO Financial Group 205th Annual Report 2022 19
MANAGEMENT’S DISCUSSION AND ANALYSIS
Total Shareholder Return
For the year ended October 31
2022
2021
2020
2019
2018
3-year
CAGR (1)
5-year
CAGR (1)
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)
Increase (decrease) in share price (%)
Total annual shareholder return (%) (2)
Canadian peer group average (excluding BMO) (3)
125.49
5.11
4.3
(6.6)
(3.1)
(6.2)
134.37
4.24
3.2
69.4
75.9
56.1
79.33
4.21
5.3
(18.6)
(14.6)
(11.5)
97.50
3.99
4.2
(0.9)
3.2
11.4
98.43
3.72
3.8
(0.4)
3.3
(1.2)
8.8
8.6
nm
nm
13.4
8.9
4.9
7.7
nm
nm
9.2
7.2
(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.
(3) As at October 31, 2022, peers: BNS, CIBC, NB, RBC, TD.
nm – not meaningful
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Earnings per Share Growth
All references to earnings per share (EPS) are to diluted EPS, unless otherwise indicated.
EPS was $19.99 in 2022, an increase of $8.41 or 73% from $11.58 in 2021. Adjusted EPS was $13.23, an
increase of $0.27 or 2% from $12.96 in 2021. The increase in EPS primarily reflected higher earnings. Net income
available to common shareholders increased 77% year-over-year on a reported basis, and increased 5% on an
adjusted basis. The average number of diluted common shares outstanding increased 3% from 2021.
On March 29, 2022, we completed a public offering to finance a portion of the purchase price of the
announced acquisition of Bank of the West. The impact of this share offering reduced reported EPS by $0.34 and
adjusted EPS by $0.21, or 2%, respectively.
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 22.9% in 2022 and adjusted ROE was 15.2%, compared with 14.9%
and 16.7%, respectively, in 2021. Reported ROE increased due to higher net income, primarily due to higher
revenue in the current year resulting from fair value management actions related to the announced acquisition of
Bank of the West. Adjusted ROE decreased, as higher net income was offset by an increase in common equity,
partially due to the impact of equity issued related to the announced acquisition of Bank of the West.
There was an increase of $5,796 million in reported net income available to common shareholders and an
increase of $401 million in adjusted net income available to common shareholders in the current year. Average
common shareholders’ equity increased $7.6 billion or 15% from 2021, primarily due to growth in retained
earnings and the issuance of common shares, partially offset by a decrease in accumulated other comprehensive
income.
The reported return on tangible common equity (ROTCE) was 25.1%, compared with 17.0% in 2021, and
adjusted ROTCE was 16.6%, compared with 18.9% in 2021. Book value per share increased 19% from the
prior year to $95.60, reflecting the increase in shareholders’ equity.
Return on common shareholders’ equity (ROE) is calculated as net income, less preferred dividends and
distributions on other equity instruments, as a percentage of average common shareholders’ equity. Common
shareholders’ equity comprises common share capital, contributed surplus, accumulated other comprehensive
income (loss) and retained earnings. Adjusted ROE is calculated using adjusted net income rather than net
income.
Return on tangible common equity (ROTCE) is calculated as net income available to common shareholders,
adjusted for the amortization of acquisition-related intangible assets, as a percentage of average tangible
common equity. Adjusted ROTCE is calculated using adjusted net income rather than net income.
20 BMO Financial Group 205th Annual Report 2022
EPS ($)
19.99
11.58
12.96
13.23
7.55
7.71
Reported
Adjusted
2020
2021
2022
ROE (%)
22.9
14.9
16.7
15.2
10.1
10.3
Reported
Adjusted
2020
2021
2022
ROTCE (%)
25.1
17.0
18.9
16.6
11.9
11.9
Reported
Adjusted
2020
2021
2022
Efficiency Ratio and Operating Leverage
BMO’s reported gross efficiency ratio (1) was 48.0%, compared with 57.0% in 2021. On a net revenue basis (2),
the reported efficiency ratio was 47.1%, compared with 60.1% in 2021, and the adjusted efficiency ratio
was 55.8%, compared with 56.5% in 2021, an improvement of 70 basis points.
Reported operating leverage (1) was positive 19.6%. On a net revenue basis (2), reported operating leverage
was positive 29.0%, and adjusted operating leverage was positive 1.3%.
(1) This ratio is calculated using revenue and non-interest expense. Refer to the Revenue section and the Non-Interest Expense section.
(2) Net revenue comprises revenue, net of insurance claims, commissions and changes in policy benefit liabilities (CCPB).
Operating leverage is the difference between revenue and non-interest expense growth rates, and adjusted
operating leverage is the difference between adjusted revenue and adjusted non-interest expense growth
rates.
Operating leverage, net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), is the difference between revenue, net of CCPB (net revenue) and non-interest expense growth rates.
Adjusted operating leverage, net of CCPB, is the difference between adjusted revenue, net of CCPB (net
revenue), and adjusted non-interest expense growth rates. We evaluate 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 efficiency ratio, net of CCPB, is calculated in the same manner as efficiency ratio, net of CCPB,
utilizing adjusted revenue, net of CCPB, and adjusted non-interest expense.
Common Equity Tier 1 Ratio
Our Common Equity Tier 1 (CET1) Ratio was 16.7% as at October 31, 2022, compared with 13.7% as at
October 31, 2021. The CET1 Ratio increased from the end of fiscal 2021, primarily driven by the benefit of fair value
management actions related to the announced acquisition of Bank of the West, strong internal capital generation, the
issuance of common shares and the benefit of the sale of our EMEA Asset Management business, partially offset by
higher risk-weighted assets and a legal provision related to a lawsuit associated with a predecessor bank,
M&I Marshall and Ilsley Bank.
The cumulative impact of the fair value management actions on our CET1 Ratio was approximately 150 basis
points.
Efficiency Ratio,
Net of CCPB (%)
60.4
59.8
60.1
56.5
55.8
47.1
2020
2021
2022
Reported Efficiency Ratio, Net of CCPB
Adjusted Efficiency Ration, Net of CCPB
Operating Leverage,
Net of CCPB (%)
29.0
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6.2
0.4
6.1
2.7
1.3
Reported
Adjusted
2020
2021
2022
CET1 Ratio (%)
16.7
13.7
11.9
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.
2020
2021
2022
Caution
This Financial Objectives and Value Measures section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 205th Annual Report 2022 21
MANAGEMENT’S DISCUSSION AND ANALYSIS
Supporting a Sustainable and Inclusive Future
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 in order to create opportunities for our stakeholders and communities to make positive, sustainable change, because we believe
that success can and must be mutual. In support of our customers, communities and employees, in 2022 we:
• Deployed more than US$5.5 billion in loans and investments in the past two years as part of BMO EMpower™, exceeding our commitment of
US$5 billion over five years to advance an inclusive economic recovery in the United States by addressing key barriers faced by U.S. minority
businesses, communities and families.
• Mobilized more than $1.1 billion toward a 10-year, $12 billion commitment to finance affordable housing in Canada.
• Announced a $5 billion commitment to support women business owners in Canada, allocating capital over five years to women entrepreneurs.
• Acted as joint lead manager for the Government of Canada’s inaugural Green Bond transaction, a landmark achievement. The $5 billion transaction
demonstrates Canada’s environmental leadership and acts as a catalyst for the continued development of the sustainable finance market in
Canada.
• Continued to support our employees’ wellness by providing free access to Headspace®, a platform that is offering preventative and proactive
mental wellness resources to all of our employees.
BMO’s leadership continues to be recognized in a number of rankings, including:
• Ranked among the most sustainable companies on the Dow Jones Sustainability Indices (DJSI), benchmarks for investors who recognize that
sustainable business practices are critical to generating long-term shareholder value. We are one of only five companies in Canada – and one of
only two North American banks – included in the DJSI World Index.
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•
• Named as one of Corporate Knights’ 2022 Global 100 Most Sustainable Corporations in the World and, for the third consecutive year, ranked as
North America’s most sustainable bank. We ranked in the top quartile for Clean Revenue, as well as for the representation of diversity among
our directors and senior leadership.
Included in Corporate Knights’ listing of Canada’s Best 50 Corporate Citizens, and ranked first among Canadian banks with top-quartile scores in
board gender diversity, executive diversity and compensation linked to sustainability. In addition, we received a top-quartile Clean Revenue score,
reflecting our commitment to sustainable financing and responsible investing.
Included for the seventh consecutive year in the Bloomberg Gender-Equality Index (GEI), which recognizes BMO as a global leader in gender
inclusion, as well as a leader within the financial sector.
•
• Recognized by Ethisphere as one of the World’s Most Ethical Companies for the fifth consecutive year. We are one of five banks worldwide – one of
four banks in the United States and the only bank in Canada – to be recognized in 2022. The award affirms our commitment to doing what’s right
and operating with transparency, good governance and integrity in support of a thriving economy, a sustainable future and an inclusive society.
Caution
This Supporting a Sustainable and Inclusive Future section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
22 BMO Financial Group 205th Annual Report 2022
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
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
Efficiency ratio, net of CCPB (2)
Adjusted efficiency ratio, net of CCPB (2)
Operating leverage
Operating leverage, net of CCPB (2)
Adjusted operating leverage, net of CCPB (2)
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 October 31, $ 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
M
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A
2022
2021
15,885
17,825
33,710
(683)
34,393
502
(189)
313
16,194
4,349
13,537
9,039
20.04
19.99
13.23
5.44
95.60
125.49
677.1
664.0
665.7
85.0
4.3
27.1
41.0
22.9
15.2
25.1
16.6
48.0
47.1
55.8
19.6
29.0
1.3
1.62
24.3
22.8
0.06
0.10
135
114
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
57.0
60.1
56.5
(1.5)
0.4
6.1
1.59
24.4
22.7
–
0.11
125
118
1,139,199
979,341
567,191
564,574
769,478
64,730
363,997
744,442
305,462
16.7
18.4
20.7
5.6
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
1.3625
1.2918
1.2376
1.2554
(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 resulting 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. For further information, refer to the Insurance Claims, Commissions and Changes in Policy
Benefits section.
(3) LCR and NSFR are disclosed in accordance with the Liquidity Adequacy Requirements (LAR) Guideline, as set out by OSFI, as applicable.
(4) Capital ratios and risk-weighted assets are disclosed in accordance with the Capital Adequacy Requirements (CAR) Guideline, as set out by OSFI, as applicable.
BMO Financial Group 205th Annual Report 2022 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP and Other Financial Measures
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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
segments, including amounts, 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 to be useful in assessing underlying ongoing business performance.
Adjusted results and measures remove certain specified items from revenue, non-interest expense and income taxes, as detailed in the following
table. Adjusted results and measures presented in this document are non-GAAP. Presenting results on both a reported basis and an adjusted basis
permits readers to assess the impact of certain items on results for the periods presented, and to better assess results excluding those items that may
not be reflective of ongoing business performance. As such, the presentation may facilitate readers’ analysis of trends. Except as otherwise noted,
management’s discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results.
Measures net of insurance claims, commissions and changes in policy benefit liabilities (CCPB)
We also present reported and adjusted revenue on a basis that is net of insurance claims, commissions and changes in policy benefit liabilities (CCPB),
and our efficiency ratio and operating leverage are calculated on a similar basis, as reconciled in the Revenue section. Measures and ratios presented
on a basis net of CCPB are non-GAAP. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets
caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities are predominantly fixed income
assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair value
changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in CCPB. The presentation and
discussion of revenue, efficiency ratios and operating leverage on a net basis reduces this variability, which allows for a better assessment of
operating results. For more information, refer to the Insurance Claims, Commissions and Changes in Policy Benefit Liabilities section.
Presenting results on a taxable equivalent basis (teb)
We analyze consolidated revenue on a reported basis. In addition, we analyze revenue on a taxable equivalent basis (teb) at the operating group
level, consistent with our 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 in facilitating 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.
24 BMO Financial Group 205th Annual Report 2022
Non-GAAP and Other Financial Measures
(Canadian $ in millions, except as noted)
Reported Results
Net interest income
Non-interest revenue
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
Diluted EPS ($)
Adjusting Items Impacting Revenue (Pre-tax)
Impact of divestitures (1)
Management of fair value changes on the purchase of Bank of the West (2)
Legal provision (3)
Impact of adjusting items on revenue (pre-tax)
Adjusting Items Impacting Non-Interest Expense (Pre-tax)
Acquisition and integration costs (4)
Amortization of acquisition-related intangible assets (5)
Impact of divestitures (1)
Restructuring (costs) reversals (6)
Legal provision (3)
Impact of adjusting items on non-interest expense (pre-tax)
Impact of adjusting items on reported net income (pre-tax)
Adjusting Items Impacting Revenue (After-tax)
Impact of divestitures (1)
Management of fair value changes on the purchase of Bank of the West (2)
Legal provision (3)
Impact of adjusting items on revenue (after-tax)
Adjusting Items Impacting Non-Interest Expense (After-tax)
Acquisition and integration costs (4)
Amortization of acquisition-related intangible assets (5)
Impact of divestitures (1)
Restructuring (costs) reversals (6)
Legal provision (3)
Impact of adjusting items on non-interest expense (after-tax)
Impact of adjusting items on reported net income (after-tax)
Impact on diluted EPS ($)
Adjusted Results
Net interest income
Non-interest revenue
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 ($)
M
D
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A
2022
2021
2020
15,885
17,825
33,710
683
34,393
(313)
(16,194)
17,886
(4,349)
13,537
19.99
(21)
7,713
(515)
7,177
(326)
(31)
(16)
–
(627)
(1,000)
6,177
(23)
5,667
(382)
5,262
(245)
(23)
(32)
–
(464)
(764)
4,498
6.76
16,352
10,181
26,533
683
27,216
(313)
(15,194)
11,709
(2,670)
9,039
13.23
14,310
12,876
27,186
(1,399)
25,787
(20)
(15,509)
10,258
(2,504)
7,754
11.58
13,971
11,215
25,186
(1,708)
23,478
(2,953)
(14,177)
6,348
(1,251)
5,097
7.55
29
–
–
29
(9)
(88)
(886)
24
–
(959)
(930)
22
–
–
22
(7)
(66)
(864)
18
–
(919)
(897)
(1.38)
–
–
–
–
(14)
(121)
–
–
–
(135)
(135)
–
–
–
–
(11)
(93)
–
–
–
(104)
(104)
(0.16)
14,310
12,847
27,157
(1,399)
25,758
(20)
(14,550)
11,188
(2,537)
8,651
12.96
13,971
11,215
25,186
(1,708)
23,478
(2,953)
(14,042)
6,483
(1,282)
5,201
7.71
(1) Reported net income included the impact of divestitures related to the sale of our EMEA Asset Management business and our Private Banking business in Hong Kong and Singapore. Fiscal 2022
reported net income included a gain of $6 million ($8 million pre-tax) related to the transfer of certain U.S. asset management clients and a $29 million (pre-tax and after-tax) loss related to foreign
currency translation reclassified from accumulated other comprehensive income, both recorded in non-interest revenue, and expenses of $32 million ($16 million pre-tax), including taxes
of $22 million on closing of the sale of our EMEA Asset Management business recorded in non-interest expense. 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.
These amounts were recorded in Corporate Services.
(2) Fiscal 2022 reported net income included revenue of $5,667 million ($7,713 million pre-tax) related to the announced acquisition of Bank of the West resulting from the management of the impact of
interest rate changes between the announcement and closing on its fair value and goodwill, comprising $7,665 million of pre-tax mark-to-market gains on certain interest rate swaps recorded in
non-interest trading revenue and $48 million of pre-tax non-trading interest income on a portfolio of primarily U.S. treasury securities recorded in net interest income. These amounts were recorded
in Corporate Services. For further information on this acquisition, refer to the Significant Events section.
(3) Fiscal 2022 reported net income included a legal provision of $846 million ($1,142 million pre-tax) related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, comprising
interest expense of $515 million pre-tax and non-interest expense of $627 million pre-tax, including legal fees of $22 million. These amounts were recorded in Corporate Services. For further
information, refer to the Provisions and Contingent Liabilities section in Note 24 of the consolidated financial statements.
(4) Fiscal 2022 reported net income included acquisition and integration costs of $237 million ($316 million pre-tax) related to the announced acquisition of Bank of the West recorded in non-interest
expense in Corporate Services. In addition, reported net income included acquisition and integration costs of $8 million ($10 million pre-tax) related to KGS-Alpha and Clearpool in
fiscal 2022, $7 million ($9 million pre-tax) in fiscal 2021, and $11 million ($14 million pre-tax) in fiscal 2020 recorded in non-interest expense in BMO Capital Markets.
(5) Amortization of acquisition-related intangible assets of $23 million ($31 million pre-tax) in fiscal 2022, $66 million ($88 million pre-tax) in fiscal 2021, and $93 million ($121 million pre-tax) in
fiscal 2020 were recorded in non-interest expense in the related operating group.
(6) Fiscal 2021 reported net income included a partial reversal of $18 million ($24 million pre-tax) of restructuring charges related to severance recorded in 2019 in non-interest expense, in Corporate
Services.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO Financial Group 205th Annual Report 2022 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
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)
2022
Reported net income
Acquisition and integration costs
Amortization of acquisition-related
intangible assets
Impact of divestitures
Management of fair value changes on the
purchase of Bank of the West
Legal provision
Adjusted net income (loss)
2021
Reported net income (loss)
Acquisition and integration costs
Amortization of acquisition-related
intangible assets
Impact of divestitures
Restructuring costs (reversals)
A
&
D
M
3,826
–
2,497
–
6,323
–
1,251
–
1,772
8
4,191
237
13,537
245
1
–
–
–
5
–
–
–
6
–
–
–
3
–
–
–
14
–
–
–
–
55
23
55
(5,667)
846
(5,667)
846
3,827
2,502
6,329
1,254
1,794
(338)
9,039
3,288
–
2,176
–
5,464
–
1,382
–
2,120
7
(1,212)
–
7,754
7
1
–
–
24
–
–
25
–
–
24
–
–
17
–
–
–
842
(18)
66
842
(18)
6,079
185
17
(45)
(4,312)
621
2,545
2,593
6
37
27
(13)
Adjusted net income (loss)
3,289
2,200
5,489
1,406
2,144
(388)
8,651
2,650
(1) U.S. segment reported and adjusted results comprise net income recorded in U.S. P&C and our U.S. operations in BMO Wealth Management, BMO Capital Markets and Corporate Services.
Refer to footnotes (1) to (6) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Net Revenue, Efficiency Ratio and Operating Leverage
(Canadian $ in millions, except as noted)
For the year ended October 31
Reported
Revenue
Insurance claims, commissions and changes in policy benefit liabilities (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
Revenue
Impact of adjusting items on revenue
Insurance claims, commissions and changes in policy benefit liabilities (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 (%)
Refer to footnotes (1) to (6) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
2022
2021
2020
33,710
(683)
34,393
16,194
27,186
1,399
25,787
15,509
25,186
1,708
23,478
14,177
48.0
47.1
24.0
33.4
4.4
19.6
29.0
26,533
(7,177)
(683)
27,216
(1,000)
15,194
57.3
55.8
5.7
4.4
1.3
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
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
26 BMO Financial Group 205th Annual Report 2022
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)
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) (2)
Return on tangible common equity (%) (= B/E)
Adjusted return on tangible common equity (%) (= C/E)
2022
2021
2020
13,537
(231)
13,306
23
13,329
(4,521)
8,808
58,078
22.9
15.2
7,754
(244)
7,510
66
7,576
831
5,097
(247)
4,850
93
4,943
11
8,407
50,451
4,954
48,235
14.9
16.7
10.1
10.3
53,148
44,505
41,484
25.1
16.6
17.0
18.9
11.9
11.9
M
D
&
A
(1) Refer to footnotes (1) to (6) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
(2) Average tangible common equity is average common shareholders’ equity (D above) adjusted for goodwill of $5,051 million ($5,836 million in 2021 and $6,530 million in 2020) and
acquisition-related intangible assets of $130 million ($381 million in 2021 and $495 million in 2020), net of related deferred tax liabilities of $251 million ($271 million in 2021 and $274 million
in 2020).
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
Reported
Net income available to common shareholders
Total average common equity
Return on equity (%)
Adjusted (1)
Net income available to common shareholders
Total average common equity
Return on equity (%)
3,783
2,461
11,798 13,815
6,244
25,613
32.1
17.8
24.4
3,784
2,466
11,798 13,815
6,250
25,613
32.1
17.8
24.4
2022
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
1,732
11,602
4,087
15,581
13,306
58,078
14.9
na
22.9
1,754
11,602
(442)
15,581
8,808
58,078
15.1
na
15.2
1,243
5,282
23.5
1,246
5,282
23.6
2021
(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
Reported
Net income available to common shareholders
Total average common equity
Return on equity (%)
Adjusted (1)
Net income available to common shareholders
Total average common equity
Return on equity (%)
3,246
11,147
2,136
13,522
5,382
24,669
29.1
15.8
21.8
3,247
11,147
2,160
13,522
5,407
24,669
29.1
16.0
21.9
1,374
5,899
23.3
1,398
5,899
23.7
2,081
10,913
(1,327)
8,970
7,510
50,451
19.1
na
14.9
2,105
10,913
(503)
8,970
8,407
50,451
19.3
na
16.7
(1) Refer to footnotes (1) to (6) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
na – not applicable
Certain comparative figures have been reclassified to conform with the current year’s presentation.
BMO Financial Group 205th Annual Report 2022 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Significant Events
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During the first quarter of 2022, we completed the sale of our EMEA Asset Management business to Ameriprise Financial, Inc., including the transfer of
certain U.S. asset management clients, and on April 30, 2021, we completed the sale of our Private Banking business in Hong Kong and Singapore to
J. Safra Sarasin Group. Collectively, we refer to these transactions as “divestitures”. The divestitures reduced net revenue and expenses by
approximately 3% and 4%, respectively, on both a reported and an adjusted basis, compared with the prior year.
On December 20, 2021, we announced the signing of a definitive agreement with BNP Paribas to acquire Bank of the West and its subsidiaries.
Under the terms of the agreement, we will pay a cash purchase price of US$16.3 billion, or US$13.4 billion net of an estimated US$2.9 billion of
excess capital (at closing) at Bank of the West. The transaction, which is expected to close by the end of the first calendar quarter of 2023, is subject
to customary closing conditions, including regulatory approvals. We expect to fund the transaction primarily with excess capital, reflecting our strong
capital position, including the added impact of the 20,843,750 common shares issued for $3,106 million on March 29, 2022, and anticipated capital
generation.
On closing, the acquisition is expected to add approximately US$92 billion of assets, US$59 billion of loans and US$76 billion of deposits to our
consolidated balance sheet. These amounts are based on the financial position and results of Bank of the West as at the period ended
September 30, 2022.
This acquisition aligns with our strategic, financial and cultural objectives, and meaningfully accelerates our U.S. growth. Building on the strength
of our performance and our integrated North American foundation, the acquisition will bring nearly 1.8 million customers to BMO and will further
extend our banking presence through an additional 503 branches and commercial and wealth offices in key U.S. markets. After closing, our footprint
will expand to 32 states, including an immediate scaled entry into the attractive California market, where we expect to deliver a highly competitive
offering to new growth markets, combining the strength of our digital banking platform and our strong banking team to generate good customer
growth.
A signature strength of Bank of the West is the deep relationships formed between its customers, its employees, and the communities they have
served for over 100 years. As part of this transaction, we do not plan to close Bank of the West branches, and we are committed to retaining front-
line Bank of the West branch employees.
Leveraging our deep integration experience and proven track record in U.S. expansion, we remain confident that we can achieve annual pre-tax
cost synergies of approximately US$670 million (C$860 million) through operational efficiencies across our combined businesses. Integration planning
is underway and is being overseen by a dedicated joint integration management office.
Under IFRS, the purchase price will be allocated to the identifiable assets and liabilities of Bank of the West at closing, on the basis of their
relative fair values, with the difference recorded as goodwill. The fair value/par value differences, referred to as the fair value mark, will be amortized
to income over the estimated life of an underlying asset (liability). Intangible assets identified, including the core deposit intangible related to
non-maturity deposits, will be amortized over their estimated life. The fair value of fixed rate loans, securities and deposits is largely dependent on
interest rates. If interest rates increase, the fair value of the acquired fixed rate assets (in particular, loans and securities) will decrease, resulting in
higher goodwill. If interest rates decrease, the opposite would be true. Conversely, the fair value of floating rate assets (liabilities) and non-maturity
deposits approximate par, providing no natural fair value change offset. Changes in goodwill relative to our original assumptions announced on
December 20, 2021 will impact capital ratios at closing, because goodwill is treated as a deduction from capital under the Office of the
Superintendent of Financial Institutions (OSFI) Basel III rules. In addition, given that the purchase price of the acquisition is in U.S. dollars, any change
in foreign exchange translation between the Canadian dollar relative to the U.S. dollar between the announcement and the closing of the acquisition
will result in a change to the Canadian dollar equivalent goodwill.
We are proactively managing exposure to capital from changes in fair value of the assets and liabilities of Bank of the West at closing. As part of
our fair value management actions, we entered into interest rate swaps that increase in value as interest rates rise, resulting in mark-to-market gains
recorded in trading revenue. These swaps were largely offset from an interest rate risk perspective through the purchase of a portfolio of matched-
duration U.S. treasuries and other balance sheet instruments that generate net interest income. Together, these transactions aim to mitigate the
effects of any changes in goodwill arising from changes in interest rates between the announcement and closing of the acquisition, with the
associated revenue (loss) treated as an adjusting item. In addition, BMO entered into forward contracts, which qualify as accounting hedges, to
mitigate the effects of changes in the Canadian dollar equivalent of the purchase price on closing. Changes in the fair value of these forward contracts
are recorded in other comprehensive income (OCI) until closing of the transaction.
The impact of the fair value management actions on our results was treated as an adjusting item. The current year included $7,713 million
pre-tax ($5,667 million after-tax) revenue related to the management of interest rate changes, comprising $7,665 million of mark-to-market gains on
certain interest rate swaps recorded in non-interest revenue, as well as $48 million interest income on a portfolio of U.S. treasuries and other balance
sheet instruments recorded in net interest income.
The cumulative impact on our Common Equity Tier 1 Ratio related to these fair value management actions was approximately 150 basis points. In
addition, changes in the fair value of the forward contracts increased OCI by $638 million in 2022. The impact of the stronger U.S. dollar increased OCI
by 5%.
Caution
This Significant Events section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
28 BMO Financial Group 205th Annual Report 2022
Economic Developments and Outlook
Economic Developments in 2022 and Outlook for 2023 (1)
After reaching 5.0% in 2021, growth in Canada’s real gross domestic product (GDP) is anticipated to slow to an estimated rate of 3.5% in 2022. Growth
remained robust in the first half of the year, as economic activity rebounded following the easing of pandemic restrictions. The trade balance
benefitted from rising commodity prices and consumer spending was supported by high levels of household savings. However, the momentum in the
economy has been halted by rapidly rising interest rates, high inflation, supply-chain disruptions and weakening global demand. Housing sales have
plunged below pre-pandemic levels, while prices are retreating from the record levels of the previous two years. With headwinds growing, real GDP is
expected to contract modestly in early 2023 and to register no growth for the year. In order to dampen demand and control inflation, the Bank of
Canada has raised its overnight lending rate by 350 basis points to 3.75% since March 2022, the most aggressive round of tightening in nearly three
decades. The policy rate will likely rise to 4.5% in early 2023, with the intent of maintaining sustained downward pressure on inflation. A contracting
economy is expected to lift the unemployment rate from 5.2% in October 2022 to 6.5% by late 2023, easing pressure on wages and prices. After
reaching four-decade highs above 8% year-over-year in the summer, consumer price index (CPI) inflation is expected to decline but remain elevated at
around 3% in late 2023. The strong industry-wide growth in residential mortgage balances seen in the first half of 2022 is projected to moderate to the
low single digits in 2023, as housing market activity slows and prices decline. Consumer credit balances (excluding mortgages) have been restrained
by higher borrowing costs and elevated household savings, and are anticipated to rise only modestly in the year ahead. Growth in non-financial
corporate credit is expected to decelerate in response to rising interest rates and a slowing economy, as businesses draw on their elevated cash
balances.
After rebounding strongly in 2021, growth in U.S. real GDP likely slowed sharply to an estimated rate of 1.9% in 2022 due to rising interest rates,
high inflation, a strong U.S. dollar and supply-chain disruptions. Despite elevated household savings and strong gains in employment and wages, real
consumer spending growth has slowed. Business investment has also slowed in response to a deteriorating economic outlook. Housing market
activity has fallen sharply amid the worst affordability levels in three decades. Real GDP is anticipated to contract modestly in the first half of 2023
and to register no growth for the year, largely in response to tighter monetary policy and weaker financial conditions. The economic slump is
anticipated to raise the unemployment rate from 3.7% in October 2022 to 5.0% by late 2023. In line with a partial retreat in oil prices, CPI inflation
likely peaked at above 9% year-over-year in the summer. However, it is anticipated to decline slowly and remain above 3% in late 2023. After raising
its policy rate by 375 basis points from March to November 2022, the Federal Reserve is projected to lift it by an additional 100 basis points to a
range of 4.75% to 5.0% by spring 2023. Earlier strong growth in industry-wide residential mortgage balances is anticipated to moderate as housing
market activity slows. Consumer credit balances have risen recently, as inflation has strained household budgets, but growth is expected to
decelerate as a result of rising interest rates and a higher unemployment rate. Non-financial corporate credit growth strengthened earlier this year as
companies took advantage of still-low interest rates, but is projected to weaken quickly as interest rates rise, economic growth slows and businesses
draw on their elevated cash balances.
The economic outlook is subject to several risks that could lead to a severe downturn in Canada and the United States. These include persistent
high inflation and significant further increases in interest rates, an escalation of the conflict in Ukraine, geopolitical tensions between the United
States and China, and emerging new strains of COVID-19. A material housing market correction could also occur if monetary policy becomes overly
restrictive in an effort to control inflation.
Caution
This Economic Developments and Outlook section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
(1) All time periods in this section refer to the calendar year rather than BMO’s fiscal year.
M
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A
BMO Financial Group 205th Annual Report 2022 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
2022 Financial Performance Review
This section provides a review of BMO’s enterprise financial performance for 2022 that focuses on the Consolidated Statement of Income in BMO’s
audited annual 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
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Foreign Exchange
The Canadian dollar equivalents of BMO’s U.S. segment results that are denominated in U.S. dollars increased relative to 2021 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 2022 and 2021.
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 (or 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)
2022
2021
Effects on U.S. segment reported results
Increased (Decreased) net interest income
Increased (Decreased) non-interest revenue
Increased (Decreased) total revenue
Decreased (Increased) provision for credit losses
Decreased (Increased) non-interest expense
Decreased (Increased) provision for income taxes
Increased (Decreased) net income
Impact on earnings per share ($)
Effects on U.S. segment adjusted results
Increased (Decreased) net interest income
Increased (Decreased) non-interest revenue
Increased (Decreased) total revenue
Decreased (Increased) provision for credit losses
Decreased (Increased) non-interest expense
Decreased (Increased) provision for income taxes
Increased (Decreased) net income
Impact on earnings per share ($)
Adjusted results in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
2022 vs.
2021
1.2918
1.2554
166
102
268
7
(153)
(27)
95
0.14
166
102
268
7
(150)
(28)
97
0.15
30 BMO Financial Group 205th Annual Report 2022
Net Income
Reported net income was $13,537 million, an increase of $5,783 million or 75% from the prior year, and adjusted net income was $9,039 million, an
increase of $388 million or 4%.
Adjusted results in the current year excluded the impact of the announced acquisition of Bank of the West, comprising revenue of $5,667 million
($7,713 million pre-tax) related to management of the impact of interest rate changes between the announcement and closing on its fair value and
goodwill, and related acquisition and integration costs of $237 million ($316 million pre-tax). In addition, the current year excluded a legal provision
of $846 million ($1,142 million pre-tax) related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, the impact of
divestitures related to the sale of our EMEA Asset Management business and the transfer of certain U.S. asset management clients of $55 million,
comprising a gain of $6 million ($8 million pre-tax), a loss related to foreign currency translation of $29 million pre-tax and after-tax that was
reclassified from accumulated other comprehensive income to non-interest revenue, and expenses of $32 million ($16 million pre-tax), including
taxes of $22 million on the closing of the sale. Adjusted results in the prior 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, as well as an $18 million
($24 million pre-tax) partial reversal of restructuring charges related to severance recorded in 2019. Adjusted net income in both years excluded the
amortization of acquisition-related intangible assets and acquisition and integration costs. The amortization of acquisition-related intangible assets
was $23 million ($31 million pre-tax) and $66 million ($88 million pre-tax) in 2022 and 2021, respectively. Acquisition and integration costs related to
KGS-Alpha and Clearpool were $8 million ($10 million pre-tax) and $7 million ($9 million pre-tax) in 2022 and 2021, respectively. For further
information, refer to the Non-GAAP and Other Financial Measures section.
The increase in reported net income was driven by the impact of fair value management actions in the current year. Adjusted results were
primarily driven by higher net revenue, partially offset by higher expenses and a higher provision for credit losses. Net income increased in our
P&C businesses, and decreased in BMO Capital Markets and BMO Wealth Management. On a reported basis, Corporate Services recorded net income
compared with a net loss in the prior year, and on an adjusted basis recorded a lower net loss compared with the prior year.
Canadian P&C reported net income increased $538 million or 16% from the prior year, driven by a 12% increase in revenue, with higher net
interest income and non-interest revenue and a lower provision for credit losses compared with the prior year, partially offset by higher expenses.
U.S. P&C reported net income increased $321 million or 15% from the prior year, primarily driven by a 14% increase in revenue due to higher net
interest income, partially offset by higher expenses and a higher provision for credit losses compared with the prior year. BMO Wealth Management
reported net income decreased $131 million or 9%, in part due to divestitures, with higher underlying revenue more than offset by higher underlying
expenses. BMO Capital Markets reported net income decreased $348 million or 16%, with higher revenue more than offset by higher expenses and a
lower recovery of the provision for credit losses compared with the prior year. Corporate Services reported net income was $4,191 million and
adjusted net loss was $338 million, compared with a reported net loss of $1,212 million and an adjusted net loss of $388 million in the prior year.
Further discussion is provided in the 2022 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.
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Revenue
Reported revenue was $33,710 million, an increase of $6,524 million or 24% from the prior year, and adjusted
revenue was $26,533 million, a decrease of $624 million or 2%. On a basis that nets insurance claims,
commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), reported
net revenue was $34,393 million, an increase of $8,606 million or 33% from the prior year, and adjusted net
revenue was $27,216 million, an increase of $1,458 million or 6%.
Adjusted revenue in the current year excluded $7,713 million related to fair value management actions,
comprising $7,665 million of pre-tax mark-to-market gains on certain interest rate swaps recorded in non-interest
trading revenue and $48 million of non-trading interest income on a portfolio of primarily U.S. treasury securities.
In addition, adjusted revenue excluded interest expense of $515 million related to a legal provision. Both years
excluded the impact of divestitures. The stronger U.S. dollar increased revenue growth by 1%.
Revenue increased in Canadian P&C, due to higher net interest income and non-interest revenue, and in
U.S. P&C, primarily due to higher net interest income and the impact of the stronger U.S. dollar. BMO Wealth
Management revenue decreased, as underlying revenue growth was more than offset by divestitures, while
BMO Capital Markets revenue increased 1%, with higher Global Markets revenue offset by lower Investment and
Corporate Banking revenue. Corporate Services reported revenue increased, due to fair value management
actions, partially offset by a legal provision, while adjusted revenue decreased compared with the prior year.
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 2022 totalled $270 million, compared with $315 million in 2021.
Further discussion is provided in the 2022 Operating Groups Performance Review section.
For further information on non-GAAP amounts, measures and ratios, and results presented on a net revenue
basis in this Revenue section, refer to the Non-GAAP and Other Financial Measures section.
Revenue, Net of CCPB*
($ billions)
34.4
25.8
15.9
14.3
11.5
18.5
27.2
25.8
14.3 16.4
11.4
10.9
2021 2022
Reported
2021 2022
Adjusted
Net Interest Income
Net Non-Interest Revenue
*Numbers may not add due to rounding.
BMO Financial Group 205th Annual Report 2022 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 presented on a basis that excludes trading-related interest
income.
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, 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).
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) – operating group revenue is presented 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.
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Revenue
(Canadian $ in millions, on a pre-tax basis)
For the year ended October 31
Net interest income
Non-interest revenue
Total revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) (1)
Revenue, net of CCPB (1)
Impact of divestitures (2)
Management of fair value changes on the purchase of Bank of the West (3)
Legal provision (4)
Impact of adjusting items on revenue
Adjusted revenue (2) (3) (4)
Adjusted revenue, net of CCPB (1) (2) (3) (4)
2022
15,885
17,825
33,710
(683)
34,393
21
(7,713)
515
(7,177)
26,533
27,216
Change
from 2021
(%)
11
38
24
(+100)
33
na
na
na
na
(2)
6
2021
14,310
12,876
27,186
1,399
25,787
(29)
–
–
(29)
27,157
25,758
(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 presentation of revenue on a basis net of CCPB reduces variability
in results, which allows for a better discussion of operating results. For further information, refer to the Insurance Claims, Commissions and Changes in Policy Benefits section.
(2) Reported revenue included the impact of divestitures related to the sale of our EMEA Asset Management business and our Private Banking business in Hong Kong and Singapore. Fiscal 2022 included
a gain of $8 million related to the transfer of certain U.S. asset management clients and a $29 million (pre-tax and after-tax) loss related to foreign currency translation reclassified from accumulated
other comprehensive income to non-interest revenue. Fiscal 2021 included a $29 million net gain on the sale of our Private Banking business in Hong Kong and Singapore. These amounts were
recorded in Corporate Services.
(3) Fiscal 2022 reported revenue included $7,713 million related to the announced acquisition of Bank of the West resulting from the management of the impact of interest rate changes between the
announcement and closing on its fair value and goodwill, comprising $7,665 million of pre-tax mark-to-market gains on certain interest rate swaps recorded in non-interest trading revenue and
$48 million of pre-tax non-trading interest income related to fair value management actions recorded in net interest income. These amounts were recorded in Corporate Services. For further
information on this acquisition, refer to the Significant Events section.
(4) Fiscal 2022 reported revenue included interest expense of $515 million for a legal provision related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, recorded in interest
expense in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the consolidated financial statements.
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.
na – not applicable
Net Interest Income
Reported net interest income was $15,885 million, an increase of $1,575 million or 11% from the prior year, and adjusted net interest income was
$16,352 million, an increase of $2,042 million or 14%. Adjusted net interest revenue excluded interest expense of $515 million related to the legal
provision and non-trading interest income of $48 million related to fair value management actions.
Net interest income increased across all operating groups due to strong balance growth and higher net interest margins reflecting the impact of
the higher interest rate environment, partially offset by lower trading-related net interest income, which decreased $181 million.
Average earning assets were $979.3 billion, an increase of $82 billion or 9%, primarily due to loan growth and higher securities balances.
BMO’s overall reported net interest margin of 162 basis points increased 3 basis points from the prior year, primarily due to higher net interest
margins in our P&C businesses, partially offset by the net impact of the adjusting items, as well as trading-related activities. Adjusted net interest
margin, excluding trading-related interest income and earning assets, of 178 basis points increased 12 basis points.
Average Earning Assets
($ billions)
Net Interest Margin (%)
897.3
979.3
1.78
1.62
2022
1.66
1.59
2021
2021
2022
Net Interest Margin (%)
Adjusted Net Interest Margin Excluding
Trading Net Interest Income and
Trading Assets (%)
32 BMO Financial Group 205th Annual Report 2022
Change in Net Interest Income, Average Earning Assets and Net Interest Margin (1)
(Canadian $ in millions, except as noted)
For the year ended October 31
Canadian P&C
U.S. P&C
Personal and Commercial Banking (P&C)
All other operating groups and Corporate Services (4)
Total reported
Total adjusted
Trading net interest income and earning assets
Total excluding trading net interest income and
earning assets
Total adjusted excluding trading net interest income and
earning assets
U.S. P&C (US$ in millions)
Net interest income (teb) (2)
Average earning assets (3)
Change
Change
2022
2021
7,449
5,037
12,486
3,399
6,561
4,268
10,829
3,481
%
14
18
15
(2)
2022
2021
278,022
138,094
416,116
563,225
248,215
122,166
370,381
526,921
15,885
14,310
11
979,341
897,302
16,352
1,672
14,310
1,853
14
(10)
979,341
153,875
897,302
144,865
14,213
12,457
14,680
12,457
3,893
3,400
14
18
15
825,466
752,437
825,466
752,437
106,829
97,321
%
12
13
12
7
9
9
6
10
10
10
Net interest margin
(in basis points)
2022
2021
Change
268
365
300
na
162
167
na
172
178
364
264
349
292
na
159
159
na
166
166
349
4
16
8
na
3
8
na
6
12
15
(1) Adjusted results and ratios in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) 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.
(3) 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.
(4) For further information on net interest income for these other operating groups and Corporate Services, refer to the Review of Operating Groups’ Performance section.
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Certain comparative figures have been reclassified to conform with the current year’s presentation.
na – not applicable
Non-Interest Revenue
Reported non-interest revenue was $17,825 million, an increase of $4,949 million or 38% from the prior year, and adjusted non-interest revenue was
$10,181 million, a decrease of $2,666 million from the prior year. Adjusted non-interest revenue excluded the impact of fair value management
actions of $7,665 million in the current year and the impact of divestitures in both the current and prior years. Reported non-interest revenue, net of
CCPB, was $18,508 million, an increase of $7,031 million from the prior year, and adjusted non-interest revenue, net of CCPB, was $10,864 million, a
decrease of $584 million or 5%.
Adjusted non-interest revenue decreased due to divestitures, which reduced mutual fund revenue and investment management and custodial
fee revenue, as well as lower securities gains, other than trading and underwriting and advisory revenue, partially offset by higher trading and card
fee revenue and the impact of the stronger U.S. dollar. Trading revenue is discussed in the Trading-Related Revenue section that follows.
Gross insurance loss was $157 million, compared with revenue of $1,941 million in the prior year, primarily due to changes in the fair value of
investments and lower 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.
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
Share of profit (loss) in associates and joint ventures
Other
Total reported
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Reported non-interest revenue, net of CCPB
Management of fair value changes on the purchase of Bank of the West (1)
Impact of divestitures (2)
Adjusted non-interest revenue
Adjusted non-interest revenue, net of CCPB
Insurance revenue, net of CCPB
2022
1,082
1,318
8,250
1,440
548
1,770
1,312
1,193
281
181
(157)
274
333
17,825
(683)
18,508
(7,665)
21
10,181
10,864
526
Change
from 2021
(%)
(2)
6
+100
4
24
(11)
(18)
(16)
(52)
8
(+100)
10
(26)
38
(+100)
61
na
na
(21)
(5)
(3)
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
11,448
542
(1) Fiscal 2022 non-interest revenue included $7,665 million of mark-to-market gains on certain interest rate swaps related to the announced acquisition of Bank of the West resulting from the
management of the impact of interest rate changes between the announcement and closing on its fair value and goodwill, recorded in Corporate Services. For further information on this acquisition,
refer to the Significant Events section.
(2) Fiscal 2022 non-interest revenue included the impact of divestitures related to the sale of our EMEA Asset Management business of $21 million of non-interest losses, comprising a gain of $8 million
related to the transfer of certain U.S. asset management clients and a $29 million loss related to foreign currency translation reclassified from accumulated other comprehensive income to non-interest
revenue. Fiscal 2021 non-interest revenue included a $29 million net gain on the sale of our Private Banking business in Hong Kong and Singapore. These amounts were recorded in Corporate Services.
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.
na – not applicable
BMO Financial Group 205th Annual Report 2022 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, as well as 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.
Reported interest and non-interest trading-related revenue on a teb basis increased $7,725 million to $10,159 million, primarily driven by the
impact of fair value management actions related to the announced acquisition of Bank of the West of $7,665 million. Adjusted interest and
non-interest trading-related revenue on a teb basis increased $60 million or 2% to $2,494 million. Foreign exchange trading-related revenue
increased $155 million or 37% due to higher client activity. Equities trading-related revenue increased $98 million or 12% due to elevated levels of
client activity in the first quarter of 2022. Commodities trading-related revenue increased $42 million or 29%, driven by higher metals and energy
trading due to volatile markets. Interest rate trading-related revenue decreased $124 million or 12% due to lower levels of client activity. Other
trading-related revenue increased $7,554 million, primarily due to the impact of fair value management actions related to the announced acquisition
of Bank of the West, partially offset by mark-downs on loan underwriting commitments, largely in the United States.
Refer to the Enterprise-Wide Risk Management – Market Risk section for 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 revenue on a teb basis at the operating group level. Revenue and the
provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis in order 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) (2)
Teb offset
Reported total
Management of fair value changes on the purchase of Bank of the West (3)
Adjusted total trading revenue (3)
Reported as:
Net interest income
Non-interest revenue – trading revenue
Total (teb)
Teb offset
Reported total, net of teb offset
Adjusted total trading revenue (3)
2022
893
571
950
189
7,556
10,159
237
9,922
(7,665)
2,257
1,909
8,250
10,159
237
9,922
2,257
Change
from 2021
(%)
(12)
37
12
29
+100
+100
(17)
+100
na
5
(11)
+100
+100
(17)
+100
5
2021
1,017
416
852
147
2
2,434
285
2,149
–
2,149
2,138
296
2,434
285
2,149
2,149
(1) Reported and adjusted revenue measures, net of CCPB, adjusted results, and teb amounts are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Trading-related revenue is presented on a taxable equivalent basis (teb).
(3) Fiscal 2022 included $7,665 million of mark-to-market gains on certain interest rate swaps related to the announced acquisition of Bank of the West resulting from the management of the impact of
interest rate changes between the announcement and closing on its fair value and goodwill. These amounts were recorded in other trading revenue, in Corporate Services. For further information on
this acquisition, refer to the Significant Events section.
na – not applicable
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were negative $683 million in 2022, compared with $1,399 million in
the prior year. CCPB decreased, primarily due to changes in the fair value of policy benefit liabilities and the impact of lower annuity sales. The
changes were largely offset in revenue.
34 BMO Financial Group 205th Annual Report 2022
Total Provision for Credit Losses
The total provision for credit losses (PCL) was $313 million, compared with $20 million in the prior year, primarily
due to lower recoveries of performing loan provisions, due to a deteriorating economic outlook. Total PCL as a
percentage of average net loans and acceptances was 6 basis points, compared with nil basis points in the prior
year. PCL on impaired loans was $502 million, a decrease of $23 million from the prior year, largely due to lower
provisions in Canadian P&C and BMO Capital Markets, partially offset by higher provisions in U.S. P&C. PCL on
impaired loans as a percentage of average net loans and acceptances was 10 basis points, compared
with 11 basis points in the prior year. There was a $189 million recovery of the provision for credit losses on
performing loans in the current year, compared with a $505 million recovery in the prior year. The year-over-year
change largely reflected the impact of a deteriorating economic outlook, a lower benefit from improvement in
credit quality and stronger balance growth, partially offset by reduced uncertainty as a result of the improving
pandemic environment and a smaller impact from changing scenario weight.
PCL on impaired loans decreased $61 million in Canadian P&C, reflecting lower Commercial Banking and
Personal and Business Banking provisions, and increased $85 million in U.S. P&C, reflecting higher Commercial
Banking provisions, partially offset by lower Personal and Business Banking provisions. In BMO Capital Markets,
PCL on impaired loans decreased $43 million from the prior year. All lines of business recorded recoveries of
provisions for credit losses on performing loans in the current year, similar to the prior year.
Note 4 of the consolidated financial statements provides additional information on PCL, including on a
geographic basis. Table 12 in the Supplemental Information provides further segmented PCL information.
For further information, refer to the Credit and Counterparty Risk – Provision for Credit Losses and Critical
Accounting Estimates and Judgments – Allowance for Credit Losses sections.
Provision for Credit Losses
($ millions)
20
525
(505)
313
502
(189)
2021
2022
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on
performing loans
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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 outlook 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 Critical Accounting Estimates and Judgments – 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
2022
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
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
Provision for Credit Losses Performance Ratios
432
(91)
341
493
(116)
377
107
(90)
17
22
(166)
(144)
539
(181)
358
515
(282)
233
2
(4)
(2)
4
(16)
(12)
(32)
(11)
(43)
11
(205)
(194)
(7)
7
–
(5)
(2)
(7)
502
(189)
313
525
(505)
20
Total PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances (annualized) (%)
2022
0.06
0.10
2021
–
0.11
BMO Financial Group 205th Annual Report 2022 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Interest Expense
Reported non-interest expense was $16,194 million, an increase of $685 million or 4% from the prior year.
Adjusted non-interest expense was $15,194 million, an increase of $644 million or 4% from the prior year.
Adjusted non-interest expense in the current year excluded a legal provision of $627 million, including legal fees
of $22 million, and in the prior year excluded a $779 million write-down of goodwill and a $24 million partial
reversal of a restructuring charge. Adjusted non-interest expense in both years excluded divestiture costs, the
amortization of acquisition-related intangible assets and acquisition and integration costs.
Reported and adjusted non-interest expense increased, due to higher employee-related costs, computer and
equipment costs, advertising and business development costs and professional fees, partially offset by lower
premises costs and divestitures. The stronger U.S. dollar increased expenses by 1%.
The dollar and percentage changes in expense by category are outlined in the Non-Interest Expense table
below.
Performance-based compensation increased $41 million on a reported basis and $40 million on an adjusted
basis, or 1% respectively, reflecting improved business performance, partially offset by divestitures. Other
employee compensation, which includes salaries, benefits and severance, increased $432 million or 8% on a
reported basis, and $379 million or 7% on an adjusted basis, primarily due to sales force expansion and higher
salaries, partially offset by divestitures.
Total premises costs decreased $95 million or 9% on a reported basis, and $90 million or 9% on an adjusted
basis, reflecting lower real estate costs. Computer and equipment costs increased $334 million or 14% on a
reported basis, and $188 million or 8% on an adjusted basis, primarily due to continued investment in technology
and digital capabilities to enhance the customer experience and improve efficiency. Amortization of intangible
assets on a reported basis decreased $30 million or 5%, and increased $32 million or 6% on an adjusted basis,
reflecting higher software amortization. Other expenses were relatively unchanged on a reported basis, and
increased $95 million or 4% on an adjusted basis, due to higher advertising and business development costs and
professional fees.
For further information on non-GAAP amounts, measures and ratios in this Non-Interest Expense section,
refer to the Non-GAAP and Other Financial Measures section.
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Non-Interest Expense
($ billions)
16.2
15.5
15.2
14.6
Reported
Adjusted
2021
2022
Non-Interest Expense (1)
(Canadian $ in millions, on a pre-tax basis)
For the year ended October 31
Employee compensation
Salaries
Performance-based compensation
Employee benefits
Total employee compensation
Total premises and equipment
Amortization of intangible assets
Other expenses
Advertising and business development
Communications
Professional fees
Other
Total other expenses
Total non-interest expense
Acquisition and integration costs (2)
Amortization of acquisition-related intangible assets (3)
Impact of divestitures (4)
Restructuring (costs) reversals (5)
Legal provision (6)
Impact of adjusting items on non-interest expense
Total adjusted non-interest expense
Efficiency ratio (%)
Efficiency ratio, net of CCPB (%) (1)
Adjusted efficiency ratio (%)
Adjusted efficiency ratio, net of CCPB (%) (1)
2022
2021
Change
from 2021
(%)
4,467
3,193
1,135
8,795
3,635
604
517
278
788
1,577
3,160
4,041
3,152
1,129
8,322
3,396
634
397
264
607
1,889
3,157
16,194
15,509
(326)
(31)
(16)
–
(627)
(1,000)
15,194
48.0
47.1
57.3
55.8
(9)
(88)
(886)
24
–
(959)
14,550
57.0
60.1
53.6
56.5
11
1
1
6
7
(5)
30
5
30
(17)
–
4
na
na
na
na
na
na
4
(9)
(13)
4
(1)
(1) Adjusted results, measures and ratios are on a non-GAAP basis. For a quantitative reconciliation of revenue, net of CCPB, and adjusted results, refer to the Revenue and Non-GAAP and Other Financial
Measures sections.
(2) Fiscal 2022 reported non-interest expense included acquisition and integration costs of $316 million related to the announced acquisition of Bank of the West, recorded in Corporate Services. In
addition, reported non-interest expense included acquisition and integration costs related to KGS-Alpha and Clearpool of $10 million in fiscal 2022 and $9 million in fiscal 2021, recorded in BMO
Capital Markets.
(3) Amortization of acquisition-related intangible assets of $31 million in fiscal 2022 and $88 million in fiscal 2021 were recorded in the related operating group.
(4) Fiscal 2022 reported non-interest expense included the impact of divestitures related to the sale of our EMEA Asset Management business and our Private Banking business in Hong Kong and
Singapore. Fiscal 2022 included expenses of $32 million, including taxes of $22 million, and fiscal 2021 included a $779 million pre-tax and after-tax write-down of goodwill related to the sale of our
EMEA Asset Management business, as well as $107 million of divestiture-related costs for both transactions, recorded in Corporate Services.
(5) Fiscal 2021 reported non-interest expense included a partial reversal of $24 million of restructuring charges related to severance recorded in 2019, in Corporate Services.
(6) Fiscal 2022 reported non-interest expense included a legal provision of $627 million, including legal fees of $22 million, related to a lawsuit associated with a predecessor bank, M&I Marshall and
Ilsley Bank, recorded in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the consolidated financial statements.
na – not applicable
36 BMO Financial Group 205th Annual Report 2022
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)
Provision for income taxes
(1)
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 income tax rate (%)
Adjusted effective income tax rate (%)
2022
398
34
45
11
459
1
948
4,349
5,297
28.1
24.3
22.8
2021
355
36
36
10
382
1
820
2,504
3,324
30.0
24.4
22.7
(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 $5,297 million in the current year. Of this amount, $3,651 million was incurred in Canada, with
$2,921 million included in the provision for income taxes, and the remaining $730 million was recorded in total government levies other than income
taxes (other taxes). The increase from $3,324 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 on 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 $4,349 million, compared with $2,504 million in the prior year. The reported effective tax rate was 24.3%,
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compared with 24.4% in the prior year. The adjusted provision for income taxes was $2,670 million, compared with $2,537 million in the prior year.
