BMO Financial Group | 206th Annual Report
2023 Annual Report
to Shareholders
Our Purpose is comprised of three core commitments:
For a 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
For a sustainable future
Being our clients’ lead partner in the transition to a net zero world, delivering
on our commitments to sustainable financing and responsible investing
For an inclusive society
Committing to zero barriers to inclusion through investments, financial products
and services, and partnerships that remove systemic barriers for under-represented
customers, employees and communities – and drive inclusion and equitable
growth for everyone
Business Review
2 Who We Are
4
5
6
7
10
12
14
Financial Performance
Digital Strategy and Leadership
Chair’s Message
Chief Executive Officer’s Message
Economic Progress
Sustainable Progress
Equitable Progress
16 One Client Leadership
18
Board of Directors and Executive
Committee
Financial Review
19
20
Enhanced Disclosure Task Force
Management’s Discussion
and Analysis
126 Supplemental Information
138
Statement of Management’s
Responsibility for Financial Information
139
Independent Auditor’s Report
142
Reports of Independent Registered
Public Accounting Firm
145
Consolidated Financial Statements
150
Notes to Consolidated Financial
Statements
Resources and Directories
135 Glossary of Financial Terms
215
Where to Find More Information
216 Shareholder Information
A LEED Gold-certified building, the Nova Centre
houses BMO’s Atlantic Canada headquarters
in Halifax, Nova Scotia.
Photography: Dean Casavechia
BMO Financial Group 206th Annual Report 2023 1
Our StrategyAt BMO, we’re building a high-performing, digitally-enabled, future-ready bank with engaged employees and a winning culture. We are focused on helping our customers make real financial progress, and on financing our clients’ growth and innovation, while also investing in our workforce. Anchored by our Purpose, we are driven by our strategic priorities for growth, strengthened by our approach to sustainability and guided by our values as we build a foundation of trust with our stakeholders. 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
$1.29 trillion. We are a highly diversified financial institution providing a broad range of personal and commercial banking,
wealth management, global markets and investment banking products and services. We serve 13 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
Provides financial products and services to
customers across North America. Personal
and Business Banking helps customers
make real financial progress through
an extensive network of branches,
contact centres, digital banking platforms
and automated teller machines.
Commercial Banking offers valuable
industry expertise, local presence and a
comprehensive range of commercial
products and services.
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 make real
financial progress through planning,
growing, protecting and transitioning
their wealth. Our asset management
business is focused on making a positive
impact and delivering innovative financial
solutions and strategies for our clients.
BMO Capital Markets
Offers a comprehensive range of products
and services to corporate, institutional
and government clients. BMO Capital
Markets has thousands of professionals
around the world enabling the growth
aspirations of our clients across the bank.
YT
NT
NU
BC
AB
SK
MB
BMO’s Strategic Footprint spans strong
regional economies, with branches and
commercial, wealth management and
capital markets offices across Canada
and the United States. Our physical
presence is supplemented by digital
platforms that enable us to seamlessly
serve customers throughout both
countries. Our significant presence in
North America is complemented by
BMO Capital Markets operations in
select international markets, allowing
us to provide all our customers with
access to economies and markets
around the world.
WA
OR
ID
MT
WY
NV
UT
CO
CA
AZ
NM
NL
PE
NB
NS
ON
QC
ME
MA
VT
NH
CT
RI
NY
NJ
DE
MD-DC
ND
SD
NE
MN
IA
KS
MO
OK
TX
AR
LA
WI
MI
IL
IN
OH
KY
TN
MS
AL
GA
PA
VA
NC
WV
SC
FL
Physical footprint
Digital footprint
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 206th Annual Report 2023
2 BMO Financial Group 206th Annual Report 2023
BMO’s brand presence on Hollywood Boulevard, Los Angeles, California.
13 million
customers globally
$1.29 trillion
in total assets
8th largest
bank in North America
by assets
1817
serving customers for
206 years and counting
BMO Financial Group 206th Annual Report 2023 3
Financial Performance
Medium-term objectives1
2023 financial performance
3-year3 financial performance
EPS growth of 7% to 10%
ROE of 15% or more
ROTCE of 18% or more
Net operating leverage2 of 2% or more
Reported
(71.6)%
6.0%
8.2%
(45.9)%
Capital ratios that exceed regulatory requirements
12.5% CET1 Ratio4
Earnings Per Share Growth (%)
Return on Equity (%)
Reported
Adjusted2
68.0
72.7
53.3
2.1
(11.4)
(71.6)
Reported
Adjusted2
22.9
16.7
14.9
15.2
12.3
6.0
Adjusted2
Reported
Adjusted2
(11.4)%
12.3%
15.8%
(8.2)%
(9.1)%
14.6%
16.8%
(6.8)%
na
15.0%
14.7%
17.1%
—
A 195-year dividend record
BMO Financial Group has the longest-
running dividend payout record of any
company in Canada, at 195 years. BMO
common shares had an annual dividend
yield of 5.5% at October 31, 2023.
Compound annual growth rate
5.0%
8.9%
BMO 15-year
BMO 5-year
2021
2022
2023
2021
2022
2023
Net Income by Geography
Net Income (C$ billions)
Total Shareholder Return5 (%)
Reported
Reported
Adjusted²
Adjusted²
Reported
Adjusted2
13.5
8.7
7.8
9.0
8.7
4.4
BMO
S&P/TSX Composite Index
14.3
9.8
8.0
5.6
0.4
(12.5)
2021
2022
2023
1-year
3-year
5-year
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 3-year EPS growth rate and operating leverage, net of CCPB, reflect compound annual growth rates (CAGR).
4 The CET1 Ratio is disclosed in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline.
5 As of October 31, 2023.
6 Percentages determined excluding results in Corporate Services.
4 BMO Financial Group 206th Annual Report 2023
Canada/Other 97% 55%
Canada/Other 97% 55%
3% 45%
U.S.
3% 45%
U.S.
Reported Net Income
by Operating Group6
BMO CM
18%
BMO WM
12%
U.S. P&C
30%
Canadian
P&C
40%
Digital Strategy and Leadership
Our Digital First strategy is focused on 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.
J.D. Power 2023 Canada Online
Banking Satisfaction Study
BMO received the highest score in the
J.D. Power 2023 Canada Online Banking
Satisfaction Study. The study analyzes feedback
from thousands of online banking customers
across Canada, and awarded BMO top marks
in four key categories: Information/content,
navigation, speed and visual appeal.1
Best Workplaces for Innovators
BMO was the only financial institution
named among the top 30 companies on
Fast Company’s fifth annual Best Workplaces
for Innovators list, honouring organizations
that demonstrate a commitment to
encouraging innovation enterprise-wide.
2023 BAI Global Innovation Award
BMO Digital has won a 2023 BAI Global Innovation
Award for the BMO New to Canada pre-arrival
digital account opening application. The BAI
Global Innovation Awards recognize financial
institutions that embrace digital innovation
to transform the customer experience, drive
business results and effect positive change.
Fintech Open Source Foundation
(FINOS)
BMO Capital Markets received the Breaking
the Status Quo award in recognition
of our significant progress on open source
readiness, as well as the positive impact
and contributions we’ve made to open source
in financial services.
1 For more information, refer to www.jdpower.com/business.
BMO Financial Group 206th Annual Report 2023 5
Chair’s Message
George A. Cope
Chair of the Board
Our long-term growth strategy continues to pay off as our
businesses attract new customers and grow market share – and the
growth strategy has been accelerated by our strategic acquisitions.
The integration of Bank of the West was well executed, expanding
BMO’s footprint significantly in the Western and Midwestern parts
of the United States, including California, the U.S. state with the
largest economy. The acquisition strengthens our position in
North America with increased scale and greater access to growth
opportunities in strategic new markets.
Your bank continues to deliver solid financial results, reflecting
the strength, diversification and active management of all our
businesses in this evolving environment. As a board of directors,
we recognize the excellent work of our people at BMO – including
our new colleagues who have joined from Bank of the West –
and the strong leadership of Darryl and the management team.
I want to extend congratulations to our CEO, whose strategic
skills and effectiveness were singled out by The Globe and Mail’s
Report on Business magazine as they named him their Strategist
of the Year and CEO of the Year.
We have great confidence in our strategic direction as an
organization, and the bank’s demonstrated ability to capitalize
on opportunities as general economic conditions improve.
The bank achieves these results by living Our Purpose – Boldly
Grow the Good in business and life – and this is reflected in the
recognition it receives, including being ranked among the World’s
Most Ethical Companies, as well as among the most sustainable
corporations in the world.
On your behalf, we acknowledge and appreciate the commitment
shown by all BMO employees to continue to meet and exceed
such high expectations.
A new director
Over the course of the year, we added a new member to our board
of directors, whom we will be nominating for election at our next
Annual Meeting of Shareholders.
Hazel Claxton, who was, until her 2018 retirement, Chief Human
Resources Officer of Morneau Shepell Inc. (now part of TELUS
Health) and, previously, a senior partner at PwC Canada, has joined
the board’s Audit and Conduct Review Committee. Our 14-member
board now comprises seven women and seven men, in keeping
with our commitment to maintain a gender-balanced board, and
three of our board committee chairs are women.
Because we want to ensure that we always have the full benefit of
the varied talents, knowledge, and work and life experiences that
diversity brings, we are continually taking steps to shape a board
that is rich in diversity.
As your representatives, we thank all our fellow shareholders for
the trust you place in us, and for supporting BMO’s bold ambitions
for growth and progress.
George A. Cope
6 BMO Financial Group 206th Annual Report 2023
Chief Executive
Officer’s Message
Darryl White
Chief Executive Officer
2023 saw emerging challenges in the global economy, impacted by
rising interest rates, weaker financial conditions and compounded
by the escalation of geopolitical crises. While growth of inflation
fell sharply from four-decade highs across North America, further
progress towards normalizing could be impeded by ongoing
cost pressures in the services sector. With persistently high inflation
and weaker global demand due to higher costs of borrowing,
the potential for an economic downturn remains elevated both
in Canada and the U.S., with higher risks north of the border.
The clean energy transition, the accelerated at-scale availability
of advanced technologies, artificial intelligence and otherwise,
and rapidly reorganizing geopolitical relationships are three
transversal trends impacting global economies and presenting
new opportunities and risks to BMO and to our clients.
Within this macroeconomic context, BMO has been reinforcing
and expanding the foundations of our bank to position us strongly
for the future – and this year we’ve made tremendous progress
on that agenda.
Our successful acquisition of Bank of the West is now complete,
and BMO is the most integrated North-South bank on the continent.
The completion of this natural next step in our North American
growth strategy has significantly expanded our market access to
high-growth regions of the United States and strengthened our
competitive position as the eighth largest bank in North America
by assets.
Alongside other notable acquisitions, including the AIR MILES
Reward Program, we are building a high-performing, digitally
enabled, future-ready bank with leading efficiency, profitability
and loyalty. Our newest colleagues are united and energized
by our industry-leading winning culture. Serving our clients across
a wider geographical footprint than ever before, we now have
more opportunities to Boldly Grow the Good in business and life
for all of our stakeholders.
In a year with so much achieved by Team BMO, we’ve been proud
to put our Purpose into action. It starts by helping our clients and
1 For more information, refer to www.jdpower.com/business.
communities make real financial progress – because when they
succeed, we succeed.
For our customers, access to expert advice through a dynamic
operating environment is key to achieving their financial goals –
today and into the future. As a team of bankers aligned in our
objective of meeting and exceeding our clients’ expectations, we
are actively teaming up across our businesses to deliver industry-
leading customer experience. The results are clear: this year, we
were ranked #1 in personal banking customer satisfaction among
Canada’s “Big Five” banks in the J.D. Power 2023 Canada Retail
Banking Satisfaction Study1.
This recognition reinforces the trust our customers place in us and
builds on our leading reputation of customer satisfaction in retail
banking advice, earned by the expert guidance we provide our
clients as they navigate the evolving economy.
Digital First
We lead with a digital-first mindset to drive progress for our
customers, unlock the power of our people and deliver loyalty,
growth and efficiency. Digital is at the centre of how we operate,
powering our teams to build solutions that free up more human
capacity to do what we do best: give expert advice.
We have a strong track record of industry recognition for
providing customer-centric experiences. Our leading digital money
management tools and experiences received the highest score
in the J.D. Power 2023 Canada Online Banking Satisfaction Study1.
BMO also received Celent’s Retail Digital Banking Transformation
Award in recognition of our leadership in digital transformation,
and its Customer Financial Resilience Award for our commitment
to enhancing the customer experience. Our commercial banking
digital offerings received a Datos Insights Impact Award for our
leading use of artificial intelligence and advanced analytics, while
our capital markets team was recognized with a Breaking the
Status Quo award from Fintech Open Source Foundation for our
progress on open source readiness.
BMO Financial Group 206th Annual Report 2023 7
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.
The scope of digital goes deeper, not only for the quality of
customer interactions, but also to powering technological change
across our teams resulting in advanced analytics, stronger insights
and agile decision-making. This was clearly evident as we
successfully converted nearly 2 million new customers to our
systems, a critical step in our integration of Bank of the West.
We are extremely proud that BMO was the only financial
institution named among the top 30 companies on Fast Company’s
fifth annual Best Workplaces for Innovators list, honouring
organizations that demonstrate a commitment to encouraging
and developing innovation enterprise-wide.
North American integration
Significant advancements in our U.S. franchise laid the groundwork
for our successful integration of Bank of the West – the largest
acquisition in Canadian banking history.
Our strategic focus on North American growth, supported by a global
presence that provides our clients access to the world, sets BMO
apart from our competitors. While we’ve operated in the U.S. since
1818, our acquisition of Harris Bank in 1984 established a meaningful
presence that was advanced with our 2011 acquisition of Marshall &
Ilsley Corporation (M&I) and expanded in 2023 with Bank of the
West. BMO is now a top 10 U.S. bank1, with over US$435 billion in
assets and physical presence in 32 states. Combined with our global
operations, our $1 trillion+ balance sheet positions us strongly
for future growth.
Our three operating groups are integrated across robust North-
South infrastructure, with commercial banking and capital markets
operations approximately the same size on both sides of the border
and our commercial bank now ranked among the top 5 in North
America. Our personal banking business is growing strongly with
peer-leading revenue growth in Canada as we gain market share
in the communities we serve, and our wealth management group
is primed for acceleration with continued net new asset growth,
reflecting the trusted relationship we have built with our clients.
Well-positioned for continued growth
Our performance continues to reflect the fundamental strength
and diversified portfolio of businesses that make up BMO –
our powerful platform for growth and resilience in a challenging
economic environment. To adjust to near-term industry headwinds
and return to our well-established record of positive operating
leverage in fiscal 2024 – a key objective for our bank – we’re
dynamically managing our businesses and taking action to align
our resources to our dual objectives of growing our revenues
and controlling expenses.
Our superior risk management capabilities and ethical culture have
guided the relentless execution of our strategy to strengthen and
grow our bank. We expect that disciplined expense management
and targeted investments, combined with revenue and expense
synergies from our recent acquisition, will continue to improve our
efficiency ratio over time.
North America’s potential
North America’s fundamental advantages position the region
for considerable growth in the years ahead, and BMO is well-
positioned to serve more clients between the Canadian and
American economies.
The clean energy transition will benefit both Canada and the U.S.
as reliable and trusted suppliers of sought-after resources and
sustainability expertise. BMO’s Climate Ambition, to be our clients’
lead partner in the transition to a net zero world, is backed by
a $300 billion pledge to mobilize capital to clients’ sustainable
outcomes by 2025 – and we’re on track to exceed that goal this
year. With support for sustainable bond underwriting, equity and
debt financing, ESG advisory services, and loans for sustainable
projects, our Energy Transition and Sustainable Finance Groups are
helping clients pursue opportunities in the global economy’s shift
in the production and consumption of energy.
1 Ranking by assets as at September 30, 2023 and internal analysis. Source: SNL Financial. Top 10 U.S. JP Morgan, Bank of America, Citibank, Wells Fargo, U.S. Bank, PNC Bank,
Truist Bank, TD Bank, Capital One, BMO.
8 BMO Financial Group 206th Annual Report 2023
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
Be our clients’
lead partner
in the transition
to a net
zero world
Superior
management
of risk, capital
and funding
performance
U.S. productivity is growing twice as fast as the G7 average and
is among the world’s strongest. The U.S. also has the largest
middle-class consumer market globally. Next door, Canada’s rapidly
growing population – the fastest among G7 nations – and its
position as the only G7 economy with comprehensive free trade
access to the entire G7 and European Union, offers significant
global economic advantage.
Canada and the U.S. share one of the largest bilateral trade
relationships in the world, and BMO is serving our clients at the
heart of each economy, helping to build a thriving economy,
sustainable future and inclusive society across the region as a
purpose-driven organization.
BMO’s clear North American positioning is now well established
to serve the impressive potential of the North American region
in a shifting global landscape.
Our Purpose commitments
Our performance enables us to put our Purpose into action
and Boldly Grow the Good in business and life. When we enter
a new market, we commit to making progress for our clients
and communities there. That’s why we are delivering on our plan
to support the communities we serve across our U.S. footprint. Our
BMO EMpower 2.0 plan will deliver more than $40 billion in lending
to minority-owned small businesses, community reinvestment
in real estate, affordable housing and neighbourhood revitalization,
and philanthropic giving to support under-represented
communities and organizations.
With input from more than 85 community groups, this five-year
plan reinforces BMO’s focus on increasing home ownership
and supporting the growth of small business in low- to moderate-
income neighbourhoods and underserved communities.
We’re also committed to empowering our employees. Our
exceptionally engaged team has made significant strides in
activating a winning culture in just a few short years, making
substantial progress across every business and group to rank
among the world’s strongest financial institutions. Every member
of Team BMO is committed to building world-class loyalty and
deepening client relationships by bringing the whole bank to
our clients.
Looking ahead
With the size, strength and stability of our bank, BMO is
well positioned for growth and consistent performance through
economic cycles. With the longest-running dividend payout record
of any company in Canada at 195 years, we have a leading track
record of delivering value for our shareholders.
Following a year of successful acquisitions, we’re moving into the
future with the full strength of our North American footprint and
global presence – making our growth ambitions a reality, realizing
opportunities in new markets, and driving progress for our clients,
our communities and the planet.
Darryl White
BMO Financial Group 206th Annual Report 2023 9
Economic
progress
THRIVING ECONOMY
#1 in customer
satisfaction
BMO received the highest score
in customer satisfaction among
Canada’s “Big Five” banks in the
J.D. Power 2023 Canada Retail
Banking Satisfaction Study.
The annual study analyzes
direct feedback from thousands
of customers across Canada
and measures their satisfaction
with their primary bank.1
Innovative
platforms
We’re meeting and engaging
clients where they are. BMO
was recognized for innovation at
the 2023 Cannes Lions festival,
winning Gold for BMO NXT LVL,
a first-of-its-kind gaming platform
on Twitch that educates and
informs gamers about personal
finances. We also won two Gold
Lions in the Creative Commerce
and Social & Influencer categories.
A wider
U.S. footprint
With the acquisition of Bank of
the West, BMO has expanded our
market presence in the U.S. West
and Southwest – while reinforcing
our third-place market share
position for deposits across our
Midwest footprint.
1 For more information, refer to
www.jdpower.com/business.
10 BMO Financial Group 206th Annual Report 2023
Hannalee Pervan, co-owner of One House Bakery.
Photography: Marco Boscacci/BMO
One House Bakery
Benicia, California
“As a small business, it’s important for me to take care of my employees
and my community. I want to be Benicia’s bakery,” says Hannalee Pervan,
co-owner of One House Bakery.
Hannalee travelled a long road to open the business she’s dreamed of
since she was a little girl. After earning a basketball scholarship, she
studied business at university, and then cooking at Le Cordon Bleu Ottawa.
For more than a decade afterwards, she worked at bakeries across Canada
and the United States, learning everything from how to make different
styles of pastry to how to manage wholesaling.
At One House, bakers mill their own flour and use natural colours and
ingredients. “I want everything to be as delicious and healthy as it can
be,” says Hannalee, who co-owns the bakery with her parents Catherine
and Peter Pervan. And it’s truly a family affair: Peter handles payroll, and
Catherine is a chocolatier.
The bakery’s name references the unity between front and back of the
house at this bakery – two realms that are typically separated at culinary
establishments. Similar to BMO’s One Client Leadership approach, Hannalee
knows you get the best from your team when everyone works together.
“Their philosophy is just like BMO’s,” says Chris Wheeler, VP and Business
Relationship Manager, BMO. “Their focus is ensuring everyone works
together to get to a better end result.”
US$16.5B
committed to lending for U.S.
small businesses with owners
who are Native American,
Black, Latinx or women.
Top 5
commercial
lender in
North America1
$8.3B
in loans, deposits and
investments originated
or administered by BMO
for Canadian Indigenous
communities and
businesses, not far from our
target of $9.5B by 2025.
Benicia, California
1 Share of commercial loans based upon publicly available U.S. regulatory filings
(FR Y-9Cs and FFIEC 002s) and internal analysis.
BMO Financial Group 206th Annual Report 2023 11
SUSTAINABLE FUTURE
Sustainable
progress
Benjamin Feagin Jr., CEO of AgriTech North.
Photography: Tony McGuire/Theymedia
12 BMO Financial Group 206th Annual Report 2023
AgriTech North
Dryden, Ontario
Food insecurity is a major issue in Canada’s northern Indigenous
communities, where food costs can be significantly higher than in urban
centres. Benjamin Feagin Jr., CEO of AgriTech North and a member of
the Métis community, is on a mission to change that.
AgriTech is a vertical farming company using innovation to enhance
sustainability, food security and affordability in Canada’s northern and
remote Indigenous communities. “We’re trying to innovate around
existing technologies to find lower-tech ways to do the same job – but
that are more sustainable and less energy-intensive,” says Benjamin.
For example, they’re exploring ways to combine vertical farming – which
generates heat, with greenhouse production – which requires heat.
They’re also planning to work with First Nations governments to help
them establish food sovereignty in their own communities. “We want to
help others implement the successes we have in our area,” says Benjamin.
BMO is focused on being our clients’ lead partner in the transition to a net
zero world – and Seleen Mostow, Relationship Manager at BMO is excited
to support AgriTech’s mission to reduce food costs by 25%. “BMO’s helping
them remain sustainable so they can focus on achieving year-round
growing that has net-zero emissions and is energy-independent,” she says.
“We can make a difference at BMO by supporting businesses that do so
much good in our communities – this is why I love my job.”
$300B
in capital to support
clients pursuing
sustainable outcomes.
#1
Corporate Knights’ most
sustainable bank in North
America, for the fourth
year in a row.
13 years
BMO has been carbon
neutral in our own
operations since 2010.
Dryden, Ontario
A global leader
BMO was recognized as the
world’s top-ranked financial
institution for helping make
progress in support of a just
and sustainable economy by
the World Benchmarking Alliance
(WBA)1, which has developed
transformative new benchmarks
to measure companies’ impacts –
and encourage them to do better.
The WBA noted our leadership
in governance and respect for
planetary boundaries and
human rights.
Protecting
biodiversity
BMO was named to the United
Nations Principles for Responsible
Banking (PRB), Nature Target
Setting Working Group, focused
on developing guidance for
biodiversity and nature-related
target setting – the only Canadian
bank among 34 UN PRB
signatories from 24 countries.
Banking
on ethics
BMO was named one of the
World’s Most Ethical Companies
for the sixth consecutive year
by Ethisphere, a global leader
in defining and advancing the
standards of ethical business
practices – one of only four banks
worldwide to be included in 2023,
and the only Canadian bank to
receive this designation since the
award’s inception in 2007.
1 Awarded in 2022.
BMO Financial Group 206th Annual Report 2023 13
INCLUSIVE SOCIETY
Equitable
progress
Carmell Macklin, owner of Macklin Hauling Inc.
Photography: Kevin A. Roberts
Custom hat embroidery courtesy of Anish Branding, Nepean, ON
14 BMO Financial Group 206th Annual Report 2023
Macklin Hauling Inc.
St. Louis, Missouri
At 74 years old – and after recovering from a stroke that initially left
him unable to walk – Macklin Hauling owner Carmell Macklin
was ready to restart his trucking business. A big fan of BMO, he trusted
his banker of seven years, Branch Manager and VP Stephanie Tuomey,
to help him get back on the road. But when his truck broke down
shortly afterwards, he almost parked it for good.
“I told him we didn’t come this far just to come this far!” says Stephanie,
noting that while Carmell had other sources of income, trucking is the
work he loves to do.
“Stephanie is truly an angel, along with her team. They gave me the
courage and confidence – along with the financial support – to get me
back trucking again,” says Carmell. “Every tool BMO had that would
benefit Macklin Hauling, we used – and they worked.”
Stephanie set Carmell up with a business credit card using BMO
EMpower’s Zero Barriers to Business program so he could finance the
repairs without depleting his cash reserves, and a business savings
account so he’s better prepared for the next challenge.
Carmell says BMO has always been there for him, and he tells everyone
he can about the bank. “Carmell shared with me what an impact it made,
just having someone believe in him,” says Stephanie. His son, who runs a
trucking business of his own, has also moved his banking to BMO.
“Zero Barriers to Business and EMpower are two of our most impactful
programs,” says Stephanie. “They allow us to bring valuable tools and
resources to the businesses that fuel our communities.”
8 years
on the Bloomberg Gender-Equality
Index, for our commitment to gender
equity and inclusion in the workplace
and the community.
90+%
of BMO employees completed our
Learn from Difference program,
fostering a more inclusive workplace.
$100M
committed to Business Within Reach:
BMO for Black Entrepreneurs program,
helping Black-owned businesses in
Canada start up, scale up and grow.
St. Louis, Missouri
Supporting
research
BMO committed $5 million to the
Centre for Addiction and Mental
Health to support independent
research and help build a new
research centre – the Krembil Centre
for Neuroinformatics in Toronto, a
global hub collecting and integrating
large-scale research data, using
machine learning and mathematical
models to potentially transform our
understanding of brain disorders.
An inclusive
workplace
BMO’s commitment to a diverse
and inclusive workplace was
recognized by several organizations
in 2023. For example, we received a
top score on the Disability Equality
Index (DEI) Best Places to Work,
the leading benchmark tool for
disability inclusion in business. DEI
is a joint initiative of Disability:IN
and The American Association of
People with Disabilities.
$40 billion+
for communities
BMO EMpower 2.0 is our five-year
plan to address key barriers for
minority businesses, communities
and families. We’ve committed more
than $40 billion in funding across
the United States, with over $16
billion targeted for California. The
plan goes beyond financial support
– these partnerships foster deep
community engagement, creating
meaningful change at the local level.
BMO Financial Group 206th Annual Report 2023 15
One Client
Leadership
Neil’s Harbour, Nova Scotia
Business groups partner across BMO to deliver an industry-leading
customer experience. We work together as one team aligned in our
objective of exceeding our customers’ expectations as we help them
make real financial progress.
Victoria Fisheries Ltd.
Neil’s Harbour, Nova Scotia
In 2022, Quebec and Atlantic Canada were struck
by Hurricane Fiona, one of the most powerful and
destructive storms in Canadian history. The storm
was devastating to families, communities and
businesses across the Atlantic provinces – including
Nova Scotia-based Victoria Co-operative Fisheries Ltd.
(Co-op), a BMO client since 2012.
The Co-op, formed in 1955, works with more than
140 inshore commercial fishing vessels to purchase
and process a variety of seafood that is then shipped
to Europe, Asia and the United States Most of
the vessels are locally owned and operated by
Co-op members, and their earnings to stay in
the community.
As the largest employer on the northern tip of
Cape Breton Island, each year the Co-op contributes
approximately $2 million in payroll to the local economy.
The Co-op’s plant was severely damaged by Hurricane
Fiona, and they lost over $500,000 in product. Luckily,
no one was injured – but the Co-op’s future was at risk.
Peter MacLeod, Senior Relationship Manager at BMO,
and several colleagues sprang into action, assuring
Osborne Burke, General Manager of the Co-op, that
BMO would be there for them.
16 BMO Financial Group 206th Annual Report 2023
From there, it was a joint effort between the
commercial deal and risk management teams.
BMO is one of few Canadian banks with extensive
expertise in fisheries, and our risk management team
understood the scope of the initial impact, enabling
BMO to act quickly to ensure the Co-op was able to
pay critical bills – and to rebuild as soon as possible.
For the Co-op to survive, it would need to be
operational in time for the beginning of the next
fishing season in April 2023.
“Very simply, we would have been
out of business without BMO.” Osborne Burke
“We needed the bank’s support to get started, not
knowing what insurance or other support would be
available. We didn’t know the extent of the damage –
ultimately it was more than $8 million – but BMO
stepped up to the plate. It wasn’t an issue worrying
about how we’d pay the bills,” says Osborne.
“BMO did what a lot of banks would never do for
someone in our industry,” says Osborne. The Co-op was
able to start rebuilding right away – and Osborne made
sure they built back better than ever, with a more
efficient facility made to withstand the next storm.
Peter MacLeod, Senior Relationship Manager,
BMO Commercial Bank and Osborne Burke,
General Manager of Victoria Co-operative Fisheries Ltd.
Photography: Riley Smith
BMO’s One Client Leadership approach helped get
the Co-op fully operational in time for the opening of
snow crab season in April – just seven months after
the devastating hurricane.
“We never missed a day of production, which would
never have happened without the bank being there for
us from the very first day. Very simply, we would have
been out of business without BMO,” says Osborne,
who has gone on to recommend BMO to several
others in the industry.
“All the credit for the rebuild goes to Osborne,” says
Peter. “He made it happen – in record time.” At the
same time, Peter is proud of the way his colleagues
partnered across business groups to provide timely
support and local expertise.
“All the credit for the rebuild goes
to Osborne. He made it happen –
in record time.” Peter MacLeod
“Working together as one team is ingrained within
BMO’s culture,” says Peter. “Our dedication to
understanding the businesses we serve – and how
they impact their communities – allows us to make
a real difference.”
A winning bank
A top innovator
World Finance magazine recognized several BMO businesses
in 2023:
Best Commercial Bank in Canada for the ninth
consecutive year
Best Retail Bank in Canada for the second consecutive year
Best Commercial Bank in the United States
Best Private Bank in Canada for the 13th consecutive year
Best Private Bank in the United States
BMO InvestorLine ranked third in The Globe and Mail 2023
digital broker ranking for consistently driving digital
innovation that focuses on client needs and delivering
an exceptional client experience.
International leadership
Maintaining BMO’s global leadership in mining and metals,
we were recognized as the world’s best Mining & Metals
Investment Bank by Global Finance magazine for the 14th
consecutive year.
BMO Financial Group 206th Annual Report 2023 17
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.
Corporate director
Board/Committees:
Governance and Nominating,
Human Resources
Director since: 2011
Craig W. Broderick
Corporate director
Board/Committees:
Audit and Conduct Review,
Governance and Nominating,
Risk Review (Chair)
Director since: 2018
Hazel Claxton
Corporate director
Board/Committees:
Audit and Conduct Review
Director since: 20232
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:
Human Resources,
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
Piyush Agrawal
Chief Risk Officer
Darrel Hackett
U.S. Chief Executive Officer
Sharon Haward-Laird
General Counsel
Nadim Hirji
Group Head,
BMO Commercial Bank,
North America
and Co-Head, Personal and
Commercial Banking
Ernie (Erminia) Johannson
Group Head,
North American Personal &
Business Banking
and Co-Head, Personal and
Commercial Banking
Deland Kamanga
Group Head,
BMO Wealth Management
Mona Malone
Chief Human Resources Officer
and Head, People, Culture and Brand
Steve Tennyson
Chief Technology
and Operations Officer
Tayfun Tuzun
Chief Financial Officer
Alan Tannenbaum
Chief Executive Officer and
Group Head,
BMO Capital Markets
1 As at November 1, 2023.
2 Appointed to the Board of Directors effective August 30, 2023.
18 BMO Financial Group 206th Annual Report 2023
Enhanced Disclosure Task Force
The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board to provide guidance and recommendations for best
practice risk disclosures for banks. We have adopted these recommendations at BMO in order to prepare and deliver high-quality, transparent
risk disclosures. The index below details these recommendations and references the presentation of the disclosures in our 2023 Annual Report,
Supplementary Financial Information (SFI) and 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 2023 Annual Report.
Topic
General
EDTF Disclosure
Page number
Annual Report
SFI
SRCI
1. Risk-related information in each report, including an index for easy navigation
2. Risk terminology, measures and key parameters
3.
4.
Top and emerging risks
Plans to meet new key regulatory ratios once applicable rules are finalized
78-118
82-118,126-128
78-80
72
Index
Index
Risk Governance,
Risk Management and
Business Model
5. Risk management and governance framework, processes and key functions
6. Risk culture, risk appetite and procedures to support the culture
7. Risks that arise from business models and activities
8.
Stress testing within the risk governance and capital frameworks
Capital Adequacy and
Risk-Weighted Assets
(RWA)
Liquidity
Funding
Pillar 1 capital requirements
9.
10. Composition of capital components and 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. Flow statement of movements in regulatory capital, including changes in
Common Equity Tier 1 Capital, Additional Tier 1 Capital and Tier 2 Capital
12. Capital management and strategic planning
13. Risk-weighted assets (RWA) by operating group
14. Analysis of capital requirements for each method used in calculating RWA
15. Tabulate credit risk in the banking book for Basel asset classes and
major portfolios
16. Flow statement that reconciles movements in RWA by credit risk and
market risk
17. Basel validation and back-testing process, including estimated and actual
loss parameter information
18. Management of liquidity needs and liquidity reserve held to meet those needs
19. Encumbered and unencumbered assets disclosed by balance sheet category
20. Consolidated total assets, liabilities and off-balance sheet commitments by
remaining contractual maturity
21. Analysis of funding sources and funding strategy
Market Risk
22. Linkage of trading and non-trading market risk to the consolidated
Credit Risk
balance sheet
23. Significant trading and non-trading market risk factors
24. Market risk model assumptions, validation procedures and back-testing
25. Primary techniques for risk measurement and risk assessment, including risk of
loss
26. Analysis of credit risk profile, exposures and concentration
27. Policies to identify impaired loans and renegotiated loans
28. Reconciliation of opening and closing balances of impaired loans and allowance
for credit losses
29. Counterparty credit risk arising from derivative transactions
30. Credit risk mitigation
82-86
86
84-85
85-86
70-73
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5-6,13
73-74
5-7,16-17
69,75-76
74
73-74,87-90
112
100-106
102-103
107-108
103-104
99
95-99
95-99,112
95-99
87-94,159-166
159-161,166
93,164
87-88,
94,178-179
87-88,
162,170,209
8
14
14-15,22-44,
51-62,83-84
22-44,46-62,
84
45,80
85-89
36-37
24-33
14-79
51-67
21,46-48,63
Other Risks
31. Discussion of other risks
32. Publicly known risk events involving material or potentially material loss events
82-84,109-118
109-118
BMO Financial Group 206th Annual Report 2023 19
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 audited 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, 2023 and 2022. The MD&A should be read
in conjunction with the audited annual consolidated financial statements for the year ended October 31, 2023. The MD&A commentary is as at
November 30, 2023. Unless otherwise indicated, all amounts are stated in Canadian dollars and have been derived from audited annual 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).
References to generally accepted accounting principles (GAAP) mean IFRS.
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Index
21
Caution Regarding Forward-Looking Statements
61
Summary Quarterly Earnings Trends
22 About BMO
63 Review of Fourth Quarter 2023 Performance
Financial Objectives and Value Measures
64 2022 Financial Performance Review
23
26
27
Supporting a Sustainable and Inclusive Future
Financial Highlights
28 Non-GAAP and Other Financial Measures
32 Recent Acquisitions
33
Economic Developments and Outlook
34 2023 Financial Performance Review
Summary
Personal and Commercial Banking
42 2023 Operating Groups Performance Review
42
43
44
48
52
56
59
Canadian Personal and Commercial Banking
U.S. Personal and Commercial Banking
BMO Wealth Management
BMO Capital Markets
Corporate Services, including Technology and Operations
67
67
69
76
78
Financial Condition Review
Summary Balance Sheet
Enterprise-Wide Capital Management
Off-Balance Sheet Arrangements
Enterprise-Wide Risk Management
119 Accounting Matters and Disclosure and Internal Control
119
122
123
123
124
125
Critical Accounting Estimates and Judgments
Future Changes in Accounting Policies
Other Regulatory Developments
Transactions with Related Parties
Shareholders’ Auditors’ Services and Fees
Management’s Annual Report on Disclosure Controls and Procedures
and Internal Control over Financial Reporting
126
Supplemental Information
135 Glossary of Financial Terms
Regulatory Filings
BMO’s continuous disclosure materials, including our interim consolidated financial statements and interim MD&A, audited annual consolidated financial statements
and annual MD&A, Annual Information Form and Notice of Annual Meeting of Shareholders and Management Proxy Circular, are available on our website at
www.bmo.com/investorrelations, on the Canadian Securities Administrators’ website at www.sedarplus.ca 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, Recent Acquisitions, Economic Developments and Outlook,
Provision for Income Taxes and Other Taxes, 2024 Areas of 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 section for a discussion of such risks and uncertainties and the material factors and assumptions related to the statements set
forth in such sections.
20 BMO Financial Group 206th Annual Report 2023
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 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 2024 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, the regulatory environment in which we operate, the results of, or outlook for, our operations or the Canadian,
U.S. and international economies, plans for the combined operations of BMO and Bank of the West, 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 anticipated benefits from acquisitions, including Bank of the West, are not realized;
changes to our credit ratings; the emergence or continuation of widespread health emergencies or pandemics, and their impact on local, national or international
economies, as well as their heightening of certain risks that may affect our future results; cyber and cloud security, including the threat of data breaches, hacking, identity
theft and corporate espionage, as well as the possibility of denial of service resulting from efforts targeted at causing system failure and service disruption; technology
resiliency; failure of third parties to comply with their obligations to us; political conditions, including changes relating to, or affecting, economic or trade matters; climate
change and other environmental and social risks; the Canadian housing market and consumer leverage; inflationary pressures; technological innovation and competition;
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 and capital requirements; 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; 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; 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, and 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. In determining our expectations for economic growth, we primarily consider historical economic data, past relationships between economic
and financial variables, changes in government policies, and the risks to the domestic and global economy.
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BMO Financial Group 206th Annual Report 2023 21
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 $1.29 trillion. We are a highly diversified financial institution providing a broad range of personal and commercial banking, wealth
management, global markets and investment banking products and services. We serve thirteen 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 engaged employees and a winning culture.
We are focused on helping our customers make real financial progress, and on financing our clients’ growth and innovation, while also investing
in our workforce. Anchored by our Purpose, we are driven by our strategic priorities for growth, strengthened by our approach to sustainability
and guided by our values as we 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 of progress and a catalyst for change. We are leveraging our position as a leading financial
services provider in order 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, financial products and 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
The strength and consistency of our performance are 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 2024 to reflect our strong momentum in an environment of ongoing transformation:
‰ 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
‰ Be our clients’ lead partner in the 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 achieve competitive performance.
The operating group strategies are outlined in the 2023 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.
22 BMO Financial Group 206th Annual Report 2023
Financial Objectives and Value Measures
Results and measures in this section are presented on a reported and an adjusted basis, as well as a gross and net revenue basis, and management
considers all of these 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 amounts. 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
Financial objectives (adjusted)
Reported basis
Adjusted basis (1)
As at and for the periods ended October 31, 2023
1-year
3-year (2)
5-year (2)
1-year
3-year (2)
5-year (2)
Earnings per share growth (%)
Average return on equity (%)
Average return on tangible common equity (%)
Operating leverage, net of CCPB (%) (3)
Common Equity Tier 1 Ratio (%)
Total shareholder return (%)
7-10%
15% or more
18% or more
2% or more
Exceed regulatory requirement
Top-tier
(71.6)
6.0
8.2
(45.9)
12.5
(12.5)
(9.1)
14.6
16.8
(6.8)
na
14.3
(7.0)
13.3
15.5
(3.2)
na
5.6
(11.4)
12.3
15.8
(8.2)
na
na
15.0
14.7
17.1
–
na
na
5.5
13.6
15.9
0.7
na
na
(1) Adjusted results and measures 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
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 above. 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 changes in the economic environment, or 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 above and described in the sections that follow.
Earnings per Share Growth
All references to earnings per share (EPS) are to diluted EPS, unless otherwise indicated.
EPS was $5.68 in 2023, a decrease of $14.31 or 72% from $19.99 in 2022. Adjusted EPS was $11.73, a
decrease of $1.50 or 11% from $13.23 in 2022. The decrease in EPS reflected lower earnings and a higher
number of common shares outstanding. Net income available to common shareholders decreased 70%
year-over-year on a reported basis, and decreased 5% on an adjusted basis. The average number of diluted
common shares outstanding increased 7% from 2022, reflecting common shares issued during the year through
a public offering, private placements, the dividend reinvestment plan, acquisitions and the stock option plan.
EPS ($)
19.99
11.58
5.68
12.96
13.23
11.73
Earnings per Share (EPS) is calculated by dividing net income attributable to bank shareholders, after
deducting preferred share dividends and distributions on other equity instruments, by the average number
of common shares outstanding. Adjusted EPS is calculated in the same manner, using adjusted net income
attributable to bank shareholders. 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 audited annual consolidated financial statements.
Reported
Adjusted
2021
2022
2023
BMO Financial Group 206th Annual Report 2023 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Return on Equity and Return on Tangible Common Equity
Reported return on equity (ROE) was 6.0% in 2023 and adjusted ROE was 12.3%, compared with 22.9%
and 15.2%, respectively, in 2022. Reported ROE decreased due to lower net income, primarily due to lower
revenue in the current year resulting from the impact of fair value management actions related to the acquisition
of Bank of the West, and higher expenses in the current year due to higher acquisition and integration-related
costs. Reported and adjusted ROE decreased due to the impact of share issuances, as well as lower earnings.
There was a decrease of $9,272 million in reported net income available to common shareholders and a
decrease of $476 million in adjusted net income available to common shareholders in the current year. Average
common shareholders’ equity increased $9.4 billion or 16% from 2022, primarily due to the issuance of common
shares and growth in retained earnings, partially offset by a decrease in accumulated other comprehensive
income.
Reported return on tangible common equity (ROTCE) was 8.2%, compared with 25.1% in 2022, and adjusted
ROTCE was 15.8%, compared with 16.6% in 2022. Reported and adjusted ROTCE decreased due to lower earnings,
partially offset by lower tangible common equity. Book value per share increased 2% from the prior year
to $97.17, 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
reported 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. Average tangible common equity comprises common shareholders’ equity, less goodwill and
acquisition-related intangible assets, net of related deferred tax liabilities. Adjusted ROTCE is calculated using
adjusted net income rather than reported net income.
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Efficiency Ratio and Operating Leverage
BMO’s reported gross efficiency ratio was 68.0% in 2023, compared with 48.0% in 2022. On a net revenue
basis (1), the reported efficiency ratio was 72.5%, compared with 47.1% in 2022, and the adjusted efficiency ratio
was 59.8%, compared with 55.8% in 2022. The increase in the efficiency ratio reflected revenue growth that was
more than offset by higher expense growth, as well as the impact of Bank of the West, which operated at a
higher efficiency ratio.
Reported operating leverage was negative 38.5%. On a net revenue basis, reported operating leverage was
negative 45.9%, and adjusted operating leverage was negative 8.2%.
(1) Net revenue comprises revenue, net of insurance claims, commissions and changes in policy benefit liabilities (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 insurance claims, commissions and changes in policy benefits (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.
Operating Leverage is the difference between the growth rates of revenue and non-interest expense, and
adjusted operating leverage is the difference between the growth rates of adjusted revenue and adjusted
non-interest expense.
Operating Leverage, net of insurance claims, commissions and changes in policy benefit liabilities
(CCPB), is the difference between the growth rates of revenue, net of CCPB (net revenue) and non-interest
expense. Adjusted operating leverage, net of CCPB, is calculated using the growth rates of adjusted net
revenue and adjusted non-interest expense. The bank evaluates performance using adjusted net revenue.