The adjusted effective tax rate
was 22.8%, compared with 22.7% in the prior 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 recovery in other comprehensive income of $124 million in the current year, compared with an expense of $180 million in the
prior year. Refer to Note 22 of the consolidated financial statements for further information.
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 and Judgments section for further information. 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 and might
not be comparable to similar financial measures disclosed by other issuers, 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.
BMO Financial Group 205th Annual Report 2022 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
2022 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
BMO Wealth
Management
BMO Capital
Markets
Lines of Business
Personal and Business Banking
Commercial Banking
Personal and Business 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*
2022
Reported Net Income
by Geography
2022
Adjusted Net Income
by Geography
2022
Canadian P&C 41%
U.S. P&C 27%
BMO Wealth Management 13%
BMO Capital Markets 19%
Canada 41%
United States 58%
Other Countries 1%
Canada 63%
United States 36%
Other Countries 1%
* Percentages determined excluding results in Corporate Services.
Adjusted net income is on a non-GAAP basis and is discussed in
the Non-GAAP and Other Financial Measures section.
38 BMO Financial Group 205th Annual Report 2022
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 segment 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 segments in order 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, as well as facilitating 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 T&O services are largely allocated to the four operating segments, with any remaining amounts retained in
Corporate Services. Expenses directly incurred to support a specific operating segment are generally allocated to that operating segment. Other
expenses that are not directly attributable to a specific operating segment are allocated across the operating segments, reasonably reflective of the
level of support provided to each operating segment. We review these expense allocation methodologies periodically.
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. We review our capital allocation methodologies annually.
Periodically, certain lines of business and units within our organizational structure are realigned to support our strategic priorities. Effective the
first quarter of 2022, loans, deposits and revenue in our business banking line of business have been reclassified from Commercial Banking to
Personal and Business Banking within Canadian P&C, to align with our organizational structure. In addition, certain expense allocations have been
updated to better align with current experience. Prior periods have been reclassified to conform with the current period’s presentation.
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 segment 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 segment 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) (2)
Non-interest revenue
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
2022
2021
2022
2021
2022
2021
7,449
2,419
9,868
432
(91)
341
4,349
5,178
1,352
3,826
1
6,561
2,225
8,786
493
(116)
377
3,968
4,441
1,153
3,288
1
5,037
1,265
6,302
107
(90)
17
3,043
3,242
745
2,497
5
4,268
1,243
5,511
22
(166)
(144)
2,813
2,842
666
2,176
24
12,486 10,829
3,684 3,468
16,170 14,297
515
(282)
539
(181)
358
233
7,392 6,781
8,420 7,283
2,097 1,819
6,323 5,464
25
6
Adjusted net income
3,827
3,289
2,502
2,200
6,329 5,489
(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 $25 million in fiscal 2022 and $24 million in fiscal 2021 were recorded in net interest income.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $7 million in fiscal 2022 and $35 million in fiscal 2021 were 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
$6,323 million, an increase of $859 million or 16% from the prior year. Adjusted net income, which excludes the amortization of acquisition-related
intangible assets, was $6,329 million, an increase of $840 million or 15% from the prior year. Increases in reported and adjusted net income were
primarily driven by revenue growth, partially offset by higher expenses and higher provisions for credit losses. These operating segments are reviewed
separately in the sections that follow.
For further information on non-GAAP amounts, measures and ratios in this 2022 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 205th Annual Report 2022 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Personal and Commercial Banking
Canadian Personal and Commercial Banking provides financial products and services to nearly eight million customers.
Personal and Business Banking helps customers make real financial progress through a network of almost 900 branches,
contact centres and digital banking platforms, with more than 3,200 automated teller machines. Commercial Banking
serves clients across Canada as a trusted advisor, offering industry expertise, a local presence and a comprehensive range
of commercial products and services.
Lines of Business
Personal and Business Banking provides customers with a wide range
of products and services, including chequing and savings accounts, credit
cards, mortgages, personal loans, small business lending, cash
management, 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.
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Commercial Banking provides clients with a comprehensive range
of commercial products and services, including a variety of financing
options and treasury and payment solutions, as well as risk management
products. Our 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
2022 Priorities and Achievements
Key Priority: Build on our strong franchise to drive growth and customer loyalty by continuing to
invest in differentiating capabilities and delivering enhanced client experiences
Achievements
• Maintained strong customer loyalty in Personal and Business Banking
and top-tier customer loyalty in Commercial Banking, as measured by
Net Promoter Score (1)
• Named Best Commercial Bank in Canada for the eighth consecutive
year, as well as Best Retail Bank, by World Finance magazine at
its 2022 Banking Awards in recognition of our commitment to
fostering client-centric relationships, driving digital innovation and
transformation, and our comprehensive understanding of evolving
client needs and industry developments
• Awarded #1 in Customer Satisfaction with Retail Banking Advice in the
(2)
2022 Canada Retail Banking Advice Satisfaction Study,
J.D. Power
demonstrating our continued commitment to helping customers make
real financial progress, with clarity of advice and concern for customer
needs
• Continued to grow our customer-facing, advice-based roles,
strengthening our ability to engage with customers on the financial
issues that are important to them
Key Priority: In Personal and Business Banking, drive top-tier customer acquisition, build leading share
of wallet, and enhance the digital experience to help customers make real financial progress
Achievements
• Continued to strengthen our digital sales and service capabilities, with
•
more than a third of core banking product sales purchased and
delivered digitally, and more than 90% of service transactions
completed through self-serve channels, allowing our front-line
employees to focus on delivering leading advisory services
Improved market share in key categories, including retail operating
deposits and credit cards, supported by strong customer acquisition
• Enhanced personal credit card offerings, including a first-to-market
Pre-Authorized Payments Manager, and launched a small business
World Elite Mastercard® for our customers to maximize the benefits
from their everyday spending and travel expenses
• Helped customers to start saving, stay on track and achieve their
goals with our Savings Amplifier, which can automate savings with no
monthly fees and a competitive interest rate, and launched a Savings
Goals feature in our mobile banking app
•
• Enhanced our BMO NewStart® program, extending access to no-fee
banking for newcomers to Canada, including support for displaced
Ukrainians
• Continued to enhance our industry-leading Business Banking XpressTM
(BBX) platform, which has facilitated more than $2.5 billion in lending
authorizations to date, while providing solutions to business owners
quickly, in a single intuitive experience
• Announced Business Within Reach: BMO for Black Entrepreneurs, a
new program providing access to capital, educational resources and
professional partnerships for Black-owned businesses; and committed
$100 million in loans to help Black-led businesses start up, scale up
and grow
• Launched BMO Global Money TransferTM, providing a fast and
convenient digital solution to send money internationally 24/7,
including a Send Again feature for recurring transactions, a digital first
for a Canadian bank
Introduced new digital tools to meet our customers’ cash
management needs, including a Low Balance Alert feature, which
signals that their account balance has dipped below certain
thresholds, and Same Day Grace, which allows customers to return
their account to a positive balance and avoid fees
(1) Net Promoter Score (NPS): The percentage of surveyed customers who would recommend BMO to a friend or colleague.
(2) For more information, refer to www.jdpower.com/business.
40 BMO Financial Group 205th Annual Report 2022
Key Priority: In Commercial Banking, strengthen core market presence, accelerate growth in key
sectors and continue to build share of wallet with strengthened digital capabilities
Achievements
• Reinforced our second-place ranking in national market share for
lending, maintaining a leadership position in the Atlantic and British
Columbia regions
• Demonstrated our support for gender equity and the advancement of
women with a commitment to allocate $5 billion in capital over five
years to financing for women entrepreneurs as they grow their
businesses
• Enhanced our fully integrated North American platform for Treasury
and Payment Services in Canada to simplify the collection of
information for anti-money laundering purposes, enhancing the
onboarding experience and digitizing billing, resulting in significant
time savings for both customers and employees
• Partnered with Export Development Canada (EDC) to bring sustainable
finance solutions to large and mid-sized Canadian exporting
businesses, offering a new EDC Sustainable Financing Guarantee to
support clients in their transition to more sustainable business
operations that eliminate or significantly reduce emissions
• First Canadian bank to introduce a portal for commercial application
programming interface (API) developers, enhancing our digital
capabilities and advancing business-to-business integration
Key Priority: Drive efficiencies by simplifying and streamlining operations, investing in digital
capabilities and through cross-bank collaboration
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Achievements
• Recognized as overall leader in the Q4 2022 Forrester Digital
Experience ReviewTM for Canadian Mobile Banking Apps, with the
highest score in six areas, including money movement and self-
service features
• Ranked first in the Insider Intelligence Canada Mobile Banking
Emerging Features Benchmark 2022, reflecting the strength of select
emerging features offered on the BMO mobile banking app, with top
marks in the digital money management, account management and
alerts categories
• Ranked first in the Best Fintech Accelerator and Incubator category at
the 2022 Finovate Awards for the BMO Innov8TM program, recognizing
our commitment to deliver leading digital experiences to customers
that help them make real financial progress
• Refreshed the personal online banking desktop platform, driving
growth with an enhanced customer experience, accelerated digital
sales and increased use of key functionality
• Removed complexity by digitizing and simplifying key branch
processes to complete transactions efficiently and seamlessly, leading
to expanded capacity for our front-line employees
• Optimized our commercial sales and service model to allow for more
focused specialization, which can deliver services consistently across
all regions
Key Priority: Foster an inclusive, winning culture, focused on alignment, empowerment and
recognition, with a commitment to a diverse and inclusive workplace
Achievements
• Achieved strong employee engagement index above the leading
companies’ benchmark
reached a top-quartile culture ranking, placing us among the best
financial institutions surveyed globally
, with improved results across all areas, and
(1)
• Launched an expanded mentoring and networking platform that
makes it easy for all Commercial Banking employees to connect with
their peers, as well as our leaders, across geographies and sectors
• Highlighted the core performance priorities for Personal and Business
Banking that will enable our employees to maintain our momentum
as a high-performing culture, and created a recognition program for
“All Stars” who exemplify those priorities
2023 Focus
• Build on our strong franchise to drive growth and customer loyalty by continuing to invest in differentiating
capabilities and delivering enhanced One Client experiences
• In Personal and Business Banking, continue to drive customer acquisition, increase share of wallet, enhance digital
engagement and in-person guidance conversations, and help customers make real financial progress
• In Commercial Banking, maintain focus on key sectors and geographies, and enhance the client experience through
innovative capabilities and products, including climate transition and digital first solutions
• Drive efficiencies by simplifying and streamlining operations, and investing in digital capabilities
• Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a diverse and
inclusive workplace
(1) Source: BMO Ambition 2025 Winning Culture Checkup | Qualtrics, 2022.
BMO Financial Group 205th Annual Report 2022 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 and Business Banking revenue
Commercial Banking revenue
Net income growth (%)
Revenue growth (%)
Non-interest expense growth (%)
Adjusted non-interest expense growth (%)
Return on equity (%) (3)
Adjusted return on equity (%) (3)
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
2022
7,449
2,419
9,868
432
(91)
341
4,349
5,178
1,352
3,826
1
3,827
4,348
2021
6,561
2,225
8,786
493
(116)
377
3,968
4,441
1,153
3,288
1
3,289
3,966
6,904
2,964
16.4
12.3
9.6
9.6
32.1
32.1
2.7
2.7
44.1
2.68
278,022
290,324
288,979
243,541
15,475
6,168
2,618
62.8
9.4
1.7
1.7
29.1
29.1
7.7
7.7
45.2
2.64
248,215
261,869
260,359
225,555
14,687
(1) Adjusted results and ratios in this table are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial
Measures section.
(2) Amortization of acquisition-related intangible assets pre-tax amounts of $1 million in fiscal 2022 and $2 million in fiscal 2021
are recorded in non-interest expense.
(3) Return on equity is based on allocated capital. For further information, refer to the Non-GAAP and Other Financial Measures
section.
Revenue by Line of Business
($ millions)
Personal and Business Banking
Commercial Banking
9,868
2,964
8,786
2,618
6,168
6,904
2021
2022
Average Deposits*
($ billions)
Personal and Business Banking
Commercial Banking
225.6
69.5
243.5
77.4
156.0
166.1
2021
2022
*Numbers may not add due to rounding.
Average Gross Loans and Acceptances*
($ billions)
261.9
85.6
8.2
51.0
111.9
5.2
2021
2
90.3
97.9
9.4
56.6
1
20.5
5.9
2022
Commercial
Credit Cards
Consumer Instalment and Other Personal
Residential Mortgages
Business Banking
*Numbers may not add due to rounding.
42 BMO Financial Group 205th Annual Report 2022
Financial Review
Canadian P&C reported net income was $3,826 million, an increase of $538 million or 16% from the prior year. Results were driven by a 12% increase
in revenue, with higher net interest income and non-interest revenue, and lower provisions for credit losses compared with the prior year, partially
offset by higher expenses.
Total revenue was $9,868 million, an increase of $1,082 million or 12% from the prior year. Net interest income increased $888 million or 14%,
due to higher loan and deposit balances, and higher net interest margins. Non-interest revenue increased $194 million or 9%, with increases across
most categories, including card-related revenue and deposit fee revenue, partially offset by lower gains on investments in our commercial business.
Personal and Business Banking revenue increased $736 million or 12%, due to higher net interest income and non-interest revenue. Commercial
Banking revenue increased $346 million or 13%, due to higher net interest income.
Net interest margin of 2.68% increased 4 basis points from the prior year, primarily due to higher deposit margins that reflected the impact of
the higher rate environment, partially offset by lower loan margins and loans growing faster than deposits.
Total provision for credit losses was $341 million, a decrease of $36 million from the prior year. The provision for credit losses on impaired loans
was $432 million, a decrease of $61 million, due to lower Commercial Banking and Personal and Business Banking provisions. There was a $91 million
recovery of the provision for credit losses on performing loans in the current year, compared with a $116 million recovery in the prior year.
Reported non-interest expense was $4,349 million, an increase of $381 million or 10% from the prior year, reflecting investments in the
business, including sales force expansion and technology costs, as well as higher salaries.
Average gross loans and acceptances increased $28.5 billion or 11% from the prior year to $290.3 billion. Personal and Business Banking loan
balances increased 9% and Commercial Banking loan balances increased 14%, while credit card balances increased 15%. Average deposits increased
$18.0 billion or 8% to $243.5 billion. Personal and Business Banking deposits increased 6%, with strong growth in chequing and savings account
deposits, as well as higher term deposits. Commercial Banking deposits increased 11%.
For further information on non-GAAP amounts, measures and ratios in this 2022 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’s strong performance in fiscal 2022 demonstrated resilience and an ability to adapt quickly to economic uncertainty, high inflation and a
rapidly rising interest rate environment. Our performance was supported by higher consumer spending and business investment as remaining
pandemic restrictions were lifted, higher margins reflecting the rising interest rate environment and good customer acquisition. In addition, strategic
investments in our sales force and technology supported growth across our lines of business and improved efficiency. Mortgage growth remained
robust through fiscal 2022, due to elevated housing market activity and prices, but is moderating as a result of higher interest rates and slowing
demand, and a period of lower mortgage origination volumes is expected. Business lending growth has accelerated, reflecting strong consumer
demand, capital investments and a rebound in utilization, but volumes are expected to moderate in response to higher interest rates and slower
economic growth. Credit performance was strong, with delinquency, insolvency and impairment rates well below pre-pandemic levels. Growth in
consumer and business deposits reflected government support and reduced spending during the pandemic, and deposits have continued to grow at a
more modest pace, supported by strong employment and wage growth.
Economic uncertainty is expected to continue in fiscal 2023. Interest rates are expected to rise further in the near term, supporting continued
margin expansion but reducing loan demand. Credit performance is expected to return to more normalized levels but remains well-managed, as
inflation and interest costs put more pressure on purchasing power and household budgets, and the economy continues to slow.
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.
Our focus on helping customers make real financial progress by delivering exceptional customer service and advice, together with leading digital
experiences, is key to successfully delivering on our strategy.
The Canadian economic environment in calendar 2022 and the outlook for calendar 2023 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 205th Annual Report 2022 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
U.S. Personal and Commercial Banking
U.S. Personal and Commercial Banking provides financial products and services to more than two million customers.
Personal and Business Banking helps customers make real financial progress through an extensive network of more
than 500 branches, contact centres and digital banking platforms, with nationwide access to more than 40,000
automated teller machines. Commercial Banking serves clients across the United States as a trusted advisor, offering
industry expertise, a local presence and a comprehensive range of commercial products and services.
Lines of Business
Personal and Business Banking (P&BB) 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.
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Commercial Banking provides clients with a comprehensive range of
commercial products and services, including a variety of financing
options and treasury and payment solutions, as well as risk
management products. Our 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
2022 Priorities and Achievements
Key Priority: Build on our strong franchise to drive growth and customer loyalty by continuing to
invest in differentiating capabilities and delivering enhanced client experiences
Achievements
• Continued to strengthen customer loyalty in Personal and Business
Banking and maintained top-tier customer loyalty in Commercial
Banking, as measured by Net Promoter Score
(1)
• 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
• Maintained our partnership with 1871, a Chicago-based business
incubator, with the third year of our WMN•FINtechTM program, now the
largest non-profit women’s fintech accelerator program in North America
• Deployed more than US$5.5 billion in loans and investments in the
past two years as part of BMO EMpowerTM, exceeding our
commitment of US$5 billion over five years to address key barriers
faced by U.S. minority businesses, communities and families
• Rated Outstanding by the Office of the Comptroller of the Currency on
Community Reinvestment Act performance, recognizing our
commitment to help support communities with moderate or low
income levels
Key Priority: In Personal and Business Banking, continue to drive new customer acquisition, increase
digital engagement, and help customers make real financial progress
Achievements
• Continued to strengthen our digital sales and service capabilities, with
digital adoption rate rising more than 350 basis points year-over-year,
nearly one third of core banking product sales purchased and
delivered digitally, and close to 80% of service transactions completed
through self-serve channels, allowing our front-line employees to
focus on delivering leading advisory services
• Enhanced our credit card offering by refreshing CashBackTM
•
Mastercard® to enable our customers to make the most of their
everyday spending
Introduced Real Financial ProgressTM checks, including conversations
about personal finance that help us better understand our customers’
goals and provide them with financial products and services that can
help them achieve these goals, with more than 350,000 personalized
conversations held in the current year
• Supported home ownership in minority communities by offering
down payment relief through the Welcome Home GrantTM program in
our Chicago and Phoenix markets
• Advanced our offerings for underserved customer groups, reducing
fees and improving their access to products and services, including an
enhanced Credit BuilderTM offering, opening more than 68,000 Bank
OnTM certified Smart MoneyTM accounts
• Eliminated non-sufficient funds and overdraft transfer fees, and
significantly reduced overdraft fees
• Removed systemic barriers for small businesses and empowered their
local communities by funding more than US$66 million in special-
purpose credit programs that support Black, Latinx and women-owned
businesses, while also expanding our program of financial education
and coaching for Native American business owners
• Supported small business owners by processing more than 98% of
Paycheck Protection Program
our loan commitment to drive progress for business owners and
local economies
forgiveness applications and doubling
(2)
(1) Net Promoter Score (NPS): The percentage of surveyed customers who would recommend BMO to a friend or colleague.
(2) The U.S. Small Business Administration Paycheck Protection Program (PPP) is a government relief program implemented in fiscal 2020 to support businesses that faced financial hardship caused by the
COVID-19 pandemic.
44 BMO Financial Group 205th Annual Report 2022
Key Priority: In Commercial Banking, strengthen core market presence, drive growth in expansion
markets and continue to build share of wallet with strengthened digital capabilities
Achievements
• Continued to extend our footprint and strengthen our position in the
markets of Florida, Georgia, Colorado, Michigan, Texas and Southern
California, expanding our cross-border banking presence and better
serving our clients
• Added new functionality to our fully integrated North American
platform for Treasury and Payment Solutions in the United States to
simplify the collection of information for anti-money laundering
purposes, enhancing the onboarding experience and digitizing billing,
resulting in significant time savings for both customers and
employees
•
Introduced a new segment, mid-ticket equipment financing, in our
Transportation Finance business, leveraging our existing credit and
industry experience, and extending financing loans up to
US$1.5 million for eligible customers in this segment
• Enhanced wire experience (eFX) within Online Banking for Business
with same-day euro and pound sterling wires and a new user-friendly
interface that enables our customers to transfer funds by wire in the
currency of their choice
Key Priority: Drive efficiencies by simplifying and streamlining operations, investing in digital
capabilities and through cross-bank collaboration
Achievements
• Ranked among the top 10 banks for Ease of Use and Financial Fitness
functionality by Javelin Strategy & Research in its 2022 Mobile and
Online Banking Scorecards
Introduced personalized self-serve payoff quote feature in online and
mobile banking for our Transportation Finance customers
•
•
Invested in key digital capabilities to simplify our customers’
onboarding experience and improve convenience, including integrated
digital banking enrolment, real-time account funding capability and a
credit card lock and unlock feature, as well as credit card activation
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Key Priority: Foster an inclusive, winning culture, focused on alignment, empowerment and
recognition, with a commitment to a diverse and inclusive workplace
Achievements
• Achieved strong employee engagement index above the leading
companies’ benchmark
reached a top-quartile culture ranking, placing us among the best
financial institutions surveyed globally
, with improved results across all areas, and
(1)
• Continued to strengthen BMORETM, our inclusive hiring and
employment program focused on improving access to careers, skills
and advancement in the financial industry for under-represented
groups
• Named one of the Best Places to Work for Disability Inclusion, and
• Recognized by Forbes magazine as one of the Best Employers for
received a maximum score of 100 on the Disability Equality Index for
the seventh consecutive year
• Earned a top score of 100 on the Human Rights Campaign’s Corporate
Equality Index for the fifth consecutive year, and recognized as one of
the Best Places to Work for LGBTQ Equality
Diversity for the fourth consecutive year, in an independent survey
of 60,000 U.S. employees
• Launched several employee mentorship and development programs
for Commercial Banking employees, some of which have been
specifically designed for our Asian, Black and Latinx employees
2023 Focus
• Build on our strong franchise to drive growth and customer loyalty by continuing to invest in differentiating
capabilities and delivering enhanced One Client experiences
• In Personal and Business Banking, continue to drive customer acquisition, increase share of wallet, enhance digital
engagement and in-person guidance conversations, and help customers make real financial progress
• In Commercial Banking, maintain focus on key sectors and geographies, and enhance the client experience through
innovative capabilities and products, including climate transition and digital first solutions
• Drive efficiencies by simplifying and streamlining operations, and investing in digital capabilities
• Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a diverse and
inclusive workplace
• Effectively integrate Bank of the West upon regulatory approval and closing of the announced acquisition, with an
emphasis on customer and employee experience
(1) Source: BMO Ambition 2025 Winning Culture Checkup | Qualtrics, 2022.
BMO Financial Group 205th Annual Report 2022 45
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) (2)
Non-interest revenue
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$ equivalent in millions)
Net interest income (teb) (4)
Non-interest revenue
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 and Business Banking revenue
Commercial Banking 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)
Revenue by Line of Business (teb)
(US$ millions)
Personal and Business Banking
Commercial Banking
4,390
3,077
1,313
2021
Average Deposits
(US$ billions)
Personal and Business Banking
Commercial Banking
110.9
62.9
48.0
2021
4,874
3,454
1,420
2022
112.8
64.3
48.5
2022
Average Gross Loans and Acceptances*
(US$ billions)
92.4
10.6
4.5
77.3
102.3
11.0
4.3
87.0
2021
2022
Personal Other Loans
Personal Mortgages
Commercial
*Personal Other Loans includes Business Banking, Indirect Auto,
Credit Cards, Home Equity, Non-Strategic and other personal loans.
2022
5,037
1,265
6,302
107
(90)
17
3,043
3,242
745
2,497
5
2,502
3,037
2021
4,268
1,243
5,511
22
(166)
(144)
2,813
2,842
666
2,176
24
2,200
2,780
138,094
132,240
131,394
145,633
122,166
116,039
115,025
139,197
3,893
981
4,874
82
(71)
11
2,353
2,510
577
1,933
4
1,937
2,348
1,420
3,454
11.5
10.5
11.0
5.0
6.0
17.8
17.8
6.0
5.0
48.3
48.2
3.64
106,829
102,290
101,636
112,780
6,822
3,400
990
4,390
15
(132)
(117)
2,242
2,265
531
1,734
19
1,753
2,216
1,313
3,077
77.5
74.2
6.7
(0.4)
0.1
15.8
16.0
7.1
6.6
51.1
50.5
3.49
97,321
92,439
91,631
110,910
6,442
(1) Adjusted results and ratios 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 $25 million in fiscal 2022 and $24 million in fiscal 2021 are recorded in net interest
income.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $6 million in fiscal 2022 and $33 million in
fiscal 2021 are recorded in non-interest expense.
(4) Taxable equivalent basis amounts of US$20 million in both fiscal 2022 and fiscal 2021 are recorded in net interest income.
(5) Amortization of acquisition-related intangible assets pre-tax amounts of US$5 million in fiscal 2022 and US$26 million in
fiscal 2021 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 205th Annual Report 2022
Financial Review
U.S. P&C reported net income was $2,497 million, an increase of $321 million or 15% from the prior year. The impact of the stronger U.S. dollar
increased growth in net income, revenue and expenses by 3%. All amounts in the remainder of this section are presented on a U.S. dollar basis.
Reported net income was $1,933 million, an increase of $199 million or 12% from the prior year, primarily driven by strong revenue growth due
to higher net interest income, partially offset by a higher provision for credit losses compared with the prior year and higher expenses.
Total revenue was $4,874 million, an increase of $484 million or 11% from the prior year. Net interest income increased $493 million or 14%,
due to higher loan and deposit balances, and higher net interest margins, partially offset by lower Paycheck Protection Program-related (PPP) (1)
revenue. Non-interest revenue decreased $9 million or 1%, due to lower operating lease revenue and deposit fee revenue, partially offset by higher
lending fee revenue. Commercial Banking revenue increased $377 million or 12%, due to higher net interest income and non-interest revenue.
Personal and Business Banking revenue increased $107 million or 8%, due to higher net interest income, partially offset by lower non-interest
revenue.
Net interest margin of 3.64% increased 15 basis points from the prior year, primarily due to higher deposit margins that reflected the impact of
the higher rate environment, partially offset by loans growing faster than deposits and lower loan margins.
Total provision for credit losses was $11 million, compared with a recovery of $117 million in the prior year. The provision for credit losses on
impaired loans increased $67 million, reflecting higher Commercial Banking provisions, partially offset by lower Personal and Business Banking
provisions. There was a $71 million recovery of the provision for credit losses on performing loans in the current year, compared with a $132 million
recovery in the prior year.
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Reported non-interest expense was $2,353 million, an increase of $111 million or 5% from the prior year, primarily due to higher employee-
related costs, including higher salaries, and higher technology costs.
Average gross loans and acceptances increased $9.9 billion or 11% from the prior year to $102.3 billion. The reduction in PPP
(1)
loans reduced
loan growth by 3%. Commercial Banking loan balances increased 13% and Personal and Business Banking loan balances increased 1%. Average
deposits increased $1.9 billion or 2% to $112.8 billion, with growth of 2% in Commercial Banking deposits and growth of 1% in Personal and
Business Banking deposits.
For further information on non-GAAP amounts, measures and ratios in this 2022 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
Business Environment and Outlook
U.S. P&C recorded strong results in fiscal 2022, supported by continued customer and volume growth, as well as higher margins that reflected rapidly
rising interest rates. Commercial Banking continued to drive growth in expansion markets through nationwide coverage of key specialty sectors,
while taking a One Client approach with coordinated solutions across businesses to deliver better outcomes for our clients. Business lending growth
has accelerated, reflecting consumer demand, capital investments and a rebound in utilization, but volumes are expected to moderate in response to
rising interest rates and slower economic growth. Personal and Business Banking is accelerating the shift to digital applications, with investments in
technology focused on helping customers make real financial progress. Credit quality was strong, with impairment rates remaining below
pre-pandemic levels.
While growth in real GDP strengthened at the beginning of fiscal 2022, it slowed during the second half of the year due to rising interest rates
and inflation, as well as declining consumer and business confidence. The U.S. economy is expected to remain weak in fiscal 2023 as a result of the
Federal Reserve’s measures to control inflation, with housing market activity and credit growth in non-financial sectors expected to continue to slow
in the coming year. Credit performance is expected to return to more normalized levels but remains well-managed.
The financial services landscape in the United States remains highly competitive, with traditional and non-traditional competitors offering a wide
range of banking products and services across physical and digital channels. U.S. P&C has demonstrated its ability to perform well through economic
cycles, supported by its diversified growth strategy.
We remain committed to our customers, employees and local communities – investing in opportunities to enhance customer experience,
augment revenue growth and drive positive operating leverage. Once approved and closed, the announced acquisition of Bank of the West will build
scale and provide access to attractive markets across the United States.
The U.S. economic environment in calendar 2022 and the outlook for calendar 2023 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.
(1) The U.S. Small Business Administration Paycheck Protection Program (PPP) is a government relief program implemented in fiscal 2020 to support businesses that faced financial hardship caused by the
COVID-19 pandemic.
BMO Financial Group 205th Annual Report 2022 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 delivering innovative client
solutions and strategies.
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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, which offer three ways for Canadian clients to invest: a
self-directed online trading platform for investors who want to be in
control of their investments; adviceDirect® for investors who want 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 individuals, 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
2022 Priorities and Achievements
Key Priority: Deliver a top-tier digital wealth management offering, building on our differentiated
digital advisory capabilities to provide an enhanced client experience
Achievements
• Enhanced BMO InvestorLine’s digital capability with new features,
including a total portfolio snapshot, a dividend calculator, real-time
cash transfers and a real-time margin balance refresh
• BMO Wealth Management U.S. added robust new digital capabilities,
including BMO Smart Portfolio®, a new digital hybrid investment
solution
• Updated the digital experience for clients at BMO Nesbitt Burns,
sharing a common technology platform with BMO InvestorLine
• Launched electronic funds transfers (EFTs) and real-time cash transfers
(RTCTs), enabling real-time transfers from a BMO bank account into a
Nesbitt Burns account and digitizing EFT enrolment for personal and
non-personal accounts in myWealth
Key Priority: Scale our leadership position in private wealth advisory services across North America to
plan, grow, protect and transition our clients’ wealth with confidence
Achievements
• BMO Private Banking was named Best Private Bank in Canada by
World Finance magazine for the 12th consecutive year, in recognition
of our client-centric approach in navigating the complexity of
managing our clients’ wealth during times of uncertainty
• Achieved top-tier customer loyalty scores across BMO Wealth
Management businesses, as measured by Net Promoter Score
(1)
• Reinvested in Private Wealth, expanding our banker and investment
professional workforce, as well as our geographic footprint, including
offices in Denver and Salt Lake City
(1) Net Promoter Score (NPS): The percentage of surveyed customers who would recommend BMO to a friend or colleague.
48 BMO Financial Group 205th Annual Report 2022
Key Priority: Extend our advantage as a solutions provider, expanding asset management and
insurance offerings in key growth areas
Achievements
• Received the 2022 RiA Leadership Award for Stewardship for the
second consecutive year, recognizing BMO Global Asset Management
for its performance in the environmental, social and governance (ESG)
space
• Maintained our leadership position in Canadian exchange traded funds
(ETFs) through continued product innovation, including a climate-
focused solution, a broadened asset allocation ETF suite and exposure
to real assets
• Five BMO ETFs and two BMO mutual funds recognized at the Canada
Refinitiv Lipper Fund Awards with top honours across eight categories
• Launched digital enrolment in creditor insurance for line of credit
accounts in Canadian digital banking, enabling convenient processing
for Canadian loan customers
• Expanded the investment team and capabilities at BMO Global Asset
Management, adding investment professionals with experience in key
global sectors
Key Priority: Enhance efficiencies by continuing to evolve, simplify and streamline our businesses to
drive value
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Achievements
•
Introduced multi-factor authentication (MFA) for the advisor channel
at BMO Insurance, creating an enhanced and seamless user
experience
• Launched BMO Invest™ mobile app, which offers a user-friendly
experience with real-time cash movement capabilities and a
consolidated view of portfolio details under one-client identification,
providing a seamless mobile interface for retail banking and wealth
clients
Key Priority: Foster an inclusive, winning culture, focused on alignment, empowerment and
recognition, with a commitment to a diverse and inclusive workplace
Achievements
• Achieved strong employee engagement index, with improved results
across all areas, and reached a culture ranking that places us above
average among the best financial institutions surveyed globally
• Sponsored a new Women in Asset Management™ program, in
partnership with the Ivey Business School, to inspire women to learn
about and experience careers in asset management
• Announced support from BMO ETFs for the BlackNorth Initiative’s
Education Within Reach Program, with a $100,000 investment to help
provide career discovery opportunities and support tuition for students
in the Black community
• Launched a sponsorship program in collaboration with Black and
Latinx employees, as part of the Wealth Racial Equity Action Plan, with
insights from the Black Professionals Network and Latino Alliance
chairs, to support diversity, equity and inclusion
2023 Focus
• 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, including environmental, social and governance (ESG) and climate-focused offerings
• Deliver a top-tier digital wealth management offering, building on our differentiated digital advisory capabilities to
provide an enhanced client experience, including streamlined processes that deliver efficiencies and value
• Provide One Client leadership to improve delivery of services and products to our clients across BMO
• Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a diverse and
inclusive workplace
BMO Financial Group 205th Annual Report 2022 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
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Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets
(2)
Adjusted net income
Adjusted non-interest expense
Key Performance Metrics and Drivers
(3)
(3)
Wealth and Asset Management reported net income
Wealth and Asset Management adjusted net income
Insurance net income (loss)
Net income growth (%)
Adjusted net income growth (%)
Revenue growth (%)
Revenue growth, net of 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 (%)
Reported efficiency ratio (%)
Adjusted efficiency ratio, net of CCPB (%)
Average common equity
Average assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Assets under administration
Assets under management
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 gross loans and acceptances
Average deposits
Reported Net Income
($ millions)
Wealth and Asset Management
Insurance
AUA and AUM
($ billions)
1,382
273
1,109
1,251
259
992
2021
2022
950.7
523.3
427.4
2021
729.7
305.5
424.2
2022
AUA
AUM
2022 Net Revenue by Line of Business
(%)
8% BMO InvestorLine
9% BMO Insurance
14% BMO Wealth
Management U.S.
20% BMO Global Asset
Management
49% BMO Private Wealth
2022
1,188
3,336
4,524
(683)
5,207
2
(4)
(2)
3,564
1,645
394
1,251
3
1,254
3,559
992
995
259
(9.5)
(10.7)
(35.8)
(7.9)
(7.2)
(6.6)
23.5
23.6
(0.7)
(1.3)
78.8
68.4
5,282
50,488
34,007
33,974
55,919
424,191
305,462
6,124
576
458
91
454
94
5,937
7,528
2021
982
6,071
7,053
1,399
5,654
4
(16)
(12)
3,843
1,823
441
1,382
24
1,406
3,812
1,109
1,133
273
37.9
35.7
5.1
13.1
5.3
5.8
23.3
23.7
7.8
7.3
54.5
67.4
5,899
48,232
28,920
28,880
51,030
427,446
523,270
6,324
625
481
111
474
116
4,892
7,321
(1) Revenue measures, net of CCPB, adjusted results and ratios in this table are on a non-GAAP basis and are discussed in the
Non-GAAP and Other Financial Measures section.
(2) Amortization of acquisition-related intangible assets pre-tax amounts of $5 million in fiscal 2022 and $31 million in
fiscal 2021 are recorded in non-interest expense.
(3) Wealth and Asset Management was previously known as Traditional Wealth.
(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 205th Annual Report 2022
Financial Review
BMO Wealth Management reported net income was $1,251 million, compared with $1,382 million in the prior year. The decrease was partially due to
divestitures that reduced net income growth by 2%, with higher underlying revenue more than offset by higher underlying expenses. Wealth and
Asset Management reported net income was $992 million, a decrease of $117 million or 11% from the prior year, and Insurance net income
was $259 million, a decrease of $14 million or 5%.
We present 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, which 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.
Total revenue was $4,524 million, compared with $7,053 million in the prior year. Revenue, net of CCPB, was $5,207 million, a decrease of
$447 million or 8%. Revenue in Wealth and Asset Management was $4,752 million, a decrease of $426 million or 8% from the prior year due to
divestitures. Underlying revenue growth of 5% was driven by higher net interest income due to strong deposit and loan growth and higher net
interest margins, as well as the benefit from growth in net new client assets, partially offset by lower online brokerage transaction revenue and the
impact of weaker global markets. Insurance revenue, net of CCPB, was $455 million, a decrease of $21 million or 5% from the prior year, primarily
due to less favourable market movements in the current year relative to the prior year.
The total recovery of provisions for credit losses was $2 million, compared with a recovery of $12 million in the prior year. The provision for
credit losses on impaired loans decreased by $2 million from the prior year. There was a $4 million recovery of the provision for credit losses on
performing loans in the current year, compared with a recovery of $16 million in the prior year.
Reported non-interest expense was $3,564 million, a decrease of $279 million or 7% from the prior year, as higher revenue-based costs and
investments in the business, including higher technology and sales force costs, were more than offset by divestitures and a legal provision in the
prior year.
Assets under management decreased $217.8 billion or 42%, and assets under administration decreased $3.3 billion or 1% from the prior year,
primarily due to divestitures and the impact of weaker global markets, partially offset by favourable foreign exchange rate movements and higher
underlying net new client assets. Average gross loans and average deposits increased 18% and 10%, respectively.
For further information on non-GAAP amounts, measures and ratios in this 2022 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
In the first half of fiscal 2022, BMO Wealth Management results benefitted from strong equity markets and economic growth. However, business
performance in the second half of the year was impacted by market volatility, resulting in lower levels of assets under administration and
management, while rising interest rates resulted in wider margins. We continue to provide our clients with expert advice as we assist them in
navigating volatile and uncertain market conditions. We have introduced new and differentiated products, and enhanced our digital advisory
capabilities, all of which drove robust growth in net new assets, loans and deposits. Online brokerage transaction levels continued to moderate in
fiscal 2022 compared with the prior year, but are expected to remain above pre-pandemic levels.
The outlook for equity markets and the economy is shifting rapidly and continues to be impacted by supply-chain disruptions, labour shortages,
inflation and geopolitical tensions. Interest rates are expected to continue to rise as Canadian and U.S. monetary authorities attempt to combat
inflation, which would positively affect deposit margins. However, continued market volatility and near-term recessionary risks may constrain our
overall business performance.
The wealth management industry has attractive growth potential, and competitors in this market continue to invest heavily in advisory
capabilities, product innovation, technology, and mergers and acquisitions to drive growth and meet customers’ evolving needs. We are well-
positioned to benefit from emerging trends, including the accelerated adoption of digital channels, with our integrated business model, strong client
loyalty and expanded sales forces in Canada and the United States.
We continue to invest in technology to enhance client experiences and improve the productivity of our investment advisors and private bankers.
BMO InvestorLine continues to attract new clients through digital platform enhancements and is expanding access to adviceDirect® to more
Canadians, with a lower minimum investment balance required for entry. In addition, we continue to build on our Canadian asset management team
and capabilities to accelerate growth and diversify our product offerings for both retail and institutional clients.
The Canadian and U.S. economic environment in calendar 2022 and the outlook for calendar 2023 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 205th Annual Report 2022 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 2,800 professionals
in 32 locations around the world, including 18 offices in North America.
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.
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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 and advisory services to hedge against fluctuations in a
variety of key factors, including interest rates, foreign exchange rates
and commodities prices. In addition, Global Markets provides funding
and liquidity management services to clients.
Strategy and Key Priorities
2022 Priorities and Achievements
Key Priority: 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
Achievements
• Continued to play a market-leading role in mergers and acquisitions
(M&A) with our strong global expertise across sectors and our deep
client relationships, advising on landmark transactions, such as the
acquisition of Kansas City Southern by CP Rail and the combination of
Kirkland Lake Gold with Agnico Eagle
• Expanded our commercial mortgage-backed securities (CMBS) offering
with our first securitization of USD commercial real estate mortgage
loans through a new public issuance shelf
• Announced our registration as a Securities Licensed company in Japan,
marking the expansion of our footprint in the world’s third-largest
economy and Canada’s fourth-largest export partner
• Supported clients with top-tier market insights and led high-profile
initial public offerings, including the TSX’s largest IPO in fiscal 2022,
for Definity Financial Corporation
• Maintained our global leadership position in the metals and mining
sector, advising on the largest gold M&A transaction in history, and
recognized by Global Finance magazine for the 13th consecutive year
as the World’s Best Metals & Mining Investment Bank
• Delivered strong institutional product performance across Global
Markets
• Achieved top rankings
(1)
in U.S. sovereign, supranational and agency
(SSA) issuances, Canadian corporate bonds, Canadian options,
Canadian exchange traded funds, trading and structured notes
• Recognized as a top-10 bookrunner in CMBS and a top-2 in
U.S. agency collateralized mortgage obligations (CMO)
• Ranked #1 in U.S. Rates Strategy and earned recognition as a
top-tier flow rates platform with focused digital enhancements and
expanded distribution
• Received the 2022 U.S. Markets Choice Award in Equities for Best
Sell-Side Trading Desk
(1) Ranking as in Bloomberg Professional Services’ league tables.
52 BMO Financial Group 205th Annual Report 2022
Key Priority: Become an industry leader in sustainable finance, providing advice and innovative
solutions to help our clients reach their environmental, social and governance objectives
Achievements
• Accelerated progress on our climate agenda with the announced
acquisition of Radicle Group, one of Canada’s largest developers of
carbon offsets and a market leader in environmental services
• Continued to deliver on our commitment of deploying $300 billion in
sustainable lending and underwriting by 2025
• Partnered with Bruce Power to develop the world’s first green
nuclear financing framework and supported the issuance of its
Green Bonds for nuclear power, and supported Capital Power in its
green hybrid transaction issuance – the first of its kind in Canada
• Led all Canadian companies as the first to partner with Breakthrough
Energy Catalyst and its philanthropic and private-sector partners to
accelerate the shift to clean technologies and climate solutions
• Continued to drive innovation in sustainable finance solutions,
entering into a partnership with Export Development Canada for
energy transition lending, and raised funds to plant 150,000 trees,
furthering our reforestation efforts
•
• Sponsored key industry climate events, including the Climate Action
Sustainable Innovation Forum and Bloomberg Sustainable Finance
Week, and provided leadership on sustainable finance
Increased our commitment of funding for the BMO Impact Investment
Fund to $350 million, investing in six portfolio companies across three
verticals, with a focus on decarbonization, the circular economy and
AgTech
• Supported the largest energy-related Indigenous economic
partnership transaction in North America, which involved Athabasca
Indigenous Investments (Aii) and Enbridge
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Key Priority: Deploy digital-first capabilities with an increased focus on data, analytics and artificial
intelligence to drive simplification and scale
Achievements
• Expanded our digital capabilities, launching our electronic trading
capabilities into Europe and enhancing our platform with algorithmic
trading and market structure expertise
• Enhanced data insights and developed digital tools to optimize and
manage resources dynamically, enabling better data-driven decisions
• Deployed innovative technology enhancements to connect our
coverage across lines of business, and implemented workflow tools
and process automation to increase employee productivity, including
an employee-led Million Hour Challenge that resulted in more
than 300 time-saving innovations and initiatives
• Drove higher levels of client engagement with differentiated insights
and connectivity options through digital marketing events, such as
LinkedIn Live, and social media
Key Priority: Foster and drive an inclusive, winning culture, focused on alignment, empowerment and
recognition, with a commitment to a diverse and inclusive workplace
Achievements
• Achieved strong employee engagement index above the leading
(1)
, with improved results across all areas, and
companies’ benchmark
reached a top-quartile culture ranking, placing us among the best
financial institutions surveyed globally
Invested in talent, adding key leaders in high-growth areas and
attracting, developing and retaining talent through expanded
partnerships and mentorship opportunities
•
• Advanced our diversity, equity and inclusion strategy and improved
the representation of diversity in senior leadership roles
• Enhanced our workplaces and technology, and introduced a flexible
hybrid work model focused on alignment, empowerment and
recognition with a greater emphasis on employee well-being and
mental health
• Continued our commitment to Zero Barriers to Inclusion, supporting
charitable organizations and causes in our local communities, with
record levels of fund-raising for employee giving, supporting our
Equity Through Education and Trees from Trades programs
2023 Focus
• Drive client-focused growth and activate and scale a One Client approach, with improved connectivity and integrated
offerings across BMO to deliver greater value and a better experience for our clients
• Be an industry leader in sustainable finance and lead partner in our clients’ transition to a net zero world
• Deploy digital-first capabilities and solutions for speed, scale and simplification
• Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a diverse and
inclusive workplace
(1) Source: BMO Ambition 2025 Winning Culture Checkup | Qualtrics, 2022.
BMO Financial Group 205th Annual Report 2022 53
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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) (2)
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 before income taxes
Provision for income taxes (teb)
Reported net income
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (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 (%) (5)
Operating leverage (teb) (%)
Adjusted operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Adjusted efficiency ratio (teb) (%)
Average common equity
Average assets
Average gross loans and acceptances
Average net loans and acceptances
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb)
Non-interest expense
Reported net income
Adjusted non-interest expense
Adjusted net income
Average assets
Average gross loans and acceptances
Revenue by Line of Business (teb)
($ millions)
2022
2021
Global Markets
Investment and Corporate Banking
6,126
2,521
3,605
2021
Revenue by Geography
(%)
Canada and Other Countries
United States
49%
51%
2021
6,172
2,409
3,763
2022
42%
58%
2022
3,197
2,975
6,172
(32)
(11)
(43)
3,855
2,360
588
1,772
8
14
1,794
3,826
3,115
3,011
6,126
11
(205)
(194)
3,462
2,858
738
2,120
7
17
2,144
3,431
3,763
2,409
(16.5)
(16.4)
0.7
11.3
11.5
14.9
15.1
(10.6)
(10.8)
62.5
62.0
11,602
404,728
63,254
62,986
2,815
2,010
1,471
415
1,450
431
141,506
25,118
3,605
2,521
94.1
91.3
15.0
7.3
7.5
19.1
19.3
7.7
7.5
56.5
56.0
10,913
372,475
59,385
58,909
2,591
2,373
1,317
836
1,292
855
127,619
25,480
(1) Adjusted results and ratios 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 $245 million in fiscal 2022 and $291 million in fiscal 2021 are recorded in net interest
income.
(3) KGS-Alpha and Clearpool pre-tax acquisition and integration costs of $10 million in fiscal 2022 and $9 million in fiscal 2021
are recorded in non-interest expense.
(4) Amortization of acquisition-related intangible assets pre-tax amounts of $19 million in fiscal 2022 and $22 million in
fiscal 2021 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 205th Annual Report 2022
Financial Review
BMO Capital Markets reported net income was $1,772 million, a decrease of $348 million or 16% from the prior year. Results were driven by higher
revenue, more than offset by higher expenses and a lower recovery of provisions for credit losses compared with the prior year.
Revenue was $6,172 million, an increase of $46 million or 1% from the prior year. Global Markets revenue increased $158 million or 4%,
primarily due to higher foreign exchange, equities and commodities trading revenue and the impact of the stronger U.S. dollar, partially offset by
lower interest rate trading revenue and lower levels of new equity and debt issuances. Investment and Corporate Banking revenue decreased
$112 million or 4%, primarily due to lower net securities gains, lower underwriting and advisory revenue reflecting lower levels of client activity
given market conditions, and mark-downs on loan underwriting commitments, largely in the United States, resulting from a widening of credit
spreads, partially offset by higher corporate banking-related revenue and the impact of the stronger U.S. dollar.
The total recovery of provisions for credit losses was $43 million, compared with a recovery of $194 million in the prior year. The recovery of the
provision for credit losses on impaired loans was $32 million, compared with a provision of $11 million in the prior year. The recovery of the provision
for credit losses on performing loans was $11 million, compared with a recovery of $205 million in the prior year.
Non-interest expense was $3,855 million, an increase of $393 million or 11% from the prior year. The increase was driven by continued
investments in the business, including technology costs, higher employee-related costs, including severance, higher operating expenses and the
impact of the stronger U.S. dollar.
Average gross loans and acceptances increased $3.9 billion or 7% from the prior year to $63.3 billion, primarily due to higher levels of lending
activity across loan portfolios and the impact of the stronger U.S. dollar, partially offset by the impact of the deconsolidation of our customer
securitization vehicle in the United States and the wind-down of our non-Canadian energy portfolio.
For further information on non-GAAP amounts, measures and ratios in this 2022 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
In fiscal 2022, the global operating landscape reflected a rapidly changing economic and market environment. BMO Capital Markets’ performance in
the first half of fiscal 2022 benefitted from elevated levels of client activity, robust equity prices and favourable market conditions for investment
banking services, while the latter half of fiscal 2022 reflected a reduction in client activity in light of more challenging market conditions, with rising
interest rates, widening credit spreads and increased volatility leading to lower underwriting and advisory fee revenue.
Uncertainty about the economic recovery and concerns about a recession affect the outlook for fiscal 2023. High inflation rates, waning corporate
confidence, volatile markets and the conflict in Ukraine are expected to generate headwinds for the financial services industry and our business.
Investment Banking and Corporate Banking activity is expected to continue to reflect challenges across debt and equity markets, as well as a cautious
merger and acquisition environment. Activity in the Global Markets origination and refinancing businesses is expected to remain muted in the near
term.
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, particularly where BMO
has core strengths and opportunities, are building a solid foundation for profitable growth and sustainable returns. In addition, we continue to make
progress on sustainability, a core part of our strategy, providing innovative financing solutions and advice to support clients in their transition to a
more sustainable economy. BMO Capital Markets’ disciplined and integrated approach to risk management, along with continued investments in
technology infrastructure, is expected to position the business to adapt to evolving regulatory and compliance requirements in the coming years.
The Canadian and U.S. economic environment in calendar 2022 and the outlook for calendar 2023 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 205th Annual Report 2022 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporate Services, including Technology and Operations
Corporate Services consists of Corporate Units and Technology and Operations (T&O). Corporate Units provide enterprise-wide expertise, governance
and support in a variety of areas, including strategic planning, risk management, treasury, finance, legal and regulatory compliance, sustainability,
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 cybersecurity and operations services.
Corporate Services focuses on enterprise-wide priorities related to maintaining a sound risk management and internal control environment and
regulatory compliance, including the management, assessment and monitoring of BMO’s investment portfolios, funding, liquidity and capital
activities, and exposure to 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.
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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
• Continued to advance our Digital First capabilities, augmenting our
agility, cloud engineering and analytics. Used cloud computing
to compress the computing time for an initial set of risk and
regulatory reports
• Maintained a well-defined trajectory for cloud adoption. Notable
examples of cloud migration include Transportation Finance,
selected market and credit risk use cases, and a first set of
application programming interfaces (APIs) that will grow over time.
Developed the security and monitoring capabilities to secure our
environment and adapt to a changing threat landscape
• Evolved our Financial Crimes Unit (FCU) to respond to heightened
cyber, fraud and physical security requirements. Technology, people
and process areas of focus included enhancing detection and response
capabilities, improving identity and access management, and building
resilience against virtual and physical attacks
• Further enhanced our ability to aggregate, mine and analyze data, and
developed several new examples of business processes driven by
artificial intelligence (AI). Continued to track a suite of emerging
technologies as we seek to move from awareness to proof of concept,
followed by wider adoption, where appropriate
• Drove high levels of uptime and availability for customer-facing
technology and improved our ability to monitor, detect and automate
responses to potential issues
56 BMO Financial Group 205th Annual Report 2022
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
Provision for (recovery of) income taxes (teb)
Reported net income (loss)
Acquisition and integration costs (2)
Impact of divestitures (3)
Management of fair value changes on the purchase of Bank of the West (4)
Restructuring costs (reversals) (5)
Legal provision (6)
Adjusted net loss
Adjusted total revenue (teb) (7)
Adjusted non-interest expense (7)
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue
Total provision for (recovery of) credit losses
Non-interest expense
Provision for (recovery of) income taxes (teb)
Reported net income (loss)
Adjusted total revenue
Adjusted non-interest expense
Adjusted net income (loss)
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2022
2021
(716)
(270)
(986)
7,830
6,844
(7)
7
–
1,383
5,461
1,270
4,191
237
55
(5,667)
–
846
(301)
(315)
(616)
326
(290)
(5)
(2)
(7)
1,423
(1,706)
(494)
(1,212)
–
842
–
(18)
–
(338)
(388)
(333)
424
15,486
(319)
561
13,819
5,604
(4)
686
1,282
3,640
106
44
83
(26)
(6)
148
(80)
(88)
(26)
130
(74)
(1) Adjusted results and ratios, 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) Fiscal 2022 reported net income included acquisition and integration costs related to the announced acquisition of Bank of the West of $237 million ($316 million pre-tax) recorded in non-interest
expense.
(3) Reported net income included the impact of divestitures related to the sale of our EMEA Asset Management business and our Private Banking business in Hong Kong and Singapore. Fiscal 2022
reported net income included a gain of $6 million ($8 million pre-tax) related to the transfer of certain U.S. asset management clients and a $29 million pre-tax and after-tax loss related to foreign
currency translation reclassified from accumulated other comprehensive income, both recorded in non-interest revenue, and expenses of $32 million ($16 million pre-tax), including taxes of
$22 million on closing of the sale of our EMEA Asset Management business recorded in non-interest expense. 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.
(4) Fiscal 2022 reported net income included revenue of $5,667 million ($7,713 million pre-tax) related to the announced acquisition of Bank of the West resulting from the management of the impact of
interest rate changes between the announcement and closing on its fair value and goodwill, comprising $7,665 million of pre-tax mark-to-market gains on certain interest rate swaps recorded in
non-interest trading revenue and $48 million of pre-tax non-trading interest income on a portfolio of primarily U.S. treasury securities recorded in net interest income. For further information on this
acquisition, refer to the Significant Events section.
(5) Fiscal 2021 reported net income included a partial reversal of $18 million ($24 million pre-tax) of restructuring charges related to severance recorded in 2019, in non-interest expense.
(6) Fiscal 2022 reported net income included a legal provision of $846 million ($1,142 million pre-tax) related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, comprising
interest expense of $515 million pre-tax and non-interest expense of $627 million pre-tax, including legal fees of $22 million. For further information, refer to the Provisions and Contingent Liabilities
section in Note 24 of the consolidated financial statements.
(7) Adjusted results exclude the impact of the items described in footnotes (2) and (6).
Financial Review
Corporate Services reported net income was $4,191 million, compared with a reported net loss of $1,212 million in the prior year.
Results in the current year included the impact of the announced acquisition of Bank of the West, including revenue related to the management
of the impact of interest rate changes between the announcement and the closing of the acquisition on its fair value and goodwill, and related
acquisition and integration costs. In addition, the current year included a legal provision related to a lawsuit associated with a predecessor bank, M&I
Marshall and Ilsley Bank, the impact of divestitures related to the sale of our EMEA Asset Management business and the transfer of the assets of
certain U.S. asset management clients.
In the prior year, reported net loss reflected the impact of divestitures, including the write-down of goodwill related to the sale of our EMEA
Asset Management business, a gain on the sale of our Private Banking business in Hong Kong and Singapore, and divestiture-related costs for both
transactions, as well as a partial reversal of restructuring charges related to severance recorded in 2019.
Adjusted net loss was $338 million, compared with an adjusted net loss of $388 million in the prior year. Adjusted results increased due to lower
expenses, partially offset by lower revenue.
For further information on non-GAAP amounts, measures and ratios in this 2022 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 205th Annual Report 2022 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
Summary Quarterly Earnings Trends
Summarized Statement of Income and Quarterly Financial Measures (1)
Q4-2022
Q3-2022
Q2-2022
Q1-2022
Q4-2021
Q3-2021
Q2-2021
Q1-2021
(Canadian $ in millions, except as noted)
Net interest income (teb)
Non-interest revenue
3,767
6,803
Revenue (1)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
10,570
(369)
Revenue, net of CCPB (1)
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 (1)
Income before income taxes
Provision for income taxes
Reported net income (see below)
Acquisition and integration costs (2)
Amortization of acquisition-related intangible assets (3)
Impact of divestitures (4)
Management of fair value changes on the purchase of Bank of the West (5)
Restructuring costs (reversals) (6)
Legal provision (7)
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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 and integration costs (2)
Amortization of acquisition-related intangible assets (3)
BMO Capital Markets adjusted net income
Corporate Services reported net income (loss)
Acquisition and integration costs (2)
Impact of divestitures (4)
Management of fair value changes on the purchase of Bank of the West (5)
Restructuring costs (reversals) (6)
Legal provision (7)
Corporate Services adjusted net income (loss)
Basic earnings per share ($) (8) (9)
Diluted earnings per share ($) (8) (9)
Adjusted diluted earnings per share ($)
Net interest margin on average earning assets (%)
PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances (annualized) (%)
Effective tax rate (%)
Adjusted effective tax rate (%)
Canadian/U.S. dollar average exchange rate ($)
10,939
192
34
226
4,776
5,937
1,454
4,483
145
6
(8)
(3,336)
–
846
2,136
917
–
917
660
2
662
298
–
298
357
2
4
363
2,251
143
(8)
(3,336)
–
846
(104)
6.52
6.51
3.04
1.46
0.16
0.14
24.5
21.8
1.3516
4,197
1,902
6,099
413
5,686
104
32
136
3,859
1,691
326
1,365
62
5
6
694
–
–
2,132
965
–
965
568
1
569
324
1
325
262
1
3
266
(754)
61
6
694
–
–
7
1.96
1.95
3.09
1.71
0.10
0.08
19.3
22.0
1.2774
3,902
5,416
9,318
(808)
10,126
120
(70)
50
3,713
6,363
1,607
4,756
28
6
9
(2,612)
–
–
4,019
3,704
7,723
81
7,642
86
(185)
(99)
3,846
3,895
962
2,933
10
6
48
(413)
–
–
2,187
2,584
940
1
941
588
1
589
314
1
315
448
2
3
453
2,466
26
9
(2,612)
–
–
(111)
7.15
7.13
3.23
1.69
0.04
0.10
25.2
23.6
1.2665
1,004
–
1,004
681
1
682
315
1
316
705
3
4
712
228
7
48
(413)
–
–
(130)
4.44
4.43
3.89
1.64
(0.08)
0.07
24.7
23.5
1.2710
3,756
2,817
6,573
97
6,476
84
(210)
(126)
3,803
2,799
640
2,159
1
14
52
–
–
–
2,226
933
–
933
509
6
515
345
4
349
531
1
4
536
(159)
–
52
–
–
–
(107)
3.24
3.23
3.33
1.62
(0.11)
0.07
22.9
22.7
1.2546
3,521
4,041
7,562
984
6,578
71
(141)
(70)
3,684
2,964
689
2,275
2
15
18
–
(18)
–
2,292
828
–
828
550
6
556
379
5
384
553
2
4
559
(35)
–
18
–
(18)
–
(35)
3,455
2,621
6,076
(283)
6,359
155
(95)
60
4,409
1,890
587
1,303
2
18
772
–
–
–
2,095
777
1
778
538
5
543
322
7
329
558
2
5
565
(892)
–
772
–
–
–
(120)
3,578
3,397
6,975
601
6,374
215
(59)
156
3,613
2,605
588
2,017
2
19
–
–
–
–
2,038
750
–
750
579
7
586
336
8
344
478
2
4
484
(126)
–
–
–
–
–
(126)
3.42
3.41
3.44
1.57
(0.06)
0.06
23.2
23.2
1.2316
1.91
1.91
3.13
1.59
0.05
0.13
31.1
22.1
1.2512
3.03
3.03
3.06
1.59
0.14
0.19
22.6
22.6
1.2841
(1) Revenue measures, net of CCPB, adjusted results and ratios, teb amounts and U.S. dollar amounts are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Acquisition and integration costs related to KGS-Alpha and Clearpool are reported in BMO Capital Markets. Acquisition and integration costs are recorded in non-interest expense.
(3) Amortization of acquisition-related intangible assets was charged to non-interest expense in the related operating group.
(4) Reported net income included the impact of divestitures related to the sale of our EMEA Asset Management business and our Private Banking business in Hong Kong and Singapore. The impact of the sale
of our EMEA Asset Management business comprised the following in fiscal 2022: Q4-2022 included an expense recovery of $8 million ($6 million pre-tax); Q3-2022 included expenses of $6 million
($7 million pre-tax); Q2-2022 included a gain of $6 million ($8 million pre-tax) related to the transfer of certain U.S. asset management clients recorded in revenue and expenses of $15 million
($18 million pre-tax); and Q1-2022 included a $29 million (pre-tax and after-tax) loss related to foreign currency translation reclassified from accumulated other comprehensive income to non-interest
revenue, a $3 million pre-tax net recovery of non-interest expense, including taxes of $22 million on closing of the sale of our EMEA Asset Management business. Divestitures in fiscal 2021 comprised the
following: Q4-2021 included expenses of $52 million ($62 million pre-tax) related to the sale of our EMEA Asset Management business; Q3-2021 included expenses of $18 million ($24 million pre-tax)
related to the sale of our EMEA Asset Management business and the sale of our Private Banking business in Hong Kong and Singapore; Q2-2021 included a $747 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) gain on the sale of our Private Banking business, and $47 million ($53 million pre-tax) of
divestiture-related costs for both transactions – the gain on the sale was recorded in revenue and the goodwill write-down and divestiture costs were recorded in non-interest expense in Corporate
Services.
(5) Reported net income included revenue (losses) related to the announced acquisition of Bank of the West resulting from the management of the impact of interest rate changes between the
announcement and closing on its fair value and goodwill: Q4-2022 included revenue of $3,336 million ($4,541 million pre-tax), comprising $4,698 million of pre-tax mark-to-market revenue on
certain interest rate swaps recorded in non-interest trading revenue and a loss of $157 million pre-tax in net interest income on a portfolio of primarily U.S. treasury securities recorded in net interest
income; Q3-2022 included a loss of $694 million ($945 million pre-tax), comprising $983 million of pre-tax mark-to-market non-interest losses and $38 million of pre-tax interest income on a portfolio
of primarily U.S. treasury securities recorded in net interest income; Q2-2022 included revenue of $2,612 million ($3,555 million pre-tax), comprising $3,433 million of pre-tax mark-to-market gains
and $122 million of pre-tax net interest income; and Q1-2022 included revenue of $413 million ($562 million pre-tax), comprising $517 million of pre-tax mark-to-market gains and $45 million of
pre-tax interest income. For further information on this acquisition, refer to the Significant Events section.
(6) Q3-2021 reported net income included a partial reversal of $18 million ($24 million pre-tax) of restructuring charges related to severance recorded in 2019 in non-interest expense, in Corporate
Services.
(7) Q4-2022 reported net income included a legal provision of $846 million ($1,142 million pre-tax) related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, comprising net
interest expense of $515 million pre-tax and non-interest expense of $627 million pre-tax, including legal fees of $22 million. These amounts were recorded in Corporate Services. For further
information, refer to the Provisions and Contingent Liabilities section in Note 24 of the consolidated financial statements.
(8) Earnings per share (EPS) is calculated using net income after deducting total dividends on preferred shares and distributions on other equity instruments. For further information on EPS, refer to
Note 23 of the consolidated financial statements.
(9) 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.
58 BMO Financial Group 205th Annual Report 2022
Earnings in certain quarters are impacted by modest seasonal factors. The first quarter includes higher employee expenses related to employee
benefits and stock-based compensation for employees eligible to retire. The second quarter has fewer days relative to other quarters, which reduces
certain revenue and expense amounts. Quarterly earnings are also impacted by foreign exchange translation. Divestitures in BMO Wealth
Management reduced overall revenue and expenses in 2022 relative to 2021.
Reported results in 2022 included the impact of the announced acquisition of Bank of the West, comprising revenue (losses) related to fair value
management actions, as well as acquisition and integration costs. The current quarter included a legal provision. Results over the last seven quarters
included the impact of divestitures, including a write-down of goodwill related to the sale of our EMEA Asset Management business and a gain on the
sale of our Private Banking business in Hong Kong and Singapore in the second quarter of 2021. All periods included the amortization of acquisition-
related intangible assets and acquisition and integration costs.
Revenue has generally been increasing, reflecting the benefit of our diversified businesses. Revenue growth in our P&C businesses has
strengthened in recent quarters, supported by customer acquisition and higher loan volumes, with higher net interest margins reflecting the rapidly
rising interest rate environment. Revenue in BMO Wealth Management is impacted by fluctuations in global markets, with underlying performance
driven by strong growth in loans and deposits and net new client assets, as well as higher net interest margins in recent quarters. Insurance revenue,
net of CCPB, is subject to variability resulting from changes in interest rates and equity markets. BMO Capital Markets revenue is impacted by market
conditions that drive client activity, which supported strong performance in the previous five quarters in both Global Markets and Investment and
Corporate Banking, while the most recent three quarters reflected more challenging market conditions that led to lower underwriting and advisory
revenue.
As the economy recovered from the economic downturn brought on by the pandemic, we recorded lower provisions for credit losses on impaired
loans, as well as recoveries of provisions for credit losses on performing loans, as a result of an improving economic outlook and portfolio credit
improvement. However, the most recent quarters reflected the impact of a deteriorating economic outlook, a lower benefit from improvement in
credit quality, and stronger balance growth.
Non-interest expense growth was driven by investments to drive revenue growth and efficiency improvement, including sales force expansion,
higher advertising spend and technology, as well as higher salaries reflecting the inflationary environment.
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 reported effective tax rate in the past seven quarters was impacted by the sale of our EMEA
Asset Management business, as well as fair value management actions related to the announced acquisition of Bank of the West.
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.
M
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Review of Fourth Quarter 2022 Performance
Q4 2022 vs. Q4 2021
Net Income
Reported net income was $4,483 million, an increase of $2,324 million from the prior year, and adjusted net income was $2,136 million, a decrease
of $90 million or 4% from the prior year. Adjusted results in the current quarter excluded the impact of the announced acquisition of Bank of the
West, including revenue of $3,336 million ($4,541 million pre-tax) related to the management of the impact of interest rate changes between the
announcement and the closing of the acquisition on its fair value and goodwill, and related acquisition and integration costs. In addition, reported
results excluded the impact of a legal provision of $846 million ($1,142 million pre-tax), including legal fees of $22 million. Adjusted results in both
periods excluded the impact of divestitures, the amortization of acquisition-related intangible assets, and acquisition and integration costs. Reported
EPS was $6.51, an increase of $3.28 from the prior year, and adjusted EPS was $3.04, a decrease of $0.29 from the prior year. The public share
offering completed on March 29, 2022 reduced reported EPS by $0.18 and adjusted EPS by $0.07.
The increase in reported results reflected higher revenue from fair value management actions, partially offset by the legal provision noted above.
Adjusted results decreased, as higher net revenue was more than offset by a higher provision for credit losses compared with a recovery in the prior
year, and higher expenses.
Revenue
Reported revenue was $10,570 million, compared with $6,573 million in 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 $10,939 million, an increase of $4,463 million from
the prior year, and adjusted revenue, net of CCPB was $6,913 million, an increase of $437 million or 7%. Adjusted net revenue in the current quarter
excluded revenue of $4,541 million resulting from fair value management actions related to the announced acquisition of Bank of the West, as well
as interest expense of $515 million related to the legal provision. The impact of the stronger U.S. dollar increased revenue growth by 4% and 3% on a
reported and adjusted basis, respectively.
Revenue increased in our P&C businesses, primarily due to higher net interest income reflecting strong loan growth and higher net interest
margins, partially offset by lower non-interest revenue. Revenue decreased in BMO Wealth Management, as higher net interest income and growth in
net new client assets were more than offset by divestitures and weaker global markets. Revenue decreased in BMO Capital Markets, as higher Global
Markets revenue was more than offset by lower Investment and Corporate Banking revenue. On a reported basis, revenue in Corporate Services
increased from the prior year, due to the adjusting items noted above, and decreased on an adjusted basis.
BMO Financial Group 205th Annual Report 2022 59
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Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were negative $369 million, compared with $97 million in the prior
year. Results decreased largely due to changes in the fair value of policy benefit liabilities. CCPB decreased $782 million from the prior quarter, due to
changes in the fair value of policy benefit liabilities and the impact of lower annuity sales. These changes were largely offset in insurance revenue.
Provision for Credit Losses
Total provision for credit losses was $226 million, compared with a recovery of the provision for credit losses of $126 million in the prior year. The
total provision for credit losses as a percentage of average net loans and acceptances ratio was 16 basis points, compared with a recovery of 11 basis
points in the prior year. The provision for credit losses on impaired loans was $192 million, an increase of $108 million from the prior year. The
provision for credit losses on impaired loans as a percentage of average net loans and acceptances ratio was 14 basis points, compared with 7 basis
points in the prior year. There was a $34 million provision for credit losses on performing loans in the current quarter, compared with a $210 million
recovery in the prior year. The $34 million provision for credit losses on performing loans in the current quarter reflected a deteriorating economic
outlook and balance growth, largely offset by continued reduction in uncertainty as a result of the improving pandemic environment and portfolio
credit improvement. The $210 million recovery of credit losses in the prior year largely reflected an improving economic outlook and portfolio credit
improvement, partially offset by growth in loan balances.
Non-Interest Expense
Reported non-interest expense was $4,776 million, an increase of $973 million from the prior year, and adjusted non-interest expense was
$3,954 million, an increase of $234 million or 6%. Adjusted non-interest expense excluded the impact of the legal provision in the current quarter and
the impact of divestitures, amortization of acquisition-related intangible assets, and acquisition and integration costs in both periods. The increase in
reported expenses reflected the impact of the legal provision, as well as higher acquisition and integration costs related to the announced acquisition
of Bank of the West. Reported and adjusted expenses increased due to higher employee-related costs, including higher salaries, performance-based
compensation and sales force expansion, and higher computer and equipment costs, partially offset by divestitures. The impact of the stronger U.S.
dollar increased expenses by approximately 4% on a reported basis and 3% on an adjusted basis.
Provision for Income Taxes
The provision for income taxes was $1,454 million, an increase of $814 million from the prior year, and the effective tax rate was 24.5%, compared
with 22.9% in the prior year. The adjusted provision for income taxes was $597 million, a decrease of $59 million from the prior year, and the
adjusted effective tax rate was 21.8%, compared with 22.7% in the prior year. The change in the reported effective tax rate was primarily due to the
impact of higher pre-tax income in the current quarter. The change in the adjusted effective tax rate was primarily due to earnings mix, including the
impact of lower pre-tax income in the current quarter.
Q4 2022 vs. Q3 2022
Reported net income was $4,483 million, an increase of $3,118 million from the prior quarter, and adjusted net income was $2,136 million, relatively
unchanged from the prior quarter. Reported EPS increased $4.56 from the prior quarter, and adjusted EPS decreased $0.05. The increase in reported
results reflected higher revenue related to fair value management actions, partially offset by the legal provision and higher acquisition and integration
costs noted above. Adjusted results were relatively unchanged, as higher net revenue was offset by higher expenses and a higher provision for credit
losses. Net income increased in BMO Capital Markets and U.S. P&C, and decreased in Canadian P&C and BMO Wealth Management. On a reported basis,
Corporate Services recorded net income compared with a net loss in the prior quarter, and on an adjusted basis, Corporate Services recorded a net loss
compared with net income in the prior quarter.
Reported revenue was $10,570 million, an increase of $4,471 million from the prior quarter, and reported revenue, net of CCPB, was
$10,939 million, and increase of $5,253 million from the prior quarter. Adjusted revenue, net of CCPB, increased $282 million or 4%. The impact of
the stronger U.S. dollar increased revenue growth by 3% and 2% on a reported and adjusted basis, respectively. Reported non-interest expense
increased $917 million or 24% from the prior quarter, and adjusted non-interest expense increased $193 million or 5%. The impact of the stronger
U.S. dollar increased expenses by approximately 3% on a reported basis and 2% on an adjusted basis. Total provision for credit losses was
$226 million, an increase of $90 million from the prior quarter.
For further information on non-GAAP amounts, measures and ratios in this Review of Fourth Quarter 2022 Performance section, refer to the
Non-GAAP and Other Financial Measures section.
60 BMO Financial Group 205th Annual Report 2022
2021 Financial Performance Review
The preceding discussions in the MD&A focused on BMO’s performance in fiscal 2022. This section summarizes BMO’s performance in fiscal 2021,
relative to fiscal 2020. Certain prior-year data has been reclassified to conform with the presentation in 2022, 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)
2021
Net interest income (loss)
Non-interest revenue
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) (1)
Provision for (recovery of) income taxes
Net income (loss)
Acquisition and integration costs
Amortization of acquisition-related intangible assets
Impact of divestitures
Restructuring costs (reversals)
Adjusted net income (loss)
2020
Net interest income (loss)
Non-interest revenue
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) (1)
Provision for (recovery of) income taxes
Net income (loss)
Acquisition and integration costs
Amortization of acquisition-related intangible assets
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Canadian P&C U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
6,561
2,225
8,786
–
4,268 10,829
3,468
1,243
5,511
–
14,297
–
8,786
5,511 14,297
377
3,968
4,441
1,153
(144)
2,813
2,842
666
233
6,781
7,283
1,819
3,288
2,176
5,464
–
1
–
–
–
24
–
–
–
25
–
–
982
6,071
7,053
1,399
5,654
(12)
3,843
1,823
441
1,382
–
24
–
–
3,115
3,011
6,126
–
6,126
(616)
326
(290)
–
14,310
12,876
27,186
1,399
(290)
25,787
(194)
3,462
(7)
1,423
20
15,509
2,858
738
(1,706)
(494)
10,258
2,504
2,120
(1,212)
7,754
7
17
–
–
–
–
842
(18)
7
66
842
(18)
3,289
2,200
5,489
1,406
2,144
(388)
8,651
6,104
1,930
8,034
–
4,346 10,450
3,116
1,186
5,532
–
13,566
–
8,034
5,532 13,566
1,411
3,901
2,722
702
859
3,029
1,644
332
2,270
6,930
4,366
1,034
2,020
1,312
3,332
–
2
–
39
–
41
901
5,808
6,709
1,708
5,001
22
3,648
1,331
329
1,002
–
34
3,320
2,006
5,326
–
5,326
659
3,227
1,440
348
1,092
11
18
(700)
285
(415)
–
13,971
11,215
25,186
1,708
(415)
23,478
2
372
2,953
14,177
(789)
(460)
6,348
1,251
(329)
5,097
–
–
11
93
Adjusted net income (loss)
2,022
1,351
3,373
1,036
1,121
(329)
5,201
(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, and teb 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 2021 was $7,754 million, an increase of $2,657 million or 52% from 2020. Adjusted net income was $8,651 million, an
increase of $3,450 million or 66%. Adjusted results in 2021 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 the partial reversal of
$18 million ($24 million pre-tax) of restructuring charges related to severance in 2019. In addition, adjusted net income in both years excluded the
amortization of acquisition-related intangible assets and acquisition-related integration costs. The amortization of acquisition-related intangible assets
was $88 million and $121 million in 2021 and 2020, respectively. Acquisition and integration costs were $9 million and $14 million in 2021 and 2020,
respectively. The increase in net income reflected a recovery from the significant adverse impact of the COVID-19 pandemic on the global economy,
our customers and our 2020 financial results, including the impact of lower provisions for credit losses and net revenue growth of 10%, 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.
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 higher common equity. 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%. Book value per share increased 4% from 2020 to $80.18, reflecting the increase in shareholders’ equity.
Revenue
Reported revenue in 2021 was $27,186 million, an increase of $2,000 million from 2020, and adjusted revenue was $27,157 million, an increase of
$1,971 million, both increasing 8% from 2020. On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB)
against insurance revenue (net revenue), reported net revenue in 2021 was $25,787 million, an increase of $2,309 million, and adjusted net revenue
BMO Financial
Group 205th Annual Report 2022 61
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MANAGEMENT’S DISCUSSION AND ANALYSIS
was $25,758 million, an increase of $2,280 million, both increasing 10% from 2020. Adjusted revenue and adjusted net revenue in 2021 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 growth by 2%.
Canadian P&C
Total revenue in 2021 increased $752 million or 9% from 2020. Net interest income increased $457 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 and Business Banking
revenue increased $437 million or 8%, and Commercial Banking revenue increased $315 million or 14%.
U.S. P&C
Total revenue in 2021 decreased $21 million from 2020 on a Canadian dollar basis. On a U.S. dollar basis, revenue increased $277 million or 7%. Net
interest income increased $169 million or 5%, due to higher loan margins, growth in deposits and accelerated Paycheck Protection Program (PPP) (1)
revenue resulting from loan forgiveness, partially offset by lower deposit product margins. 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. Personal and Business Banking revenue increased $20 million or 2%, and Commercial Banking revenue increased $257 million or 9%.
BMO Wealth Management
Revenue in 2021 increased $344 million or 5% from 2020. Revenue, net of CCPB, in 2021 increased $653 million or 13%. Revenue in Wealth and
Asset Management increased $584 million or 13%, reflecting growth in client assets, including the impact of stronger global markets, strong loan and
deposit growth partially offset by lower margins, higher online brokerage revenue and a legal provision in 2020, partially offset by the impact of the
weaker U.S. dollar. Insurance revenue in 2021 decreased $240 million or 11% from 2020. Insurance revenue, net of CCPB, increased $69 million
or 17% in 2021, primarily due to the impact of more favourable market movements in 2021 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 2021.
BMO Capital Markets
Revenue increased $800 million or 15% from 2020. 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. Revenue in 2020 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. Revenue in 2020 was impacted by mark-downs on the
held-for-sale loan portfolio.
Corporate Services
Reported and adjusted revenue in 2021 increased $125 million and $96 million, respectively, from 2020, primarily due to higher securities gains and
treasury-related activities.
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 2020.
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.
Provision for Credit Losses
The total provision for credit losses (PCL) in 2021 was $20 million, compared with $2,953 million in 2020, primarily due to an improving economic
outlook and more favourable credit conditions. PCL on impaired loans was $525 million, a decrease of $997 million from 2020, largely due to lower
provisions in our P&C businesses and BMO Capital Markets. There was a $505 million recovery of the provision for credit losses on performing loans
in 2021, compared with a $1,431 million provision in 2020. The recovery in 2021 largely reflected an improving economic outlook and positive credit
migration, partially offset by growth in loan balances.
Non-Interest Expense
Reported non-interest expense in 2021 was $15,509 million, an increase of $1,332 million or 9% from 2020, 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 2021. Adjusted non-interest expense in 2021 was $14,550 million, an increase of $508 million or 4% from 2020. Adjusted
non-interest expense excluded the impact of divestitures and a restructuring cost reversal in 2021, as well as the amortization of acquisition-related
intangible assets and acquisition and integration costs in both years. 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 expense growth by 3% on a reported basis and 2% on an
adjusted basis.
Provision for Income Taxes
The provision for income taxes in 2021 was $2,504 million, compared with $1,251 million in 2020. The effective tax rate was 24.4%, compared
with 19.7%. The adjusted provision for income taxes was $2,537 million, compared with $1,282 million in 2020. The adjusted effective tax rate
was 22.7% in 2021, compared with 19.8%. 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 2020. The effective tax rate in 2021 was 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 2021.
For further information on non-GAAP amounts, measures and ratios in this 2021 Financial Performance Review section, refer to the Non-GAAP
and Other Financial Measures section.
(1) The U.S. Small Business Administration Paycheck Protection Program (PPP) is a government relief program implemented in fiscal 2020 to support businesses that faced financial hardship caused by the
COVID-19 pandemic.
62 BMO Financial Group 205th Annual Report 2022
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
2022
2021
93,200
273,262
113,194
551,339
48,160
60,044
1,139,199
769,478
59,956
103,963
126,614
8,150
71,038
1,139,199
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
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Overview
Total assets of $1,139.2 billion increased $151.0 billion from October 31, 2021. The stronger U.S. dollar increased assets by $44.7 billion, excluding the
impact on derivative assets. Total liabilities of $1,068.2 billion increased $137.5 billion from the prior year. The stronger U.S. dollar increased liabilities
by $43.4 billion, excluding the impact of derivative liabilities. Total equity of $71.0 billion increased $13.5 billion from October 31, 2021, including the
equity issuance related to the announced acquisition of Bank of the West.
Cash and Interest Bearing Deposits with Banks
Cash and interest bearing deposits with banks decreased $8.4 billion, primarily due to lower balances held with central banks, partially offset by the
impact of the stronger U.S. dollar. The reduction of central bank cash balances reflects the use of the proceeds to purchase U.S. treasury securities as
part of our fair value management actions related to the announced acquisition of Bank of the West and was partially offset by higher cash balances
in Global Markets. Refer to the Significant Events section for further information on our fair value management actions.
Securities
(Canadian $ in millions)
As at October 31
Trading
Fair value through profit or loss (FVTPL) (1)
Fair value through other comprehensive income – Debt and equity (2)
Amortized cost (3)
Investments in associates and joint ventures
Total securities
2022
108,177
13,641
43,561
106,590
1,293
273,262
2021
104,411
14,210
63,123
49,970
1,135
232,849
(1) Included securities mandatorily measured at FVTPL of $4,410 million ($3,038 million as at October 31, 2021) and designated securities at fair value of $9,231 million ($11,172 million as at
October 31, 2021).
(2) Included allowances for credit losses on debt securities recorded at fair value through other comprehensive income of $3 million as at October 31, 2022 ($2 million as at October 31, 2021).
(3) Net of allowances for credit losses of $3 million ($2 million as at October 31, 2021).
Securities increased $40.4 billion, primarily due to the fair value management actions noted above and the impact of the stronger U.S. dollar, partially
offset by lower levels of client activity in BMO Capital Markets.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements increased $5.8 billion, due to the impact of the stronger U.S. dollar and higher levels of
client activity in BMO Capital Markets, partially offset by treasury activities in Corporate Services.
Net Loans
(Canadian $ in millions)
As at October 31
Residential mortgages
Non-residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Gross loans
Allowance for credit losses
Total net loans
2022
148,880
18,625
86,103
9,663
290,685
553,956
(2,617)
551,339
2021
135,750
17,195
77,164
8,103
222,614
460,826
(2,564)
458,262
BMO Financial Group 205th Annual Report 2022 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net loans increased $93.1 billion from October 31, 2021. Residential mortgages increased $13.1 billion, primarily due to growth in Canadian P&C.
Non-residential mortgages increased $1.4 billion due to growth in U.S. P&C, including the impact of the stronger U.S. dollar, partially offset by lower
balances in BMO Capital Markets and Canadian P&C. Consumer instalment and other personal loans increased $8.9 billion, primarily due to growth in
Canadian P&C and BMO Wealth Management and the impact of the stronger U.S. dollar. Business and government loans increased $68.1 billion,
reflecting growth across all operating groups and the impact of the stronger U.S. dollar. Credit cards increased $1.6 billion, primarily reflecting higher
balances in Canadian P&C.
Table 4 in the Supplemental Information provides a comparative summary of loans by geographic location and product. Table 6 in the
Supplemental Information 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 increased $11.4 billion, reflecting an increase in the value of client-driven trading derivatives in BMO Capital Markets, with
increases in the fair value of foreign exchange, interest rate and equity contracts, partially offset by a decrease in the value of commodities contracts.
Further details on derivative financial assets are provided in Note 8 of the consolidated financial statements.
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Other Assets
Other assets primarily include customers’ liability under acceptances, goodwill and intangible assets, cash collateral, insurance-related assets,
premises and equipment, precious metals, current and deferred tax assets, accounts receivable and prepaid expenses. Other assets increased
$8.6 billion, primarily due to higher cash collateral balances posted with counterparties and the impact of the stronger U.S. dollar, partially offset by
lower customers’ liability under acceptances and the write-down of goodwill related to the sale of our EMEA Asset Management business. Further
details on other assets are provided in Notes 11 and 12 of the consolidated financial statements.
Deposits
(Canadian $ in millions)
As at October 31
Banks
Businesses and governments
Individuals
Total deposits
2022
30,901
495,831
242,746
769,478
2021
26,611
442,248
216,772
685,631
Deposits increased $83.8 billion. Business and government deposits increased $53.6 billion, reflecting the impact of the stronger U.S. dollar, higher
wholesale funding balances to fund customer loan growth and Global Markets client activity, and growth in customer deposits in Canadian P&C and
BMO Wealth Management, partially offset by lower source currency commercial deposits in U.S. P&C. Deposits by individuals increased $26.0 billion,
primarily due to growth in customer deposits in Canadian P&C, higher broker term deposits reported in Corporate Services and the impact of the
stronger U.S. dollar. Deposits by banks increased $4.3 billion, reflecting higher wholesale funding for Global Markets client activity and the impact of
the stronger U.S. dollar. 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 $29.1 billion, primarily due to an increase in the value of client-driven trading derivatives in BMO Capital
Markets, with increases in the fair value of foreign exchange, interest rate, equity and commodities contracts.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements increased $6.4 billion due to the impact of the stronger U.S. dollar and higher levels of client
activity in BMO Capital Markets.
Other Liabilities
Other liabilities primarily include securities sold but not yet purchased, securitization and structured entities liabilities, acceptances, insurance-related
liabilities and accounts payable. Other liabilities increased $16.9 billion, primarily reflecting an increase in securities sold but not yet purchased due to
higher levels of client activity in BMO Capital Markets, higher Federal Home Loan Bank borrowings, the impact of the stronger U.S. dollar and higher
accrued interest payable, partially offset by lower cash collateral received on over-the-counter derivatives, as well as insurance-related liabilities and
acceptances.
Further details on the composition of other liabilities are provided in Note 14 of the consolidated financial statements.
Subordinated Debt
Subordinated debt increased $1.3 billion from the prior year, reflecting new issuances net of a redemption and the impact of the stronger U.S. dollar.
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 205th Annual Report 2022
2022
2021
6,308
17,744
317
45,117
1,552
71,038
5,558
13,599
313
35,497
2,556
57,523
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Total equity increased $13.5 billion from October 31, 2021, primarily due to higher retained earnings and a common share issuance, partially offset by
a decrease in accumulated other comprehensive income. Retained earnings increased $9.6 billion, as a result of net income earned in the year,
partially offset by dividends and distributions on other equity instruments. Common shares increased $4.1 billion, as a result of the equity issuance
related to the announced acquisition of Bank of the West and shares issued under the dividend reinvestment plan. Preferred shares and other equity
instruments increased $0.8 billion, reflecting new issuances net of redemptions in the year. Accumulated other comprehensive income decreased
$1.0 billion, primarily due to the impact of higher interest rates on cash flow hedges, partially offset by the impact of the stronger U.S. dollar on the
translation of net foreign operations and gains on remeasurement of own credit risk on financial liabilities designated at fair value.
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 our shareholders, regulators,
depositors, fixed income investors and rating agencies. Our objective is to maintain a strong capital position in a cost-effective structure that:
•
• Underpins BMO’s operating groups’ business strategies
• Supports depositor, investor and regulator confidence, while building long-term shareholder value
•
Is appropriate given BMO’s target regulatory capital ratios and internal assessment of required economic capital
Is consistent with BMO’s target credit ratings.
Framework
Capital Demand
Capital required to support
the risks underlying our
business activities
Capital adequacy
assessment of capital
demand and supply
Capital Supply
Capital available
to support risks
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 assess 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 annual 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. Our capital management framework seeks to ensure that the bank is adequately
capitalized given the risks we assume 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 our business activities and risk profile, as well as the operating environment or regulatory requirements or 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 our shareholders, while maintaining a
well-capitalized position. This approach is intended to protect our stakeholders from the risks inherent in our various businesses, while still providing
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 our corporate policies
and frameworks related to capital and risk management, as well as ICAAP. The Corporate Audit Division, as the third line of defence, verifies
adherence to controls and identifies opportunities to strengthen our processes. Refer to the Enterprise-Wide Risk Management Framework section for
further discussion.
BMO Financial Group 205th Annual Report 2022 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 Common Equity Tier 1 (CET1) Ratio of 4.5%, a Tier 1
Capital Ratio of 6% and a Total Capital Ratio of 8%. 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). Pillar 2 buffers include the
Domestic Stability Buffer (DSB), which can range from 0% to 2.5% of RWA and was set at 2.5% as of October 31, 2022. 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
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Tier 1 Capital Ratio
Total Capital Ratio
TLAC Ratio
Leverage Ratio
TLAC Leverage Ratio
Minimum capital
requirements
Pillar 1 Capital
Buffers (1)
Domestic Stability
Buffer (2)
Minimum OSFI capital requirements
including capital buffers
BMO Capital and Leverage
Ratios as at October 31, 2022
4.5%
6.0%
8.0%
21.5%
3.0%
6.75%
3.5%
3.5%
3.5%
na
na
na
2.5%
2.5%
2.5%
2.5%
na
na
10.5%
12.0%
14.0%
24.0%
3.0%
6.75%
16.7%
18.4%
20.7%
33.1%
5.6%
10.1%
(1) The minimum 4.5% CET1 Ratio requirement is augmented by a total of 3.5% in Pillar 1 Capital Buffers, which can absorb losses during periods of stress. Pillar 1 Capital Buffers include a Capital
Conservation Buffer of 2.5%, a Common Equity Tier 1 surcharge for D-SIBs of 1.0% and a Countercyclical Buffer, as prescribed by OSFI (immaterial for the fourth quarter of 2022). 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, 2022.
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 (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.
The Tier 1 Capital Ratio reflects Tier 1 Capital divided by risk-weighted assets.
The Total Capital Ratio reflects Total Capital divided by risk-weighted assets.
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 risk-weighted assets.
The TLAC Leverage Ratio reflects TLAC divided by leverage exposures.
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 205th Annual Report 2022
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 if 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, were
fully phased out effective the first quarter of fiscal 2022. The impact on the bank was 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 the DSB currently set at 2.5%, and a TLAC Leverage Ratio of 6.75%,
effective November 1, 2021. As at October 31, 2022, our TLAC Ratio was 33.1% and our TLAC Leverage Ratio was 10.1%, calculated in accordance
with OSFI’s TLAC Guideline.
Risk-Weighted Assets
Risk-weighted assets (RWA) measure a bank’s exposures, weighted for their relative risk and calculated in accordance with the regulatory capital
rules prescribed by OSFI. 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 applies
sophisticated techniques to measure RWA at the exposure level based on sound risk management principles, including estimates of the probability
of default, 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 Basel III 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 has required that BMO, along with the other banks that have been approved to use the Advanced Measurement
Approach, 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 as part of the Basel III reforms.
BMO is subject to a capital floor as prescribed in OSFI’s CAR Guideline. In calculating regulatory capital ratios, there is a requirement to increase
total RWA when the capital floor amount calculated under the Standardized Approach is higher than a similar calculation using the more risk-sensitive
advanced approach rules. The capital floor became operative for BMO at the beginning of the second quarter of fiscal 2022.
Regulatory Capital Developments
On November 7, 2022, OSFI announced a new Assurance on Capital, Leverage and Liquidity Returns Guideline, applicable to the capital, leverage and
liquidity returns of federally regulated deposit-taking institutions. The requirements for an internal audit opinion, senior management attestation and
external audit opinion will phase in over a three-year period, beginning in fiscal 2023.
On September 13, 2022, OSFI announced that the temporary exclusion of central bank reserves from the Leverage Ratio exposure measure for
deposit-taking institutions will end on April 1, 2023.
On August 18, 2022, OSFI issued Interim arrangements for the regulatory capital and liquidity treatment of crypto asset exposures, which is
intended to ensure that federally regulated financial institutions apply a conservative treatment and set prudent limits in relation to their crypto asset
exposures.
On June 22, 2022, OSFI announced that the DSB would remain at 2.50% of total RWA. OSFI has stated that it is reviewing the design and range of
the DSB as part of its work to ensure the long-term effectiveness of the capital regime applicable to D-SIBs.
On January 31, 2022, OSFI announced revised capital, leverage, liquidity and disclosure requirements for the domestic implementation of the final
Basel III banking reforms. Most of these revised requirements will take effect in the second quarter of 2023, with those related to market risk and
credit valuation adjustment risk taking effect in 2024.
Effective November 4, 2021, OSFI announced that financial institutions may resume regular dividend increases and common share repurchases,
which had been restricted since March 2020.
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 16.7% as at October 31, 2022, compared with 13.7% as at October 31, 2021. The CET1 Ratio increased from the end of fiscal 2021, primarily
driven by the benefit of fair value management actions related to the announced acquisition of Bank of the West, strong internal capital generation,
the issuance of common shares through a public offering and under the shareholder dividend reinvestment and share repurchase plan (DRIP), and the
benefit of the sale of our EMEA Asset Management business, partially offset by higher risk-weighted assets (RWA) and a legal provision related to a
lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank.
Our Tier 1 Capital and Total Capital Ratios were 18.4% and 20.7%, respectively, as at October 31, 2022, compared with 15.4% and 17.6%,
respectively, as at October 31, 2021. The Tier 1 Capital Ratio was higher due to the factors impacting the CET1 Ratio and issuances of Additional Tier 1
(AT1) instruments, partially offset by redemptions. The Total Capital Ratio was higher due to the factors impacting the Tier 1 Capital Ratio, as well as
issuances of Tier 2 capital instruments, partially offset by redemptions.
BMO Financial Group 205th Annual Report 2022 67
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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 2022. Any such
activities could also impact BMO’s book value and return on equity.
Our Leverage Ratio was 5.6% as at October 31, 2022, an increase from 5.1% as at October 31, 2021, due to higher Tier 1 Capital, which was
partially offset by higher leverage exposures driven by business growth and the impact of 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 was required to participate in the FRB’s 2022 CCAR exercise. On June 23, 2022, the FRB released its 2022 CCAR and DFAST results, and on
August 4, 2022, announced individual large bank capital requirements, which were effective October 1, 2022. For BFC, the FRB determined a
CET1 Ratio requirement of 7.9%, including the 4.5% minimum CET1 Ratio and a 3.4% stress capital buffer (SCB). BFC is well capitalized, with a strong
CET1 Ratio of 13.1% as at September 30, 2022.
Regulatory Capital (1)
(Canadian $ in millions, except as noted)
As at October 31
Common Equity Tier 1 Capital: instruments and reserves
Directly issued qualifying common share capital plus related stock surplus
Retained earnings
Accumulated other comprehensive income (and other reserves)
Goodwill and other intangibles (net of related tax liability)
Other common equity Tier 1 capital deductions
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
TLAC Ratio
Leverage Ratio
TLAC Leverage Ratio
2022
2021
18,061
45,117
1,552
(6,901)
3,062
60,891
6,308
–
–
–
(78)
6,230
67,121
8,003
–
–
–
235
(50)
8,188
75,309
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
363,997
1,189,990
325,433
976,690
16.7
18.4
20.7
33.1
5.6
10.1
13.7
15.4
17.6
27.8
5.1
9.3
(1) Calculated in accordance with OSFI’s CAR Guideline and LR Guideline, as applicable. Non-qualifying Additional Tier 1 and Tier 2 Capital instruments were phased out at a rate of 10% per year from
January 1, 2013 to January 1, 2022.
Our CET1 Capital was $60.9 billion as at October 31, 2022, compared with $44.5 billion as at October 31, 2021. CET1 Capital increased, driven by the
benefit of fair value management actions related to the announced acquisition of Bank of the West, strong retained earnings growth, the issuance of
common shares through a public offering under the DRIP, the impact of foreign exchange movements, and the elimination of goodwill and intangible
assets related to the EMEA Asset Management business, which was sold during the year, partially offset by a legal provision.
Tier 1 Capital and Total Capital were $67.1 billion and $75.3 billion, respectively, as at October 31, 2022, compared with $50.0 billion and
$57.2 billion, respectively, as at October 31, 2021. The increase in Tier 1 Capital was primarily due to the factors impacting CET1 Capital and issuances
of AT1 capital instruments, partially offset by preferred share redemptions. Total Capital was higher, primarily due to the factors impacting Tier 1
Capital and issuances of subordinated notes, partially offset by redemptions.
68 BMO Financial Group 205th Annual Report 2022
Risk-Weighted Assets
RWA were $364.0 billion as at October 31, 2022, an increase from $325.4 billion as at October 31, 2021. Credit Risk RWA were $295.5 billion as at
October 31, 2022, an increase from $272.9 billion as at October 31, 2021, primarily resulting from increased asset size driven by wholesale and
commercial lending growth and the impact of foreign exchange rate movements, partially offset by positive asset quality impacts, risk transfer
transactions and the transition of certain portfolios treated under the standardized approach to the advanced approach. As noted above, the impact of
foreign exchange rate movements is largely offset in the CET1 Ratio. Market Risk RWA were $13.5 billion as at October 31, 2022, an increase from
$12.1 billion as at October 31, 2021, primarily attributable to higher volatility and changes in portfolio composition during the year. Operational Risk
RWA were $42.4 billion as at October 31, 2022, an increase from $40.5 billion as at October 31, 2021, primarily due to growth in our average gross
income. The capital floor adjustment reflected in our RWA was $12.6 billion as at October 31, 2022, driven by asset quality changes and the transition
of certain portfolios to the advanced RWA approach. The capital floor was not operative in the prior year.
(Canadian $ in millions)
As at October 31
Credit Risk
Wholesale
Corporate, including specialized lending
Corporate small and medium-sized enterprises
Sovereign
Bank
Retail
Residential mortgages, excluding home equity line of credit
Home equity line of credit
Qualifying revolving retail
Other retail, excluding small and medium-sized enterprises
Retail small and medium-sized enterprises
Equity
Trading book
Securitization
Other credit risk assets – non-counterparty managed assets
Scaling factor for credit risk assets under AIRB Approach (1)
Total Credit Risk
Market Risk
Operational Risk
Risk-Weighted Assets before floor
Floor adjustment (2)
Total Risk-Weighted Assets
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2022
2021
123,595
45,479
4,833
4,138
10,923
5,915
7,408
16,098
11,844
6,441
11,036
9,530
24,095
14,189
295,524
13,522
42,353
351,399
12,598
363,997
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
–
325,433
(1) Basel III framework requires an additional 6% scaling factor to be applied to RWA amounts for credit risk under the Advanced Internal Ratings Based (AIRB) Approach.
(2) The bank is subject to capital floor requirements as prescribed in OSFI’s CAR Guideline. Total RWA is increased by a floor adjustment amount, which is calculated based on the standardized
methodology.
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, 2022)
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%
187,119
–
23,576
29%
30%
41%
20,685
22
6,314
60%
24%
16%
72,417
13,500
12,463
80%
20%
–
27,901
–
–
BMO Financial Group 205th Annual Report 2022 69
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Management Activities
During fiscal 2022, we issued approximately 20.8 million common shares through a public offering to finance a portion of the purchase price for the
announced acquisition of Bank of the West and approximately 8.3 million common shares through the DRIP and the exercise of stock options.
During fiscal 2022, we completed Tier 1 and Tier 2 Capital instrument issuances and redemptions, as outlined in the table below.
Capital Instrument Issuances and Redemptions
As at October 31, 2022
Common shares issued
Issuance
or redemption date
Number
of shares Amount (in millions)
Tier 1 Capital
Redemption of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 38
Issuance of 5.625% Limited Recourse Capital Notes, Series 2
Redemption of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 40
Issuance of Non-Cumulative 5-Year Fixed Rate Reset Class B Preferred Shares, Series 50
Redemption of Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 42
Issuance of 7.325% Limited Recourse Capital Notes, Series 3
Tier 2 Capital
Issuance of 3.088% Subordinated Notes due 2037
Redemption of Series I Medium-Term Notes, Second Tranche
Issuance of Series L Medium-Term Notes, First Tranche
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February 25, 2022
March 15, 2022
May 25, 2022
July 27, 2022
August 25, 2022
September 13, 2022
January 10, 2022
June 1, 2022
October 27, 2022
29.1
24.0
20.0
0.5
16.0
$ 4,162
600
$
750
$
500
$
500
$
$
400
$ 1,000
USD 1,250
850
750
$
$
If an NVCC trigger event were to occur, NVCC instruments would be converted into BMO common shares pursuant to automatic conversion formulas,
with the 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 instruments would be converted into
approximately 3.9 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 Instruments
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* (3)
Series 40* (4)
Series 42* (5)
Series 44*
Series 46*
Series 50*
Additional Tier 1 Capital Notes*
4.800% Additional Tier 1 Capital Notes
4.300% Limited Recourse Capital Notes, Series 1 (6)
5.625% Limited Recourse Capital Notes, Series 2 (6)
7.325% Limited Recourse Capital Notes, Series 3 (6)
Medium-Term Notes* (7)
3.803% Subordinated Notes
4.338% Subordinated Notes
Series J – First Tranche
Series J – Second Tranche
Series K – First Tranche
3.088% Subordinated Notes
Series L – First Tranche
Stock options
Vested
Non-vested
Dividends declared per share
2022
$ 5.44
–
–
$ 0.96
$ 0.91
$ 0.96
$ 0.76
–
–
$ 0.30
$ 0.56
$ 0.83
$ 1.21
$ 1.28
$24.64
na
na
na
na
na
na
na
na
na
na
na
2021
$4.24
$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
na
na
na
2020
$ 4.24
$ 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
na
na
na
Number of shares
or dollar amount
(in millions)
677
–
–
$ 500
$ 400
$ 300
$ 200
–
–
–
–
–
$ 400
$ 350
$ 500
US$ 500
$1,250
$ 750
$1,000
US$1,250
US$ 850
$1,000
$1,250
$1,000
US$1,250
$ 750
2.6
3.3
Convertible into common shares.
*
(1) Redeemed in August 2021.
(2) Redeemed in November 2020.
(3) Redeemed in February 2022.
(4) Redeemed in May 2022.
(5) Redeemed in August 2022.
(6) Convertible into common shares by virtue of recourse to the Preferred Shares Series 48, Preferred Shares Series 49 and Preferred Shares Series 51, respectively. Refer to Note 16 of the consolidated
financial statements for conversion details.
(7) 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.
70 BMO Financial Group 205th Annual Report 2022
Dividends
Dividends per common share declared in fiscal 2022 totalled $5.44, an increase of 28% from the prior year. Annual dividends declared
represented 27% of reported net income and 41% 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. BMO resumed dividend increases in fiscal 2022, once
OSFI lifted its restriction on dividend increases and common share repurchases, which had been in effect from March 13, 2020 to November 4, 2021.
At year-end, our common shares provided a 4% annualized dividend yield based on the year-end closing share price. On December 1, 2022,
we announced that the Board of Directors had declared a quarterly dividend on common shares of $1.43 per share, an increase of $0.10 per share
or 8% from the prior year. The dividend is payable on February 28, 2023 to shareholders of record on January 30, 2023.
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 2022, common shares to supply the DRIP were issued from treasury at a 2% discount from the then-current market price except in
the first quarter, when common shares to supply the DRIP were purchased on the open market. Such shares will continue to be issued from treasury
at a 2% discount until further notice. During fiscal 2021, common shares to supply the DRIP were purchased on the open market.
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Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) or 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, and these 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 exposure 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
an SE if we control the entity. We consolidate our own securitization vehicles, certain capital and funding vehicles, and other structured entities
established to meet our own as well as our customers’ needs. We do not consolidate our Canadian and U.S. customer securitization vehicles, certain
capital vehicles, various BMO-managed funds or various other structured entities where investments are held. Further details on our Canadian and
U.S. 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). We earn
fees for providing services related to these customer securitization vehicles, including liquidity, distribution and financial arrangement fees for
supporting the ongoing operations of the vehicles. These fees totalled approximately $140 million in fiscal 2022 ($132 million in fiscal 2021).
Canadian Customer Securitization Vehicles
These vehicles 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 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 we do when extending credit in the form of a loan.
Two of these customer securitization vehicles are market-funded, while the third is funded directly by 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.
We provide liquidity facilities to the market-funded vehicles, which may require that we provide additional financing to the vehicles should
certain events occur. The total committed and undrawn amount under these liquidity facilities and undrawn amounts of the BMO funded vehicle as at
October 31, 2022 totalled $7.1 billion ($5.4 billion as at October 31, 2021). This amount comprises part of the commitments outlined in Note 24 of the
consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
The market-funded vehicles had a total of $4.5 billion of ABCP outstanding as at October 31, 2022 ($3.6 billion in 2021). The ABCP issued by the
market-funded vehicles is rated R-1(high) by DBRS and P1 by Moody’s. Our holdings of ABCP, as distributing agent of ABCP issued by the market-
funded vehicles, totalled $573 million as at October 31, 2022 ($24 million in 2021).
The assets of each of these market-funded vehicles consist primarily of exposure to diversified pools of Canadian automobile-related receivables
and Canadian conventional residential mortgages. These two asset classes represent 66% (62% in 2021) of the aggregate assets of these vehicles as
at October 31, 2022.
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 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.
Effective October 31, 2021, we concluded that we no longer control this vehicle, and therefore deconsolidated this vehicle, since our involvement
has changed from principal to agent, as reflected primarily by the change in our exposure to its variable returns. Further information on the vehicle is
provided in Note 7 of the consolidated financial statements.
The vehicle had US$4.8 billion of ABCP outstanding as at October 31, 2022 (US$3.1 billion in 2021). The ABCP issued by the vehicle is rated A1 by
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S&P and P1 by Moody’s.
We provide committed liquidity support facilities to the vehicle, with the undrawn amount totalling US$8.3 billion as at October 31, 2022
(US$6.5 billion in 2021). This amount comprises part of the commitments outlined in Note 24 of the consolidated financial statements. The
vehicle’s assets primarily have exposure to diversified pools of U.S. automobile-related receivables, and student loans. These two asset classes
represent 88% (82% in 2021) of the aggregate assets of the vehicle as at October 31, 2022.
Credit Instruments
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. Credit commitments 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
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 we do when extending credit in the form of a loan. We monitor
off-balance sheet credit instruments in order to avoid undue concentrations in any geographic region or industry.
The maximum amount payable by BMO in relation to these credit instruments was approximately $228 billion as at October 31, 2022
($202 billion in 2021). However, this amount is not representative of our likely credit exposure or the liquidity requirements for these instruments, as
it does not take into account customer behaviour, which suggests that only a portion of our customers would utilize the facilities related to these
instruments, nor does it take into account any amounts that could be recovered under recourse and collateral provisions.
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 $59 billion as at October 31, 2022 ($40 billion
in 2021). 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.
Caution
This Off-Balance Sheet Arrangements section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
72 BMO Financial Group 205th Annual Report 2022
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 our business activities. A disciplined and integrated approach to
managing risk is fundamental to the success of our operations. Our risk management framework provides independent risk
oversight across the enterprise and is integral to building competitive advantage.
Enterprise-Wide Risk Management outlines BMO’s approach to managing the key financial risks and other related risks that are inherent in its
business activities, as discussed in the following sections:
73 Risks That May Affect Future Results
77 Enterprise-Wide Risk Management Framework
83 Credit and Counterparty Risk
90 Market Risk
95
95 Liquidity and Funding Risk
Insurance Risk
104 Operational Non-Financial Risk
107 Legal and Regulatory Risk
109 Strategic Risk
110 Environmental and Social Risk
113 Reputation Risk
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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 2022 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 Notes 1 and 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 that may have an impact on our overall risk profile. These events have the
potential to affect our business, the results of our operations and our financial condition. The fundamental undertaking in the risk management
process is to proactively identify, assess, manage, monitor and report on an array 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 leaders, and incorporates both
bottom-up and top-down approaches. Risks are assessed, and supported by scenario analysis. These risk assessments 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, operational
efficiency, 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, global economies continued to recover from the effects of the COVID-19 pandemic. The Canadian economy outperformed
global peers at the start of the year, whereas in the United States, real GDP growth began to slow early in the year. Across North America, growth is
slowing due to aggressive monetary tightening, weaker global demand, rising interest rates, supply constraints, labour shortages and high inflation
rates. However, one partial offsetting factor is that households have retained a significant amount of the savings they accumulated during the
pandemic, which is supporting pent-up demand for travel, in-person services and motor vehicles. The recovery faces headwinds generated by
ongoing disruptions to global supply chains, the conflict in Ukraine, COVID-19 restrictions in China, volatile oil and natural gas prices, price and wage
inflation and labour market challenges. Rising geopolitical tensions are expected to contribute to a decline in growth rates in North American
economies through the coming year. Refer to the Geopolitical Risk and Escalating Trade Disputes section for further discussion of these risks.