ROE (%)
22.9
14.9
6.0
16.7
15.2
12.3
Reported
Adjusted
2021
2022
2023
ROTCE (%)
25.1
17.0
18.9
16.6
15.8
8.2
Reported
Adjusted
2021
2022
2023
Efficiency Ratio,
Net of CCPB (%)
60.1
56.5
55.8
47.1
72.5
59.8
2021
2022
2023
Reported Efficiency Ratio, Net of CCPB
Adjusted Efficiency Ratio, Net of CCPB
Operating Leverage,
Net of CCPB (%)
29.0
0.4
6.1
1.3
(8.2)
(45.9)
Reported
Adjusted
2021
2022
2023
24 BMO Financial Group 206th Annual Report 2023
Common Equity Tier 1 Ratio
Our Common Equity Tier 1 (CET1) Ratio was 12.5% as at October 31, 2023, compared with 16.7% as at
October 31, 2022. Our CET1 Ratio was elevated at the end of fiscal 2022, primarily driven by fair value
management actions related to the acquisition of Bank of the West. The CET1 Ratio decreased from the prior
year, primarily as a result of the acquisition and integration of Bank of the West.
CET1 Ratio (%)
16.7
13.7
12.5
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.
2021
2022
2023
Total Shareholder Return
For the year ended October 31
Closing market price per common share ($)
Dividends paid ($ per share)
Dividend yield (%)
Increase (decrease) in share price (%)
Total annual shareholder return (%) (2)
Canadian peer group average (excluding BMO) (3)
2023
2022
2021
104.79
5.72
5.5
(16.5)
(12.5)
(8.8)
125.49
5.11
4.3
(6.6)
(3.1)
(6.2)
134.37
4.24
3.2
69.4
75.9
56.1
2020
79.33
4.21
5.3
(18.6)
(14.6)
(11.5)
2019
97.50
3.99
4.2
(0.9)
3.2
11.4
3-year
CAGR (1)
5-year
CAGR (1)
9.7
10.8
nm
nm
14.3
10.0
1.3
9.0
nm
nm
5.6
5.5
M
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(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, 2023; peers: BNS, CIBC, NB, RBC, TD.
nm – not meaningful
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 12.5%,
positive 14.3% and positive 5.6%, respectively, compared with our Canadian peer group average (excluding BMO) of negative 8.8%, positive 10.0%
and positive 5.5%, respectively.
The table above 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 2019 would have been worth $1,315 as at October 31, 2023,
assuming reinvestment of dividends, for a total return of 31.5%.
Dividends declared per common share in fiscal 2023 totalled $5.80, an increase of $0.36 from $5.44 in the prior year. Dividends paid over
a five-year period have increased at an average annual compound rate of approximately 9%.
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.
Caution
This Financial Objectives and Value Measures section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 206th Annual Report 2023 25
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Supporting a Sustainable and Inclusive Future
In support of our customers, communities and employees, in 2023 we:
‰ Launched BMO EMpowerTM 2.0, pledging more than US$40 billion to support organizations in communities across the United States focused
on advancing home ownership, growing small businesses, strengthening communities, and creating a more equitable society.
‰ Exceeded BMO’s annual Employee Giving Campaign target with our employees contributing more than $31 million to the United Way and
thousands of other community organizations across North America, while also setting a new record for pledges.
‰ Announced the 2022 recipients of $150,000 in grants awarded to twelve Canadian women entrepreneurs as part of the BMO Celebrating
Women Grant Program for women-owned businesses across Canada, in collaboration with Deloitte. The program is in its third year and has
supported 56 women-owned businesses to date in Canada, with grants totalling $530,000.
‰ Were named to the United Nations Principles for Responsible Banking, Nature Target Setting Working Group, focused on developing guidance
‰
for setting biodiversity and nature targets – the only Canadian bank among 34 signatories from 24 countries.
Invested $15 million in the Feel Out Loud campaign, sponsored by Kids Help Phone to expand access to clinical care and services in Canada
through its e-mental health platform for youth. As a founding partner of Kids Help Phone, and with the help of our employees, we have raised
more than $40 million to support this campaign to date.
‰ Continued to drive progress for mental health treatment with a $5 million donation to the Centre for Addiction and Mental Health (CAMH) to
support independent research at its Krembil Centre for Neuroinformatics and help build a research centre. We also donated $2 million to the Royal
Ottawa Health Care Group (The Royal) to support the newly-established BMO Innovative Clinic for Depression, providing more treatment options for
people living with depression.
‰ Released Wîcihitowin, our third annual Indigenous Partnerships and Progress Report, highlighting our focus on advancing education, employment
and economic empowerment in First Nations, Inuit and Métis communities. In addition, we announced six new members of our Indigenous
Advisory Council (IAC), which now includes leaders from across Canada.
BMO’s leadership continues to be recognized in a significant number of rankings, including:
‰ Ranked among the most sustainable companies on the Dow Jones Sustainability Indices (DJSI). In addition, BMO ranked in the 95th percentile
among banks globally and earned the highest possible score in the areas of Environmental Reporting, Social Reporting and Financial Inclusion.
‰ Named one of Corporate Knights’ 2023 Global 100 Most Sustainable Corporations in the World and, for the fourth consecutive year, ranked as North
America’s most sustainable bank. We ranked eighth in the world and in the top 15% of banks globally for Sustainable Revenue and received high
marks for diversity on our Board of Directors and the representation of diversity in our senior leadership.
Included in Corporate Knights’ list of Canada’s Best 50 Corporate Citizens, with top-quartile scores in board gender diversity and the representation
of visible minorities in our executive leadership – the only Canadian bank named to this listing. We also received a top-quartile Sustainable Revenue
score, demonstrating our ongoing commitment to sustainable financing and responsible investing.
‰
‰ Recognized by the World Benchmarking Alliance (WBA) as the world’s top-ranked financial institution for supporting progress toward a just and
‰
sustainable economy.
Included for the eighth consecutive year in the Bloomberg Gender-Equality Index (GEI), in recognition of BMO’s global leadership in gender
equity and inclusion within the workplace and the community, and for publicly demonstrating our commitment to equality and the advancement
of women.
‰ Recognized by Ethisphere Institute as one of the World’s Most Ethical Companies for the sixth consecutive year, remaining the only Canadian bank
‰
to be honoured with this designation since its inception in 2007. The designation affirms our commitment to doing what is right and operating with
transparency, good governance and integrity in support of a thriving economy, a sustainable future and an inclusive society.
Included for the third consecutive year in the 2023 Women Lead Here list published by the Globe and Mail in its Report on Business magazine to
recognize Canadian businesses for excellence in gender diversity in executive roles. Our objective for gender equality in our senior leadership has
been above 40% since 2016, and we continue to support advancing diversity, equity and inclusion across the bank.
‰ Received a top score on the Disability Equality Index (DEI) for the eighth consecutive year. BMO was named one of the Best Places to Work for
Disability Inclusion by Disability:IN and the American Association of People with Disabilities (AAPD), in recognition of our continued focus and
progress on building an inclusive society for our employees and the communities we serve.
Caution
This Supporting a Sustainable and Inclusive Future section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
26 BMO Financial Group 206th Annual Report 2023
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
Net income available to common shareholders
Adjusted net income
Adjusted net income available to common shareholders
Common Share Data ($, except as noted) (1)
Basic earnings per share
Diluted earnings per share
Adjusted diluted earnings per share
Book value per share
Closing share price
Number of common shares outstanding (in millions)
End of period
Average basic
Average diluted
Market capitalization ($ billions)
Dividends declared per share
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
Adjusted efficiency ratio, net of CCPB (2)
Operating leverage
Adjusted operating leverage, net of CCPB (2)
Net interest margin on average earning assets
Net interest margin on average earning assets excluding trading revenue and trading 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
TLAC Ratio
Foreign Exchange Rates ($)
As at October 31, Canadian/U.S. dollar
Average Canadian/U.S. dollar
M
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A
2023
2022
18,681
12,518
31,199
1,939
29,260
1,180
998
2,178
21,219
1,486
4,377
4,034
8,675
8,332
5.69
5.68
11.73
97.17
104.79
720.9
709.4
710.5
75.5
5.80
5.5
102.0
49.4
6.0
12.3
8.2
15.8
68.0
59.8
(38.5)
(8.2)
1.63
1.82
25.3
22.3
0.35
0.19
128
115
15,885
17,825
33,710
(683)
34,393
502
(189)
313
16,194
4,349
13,537
13,306
9,039
8,808
20.04
19.99
13.23
95.60
125.49
677.1
664.0
665.7
85.0
5.44
4.3
27.1
41.0
22.9
15.2
25.1
16.6
48.0
55.8
19.6
1.3
1.62
1.72
24.3
22.8
0.06
0.10
135
114
1,293,276
1,145,632
668,396
664,589
909,676
70,051
424,197
808,985
332,947
12.5
14.1
16.2
4.2
27.0
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
33.1
1.3868
1.3492
1.3625
1.2918
(1) Adjusted results exclude 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, as well as reported ratios calculated net of CCPB, and adjusted results, measures and ratios in this table are non-GAAP
amounts. For further information, refer to the Non-GAAP and Other Financial Measures section; for details on the 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 the Office of the Superintendent of Financial Institutions (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 206th Annual Report 2023 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-GAAP and Other Financial Measures
A
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Results and measures in this document are presented on a generally accepted accounting principles (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) as issued by the International Accounting Standards Board. 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, provision for credit losses and income taxes,
as detailed in the following table. Adjusted results and measures presented in this document are non-GAAP amounts. 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
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. Measures and ratios presented on a basis net of CCPB are non-GAAP
amounts. 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.
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.
Caution
This Non-GAAP and Other Financial Measures section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
28 BMO Financial Group 206th Annual Report 2023
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 ($)
Adjusting Items Impacting Revenue (Pre-tax)
Impact of divestitures (1)
Management of fair value changes on the purchase of Bank of the West (2)
Legal provision (including related interest expense and legal fees) (3)
Impact of Canadian tax measures (4)
Impact of adjusting items on revenue (pre-tax)
Adjusting Items Impacting Provision for Credit Losses (Pre-tax)
Initial provision for credit losses on purchased performing loans (pre-tax) (5)
Adjusting Items Impacting Non-Interest Expense (Pre-tax)
Acquisition and integration costs (6)
Amortization of acquisition-related intangible assets (7)
Impact of divestitures (1)
Legal provision (including related interest expense and legal fees) (3)
Restructuring (costs) reversals (8)
Impact of Canadian tax measures (4)
Impact of adjusting items on non-interest expense (pre-tax)
Impact of adjusting items on reported net income (pre-tax)
Adjusting Items Impacting Revenue (After-tax)
Impact of divestitures (1)
Management of fair value changes on the purchase of Bank of the West (2)
Legal provision (including related interest expense and legal fees) (3)
Impact of Canadian tax measures (4)
Impact of adjusting items on revenue (after-tax)
Adjusting Items Impacting Provision for Credit Losses (After-tax)
Initial provision for credit losses on purchased performing loans (after-tax) (5)
Adjusting Items Impacting Non-Interest Expense (After-tax)
Acquisition and integration costs (6)
Amortization of acquisition-related intangible assets (7)
Impact of divestitures (1)
Legal provision (including related interest expense and legal fees) (3)
Restructuring (costs) reversals (8)
Impact of Canadian tax measures (4)
Impact of adjusting items on non-interest expense (after-tax)
Adjusting Items Impacting Provision for Income Taxes
Impact of Canadian tax measures (4)
Impact of adjusting items on reported net income (after-tax)
Impact on diluted EPS ($)
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
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2023
2022
2021
18,681
12,518
31,199
(1,939)
29,260
(2,178)
(21,219)
5,863
(1,486)
4,377
5.68
–
(2,011)
(30)
(138)
(2,179)
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
(705)
–
(2,045)
(357)
–
3
–
(22)
(2,421)
(5,305)
–
(1,461)
(23)
(115)
(1,599)
(326)
(31)
(16)
(627)
–
–
(1,000)
6,177
(23)
5,667
(382)
–
5,262
(517)
–
(1,533)
(264)
–
2
–
(16)
(1,811)
(371)
(4,298)
(6.05)
19,094
14,284
33,378
(1,939)
31,439
(1,473)
(18,798)
11,168
(2,493)
8,675
11.73
(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
29
–
–
–
29
–
(9)
(88)
(886)
–
24
–
(959)
(930)
22
–
–
–
22
–
(7)
(66)
(864)
–
18
–
(919)
–
(897)
(1.38)
14,310
12,847
27,157
(1,399)
25,758
(20)
(14,550)
11,188
(2,537)
8,651
12.96
BMO Financial Group 206th Annual Report 2023 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
(1) Reported net income included the impact of divestitures related to the sale of our EMEA and U.S. Asset Management businesses and our Private Banking business. Fiscal 2022 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 the
business recorded in non-interest expense. Fiscal 2021 included a $779 million (pre-tax and after-tax) write-down of goodwill related to the sale of our EMEA and U.S. Asset Management businesses
recorded in non-interest expense, a $22 million ($29 million pre-tax) net gain on the sale of our Private Banking business 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 2023 reported net income included a loss of $1,461 million ($2,011 million pre-tax) related to the acquisition of Bank of the West resulting from the management of the impact of interest
rate changes between the announcement and closing of the acquisition on its fair value and goodwill, comprising $1,628 million of mark-to-market losses on certain interest rate swaps recorded
in trading revenue and $383 million of losses on a portfolio of primarily U.S. treasuries and other balance sheet instruments recorded in net interest income. Fiscal 2022 included revenue of
$5,667 million ($7,713 million pre-tax), comprising $7,665 million of mark-to-market gains and $48 million of non-trading interest income. These amounts were recorded in Corporate Services.
For further information on this acquisition, refer to the Recent Acquisitions section.
(3) Fiscal 2023 reported net income included the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, of $21 million ($27 million pre-tax), comprising interest expense
of $30 million and a net non-interest expense recovery of $3 million. Fiscal 2022 included a provision of $846 million ($1,142 million pre-tax), comprising interest expense of $515 million and
non-interest expense of $627 million. These amounts were recorded in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the audited
annual consolidated financial statements.
(4) Fiscal 2023 reported net income included the impact of certain tax measures enacted by the Canadian government. These tax measures included a one-time tax expense of $371 million, comprising a
Canada Recovery Dividend (CRD) of $312 million and $59 million related to the pro-rated fiscal 2022 impact of the 1.5% tax rate increase, net of a deferred tax asset remeasurement, and a charge of
$131 million ($160 million pre-tax) related to the amended GST/HST definition for financial services, comprising $138 million recorded in non-interest revenue and $22 million recorded in non-interest
expense. These amounts were recorded in Corporate Services.
(5) Fiscal 2023 reported net income included a provision for credit losses of $517 million ($705 million pre-tax) on the purchased Bank of the West performing loan portfolio, recorded in
Corporate Services.
(6) Fiscal 2023 reported net income included acquisition and integration costs of $1,533 million ($2,045 million pre-tax), comprising $1,520 million ($2,027 million pre-tax) related to Bank of the West,
$4 million ($5 million pre-tax) related to Radicle and Clearpool, and $9 million ($13 million pre-tax) related to AIR MILES. Fiscal 2022 included acquisition and integration costs of $245 million
($326 million pre-tax), comprising $237 million ($316 million pre-tax) related to Bank of the West and $8 million ($10 million pre-tax) related to Radicle, Clearpool and KGS-Alpha. Fiscal 2021 included
acquisition and integration costs of $7 million ($9 million pre-tax) related to Clearpool and KGS-Alpha. These amounts were recorded in non-interest expense. Bank of the West acquisition and
integration costs were recorded in Corporate Services; Radicle, Clearpool and KGS-Alpha costs were recorded in BMO Capital Markets; and AIR MILES costs were recorded in Canadian P&C.
(7) Amortization of acquisition-related intangible assets of $264 million ($357 million pre-tax) in fiscal 2023, $23 million ($31 million pre-tax) in fiscal 2022, and $66 million ($88 million pre-tax)
in fiscal 2021 were recorded in non-interest expense in the related operating group.
(8) 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.
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)
A
&
D
M
2023
Reported net income (loss)
Acquisition and integration costs
Amortization of acquisition-related
intangible assets
Management of fair value changes on
the purchase of Bank of the West
Legal provision (including related interest
expense and legal fees)
Impact of Canadian tax measures
Initial provision for credit losses on purchased
performing loans
Adjusted net income (loss)
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 (including related interest
expense and legal fees)
3,718
9
2,724
–
6,442
9
1,126
–
1,682
4
(4,873)
1,520
4,377
1,533
6
–
–
–
–
234
240
–
–
–
–
–
–
–
–
4
–
–
–
–
20
–
264
–
–
–
–
1,461
1,461
21
502
517
21
502
517
3,733
2,958
6,691
1,130
1,706
(852)
8,675
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)
(5,667)
(4,312)
846
(338)
846
9,039
621
2,545
90
1,124
186
1,093
15
–
379
2,887
6,079
185
17
(45)
Adjusted net income (loss)
3,827
2,502
6,329
1,254
1,794
(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 (8) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
30 BMO Financial Group 206th Annual Report 2023
Net Revenue, Efficiency Ratio and Operating Leverage
(Canadian $ in millions, except as noted)
For the year ended October 31
Reported
Net interest income
Non-interest revenue
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 (1)
Net interest income
Non-interest revenue
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, net of CCPB (%)
Non-interest expense growth (%)
Operating leverage, net of CCPB (%)
(1) Refer to footnotes (1) to (8) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
Return on Equity and Return on Tangible Common Equity
(Canadian $ in millions, except as noted)
For the year ended October 31
Reported net income
Net income attributable to non-controlling interest in subsidiaries
Net income attributable to bank shareholders
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)
Goodwill
Acquisition-related intangible assets
Net of related deferred liabilities
Average tangible common equity (E)
Return on equity (%) (= A/D)
Adjusted return on equity (%) (= C/D)
Return on tangible common equity (%) (= B/E)
Adjusted return on tangible common equity (%) (= C/E)
(1) Refer to footnotes (1) to (8) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
M
D
&
A
2023
2022
2021
18,681
12,518
31,199
1,939
29,260
21,219
68.0
72.5
(7.5)
(14.9)
31.0
(38.5)
(45.9)
19,094
14,284
33,378
1,939
31,439
18,798
56.3
59.8
15.5
23.7
(8.2)
2023
4,377
12
4,365
(331)
4,034
264
4,298
4,034
8,332
67,486
(13,466)
(2,197)
856
15,885
17,825
33,710
(683)
34,393
16,194
48.0
47.1
24.0
33.4
4.4
19.6
29.0
16,352
10,181
26,533
(683)
27,216
15,194
57.3
55.8
5.7
4.4
1.3
2022
13,537
–
13,537
(231)
13,306
23
13,329
(4,521)
8,808
58,078
(5,051)
(130)
251
14,310
12,876
27,186
1,399
25,787
15,509
57.0
60.1
7.9
9.8
9.4
(1.5)
0.4
14,310
12,847
27,157
1,399
25,758
14,550
53.6
56.5
9.7
3.6
6.1
2021
7,754
–
7,754
(244)
7,510
66
7,576
831
8,407
50,451
(5,836)
(381)
271
52,679
53,148
44,505
6.0
12.3
8.2
15.8
22.9
15.2
25.1
16.6
14.9
16.7
17.0
18.9
BMO Financial Group 206th Annual Report 2023 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Return on Equity by Operating Segment (1)
A
&
D
M
(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 (2)
(US$ in millions)
2023
Reported
Net income available to common shareholders
Total average common equity
3,677
13,672
2,672
27,889
6,349
41,561
Return on equity (%)
Adjusted (3)
26.9
9.6
15.3
Net income available to common shareholders
Total average common equity
3,692
13,672
2,906
27,889
6,598
41,561
Return on equity (%)
27.0
10.4
15.9
1,648
11,856
13.9
1,672
11,856
14.1
(5,081)
7,713
4,034
67,486
na
6.0
(1,060)
7,713
8,332
67,486
na
12.3
56
27,203
0.2
2,853
27,203
10.5
1,118
6,356
17.6
1,122
6,356
17.7
2022
(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 (2)
(US$ in millions)
Reported
Net income available to common shareholders
Total average common equity
3,783
11,798
2,461
13,815
6,244
25,613
Return on equity (%)
Adjusted (3)
32.1
17.8
24.4
Net income available to common shareholders
Total average common equity
3,784
11,798
2,466
13,815
6,250
25,613
Return on equity (%)
32.1
17.8
24.4
1,243
5,282
23.5
1,246
5,282
23.6
1,732
11,556
15.0
1,754
11,556
15.2
4,087
15,627
na
(442)
15,627
na
13,306
58,078
22.9
8,808
58,078
15.2
6,052
17,081
35.4
2,518
17,081
14.7
(1) Return on equity is based on allocated capital. In fiscal 2023, following the closing of the Bank of the West acquisition, capital was allocated from Corporate Services to U.S. P&C and
BMO Wealth Management. For further information, refer to the How BMO Reports Operating Group Results section.
(2) U.S. segment reported and adjusted results comprise net income and allocated capital recorded in U.S. P&C and our U.S. operations in BMO Wealth Management, BMO Capital Markets and
Corporate Services.
(3) Refer to footnotes (1) to (8) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
na – not applicable
Capital is allocated to the operating segments based on the amount of regulatory capital required to support business activities. Effective the first
quarter of fiscal 2023, our capital allocation rate increased to 11.0% of risk-weighted assets, compared with 10.5% in 2022, to reflect increased
regulatory capital requirements. Unallocated capital is reported in Corporate Services. Capital allocation methodologies are reviewed annually.
Recent Acquisitions
On February 1, 2023, we completed our acquisition of Bank of the West, including its subsidiaries, from BNP Paribas. Bank of the West provides a
broad range of banking products and services, primarily in the Western and Midwestern regions of the United States. The acquisition strengthens our
position in North America with increased scale and greater access to growth opportunities in strategic new markets. We completed the conversion of
Bank of the West customer accounts and systems to our respective BMO operating platforms in September 2023. The acquisition has been reflected in
our results as a business combination, primarily in the U.S. P&C and BMO Wealth Management reporting segments.
On closing, we recognized purchase accounting fair value marks on Bank of the West’s loans and deposits of $3.0 billion and discounts on
securities of $3.5 billion on our balance sheet, in accordance with International Financial Reporting Standards (IFRS). As previously disclosed, to
manage the exposure of our regulatory capital to the risk of changes in the fair value of the assets and liabilities of Bank of the West due to changes
in interest rates between the announcement and closing of the acquisition, we entered into interest rate swaps that resulted in cumulative mark-to-
market gains of $5.7 billion on closing. Any exposure to interest rate risk in relation to these interest rate swaps was largely offset by our purchase of
a portfolio of matched-duration U.S. treasuries and other balance sheet instruments. On closing, the swaps were neutralized and replaced with fair
value accounting hedges, which in effect crystallized the unrealized loss position on our balance sheet. Accretion of the fair value marks and the
discount on securities will increase net interest income, and the amortization of the fair value hedge will decrease net interest income over the
remaining term of these instruments, both of which will be recorded in Corporate Services.
On June 1, 2023, we completed the acquisition of the AIR MILES Reward Program (AIR MILES) business of LoyaltyOne Co. The AIR MILES business
operates as a wholly-owned subsidiary of BMO. The acquisition was accounted for as a business combination and the acquired business and
corresponding goodwill are included in our Canadian P&C reporting segment.
For more information on the acquisition of Bank of the West and AIR MILES, refer to Note 10 of the audited annual consolidated financial
statements.
Caution
This Recent Acquisitions section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
32 BMO Financial Group 206th Annual Report 2023
Economic Developments and Outlook
Economic Developments in 2023 and Outlook for 2024 (1)
After reaching 3.8% in 2022, growth in Canada’s real gross domestic product (GDP) will likely slow to a modest estimated rate of 1.0% in 2023, due
to the impact of higher interest rates and weaker global demand. The economy is expected to expand by only 0.5% in 2024, although activity should
improve later in the year when interest rates are projected to begin to decline. A moderation in the pace of employment growth, coupled with rapid
expansion of the population and labour force, has lifted the unemployment rate to 5.7% in October 2023 from a half-century low of 4.9% in
July 2022, and we anticipate this rate will rise to approximately 6.5% in the summer of 2024. Looser labour market conditions are starting to relieve
upward pressure on wages and prices. Year-over-year growth in the consumer price index has declined from a four-decade high of 8.1% in June 2022
to 3.1% in October 2023. Although inflation is projected to moderate further, it will likely remain above the Bank of Canada’s 2% target until
late 2024 due to elevated oil prices and lingering wage pressures. After raising the policy rate by 475 basis points from March 2022 to July 2023,
the Bank of Canada has since held the policy rate steady at 5%. With the rate of economic growth and inflation projected to slow, the Bank of Canada
will likely forgo further interest rate increases, before gradually reducing rates starting in mid-2024 to more neutral levels below 3.0% in early 2026.
Interest rate concerns and a weaker economy have depressed equity markets. Housing market activity rebounded earlier this year due to steadier
mortgage rates and strong population growth, but sales have weakened recently and will likely be held back by the ongoing lack of affordability.
Housing prices are expected to decline moderately in response to lower demand. Industry-wide growth in residential mortgage balances has
decelerated from more than 10% year-over-year in early 2022 to 3.2% in September 2023, and will likely moderate somewhat further. Year-over-
year growth in consumer credit balances (excluding mortgages), which was 2.4% in September 2023, has been restrained by high interest rates,
and is anticipated to moderate further as households curtail spending. After rising strongly in recent years, growth in non-financial corporate credit
balances has decelerated sharply in 2023 in response to higher interest rates, a weakening economy and elevated cash balances, and will likely
slow further in 2024.
The U.S. economy is estimated to grow at a moderate rate of 2.4% in 2023, up from 1.9% in 2022, before likely slowing to 1.3% in 2024.
Resiliency in the first three quarters of 2023, amid expansionary fiscal policies and pent-up demand for entertainment, travel and automobiles,
is expected to give way to much weaker activity at the turn of the year in response to higher interest rates, tighter lending conditions and the
resumption of student loan repayments. Housing market activity remains depressed due to high mortgage rates and rising home prices, and sales are
anticipated to remain soft as the economy weakens. The unemployment rate is projected to rise from 3.9% in October 2023 to 4.4% by the middle
of 2024, which is still low by historical standards. Lower commodity prices and smoother-running supply chains have reduced year-over-year growth
in the consumer price index from 9.1% in June 2022 to 3.2% in October 2023. However, inflation is expected to moderate more slowly in the year
ahead, reflecting continued pressure from elevated energy prices and rising wages. The Federal Reserve held its policy rate steady in the fall of 2023
after cumulative increases of 525 basis points since March 2022. We anticipate that the policy rate will hold steady at around 5.4% until the fall
of 2024, before returning to more neutral levels below 3.0% by early 2026. The yield on 10-year Treasury bonds has risen to 16-year highs due to the
economy’s resiliency, elevated inflation and restrictive monetary policies, but is forecast to decline gradually in 2024 ahead of an easing in monetary
policy. Equity markets have been volatile as a result of rising long-term interest rates and fears of a recession. Earlier strong growth in industry-wide
residential mortgage balances has slowed considerably as a result of weaker housing market activity, and will likely moderate somewhat further
given the ongoing lack of affordability. Year-over-year growth in consumer credit balances has also decelerated and is projected to slow further amid
elevated interest rates, higher unemployment and slower consumer spending. Non-financial corporate credit growth has decelerated from its
previously strong pace and will remain impacted by high interest rates, a slowing economy, and a drawdown of deposit balances.
The economic outlook is subject to several risks that could potentially cause a contraction of the North American economy. The persistence
of elevated inflation could lead to additional increases in interest rates and renewed stress in the U.S. regional banking sector. Any escalation of
the conflicts in Ukraine and the Middle East could raise energy prices, unsettle financial markets and weaken global growth. Other risks stem from
ongoing trade tensions with China, and a deterioration in diplomatic relations between Canada and India that could impede trade and tourism
in Canada.
Caution
This Economic Developments and Outlook section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
M
D
&
A
(1) All time periods in this section refer to the calendar year rather than BMO’s fiscal year.
BMO Financial Group 206th Annual Report 2023 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
2023 Financial Performance Review
This section provides a review of BMO’s enterprise financial performance for 2023 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 non-GAAP amounts, measures and ratios is provided in the Non-GAAP and Other Financial Measures section.
For further information regarding the composition of non-GAAP and other financial measures, including supplementary financial measures,
refer to the Glossary of Financial Terms.
A
&
D
M
Foreign Exchange
(Canadian $ in millions, except as noted)
Canadian/U.S. dollar exchange rate (average)
2023
2022
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 ($)
Effects on U.S. segment adjusted results
Increased (Decreased) net interest income
Increased (Decreased) non-interest revenue
Increased (Decreased) total revenue
Decreased (Increased) provision for credit losses
Decreased (Increased) non-interest expense
Decreased (Increased) provision for income taxes
Increased (Decreased) net income
Impact on earnings per share ($)
2023 vs.
2022
1.3492
1.2918
273
476
749
1
(285)
(117)
348
0.52
292
142
434
1
(246)
(43)
146
0.22
Adjusted results are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
The table above indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on BMO’s U.S. segment
reported and adjusted results.
The Canadian dollar equivalents of BMO’s U.S. segment results that are denominated in U.S. dollars increased in 2023 relative to 2022, due to
changes in the Canadian/U.S. dollar exchange rate. 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 2023 and 2022.
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 and 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.
34 BMO Financial Group 206th Annual Report 2023
Net Income
Reported net income was $4,377 million, compared with $13,537 million in the prior year, and adjusted net income was $8,675 million, a decrease
of $364 million or 4%. The inclusion of Bank of the West results in the current year decreased reported net income by $1,498 million, and increased
adjusted net income by $592 million. The impact of the stronger U.S. dollar increased net income by 1% on a reported basis, and 2% on an
adjusted basis.
Adjusted results in the current year and the prior year excluded the following items:
‰ Acquisition and integration costs of $1,533 million ($2,045 million pre-tax) in the current year and $245 million ($326 million pre-tax) in the prior
year, recorded in non-interest expense. The current year included acquisition and integration costs of $1,520 million ($2,027 million pre-tax) related
to Bank of the West.
‰ A loss of $1,461 million ($2,011 million pre-tax) in the current year related to the management of the impact of interest rate changes between the
announcement and closing of the Bank of the West acquisition on its fair value and goodwill, comprising $1,628 million of mark-to-market losses
on certain interest rate swaps recorded in non-interest trading revenue and $383 million of losses on a portfolio of primarily U.S. treasuries and
other balance sheet instruments recorded in net interest income. The prior year included revenue of $5,667 million ($7,713 million pre-tax),
comprising $7,665 million of non-interest trading revenue and $48 million of net interest income.
Initial provision for credit losses of $517 million ($705 million pre-tax) in the current year on the purchased Bank of the West performing
loan portfolio.
‰
‰ Amortization of acquisition-related intangible assets of $264 million ($357 million pre-tax) in the current year and $23 million ($31 million pre-tax)
in the prior year, recorded in non-interest expense. The current year included amortization of acquisition-related intangible assets of $231 million
($311 million pre-tax) related to Bank of the West.
‰ The impact of certain tax measures enacted by the Canadian government in the current year, including a one-time tax expense of $371 million,
comprising a Canada Recovery Dividend (CRD) of $312 million and $59 million related to the pro-rated fiscal 2022 impact of a 1.5% tax rate
increase, net of a deferred tax asset remeasurement, and a charge of $131 million ($160 million pre-tax) related to the amended GST/HST
definition for financial services, comprising $138 million recorded in non-interest revenue and $22 million recorded in non-interest expense.
‰ The impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, of $21 million ($27 million pre-tax) in the current year,
comprising interest expense of $30 million and a net non-interest expense recovery of $3 million. The prior year included $846 million
($1,142 million pre-tax), comprising interest expense of $515 million and non-interest expense of $627 million.
‰ The impact of divestitures of $55 million ($37 million pre-tax) in the prior year related to the sale of our EMEA business and the transfer of certain
U.S. asset management clients, comprising a net loss of $21 million recorded in non-interest revenue and expenses of $16 million, including taxes
of $22 million on closing of the sale.
Reported net income decreased from the prior year, primarily due to the items noted above, which in aggregate reduced net income
by $4,298 million, compared with a gain of $4,498 million in the prior year. Adjusted net income decreased, as the inclusion of Bank of the West and
higher underlying revenue were more than offset by higher expenses and a higher provision for credit losses. Reported and adjusted net income
increased in U.S. P&C and decreased in BMO Wealth Management, Canadian P&C and BMO Capital Markets. On a reported basis, Corporate Services
recorded a net loss, compared with net income in the prior year, primarily due to the items noted above. On an adjusted basis, Corporate Services
recorded a higher net loss.
Further discussion is provided in the 2023 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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BMO Financial Group 206th Annual Report 2023 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 (including related interest expense and legal fees) (4)
Impact of Canadian tax measures (5)
Impact of adjusting items on revenue
Adjusted revenue (2) (3) (4)
Adjusted revenue, net of CCPB (1) (2) (3) (4)
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2023
2022
18,681
12,518
31,199
1,939
29,260
–
2,011
30
138
2,179
33,378
31,439
15,885
17,825
33,710
(683)
34,393
21
(7,713)
515
–
(7,177)
26,533
27,216
(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 assessment of operating results. For further information, refer to the Insurance Claims, Commissions and Changes in Policy Benefits section.
(2) Fiscal 2022 reported revenue included non-interest revenue related to the sale of our EMEA and U.S. Asset Management businesses, 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, recorded
in Corporate Services.
(3) Reported revenue included revenue (losses) related to the acquisition of Bank of the West resulting from the management of the impact of interest rate changes between the announcement and closing
of the acquisition on its fair value and goodwill. Fiscal 2023 included a loss of $2,011 million, comprising $1,628 million of mark-to-market losses on certain interest rate swaps recorded in trading
revenue and $383 million of losses on a portfolio of primarily U.S. treasuries and other balance sheet instruments recorded in net interest income. Fiscal 2022 included revenue of $7,713 million,
comprising $7,665 million of mark-to-market gains and $48 million of non-trading interest income. These amounts were recorded in Corporate Services. For further information on this acquisition, refer
to the Recent Acquisitions section.
(4) Reported revenue included the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank. Interest expense of $30 million was recorded in fiscal 2023 and $515 million
was recorded in fiscal 2022. These amounts were recorded in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the audited annual
consolidated financial statements.
(5) Fiscal 2023 reported revenue included the impact of certain tax measures enacted by the Canadian government. These tax measures included a charge of $138 million related to the amended
GST/HST definition for financial services, recorded in non-interest revenue in Corporate Services.
Revenue, net of CCPB, and adjusted results are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
Reported revenue was $31,199 million, a decrease of $2,511 million or 7% from the prior year. On a basis that nets insurance claims, commissions
and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), reported net revenue was $29,260 million, a decrease
of $5,133 million or 15% from the prior year, and adjusted net revenue was $31,439 million, an increase of $4,223 million or 16%. The inclusion
of Bank of the West contributed $3,143 million to both reported and adjusted revenue in the current year. The impact of the stronger U.S. dollar
increased revenue by 2% on both a reported and an adjusted basis.
The decrease in reported net revenue primarily reflected the impact of fair value management actions and the impact of certain tax measures
enacted by the Canadian government, partially offset by lower interest expense due to the legal provision related to the lawsuit associated with
M&I Marshall and Ilsley Bank in the prior year. Net revenue increased across all operating groups and decreased in Corporate Services on both a
reported and an adjusted basis.
BMO analyzes revenue at the consolidated level based on GAAP revenue as reported in the audited annual consolidated financial statements,
on a basis net of insurance CCPB, and on an adjusted basis.
Further discussion is provided in the 2023 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.
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 and
earning assets.
Net Interest Margin is the ratio of net interest income to average earning assets, expressed as a percentage or in basis points. Net interest
margin, 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.
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, and 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. 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.
36 BMO Financial Group 206th Annual Report 2023
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Net Interest Income
Reported net interest income was $18,681 million, an increase of $2,796 million or 18% from the prior year, and adjusted net interest income
was $19,094 million, an increase of $2,742 million or 17%.
The increase in reported net interest income primarily reflected lower interest expense related to the lawsuit associated with M&I Marshall
and Ilsley Bank in the prior year, partially offset by the impact of fair value management actions in the current year.
Adjusted net interest income increased due to the inclusion of Bank of the West, higher balances and margins in Canadian P&C and higher
margins in U.S. P&C, as well as the impact of the stronger U.S. dollar, partially offset by a decrease in trading-related interest income, lower net
interest income in Corporate Services and the impact of risk transfer transactions. Trading-related net interest income was $900 million, a decrease
of $772 million, and was largely offset in trading non-interest revenue.
BMO’s overall reported net interest margin of 1.63% increased 1 basis point from the prior year. Adjusted net interest margin, excluding
trading-related net interest income and trading-related earning assets, was 1.86%, an increase of 8 basis points, primarily due to higher margins
in our P&C businesses, including the impact of Bank of the West, partially offset by higher low-yielding assets and lower net interest income
in Corporate Services.
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-related 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 (2)
Average earning assets (3)
Net interest margin
(in basis points)
2023
2022
2023
2022
2023
8,308
7,853
16,161
2,520
2022
7,449
5,037
12,486
3,399
303,855
202,155
506,010
639,622
278,022
138,094
416,116
563,225
18,681
15,885
1,145,632
979,341
19,094
16,352
1,145,632
979,341
900
17,781
18,194
1,672
14,213
14,680
168,686
976,946
976,946
153,875
825,466
825,466
5,818
3,893
149,767
106,829
273
388
319
na
163
167
na
182
186
388
268
364
300
na
162
167
na
172
178
364
(1) Adjusted results and ratios 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. For further information, refer to the How BMO Reports Operating Group Results section.
(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 2023 Operating Groups Performance Review section.
na – not applicable
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 (loss)
Share of profit 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)
Impact of Canadian tax measures (3)
Adjusted non-interest revenue
Adjusted non-interest revenue, net of CCPB
Insurance revenue, net of CCPB
2023
1,025
1,517
(216)
1,548
700
1,851
1,244
1,107
181
235
2,498
185
643
12,518
1,939
10,579
1,628
–
138
14,284
12,345
559
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
(1) Fiscal 2023 reported non-interest revenue included $1,628 million of mark-to-market losses on certain interest rate swaps related to the acquisition of Bank of the West resulting from the
management of the impact of interest rate changes between the announcement and closing of the acquisition on its fair value and goodwill. Fiscal 2022 included $7,665 million of mark-to-market
gains. These amounts were recorded in Corporate Services. For further information on this acquisition, refer to the Recent Acquisitions section.
(2) Fiscal 2022 reported non-interest revenue included the impact of divestitures related to the sale of our EMEA and U.S. Asset Management businesses 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, recorded in Corporate Services.
(3) Fiscal 2023 reported non-interest revenue included the impact of certain tax measures enacted by the Canadian government. These tax measures included a charge of $138 million related to the
amended GST/HST definition for financial services, recorded in non-interest revenue 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.
BMO Financial Group 206th Annual Report 2023 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Reported non-interest revenue was $12,518 million, a decrease of $5,307 million from the prior year. Reported non-interest revenue, net of CCPB,
was $10,579 million, a decrease of $7,929 million or 43% from the prior year, and adjusted non-interest revenue, net of CCPB, was $12,345 million,
an increase of $1,481 million or 14%. The inclusion of Bank of the West contributed $461 million to non-interest revenue. The impact of the stronger
U.S. dollar increased non-interest revenue by 1% on both a reported and an adjusted basis.
Reported non-interest revenue, net of CCPB, decreased primarily due to the loss related to fair value management actions in the current year,
compared with a gain in the prior year. Adjusted non-interest revenue, net of CCPB, increased due to the inclusion of Bank of the West and AIR MILES,
higher trading and card-related revenue and the impact of the stronger U.S. dollar, partially offset by lower underwriting and advisory revenue and
securities gains, other than trading. Trading-related revenue is discussed in the section that follows.
Gross insurance revenue was $2,498 million, compared with a loss of $157 million in the prior year, primarily due to changes in the fair value of
investments and higher annuity sales. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets
caused by movements in interest rates and equity markets. The investments that support policy benefit liabilities are predominantly fixed income and
equity assets recorded at fair value, with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. The impact of
these fair value changes was largely offset by changes in the fair value of policy benefit liabilities, which are reflected in the Insurance Claims,
Commissions and Changes in Policy Benefits section.
We believe analyzing revenue, net of CCPB, is useful given the extent to which insurance revenue can vary, and given that this variability is
largely offset in CCPB.
For further information on results presented on a net revenue basis in this Non-Interest Revenue section, refer to the Non-GAAP and Other
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Financial Measures section.
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
Reported as:
Net interest income
Non-interest revenue – trading revenue
Total (teb)
Teb offset
Reported total, net of teb offset
Adjusted total trading revenue
2023
770
638
931
192
(1,526)
1,005
321
684
1,628
2,312
1,221
(216)
1,005
321
684
2,312
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
(1) Reported and adjusted revenue measures are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Trading-related revenue presented on a taxable equivalent basis (teb) is a non-GAAP measure. Similar to other banks, BMO analyzes trading-related revenue on a taxable equivalent basis (teb),
which reflects an increase in net interest income on tax-exempt securities to equivalent pre-tax amounts and is useful in facilitating comparisons of income from taxable and tax-exempt sources.
(3) Fiscal 2023 trading-related revenue included $1,628 million of mark-to-market losses 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 of the acquisition on its fair value and goodwill. Fiscal 2022 included $7,665 million of mark-to-market
gains. These amounts were recorded in other trading revenue, in Corporate Services. For further information on this acquisition, refer to the Recent Acquisitions section.
Reported trading-related revenue on a teb basis was $1,005 million, a decrease of $9,154 million, primarily due to the impact of fair value
management actions related to the acquisition of Bank of the West. Adjusted trading-related revenue on a teb basis was $2,633 million, an increase
of $139 million or 6%. Foreign exchange trading-related revenue increased $67 million or 12%, due to higher levels of client activity. Equities and
commodities trading-related revenue was relatively unchanged from the prior year. Interest rate trading-related revenue decreased $123 million
or 14%, due to lower levels of client activity. Adjusted other trading-related revenue on a teb basis increased $211 million, primarily due to
mark-downs on loan underwriting commitments recorded in the prior year.
Refer to the Enterprise-Wide Risk Management – Market Risk section for more information on trading-related revenue.
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $1,939 million in 2023, compared with negative $683 million
in the prior year. CCPB increased, primarily due to changes in the fair value of policy benefit liabilities and the impact of higher annuity sales.
The changes were largely offset in revenue.
38 BMO Financial Group 206th Annual Report 2023
Total Provision for Credit Losses
(Canadian $ in millions)
Canadian P&C
U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
2023
Provision for credit losses on impaired loans
Provision for credit losses on performing loans
Total provision for credit losses
Initial provision for credit losses on purchased performing loans (1)
Adjusted total provision for (recovery of) credit losses (2)
Total PCL-to-average net loans and acceptances (%) (3)
PCL on impaired loans-to-average net loans and acceptances (%) (3)
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
Total PCL-to-average net loans and acceptances (%) (3)
PCL on impaired loans-to-average net loans and acceptances (%) (3)
784
146
930
–
930
0.30
0.25
432
(91)
341
0.12
0.15
380
130
510
–
510
0.26
0.20
107
(90)
17
0.01
0.08
1,164
276
1,440
–
1,440
0.28
0.23
539
(181)
358
0.09
0.13
5
13
18
–
18
0.04
0.01
2
(4)
(2)
(0.01)
–
9
9
18
–
18
0.02
0.01
(32)
(11)
(43)
(0.07)
(0.05)
2
700
702
(705)
(3)
nm
nm
(7)
7
–
nm
nm
1,180
998
2,178
(705)
1,473
0.35
0.19
502
(189)
313
0.06
0.10
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(1) Fiscal 2023 comprised an initial provision for credit losses of $705 million on the purchased Bank of the West performing loan portfolio, recorded in Corporate Services.
(2) Adjusted results exclude 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. For further information, refer to the Non-GAAP and Other Financial Measures section, and for details on the composition of non-GAAP amounts,
measures and ratios, as well as supplementary financial measures, refer to the Glossary of Financial Terms.