Management continues to review the economic environment in which we operate, to identify significant changes in key economic indicators. In
the event of a significant change in economic conditions, management assesses our portfolio and business strategies and develops contingency plans
to address any adverse developments.
Cyber and Cloud Security Risk
Our exposure to banking cybersecurity risks arises from the ever-increasing reliance on internet and cloud technologies, coupled with the remote or
hybrid work environment, and extensive dependence on advanced digital technologies to process data. Heightened geopolitical tensions are also
contributing to elevated global exposures to cybersecurity risks. These 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 better organized and more sophisticated, with reported data breaches, often through third-party suppliers, that can
negatively impact the company’s brand and reputation. At BMO, we are responding by investing in our Financial Crimes Unit and technological
infrastructure, equipping our team to detect and address cybersecurity threats across North America, Europe and Asia in order to help keep our
customers’ and employees’ data secure.
BMO Financial Group 205th Annual Report 2022 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
Technology Resiliency
As the adoption of digital banking continues to grow, we continue to invest in innovative enhancements to our technological capabilities in order to
meet our customers’ expectations and keep their data secure. Our customers, employees and suppliers have increasingly 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 can function at high levels of operational reliability and resiliency,
particularly with respect to business-critical systems.
In line with our Digital First strategy, we are focusing on technology innovations, such as advanced data management, analytical tools and
artificial intelligence, to generate insights that will improve the way we do business and serve our customers.
Geopolitical Risk and Escalating Trade Disputes
The escalation of geopolitical tensions in Europe caused by the conflict in Ukraine is having significant global effects, including high energy prices and
the erosion of business confidence. Sanctions imposed on Russia by Ukraine’s allies have also aggravated supply shortages, particularly energy, across
the global economy.
Trade tensions between China and the United States remain elevated, as the competition for technology dominance intensifies and both the
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United States and China seek to lessen economic dependence on each other. This 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 the three countries.
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. Our
lending portfolio has limited direct exposure outside North America. However, our customers rely on global trade and sustained economic growth. To
mitigate exposure to geopolitical risk, we maintain a diversified portfolio that is continually monitored, in addition to contingency plans that address
any possible adverse developments. 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 4, 5 and 8 to 10 in the Supplemental Information and in Note 4 of the
consolidated financial statements.
Benchmark Interest Rate Reform
The transition from London interbank rates (LIBORs) and other interbank offered rates (IBORs) to alternative reference rates (ARRs) continues. BMO
transitioned all sterling, euro, Swiss franc, Japanese yen and 1-week and 2-month USD LIBOR exposures to ARRs, in advance of the December 31, 2021
discontinuation of these rates.
In addition, BMO ceased issuing new USD LIBOR-based loans and instruments after December 31, 2021, except in permitted circumstances, in
compliance with U.S. prudential regulatory supervisory guidance. As we approach the June 30, 2023 cessation date for the remaining USD LIBOR
settings, overall USD LIBOR exposures are being reduced, except for fluctuations due to permitted derivatives activity to offset existing LIBOR risk.
Existing USD LIBOR derivative exposures are expected to largely transition when central counterparties convert existing LIBOR derivatives to Secured
Overnight Financing Rate (SOFR) derivatives by the cessation date.
On December 16, 2021, the Canadian Alternative Reference Rate working group (CARR) recommended the administrator, Refinitiv Benchmark
Services UK Limited (RBSL), cease publication of Canadian Dollar Offered Rate (CDOR) settings immediately after June 28, 2024, using a two-stage
transition approach. By the end of the first stage on June 30, 2023, CARR expects that all new derivative contracts and securities will use the Canadian
Overnight Repo Rate Average (CORRA), with the exception of derivatives that hedge or reduce CDOR exposures from derivatives, or securities
transacted before June 30, 2023, or loan agreements entered into before June 28, 2024. All remaining CDOR exposures should be transitioned to
CORRA by June 28, 2024, marking the end of the second stage.
On May 16, 2022, following public consultation, RBSL announced that all remaining CDOR settings will cease publication immediately after
June 28, 2024, in line with CARR recommendations. The enterprise IBOR Transition Office (ITO) adjusted all affected project plans as a result of the
RBSL announcement.
Climate Change and Other Environmental and Social Risks
BMO is exposed to risks related to environmental events and extreme weather conditions that could potentially disrupt our operations, impact our
customers and counterparties, and result in lower earnings and higher losses. Factors contributing to heightened environmental risks include the
impacts of climate change and the continued intensification of development in areas of greater environmental sensitivity. Business continuity
management plans provide us with the roadmap and tools that would support the restoration, maintenance and management of critical operations
and processes in the event of a business disruption.
BMO is also exposed to risks related to borrowers that may experience financial losses or increases in operating costs as a result of climate-related
litigation or policies, such as carbon emissions pricing, or that may experience a decline in revenue as new and emerging technologies disrupt or
displace demand for certain commodities, products and services. As a global bank, we aim to help drive the transformation to a net-zero carbon
economy by partnering with our clients to accelerate the low-carbon transition, in part through the establishment of the BMO Climate Institute
announced in March 2021, and our dedicated Energy Transition Group.
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 give rise to new business or reputation risks. Globally,
climate-related litigation or enforcement measures could arise from new and more stringent obligations to manage and report climate-related risks.
Refer to the Environmental and Social Risk section for further discussion of these risks.
74 BMO Financial Group 205th Annual Report 2022
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Canadian Housing Market and Consumer Leverage
Household debt and housing affordability risks are elevated. Successive hikes in interest rates by central banks have primed the housing market for a
correction through to 2023 and are slowing demand. Although housing prices have started to decline, the annual income needed to buy a home has
increased significantly due to rising mortgage rates. In addition, the pandemic may have caused permanent changes in consumer behaviours and
preferences, as well as changes in how and where work is performed, including the widespread adoption of remote working arrangements. These
changes could lead to structural shifts in the demand for housing based on geographic and other characteristics, and could dampen sales activity,
home prices and property values within our current mortgage portfolio.
Housing affordability continues to be a challenge, especially in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA) and their
surrounding regions, and represents an ongoing barrier to entry for potential first-time homebuyers. Although unemployment rates remain historically
low, inflation and higher interest rates are putting a strain on household budgets, which is reducing overall household purchasing power. Further
increases in interest rates, if material, could pressure the finances of households with adjustable-rate mortgages, variable-rate loans that reach their
“trigger rate” where the payment no longer covers interest on the loan, and fixed-rate loans that come up for renewal. Prolonged economic
uncertainty could also cause households to continue to focus on building savings.
Reductions in home sales activity, particularly in the GTA and GVA, would impact mortgage origination volumes, while lower property values
could result in higher provisions for credit losses. BMO’s prudent lending practices, which include the application of additional underwriting scrutiny
and regulatory stress testing at origination 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 BMO’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, primarily
due to insurance coverage and the significant level of equity held by owners with seasoned loans.
Inflation
Inflation rates in North America have increased sharply and are expected to decline slowly over time. Central banks began to implement corrective
measures through a series of interest rate increases in 2022. Further interest rate increases will put additional pressure on our customers and increase
the risk of an economic recession in North America. Higher inflation rates are having an impact on both our operations and the operations of our
clients, and could have a negative effect on our earnings through 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. Refer to the
Canadian Housing Market and Consumer Leverage section and the General Economic Conditions section for further discussion of these risks.
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 reduce profitability and increase economic uncertainty in specific businesses
and markets, which may affect our customers and counterparties, and potentially contribute to a greater risk of default. Changes in fiscal and
monetary policies are difficult to predict. Higher levels of government and business debt resulting from the pandemic may create future
vulnerabilities that could impact our markets and our operating results. Interest rate fluctuations 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.
Canadian dollar value changes relative to other currencies have affected, and could continue to affect, the business operations and results of
clients with significant earnings or input costs denominated in foreign currencies. Our foreign operation investments are primarily denominated in U.S.
dollars, and the foreign exchange impact on our 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 the pending Bank of the West acquisition, as well as interest rate exposures and foreign exchange
impacts, and to 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 our exposure to foreign exchange and interest rate risk.
Regulatory Requirements
The financial services industry is highly regulated, and BMO has experienced increasing complexity in regulatory requirements and expectations, 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. Consequently, there is the potential for increases in regulatory capital requirements and additional compliance
costs, which could lower returns and affect growth. These reforms could also affect the cost and availability of funding and the level 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 a range of national regulatory authorities may provide advantages to our international competitors, which could affect our
ability to compete. We monitor such developments, and other potential changes, so that we are well-positioned to respond and implement any
necessary changes.
Failure to comply with applicable legal and regulatory requirements and expectations could result in legal proceedings, financial losses,
regulatory sanctions, enforcement actions, criminal convictions and penalties, 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 and U.S. federal governments, other
G20 governments and the Organization for Economic Co-operation and Development (OECD) to increase taxes, broaden the tax base globally and
BMO Financial Group 205th Annual Report 2022 75
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MANAGEMENT’S DISCUSSION AND ANALYSIS
improve tax-related reporting. For example, the Canadian government introduced legislation related to tax measures that would be applicable to
certain Canadian companies in a bank or life insurer group, including a one-time 15% tax (referred to as the Canada Recovery Dividend, or CRD) and a
permanent 1.5% increase in the tax rate, and has proposed to adopt the OECD Pillar 2 Model Rules, which will levy a 15% minimum tax on operations
globally. Refer to the Critical Accounting Estimates and Judgments section for further discussion of income taxes and deferred taxes.
Pending Bank of the West Acquisition
BMO is subject to several risks related to the pending acquisition of Bank of the West. Such risks include, but are not limited to: the possibility that the
announced acquisition of Bank of the West does not close when expected, or at all, because regulatory approvals or other conditions required for
closing are not received or satisfied on a timely basis, or at all, or regulatory approvals are received subject to adverse conditions or requirements; the
risk that BMO may be unable to realize, in the anticipated time frame, the benefits anticipated from the proposed transaction, such as it being
accretive to adjusted earnings per share and creating opportunities for synergies; the risk that the business of Bank of the West may not perform as
expected, or in a manner consistent with historical performance; the risk that BMO may not be able to promptly and effectively integrate Bank of the
West and that the costs of integration may be higher than expected; the risk that the total amount of BMO’s existing excess capital, completed
financing for the transaction and capital generation anticipated before closing may not be sufficient to maintain capital targets without raising
additional capital; the risk that our fair value management actions (as described in the Significant Events section) are not effective or result in
unforeseen consequences; reputational risks and the reaction of Bank of the West’s customers and employees to the transaction; the risk of increased
exposure to regional economic and other issues as a result of expanding BMO’s presence in the United States; risks related to possible demands on
management time by transaction-related issues; and risks related to increased exposure to exchange rate fluctuations. Any of these and other risks
related to the pending acquisition of Bank of the West including, but not limited to, the risk that our assumptions about us, Bank of the West and the
announced acquisition may prove inaccurate, could adversely impact our financial results or strategic direction.
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 because of regulatory costs related to an acquisition, operational loss
events, other unanticipated expenses 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.
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 that, 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 new accounting policies and future changes in
accounting policies are discussed in the Changes in Accounting Policies in 2022 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 and Judgments section.
Technological Innovation and Competition
Advancement of technological capabilities is shaping the future of everyday banking for individuals and businesses. The change in customers’
behaviour and preferences for on-demand banking in recent years has led to significant progress in open banking, an increase in the use of digital
currencies, a growing number of non-bank financial service providers and more banking options for customers and businesses. This shift in the
financial services ecosystem creates risks for BMO, including direct competition with technology companies. In response to these challenges, we have
set out a Digital First strategy to enhance customer experiences, streamline processes and reduce complexity. We continue to make investments in
advanced technologies, including artificial intelligence (AI), and we have designed new talent strategies to attract and retain employees with the
skills we need. In addition, we closely monitor evolving technologies and practices in the financial services industry, and we are developing new risk
management approaches to identify and manage these risks.
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.
76 BMO Financial Group 205th Annual Report 2022
Enterprise-Wide Risk Management Framework
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 enable 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.
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 positions, 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 exposure to material risks. The ERMF is
supported by our people, processes and technology, along with a range of risk management 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.
Enterprise Risk Management Framework
Diversify. Limit Tail
Risk
Optimize Risk
Return
Understand and
Manage
Protect our
Reputation
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Risk
Management
Approach
Risk Governance
Maintain Strong
Capital and
Liquidity
Board
(RRC*, ACRC*)
Senior Management
(RMC*, ERC* & Sub-Committees)
Risk Appetite Framework
Policy Framework
1st Line
2nd Line
Operating Groups, Technology &
Operations, Corporate Services
Enterprise Risk & Portfolio Management,
Legal & Regulatory Compliance
3rd Line
Corporate Audit Division
Risk
Management
LifeCycle
IDENTIFY
ASSESS
MANAGE
MONITOR
REPORT
Risk
Taxonomy
Credit and
Counterparty
Risk
Market
Risk
Liquidity and
Funding Risk
Insurance
Risk
Operational
Non-Financial
Risk
Legal and
Regulatory
Risk
Reputation
Risk
Environmental
and Social Risk
Strategic
Risk
Risk Management Enablement
Risk Management Tools
People
Process
Technology
(e.g.: Stress Testing, Scenario Analysis, Modelling Analytics)
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
BMO Financial Group 205th Annual Report 2022 77
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 exercised 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, exercising oversight and
governance of the risks taken across the enterprise and the processes through which exposures to such risks are identified, assessed, managed,
monitored, and reported in accordance with policies, and held within approved limits and risk tolerances.
The ERMF is reviewed on a regular basis by the Risk Review Committee (RRC) of the Board, in order to exercise oversight and guide risk-taking
activities.
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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)
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 oversight exercised by the Board of Directors and senior management, provisions for appropriate risk governance, supported by the
three lines of defence, are in place in all significant businesses and entities. In each of the operating groups, as well as in Corporate Services, which
includes Technology and Operations, management serves as the first line of defence, responsible for governance and controls, and the implementation
and operation of risk management processes and procedures designed to 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 outcomes are consistent with expected returns.
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 more specific risk limits, consistent with Board-
approved limits.
78 BMO Financial Group 205th Annual Report 2022
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 Review Committee (RRC) of the Board of Directors assists
the Board in fulfilling its risk management oversight responsibilities.
This includes maintaining a strong risk culture; overseeing the
identification and management of BMO’s risks; monitoring
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 (ACRC) of the Board of
Directors assists the Board in fulfilling its oversight responsibilities
for the integrity of BMO’s financial reporting; the effectiveness of
BMO’s internal controls; the 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.
Risk Management Committee (RMC) brings together senior
executive members of BMO management to oversee risk
management across the enterprise. RMC reviews and discusses
significant risk issues and action plans as they arise in the
implementation of the enterprise-wide strategy. RMC exercises 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.
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 exercise
oversight of the risks taken across the enterprise and the processes
through which such risks are identified, assessed, managed,
monitored, and reported in accordance with policies, and held within
limits and risk tolerances.
Enterprise Risk and Portfolio Management (ERPM), as the 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
exercising its responsibility 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 risks accepted 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 exposures to 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.
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Risk Appetite Framework
BMO’s Risk Appetite Framework consists of a Risk Appetite Statement and a delineation of the 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 the assumption of material
risks. Key risk metrics are outlined for material risks, with 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 positions 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.
BMO Financial Group 205th Annual Report 2022 79
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Limits
Risk limits are set so that risk-taking activities remain within BMO’s risk appetite, balancing 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 exposure to
credit and liquidity facilities.
• Operational Risk – key metrics for measuring operational and other non-financial risks that may have financial consequences.
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The Board of Directors, after considering recommendations from the RRC and 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.
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 exposures to
key risks are identified, assessed, managed, 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, serve as 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 (which includes mitigation), monitor and report on all risks in, or arising from, their businesses, operations
and exposures. The first line fulfils its responsibilities by applying risk management and reporting methodologies, by establishing appropriate
internal controls in accordance with the ERMF and by monitoring the effectiveness of such controls. These processes and controls provide the
framework for our lines of business to act within their delegated risk-taking authority and risk limits, as set out in corporate policies and the Risk
Appetite Framework. Corporate Services, while part of our first line of defence, may also serve 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 exercises independent oversight, offers effective
challenge and provides independent assessment of risks and risk management practices, including transaction, product and portfolio risk
management decisions, processes and controls applied 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 (which includes
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
We maintain a Risk Taxonomy that documents the key risks to which BMO is exposed and provides foundational support across the risk management
life cycle in relation to each of the 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 Non-Financial 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. Any failure in managing
these risks, or in controlling our exposures to them, could have financial consequences for BMO.
80 BMO Financial Group 205th Annual Report 2022
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 documents the 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 assessed under 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 size of an initiative’s investment spending and its inherent risk.
•
• New products and services – policies and 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 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 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 current transaction or 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 our risk management 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. Oversight and governance of the stress testing associated with the Horizontal Capital Review (HCR), which is
a U.S. regulatory requirement for BMO Financial Corp. (BFC), are exercised at the BFC level by its Board of Directors.
Quantitative models and tools, along with qualitative evaluations, 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 position 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
our earnings, our balance sheet, and our 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 distills 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 BMO could experience as a result of a specific stress, as well as the ordinary course of business and extraordinary actions anticipated in
response to that stress.
Stress test results, including mitigating actions, are benchmarked and challenged by the relevant business units and senior management,
including the Enterprise Stress Testing Committee.
BMO Financial Group 205th Annual Report 2022 81
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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 the test
results 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.
Refer to the Environmental and Social Risk section for a discussion of our climate scenario analysis program.
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 managing 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 at BMO is the set of shared norms, attitudes and behaviours related to risk awareness, risk-taking and risk management. Sound risk
culture consistently supports appropriate behaviours and judgments about risk-taking, and promotes effective risk management and the 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 our values of integrity, empathy, diversity and responsibility. Our Purpose – to Boldly Grow the Good in business and
life defines BMO as an organization and is the foundation of 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 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 appropriately evaluated and 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, which brings 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 and effective 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 to discourage 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 management 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.
•
82 BMO Financial Group 205th Annual Report 2022
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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 represent 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 our earnings, financial condition and reputation.
Credit and Counterparty Risk Governance
The Credit Risk Management Framework seeks to ensure that all material credit risks to which the enterprise is exposed are identified, assessed,
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 framework incorporates governing principles that are defined in a series of corporate policies
and standards and are applied through specific operating procedures. These policies and standards are reviewed on a regular basis and modified as
necessary, so that they are 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 an automated
decision-making process, 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 transactions or transactions involving greater risk and are accountable for providing an
objective independent assessment of the relevant 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-making 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 corporate policies, standards and procedures.
For corporate and commercial borrowers presenting a higher than normal risk of default, we have in place formal policies that outline the
framework for managing such accounts and specialized groups that manage them. We strive to identify borrowers facing 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. Borrowers 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 of 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 conducted, including
stress testing and scenario analysis based on current, emerging or prospective risks. Reporting is provided at least quarterly, and more frequently
where appropriate, to the Board and senior management committees in order to keep them informed of credit risk developments in our portfolios,
including changes in credit risk concentrations, watchlist accounts, impaired loans, provisions for credit losses, negative credit migration and
significant emerging credit risk issues. This supports RRC and senior management committees in 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 also monitored under the market risk framework. In order to reduce our exposure to CCR, transactions 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 the risk of default by any
member through 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 83
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Credit and Counterparty Risk Management
Collateral Management
Collateral is used for credit risk mitigation purposes in order 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 obtain 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 Master Agreement provided by International Swaps and Derivatives Association Inc., 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.
A Credit Support Annex entitles a party to demand a transfer of collateral (or other credit support) when its exposure to OTC derivatives of 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, certain thresholds and provisions setting out acceptable types of collateral, a method for their valuation
(discounts are often applied to market values), 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 the Derivative
Transactions section.
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 established at
the time of origination, and the frequency of revaluation is dependent on the type of collateral. For commercial real estate collateral, a full external
appraisal of the property is typically obtained at the time of loan origination, unless the exposure is below a specified threshold amount, in which
case an internal evaluation and a site inspection are conducted. Internal evaluations may consider property tax assessments, purchase prices, real
estate listings or realtor opinions. The case for an updated appraisal is reviewed annually, with consideration given to the borrower risk rating,
existing tenants and lease contracts, as well as current market conditions.
In the event a loan is classified as impaired, and depending on its size, a current external appraisal, valuation or restricted use appraisal is
obtained and updated every 12 months, as long as the loan remains classified as impaired. In Canada, for residential real estate that has a
loan-to-value (LTV) ratio of less than 80%, an independent property valuation is routinely obtained at the time of loan origination. For U.S. residential
loans secured by real estate, an independent property valuation is obtained for all loans that will be retained in BMO’s loan portfolio. For certain real
estate loans originated for sale to government-sponsored agencies, the requirement may be waived based on an existing valuation already on file
with that agency.
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 in 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 current
value of the property.
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 when a relatively large 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.,
commercial real estate), country, product and single-name concentrations. We use a range of tools to reduce the credit risk exposures in our loan
portfolio. These include asset sales, traditional securitizations, or the purchase of credit protection in the form of credit default swaps or credit
insurance and risk transfer transactions. Credit risk is mitigated by obtaining protection from better-rated counterparties or high-quality collateral.
Credit risk mitigation activities support our management of capital, and individual and portfolio credit concentration.
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. On a drawn loans and commitments basis, our most significant exposure as at October 31, 2022 was to individual
consumers, comprising $308,446 million ($280,087 million in 2021).
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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
84 BMO Financial Group 205th Annual Report 2022
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 of BMO’s 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.
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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 any authorizations that 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 type and industry sector, as at October 31, 2022 and 2021, 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)
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
245,673 224,348
Individual
Financial institutions 175,770 187,011
67,207
Governments
27,002
Manufacturing
43,524
Real estate
16,270
Retail trade
44,367
Service industries
14,372
Wholesale trade
6,075
Oil and gas
7,412
Utilities
37,071
Others (2)
99,498
36,274
53,531
24,040
54,750
20,220
4,084
9,954
48,441
Total exposure at
62,697
22,535
1,863
20,237
13,325
5,235
18,603
7,859
4,967
13,740
17,548
55,655
26,933
1,606
16,470
9,830
4,646
16,126
5,199
5,468
10,864
17,177
–
19,030
5,500
1,643
459
248
695
336
6,066
2,087
1,649
–
16,331
4,011
1,649
1,032
289
1,238
282
10,281
1,273
1,588
76
7,887
434
2,067
1,295
548
3,169
773
1,341
4,364
5,248
84
6,808
400
1,784
1,189
592
2,998
694
1,377
2,950
4,732
–
24,311
3,173
–
–
–
–
–
–
–
–
–
28,968
3,226
–
–
–
–
–
–
–
–
308,446 280,087
249,533 266,051
110,468 76,450
60,221 46,905
68,610 55,575
30,071 21,797
77,217 64,729
29,188 20,547
16,458 23,201
30,145 22,499
72,886 60,568
default (6)
772,235 674,659
188,609 169,974
37,713
37,974
27,202
23,608
27,484
32,194 1,053,243
938,409
(1) Credit exposure excluding equity, securitization and other assets, such as non-significant investments, goodwill, deferred tax assets and intangibles.
(2) Includes remaining industries that individually comprise less than 2% of total exposures.
(3) Represents gross credit exposures without accounting for collateral.
(4) Credit exposure at default is inclusive of collateral.
(5) Impact of collateral on the credit exposure for repo-style transactions is $215,806 million ($208,635 million in 2021).
(6) Excludes exposures arising from derivative and repo-style transactions that are cleared through CCPs totalling $13,698 million ($18,440 million in 2021).
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 85
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Rating Systems
BMO’s risk rating systems are designed to assess and measure the risk of any exposure.
Credit risk-based parameters are monitored, reviewed and validated regularly. 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.
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 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. Risk drivers used in the retail credit 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 downturn conditions. The PD, LGD and EAD estimates are updated
annually and recalibrated as required by comparing the estimates to observed historical experience.
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Retail Credit Probability of Default Bands by Risk Rating
Risk profile
Probability of default band
Exceptionally low
Very low
Low
Medium
High
Default
≤ 0.05%
> 0.05% to 0.20%
> 0.20% to 0.75%
> 0.75% to 7.00%
> 7.00% to 99.99%
100%
Wholesale (Sovereign, Bank, Corporate and Commercial)
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 sovereign, bank, corporate and
commercial 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 based on internal data, supplemented by 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 also 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.
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. An 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 amount drawn, 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
86 BMO Financial Group 205th Annual Report 2022
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 $1,053.2 billion as at October 31, 2022, with $550.5 billion recorded in Canada,
$456.1 billion in the United States and $46.6 billion in other jurisdictions. This represented an increase of $114.8 billion or 12% from the prior year.
BMO’s loan book continues to be well-diversified by industry and geographic region. Gross loans and acceptances increased $92.3 billion or 19%
from the prior year to $567.2 billion as at October 31, 2022. The geographic mix of BMO’s Canadian and U.S. portfolios represented 62.6% and 35.4%
of total loans, respectively, compared with 66.0% and 32.4% in the prior year. The loan portfolio is well-diversified, with the consumer loan portfolio
representing 43.1% of the total portfolio, a decrease from 46.5% in the prior year, and business and government loans representing 56.9% of the
total portfolio, an increase from 53.5% in the prior year.
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Canada and Other Countries
U.S.
9%
31%
60%
20%
13%
67%
P&C/BMO Wealth Management - Consumer
P&C/BMO Wealth Management - Business & Government
BMO Capital Markets
P&C/BMO Wealth Management - Consumer
P&C/BMO Wealth Management - Business & Government
BMO Capital Markets
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 2% of total assets, with $25.1 billion outstanding
as at October 31, 2022 (2% and $19.0 billion, respectively, in 2021). Of this amount, 25% of leveraged finance loans, with $6.3 billion outstanding as
at October 31, 2022 (27% and $5.2 billion, respectively, in 2021), were well-secured by high-quality assets. The remainder of the portfolio is closely
managed, and in some cases, has risk mitigation and structural elements that lower the level of credit risk. In addition, $348 million or 1% of all
leveraged finance loans were classified as impaired as at October 31, 2022 ($417 million or 2% in 2021).
Provision for Credit Losses
Total provision for credit losses was $313 million, compared with $20 million in the prior year, reflecting a deteriorating economic outlook and less
favourable credit conditions. Detailed discussions of PCL, including historical PCL trends, are provided in Table 12 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 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 87
MANAGEMENT’S DISCUSSION AND ANALYSIS
Gross Impaired Loans
Total gross impaired loans and acceptances (GIL) were $1,991 million, a decrease of 8% from $2,169 million in the prior year. 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 0.35% in 2022,
compared with 0.46% 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 $1,635 million
from $1,775 million in 2021, reflecting lower impaired loan formations in the oil and gas, manufacturing and retail trade industries. On a geographic
basis, Canada accounted for most impaired loan formations, comprising 71% of total formations in 2022, compared with 75% in 2021.
Detailed breakdowns of impaired loans by geographic region and industry can be found in Table 8 in the Supplemental Information and in Note 4
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of the consolidated financial statements.
Changes in Gross Impaired Loans (1) and Acceptances
(Canadian $ in millions, except as noted)
For the year ended October 31
GIL, beginning of year
Classified as impaired during the year
Transferred to not impaired during the year
Net repayments
Amounts written-off
Recoveries of loans and advances previously written-off
Disposals of loans
Foreign exchange and other movements
GIL, end of year
GIL as a % of gross loans and acceptances
(1) GIL excludes purchased credit impaired loans.
2022
2021
2,169
1,635
(659)
(819)
(363)
–
(54)
82
1,991
0.35
3,638
1,775
(821)
(1,618)
(584)
–
(79)
(142)
2,169
0.46
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, 2022,
the total ACL was $2,998 million, an increase of $40 million from the prior year, reflecting higher allowances on impaired loans, partially offset by a
lower allowance on performing loans. The allowance on impaired loans was $557 million as at October 31, 2022, and the allowance on performing
loans was $2,441 million. These amounts included an allowance on impaired loans of $13 million and an allowance on performing loans of
$368 million related to undrawn commitments and letters of credit that are considered other credit instruments and recorded in other liabilities. The
allowance on impaired loans increased $46 million from $511 million in the prior year, and our coverage ratio remained adequate, with ACL on
impaired loans as a percentage of GIL of 27.3%, compared with 23.0% in 2021. 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 $6 million to $2,441 million from $2,447 million in the
prior year, primarily driven by reduced uncertainty as a result of the improving pandemic environment and portfolio credit improvement, almost fully
offset by a deteriorating economic outlook, movements in foreign exchange rates, balance growth and adoption of a higher adverse scenario weight
during the second quarter.
Further details on the continuity in ACL by each product type can be found in Tables 9 and 10 in the Supplemental Information, and in Note 4 of
the consolidated financial statements.
88 BMO Financial Group 205th Annual Report 2022
International Exposures
BMO’s geographic exposures in regions outside of Canada and the United States are subject to a risk management framework that incorporates
assessments of the economic and political risk in each region or country, as well as management of exposures within limits based on product, entity
and country of ultimate risk. Our exposure to these regions is set out in the table below.
On October 26, 2021, OSFI recommended that Canadian global systemically important banks (G-SIBs) discontinue country-by-country disclosures
of European sovereign exposures and begin to disclose sovereign exposures at the regional (continental) level, effective the first quarter of 2022.
The table outlines total net exposure for funded lending and undrawn commitments, securities (including cash products, traded credit and credit
default swap activity), repo-style transactions and derivatives. Repo-style transactions and derivatives exposures are reported at mark-to-market
value. Derivatives exposures incorporate 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.
Exposure by Region
As at October 31, 2022
As at
October 31, 2021
(Canadian $ in millions)
Funded lending and commitments
Securities
Repo-style transactions and derivatives
Region
Bank Corporate Sovereign
Total
Bank Corporate Sovereign
Total
Bank Corporate Sovereign
Total
Total net
exposure
Total net
exposure
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Europe (excluding
United Kingdom)
United Kingdom
Latin America
Asia-Pacific
Africa and Middle East
Other (1)
416 2,742
60 4,914
3,150 5,970
4,763 3,081
318
1,500
5
–
– 3,158
– 4,974
– 9,120
728
77
–
54 7,898 1,400
6
33
– 1,818
37
32
44
108
31
213
5
–
377
–
6,718 7,490 267
562 516
31 13
3,272 4,885 162
7
–
44
3,947 3,980
33
718
1,011
107
719
2
–
184 1,169 11,817
32 1,559 7,095
134 9,285
14
923 13,706
42
441 2,303
432
1,885 1,885 5,902
Total
9,889 17,030
86 27,005 2,244
401 14,347 16,992 965
2,557
2,589 6,111 50,108
12,477
8,236
5,846
11,766
2,923
4,775
46,023
(1) Primarily exposure to supranational entities.
Derivative Transactions
The following table presents the notional amounts of BMO’s over-the-counter (OTC) derivative contracts, comprising contracts that are centrally
cleared and settled through a designated clearing house or central counterparty (CCP) and contracts that are not 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, in order to centrally clear OTC contracts, 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 of default by another member.
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
2022
2021
2022
2021
2022
2021
420,700
3,929
98,113
87,941
379,117
2,919
69,491
68,155
5,534,061
18,468
–
–
3,772,174
144,738
–
–
5,954,761
22,397
98,113
87,941
4,151,291
147,657
69,491
68,155
610,683
519,682
5,552,529
3,916,912
6,163,212
4,436,594
119,976
582,092
469,503
72,733
74,041
85,912
513,421
441,107
54,051
54,045
1,318,345
1,148,536
–
–
12,270
–
–
12,270
–
–
48,319
94
102
48,515
119,976
582,092
481,773
72,733
74,041
85,912
513,421
489,426
54,145
54,147
1,330,615
1,197,051
24,487
5,686
5,011
35,184
105,280
1,496
962
2,458
28,892
4,526
3,132
36,550
99,471
778
179
957
38
–
–
38
–
–
–
–
–
7
15,275
10,137
25,412
11,580
4,979
16,559
24,525
5,686
5,011
35,222
105,280
16,771
11,099
27,870
28,892
4,526
3,132
36,550
99,478
12,358
5,158
17,516
2,071,950
1,805,196
5,590,249
3,981,993
7,662,199
5,787,189
BMO Financial Group 205th Annual Report 2022
89
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.
A
&
D
M
Trading and Underwriting Market Risk Governance
Our market risk-taking activities are subject to an extensive governance framework. The Risk Review Committee (RRC) exercises 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 our
customers’ 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,
leveraged loan, bond and equity underwriting, and market risk exposures arising from the domestic and foreign operations of our operating groups.
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 Incremental Risk Charge, as defined below, as well as stress testing. Other techniques include sensitivity analysis of our
trading and underwriting portfolios to market risk factors, and the review of position concentrations, notional values and trading revenues.
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 with exposure to interest rate risk that are held in the trading book, measured over a one-year horizon at a 99.9%
confidence level.
Risk models support the measurement of our risk exposure. 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 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 2008 global financial crisis, the current conflict in Ukraine and 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, 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.
Back-testing processes assume there are no changes in the previous day’s closing positions and then isolate 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
90 BMO Financial Group 205th Annual Report 2022
Although it is a useful indicator of risk, VaR has limitations, as with any model-driven metric. These include 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 that VaR calculations are based on 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, stress tests 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 declined year-over-year, as the impact of pandemic-related market volatility in 2020 no longer factored into the historical
period VaR calculations by the middle of 2021. VaR trended higher in the second half of 2022 due to increased market volatility and portfolio changes,
primarily in our equity derivatives portfolio. Average Total SVaR increased year-over-year, due to higher equity portfolio risks.
M
D
&
A
Total Trading Value at Risk (VaR) Summary (1) (2)
As at or for the year ended October 31
(Pre-tax Canadian $ equivalent in millions)
Commodity VaR
Equity VaR
Foreign exchange VaR
Interest rate VaR (3)
Debt-specific risk
Diversification
Total Trading VaR
Total Trading SVaR
2022
2021
Year-end
Average
High
Low
Year-end
Average
High
Low
1.6
14.1
2.3
22.1
10.2
(15.0)
35.3
64.4
3.1
13.1
1.8
18.0
5.7
(15.1)
5.5
18.4
5.2
26.5
10.5
nm
1.0
8.5
0.5
12.4
1.8
nm
26.6
38.2
18.1
53.6
70.8
34.2
1.8
10.8
0.5
15.2
3.0
(12.8)
18.5
55.8
2.7
14.9
2.2
27.1
3.3
(19.7)
6.2
24.9
6.4
52.5
5.4
nm
1.1
10.0
0.5
9.8
1.9
nm
30.5
53.5
15.3
45.7
65.4
36.3
(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) Interest rate VaR includes general credit spread risk.
nm – not meaningful
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 2022,
net trading losses were incurred on four days with none of these losses exceeding Total Trading VaR. A combination of market volatility, which had a
negative impact on some of our positions, and lower than usual customer activity contributed to the losses for the four days.
Trading Net Revenues versus Value at Risk
November 1, 2021 to October 31, 2022 (pre-tax basis, Canadian $ in millions)
60
50
40
30
20
10
0
(10)
(20)
(30)
(40)
(50)
1
2
-
v
o
N
-
3
1
2
-
v
o
N
-
2
1
1
2
-
v
o
N
-
2
2
1
2
-
v
o
N
-
0
3
1
2
-
c
e
D
-
8
1
2
-
c
e
D
-
6
1
1
2
-
c
e
D
-
4
2
2
2
-
n
a
J
-
6
2
2
-
n
a
J
-
4
1
2
2
-
n
a
J
-
4
2
2
2
-
b
e
F
-
1
2
2
-
b
e
F
-
9
2
2
-
b
e
F
-
7
1
2
2
-
b
e
F
-
8
2
2
2
-
r
a
M
-
8
2
2
-
r
a
M
-
6
1
2
2
-
r
a
M
-
4
2
2
2
-
r
p
A
-
1
2
2
-
r
p
A
-
1
1
2
2
-
r
p
A
-
0
2
2
2
-
r
p
A
-
8
2
2
2
-
y
a
M
-
6
2
2
-
y
a
M
-
6
1
2
2
-
y
a
M
-
5
2
2
2
-
n
u
J
-
2
2
2
-
n
u
J
-
0
1
2
2
-
n
u
J
-
1
2
2
2
-
n
u
J
-
9
2
2
2
-
l
u
J
-
8
2
2
-
l
u
J
-
8
1
2
2
-
l
u
J
-
6
2
2
2
-
g
u
A
-
4
2
2
-
g
u
A
-
2
1
2
2
-
g
u
A
-
2
2
2
2
-
g
u
A
-
0
3
2
2
-
p
e
S
-
8
2
2
-
p
e
S
-
6
1
2
2
-
p
e
S
-
6
2
2
2
-
t
c
O
-
4
2
2
-
t
c
O
-
3
1
2
2
-
t
c
O
-
1
2
2
2
-
t
c
O
-
1
3
Daily Revenue
Total Trading VaR
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 91
MANAGEMENT’S DISCUSSION AND ANALYSIS
Frequency Distribution of Daily Net Revenues
Nov 1, 2021 to Oct 31, 2022 (Canadian $ in millions)
65
60
55
50
45
40
35
30
25
20
15
10
5
0
s
y
a
d
f
o
r
e
b
m
u
n
n
i
y
c
n
e
u
q
e
r
F
A
&
D
M
-5
0
5
10
15
20
25
30
35
40
45
50
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 ongoing senior management oversight of risk positions and activity.
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 any 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 align with 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 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 from a portfolio of
assets, liabilities and off-balance sheet positions in response to prescribed parallel interest rate movements, with interest rates floored at zero.
Economic Value Sensitivity is a measure of the impact of potential changes in interest rates on the market value of a portfolio of assets, liabilities
and off-balance sheet positions in response to prescribed parallel interest rate movements, with interest rates floored at zero.
The models 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 generated by these structural market risk models, by their
nature, have inherent uncertainty, as they reflect potential future 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
92 BMO Financial Group 205th Annual Report 2022
Structural interest rate earnings sensitivity and economic value sensitivity to an immediate parallel increase or decrease of 100 basis points in
the yield curve are disclosed in the table below. Prior to the third quarter of 2022, earnings and economic value sensitivities to declining interest rates
were measured using a decrease of 25 basis points, due to the low interest rate environment that prevailed at that time.
On December 20, 2021, we announced our intention to acquire Bank of the West. To mitigate the impact of movements in the Canadian dollar
equivalent of the purchase price on the closing of the acquisition, we entered into interest rate swap arrangements that would offset the impact of
foreign exchange rate movements on our capital ratios. Any exposure to interest rate risk related to these arrangements was largely offset through
the purchase of a portfolio of matched-duration U.S. treasuries and other balance sheet instruments that generate net interest income. Refer to the
Enterprise-Wide Capital Management and Significant Events sections for further discussion.
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 decreased relative to October 31, 2021,
primarily due to a modestly shorter net duration of BMO’s position in anticipation of the Bank of the West acquisition, partially offset by the impact of
higher projected interest rate levels following the increase in term market rates during the current 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. The benefits to structural earnings of rising interest rates primarily reflect the positive impact of reinvesting our net equity and
non-rate sensitive deposits into higher term rates. Structural earnings benefits of rising interest rates increased in 2022 relative to 2021, largely due
to a modestly shorter net duration of BMO’s position in anticipation of the Bank of the West acquisition. Structural earnings exposure to falling
interest rates remained relatively unchanged. Earnings exposure to falling interest rates was due to the negative impact of reinvesting net equity and
non-rate sensitive deposits into lower term rates, as well as the impact of floor rates on deposit expense.
During 2022, both economic value sensitivity and earnings sensitivity remained within limits established by the Board of Directors.
M
D
&
A
Structural Interest Rate Sensitivity (1)
(Pre-tax Canadian $
equivalent in millions)
100 basis point increase
25 basis point decrease
100 basis point decrease (2)
Economic value sensitivity
Earnings sensitivity over the next 12 months
October 31, 2022
October 31, 2021
October 31, 2022
October 31, 2021
Canada (3)
United States
Total
Total
Canada (3)
United States
Total
(683.6)
159.7
599.1
(306.6)
42.0
48.7
(990.2)
201.6
647.9
(1,459.1)
264.9
na
232.0
(59.8)
(246.0)
266.9
(79.8)
(349.2)
498.9
(139.6)
(595.2)
Total
383.7
(141.6)
na
(1) Losses are presented in brackets and gains are presented as positive numbers.
(2) Due to the low interest rate environment that prevailed between April 30, 2020 and April 30, 2022, economic value sensitivity and earnings sensitivity to declining interest rates are measured using a
decrease of 25 basis points. Not applicable for October 31, 2021.
(3) Includes Canadian dollar and other currencies.
na – not applicable
The following table presents net loans and acceptances by interest rate sensitivity:
(Canadian $ in millions)
Fixed rate (1)
Contractual amounts that will reprice/repay within 3 months
Contractual amounts that will reprice/repay after 3 months
Floating rate (2)
Non-rate sensitive (3)
Total
2022
2021
148,036
181,768
215,337
19,433
126,452
181,130
145,903
18,798
564,574
472,283
(1) Includes index-based loans.
(2) Floating rate only includes loans that reprice immediately upon a change in interest rates.
(3) Includes credit card balances that are paid when due, customers’ liability under acceptances, credit impaired loans and allowance for credit losses.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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, 2022 would result in an increase in earnings before tax of $35 million ($40 million as at July 31, 2022 and $48 million as at
October 31, 2021). A 25 basis point decrease in interest rates as at October 31, 2022 would result in a decrease in earnings before tax of $9 million
($9 million as at July 31, 2022 and $12 million as at October 31, 2021). A 10% increase in equity market values as at October 31, 2022 would result in
an increase in earnings before tax of $13 million ($17 million as at July 31, 2022 and $22 million as at October 31, 2021). A 10% decrease in equity
market values as at October 31, 2022 would result in a decrease in earnings before tax of $13 million ($16 million as at July 31, 2022 and $22 million
as at October 31, 2021). 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 2022 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 93
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-Trading 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.
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 2022 fiscal
year. In addition, BMO entered into forward contracts that qualify for hedge accounting during the year to mitigate the impact of movements in the
Canadian dollar equivalent of the purchase price on the closing of the announced Bank of the West acquisition. Changes in the fair value of these
forward contracts related to the announced acquisition are recorded in other comprehensive income. Refer to the Enterprise-Wide Capital
Management and Significant Events sections 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 we did not enter
into any hedging arrangements in the current or prior year. If future results are consistent with results in 2022, 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 $33 million, in the absence of hedging arrangements. 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.
A
&
D
M
– Interest rate
– Interest rate
– Interest rate,
credit spread, equity
– Interest rate
Interest rate,
– foreign exchange
– Interest rate,
foreign exchange
As at October 31, 2022
Subject to market risk
As at October 31, 2021
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
Primary risk factors
for non-traded
risk balances
87,466
5,734
87,466
5,592
273,262 108,303 164,959
–
142
–
–
–
93,261
8,303
93,261
8,209
232,849 104,412 128,437
–
94
(Canadian $ in millions)
Assets Subject to Market Risk
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Securities borrowed or purchased under
resale agreements
113,194
– 113,194
–
107,382
– 107,382
Loans and acceptances (net of allowance
for credit losses)
Derivative instruments
551,339
48,160
3,501 547,838
2,623
45,537
–
–
458,262
36,713 34,350
3,665 454,597
2,363
Customers’ liabilities under acceptances
Other assets
13,235
46,809
–
3,030
13,235
26,561
–
17,218
14,021
37,384
–
3,359
14,021
16,970
– Interest rate
17,055 Interest rate
Total Assets
1,139,199 160,513 961,468
17,218
988,175 145,880 825,240
17,055
Liabilities Subject to Market Risk
Deposits
769,478
26,305 743,173
–
685,631 22,665 662,966
– Interest rate,
foreign exchange
Derivative instruments
59,956
46,803
13,153
–
30,815 27,875
2,940
– Interest rate,
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Other liabilities
Subordinated debt
Total Liabilities
13,235
40,979
–
40,979
13,235
–
–
–
14,021
–
32,073 32,073
14,021
–
foreign exchange
– Interest rate
–
103,963
72,400
8,150
– 103,963
71,815
8,150
60
–
–
525
–
97,556
63,663
6,893
–
85
–
97,556
63,165
6,893
– Interest rate
413 Interest rate
– Interest rate
1,068,161 114,147 953,489
525
930,652 82,698 847,541
413
(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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
94 BMO Financial Group 205th Annual Report 2022
M
D
&
A
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 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
include 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 catastrophic risk;
• Policyholder behaviour risk – the risk that the behaviour of policyholders in regard to premium payments, withdrawals or loans, as well as 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, monitoring 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, serving as the first line of defence and assuming 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 to the insurance companies’ boards of directors on a quarterly
basis. 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 manages
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 or
cede insurance risk from BMO Insurance to independent reinsurance companies also mitigate our exposure to insurance risk by diversifying risk and
limiting claims. BMO Insurance has exited the Property and Casualty Reinsurance market, with the last remaining treaty terminated in January 2021,
significantly reducing our exposure to catastrophic claims and in turn, the risks arising from climate change. However, a certain portion of our
exposure to 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 significant impact on BMO
Insurance’s overall financial results. In line with BMO’s Enterprise Risk Management Framework, as well as the corresponding 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, as well as 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 across
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, exercises 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 Asset Liability Committee (ALCO) provide senior management oversight, and 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) exercises 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 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 95
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. These limits define 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 risk 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
A
&
D
M
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, 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.
BMO continued to maintain a strong liquidity position during 2022. Customer loans and deposits continued to grow, while wholesale funding
increased reflecting net issuances. Our liquidity metrics, including the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), exceeded
internal and regulatory requirements throughout 2022.
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 vary by
deposit 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’s 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 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 cash on
deposit with central banks, securities, and short-term reverse repurchase agreements of highly-rated Canadian federal and provincial government
debt and U.S. federal government and agency debt. Substantially all supplemental liquidity pool assets meet the definition of high-quality liquid
assets under Basel III. Approximately 65% of the supplemental liquidity pool is held at the parent bank level in assets denominated in Canadian 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 assets encumbered as collateral, totalled $335.3 billion as at October 31, 2022, compared with $317.3 billion as at October 31, 2021.
The increase in unencumbered liquid assets was primarily due to higher securities balances, partially offset by lower cash 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, 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 of the 2022 audited annual consolidated financial statements.
96 BMO Financial Group 205th Annual Report 2022
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 limits for
pledging 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
93,151
8,303
76,410
40,422
35,330
48,509
200,671
15,126
317,251
M
D
&
A
(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
As at October 31, 2022
As at October 31, 2021
Other cash
and securities
received
Total gross
assets (1)
Encumbered
assets
Net
unencumbered
assets (2)
Net
unencumbered
assets (2)
–
–
87,466
5,734
87
–
87,379
5,734
Bank-owned
assets
87,466
5,734
143,094
101,481 244,575
132,635
111,940
54,601
22,560
53,007
60,166
5,565
19,328
41,888
50,926 103,933
20,188
8,190
63,967
39,978
33,698
39,966
Total securities and securities borrowed or purchased under
resale agreements
NHA mortgage-backed securities (reported as loans at amortized cost) (3)
Total liquid assets
273,262
21,881
177,300 450,562
21,881
–
224,980
5,277
225,582
16,604
388,343
177,300 565,643
230,344
335,299
(1) Gross assets included 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 Risk Management Framework. This amount is shown as a separate line item, NHA mortgage-backed securities.
Asset Encumbrance
(Canadian $ in millions)
As at October 31, 2022
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 assets
Other assets
Total other assets
Total assets
(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 assets
Other assets
Total other assets
Total assets
Total gross
assets (1)
93,200
472,443
529,458
48,160
13,235
4,841
5,285
2,193
1,421
1,175
31,894
108,204
Encumbered (2)
Net unencumbered
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
–
183,275
71,139
87
46,982
656
–
12,620
299,358
93,113
229,566
158,305
–
–
–
–
–
–
–
13,991
13,991
–
–
–
–
–
–
–
–
–
48,160
13,235
4,841
5,285
2,193
1,421
1,175
17,903
94,213
–
–
–
–
–
–
–
–
–
1,203,305
268,405
47,725
406,191
480,984
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
(1) Gross assets included 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 included select liquid asset holdings that management believes are not readily available to support BMO’s liquidity requirements. These included securities of $12.6 billion
as at October 31, 2022, which included securities held at BMO’s insurance subsidiary, significant equity investments and certain investments held at BMO’s merchant banking business. Other
unencumbered assets included mortgages and loans that may be securitized to access secured funding.
(4) Loans included in available as collateral represented 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 U.S. Federal Home Loan Bank (FHLB) advances.
(5) Included securities, securities borrowed or purchased under resale agreements and NHA mortgage-backed securities (reported as loans at amortized cost).
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 97
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 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 position, is a source of strength. This
supports the maintenance of a sound liquidity position and reduces reliance on wholesale funding. Customer deposits totalled $544.4 billion as at
October 31, 2022, increasing from $498.9 billion in 2021, primarily due to strong growth in both retail and commercial deposits and the impact of the
stronger U.S. dollar.
Total secured and unsecured wholesale funding outstanding, which largely consists of negotiable marketable securities, was $236.8 billion as at
October 31, 2022, with $63.6 billion sourced as secured funding and $173.2 billion sourced as unsecured funding. Total wholesale funding outstanding
increased from $190.4 billion as at October 31, 2021, primarily due to the net issuance of wholesale funding during the year and the impact of the
stronger U.S. dollar. The mix and maturities of BMO’s wholesale term funding are outlined later in this section. Additional information on deposit
maturities can also be found in the Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments section. We maintain a
sizeable portfolio of unencumbered liquid assets, totalling $335.3 billion as at October 31, 2022 and $317.3 billion as at October 31, 2021, that can be
monetized to meet potential funding requirements, as described in the Unencumbered Liquid Assets section above.
Wholesale Funding Maturities (1)
A
&
D
M
(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)
Secured funding
Mortgage and HELOC securitizations
Covered bonds
Other asset-backed securitizations (3)
Federal Home Loan Bank advances
Subordinated debt
Less than
1 month
5,127
9,719
446
–
2,031
116
–
–
–
–
–
1 to 3
months
541
22,586
122
–
1,691
40
1,749
2,021
865
–
–
As at October 31, 2022
6 to 12
months
Subtotal less
than 1 year
2,880
28,896
38
–
9,286
71
2,231
2,358
59
–
–
9,550
79,902
1,661
–
17,015
227
4,389
10,130
1,645
–
–
3 to 6
months
1,002
18,701
1,055
–
4,007
–
409
5,751
721
–
–
1 to 2
years
–
263
–
–
18,743
34
3,456
2,126
249
3,406
–
Over
2 years
–
531
–
–
29,476
7,689
12,540
16,791
4,737
4,088
8,150
Total
9,550
80,696
1,661
–
65,234
7,950
20,385
29,047
6,631
7,494
8,150
As at October 31, 2021
Total
3,421
71,898
2,364
–
51,837
5,182
20,128
23,405
5,316
–
6,892
Total
Of which:
Secured
Unsecured
Total (4)
17,439
29,615
31,646
45,819 124,519
28,277
84,002 236,798
190,443
–
17,439
4,635
24,980
6,881
24,765
4,648
16,164
41,171 108,355
9,237
19,040
38,156
63,557
45,846 173,241
17,439
29,615
31,646
45,819 124,519
28,277
84,002 236,798
48,849
141,594
190,443
(1) Wholesale unsecured funding primarily included funding raised through the issuance of negotiable marketable securities. Wholesale funding excluded repo transactions and bankers’ acceptances,
which are disclosed in the Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments section, and also excluded ABCP issued by certain ABCP conduits that are not
consolidated for financial reporting purposes.
(2) Primarily issued to institutional investors.
(3) Included credit card, auto and transportation finance loan securitizations.
(4) Total wholesale funding comprised Canadian-dollar-denominated funding totalling $50.0 billion and U.S.-dollar-denominated and other foreign-currency-denominated funding totalling $186.8 billion
as at October 31, 2022.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2022 audited annual consolidated financial statements.
98 BMO Financial Group 205th Annual Report 2022
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 (%)
2022
2021
24%
23%
37%
16%
23%
25%
33%
19%
Covered Bonds
Mortgage, Credit Card, Auto Loan, TF and HELOC Securitization, and FHLB Advances
Senior Debt (Canadian dollar)
Senior Debt (Global Issuances)
M
D
&
A
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 senior management committees with specific related
responsibilities and approved by the RRC, and is regularly updated to reflect actual results and incorporate updated forecast information.
Regulatory Developments
During the year, OSFI announced changes to its Liquidity Adequacy Requirements Guideline that are effective April 1, 2023. The changes primarily
relate to the calculation of the OSFI Net Cumulative Cash Flow supervisory tool. We do not anticipate a material impact on our liquidity and funding
practices or requirements as a result of these changes.
Credit Ratings
The credit ratings assigned to BMO’s short-term and senior long-term debt securities by external rating agencies are important for the bank 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 2022, 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, 2022
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, 2022, we
would be required to deliver additional collateral to counterparties totalling $161 million, $429 million and $1,340 million as a result of a one-notch,
two-notch and three-notch downgrade, respectively.
BMO Financial Group 205th Annual Report 2022 99
A
&
D
M
MANAGEMENT’S DISCUSSION AND ANALYSIS
Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) is calculated in accordance with the Liquidity Adequacy Requirements (LAR) Guideline issued by the Office of the
Superintendent of Financial Institutions (OSFI) and is summarized in the following table. The LCR is calculated on a daily basis as the ratio of High-
Quality Liquid Assets (HQLA) held to total net stressed cash outflows over the next 30 calendar days. BMO’s HQLA primarily comprises 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 OSFI are applied to cash flows and HQLA to arrive at the weighted values and the LCR. The LCR does not reflect excess
liquidity in BMO Financial Corp. (BFC) that is greater than 100%, because of limitations on the transfer of liquidity between BFC and the parent bank.