(3) Ratios are presented on an annualized basis.
nm – not meaningful
The total provision for credit losses (PCL) was $2,178 million on a reported basis and $1,473 million on an adjusted basis, compared with $313 million
on both a reported and adjusted basis in the prior year. Total PCL as a percentage of average net loans and acceptances was 35 basis points on a
reported basis and 24 basis points on an adjusted basis, compared with 6 basis points on both a reported and adjusted basis in the prior year. PCL on
impaired loans was $1,180 million, an increase of $678 million from the prior year, with higher provisions across all businesses. PCL on impaired
loans as a percentage of average net loans and acceptances was 19 basis points, compared with 10 basis points in the prior year. The provision for
credit losses on performing loans in the current year was $998 million on a reported basis and $293 million on an adjusted basis, compared with a
reported and adjusted recovery of credit losses of $189 million in the prior year. Reported PCL on performing loans included an initial provision of
$705 million on the purchased Bank of the West performing loan portfolio. On an adjusted basis, PCL on performing loans of $293 million in the
current year primarily reflected portfolio credit migration, uncertainty in credit conditions and balance growth, partially offset by an improvement in
the macroeconomic outlook and the continued benefit from risk transfer transactions.
Note 4 of the audited annual consolidated financial statements provides additional information on PCL, including on a geographic basis.
Table 12 in the Supplemental Information provides further segmented PCL information.
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 section, the Critical Accounting Estimates and Judgments – Allowance for Credit Losses section and Note 4 of the audited annual
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.
BMO Financial Group 206th Annual Report 2023 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
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Acquisition and integration costs (2)
Amortization of acquisition-related intangible assets (3)
Impact of divestitures (4)
Legal provision (including related interest expense and legal fees) (5)
Impact of Canadian tax measures (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)
2023
2022
6,602
3,565
1,348
11,515
4,879
1,015
814
368
1,147
1,481
3,810
4,467
3,193
1,135
8,795
3,635
604
517
278
788
1,577
3,160
21,219
16,194
(2,045)
(357)
–
3
(22)
(2,421)
18,798
68.0
72.5
56.3
59.8
(326)
(31)
(16)
(627)
–
(1,000)
15,194
48.0
47.1
57.3
55.8
(1) Reported and adjusted results, measures and ratios, net of CCPB, are on a non-GAAP basis. For a quantitative reconciliation of revenue, net of CCPB, and adjusted results, refer to the Revenue section
and the Non-GAAP and Other Financial Measures section.
(2) Reported non-interest expense included acquisition and integration costs of $2,027 million in fiscal 2023 and $316 million in fiscal 2022 related to the acquisition of Bank of the West, recorded in
Corporate Services. In addition, reported non-interest expense included acquisition and integration costs of $5 million related to Radicle and Clearpool in fiscal 2023 and $10 million related to
KGS-Alpha and Clearpool in fiscal 2022, recorded in BMO Capital Markets. Fiscal 2023 included acquisition and integration costs of $13 million related to the acquisition of AIR MILES, recorded in
Canadian P&C.
(3) Reported non-interest expense included amortization of acquisition-related intangible assets of $357 million in fiscal 2023 and $31 million in fiscal 2022, recorded in the related operating group.
(4) Fiscal 2022 reported non-interest expense included the impact of divestitures of $32 million, including taxes of $22 million, related to the sale of our EMEA and U.S. Asset Management businesses,
recorded in Corporate Services.
(5) Reported non-interest expense included the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank. Fiscal 2023 included a net non-interest expense recovery of
$3 million and fiscal 2022 included a provision of $627 million. These amounts were recorded in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section
in Note 24 of the audited annual consolidated financial statements.
(6) Fiscal 2023 reported non-interest expense included the impact of certain tax measures enacted by the Canadian government, comprising $22 million related to the amended GST/HST definition
for financial services, recorded in Corporate Services.
na – not applicable
Reported non-interest expense was $21,219 million, an increase of $5,025 million or 31% from the prior year. Adjusted non-interest expense
was $18,798 million, an increase of $3,604 million or 24% from the prior year. The inclusion of Bank of the West contributed $4,284 million to
reported non-interest expense and $2,181 million on an adjusted basis. The impact of the stronger U.S. dollar increased non-interest expense
by 2% on both a reported and an adjusted basis.
Reported results included higher acquisition and integration costs and amortization of acquisition-related intangible assets compared with
the prior year, partially offset by the lower legal expense related to the lawsuit associated with M&I Marshall and Ilsley Bank in the prior year.
Reported and adjusted non-interest expense increased, primarily due to the inclusion of Bank of the West, as well as higher employee-related,
technology, advertising and business development costs, legal provisions in the current year and the impact of the stronger U.S. dollar.
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.
40 BMO Financial Group 206th Annual Report 2023
Provision for Income Taxes and Other Taxes
(Canadian $ in millions, except as noted)
For the year ended October 31
Payroll levies
Property taxes
Provincial capital taxes
Business taxes
Harmonized sales tax, GST, VAT and other sales taxes
Sundry taxes
Total government levies other than income taxes (other taxes) (1)
Provision for income taxes
Provision for income taxes and other taxes
Provision for income taxes and other taxes as a % of income
before provision for income taxes and other taxes
Effective income tax rate (%)
Adjusted effective income tax rate (%)
(1) Other taxes are included in various non-interest expense categories.
2023
517
40
50
24
563
1
1,195
1,486
2,681
38.0
25.3
22.3
2022
398
34
45
11
459
1
948
4,349
5,297
28.1
24.3
22.8
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Provision for income taxes and other taxes and the adjusted effective tax rate 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 $2,681 million in the current year. Of this amount, $1,345 million was incurred in Canada,
with $498 million included in the provision for income taxes, and the remaining $847 million was recorded in total government levies other than
income taxes (other taxes). The decrease from $5,297 million in the prior year primarily reflected a lower 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 audited annual 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 $1,486 million, compared with $4,349 million in the prior year. The reported effective tax rate was 25.3%,
compared with 24.3% in the prior year, primarily due to the impact of certain Canadian tax measures during the 2023 fiscal year. The adjusted
provision for income taxes was $2,493 million, compared with $2,670 million in the prior year. The adjusted effective tax rate was 22.3%, compared
with 22.8% in the prior year.
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 $90 million in the current year, compared with a recovery of $124 million in the
prior year. Refer to Note 22 of the audited annual 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 may
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.
BMO Financial Group 206th Annual Report 2023 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
2023 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
A
&
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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
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 (T&O) within Corporate Services. Operating segment results include allocations from Corporate Services for
treasury-related revenue, corporate and T&O costs, and capital. The impact of the Bank of the West acquisition has been reflected in our results as
a business combination, primarily in the U.S. P&C and BMO Wealth Management reporting segments.
BMO employs funds transfer pricing and liquidity transfer pricing between corporate 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, in order to align with our interest rate, liquidity and funding risk management practices, and update these
as appropriate.
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. Certain expenses, directly incurred to support a specific operating segment, are generally allocated to that operating segment.
Other expenses are generally allocated across the operating segments in amounts that are reasonably reflective of the level of support provided to
each operating segment. We review our expense allocation methodologies annually, and update these as appropriate.
Capital is allocated to the operating segments based on the amount of regulatory capital required to support business activities. Effective
fiscal 2023, our capital allocation rate increased to 11.0% of risk-weighted assets, compared with 10.5% in fiscal 2022, in order to reflect an increase
in capital requirements. Unallocated capital is reported in Corporate Services. We review our capital allocation methodologies annually, and update
these as appropriate.
Periodically, certain lines of business and units within our organizational structure are realigned to support our strategic priorities, and
comparative figures from 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, which is consistent with our Canadian banking peer group. Like many banks, BMO analyzes revenue on a taxable
equivalent basis (teb) at the operating segment level. Revenue and the provision for income taxes in BMO Capital Markets and U.S. P&C are increased
on tax-exempt securities to equivalent pre-tax amounts that facilitate comparisons of income from taxable and tax-exempt sources. The offset to the
segment teb adjustments is reflected in Corporate Services revenue and provision for (recovery of) income taxes.
42 BMO Financial Group 206th Annual Report 2023
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) (2)
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) (2)
Reported net income
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (4)
Adjusted net income
Net income available to common shareholders
Adjusted net income available to common shareholders
Canadian P&C
U.S. P&C
Total P&C
2023
2022
2023
2022
2023
2022
8,308
2,519
10,827
784
146
930
4,770
5,127
1,409
3,718
9
6
3,733
3,677
3,692
7,449
2,419
9,868
432
(91)
341
4,349
5,178
1,352
3,826
–
1
3,827
3,783
3,784
7,853
1,573
9,426
380
130
510
5,502
3,414
690
2,724
–
234
2,958
2,672
2,906
5,037
1,265
6,302
107
(90)
17
3,043
3,242
745
2,497
–
5
2,502
2,461
2,466
16,161
4,092
20,253
1,164
276
1,440
10,272
8,541
2,099
6,442
9
240
6,691
6,349
6,598
12,486
3,684
16,170
539
(181)
358
7,392
8,420
2,097
6,323
–
6
6,329
6,244
6,250
M
D
&
A
(1) Adjusted results are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Taxable equivalent basis (teb) amounts of $33 million in fiscal 2023 and $25 million in fiscal 2022 were recorded in net interest income, revenue and provision for income taxes.
(3) Acquisition and integration costs of $13 million pre-tax related to the acquisition of AIR MILES in fiscal 2023 were recorded in non-interest expense.
(4) Amortization of acquisition-related intangible assets pre-tax amounts of $323 million in fiscal 2023 and $7 million in fiscal 2022 were recorded in non-interest expense.
The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and commercial operating segments, Canadian
Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The P&C banking business reported net
income was $6,442 million in 2023, an increase of $119 million or 2% from the prior year. Adjusted net income, which excludes acquisition and
integration costs and the amortization of acquisition-related intangible assets, was $6,691 million in 2023, an increase of $362 million or 6% from
the prior year. These operating segments are reviewed separately in the sections that follow.
For further information on non-GAAP amounts, measures and ratios in this 2023 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 206th Annual Report 2023 43
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, offering valuable industry expertise, local presence and a comprehensive range of commercial
products and services.
Lines of Business
Personal and Business Banking (P&BB) provides customers with a wide range of products and services, including deposits, home lending, consumer
credit, small business lending, credit cards, cash management, everyday financial and investment advice and other banking services, with an overall
focus on providing customers with an exceptional experience in every interaction and helping them make real financial progress.
Commercial Banking provides clients with a 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 their unique expertise and industry knowledge to help them manage and grow their businesses.
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&
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Strategy and Key Priorities
2023 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 One Client experiences
2023 Achievements
‰ Maintained strong customer loyalty in both Personal and Business Banking and Commercial Banking, as measured by Net Promoter Score (1)
‰ Ranked first by J.D. Power (2) for Personal Banking Customer Satisfaction among the Big 5 Banks in its 2023 Canada Retail Banking Satisfaction
Study, as well as for Customer Satisfaction with Online Banking in its 2023 Canada Online Banking Satisfaction Study, with the highest scores
among Canada’s largest banks, demonstrating our dedication to support our customers’ financial goals and achievements, as well as our focus
on convenience and digital innovation across all customer channels
‰ Named Best Commercial Bank in Canada for the ninth consecutive year and Best Retail Bank in Canada for the second consecutive year by World
Finance magazine, in recognition of our Digital First strategy and industry-leading delivery of personal and digital experiences that are meeting and
exceeding our customers’ evolving expectations, as well as best-in-class digital money management services
‰ 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
2024 Areas of Focus
‰ Drive strong customer loyalty, leveraging our enhanced capabilities across customer channels
‰ Leverage our One Client strategy to provide a connected and integrated experience to our clients, with a holistic approach to address their needs
across our businesses
Key Priority: 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
2023 Achievements
‰ Continued to expand our digital sales and service capabilities, with more than a third of our core banking products purchased and delivered
digitally, while more than 90% of service transactions were completed through self-serve channels, allowing our front-line employees to focus
on delivering leading advisory services
‰
Improved market share in key categories, including deposits, mortgages and credit cards, supported by strong year-over-year customer acquisition
‰ Completed our acquisition of the AIR MILES Reward Program, one of Canada’s most recognized loyalty programs, with more than 10 million active
collector accounts. Added new partnerships and introduced robust new features, including an updated travel booking platform, an AIR MILES mobile
app and new ways to earn Miles
‰ Helped customers grow their savings through our BMO Savings Goals feature and the BMO Savings Amplifier Account, as well as offering access
to BMO’s SmartProgress online financial literacy program
‰ Enhanced our offerings to support new Canadians, including the expansion of our industry-leading BMO NewStart® Pre-Arrival Account Opening
program, and continued to develop and build strategic relationships with Immigration.ca and Immigrant Services Calgary to provide specialized
guidance and resources aimed at helping newcomers transition to their new lives in Canada
‰ Launched the Greener Future Financing program for small and medium-sized agriculture businesses, committing $30 million to a climate-related
‰
financing product that supports investments in sustainable business practices and climate resilience measures
Introduced BMO for Indigenous Entrepreneurs, providing Indigenous business owners with greater access to working capital, educational resources
and professional partnerships
(1) Net Promoter Score (NPS): The percentage of customers surveyed who would recommend BMO to a friend or colleague.
(2) For more information, refer to www.jdpower.com/business.
44 BMO Financial Group 206th Annual Report 2023
2024 Areas of Focus
‰ Drive customer acquisition through our differentiated value proposition, enabled by analytics and digital marketing capabilities
‰ Deliver differentiated products and services that meet customers’ needs and help them make real financial progress
‰ Accelerate growth of our AIR MILES Reward Program by strengthening the program’s offering for collectors and program partners
Key Priority: 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
2023 Achievements
‰ Maintained a leadership position in lending in the Atlantic and British Columbia regions and reinforced our second-place ranking in national
‰
lending market share, as well as peer-leading deposit growth
Introduced a new retrofits product, the first of its kind in Canada, which is anchored by our strategic relationships with energy services companies
and the Canada Infrastructure Bank and bundled with conventional construction financing
‰ Launched BMO Marketplace, a one-stop shop for third-party partnerships, where our clients across North America can connect their accounts to
create a more efficient and customized banking experience
‰ Launched mobile wallet functionality for physical and virtual cards, as well as contactless payments through Mastercard Extend, enabling our
Corporate Card clients in Canada and the United States to manage their businesses more conveniently
M
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2024 Areas of Focus
‰ Maintain focus on key sectors and geographies
‰ Deepen relationships through simplification and digital innovation to drive deposit growth
‰ Continue to develop climate and carbon transition solutions for our clients
Key Priority: Drive efficiencies by simplifying and streamlining operations, and investing in digital capabilities
2023 Achievements
‰
Introduced new digital solutions to address our customers’ needs, including digital mortgage pre-qualification and recurring lump-sum mortgage
payment features, as well as the PaySmartTM credit card instalment plan, which simplifies card transactions and helps customers build a credit history
‰ Continued to modernize our digital payments functionality and improve our customers’ experiences and our operational efficiency, including platform
upgrades, enhanced fraud detection capabilities and increased transaction limits, and optimized the BMO.com interface with the introduction of an
advanced decision management tool that adapts quickly to changing market demands and regulations
‰ Received two 2023 Celent Model Bank Awards, the Retail Digital Banking Transformation Award and the Customer Financial Resilience Award,
for our leadership in digital transformation and our commitment to enhancing the customer experience
‰ Recognized for innovation at the 2023 Cannes Lion festival, winning Gold for BMO NXT LVL, a first of its kind gaming platform on Twitch that
educates and informs gamers about personal finance
‰ Ranked first in the Account Management, Digital Money Management and Alerts categories in the 2023 Insider Intelligence Canadian Mobile
Banking Emerging Features Benchmark
‰ Named Overall Leader in the 2023 Javelin Canadian Mobile Banking Scorecard in the Financial Fitness, Money Movement and Account
Opening categories
‰ Recognized for artificial intelligence (AI) and advanced analytics by Datos Insights, with the 2023 Impact Innovation Award in Cash Management
and Payments
‰ Continued to deliver automated open-banking solutions for business clients through partnerships with Xero and FISPAN, enabling owners to spend
more time growing their business
2024 Areas of Focus
‰ Continue to simplify and digitize processes to enhance efficiency
‰ Continue to strengthen digital capabilities, leveraging existing and new partnerships and delivering leading digital experiences to our customers
Key Priority: Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a
diverse and inclusive workplace
2023 Achievements
‰
Improved on strong employee engagement index scores – on par with the global benchmark for leading companies – with ongoing improvements
in all priority areas of our winning culture
‰ Opened BMO Place in Toronto, a new workspace designed to support accessibility, sustainability, inclusion and collaboration – in alignment with
our Purpose and our Zero Barriers to Inclusion strategy
‰ Launched a Personal and Business Banking rotation program, demonstrating our commitment to attracting and developing diverse talent by
providing access to meaningful career experiences and development opportunities
‰ Recognized by the Office québécois de la langue française with a Mérites du français award for promoting the use of the French language in
the workplace and preserving French culture within BMO
2024 Areas of Focus
‰ Continue to attract and develop a diverse workforce while promoting an inclusive workplace
‰ Maintain a world-class, winning culture and continue to drive strong employee engagement
BMO Financial Group 206th Annual Report 2023 45
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
A
&
D
M
Acquisition and integration costs (2)
Amortization of acquisition-related intangible assets (3)
Adjusted net income
Adjusted non-interest expense
Net income available to common shareholders
Adjusted net income available to common shareholders
Key Performance Metrics
Personal and Business Banking revenue
Commercial Banking revenue
Return on equity (%) (4)
Adjusted return on equity (%) (4)
Operating leverage (%)
Adjusted operating leverage (%)
Efficiency ratio (%)
PCL on impaired loans to average net loans and acceptances (%)
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
2023
8,308
2,519
10,827
784
146
930
4,770
5,127
1,409
3,718
9
6
3,733
4,749
3,677
3,692
7,762
3,065
26.9
27.0
–
0.4
44.1
0.25
2.73
303,855
314,988
313,486
272,575
16,217
2022
7,449
2,419
9,868
432
(91)
341
4,349
5,178
1,352
3,826
–
1
3,827
4,348
3,783
3,784
6,890
2,978
32.1
32.1
2.7
2.7
44.1
0.15
2.68
278,022
290,324
288,979
243,541
15,471
(1) Adjusted results and ratios are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures
section.
(2) Pre-tax acquisition and integration costs related to AIR MILES of $13 million in fiscal 2023 were recorded in non-interest
expense.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $8 million in fiscal 2023 and $1 million in
fiscal 2022 were recorded in non-interest expense.
(4) Return on equity is based on allocated capital. Effective fiscal 2023, the capital allocation rate increased to 11.0% of
risk-weighted assets, compared with 10.5% in fiscal 2022. For further information, refer to the Non-GAAP and Other
Financial Measures section.
Revenue by Line of Business
($ millions)
Personal and Business Banking
Commercial Banking
10,827
3,065
9,868
2,978
6,890
7,762
2022
2023
Average Deposits*
($ billions)
Personal and Business Banking
Commercial Banking
272.6
83.9
243.5
77.4
166.1
188.7
2022
2023
*Numbers may not add due to rounding.
Average Gross Loans and Acceptances*
($ billions)
290.3
97.9
9.4
56.6
120.5
5.9
2022
315.0
107.6
11.3
58.8
130.9
6.4
2023
Commercial
Credit Cards
Consumer Instalment and Other Personal
Residential Mortgages
Business Banking
*Numbers may not add due to rounding.
46 BMO Financial Group 206th Annual Report 2023
Financial Review
Canadian P&C reported net income was $3,718 million, a decrease of $108 million or 3% from the prior year, with strong revenue growth more than
offset by higher provisions for credit losses and higher expenses.
Total revenue was $10,827 million, an increase of $959 million or 10% from the prior year. Net interest income increased $859 million or 12%,
due to higher balances and net interest margins. Non-interest revenue increased $100 million or 4%, primarily due to the inclusion of AIR MILES and
higher card-related revenue, partially offset by lower gains on investments in Commercial Banking and lower loan and mutual fund distribution fee
revenue. Net interest margin of 2.73% increased 5 basis points from the prior year, with higher deposit margins and deposits growing faster than
loans, partially offset by lower loan margins.
Personal and Business Banking revenue increased $872 million or 13%, due to higher net interest income and non-interest revenue. Commercial
Banking revenue increased $87 million or 3%, due to higher net interest income, partially offset by lower non-interest revenue.
Total provision for credit losses was $930 million, an increase of $589 million from the prior year. The provision for credit losses on impaired
loans was $784 million, an increase of $352 million from the prior year, reflecting higher Personal and Business Banking and Commercial Banking
provisions. There was a $146 million provision for credit losses on performing loans in the current year, compared with a recovery of $91 million in
the prior year.
Reported non-interest expense was $4,770 million, an increase of $421 million or 10% from the prior year, reflecting higher employee-related
costs, including severance, the impact of AIR MILES and other business investment costs.
Average gross loans and acceptances increased $24.7 billion or 8% from the prior year to $315.0 billion, reflecting growth of 7% in Personal and
Business Banking, 10% in Commercial Banking and 20% in credit card balances. Average deposits increased $29.0 billion or 12% to $272.6 billion,
reflecting growth of 14% in Personal and Business Banking and 8% in Commercial Banking balances, primarily due to strong growth in term deposits.
For further information on non-GAAP amounts, measures and ratios in this 2023 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
M
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Business Environment and Outlook
Canadian P&C’s solid performance in fiscal 2023 demonstrated resilience and an ability to adapt quickly to economic uncertainty. While inflation has
moderated from peak levels in fiscal 2022, it remains elevated and the Bank of Canada continued to raise interest rates by an additional 125 basis
points in fiscal 2023 to 5.0%, which together with weaker global demand, has slowed GDP growth compared with the prior year. Higher interest rates
helped drive strong growth in term deposits, partially offsetting a decline in chequing and savings deposits, reflecting both deposit migration and a
drawdown of excess savings built during the pandemic. Mortgage growth remained healthy in the first half of 2023, supported by robust population
growth and a rising demand for housing, but balance growth moderated in the second half of fiscal 2023, as housing sales slowed in response to
rising mortgage rates. Growth in credit card balances was supported by successful customer acquisition, an increase in consumer spending compared
with the prior year and revolving balances returning to more normalized levels. Business lending growth moderated in the second half of fiscal 2023,
in response to the higher interest rate environment. Credit performance is normalizing from historically low levels, with insolvency and impairment
rates trending higher. Expense growth has moderated from the first half of the year, reflecting the impact of prior-year investments in our sales force,
technology and advertising, which have supported strong customer acquisition and expanded market share.
The Canadian economy is expected to slow further in fiscal 2024, which is projected to keep loan demand modest. The Bank of Canada is
anticipated to hold interest rates steady before gradually reducing interest rates beginning in the second half of the year. Migration to term deposits
is projected to taper, with mortgage growth forecast to decelerate further as housing sales are constrained by poor affordability, partially offset by
the impact of continued immigration. Credit performance is expected to deteriorate modestly compared with fiscal 2023 but remain well-managed,
as inflation and the higher cost of borrowing put more pressure on purchasing power and household and business budgets.
Our focus on helping customers make real financial progress by delivering exceptional customer solutions and advice, together with leading
digital experiences, is key to successfully delivering on our strategy in any environment.
The Canadian economic environment in calendar 2023 and the outlook for calendar 2024 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 206th Annual Report 2023 47
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 four million customers.
Personal and Business Banking helps customers make real financial progress through an extensive network of more
than 1,000 branches, with nationwide access to contact centres, digital banking platforms and more than 40,000 BMO
and Allpoint® automated teller machines. Commercial Banking serves clients across the United States, offering valuable
industry expertise, local presence and a comprehensive range of commercial products and services.
Lines of Business
Personal and Business Banking (P&BB) provides customers with a wide range of products and services, including deposits, home lending, consumer
credit, small business lending, credit cards, cash management and other banking services, with an overall focus on providing customers with an
exceptional experience in every interaction and helping them make real financial progress.
Commercial Banking provides clients with a 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 their unique expertise and industry knowledge to help them manage and grow their businesses.
A
&
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M
Strategy and Key Priorities
2023 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 One Client experiences
2023 Achievements
‰ Continued to strengthen customer loyalty in both Personal and Business Banking and Commercial Banking, as measured by Net Promoter Score (1)
‰ Expanded our market presence in the U.S. West and Southwest regions with the acquisition of Bank of the West, while reinforcing our third-place
market share position for deposits across our Midwest footprint
‰ Named by World Finance magazine as Best Commercial Bank in the United States, in recognition of our efforts to provide a more comprehensive
range of banking products and services
‰ Rated Outstanding by the Office of the Comptroller of the Currency on Community Reinvestment Act performance, in recognition of our
commitment to help support communities with moderate or low income levels
2024 Areas of Focus
‰ Drive strong customer loyalty, leveraging our enhanced capabilities across customer channels
‰ Leverage our One Client strategy to provide a connected and integrated experience to our clients, with a holistic approach to address their needs
across our businesses
Key Priority: Effectively integrate Bank of the West upon closing of the acquisition, with an emphasis on customer and
employee experience
2023 Achievements
‰ Successfully transitioned nearly two million customers to BMO, along with their accounts, financial products and online banking relationships
‰
Integrated our Bank of the West colleagues into BMO’s internal processes and systems, adapting our organizational structure to support our
growth objectives
‰ Rebranded and integrated branches, automated teller machines and digital banking platforms across the United States to BMO
‰
Introduced a long-term commercial agreement with BNP Paribas (BNPP), to enhance coverage and global access for commercial banking clients
of both institutions
Key Priority: 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
2023 Achievements
‰ Continued to build our digital sales and service capabilities, with our digital adoption rate increasing nearly 200 basis points year-over-year,
approximately one third of our core banking products purchased and delivered digitally, and more than 80% of service transactions completed
through self-serve channels, allowing our front-line employees to focus on delivering leading advisory services (2)
‰ Enhanced our credit card product suite, introducing a new BMO Boost Secured Credit Card and rebranding the BMO Flex Rewards loyalty program,
which led to higher levels of customer engagement
‰ Engaged in personalized conversations through more than 400,000 Real Financial ProgressTM checks, to help our customers identify their goals
and make real financial progress
‰ Launched BMO AltoTM, an online, high-yielding deposit account offering, successfully growing deposits nationally
(1) Net Promoter Score (NPS): The percentage of customers surveyed who would recommend BMO to a friend or colleague.
(2) Metrics exclude Bank of the West.
48 BMO Financial Group 206th Annual Report 2023
‰ Maintained our commitment to underserved customer groups by reducing fees and improving access to products and services, including our
enhanced Credit BuilderTM Loan Program, supporting home ownership by offering down-payment relief through the Welcome Home GrantTM
Program and opening more than 50,000 Bank OnTM certified Smart Money accounts since the launch of the product
‰ Launched multiple programs to support members of many different communities, including Asian, veteran and 2SLGBTQI+ special purpose credit
programs that are intended to improve access to capital for historically underserved segments, and hosted educational webinars to support Black,
Latinx, Native American and women-owned businesses
‰ Launched CreditView®, enabling our customers to view and improve their credit score, and BMO Digital Banking Security Hub, helping our
customers protect their accounts with added security features
2024 Areas of Focus
‰ Drive customer acquisition through our differentiated value proposition, enabled by digital and marketing capabilities, leveraging our expanded
footprint and realizing synergies
‰ Deliver differentiated products and services that meet customers’ needs and help them make real financial progress
Key Priority: 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
2023 Achievements
‰ Achieved Top 10 Commercial Bank market share for total wholesale loans, maintained our leading position in key markets (Illinois and Wisconsin)
and continued to grow through the Bank of the West acquisition, establishing a market presence in 21 of the top 50 U.S. metropolitan areas
‰ Completed a renewable natural gas/manure biodigester transaction, which has enabled an agriculture client to build a unique operating model
that captures methane gas, reducing greenhouse gas emissions and generating renewable energy
‰ Expanded V-PAYO, an integrated payables solution that offers existing and new clients automation, process efficiency and digitization – with one
easy payment file
‰ Partnered with Latino Leaders Magazine to create and launch the inaugural Index 200, an index that helps to celebrate the growing base of large
Latinx-owned companies in the United States
2024 Areas of Focus
‰ Maintain focus on key sectors and geographies while leveraging our wider footprint to unlock synergies and cross-sell opportunities
‰ Deepen relationships through simplification and digital innovation to drive deposit growth
‰ Continue to develop solutions and capabilities to support our clients through their climate and carbon transition journey
Key Priority: Drive efficiencies by simplifying and streamlining operations, and investing in digital capabilities
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2023 Achievements
‰ Recognized by The Digital Banker for an Outstanding Machine Learning Initiative – our cutting-edge artificial intelligence (AI) solution uses natural
language processing to rapidly analyze and categorize linguistic patterns, enhancing the customer experience and improving front-line efficiency
Invested in key digital capabilities to improve the customer experience, including digital card activation and automated increases in card limits, an
enhanced account opening experience with e-sign capability in Business Banking, and a self-serve option for client onboarding in Commercial Banking
Introduced greater convenience for customers completing the end-to-end mortgage and home equity application process digitally, with online
scheduling of closings that simplifies the experience for both customers and employees
Introduced digital chat capabilities in BMO Virtual Connect and addressed our customers’ sales and service needs by scaling the chat functionality
of BMO Assist, powered by AI
‰ Partnered with DailyPay to provide Commercial Banking client employees with real-time access to their pay by depositing funds into direct-deposit
‰
‰
accounts for immediate access by employees
2024 Areas of Focus
‰ Continue to simplify and digitize processes to enhance efficiency
‰ Continue to strengthen digital capabilities, leveraging existing and new partnerships and delivering leading digital experiences to our customers
Key Priority: Foster an inclusive, winning culture, focused on alignment, empowerment and recognition, with a
commitment to a diverse and inclusive workplace
2023 Achievements
‰
Improved on strong employee engagement index scores – on par with the global benchmark for leading companies – with ongoing improvements
in all priority areas of our winning culture
‰ Named one of the Best Workplaces for Innovators by Fast Company, an annual list honouring organizations and teams that demonstrate
a commitment to encourage and develop innovation, the only financial institution to be recognized among the top 30 companies
‰ Recognized by Forbes magazine as one of the Best Employers for Diversity for the fifth consecutive year in an independent survey of 60,000
U.S. employees, as well as one of the 2023 Best Employers for New Grads
‰ Expanded BMORETM, our inclusive hiring and employment program focused on improving access to careers, skills and advancement in the financial
industry for under-represented groups
2024 Areas of Focus
‰ Continue to attract and develop a diverse workforce while promoting an inclusive workplace
‰ Maintain a world-class, winning culture and continue to drive strong employee engagement
BMO Financial Group 206th Annual Report 2023 49
Revenue by Line of Business (teb) (2)
(US$ millions)
Personal and Business Banking
Commercial Banking
4,874
3,454
1,420
2022
Average Deposits
(US$ billions)
Personal and Business Banking
Commercial Banking
112.8
64.3
48.5
2022
6,983
4,363
2,620
2023
147.2
80.0
67.2
2023
Average Gross Loans and Acceptances
(US$ billions)
Personal and Business Banking
Commercial Banking
102.3
87.0
15.3
2022
145.5
112.6
33.0
2023
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) (2)
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 (teb) (2)
Reported net income
Amortization of acquisition-related intangible assets (3)
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Adjusted net income
Adjusted non-interest expense
Net income available to common shareholders
Adjusted net income available to common shareholders
Average earning assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
(US$ equivalent in millions)
Net interest income (teb) (2)
Non-interest revenue
Total revenue (teb) (2)
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 (teb) (2)
Reported net income
Amortization of acquisition-related intangible assets (3)
Adjusted net income
Adjusted non-interest expense
Net income available to common shareholders
Adjusted net income available to common shareholders
Key Performance Metrics (US$ basis)
Personal and Business Banking revenue
Commercial Banking revenue
Return on equity (%) (4)
Adjusted return on equity (%) (4)
Operating leverage (teb) (%)
Adjusted operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Adjusted efficiency ratio (teb) (%)
Net interest margin on average earning assets (teb) (%)
PCL on impaired loans to average net loans and acceptances (%)
Average earning assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Full-time equivalent employees
2023
7,853
1,573
9,426
380
130
510
5,502
3,414
690
2,724
234
2,958
5,187
2,672
2,906
2022
5,037
1,265
6,302
107
(90)
17
3,043
3,242
745
2,497
5
2,502
3,037
2,461
2,466
202,155
196,459
194,746
198,717
138,094
132,240
131,394
145,633
5,818
1,165
6,983
282
97
379
4,076
2,528
510
2,018
173
2,191
3,843
1,979
2,157
3,893
981
4,874
82
(71)
11
2,353
2,510
577
1,933
4
1,937
2,348
1,905
1,909
2,620
4,363
9.6
10.4
(29.9)
(20.3)
58.4
55.0
3.88
0.20
149,767
145,543
144,274
147,220
12,235
1,420
3,454
17.8
17.8
6.0
5.0
48.3
48.2
3.64
0.08
106,829
102,290
101,636
112,780
6,822
(1) Adjusted results and ratios are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures
section.
(2) Taxable equivalent basis (teb) amounts of $33 million in fiscal 2023 and $25 million in fiscal 2022 were recorded in net
interest income, revenue and provision for income taxes, and were reflected in the ratios. On a source currency basis, teb
amounts were US$25 million in fiscal 2023 and US$20 million in fiscal 2022.
(3) Amortization of acquisition-related intangible assets pre-tax amounts of $315 million in fiscal 2023 and $6 million in
fiscal 2022 were recorded in non-interest expense. On a source currency basis, pre-tax amounts were US$233 million in
fiscal 2023 and US$5 million in fiscal 2022.
(4) Return on equity is based on allocated capital. Effective fiscal 2023, the capital allocation rate increased to 11.0% of
risk-weighted assets, compared with 10.5% in fiscal 2022. For further information, refer to the Non-GAAP and Other
Financial Measures section.
50 BMO Financial Group 206th Annual Report 2023
Financial Review
U.S. P&C reported net income was $2,724 million, an increase of $227 million or 9% from the prior year. The impact of the stronger U.S. dollar
increased growth in net income by 5%, revenue by 6% and expenses by 8%. All amounts in the remainder of this section are presented on a
U.S. dollar basis.
Reported net income was $2,018 million, an increase of $85 million or 4% from the prior year, primarily driven by the Bank of the West
acquisition and underlying revenue growth due to higher net interest income, partially offset by higher provisions for credit losses and higher
expenses, compared with the prior year.
Total revenue was $6,983 million, an increase of $2,109 million or 43% from the prior year. Net interest income increased $1,925 million or 49%,
due to the inclusion of Bank of the West, and higher net interest margins and loan balances, partially offset by lower deposit balances. Non-interest
revenue increased $184 million or 19%, due to the inclusion of Bank of the West, partially offset by lower operating lease revenue and deposit and
lending fee revenue. Net interest margin of 3.88% increased 24 basis points from the prior year, primarily due to higher deposit margins reflecting
the impact of the higher interest rate environment and the inclusion of Bank of the West, partially offset by lower loan margins.
Personal and Business Banking revenue increased $1,200 million or 85% and Commercial Banking revenue increased $909 million or 26%,
both due to the inclusion of Bank of the West and higher underlying net interest income, partially offset by lower underlying non-interest revenue.
Total provision for credit losses was $379 million, compared with a provision of $11 million in the prior year. The provision for credit losses on
impaired loans was $282 million, an increase of $200 million from the prior year, reflecting higher Personal and Business Banking and Commercial
Banking provisions. There was a $97 million provision for credit losses on performing loans in the current year, compared with a recovery of
$71 million in the prior year.
Reported non-interest expense was $4,076 million, an increase of $1,723 million or 73%, primarily reflecting the impact of Bank of the West,
as well as higher employee-related and advertising costs.
Average gross loans and acceptances increased $43.3 billion or 42% from the prior year to $145.5 billion, reflecting the impact of Bank of the
West and underlying growth in Commercial Banking balances, partially offset by a decrease in Personal and Business Banking balances. Average
deposits increased $34.4 billion or 31% to $147.2 billion, reflecting the impact of Bank of the West, partially offset by a decrease in underlying
Commercial Banking and Personal and Business Banking deposits.
For further information on non-GAAP amounts, measures and ratios in this 2023 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
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Business Environment and Outlook
U.S. P&C recorded strong results in fiscal 2023, driven by the successful integration of the Bank of the West acquisition. While the U.S. economy grew
at a modest rate, inflation remained high and in response, the Federal Reserve raised the federal funds target rate in the current fiscal year to
reach 5.33%. In addition, quantitative tightening and the failure of several U.S. regional banks intensified competition for deposits across the financial
services sector, including from money market funds, putting pressure on net interest margins. Demand for business lending moderated and
residential mortgage balance growth softened in response to higher interest rates, slower economic growth and weaker housing activity. Deposit
balances have been declining as customers deployed excess savings and sought higher yields. Credit performance is normalizing from historical lows
with credit migration trending higher. Commercial Banking continued to drive growth by adding new clients across its expanded footprint, despite
intense competition and shrinking market liquidity. Personal and Business Banking continued to attract new clients through a Digital First strategy
aimed at optimizing sales and delivering an enhanced client experience across all channels, enabled by leading digital, data analytics and marketing
capabilities.
The U.S. economy is expected to slow in fiscal 2024, reflecting weaker consumer demand in response to higher interest rates, tighter lending
conditions and the resumption of student loan repayments. The Federal Reserve is expected to hold policy rates steady before beginning a return to a
more neutral position late in fiscal 2024, supporting a modest pickup in growth. Residential mortgage activity is expected to moderate further due to
the weaker housing market, and consumer and business credit growth is expected to decelerate amid elevated interest rates, higher unemployment
and weaker consumer spending growth. Credit performance is expected to deteriorate modestly in the upcoming year.
The financial services landscape in the United States remains highly competitive and is facing more stringent capital and liquidity constraints.
U.S. P&C has demonstrated its ability to perform well through economic cycles, supported by its diversified growth strategy and expanded scale
as a leading North American bank, with a presence in 32 states and in 21 of the top 50 U.S. metropolitan areas. We are committed to helping our
customers, employees and local communities make real financial progress by harnessing all of BMO’s capabilities to drive efficient growth – and by
tailoring our products and offerings to client needs.
The U.S. economic environment in calendar 2023 and the outlook for calendar 2024 are discussed in more detail in the Economic Developments
and Outlook section.
Caution
This U.S. Personal and Commercial Banking section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
BMO Financial Group 206th Annual Report 2023 51
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
make real financial progress through planning, growing, protecting and transitioning their wealth. Our asset management
business is focused on making a positive impact and delivering innovative financial solutions and strategies for our clients.
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.
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BMO InvestorLine leads Wealth Management’s digital investing services, offering 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. In addition, group creditor and travel insurance is available to customers
in Canada through BMO.
Strategy and Key Priorities
2023 Priorities and Achievements
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
2023 Achievements
‰ Achieved top-tier loyalty scores across several BMO Wealth Management businesses, with Private Wealth Canada and BMO InvestorLine achieving
record results, as measured by Net Promoter Score (1)
‰ Recognized by World Finance magazine as Best Private Bank in Canada for the 13th consecutive year and for the first time, as Best Private Bank in the
United States
2024 Areas of Focus
‰ Accelerate growth across our client base by strengthening product and service offerings, deepening client relationships and growing distribution
in core markets, while maintaining top-tier client loyalty scores in North America
Key Priority: Extend our advantage as a solutions provider, expanding asset management and insurance offerings in key
growth areas, including environmental, social and governance and climate-focused offerings
2023 Achievements
‰ Launched new capabilities in exchange-traded funds (ETFs), providing investors with more choice in portfolio construction, as well as solutions
for investors seeking exposure to key sectors
‰ Maintained our leadership position in Canadian ETFs, ranking first in net sales for 12 consecutive years (2)
‰ Recognized at the 2022 Canada Refinitiv Lipper Fund Awards (3), which honour funds and fund management firms that have excelled in delivering
consistently strong risk-adjusted performance relative to their peers. Seven BMO ETFs claimed top honours across seven categories
‰ Received 18 FundGrade A+ Awards from Fundata Canada Inc., one of the most widely recognized analytics firms in the financial services industry
for its objectivity in selecting funds with a record of consistent risk-adjusted performance
‰ Announced a new strategic partnership with Sagard, a global multi-strategy alternative asset management firm, in line with our commitment to
building a market-leading alternatives platform with access to demonstrated investment experience through partnerships with top-tier managers
‰ Launched ESG Insights, a comprehensive research tool for self-directed clients that can help them build a more sustainable portfolio by evaluating
environmental, social and governance risks and opportunities related to their investments
2024 Areas of Focus
‰ Continue to provide innovative and competitive product solutions across our distribution channels to meet the evolving needs of our clients
(1) Net Promoter Score (NPS): The percentage of customers surveyed who would recommend BMO to a friend or colleague.
(2) National Bank ETF Report as at December 31, 2022.
(3) Announced in fiscal 2023: 2022 Canada Refinitiv Lipper Fund Awards.
52 BMO Financial Group 206th Annual Report 2023
Key Priority: 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
2023 Achievements
‰ Maintained a top-two market share for self-managed assets with digital advisory services – a category that represents more than one third of
total market assets
‰ BMO InvestorLine ranked in the top three in the Globe and Mail 2023 Digital Broker Ranking for consistently driving digital innovation that focuses
on client needs and delivering an exceptional client experience
‰ Successfully rolled out BMO Smart Portfolio®, a new digital investment solution for BMO U.S. retail customers, providing them with the convenience
of online investing and personalized portfolio management
‰ Launched BMO Active Trader, a web-based platform that enables our clients to execute trading strategies with ease and precision, supported by
market insights, advanced technical charts and a customizable workspace
2024 Areas of Focus
‰ Continue to invest in technology platforms to simplify, streamline and integrate client digital experiences, along with leading advisor-facing tools
and practice support
Key Priority: Provide a One Client experience, with improved delivery of services and products to our clients across BMO
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2023 Achievements
‰ Leveraged digital channels and data analytics to deliver investment solutions to Personal Banking customers through BMO InvestorLine
‰ Significantly expanded product and service offerings through greater collaboration and more efficient integration with Personal and
Commercial Banking
2024 Areas of Focus
‰ Deepen client relationships by working in partnership with colleagues across BMO, supported by data and analytics and a client-centric
operating model
Key Priority: Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a
diverse and inclusive workplace
2023 Achievements
‰ Maintained strong employee engagement index scores, with improvement across many key metrics
‰ Well-represented in the inaugural Globe and Mail Report on Business list of 100 Top Women Wealth Advisors, which included 19 Nesbitt Burns
advisors who manage exceptional businesses and are raising the bar for the industry
2024 Areas of Focus
‰ Maintain an engaged and diverse workforce to promote innovation and enable strategic outperformance
BMO Financial Group 206th Annual Report 2023 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Wealth Management (1)
(Canadian $ in millions, except as noted)
As at or for the year ended October 31
Net interest income
Non-interest revenue
Total revenue
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
Revenue, net of CCPB
Provision for credit losses on impaired loans
Provision for (recovery of) credit losses on performing loans
Total provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes
Reported net income
Amortization of acquisition-related intangible assets (2)
Adjusted net income
Adjusted non-interest expense
Net income available to common shareholders
Adjusted net income available to common shareholders
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Key Performance Metrics
Wealth and Asset Management reported net income
Wealth and Asset Management adjusted net income
Insurance net income
Return on equity (%) (3)
Adjusted return on equity (%) (3)
Operating leverage, net of CCPB (%)
Adjusted operating leverage, net of CCPB (%)
Efficiency ratio (%)
Adjusted efficiency ratio, net of CCPB (%)
Average assets
Average gross loans and acceptances
Average net loans and acceptances
Average deposits
Assets under administration (AUA) (4)
Assets under management (AUM)
Full-time equivalent employees
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)
1,251
259
992
1,126
264
862
2022
2023
729.7
305.5
749.3
332.9
424.2
416.4
2022
2023
AUA
AUM
2023 Net Revenue by Line of Business
(%)
7% BMO InvestorLine
9% BMO Insurance
19% BMO Wealth
Management U.S.