Canadian domestic systemically important banks (D-SIBs), including BMO, are required to maintain a minimum LCR of 100%. The average daily LCR for
the quarter ended October 31, 2022 was 135%, indicating a surplus of $53 billion above the regulatory minimum, and an increase of 10% from 125%
in 2021 due to higher HQLA and lower net cash outflows. While banks are required to maintain an LCR of 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. 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.
(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, 2021
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
For the quarter ended October 31, 2022
Total unweighted value
(2)
(average)
(1)
Total weighted value
(3)
(average)
(2)
*
204.3
238.4
116.1
122.3
252.9
140.6
89.1
23.2
–
203.7
21.3
2.9
179.5
1.3
477.0
*
147.3
10.8
10.7
168.8
16.1
3.5
12.6
114.3
35.0
56.1
23.2
22.9
39.5
6.6
2.9
30.0
–
9.3
202.1
34.3
5.9
10.7
50.9
Total adjusted value (4)
204.3
151.2
135
Total adjusted value (4)
194.4
156.0
125
* Disclosure is not required under the LCR disclosure standard.
(1) Unweighted values are calculated at market value (for HQLA) or as outstanding balances maturing or callable within 30 days (for inflows and outflows).
(2) Values are calculated based on the simple average of the daily LCR over 63 business days in the fourth quarter of 2022.
(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.
100 BMO Financial Group 205th Annual Report 2022
Net Stable Funding Ratio
The Net Stable Funding Ratio (NSFR) is a regulatory 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 the OSFI Liquidity Adequacy Requirements (LAR) Guideline. Unlike the LCR, which is a short-term metric,
the NSFR assesses a bank’s medium-term and long-term resilience. The NSFR is defined as the ratio of the amount of available stable funding (ASF)
to the amount of required stable funding (RSF). ASF represents the proportion of own and third-party resources that are expected to be reliably
available to a bank over a one-year time horizon (including customer deposits, long-term wholesale funding and capital). 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, RSF and the NSFR. Canadian domestic
systemically important banks (D-SIBs), including BMO, are required to maintain a minimum NSFR of 100%. BMO’s NSFR was 114% as at
October 31, 2022, indicating a surplus of $81 billion above the regulatory minimum. The NSFR decreased from 118% as at October 31, 2021, as higher
required stable funding was partially offset by higher available stable funding.
(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, 2022
Unweighted value by residual maturity
No
maturity (1)
Less than 6
months
6 to 12
months Over 1 year
Weighted
value (2)
–
–
–
210.0
105.5
104.5
253.4
144.0
109.4
–
5.3
*
5.3
–
–
–
33.2
14.9
18.3
197.9
0.2
197.7
1.6
67.7
*
44.9
–
–
–
24.8
9.0
15.8
56.9
–
56.9
2.1
*
*
0.1
83.4
83.4
–
42.3
7.8
34.5
90.5
–
90.5
11.8
*
–
4.3
83.4
83.4
–
285.7
130.8
154.9
236.7
72.1
164.6
–
4.4
*
4.4
*
*
*
*
610.2
*
–
180.3
–
*
–
137.0
41.3
*
–
51.8
2.5
*
–
311.5
–
12.6
–
459.5
3.3
performing loans to financial institutions
37.8
57.3
4.7
15.7
62.6
Performing loans to non-financial corporate clients, loans to retail and small business
customers, and loans to sovereigns, central banks and public sector entities, 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 (%)
For the quarter ended October 31, 2021
Total ASF
Total RSF
Net Stable Funding Ratio (%)
101.8
29.1
31.7
156.8
246.6
–
13.3
13.3
27.4
–
11.0
3.4
*
*
*
7.6
–
*
*
–
6.9
6.7
2.4
1.6
*
*
*
*
*
1.4
–
*
*
–
12.6
12.4
0.3
2.1
*
*
*
*
*
0.1
–
*
*
–
125.2
–
110.6
120.7
13.8
11.8
44.2
*
11.4
9.8
1.5
20.0
537.0
106.6
36.4
–
43.2
2.9
9.7
–
1.5
29.1
18.8
*
*
534.1
114
Weighted
value (2)
535.2
453.4
118
* Disclosure is not required under the NSFR disclosure standard.
(1) Items 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 205th Annual Report 2022 101
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
A
&
D
M
0 to 1
month
1 to 3
months
3 to 6
months
6 to 9
months
9 to 12
months
1 to 2
years
2 to 5
years
Over 5
years
No
maturity
2022
Total
86,003
3,844
4,189
–
1,662
4,284
–
86
–
44
–
98
–
–
–
–
–
–
1,463
87,466
–
5,734
5,480
5,375
6,060
18,272
68,521 108,072
53,009 273,262
resale agreements
83,861
21,736
5,101
2,448
48
–
–
–
– 113,194
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
526
211
–
13,003
–
1,519
553
–
9,595
–
3,708
940
–
11,724
–
5,778
1,693
–
9,300
–
6,501
1,537
–
11,394
–
4,844
–
14,665 105,285
37,742
–
37,250 105,009
–
–
10,810
14,084
–
17,776
–
24,499
9,663
88 148,880
86,103
9,663
94,259 309,310
(2,617)
(2,617)
Total loans, net of allowance
13,740
11,667
16,372
16,771
19,432
56,759 248,036
42,670 125,892 551,339
Other Assets
Derivative instruments
Customers’ liabilities under acceptances
Other
Total other assets
Total Assets
5,362
9,752
2,735
7,147
3,461
625
17,849
11,233
3,359
19
225
3,603
2,552
3
21
2,576
2,225
–
2
2,227
7,787
–
10
11,636
–
19
8,092
–
5,817
–
–
37,355
48,160
13,235
46,809
7,797
11,655
13,909
37,355 108,204
209,486
50,582
30,642
27,214
27,865
82,828 328,212 164,651 217,719 1,139,199
(Canadian $ in millions)
Liabilities and Equity
Deposits
(2)
(3)
Other liabilities
Derivative instruments
Acceptances
Securities sold but not yet purchased (4)
Securities lent or sold under repurchase
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
2022
Total
38,064
44,637
49,626
47,908
48,444
39,992
62,978
16,265 421,564 769,478
3,370
9,752
40,979
11,764
3,461
–
4,399
19
–
3,814
3
–
2,895
–
–
7,619
–
–
14,092
–
–
12,003
–
–
–
–
–
59,956
13,235
40,979
agreements (4)
94,215
6,476
1,046
2,226
–
–
–
–
– 103,963
Securitization and liabilities related to
structured entities
Other
Total other liabilities
Subordinated debt
Total Equity
14
12,143
2,803
4,980
160,473
29,484
–
–
–
–
1,300
101
6,865
–
–
794
97
1,673
146
5,136
872
9,342
2,558
6,006
5,722
–
18,713
27,068
45,332
6,934
4,714
13,627
25,992
23,731
18,713 290,533
–
–
–
–
–
–
25
–
8,125
–
8,150
–
71,038
71,038
Total Liabilities and Equity
198,537
74,121
56,491
54,842
53,158
53,619
88,995
48,121 511,315 1,139,199
(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 $29,966 million as at October 31, 2022 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.
(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
2022
Total
1,932
1,680
–
–
–
27
3,610
4,601
585
–
–
98
10,461
4,936
393
–
–
55
13,373
4,662
1,438
–
–
55
14,753
4,922
1,275
–
–
58
38,057 119,430
3,680
9,189
44
–
309
2,832
3,465
3
–
217
5,490
57
985
256
–
22
– 207,106
27,370
–
17,330
–
303
–
–
–
41
–
8
(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 of the 2022 audited annual consolidated financial statements.
102 BMO Financial Group 205th Annual Report 2022
(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
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
resale agreements
70,080
22,873
11,362
1,602
766
699
–
–
– 107,382
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
458
215
–
12,082
–
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
–
138 135,750
22,752 77,164
8,103
66,561 239,809
(2,564) (2,564)
8,103
Total loans, net of allowance
12,755
9,167
10,445
16,035
16,202
57,205
204,136
37,327
94,990 458,262
M
D
&
A
Other Assets
Derivative instruments
Customers’ liabilities under acceptances
Other
Total other assets
Total Assets
(Canadian $ in millions)
Liabilities and Equity
Deposits
(2)
(3)
Other liabilities
2,752
11,574
2,002
16,328
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
– 36,713
– 14,021
29,671 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
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
2,771
11,574
32,073
3,651
2,428
–
2,379
19
–
1,508
–
–
agreements (4)
73,190
17,199
3,994
3,103
Securitization and liabilities related to
structured entities
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
– 25,486
20,307 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.
(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.
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 of the 2022 audited annual consolidated financial statements.
BMO Financial Group 205th Annual Report 2022 103
A
&
D
M
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operational Non-Financial Risk
Operational non-financial risk encompasses a wide range of non-financial risks, including those related to business change, customer trust,
reputation and data, all of which 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 the fair value of assets we hold in our credit or investment
portfolios. Examples of these risks include cyber and cloud security risk, 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 (ONFR) 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 of financial results 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 be the result of process and control failures, theft and
fraud, unauthorized transactions by employees, business disruption, information security breaches, cybersecurity 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.
Operational non-financial risk is not only inherent in our business and banking activities, it is also inherent in the processes and controls we use
to manage risks. There is the possibility that errors could 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, restatements of financial
results and damage to BMO’s reputation.
The nature of our business activities 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 due diligence in relation to 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 our ability to serve our clients and minimize disruptions
and adverse impacts, and the contingency plans of our third-party service providers, our ability to conduct business may be adversely affected by a
disruption to the infrastructure that supports 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 top and emerging risk exposures that could impact BMO’s business and operations, and we 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 exposures to 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 Enterprise Operational Risk Committee (EORC), a sub-committee of the Risk Management Committee (RMC), is the primary governance committee
exercising oversight of all operational non-financial risk management matters, including: providing direction on, and monitoring against, strategic
objectives and deliverables; improving operational resilience; and helping ensure that BMO maintains its reputation for preventing avoidable
operating failures and mistakes. As part of its governance responsibilities, the EORC reviews and recommends corporate policies and standards to the
Board and senior executives for review and approval as required, as well as the methodologies and tools that comprise the governing principles of
the Operational Non-Financial Risk Management Framework (ONFRMF). 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 (EORC, 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 to 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, along 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 exercising second-line oversight, effective challenge and governance. ONFRM establishes and maintains the ONFRMF, 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 ONFRMF 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 operational
104 BMO Financial Group 205th Annual Report 2022
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non-financial risks. 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. Implementing the governing
principles of the ONFRMF 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 ONFRMF. We also continue to strengthen our second-line-of-defence support and oversight capabilities
with an enhanced Operational 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 ONFRMF, we seek to maintain an operational risk profile that is not only consistent with our
risk appetite and supported by adequate capital, but is also reinforced by enhanced operational resilience. Operational resilience is an organization’s
ability to protect and sustain core business services that are key for its clients, both during the normal course of business and when experiencing
operational stress or disruption. It involves our ability to deal with unpredictable events and adapt to changes in external circumstances. Operational
resilience is not a defensive strategy, it is a positive, forward-looking strategic posture that allows us to take measured risks with confidence and
prepare BMO 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 ONFRMF that assist us in the ongoing review of our operational
risk profile:
• Risk Control Self-Assessment is an established process which is evolving into the Product/Service and Process Risk Assessment program
in 2023-2024. This new Product/Service and Process Risk Assessment program will be used by our operating groups and Corporate Service areas to
assess the controls and residual exposures to risk in their business operations by focusing on the key controls they have in place to address specific
material risks associated with their products, services, internal activities and processes. It provides a forward-looking view of the impact of the
business environment and internal controls on the risk profiles of our operating groups and Corporate Service areas, 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. This process supports continuous oversight of changes in risk by
setting out specific requirements for due diligence, approval, monitoring and reporting that apply 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.
• Stress testing assesses the potential impact of severe negative events on key risks and critical business processes in order to inform risk
management. Stress testing helps 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 aim to
help manage tail risk.
• Effective business continuity management prepares us to recover, maintain and manage critical operations and processes, as well as safeguard
the interests and well-being of our customers, shareholders and employees, in the event of a business disruption, thereby minimizing any adverse
effects on our customers and other stakeholders. We have established a framework that facilitates the rapid recovery and timely resumption of
critical operations. Our comprehensive business continuity management strategy involves developing, testing and maintaining effective recovery
strategies and plans so that critical processes and third-party arrangements remain viable.
• 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. For more information, refer to the Top and
Emerging Risks That May Affect Future Results section.
Cyber and Cloud Security Risk
Cyber and cloud security is integral to BMO’s business activities, brand and reputation. As technology evolves rapidly and the connective capabilities
of digital devices grow, cyber threats and risks also evolve. These threats and risks include: breaches of, or disruptions to, our systems or operations,
as well as unauthorized access, use or dissemination of information pertaining to BMO, our customers or employees. Refer to the Risks That May
Affect Future Results section for further information.
Technology Risk
Technology is a key enabler of BMO’s critical business products and services delivery. Thus, failure to maintain and invest in technology can lead to
operational disruption (e.g., prolonged slowdown or outage of critical systems or business services) and impede the achievement of strategic
organizational goals, at significant financial cost. Technology risk management activities are intended to protect BMO’s systems, data and assets, and
aim to ensure their confidentiality, integrity and availability. As the adoption of digital banking continues to grow, we continue to invest in innovative
new enhancements of our technological capabilities in order to meet our customers’ expectations and keep their data secure.
Data and Analytics Risks
BMO continues to invest in new digital and analytics capabilities in support of the enterprise Digital First goals. Our ability to effectively manage and
safeguard our data assets has a direct impact on our digital processes and our ability to develop and introduce innovative new analytics capabilities
with tools and systems driven by artificial intelligence (AI). Our management of data risks is focused on the quality, resilience, retention and
governance of BMO’s data assets, which are foundational to our business operations. Our management of analytics risks focuses on BMO’s
commitment to fair and ethical use of AI tools and systems, in compliance with all regulatory expectations.
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Third-Party Risk
We continue to use third parties 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 arising from the breakdown of processes and controls at third parties and their sub-contractors. To manage this
risk, we have in place a robust third-party risk management framework designed to identify, assess, manage, monitor, mitigate and report on risks
arising from the use of third parties through all stages of the third-party life cycle, in line with our organizational strategy and risk appetite. We
continue to enhance our third-party risk management capabilities in order to help maintain robust risk management, operational resilience and
compliance with relevant regulatory requirements. This includes monitoring and assessing the anticipated impact of pending regulatory changes to
B-10 – Third-Party Risk Management, to be announced by the Office of the Superintendent of Financial Institutions (OSFI).
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, criminal prosecution,
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 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. Continuing amendments
to Canada’s AML/ATF regulations, including the amended 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. In addition, we continue to comply with the ongoing sanctions arising
from Russia’s invasion of Ukraine in February 2022. We remain committed to effective compliance and the ongoing effort to protect the financial
system and the communities in which we operate.
Non-Financial Risk Measurement
Effective November 1, 2019, OSFI permitted BMO, along with other AMA-approved banks, to use the Basel II Standardized Approach for determining
regulatory capital requirements for enterprise operational risk 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 effective
February 2023.
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. These analytical
tools 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 generate 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 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.
1
Model
Initiation &
Identification
Model
Life Cycle
2
Model
Development
3
Model
Validation
7
Model
Decommission
6
Ongoing
Monitoring &
Validation
5
Model Use &
Maintenance
4
Implementation
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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 for managing
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 aligns with regulatory
expectations, as well as for exercising oversight of the effectiveness of model processes, model inventory and the overall aggregation, assessment
and reporting of model risk. This framework incorporates guidance on 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, including models that incorporate AI and ML techniques, are subject to validation and ongoing monitoring to
confirm that they are being used in accordance with our framework and in alignment with regulatory expectations, such as those related to ethics,
privacy, fairness and explainability. 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.
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Caution
This Operational Non-Financial Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Legal and Regulatory Risk
Legal and regulatory risk is the potential for loss or harm resulting from failure to comply with laws or satisfy contractual obligations or
regulatory requirements. This includes the risk arising from any 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 other 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, and criminal prosecutions. As rulemaking and supervisory expectations continue to evolve, we monitor developments to
enable BMO to respond by implementing changes as required.
Under the direction of BMO’s General Counsel, our Legal & Regulatory Compliance group maintains enterprise-wide frameworks that set out the
steps to be taken to identify, assess, manage, monitor and report on legal and regulatory issues. We identify applicable laws and regulations and
potential risks, recommend mitigation measures and strategies, conduct internal investigations, and oversee legal proceedings and enforcement
actions, including civil claims and litigation, criminal charges, and regulatory examinations and audits.
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, criminal convictions and penalties, an inability to execute our
business strategies, a decline in investor and customer confidence, and damage to our reputation. 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.
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 grow in the future. Information regarding
material legal proceedings to which we are a party is included in the Legal Proceedings section in Note 24 of the consolidated financial statements.
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 may 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.
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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 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 the 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 risk management practices with
respect to anti-money laundering measures, refer to the Anti-Money Laundering section.
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
in addition to 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.
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.
We continue to respond to other global regulatory developments, including capital and liquidity requirements. These developments include
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 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 and Judgments – 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.
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 have included amending the Bank Act to implement the Financial Consumer Protection Framework (FCPF) and amending the
Financial Consumer Agency of Canada Act to strengthen the mandate and powers of the Financial Consumer Agency of Canada. Key features of the
FCPF include the introduction of responsible business conduct obligations, such as prohibited conduct and obtaining express consent, cooling-off
periods for certain consumer agreements, stricter complaint management and whistleblowing requirements, implementation of an appropriateness
requirement for the sale of banking products to retail customers, and enhanced disclosure requirements. BMO implemented the FCPF on June 30,
2022. In addition, reforms to the Canadian securities regulatory regime related to the protection of investors are also proceeding. Canadian securities
regulatory reforms include plans to: consolidate the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory
Organization of Canada (IIROC) into a single self-regulatory organization and combine the two investor protection funds, and harmonize and enhance
the reporting of ongoing costs, including embedded fees, of owning investment funds and segregated funds under joint proposals by the Canadian
Securities Administrators (CSA) and Canadian Council of Insurance Regulators. Regulators also plan to monitor and assess the impacts of the client-
focused reforms, the final stage of which came into effect on December 31, 2021. In the United States, banking regulators have a heightened focus,
with respect to all consumer products, on matters pertaining to racial equity and consumer protection. Key consumer concerns, including fair lending,
and unfair, deceptive or abusive acts or practices, are the subject of heightened regulatory scrutiny in bank examination programs.
French Language Requirements in Quebec – On May 24, 2022, the Quebec government adopted Bill 96, which provides for material amendments
to the Charter of the French Language and other legislation. Bill 96 received royal assent on June 1, 2022. Some changes were effective immediately,
while others will be effective at a later date (three months, one year or three years). The purpose of Bill 96 is to affirm that the official language of
Quebec is French. The Bill sets out new obligations intended to ensure that employees’ right to carry on their activities in French is respected and that
French is the language of business and service in Quebec. It also strengthens the forms of recourse available to employees and customers. The Office
québécois de la langue française has enhanced enforcement powers and can impose stricter penalties. The main areas impacted by this legislation
are labour and employment matters, the language of proceedings filed with the court, the registration of security interests and other related
documents, the language of standard-form and consumer contracts, communications and contracts with the Quebec government and its agencies
(subject to certain exceptions), trademarks, remedies and penalties. We are implementing the new requirements, in accordance with the required
timelines.
U.S. Regulatory Reform – In 2022, leadership at the U.S. federal banking agencies continued to evolve, including key appointees who may initiate
regulatory reforms, impact areas of supervisory focus or facilitate new rulemaking. It is expected that the agencies will issue new rules related to
data collection for small business lending and reforms to the rules implementing the Community Reinvestment Act. In addition, agencies and U.S.
lawmakers continue to focus on consumer protection, as well as potential reforms to bank merger standards. We continue to monitor the rulemaking
activities at all relevant agencies.
108 BMO Financial Group 205th Annual Report 2022
Other Regulatory Initiatives Impacting Financial Services in Canada – The Department of Finance Canada has appointed an open banking lead to
develop a Canadian open banking system, which would allow Canadian consumers and small businesses to direct federally regulated financial
institutions to share their banking information through a secure mechanism with entities that meet information security and other requirements.
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 legislative modification to interchange fees, which had previously
been lowered by legislation in 2018. At this time, we are not anticipating changes from the current voluntary commitment of the payment networks.
In addition, the federal government has tabled Bill C-13, which is intended to promote substantive equality between the French and English
languages in federally regulated businesses, including banks. The Bill is currently being considered by the Standing Committee on Official Languages.
Climate Change and Environmental, Social and Governance Matters – We continue to monitor the rulemaking activities of securities regulatory
authorities, and we are participating in programs and consultations that focus on risk management and disclosures related to environmental, social
and governance (ESG) matters, as well as trends in climate-related litigation. Globally, we are also tracking 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. In addition, emerging regulatory requirements in certain U.S. jurisdictions may prohibit or penalize financial institutions that engage
in “boycotting” due to environmental concerns or require clients to meet environmental standards that exceed the legal or regulatory requirements in
the jurisdictions in which they operate. ESG and climate-related litigation trends and regulatory investigations involving disclosure practices or
financing activities, as well as allegations of “greenwashing”, also continue to evolve. We are monitoring these trends and assessing their potential
impact in the context of BMO’s climate-related sustainable finance and responsible investment activities, environmental and social risk management,
and ESG and climate-related disclosure practices. For further discussion, refer to the Environmental and Social Risk section.
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Privacy – There is an increasing focus on privacy regulation related to the use and safeguarding of personal information, and we continue to advance
our privacy program to comply with these evolving regulatory requirements. In Canada, significant reform to federal privacy laws is expected under
Bill C-27, including new regulatory powers and penalties. In Quebec, Bill 64 has been adopted, which will modernize the province’s private-sector
privacy regime and give new powers to regulators to impose monetary administrative penalties. Ontario is also considering implementing private-
sector privacy legislation. Outside of Canada, large fines and settlements have been imposed for breaches of privacy rights and failure to comply with
regulatory privacy requirements, evidence of heightened regulatory vigilance and enforcement. The California Consumer Privacy Act, which is
currently the most comprehensive privacy law at the state level in the United States, will be enhanced and amended in 2023 by the California Privacy
Rights Act, which includes new and expanded privacy rights for California residents. Other states have introduced privacy legislation, and this is
leading to a growing patchwork of privacy laws in the United States. In the European Union and the United Kingdom, new standard contractual
clauses have been introduced to address concerns regarding the transfer of personal data to countries lacking adequate privacy protection. For
additional discussion regarding privacy, refer to the Cyber and Cloud Security Risk section and the Operational Non-Financial Risk – Cyber and Cloud
Security Risk 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, and 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.
Strategic Risk
Strategic risk arises from the possibility that BMO could experience financial loss or other types of harm due to changes in the external business
environment and failure to respond effectively to these changes as a result of inaction, inappropriate 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 financial loss
or other negative impact that BMO could experience 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 risk 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, delivered through an integrated, multi-year strategic and financial planning process that
directs funding to support specific strategic choices across each line of business.
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, the
actions of existing and new competitors and regulatory developments, are considered in this process and inform strategic decision-making within each
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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 potential future business environment. Where required, these
strategies are revised to address new or unexpected developments, such as rising interest rates, inflation and changes to regulatory policy.
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, the inability to correctly identify client expectations, or relatively ineffective strategic 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 or cost structures, as well as actions that could be taken by competitors in future, among other
factors. To manage the impacts of transverse business risks (i.e., those spanning multiple lines of business, such as climate change), the Corporate
Strategy team works in tandem with the relevant lines of business to shape effective mitigation approaches.
The ability to implement the strategic plans developed by management influences our financial performance. Performance objectives established
through the strategic planning process are monitored regularly and reported on quarterly, using both leading and lagging indicators of absolute and
relative 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 is the potential for loss or harm directly or indirectly resulting from environmental and social factors that impact
BMO or its customers, and BMO’s impact on the environment and society.
In recognition of its unique characteristics, Environmental and Social (E&S) risk is classified in BMO’s Risk Taxonomy as a transverse risk that may arise
over a range of time frames, from short-term to long-term. Factors that may give rise to E&S risk include, but are 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 cultural heritage.
We may be directly exposed to E&S risk associated with the ownership and operation of BMO’s businesses, which involve the management and
operation of real estate owned or leased by BMO. We may be indirectly exposed to the risk of financial loss or reputational harm if our customers,
suppliers or clients are affected by E&S factors, such that they are unable to meet their financial or other obligations to us. E&S factors may also give
rise to the risk of reputational harm, for instance if we are perceived to not respond effectively to those factors, or to cause, contribute or be linked to
adverse impacts on the environment or society.
Governance
The Board of Directors, through the Risk Review Committee (RRC), approves the Enterprise Risk Appetite Statement, including the E&S Risk Appetite
Statement and the E&S Risk Corporate Policy. The Audit and Conduct Review Committee (ACRC) assesses the effectiveness of BMO’s governance of
sustainability matters and approves BMO’s sustainability reporting and disclosures, including our Sustainability Report and Public Accountability
Statement, and our Climate Report. The RRC assists the Board of Directors in executing its oversight responsibilities for the identification, assessment
and management of our exposure to E&S risk, including risks arising from climate change, for overall adherence to risk management corporate policies,
and for complying with risk-related regulatory requirements. The Human Resources Committee has responsibility for the alignment of executive
compensation with performance, including performance in relation to BMO’s environmental and social objectives. The Governance and Nominating
Committee reviews the Board and committee charters regularly to assess coverage and the alignment of ESG-related oversight responsibilities to their
respective mandates.
BMO’s General Counsel is the bank’s Executive Committee Sponsor for Sustainability and has accountability for areas such as legal and regulatory
risk, reputation risk, business conduct, ethics and sustainability, including climate change. Our ESG Executive Committee comprises senior leaders from
the lines of business and Corporate Services across the enterprise, and provides oversight and leadership for our sustainability strategy, including our
Climate Ambition, as described in the Climate Change section. In addition to the ESG Executive Committee, the bank has a Sustainability Council,
which is a leadership forum to advance sustainability initiatives. The Sustainability team is responsible for coordinating the development and
maintenance of an enterprise-wide strategy that meets our overarching E&S responsibilities.
The Chief Risk Officer (CRO) provides independent review and oversight of enterprise-wide risks and leadership on risk issues, developing and
maintaining a risk management framework and fostering a strong risk culture across the organization. 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, climate scenario analysis, modelling and risk education. The CRO and the ERPM team periodically
report to the RRC on E&S risk matters, including climate change.
As set out in our E&S Risk Corporate Policy, the Head of Risk Frameworks and Regulatory Capital Oversight leads the E&S team and is responsible
for developing and overseeing the implementation of the E&S risk management framework, consistent with regulatory expectations and considering
leading industry practices. These include: integrating the management of E&S risk across the ERMF; providing subject-matter expertise, input and
approval, if needed, for data sources, advisors and other information necessary to support the identification, management, assessment, monitoring
and reporting of E&S risk, developing the enterprise risk appetite statement for E&S risk with corresponding key risk metrics; reporting on E&S risk
exposures to senior management, the Board of Directors and its committees, and our regulators; supporting the drafting of disclosures on E&S risk;
supporting ERPM leadership in carrying out their accountabilities; and assessing new E&S risk exposures and recommending escalation to the CRO or
General Counsel, and/or relevant management committees, if necessary.
The Chief Sustainability Officer works in partnership with ERPM and is responsible for providing strategic direction and advisory support on
sustainability matters, including sustainability governance and E&S risk management, across BMO. These include: providing subject-matter expertise
110 BMO Financial Group 205th Annual Report 2022
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and input for the development of the E&S risk management framework outlined in the E&S Risk Corporate Policy, to drive alignment with regulatory
expectations and considering leading industry practices; and providing guidance and subject-matter expertise to the operating groups and Corporate
Services (including Finance, People & Culture, Strategy, Corporate Real Estate, and Procurement), Legal & Regulatory Compliance and ERPM regarding
the identification, management, assessment, monitoring and reporting of E&S risk, in alignment with the Reputation Risk Management Framework
set out in the Reputation Risk Corporate Standard. The Chief Sustainability Officer reports quarterly to the Sustainability Council and reports regularly
to the ESG Executive Committee, as well as to other relevant Board and management committees, on key sustainability developments and climate
change, and engages with external stakeholders to better understand the social consequences and environmental effects of our operations and
financing decisions.
Senior management oversees E&S risk through management committees and forums that provide oversight and receive updates on sustainability
matters and E&S risk. These include, but are not limited to: Sustainability Council, Disclosure Committee, Risk Management Committee (RMC),
Reputation Risk Management Committee (RRMC), Enterprise Regulatory Developments Committee, Sustainable Finance Steering Committee, Impact
Investment Fund Committee and BMO GAM Investment Committee. The ESG Executive Committee, chaired by BMO’s General Counsel with
representation from the Executive Committee, examines topics related to sustainability and E&S risk, including climate strategy. Additional
committees, forums and working groups will be established as needed. In addition, the Board and management committees operating in other
jurisdictions receive updates and oversee E&S risk for the relevant jurisdiction. They may also receive updates on sustainability matters and E&S risk
across the enterprise.
Environmental and Social Risk Management Approach
A successful future for BMO and our customers depends on the sustainability of the environment, communities and economies in which BMO and our
customers operate. At BMO, we seek to understand the impact that environmental and social factors have on our business environment, clients,
portfolios and operations. With this understanding, we are better positioned to make informed strategic decisions.
E&S risk is a transverse risk that impacts our other material risks: credit and counterparty risk, market risk, insurance risk, liquidity and funding
risk, operational non-financial risk, legal and regulatory risk, strategic risk and reputation risk. We have developed a qualitative risk appetite
statement on E&S risks, including risks related to climate change. In addition, we have established a key risk metric with risk tolerance thresholds,
which measures our lending to carbon-related assets as a percentage of our total net loans and acceptances, net of the allowance for credit losses on
impaired loans.
We have established an E&S Risk Corporate Policy that is part of our ERMF and applies to all employees of BMO and its subsidiaries. The policy
outlines the expectation of our Board of Directors that BMO will integrate E&S risk considerations across the ERMF, and sets out a foundation for risk
governance in all stages of the risk management life cycle (identification, assessment, management, monitoring and reporting). It is supported by
BMO’s three-lines-of-defence operating model, as underpinned by our risk culture. The approach to implementation involves building new capabilities
while also leveraging our existing risk governance mechanisms and tools, to identify, assess, manage, monitor and report on potential impacts to
clients, portfolios and operations. We recognize that E&S risk management is a new risk discipline and that, along with our peers, we are on a longer
journey to fully understand and manage these risks. We will need to adapt and refine our approach, tools and methodologies in order to we address
the changing expectations and requirements of our regulators, clients, communities and shareholders.
E&S risk is addressed in our Credit Risk Management Framework, including provisions for governance and accountabilities, enhanced due
diligence and requirements for escalations or exceptions. We have sector-specific financing guidelines to help us identify and manage E&S risks in
higher-risk sectors and to integrate a consideration of these risks into our decision-making, including topics such as climate change and Indigenous
consultation. Social and environmental requirements in financing arrangements and transactions are monitored by the lines of business as part of our
overall monitoring process. Updates to our policies are distributed to all affected employees, and we inform key decision-makers on a case-by-case or
issue-by-issue basis, as necessary. Our internal audit function periodically conducts audits on all operating units, which include assessing compliance
with applicable policies and procedures, including those related to E&S risk management. 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 certain higher-risk
sectors and geographies. Transactions involving significant environmental or social concerns may be escalated to BMO’s Reputation Risk Management
Committee for consideration. We have restrictions in place for lending to companies involved in certain higher-risk activities, as described in the
Environmental and Social Risk Management section of BMO’s Sustainability Report.
Our Sustainability team 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.
Frameworks and Commitments
In order to better understand and address the issues that affect our business and our approach to E&S risk management, we are signatories to, and
participate in, many market-leading initiatives, including the Equator Principles, the United Nations (UN) Principles for Responsible Banking (UNPRB)
and the UN Principles for Responsible Investment (UNPRI), and we are a member of the Partnership for Carbon Accounting Financials (PCAF), the
Net-Zero Banking Alliance (NZBA) and Net-Zero Asset Managers initiative (NZAM). These frameworks may include process and reporting requirements
that are intended to be voluntary, or they may adopt a “comply-or-explain” approach. As signatories, we may be exposed to legal, regulatory or
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 any exposures to E&S risks in these transactions.
As a signatory to the Equator Principles, we have implemented the EP4 framework, the most recent iteration of the Equator Principles, which includes
requirements related to climate change and free, prior and informed consent of affected Indigenous peoples, for transactions within its scope.
BMO Financial Group 205th Annual Report 2022 111
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MANAGEMENT’S DISCUSSION AND ANALYSIS
• 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. UNPRB enables any financial institution
genuinely committed to sustainable and responsible banking to set targets that are within the scope of its capabilities and current financial and
operational position.
• UNPRI is a framework that encourages sustainable investing through the integration of ESG 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 and NZAM are industry-led, UN-convened organizations of banks and asset managers supporting the implementation of decarbonization
strategies and the development of an internationally coherent framework and guidelines for banks and asset managers committed to aligning their
lending and investment portfolios with net-zero emissions by 2050.
In order to be better informed about 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). BMO is also a member of the U.S. Risk Management Association Climate Risk Consortium.
Climate Change
BMO’s Climate Ambition is to be our clients’ lead partner in the transition to a net-zero world. We strive to achieve this ambition through a four-pillar
climate strategy: Commitment; Capabilities; Client partnership and commercialization; and Convening for climate action. As a global bank, we aim to
help drive the transformation to a net-zero carbon economy by partnering with our clients to accelerate the low-carbon transition. As part of the
development of our climate-related capabilities, in March 2021, we announced the establishment of the BMO Climate Institute – a centre of
excellence that bridges climate-related policy and science with business strategy and finance to unlock solutions for BMO and our clients.
In line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), we recognize that climate change involves
exposure to physical risks and transition risks. Physical risks are risks associated with a changing climate, which can have 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 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 these changes, some of which may unfold more rapidly than others as consumers, clients, investors,
governments and communities act to enhance their resilience to climate-related risks.
We consider the physical and transaction risks arising from climate change to be transverse risks, as discussed in the Environmental and Social
Risk Management Approach section. 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.
We are developing a climate scenario analysis program to explore climate-specific vulnerabilities in order to enhance our resilience to climate-
related risks, in line with the TCFD recommendations. The climate scenario analysis program leverages existing risk capabilities in combination with
climate-specific expertise. This program includes the evaluation of transition risks and/or physical risks, where relevant and potentially significant,
across a selection of climate-sensitive portfolios, and we will continue expanding analyses across sectors and risk types in line with internal policies
and any applicable regulatory requirements. Utilizing scenario analysis to gain a deeper understanding of climate-related risks is relatively new and
evolving rapidly. As we enhance our knowledge of climate-related impacts and consider comprehensive climate-based scenarios, and as data
modelling techniques and data availability improve, we expect our approach to analyzing these scenarios will evolve. These analyses will help
identify potential exposures to material financial risks and may inform our business strategy in relation to climate change, going forward.
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 the Australian Modern Slavery Act 2018, and we have in place a Supplier Code of Conduct, which outlines our standards
for integrity, fair dealing and sustainability. We are also monitoring Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in
Supply Chains Act and to amend the Customs Tariff (Bill S-211), and will develop a plan for alignment, if and when Bill S-211 is enacted. We expect
our suppliers to be aware of, understand and comply with the principles of our Supplier Code of Conduct.
112 BMO Financial Group 205th Annual Report 2022
Legal and Regulatory Developments
We continue to monitor the rulemaking activities of securities regulatory authorities and standard-setters. In October 2021, the Canadian Securities
Administrators proposed National Instrument 51-107, Disclosure of Climate-related Matters (NI 51-107) and related policies. NI 51-107 would involve
compliance by reporting issuers with disclosure requirements related to climate-related governance, strategy, risk management, metrics and targets,
which would be finalized in 2023. In January 2022, Canadian securities regulators published guidance on ESG disclosure practices for investment
funds. In March 2022, the International Sustainability Standards Board (ISSB) published two exposure drafts setting out proposed new IFRS general
requirements, one involving disclosure of sustainability-related financial information and the other involving climate-related disclosures. The ISSB
standards are expected to be released in 2023. We have established internal working groups to assess the impact of these new rules and standards
on our disclosure practices, identify any potential gaps in our reporting and develop a plan to implement new disclosure practices, if and when such
rules and standards are announced.
In May 2022, the Office of the Superintendent of Financial Institutions (OSFI) launched a public consultation process for its draft Guideline B-15,
Climate Risk Management (Guideline B-15). Guideline B-15 consists of two chapters, the first outlining OSFI’s expectations for governance and
management of climate-related risks, and the second outlining OSFI’s expectations for the disclosure of climate-related risks. The final Guideline B-15
is expected to be released in early fiscal 2023, with federally regulated financial institutions expected to report Guideline B-15 disclosures for fiscal
years ending on or after October 1, 2023. We are currently developing programs through Enterprise-Wide Risk and Portfolio Management, including a
climate scenario analysis program, that address these developments, and we plan to integrate these emerging expectations into our ERMF.
We are also monitoring trends in climate-related litigation, including cases involving allegations of “greenwashing”, where claims of environmental
and social benefits are made in relation to products or services or corporate performance that are not capable of substantiation, or which give a
misleading impression. Prosecution of greenwashing claims has occurred in jurisdictions in Canada, the United States and Europe, and the Securities
Exchange Commission (SEC) is seeking comment on two proposed rules expanding the regulation of ESG-related funds. We continue to evaluate our
ESG-related disclosures for consistency and accuracy in relation to our practices and approach, and we are assessing our exposure to risks that may arise
in relation to allegations of greenwashing.
Reporting
We have supported the TCFD since 2018, and we have adopted the TCFD framework 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. The shareholders’ auditors provide a limited assurance report on selected environmental and social indicators in the
Sustainability Report and the Climate Report.
Caution
This Environmental and Social Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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Reputation Risk
Reputation risk is the potential for loss or harm to the BMO brand. It can arise even if other risks are managed effectively.
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. Ongoing 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 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 in place specific controls 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
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 205th Annual Report 2022 113
MANAGEMENT’S DISCUSSION AND ANALYSIS
Accounting Matters and Disclosure and Internal Control
Critical Accounting Estimates and Judgments
The most significant assets and liabilities for which we must make estimates and judgments 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; provisions, including legal proceedings and restructuring charges; transfers of financial assets; and
consolidation of structured entities. 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 structured entities (SEs). These judgments are
discussed in Notes 6 and 7 of the 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 these estimates, the impact would be
recorded in future periods.
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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.
Allowance for Credit Losses
The allowance for credit losses consists of allowances for estimated losses related to impaired loans in the portfolio provided for but not yet written
off, and allowances for performing loans, which represent 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 9 Financial Instruments and considering the guideline issued by the Office of the Superintendent of Financial Institutions (OSFI). Under the IFRS 9
expected credit loss (ECL) methodology, an allowance is recorded for expected credit losses on financial assets regardless of whether there has been
actual impairment. ECL is calculated on a probability-weighted basis, based on three economic scenarios, 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 requires a consideration of many different factors that 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 impact of the uncertain environment on credit conditions and the economy. We
have controls and processes in place to govern the ECL process, including judgments and assumptions used in determining 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 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 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.
Information on the provision for credit losses for the years ended October 31, 2022 and 2021 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 held for 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 the amount that would be received on the sale of an asset or
paid on the transfer of a liability in an orderly transaction between willing parties at the measurement date. We employ the fair value hierarchy
based on inputs we use in valuation techniques to measure fair value of our financial instruments. 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, derivatives, certain other assets, and liabilities recorded at fair value as at October 31, 2022 and October 31, 2021, as
well as a sensitivity analysis of our 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.
114 BMO Financial Group 205th Annual Report 2022
Valuation Product Control (VPC), a group independent of the trading lines of business, seeks to ensure that the recorded fair values of financial
instruments are materially accurate by:
• Developing and maintaining valuation policies, procedures and methodologies in accordance with IFRS and regulatory requirements
• 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 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 the reliability of our 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, 2022, total valuation adjustments were a net decrease in value of $197 million for financial instruments carried at fair value on
the Consolidated Balance Sheet (a net decrease of $124 million as at October 31, 2021).
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, plan assets and defined benefit 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,
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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 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 Notes 3 and 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, 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.
On November 4, 2022, the Canadian government introduced legislation related to certain tax measures that would be applicable to certain
Canadian companies in a bank or life insurer group, including a one-time 15% tax (referred to as the Canada Recovery Dividend, or CRD), based on
the average taxable income for fiscal 2020 and fiscal 2021, less a $1 billion exemption, payable in equal instalments over five years. Once the
legislation is substantively enacted, which would occur after the third legislative reading, we expect to record a one-time tax expense relating to the
CRD of approximately $325 million. The legislation also included a permanent 1.5% increase in the tax rate, based on taxable income above
$100 million (effective for taxation years that end after April 7, 2022 and pro-rated for the first year). The permanent 1.5% increase in tax rate will
also be reflected in higher deferred tax assets and liabilities. The fiscal 2022 impact of this increase is not expected to be material to the bank.
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,425 million to date, in respect
of certain 2011-2017 Canadian corporate dividends. Those reassessments denied certain dividend deductions on the basis that the dividends were
BMO Financial Group 205th Annual Report 2022 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
received as part of a “dividend rental arrangement”. In general, the tax rules raised by the Canadian tax authorities were prospectively addressed in
the 2015 and 2018 Canadian Federal Budgets.
We filed Notices of Appeal with the Tax Court of Canada and the matter is in litigation. We expect to be reassessed for income tax in respect of
similar activities undertaken in 2018. 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 each 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 the
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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. Differences in judgments and assumptions could affect the determination of fair value and any resulting impairment write-
down.
As at October 31, 2022, no goodwill impairment was recorded as the estimated fair value of the CGUs was greater than their carrying value.
In 2021, we recorded a goodwill write-down of $779 million, 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.
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 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 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 $35 million. A reduction of one percentage point would
lower earnings before tax by approximately $34 million. If the assumed equity market value increased by 10%, earnings before tax would increase
by approximately $13 million. A reduction of 10% would lower earnings before tax by approximately $13 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.
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 estimating 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 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.
116 BMO Financial Group 205th Annual Report 2022
Transfer of Financial Assets
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 program. In 2020, we 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 also purchase or originate certain commercial mortgage loans which are subsequently sold and derecognized, and we purchase U.S.
government agency collateralized mortgage obligations (CMOs) issued by third-party sponsored vehicles, which we may further securitize by
repackaging them into new CMOs prior to selling to third-party investors.
We assess whether substantially all of the risks and rewards of these financial instruments have been transferred in order to determine if they
qualify for derecognition. Where we continue to be substantially exposed to prepayment, interest rate and/or credit risk of these financial
instruments, they do not qualify for derecognition. We continue to recognize these financial instruments, and recognize the related cash proceeds as a
secured financing on our Consolidated Balance Sheet.
Consolidation of Structured Entities
In the normal course of business, we enter into arrangements with SEs, using them to secure customer transactions, to securitize financial assets to
obtain liquidity, or to pass our credit risk exposure 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 our interests in SEs is included in the Off-Balance Sheet Arrangements section, as well as in Note 7 of the
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consolidated financial statements.
Caution
This Critical Accounting Estimates and Judgments section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Changes in Accounting Policies in 2022
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 drive 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.
BMO Financial Group 205th Annual Report 2022 117
MANAGEMENT’S DISCUSSION AND ANALYSIS
Future Changes in Accounting Policies
IFRS 17, Insurance Contracts (IFRS 17)
In May 2017, the IASB issued IFRS 17, Insurance Contracts (IFRS 17), which provides a comprehensive approach to accounting for all types of
insurance contracts and will replace the existing IFRS 4, Insurance Contracts (IFRS 4). The standard was subsequently amended in June 2020, with
additional narrow-scope amendments in December 2021. IFRS 17 will be effective for our fiscal year beginning November 1, 2023. We established an
enterprise-wide project in order to meet the requirements of IFRS 17, and continue to evaluate the potential impacts of adoption, including available
accounting policy and transition choices.
IFRS 17 will change the fundamental principles used to recognize and measure insurance contracts, including life insurance contracts reinsurance
contracts and investment contracts with discretionary participation features. Key differences from IFRS 4 are as follows:
IFRS 17 requires us to measure groups of contracts based on our estimates of the present value of future cash flows that are expected to arise as
we fulfil the contracts, an explicit risk adjustment for non-financial risk and a contractual service margin (CSM), which represents unearned profits. The
CSM component of the insurance contract liability will be amortized into income as services/insurance coverage is provided, and groups of contracts
that result in losses are recorded in income immediately. Under IFRS 4, there is no similar grouping requirement and gains/losses on new business
are recognized in income immediately. When we adopt IFRS 17, we will establish the CSM for insurance contracts in effect, which will increase
liabilities and decrease equity.
The discount rate we use under IFRS 4 is connected to the assets held to support insurance contract liabilities. Under IFRS 17, the discount rate
will reflect the characteristics of insurance contract liabilities. We have an accounting policy choice under IFRS 17 to recognize changes in the discount
rate on insurance contract liabilities, either through other comprehensive income or in our statement of income.
On transition, we will apply either a full retrospective approach, where we restate prior periods as if we had always applied IFRS 17, a modified
retrospective approach where we apply specific modifications to the full retrospective application, or a full fair value method where we measure the
contracts at fair value to determine a value for the CSM.
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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.
Other Regulatory Developments
We continue to monitor and prepare for other regulatory developments, including those referenced elsewhere in this document.
For a comprehensive discussion of other regulatory developments, refer to the Enterprise-Wide Capital Management section, the Risks That May
Affect Future Results section, the Liquidity and Funding Risk section, and the Legal and Regulatory Risk section.
Treatment of Innovative Real Estate Secured Lending Products
On June 28, 2022, the Office of the Superintendent of Financial Institutions (OSFI) published an Advisory, Clarification on the Treatment of Innovative
Real Estate Secured Lending Products, under Guideline B-20 (the Advisory), with clarifications on residential reverse mortgages, residential mortgages
with shared equity features and combined loan plans (CLPs). For CLPs, the Advisory outlines OSFI’s expectations on the re-advanceability feature
above the 65% loan-to-value (LTV) limit.
BMO originates CLPs through its BMO Homeowner ReadiLine® product. The Advisory is not expected to impact the way CLPs are used by
borrowers.
The Advisory will come into effect on October 31, 2023 in respect of CLPs originated, renewed or refinanced after this date.
Caution
This Other Regulatory Developments 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 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.
118 BMO Financial Group 205th Annual Report 2022
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 of
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• 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 2022, 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 reviews, the ACRC was satisfied with the performance of the
shareholders’ auditors.
Independence of the shareholders’ auditors is overseen by the ACRC in accordance with BMO’s Auditor Independence Standard. The ACRC also
confirms 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 provided 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
2022
23.5
4.8
0.3
0.7
29.3
2021
25.2
3.4
0.1
1.3
30.0
(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.
BMO Financial Group 205th Annual Report 2022 119
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s Annual Report on Disclosure Controls and Procedures
and Internal Control over Financial Reporting
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior
management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), on a timely basis, so that appropriate decisions can be
made regarding public disclosure.
As at October 31, 2022, 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 BMO’s disclosure controls and procedures were effective as at October 31, 2022.
Internal Control over Financial Reporting
Internal control over financial reporting is a process designed under the supervision of the CEO and the 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, 2022.
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, 2022, 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, 2022 that have materially affected, or are
reasonably likely to materially affect, the adequacy and effectiveness of our internal control over financial reporting.
120 BMO Financial Group 205th Annual Report 2022
Supplemental Information
Table 1: Ten-Year Statistical Review
($ millions)
As at or for the year ended October 31
Condensed Consolidated Balance Sheet
Assets
Cash and cash equivalents
Interest bearing deposits with banks
Securities
Securities borrowed or purchased under
resale agreements
Loans, net of allowances
Other
Total assets
Liabilities
Deposits
Other
Subordinated debt
Total liabilities
Total equity
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
87,466
5,734
273,262
113,194
551,339
108,204
93,261
8,303
26,348
6,259
232,849 234,260 189,438 180,935 163,198 149,985 130,918 143,319 135,800
28,386
6,110
42,142
8,305
57,408
9,035
40,295
7,382
32,599
6,490
31,653
4,449
48,803
7,987
107,382 111,878 104,004
39,799
75,047
458,262 447,420 426,984 384,172 358,507 357,518 321,531 291,400 269,059
59,779
73,763
65,889
72,688
85,051
89,260
66,646
77,709
74,979
53,555
68,066
88,118
73,689
1,139,199
988,175 949,261 852,195 773,293 709,604 687,960 641,881 588,659 537,044
769,478
290,533
8,150
685,631 659,034 568,143 520,928 479,792 470,281 438,169 393,088 368,369
133,500
238,128 225,218 225,981 199,862 180,438
3,996
5,029
170,910
4,439
159,383
4,416
155,254
4,913
6,893
8,416
6,782
6,995
1,068,161
930,652 892,668 801,119 727,572 665,259
645,630
601,968
553,255
505,865
71,038
57,523
56,593
51,076
45,721
44,345
42,306
39,422
34,313
30,107
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Total liabilities and equity
1,139,199
988,175 949,261 852,195 773,293 709,604 687,960 641,881 588,659 537,044
Condensed Consolidated Statement of
Income
Net interest income
Non-interest revenue
Total revenue
Insurance claims, commissions and changes in
15,885
17,825
14,310
12,876
13,971
11,215
12,888
12,595
11,438
11,467
11,275
10,832
10,945
10,015
9,796
9,593
8,292
9,931
8,487
8,343
33,710
27,186
25,186
25,483
22,905
22,107
20,960
19,389
18,223
16,830
policy benefit liabilities (CCPB)
683
(1,399)
(1,708)
(2,709)
(1,352)
(1,538)
(1,543)
(1,254)
(1,505)
(767)
Provision for credit losses (PCL)
Non-interest expense
Income before income taxes
Provision for income taxes
(313)
(16,194)
(20)
15,509)
(
(2,953)
(14,177)
(872)
(14,630)
(662)
(13,477)
(746)
(13,192)
(771)
(12,916)
(544)
(12,250)
(527)
(10,955)
(553)
(10,260)
17,886
(4,349)
10,258
(2,504)
6,348
(1,251)
7,272
(1,514)
7,414
(1,961)
6,631
(1,292)
5,730
(1,100)
5,341
(936)
5,236
(903)
5,250
(1,055)
Net income
13,537
7,754
5,097
5,758
5,453
5,339
4,630
4,405
4,333
4,195
Attributable to equity holders of the bank
Attributable to non-controlling interest
in subsidiaries
Net income
Condensed Consolidated Statement of
Changes in Equity
13,537
7,754
5,097
5,758
5,453
5,337
4,621
4,370
4,277
4,130
–
–
–
–
–
2
9
35
56
65
13,537
7,754
5,097
5,758
5,453
5,339
4,630
4,405
4,333
4,195
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
6,308
17,744
317
45,117
1,552
5,558
13,599
313
35,497
2,556
6,598
13,430
302
30,745
5,518
5,348
12,971
303
28,725
3,729
4,340
12,929
300
25,850
2,302
4,240
13,032
307
23,700
3,066
3,840
12,539
294
21,207
4,426
3,240
12,313
299
18,930
4,640
3,040
12,357
304
17,237
1,375
2,265
12,003
315
15,087
437
Total equity
71,038
57,523
56,593
51,076
45,721
44,345
42,306
39,422
34,313
30,107
Certain comparative figures have been reclassified to conform with the current year’s presentation to reflect changes in accounting policies. Refer to Note 1 of the consolidated financial statements.
BMO adopted various new and amended IFRS standards in 2015, IFRS 9 Financial Instruments in 2018 and IFRS 16 Leases in 2020 prospectively, with no changes to prior periods. In 2014, BMO adopted
several new and amended accounting pronouncements issued by the International Accounting Standards Board and elected to reclassify 2012 and 2013 amounts. In 2019, BMO adopted IFRS 15 Revenue
from Contract with Customers and elected to reclassify 2017 and 2018 amounts.
BMO Financial Group 205th Annual Report 2022 121
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SUPPLEMENTAL INFORMATION
($ millions, except as noted)
As at or for the year ended October 31
Other Financial Measures
Common Share Data ($)
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Book value per share
Closing share price
One-year return (%)
Number outstanding (in thousands)
End of year
Average basic
Average diluted
Market capitalization ($ billions)
Price-to-earnings multiple
Market-to-book value multiple
Dividend yield (%)
Dividend payout ratio (%)
Financial Measures and Ratios (%)
Return on equity
Efficiency ratio
Net interest margin on average
earning assets
Total PCL-to-average net loans
and acceptances
PCL on impaired loans-to-average net
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
20.04
19.99
5.44
95.60
125.49
(3.1)
11.60
11.58
4.24
80.18
134.37
75.9
7.56
7.55
4.24
77.40
79.33
(14.6)
8.68
8.66
4.06
71.54
97.50
3.2
8.19
8.17
3.78
64.73
98.43
3.3
7.93
7.90
3.56
61.91
98.83
20.2
6.94
6.92
3.40
59.57
85.36
17.0
6.59
6.57
3.24
56.31
76.04
(3.0)
6.44
6.41
3.08
48.18
81.73
17.1
6.19
6.17
2.94
43.22
72.62
28.8
677,107
663,990
665,707
85.0
6.3
1.31
4.3
27.1
648,136 645,889 639,232 639,330 647,816 645,761 642,583 649,050 644,130
647,163 641,424 638,881 642,930 649,650 644,049 644,916 645,860 648,476
648,676 642,128 640,360 644,913 651,961 646,126 647,141 648,475 649,806
46.8
11.8
1.66
4.0
47.5
53.0
12.8
1.70
3.8
47.8
62.3
11.3
1.36
4.2
46.8
64.0
12.5
1.60
3.6
44.9
55.1
12.3
1.43
4.0
49.0
48.9
11.6
1.35
4.3
49.2
62.9
12.0
1.52
3.8
46.1
51.2
10.5
1.02
5.3
56.1
87.1
11.6
1.68
3.2
36.5
22.9
48.0
14.9
57.0
10.1
56.3
12.6
57.4
13.3
58.8
13.2
59.7
12.1
61.6
12.5
63.2
14.0
60.1
14.9
61.0
1.62
1.59
1.64
1.70
1.67
1.74
1.76
1.69
1.57
1.75
0.06
–
0.63
0.20
0.17
0.20
0.22
0.17
0.18
0.21
loans and acceptances
Return on average assets (%)
Return on average risk-weighted assets (%) (1)
Average assets ($ millions)
Net income growth
Diluted EPS growth
0.10
1.26
3.89
1,072,497
74.6
72.7
0.11
0.79
2.38
0.33
0.54
1.51
0.17
0.69
1.86
–
0.74
1.93
981,140 942,450 833,252 754,295 722,626 707,122 664,391 593,928 555,431
0.9
1.1
0.22
0.65
1.71
0.22
0.74
1.98
0.18
0.72
1.97
–
0.66
1.84
–
0.72
1.85
(11.5)
(12.8)
15.3
14.3
52.1
53.3
5.6
6.0
2.1
3.3
5.1
5.3
1.7
2.5
3.3
3.9
Capital Measures (%) (1)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Leverage Ratio
Other Statistical Information
Number of employees
Number of bank branches
Number of automated teller machines
16.7
18.4
20.7
5.6
13.7
15.4
17.6
5.1
11.9
13.6
16.2
4.8
11.4
13.0
15.2
4.3
11.3
12.9
15.2
4.2
11.4
13.0
15.1
4.4
10.1
11.6
13.6
4.2
10.7
12.3
14.4
4.2
10.1
12.0
14.3
na
9.9
11.4
13.7
na
46,722
1,383
4,717
43,863
1,405
4,851
43,360
1,409
4,820
45,513
1,456
4,967
45,454
1,483
4,828
45,200
1,503
4,731
45,234
1,522
4,599
46,353
1,535
4,761
46,778
1,553
4,338
45,631
1,563
4,225
BMO adopted various new and amended IFRS standards in 2015, IFRS 9 Financial Instruments in 2018 and IFRS 16 Leases in 2020 prospectively, with no changes to prior periods. In 2014, BMO adopted
several new and amended accounting pronouncements issued by the International Accounting Standards Board and elected to reclassify 2012 and 2013 amounts. In 2019, BMO adopted IFRS 15 Revenue
from Contract with Customers and elected to reclassify 2017 and 2018 amounts.
(1) Capital ratios and risk-weighted assets are disclosed in accordance with the Capital Adequacy Requirements (CAR) Guideline, as set out by OSFI, as applicable.
na – not applicable
122 BMO Financial Group 205th Annual Report 2022
Table 2: 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
Total U.S. dollar and other currencies
Other non-interest bearing assets
Total All Currencies
Total assets and interest income
Liabilities
Canadian Dollar
Deposits
Banks
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
Average
balances
Average
interest
rate (%)
33,950
80,971
50,090
132,118
4,954
74,832
96,057
307,961
472,972
60,463
185,099
62,416
8,312
12,426
15,060
160,157
195,955
503,933
95,592
1.23
2.52
1.39
2.63
3.09
4.68
3.81
3.50
2.95
0.83
1.92
1.02
2.97
3.86
3.89
4.34
4.22
2.57
4,983
169,063
149,329
323,375
60,163
25,788
409,326
23,583
305,576
75,160
404,319
90,324
20,600
515,243
84,253
0.37
1.31
0.58
0.96
1.62
2.39
1.15
1.21
1.02
0.29
0.89
1.85
5.05
1.23
Average
balances
Average
interest
rate (%)
2022
Interest
income/
expense
416
2,043
695
3,476
153
3,503
3,656
34,255
90,140
43,375
122,661
5,368
66,247
82,858
10,788
277,134
13,942
444,904
504
3,548
640
247
479
586
6,951
8,263
68,612
145,504
62,250
8,055
10,684
13,344
141,003
173,086
12,955
449,452
86,784
19
2,221
866
3,106
974
616
9,616
157,226
142,833
309,675
55,415
28,416
4,696
393,506
285
3,104
216
3,605
1,671
1,040
6,316
24,200
272,380
71,795
368,375
74,376
14,118
456,869
74,471
924,846
56,294
2021
Interest
income/
expense
79
1,618
190
3,168
171
2,823
2,796
8,958
10,845
124
2,345
245
243
339
516
5,230
6,328
9,042
0.23
1.79
0.44
2.58
3.19
4.26
3.37
3.23
2.44
0.18
1.61
0.39
3.02
3.18
3.86
3.71
3.66
2.01
0.35
0.69
0.44
0.56
0.91
2.10
0.72
0.33
0.45
0.22
0.40
1.35
1.76
0.60
33
1,091
622
1,746
506
597
2,849
80
1,234
160
1,474
1,005
249
2,728
0.60
5,577
1,072,497
2.51
26,897
981,140
2.03
19,887
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
1,008,822
63,675
1.09
11,012
Total Liabilities, Interest Expense and Shareholders’ Equity
1,072,497
1.03
11,012
981,140
0.57
5,577
Net interest margin
– based on earning assets
– based on total assets
Net interest income
1.62
1.48
1.59
1.46
15,885
14,310
(1) For the years ended October 31, 2022 and 2021, the maximum amount of securities lent or sold under repurchase agreements at any month end was $129,549 million and
$102,567 million, respectively.
BMO Financial Group 205th Annual Report 2022 123
SUPPLEMENTAL INFORMATION
Table 3: Volume/Rate Analysis of Changes in Net Interest Income
Increase (decrease) due to change in
2022/2021
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
($ 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
Change in U.S. dollar and other currencies interest income
Total All Currencies
Change in total interest income (a)
Liabilities
Canadian Dollar
Deposits
Banks
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements
Subordinated debt and other interest bearing liabilities
Change in Canadian dollar interest expense
U.S. Dollar and Other Currencies
Deposits
Banks
Business and government
Individuals
Total deposits
Securities sold but not yet purchased and securities lent or sold
under repurchase agreements
Subordinated debt and other interest bearing liabilities
Change in U.S. dollar and other currencies interest expense
Total All Currencies
Change in total interest expense (b)
Change in total net interest income (a – b)
124 BMO Financial Group 205th Annual Report 2022
Average
balance
Average
rate
(1)
(165)
30
243
(13)
366
446
1,042
906
(15)
639
1
8
55
65
711
839
1,464
338
590
475
65
(5)
314
414
788
2,191
395
564
394
(4)
85
5
1,010
1,096
2,449
2,370
4,640
(16)
83
28
95
43
(55)
83
(2)
150
7
155
216
114
485
2
1,047
216
1,265
425
74
1,764
207
1,720
49
1,976
450
677
3,103
568
1,802
4,867
(227)
Total
337
425
505
308
(18)
680
860
1,830
3,097
380
1,203
395
4
140
70
1,721
1,935
3,913
7,010
(14)
1,130
244
1,360
468
19
1,847
205
1,870
56
2,131
666
791
3,588
5,435
1,575
Table 4: Net Loans and Acceptances –
(1)
Segmented Information (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
Total net loans and
acceptances
Canada
United States
Other countries
Total
2022
2021
2022
2021
2022
2021
2022
2021
139,387
9,069
128,020
7,642
71,070
63,841
219,526
199,503
9,483
594
14,931
25,008
7,718
461
13,232
21,411
–
–
–
–
–
–
–
–
148,870
9,663
135,738
8,103
86,001
77,073
244,534
220,914
135,317
113,895
175,571
132,087
11,225
7,453
322,113
253,435
354,843
313,398
200,579
153,498
11,225
7,453
566,647
474,349
(1,102)
(1,143)
(959)
(910)
(12)
(13)
(2,073)
(2,066)
353,741
312,255
199,620
152,588
11,213
7,440
564,574
472,283
Table 5: Net Impaired Loans and Acceptances (NIL) –
Segmented Information (3) (4)
(2)
($ millions, except as noted)
Canada
United States
Other countries
Total
As at October 31
Consumer
Residential mortgages
Consumer instalment and
other personal loans
Total consumer
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
2022
2021
2022
2021
2022
2021
2022
2021
187
109
296
499
216
83
299
551
98
101
199
445
123
113
236
585
795
850
644
821
–
–
–
8
8
0.22
0.27
0.32
0.54
0.07
0.13
0.37
0.15
0.48
0.80
0.25
1.10
0.44
–
0.07
–
–
–
–
–
–
–
–
285
210
495
952
339
196
535
1,136
1,447
1,671
0.26
0.35
0.20
0.30
0.24
0.45
(1) Aggregate Net Loans and Acceptances balances are net of allowance for credit losses on performing loans and impaired loans. The Consumer and Business and government Net Loans and
Acceptances balances are net of allowance for credit losses on impaired loans only.
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Net Impaired Loans and Acceptances balances are net of allowance for credit losses on impaired loans.
(4) Net Impaired Loans exclude purchased credit impaired loans.
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
BMO Financial Group 205th Annual Report 2022 125
SUPPLEMENTAL INFORMATION
Table 6: Net Loans and Acceptances –
Segmented Information (2)
(1)
($ millions)
As at October 31
Net Loans and Acceptances by Province
Atlantic provinces
Quebec
Ontario
Prairie provinces
British Columbia and territories
Total net loans and acceptances in Canada
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
Total business and government
Table 7: Net Impaired Loans and Acceptances –
Segmented Information (3)
($ millions)
As at October 31
Net Impaired Business and Government Loans
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
Total business and government
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
2022
2021
17,617
53,975
159,862
54,607
67,680
353,741
54,478
5,761
23,716
20,693
14,181
876
1,588
36,607
3,503
3,780
14,691
9,754
1,113
55,658
70,438
1,859
3,417
15,996
48,090
136,638
51,460
60,071
312,255
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
322,113
253,435
2022
2021
61
34
92
47
189
1
–
143
14
–
63
3
2
266
25
3
9
952
56
58
143
38
190
1
–
130
2
63
73
2
2
344
12
2
20
1,136
(1) Aggregate Net Loans and Acceptances balances are net of allowance for credit losses on performing loans and impaired loans. The net Business and government loans by industry balances are net of
allowance for credit losses on impaired loans only.
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Balances are presented net of allowances on impaired loans.
126 BMO Financial Group 205th Annual Report 2022
Table 8: Changes in Gross Impaired Loans –
Segmented Information (1) (2)
($ millions, except as noted)
As at October 31
Gross impaired loans and acceptances (GIL),
Canada
United States
Other countries
Total
2022
2021
2022
2021
2022
2021
2022
2021
beginning of year
Consumer
Business and government
Total GIL, beginning of year
Additions to impaired loans
and acceptances
Consumer
Business and government
Total additions
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
Total write-offs
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
GIL as a % of gross loans and acceptances
382
813
414
929
1,195
1,343
630
538
712
616
1,168
1,328
256
718
974
77
377
454
335
1,876
2,211
134
313
447
(462)
(533)
(547)
(636)
(66)
(389)
(162)
(1,231)
(995)
(1,183)
(455)
(1,393)
(159)
(51)
(210)
(197)
(96)
(293)
(51)
(102)
(153)
(51)
(240)
(291)
391
767
382
813
1,158
1,195
0.18
0.57
0.33
0.19
0.71
0.38
216
604
820
0.86
0.34
0.41
256
718
974
1.19
0.54
0.63
–
–
–
–
13
13
–
–
–
–
–
–
–
13
13
–
0.12
0.12
–
84
84
–
–
–
638
1,531
2,169
749
2,889
3,638
707
928
846
929
1,635
1,775
–
(84)
(528)
(922)
(709)
(1,951)
(84)
(1,450)
(2,660)
–
–
–
–
–
–
–
–
–
(210)
(153)
(363)
(248)
(336)
(584)
607
1,384
1,991
0.25
0.43
0.35
638
1,531
2,169
0.29
0.60
0.46
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
(1) Gross Impaired Loans excludes Purchased Credit Impaired Loans.
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Includes impaired amounts returned to performing status, sales, repayments, the impact of foreign exchange fluctuations and offsets for consumer write-offs which have not been recognized in
formations.
(4) Excludes certain loans that are written off directly and not classified as new formations.
BMO Financial Group 205th Annual Report 2022 127
SUPPLEMENTAL INFORMATION
Table 9: Changes in Allowance for Credit Losses –
Segmented Information (1)
($ millions, except as noted)
As at October 31
Allowance for credit losses (ACL),
beginning of year
Consumer
Business and government
Total ACL, beginning of year
Provision for credit losses
(2)
Consumer
Business and government
Total provision for credit losses
Recoveries
Consumer
Business and government
Total recoveries
Write-offs
Consumer
Business and government
Total write-offs
Other, including foreign exchange
rate changes
Consumer
Business and government
Total other, including foreign
exchange rate changes
ACL, end of year
Consumer
Business and government
Total ACL, end of year
Net write-offs as a % of average
loans and acceptances (3)
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
Canada
United States
Other countries
Total
2022
2021
2022
2021
2022
2021
2022
2021
907
792
1,699
1,073
782
1,855
133
1,111
1,244
268
48
316
105
–
105
(390)
(51)
(441)
201
117
318
127
23
150
(442)
(96)
(538)
45
(43)
2
60
50
110
(69)
(102)
(171)
217
1,696
1,913
(48)
(211)
(259)
64
19
83
(72)
(240)
(312)
(39)
8
(52)
(34)
4
146
(28)
(153)
(31)
(86)
150
(181)
851
797
907
792
1,648
1,699
173
1,162
1,335
133
1,111
1,244
un
un
un
un
–
15
15
–
(7)
(7)
–
–
–
–
–
–
–
7
7
–
15
15
un
–
46
46
–
(32)
(32)
–
–
–
–
–
–
–
1
1
–
15
15
un
1,040
1,918
2,958
1,290
2,524
3,814
313
(2)
311
165
50
215
(459)
(153)
(612)
153
(126)
27
191
42
233
(514)
(336)
(850)
(35)
161
(80)
(186)
126
(266)
1,024
1,974
2,998
1,040
1,918
2,958
0.08
0.13
Table 10: Allocation of Allowance for Credit Losses –
Segmented Information (4)
(1)
($ millions, except as noted)
Canada
United States
Other countries
Total
As at October 31
Consumer
Residential mortgages
Consumer instalment and other
personal loans
Total consumer
Business and government
Total allowance for credit losses
on impaired loans
Allowance for credit losses
on performing loans
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
2022
2021
2022
2021
2022
2021
2022
2021
7
88
95
268
7
76
83
262
363
345
1,102
1,465
1,143
1,488
3
14
17
159
176
959
5
15
20
133
153
910
1,135
1,063
–
–
–
5
5
12
17
–
–
–
–
–
10
102
112
432
12
91
103
395
544
498
13
13
2,073
2,617
2,066
2,564
31.3
24.3
34.9
28.9
21.7
32.2
21.5
7.9
26.3
15.7
7.8
18.5
38.5
–
38.5
–
–
–
27.3
18.5
31.2
23.0
16.1
25.8
(1) Segmented credit information by geographic area is based upon country of ultimate risk.
(2) Excludes provision for credit losses on other assets.
(3) 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).
(4) Amounts exclude Allowance for Credit Losses related to off-balance sheet instruments, which are reported in Other Liabilities.
un – unavailable
128 BMO Financial Group 205th Annual Report 2022
Table 11: Allowance for Credit Losses on Impaired Loans –
Segmented Information
($ millions)
As at October 31
Business and Government
Allowance for Credit Losses on Impaired Loans by Industry
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
Total business and government (1)
Table 12: Provision for Credit Losses –
Segmented Information
($ millions)
For the year ended October 31
Consumer
Residential mortgages
Cards
Consumer instalment and other personal loans
Total consumer
Business and Government
Commercial real estate
Construction (non-real estate)
Retail trade
Wholesale trade
Agriculture
Communications
Financing products
Manufacturing
Mining
Oil and gas
Transportation
Utilities
Forest products
Service industries
Financial
Government
Other
Total business and government
Total provision for credit losses on impaired loans
Provision for credit losses on performing loans
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
(1) Amounts exclude Allowance for Credit Losses related to off-balance sheet instruments, which are reported in Other Liabilities.
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
2022
2021
11
25
81
31
13
–
–
41
5
39
10
1
1
144
29
–
1
432
11
9
90
36
23
5
–
47
–
77
17
1
2
73
3
–
1
395
2022
2021
7
190
151
348
2
20
4
7
(2)
(5)
–
10
5
(32)
(7)
1
–
133
16
–
2
154
502
(189)
313
0.06
0.15
0.05
0.10
16
194
158
368
7
3
38
18
2
(2)
–
41
(9)
18
11
1
2
30
(4)
–
1
157
525
(505)
20
–
0.17
0.06
0.11
BMO Financial Group 205th Annual Report 2022 129
SUPPLEMENTAL INFORMATION
Table 13: 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 (2)
Average
balance
51,184
84,280
130,812
205,284
471,560
19,303
8,404
18,816
209,611
256,134
727,694
2022
Average
rate paid (%)
1.84
–
0.61
1.74
1.13
1.29
0.44
0.52
0.48
0.55
0.92
Average
balance
48,372
74,505
122,916
173,030
418,823
21,237
8,705
17,778
211,507
259,227
678,050
2021
Average
rate paid (%)
0.58
–
0.20
1.31
0.67
0.36
0.16
0.08
0.15
0.16
0.47
As at October 31, 2022 and 2021: deposits by foreign depositors in our Canadian bank offices amounted to $95,292 million and $58,396 million, respectively.
(1) Includes regulated and central banks.
(2) Average deposits payable on a fixed date included $101 million, $27,287 million and $17,394 million of federal funds purchased, commercial paper issued and other deposit liabilities, respectively, as
at October 31, 2022 ($101 million, $14,740 million and $18,893 million, respectively, as at October 31, 2021).
n
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f
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S
130 BMO Financial Group 205th Annual Report 2022
Glossary of Financial Terms
Adjusted Earnings and Measures
• Adjusted Revenue – calculated as revenue
excluding the impact of certain non-recurring
items, and adjusted net revenue is adjusted
revenue, net of CCPB, 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.
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.
Bail-In Debt is senior unsecured debt subject to
the Canadian Bail-In Regime. Bail-in debt
includes senior unsecured debt issued directly
by the bank on or after September 23, 2018,
which has an original term greater than
400 days and is marketable, subject to certain
exceptions. Some or all of this debt may be
statutorily converted into common shares of the
bank under the Bail-In Regime if the bank
enters resolution.
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.
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.
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.
Basis Point is one one-hundredth of a
percentage point.
Common Equity Tier 1 (CET1) Capital
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.
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.
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, requiring no initial or
little investment, with a value that is derived
from movements in underlying interest or
foreign exchange rates, equity or commodity
prices or other indices. Derivatives are used to
transfer, modify or reduce 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
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 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 insurance claims, commissions and
changes in policy benefit liabilities (CCPB). The
adjusted efficiency ratio, net of CCPB, is
calculated in the same manner, utilizing
adjusted revenue, net of CCPB, and adjusted
non-interest expense.
Environmental and Social Risk is the potential
for loss or harm, directly or indirectly, resulting
from environmental or social factors that impact
BMO or its customers, and BMO’s impact on the
environment.
Fair Value is the amount of consideration that
would be agreed upon in an arm’s-length
transaction between knowledgeable, willing
BMO Financial Group 205th Annual Report 2022 131
GLOSSARY OF FINANCIAL TERMS
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.
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, as well as lending, investment
and pledging commitments.
132 BMO Financial Group 205th Annual Report 2022
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.
Office of the Superintendent of Financial
Institutions (OSFI) Canada is the government
agency responsible for regulating banks,
insurance companies, trust companies, loan
companies and pension plans in Canada.
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 presented on a basis that excludes trading-
related interest income.
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,
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).
Net Promoter Score (NPS) is the percentage of
surveyed customers who would recommend
BMO to a friend or colleague. Data is gathered
in a survey that uses a 0–10 point scale.
“Detractors” are defined as those who provide a
rating of 0–6, “Passives” are defined as those
who provide a rating of 7 or 8, and “Promoters”
are defined as those who provide a rating of
9 or 10. The NPS score is calculated by
subtracting the percentage of “Detractors” from
the percentage of “Promoters”.
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.
Operating Leverage is the difference between
revenue and non-interest expense growth rates.
Adjusted operating leverage is the difference
between adjusted revenue and adjusted non-
interest expense growth rates.
Operating Leverage, net of CCPB, is the
difference between revenue, net of CCPB (net
revenue) and non-interest expense growth
rates. Adjusted net operating leverage, is the
difference between adjusted revenue, net of
CCPB, and adjusted non-interest expense
growth rates. The bank evaluates performance
using adjusted revenue, net of CCPB.
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 the fair value of
assets we fold in our credit or investment
portfolios. Examples of these risks include cyber
and cloud security risk, 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 the provision for
income taxes and provision for/(recovery of)
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 Credit and Counterparty
Risk – Provision for Credit Losses and Critical
Accounting Estimates and Judgments –
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.
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 arises from the possibility that
the bank could experience financial loss or other
types of harm due to changes in the external
business environment and failure to respond
effectively to these changes as a result of
inaction, inappropriate 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 counter party 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): Operating
group revenue is presented 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 annual total
shareholder return (TSR) represents the average
annual total return earned on an investment in
BMO common shares made at the beginning of
the respective period. The return includes the
change in share price and assumes dividends
received were reinvested in additional common
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 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.
BMO Financial Group 205th Annual Report 2022 133
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, 2022, 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, 2022 is set forth on page 140.
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.
KPMG LLP, the independent auditors appointed by the shareholders of the bank who have audited the consolidated financial statements, have
also audited the effectiveness of the bank’s internal control over financial reporting as at October 31, 2022 and have issued their report below.
Darryl White
Chief Executive Officer
Tayfun Tuzun
Chief Financial Officer
Toronto, Canada
December 1, 2022
134 BMO Financial Group 205th Annual Report 2022
Independent Auditor’s Report
To the Shareholders and the Board of Directors of Bank of Montreal
Opinion
We have audited the consolidated financial statements of Bank of Montreal (the Bank), which comprise:
•
•
•
•
•
• and notes to the consolidated financial statements, including a summary of significant accounting policies
the consolidated balance sheets as at October 31, 2022 and October 31, 2021;
the consolidated statements of income for the years then ended;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in equity for the years then ended;
the consolidated statements of cash flows for the years then ended;
(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, 2022 and October 31, 2021, and its consolidated financial performance and its consolidated cash flows for the years then ended 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 Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our auditor’s 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, 2022. 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 auditor’s report.
Assessment of the Allowances for Credit Losses for Loans
Refer to Notes 1 and 4 to the consolidated financial statements.
The Bank’s allowances for credit losses (ACL) as at October 31, 2022 were $2,998 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 modelled 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 are 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 modelled inputs, methodology and judgments and their resulting impact on the APL, as
described above, including the impact of the current macro-economic environment. 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 modelled 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 modelled 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 modelled 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 205th Annual Report 2022 135
INDEPENDENT AUDITOR’S REPORT
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 $165,379 million of securities as at October 31, 2022 that are measured at fair value. Included in these
amounts are certain securities for which the Bank determines fair value using models that use significant unobservable inputs and third-party net
asset valuations (NAVs). 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 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 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 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; and for a selection of securities, we compared the NAVs to external information or developed an independent
estimate of fair value and comparing it to the fair value determined by the Bank.
Assessment of Income Tax Uncertainties
Refer to Notes 1 and 22 to the consolidated financial statements.
In determining the provision for income taxes, the Bank interprets tax legislation, case law and administrative positions, and, based on its
judgment, records 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, 2022 were $11,201 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 auditor attention 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 the 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 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 auditor’s 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.
136 BMO Financial Group 205th Annual Report 2022
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 auditor’s 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 auditor’s report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS as issued by the
International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to
liquidate the Bank or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
Auditor’s 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 auditor’s 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 auditor’s 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 auditor’s 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 auditor’s 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 auditor’s 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 auditor’s report is Naveen Kumar Kalia.
Toronto, Canada
December 1, 2022
BMO Financial Group 205th Annual Report 2022 137
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 of October 31, 2022 and 2021, the related
consolidated statements of income, comprehensive income, changes in equity, and cash flows for the years then ended, 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 of October 31, 2022 and 2021, and its financial performance and its cash flows for each of the years then ended, 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, 2022, 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 1, 2022 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 allowances for credit losses (ACL) as at October 31, 2022 were
$2,998 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 modelled
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 are 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 modelled inputs, methodology and judgments and their resulting impact on the APL, as
described above, including the impact of the macro-economic environment. 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 modelled 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 modelled 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 modelled 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.
138 BMO Financial Group 205th Annual Report 2022
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 $165,379 million of securities as at
October 31, 2022 that are measured at fair value. Included in these amounts are certain securities for which the Bank determines fair value using
models that use significant unobservable inputs and third-party net asset valuations (NAVs). 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 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 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; and for a selection of securities, we compared the NAVs to external information or developed an independent estimate of
fair value, comparing it to the fair value determined by the Bank.
Assessment of Income Tax Uncertainties
As discussed in Notes 1 and 22 to the consolidated financial statements, in determining the provision for income taxes, the Bank interprets tax
legislation, case law and administrative positions, and, based on its judgment, records 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, 2022 were
$11,201 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 auditor attention 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 the 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 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 1, 2022
BMO Financial Group 205th Annual Report 2022 139
Report of Independent Registered Public Accounting Firm
To the Shareholders and 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, 2022, 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, the Bank
maintained, in all material respects, effective internal control over financial reporting as of October 31, 2022, 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 of October 31, 2022 and 2021, the related consolidated statements of income, comprehensive income,
changes in equity and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements) and our report
dated December 1, 2022 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 120 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 1, 2022
140 BMO Financial Group 205th Annual Report 2022
Consolidated Statement of Income
For the Year Ended October 31 (Canadian $ in millions, except as noted)
2022
2021
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 (Notes 10 and 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
Share of profit (loss) 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)
Advertising and business development
Communications
Professional fees
Other
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
$
$
$
$
$
20,464
5,590
843
26,897
6,711
227
4,074
11,012
15,885
1,082
1,318
8,250
1,440
548
1,770
1,312
1,193
281
181
(157)
274
333
17,825
33,710
313
(683)
8,795
3,635
604
517
278
788
1,577
16,194
17,886
4,349
13,537
20.04
19.99
5.44
$
$
$
$
$
15,727
3,963
197
19,887
3,220
195
2,162
5,577
14,310
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) Includes interest income on securities measured at fair value through other comprehensive income and amortized cost, calculated using the effective interest rate method, of $1,945 million for the
year ended October 31, 2022 ($889 million in 2021).
The accompanying notes are an integral part of these consolidated financial statements.
Darryl White
Chief Executive Officer
Jan Babiak
Chair, Audit and Conduct Review Committee
BMO Financial Group 205th Annual Report 2022 141
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
For the Year Ended October 31 (Canadian $ in millions)
Net Income
Other Comprehensive Income (Loss), net of taxes (Note 22)
Items that may subsequently be reclassified to net income
Net change in unrealized (losses) on fair value through OCI debt securities
Unrealized (losses) on fair value through OCI debt securities arising during the year
Reclassification to earnings of (gains) during the year
Net change in unrealized gains (losses) on cash flow hedges
(Losses) on derivatives designated as cash flow hedges arising during the year
Reclassification to earnings of (gains) on derivatives designated as cash flow hedges during the year
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
Reclassification to earnings of net losses related to divestitures (Note 10)
Items that will not be reclassified to net income
Unrealized gains on fair value through OCI equity securities arising during the year
Gains 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 (Loss), net of taxes (Note 22)
Total Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
2022
2021
$
13,537
$
7,754
(520)
(11)
(531)
(4,999)
(315)
(5,314)
3,202
(332)
29
2,899
1
659
1,282
1,942
(161)
(43)
(204)
(1,380)
(414)
(1,794)
(2,207)
496
–
(1,711)
20
923
(196)
747
(1,004)
(2,962)
$
12,533
$
4,792
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142 BMO Financial Group 205th Annual Report 2022
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 (Note 14)
Subordinated Debt (Note 15)
Total Liabilities
Equity
Preferred shares and other equity instruments (Note 16)
Common shares (Note 16)
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
2022
2021
$
87,466
$
93,261
5,734
8,303
108,177
13,641
43,561
106,590
1,293
273,262
113,194
148,880
86,103
9,663
309,310
553,956
(2,617)
551,339
48,160
13,235
4,841
5,285
2,193
1,421
1,175
31,894
108,204
1,139,199
769,478
59,956
13,235
40,979
103,963
27,068
425
102
44,805
290,533
8,150
1,068,161
6,308
17,744
317
45,117
1,552
71,038
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
$
$
988,175
685,631
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
$
$
$
1,139,199
$
988,175
BMO Financial Group 205th Annual Report 2022 143
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CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Changes in Equity
For the Year Ended October 31 (Canadian $ in millions)
Preferred Shares and Other Equity Instruments (Note 16)
Balance at beginning of year
Issued during the year
Redeemed during the year
Balance at End of Year
Common Shares (Note 16)
Balance at beginning of year
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan
Issued under the Stock Option Plan
Treasury shares sold/purchased
Issued to finance a portion of the announced acquisition (Notes 10 and 16)
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
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
Net discount on sale of treasury shares
Balance at End of Year
Accumulated Other Comprehensive Income (Loss) on Fair Value through OCI Securities, net of taxes (Note 22)
Balance at beginning of year
Unrealized (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 (Loss) on Cash Flow Hedges, net of taxes (Note 22)
Balance at beginning of year
(Losses) on derivatives designated as cash flow hedges arising during the year (Note 8)
Reclassification to earnings of (gains) on derivatives designated as cash flow hedges during the year
Balance at End of Year
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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
Reclassification to earnings of net losses related to divestitures (Note 10)
Balance at End of Year
Accumulated Other Comprehensive Income (Loss) on Pension and Other Employee Future Benefit Plans,
net of taxes (Note 21)
Balance at beginning of year
Gains on remeasurement of pension and other employee future benefit plans (Note 21)
Balance at End of Year
Accumulated Other Comprehensive Income (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
The accompanying notes are an integral part of these consolidated financial statements.
144 BMO Financial Group 205th Annual Report 2022
2022
2021
$
$
5,558
2,250
(1,500)
6,308
13,599
999
57
(17)
3,106
17,744
313
3
1
317
35,497
13,537
(231)
(3,634)
(52)
–
45,117
171
(520)
1
(11)
(359)
185
(4,999)
(315)
(5,129)
2,269
3,202
(332)
29
5,168
285
659
944
(354)
1,282
928
1,552
6,598
–
(1,040)
5,558
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)
2,556
$
71,038
$
57,523
Consolidated Statement of Cash Flows
For the Year Ended October 31 (Canadian $ in millions)
2022
2021
Cash Flows from Operating Activities
Net Income
Adjustments to determine net cash flows provided by (used in) operating activities:
$
13,537
$
7,754
Securities (gains), other than trading (Note 3)
Depreciation of premises and equipment (Note 9)
Depreciation of other assets
Amortization of intangible assets (Note 11)
Write-down of goodwill (Notes 10 and 11)
Provision for credit losses (Note 4)
Deferred taxes (Note 22)
Net loss on divestitures (Note 10)
Changes in operating assets and liabilities:
Net (increase) decrease in trading securities
Change in derivative instruments – (Increase) decrease in derivative asset
– Increase in derivative liability
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 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 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 costs (Note 16)
Redemption of preferred shares (Note 16)
Net proceeds from issuance of common shares (Note 16)
Net proceeds from the sale (purchase) of treasury shares (Note 16)
Cash dividends and distributions paid
Repayment of lease liabilities
Net Cash Provided by (Used in) Financing Activities
Cash Flows from Investing Activities
Net 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)
Net proceeds from divestitures (Note 10)
Net Cash (Used in) Investing Activities
Effect of Exchange Rate Changes on Cash and Cash Equivalents
Net increase (decrease) 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:
(1)
Interest paid in the year
Income taxes paid in the year
Interest received in the year
Dividends received in the year
(1) 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.
(281)
780
96
604
–
313
475
29
1,698
(13,376)
27,800
328
156
(1,170)
1,312
(6,222)
45,232
(74,748)
7,515
810
(954)
1,023
4,957
6,927
12,443
(5,829)
2,337
(850)
2,245
(1,500)
3,113
(17)
(2,595)
(294)
15,980
3,316
(96,598)
21,204
42,829
(777)
(671)
1,226
(29,471)
2,739
(5,795)
93,261
(591)
791
140
634
779
20
184
–
(10,447)
542
529
(539)
143
75
(366)
751
52,244
(23,748)
3,545
12,866
(289)
(968)
44,049
–
4,396
(4,074)
1,000
(2,250)
–
(1,046)
112
47
(2,980)
(327)
(5,122)
144
(49,620)
27,377
22,720
(484)
(499)
63
(299)
(2,775)
35,853
57,408
$
$
$
$
$
87,466
$
93,261
9,557
2,374
24,046
1,823
$
$
$
$
5,864
2,167
18,323
1,732
BMO Financial Group 205th Annual Report 2022 145
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1, 2022.
Basis of Consolidation
These consolidated financial statements are inclusive of the financial statements of our subsidiaries as at October 31, 2022. 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’s 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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152
152
155
162
162
163
166
175
176
177
178
179
180
182
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
Page
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186
192
193
194
196
201
203
203
206
208
209
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.
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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.
146 BMO Financial Group 205th Annual Report 2022
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 the fees 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.
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 (IFRS 4), 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.
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BMO Financial Group 205th Annual Report 2022 147
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 continues to be exposed to financial, operational, legal
and regulatory, and reputational risks. These risks arise principally from amending legacy contracts from LIBOR to an ARR or existing fallback clauses
for new ARRs and the resulting impact on economic risk management, as well as updating hedge designations as the new ARRs emerge. Our
enterprise IBOR Transition Office (ITO) continues 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 has a global
mandate, including to address the bank’s industry and regulatory engagement, internal and external communications, technology and operations
modifications, introduction of new products, migration of existing client contracts, program strategy and governance, and to evaluate financial
reporting impacts, including impacts on hedge accounting. 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) has been permanently discontinued
or is temporarily unavailable. 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.
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 timelines.
As planned, BMO transitioned all exposure to Sterling, Euro, Swiss Franc and Japanese Yen LIBOR, as well as the 1-week and 2-month USD LIBOR
to ARRs, in advance of the December 31, 2021 discontinuation of such settings.
In addition, BMO ceased issuing new USD LIBOR-based loans and financial instruments after December 31, 2021, except in permitted
circumstances, in compliance with U.S. prudential regulator supervisory guidance. As we approach the June 30, 2023 cessation date for the remaining
USD LIBOR settings, overall USD LIBOR exposures are being reduced and existing USD LIBOR derivative exposures are expected to largely transition
when central counterparties convert existing LIBOR trades to Secured Overnight Financing Rate by the cessation date.
On December 16, 2021, the Canadian Alternative Reference Rate working group (CARR) recommended the administrator, Refinitiv Benchmark
Services UK Limited (RBSL), to cease publication of Canadian Dollar Offered Rate (CDOR) settings immediately after June 28, 2024, using a two-stage
transition approach. By the end of the first stage on June 30, 2023, CARR expects that all new derivative contracts and securities will use the Canadian
Overnight Repo Rate Average (CORRA), with the exception of derivatives that hedge or reduce CDOR exposures from derivatives or securities
transacted before June 30, 2023, or loan agreements entered into before June 28, 2024. All remaining CDOR exposures should be transitioned to
CORRA by June 28, 2024, marking the end of the second stage. On May 16, 2022, following public consultation, RBSL announced that all remaining
CDOR settings will cease publication immediately after June 28, 2024, in line with CARR recommendations. The ITO adjusted all affected project plans
as a result of the RBSL announcement.
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. The quantitative information for October 31, 2022 includes financial instruments that
referenced remaining USD LIBOR settings due to mature after June 30, 2023, or after June 28, 2024 for remaining CDOR and bankers’ acceptance (BA)
rate settings, or are demand facilities that will be subject to remediation to amend the benchmark interest rate. Changes in our exposure during fiscal
2022 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
Derivative notional amounts
Authorized and committed loan commitments (5)
(3)(4)
(2)
(6)
(7)
USD LIBOR
48,162
3,335
1,870,472
90,797
2022
CDOR
37,101
4,583
1,554,518
26,106
2021
USD LIBOR
GBP LIBOR
Other (1)
91,991
3,043
1,340,121
62,174
730
678
28,385
241
884
–
4,898
15,047
(1) Includes CHF LIBOR, EONIA and JPY LIBOR, which have been discontinued after December 31, 2021.
(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,
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including those that are in scope of IBOR reform.
(7) Commitments also include backstop liquidity facilities provided by the bank to external parties.
148 BMO Financial Group 205th Annual Report 2022
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.
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. 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 economic outlook for Canada and the U.S. is subject to several risks that could lead to a severe downturn, including, persistent high inflation
and significant further increases in interest rates, an escalation of the conflict in Ukraine, rising geopolitical tensions between the U.S. and China, and
the pandemic. A significant housing market correction could also occur if monetary policy becomes overly restrictive to control inflation. The 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
consolidated financial statements relate to matters that are inherently uncertain. However, we have detailed policies and internal controls that are
intended to ensure the judgments made in estimating these amounts 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,
2022.
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
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ventures, allowance for credit losses and the determination of fair value is included in Notes 3 and 17.
BMO Financial Group 205th Annual Report 2022 149
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes and Deferred Tax Assets
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in either our Consolidated Statement of
Income or Consolidated Statement of Changes in Equity. In determining the provision for income taxes, we interpret tax legislation, case law and
administrative positions in numerous jurisdictions and, based on our judgment, record our estimate of the amount required to settle tax obligations.
We also make assumptions about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations and assumptions
differ from those of tax authorities or if the timing of reversals is not as expected, our provision for income taxes could increase or decrease in future
periods. The amount of any such increase or decrease cannot be reasonably estimated.
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible
temporary differences or unused tax losses and tax credits may be utilized. We are required to assess whether it is probable that our deferred 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
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.
Transferred assets are discussed in greater detail in Note 6.
Consolidation of Structured Entities
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.
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150 BMO Financial Group 205th Annual Report 2022
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.
Structured entities are discussed in greater detail in Notes 7 and 20.
Future Changes in IFRS
Insurance Contracts
In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), which provides a comprehensive approach to accounting for all types of insurance
contracts and will replace the existing IFRS 4 Insurance Contracts (IFRS 4). The standard was subsequently amended in June 2020 with additional
narrow-scope amendments in December 2021. IFRS 17 will be effective for our fiscal year beginning November 1, 2023. We established an
enterprise-wide project in order to meet the requirements of IFRS 17, and we continue to evaluate the potential impacts of adoption, including
available accounting policy and transition choices.
IFRS 17 will change the fundamental principles used to recognize and measure insurance contracts, including life insurance contracts, reinsurance
contracts and investment contracts with discretionary participation features.
Key differences from IFRS 4 are as follows:
IFRS 17 requires us to measure groups of contracts based on our estimates of the present value of future cash flows that are expected to arise as
we fulfill the contracts, an explicit risk adjustment for non-financial risk and a contractual service margin (CSM) which represents unearned profits. The
CSM component of the insurance contract liability will be amortized into income as services/insurance coverage is provided and groups of contracts
that result in losses are recorded in income immediately. Under IFRS 4, there is no similar grouping requirement and gains/losses on new business
are recognized in income immediately. When we adopt IFRS 17, we will establish the CSM for insurance contracts in effect which will increase
liabilities and decrease equity.
The discount rate we use under IFRS 4 is connected to the assets held to support insurance contract liabilities. Under IFRS 17, the discount rate
will reflect the characteristics of the insurance contract liabilities. We have an accounting policy choice under IFRS 17 to recognize changes in the
discount rate on insurance contract liabilities, either through other comprehensive income or in our statement of income.
On transition, we will either apply a full retrospective approach where we restate prior periods as if we had always applied IFRS 17, a modified
retrospective approach where we apply specific modifications to the full retrospective application, or a full fair value method where we measure the
contracts at fair value to determine a value for the CSM.
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BMO Financial Group 205th Annual Report 2022 151
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2022
85,234
2,232
87,466
2021
91,377
1,884
93,261
(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 $87 million as at October 31, 2022 ($110 million as at October 31, 2021).
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
(FVTPL). 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 FVOCI or
amortized cost.
We designate certain securities held by our insurance subsidiaries that support our insurance liabilities at FVTPL, 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 $9,231 million as at October 31, 2022 ($11,172 million as at October 31, 2021) 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 $1,954 million in non-interest revenue,
insurance revenue, for the year ended October 31, 2022 (a decrease of $202 million in 2021).
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
$4,410 million as at October 31, 2022 ($3,038 million as at October 31, 2021) 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.
Debt securities measured at FVOCI are initially recorded at fair value plus transaction costs. They are subsequently measured at fair value, with
unrealized gains and losses recorded in our Consolidated Statement of Comprehensive Income until the security is sold or impaired. Gains and losses
on disposal and impairment losses (recoveries) are recorded in our Consolidated Statement of Income in non-interest revenue, securities gains, other
than trading. Interest income earned is recorded in our Consolidated Statement of Income in interest, dividend and fee income, securities, using the
effective interest method.
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Equity securities at FVOCI are equity securities for which we have elected to record changes in the fair value of the instrument in other
comprehensive income as opposed to fair value through profit or loss. Gains or losses recorded on these instruments will never be recognized in
profit or loss. Equity securities measured at FVOCI are not subject to an impairment assessment.
152 BMO Financial Group 205th Annual Report 2022
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, share of profit (loss) 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.
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 $106,590 million as at October 31, 2022 ($49,970 million as at October 31, 2021) are net of allowances
for credit losses of $3 million as at October 31, 2022 ($2 million as at October 31, 2021).
Debt securities at FVOCI totalling $43,408 million as at October 31, 2022 ($62,991 million as at October 31, 2021) are net of allowances for credit
losses of $3 million as at October 31, 2022 ($2 million as at October 31, 2021).
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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BMO Financial Group 205th Annual Report 2022 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Remaining Term to Maturity of Securities
The following table shows the remaining term to maturity 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
Amortized cost
Fair value
U.S. agency MBS and CMO (1)
Canadian provincial and municipal governments
Total cost or amortized cost
Total fair value
Yield (%)
Amortized Cost Securities
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
U.S. federal government
Amortized cost
Fair value
Yield (%)
Other governments
Amortized cost
Fair value
Yield (%)
Amortized cost
Fair value
Yield (%)
Corporate debt
U.S. states, municipalities and agencies
NHA MBS, U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Yield (%)
Total amortized cost
Total fair value
Yield (%)
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
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3,361
1,247
2,269
–
1,337
32
2,375
–
–
10,621
319
36
4
39
–
136
–
534
2,235
2,229
2.08
720
714
1.22
1,006
989
2.65
485
483
2.26
3,385
3,377
0.86
25
21
0.46
70
70
3.42
1,439
1,391
0.82
–
–
9,365
9,274
1.45
2,146
2,223
0.89
984
1,044
2.71
924
942
0.94
–
–
–
419
456
1.44
79
77
1.10
407
457
1.05
4,959
5,199
1.32
–
25,479
25,388
13,049
9,620
2,719
25,388
3,617
826
6,034
60
1,432
165
1,685
96
–
13,915
2
10
–
48
–
152
–
212
843
816
1.68
632
611
2.51
49
46
1.02
1,062
1,030
2.16
1,420
1,390
1.95
102
102
0.85
44
42
2.96
1,249
1,221
3.28
–
–
5,401
5,258
2.30
3,537
3,513
1.85
2,113
2,133
1.91
15,825
14,785
1.46
–
–
–
577
544
1.31
1,757
1,675
1.47
530
501
1.59
24,339
23,151
1.56
–
43,867
43,724
13,167
29,363
1,194
43,724
759
390
3,051
42
742
432
2,117
49
–
7,582
9
8
–
–
–
285
–
302
6,261
6,122
1.65
1,360
1,300
2.74
751
680
1.67
602
567
2.31
1,589
1,511
2.64
1,212
1,204
2.22
78
72
2.67
1,084
1,024
2.34
–
–
12,937
12,480
2.04
1,319
1,267
1.71
1,345
1,299
2.32
15,098
13,414
1.29
–
–
–
376
364
2.46
3,579
3,254
1.65
988
919
2.39
22,705
20,517
1.50
–
43,526
43,069
14,499
28,094
476
43,069
1,815
876
3,572
16
367
176
2,521
201
–
9,544
–
90
–
–
8
937
–
1,035
3,159
3,134
3.29
1,929
1,866
3.21
1,249
1,067
1.50
864
809
2.37
138
133
5.04
–
–
–
1,215
1,181
2.34
238
206
4.74
–
–
8,792
8,396
2.86
134
126
2.66
1,146
1,107
2.90
23,511
19,703
1.56
109
105
4.26
15
13
1.00
2,747
2,383
1.73
128
125
1.54
27,790
23,562
1.65
–
47,161
46,765
10,823
35,743
199
46,765
1,384
2,771
1,773
21
92
13,507
894
–
–
20,442
163
936
–
–
–
4,969
–
6,068
–
–
–
83
80
4.29
348
328
4.05
850
825
2.44
–
–
–
37
36
1.53
6,789
6,540
2.38
193
191
3.59
–
–
8,300
8,000
2.50
–
–
–
–
–
–
3,887
2,873
2.05
–
–
–
–
–
–
22,851
19,475
1.57
59
55
0.22
26,797
22,403
1.64
–
61,607
61,307
10,895
50,334
78
61,307
–
–
–
–
–
–
–
–
46,073
46,073
–
–
–
–
–
–
5,490
5,490
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
122
153
122
153
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,293
52,978
53,009
25,203
24,217
3,589
53,009
2022
Total
10,936
6,110
16,699
139
3,970
14,312
9,592
346
46,073
108,177
493
1,080
4
87
8
6,479
5,490
13,641
12,498
12,301
2.14
4,724
4,571
2.70
3,403
3,110
2.13
3,863
3,714
2.30
6,532
6,411
1.62
1,376
1,363
2.07
8,196
7,905
2.39
4,203
4,033
2.29
122
153
44,917
43,561
2.19
7,136
7,129
1.55
5,588
5,583
2.35
59,245
51,717
1.49
109
105
4.26
1,387
1,377
1.66
31,013
26,864
1.59
2,112
2,057
1.82
106,590
94,832
1.58
1,293
274,618
273,262
87,636
177,371
8,255
273,262
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
1.49
5,642
5,723
2.07
5,633
5,589
1.51
–
–
–
1,413
1,420
1.24
28,557
28,307
1.30
1,641
1,651
1.30
49,970
49,810
1.44
1,135
232,603
232,849
85,933
140,422
6,494
232,849
(1) These amounts are either 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.
154 BMO Financial Group 205th Annual Report 2022
Unrealized Gains and Losses on FVOCI Securities
The following table summarizes unrealized gains and losses:
(Canadian $ in millions)
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
NHA MBS
U.S. agency MBS and CMO
Corporate debt
Corporate equity
Total
Cost or
amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
2022
Fair
value
Cost or
amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
12,498
4,724
3,403
3,863
6,532
1,376
8,196
4,203
122
44,917
11
6
–
5
4
1
12
25
31
95
208
159
293
154
125
14
303
195
–
12,301
4,571
3,110
3,714
6,411
1,363
7,905
4,033
153
13,087
2,973
21,041
4,034
6,476
1,122
10,894
3,147
103
1,451 43,561
62,877
62
29
282
85
55
6
151
34
29
733
84
15
297
5
29
3
34
20
–
487
2021
Fair
value
13,065
2,987
21,026
4,114
6,502
1,125
11,011
3,161
132
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 our share of profit (loss) 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
2022
28
650
1,295
1,973
2021
22
470
419
911
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 – realized gains (losses) (1)
Impairment losses
Securities gains, other than trading
(1) Gains (losses) are net of (losses) gains on hedge contracts.
Gains and losses on trading securities are included in trading-related revenue in Note 17.
2022
268
14
(1)
281
2021
535
57
(1)
591
Interest and dividend income and gains (losses) on securities held in our insurance business are recorded in non-interest revenue, insurance revenue,
in our Consolidated Statement of Income. These include:
•
Interest and dividend income of $397 million for the year ended October 31, 2022 ($379 million for the year ended October 31, 2021). Interest
income is calculated using the effective interest method;
• Gains (losses) from securities designated at FVTPL of $(1,954) million for the year ended October 31, 2022 ($(202) million for the year ended
October 31, 2021); and
• Realized gains (losses) from FVOCI securities of $nil million for the year ended October 31, 2022 ($1 million for the year ended October 31, 2021).
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.
N
o
t
e
s
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.
BMO Financial Group 205th Annual Report 2022 155
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 a defined number of days past due.
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.
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.
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.
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 $55 million was recognized for the year ended
October 31, 2022 ($71 million in 2021).
During the year ended October 31, 2022, we recorded a net gain of $3 million before tax (loss of $10 million in 2021) 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 $2,998 million as at October 31, 2022 ($2,958 million
as at October 31, 2021), of which $2,617 million ($2,564 million as at October 31, 2021) was recorded in loans and $381 million ($394 million as at
October 31, 2021) 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-day 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.
s
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156 BMO Financial Group 205th Annual Report 2022
LGD is the amount that may not be recovered in the event of default and is modelled based on historical data and reasonable and supportable
information about future economic conditions, where appropriate. LGD takes into consideration the amount and quality of any collateral held.
We consider past events, current market conditions and reasonable and 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 pandemic, as well as the estimated impacts of high inflation and supply-chain disruptions.
Allowance on Impaired Loans
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.
N
o
t
e
s
BMO Financial Group 205th Annual Report 2022 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2022 and 2021.
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
Stage 1
Stage 2
Stage 3 (5)
Stage 1
Stage 2
Stage 3 (5)
2022
Total
7
94,824
34,751
17,345
479
1,179
295
–
–
–
–
–
–
295
4
94,566
23,471
12,066
167
1,051
–
295
148,880
131,325
10
135
46
2021
Total
4
94,745
24,764
14,316
473
1,097
351
135,750
97
–
179
1,293
2,250
306
46
–
4,074
39
–
–
–
–
–
–
351
351
12
7
94,743
31,617
13,474
138
1,126
–
141,105
59
–
81
3,134
3,871
341
53
–
7,480
66
141,046
7,414
285
148,745
131,279
4,035
339
135,653
1,792
33,554
24,369
13,536
873
4,052
–
78,176
101
35
83
1,307
4,633
1,525
32
–
7,615
288
78,075
7,327
2,920
442
1,569
2,918
316
90
–
8,255
69
–
1
51
792
563
1
–
1,408
207
8,186
1,201
–
–
–
–
–
–
312
312
102
210
–
–
–
–
–
–
–
–
–
–
1,827
33,637
25,676
18,169
2,398
4,084
312
1,487
30,672
21,660
13,336
661
3,450
–
86,103
71,266
491
113
37
8
534
3,607
1,375
50
–
5,611
333
85,612
71,153
5,278
2,920
443
1,620
3,710
879
91
–
9,663
276
2,532
450
1,801
1,743
75
486
–
7,087
67
9,387
7,020
–
–
66
663
287
–
–
1,016
209
807
–
–
–
–
–
–
287
287
91
196
–
–
–
–
–
–
–
–
–
–
1,524
30,680
22,194
16,943
2,036
3,500
287
77,164
537
76,627
2,532
450
1,867
2,406
362
486
–
8,103
276
7,827
187,245
98,451
–
–
6,765
22,390
6,310
–
–
–
–
1,384
194,010
120,841
6,310
1,384
144,807
85,375
–
–
1,446
14,534
6,137
–
–
–
–
1,531
146,253
99,909
6,137
1,531
Gross business and government
285,696
35,465
1,384
322,545
230,182
22,117
1,531
253,830
Allowance for credit losses
Carrying amount
608
675
432
1,715
529
730
395
1,654
285,088
34,790
952
320,830
229,653
21,387
1,136
252,176
Gross total loans and acceptances
513,232
51,968
1,991
567,191
439,860
32,818
2,169
474,847
Net total loans and acceptances
512,395
50,732
1,447
564,574
439,105
31,507
1,671
472,283
Commitments and financial guarantee contracts
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Allowance for credit losses
Carrying amount (3)(4)
s
e
t
o
N
182,153
45,920
2
–
5,134
14,047
2,176
–
194
174
–
–
–
292
13
187,287
59,967
2,178
292
154,975
46,827
–
–
381
195
2,367
8,164
2,453
–
186
–
–
–
682
13
157,342
54,991
2,453
682
394
227,881
21,183
279
249,343
201,607
12,798
669
215,074
(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 counterparties.
(5) 92% of Stage 3 loans were either fully or partially collateralized as at October 31, 2022 (92% as at October 31, 2021).
158 BMO Financial Group 205th Annual Report 2022
The following table shows the continuity in the loss allowance, by product type, for the years ended October 31, 2022 and 2021. 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
Recoveries of previous write-offs
Foreign exchange and other
(2)
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)
Stage 1
Stage 2
Stage 3
(
46
39
(4)
–
52)
34
(5)
2
14
–
–
(1)
59
128
230
(41)
(5)
(263)
92
(22)
(9)
(18)
–
–
1
111
114
149
(34)
(2)
(156)
54
(5)
(6)
–
–
–
1
40
(37)
10
(7)
61
–
(7)
5
25
–
–
2
67
357
(221)
71
(82)
226
–
(39)
(13)
(58)
–
–
5
304
245
(149)
34
(114)
236
–
(23)
18
2
–
–
3
115
250
662
313
(166)
(1)
(437)
488
(223)
19
(7)
–
–
91
746
1,031
837
194
855
(267)
243
(52)
127
–
(168)
(32)
(149)
–
–
83
789
1,410
1,236
174
19
(2)
(6)
7
8
–
–
–
7
(5)
7
(12)
16
91
(9)
(30)
87
103
–
–
–
151
(205)
80
(15)
102
–
–
–
116
74
–
–
–
190
(249)
78
(19)
–
401
(46)
(77)
53
224
–
–
–
154
(153)
50
(13)
439
557
544
13
2022
Total
105
–
–
–
17
34
(
12)
7
46
(5)
7
(11)
142
576
–
–
–
66
92
(61)
(22)
75
(205)
80
(9)
517
359
–
–
–
154
54
(28)
12
192
(249)
78
(15)
365
1,918
–
–
–
(86)
488
(391)
(13)
(2)
(153)
50
161
1,974
2,998
2,617
381
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
N
o
t
e
s
(1) Excludes PCL on other assets of $2 million for the year ended October 31, 2022 ($(7) million for the year ended October 31, 2021).