18% BMO Global Asset
Management
47% BMO Private Wealth
2023
1,416
5,978
7,394
1,939
5,455
5
13
18
3,962
1,475
349
1,126
4
1,130
3,955
1,118
1,122
862
866
264
17.6
17.7
(6.4)
(6.3)
53.6
72.5
58,661
40,851
40,805
61,739
416,352
332,947
6,417
774
599
132
594
136
9,776
11,975
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
1,243
1,246
992
995
259
23.5
23.6
(0.7)
(1.3)
78.8
68.4
50,488
34,007
33,974
55,919
424,191
305,462
6,124
576
458
91
454
94
5,937
7,528
(1) Revenue measures, net of CCPB, and adjusted results and ratios 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 $7 million in fiscal 2023 and $5 million in fiscal 2022
were recorded in non-interest expense.
(3) Return on equity is based on allocated capital. Effective fiscal 2023, the capital allocation rate increased to 11.0% of
risk-weighted assets, compared with 10.5% in fiscal 2022. For further information, refer to the Non-GAAP and Other
Financial Measures section.
(4) Certain assets under management that are also administered by BMO are included in assets under administration.
54 BMO Financial Group 206th Annual Report 2023
Financial Review
BMO Wealth Management reported net income was $1,126 million, compared with $1,251 million in the prior year. Wealth and Asset Management
reported net income was $862 million, a decrease of $130 million or 13%, and Insurance net income was $264 million, an increase of $5 million
or 2%.
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.
Total revenue was $7,394 million, an increase of $2,870 million. Revenue, net of CCPB, was $5,455 million, an increase of $248 million or 5%.
Wealth and Asset Management revenue was $4,971 million, an increase of $219 million or 5%, as the inclusion of Bank of the West, higher net new
client assets and the impact of the stronger U.S. dollar were partially offset by the impact of weaker global markets, lower net interest income,
primarily from lower deposit balances and the impact of lower revenue from online brokerage transactions. Insurance revenue, net of CCPB, was
$484 million, an increase of $29 million or 6% from the prior year, primarily due to underlying business growth, partially offset by the impact of
actuarial assumption changes in the current year.
Non-interest expense was $3,962 million, an increase of $398 million or 11% from the prior year, primarily reflecting the impact of Bank of the
West, higher employee-related and technology costs, and the impact of the stronger U.S. dollar.
Assets under management increased $27.5 billion or 9% from the prior year to $332.9 billion, driven by higher net client assets, the impact of
Bank of the West, stronger global markets and favourable foreign exchange movements. Assets under administration decreased $7.8 billion or 2% to
$416.4 billion. Average gross loans increased 18% and average deposits increased 9%, primarily due to the inclusion of Bank of the West.
For further information on non-GAAP amounts, measures and ratios in this 2023 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 2023, BMO Wealth Management results were impacted by challenging market conditions. We continued to support our clients with expert
advice to help them navigate the impacts of market volatility, rising interest rates and macroeconomic uncertainty. As a result of higher interest rates,
client preferences shifted toward fixed income products, and weaker global markets resulted in lower levels of assets under administration and
assets under management, as well as a reduction in digital trading volumes. We continue to provide our clients with enhanced digital advisory
capabilities and innovative solutions to meet their financial needs, leveraging BMO’s comprehensive investment and banking products and services,
leading to growth in net new assets, and positioning them to re-enter the market when markets stabilize. In addition, we completed the integration
of Bank of the West, which is expected to provide new growth opportunities in our expanded markets.
The outlook for equity markets and the economy is shifting rapidly and continues to be impacted by elevated (though moderating) inflation,
high interest rates and growing geopolitical tensions. Continued market volatility and near-term recessionary risks may impact our overall business
performance, as we continue to focus on prudently managing expenses while strategically investing for growth.
The wealth management industry remains attractive, with good growth potential over the long term. Our expanded North American sales force,
strong client loyalty and integrated business model position us well to meet our clients’ evolving needs.
We continue to invest in technology to enhance the client experience and improve the productivity of our sales force. BMO InvestorLine continues
to attract new clients through digital platform enhancements, while BMO Global Asset Management is building new capabilities to accelerate growth
and diversify our product offerings for both retail and institutional clients.
The Canadian and U.S. economic environment in calendar 2023 and the outlook for calendar 2024 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 206th Annual Report 2023 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO Capital Markets
BMO Capital Markets offers a comprehensive range of products and services to corporate, institutional and government
clients. BMO Capital Markets has approximately 2,700 professionals in 33 locations around the world, supporting the growth
aspirations of our clients across the enterprise.
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,
restructurings and recapitalizations, trade finance and risk mitigation services to support international business activities, along with 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 related to debt, foreign exchange, interest rates, credit, equities, securitization and commodities. New product development and
origination services are also offered, as well as risk management and advisory services for hedging strategies, including in interest rates, foreign
exchange rates and commodities prices. In addition, Global Markets provides funding and liquidity management services to clients.
Strategy and Key Priorities
2023 Priorities and Achievements
Key Priority: Drive client-focused growth and activate and scale a One Client approach, with improved connectivity and
integrated offerings
2023 Achievements
‰ Maintained a leading position in global and North American mergers and acquisitions (M&A), advising on landmark transactions, including the
largest investment to date by an automaker to produce battery raw materials, the largest industrial real estate investment trust (REIT) transaction
in Canadian history and the third-largest public net lease REIT
‰ Partnered with Commercial Banking to deliver holistic, integrated coverage that resulted in successful convertible note offerings and middle-market
M&A deals. This unified approach also delivered success with transitioning Bank of the West clients to the BMO platform, such as Wayfair and
Granite Construction
‰ Maintained global leadership in metals and mining, and recognized as the world’s best Metals & Mining Investment Bank by Global Finance
magazine for the 14th consecutive year
‰ Delivered top-tier product performance across Global Markets – awarded Best Issuer Sales in Canadian retail structured notes, ranked first
in Canadian equity block volumes and recognized as a top-five dealer in sovereign, supranational and agency (SSA) USD global issuances,
U.S. treasuries, U.S. agency collateralized mortgage obligations (CMOs) and U.S. commercial mortgage-backed securities (CMBS) issuances
2024 Areas of Focus
‰ Accelerate a One Client approach, with improved connectivity and integrated offerings
‰ Build deep client relationships, deliver value-added solutions to meet their needs, and win through expertise, knowledge and insight
Key Priority: Be an industry leader in sustainable finance and our clients’ lead partner in the transition to a net zero world
2023 Achievements
‰ Played a leadership role in sustainable finance and energy transition solutions – we ranked first in the sustainability-linked loan market, launched
one of the first sustainability-linked deposit offerings in North America and acted as co-lead manager on the government of Canada’s Ukraine
sovereignty bond, which was recognized as Social Bond of the Year by Environmental Finance
‰ Advanced our Climate Ambition, adding carbon market expertise and capabilities with the integration of BMO Radicle
‰ Signed a memorandum of understanding with Banco do Brasil to provide sustainability-linked trade loans to Brazilian exporters, a first of its kind
program that will accelerate lending to companies focused on sustainable and regenerative agriculture
‰ Sponsored and contributed thought leadership to industry-leading climate events such as the Bloomberg Sustainable Business Summit and
New Energy Finance Forum, as well as our new Transition Think Summit
2024 Areas of Focus
‰ Maintain our leading position in sustainable finance and build on our strong foundation in climate leadership by adding capabilities to serve
rapidly evolving markets
56 BMO Financial Group 206th Annual Report 2023
Key Priority: Deploy Digital First capabilities and solutions for speed, scale and simplification
2023 Achievements
‰ Scaled our digital capabilities to deliver new service models and enhance our offerings, including end-to-end digital platform capabilities
to onboard new clients, provide advanced analytics and execute electronic trading
‰ Launched an agile testing and innovation environment for emerging technologies, including artificial intelligence and machine learning
‰
‰ Recognized with Breaking the Status Quo and Leading the Pack awards from Fintech Open Source Foundation for our progress on open source
Implemented technology and workflow enhancements, as well as process automation to improve employee productivity
readiness
2024 Areas of Focus
‰ Leverage Digital First capabilities and data to improve operational efficiency and deliver innovative solutions
‰ Deliver client-centric, digitally-enabled service models with leading digital client portals and platforms
Key Priority: Foster a winning culture, focused on alignment, empowerment and recognition, with a commitment to a
diverse and inclusive workplace
2023 Achievements
‰ Maintained strong employee engagement index scores, with ongoing improvement in all priority areas of our winning culture, including
enablement and empowerment
‰ Continued to make progress on our Zero Barriers to Inclusion strategy, supporting communities through our hallmark programs, including Equity
Through Education and Trees from Trades
‰ Advanced our diversity, equity and inclusion strategy and improved the representation of diversity in our talented and engaged workforce
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2024 Areas of Focus
‰ Foster a winning culture focused on alignment, empowerment and recognition, while advancing progress on our Zero Barriers to Inclusion strategy
BMO Financial Group 206th Annual Report 2023 57
Revenue by Line of Business (teb) (2)
($ millions)
Global Markets
Investment and Corporate Banking
6,172
2,409
3,763
2022
6,450
2,594
3,856
2023
Revenue by Geography
(%)
Canada and Other Countries
United States
42%
43%
58%
2022
57%
2023
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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) (2)
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) (2)
Reported net income
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (4)
Adjusted net income
Adjusted non-interest expense
Net income available to common shareholders
Adjusted net income available to common shareholders
Key Performance Metrics
Global Markets revenue
Investment and Corporate Banking revenue
Return on equity (%) (5)
Adjusted return on equity (%) (5)
Operating leverage (teb) (%)
Adjusted operating leverage (teb) (%)
Efficiency ratio (teb) (%)
Adjusted efficiency ratio (teb) (%)
PCL on impaired loans to average net loans and acceptances (%)
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) (2)
Non-interest expense
Reported net income
Adjusted non-interest expense
Adjusted net income
Average assets
Average gross loans and acceptances
2023
2,553
3,897
6,450
9
9
18
4,279
2,153
471
1,682
4
20
1,706
4,247
1,648
1,672
2022
3,197
2,975
6,172
(32)
(11)
(43)
3,855
2,360
588
1,772
8
14
1,794
3,826
1,732
1,754
3,856
2,594
13.9
14.1
(6.5)
(6.5)
66.3
65.8
0.01
416,261
77,058
76,751
2,717
2,052
1,617
311
1,604
320
138,475
29,003
3,763
2,409
15.0
15.2
(10.6)
(10.8)
62.5
62.0
(0.05)
390,306
63,254
62,986
2,815
2,010
1,471
415
1,450
431
135,030
25,118
(1) Adjusted results and ratios are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures
section.
(2) Taxable equivalent basis (teb) amounts of $321 million in fiscal 2023 and $245 million in fiscal 2022 were recorded in
net interest income, revenue and provision for income taxes, and were reflected in the ratios. For our U.S. businesses,
teb amounts were US$nil in fiscal 2023 and US$11 million in fiscal 2022.
(3) Pre-tax acquisition and integration costs related to Clearpool and Radicle of $5 million in fiscal 2023 were recorded in
non-interest expense. Pre-tax acquisition and integration costs related to KGS-Alpha and Clearpool of $10 million in
fiscal 2022 were recorded in non-interest expense.
(4) Amortization of acquisition-related intangible assets pre-tax amounts of $27 million in fiscal 2023 and $19 million in
fiscal 2022 were recorded in non-interest expense.
(5) Return on equity is based on allocated capital. Effective fiscal 2023, the capital allocation rate increased to 11.0% of
risk-weighted assets, compared with 10.5% in fiscal 2022. For further information, refer to the Non-GAAP and Other
Financial Measures section.
58 BMO Financial Group 206th Annual Report 2023
Financial Review
BMO Capital Markets reported net income was $1,682 million, a decrease of $90 million or 5% from the prior year. Results were driven by higher
revenue, more than offset by higher expenses and a higher provision for credit losses, compared with a recovery in the prior year.
Revenue was $6,450 million, an increase of $278 million or 5% from the prior year. Global Markets revenue increased $93 million or 2%, as
lower trading revenue and equity and debt issuances were more than offset by higher revenue related to securitization activity and the impact of the
stronger U.S. dollar. Investment and Corporate Banking revenue increased $185 million or 8%, primarily due to higher corporate banking-related
revenue, the prior-year mark-down on loan underwriting commitments and the impact of the stronger U.S. dollar, partially offset by a decrease in
underwriting and advisory revenue reflecting lower levels of client activity.
Total provision for credit losses was $18 million, compared with a recovery of $43 million in the prior year. The provision for credit losses on
impaired loans was $9 million, compared with a recovery of $32 million in the prior year. There was a $9 million provision for credit losses on
performing loans in the current year, compared with a recovery of $11 million in the prior year.
Non-interest expense was $4,279 million, an increase of $424 million or 11% from the prior year. The increase was driven by higher legal
provisions and higher technology, employee-related and travel and business development costs, and the impact of the stronger U.S. dollar.
Average gross loans and acceptances increased $13.8 billion or 22% from the prior year to $77.1 billion, reflecting higher levels of lending
activity across loan portfolios and the impact of the stronger U.S. dollar.
For further information on non-GAAP amounts, measures and ratios in this 2023 Operating Groups Performance Review section, refer to the
M
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Non-GAAP and Other Financial Measures section.
Business Environment and Outlook
BMO Capital Markets’ performance in the current year reflected the strength of our diversified business in a volatile environment. Market conditions
in fiscal 2023 reflected economic uncertainty, geopolitical tensions and a heightened risk of a recession, which lowered business confidence.
While client trading activity has remained stable, client appetite for new M&A and issuance activity has been below historical levels. A number of
disruptive forces, including rising interest rates, tightened money supply, a more assertive regulatory environment and a focus on climate change,
are reshaping the banking and capital markets industry. BMO Capital Markets has responded by optimizing resources against the current environment
to accelerate growth opportunities across its businesses and leveraging its digital-first capabilities and data to improve efficiency.
Looking forward, we expect a more constructive environment in the capital markets in fiscal 2024, reflecting more moderate inflation and an end
to the current cycle of rising rates, although geopolitical risks may lead to further market disruption. Our robust and diversified platform positions us
well to benefit from the normalization of market conditions and client activity across industry sectors.
Our strategy remains unchanged, with a client-centric approach to be a valued financial partner through the deployment of capital and our
integrated offerings of digital-first solutions to help clients achieve their goals. We leverage our strong talent, sector expertise and thought leadership
to support our clients in changing market environments. Our commitment to sustainability is integral to our strategy, with sustainable finance product
offerings and advice to support clients in their transition to a net zero world. In addition, our disciplined and integrated approach to risk management,
along with continued investments in technology infrastructure, should position the business well to adapt to evolving regulatory and compliance
requirements. With a prominent presence in Canada and strong momentum in the United States, we are building a solid foundation for profitable
growth and sustainable returns.
The Canadian and U.S. economic environment in calendar 2023 and the outlook for calendar 2024 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.
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 cyber security and operations services.
Corporate Services focuses on enterprise-wide priorities related to maintaining a sound internal control and risk management environment and
regulatory compliance, including the management, assessment and monitoring of BMO’s investment portfolios and funding, liquidity and capital
activities, as well as any exposures 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.
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 unallocated expenses, residual treasury-related activities and the elimination of taxable equivalent adjustments.
We review revenue and expense allocation methodologies on an annual basis.
BMO Financial Group 206th Annual Report 2023 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
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)
Initial provision for credit losses on purchased performing loans (2)
Acquisition and integration costs (3)
Impact of divestitures (4)
Management of fair value changes on the purchase of Bank of the West (5)
Legal provision (including related interest expense and legal fees) (6)
Impact of Canadian tax measures (7)
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Adjusted net loss
Adjusted total revenue (teb)
Adjusted total recovery of credit losses
Adjusted non-interest expense
Net income (loss) available to common shareholders
Adjusted net loss available to common shareholders
Full-time equivalent employees
U.S. Business Select Financial Data (US$ in millions)
Total revenue (teb) (8)
Total provision for (recovery of) credit losses
Non-interest expense
Provision for (recovery of) income taxes (teb) (8)
Reported net income (loss)
Adjusted total revenue
Adjusted total provision for (recovery of) credit losses
Adjusted non-interest expense
Adjusted net income (loss)
2023
(1,095)
(354)
(1,449)
(1,449)
(2,898)
2
700
702
2,706
(6,306)
(1,433)
(4,873)
517
1,520
–
1,461
21
502
(852)
(719)
(3)
660
(5,081)
(1,060)
2022
(716)
(270)
(986)
7,830
6,844
(7)
7
–
1,383
5,461
1,270
4,191
–
237
55
(5,667)
846
–
(338)
(333)
–
424
4,087
(442)
18,181
15,490
(956)
518
1,688
(791)
5,604
(4)
686
1,282
(2,371)
3,640
571
1
190
240
106
(4)
44
83
(1) Adjusted results are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
(2) Fiscal 2023 reported net income included a provision for credit losses of $517 million ($705 million pre-tax) on the purchased Bank of the West performing loan portfolio.
(3) Fiscal 2023 reported net income included acquisition and integration costs related to Bank of the West of $1,520 million ($2,027 million pre-tax), and fiscal 2022 included $237 million ($316 million
pre-tax). These amounts were recorded in non-interest expense.
(4) Fiscal 2022 reported net income included the impact of divestitures related to the sale of our EMEA and U.S. Asset Management businesses, 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, both recorded in non-interest revenue,
and expenses of $16 million, including taxes of $22 million on the closing of the sale, recorded in non-interest expense.
(5) Fiscal 2023 reported net income included a loss of $1,461 million ($2,011 million pre-tax) related to the acquisition of Bank of the West resulting from the management of the impact of interest
rate changes between the announcement and closing of the acquisition on its fair value and goodwill, comprising $1,628 million of mark-to-market losses on certain interest rate swaps recorded
in trading revenue and $383 million of losses on a portfolio of primarily U.S. treasuries and other balance sheet instruments recorded in net interest income. Fiscal 2022 included revenue
of $5,667 million ($7,713 million pre-tax), comprising $7,665 million of mark-to-market gains and $48 million of non-trading interest income. For further information on this acquisition, refer to
the Recent Acquisitions section.
(6) Fiscal 2023 reported net income included the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank, of $21 million ($27 million pre-tax), comprising interest expense
of $30 million and a net non-interest expense recovery of $3 million. Fiscal 2022 included a provision of $846 million ($1,142 million pre-tax), comprising interest expense of $515 million and
non-interest expense of $627 million. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the audited annual consolidated financial statements.
(7) Fiscal 2023 reported net income included the impact of certain tax measures enacted by the Canadian government. These tax measures included a one-time tax expense of $371 million, comprising
a Canada Recovery Dividend (CRD) of $312 million and $59 million related to the pro-rated fiscal 2022 impact of the 1.5% tax rate increase, net of a deferred tax asset remeasurement, and a charge
of $131 million ($160 million pre-tax) related to the amended GST/HST definition for financial services, comprising $138 million recorded in non-interest revenue and $22 million recorded in
non-interest expense.
(8) Fiscal 2023 reported net income included group teb offset amounts for our U.S. businesses of US$25 million and fiscal 2022 included US$31 million, recorded in revenue and provision for (recovery of)
income taxes.
Financial Review
Corporate Services reported net loss was $4,873 million, compared with reported net income of $4,191 million in the prior year.
The reported net loss in the current year reflected a loss related to fair value management actions and the impact of certain Canadian tax
measures, including the Canada Recovery Dividend and a charge related to the amended GST/HST definition for financial services, as well as higher
acquisition and integration costs related to Bank of the West and an initial provision for credit losses on the purchased Bank of the West performing
loan portfolio. Reported net income in the prior year reflected gains related to fair value management actions, partially offset by the impact of the
lawsuit associated with M&I Marshall and Ilsley Bank.
Adjusted net loss was $852 million, compared with an adjusted net loss of $338 million in the prior year. Adjusted results were driven by higher
expenses, primarily due to the inclusion of Bank of the West and lower revenue. Lower revenue was driven by treasury-related activities, partially
offset by the impact of Bank of the West, which included the accretion of purchase accounting fair value marks on loans and deposits and the
discount on securities, net of the amortization of the fair value hedge.
For further information on non-GAAP amounts, measures and ratios in this 2023 Operating Groups Performance Review section, refer to the
Non-GAAP and Other Financial Measures section.
60 BMO Financial Group 206th Annual Report 2023
Summary Quarterly Earnings Trends
Summarized Statement of Income and Quarterly Financial Measures (1)
(Canadian $ in millions, except as noted)
Q4-2023
Q3-2023
Q2-2023
Q1-2023
Q4-2022
Q3-2022
Q2-2022
Q1-2022
Net interest income
Non-interest revenue
Revenue (1)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
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
Income before income taxes
Provision for income taxes
Reported net income (see below)
Initial provision for credit losses on purchased performing loans (2)
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (4)
Impact of divestitures (5)
Management of fair value changes on the purchase of Bank of the West (6)
Legal provision (including related interest expense and legal fees) (7)
Impact of Canadian tax measures (8)
4,941
3,419
8,360
151
8,209
408
38
446
5,700
2,063
446
1,617
–
433
88
–
–
12
–
4,905
3,024
7,929
4
7,925
333
159
492
5,594
1,839
385
1,454
–
370
85
–
–
(3)
131
4,814
3,626
8,440
591
7,849
243
780
1,023
5,522
1,304
245
1,059
517
549
85
–
–
6
–
4,021
2,449
6,470
1,193
5,277
196
21
217
4,403
657
410
247
–
181
6
–
1,461
6
371
3,767
6,803
10,570
(369)
10,939
192
34
226
4,776
5,937
1,454
4,483
–
145
6
(8)
(3,336)
846
–
4,197
1,902
6,099
413
5,686
104
32
136
3,859
1,691
326
1,365
–
62
5
6
694
–
–
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)
–
–
Adjusted net income
2,150
2,037
2,216
2,272
2,136
2,132
2,187
2,584
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Operating Group Reported and Adjusted Net Income
Canadian P&C reported net income
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (4)
Canadian P&C adjusted net income
U.S. P&C reported net income
Amortization of acquisition-related intangible assets (4)
U.S. P&C adjusted net income
BMO Wealth Management reported net income
Amortization of acquisition-related intangible assets (4)
BMO Wealth Management adjusted net income
BMO Capital Markets reported net income
Acquisition and integration costs (3)
Amortization of acquisition-related intangible assets (4)
BMO Capital Markets adjusted net income
Corporate Services reported net income (loss)
Initial provision for credit losses on purchased performing loans (2)
Acquisition and integration costs (3)
Impact of divestitures (5)
Management of fair value changes on the purchase of Bank of the West (6)
Legal provision (including related interest expense and legal fees) (7)
Impact of Canadian tax measures (8)
Corporate Services adjusted net income (loss)
Key Performance Metrics
Basic earnings per share ($) (9)
Diluted earnings per share ($) (9)
Adjusted diluted earnings per share ($)
Net interest margin on average earning assets (%)
PCL-to-average net loans and acceptances (annualized) (%)
PCL on impaired loans-to-average net loans and acceptances (annualized) (%)
Effective tax rate (%)
Adjusted effective tax rate (%)
Canadian/U.S. dollar average exchange rate ($)
962
1
3
966
661
79
740
262
1
263
489
(2)
5
492
(757)
–
434
–
–
12
–
(311)
915
6
2
923
576
77
653
303
1
304
310
1
5
316
861
2
1
864
789
77
866
284
1
285
380
2
6
388
980
–
–
980
698
1
699
277
1
278
503
3
4
510
917
–
–
917
660
2
662
298
–
298
357
2
4
363
965
–
–
965
568
1
569
324
1
325
262
1
3
266
940
–
1
941
588
1
589
314
1
315
448
2
3
453
(650)
–
363
–
–
(3)
131
(159)
(1,255)
517
545
–
–
6
–
(187)
(2,211)
–
178
–
1,461
6
371
(195)
2,251
–
143
(8)
(3,336)
846
–
(104)
(754)
–
61
6
694
–
–
7
2,466
–
26
9
(2,612)
–
–
(111)
1,004
–
–
1,004
681
1
682
315
1
316
705
3
4
712
228
–
7
48
(413)
–
–
(130)
2.07
2.06
2.81
1.66
0.27
0.25
21.6
22.7
1.3648
1.97
1.97
2.78
1.68
0.30
0.21
20.9
21.8
1.3331
1.31
1.30
2.93
1.69
0.65
0.16
18.8
22.5
1.3564
0.30
0.30
3.22
1.48
0.15
0.14
62.5
22.3
1.3426
6.52
6.51
3.04
1.46
0.16
0.14
24.5
21.8
1.3516
1.96
1.95
3.09
1.71
0.10
0.08
19.3
22.0
1.2774
7.15
7.13
3.23
1.69
0.04
0.10
25.2
23.6
1.2665
4.44
4.43
3.89
1.64
(0.08)
0.07
24.7
23.5
1.2710
(1) Adjusted results exclude 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, as well as reported ratios calculated net of CCPB, and adjusted results, measures and ratios in this table are
non-GAAP amounts. For further information, refer to the Non-GAAP and Other Financial Measures section; and for details on the composition of non-GAAP amounts, measures and ratios,
as well as supplementary financial measures, refer to the Glossary of Financial Terms.
(2) Reported net income included a provision for credit losses of $517 million ($705 million pre-tax) on the acquired Bank of the West performing loan portfolio in Q2-2023, recorded in
Corporate Services.
(3) Reported net income included acquisition and integration costs recorded in non-interest expense. Costs related to the acquisition of Bank of the West were recorded in Corporate Services: Q4-2023
included $434 million ($583 million pre-tax), Q3-2023 included $363 million ($487 million pre-tax), Q2-2023 included $545 million ($722 million pre-tax), Q1-2023 included $178 million ($235 million
pre-tax), Q4-2022 included $143 million ($191 million pre-tax), Q3-2022 included $61 million ($82 million pre-tax), Q2-2022 included $26 million ($35 million pre-tax) and Q1-2022 included $7 million
($8 million pre-tax). Costs related to Radicle and Clearpool were recorded in BMO Capital Markets: Q3-2023 included $1 million ($2 million pre-tax), Q2-2023 included $2 million ($2 million pre-tax),
Q1-2023 included $3 million ($4 million pre-tax), Q4-2022 included $2 million ($2 million pre-tax), Q3-2022 included $1 million ($2 million pre-tax), Q2-2022 included $2 million ($2 million pre-tax)
and Q1-2022 included $3 million ($4 million pre-tax). Q4-2023 included a recovery of $2 million ($3 million pre-tax). Costs related to the acquisition of AIR MILES were recorded in Canadian P&C:
Q4-2023 included $1 million ($2 million pre-tax), Q3-2023 included $6 million ($8 million pre-tax) and Q2-2023 included $2 million ($3 million pre-tax).
BMO Financial Group 206th Annual Report 2023 61
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MANAGEMENT’S DISCUSSION AND ANALYSIS
(4) Reported net income included amortization of acquisition-related intangible assets recorded in non-interest expense in the related operating group: Q4-2023 included $88 million ($119 million
pre-tax), Q3-2023 and Q2-2023 both included $85 million ($115 million pre-tax), Q1-2023 and Q4-2022 both included $6 million ($8 million pre-tax), Q3-2022 included $5 million ($7 million pre-tax),
and Q2-2022 and Q1-2022 both included $6 million ($8 million pre-tax).
(5) Reported net income in fiscal 2022 included the impact of divestitures related to the sale of our EMEA and U.S. Asset Management businesses: Q4-2022 included an $8 million ($6 million pre-tax)
recovery of non-interest expense; Q3-2022 included non-interest expense of $6 million ($7 million pre-tax); Q2-2022 included a loss of $9 million ($10 million pre-tax), comprising a gain of $8 million
related to the transfer of certain U.S. asset management clients recorded in non-interest revenue and non-interest expense of $18 million; and Q1-2022 included a loss of $48 million ($26 million
pre-tax), comprising a $29 million loss related to foreign currency translation reclassified from accumulated other comprehensive income to non-interest revenue, and a $3 million net recovery of
non-interest expense, including taxes of $22 million on closing of the sale of our EMEA Asset Management businesses. These amounts were recorded in Corporate Services.
(6) Reported net income included revenue (losses) related to the acquisition of Bank of the West resulting from the management of the impact of interest rate changes between the announcement and
closing of the acquisition on its fair value and goodwill: Q1-2023 included a loss of $1,461 million ($2,011 million pre-tax), comprising $1,628 million of mark-to-market losses on certain interest rate
swaps recorded in non-interest trading revenue and $383 million of losses on a portfolio of primarily U.S. treasuries and other balance sheet instruments recorded in net interest income; Q4-2022
included revenue of $3,336 million ($4,541 million pre-tax), comprising $4,698 million of mark-to-market gains and $157 million of net interest losses; Q3-2022 included a loss of $694 million
($945 million pre-tax), comprising $983 million of mark-to-market losses and $38 million of net interest income; Q2-2022 included revenue of $2,612 million ($3,555 million pre-tax), comprising
$3,433 million of mark-to-market gains and $122 million of net interest income; and Q1-2022 included revenue of $413 million ($562 million pre-tax), comprising $517 million of mark-to-market
gains and $45 million of net interest income. These amounts were recorded in Corporate Services. For further information on this acquisition, refer to the Recent Acquisitions section.
(7) Reported net income included the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank: Q4-2023 included $12 million ($16 million pre-tax), comprising interest
expense of $14 million and non-interest expense of $2 million; Q3-2023 included a net recovery of $3 million ($4 million pre-tax), comprising interest expense of $3 million and a non-interest
expense recovery of $7 million; Q2-2023 included interest expense of $6 million ($7 million pre-tax); Q1-2023 included $6 million ($8 million pre-tax), comprising interest expense of $6 million
and non-interest expense of $2 million; and Q4-2022 included a legal provision of $846 million ($1,142 million pre-tax), comprising interest expense of $515 million and non-interest expense
of $627 million. These amounts were recorded in Corporate Services. For further information, refer to the Provisions and Contingent Liabilities section in Note 24 of the audited annual consolidated
financial statements.
(8) Reported net income included the impact of certain tax measures enacted by the Canadian government: Q3-2023 included a charge of $131 million ($160 million pre-tax) related to the amended
GST/HST definition for financial services, comprising $138 million recorded in non-interest revenue and $22 million recorded in non-interest expense; and Q1-2023 included a one-time tax expense
of $371 million, comprising a Canada Recovery Dividend (CRD) of $312 million and $59 million related to the pro-rated fiscal 2022 impact of the 1.5% tax rate increase, net of a deferred tax asset
remeasurement. These amounts were recorded in Corporate Services.
(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.
Earnings in certain quarters are impacted by modest seasonal factors, such as higher employee expenses related to higher employee benefits and
stock-based compensation for employees eligible to retire that are recorded in the first quarter of each year, as well as the impact of fewer days in
the second quarter relative to other quarters. Quarterly earnings are also impacted by foreign currency translation. The table above outlines summary
results for the first quarter of 2022 through the fourth quarter of 2023.
On February 1, 2023, we completed the acquisition of Bank of the West, which contributed to the increase in revenue, expenses and provision
for credit losses beginning in the second quarter of 2023, with operating results primarily allocated to our U.S. P&C and BMO Wealth Management
businesses. In addition, we completed the acquisition of AIR MILES Reward Program (AIR MILES) on June 1, 2023, which contributed to the increase
in revenue and expenses in our Canadian P&C business beginning in the third quarter of 2023.
Financial performance has demonstrated good operating momentum and benefitted from the strength and diversification of our businesses.
Results were impacted by a higher interest rate environment resulting in an increase in net interest income, while uncertain economic conditions
resulted in lower levels of client activity in our market-sensitive businesses, as well as higher provisions for credit losses from historically low levels.
A number of items impacted reported results in certain quarters. The third quarter and first quarter of 2023 included the impact of certain tax
measures enacted by the Canadian government, reducing revenue and increasing expenses and provision for income taxes. The second quarter
of 2023 included an initial provision for credit losses on the purchased Bank of the West performing loan portfolio. The first quarter of 2023 and
fiscal 2022 included revenue (losses) resulting from fair value management actions related to the impact of interest rate changes between the
announcement and closing of the Bank of the West acquisition on its fair value and goodwill. The fourth quarter of 2022 included a legal provision
related to a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley Bank. Results in 2022 included the impact of divestitures related to
the sale of our EMEA and U.S. Asset Management businesses. All periods included acquisition and integration costs, as well as the amortization of
acquisition-related intangible assets, which increased in recent quarters due to the acquisition of Bank of the West.
Revenue in our P&C businesses benefitted from customer acquisition, higher loan and deposit volumes and margin expansion, reflective of
higher rate environments in both Canada and the United States, as well as the inclusion of Bank of the West revenue. Revenue in BMO Wealth
Management benefitted from steady growth in client assets and higher net interest income, while the impact of weaker global markets in fiscal 2023
negatively impacted non-interest revenue, relative to fiscal 2022. Insurance revenue, net of CCPB, is subject to variability, resulting from changes in
interest rates and equity markets. BMO Capital Markets’ performance in recent quarters reflects modest improvements in market conditions,
particularly in M&A and underwriting activities.
Early in 2022, as the economy recovered from the economic downturn brought on by the pandemic, we recovered provisions on performing
loans, reflecting favourable credit conditions and positive credit migration. Later in 2022, we saw signs of normalization in credit conditions with
gradually increasing provisions on impaired loans and modest provisions on performing loans reflecting balance growth and deterioration in the
economic outlook. In 2023, the macroeconomic outlook improved, but this was more than offset by downward credit migration, resulting in higher
provisions for performing loans and an increase in losses on impaired loans during the year.
Non-interest expense growth has reflected investments to drive revenue growth and efficiency improvement, as well as the impact of inflation,
resulting in higher employee-related costs, including sales force expansion, higher salaries and performance-based compensation, as well as higher
technology and advertising costs. The third quarter of fiscal 2023 included severance costs to accelerate efficiency initiatives across the enterprise, as
well as the impact of legal provisions recorded in BMO Capital Markets.
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 investments or securities which generate tax credits, or tax-exempt income from securities. The reported effective tax rate was
impacted by certain tax measures enacted by the Canadian government as noted above, fair value management actions relating to the acquisition
of Bank of the West in the first quarter of 2023 and in fiscal 2022, and the sale of our EMEA and U.S. Asset Management businesses in 2022.
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.
62 BMO Financial Group 206th Annual Report 2023
Review of Fourth Quarter 2023 Performance
Q4 2023 vs. Q4 2022
Net Income
Reported net income was $1,617 million, a decrease of $2,866 million or 64% from the prior year, and adjusted net income was $2,150 million, an
increase of $14 million or 1% from the prior year. Adjusted results in both the current quarter and the prior year excluded acquisition and integration
costs, amortization of acquisition-related intangible assets and the impact of a lawsuit associated with a predecessor bank, M&I Marshall and Ilsley
Bank. Adjusted results in the prior year also excluded the impact of fair value management actions related to the acquisition of Bank of the West.
Reported EPS was $2.06, a decrease of $4.45 from the prior year, and adjusted EPS was $2.81, a decrease of $0.23, including the impact of common
share issuances in the first quarter of 2023.
The decrease in reported results reflected the impact of fair value management actions in the prior year and higher acquisition-related costs in
the current quarter, partially offset by lower legal provisions related to the lawsuit noted above. Adjusted net income increased due to the inclusion
of Bank of the West, as well as higher underlying revenue, largely offset by higher expenses and a higher provision for credit losses.
Revenue
Reported revenue was $8,360 million, a decrease of $2,210 million or 21% from the prior year. Revenue, net of insurance claims, commissions and
changes in policy benefit liabilities (CCPB), was $8,209 million, a decrease of $2,730 million or 25% from the prior year, and adjusted revenue, net
of CCPB, was $8,223 million, an increase of $1,310 million or 19%. The decrease in reported results primarily reflected the impact of fair value
management actions in the prior year, partially offset by lower interest expense related to the lawsuit associated with M&I Marshall and Ilsley Bank.
On an adjusted basis, revenue, net of CCPB, increased across all operating groups, including the addition of Bank of the West and AIR MILES, reflecting
higher net interest income and non-interest revenue. Revenue in Corporate Services decreased on a reported and an adjusted basis.
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Insurance Claims, Commissions and Changes in Policy Benefit Liabilities
Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $151 million, an increase of $520 million from the prior year,
largely driven by higher annuity premiums. These changes were largely offset in insurance revenue.
Provision for Credit Losses
Total provision for credit losses was $446 million, compared with $226 million in the prior year. The total provision for credit losses as a percentage
of average net loans and acceptances ratio was 27 basis points, compared with 16 basis points in the prior year. The provision for credit losses on
impaired loans was $408 million, an increase of $216 million from the prior year. The provision for credit losses on impaired loans as a percentage
of average net loans and acceptances ratio was 25 basis points, compared with 14 basis points in the prior year. The provision for credit losses on
performing loans was $38 million, compared with a $34 million provision in the prior year.
Non-Interest Expense
Reported non-interest expense was $5,700 million, an increase of $924 million or 19% from the prior year, and adjusted non-interest expense
was $4,997 million, an increase of $1,043 million or 26%. Reported results reflected higher acquisition and integration costs and amortization
of acquisition-related intangible assets compared with the prior year, partially offset by lower expenses related to the lawsuit associated with
M&I Marshall and Ilsley Bank. Reported and adjusted non-interest expense increased due to the impact of Bank of the West and AIR MILES, as well as
higher employee-related costs, higher premises costs, including a charge related to the consolidation of BMO real estate in the current quarter, and
higher advertising costs.
Provision for Income Taxes
The reported provision for income taxes was $446 million, a decrease of $1,008 million from the fourth quarter of 2022, and the adjusted provision
for income taxes was $630 million, an increase of $33 million. The effective tax rate for the current quarter was 21.6%, compared with 24.5% in the
fourth quarter of 2022, and the adjusted effective tax rate was 22.7% in the current quarter, compared with 21.8%. The change in the reported
effective tax rate in the current quarter relative to the fourth quarter of 2022 was primarily due to the impact of higher pre-tax earnings in the prior
year, and the change in the adjusted effective tax rate was primarily due to earnings mix.
Q4 2023 vs. Q3 2023
Reported net income increased $163 million or 11% from the prior quarter, and adjusted net income increased $113 million or 6%. The increase in
reported net income was primarily due to the impact of certain tax measures in the prior quarter, partially offset by higher acquisition-related costs in
the current quarter. The increase in adjusted net income primarily reflected higher revenue. Reported net income increased in BMO Capital Markets,
Canadian P&C and U.S. P&C, and decreased in BMO Wealth Management. Corporate Services recorded a higher net loss on both a reported and an
adjusted basis, compared with the prior quarter.
Reported revenue increased $431 million or 5% from the prior quarter. Reported revenue, net of CCPB, increased $284 million or 4%, including
the impact of certain tax measures in the prior quarter, and adjusted revenue, net of CCPB, increased $157 million or 2% from the prior quarter,
reflecting higher net interest income and higher non-interest revenue. CCPB increased $147 million from the prior quarter, reflecting higher annuity
premiums and lower claims associated with a change in our longevity portfolios in the prior quarter, partially offset by changes in the fair value of
investments. These changes were largely offset in insurance revenue. Reported non-interest expense increased $106 million or 2% from the prior
quarter, and adjusted non-interest expense increased $30 million or 1%, primarily due to the impact of the stronger U.S. dollar. Total provision for
credit losses decreased $46 million from the prior quarter, with a higher provision on impaired loans more than offset by a lower provision on
performing loans.
For further information on non-GAAP amounts, measures and ratios in this Review of Fourth Quarter 2023 Performance section, refer to the
Non-GAAP and Other Financial Measures section.
BMO Financial Group 206th Annual Report 2023 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
2022 Financial Performance Review
The preceding discussions in the MD&A focused on BMO’s performance in fiscal 2023. This section summarizes BMO’s performance in fiscal 2022
relative to fiscal 2021. Periodically, certain lines of business and units within our organizational structure are realigned to support our strategic
priorities, and comparative figures in prior periods have been reclassified to conform with the current period’s presentation. Further information on
these reclassifications is provided in the How BMO Reports Operating Group Results section.
(Canadian $ in millions)
2022
Net interest income (loss) (1)
Non-interest revenue
Revenue (1)
Insurance claims, commissions and changes in policy benefit liabilities (CCPB)
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Revenue, net of CCPB
Provision for (recovery of) credit losses
Non-interest expense
Income before income taxes
Provision for income taxes (1)
Net income (loss)
Acquisition and integration costs
Amortization of acquisition-related intangible assets
Impact of divestitures
Restructuring costs (reversals)
Legal provision (including related interest expense and legal fees)
Management of fair value changes on the purchase of Bank of the West
Adjusted net income (loss)
2021
Net interest income (loss) (1)
Non-interest revenue
Revenue (1)
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
Provision for (recovery of) income taxes (1)
Net income (loss)
Acquisition and integration costs
Amortization of acquisition-related intangible assets
Impact of divestitures
Restructuring costs (reversals)
Adjusted net income (loss)
Canadian P&C U.S. P&C
Total P&C
BMO Wealth
Management
BMO Capital
Markets
Corporate
Services
Total Bank
7,449
2,419
9,868
–
5,037
1,265
6,302
–
12,486
3,684
16,170
–
9,868
6,302
16,170
341
4,349
5,178
1,352
3,826
–
1
–
–
–
–
17
3,043
3,242
745
2,497
–
5
–
–
–
–
358
7,392
8,420
2,097
6,323
–
6
–
–
–
–
3,827
2,502
6,329
6,561
2,225
8,786
–
4,268
1,243
5,511
–
10,829
3,468
14,297
–
8,786
5,511
14,297
377
3,968
4,441
1,153
3,288
–
1
–
–
(144)
2,813
2,842
666
2,176
–
24
–
–
233
6,781
7,283
1,819
5,464
–
25
–
–
3,289
2,200
5,489
1,188
3,336
4,524
(683)
5,207
(2)
3,564
1,645
394
1,251
–
3
–
–
–
–
1,254
982
6,071
7,053
1,399
5,654
(12)
3,843
1,823
441
1,382
–
24
–
–
1,406
3,197
2,975
6,172
–
6,172
(43)
3,855
2,360
588
1,772
8
14
–
–
–
–
1,794
3,115
3,011
6,126
–
6,126
(194)
3,462
2,858
738
2,120
7
17
–
–
2,144
(986)
7,830
6,844
–
15,885
17,825
33,710
(683)
6,844
34,393
–
1,383
5,461
1,270
4,191
237
–
55
–
846
(5,667)
313
16,194
17,886
4,349
13,537
245
23
55
–
846
(5,667)
(338)
9,039
(616)
326
(290)
–
14,310
12,876
27,186
1,399
(290)
25,787
(7)
1,423
(1,706)
(494)
(1,212)
–
–
842
(18)
20
15,509
10,258
2,504
7,754
7
66
842
(18)
(388)
8,651
(1) Operating group revenue, net interest income and provision for income taxes are presented on a taxable equivalent basis (teb). The offset to the groups’ teb adjustments is reflected
in Corporate Services. For further information, refer to the How BMO Reports Operating Group Results section.
Revenue measures, net of CCPB, and adjusted results and ratios are on a non-GAAP basis and are discussed in the Non-GAAP and Other Financial Measures section.
Refer to footnotes (1) to (8) in the Non-GAAP and Other Financial Measures table for further information on adjusting items.
64 BMO Financial Group 206th Annual Report 2023
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Net Income
Reported net income in 2022 was $13,537 million, an increase of $5,783 million or 75% from 2021, and adjusted net income was $9,039 million, an
increase of $388 million or 4%. Reported results in 2022 included 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 of the Bank of the West acquisition on its fair value and goodwill, and related
acquisition and integration costs of $237 million ($316 million pre-tax). In addition, 2022 included the impact of a lawsuit associated with a
predecessor bank, M&I Marshall and Ilsley Bank, of $846 million ($1,142 million pre-tax), and the impact of divestitures related to the sale of our
EMEA Asset Management businesses and the transfer of certain U.S. asset management clients of $55 million. Reported results in 2021 included a
$779 million (pre-tax and after-tax) write-down of goodwill related to the sale of our EMEA Asset Management businesses, 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 recorded in 2019
related to severance. In addition, reported net income in both years included the amortization of acquisition-related intangible assets and acquisition
and integration costs. The increase in reported net income was driven by the impact of fair value management actions in 2022. Adjusted results
increased, primarily due to 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 of $4,191 million, compared with a net loss of $1,212 million in the prior year, and on an adjusted basis recorded a lower net loss compared
with the prior year.