(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.
BMO Financial Group 205th Annual Report 2022 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans and allowance for credit losses by geographic region as at October 31, 2022 and 2021 are as follows:
(Canadian $ in millions)
2022
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)
2021
Net
amount
By geographic region (1):
Canada
United States
Other countries
Total
342,430
200,439
11,087
553,956
363
176
5
544
1,102
959
12
340,965
199,304
11,070
299,905
153,479
7,442
2,073
551,339
460,826
345
153
–
498
1,143
910
13
298,417
152,416
7,429
2,066
458,262
(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 ($13 million as at October 31, 2021).
(3) Excludes allowance for credit losses on performing loans of $368 million for other credit instruments, which is included in other liabilities ($381 million as at October 31, 2021).
Impaired (Stage 3) loans, including the related allowances, as at October 31, 2022 and 2021 are as follows:
(Canadian $ in millions)
2022
2021
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)
295
312
1,384
1,991
1,158
820
13
1,991
10
102
432
544
363
176
5
544
285
210
952
1,447
795
644
8
1,447
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
(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 ($13 million as at October 31, 2021).
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, 2022 and 2021. 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
411
392
198
1,001
2022
Total
430
476
236
19
84
38
404
279
264
947
2021
Total
418
338
297
14
59
33
141
1,142
106
1,053
Fully secured loans with amounts between 90 and 180 days past due that we have not classified as impaired totalled $43 million as at October 31, 2022 ($36 million as at October 31, 2021).
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, 2022, our benign scenario involves a materially stronger economic environment than the base case forecast due to a resolution
of the Ukraine war and a stronger response of households to elevated savings, with a considerably lower unemployment rate.
As at October 31, 2022, our base case scenario depicts a weak economy in both Canada and the U.S., as growth is tempered by high inflation,
rapidly-rising interest rates, lingering supply-chain disruptions, and weaker global demand. In contrast, our base case economic forecast as at
October 31, 2021, depicted a stronger economic forecast in both Canada and the U.S. over the 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 $1,900 million as at October 31, 2022 ($1,725 million as at
October 31, 2021) compared to the reported allowance for performing loans of $2,441 million ($2,447 million as at October 31, 2021).
As at October 31, 2022, our adverse economic scenario depicts a contracting economy with annual average real GDP declining in both Canada
and the U.S. in response to a potential escalation of the war in Ukraine. The adverse case as at October 31, 2021 depicted a slightly weaker economic
environment in Canada and the U.S. due to higher initial levels for the unemployment rates. 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 $3,250 million as at October 31, 2022 ($3,825 million as at October 31, 2021) compared
to the reported allowance for performing loans of $2,441 million ($2,447 million as at October 31, 2021).
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.
160 BMO Financial Group 205th Annual Report 2022
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The following table shows the key economic variables used to estimate the allowance on performing loans forecast over the next 12 months or
lifetime measurement period. While the values disclosed below are national variables, we use regional variables in the underlying models and
consider factors impacting particular industries where appropriate.
All figures are average annual values
Benign scenario
Base scenario
Adverse scenario
Benign scenario
Base scenario
Adverse scenario
As at October 31, 2022
As at October 31, 2021
First 12
months
Remaining
horizon (1)
First 12
months
Remaining
horizon (1)
First 12
months
Remaining
horizon (1)
First 12
months
Remaining
horizon (1)
First 12
months
Remaining
horizon (1)
First 12
months
Remaining
horizon (1)
Real GDP growth rates (2)
Canada
United States
Corporate BBB 10-year spread
Canada
United States
Unemployment rates
Canada
United States
Housing Price Index (2)
Canada (3)
United States (4)
3.7%
2.4%
1.9%
1.8%
4.3%
3.2%
(6.7)%
2.2%
2.1%
1.9%
1.9%
3.6%
2.6%
1.5%
0.2%
2.4%
2.2%
5.9%
4.2%
1.1%
1.3%
2.2%
2.2%
6.5%
4.8%
(2.3)%
(3.3)%
3.7%
4.2%
8.0%
6.5%
0.4%
0.6%
3.9%
3.9%
9.9%
8.4%
6.3%
7.1%
1.4%
0.9%
6.0%
4.2%
1.6% (0.7)%
2.1% (10.0)% (1.0)% (13.6)% (8.0)% 18.2%
(7.5)% (8.4)% 14.6%
(0.9)% (2.6)%
(2.6
)%
5)
4.0%
3.2%
4.0%
4.8%
2.9% (2.7)%
2.4% (1.2)%
1.8%
1.3%
1.8%
1.2%
2.0%
1.6%
3.6%
4.2%
0.4%
0.6%
3.9%
3.9%
4.8%
3.0%
6.6%
4.7%
5.6%
3.6%
10.8%
8.5%
12.4%
10.6%
7.1% 15.1%
5.7% 12.3%
4.0% (6.4)% (9.5)%
3.8% (6.1)% (7.8)%
3.8%
(1)(1) The remaining forecast period is two years.
(2) Real gross domestic product (GDP) and housing price index are averages of quarterly year-over-year growth rates.
(3) In Canada, we use the HPI Benchmark Composite.
(4) In the United States, we use the National Case-Shiller House Price Index.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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 $1,850 million compared to the reported allowance for performing loans of $2,441 million as at October 31, 2022
($1,775 million compared to the reported allowance for performing loans of $2,447 million as at October 31, 2021).
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, 2022 was $91 million
($37 million in 2021). Modified loans of $16 million ($21 million in 2021) were written off during the year ended October 31, 2022. As at
October 31, 2022, $13 million ($29 million as at October 31, 2021) 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, 2022, we foreclosed on impaired loans and received $24 million of real estate properties that we classified as
held-for-sale ($27 million in 2021). As at October 31, 2022, real estate properties held-for-sale totalled $13 million ($11 million as at
October 31, 2021). These properties are disposed of when considered appropriate.
Collateral
Collateral is used to manage credit risk related to securities borrowed or purchased under resale agreements, residential mortgages, consumer
instalment and other personal loans, and business and government loans. Additional information on our collateral requirements is included in Notes
14 and 24, as well as in the blue-tinted font in the Enterprise-Wide Risk Management section of Management’s Discussion and Analysis within this
report.
N
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BMO Financial Group 205th Annual Report 2022 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 pandemic and
economic headwinds, including rising interest rates and inflation, 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 Notes 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
Transfers of Financial Assets that do not Qualify for Derecognition
Loan Securitization
We sell Canadian residential mortgages 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 (NHA MBS) 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 in our Consolidated Balance Sheet and the related cash proceeds are recognized as secured financing as part of
securitization and structured entities’ liabilities 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, 2022, we sold $5,495 million of mortgages to these
programs ($7,614 million in 2021).
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, 2022, the carrying values of securities lent and securities sold under
repurchase agreements were $13,473 million and $90,490 million, respectively ($9,662 million and $87,894 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.
s
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162 BMO Financial Group 205th Annual Report 2022
The following table presents the carrying value 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 value (1)
Fair value
Carrying value (1)
Fair value
2022
2021
1,062
7,503
10,012
18,577
17,471
–
–
–
17,764
16,846
997
7,847
10,009
18,853
18,208
–
–
–
18,859
18,323
(1) Carrying value 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 and securities lent or sold under repurchase agreements in our Consolidated Balance Sheet.
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, 2022, we sold and derecognized $556 million of these loans ($631 million in
2021) and recognized a $17 million gain ($32 million in 2021) in non-interest revenue, other. As at October 31, 2022, the carrying value of the
mortgage servicing rights was $39 million ($29 million as at October 31, 2021) and the fair value was $54 million ($28 million as at
October 31, 2021).
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, 2022, we sold and derecognized $4,014 million of these loans
($1,252 million in 2021) and recognized a gain of $7 million upon transfer ($3 million in 2021). The carrying values of our retained interests classified
as debt securities at amortized cost and loans carried at amortized cost were $8 million and $37 million, respectively, as at October 31, 2022
($7 million and $7 million as at October 31, 2021). 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,
associated gains and losses are recognized in non-interest revenue, trading revenues. As at October 31, 2022, the fair value of our retained interests
in these CMOs was $10 million, classified as trading securities in our Consolidated Balance Sheet ($3 million as at October 31, 2021). Refer to Note 3
for further information.
Transferred Financial Assets that Qualify for Derecognition
The Canadian government launched the Canada Emergency Business Account Program in 2020 as part of its response to COVID-19, in which we issued
loans that were funded by the government, until the program was closed to new applicants as of June 30, 2021. 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.
Note 7: Structured Entities
We enter into certain transactions in the ordinary course of business which involve the establishment of structured entities (SEs) to facilitate or secure
customer transactions and to obtain 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 derecognize 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 a 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.
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BMO Financial Group 205th Annual Report 2022 163
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying value and fair values of transferred assets that did not qualify for derecognition and the associated liabilities
issued by our bank securitization vehicles:
(Canadian $ in millions)
Assets
Credit cards
Consumer instalment and other personal (2)
Business and government
Total
Associated liabilities (3)
Carrying value (1)
Fair value
Carrying value (1)
Fair value
2022
2021
8,223
4,769
125
8,223
4,738
124
7,106
5,228
250
7,106
5,238
253
13,117
13,085
12,584
12,597
9,274
9,072
7,278
7,341
(1) Carrying value 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.
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 (Series 1 LRCNs),
$750 million 5.625% Limited Recourse Capital Notes, Series 2 (Series 2 LRCNs) and $1,000 million 7.325% Limited Recourse Capital Notes, Series 3
(Series 3 LRCNs), 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)), $750 million of BMO issued Non-Cumulative, 5-Year Rate Reset Class B Preferred Shares, Series 49 (NVCC) and
$1,000 million of BMO issued Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 51 (NVCC), issued concurrently with the Series 1,
Series 2 and Series 3 LRCNs, respectively. 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 fiscal 2021, we redeemed all guarantee-linked notes issued by these
vehicles.
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)
Interests recorded on our Consolidated Balance Sheet
Financial Assets
Cash and cash equivalents
Trading securities
FVTPL securities
FVOCI securities
Amortized cost securities
Derivatives
Other
Total
Financial Liabilities
Deposits
Derivatives
Other
Total
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Maximum exposure to loss (2)
Total assets of the entities
Customer
securitization
vehicles (1)
Capital vehicles
2022
Other
securitization
vehicles
Customer
securitization
vehicles (1)
Capital vehicles
2021
Other
Securitization
vehicles
68
573
119
1,079
–
–
11
1,850
68
17
–
85
20,141
12,364
3,483
–
–
–
–
–
–
3,483
3,483
–
48
3,531
1
3,531
–
1,795
–
–
–
–
80
1,875
–
–
–
–
63
24
218
464
–
2
5
776
63
–
–
63
1,875
11,845
14,208
8,116
1,210
–
–
–
–
–
–
1,210
1,210
–
22
1,232
–
1,234
–
58
–
–
93
–
–
151
–
–
–
–
151
5,686
(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 either trading securities, FVTPL
securities or FVOCI securities.
(2) Maximum exposure to loss represents securities held, undrawn liquidity facilities, any remaining unfunded committed amounts to the BMO funded vehicle, derivative assets and other assets.
164 BMO Financial Group 205th Annual Report 2022
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 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 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 vehicles
because either we do not service the program assets, the key relevant activity, or we do not have any exposure to variable returns.
We provide liquidity facilities to the market-funded vehicles, which may require that we provide additional financing to the vehicles should
certain events occur. The total committed and undrawn amount under these liquidity facilities and undrawn amounts of the BMO funded vehicle as at
October 31, 2022 was $7,114 million ($5,400 million as at October 31, 2021). This amount comprises part of the commitments outlined in Note 24.
Effective October 31, 2021, our relationship with Fairway Financial Company LLC (a customer securitization vehicle in the U.S.) changed from
principal to agent as reflected primarily in the change to our exposure to variable returns. At that point, we concluded we no longer control the entity
and as a result, we deconsolidated our investment. No gain or loss was recognized in our Consolidated Statement of Income as a result of
deconsolidating this entity.
We continue to provide liquidity facilities to this vehicle, which may require that we provide additional financing to the vehicle in the event that
certain events occur. The total committed undrawn amount under these facilities as at October 31, 2022 was $11,245 million ($8,095 million as at
October 31, 2021).
Our interest in this vehicle as at October 31, 2022 and 2021 has been included in the Unconsolidated Structured Entities table above.
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 Unconsolidated Structured Entities table above.
Where the asset-backed instruments in these securitizations are transferred to third parties, but we do not substantially transfer all risks and
rewards of ownership to the third-party investors, we continue to recognize the transferred assets with the related cash proceeds recorded as secured
financing in our Consolidated Balance Sheet in other liabilities, securitization and structured entities’ liabilities. As at October 31, 2022, these
transferred assets were carried at fair value totalling $1,385 million ($53 million as at October 31, 2021) with $323 million ($nil million as at
October 31, 2021) 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, 2022, we held retained interests of $410 million ($5 million as at October 31, 2021) carried at fair value on our
Consolidated Balance Sheet in securities, trading.
During the year ended October 31, 2022, we sold $8,342 million of MBS to these sponsored securitization vehicles ($2,549 million in 2021),
where we divested all interests in the securitized MBSs and any gains and losses were recorded in non-interest revenue, trading revenues.
We retain residual interests in certain commercial mortgage loans that are either purchased or originated in the U.S. which are then sold and
derecognized through bank sponsored SEs that securitize these loans into MBS. During the year ended October 31, 2022, we sold and derecognized
$2,142 million of these loans ($411 million in 2021) and recognized a gain of $3 million upon transfer ($nil million in 2021). The carrying values of
our retained interests classified as loans carried at amortized cost were $80 million as at October 31, 2022 ($nil million as at October 31, 2021). Fair
value was equal to carrying value on these dates.
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 $948 million as
at October 31, 2022 ($1,345 million as at October 31, 2021), with $185 million included in FVTPL securities and $763 million included in trading
securities as at October 31, 2022 ($321 million and $1,024 million, respectively, as at October 31, 2021) in our Consolidated Balance Sheet.
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BMO Financial Group 205th Annual Report 2022 165
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 entities 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 entities. We are generally a passive investor and do not have power over the key decision-making activities
of these entities. Our maximum exposure to loss from our investments is limited to the carrying amounts of our investments in these entities 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, 2022 and 2021, 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.
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:
•
• 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 swaps – counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.
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.
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166 BMO Financial Group 205th Annual Report 2022
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 our Consolidated Statement of Income. Embedded derivatives in certain of our GIC deposits are accounted for separately from
the host instrument and presented within deposits in our Consolidated Balance Sheet.
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, 2022 was $12,413 million
($4,537 million as at October 31, 2021), for which we have posted collateral of $10,464 million ($3,921 million as at October 31, 2021).
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.
Trading Derivatives
Trading derivatives include derivatives entered into with customers to accommodate their risk management needs, market-making to facilitate
customer-driven demand for derivatives, derivatives transacted on a limited basis to generate trading income from our principal trading positions, and
certain derivatives that we enter into as part of our risk management strategy that do not qualify as hedges for accounting purposes (economic hedges).
We structure and market derivative products to enable customers to transfer, modify or reduce current or expected exposure to risks.
Principal trading activities include market-making and positioning activities. Market-making involves quoting bid and offer prices to other market
participants with the intention of generating revenues based on spread and volume. Positioning activities involve managing market risk positions
with the expectation of profiting from favourable movements in prices, rates or indices.
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. We entered into economic hedges in
relation to the announced definitive agreement with BNP Paribas to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
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.
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BMO Financial Group 205th Annual Report 2022 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (1)
Forward rate agreements
Purchased options
Written options
Futures
Foreign Exchange Contracts (2)
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 (3)
Cash flow hedges – swaps
Fair value hedges – swaps
Total swaps
Foreign Exchange Contracts (4)
Cash flow hedges (1)
Net investment hedges
Total foreign exchange contracts
Equity Contracts
Cash flow hedges
Total equity contracts
Gross
assets
Gross
liabilities
7,176
437
3,157
–
16
1,688
10,722
8,387
1,096
–
4,198
1,851
–
275
6,473
27
34
(4,249)
(120)
–
(2,391)
(27)
(2,096)
(11,254)
(7,267)
–
(1,151)
(1,725)
–
(1,627)
(237)
(14,584)
(3)
(72)
2022
Net
2,927
317
3,157
(2,391)
(11)
(408)
(532)
1,120
1,096
(1,151)
2,473
1,851
(1,627)
38
(8,111)
24
(38)
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)
45,537
(46,803)
(1,266)
34,350
(27,875)
6,475
41
1,935
1,976
629
–
629
18
18
(6,824)
(2,987)
(9,811)
(3,342)
–
(3,342)
–
–
(6,783)
(1,052)
(7,835)
(2,713)
–
(2,713)
18
18
354
903
1,257
1,020
46
1,066
40
40
2,363
36,713
(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
Total fair value – hedging derivatives (5)
2,623
(13,153)
(10,530)
Total fair value – trading and hedging derivatives
48,160
(59,956)
(11,796)
Less: impact of master netting agreements
(31,878)
31,878
–
(20,952)
Total
16,282
(28,078)
(11,796)
15,761
(1) Includes derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
(2) Gold contracts are included in foreign exchange contracts.
(3) Includes the fair value of bond futures in fair value hedges rounded down to $nil million as at October 31, 2022 (we held no bond futures as at October 31, 2021).
(4) Includes the fair value of USD-EUR cross-currency swaps in fair value hedges rounded down to $nil million as at October 31, 2022 (we held no USD-EUR cross-currency swaps as at October 31, 2021).
(5) 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.
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168 BMO Financial Group 205th Annual Report 2022
Notional Amounts of Trading Derivatives
The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be
exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.
(Canadian $ in millions)
Interest Rate Contracts
Swaps (1)
Forward rate agreements
Purchased options
Written options
Futures
Total interest rate contracts
Foreign Exchange Contracts (2)
Cross-currency swaps
Cross-currency interest rate swaps
Forward foreign exchange contracts
Purchased options
Written options
Futures
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Written options
Futures
Total commodity contracts
Equity Contracts
Credit Contracts
Purchased
Written
Total
Exchange traded
Over-the-counter
2022
Total
Exchange traded
Over-the-counter
2021
Total
–
–
23,854
11,073
401,965
5,683,145
22,397
98,113
87,941
–
5,683,145
22,397
121,967
99,014
401,965
–
–
10,611
3,621
232,972
3,976,428
147,657
69,491
68,155
–
3,976,428
147,657
80,102
71,776
232,972
436,892
5,891,596
6,328,488
247,204
4,261,731
4,508,935
–
–
–
1,127
5,421
1,032
7,580
–
34,177
34,245
44,836
113,258
162,102
53,837
578,685
481,773
72,733
74,041
–
53,837
578,685
481,773
73,860
79,462
1,032
1,261,069
1,268,649
24,525
5,686
5,011
–
24,525
39,863
39,256
44,836
35,222
148,480
–
–
–
1,762
4,735
222
6,719
–
10,020
11,000
39,448
60,468
104,825
266,927
106,302
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
4,526
3,132
–
36,550
98,962
28,892
14,546
14,132
39,448
97,018
205,264
–
–
16,771
11,099
16,771
11,099
–
–
12,358
5,158
12,358
5,158
719,832
7,320,582
8,040,414
420,693
5,564,405
5,985,098
(1) Includes derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
(2) Gold contracts are included with foreign exchange contracts.
Table excludes loan commitment derivatives with notionals of $4,183 million ($5,613 million as at October 31, 2021).
Derivatives Used in Hedge Accounting
The bank applies the requirements of IAS 39 Financial Instruments: Recognition and Measurement for hedge accounting purposes. 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, foreign exchange forwards and options 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 Non-Trading 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 changes in 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,
which is 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 205th Annual Report 2022 169
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 that 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, 2022, with application ending at the earlier of the discontinuation of the impacted hedge 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
2022
Total
2021
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
Notional amount
Average fixed interest rate
Average exchange rate: CAD-USD
Notional amount
Average fixed interest rate
Average exchange rate: CAD-EUR
Other currency pairs (4) Notional amount (5)
Average fixed interest rate
Average exchange rate:
CAD-Non USD/EUR
Equity price risk – Total return swap (6)
Notional amount
Fair Value Hedges
Interest rate risk – Interest rate swaps
Notional amount (7)
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-EUR pair
Notional amount (8)
Average fixed interest rate
Average exchange rate: USD-EUR
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
54,197
29,562
41,475
41,028
1,683
167,945
94,152
3.87%
3.37%
2.30%
2.56%
2.42%
3.06%
1.06%
33,018
12,436
0.60%
2.10%
1.3329
6,710
1.3076
1,924
9,943
2.45%
1.2757
8,756
1.76%
2.41%
3.12%
1.4919
1,801
1.5395
2,077
1.3904
3,621
3.15%
2.35%
1.96%
6,979
1.58%
1.3407
1,839
1.89%
1.4711
143
4.33%
327
3.42%
1.3076
200
2.97%
1.4870
76
5.24%
62,703
38,292
1.31%
1.91%
1.3196
19,429
1.3137
14,517
2.47%
2.10%
1.4489
7,718
1.5078
10,055
2.42%
2.39%
1.0536
1.2744
1.6947
0.1500
0.9038
1.3956
1.4606
–
455
–
–
–
455
515
31,073
31,604
24,011
14,692
2,291
103,671
80,711
2.85%
2.01%
2.28%
2.56%
2.90%
2.42%
1.21%
109
104
–
–
–
–
–
–
1,251
–
19
3.25%
0.9706
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
109
104
19
3.25%
0.9706
–
–
–
–
–
–
1,285
1,251
–
5,964
728
(1) The notional amount of the interest rate swaps likely subject to IBOR reform was $22,689 million of USD LIBOR maturing after June 30, 2023 and $49,560 million of CDOR maturing after June 28, 2024,
as at October 31, 2022. We had a notional amount of $35,519 million as at October 31, 2021, likely subject to USD 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 derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
(4) Includes CAD-AUD, CAD-CHF, CAD-CNH, CAD-GBP, CAD-HKD, CAD-JPY, or CAD-NOK cross-currency swaps where applicable. The notional amount of the cross-currency swaps likely subject to IBOR reform
was $nil million of USD LIBOR maturing after June 30, 2023 and $nil million of CDOR maturing after June 28, 2024 as at October 31, 2022. We had a notional amount of $nil million of USD LIBOR as at
October 31, 2021, 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.
(5) The notional amount of the cross-currency swaps likely subject to IBOR reform that mature after December 31, 2021 was $nil million of GBP LIBOR as at October 31, 2022 ($718 million as at
October 31, 2021).
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(6) The notional amount of the total return swaps likely subject to IBOR reform that mature after June 28, 2024 was $455 million of CDOR as at October 31, 2022.
(7) The notional amount of the interest rate swaps likely subject to IBOR reform was $31,455 million of USD LIBOR maturing after June 30, 2023 and $21,043 million of CDOR maturing after June 28, 2024
as at October 31, 2022. We had a notional amount of $43,642 million of USD LIBOR as at October 31, 2021, 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 $nil million as at October 31, 2022
($nil million as at October 31, 2021).
(8) The notional amount of the cross-currency swaps likely subject to IBOR reform was $nil million of USD LIBOR maturing after June 30, 2023 and $nil million of CDOR maturing after June 28, 2024 as at
October 31, 2022. We had a notional amount of $nil million of USD LIBOR as at October 31, 2021, 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.
170 BMO Financial Group 205th Annual Report 2022
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, forwards 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, bankers’ acceptance (BA) rates or Secured Overnight Financing Rate (SOFR).
We determine the amount of the exposure to which hedge accounting is applied by assessing the potential impact of changes in interest rates,
foreign exchange rates, and equity prices on the future cash flows of floating rate loans and deposits, foreign currency denominated assets and
liabilities and certain cash-settled share-based payments. This assessment is performed using analytical techniques, such as simulation, sensitivity
analysis, stress testing and gap analysis.
We record interest that we pay or receive on these cash flow hedge derivatives as an adjustment to net interest income in our Consolidated
Statement of Income over the life of the hedge.
We entered into forward contracts, to hedge variability in the fixed cash USD purchase price we will pay BNP Paribas to acquire Bank of the West
and its subsidiaries. Refer to Note 10 for further details.
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. If the hedged item is sold or settled, the entire unrealized gain or
loss is recognized immediately in net interest income in our Consolidated Statement of Income. 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, foreign exchange forwards and options 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 hedges. 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 had not been 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.
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BMO Financial Group 205th Annual Report 2022 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For cash flow hedges and net investment hedges, the following table contains information related to items designated as hedging instruments,
hedged items and hedge ineffectiveness for the years ended October 31, 2022 and October 31, 2021.
(Canadian $ in millions)
2022
Carrying amount of
hedging instruments (1)
Hedge ineffectiveness
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps,
foreign exchange forwards and options (3)
Equity price risk – Total return swaps
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps,
foreign exchange forwards and options
Foreign exchange risk – Deposit liabilities
Total
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps,
foreign exchange forwards and options
Equity price risk – Total return swaps
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps,
foreign exchange forwards and options
Foreign exchange risk – Deposit liabilities
Total
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
(8,481)
1,684
(29)
(6,826)
429
(886)
(7,283)
(2,467)
276
313
(1,878)
29
647
(1,202)
8,588
(33)
(1,684)
29
6,933
(429)
886
7,390
2,447
(276)
(313)
1,858
(29)
(647)
1,182
–
–
(33)
–
–
(33)
2021
(5)
–
–
(5)
–
–
(5)
Asset
Liability
41
(6,824)
629
18
688
(3,342)
–
(10,166)
–
–
–
(1,251)
688
(11,417)
354
(1,166)
1,020
40
1,414
(1,112)
–
(2,278)
46
–
–
(6,692)
1,460
(8,970)
(1) Represents 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.
(3) Includes derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
The following tables provide a reconciliation related to the impacts of our cash flow hedges and net investment hedges in our Consolidated
Statement of Other Comprehensive Income, on a pre-tax basis for the years ended October 31, 2022 and October 31, 2021.
(Canadian $ in millions)
Cash Flow Hedges
Interest rate risk
Foreign exchange risk (3)
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
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Cash Flow Hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
Balance
October 31, 2021
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
2022
Balance in cash flow hedge AOCI /
net foreign operations AOCI
Balance
October 31, 2022 (1)(2)
Active hedges
Discontinued hedges
578
(483)
179
274
(8,448)
1,684
(29)
(6,793)
(1,263)
(457)
(989)
(7,250)
(334)
22
(117)
(429)
(3)
(432)
(8,204)
1,223
33
(6,948)
(1,723)
(8,671)
(6,713)
1,168
33
(5,512)
(1,723)
(7,235)
(1,491)
55
–
(1,436)
–
(1,436)
2021
Balance
October 31, 2020
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance in cash flow hedge AOCI /
net foreign operations AOCI
Balance
October 31, 2021 (1)(2)
Active hedges
Discontinued hedges
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
(1,263)
(989)
(921)
(483)
179
(1,225)
(1,263)
(2,488)
1,499
–
–
1,499
–
1,499
(1) Tax balance related to cash flow hedges accumulated other comprehensive income was $1,819 million as at October 31, 2022 ($(89) million as at October 31, 2021).
(2) Tax balance related to net investment hedges accumulated other comprehensive income was $466 million as at October 31, 2022 ($341 million as at October 31, 2021).
(3) Includes derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
172 BMO Financial Group 205th Annual Report 2022
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 foreign exchange
risk and 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 is 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.
The amounts related to derivatives designated as fair value hedging instruments, hedged items and hedge ineffectiveness for the years ended
October 31, 2022 and 2021 are as follows:
(Canadian $ in millions)
Carrying amount of
hedging derivatives (1)
Hedge ineffectiveness
2022
Accumulated amount of fair value
hedge gains (losses) on hedged items
Fair Value Hedge (3)
Interest rate swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
Asset
Liability
1,935
–
(2,987)
–
–
–
1,935
(2,987)
Fair Value Hedge (3)
Interest rate swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
903
–
–
903
(662)
–
–
(662)
Gains (losses) on
hedging derivatives
used to calculate
hedge ineffectiveness
Gains (losses) on
hedged item used
to calculate hedge
ineffectiveness
Ineffectiveness
recorded in
non-interest
revenue – other
Carrying amount
of the hedged
item (2)
Active
hedges
Discontinued
hedges
–
2,633
(3,113)
(480)
–
1,649
(644)
1,005
–
(2,625)
3,128
503
–
(1,654)
638
(1,016)
–
8
15
23
–
(5)
(6)
–
36,394
–
(2,603)
(61,307)
(24,913)
2,841
238
–
49,789
–
156
(31,530)
(121)
(11)
18,259
35
–
122
425
547
2021
–
62
(91)
(29)
(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) Includes the fair value of USD-EUR cross-currency swaps and bond futures rounded down to $nil million as at October 31, 2022 (we held no USD-EUR cross-currency swaps and bond futures as at
October 31, 2021).
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 expose us
to potential credit loss if changes in market rates affect the counterparty’s position unfavourably and the counterparty defaults on payment. The credit
risk is represented by the positive fair value of the derivative instrument. We strive to limit credit risk by dealing with counterparties that we believe
are creditworthy, and we manage our credit risk for derivatives using the same credit risk process that is applied to loans and other credit assets.
We also pursue opportunities to reduce our exposure to credit losses on derivative instruments, by securing 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 risk exposure, as they are settled net daily with each exchange.
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BMO Financial Group 205th Annual Report 2022 173
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and 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 of 1.4, as outlined in OSFI’s Capital Adequacy Requirements (CAR) 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.
(Canadian $ in millions)
2022
2021
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
4,133
943
48
4
5,128
231
159
7
397
8,718
1,773
170
131
764
430
46
67
10,792
1,307
359
227
11
597
7
5
–
12
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
5,525
11,389
1,319
3,414
9,807
2,402
1,645
2,250
321
2
4,218
–
–
7
7
5,535
8,339
681
88
14,643
2
2
10
14
880
1,237
183
30
2,330
–
–
–
–
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
Total foreign exchange contracts
4,225
14,657
2,330
2,002
11,704
2,013
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
3,160
435
126
3,721
1,122
356
303
1,781
5,502
582
1,580
2,162
97
6,107
936
403
7,446
2,055
552
471
3,078
1,281
194
107
1,582
41
11
9
61
10,524
1,643
9,076
3,888
12,964
562
2,406
78
2,484
103
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
17,511
50,096
7,879
18,699
55,575
10,066
(1) Replacement cost and credit risk equivalent are presented after the impact of master netting agreements and calculated using the Standardized Approach Counterparty Credit Risk (SA-CCR) in
accordance with the Capital Adequacy Requirements (CAR) Guideline issued by OSFI. The table therefore excludes loan commitment derivatives.
(2) Gold contracts are included in foreign exchange contracts.
174 BMO Financial Group 205th Annual Report 2022
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Term to Maturity
Our derivative contracts have varying maturity dates. The remaining contractual terms to maturity for the notional amounts of our derivative contracts
are set out below:
(Canadian $ in millions)
Term to maturity
2022
2021
Interest Rate Contracts
Swaps (1)
Forward rate agreements, futures and options
2,458,155
418,903
1,520,032
166,623
829,127
37,057
878,514
19,511
268,933
3,358
5,954,761
645,452
4,151,291
532,507
Total interest rate contracts
2,877,058
1,686,655
866,184
898,025
272,291
6,600,213
4,683,798
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
Total notional
amounts
Total notional
amounts
Foreign Exchange Contracts (2)
Swaps
Forward foreign exchange contracts (1)
Futures
Options
179,823
454,751
992
139,587
208,539
21,846
40
12,230
152,167
3,646
–
1,505
124,941
1,514
–
–
36,598
16
–
–
702,068
481,773
1,032
153,322
599,333
489,426
222
114,789
Total foreign exchange contracts
775,153
242,655
157,318
126,455
36,614
1,338,195
1,203,770
Commodity Contracts
Swaps
Futures
Options
Total commodity contracts
Equity Contracts
Credit Contracts (3)
Total notional amount
12,320
25,521
53,033
90,874
192,539
255
10,426
17,094
21,345
48,865
59,957
640
1,661
2,193
4,741
8,595
13,709
21,986
118
28
–
146
967
–
–
–
–
24,525
44,836
79,119
148,480
210
267,382
3,137
1,852
27,870
28,892
39,448
28,678
97,018
205,780
17,516
3,935,879
2,038,772
1,067,792
1,028,730
310,967
8,382,140
6,207,882
(1) Includes derivatives entered into in relation to our announced agreement to acquire Bank of the West and its subsidiaries. Refer to Note 10 for further details.
(2) Gold contracts are included in foreign exchange contracts.
(3) Under the SA-CCR, excludes loan commitment derivatives.
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 value in use and 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 $6 million due to impairment during the year ended October 31, 2022
($36 million in 2021). 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. 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.
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. 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. 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 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 related to leases of low value are expensed when incurred in non-interest expense, premises and equipment, in our Consolidated
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BMO Financial Group 205th Annual Report 2022 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total cost and associated accumulated depreciation for premises and equipment owned and leased are set out below:
(Canadian $ in millions)
2022
2021
Land Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Right-of-use
assets
Total Land Buildings
Computer
equipment
Other
equipment
Leasehold
improvements
Right-of-use
assets Total
Cost
Balance at beginning of year
Additions/lease modifications
Disposals (1)
Foreign exchange and other
99
18
(8)
10
1,354
59
(44)
319
2,292
319
(53)
113
Balance at end of year
119
1,688
2,671
Accumulated Depreciation and
Impairment
Balance at beginning of year
Disposals (1)
Depreciation
Foreign exchange and other (2)
Balance at end of year
–
–
–
–
–
867
(35)
50
306
1,724
(48)
225
106
1,188
2,007
Net carrying value
119
500
664
685
105
(29)
184
945
471
(25)
53
168
667
278
1,941
281
(246)
78
3,201 9,572 112
–
(6)
(7)
329 1,111
(615)
(235)
844
140
1,454
52
(44)
(108)
2,481
193
(349)
(33)
904
53
(245)
(27)
1,769
192
(44)
24
2,580 9,300
731 1,221
(29) (717)
(81) (232)
2,054
3,435 10,912 99
1,354
2,292
685
1,941
3,201 9,572
1,338
(243)
116
59
1,270
718 5,118
(504)
(153)
780
336
677
38
939 6,071
–
–
–
–
–
784
2,496 4,841 99
936
(46)
52
(75)
867
487
1,888
(345)
217
(36)
1,724
568
680
(245)
51
(15)
471
214
1,250
(41)
105
24
1,338
363 5,117
(29) (706)
366 791
(84)
18
718 5,118
603
2,483 4,454
(1) Includes fully depreciated assets written off and assets sold as part of divestitures during the year. Refer to Note 10.
(2) Includes impairment charges.
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.
Bank of the West
On December 20, 2021, we announced a definitive agreement with BNP Paribas to acquire Bank of the West and its subsidiaries for a cash purchase
price of US$16.3 billion, or US$13.4 billion net of an estimated US$2.9 billion of excess capital (at closing). Bank of the West provides a broad range of
banking products and services primarily in the Western and Midwestern parts of the U.S. Subject to customary closing conditions, including regulatory
approvals, the transaction is expected to close in the first calendar quarter of 2023 and will primarily be part of our U.S. P&C reporting segment.
When the transaction closes, the purchase price will be allocated to the identifiable assets and liabilities of Bank of the West, on the basis of their
relative fair values, with the difference recorded as goodwill. The goodwill will not be tax deductible. The fair value of fixed rate loans, securities and
deposits is largely dependent on interest rates. If interest rates increase, the fair value of the acquired fixed rate assets (in particular, loans and
securities) will decrease, resulting in higher goodwill. If interest rates decrease, the opposite would be true. Conversely, the fair value of floating rate
assets (liabilities) and non-maturity deposits approximates par, providing no natural offset to changes in fair value.
Changes in goodwill relative to our original assumptions announced on December 20, 2021 will impact capital ratios at close, because goodwill is
treated as a deduction from capital under OSFI Basel III rules. In addition, since the purchase price of the acquisition is in U.S. dollars, any change in
foreign exchange translation between the Canadian dollar relative to the U.S. dollar between the announcement and the close of the acquisition will
result in a change to the Canadian dollar-equivalent goodwill.
To mitigate the impact of changes in interest rates between announcement and close, we entered into pay fixed/receive float interest rate
swaps and purchased a portfolio of matched-duration government debt securities and other balance sheet instruments that generate interest income
(the impact of which is recorded in Corporate Services). We recorded mark-to-market gains of $7,665 million on the swaps for the year ended
October 31, 2022 in our Consolidated Statement of Income in non-interest revenue, trading revenues, as the swaps do not qualify for hedge
accounting. Government debt securities and other instruments, which are measured at amortized cost, generated $48 million in our Consolidated
Statement of Income in interest, dividend and fee income, securities, for the year ended October 31, 2022.
To mitigate the effects of any changes in the Canadian dollar equivalent of the purchase price on close, we entered into forward contracts, which
qualify for hedge accounting. Changes in the fair value of these forward contracts of $638 million for the year ended October 31, 2022 are recorded in
Other Comprehensive Income until close of the transaction.
Radicle Group Inc.
On July 20, 2022, we announced a definitive agreement to acquire Radicle Group Inc. (Radicle), a Calgary-based leader in sustainability advisory
services and solutions, and technology-driven emissions measurement and management. All regulatory approvals for the acquisition have been
received and the acquisition is expected to close on December 1, 2022. Radicle will form part of our BMO Capital Markets reporting segment. The
impact of this acquisition is not expected to be material to the bank.
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176 BMO Financial Group 205th Annual Report 2022
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 revenue.
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$1,038 million) in an all-cash transaction. On the date of sale, assets and liabilities of
approximately $1,779 million and $527 million, respectively, were derecognized. In connection with the completion of the EMEA portion of the sale,
we recognized a before and after tax loss of $29 million relating to foreign currency translation reclassified from accumulated other comprehensive
income in equity to non-interest revenue, foreign exchange gains, other than trading, in our Consolidated Statement of Income in the first quarter.
The transaction also included the opportunity for certain BMO asset management clients in the U.S. to move to Ameriprise. These transfers were
completed in the first quarter and resulted in tax expense of $22 million. Further transfers of certain U.S. Asset Management clients were completed
in the second quarter with no material impact to the bank.
Taplin, Canida & Habacht, LLC
On January 27, 2022, we completed the sale of Taplin, Canida & Habacht, LLC, part of our U.S. asset management business to Loop Capital. The
business sold was not considered material to the bank.
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 was 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% (3.0% in 2021). The discount rates we applied in determining the
recoverable amounts in 2022 ranged from 6.8% to 11.2% (6.8% to 11.0% in 2021) 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 is 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.
A continuity of our goodwill by group of CGUs for the years ended October 31, 2021 and 2022 is as follows:
(Canadian $ in millions)
Personal and Commercial Banking
BMO Wealth Management BMO Capital Markets
Total
Balance – October 31, 2020
Dispositions during the year
Foreign exchange and other (1)
Balance – October 31, 2021
Dispositions during the year
Foreign exchange and other (1)
Canadian
P&C
97
–
–
97
–
–
U.S.
P&C
3,841
–
(274)
3,567
–
362
Wealth and
Asset
Management
Insurance
2,168
(21)
(837) (7)
1,310
(538)
50
2
–
–
2
–
–
Total
3,938
–
(274)
3,664
–
362
Balance – October 31, 2022
97 (2)
3,929 (3)
4,026
822 (4)
2 (5)
Total
2,170
(21)
(837)
1,312
(538)
50
824
427
–
(25)
402
–
33
6,535
(21)
(1,136)
5,378
(538)
445
435 (6)
5,285
(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 primarily to BMO Nesbitt Burns Inc., Guardian Group of Funds Ltd., M&I, myCFO, Inc., Stoker Ostler Wealth Advisors, Inc. and CTC Consulting LLC. The Private Banking business in Hong Kong and
Singapore was disposed in fiscal 2021. Pyrford International Limited, LGM Investments Limited and F&C Asset Management plc were disposed in fiscal 2022. Refer to Note 10 for further information.
(5) Relates to AIG Life Holdings (Canada), ULC.
(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.
(7) Includes a write-down of $779 million of goodwill attributable to the sale of our EMEA Asset Management business in fiscal 2021. Refer to Note 10 for further information.
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BMO Financial Group 205th Annual Report 2022 177
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, 2020
Additions
Transfers
Disposals (2)
Foreign exchange and other
Cost as at October 31, 2021
Additions
Transfers
Disposals (2)
Foreign exchange and other
Cost as at October 31, 2022
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
Other
Total
767
–
–
(9)
(39)
719
–
–
(247)
49
962
–
–
–
(68)
894
–
–
–
84
5,416
65
498
(313)
(118)
5,548 (1)
11
611
(53)
120
280
430
(498)
(4)
(4)
204
662
(611)
(1)
5
621
30
–
(28)
(22)
601
20
–
(319)
20
8,046
525
–
(354)
(251)
7,966
693
–
(620)
278
521
978
6,237 (1)
259
322 8,317
(1) Includes $5,486 million of internally generated software as at October 31, 2022 ($4,798 million as at October 31, 2021).
(2) Includes fully depreciated assets written off and assets sold as part of divestitures during the year. Refer to Note 10 for further information.
The following table presents the accumulated amortization of our intangible assets:
(Canadian $ in millions)
Accumulated amortization at October 31, 2020
Amortization
Disposals (2)(3)
Foreign exchange and other
Accumulated amortization at October 31, 2021
Amortization
Disposals (2)(3)
Foreign exchange and other
Accumulated amortization at October 31, 2022
Carrying value at October 31, 2022
Carrying value at October 31, 2021
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
Other
Total
616
35
(5)
(30)
616
22
(247)
44
435
86
103
933
27
–
(66)
894
–
–
84
978
–
–
3,681
530
(308)
(82)
3,821 (1)
556
(49)
94
4,422 (1)
1,815
1,727
–
–
–
–
–
–
–
–
–
259
204
374
42
(28)
(19)
369
26
(123)
17
5,604
634
(341)
(197)
5,700
604
(419)
239
289 6,124
33 2,193
232
2,266
(1) Includes $3,819 million of internally generated software as at October 31, 2022 ($3,231 million as at October 31, 2021).
(2) Includes fully depreciated assets written off and assets sold as part of divestitures during the year. Refer to Note 10 for further information.
(3) Includes impairment charges.
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 $nil million as at October 31, 2022 ($166 million as at October 31, 2021) 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 $5 million during the year ended October 31, 2022 ($9 million in 2021).
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.
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178 BMO Financial Group 205th Annual Report 2022
Other
The components of other within other assets are as follows:
(Canadian $ in millions)
Accounts receivable, prepaid expenses and other items
Accrued interest receivable
Bank owned life insurance policies
Leased vehicles, net of accumulated amortization
Cash collateral
Due from clients, dealers and brokers
Insurance-related assets (1)
Other employee future benefits assets (Note 21)
Pension asset (Note 21)
Precious metals (2)
Total
2022
2021
3,634
2,726
4,509
263
13,586
313
2,575
51
1,267
2,970
3,302
1,452
4,096
415
6,436
353
2,080
40
947
3,290
31,894
22,411
(1) Includes $1,001 million of investment properties ($881 million as at October 31, 2021) carried at cost less accumulated amortization. These investment properties support our insurance contract
liabilities. The fair value, determined by external independent property valuers for disclosure purposes, is $1,195 million and categorized as Level 3 using models with unobservable market inputs
($1,033 million as at October 31, 2021).
(2) Precious metals are recorded at fair value based on quoted prices in active markets.
Note 13: Deposits
Payable on demand
(Canadian $ in millions)
Interest bearing
Non-interest
bearing
Payable
after notice
Payable on
a fixed date (2)
2022
2021
Deposits by:
Banks (1)
Business and government
Individuals
Total (3)
Booked in:
Canada
United States
Other countries
Total
4,938
49,074
4,435
58,447
48,260
9,851
336
58,447
2,096
52,355
36,822
91,273
81,726
9,478
69
91,273
1,417
151,298
119,129
271,844
126,204
143,819
1,821
271,844
22,450
243,104
82,360
347,914
259,100
54,572
34,242
347,914
30,901
495,831
242,746
769,478
515,290
217,720
36,468
769,478
26,611
442,248
216,772
685,631
427,316
232,830
25,485
685,631
(1) Includes regulated and central banks.
(2) Includes $51,746 million of senior unsecured debt as at October 31, 2022 subject to the Bank Recapitalization (Bail-In) regime ($35,959 million as at October 31, 2021). 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.
(3) Included in deposits as at October 31, 2022 and 2021 are $384,080 million and $342,967 million, respectively, of deposits denominated in U.S. dollars, and $46,830 million and $29,937 million,
respectively, of deposits denominated in other foreign currencies.
Deposits are measured at amortized cost, except for structured notes, structured deposits and metal deposits, which are measured at FVTPL. 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 $29,966 million as at October 31, 2022 ($20,991 million as at
October 31, 2021) can be early redeemed, either fully or partially, by customers without penalty. These are classified as payable on a fixed date,
based on their remaining contractual maturities.
• Commercial paper, which totalled $42,138 million as at October 31, 2022 ($13,834 million as at October 31, 2021).
• Covered bonds, which totalled $29,076 million as at October 31, 2022 ($23,495 million as at October 31, 2021).
The following table presents the maturity schedule for deposits payable on a fixed date:
(Canadian $ in millions)
As at October 31, 2022
As at October 31, 2021
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
228,679
163,370
39,992
33,778
23,445
24,826
16,665
8,908
22,868
11,995
16,265 347,914
262,802
19,925
We have unencumbered liquid assets of $335,299 million to support these and other deposit liabilities ($317,251 million as at October 31, 2021).
The following table presents deposits payable on a fixed date and greater than one hundred thousand dollars:
(Canadian $ in millions)
As at October 31, 2022
As at October 31, 2021
Canada
United States
Other
Total
230,475
140,002
50,542
72,399
34,241
23,921
315,258
236,322
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BMO Financial Group 205th Annual Report 2022 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the maturity schedule for deposits payable on a fixed date and greater than one hundred thousand dollars, that are
booked in Canada:
(Canadian $ in millions)
As at October 31, 2022
As at October 31, 2021
Less than 3 months
3 to 6 months
6 to 12 months
Over 12 months
Total
46,792
20,626
28,826
12,761
55,288
20,933
99,569 230,475
140,002
85,682
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, 2022
As at October 31, 2021
Notional amount
due at contractual
maturity
32,507
22,448
Fair value
26,305
22,665
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)
4,617
(1,310)
1,653
(240)
1,245
(408)
(1) Change in fair value may be offset by related change in fair value on hedge contracts.
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 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.
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180 BMO Financial Group 205th Annual Report 2022
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
Liabilities of subsidiaries
Other employee future benefits liability (Note 21)
Payable to brokers, dealers and clients
Pension liability (Note 21)
Total
2022
2021
11,647
2,319
381
5,042
11,201
2,835
7,494
832
2,966
88
9,444
960
394
6,733
12,845
2,743
–
1,094
3,413
138
44,805
37,764
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 obligations 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 the fair value and changes in fair value in our investment contract liabilities:
(Canadian $ in millions)
As at October 31, 2022
As at October 31, 2021
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)
1,459
1,526
(114)
(81)
94
(26)
22
(72)
Fair value
770
1,046
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.
A reconciliation of the change in insurance-related liabilities is as follows:
(Canadian $ in millions)
Insurance-related liabilities, beginning of year
Increase (decrease) in life insurance policy benefit liabilities from:
New business
In-force policies
Changes in actuarial assumptions and methodology
Foreign currency
Net increase (decrease) in life insurance policy benefit liabilities
Change in other insurance-related liabilities
Insurance-related liabilities, end of year
2022
2021
12,845
12,441
354
(1,938)
201
3
(1,380)
(264)
765
(306)
(72)
(2)
385
19
11,201
12,845
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, 2022 and 2021, as shown in the table below:
(Canadian $ in millions)
Direct premium income
Ceded premiums
2022
2021
1,623
(399)
2,050
(408)
1,224
1,642
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BMO Financial Group 205th Annual Report 2022 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Liabilities
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, 2022 was $59 million ($56 million in 2021). Total cash outflow for lease liabilities for the
year ended October 31, 2022 was $342 million ($383 million in 2021). Variable lease payments (for example maintenance, utilities and property
taxes) not included in the measurement of lease liabilities for the year ended October 31, 2022 were $206 million ($236 million in 2021).
The maturity profile of our undiscounted lease liabilities is $350 million for 2023, $342 million for 2024, $323 million for 2025, $298 million for
2026, $275 million for 2027 and $1,643 million for 2028 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 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)
3.088% Subordinated Notes due 2037 (1)
Series L Medium-Term Notes, First Tranche (1)
Total (10)
150 December 2025 to 2040
850
June 2027
US 1,250 December 2032
US 850 October 2028
1,000
1,250
1,000
US 1,250
September 2029
June 2030
July 2031
January 2037
750 October 2032
8.25 Not redeemable
2.57
June 2022 (2)
3.80 December 2027 (3)
4.34 October 2023 (4)
September 2024 (5)
2.88
June 2025 (6)
2.08
July 2026 (7)
1.93
3.09
January 2032 (8)
6.53 October 2027 (9)
2022
Total
2021
Total
146
–
1,497
1,135
998
1,248
984
1,393
749
146
843
1,567
1,096
998
1,248
995
–
–
8,150
6,893
(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 $850 million Series I Medium-Term Notes Second Tranche were redeemed on June 1, 2022 for 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption
date.
(3) Redeemable at par on December 15, 2027 together with accrued and unpaid interest to, but excluding, the redemption date.
(4) Redeemable at par on October 5, 2023 together with accrued and unpaid interest to, but excluding, the redemption date.
(5) Redeemable at par on September 17, 2024 together with accrued and unpaid interest to, but excluding, the redemption date.
(6) Redeemable at par on June 17, 2025 together with accrued and unpaid interest to, but excluding, the redemption date.
(7) Redeemable at par on July 22, 2026 together with accrued and unpaid interest to, but excluding, the redemption date.
(8) On January 10, 2022, we issued US$1,250 million of unsecured subordinated debt through our U.S. Medium-Term Note Program. These notes are redeemable at par on January 10, 2032 together
with accrued and unpaid interest to, but excluding, the redemption date.
(9) On October 27, 2022, we issued $750 million of unsecured subordinated debt through our Canadian Medium-Term Note Program. These notes are redeemable at par on October 27, 2027 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 decreased their carrying value as at October 31, 2022 by
$565 million (increased by $44 million in 2021); 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.
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.
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182 BMO Financial Group 205th Annual Report 2022
Note 16: Equity
Preferred and Common Shares Outstanding and Other Equity Instruments
(Canadian $ in millions, except as noted)
2022
2021
Number of
shares
Amount
Dividends declared
per share
Number of
shares
Amount
Dividends declared
per share
Preferred Shares – Classified as Equity
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 38 (1)
Class B – Series 40 (2)
Class B – Series 42 (3)
Class B – Series 44
Class B – Series 46
Class B – Series 50 (4)
Preferred Shares – Classified as Equity
Other Equity Instruments
4.800% Additional Tier 1 Capital Notes (AT1 Notes)
4.300% Limited Recourse Capital Notes, Series 1
(Series 1 LRCNs)
5.625% Limited Recourse Capital Notes, Series 2
(Series 2 LRCNs) (5)
7.325% Limited Recourse Capital Notes, Series 3
(Series 3 LRCNs) (6)
Preferred Shares and Other Equity Instruments
Common Shares
Balance at beginning of year
Issued to finance a portion of the announced
acquisition (Note 10)
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)
Treasury shares sold/(purchased)
20,000,000
16,000,000
12,000,000
8,000,000
–
–
–
16,000,000
14,000,000
500,000
500
400
300
200
–
–
–
400
350
500
2,650
658
1,250
750
1,000
6,308
0.96
0.91
0.96
0.76
0.30
0.56
0.83
1.21
1.28
24.64
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
–
0.96
0.91
0.96
0.76
1.21
1.13
1.10
1.21
1.28
–
500
400
300
200
600
500
400
400
350
–
3,650
658
1,250
–
–
5,558
648,136,472
13,599
645,889,396
13,430
20,843,750
3,106
7,531,233
999
733,591
(138,168)
57
(17)
–
–
1,630,867
616,209
–
–
122
47
Balance at End of Year (7)
677,106,878
17,744
5.44
648,136,472
13,599
4.24
(1) Series 38 was redeemed and final dividends were paid on February 25, 2022.
(2) Series 40 was redeemed and final dividends were paid on May 25, 2022.
(3) Series 42 was redeemed and final dividends were paid on August 25, 2022.
(4) On July 27, 2022, we issued Class B Series 50 Preferred Shares for $500 million.
(5) On March 15, 2022, we issued Series 2 LRCNs for $750 million.
(6) On September 13, 2022, we issued Series 3 LRCNs for $1,000 million.
(7) Common shares are net of 174,689 treasury shares as at October 31, 2022 (36,521 treasury shares as at October 31, 2021).
Preferred Share Rights and Privileges
(Canadian $, except as noted)
Class B – Series 27
Class B – Series 29
Class B – Series 31
Class B – Series 33
Class B – Series 44
Class B – Series 46
Class B – Series 50
Redemption amount
Non-cumulative dividend (1)
Reset premium
Date redeemable / convertible
Convertible to
25.00
25.00
25.00
25.00
25.00
25.00
1,000.00
$ 0.24075 (2)
$ 0.2265 (2)
$0.240688 (2)
$0.190875 (2)
$0.303125 (2)
$ 0.31875 (2)
$24.64400 (2)
2.33%
2.24%
2.22%
2.71%
2.68%
3.51%
4.25%
May 25, 2024 (3)(4)
August 25, 2024 (3)(4)
November 25, 2024 (3)(4)
August 25, 2025 (3)(4)
November 25, 2023 (3)(4)
May 25, 2024 (3)(4)
November 26, 2027 (3)
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 45 (5)(6)
Class B – Series 47 (5)(6)
Not convertible (6)
(1) Non-cumulative dividends are payable quarterly as and when declared by the Board of Directors, except for Class B – Series 50 preferred shares which are payable semi-annually.