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, including the impact of fair value management actions related to the acquisition of Bank of
the West. Adjusted ROE decreased, as higher net income was offset by an increase in common equity. 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 related to the acquisition
of Bank of the West, partially offset by a decrease in accumulated other comprehensive income. The reported return on tangible common equity
(ROTCE) was 25.1% in 2022, compared with 17.0% in 2021, and adjusted ROTCE was 16.6%, compared with 18.9%. Book value per share
increased 19% from 2021 to $95.60 in 2022, reflecting the increase in shareholders’ equity.
Revenue
Reported revenue in 2022 was $33,710 million, an increase of $6,524 million from 2021, 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 in 2022 was $34,393 million, an increase of $8,606 million or 33% from 2021, and adjusted net revenue
was $27,216 million, an increase of $1,458 million or 6%. Reported revenue in 2022 included $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, reported revenue included interest
expense of $515 million related to the lawsuit noted above. Both years included the impact of divestitures.
Canadian P&C
Total revenue in 2022 increased $1,082 million or 12% from 2021. 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 higher revenue 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%, and Commercial Banking revenue increased $346 million or 13%.
U.S. P&C
Total revenue in 2022 increased $791 million or 14% from 2021 on a Canadian dollar basis. On a U.S. dollar basis, revenue increased $484 million
or 11%, primarily due to an increase in net interest income of $493 million or 14%, reflecting higher loan and deposit balances and higher net
interest margins, partially offset by lower Paycheck Protection Program (PPP) (1) revenue. Non-interest revenue was relatively unchanged.
Commercial Banking revenue increased $377 million or 12%, and Personal and Business Banking revenue increased $107 million or 8%.
BMO Wealth Management
Total revenue in 2022 was $4,524 million, compared with $7,053 million in 2021. Revenue, net of CCPB, in 2022 decreased $447 million or 8%.
Revenue in Wealth and Asset Management decreased $426 million or 8%, due to divestitures, partially offset by underlying revenue growth of 5%,
reflecting 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, decreased $21 million or 5% from 2021, primarily due to the impact of less favourable market movements in 2022 relative to 2021.
BMO Capital Markets
Revenue in 2022 increased $46 million or 1% from 2021. 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, partially offset by higher corporate banking-related revenue and the impact of the stronger U.S. dollar.
(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 206th Annual Report 2023 65
MANAGEMENT’S DISCUSSION AND ANALYSIS
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Corporate Services
Reported revenue in 2022 increased $7,134 million from 2021, and adjusted revenue decreased $14 million. Reported revenue in 2022 included
the impact of fair value management actions related to the acquisition of Bank of the West and a legal provision related to a lawsuit noted above.
In addition, both years included the impact of divestitures.
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 2021. 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.
Provision for Credit Losses
The total provision for credit losses (PCL) in 2022 was $313 million, compared with $20 million in 2021. PCL on impaired loans was $502 million
in 2022, a decrease of $23 million from 2021, largely due to lower provisions in Canadian P&C and BMO Capital Markets, partially offset by higher
provisions in U.S. P&C. There was a $189 million recovery of the provision for credit losses on performing loans in 2022, compared with a $505 million
recovery in 2021. 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 changes in scenario weight.
Non-Interest Expense
Reported non-interest expense in 2022 was $16,194 million, an increase of $685 million or 4% from 2021, and adjusted non-interest expense
was $15,194 million, an increase of $664 million or 4% from 2021. Reported non-interest expense in 2022 included $627 million related to the
lawsuit noted above and in 2021, included a $24 million partial reversal of a restructuring charge. Reported non-interest expense in both
years included the impact of divestiture costs, acquisition and integration costs, and the amortization of acquisition-related intangible assets.
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.
Provision for Income Taxes
The provision for income taxes in 2022 was $4,349 million, compared with $2,504 million in 2021. The reported effective tax rate was 24.3%,
compared with 24.4% in 2021. The adjusted provision for income taxes was $2,670 million, compared with $2,537 million in 2021. The adjusted
effective tax rate was 22.8%, compared with 22.7% in 2021.
For further information on non-GAAP amounts, measures and ratios in this 2022 Financial Performance Review section, refer to the Non-GAAP
and Other Financial Measures section.
66 BMO Financial Group 206th Annual Report 2023
Financial Condition Review
Summary Balance Sheet
(Canadian $ in millions)
As at October 31
Assets
Cash and cash equivalents 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
Non-controlling interest in subsidiaries
Total liabilities and equity
2023
2022
82,059
322,379
115,662
656,478
39,976
76,722
93,200
273,262
113,194
551,339
48,160
60,044
1,293,276
1,139,199
909,676
50,193
106,108
142,034
8,228
77,009
28
769,478
59,956
103,963
126,614
8,150
71,038
–
1,293,276
1,139,199
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Overview
Total assets of $1,293.3 billion increased $154.1 billion from October 31, 2022. The stronger U.S. dollar increased assets by $9.2 billion, excluding the
impact on derivative assets. Total liabilities of $1,216.2 billion increased $148.1 billion from the prior year. The stronger U.S. dollar increased liabilities
by $8.8 billion, excluding the impact of derivative liabilities. Total equity of $77.0 billion increased $6.0 billion from October 31, 2022, including share
issuances during the first quarter of 2023.
Cash and Interest Bearing Deposits with Banks
Cash and interest bearing deposits with banks decreased $11.1 billion, primarily reflecting the use of cash accumulated in the prior year for the
completion of the Bank of the West acquisition on February 1, 2023.
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
2023
124,556
16,720
62,828
116,814
1,461
322,379
2022
108,177
13,641
43,561
106,590
1,293
273,262
(1) Included securities mandatorily measured at FVTPL of $6,729 million ($4,410 million as at October 31, 2022) and securities designated at fair value of $9,991 million ($9,231 million as at
October 31, 2022).
(2) Included allowances for credit losses on debt securities recorded at fair value through other comprehensive income of $3 million as at October 31, 2023 ($3 million as at October 31, 2022).
(3) Net of allowances for credit losses of $3 million ($3 million as at October 31, 2022).
Securities increased $49.1 billion, primarily due to the inclusion of Bank of the West, higher levels of client activity in BMO Capital Markets and the
impact of the stronger U.S. dollar.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements increased $2.5 billion, due to higher levels of client activity in BMO Capital Markets and
the impact of the stronger U.S. dollar.
Net Loans
(Canadian $ in millions)
As at October 31
Residential mortgages
Consumer instalment and other personal
Credit cards
Businesses and governments
Gross loans
Allowance for credit losses
Total net loans
2023
177,250
104,040
12,294
366,701
660,285
(3,807)
656,478
2022
148,880
86,103
9,663
309,310
553,956
(2,617)
551,339
BMO Financial Group 206th Annual Report 2023 67
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net loans increased $105.1 billion from October 31, 2022, due to the inclusion of Bank of the West, growth in residential mortgages and credit
card balances in Canadian P&C, growth in business and government loans in Canadian P&C and BMO Capital Markets and the impact of the stronger
U.S. dollar, partially offset by lower source currency balances in U.S. 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 audited annual consolidated financial statements.
Derivative Financial Assets
Derivative financial assets decreased $8.2 billion, primarily reflecting a decrease in the fair value of client-driven trading derivatives in BMO Capital
Markets, with decreases in the fair value of commodities, foreign exchange and equity contracts, partially offset by an increase in the fair value of
interest rate contracts. Further details on derivative financial assets are provided in Note 8 of the audited annual consolidated financial statements.
Other Assets
Other assets primarily include goodwill and intangible assets, customers’ liability under acceptances, cash collateral, insurance-related assets,
premises and equipment, precious metals, current and deferred tax assets, accounts receivable and prepaid expenses. Other assets increased
$16.7 billion, primarily due to goodwill and intangible assets related to Bank of the West, higher deferred tax assets and higher precious metals
balances, partially offset by lower customers’ liability under acceptances due to lower levels of acceptances issued into the market. Further details
on other assets are provided in Notes 9, 11, 12 and 22 of the audited annual consolidated financial statements.
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Deposits
(Canadian $ in millions)
As at October 31
Banks
Businesses and governments
Individuals
Total deposits
2023
29,587
574,670
305,419
909,676
2022
30,901
495,831
242,746
769,478
Deposits increased $140.2 billion. Business and government deposits increased $78.8 billion, reflecting the inclusion of Bank of the West, higher
wholesale funding balances primarily to fund Global Markets client activity, growth in customer deposits in Canadian P&C and the impact of the
stronger U.S. dollar, partially offset by lower source currency customer deposits in U.S. P&C. Deposits by individuals increased $62.7 billion, primarily
reflecting the inclusion of Bank of the West and growth in customer deposits in the P&C businesses, partially offset by lower customer deposits in
BMO Wealth Management.
Deposits by banks were relatively unchanged from the prior year. Further details on the composition of deposits are provided in Note 13 of the
audited annual consolidated financial statements and in the Liquidity and Funding Risk section.
Derivative Financial Liabilities
Derivative financial liabilities decreased $9.8 billion, primarily due to a decrease in the fair value of client-driven trading derivatives in BMO Capital
Markets, with decreases in the fair value of foreign exchange, equity and commodities contracts, partially offset by an increase in the fair value of
interest rate contracts.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements increased $2.1 billion, primarily due to the impact of the stronger U.S. dollar and Treasury
activities.
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 $15.4 billion, driven by higher Federal Home Loan Bank borrowings, higher accrued interest
payable, an increase in securities sold but not yet purchased due to higher levels of client activity in BMO Capital Markets and higher insurance-
related liabilities, partially offset by lower acceptances as a result of lower levels of acceptances issued into the market.
Further details on the composition of other liabilities are provided in Note 14 of the audited annual consolidated financial statements.
Subordinated Debt
Subordinated debt was relatively unchanged from the prior year, reflecting a new issuance, net of a redemption. Further details on the composition
of subordinated debt are provided in Note 15 of the audited annual 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
68 BMO Financial Group 206th Annual Report 2023
2023
2022
6,958
22,941
328
44,920
1,862
77,009
6,308
17,744
317
45,117
1,552
71,038
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Total equity increased $6.0 billion from October 31, 2022, primarily due to common and preferred share issuances. Common shares increased
$5.2 billion, reflecting share issuances during the first quarter of 2023, as well as shares issued under the dividend reinvestment and share purchase
plan. Preferred shares and other equity instruments increased $0.7 billion, as a result of an issuance in the first quarter of 2023. Accumulated other
comprehensive income increased $0.3 billion, primarily due to the impact of the stronger U.S. dollar on the translation of net foreign operations,
partially offset by losses on remeasurement of own credit risk on financial liabilities designated at fair value and the impact of higher interest rates
on cash flow hedges. Retained earnings decreased $0.2 billion, as a result of dividends and distributions on other equity instruments, partially offset
by net income earned in the current year.
The Consolidated Statement of Changes in Equity in the audited annual consolidated financial statements provides a summary of items that
increase or reduce total equity, while Note 16 of the audited annual 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. We recognize the emerging global trend of rising regulatory capital requirements, and
manage our capital position accordingly. Our objective is to maintain a strong capital position in a cost-effective structure that:
‰
‰ Underpins BMO’s operating groups’ business strategies and considers the market environment
‰ 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 economic capital requirements
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 inform and support 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 applied in managing balance sheet positions, risk levels and capital requirements at both the
consolidated entity and operating group levels. We seek to optimize our capital through efficient use of our balance sheet and the related risks we
undertake, and may employ levers such as risk transfer transactions and the sale of assets. We evaluate assessments of actual and forecast capital
adequacy against our capital plan throughout the year, including consideration of 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 view 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 strategic growth activities.
Refer to the Enterprise-Wide Risk Management section for further discussion of the risks underlying our business.
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, capital plan and capital adequacy assessments. The Board of Directors
regularly reviews the bank’s capital position and key capital management activities. In addition, the capital adequacy assessment results determined
by ICAAP are reviewed by the Board of Directors and the Risk Review Committee. The Enterprise 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 206th Annual Report 2023 69
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 current
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 6.0% and a Total Capital Ratio of 8.0%. In addition to these 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 4.0% of risk-weighted assets (RWA) and was set at 3.0% as at October 31, 2023.
The buffer level is set twice a year by OSFI, in June and December, but OSFI can make a change any time when needed. Effective November 1, 2023,
the DSB increased to 3.5%.
The current minimum Total Loss Absorbing Capacity (TLAC) requirements set by OSFI are a TLAC Ratio of 21.5% of RWA and a TLAC Leverage Ratio
of 6.75% as at October 31, 2023.
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The current minimum Leverage Ratio set out in OSFI’s Leverage Requirements (LR) Guideline is 3.0%. Effective February 1, 2023, D-SIBs were
required to meet a 0.5% buffer requirement for the Leverage and TLAC Leverage Ratios, in addition to the minimum requirements.
OSFI’s requirements as at October 31, 2023, are summarized in the following table.
(% of risk-weighted assets or leverage exposures)
Common Equity Tier 1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
TLAC Ratio
Leverage Ratio
TLAC Leverage Ratio
Minimum capital,
leverage and TLAC
requirements
Total Pillar 1 Capital
buffers (1)
Tier 1 Capital
buffer
Domestic stability
buffer (2)
Minimum capital,
leverage and TLAC
requirements including
capital buffers
BMO capital, leverage
and TLAC ratios as at
October 31, 2023
4.5%
6.0%
8.0%
21.5%
3.0%
6.75%
3.5%
3.5%
3.5%
na
na
na
na
na
na
na
0.5%
0.5%
3.0%
3.0%
3.0%
3.0%
na
na
11.0%
12.5%
14.5%
24.5%
3.5%
7.25%
12.5%
14.1%
16.2%
27.0%
4.2%
8.1%
(1) The minimum CET1 Ratio requirement of 4.5% 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 2023). 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) Breaches of the DSB will not result in a bank being subject to automatic constraints on capital distributions. In the event of a breach, OSFI would require a remediation plan, and would expect for the
plan to be executed in a timely manner. Banks may be required to hold additional regulatory capital buffers that are applicable to Capital, Leverage and TLAC Ratios.
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.
70 BMO Financial Group 206th Annual Report 2023
Regulatory Capital and Total Loss Absorbing Capacity Elements
BMO maintains a capital structure that is diversified across instruments and tiers in order to provide an appropriate mix of loss absorbency.
The major components of regulatory capital and total loss absorbing capacity are summarized as follows:
CET1 Capital
• Common Shareholders’ Equity
(cid:129) May include portion of expected credit loss provisions
(cid:129) Less regulatory deductions for items such as:
o Goodwill
o Intangible assets
o Defined benefit pension assets
o Certain deferred tax assets
o Certain other items
Additional Tier 1 (AT1) Capital
(cid:129) Preferred shares
(cid:129) Other AT1 capital instruments
(cid:129) Less regulatory deductions
Tier 2 Capital
(cid:129) Subordinated debentures
(cid:129) May include portion of expected credit loss provisions
(cid:129) Less regulatory deductions
Other Total Loss Absorbing Capacity (TLAC)
(cid:129) Other TLAC instruments (including eligible Bail-in debt)
(cid:129) Less regulatory deductions
Tier 1 Capital
Total Capital
TLAC
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OSFI’s CAR Guideline includes non-viability contingent capital (NVCC) provisions, which require the conversion of Additional Tier 1 and Tier 2 capital
instruments into 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.
Pursuant to the principles set out in the CAR Guideline, a conversion to common shares would respect the hierarchy of claims in liquidation, ensuring
that holders of Additional Tier 1 and Tier 2 instruments are entitled to a more favourable economic outcome than existing common shareholders.
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.
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, which include standardized and internal ratings or internal model approaches for credit risk and market risk.
We primarily use the Internal Ratings Based (IRB) Approach to determine credit RWA in our portfolio. Effective with the implementation of the
Basel III Reforms as at February 1, 2023, the IRB approaches include the Foundation (FIRB) Approach for exposures to financial institutions and large
corporate portfolios, and the Advanced (AIRB) Approach for all other exposures. 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 (PD), loss given default (LGD) and
exposure at default (EAD) risk parameters, as well as term to maturity and asset class type, as prescribed by the OSFI rules. These risk parameters are
determined using internal models that leverage historical portfolio data supplemented by benchmarking, as appropriate, and are updated periodically.
Validation procedures related to these models are in place in order to quantify and differentiate risks appropriately. The FIRB Approach employs the
same internal PD estimates as the AIRB Approach, but LGD and EAD parameters are prescribed by OSFI. Credit risk RWA related to certain Canadian
and U.S. portfolios, including the acquired Bank of the West portfolio, are determined under the Standardized Approach using prescribed risk weights
based on external ratings, counterparty type or product type. These portfolios reflect current waivers and exemptions to the IRB Approach approved
by OSFI. For further discussion of the respective approaches noted above, refer to the Credit and Counterparty Risk – Credit and Counterparty Risk
Measurement section.
In fiscal 2023, our market risk RWA was primarily determined using the Internal Models Approach, and the Standardized Approach was used
for some exposures. With the implementation of the Basel III Reforms for market risk, effective November 1, 2023, we transitioned to a fully
Standardized Approach.
We use the new Standardized Measurement Approach for determining operational risk regulatory capital requirements, which was effective
February 1, 2023, as part of the Basel III Reforms implementation.
BMO is subject to a capital floor as prescribed in OSFI’s CAR Guideline. In calculating regulatory capital ratios, total RWA must be increased when
the capital floor amount calculated under the standardized approaches, multiplied by a capital floor adjustment factor, is higher than a similar
calculation using the more risk-sensitive internal modelled approaches, where applicable. Other than during the first quarter of 2023, the capital floor
was not operative for BMO in fiscal 2023, following the acquisition of Bank of the West.
BMO Financial Group 206th Annual Report 2023 71
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Regulatory Capital Developments
Effective November 1, 2023, the DSB has been raised from 3.0% to 3.5% of total RWA. On December 8, 2022, OSFI raised the DSB range of 0%
to 2.5% to 0% to 4.0%.
On October 20, 2023, OSFI published the revised CAR Guideline, which will be effective in the first quarter of fiscal 2024. The key revisions reflect
heightened regulatory capital requirements for mortgages with growing balances where payments are insufficient to cover the interest component,
as well as other changes that provide further clarification on the application of the guideline.
On September 12, 2023, OSFI published the final Parental Stand-Alone (Solo) TLAC Framework for D-SIBs, which will be effective in the first
quarter of fiscal 2024. The purpose of the Solo framework is to ensure a non-viable D-SIB has sufficient loss absorbing capacity on a stand-alone legal
entity basis to support its resolution, which would, in turn, facilitate an orderly resolution of the D-SIB while minimizing adverse impacts on the
stability of the financial sector, ensuring the continuity of critical functions and minimizing taxpayers’ exposure to loss. We are well-positioned to
meet the new Solo TLAC requirement.
The domestic implementation of Basel III Reforms related to capital, leverage, liquidity and disclosure requirements was effective as of the
second quarter of fiscal 2023. Regulatory capital changes in the year under these reforms included revised rules for credit risk and operational risk.
The capital floor adjustment factor was set at 65% effective February 1, 2023, rising 2.5% on November 1 of each year to 72.5% in fiscal 2026.
Effective February 1, 2023, D-SIBs were required to hold a 0.5% buffer for the Leverage and TLAC Leverage Ratios, in addition to the minimum
requirements. Basel III Reforms for market risk and credit valuation adjustment (CVA) risk come into effect in the first quarter of fiscal 2024. With this
transition, the determination of market risk capital will shift from a primarily Internal Models Approach to a fully Standardized Approach and capital
for CVA risk will also reflect OSFI’s standardized rules.
International Financial Reporting Standard 17, Insurance Contracts (IFRS 17) becomes effective for our fiscal year beginning November 1, 2023,
and we will apply the full retrospective approach where we restate prior periods as if we had always applied IFRS 17. On transition to IFRS 17, we will
also change our accounting policy for the measurement of investment properties, recorded in insurance-related assets, under IAS 40, Investment
Property. For more information, refer to the Future Changes in Accounting Policies section.
These regulatory and accounting changes are expected to have a modest impact on our regulatory capital ratios upon adoption.
Regulatory Capital and Total Loss Absorbing Capacity Review
BMO is well-capitalized, with capital ratios that exceed OSFI’s published requirements for large Canadian banks, including a DSB of 3.0%.
Our CET1 Ratio was 12.5% as at October 31, 2023, compared with 16.7% as at October 31, 2022. Our CET1 Ratio was elevated at the end of
fiscal 2022, primarily driven by fair value management actions related to the acquisition of Bank of the West. The CET1 Ratio decreased
from the prior year, primarily as a result of the acquisition and integration of Bank of the West.
Our Tier 1 Capital and Total Capital Ratios were 14.1% and 16.2%, respectively, as at October 31, 2023, compared with 18.4% and 20.7%,
respectively, as at October 31, 2022. The Tier 1 Capital and Total Capital Ratios were lower due to the factors impacting the CET1 Ratio, partially offset
by a $650 million issuance of institutional preferred shares.
The impact of foreign exchange rate movements on BMO’s 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 BMO’s capital ratios, and did so during fiscal 2023.
Any such activities could also impact BMO’s book value and return on equity.
Our Leverage Ratio was 4.2% as at October 31, 2023, a decrease from 5.6% as at October 31, 2022, primarily as a result of our acquisition of
Bank of the West.
As at October 31, 2023, our TLAC Ratio was 27.0% and our TLAC Leverage Ratio was 8.1%, compared with 33.1% and 10.1%, respectively,
as at October 31, 2022.
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.
Following our acquisition of Bank of the West, our subsidiary, BMO Financial Corp. (BFC), as a U.S. bank intermediate holding company, has
transitioned from a Category IV to a Category III institution under the Enhanced Prudential Standards issued by the Federal Reserve Board (FRB).
This change will require BFC to meet certain heightened regulatory standards related to capital, liquidity and risk management, including complying
with single counterparty credit limits. These heightened regulatory standards include a requirement that BFC will now be subject to the
Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST) requirements of the FRB on an annual (from biennial)
basis, along with other requirements, including biennial company-run stress testing, countercyclical capital buffer and supplementary leverage ratio
requirements. We are well-positioned to meet these incremental requirements and do not expect them to have a material impact on our business,
financial condition, results of operations or capital position.
BFC was also required to participate in the FRB’s 2023 CCAR exercise as a result of our acquisition of Bank of the West. On June 28, 2023,
the FRB released its 2023 CCAR and DFAST results, and on July 27, 2023, announced individual large bank capital requirements, which were effective
October 1, 2023. For BFC, the FRB determined a CET1 Ratio requirement of 7.8%, including the 4.5% minimum CET1 Ratio and a 3.3% stress capital
buffer (SCB). BFC is well-capitalized, with a strong CET1 Ratio of 10.3% as at September 30, 2023.
72 BMO Financial Group 206th Annual Report 2023
Regulatory Capital and TLAC (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
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
General allowance
Total regulatory adjustments to Tier 2 Capital
Tier 2 Capital (T2)
Total Capital (TC = T1 + T2)
Non-Regulatory Capital Elements of TLAC
Directly issued qualifying Other TLAC instruments
Total regulatory adjustments applied to Other TLAC
Other TLAC
TLAC (TLAC = TC + Other TLAC)
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
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2022
23,269
44,920
1,862
(20,899)
3,762
52,914
6,958
(87)
6,871
59,785
8,082
902
(51)
8,933
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
68,718
75,309
45,773
(89)
45,684
45,554
(200)
45,354
114,402
120,663
424,197
1,413,036
363,997
1,189,990
12.5
14.1
16.2
27.0
4.2
8.1
16.7
18.4
20.7
33.1
5.6
10.1
(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 $52.9 billion as at October 31, 2023, compared with $60.9 billion as at October 31, 2022. CET1 Capital decreased, as internal
capital generation, common shares issuances through a public offering and private placements, and under the Shareholder Dividend Reinvestment
and Share Purchase Plan (DRIP) were more than offset by an increase in the capital deductions for goodwill and intangible assets, and acquisition and
integration costs related to Bank of the West.
Tier 1 Capital and Total Capital were $59.8 billion and $68.7 billion, respectively, as at October 31, 2023, compared with $67.1 billion and
$75.3 billion, respectively, as at October 31, 2022. The decrease in Tier 1 Capital was primarily due to the factors impacting CET1 Capital, partially
offset by an issuance of institutional preferred shares. Total Capital was lower, primarily due to the factors impacting Tier 1 Capital.
Risk-Weighted Assets
RWA were $424.2 billion as at October 31, 2023, an increase from $364.0 billion as at October 31, 2022. Credit Risk RWA were $349.9 billion as at
October 31, 2023, an increase from $295.5 billion as at October 31, 2022, primarily due to the inclusion of the assets of Bank of the West, partially
offset by the impact of the implementation of the Basel III Reforms and risk transfer transactions. As noted above, the impact of foreign exchange
rate movements is largely offset in the CET1 Ratio. Market Risk RWA were $17.0 billion as at October 31, 2023, an increase from $13.5 billion as at
October 31, 2022, primarily attributable to portfolio changes, including business growth, and market volatility during the year. Operational Risk RWA
were $57.4 billion as at October 31, 2023, an increase from $42.4 billion as at October 31, 2022, primarily due to the acquisition of Bank of the West
and the impact of legal provisions. The capital floor was not operative at October 31, 2023, compared with a floor adjustment of $12.6 billion
reflected in our RWA as at October 31, 2022.
BMO Financial Group 206th Annual Report 2023 73
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MANAGEMENT’S DISCUSSION AND ANALYSIS
(Canadian $ in millions)
As at October 31
Credit Risk
Wholesale
Corporate, including specialized lending
Corporate small and medium-sized enterprises
Sovereign
Bank
Retail
Residential mortgages, excluding home equity
line of credit
Home equity line of credit
Qualifying revolving retail
Other retail, excluding small and medium-sized
enterprises
Retail small and medium-sized enterprises
Equity
Trading book
Securitization
Other credit risk assets – non-counterparty managed assets
Scaling factor for credit risk assets under AIRB Approach (3)
Total Credit Risk
Market Risk
Operational Risk
Risk-Weighted Assets before floor
Floor adjustment (4)
Total Risk-Weighted Assets
Total
Exposure (1) (2)
Average
risk weight
2023
2022
RWA (1)
IRB
Standardized
FIRB
AIRB
Total
Total RWA (5)
406,703
33,830
261,799
23,111
175,473
74,487
49,006
46,276
19,459
11,101
50,763
81,947
21,091
na
1,255,046
–
–
1,255,046
–
1,255,046
44.4%
61.7%
1.6%
20.9%
10.8%
10.6%
21.9%
57.6%
62.4%
131.3%
24.5%
15.4%
112.1%
na
36,787
4,830
180
214
71,214
52
–
4,623
72,522
15,987
3,901
–
180,523
20,869
4,081
4,837
4,559
982
690
17,765
3,407
14,574
5,055
1,467
23,641
na
–
–
–
–
–
–
6,478
–
–
na
14,308
6,895
10,048
8,892
8,733
–
888
11,160
–
na
18,867
7,877
10,738
26,657
12,140
14,574
12,421
12,627
23,641
na
–
–
–
–
–
–
114,151
2,131
57,364
82,367
–
–
153,334
14,850
–
349,852
16,981
57,364
173,646
82,367
168,184
424,197
–
–
–
–
173,646
82,367
168,184
424,197
137,272
31,671
4,818
4,113
11,076
5,915
7,408
16,099
11,860
11,956
11,036
9,530
18,580
14,189
295,524
13,522
42,353
351,399
12,598
363,997
(1) Exposure and RWA are grouped by the obligor’s asset class.
(2) Exposure represents exposure at default (EAD) after the application of credit risk mitigation and the credit conversion factor for undrawn exposures.
(3) In fiscal 2022, RWA amounts for credit risk under the Advanced Internal Ratings Based (AIRB) Approach were subject to a 6% scaling factor. This scaling factor is no longer effective as of the second
quarter of fiscal 2023, following the implementation of Basel III Reforms.
(4) 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. The capital floor was not operative at October 31, 2023.
(5) Prior periods have been reclassified to conform with the current period’s presentation.
na – not applicable
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, 2023)
BMO Financial Group
Operating Groups
Canadian Personal
and Commercial
Banking
U.S. 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
71%
8%
21%
89,990
–
19,010
74 BMO Financial Group 206th Annual Report 2023
80%
5%
15%
146,561
3
17,559
32%
28%
40%
20,487
91
8,926
57%
24%
19%
70,588
16,887
11,869
75%
25%
–
22,226
–
–
Capital Management Activities
During fiscal 2023, we issued approximately 28.3 million common shares through a public offering and private placements to align our capital
position with increased regulatory requirements and for general corporate purposes. We also issued approximately 14.2 million common shares
through the Shareholder Dividend Reinvestment and Share Purchase Plan (DRIP) and the exercise of stock options. In addition, we issued
1.2 million common shares for the acquisition of Radicle Group Inc.
During fiscal 2023, we completed the issuances and redemptions of Tier 1 and Tier 2 Capital instruments, outlined in the table below.
Capital Instrument Issuances and Redemptions
As at October 31, 2023
Common shares issued
Tier 1 Capital
Issuance of Non-Cumulative 5-Year Fixed Rate Reset
Class B Preferred Shares, Series 52
Tier 2 Capital
Issuance of Medium-Term Notes, Series M, First Tranche
Redemption of U.S. 4.338% Subordinated Notes
Outstanding Shares and NVCC Instruments
As at October 31
Common shares
Class B Preferred shares
Series 27*
Series 29*
Series 31*
Series 33*
Series 44*
Series 46*
Series 50*
Series 52*
Additional Tier 1 Capital Notes*
4.800% Additional Tier 1 Capital Notes
4.300% Limited Recourse Capital Notes, Series 1 (1)
5.625% Limited Recourse Capital Notes, Series 2 (1)
7.325% Limited Recourse Capital Notes, Series 3 (1)
Medium-Term Notes* (2)
3.803% Subordinated Notes
Series J – First Tranche
Series J – Second Tranche
Series K – First Tranche
3.088% Subordinated Notes
Series L – First Tranche
Series M – First Tranche
Stock options
Vested
Non-vested
*
Convertible into common shares.
Issuance or
redemption date
Number of shares
(in millions)
43.8
0.65
January 31, 2023
September 7, 2023
October 5, 2023
Balance
(Canadian $ in millions,
except as noted)
$ 5,197
$
650
$ 1,150
850
USD
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Number of shares
or dollar amount
(in millions)
Dividends declared per share
2023
2022
721
$ 5.80
$ 5.44
$ 0.96
$ 0.91
$ 0.96
$ 0.76
$ 1.21
$ 1.28
$73.73
$57.52
$ 0.96
$ 0.91
$ 0.96
$ 0.76
$ 1.21
$ 1.28
$24.64
–
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
na
$ 500
$ 400
$ 300
$ 200
$ 400
$ 350
$ 500
$ 650
US$ 500
$1,250
$ 750
$1,000
US$1,250
$1,000
$1,250
$1,000
US$1,250
$ 750
$1,150
2.8
3.6
(1) 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 audited annual
consolidated financial statements for conversion details.
(2) Note 15 of the audited annual consolidated financial statements includes details on the NVCC Medium-Term Notes.
na – not applicable
Note 16 of the audited annual consolidated financial statements includes details on share capital and other equity instruments.
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 4.0 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 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 75
MANAGEMENT’S DISCUSSION AND ANALYSIS
Dividends
Dividends per common share declared in fiscal 2023 totalled $5.80, an increase of 7% from the prior year. Annual dividends declared
represented 103% of reported net income available to common shareholders on a last twelve-month basis, primarily reflecting the impact of
Bank of the West. On an adjusted basis, annual dividends declared represented 49% of adjusted net income available to common shareholders.
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.
At year-end, our common shares provided an annualized dividend yield of 6% based on the year-end closing share price. On December 1, 2023,
we announced that the Board of Directors had declared a quarterly dividend on common shares of $1.51 per share, an increase of $0.04 per share
or 6% from the prior year. The dividend is payable on February 27, 2024 to shareholders of record on January 30, 2024.
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 DRIP.
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During fiscal 2023, common shares to supply the DRIP were issued from treasury at a 2% discount from the then-current market price.
Such shares will continue to be issued from treasury at a 2% discount until further notice. 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.
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, to secure customer transactions, or to 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 audited annual
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 audited annual consolidated financial statements provides further details of our interests in both consolidated and
unconsolidated SEs. Under IFRS, we consolidate a SE if we control the entity. We consolidate our own securitization vehicles, certain capital and
funding vehicles, and other structured entities created to meet our customers’ needs, as well as our own. We do not consolidate our customer
securitization vehicles, certain capital vehicles, various BMO-managed funds or various other SEs where investments are held. The acquisition of Bank
of the West had a nominal impact on our SEs and securitization profile. Further details on our 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 $149 million in fiscal 2023 ($140 million in fiscal 2022).
Customer Securitization Vehicles
Our customer securitization 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 either to investors or to us, in
order to fund the purchases. The sellers remain responsible for servicing the transferred assets and are first to absorb any losses realized on those
assets. We are not responsible for servicing or absorbing the first loss and none of the sellers are affiliated with BMO.
Our exposure to potential losses arises from the purchase of ABCP issued by the vehicles, any related derivative contracts entered into with the
vehicles, and the liquidity support provided to the market-funded vehicles. We use the credit adjudication process in deciding whether to enter into
these arrangements, just as we do when extending credit in the form of a loan.
Three of these customer securitization vehicles are market-funded, while the fourth 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 audited annual consolidated financial statements.
The market-funded vehicles had a total of $12.2 billion of ABCP outstanding as at October 31, 2023 ($11.0 billion in 2022). The ABCP issued by
the Canadian market-funded vehicles is rated R-1 (high) by DBRS and P1 by Moody’s, and the ABCP issued by the U.S. market-funded vehicle is rated
A1 by S&P and P1 by Moody’s. Our holdings of ABCP, as distributing agent of ABCP issued by the market-funded vehicles, totalled $518 million as at
October 31, 2023 ($573 million in 2022).
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 vehicles as
at October 31, 2023 totalled $19.8 billion ($18.4 billion as at October 31, 2022). This amount comprises part of the commitments outlined in Note 24
of the audited annual consolidated financial statements.
76 BMO Financial Group 206th Annual Report 2023
The assets of each of these market-funded vehicles consist primarily of exposures to diversified pools of automobile-related receivables and
conventional residential mortgages in Canada, and automobile-related receivables and equipment loans in the United States. These two asset classes
represent 63% (66% in 2022) in Canada, and 86% (88% in 2022) in the United States, of the aggregate assets of their respective vehicles as at
October 31, 2023.
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 $250 billion as at October 31, 2023 ($228 billion as
at October 31, 2022). 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 audited annual 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 $58 billion as at October 31, 2023 ($54 billion as at
October 31, 2022). 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 audited annual consolidated financial statements.
Caution
This Off-Balance Sheet Arrangements section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
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BMO Financial Group 206th Annual Report 2023 77
MANAGEMENT’S DISCUSSION AND ANALYSIS
Enterprise-Wide Risk Management
As a diversified financial services company providing banking, wealth management, capital markets and insurance services,
BMO is exposed to a variety of risks that are inherent in each of these 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 these
business activities, as discussed in the following sections:
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78 Risks That May Affect Future Results
82
87
95 Market Risk
Enterprise-Wide Risk Management Framework
Credit and Counterparty Risk
100
100
Insurance Risk
Liquidity and Funding Risk
109 Operational Non-Financial Risk
Legal and Regulatory Risk
113
Strategic Risk
115
116
Environmental and Social Risk
118 Reputation Risk
Text and tables presented in a blue-tinted font in the Enterprise-Wide Risk Management section of the MD&A form an integral part of the 2023 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 audited annual consolidated financial
statements.
Risks That May Affect Future Results
Top and Emerging Risks That May Affect Future Results
Evolving internal and external events may have an impact on BMO’s overall risk profile. These events have the potential to affect our business, the
results of our operations and our financial condition. Our risk management process involves proactively identifying, assessing, managing, monitoring
and reporting on risks arising from these events. Risks that are identified are brought forth to several forums for discussion with the Board of
Directors, senior management and business leaders, incorporating both bottom-up and top-down approaches. Risks are examined and assessed
by scenario analysis. Action plans that address our exposure to certain events are developed based on these risk assessments.
The following risks are considered to have the potential to materially impact BMO’s financial results, operational efficiency, strategic direction
or reputation.
General Economic Conditions
The general economic conditions prevailing in Canada, the United States and other jurisdictions in which we conduct business affect our earnings.
The Canadian and U.S. economies slowed in the past year in response to higher interest rates, but have shown some resilience as a result of high
levels of household savings, pent-up demand, expansionary fiscal policies and, in Canada, robust population growth. The labour market remains
healthy, with some recent signs of softening. Inflation has moderated, although underlying price pressures persist. The economy faces headwinds
from high interest rates and high levels of household indebtedness in Canada, as well as the conflicts in Ukraine and the Middle East, trade disputes
with China, diplomatic tensions between Canada and India, and other global geopolitical risks. The possibility that policy rates could rise further and
remain high for an extended period has driven longer-term borrowing costs to multi-decade highs, which could lead to higher loan provisions, lower
levels of loan demand and stronger deposit pricing competition, with potential impacts on net interest income. These factors represent potential risks
for market stability and economic growth. Refer to the Geopolitical Risk and Escalating Trade Disputes section and the Inflation section for further
discussion of these risks.
Management regularly monitors the economic environment in which we operate, in order to identify significant changes in key economic
indicators, so that we can assess BMO’s portfolio and business strategies, and develop contingency plans to address any adverse developments.
Cyber and Cloud Security Risk
Our exposure to cyber security risk arises from the ever-increasing reliance of our business operations on internet and cloud technologies, coupled
with a hybrid work environment and extensive dependence on advanced digital technologies to process data. Heightened geopolitical tensions are
also contributing to increasing global exposures to cyber security risks. These risks include the threat of data loss, which could lead to exposure of
customer or employee information, as well as identity theft and fraud. Ransomware or denial of service attacks could result in system failure and
disruption of services. Threat campaigns are becoming better organized and more sophisticated, including an increase in reported data breaches,
often occurring through third-party suppliers, that can negatively impact a company’s brand and reputation, as well as customer retention and
acquisition. At BMO, our response includes investing in our Financial Crimes Unit and technological infrastructure, equipping our team to detect and
address cyber security threats across North America, Europe and Asia in order to help keep our customers’ and employees’ data secure.
78 BMO Financial Group 206th Annual Report 2023
Technology Resiliency Risk
Heightened exposure to technology resiliency risk is leading to new and more expansive regulatory requirements related to operational resilience,
challenging banks to extend their programs beyond disaster recovery and business continuity activities. New regulatory expectations include the need
to be predictive and respond proactively to internal and external threats of disruption.
Technology resiliency is critical to providing our customers with a smooth online experience across our digital channels. Given the extent to
which our customers, employees and suppliers are increasingly reliant on technology platforms and the Internet of Things to manage and support
their personal, business and investment banking activities, it is important that we maintain platforms that can function at high levels of operational
reliability and resilience, particularly with respect to business-critical systems.
Third-Party Risk
Our use of third-party arrangements continues to expand, helping us to deliver innovative solutions across the bank and for our clients. Failure to
effectively manage these third-party arrangements exposes BMO to the risk that data may be compromised or the delivery of critical products and
services may be disrupted. In addition, third-party service providers may use sub-contractors, introducing an additional layer of complexity for
oversight. Any concentration of third parties will also heighten exposures to existing risks of disruption arising from other events, such as natural
disasters or geopolitical events.
Effective risk management and oversight are important for third-party arrangements. This includes determining the inherent risk and criticality
of third-party arrangements, conducting appropriate due diligence, as well as ongoing monitoring and oversight of the third-party service provider.
At BMO, we continue to enhance our third-party risk management practices, aligning them with regulatory expectations and strengthening
operational resilience across the supply chain.
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Geopolitical Risk and Escalating Trade Disputes
The Russia-Ukraine conflict has had a significant global impact, including high energy prices and the erosion of business confidence. The financial,
energy and technology sanctions imposed on Russia by Ukraine’s allies have also aggravated shortages, particularly the supply of energy, across the
global economy. This could result in a long-term political, economic and military standoff between Western countries and Russia.
Canadian and U.S. relations with China remain fragile. Taiwan continues to be a volatile issue between the United States and China, as China
is committed to unification. A U.S. commitment to expanding trade ties with Taiwan may further increase the tension. In addition, the strategic
competition between the two countries is driving greater global fragmentation, as both seek to reinforce their autonomy, limit any vulnerabilities and
insulate their technology sectors. This could adversely affect business investment, and could prove especially problematic for commodity-producing
countries such as Canada that rely on a large export market. Recent Canada-China disputes over political interference are further evidence of this
antagonism. More recently, diplomatic relations between Canada and India have frayed, threatening to disrupt trade flows and tourism between the
two countries and limit the number of international students applying to study in Canada. The Middle East crisis has raised tensions significantly in the
region, and the risk of potential for escalation could drive up energy prices, unsettle financial markets and slow global growth even further, which
would have a direct impact on our customers.
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 we monitor continually, in addition to contingency plans that are intended to
prepare BMO for any possible adverse developments. Our portfolios, business plans and capital adequacy are stress tested against severely adverse
scenarios arising from trade-related shocks, and we build 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 audited
annual consolidated financial statements.
Climate Change
BMO is exposed to risks related to environmental conditions and extreme weather events 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 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 rising 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, our strategic priority is to be our clients’ lead partner in the
transition to a net zero world, delivering on our commitments to sustainable financing and responsible investing, supported by the BMO Climate
Institute 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.
BMO Financial Group 206th Annual Report 2023 79
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Canadian Housing Market and Consumer Leverage
The level of household debt in Canada is high, making the economy vulnerable to economic shocks. The housing market rebounded after the Bank of
Canada paused interest rate hikes in early 2023, which together with elevated inflation and a pickup in economic activity, prompted the Canadian
central bank to raise rates twice over the summer. While the Bank of Canada may refrain from raising rates further, the housing market recovery will
likely be held back by the persistent lack of affordability, notably in Ontario and British Columbia. However, high rates of immigration should provide
underlying support to housing market activity and prices.
Housing affordability remains challenging, 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. Inflation and higher interest rates are putting a strain on
household budgets despite historically low unemployment rates, which is reducing overall household purchasing power. Further increases in interest
rates could add more stress to the financial situation of some households as their fixed payment variable-rate mortgage or fixed-rate mortgage is
renewed. To address this risk, BMO has proactively reached out to customers, directly and through our website, to inform them of the potential
impact of higher interest rates and provide options for increasing their scheduled payments before renewal.
A decline 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. Credit losses may be mitigated by relatively low
unemployment and rising wages, which are expected to support consumer spending capacity in the face of high inflation.
Inflation
The inflation rate has begun to moderate after reaching four-decade highs in 2022, amid lower commodity prices and improved global supply chains.
However, it is not expected to return to the 2% target of central banks until 2025. Elevated inflation is having an impact on 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 monitor
inflationary pressures in North America closely and assess 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.
Technological Innovation and Competition
Emerging technologies continue to evolve rapidly, creating opportunities to drive revenue growth and operating efficiencies in the financial sector.
We are committed to the prudent and responsible adoption of emerging new technologies in order to have a competitive advantage and meet our
customers’ expectations, as we deliver personalized on-demand banking and new digital products and services. In alignment with BMO’s Digital First
strategy, we are continuing to invest in risk management technology that can also enhance the customer experience, streamline processes and
reduce complexity. We continue to monitor the evolving external environment to identify emerging technologies, practices and regulations in the
financial services industry. Our emerging technologies risk management framework is now a component of Technology Risk Management, supporting
prudent and responsible innovation and adoption. We are also developing and deploying new talent strategies to attract and retain employees with
the skills essential to maintaining BMO’s global competitive position.
Other Factors That May Affect Future Results
Fiscal and Monetary Policies and Other Economic Conditions in the Countries in which BMO Conducts Business
Fiscal and monetary policies and other economic conditions prevailing in Canada, the United States and other jurisdictions in which we do business
may impact profitability and heighten economic uncertainty in specific businesses and markets, which may in turn affect our customers and
counterparties, reduce profitability and contribute to a greater risk of default. Higher levels of business debt following the pandemic may give rise
to 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, as well as the capital markets that we access.
Fluctuations in the value of the Canadian dollar 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 investments in operations outside of Canada 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 for further discussion of these risks. The value
of the Canadian dollar relative to the U.S. dollar will also affect the contribution of U.S. operations to Canadian-dollar profitability.
Hedging positions may be taken to manage interest rate exposures and 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. These may lead to further increases in regulatory capital or liquidity 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 the
laws and regulations enacted by a range of national regulatory authorities may offer 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.
80 BMO Financial Group 206th Annual Report 2023
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Following our acquisition of Bank of the West, our subsidiary, BMO Financial Corp. (BFC), as a U.S. bank intermediate holding company, has
transitioned from a Category IV to a Category III institution under the Enhanced Prudential Standards issued by the Federal Reserve Board. This change
will require BFC to meet certain heightened regulatory standards. Additional information regarding regulatory requirements that now apply to BFC is
set out in the Enterprise-Wide Capital Management section.
Failure to comply with applicable legal and regulatory requirements and expectations could result in legal proceedings, financial losses,
regulatory sanctions and fines, enforcement actions, criminal convictions and penalties, restrictions on or an inability to execute certain 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 Organisation for Economic Co-operation and Development (OECD) to increase taxes, broaden the tax base globally and improve
tax-related reporting. For example, the Canadian government has released proposed legislation to adopt the OECD/G20 Inclusive Framework on Base
Erosion and Profit Shifting two-pillar plan (Pillar 2) for international tax reform, which will levy a 15% minimum tax on operations globally. For further
discussion, refer to the Regulatory Developments – New Canadian Tax Measures section.
Changes to Business Portfolio
On occasion, BMO may acquire companies, businesses and assets as part of its overall business strategy. We conduct thorough due diligence before
completing these acquisitions. However, some acquisitions, including Bank of the West, may not perform in accordance with our financial or strategic
objectives or expectations. We may be subject to regulatory and shareholder approvals to successfully complete an acquisition, and it may not be
possible to establish 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
anticipated 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 may in turn lead
to delays in attaining 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 experience difficulty in finding buyers or devising 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 favourable
than anticipated or lead to adverse operational or financial impacts, or greater disruption than expected, and the impact of the divestiture on revenue
growth may be greater 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, Judgments and Accounting Standards
BMO prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Changes that the International
Accounting Standards Board makes from time to time may materially affect the way we record and report financial results. Future changes in accounting
policies are discussed in the Future Changes in Accounting Policies section, as well as in Note 1 of the audited annual 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.
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.
BMO Financial Group 206th Annual Report 2023 81
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 our 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, and informs our efforts to identify, assess, manage (which includes mitigation), monitor and report on
our exposure to material risks. The ERMF is driven 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 and
provide for the direct management of each individual risk type, as well as the management of risk on an integrated basis.
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Enterprise Risk Management Framework
Diversify. Limit Tail
Risk
Optimize Risk
Return
Understand and
Manage
Protect our
Reputation
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
Life Cycle
IDENTIFY
ASSESS
MANAGE
MONITOR
REPORT
Risk
Taxonomy
Credit &
Counterparty
Risk
Market
Risk
Liquidity &
Funding Risk
Insurance
Risk
Operational
Non-Financial
Risk
Legal &
Regulatory
Risk
Reputation
Risk
Environmental
& 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
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 policies approved by our Board of Directors govern our approach to the management of material risks, and oversight is exercised at every
level of the enterprise through a hierarchy of committees and individual responsibilities, as outlined in the following diagram. The Board of Directors
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 lines of business and other operations. The Board also has overall responsibility for oversight of 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 on, 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 of Directors, in order to exercise oversight and guide
risk-taking activities.
82 BMO Financial Group 206th Annual Report 2023
Board and Senior Management Oversight (1)
Board of Directors
Risk Review Committee
(RRC)
Audit and Conduct Review
Committee (ACRC)
Enterprise Capital
Management
Committee (ECMC) (2)
Risk Management
Committee (RMC) (3)
Reputation Risk Management
Committee (RRMC) (4)
Enterprise Regulatory
Committee (ERC) (5)
Capital
Management
Committee
Balance Sheet
Committee (6)
Operational
Risk
Committee
Model Risk
Management
Committee
Board/Board
Committees
Management
Committees
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(1) Reporting relationships shown in dotted lines, sub-committees shown as solid lines.
(2) Co-chaired by the Chief Financial Officer and Chief Risk Officer.
(3) Chaired by the Chief Risk Officer.
(4) Chaired by the General Counsel.
(5) Co-chaired by the General Counsel and Chief Risk Officer.
(6) The Balance Sheet Committee (BSC) is a sub-committee of the Asset and Liability Management Committee (ALCO) and reports to RMC on matters related to Structural Market Risk and
Liquidity and Funding Risk.
In addition to the oversight exercised by the Board of Directors and senior management, effective governance of the bank’s risks is overseen by
management committees and supported by the three-lines-of-defence operating model, which addresses risks across the operating groups and
Corporate Services.
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 of 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 overseeing a strong risk culture; overseeing the
identification and management of BMO’s risks; monitoring
adherence to risk management corporate policies and compliance
with risk-related regulatory requirements; and evaluating the
effectiveness of the Chief Risk Officer (CRO), in conjunction with
the Human Resources Committee, including input into succession
planning for the CRO. The ERMF is reviewed on a regular basis by
the RRC and guides risk-taking activities and sets out the bank’s
approach to risk management.
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 and sustainability
reporting on environmental, social and governance (ESG) matters;
the effectiveness of BMO’s internal controls; the internal audit
function; 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; standards of business conduct and ethics;
cyber security; and consumer protection measures and complaints.
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 ERMF
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
exposures and balance sheet impacts that may arise from
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 on, 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.
BMO Financial Group 206th Annual Report 2023 83
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Appetite Framework
BMO’s Risk Appetite Framework consists of a Risk Appetite Statement and the responsibilities of senior management and the Board of Directors,
and is supported by corporate policies, standards and guidelines, including the related risk limits, concentration levels and controls defined therein.
Risk appetite defines the level and type 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
actual performance 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, Corporate Services, 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 define our approach to managing
risk across the enterprise and comprise our Risk Appetite Statement.
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‰ 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.
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 Non-Financial Risk – key metrics for measuring operational and other non-financial risks that may have financial consequences.
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 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 risk-related 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 frameworks 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 serve as 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, performs
effective challenge and provides independent assessment of risks and risk management practices, including transaction, product and portfolio risk
84 BMO Financial Group 206th Annual Report 2023
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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 on 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
Our Risk Taxonomy categorizes the key risks to which BMO is exposed and provides an analytical framework for 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 to support effective risk management practices as part of the overall ERMF. Failure in managing these risks, or in controlling
our exposures to them, could have material financial consequences for BMO.
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 significant or
heightened reputation risk are reviewed by the Reputation Risk Management Committee.
Investment initiatives – documentation of risk assessments is formalized through the investment assessment and 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 management in Corporate Services, as well as by other senior management committees.
Risk Monitoring and Reporting
Risk-Based Capital Assessment
Two measures of risk-based capital are used by BMO: economic capital and regulatory capital. Both are aggregate measures of the risk that 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 and future 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.
BMO Financial Group 206th Annual Report 2023 85
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
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,
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including the Enterprise Stress Testing Committee.
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 organizational culture. We are committed 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
affirms that 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 those concerns 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.
86 BMO Financial Group 206th Annual Report 2023
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Credit and Counterparty Risk
Credit and Counterparty Risk is the potential for financial 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 risks we face. Effective management of credit and counterparty risk is integral to our success, since failure to do so 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 on regularly. The Risk Review Committee (RRC) has oversight of the management of all material risks that BMO
faces, including the Credit Risk Management Framework. The framework incorporates governing principles that are defined in a series of corporate
policies and standards and are given effect 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 and counterparty 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 and 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 a 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 formal policies in place that outline the
framework for managing such accounts, as well as specialized groups that manage them. We strive to identify borrowers facing financial difficulty
early, and every effort is made to return such accounts to an acceptable level of risk through the application of good business judgment and the
implementation of sound and constructive workout solutions.
All credit risk exposures are subject to regular monitoring. Performing corporate and commercial accounts are reviewed on a regular basis,
generally 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 rises 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 of Directors 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 the 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, limits, risk management 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 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 87
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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 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), the availability of the collateral for re-pledging by the recipient and the manner in which interest
is to be calculated.
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 an original
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 original 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 segments, 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 credit exposure at default as at October 31, 2023 was to
individual consumers, comprising $344,912 million ($290,896 million as at October 31, 2022).
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 2023 audited annual consolidated financial statements.
88 BMO Financial Group 206th Annual Report 2023
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 the loss that BMO is expected to incur 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 (FIRB) and Advanced Internal Ratings Based (AIRB). BMO primarily uses the Internal Ratings Based
(IRB) Approach, which includes both AIRB and FIRB, to determine credit risk-weighted assets (RWA) in its portfolios, including portfolios of the bank’s
subsidiary BMO Financial Corp. Under the Basel III Reform requirement, it is mandatory to apply FIRB to a subset of IRB exposures where LGD and EAD
are based on regulatory prescribed values. Refer to the Supplementary Regulatory Capital Information disclosure for details regarding the total
exposure (measured as EAD) of Retail and Wholesale portfolios under the IRB Approach to determining regulatory capital. The remaining exposures
reflect waivers and exemptions to the IRB 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. 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, 2023 and 2022, based on the Basel III classifications, are as follows:
(Canadian $ in millions)
Drawn (3) (7)
Commitments
(undrawn) (3) (8)
Other off-balance
sheet items (3) (9)
OTC derivatives (4) (10)
Repo-style
transactions (4) (5) (11)
Total (1)
2023
2022
2023
2022
281,087
233,450
63,812
57,446
95,433 112,185
186,542
32,515
49,639
23,890
52,437
18,037
3,823
8,781
50,936
219,809
33,141
61,766
27,858
56,649
20,117
3,364
11,224
62,636
18,690
2,551
16,059
11,843
4,621
13,552
7,618
2,889
8,767
18,132
34,216
1,869
17,522
12,911
4,890
17,113
7,206
4,440
12,885
18,111
2023
13
7,201
1,575
1,915
971
441
3,172
611
788
4,547
4,009
2022
–
8,036
434
2,050
1,238
549
3,169
775
1,341
4,323
5,287
2023
2022
2023
2022
2023
2022
–
–
–
–
344,912
290,896
19,307
8,193
807
224
129
696
167
1,444
1,850
1,634
16,467
8,063
1,643
459
248
695
336
6,066
2,087
1,649
16,177
5,870
–
–
–
–
–
–
–
–
18,197
9,287
–
–
–
–
–
–
–
–
156,808
237,998
51,922
74,804
33,049
74,069
28,513
8,485
26,388
86,411
189,101
206,195
53,730
64,247
29,577
73,414
26,354
15,670
28,076
75,983
Individual
Financial
institutions
Governments
Manufacturing
Real estate
Retail trade
Service industries
Wholesale trade
Oil and gas
Utilities
Others (2)
Total exposure at
default (6)
873,084
772,235
168,534
188,609
25,243
27,202
34,451
37,713
22,047
27,484
1,123,359 1,053,243
Includes remaining industries that individually comprise less than 2% of total exposures.
(1) Credit exposure excluding equity, securitization and other assets, such as non-significant investments, goodwill, deferred tax assets and intangibles.
(2)
(3) Represents gross credit exposures without accounting for collateral.
(4) Credit exposure at default is inclusive of collateral.
(5) Repo-style transactions include repos, reverse repos and securities lending transactions, which represent both asset and liability exposures. The impact of collateral on the credit exposure for
repo-style transactions is $228,691 million ($215,806 million in 2022).
(6) Excludes exposures arising from derivative and repo-style transactions that are cleared through a clearing house or a central counterparty totalling $9,025 million ($13,698 million in 2022).
(7) Drawn exposures include loans, acceptances, deposits with regulated financial institutions and certain securities.
(8) Undrawn commitments cover all unutilized authorizations associated with the drawn exposures noted above, including any authorizations that are unconditionally cancellable. EAD for undrawn
commitments is model-generated, based on internal empirical data.
(9) Other off-balance sheet exposures include items such as guarantees, standby letters of credit and documentary credits.
(10) Over-the-counter (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.
(11) EAD for repo-style transactions is the calculated exposure, net of collateral.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Risk Rating Systems
BMO’s risk rating systems are designed to assess and measure the risk of 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
processes 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 89
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 amounts 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
developed 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 relative 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 when
events trigger a review, such as an external rating change or a 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 an 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.
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
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
90 BMO Financial Group 206th Annual Report 2023
Credit Quality Information
Portfolio Review
Total enterprise-wide outstanding credit risk exposures were $1,123.4 billion as at October 31, 2023, with $537.4 billion recorded in Canada, $539.2 billion
in the United States and $46.8 billion in other jurisdictions. This represented an increase of $70.2 billion or 7% from the prior year.
BMO’s loan book continues to be well-diversified by industry and geographic region. Gross loans and acceptances increased $101.2 billion or 18%
from the prior year to $668.4 billion as at October 31, 2023. The geographic mix of BMO’s Canadian and U.S. portfolios represented 55.9% and 42.4%
of total loans, respectively, compared with 62.6% and 35.4% in the prior year. The loan portfolio is well-diversified, with the consumer loan portfolio
representing 43.9% of the total portfolio, a slight increase from 43.1% in the prior year, and business and government loans representing 56.1% of
the total portfolio, a slight decrease from 56.9% in the prior year.
Canada and Other Countries
U.S.
10%
31%
59%
16%
22%
62%
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
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Commercial Real Estate Lending
Commercial real estate (CRE) lending refers to loans made for the purpose of financing buildings or land intended to generate a profit, derived either
from the sale of property or from rental income. CRE primarily refers to two distinct types of real estate businesses: income-producing real estate
(office, industrial and retail space, and multi-family residential buildings with more than four dwelling units), including the construction of these
assets; and development of land and construction of properties for sale (subdivisions, condominiums and other types of property). Our primary focus
is on owners of income-producing commercial real estate portfolios with stable operating performance, diversified portfolios, modest leverage and
continued access to capital, including those legally structured as real estate investment trusts (REITs), real estate investment funds and real estate
operating companies (REOCs), as well as pension funds and other established owners of income-producing commercial real estate.
Our CRE portfolio was $69.8 billion as at October 31, 2023 ($54.5 billion as at October 31, 2022) and accounted for 10% of total gross loans and
acceptances (10% as at October 31, 2022). The portfolio is well-managed, with consistent and conservative underwriting standards, strict lending
criteria and structural resilience, resulting in strong credit quality. As at October 31, 2023, 57% of CRE loans are investment grade (69% as at
October 31, 2022) and 41% are sub-investment grade (30% as at October 31, 2022), with impaired loans representing 1% of the portfolio (0% as
at October 31, 2022).
Our CRE portfolio is well-diversified across businesses, property types and geographic regions. Given the post-pandemic prevalence of remote
and hybrid work arrangements, office space is one of the higher-risk portfolio segments within commercial real estate and represents 1% of our total
gross loans and acceptances. In addition to monitoring the limits we set for the CRE portfolio, we apply lower limits on each segment, including office
space, which helps us mitigate any exposure to related risks.
Real Estate Secured Lending
Real estate secured lending comprises residential mortgages and home equity lines of credit (HELOC) we extend to individuals, secured by residential
real estate, which is defined as residential structures with one to four dwelling units. The increases in prime interest rates during fiscal 2022 and 2023
impacted variable-rate mortgages, resulting in extended and negative amortization. These prime rate increases had no immediate impact on fixed-
rate mortgages, which are fixed at one rate until renewal.
We regularly perform stress testing on our residential mortgage and HELOC portfolios to assess 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.
The following tables provide a breakdown of residential mortgages and HELOCs by geographic region, as well as insured and uninsured balances.
Residential mortgages and HELOCs are secured by residential properties.
Canadian Real Estate Secured Lending
(Canadian $ in millions)
As at October 31, 2023
As at October 31, 2022
Residential
mortgages
150,575
139,394
Amortizing
home equity
lines of credit
Total amortizing
real estate
secured lending
Non-amortizing
real estate
secured lending
Total Canadian
real estate
secured lending
35,741
34,083
186,316
173,477
12,982
13,219
199,298
186,696
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 91
MANAGEMENT’S DISCUSSION AND ANALYSIS
Residential Mortgages (1)
As at October 31, 2023
As at October 31, 2022
(Canadian $ in millions, except as noted)
Outstanding balances
Region (2)
Atlantic
Quebec
Ontario
Alberta
British Columbia
All other Canada
Total Canada
United States
Total
A
&
D
M
Home Equity Lines of Credit (1)
Insured (3) Uninsured
Total % of total
3,347
9,242
14,643
9,885
4,746
2,264
3,452
12,903
56,798
7,302
24,391
1,602
6,799
22,145
71,441
17,187
29,137
3,866
3.8%
12.5%
40.3%
9.7%
16.5%
2.2%
44,127 106,448 150,575
85.0%
68
26,607
26,675
15.0%
44,195 133,055 177,250
100%
For the 12 months
ended
Average LTV
uninsured (4)
71%
71%
70%
73%
67%
73%
70%
77%
71%
Outstanding balances
Insured (3) Uninsured
Total % of total
3,197
8,892
14,411
9,552
4,680
2,179
3,255
12,156
49,664
6,854
22,919
1,635
6,452
21,048
64,075
16,406
27,599
3,814
4.3%
14.2%
43%
11%
18.5%
2.6%
42,911
96,483 139,394
93.6%
16
9,470
9,486
6.4%
42,927 105,953 148,880
100%
For the 12 months
ended
Average LTV
uninsured (4)
72%
72%
70%
74%
68%
73%
70%
72%
71%
(Canadian $ in millions, except as noted)
Portfolio
For the 12 months
ended
Portfolio
For the 12 months
ended
As at October 31, 2023
As at October 31, 2022
Region (2)
Atlantic
Quebec
Ontario
Alberta
British Columbia
All other Canada
Total Canada
United States
Total
Outstanding
balances
% Authorizations
%
Average LTV (4)
Outstanding
balances
% Authorizations
%
Average LTV (4)
996
9,149
24,601
3,203
10,029
745
1.8%
16.6%
44.6%
5.8%
18.2%
1.3%
1,922
18,071
45,351
6,970
18,899
1,474
1.7%
15.9%
40.0%
6.2%
16.7%
1.3%
48,723
88.3%
92,687
81.8%
6,471
11.7%
20,615
18.2%
55,194
100%
113,302
100%
60%
67%
59%
62%
59%
66%
61%
60%
61%
967
1.9%
8,897 17.6%
23,647 46.8%
6.4%
3,232
9,826 19.5%
1.5%
733
1,835
17,085
43,063
6,835
17,953
1,443
1.9%
17.4%
43.9%
6.9%
18.3%
1.5%
47,302 93.7%
88,214
89.9%
3,196
6.3%
9,902
10.1%
50,498 100%
98,116
100%
64%
71%
63%
66%
61%
67%
64%
64%
64%
(1) Reporting methodologies are in accordance with OSFI’s Residential Mortgage Underwriting Practices and Procedures (B-20) Guideline.
(2) Region is based upon address of the property mortgaged.
(3) Portfolio insured mortgages are defined as mortgages that are insured individually or in bulk through an eligible insurer (i.e., CMHC, Sagen MI Canada™).
(4) Loan-to-value (LTV) is based on the value of the property at mortgage origination, as well as outstanding balances for mortgages and authorized amounts for HELOCs.
Residential Mortgages by Remaining Term of Amortization (1) (2)
Amortization period
As at October 31, 2023
< 5 years
6-10 years
11-15 years
16-20 years
21-25 years
26-30 years
31-35 years
> 35 years
Canada (3)
United States (4)
Total
As at October 31, 2022
Canada (3)
United States (4)
Total
0.7%
0.5%
0.7%
2.5%
2.2%
2.5%
6.1%
5.3%
5.9%
13.6%
2.8%
12.0%
32.1%
10.4%
28.8%
18.0%
78.6%
27.1%
2.1%
0.1%
1.8%
24.9%
0.1%
21.2%
Amortization period
< 5 years
6-10 years
11-15 years
16-20 years
21-25 years
26-30 years
31-35 years
> 35 years
0.8%
0.7%
0.8%
2.6%
4.9%
2.7%
5.7%
9.9%
6.0%
13.5%
4.9%
13.0%
32.3%
14.3%
31.1%
13.8%
65.0%
17.1%
3.4%
0.1%
3.2%
27.9%
0.2%
26.1%
(1) In Canada, the remaining amortization is based on the current balance, interest rate, customer payment amount and payment frequency. Contractual payment schedule is used in the United States.
(2) Reporting methodologies are in accordance with OSFI’s B-20 guideline.
(3) As a result of increases in interest rates, the portfolio included $29.9 billion ($22.3 billion as at October 31, 2022) of variable-rate mortgages in negative amortization, with all of the contractual
payments currently being applied to interest, and the portion of interest due that is not met by each payment is added to the principal.
(4) A large proportion of U.S.-based mortgages in the longer-amortization band are primarily associated with modification programs for troubled borrowers and regulator-initiated mortgage refinancing
programs.
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 $26.7 billion outstanding
as at October 31, 2023 (2% and $25.1 billion, respectively, in 2022). Of this amount, 25% of leveraged finance loans, with $6.8 billion outstanding as
at October 31, 2023 (25% and $6.3 billion, respectively, in 2022), were well-secured by high-quality assets. The remainder of the portfolio is well-
diversified across sectors and includes loans to borrowers where we have relatively small hold sizes. This portfolio is closely managed, and in some
cases has risk mitigation and structural elements that lower the level of credit risk. As at October 31, 2023, $497 million or 2% of all leveraged
finance loans were classified as impaired ($348 million or 1% in 2022). In addition to this leveraged finance lending business, we also enter into
underwriting activities involving leveraged borrowers, which are managed through the market risk framework.
92 BMO Financial Group 206th Annual Report 2023
M
D
&
A
Provision for Credit Losses
Total provision for credit losses was $2,178 million on a reported basis and $1,473 million on an adjusted basis, compared with $313 million on both
a reported and adjusted basis in the prior year, due to downward credit migration despite an improvement in the macroeconomic outlook, as well as
higher losses on impaired loans. Detailed discussions of PCL, including historical PCL trends, are provided in Table 12 in the Supplemental Information
and in Note 4 of the audited annual consolidated financial statements.
Gross Impaired Loans
Total gross impaired loans and acceptances (GIL) were $3,960 million, an increase from $1,991 million in the prior year. The increase in impaired
loans was predominantly in business and government lending, with the largest increases in the service, commercial real estate and retail trade
industries. GIL as a percentage of gross loans and acceptances was 0.59% in 2023, which increased from an historically low level of 0.35% in the prior
year.
Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the year increased to $4,047 million
from $1,635 million in 2022, reflecting higher impaired loan formations in both the wholesale and the consumer portfolios, including the purchased
credit impaired loans related to the acquisition of Bank of the West. On a geographic basis, Canada accounted for 42% of total formations in 2023,
compared with 71% in 2022.
Detailed breakdowns of impaired loans by geographic region and industry can be found in Table 8 in the Supplemental Information and in
Note 4 of the audited annual consolidated financial statements.
Changes in Gross Impaired Loans and Acceptances
(Canadian $ in millions, except as noted)
For the year ended October 31
GIL, beginning of year
Classified as impaired during the year
Purchased credit 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
2023
1,991
4,047
415
(545)
(1,214)
(753)
–
(24)
43
3,960
0.59
2022
2,169
1,635
–
(659)
(819)
(363)
–
(54)
82
1,991
0.35
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 for credit losses on impaired loans and an allowance for credit losses on
performing loans, in accordance with International Financial Reporting Standards (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 an allowance for loss 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 that involves 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 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.
Allowances in the second quarter of 2023 included an initial provision of $705 million on the purchased Bank of the West performing loan portfolio.
We maintain an allowance for credit losses (ACL) at a level that we consider appropriate to absorb credit-related losses. As at October 31, 2023,
the total ACL was $4,267 million, an increase of $1,269 million from the prior year, reflecting the initial provision of $705 million on the Bank of the
West performing loans and higher allowances on both performing and impaired loans. The allowance on impaired loans was $695 million as at
October 31, 2023, and the allowance on performing loans was $3,572 million. These amounts included an allowance on impaired loans of $11 million
and an allowance on performing loans of $449 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 $138 million from $557 million in the prior year. The
allowance on performing loans increased $1,131 million to $3,572 million from $2,441 million in the prior year, primarily driven by the initial
provision on the Bank of the West performing loans, portfolio credit migration, uncertainty in credit conditions, growth in certain portfolios and
movements in foreign exchange rates, partially offset by an improvement in the macroeconomic outlook.
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 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 93
MANAGEMENT’S DISCUSSION AND ANALYSIS
International Exposures
BMO’s geographic exposures to regions outside of Canada and the United States are subject to a risk management framework that incorporates
assessments of economic and political risks in each region or country. These exposures are also managed within limits based on product, entity and
country of ultimate risk. Our total net exposure to these regions is set out in the table below.
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
(Canadian $ in millions)
Funded lending and commitments
Securities
Repo-style transactions and derivatives
As at October 31, 2023
Region
Bank Corporate Sovereign
Total
Bank Corporate Sovereign
Total
Bank Corporate Sovereign
Total
A
&
D
M
Europe (excluding
United Kingdom)
United Kingdom
Latin America
Asia-Pacific
Middle East and Africa
Other (1)
641
21
2,978
3,874
782
–
2,978
4,204
6,922
3,173
437
5
–
370
–
148
105
51
3,619
4,595
9,900
7,195
1,324
56
495
102
1
782
–
6
214
100
118
107
4
–
6,423
770
–
3,641
28
3,681
7,132
972
119
4,530
32
3,687
Total
8,296 17,719
674 26,689
1,386
543 14,543 16,472
(1) Primarily exposure to supranational entities.
377
105
13
229
12
–
736
As at
October 31, 2022
Total net
exposure
11,817
7,095
9,285
13,706
2,303
5,902
50,108
Total net
exposure
11,281
6,135
10,270
12,289
2,471
5,575
124
457
238
270
28
–
29
6
–
65
530
568
251
564
1,075 1,115
1,832 1,832
1,117
3,007 4,860
48,021
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 derivative contracts, we acquire a membership
in the CCP and, in addition to providing collateral to protect the CCP against risk of loss 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
94 BMO Financial Group 206th Annual Report 2023
Non-centrally cleared
Centrally cleared
Total
2023
2022
2023
2022
2023
2022
413,856
5,439
130,000
118,524
420,700
3,929
98,113
87,941
9,197,174
127,214
–
–
5,534,061
18,468
–
–
9,611,030
132,653
130,000
118,524
5,954,761
22,397
98,113
87,941
667,819
610,683
9,324,388
5,552,529
9,992,207
6,163,212
95,932
685,022
555,031
51,143
55,370
119,976
582,092
469,503
72,733
74,041
1,442,498
1,318,345
18,573
5,319
4,218
28,110
24,487
5,686
5,011
35,184
–
–
9,335
–
–
9,335
1
–
–
1
116,011
105,280
129
–
–
12,270
–
–
12,270
95,932
685,022
564,366
51,143
55,370
119,976
582,092
481,773
72,733
74,041
1,451,833
1,330,615
38
–
–
38
–
18,574
5,319
4,218
28,111
24,525
5,686
5,011
35,222
116,140
105,280
1,705
1,080
2,785
1,496
962
2,458
15,222
8,930
24,152
15,275
10,137
25,412
16,927
10,010
26,937
16,771
11,099
27,870
2,257,223
2,071,950
9,358,005
5,590,249
11,615,228
7,662,199
M
D
&
A
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 can provide effective identification, measurement, reporting and control of market risk exposures.
Trading and Underwriting Market Risk Governance
Our market risk-taking activities are subject to an extensive governance framework. The Risk Review Committee (RRC) oversees 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 assesses significant market risk exposures and positions, and exercises ongoing
senior management oversight of our risk-taking activities. Both of these committees are kept apprised of specific market risk exposures and any
developments that could expose BMO to unusual, unexpected or unquantified risks associated with those market risk 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, rigorous 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 include Value-at-Risk and stress tests, as
well as sensitivity to market risk factors, position concentrations and trading revenues. Results are reported to the appropriate line of business, the
RMC and RRC on a regular basis.
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.
Stress Tests are used to determine the potential impact of low-frequency, high-severity events on the trading and underwriting portfolios.
The portfolios are measured daily against a variety of hypothetical and historical event scenarios. Scenarios are continuously refined to reflect
the latest market conditions and portfolio risk exposures.
Risk models support the measurement of our exposure to the risk of adverse outcomes for income, retained earnings and capital. 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. The data and correlations that underpin our models are updated frequently, so that risk metrics reflect current
conditions.
Stress tests capture a wide range of hypothetical and historical events, including the 2008 global financial crisis and the COVID-19 pandemic,
along with portfolio-specific impacts and asset class scenarios. In addition, a range of assumptions, including the duration of the scenario and
management actions, are incorporated in the stress tests to better reflect the anticipated impact on the trading and underwriting business.
Our VaR model is back-tested daily, assuming there are no changes to the previous day’s closing position and isolating the effects of each day’s
price movements against those closing positions. 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.
Although it is a useful indicator of risk, VaR has limitations, as with any model-driven metric. These include the assumption that all portfolio
positions can be liquidated within the assumed one-day holding period, which may not be the case under illiquid market conditions. Market liquidity
horizons are reviewed for suitability and updated where appropriate for relevant risk metrics, such as stress testing. Further limitations of the VaR
metric include the assumption that historical data can be used as a proxy to forecast future market events. In addition, VaR calculations are based on
portfolio positions at the close of business and do not reflect the impact of intra-day trading activity.
VaR and stress testing continue to have a significant role in managing portfolio risks, although the determination of trading market risk
regulatory capital will reflect Basel III Reforms starting in 2024. However, these metrics should not be viewed as definitive predictors of the maximum
amount of losses that could be experienced in the trading and underwriting portfolios in any one day, as their results are based on models and
estimates and are subject to confidence levels, and the estimates could be exceeded under unforeseen market conditions.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 95
MANAGEMENT’S DISCUSSION AND ANALYSIS
Monitoring and Control of Trading and Underwriting Market Risk
Limits are applied to VaR, stress testing and other risk metrics, and these limits are subject to regular monitoring and reporting, with breaches escalated
to the appropriate level of management for review. 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 committees of our Board of Directors.
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
Average Total Trading VaR increased year-over-year due to portfolio changes and higher market volatility, primarily in our fixed income portfolio.
Average diversification levels increased and provided a significant offset to the rise in average interest rate VaR and debt-specific risk VaR.
Total Trading Value at Risk (VaR) Summary (1)
A
&
D
M
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 (2)
Debt-specific risk
Diversification
Total Trading VaR
2023
Year-end
Average
4.0
13.6
1.7
27.3
11.0
(25.0)
2.4
14.0
2.9
27.4
10.9
(25.5)
32.6
32.1
High
6.1
24.5
5.6
41.5
15.9
nm
47.9
Low
1.2
8.5
1.3
16.0
7.5
nm
21.2
2022
Year-end
Average
1.6
14.1
2.3
22.1
10.2
(15.0)
35.3
3.1
13.1
1.8
18.0
5.7
(15.1)
26.6
High
5.5
18.4
5.2
26.5
10.5
nm
38.2
Low
1.0
8.5
0.5
12.4
1.8
nm
18.1
(1) One-day measure using a 99% confidence interval. Gains are presented in brackets and losses are presented as positive numbers.
(2) 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 2023,
net trading losses occurred on five days, with none of these losses exceeding Total Trading VaR. The losses on these days were attributable to lower
than usual client activity, combined with market volatility, which had a negative impact on some of our positions.
Trading Net Revenues versus Value at Risk
November 2, 2022 to October 31, 2023 (pre-tax basis, Canadian $ in millions)
80
60
40
20
0
(20)
(40)
(60)
2
2
-
v
o
N
-
2
2
2
-
v
o
N
-
0
1
2
2
-
v
o
N
-
8
1
2
2
-
v
o
N
-
8
2
2
2
-
c
e
D
-
6
2
2
-
c
e
D
-
4
1
2
2
-
c
e
D
-
2
2
3
2
-
n
a
J
-
4
3
2
-
n
a
J
-
2
1
3
2
-
n
a
J
-
4
2
3
2
-
b
e
F
-
1
3
2
-
b
e
F
-
9
3
2
-
b
e
F
-
7
1
3
2
-
b
e
F
-
8
2
3
2
-
r
a
M
-
8
3
2
-
r
a
M
-
6
1
3
2
-
r
a
M
-
4
2
3
2
-
r
p
A
-
3
3
2
-
r
p
A
-
2
1
3
2
-
r
p
A
-
0
2
3
2
-
r
p
A
-
8
2
3
2
-
y
a
M
-
8
3
2
-
y
a
M
-
6
1
3
2
-
y
a
M
-
5
2
3
2
-
n
u
J
-
2
3
2
-
n
u
J
-
2
1
3
2
-
n
u
J
-
1
2
3
2
-
n
u
J
-
9
2
3
2
-
l
u
J
-
0
1
3
2
-
l
u
J
-
8
1
3
2
-
l
u
J
-
6
2
3
2
-
g
u
A
-
3
3
2
-
g
u
A
-
4
1
3
2
-
g
u
A
-
2
2
3
2
-
g
u
A
-
0
3
3
2
-
p
e
S
-
8
3
2
-
p
e
S
-
8
1
3
2
-
p
e
S
-
6
2
3
2
-
t
c
O
-
4
3
2
-
t
c
O
-
3
1
3
2
-
t
c
O
-
3
2
3
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 2023 audited annual consolidated financial statements.
96 BMO Financial Group 206th Annual Report 2023
M
D
&
A
Frequency Distribution of Daily Net Revenues
Nov 1, 2022 to Oct 31, 2023 (Canadian $ in millions)
s
y
a
d
f
o
r
e
b
m
u
n
n
i
y
c
n
e
u
q
e
r
F
60
55
50
45
40
35
30
25
20
15
10
5
0
-8
-4
0
4
8
12
16
20
24
28
32
36
40
44
48
52
56
60
Daily net revenues (pre-tax)
Structural (Non-Trading) Market Risk
Structural market risk comprises interest rate risk arising from our banking activities (such as those involving 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 the limits approved by our Board of Directors on earnings at risk and the sensitivity
of economic value 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 related activities.
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 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 the timing of 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 limit the level of exposure to this risk.
Structural interest rate risk is measured using simulations, analyses of the sensitivity of earnings and economic value, 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 dates and timing. 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 are
inherently uncertain, 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 97
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
The sensitivity of structural interest rate earnings and economic value to an immediate parallel increase or decrease of 100 basis points in the
yield curve is disclosed in the table below.
On February 1, 2023, we closed the acquisition of Bank of the West. Prior to closing, we entered into interest rate swaps to manage the exposure
of our regulatory capital to the risk of changes in the fair value of the assets and liabilities of Bank of the West due to changes in interest rates between
the announcement and closing of the acquisition. These swaps resulted in a cumulative mark-to-market gain of $5.7 billion at closing. Any exposure to
interest rate risk in relation to these interest rate swaps was largely offset by our purchase of a portfolio of matched-duration U.S. treasuries and other
balance sheet instruments. On closing, the mark-to-market swaps were unwound and replaced with fair value accounting hedges, which in effect
crystallized an unrealized loss on the U.S. treasuries and other balance sheet instruments that will be recognized as a reduction in interest income over
their remaining life. Refer to the Enterprise-Wide Capital Management section and the Recent Acquisitions section for further discussion.
The sensitivity of structural economic value to rising interest rates primarily reflects a lower market value for fixed-rate loans. The sensitivity of
structural economic value to falling interest rates primarily reflects the impact of a higher market value for fixed-rate loans and minimum modelled
client deposit rates. The exposure of structural economic value to rising interest rates and the benefits of falling interest rates increased relative to
October 31, 2022, primarily due to a modestly shorter net duration of BMO’s position in the prior year, in advance of our acquisition of Bank of the
West. Structural earnings sensitivity quantifies the potential impact of interest rate changes on structural balance sheet pre-tax net income over the
next 12 months. The sensitivity of structural earnings to falling interest rates primarily reflects the risk of fixed-rate and floating-rate loans repricing
at lower rates and the more limited ability to reduce deposit pricing as rates fall. The benefits of rising interest rates to structural earnings primarily
reflect the positive impact of reinvesting our net equity and non-rate sensitive deposits into assets with higher-term rates. The benefits of rising
interest rates to structural earnings and exposures to falling interest rates decreased in 2023 relative to 2022, largely due to a modestly shorter net
duration of BMO’s position in the prior year, in advance of our acquisition of Bank of the West.
During 2023, both economic value sensitivity and earnings sensitivity remained within the limits established by the Board of Directors.
Structural Interest Rate Sensitivity (1)
(Pre-tax Canadian $ equivalent in millions)
Canada (2)
United States
Total
Total
Canada (2)
United States
Total
100 basis point increase
100 basis point decrease
(872.6)
750.4
(976.0) (1,848.6)
1,491.6
741.1
(990.2)
647.9
31.0
(36.2)
273.4
(289.2)
304.5
(325.4)
Total
498.9
(595.2)
Economic value sensitivity
Earnings sensitivity
October 31, 2023
October 31, 2022
October 31, 2023
October 31, 2022
A
&
D
M
(1) Losses are presented in brackets and gains are presented as positive numbers.
(2) Includes Canadian dollar and other currencies.
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
2023
2022
213,667
248,688
186,327
15,907
664,589
147,232
181,694
215,625
20,023
564,574
(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, 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. We may enter into hedging
arrangements to offset the impact of changes in interest rates and equity market values on our earnings, and we did so during the 2023 fiscal year.
The sensitivity reflects the impact of these hedging relationships. An increase of 100 basis points in interest rates would result in a decrease in
earnings before tax of $13 million as at October 31, 2023 (increase of $12 million as at July 31, 2023 and $35 million as at October 31, 2022).
A decrease of 100 basis points in interest rates would result in an increase in earnings before tax of $15 million as at October 31, 2023 (decrease
of $8 million as at July 31, 2023 and $34 million as at October 31, 2022). An increase of 10% in equity market values would result in an increase in
earnings before tax of $14 million as at October 31, 2023 ($15 million as at July 31, 2023 and $13 million as at October 31, 2022). A decrease of 10%
in equity market values would result in a decrease in earnings before tax of $11 million as at October 31, 2023 ($12 million as at July 31, 2023 and
$13 million as at October 31, 2022). 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.
BMO Insurance will adopt International Financial Reporting Standard 17, Insurance Contracts (IFRS 17) effective November 1, 2023. IFRS 17 will
change the fundamental principles used to recognize and measure insurance contracts, including life insurance contracts, reinsurance contracts held
and investment contracts with discretionary participation features. This change will impact the timing of when investment-related income emerges
and the associated market risk sensitivities, as the discount rates used in calculating the present value of insurance liabilities will no longer be based
on the assets supporting those liabilities, but rather on the features of the insurance contracts themselves. On transition, we will apply the full
retrospective approach to our creditor business and the fair value approach to all other products written prior to November 1, 2022. For further
information, refer to the Critical Accounting Estimates and Judgments – Future Changes in Accounting Policies section.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
98 BMO Financial Group 206th Annual Report 2023
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 arises from the potential 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 changes in foreign exchange rates on our capital ratios, and we did so during
the 2023 fiscal year. In addition, BMO entered into forward contracts during 2022 to mitigate the impact of changes in the Canadian dollar equivalent
of the Bank of the West purchase price between the announcement and the closing of the acquisition, which qualified for hedge accounting.
Changes in the fair value of these forward contracts of $374 million ($269 million after-tax) were accounted for as a reduction of the Canadian dollar
equivalent of the purchase price. Refer to the Enterprise-Wide Capital Management section and the Recent Acquisitions section for further discussion.
Transaction risk arises from the potential 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 2023, 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 $38 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.
M
D
&
A
As at October 31, 2023
Subject to market risk
As at October 31, 2022
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
(Canadian $ in millions)
Assets Subject to Market Risk
Cash and cash equivalents
Interest bearing deposits with banks
Securities
77,934
4,125
–
237
322,379 124,620
77,934
3,888
197,759
Securities borrowed or purchased under
115,662
–
115,662
resale agreements
Loans and acceptances (net of
allowance for credit losses)
Derivative instruments
656,478
4,412
652,066
39,976
34,004
5,972
–
–
–
–
–
–
87,466
5,734
–
142
273,262 108,303
87,466
5,592
164,959
113,194
–
113,194
551,339
3,501
547,838
48,160
45,537
2,623
–
–
–
–
Interest rate
Interest rate
Interest rate,
credit spread, equity
Interest rate
–
–
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
17,218 Interest rate
–
Customers’ liabilities under acceptances
Other assets
8,111
68,611
–
4,734
8,111
27,385
–
36,492
13,235
46,809
–
3,030
13,235
26,561
Total Assets
1,293,276 168,007
1,088,777
36,492
1,139,199 160,513
961,468
17,218
Liabilities Subject to Market Risk
Deposits
909,676
35,300
874,376
Derivative instruments
50,193
43,166
7,027
Acceptances
Securities sold but not yet purchased
Securities lent or sold under repurchase
agreements
Other liabilities
Subordinated debt
Total Liabilities
8,111
43,781
–
43,781
8,111
–
106,108
90,142
8,228
–
33
–
106,108
90,049
8,228
1,216,239 122,280
1,093,899
–
–
–
–
–
60
–
60
769,478
26,305
743,173
59,956
46,803
13,153
13,235
40,979
–
40,979
13,235
–
103,963
72,400
8,150
–
60
–
103,963
71,815
8,150
–
–
–
–
Interest rate,
foreign exchange
Interest rate,
foreign exchange
Interest rate
Interest rate
–
Interest rate
525 Interest rate
Interest rate
–
1,068,161 114,147
953,489
525
(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 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 99
MANAGEMENT’S DISCUSSION AND ANALYSIS
Insurance Risk
A
&
D
M
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 CRO, BMO Wealth Management. 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 of Directors 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.
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 a level of liquid assets and funding capacity sufficient 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 on exposures to liquidity and
funding risk across the enterprise; develops and recommends for approval the Liquidity and Funding Risk Management Framework and the related
risk appetite statement 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) provides oversight of the management of liquidity and funding risk, annually approves the applicable policies, limits and contingency plan,
and regularly reviews liquidity and funding positions.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
100 BMO Financial Group 206th Annual Report 2023
Liquidity and Funding Risk Management
BMO’s Liquidity and Funding Risk Management Framework is defined and authorized in alignment with corporate policies approved by our Board of
Directors and standards approved by management. These policies and standards set out key management principles, liquidity and funding metrics
and related limits, as well as roles and responsibilities in 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 BMO’s 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), as well as 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
intended 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 any exposure to other risks
specific to BMO.
BMO legal entities include regulated and foreign subsidiaries and branches, and as a result, movements of funds between entities in the
corporate group are subject to, among other things, the liquidity, funding and capital adequacy requirements of these entities. As such, liquidity and
funding positions are managed on both a consolidated and key legal entity basis. Liquidity and funding risk management policies and limits, 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.
M
D
&
A
BMO continued to maintain a strong liquidity position during 2023. 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 2023.
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 severe systemic and enterprise-specific stress
scenarios, and a combination thereof. 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). Stress scenarios also consider 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 potential 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 appetite 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 values recognized for different asset classes under
BMO’s risk management framework reflect management’s assessment of the liquidity values 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 for 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 60% of the supplemental liquidity pool is held at the parent bank level in assets denominated in
Canadian or U.S. dollars, and most of the remaining supplemental liquidity pool is held at our U.S. bank entity, BMO Bank N.A., in U.S.-dollar-
denominated assets. The size of the supplemental liquidity pool is integrated with our assessment of liquidity risk. In order to comply with 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 normal 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 $360.2 billion as at October 31, 2023, compared with $335.3 billion as at October 31, 2022.
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 Bank N.A., and in our broker/dealer operations. In addition to
liquid assets, we have access to the Bank of Canada’s lending assistance programs, the Federal Reserve Bank discount window in the United States,
the Bank of England’s Sterling Monetary Framework, and European Central Bank standby liquidity facilities. We do not consider central bank facilities
as a source of available liquidity when assessing the soundness of our liquidity position.