(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.
On August 25, 2022, we redeemed all of our outstanding 16 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 42
(Non-Viability Contingent Capital (NVCC)) for an aggregate total of $400 million.
On July 27, 2022, we issued 500,000 Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 50 (NVCC) at a price of $1,000 per share,
for gross proceeds of $500 million. For the initial five-year period to the earliest redemption date of November 26, 2027, the shares pay quarterly
cash dividends, if declared, at a rate of 7.373% per annum. The dividend rate will reset on the earliest redemption date and every fifth year
thereafter at a rate equal to the 5-year Government of Canada bond yield plus a premium of 4.250%.
On May 25, 2022, we redeemed all of our outstanding 20 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 40 (NVCC)
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for an aggregate total of $500 million.
On February 25, 2022, we redeemed all of our outstanding 24 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 38
(NVCC) for an aggregate total of $600 million.
BMO Financial Group 205th Annual Report 2022 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Equity Instruments
On March 15, 2022 and September 13, 2022, we issued $750 million 5.625% Limited Recourse Capital Notes, Series 2 (Series 2 LRCNs) (NVCC) and
$1,000 million 7.325% Limited Recourse Capital Notes, Series 3 (Series 3 LRCNs) (NVCC), respectively. Together with the $1,250 million 4.300%
Limited Recourse Capital Notes, Series 1 (Series 1 LRCNs) (NVCC), these LRCNs 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), $750 million of BMO issued Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 49 (NVCC) (Preferred
Shares Series 49) and $1,000 million of BMO issued Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 51 (NVCC) (Preferred Shares
Series 51) issued concurrently with Series 1, Series 2 and Series 3 LRCNs, respectively. As the Preferred Shares Series 48, Series 49 and Series 51
eliminate on consolidation, they do not currently form part of our Additional Tier 1 capital.
The US$500 million 4.800% Additional Tier 1 Capital Notes (AT1 Notes) (NVCC), are also classified as equity and form part of our Additional Tier 1
capital.
The LRCNs 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 has been classified as
equity. Semi-annual distributions on the LRCNs and AT1 Notes will be recorded when payable. The LRCNs 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 LRCNs as at
October 31, 2022 and 2021.
(Canadian $ in millions, except as noted)
Face value
Interest rate (%)
Redeemable at our option
Convertible to
4.800% Additional Tier 1 Capital Notes
US$ 500
4.800 (1)
August 2024 (2)
4.300% Limited Recourse Capital Notes, Series 1
$1,250
4.300 (4)
November 2025 (2)
5.625% Limited Recourse Capital Notes, Series 2
$ 750
5.625 (4)
May 2027 (2)
7.325% Limited Recourse Capital Notes, Series 3
$1,000
7.325 (4)
November 2027 (2)
Variable number of
common shares (3)
Variable number of
common shares (4)
Variable number of
common shares (4)
Variable number of
common shares (4)
Total
2022
Total
2021
Total
658
658
1,250
1,250
750
1,000
3,658
–
–
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 for Series 1 LRCNs, Preferred Shares Series 49 for Series 2 LRCNs and Preferred Shares Series 51 for
Series 3 LRCNs. In such an event, the delivery of the trust assets will represent the full and complete extinguishment of our obligations under the LRCNs. In circumstances under which NVCC, including
the Preferred Shares Series 48, Preferred Shares Series 49 and Preferred Shares Series 51 for Series 1, Series 2 and Series 3 LRCNs, respectively, would be converted into common shares of the bank
(described below), the LRCNs 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.
Common Shares
On March 29, 2022, we issued 20,843,750 common shares for $3,106 million to finance a portion of the purchase price for the announced acquisition
of Bank of the West. Refer to Note 10 for further information.
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.
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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.
184 BMO Financial Group 205th Annual Report 2022
Non-Viability Contingent Capital
Class B – Series 27, Class B – Series 29, Class B – Series 31, Class B – Series 33, Class B – Series 44, Class B – Series 46 and Class B – Series 50 preferred
share issues, the AT1 Notes and, by virtue of the recourse to the Preferred Shares Series 48, Preferred Shares Series 49 and Preferred Shares Series 51
for Series 1, Series 2 and Series 3 LRCNs, respectively, the LRCNs include a non-viability contingent capital provision which is necessary for them to
qualify as regulatory capital under Basel III. As such, they are convertible into a variable number of our common shares if OSFI announces that the
bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted, or
agreed to accept, a capital injection, or equivalent support, to avoid non-viability. In such an event, each preferred share or other equity instrument is
convertible into common shares pursuant to an automatic conversion formula and a conversion price based on the greater of: (i) a floor price of $5.00
and (ii) the current market price of our common shares based on the volume weighted-average trading price of our common shares on the TSX. The
number of common shares issued is determined by dividing the value of the preferred share or other equity instrument issuance, including declared
and unpaid dividends on such preferred share or other equity instrument issuance, by the conversion price and then applying the multiplier.
Normal Course Issuer Bid
On December 3, 2021, we announced our intention, subject to the approval of OSFI and the TSX, to purchase for cancellation up to 22.5 million of our
common shares under a normal course issuer bid (NCIB). Together with the announcement of the Bank of the West acquisition, we noted that we
would not proceed with establishing a NCIB and did not expect to repurchase shares prior to the closing of the acquisition.
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, Preferred
Shares Series 49 and Preferred Shares Series 51 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 (the Plan) for our shareholders. Participation in the Plan is optional. Under the terms of
the Plan, 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.
On January 10, 2022, we announced the offering of a 2% discount on the common shares issued from treasury under the dividend reinvestment
feature of the Plan. Commencing with the common share dividend declared for the first quarter of fiscal 2022, and subsequently until further notice,
common shares under the Plan will be issued by the bank from treasury with a 2% discount, calculated in accordance with the terms of the Plan. The
discount will not apply to common shares purchased under the Optional Cash Payment feature of the Plan.
We issued 7,531,233 common shares under the Plan for the year ended October 31, 2022 (nil for the year ended October 31, 2021).
Potential Share Issuances
As at October 31, 2022, we had reserved 25,669,677 common shares (33,200,910 as at October 31, 2021) for potential issuance in respect of the
Plan. We have also reserved 5,976,870 common shares (5,682,206 as at October 31, 2021) for the potential exercise of stock options, as further
described in Note 20.
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BMO Financial Group 205th Annual Report 2022 185
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17: Fair Value of Financial Instruments and Trading-Related Revenue
We record assets and liabilities held for trading, assets and liabilities designated at fair value, 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 an estimate of the amount that we would receive, or would be payable in the case of a liability, in an orderly transaction
between willing parties 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.
Securities
For traded securities, quoted market value is considered to be fair value. Quoted market value is based on bid or ask prices, depending on which is
the most appropriate to measure fair value. Securities for which no active market exists are valued using all reasonably available market information.
Our fair value methodologies are described below.
Government Securities
The fair value of debt securities issued or guaranteed by governments 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 (MBS) and collateralized mortgage obligations (CMOs) 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 quoted prices 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.
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186 BMO Financial Group 205th Annual Report 2022
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 quotes, 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
payable on the reporting date.
• For floating rate deposits, changes in interest rates have minimal impact on fair value, since deposits reprice to market frequently. On that basis,
fair value is considered to equal carrying value.
Certain of our structured note liabilities that have coupons or repayment terms linked to the performance of interest rates, foreign currencies,
commodities or equity securities have been designated at fair value through profit or loss. The fair value of these structured notes is estimated using
internally validated valuation models and incorporates observable market prices for identical or comparable securities, as well as other inputs, such as
interest rate yield curves, option volatilities and foreign exchange rates, where appropriate. Where observable prices or inputs are not available,
management judgment is required to determine the fair value by assessing other relevant sources of information, such as historical data and proxy
information from similar transactions.
Securities Sold But Not Yet Purchased
The fair value of these obligations is based on the fair value of the underlying securities, which can be equity or debt securities. As these obligations
are fully collateralized, the method used to determine fair value would be the same as that used for the relevant underlying equity or debt securities.
Securitization and Structured Entities’ Liabilities
The determination of the fair value of our securitization and structured entities’ liabilities is based on quoted market prices or quoted market prices
for similar financial instruments, where available. Where quoted prices are not available, fair value is determined using valuation techniques, such as
discounted cash flow models, that maximize the use of observable inputs.
Subordinated Debt
The fair value of our subordinated debt is determined by referring to current market prices for the same or similar instruments.
Financial Instruments with a Carrying Value Approximating Fair Value
Carrying value is considered to be a reasonable estimate of fair value for our cash and cash equivalents.
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BMO Financial Group 205th Annual Report 2022 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, certain other assets, acceptances, securities lent or sold under repurchase agreements and
certain other liabilities, is a reasonable estimate of fair value due to their short-term nature or because they are frequently repriced to current market
rates. These items are therefore excluded from the table below.
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 table are the fair values of financial instruments not carried at fair value in our Consolidated Balance Sheet.
(Canadian $ in millions)
Securities (1)
Amortized cost
Loans (1)(2)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Deposits (3)
Securitization and structured entities’ liabilities (4)
Other liabilities (5)
Subordinated debt
Carrying
value
2022
Fair
value (6)
Carrying
value
2021
Fair
value (6)
106,590
94,832
49,970
49,810
148,569
85,612
9,387
302,079
545,647
742,419
25,816
4,088
8,150
142,526
83,948
9,387
300,173
536,034
739,339
24,989
3,181
7,743
135,653
76,627
7,827
233,066
453,173
662,050
24,631
–
6,893
135,461
76,791
7,827
233,670
453,749
662,781
24,809
–
7,087
(1) Carrying value is net of allowances for credit losses.
(2) Excludes $176 million of residential mortgages classified as FVTPL, $5,496 million of business and government loans classified as FVTPL and $60 million of business and government loans classified as
FVOCI ($nil million, $5,022 million and $134 million, respectively, as at October 31, 2021).
(3) Excludes $26,305 million of structured note liabilities ($22,665 million as at October 31, 2021), $536 million of structured deposits ($777 million as at October 31, 2021) and $218 million of metal
deposits ($139 million as at October 31, 2021) measured at fair value.
(4) Excludes $1,252 million of securitization and structured entities’ liabilities classified as FVTPL ($855 million as at October 31, 2021).
(5) Other liabilities include certain other liabilities of subsidiaries.
(6) 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 $39,622 million categorized as Level 1 ($14,117 million as at October 31, 2021), and $55,210 million categorized as Level 2 ($35,693 million as at October 31, 2021).
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 yields 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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188 BMO Financial Group 205th Annual Report 2022
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, residential mortgages, 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)
2022
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)
2021
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
Corporate debt
Trading loans
ng loans
C rporate equity
Corporate equity
FVTPL Securities
ecurities
guaranteed by:
Issued or guaranteed by:
Issued or
Canadian federal government
Canadian federal government
and municipal
Canadian provincial and municipal
Canadian provincial
governments
governments
government
U.S. federal government
U.S. federal
Other governments
Other governments
MBS, and U.S. agency MBS and CMO
NHA MBS, and U.S. agency MBS and CMO
NHA
Corporate debt
Corporate debt
Corporate equity
Corporate equity
FVOCI Securities
FVOCI Securities
guaranteed by:
Issued or guaranteed by:
Issued or
Canadian federal government
Canadian federal government
and municipal
Canadian provincial and municipal
Canadian provincial
governments
governments
U.S. federal government
U.S. federal
government
and agencies
U.S. states, municipalities and agencies
U.S. states, municipalities
Other governments
Other governments
MBS, and U.S. agency MBS and CMO
NHA MBS, and U.S. agency MBS and CMO
NHA
Corporate debt
Corporate debt
Corporate equity
Corporate equity
Loans
Loans
Residential mortgages
Residential mortgages
Business and government loans
Business and
government loans
Other Assets
Other Assets (1)(1)
Fair Value Liabilities
Fair Value Liabilities
Securities sold but not yet purchased
Securities sold but not yet purchased
Structured note liabilities (2)(2)
Structured note liabilities
Structured deposits (3)(3)
Structured deposits
Other liabilities
Other liabilities (4)(4)
Derivative Assets
Derivative Assets
Interest rate contracts
Interest rate contracts
Foreign exchange contracts
Foreign exchange contracts
Commodity contracts
Commodity contracts
Equity contracts
Equity contracts
Credit default swaps
Credit default
swaps
Derivative Liabilities
Derivative Liabilities
Interest rate contracts
Interest rate contracts
Foreign exchange contracts
Foreign exchange contracts
Commodity contracts
Commodity contracts
Equity contracts
Equity contracts
Credit default swaps
Credit default
swaps
6,981
3,955
–
10,936
3,123
4,473
4,473
–
7,596
1,120
7,326
56
1,085
––
1,445
–
6,073
46,073
64,0866
4,990
4,990
9,373
83
2,885
13,327
13,327
8,144
346
346
– –
3,103
43,103
–
–
–
–
985
985
3
–
–
6,110
16,699
139
3,970
14,312
312
9,592
9
346 346
446,073
988988 1108,177
2,183
6,050
––
1,307
1,307
– –
2,231
,231
– –
54,931
54,931
669,825
3,655
3,655
3,532
3,532
458 458
591 591
13,379
13,379
7,656
7,656
160 160
– –
33,904
–
–
–
–
675 6 5
7
–
–
5,838
9,582
458
1,898
14,054
14,0
9,894
9,894
160
54,931
682682
,411
104,411
319
319
174
174
––
493493
704704
159159
––
863863
3636
– –
– –
– –
6262
1,440
1,440
1,857
1,857
1,044
1,044
4 4
87 87
8 8
6,409
6,409
6 6
7,732
7,732
––
– –
– –
– –
8 8
4,044
4,044
1,080
1,080
4 4
87 87
8 8
6,479
6,479
5,490
5,490
4,052
4,052
13,641
13,641
137137
– –
– –
– –
160 160
1,670
1,670
2,671
2,671
1,243
1,243
38 38
92 92
9 9
7,544
7,544
12 12
9,097
9,097
––
– –
– –
– –
– –
2,442
2,442
1,380
1,380
3838
9292
99
7,704
7,704
4,124
4,124
2,442
2,442
14,210
14,210
3,544
3,544
8,757
8,757
– –
12,301
12,301
9,138
9,138
3,927
3,927
– –
13,065
13,065
972 972
1,443
1,443
– –
1,795
1,795
– –
355 355
– –
8,109
8,109
– –
– –
––
4,148
4,148
18,465
18,465
– –
– –
1,179
1,179
19,644
19,644
80 80
21 21
1,514
1,514
939 939
– –
2,554
2,554
58 58
2 2
1,523
1,523
1,203
1,203
– –
2,786
2,786
3,599
3,599
1,667
1,667
3,713
3,713
4,616
4,616
9,268
9,268
3,678
3,678
– –
35,298
35,298
176 176
5,536
5,536
5,712
5,712
6060
22,514
22,514
26,305
26,305
536 536
2,298
2,298
51,653
51,653
12,682
12,682
22,475
22,475
4,810
4,810
5,552
5,552
61 61
45,580
45,580
16,540
16,540
25,108
25,108
2,066
2,066
13,381
13,381
73 73
57,168
57,168
– –
– –
1 1
– –
– –
– –
153 153
154154
– –
20 20
2020
4949
– –
– –
– –
2 2
22
– –
26 26
– –
– –
– –
2626
– –
– –
– –
– –
2 2
22
4,571
4,571
3,110
3,110
3,714
3,714
6,411
6,411
9,268
9,268
4,033
4,033
153 153
43,561
43,561
176 176
5,556
5,556
5,732
5,732
4,257
4,257
40,979
40,979
26,305
26,305
536 536
3,479
3,479
71,299
71,299
12,762
12,762
22,522
22,522
6,324
6,324
6,491
6,491
61 61
48,160
48,160
16,598
16,598
25,110
25,110
3,589
3,589
14,584
14,584
75 75
59,956
59,956
1,438
1,438
18,873
18,873
– –
2,803
2,803
– –
812 812
– –
33,064
33,064
– –
– –
––
4,392
4,392
17,424
17,424
– –
– –
1,106
1,106
18,530
18,530
6 6
3 3
642 642
1,381
1,381
– –
2,032
2,032
6 6
4 4
746
746
1,581
1,581
– –
2,337
2,337
1,549
1,549
2,153
2,153
4,113
4,113
3,699
3,699
12,136
12,136
2,349
2,349
– –
29,926
29,926
– –
5,150
5,150
5,150
5,150
8585
14,649
14,649
22,665
22,665
777 777
2,125
2,125
40,216
40,216
8,066
8,066
14,982
14,982
6,976
6,976
4,657
4,657
– –
34,681
34,681
6,773
6,773
12,451
12,451
1,445
1,445
7,802
7,802
5 5
28,476
28,476
– –
– –
1 1
– –
– –
– –
132 132
133133
– –
6 6
66
––
– –
– –
– –
– –
––
– –
– –
– –
– –
– –
––
– –
– –
– –
– –
2 2
22
2,987
2,987
21,026
21,026
4,114
4,114
6,502
6,502
12,136
12,136
3,161
3,161
132132
63,123
63,123
––
5,156
5,156
5,156
5,156
4,477
4,477
32,073
32,073
22,665
22,665
777 777
3,231
3,231
58,746
58,746
8,072
8,072
14,985
14,985
7,618
7,618
6,038
6,038
––
36,713
36,713
6,779
6,779
12,455
12,455
2,191
2,191
9,383
9,383
77
30,815
30,815
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Other assets include precious metals, segregated fund assets in our insurance business, certain receivables and other items measured at fair value.
(1) Other assets include precious metals, segregated fund assets in our insurance business, certain receivables and other items measured at fair value.
(1)
structured note liabilities included in deposits have been designated at FVTPL.
(2) These structured note liabilities included in deposits have been designated at FVTPL.
(2) These
This represents certain embedded options related to structured deposits carried at amortized cost.
(3) This represents certain embedded options related to structured deposits carried at amortized cost.
(3)
Other liabilities include investment contract liabilities and segregated fund liabilities in our insurance business, certain payables and metals deposits that have been designated at FVTPL as well as
(4) Other liabilities include investment contract liabilities and segregated fund liabilities in our insurance business, certain payables and metals deposits that have been designated at FVTPL as well as
(4)
certain securitization and structured entities’ liabilities measured at FVTPL.
certain securitization and structured entities’ liabilities measured at FVTPL.
BMO Financial Group 205th Annual Report 2022 189
BMO Financial Group 205th Annual Report 2022 189
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
Fair value
of assets
Valuation techniques
Corporate equity
4,044
Net asset value
EV/EBITDA
985 Discounted cash flows
Significant
unobservable inputs
Net asset value
Multiple
Prepayment rate
NHA MBS, U.S. agency MBS and CMO
NHA MBS, U.S. agency MBS and CMO
Private equity (2)
Corporate equity
NHA MBS, U.S. agency MBS and CMO
NHA MBS, U.S. agency MBS and CMO
2,442
Net asset value
EV/EBITDA
675 Discounted cash flows
Net asset value
Multiple
Prepayment rate
Market Comparable Comparability Adjustment (3)
Market Comparable Comparability Adjustment (3)
2022
Range of input values (1)
Low
na
5x
3%
(3.83)
na
6x
4%
(5.56)
High
na
19x
47%
6.82
2021
na
19x
47%
5.85
(1) The low and high input values represent the lowest and highest 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 $832 million of U.S. Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost ($453 million as at October 31, 2021), which approximates fair
value, and are held to meet regulatory requirements.
(3) Range of input values represents price per security adjustment (Canadian $).
na – not applicable
Significant Unobservable Inputs in Level 3 Instrument Valuations
Net Asset Value
Net asset value represents the estimated value of a security based on valuations received from the investment or fund manager. The valuation of
certain private equity securities is based on the economic benefit we derive from our investment.
EV/EBITDA Multiple
The fair value of private equity and merchant banking investments is derived by calculating an enterprise value (EV) using the EV/EBITDA multiple and
then proceeding through a waterfall of the company’s capital structure to determine the value of the assets or securities we hold. The EV/EBITDA
multiple is determined using judgment in considering factors such as multiples for comparable listed companies, recent transactions and company-
specific factors, as well as liquidity discounts that account for the lack of active trading in these assets and securities.
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.
The following table presents significant transfers between Level 1 and Level 2 for the years ended October 31, 2022 and October 31, 2021.
(Canadian $ in millions)
Trading securities
FVTPL securities
FVOCI securities
Securities sold but not yet purchased
s
e
t
o
N
Level 1 to Level 2
Level 2 to Level 1
Level 1 to Level 2
Level 2 to Level 1
2022
2021
10,983
607
16,452
9,499
13,062
522
11,895
14,623
7,863
871
11,028
7,764
11,421
902
13,542
5,950
190 BMO Financial Group 205th Annual Report 2022
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, 2022 and 2021, 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,
2021
Included in
earnings
Included
in other
comprehensive
income (1)
Purchases/
Issuances
Sales
Maturities/
Settlement
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2022
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (2)
675
7
682
–
2,442
2,442
1
132
133
6
–
–
–
–
2
2
(237)
(2)
(239)
–
231
231
76
(1)
75
1,045
11
(657)
(5)
1,056
(662)
–
176
176
8
1,450
–
(321)
1,458
(321)
–
–
–
–
–
–
–
–
–
–
–
1
1
–
–
–
–
–
–
–
–
15
15
15
49
26
26
2
–
–
–
(1)
(1)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
–
–
444
2
446
–
66
66
–
6
6
–
–
–
–
–
3
3
(361)
(9)
(370)
–
–
–
–
–
–
–
–
–
–
–
(3)
(3)
985
3
988
8
4,044
4,052
1
153
154
20
49
26
26
2
2
2
Change in fair value
Movements
Transfers
(45)
(1)
(46)
–
274
274
na
na
na
–
–
–
–
–
–
–
Balance
October 31,
2020
Included in
earnings
Included in other
comprehensive
income (1)
Purchases/
Issuances
Sales
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 (2)
803
–
803
–
1,903
1,903
1
93
94
1,945
–
–
–
–
4
4
(222)
–
(222)
–
315
315
–
–
–
–
–
–
–
–
–
–
1,465
10
(1,253)
(3)
1,475
(1,256)
–
628
628
–
(276)
(276)
(56)
–
(56)
–
(92)
(92)
–
26
26
–
13
13
(150)
1,812
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(13)
–
–
–
–
–
–
(4)
(4)
–
–
–
(1,302)
–
–
–
–
–
–
169
–
169
–
–
–
–
–
–
–
–
–
–
13
–
–
(231)
–
(231)
–
(32)
(32)
–
–
–
(2,299)
–
–
–
–
(2)
(2)
675
7
682
–
2,442
2,442
1
132
133
6
–
–
–
–
2
2
38
–
38
–
374
374
na
na
na
–
–
–
–
–
–
–
N
o
t
e
s
For the year ended October 31, 2022
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate debt
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate equity
Total FVOCI securities
Business and Government
Loans
Other Assets
Derivative Assets
Foreign exchange contracts
Total derivative assets
Other Liabilities
Derivative Liabilities
Credit default swaps
Total derivative liabilities
For the year ended October 31, 2021
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS
and CMO
Corporate debt
Total trading securities
FVTPL Securities
Corporate debt
Corporate equity
Total FVTPL securities
FVOCI Securities
Issued or guaranteed by:
U.S. states, municipalities
and agencies
Corporate equity
Total FVOCI securities
Business and Government
Loans
Other Assets
Derivative Assets
Foreign exchange contracts
Total derivative assets
Other Liabilities
Derivative Liabilities
Credit default swaps
Total derivative liabilities
(1) Foreign exchange translation on assets and liabilities held by foreign operations is included in other comprehensive income, net foreign operations.
(2) Changes in unrealized gains (losses) on trading and FVTPL securities still held on October 31, 2022 and 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
BMO Financial Group 205th Annual Report 2022 191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Trading-Related Revenue
Trading assets and liabilities, including derivatives, securities and financial instruments designated at FVTPL, 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.
(Canadian $ in millions)
Interest rates
Foreign exchange
Equities
Commodities
Other (1)
Total trading-related revenue
Reported as:
Net interest income
Non-interest revenue – trading revenues (1)
Total trading-related revenue
2022
2021
893
571
713
189
7,556
9,922
1,672
8,250
9,922
1,017
416
567
147
2
2,149
1,853
296
2,149
(1) Includes management of fair value changes on the purchase of Bank of the West. Refer to Note 10 for further information.
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
2022
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
116,309
48,494
164,803
60,290
107,078
167,368
108,799
37,054
145,853
31,156
98,973
130,129
3,115
334
3,449
334
3,115
3,449
1,417
341
1,758
341
1,417
1,758
113,194
48,160
161,354
59,956
103,963
163,919
107,382
36,713
144,095
30,815
97,556
128,371
11,757
31,878
43,635
31,878
11,757
43,635
15,779
20,952
36,731
20,952
15,779
36,731
99,736
3,282
4
3,201
1,697
9,799
103,018
3,205
11,496
7,212
91,494
8,843
176
12,023
536
98,706
9,019
12,559
2021
1,205
8,561
9,766
6,092
258
6,350
90,389
2,377
9
4,823
92,766
4,832
1,865
81,411
1,906
108
83,276
2,014
s
e
t
o
N
(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.
192 BMO Financial Group 205th Annual Report 2022
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 pandemic, OSFI announced a
suite of modifications to regulatory 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 expired 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.
Total Loss-Absorbing Capacity (TLAC) is comprised of Total capital and other TLAC instruments including eligible bail-in debt, less regulatory
deductions. 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, TLAC Ratio, Leverage Ratio and TLAC Leverage
Ratio.
• Regulatory capital ratios are calculated by dividing CET1, Tier 1, Total capital and TLAC by their respective risk-weighted assets.
• The Leverage Ratio is defined as Tier 1 capital divided by leverage exposures, which consist of on-balance sheet items and specified off-balance
sheet items, net of specified adjustments. The TLAC Leverage Ratio is defined as TLAC divided by leverage exposures.
As at October 31, 2022, we met OSFI’s required target regulatory 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 and Total Loss-Absorbing Capacity Measures, Risk-Weighted Assets and Leverage Exposures (1)
(Canadian $ in millions, except as noted)
CET1 Capital
Tier 1 Capital
Total Capital
Total Loss-Absorbing Capacity (TLAC)
Risk-Weighted Assets
Leverage Exposures
CET1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
TLAC Ratio
Leverage Ratio
TLAC Leverage Ratio
2022
2021
60,891
67,121
75,309
120,663
363,997
1,189,990
16.7%
18.4%
20.7%
33.1%
5.6%
10.1%
44,491
49,966
57,201
90,353
325,433
976,690
13.7%
15.4%
17.6%
27.8%
5.1%
9.3%
(1) Calculated in accordance with OSFI’s Capital Adequacy Requirements Guideline, Leverage Requirements Guideline and Total Loss-Absorbing Capacity Guideline, as applicable.
N
o
t
e
s
BMO Financial Group 205th Annual Report 2022 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2022
Weighted-
average
exercise price
87.79
135.58
70.64
–
–
98.12
84.14
Number of
stock options
6,446,110
984,943
1,630,867
117,980
–
5,682,206
2,616,750
12,708,296
2021
Weighted-
average
exercise price
81.50
97.14
67.88
97.03
–
87.79
77.34
Number of
stock options
5,682,206
1,028,255
733,591
–
–
5,976,870
2,648,426
11,680,041
Employee compensation expense related to this plan for the years ended October 31, 2022 and 2021 was $12 million and $10 million, respectively.
Options outstanding and exercisable at October 31, 2022 by range of exercise price were as follows:
(Canadian $, except as noted)
2022
Range of exercise prices
$60.01 to $70.00
$70.01 to $80.00
$80.01 to $90.00
$90.01 to $100.00
$100.01 and over
Number of
stock options
674,235
647,910
809,181
1,389,356
2,456,188
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)
Options outstanding
Options exercisable
Weighted-
average remaining
contractual life (years)
Weighted-average
exercise price
Number of
stock options
Weighted-average
exercise price
0.9
2.7
6.1
6.9
7.6
66.34
77.58
89.90
97.06
115.57
674,235
647,910
369,978
439,034
517,269
2022
9
52
141.50
66.34
77.58
89.90
96.90
100.63
2021
7
111
115.42
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, 2022 and 2021 was $14.17 and $10.75, respectively. To determine the fair value of the stock option tranches on the grant
date, the following ranges of values were used as inputs for each option pricing assumption:
Expected dividend yield
Expected share price volatility
Risk-free rate of return
Expected period until exercise (in years)
2022
2021
4.2%
16.8%
1.8% – 1.9%
6.5 – 7.0
4.9%
20.6% – 20.7%
1%
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, 2022 and 2021 was $135.58 and $97.14, respectively.
s
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194 BMO Financial Group 205th Annual Report 2022
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, 2022 and 2021 was $45 million and $46 million,
respectively. There were 17.8 million and 18.0 million common shares held in these plans for the years ended October 31, 2022 and 2021,
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.
Total assets held under our share ownership arrangements amounted to $2,239 million as at October 31, 2022 ($2,425 million as at
October 31, 2021).
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 and the bank’s performance relative to certain goals, when applicable. 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, 2022 and 2021 totalled 5.8 million and 6.4 million, respectively.
The weighted-average fair value of these units granted during the years ended October 31, 2022 and 2021 was $139.04 and $91.62,
respectively, and we recorded employee compensation expense of $719 million and $1,234 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, 2022 and 2021 were $3 million and $719 million, respectively, resulting in net employee compensation expense of $716 million and
$515 million, respectively.
A total of 16.6 million and 17.6 million mid-term incentive plan units were outstanding as at October 31, 2022 and 2021, respectively, and the
intrinsic value of those awards which had vested was $1,501 million and $1,679 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 BMO 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 typically either fully vested on the grant date or vest at the end of three years. The value of these share units is adjusted to reflect
reinvested dividends and changes in the market value of our common shares.
Deferred incentive plan payments are paid in cash upon the participant’s departure from the bank.
Employee compensation expense for these plans is recorded in the year the fees, incentive payments and/or commissions are earned. Changes
in the amount of the incentive plan payments as a result of dividends and share price movements are recorded as increases or decreases in
employee compensation expense in the period of the change.
Deferred incentive plan units granted during the years ended October 31, 2022 and 2021 totalled 0.2 million and 0.4 million, respectively, and
the weighted-average fair value of these units granted during the years ended October 31, 2022 and 2021 was $136.74 and $113.08, respectively.
Liabilities related to these plans are recorded in other liabilities in our Consolidated Balance Sheet and totalled $585 million and $609 million as
at October 31, 2022 and 2021, respectively.
Employee compensation expense related to these plans for the years ended October 31, 2022 and 2021 was $(16) million and $279 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, 2022 and 2021 were $(30) million and $271 million, respectively. These gains (losses) resulted in net employee compensation
expense for the years ended October 31, 2022 and 2021 of $14 million and $8 million, respectively.
A total of 4.7 million and 4.6 million deferred incentive plan units were outstanding as at October 31, 2022 and 2021, respectively.
N
o
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s
BMO Financial Group 205th Annual Report 2022 195
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2022
20% – 40%
40% – 55%
15% – 40%
Pension benefit plans
Actual
2022
25%
43%
32%
Actual
2021
30%
47%
23%
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis.
Risk Management
The defined benefit pension plans are exposed to various risks, including market risk (interest rate, equity and foreign currency risks), credit risk,
operational risk, surplus risk and longevity risk. We follow a number of approaches to monitor and actively manage these risks, including:
• monitoring surplus-at-risk, which measures a plan’s risk in an asset-liability framework;
• stress testing and scenario analyses to evaluate the volatility of the plans’ financial positions and any potential impact on the bank;
• hedging of currency exposures and interest rate risk within policy limits;
• controls related to asset mix allocations, geographic allocations, portfolio duration, credit quality of debt securities, sector guidelines, issuer/
counterparty limits and others; and
• ongoing monitoring of exposures, performance and risk levels.
Pension and Other Employee Future Benefit Liabilities
Our actuaries perform valuations of our defined benefit obligations for pension and other employee future benefits as at October 31 of each year
using the projected unit credit method based on management’s assumptions about discount rates, rates of compensation increase, retirement age,
mortality and health care cost trend rates.
The discount rates for the primary Canadian and U.S. pension and other employee future benefit plans were selected based on the yields of high-
quality AA rated corporate bonds with terms matching the plans’ cash flows.
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196 BMO Financial Group 205th Annual Report 2022
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, 2022 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 two 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)
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
Annual benefits expense
Current service cost
Net interest (income) expense on net defined benefit (asset) liability
Past service cost (income)
Gain on settlement
Administrative expenses
Remeasurement of other long-term benefits
Benefits expense
Government pension plans expense (1)
Defined contribution expense
Total annual pension and other employee future benefit expenses
recognized in the Consolidated Statement of Income
1) Includes Canada Pension Plan, Quebec Pension Plan and U.S. Federal Insurance Contribution Act.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
2022
7,082
8,261
1,179
1,267
(88)
1,179
2021
9,716
10,525
809
939
(130)
809
2022
928
147
2021
1,220
166
(781)
(1,054)
51
(832)
(781)
40
(1,094)
(1,054)
Pension benefit plans
Other employee future benefit plans
2022
2021
2022
2021
237
(27)
(2)
(1)
4
–
211
252
176
639
268
7
–
–
5
–
280
216
160
656
8
35
–
–
–
(18)
25
–
–
25
9
30
–
–
–
(11)
28
–
–
28
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BMO Financial Group 205th Annual Report 2022 197
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted-Average Assumptions
Defined Benefit Expenses
Discount rate at beginning of year (1)(2)
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
2022
2021
2022
2021
3.2%
2.2%
na
5.5%
2.3%
na
2.7%
2.1%
na
3.2%
2.2%
na
3.3%
na
4.8% (3)
5.5%
na
4.7% (3)
2.7%
2.0%
4.8% (3)
3.3%
na (4)
4.8% (3)
(1) The pension benefit current service cost was calculated using a separate discount rate of 3.7% and 3.0% for 2022 and 2021, respectively.
(2) The other employee future benefit plans current service cost was calculated using a separate discount rate of 3.6% and 3.0% for 2022 and 2021, respectively.
(3) Trending to 4.0% in 2041 and remaining at that level thereafter.
(4) Rate of compensation increase is not applicable, since the new flat dollar retiree plan benefit is no longer 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)
Life expectancy for those currently age 65
Males
Females
Life expectancy at age 65 for those currently age 45
Males
Females
Canada
United States
2022
2021
2022
23.9
24.2
24.8
25.1
23.8
24.2
24.8
25.1
21.8
23.2
23.0
24.4
2021
21.8
23.2
23.0
24.4
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198 BMO Financial Group 205th Annual Report 2022
Changes in the estimated financial positions of our defined benefit pension plans and other employee future benefit plans are as follows:
(Canadian $ in millions, except as noted)
Defined benefit obligation
Defined benefit obligation at beginning of year
Divestiture of defined benefit obligation (1)
Current service cost
Interest cost
Past service (income)
(Gain) on settlements
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
Divestiture of plan assets (1)
Interest income
Return on plan assets (excluding interest income)
Employer contributions
Employee contributions
Benefits paid
Administrative expenses
Foreign exchange and other
Fair value of plan assets at end of year
Surplus (Deficit) and net defined benefit asset (liability) at end of year
Recorded in:
Other assets
Other liabilities
Surplus (Deficit) and net defined benefit asset (liability) at end of year
Actuarial gains (losses) recognized in other comprehensive income
Net actuarial gains (losses) on plan assets
Actuarial gains (losses) on defined benefit obligation due to:
Changes in demographic assumptions
Changes in financial assumptions
Plan member experience
Foreign exchange and other
Actuarial gains recognized in other comprehensive income for the year
Pension benefit plans
Other employee future benefit plans
2022
2021
2022
2021
9,716
(532)
237
290
(2)
(1)
(578)
18
–
(2,386)
207
113
7,082
6,994
88
7,082
10,525
(647)
317
(1,524)
58
18
(578)
(4)
96
8,261
1,179
1,267
(88)
1,179
(1,524)
–
2,386
(207)
(14)
641
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
1,222
1,220
–
8
39
–
–
(49)
6
(60)
(244)
(9)
17
928
96
832
928
166
–
4
(37)
40
6
(49)
–
17
147
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
(781)
(1,054)
51
(832)
(781)
(37)
56
228
10
–
257
40
(1,094)
(1,054)
(1)
4
84
(45)
–
42
(1) Relates to the defined benefit plan included in the sale of our EMEA Asset Management business in fiscal 2022. Refer to Note 10 for further information.
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, 2022 and 2021 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
185
11
156
108
704
–
–
1,187
2,351
–
41
303
–
4,034
(53)
1,157
–
5,482
2022
Total
185
52
459
108
4,738
(53)
1,157
1,187
7,833
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
No plan assets are directly invested in the bank’s or related parties’ securities as at October 31, 2022 and 2021. As at October 31, 2022 our primary
Canadian plan indirectly held, through pooled funds, less than $1 million ($11 million as at October 31, 2021) of our common shares and fixed income
securities. The plans do not hold any property we occupy or other assets we use.
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BMO Financial Group 205th Annual Report 2022 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sensitivity of Assumptions
Key weighted-average assumptions for 2022 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) Trending to 4.00% 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
5.5
(681)
836
2.3
30
(29)
(119)
116
na
na
na
5.5
(69)
85
na
na
na
(17)
17
4.7 (1)
35
(31)
2022
12.1
7.5
12.5
2021
14.5
9.5
13.7
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
2022
24
176
34
234
2021
254
160
44
458
2022
2021
–
–
40
40
–
–
40
40
Our best estimate of the contributions and benefits paid directly to pensioners we expect to make for the year ending October 31, 2023 is approximately $69 million for our defined benefit pension plans
and $46 million for our other employee future benefit plans. Benefit payments from our defined benefit plans to retirees for the year ending October 31, 2023 are estimated to be $520 million.
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200 BMO Financial Group 205th Annual Report 2022
Note 22: Income Taxes
We report our provision for income taxes in our Consolidated Statement of Income based upon transactions recorded in our consolidated financial
statements regardless of when they are recognized for income tax purposes, with the exception of repatriation of retained earnings from our
subsidiaries, as noted below.
In addition, we record an income tax expense or benefit in other comprehensive income or directly in equity when the taxes relate to amounts
recorded in other comprehensive income or equity. For example, income tax expense (recovery) on hedging gains (losses) related to our net
investment in foreign operations is recorded in our Consolidated Statement of Comprehensive Income as part of net gains (losses) on translation of
net foreign operations.
Current tax is the amount of income tax recoverable (payable) in respect of the taxable loss (profit) for a period. Deferred tax is recognized on
temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. Deferred 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 $10 million ($9 million as at October 31, 2021) related to both U.S. tax loss carryforwards and tax credits that
will expire in various amounts in U.S. taxation years from 2022 through 2040. On the evidence available, including management projections of
income, we believe it is probable that there will be sufficient taxable income generated by our business operations to support these deferred tax
assets. The amount of tax on temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognized in our
Consolidated Balance Sheet as at October 31, 2022 is $922 million ($118 million in 2021), of which $36 million ($7 million in 2021) 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 $24 billion as at
October 31, 2022 ($17 billion in 2021).
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 (losses) on FVOCI debt securities
Reclassification to earnings of (gains) on FVOCI debt securities
(Losses) on derivatives designated as cash flow hedges
Reclassification to earnings of (gains) on derivatives designated as cash flow hedges
Unrealized gains (losses) on hedges of net foreign operations
Gains 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
2022
2021
3,889
(15)
475
–
4,349
(182)
(5)
(1,794)
(114)
(124)
239
465
1
5
(1,509)
2,840
2,334
(14)
173
11
2,504
(58)
(14)
(504)
(149)
180
341
(70)
6
(10)
(278)
2,226
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BMO Financial Group 205th Annual Report 2022 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Components of Total Provision for Income Taxes
(Canadian $ in millions)
Canada: Current taxes
Federal
Provincial
Canada: Deferred taxes
Federal
Provincial
Total Canadian
Foreign: Current taxes
Deferred taxes
Total foreign
Total provision for income taxes
2022
2021
1,178
672
1,850
148
85
233
650
373
1,023
233
134
367
2,083
1,390
953
(196)
757
940
(104)
836
2,840
2,226
Reconciliation to Statutory Tax Rate
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
Components of Deferred Tax Balances
(Canadian $ in millions)
2022
2021
4,757
26.6%
2,729
26.6%
(200)
(160)
–
–
(57)
9
(1.1)
(0.9)
–
–
(0.3)
–
(232)
(137)
202
11
(56)
(13)
(2.3)
(1.3)
2.0
0.1
(0.6)
(0.1)
4,349
24.3%
2,504
24.4%
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 (1)
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)
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Net asset,
October 31, 2021
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2022
651
330
685
(108)
34
–
(400)
(148)
(241)
(51)
343
1,095
1,287
(192)
1,095
(52)
(10)
18
(1)
(23)
–
(59)
(47)
1
193
(495)
(475)
–
(65)
–
682
–
–
–
(174)
–
–
(5)
438
6
1
5
–
–
–
(1)
(1)
(4)
–
9
15
–
–
–
605
256
708
573
11
–
(460)
(370)
(244)
142
(148)
1,073
1,175
(102)
1,073
Net asset,
November 1, 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
(1) Includes the tax impact of the interest rate swaps and securities we purchased to mitigate the impact of changes in interest rates on our announced acquisition of Bank of the West (refer to Note 10
for additional details) and the tax impact of the legal provision recorded in relation to the lawsuit described in Note 24.
202 BMO Financial Group 205th Annual Report 2022
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,425 million, to date, in respect
of certain 2011 – 2017 Canadian corporate dividends. Those reassessments denied certain dividend deductions on the basis that the dividends were
received as part of a “dividend rental arrangement”. In general, the tax rules raised by the Canadian tax authorities were prospectively addressed in
the 2015 and 2018 Canadian Federal Budgets. We filed Notices of Appeal with the Tax Court of Canada and the matter is in litigation. We expect to be
reassessed for income tax in respect of similar activities undertaken in 2018. 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.
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 $)
2022
13,537
(231)
13,306
2021
7,754
(244)
7,510
663,990
647,163
20.04
11.60
13,306
663,990
7,510
647,163
5,178
(3,461)
6,403
(4,890)
665,707
648,676
19.99
11.58
(1) In computing diluted earnings per share, we excluded average stock options outstanding of 943,741 with a weighted-average exercise price of $143.52 for the year ended October 31, 2022. For the
year ended October 31, 2021, we did not exclude any stock options outstanding as the average share price for the year exceeded 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, 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.
We also previously facilitated securities lending transactions for our customers but we divested this business in fiscal 2022.
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BMO Financial Group 205th Annual Report 2022 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The maximum amount payable related to our various commitments is as follows:
(Canadian $ in millions)
Financial Guarantees
Standby letters of credit
Credit default swaps (1)
Other Credit Instruments
Backstop liquidity facilities
Securities lending (2)
Documentary and commercial letters of credit
Commitments to extend credit (3)
Other commitments (4)
Total
2022
2021
26,019
11,099
22,165
5,158
17,330
–
1,351
200,814
7,075
263,688
12,895
3,909
1,481
174,327
8,070
228,005
(1) The fair value of the related derivatives included in our Consolidated Balance Sheet was $(38) million as at October 31, 2022 ($(4) million as at October 31, 2021).
(2) In fiscal 2022, we divested the securities lending agency business.
(3) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion.
(4) Other commitments include $783 million as at October 31, 2022 ($1,649 million as at October 31, 2021) of underwriting commitments that are extended but not yet accepted by the borrower.
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 provided directly 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 1 year to over 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 1 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. In fiscal 2022, we divested the securities lending agency business.
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 customers to grant them credit in the form of loans or other financings for specific
amounts and maturities, subject to their meeting certain conditions.
Other commitments include commitments to fund external private equity funds and investments in equity and debt securities at market value at
the time the commitments are drawn. In addition, we act as underwriter for certain new issuances under which we, alone or together with a
syndicate of financial institutions, purchase the new issue for resale to investors.
Indemnification Agreements
In the normal course of operations, we enter into various agreements that provide general indemnifications. These indemnifications typically occur in
connection with sales of assets, securities offerings, service contracts, 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 is no
default, the securities or their equivalents must be returned by the pledgee upon satisfaction of the obligation.
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204 BMO Financial Group 205th Annual Report 2022
The following tables summarize 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 repledging
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
2022
2021
87
95,194
71,795
13,991
110
82,975
54,656
6,436
181,067
144,177
177,300
(42,237)
180,705
(46,278)
135,063
134,427
316,130
278,604
2022
2021
19,082
87
40,979
90,490
69,525
16,341
27,499
33,175
18,952
9,464
110
32,073
87,894
77,456
11,439
26,075
26,340
7,753
316,130
278,604
(1) Includes NHA mortgage-backed securities of $5,277 million, which are included in loans in our Consolidated Balance Sheet ($4,519 million as at October 31, 2021).
(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.
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 $303 million as at October 31, 2022 ($248 million as at
October 31, 2021).
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 proceedings or regulatory investigations may be material to the bank’s consolidated financial
position or its results of operations for any particular reporting period.
BMO Harris Bank N.A. (BMO Harris), as successor to M&I Marshall and Ilsley Bank (M&I), was 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). The lawsuit, brought by a Trustee in bankruptcy proceedings for certain Petters entities,
alleged that between 1999 and 2008, M&I (and a predecessor bank) helped facilitate the Ponzi scheme operated by Petters. The trial took place from
October 12 to November 8, 2022 and on November 8, 2022, the jury awarded damages of approximately US$564 million against BMO Harris. This
amount does not include prejudgment interest which could be as much as US$484 million. BMO Harris strongly denies the plaintiff’s allegations and
will continue to defend itself vigorously, including by bringing an appeal to the United States Court of Appeals for the Eighth Circuit, to contest the jury
verdict and award. Following the jury’s verdict, we recorded a provision of $1,120 million ($830 million after-tax), comprising $605 million in
non-interest expense, other and $515 million in interest expense, other liabilities, representing damages awarded by the jury and an estimate of
maximum possible pre-judgment interest, net of estimated recoveries. Recoveries relate to a settlement arrangement made in 2015 in connection
with another Petters matter.
BMO Financial Group 205th Annual Report 2022 205
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring Charges
Provisions for restructuring charges as at October 31, 2022 are $94 million ($136 million as at October 31, 2021), primarily severance-related costs.
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.
Note 25: Operating and Geographic Segmentation
2022
248
1,201
(155)
(20)
3
1,277
2021
472
166
(340)
(44)
(6)
248
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 operating 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 3,200
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 cybersecurity 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.
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206 BMO Financial Group 205th Annual Report 2022
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, 2022 was $270 million ($315 million in 2021).
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.
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 before taxes
Provision for income taxes
Reported net income
Average assets (3)
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for (recovery of) credit losses on impaired loans
(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)
Canadian
P&C
7,449
2,419
9,868
432
(91)
341
–
516
3,833
5,178
1,352
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
2022 Total
5,037
1,265
6,302
107
(90)
17
–
424
2,619
3,242
745
1,188
3,336
4,524
2
(4)
(2)
(683)
258
3,306
1,645
394
3,197
2,975
6,172
(32)
(11)
(43)
–
282
3,573
2,360
588
(986)
7,830
6,844
(7)
7
–
–
–
1,383
5,461
1,270
4,191
15,885
17,825
33,710
502
(189)
313
(683)
1,480
14,714
17,886
4,349
13,537
3,826
2,497
1,251
1,772
292,087 145,187 50,488 404,728
180,007 1,072,497
Canadian
P&C
6,561
2,225
8,786
493
(116)
377
–
486
3,482
4,441
1,153
3,288
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
2021 Total
4,268
1,243
5,511
22
(166)
(144)
–
475
2,338
2,842
666
982
6,071
7,053
4
(16)
(12)
1,399
323
3,520
1,823
441
2,176
1,382
3,115
3,011
6,126
11
(205)
(194)
–
281
3,181
2,858
738
2,120
(616)
326
(290)
(5)
(2)
(7)
–
–
1,423
(1,706)
(494)
(1,212)
14,310
12,876
27,186
525
(505)
20
1,399
1,565
13,944
10,258
2,504
7,754
263,004
129,009
48,232
372,475
168,420
981,140
(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 2022 are $979,341 million, including $278,022 million for Canadian P&C, $138,094 million for U.S. P&C, and $563,225 million for all other operating segments including Corporate Services
(2021 – Total: $897,302 million, Canadian P&C: $248,215 million, U.S. P&C: $122,166 million and all other operating segments: $526,921 million).
Effective the first quarter of fiscal 2022, certain expense allocations were updated within our operating segments to better align with current experience, with no impact to total bank results. Certain
comparative figures have been reclassified to conform with the current year’s presentation.
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BMO Financial Group 205th Annual Report 2022 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 before taxes
Reported net income
Average Assets
Total Revenue
Income (loss) before taxes
Reported net income (loss)
Average Assets
Canada
United States
Other countries
2022
Total
15,977
7,335
5,557
600,607
15,983
6,242
4,809
544,652
16,980
10,526
7,894
416,885
9,242
4,224
3,254
376,102
753
25
86
33,710
17,886
13,537
55,005 1,072,497
1,961
(208)
(309)
60,386
2021
27,186
10,258
7,754
981,140
Note 26: Significant Subsidiaries
As at October 31, 2022, 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 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 Harris Bank National Association and subsidiaries, including:
BMO Harris Investment Company LLC
BMO Life Insurance Company and subsidiaries, including:
BMO Life Holdings (Canada), ULC
BMO Life Assurance Company
BMO Trust Company
BMO Japan Securities Ltd.
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
London, England
Chicago, United States
Chicago, United States
New York, United States
Chicago, United States
Chicago, United States
Toronto, Canada
Halifax, Canada
Toronto, Canada
Toronto, Canada
Tokyo, Japan
Book value of shares owned by the
bank (Canadian $ in millions)
463
1,130
36,913
289
32,490
1,610
597
6
(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. and BMO
Capital Markets Corp., which are incorporated under the laws of the state of Delaware, United States. 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.
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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208 BMO Financial Group 205th Annual Report 2022
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 and Their Close Family Members
Key management personnel is defined as those persons having authority and responsibility for planning, directing and/or controlling the activities of
an entity, being the members of our Board of Directors (directors) and certain senior executives.
The following table presents the compensation of our key management personnel:
(Canadian $ in millions)
Base salary and incentives
Post-employment benefits
Share-based payments (1)
Total key management personnel compensation
(1) Amounts included in share-based payments are the fair values of awards granted in the year.
2022
2021
25
3
45
73
22
3
32
57
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, 2022, loans to key management personnel
and their close family members totalled $20 million ($22 million as at October 31, 2021). We had no provision for credit losses related to these
amounts as at October 31, 2022 and 2021.
Directors receive a specified amount of their annual retainer in deferred stock units. Until a director’s shareholdings (including deferred stock
units) are eleven 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
Joint ventures
Associates
2022
585
126
2021
474
107
2022
708
148
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 (1)
Deposits
Fees paid for services received
Guarantees and commitments
(1) Includes customers’ liability under acceptances.
2022
1,190
202
61
93
2021
661
141
2021
791
117
59
73
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BMO Financial Group 205th Annual Report 2022 209
Where to Find More Information
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
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
Printed Copies
To obtain printed copies of the annual report:
Communications and Social Impact Department
Email: annualreports@bmo.com
Call: 416-867-7640
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 owned by other parties:
Finovate is a service mark of KNect365 US, Inc.
Forrester is a trademark of Forrester Research, Inc.
Insider Intelligence is a trademark of Insider, Inc.
Javelin Strategy & Research is a service mark of Escalent, Inc.
J.D. Power is a trademark of J.D. Power.
Brandon Hall Group is a trademark of Brandon Hall Group, Inc.
Keynova Group is a trademark of Keynova Group LLC.
Bloomberg is a trademark of Bloomberg Finance Eight L.P.
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 2023 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
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, social and
governance 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 2022 Sustainability Report/PAS
will be available on our website in March 2023.
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.
210 BMO Financial Group 205th Annual Report 2022
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 2022
Primary stock
exchanges
TSX
NYSE
Ticker
BMO
BMO
Closing price
October 31, 2022
High
Low
$125.49
US$92.08
$154.47
US$122.77
$113.73
US$81.57
Total volume of
shares traded
567.1 million
61.0 million
Common Share History
Date
March 14, 2001
March 20, 1993
June 23, 1967
Action
Common share effect
100% stock dividend
100% stock dividend
Stock split
Equivalent to a 2-for-1 stock split
Equivalent to a 2-for-1 stock split
5-for-1 stock split
Important Dates
Fiscal Year End
Annual Meeting
October 31
April 18, 2023 | 9:30 a.m. ET
Further details will be made available on our website.
www.bmo.com/investorrelations
2023 Dividend Payment Dates*
Common and preferred
shares record dates
Common shares
payment dates
January 30
April 28
July 28
October 30
February 28
May 26
August 28
November 28
Preferred shares
payment dates**
February 27
May 25
August 25
November 27
*Subject to approval by the Board of Directors.
**The preferred shares series 50 payment dates are semi-annual on May 26 and November 27, 2023.
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 Super intendent 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, respec tively. See previous
page for contact information.
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Reinvesting Your Dividends and
Purchasing Additional Common Shares
Through the Shareholder Dividend
Reinvestment and Share Purchase Plan,
you can reinvest cash dividends from your
BMO common shares to purchase additional
BMO common shares without paying a
commission or service charge. You can also
purchase additional common shares in
amounts up to $40,000 per fiscal year.
Contact Computershare Trust Company of
Canada or Shareholder Services for details.
Your vote
matters.
Watch for your proxy
circular in March and
remember to vote.
Employee Ownership*
80.3% of our Canadian employees
participate in the BMO Employee Share
Ownership Plan – a clear indication of
their commitment to BMO.
*As at October 31, 2022.
Credit Ratings
Credit rating information appears on page 99
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