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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 101
MANAGEMENT’S DISCUSSION AND ANALYSIS
BMO’s total encumbered assets and unencumbered liquid assets are summarized in the table below. Refer to Note 24 of the audited annual
consolidated financial statements for further information on pledged assets.
Liquid Assets
(Canadian $ in millions)
Cash and cash equivalents
Deposits with other banks
Securities and securities borrowed or purchased under resale agreements
Sovereigns / Central banks / Multilateral development banks
NHA mortgage-backed securities and U.S. agency mortgage-backed
securities and collateralized mortgage obligations
Corporate and other debt
Corporate equity
A
&
D
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Total securities and securities borrowed or purchased under
resale agreements
NHA mortgage-backed securities (reported as loans at amortized cost) (3)
Total liquid assets
As at October 31, 2023
As at October 31, 2022
Bank-owned
assets
77,934
4,125
Other cash
and securities
received
Total gross
assets (1)
Encumbered
assets
Net
unencumbered
assets (2)
–
–
77,934
4,125
125
–
77,809
4,125
Net
unencumbered
assets (2)
87,379
5,734
155,249
107,854 263,103
141,176
121,927
111,940
87,244
24,783
55,103
96,119
8,875
20,368
45,151
54,051 109,154
39,390
8,683
65,501
56,729
36,468
43,653
322,379
23,983
191,148 513,527
23,983
–
254,750
4,481
258,777
19,502
428,421
191,148 619,569
259,356
360,213
39,978
33,698
39,966
225,582
16,604
335,299
(1) Gross assets include bank-owned assets and cash and securities received from third parties.
(2) Net unencumbered liquid assets are defined as total gross assets less encumbered assets.
(3) Under IFRS, National Housing Act (NHA) mortgage-backed securities that include mortgages owned by BMO as the underlying collateral are classified as loans. Unencumbered NHA mortgage-backed
securities have liquidity value and are included as liquid assets under BMO’s Liquidity and Funding 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, 2023
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
Total other assets
Total assets
(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
Total other assets
Total assets
Total gross
assets (1)
82,059
537,510
632,495
39,976
8,111
6,241
16,728
5,216
2,052
3,081
35,293
116,698
Encumbered (2)
Net unencumbered
Pledged as
collateral
Other
encumbered
Other
unencumbered (3)
Available as
collateral (4)
–
209,091
93,931
125
50,140
511
–
–
–
–
–
–
–
10,596
10,596
–
–
–
–
–
–
–
–
–
–
16,061
342,211
39,976
8,111
6,241
16,728
5,216
2,052
3,081
24,697
106,102
81,934
262,218
195,842
–
–
–
–
–
–
–
–
–
1,368,762
313,618
50,776
464,374
539,994
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
–
–
–
–
–
–
–
13,991
13,991
87
46,982
656
–
12,620
299,358
93,113
229,566
158,305
–
–
–
–
–
–
–
–
–
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
(1) Gross assets include on-balance sheet and off-balance sheet assets.
(2) Pledged as collateral refers to the portion of on-balance sheet assets and other cash and securities that is pledged through repurchase agreements, securities lending, derivative contracts, minimum
required deposits at central banks, and requirements associated with participation in clearing houses and payment systems. Other encumbered assets include assets that are restricted for legal or
other reasons, such as restricted cash and short sales.
(3) Other unencumbered assets include select liquid asset holdings that management believes are not readily available to support BMO’s liquidity requirements. These include securities of $16.1 billion
as at October 31, 2023, which include securities held at BMO’s insurance subsidiary, significant equity investments and certain investments held at BMO’s merchant banking business. Other
unencumbered assets include mortgages and loans that may be securitized to access secured funding.
(4) Loans included in available as collateral represent loans currently lodged at central banks that may 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) Includes securities, securities borrowed or purchased under resale agreements and NHA mortgage-backed securities (reported as loans at amortized cost).
102 BMO Financial Group 206th Annual Report 2023
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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 our reliance on wholesale funding. Customer deposits totalled $654.4 billion
as at October 31, 2023, increasing from $544.4 billion in 2022, primarily due to the closing of the Bank of the West acquisition in February 2023, and
underlying growth in both retail and commercial deposits.
Total secured and unsecured wholesale funding outstanding, which largely consists of negotiable marketable securities, was $269.6 billion as at
October 31, 2023, with $78.2 billion sourced as secured funding and $191.4 billion sourced as unsecured funding. Total wholesale funding outstanding
increased from $236.8 billion as at October 31, 2022, primarily due to the net issuance of wholesale funding during the year. 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 $360.2 billion as at October 31, 2023 and $335.3 billion as at October 31, 2022, that can be monetized to meet potential funding
requirements, as described in the Unencumbered Liquid Assets section above.
Wholesale Funding Maturities (1)
(Canadian $ in millions)
Deposits from banks
Certificates of deposit and commercial paper
Bearer deposit notes
Asset-backed commercial paper (ABCP)
Senior unsecured medium-term notes
Senior unsecured structured notes (2)
Secured funding
Mortgage and HELOC securitizations
Covered bonds
Other asset-backed securitizations (3)
Federal Home Loan Bank advances
Subordinated debt
Less than
1 month
4,374
12,932
426
1,562
960
135
–
–
–
693
–
1 to 3
months
1,660
27,334
167
1,931
2,156
215
585
2,330
–
–
–
As at October 31, 2023
6 to 12
months
Subtotal less
than 1 year
927
27,805
85
440
13,449
31
1,717
–
148
–
–
7,714
94,303
954
6,005
24,661
381
3,467
2,330
148
693
–
3 to 6
months
753
26,232
276
2,072
8,096
–
1,165
–
–
–
–
1 to 2
years
–
69
–
–
16,131
156
3,405
3,467
176
13,265
–
Over
2 years
–
–
–
–
29,957
8,878
11,044
22,615
7,337
4,190
8,227
Total
7,714
94,372
954
6,005
70,749
9,415
17,916
28,412
7,661
18,148
8,227
As at October 31, 2022
Total
9,550
80,696
1,661
–
65,234
7,950
20,385
29,047
6,631
7,494
8,150
Total
Of which:
Secured
Unsecured
Total (4)
21,082
36,378
38,594
44,602
140,656
36,669
92,248
269,573
236,798
2,255
18,827
4,846
31,532
3,237
35,357
2,305
42,297
12,643
128,013
20,313
16,356
45,186
47,062
78,142
191,431
21,082
36,378
38,594
44,602
140,656
36,669
92,248
269,573
63,557
173,241
236,798
(1) Wholesale unsecured funding primarily includes funding raised through the issuance of negotiable marketable securities. Wholesale funding excludes repo transactions and bankers’ acceptances,
which are disclosed in the Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments section, and also excludes ABCP issued by certain ABCP conduits that are not
consolidated for financial reporting purposes.
(2) Primarily issued to institutional investors.
(3) Includes credit card, auto and transportation finance loan securitizations.
(4) Total wholesale funding comprised Canadian-dollar-denominated funding of $49.1 billion and U.S.-dollar-denominated and other foreign-currency-denominated funding of $220.5 billion
as at October 31, 2023.
Diversification of our wholesale term funding sources is an important part of our overall liquidity management strategy. Our wholesale term
funding is 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.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 103
MANAGEMENT’S DISCUSSION AND ANALYSIS
Wholesale Capital Market Term Funding Composition (%)
2023
37%
24%
21%
18%
2022
24%
23%
37%
16%
Covered Bonds
Mortgage, Credit Card, Auto loan and HELOC Securitization, and FHLB Advances
Senior Debt (Canadian dollar)
Senior Debt (Global Issuances)
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 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.
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Regulatory Developments
The Office of the Superintendent of Financial Institutions (OSFI) announced changes to its Liquidity Adequacy Requirements (LAR) Guideline that
became effective April 1, 2023. The changes primarily relate to the calculation of the Net Cumulative Cash Flow regulatory metric. There was no
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 in raising both capital
and funding to support the bank’s 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 may increase and our access to funding and capital through
the wholesale markets could be constrained. A material downgrade of BMO’s ratings could also have other consequences, including those set out in
Note 8 of the audited annual consolidated financial statements.
The credit ratings assigned to BMO’s senior debt by rating agencies are indicative of high-grade, high-quality issues. On June 20, 2023, Fitch
affirmed its ratings for BMO and revised its outlook to stable from negative, reflecting solid and above-target capital adequacy levels after the
successful closing of our acquisition of Bank of the West. During the third quarter of fiscal 2023, Moody’s, Standard & Poor’s (S&P) and DBRS also
affirmed their ratings, while maintaining their stable outlook on BMO.
As at October 31, 2023
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
Stable
Stable
(1) Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(2) Long-term deposits / Legacy senior debt includes senior debt issued prior to September 23, 2018 and senior debt issued on or after September 23, 2018 that is excluded
from the Bank Recapitalization (Bail-In) Regime.
We are required to deliver collateral to certain counterparties in the event of a downgrade of 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, 2023, we
would be required to provide additional collateral to counterparties totalling $128 million, $368 million and $844 million as a result of a one-notch,
two-notch and three-notch downgrade, respectively.
104 BMO Financial Group 206th Annual Report 2023
Liquidity Coverage Ratio
The Liquidity Coverage Ratio (LCR) is calculated in accordance with the OSFI LAR Guideline 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 comprise cash, highly-rated debt issued or backed by governments, highly-rated covered bonds and non-financial corporate
debt, and non-financial equities that are part of a major stock index. Net cash flows include outflows from deposits, secured and unsecured wholesale
funding, commitments and potential collateral requirements, offset by permitted inflows from loans, securities lending activities and other non-HQLA
debt maturing over a 30-day horizon. Weightings prescribed by OSFI are applied to cash flows and HQLA to arrive at the weighted values and the LCR.
The LCR does not reflect liquidity in BMO Financial Corp. (BFC) in excess of 100%, because of limitations on the transfer of liquidity between BFC and
the parent bank. Canadian domestic systemically important banks, including BMO, are required to maintain a minimum LCR of 100%. The average
daily LCR for the quarter ended October 31, 2023 was 128%, equivalent to a surplus of $49.9 billion above the regulatory minimum. The LCR
decreased 7% from 135% in 2022, primarily as a result of the incorporation of Bank of the West business activities into the measure. The closing of
the Bank of the West acquisition increased both HQLA and net cash outflows, but excess liquidity at BFC was capped at 100% in the LCR measure. In
the prior year, HQLA were temporarily elevated, in anticipation of the closing of the acquisition. 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 below.
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(Canadian $ in billions, except as noted)
High-Quality Liquid Assets
Total high-quality liquid assets (HQLA)
Cash Outflows
Retail deposits and deposits from small business customers, of which:
Stable deposits
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative banks
Non-operational deposits (all counterparties)
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivatives exposures and other collateral requirements
Outflows related to loss of funding on debt products
Credit and liquidity facilities
Other contractual funding obligations
Other contingent funding obligations
Total cash outflows
Cash Inflows
Secured lending (e.g., reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
For the quarter ended October 31, 2022
Total HQLA
Total net cash outflows
Liquidity Coverage Ratio (%)
As at October 31, 2023
Total unweighted value
(average) (1) (2)
Total weighted value
(average) (2) (3)
*
290.4
135.0
155.4
295.0
143.6
128.5
22.9
239.4
26.3
4.0
209.1
1.1
517.4
*
152.8
17.7
11.2
181.7
228.4
21.4
4.1
17.3
131.7
35.5
73.3
22.9
20.9
47.1
7.5
4.0
35.6
–
9.8
230.9
31.6
9.6
11.2
52.4
Total adjusted value (4)
228.4
178.5
128
Total adjusted value (4)
204.3
151.2
135
* 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 62 business days in the fourth quarter of 2023.
(3) Weighted values are calculated after the application of the weightings prescribed under the OSFI LAR Guideline for HQLA and cash inflows and outflows.
(4) Adjusted values are calculated based on total weighted values after applicable caps, as defined in the LAR Guideline.
BMO Financial Group 206th Annual Report 2023 105
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 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, including BMO,
are required to maintain a minimum NSFR of 100%. Both ASF and RSF increased in 2023, primarily due to the impact of the Bank of the West
acquisition. BMO’s NSFR was 115% as at October 31, 2023, equivalent to a surplus of $96.3 billion above the regulatory minimum. The NSFR increased
from 114% as at October 31, 2022, as higher required stable funding was more than offset by higher available stable funding.
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(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
performing loans to financial institutions
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, 2022
Total ASF
Total RSF
Net Stable Funding Ratio (%)
For the quarter ended October 31, 2023
Unweighted value by residual maturity
No
maturity (1)
Less than 6
months
6 to 12
months Over 1 year
Weighted
value (2)
–
–
–
228.4
116.7
111.7
276.1
129.6
146.5
–
4.0
*
4.0
*
*
–
185.2
–
–
–
–
54.6
20.3
34.3
262.9
–
262.9
0.9
*
*
17.2
*
*
0.3
179.1
72.6
–
–
–
36.2
15.2
21.0
61.7
–
61.7
1.5
*
*
0.1
*
*
–
61.1
2.5
90.7
90.7
–
61.5
13.8
47.7
115.2
–
115.2
12.2
33.2
11.1
4.8
90.7
90.7
–
348.2
158.4
189.8
280.4
64.8
215.6
–
4.8
*
4.8
*
724.1
*
–
370.7
0.3
11.8
0.1
525.7
3.3
33.4
55.4
6.7
16.9
59.9
109.6
40.4
42.1
193.2
300.8
–
13.0
13.0
29.2
–
42.8
4.9
*
*
*
37.9
–
*
*
–
8.5
8.5
2.2
0.9
*
*
*
*
*
7.2
–
*
*
–
9.4
9.4
0.4
1.5
*
*
*
*
*
0.2
–
*
*
–
144.9
144.9
15.4
12.2
55.1
*
12.7
6.1
20.7
8.2
589.6
–
122.5
122.5
39.2
–
69.4
4.1
10.8
–
1.0
53.5
20.8
*
*
627.8
115
Weighted
value (2)
610.2
534.1
114
* Disclosure is not required under the NSFR disclosure standard.
(1) Items 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.
106 BMO Financial Group 206th Annual Report 2023
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 incorporate 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
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
2023
Total
75,473
2,791
4,037
–
680
–
383
–
153
–
118
–
–
–
–
–
–
2,461
77,934
–
4,125
8,408
7,472
5,614
6,816
29,374
63,601
141,953
55,104
322,379
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resale agreements
93,707
12,311
6,903
2,491
–
250
–
–
–
115,662
Loans (1)
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Allowance for credit losses
1,121
283
–
19,671
–
2,188
621
–
10,920
–
3,403
1,028
–
12,550
–
4,246
1,343
–
16,370
–
4,761
1,542
–
16,953
–
27,229
8,094
–
49,366
–
107,347
35,467
–
114,289
–
26,689
29,992
–
27,880
–
266
25,670
12,294
98,702
(3,807)
177,250
104,040
12,294
366,701
(3,807)
Total loans, net of allowance
21,075
13,729
16,981
21,959
23,256
84,689
257,103
84,561
133,125
656,478
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
Derivative instruments
Acceptances
Securities sold but not yet purchased (4)
Securities lent or sold under repurchase
agreements (4)
Securitization and liabilities related
to structured entities
Other
Total other liabilities
Subordinated debt
Total Equity
2,797
4,682
4,023
11,502
4,539
3,423
814
8,776
2,670
6
336
3,012
2,827
–
42
2,869
1,555
–
4
1,559
7,804
–
10
7,814
9,325
–
19
9,344
8,459
–
7,629
–
–
55,734
39,976
8,111
68,611
16,088
55,734
116,698
208,585
43,904
34,751
33,086
31,749
122,127
330,048
242,602
246,424 1,293,276
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
2023
Total
48,986
63,728
64,939
60,911
52,040
47,624
80,829
18,624
471,995
909,676
3,103
4,682
43,781
8,450
3,423
–
3,033
6
–
2,278
–
–
2,014
–
–
7,694
–
–
11,748
–
–
11,873
–
–
99,006
4,751
476
539
–
1,336
–
–
–
–
–
–
50,193
8,111
43,781
106,108
97
15,672
717
2,269
166,341
19,610
–
–
–
–
1,199
116
4,830
–
–
2,195
110
5,122
–
–
592
107
4,896
14,109
9,870
2,763
7,528
6,160
–
21,742
27,094
63,048
2,713
28,035
24,381
25,561
21,742
298,335
–
–
–
–
25
–
8,203
–
8,228
–
77,037
77,037
Total Liabilities and Equity
215,327
83,338
69,769
66,033
54,753
75,659
105,235
52,388
570,774 1,293,276
(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 $30,852 million as at October 31, 2023 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
Other commitments (3)
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
2023
Total
2,216
1,641
212
46
4,874
5,088
241
91
9,377
5,739
666
106
14,499
5,397
2,207
101
14,190
6,065
2,039
155
41,713
3,663
3,951
354
129,634
3,778
8,643
626
5,927
48
846
141
–
–
–
–
222,430
31,419
18,805
1,620
(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.
(3) Other commitments comprise purchase obligations and lease commitments for leases signed but not yet commenced.
Material presented in a blue-tinted font above is an integral part of Note 5 of the 2023 audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 107
MANAGEMENT’S DISCUSSION AND ANALYSIS
(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
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
–
14,665
4,844
–
37,250
–
105,285
37,742
–
105,009
–
10,810
14,084
–
17,776
–
88
24,499
9,663
94,259
(2,617)
148,880
86,103
9,663
309,310
(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
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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
Derivative instruments
Acceptances
Securities sold but not yet purchased (4)
Securities lent or sold under repurchase
agreements (4)
Securitization and liabilities related
to structured entities
Other
Total other liabilities
Subordinated debt
Total Equity
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
7,797
11,636
–
19
8,092
–
5,817
–
–
37,355
48,160
13,235
46,809
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
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
–
–
94,215
6,476
1,046
2,226
–
–
–
–
–
–
–
–
59,956
13,235
40,979
103,963
14
12,143
2,803
4,980
160,473
29,484
–
–
–
–
1,300
101
6,865
–
–
794
97
6,934
–
–
1,673
146
4,714
–
–
5,136
872
9,342
2,558
6,006
5,722
–
18,713
27,068
45,332
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
Other commitments (3)
0 to 1
month
1,932
1,680
–
27
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
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
2,832
3,465
220
119,430
3,680
9,189
353
5,490
57
985
278
–
–
–
–
207,106
27,370
17,330
1,144
(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.
(3) Other commitments comprise purchase obligations and lease commitments for leases signed but not yet commenced.
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 2023 audited annual consolidated financial statements.
108 BMO Financial Group 206th Annual Report 2023
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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 and business continuity 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 service organizations,
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, unauthorized transactions by employees, business
disruption, information security breaches, theft or fraud and cyber security threats, exposure to risks related to third-party relationships and damage
to physical assets. For example, given the large volume of transactions that we process on a daily basis and the complexity and speed of our business
operations, there is a possibility that certain operational or human errors may be repeated or compounded before they are discovered and rectified.
ONFR is not only inherent in our business and banking activities, it is also inherent in the processes and controls 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 a failure to manage or
mitigate risk, 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 transactions with customers or
counterparties. 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 Risks That May Affect Future Results – Top and Emerging Risks That May Affect Future Results section for further discussion
of these 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 of Directors 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,
supporting 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 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. Operational Risk Officers independently assess the operational
risk profiles of our operating groups, identify material exposures and potential weaknesses in our product, service and process-based risk and control
environment, and recommend appropriate mitigation strategies and actions.
Independent risk management oversight is provided by ONFR, which is responsible for developing and implementing effective risk-related
strategies, tools and policies, and for exercising second-line oversight, effective challenge and governance. ONFR 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 sets out the
processes by which ONFR, as the second line of defence, guides, supports, monitors, assesses and communicates with the first line in its
management of operational non-financial risks.
BMO Financial Group 206th Annual Report 2023 109
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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 essential 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 and external circumstances.
Operational resilience 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 and Control Self-Assessment is an established process that is evolving into the Product/Service and Process Risk Assessment program
in 2023-2024. This new program will be used by our operating groups and Corporate Services 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 current and forward-looking view of the impact of both our internal controls and the
external business environment on the risk profiles of our operating groups and Corporate Services areas, supporting the proactive prevention,
mitigation and management of risk.
‰ BMO’s Initiative Assessment and Approval Process is used to assess, document and approve qualifying initiatives when a new business, service
or product is developed, or existing services and products are enhanced. This process supports continuous oversight of change in risk exposure 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 an operational risk profile and are utilized to assess specific risk exposures in relation to BMO’s overall risk appetite.
‰ Historical Internal Loss Data Events are key data elements utilized in the Standardized Approach for the calculation of operational risk regulatory
capital. BMO adopted the new Basel III Standardized Approach for regulatory capital reporting as of February 1, 2023, as set out in the Capital
Adequacy Requirements (CAR) Guideline published by OSFI.
‰ Stress Testing assesses the potential impact of severe negative events on key risk exposures 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.
‰ BMO’s Corporate Risk & Insurance (CR&I) group provides a second layer of mitigation for certain operational risk exposures. CR&I is also
accountable for establishing and maintaining the enterprise-wide insurance program. 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 policy structures and coverage provisions of our insurance positions are assessed annually to confirm alignment with
BMO’s overall risk tolerance.
The following are some of the operational non-financial risks that may adversely affect BMO’s business and financial results.
Anti-Money Laundering
Money laundering, terrorist financing and sanctions risks are associated with laundering the proceeds of crime, financing terrorist activity, or violating
economic sanctions by making use of our products or services. Compliance with all anti-money laundering, anti-terrorist financing (AML/ATF) and
sanctions measures is critical to safeguarding BMO, our customers and the communities in which we operate. We are committed to managing
AML/ATF and sanctions risks effectively, and to complying with all relevant laws and regulations. The consequences of 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 sets out policies, risk assessments, due diligence processes and controls, and training, including mandatory annual training
for all employees. BMO’s compliance program applies analytics, technology and professional expertise in order to deter, detect and report suspicious
activity. The CAMLO reports regularly to the Audit and Conduct Review Committee (ACRC) of the Board of Directors and to senior management on
the effectiveness of the compliance program. The effectiveness of our AML/ATF and sanctions compliance program is subject to regular review and
independent assessment by the Corporate Audit Division. We remain committed to effective compliance and the ongoing effort to protect the
financial system and the communities in which we operate.
Artificial Intelligence Risk
Artificial intelligence (AI) risk is the potential for loss or harm arising from incorrect use or misuse of AI systems, which can include one or many
AI techniques, such as machine learning (ML) or generative AI.
These outcomes can include financial loss, poor customer experiences and damage to our reputation. AI continues to present new opportunities
for innovative products and services, including system automation and revenue-generating capabilities, and is expected to become a key enabler of
future operating efficiencies, but only if we safely and responsibly adopt and integrate new AI technologies. The application of AI in our business
operations is governed and managed by our existing risk management policies. Significant initiatives are reviewed by a cross-enterprise group before
implementation with the aim to ensure that ethical, privacy and fair and responsible banking requirements are met.
Our management and oversight of AI risk is focused on advancing our commitment to serving our customers in a way that fosters confidence
and trust in our secure, ethical and responsible use of these technologies, utilizing our robust risk management practices and internal safeguards
in a manner aligned with, and in compliance with, regulatory expectations.
110 BMO Financial Group 206th Annual Report 2023
Business Continuity Risk
Business continuity risk is related to the possibility that we may be unable to maintain, continue or restore essential business operations during
and/or after an event that prevents BMO from conducting business in the normal course.
Business continuity management should enable BMO to recover, maintain and manage critical processes, as well as safeguard the interests and
well-being of our customers, shareholders and employees. In the event of an operational disruption, effective business continuity plans minimize
adverse impacts on our customers, employees and other stakeholders. These operational disruptions could result from severe weather, technology
failures, cyber attacks or any other event that can lead to process failure. We have a framework in place that facilitates the rapid recovery and timely
resumption of critical operations, including availability of our people, processes, facilities and technology, and maintenance of our third-party
arrangements. Our comprehensive business continuity management strategy involves developing, testing and maintaining recovery strategies
and plans, and is intended to ensure that critical processes and third-party arrangements remain viable.
Cyber and Cloud Security Risk
Cyber and cloud security risk arises from the possibility that BMO could experience security incidents, including the loss, theft or misuse of
information, including all types of data (e.g., client data, employee data and the organization’s proprietary data), as well as any potential failure
to comply with rules concerning information or cyber security.
Cyber and cloud security is integral to BMO’s business operations, brand and reputation. As technology evolves rapidly and the connective
capabilities of digital devices continue to grow, cyber threats and risks also evolve. These threats include: breaches of, or disruptions to, our systems
or operations, as well as unauthorized access to, or use or dissemination of, information pertaining to BMO, our customers or employees. At BMO, our
response includes investing in our Financial Crimes Unit and technological infrastructure, equipping our team to detect and address cyber security
threats across North America, Europe and Asia in order to help us keep our customers’ and employees’ data secure.
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Data Risk
Data risk is the risk of loss resulting from inadequate or failed internal processes and systems, or from external events impacting data. Data quality,
governance and architecture impact our understanding and management of BMO’s data assets.
We continue to invest in new capabilities in support of BMO’s digital transformation. Our ability to effectively manage and safeguard critical data
has a direct impact on our successful deployment of digital processes and our ability to develop and introduce innovative new capabilities with tools
and systems driven by AI. Our management of data risk is focused on the quality, resilience, retention and governance of BMO’s data assets, which
are foundational to our business operations, strategy and future growth, including BMO’s Digital First strategy.
Fraud and Physical Security Risk
Fraud risk is related to the possibility that an intentional act, misstatement or omission designed to deceive others may result in the intended target
experiencing a loss or the perpetrator achieving a gain. Fraud may be perpetrated by our employees, suppliers or other external parties, including
BMO customers. Fraudsters are getting more sophisticated and may open accounts with financial institutions, including BMO, and then use those
accounts to commit fraud. BMO maintains a Fraud Risk Management program intended to proactively manage fraud risks across the bank.
A recessionary or tightening interest rate environment may lead to an increase in fraud attacks against BMO and our customers.
The management of physical security risk seeks to ensure that the bank, its customers, employees and third parties are protected against the
risk of loss, interference, unauthorized physical access, damage or injury to which they may be exposed as a result of the bank’s operations. Physical
security risks may emerge through various threat vectors, including criminal activities, terrorist attacks, sociopolitical unrest, human error, natural
events and/or geopolitical threats. Physical security measures may also support the management of a number of other risks, including risks related
to information security, privacy and fraud.
Project and Change Management Risk
Project and change management risk is related to the possibility that BMO could experience a loss due to substandard delivery of an initiative that
may lead to the business not achieving its intended outcome, as well as attracting additional regulatory scrutiny.
The bank has established a Project and Change Management Risk Framework to drive consistency in the delivery of an initiative within a
prescribed control environment. This framework outlines the principles and processes for providing governance, monitoring and reporting, as well
as the roles and responsibilities necessary to address project and change management risk across the enterprise and meet or exceed stakeholder
expectations.
Technology Risk
Technology risk, including risks related to emerging technology and digital platforms, arises from the possibility that the inadequacy, misuse,
disruption or failure of information technology systems, infrastructure or data could result in an inability to meet business needs. Failure to maintain
and invest in technology can lead to operational disruption and impede the achievement of strategic organizational goals, at significant financial cost.
Technology risk management measures are intended to protect BMO’s systems, data and assets, and help ensure their confidentiality, integrity and
availability. As the adoption of digital banking channels continues to grow, we continue to invest in new and innovative technological capabilities in
order to meet our customers’ expectations and keep their data secure. In alignment with our operational risk management framework, we follow a
program that addresses exposures to technology risk, supported by a team of technology risk management experts.
Third-Party Risk
Third-party risk is the risk associated with the acquisition of goods, services and arrangements that permit BMO’s products, processes and/or systems to
be managed or supplied by external service providers, which could result in a negative impact on our business operations, regulatory compliance or
reputation. Failure to effectively manage these third-party arrangements exposes BMO to the risk that data may be compromised, or the delivery of
critical products and services may be disrupted. In addition, third-party service providers may use sub-contractors, introducing an additional layer of
BMO Financial Group 206th Annual Report 2023 111
MANAGEMENT’S DISCUSSION AND ANALYSIS
complexity for oversight. Any concentration of third parties will also heighten exposures to existing risks of disruption arising from other events, such as
natural disasters or geopolitical events. BMO’s third-party risk management (TPRM) framework defines the identification, governance, measurement,
mitigation, monitoring and reporting of third-party risk across the third-party life cycle. This framework is supported by enterprise-wide TPRM policies
that are intended to ensure compliance with the framework.
We continue to enhance our capabilities in order to maintain robust risk management practices, support operational resilience objectives and
comply with relevant regulatory requirements.
Model Risk
Model Risk is the potential for adverse outcomes resulting from decisions that are based on incorrect or misused model results. These adverse
outcomes can include financial loss, poor business decision-making and damage to reputation.
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Model risk arises from the use of quantitative analytical tools that apply statistical, mathematical, economic, algorithmic or other advanced
techniques, such as AI and ML, to process input data and generate quantitative output or estimates. These analytical tools range from very simple
quantitative methods that produce straightforward estimates to highly sophisticated models that can be used to value complex transactions or
provide a broad range of forward-looking estimates. These analytical tools generate results that can inform business, risk and capital management
decision-making, and 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 any additional overlays and approaches to estimation in 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 that rely on statistical, mathematical or other quantitative techniques to approximate
reality and 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 a risk-based enterprise-wide Model Risk Management Framework.
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Initiation &
Identification
Model
Life Cycle
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Development
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Model
Validation
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Model
Decommission
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Ongoing
Monitoring &
Validation
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Model Use &
Maintenance
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Implementation
The Model Risk Management Framework sets out an end-to-end approach for model risk governance across the model life cycle and for the
management of 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 the governing principles for managing model risk, describe model risk management processes in
detail 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 our Model Risk Management Framework in alignment with regulatory
expectations, as well as 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, the safe and responsible adoption of advances in
automation used for decision-making, such as large language models and algorithmic trading, as well as other AI and ML applications. Our enterprise
Model Risk Management Committee (MRMC), a sub-committee of the RMC, is a cross-functional group representing key stakeholders across the
enterprise. The MRMC meets regularly to help direct BMO’s use of models, oversee the development, implementation and maintenance of the Model
Risk Management Framework, provide effective challenge and 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 further steps being
taken, 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 alignment with our framework and in compliance 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.
Caution
This Operational Non-Financial Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
112 BMO Financial Group 206th Annual Report 2023
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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 operations 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, as well as 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 exposure to legal and regulatory risk. 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, Legal & Regulatory Compliance assesses and analyzes the implications of changes in regulatory and supervisory expectations.
We devote substantial resources to the implementation of systems and processes required to comply with new regulations. Failure to comply with
applicable legal and regulatory requirements may lead to legal proceedings, financial losses, regulatory sanctions or fines, enforcement actions,
criminal convictions and penalties, restrictions on or an inability to execute certain 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 audited annual consolidated
financial statements. Our disclosure controls and procedures are intended 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.
BMO’s Anti-Corruption Office, through its global program, has articulated key principles and procedures that support the effective oversight
of compliance with anti-corruption legislation in the jurisdictions in which we operate. These include guidance on both identifying, avoiding and
reporting on 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 for
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 assessment, governance and oversight of
the principles and procedures we have in place 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, refer to the Operational Non-Financial Risk Management
– Anti-Money Laundering section.
The success of our business operations has been 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 the risk of 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
manage day-to-day risks by implementing and observing corporate policies and standards, while Legal & Regulatory Compliance units specifically
assigned to 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 the impact of changes in capital and liquidity requirements.
These developments include consumer protection measures and specific financial reforms, including proposals in respect of the assessment,
management and disclosure of climate-related financial risk, which are discussed further below. For additional discussion of regulatory developments
related 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; Fiscal and Monetary Policies and Other Economic Conditions in the Countries in which BMO Conducts Business; Tax
Legislation and Interpretations; and Other Regulatory Developments.
BMO Financial Group 206th Annual Report 2023 113
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Climate Change and Environmental, Social and Governance Matters
We continue to monitor the rulemaking activities of 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 and finalization of formal supervisory regulatory frameworks governing the analysis and reporting of risks related
to sustainability and climate change, including frameworks in Canada, the United States, the United Kingdom and the European Union. In addition,
current and emerging regulatory requirements in certain U.S. states may apply restrictions or sanctions on financial institutions that impose any
environmental standards that exceed the legal or regulatory requirements in the states in which they operate. Trends in litigation and regulatory
investigation involving disclosure practices or financing activities related to climate or ESG matters, 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 disclosure practices related to climate or ESG matters.
For further discussion, refer to the Environmental and Social Risk section.
Consumer and Investor Protection
Regulators around the world continue to focus on consumer protection measures, including those related to seniors and other vulnerable customers,
interactions with consumers, and standards of conduct for individuals in the financial services industry. In Canada, the Financial Consumer Agency of
Canada (FCAC) issued a Guideline on Existing Consumer Mortgage Loans in Exceptional Circumstances. The guideline requires banks to establish
policies and procedures that can provide tailored support to consumers who are experiencing severe financial stress as a result of exceptional
circumstances, including rising interest rates, and who are at risk of mortgage default. Recently enacted provincial legislation specifies various
language requirements, including with respect to consumer contracts and the manner in which we conduct business. In addition, reforms to the
Canadian securities regulatory regime related to the protection of investors are also proceeding. Canadian securities regulatory reforms included the
consolidation of the Mutual Fund Dealers Association of Canada (MFDA) and the Investment Industry Regulatory Organization of Canada (IIROC) into a
single self-regulatory organization known as the Canadian Investment Regulatory Organization (CIRO), as well as the merger of two investor
protection funds under the continuing name of the Canadian Investor Protection Fund (CIPF). Further, the Canadian Securities Administrators (CSA) and
the Canadian Council of Insurance Regulators adopted changes to harmonize and enhance reporting of the ongoing costs, including embedded fees, of
owning investment funds and segregated funds. In addition, the Canadian government announced that it will implement new measures to reduce
fees for non-sufficient funds and certain other fees charged by financial institutions. If these proposed measures are enacted, the expected impact
would be a reduction in BMO fee revenue. In the United States, banking regulators have a heightened focus, with respect to all consumer products,
on matters pertaining to racial equity, financial inclusion and consumer protection. Key consumer concerns, including fair lending and unfair,
deceptive or abusive acts or practices, are now the subject of heightened regulatory scrutiny in bank examination programs.
Privacy
There is a growing focus on regulation related to privacy and the use and safeguarding of personal information, and we continue to advance our
privacy program so that we are able to comply with evolving regulatory requirements. In Canada, significant reform to federal privacy laws is
expected under Bill C-27, including new regulatory powers and penalties and additional legislation to address artificial intelligence. In Quebec, Law 25
(previously Bill 64) is coming into effect in phases, which began in 2021 and will end in 2024. Law 25 modernizes the province’s private-sector
privacy regime, introduces new regulations related to biometrics and automated decisions, and gives new powers to regulators to impose monetary
administrative penalties. 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, was 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, which is leading
to a growing patchwork of privacy laws in the United States. In the European Union and the United Kingdom, there are continuing concerns regarding
the transfer of personal data to countries lacking adequate privacy protection. For further discussion, refer to the Top and Emerging Risks That May
Affect Future Results – 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 any risks related to 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 directives. This is carried out in conjunction with our Code of Conduct training, which tests employees’ knowledge and
understanding of the behaviour required of employees of BMO.
Securities Transaction Settlement Cycle
The U.S. Securities and Exchange Commission published final rules, effective in May 2024, shortening the settlement cycle for most securities
transactions to T+1. Canadian securities regulators have also proposed rule amendments to support the adoption of a T+1 settlement cycle, and
this is expected to occur in 2024, in step with the U.S. rules. Planning for implementation at BMO is underway.
Third-Party Risk Management
On April 24, 2023, OSFI released its final Guideline B-10 – Third-Party Risk Management, which sets out expectations for federally regulated financial
institutions, including BMO, in managing risks involving third-party arrangements. Federally regulated financial institutions retain accountability for
business activities and services outsourced to a third party. We continue to prepare for compliance with this guideline, which comes into effect on
May 1, 2024. Refer to the Operational Non-Financial Risk – Third-Party Risk section for further discussion.
114 BMO Financial Group 206th Annual Report 2023
U.S. Regulatory Developments
On October 25, 2023, the U.S. Federal Reserve announced proposed revisions to the debit card interchange fee cap under Regulation II of the Dodd-
Frank Act, which would: (i) reduce the base component of the interchange fee cap and the transaction value; and (ii) increase the fraud-prevention
adjustment. If these revisions are enacted as proposed, the expected impact would be a reduction in BMO’s U.S. interchange revenue.
U.S. Regulatory Reform
Following the closing of our acquisition of Bank of the West and with the increasing size and scope of our U.S. operations, BMO Financial Corp. (BFC),
BMO’s U.S. holding company, has met the threshold for designation as a Category III firm under the Enhanced Prudential Standards issued by the
Federal Reserve Board. This change requires BFC to meet certain increased regulatory requirements related to capital, liquidity and risk management,
including complying with single counterparty credit limits. Additional information regarding regulatory requirements that now apply to BFC is set out
in the Enterprise-Wide Capital Management section.
On August 29, 2023, the U.S. banking agencies issued a new rule proposal that would require large banks with total assets of $100 billion or
more to maintain a layer of long-term debt, which would improve financial stability by increasing the resolvability and resiliency of such institutions.
The impact of these proposed rules on our results will depend on the final rules issued by the U.S. banking agencies, but we do not currently expect a
material change to our enterprise-level funding activities.
On July 27, 2023, the U.S. banking agencies issued new rule proposals that would revise the regulatory capital framework for large bank holding
companies and their depository institutions, including BFC and BMO Bank N.A. These proposals would implement the risk-based capital standards
contained in the Basel III Reforms (referred to as Basel III Endgame) published by the Basel Committee on Banking Supervision. The impact of these
proposed rules on our results will depend on the final rules issued by the U.S. banking agencies.
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Caution
This Legal and Regulatory Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Strategic Risk
Strategic Risk is the potential for loss due to fluctuations in the external business environment and/or failure to properly respond to these
fluctuations due to inaction, ineffective strategies or poor implementation of strategies.
Strategic risk arises from exposure to the 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 as a result of failing to address those external risks effectively.
While external strategic risks – including possible changes in the macroeconomic, geopolitical or regulatory environment, and changes in legal,
innovation, competitive, environmental and social factors – cannot be controlled, the likelihood and magnitude of their impact can be limited through
an effective strategic risk management framework, and the potential impact of certain of these risks can be assessed through stress testing.
BMO’s Corporate Strategy group oversees the strategic planning process and works with the lines of business and Corporate Services to identify,
monitor and mitigate strategic risk across the enterprise. Our rigorous strategic risk management framework encourages a consistent approach in the
development of strategic plans, carried out through an integrated, multi-year strategic and financial planning process that directs funding to support
specific strategic choices across each line of business, in alignment with our enterprise risk appetite.
The framework promotes 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 line of business. Oversight of strategic risk is the responsibility of the Executive Committee and the Board of Directors.
This is carried out through an annual review of enterprise and group strategies, which involves 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.
Strategic risk also includes business risk arising from specific enterprise activities and the effects these could have on earnings. Within BMO,
each operating group is responsible for controlling its respective business risk by assessing, managing and mitigating risks. To manage exposure to
transverse business risks (i.e., those spanning multiple lines of business, such as climate change), the Corporate Strategy group works in tandem with
the relevant business stakeholders to shape effective mitigation approaches.
Our ability to implement the strategic plans developed by management influences our financial performance. Performance objectives are
established through the strategic planning process and our progress toward those objectives is 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.
BMO Financial Group 206th Annual Report 2023 115
MANAGEMENT’S DISCUSSION AND ANALYSIS
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
manifest itself through other risk types, namely: 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. E&S risk 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; the use of energy, water and
other resources; 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 are advancing our risk identification efforts
by defining these factors and identifying any risk exposures that may be affected by the transverse impact of these factors.
We may have direct exposure to E&S risk associated with the ownership and operation of BMO’s businesses. We may be indirectly exposed to the
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risk of financial loss or reputational harm if our customers or suppliers are affected by E&S factors or are associated with adverse environmental or
social impacts to such an extent that they are unable to meet their financial or other obligations to us, or that they cause reputational risks for BMO.
E&S factors may also give rise to the risk of reputational harm, 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, as discussed in the Reputation Risk section.
Governance
The Board of Directors, through the Risk Review Committee (RRC), approves the E&S Risk Appetite Statement and the E&S Risk Corporate Policy, as
discussed below. The RRC assists the Board of Directors in meeting its oversight responsibilities for the identification, assessment and management
of our exposure to E&S risk, including risks arising from climate change, for the overall adherence to risk management corporate policies, and for
complying with risk-related regulatory requirements. 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 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
regularly reviews the charters of our Board of Directors and its committees to assess the coverage and alignment of their responsibilities for
overseeing environmental, social and governance (ESG) issues with their respective mandates.
BMO’s General Counsel is the bank’s Executive Committee Sponsor for Sustainability and Climate and has accountability for legal and regulatory
risk, reputation risk, business conduct and 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. In addition to the ESG Executive Committee, BMO has a Sustainability Council, which is a leadership forum for advancing
sustainability initiatives. 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: Disclosure Committee, Risk Management Committee (RMC),
Reputation Risk Management Committee (RRMC), Enterprise Regulatory Committee, Climate Commercialization Working Group and Impact Investment
Fund Committee, as well as the Investment Committee of BMO Global Asset Management. Additional committees, forums and working groups may
be established as needed. In addition, the Board of Directors and any management committees active in other jurisdictions receive updates and
oversee E&S risk for the relevant jurisdiction. They also receive updates on sustainability matters and E&S risk across the enterprise.
The Chief Risk Officer (CRO), as Head of Enterprise Risk and Portfolio Management (ERPM) and supported by the Risk Executive Committee, acts
as the second line of defence on the transverse impacts of E&S risk on credit and counterparty risk, market risk, liquidity and funding risk, insurance
risk and operational non-financial risk; oversees risk appetite for E&S risk in the context of these risks; and reports to the Board of Directors, its RRC
and the RMC on E&S risk.
Strategy
As a global bank, we are partnering with our clients to accelerate their transition to a low-carbon operating environment, identifying and advancing
solutions that meet net zero emissions and climate objectives and support positive social change. This ambition is explicitly linked to our enterprise
commercial strategy and we are working to realize this ambition through a four-pillar climate strategy: Commitment; Capabilities; Client partnership
and commercialization; and Convening for climate action. Our strategy seeks to capture commercialization opportunities by working with our clients
on their decarbonization journeys. The strategy is being implemented by our operating groups, overseen by the ESG Executive Committee and
supported by the BMO Climate Institute, which serves as an enterprise resource that is accelerating BMO’s climate-related transition efforts and as
an internal and external convenor on climate action.
In order to remain informed about emerging E&S risks, we participate in global forums with other financial institutions and maintain an open
dialogue with our external stakeholders.
E&S Risk Management
A successful future for BMO and our customers depends on the sustainability of the environment, communities and economies in which we operate.
We seek to understand the impact that E&S risk factors could have on our business environment, as well as our clients, portfolios and operations.
With this understanding, we are better positioned to make informed strategic decisions.
Our E&S Risk Corporate Policy, applicable to all BMO employees, sets out our approach to integrating E&S risk into the ERMF. The policy affirms
the expectation of our Board of Directors that BMO will integrate considerations of E&S risk across the ERMF. It is supported by BMO’s three-
lines-of-defence operating model, and is underpinned by our risk culture. Its implementation involves building new capabilities, while also leveraging
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our existing risk governance provisions and resources, to identify, assess, manage, monitor and report on potential impacts on our clients, portfolios and
operations. On March 7, 2023, the Office of the Superintendent of Financial Institutions (OSFI) published its final version of Guideline B-15 – Climate Risk
Management (Guideline B-15), setting out its expectations for the sound management of climate-related risks for Canadian financial institutions.
The guideline is effective October 2024, and the E&S risk group is considering updates to the E&S Risk Corporate Policy and related documentation for
alignment across the enterprise.
We have developed a qualitative Risk Appetite Statement that includes E&S risks, including risks related to climate change. In addition, we have
developed a key metric with risk tolerance thresholds, which measures our lending in support of carbon-related assets as a percentage of our total
net loans and acceptances, net of the allowance for credit losses on impaired loans.
E&S risk is also addressed in our Credit Risk Management Framework, including provisions for governance and accountabilities, enhanced due
diligence and thresholds for escalations or exceptions. Sector-specific financing guidelines help us identify and manage exposure to E&S risk in
higher-risk sectors and to integrate a consideration of these risks into our decision-making, which also considers factors such as climate change and
Indigenous consultation. The Environmental and Social Risk General Financing Guideline is an enterprise-level second-line directive that applies to
wholesale lending transactions; articulates our lending risk appetite for E&S risk; outlines the enhanced due diligence process, supported by E&S Risk
Rating (ESRR) assessment tools developed to address sectors with heightened risk; and outlines lending prohibitions, escalations and elevations.
Social and environmental requirements in financing arrangements and transactions are monitored by the lines of business as part of our overall
monitoring process.
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 appears to 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 transition risks arising from climate change to be transverse risks. Our Environmental and Social Risk General Financing Guideline
includes direction on developing an understanding of the specific impacts of climate change on borrowers and their operations, including regulatory
and/or legislative changes. To limit our involvement in 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. Transactions involving significant environmental or social concerns may be escalated to the RRMC for consideration.
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 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 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
the scope of these 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 a relatively new approach that is 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 the ways in which we could incorporate them into our climate risk management program and associated disclosures.
Managing E&S Risk in the Supply Chain
Our Sustainability group 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.
BMO’s Code of Conduct has been approved by our Board of Directors, and reflects our commitment to manage our business responsibly.
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 require our suppliers to be aware of, understand and
comply with the principles of our Supplier Code of Conduct.
In Canada, 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) received royal assent on May 11, 2023, and comes into effect January 1, 2024. Under the provisions of Bill S-211, corporate entities that
meet certain criteria will be required to file public reports on measures they have taken to identify, address and prevent the use of forced labour,
prison labour and child labour in their supply chains. BMO is developing a plan for compliance with this new legislation.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
Climate-Related Financial Disclosures
BMO provides voluntary annual disclosures by way of the BMO Climate Report and BMO Sustainability Report. We are implementing plans to adapt
and extend our sustainability and climate disclosure to align with requirements set forth by regulators and standard setters.
We have adopted the TCFD framework to guide climate-related financial disclosures, as set out in our Climate Report. The Canadian Securities
Administrators (CSA) has proposed National Instrument 51-107, Disclosure of Climate-Related Matters (NI 51-107), but related policies have yet to
be finalized and would require certain additional disclosures. On June 26, 2023, the International Sustainability Standards Board (ISSB) issued its
inaugural standards: IFRS S1, General Requirements for Disclosure of Sustainability-Related Financial Information, and IFRS S2, Climate-Related
Disclosures (the ISSB Standards), which are intended to provide a global baseline for disclosures related to sustainability and climate-related risks and
opportunities. The ISSB Standards are effective for our fiscal year beginning November 1, 2024, on a voluntary basis, and any mandatory application
will be determined by the rules and requirements issued by regulators in the jurisdictions in which we operate.
We are implementing plans to prepare BMO to meet the expectations of OSFI regarding the first set of climate-related financial disclosures it has
mandated, which are effective for our fiscal year ending October 31, 2024. Other disclosures mandated by OSFI will be effective for the 2025 fiscal
year.
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Metrics and Targets
Our reporting of climate-related metrics and targets includes a discussion of BMO’s Scope 1 and 2 greenhouse gas (GHG) emissions, calculated using
the GHG Protocol, and a discussion of our Scope 3 emissions, calculated using the Partnership for Carbon Accounting Financials (PCAF). More detailed
discussion, as well as a discussion of financed emissions targets for certain sectors, can be found in the Climate Report. Metrics related to
sustainability are discussed in the Sustainability Report. Our sustainability reporting suite is prepared in accordance with the Global Reporting Initiative
(GRI) Standards and the GRI Financial Services Sector Disclosure, and integrates the disclosure frameworks of the TCFD and the Sustainability
Accounting Standards Board. These include 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 BMO’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. We are currently assessing the impact of our adoption of the ISSB Standards and monitoring
domestic implementation processes in the United States and Canada.
Caution
This Environmental and Social Risk section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Reputation Risk
Reputation Risk is the potential for loss or harm to the BMO brand. It can arise even if other risks are managed effectively.
Our reputation is built on our commitment to high standards of business conduct, and is one of our most valuable assets. By protecting and
maintaining our reputation, we safeguard our brand, increase shareholder value, reduce our cost of capital, improve employee engagement and
preserve our customers’ loyalty and trust.
We manage risks to our reputation by considering the potential reputational impact of all business activities, including strategy development
and implementation, transactions and initiatives, data and technology use (including artificial intelligence), 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 inappropriate behaviour or poor decision-making. Recognizing
that non-financial risks can have a negative impact as significant as the effect of financial risks, we actively promote a culture in which employees
are encouraged to raise concerns and are supported in doing so, with zero tolerance for retaliation.
In our corporate governance practices and Enterprise-Wide Risk Management Framework, we have specific controls in place to manage risks to
our reputation. We seek to identify activities or events that could impact our reputation with customers, regulators or other stakeholders. Where we
identify a potential risk to our reputation, we take steps to assess and manage that risk. Instances of significant or heightened exposure to reputation
risk are escalated to BMO’s Reputation Risk Management Committee (RRMC) for review. As misconduct can impact our reputation, the Chief Ethics
Officer, who is responsible for enterprise-wide reporting on employee conduct, may escalate instances of misconduct involving significant reputation
risk to BMO’s RRMC for review, as appropriate.
118 BMO Financial Group 206th Annual Report 2023
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;
consolidation of structured entities; and valuation of the Bank of the West assets acquired and liabilities assumed. 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 audited annual consolidated
financial statements. Note 17 of the audited annual 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.
By their 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 values of
our assets and liabilities are appropriate.
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For a more detailed discussion of the use of estimates, refer to Note 1 of the audited annual 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 apply 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 represent 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. 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
constant, 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, 2023 and 2022 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 audited annual 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 a fair value hierarchy based
on inputs we use in valuation techniques to measure the 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, 2023 and October 31, 2022 is
disclosed in Note 17 of the audited annual consolidated financial statements. For instruments that are valued using models, we consider all
reasonable available information and maximize the use of observable market data.
BMO Financial Group 206th Annual Report 2023 119
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MANAGEMENT’S DISCUSSION AND ANALYSIS
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 is a key forum for
the discussion of sources of valuation uncertainty and how these have been addressed by management. Certain financial instruments, including
corporate equities, are valued by the respective business groups. Senior management oversees our valuation processes through various valuation
and risk committees.
As at October 31, 2023, total valuation adjustments were a net decrease in value of $135 million for financial instruments carried at fair value
on the Consolidated Balance Sheet (net decrease of $197 million as at October 31, 2022).
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,
is included in Note 21 of the audited annual consolidated financial statements.
Impairment of Securities
We have investments in associates and joint ventures, which we review at each quarter-end reporting period in order to identify and evaluate any
investments that show indications of possible impairment. For these investments, a significant or prolonged decline in their fair value to an amount
below their 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 audited annual consolidated financial statements.
Income Taxes and Deferred Tax Assets
Our approach to tax matters 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 to those risks. Our intention is to comply fully with tax laws. We consider all applicable laws in connection with our commercial activities,
and where tax laws change in our business or for our customers, we adapt and make adjustments 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, and 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 carryforwards and tax credits. Changes in our assessment of these
factors could increase or decrease the provision for income taxes in future periods.
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,465 million, in respect
of certain 2011-2018 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 Canadian tax authorities were prospectively addressed in
the 2015 and 2018 Canadian federal budgets.
120 BMO Financial Group 206th Annual Report 2023
We filed Notices of Appeal with the Tax Court of Canada and the matter is in litigation. 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 audited annual 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 of a CGU 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 its value in use.
Fair value less costs to sell has been used to perform the impairment test in all periods. In determining fair value less costs to sell, we employ
the 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, 2023 and October 31, 2022, no goodwill impairment was recorded, as the estimated fair value of the CGUs was greater than
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their carrying value.
Intangible assets with definite lives are amortized to income on either a straight-line or an accelerated basis over a period not
exceeding 15 years, depending on the nature of the asset. We test intangible assets with definite lives for impairment when circumstances indicate
that the carrying value may not be recoverable.
Intangible assets with indefinite lives are tested annually for impairment. If an intangible asset is determined to be impaired, it will be written
down to its recoverable amount, the higher of value in use and fair value less costs to sell, when this is less than the carrying value.
Additional information regarding the composition of goodwill and intangible assets is included in Note 11 of the audited annual 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. There is a significant potential impact on the valuation of
these liabilities should there be a change in assumptions for interest rates and equity market values.
Additional information on insurance-related liabilities is provided in Note 14 of the audited annual consolidated financial statements, and
information on insurance risk is provided in the Insurance Risk section and the Insurance Market 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 normal 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 audited annual
consolidated financial statements.
Transfer of Financial Assets
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 program.
We also purchase or originate certain commercial mortgage loans that 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 as described in the Off-Balance Sheet Arrangements section. 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. For certain SEs, we exercise judgment in determining whether
we control the entity.
BMO Financial Group 206th Annual Report 2023 121
MANAGEMENT’S DISCUSSION AND ANALYSIS
Additional information concerning our interests in SEs is included in the Off-Balance Sheet Arrangements section, as well as in Note 7
of the audited annual consolidated financial statements.
Acquisition of Bank of the West – Valuation of Assets and Liabilities
Significant judgments and assumptions were used to determine fair value of the Bank of the West assets acquired and liabilities assumed,
including the loan portfolio, core deposit and other relationship intangible assets and fixed-maturity deposits.
Additional information regarding the accounting for this acquisition is included in Notes 4 and 10 of the audited annual consolidated
financial statements.
Caution
This Critical Accounting Estimates and Judgments section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
Future Changes in Accounting Policies
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IFRS 17, 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 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.
IFRS 17 will change the fundamental principles used to recognize and measure insurance contracts, including life insurance contracts, reinsurance
contracts held 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 insurance-specific risk, and a contractual service margin (CSM) representing unearned profits.
‰ The CSM component of the insurance contract liability will be amortized into income as services/insurance coverage is provided. For groups of
onerous contracts that are expected to experience losses, these 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.
‰ The discount rate we use under IFRS 4 is connected to the net yield of the assets held to support insurance contract liabilities. Under IFRS 17, the
rate used to discount our insurance contract liabilities will reflect the characteristics of those insurance contract liabilities. We have elected the
accounting policy choice under IFRS 17 to recognize changes in the discount rate and financial assumptions on insurance contract liabilities through
the Consolidated Statement of Income.
On transition, we are required to apply a full retrospective approach, where we restate prior periods as if we had always applied IFRS 17, unless
impracticable, in which case we will apply either the modified retrospective approach, where we apply specific modifications to the full retrospective
approach, or the fair value approach, where we determine a fair value for the CSM by taking the difference between discounted fulfilment cash flows
and risk adjustment using market participant assumptions versus using our own IFRS 17 assumptions. We have completed our assessment of IFRS 17
and will apply the full retrospective approach to our creditor business and the fair value approach to all other products written prior to
November 1, 2022.
Further information on these amendments can be found in Note 1 of the audited annual consolidated financial statements.
IAS 40, Investment Property
On transition to IFRS 17, we plan to voluntarily change our accounting policy for the measurement of investment properties, recorded in insurance-
related assets in other assets in our Consolidated Balance Sheet, from cost to fair value. International Accounting Standard 40, Investment Property
(IAS 40), permits either measurement approach. We will apply the change retrospectively, as if we had always accounted for investment properties
at fair value.
Further information on these amendments can be found in Note 1 of the audited annual consolidated financial statements.
IAS 12, Income Taxes
In May 2021, the IASB issued an amendment to IAS 12, Income Taxes (IAS 12), which will be effective for our fiscal year beginning November 1, 2023.
The amendment narrows the IAS 12 exemption to exclude transactions that give rise to equal and offsetting temporary differences (e.g. leases
and asset retirement obligations). Upon adoption of the amendment, we will record separate deferred tax assets and liabilities related to the assets
and liabilities that give rise to these temporary differences. This change will impact note disclosure only. There will be no impact on our Consolidated
Balance Sheet, as the balances are eligible for offset when levied by the same tax authority.
In May 2023, the IASB issued an additional amendment to IAS 12. The amendment addresses concerns related to accounting for the global
minimum top-up tax, as outlined in the two-pillar plan (Pillar 2) for international tax reform developed by members of the Organisation for Economic
Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting. The objective of the tax reform is to ensure that
large multinational groups are subject to a minimum tax rate of 15% on income earned in each jurisdiction in which they operate. We will be
impacted by the tax reform once the Canadian federal government, or a foreign government of a country in which we operate, passes into law the
global minimum tax. The amendment to IAS 12 includes temporary mandatory relief from recognizing and disclosing deferred taxes for the top-up
tax, that will be applicable once the measures are substantively enacted.
Further details are provided in Note 1 of the audited annual consolidated financial statements.
Caution
This Future Changes in Accounting Policies section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.
122 BMO Financial Group 206th Annual Report 2023
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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.
New Canadian Tax Measures
On August 4, 2023, the Canadian government released proposed legislation on a number of measures, including a 2% tax on share buybacks
that occur after December 31, 2023, and the two-pillar plan (Pillar 2) for international tax reform developed by members of the Organisation for
Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting, which is expected to establish rules for
a 15% minimum tax on operations globally, effective in the fiscal years of multinational enterprises that begin on or after December 31, 2023.
On June 22, 2023, the Canadian government enacted legislation amending the definition of a financial service in order to make payment card
clearing services taxable for GST/HST purposes, retroactive to the enactment of the GST. The third quarter of 2023 included a one-time charge
of $131 million ($160 million pre-tax), comprising $138 million pre-tax recorded in non-interest revenue and $22 million pre-tax recorded in
non-interest expense, both in Corporate Services. In addition, the Canadian federal budget proposed a number of tax measures, including a rule
that would, in certain circumstances, deny any deductions for dividends that are received after December 31, 2023. This was reaffirmed in the
government’s 2023 Fall Economic Statement.
On December 15, 2022, the Canadian government enacted legislation related to tax measures that are 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 average taxable
income for fiscal 2020 and fiscal 2021, less a $1 billion exemption, payable in equal instalments over five years. The legislation also included a
permanent 1.5% increase in the tax rate, applicable to taxable income above $100 million (effective for taxation years that end after April 7, 2022,
pro-rated for the first year). The first quarter of 2023 included a one-time tax expense of $371 million, comprising a CRD of $312 million and $59 million
related to the pro-rated fiscal 2022 impact of the 1.5% tax rate increase, net of a deferred tax asset remeasurement. These amounts were recorded in
Corporate Services.
Interbank Offered Rate Reform – Phase 2 amendments
Effective November 1, 2020, BMO 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 Interbank Offered Rate (IBOR) reform.
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 temporary relief from the application of specific IAS 39 hedge accounting
requirements to hedging relationships affected by IBOR reform. For example, there is an exemption available 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 audited annual consolidated financial statements.
On July 27, 2023, the Canadian Alternative Reference Rate (CARR) working group announced that lenders may not offer new Canadian Dollar
Offered Rate (CDOR) and bankers’ acceptance (BA) loans after November 1, 2023, which will result in the Canadian loan markets’ shift away from
CDOR and BAs by the CDOR cessation date in June 2024.
U.S. Federal Deposit Insurance Corporation Assessment
On November 16, 2023, the U.S. Federal Deposit Insurance Corporation (FDIC) approved the final rule to implement the special assessment on
depository institutions to recover the losses incurred in the deposit insurance fund that were attributable to the protection of uninsured depositors
of Silicon Valley Bank and Signature Bank. The special assessment is set at an annual rate of approximately 13.4 basis points on a U.S. depository
institution’s total estimated uninsured deposits for the December 31, 2022 reporting period, payable over eight quarterly assessment periods,
beginning in the first assessment period in 2024. BMO expects to record a one-time charge related to the FDIC special assessment in the first quarter
of fiscal 2024 of approximately US$300 million in non-interest expense.
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 normal 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 that we offer these services to our customers. 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
audited annual consolidated financial statements.
BMO Financial Group 206th Annual Report 2023 123
MANAGEMENT’S DISCUSSION AND ANALYSIS
Shareholders’ Auditors’ Services and Fees
Review of Shareholders’ Auditors
The Audit and Conduct Review Committee (ACRC) of the Board of Directors 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 a focus on the more complex and challenging areas of the audit
‰ Reviewing and evaluating the audit findings, including during 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
A
&
D
M
of management
‰ Performing a comprehensive review of the shareholders’ auditors every five years, and performing an annual review in the years between these
comprehensive reviews, following the guidelines set out by the Chartered Professional Accountants of Canada (CPA Canada) and the CPAB.
In 2023, an annual review of the shareholders’ auditors was completed. Input was sought from ACRC members and management in areas such as
the effectiveness of the auditors’ communications, their 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 the CPAB. These reviews
focused on: (i) the independence, objectivity and professional skepticism of the shareholders’ auditors; (ii) the quality of the engagement team; and
(iii) the quality of communications and interactions with the shareholders’ auditors. As a result of 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
considered the risks and benefits of audit firm rotation, including reports issued by the CPAB and CPA Canada. The ACRC concluded that existing
requirements, including audit firm review and audit team member rotation, ensure auditor independence while maintaining and enhancing audit
quality, which may be impaired by audit firm rotation. 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 BMO’s 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
BMO’s 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
2023
34.4
3.0
0.2
0.9
38.5
2022
23.5
4.8
0.3
0.7
29.3
(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.
124 BMO Financial Group 206th Annual Report 2023
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, 2023, under the supervision of the CEO and the CFO, the management of BMO Financial Group (BMO) 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) of 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, 2023.
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.
M
D
&
A
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, 2023.
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, 2023, in
accordance with the criteria established in the 2013 COSO Framework.
Changes in Internal Control over Financial Reporting
During the year, the bank acquired Bank of the West, contributing $128 billion or 11% to total assets as at February 1, 2023. We evaluated the
effectiveness of internal control over financial reporting as we completed the integration of Bank of the West with BMO, and made changes to our
internal control framework, as necessary.
Other than as mentioned above, there were no changes in our internal control over financial reporting during the year ended October 31, 2023,
which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
BMO Financial Group 206th Annual Report 2023 125
SUPPLEMENTAL INFORMATION
Supplemental Information
Table 1: Ten-Year Statistical Review
($ 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
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
77,934
4,125
322,379
115,662
656,478
116,698
87,466
5,734
273,262
93,261
8,303
232,849
57,408
9,035
234,260
48,803
7,987
189,438
42,142
8,305
180,935
32,599
6,490
163,198
31,653
4,449
149,985
40,295
7,382
130,918
28,386
6,110
143,319
113,194
551,339
108,204
107,382
458,262
88,118
111,878
447,420
89,260
104,004
426,984
74,979
85,051
384,172
72,688
75,047
358,507
73,763
66,646
357,518
77,709
68,066
321,531
73,689
53,555
291,400
65,889
1,293,276
1,139,199
988,175
949,261
852,195
773,293
709,604
687,960
641,881
588,659
909,676
298,335
8,228
769,478
290,533
8,150
685,631
238,128
6,893
659,034
225,218
8,416
568,143
225,981
6,995
520,928
199,862
6,782
479,792
180,438
5,029
470,281
170,910
4,439
438,169
159,383
4,416
393,088
155,254
4,913
1,216,239
1,068,161
930,652
892,668
801,119
727,572
665,259
645,630
601,968
553,255
77,037
71,038
57,523
56,593
51,076
45,721
44,345
42,306
39,422
34,313
Total liabilities and equity
1,293,276
1,139,199
988,175
949,261
852,195
773,293
709,604
687,960
641,881
588,659
Condensed Consolidated Statement
of Income
Net interest income
Non-interest revenue
Total revenue
Insurance claims, commissions and changes
in policy benefit liabilities (CCPB)
Provision for credit losses (PCL)
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
Net income available to common shareholders
Condensed Consolidated Statement
of Changes in Equity
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interest in subsidiaries
Total equity
18,681
12,518
31,199
1,939
2,178
21,219
5,863
1,486
4,377
4,034
6,958
22,941
328
44,920
1,862
28
77,037
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
33,710
27,186
25,186
25,483
22,905
22,107
20,960
19,389
18,223
(683)
1,399
1,708
2,709
1,352
1,538
1,543
1,254
1,505
313
16,194
17,886
4,349
13,537
13,306
6,308
17,744
317
45,117
1,552
–
20
15,509
10,258
2,504
7,754
7,510
5,558
13,599
313
35,497
2,556
–
2,953
14,177
872
14,630
662
13,477
746
13,192
771
12,916
544
12,250
527
10,955
6,348
1,251
5,097
4,850
7,272
1,514
5,758
5,547
7,414
1,961
5,453
5,269
6,631
1,292
5,339
5,153
5,730
1,100
4,630
4,471
5,341
936
4,405
4,253
5,236
903
4,333
4,157
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
–
71,038
57,523
56,593
51,076
45,721
44,345
42,306
39,422
34,313
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 2019, BMO adopted
IFRS 15 Revenue from Contracts with Customers and elected to reclassify 2017 and 2018 amounts.
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126 BMO Financial Group 206th Annual Report 2023
($ millions, except as noted)
As at or for the year ended October 31
Other Financial Measures
Common Share Data ($)
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Book value per share
Closing share price
Number outstanding (in thousands)
End of year
Market capitalization ($ 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
loans and acceptances
Return on average assets
Return on average risk-weighted assets (1)
Average assets ($ millions)
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
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
5.69
5.68
5.80
97.17
104.79
720,909
75.5
18.5
1.08
5.5
102.0
6.0
68.0
1.63
0.35
20.04
19.99
5.44
95.60
125.49
677,107
85.0
6.3
1.31
4.3
27.1
11.60
11.58
4.24
80.18
134.37
648,136
87.1
11.6
1.68
3.2
36.5
7.56
7.55
4.24
77.40
79.33
8.68
8.66
4.06
71.54
97.50
8.19
8.17
3.78
64.73
98.43
7.93
7.90
3.56
61.91
98.83
6.94
6.92
3.40
59.57
85.36
6.59
6.57
3.24
56.31
76.04
6.44
6.41
3.08
48.18
81.73
645,889
51.2
10.5
1.02
5.3
56.1
639,232
62.3
11.3
1.36
4.2
46.8
639,330
62.9
12.0
1.52
3.8
46.1
647,816
64.0
12.5
1.60
3.6
44.9
645,761
55.1
12.3
1.43
4.0
49.0
642,583
48.9
11.6
1.35
4.3
49.2
649,050
53.0
12.8
1.70
3.8
47.8
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
1.62
1.59
1.64
1.70
1.67
1.74
1.76
1.69
1.57
0.06
–
0.63
0.20
0.17
0.20
0.22
0.17
0.18
0.19
0.35
1.08
1,248,356
0.10
1.26
3.89
1,072,497
0.11
0.79
2.38
981,140
0.33
0.54
1.51
942,450
0.17
0.69
1.86
833,252
0.18
0.72
1.97
754,295
0.22
0.74
1.98
722,626
0.22
0.65
1.71
707,122
–
0.66
1.84
664,391
–
0.72
1.85
593,928
12.5
14.1
16.2
4.2
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
55,767
1,890
5,765
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
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 2019, BMO adopted
IFRS 15 Revenue from Contracts 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
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BMO Financial Group 206th Annual Report 2023 127
SUPPLEMENTAL INFORMATION
Table 2: Average Assets, Liabilities and Interest Rates
($ millions, except as noted)
For the year ended October 31
Assets
Canadian Dollar
Interest bearing deposits with banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Total loans
Total Canadian dollar
U.S. Dollar and Other Currencies
Interest bearing deposits with banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
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Residential mortgages
Consumer instalment and other personal
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
Total equity
Total Liabilities, Equity and Interest Expense
Net interest margin
– based on earning assets
– based on total assets
Net interest income
Average
balances
Average
interest
rate (%)
33,102
94,697
47,239
143,958
69,611
9,519
114,176
337,264
512,302
66,212
218,443
69,405
20,168
29,021
1,265
225,567
276,021
630,081
105,973
4.77
4.08
4.90
3.96
5.70
14.69
4.88
4.93
4.76
4.33
3.45
5.11
4.41
6.54
10.70
6.35
6.25
4.95
2023
Interest
income/
expense
1,579
3,859
2,317
5,696
3,969
1,399
5,575
16,639
24,394
2,866
7,533
3,543
890
1,899
135
14,314
17,238
31,180
Average
balances
Average
interest
rate (%)
33,950
80,971
50,090
132,118
66,899
7,933
101,011
307,961
472,972
60,463
185,099
62,416
8,312
14,439
621
172,583
195,955
503,933
95,592
1.23
2.52
1.39
2.53
3.65
13.37
3.90
3.50
2.95
0.83
1.92
1.02
2.97
3.63
9.92
4.31
4.22
2.57
2022
Interest
income/
expense
416
2,043
695
3,345
2,442
1,061
3,940
10,788
13,942
504
3,548
640
247
525
61
7,430
8,263
12,955
1,248,356
4.45
55,574
1,072,497
2.51
26,897
4,415
181,371
166,134
351,920
55,466
25,750
433,136
25,940
368,237
119,710
513,887
100,084
33,403
647,374
93,548
2.01
3.47
2.02
2.77
4.22
3.58
3.00
4.43
3.70
1.70
3.27
4.95
6.37
3.69
89
6,301
3,352
9,742
2,340
921
4,983
169,063
149,329
323,375
60,163
25,788
13,003
409,326
1,148
13,617
2,040
16,805
4,957
2,128
23,890
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
19
2,221
866
3,106
974
616
4,696
285
3,104
216
3,605
1,671
1,040
6,316
1,174,058
74,298
1,248,356
3.14
36,893
1,008,822
63,675
1.09
11,012
2.96
36,893
1,072,497
1.03
11,012
1.63
1.50
1.62
1.48
18,681
15,885
Certain comparative figures have been reclassified to conform with the current year’s presentation.
(1) For the years ended October 31, 2023 and 2022, the maximum amount of securities lent or sold under repurchase agreements at any month end was $111,685 million
and $129,549 million, respectively.
128 BMO Financial Group 206th Annual Report 2023
Table 3: Volume/Rate Analysis of Changes in Net Interest Income
Increase (decrease) due to change in
2023/2022
($ millions)
For the year ended October 31
Assets
Canadian Dollar
Interest bearing deposits with banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Consumer instalment and other personal
Credit cards
Business and government
Total loans
Change in Canadian dollar interest income
U.S. Dollar and Other Currencies
Interest bearing deposits with banks and other interest bearing assets
Securities
Securities borrowed or purchased under resale agreements
Loans
Residential mortgages
Consumer instalment and other personal
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)
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t
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I
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f
o
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m
a
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i
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n
Average
balance
Average
rate
(10)
346
(40)
300
99
212
513
1,124
1,420
48
639
71
353
530
64
2,281
3,228
3,986
1,173
1,470
1,662
2,051
1,428
126
1,122
4,727
9,032
2,314
3,346
2,832
290
844
10
4,603
5,747
Total
1,163
1,816
1,622
2,351
1,527
338
1,635
5,851
10,452
2,362
3,985
2,903
643
1,374
74
6,884
8,975
14,239
18,225
5,406
23,271
28,677
(2)
162
98
258
(76)
(1)
181
29
636
128
793
180
646
1,619
1,800
3,606
72
3,918
2,388
6,378
1,442
306
8,126
834
9,877
1,696
12,407
3,106
442
15,955
24,081
(810)
70
4,080
2,486
6,636
1,366
305
8,307
863
10,513
1,824
13,200
3,286
1,088
17,574
25,881
2,796
BMO Financial Group 206th Annual Report 2023 129
SUPPLEMENTAL INFORMATION
Table 4: Net Loans and Acceptances –
by Geography (1)
($ millions)
As at October 31
Consumer
Residential mortgages
Credit cards
Consumer instalment and
other personal loans
Total consumer
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
2023
2022
2023
2022
2023
2022
2023
2022
150,570
10,880
139,387
9,069
26,675
1,414
9,483
594
69,919
71,070
33,969
14,931
–
–
–
–
–
–
231,369
141,405
219,526
135,317
62,058
221,218
25,008
175,571
–
11,662
–
11,225
177,245
12,294
103,888
293,427
374,285
148,870
9,663
86,001
244,534
322,113
372,774
354,843
283,276
200,579
11,662
11,225
667,712
566,647
(1,272)
(1,102)
(1,833)
(959)
(18)
(12)
(3,123)
(2,073)
371,502
353,741
281,443
199,620
11,644
11,213
664,589
564,574
Table 5: Net Loans and Acceptances –
Segmented Information (1)
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
($ 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 (2)
(1) Segmented credit information by geographic area is based upon the country of ultimate risk.
(2) The Business and government Net Loans and Acceptances balances are net of allowance for credit losses on impaired loans only.
2023
2022
17,741
55,978
171,236
57,877
68,670
17,617
53,975
159,862
54,607
67,680
371,502
353,741
69,726
7,531
30,374
23,643
18,400
1,917
4,710
40,547
3,268
3,711
15,656
12,247
1,302
65,593
71,179
2,746
1,735
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
374,285
322,113
130 BMO Financial Group 206th Annual Report 2023
Table 6: Gross Impaired Loans (GIL) –
by Geography (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 impaired loans and
acceptances, net of
allowance for credit losses
on impaired loans
Condition Ratios
GIL as a % of gross loans
and acceptances
Consumer
Business and government
2023
2022
2023
2022
2023
2022
2023
2022
249
291
540
1,089
194
197
391
767
175
258
433
1,898
101
115
216
604
1,629
1,158
2,331
820
0.44
0.23
0.77
0.33
0.18
0.57
0.82
0.70
0.86
0.41
0.86
0.34
–
–
–
–
–
–
–
–
–
–
–
13
424
549
973
2,987
295
312
607
1,384
13
3,960
1,991
0.12
–
0.12
0.59
0.33
0.80
0.35
0.25
0.43
Table 7: Gross Impaired Loans –
Segmented Information
($ millions)
As at October 31
Gross 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
(1) Segmented credit information by geographic area is based upon the country of ultimate risk.
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
2023
2022
438
123
479
243
135
4
–
422
2
22
170
3
4
868
52
3
19
72
59
173
78
202
1
–
184
19
39
73
4
3
410
54
3
10
2,987
1,384
BMO Financial Group 206th Annual Report 2023 131
SUPPLEMENTAL INFORMATION
Table 8: Changes in Gross Impaired Loans –
by Geography (1)
($ millions, except as noted)
As at October 31
Gross impaired loans and acceptances (GIL),
beginning of year
Consumer
Business and government
Total GIL, beginning of year
Purchased credit impaired (PCI) loans
Consumer
Business and government
Total PCI
Additions to impaired loans
and acceptances
Consumer
Business and government
Total additions
Reductions to impaired loans
and acceptances (2)
Consumer
Business and government
Total reductions due to net
repayments and other
Write-offs (3)
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
Canada
United States
Other countries
Total
2023
2022
2023
2022
2023
2022
2023
2022
391
767
1,158
–
–
–
897
819
1,716
382
813
1,195
–
–
–
630
538
1,168
216
604
820
104
311
415
332
1,994
2,326
256
718
974
–
–
–
77
377
454
(506)
(413)
(462)
(533)
(80)
(723)
(66)
(389)
(919)
(995)
(803)
(455)
(243)
(83)
(326)
539
1,090
1,629
0.23
0.77
0.44
(159)
(51)
(210)
391
767
1,158
0.18
0.57
0.33
(138)
(289)
(427)
434
1,897
2,331
0.70
0.86
0.82
(51)
(102)
(153)
216
604
820
0.86
0.34
0.41
–
13
13
–
–
–
–
5
5
–
(18)
(18)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
13
13
–
–
–
–
–
–
–
13
13
–
0.12
0.12
607
1,384
1,991
104
311
415
1,229
2,818
4,047
638
1,531
2,169
–
–
–
707
928
1,635
(586)
(1,154)
(528)
(922)
(1,740)
(1,450)
(381)
(372)
(753)
973
2,987
3,960
0.33
0.80
0.59
(210)
(153)
(363)
607
1,384
1,991
0.25
0.43
0.35
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
Table 9: Allowance for Credit Losses –
by Geography (1) (2) (4)
($ millions, except as noted)
Canada
United States
Other countries
Total
As at October 31
Consumer
Residential mortgages
Consumer instalment and other
personal loans
Total consumer
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
2023
2022
2023
2022
2023
2022
2023
2022
5
118
123
334
457
1,272
1,729
7
88
95
268
363
1,102
1,465
–
34
34
193
227
1,833
2,060
3
14
17
159
176
959
1,135
28.1
22.8
30.6
31.3
24.3
34.9
9.7
7.8
10.2
21.5
7.9
26.3
–
–
–
–
–
18
18
–
–
–
–
–
–
5
5
12
17
5
152
157
527
684
3,123
3,807
10
102
112
432
544
2,073
2,617
38.5
–
38.5
17.3
16.1
17.6
27.3
18.5
31.2
(1) Segmented credit information by geographic area is based upon the country of ultimate risk.
(2) 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.
(3) Excludes certain loans that are written off directly and not classified as new formations.
(4) Amounts exclude Allowance for Credit Losses related to off-balance sheet instruments, which are reported in Other Liabilities.
132 BMO Financial Group 206th Annual Report 2023
Table 10: 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)
2023
2022
34
55
167
43
4
–
–
61
–
22
20
2
2
108
9
–
–
527
11
25
81
31
13
–
–
41
5
39
10
1
1
144
29
–
1
432
S
u
p
p
l
e
m
e
n
t
a
l
I
n
f
o
r
m
a
t
i
o
n
Table 11: Changes in Allowance for Credit Losses –
by Geography (2)
($ 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 (3)
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 (4)
Canada
United States
Other countries
Total
2023
2022
2023
2022
2023
2022
2023
2022
851
797
1,648
907
792
1,699
789
124
913
121
26
147
(621)
(83)
(704)
(66)
(40)
(106)
268
48
316
105
–
105
(390)
(51)
(441)
(39)
8
(31)
173
1,162
1,335
437
845
1,282
63
55
118
(196)
(289)
(485)
(15)
112
97
1,074
824
1,898
851
797
1,648
462
1,885
2,347
133
1,111
1,244
45
(43)
2
60
50
110
(69)
(102)
(171)
4
146
150
173
1,162
1,335
un
un
un
un
–
15
15
–
(9)
(9)
–
–
–
–
–
–
–
16
16
–
22
22
un
–
15
15
–
(7)
(7)
–
–
–
–
–
–
–
7
7
–
15
15
un
1,024
1,974
2,998
1,226
960
2,186
184
81
265
(817)
(372)
(1,189)
(81)
88
7
1,536
2,731
4,267
1,040
1,918
2,958
313
(2)
311
165
50
215
(459)
(153)
(612)
(35)
161
126
1,024
1,974
2,998
0.15
0.08
(1) Amounts exclude Allowance for Credit Losses related to off-balance sheet instruments, which are reported in Other Liabilities.
(2) Segmented credit information by geographic area is based upon the country of ultimate risk.
(3) Excludes provision for credit losses on other assets.
(4) Aggregate Net Loans and Acceptances balances are net of allowance for credit losses on performing loans and impaired loans (excluding those related to off-balance sheet instruments).
un – unavailable
BMO Financial Group 206th Annual Report 2023 133
SUPPLEMENTAL INFORMATION
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
Table 13: Average Deposits
n
o
i
t
a
m
r
o
f
n
I
l
a
t
n
e
m
e
l
p
p
u
S
($ millions, except as noted)
Deposits Booked in Canada
Payable on demand – interest bearing
Payable on demand – non-interest bearing
Payable after notice
Payable on a fixed date
Total deposits booked in Canada
Deposits Booked in the United States
Payable on demand – interest bearing
Payable on demand – non-interest bearing
Payable after notice
Payable on a fixed date
Total deposits booked in the United States
Deposits Booked in Other Countries
Payable on demand – interest bearing
Payable on demand – non-interest bearing
Payable after notice
Payable on a fixed date
Total deposits booked in other countries
Total average deposits (1)
2023
2022
19
366
379
764
60
37
113
31
(50)
1
–
37
(6)
(10)
69
–
2
92
14
–
26
416
1,180
998
2,178
0.35
0.28
0.12
0.19
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
Average
balance
51,830
71,789
125,664
292,597
541,880
17,837
26,656
164,149
71,643
280,285
178
44
2,161
41,259
43,642
865,807
2023
Average
rate paid (%)
4.24
–
3.03
4.11
3.33
3.30
–
1.74
4.43
2.36
2.53
–
4.27
4.35
4.34
3.07
Average
balance
51,184
84,280
130,812
205,284
471,560
8,856
10,699
139,952
63,047
222,554
318
73
1,486
31,703
33,580
727,694
2022
Average
rate paid (%)
1.09
–
0.90
1.74
1.13
1.02
–
0.29
0.94
0.49
0.77
–
0.87
0.91
0.91
0.92
Certain comparative figures have been reclassified to conform with the current year’s presentation.
As at October 31, 2023 and 2022, deposits by foreign depositors in our Canadian bank offices amounted to $112,818 million and $95,292 million, respectively.
(1) Average deposits payable on a fixed date included $88 million, $44,520 million and $17,664 million of federal funds purchased, commercial paper issued and other deposit liabilities,
respectively, as at October 31, 2023 ($101 million, $27,287 million and $17,394 million, respectively, as at October 31, 2022).
134 BMO Financial Group 206th Annual Report 2023
Glossary of Financial Terms
Adjusted Earnings and Measures
Management considers both reported and
adjusted results to be useful in assessing
underlying ongoing business performance, as
set out in the Non-GAAP and Other Financial
Measures section.
• Adjusted Revenue – calculated as revenue
excluding the impact of certain non-recurring
items, and adjusted net revenue is adjusted
revenue, net of CCPB.
• Adjusted Provision for Credit Losses –
calculated as provision for credit losses
excluding the impact of certain non-recurring
items.
• Adjusted Non-Interest Expense – calculated as
non-interest expense excluding the impact of
certain non-recurring items.
• Adjusted Effective Tax Rate – calculated as
adjusted provision for income taxes divided by
adjusted income before provision for income
taxes.
• Adjusted Net Income – calculated as net
income excluding the impact of certain
non-recurring items.
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.
by basic earnings per share. Adjusted dividend
payout ratio is calculated in the same manner,
using adjusted net income.
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.
Bankers’ Acceptances (BAs) are bills of
exchange or negotiable instruments drawn by a
borrower for payment at maturity and accepted
by a bank. BAs constitute a guarantee of
payment by the bank and can be traded in the
money market. The bank earns a “stamping
fee” for providing this guarantee.
Basis Point is one one-hundredth of a
percentage point.
Collateralized Mortgage Obligations (CMOs)
are debt securities with multiple tranches,
issued by structured entities and collateralized
by a pool of mortgages. Each tranche offers
different terms, interest rates, and risks.
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 financial 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
Dividend Yield represents dividends per
common share divided by the closing share
price.
Earnings per Share (EPS) is calculated by
dividing net income attributable to bank
shareholders, after deducting preferred share
dividends and distributions on other equity
instruments, by the average number of
common shares outstanding. Adjusted EPS is
calculated in the same manner, using adjusted
net income attributable to bank shareholders.
Diluted EPS, which is BMO’s basis for measuring
performance, adjusts for possible conversions
of financial instruments into common shares if
those conversions would reduce EPS, and is
more fully explained in Note 23 of the
consolidated financial statements.
Earnings Sensitivity is a measure of the impact
of potential changes in interest rates on the
projected 12-month pre-tax net income 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 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.
Effective Tax Rate is calculated as provision
for income taxes divided by income before
provision for income taxes.
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. 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 and social factors that
impact BMO or its customers, and BMO’s impact
on the environment and society.
BMO Financial Group 206th Annual Report 2023 135
GLOSSARY OF FINANCIAL TERMS
Fair Value is the amount of consideration that
would be agreed upon in an arm’s-length
transaction between knowledgeable, willing
parties who are under no compulsion to act in
an orderly market transaction.
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.
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)
is calculated as the credit impaired balance of
loans and customers’ liability under
acceptances.
Guarantees and Standby Letters of Credit
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.
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 a reasonable assurance of the timely
collection of principal or interest.
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.
136 BMO Financial Group 206th Annual Report 2023
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.
Master Netting Agreements are agreements
between two parties designed to reduce the
credit risk of multiple derivative transactions
through the provision of a legal right to offset
exposure in the event of default.
Model Risk is the potential for adverse
outcomes resulting from decisions that are
based on incorrect or misused model results.
These adverse outcomes 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 customers surveyed 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 score is calculated by subtracting
the percentage of “Detractors” from the
percentage of “Promoters”.
Net Stable Funding Ratio (NSFR) is a
regulatory liquidity measure that assesses the
stability of a bank’s funding profile in relation to
the liquidity value of its assets and is calculated
in accordance with OSFI’s Liquidity Adequacy
Requirements Guideline.
Notional Amount refers to the principal
amount used to calculate interest and other
payments under derivative contracts. The
principal amount does not change hands
under the terms of a derivative contract, except
in the case of cross-currency swaps.
Off-Balance Sheet Financial Instruments
consist of a variety of financial arrangements
offered to clients, which include credit
derivatives, written put options, backstop
liquidity facilities, standby letters of credit,
performance guarantees, credit enhancements,
commitments to extend credit, securities
lending, documentary and commercial letters
of credit, and other indemnifications.
Office of the Superintendent of Financial
Institutions (OSFI) is the government agency
responsible for regulating banks, insurance
companies, trust companies, loan companies
and pension plans in Canada.
Operating Leverage is the difference between
the growth rates of revenue and non-interest
expense. Adjusted operating leverage is the
difference between the growth rates of
adjusted revenue and adjusted non-interest
expense.
Operating Leverage, net of CCPB, is the
difference between the growth rates of
revenue, net of CCPB (net revenue), and
non-interest expense. Adjusted net operating
leverage, is the difference between the growth
rates of adjusted net revenue and adjusted
non-interest expense. 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 hold in our credit or investment
portfolios. Examples of these risks include cyber
and cloud security risk, technology risk, fraud
risk and business continuity 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.
Purchased Credit Impaired (PCI) Loans are
loans for which the timely collection of interest
and principal is no longer reasonably assured.
These loans are credit-impaired upon initial
recognition.
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 an 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 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.
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 is the potential for loss due to
fluctuations in the external business environment
and/or failure to properly respond to these
fluctuations due to inaction, ineffective strategies
or poor implementation of strategies.
Stress Tests are used to determine the
potential impact of low-frequency, high-severity
events on the trading and underwriting
portfolios. The portfolios are measured daily
against a variety of hypothetical and historical
event scenarios. Scenarios are continuously
refined to reflect the latest market conditions
and portfolio risk exposures.
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 to facilitate comparisons of income
between taxable and tax-exempt sources. The
offset to operating segment teb adjustments is
reflected in Corporate Services revenue and
provision for (recovery of) income taxes.
Structured Entities (SEs) include entities
for which voting or similar rights are not the
dominant factor in determining control of the
entity. BMO is required to consolidate a SE if it
controls the entity by having power over the
entity, exposure to variable returns as a result
of its involvement and the ability to exercise
power to affect the amount of those returns.
Structural (Non-Trading) Market Risk
comprises interest rate risk arising from banking
activities (loans and deposits) and foreign
exchange risk arising from foreign currency
operations and exposures.
Swaps are contractual agreements between
two parties to exchange a series of cash flows.
The various swap agreements that BMO enters
into are as follows:
• Commodity swaps – counterparties generally
exchange fixed-rate and floating-rate
payments based on a notional value of a
single commodity.
• Credit default swaps – one counterparty pays
the other a fee in exchange for an agreement
by the other counterparty to make a payment
if a credit event occurs, such as bankruptcy or
failure to pay.
• Cross-currency interest rate swaps – fixed-rate
and floating-rate interest payments and
principal amounts are exchanged in different
currencies.
• Cross-currency swaps – fixed-rate interest
payments and principal amounts are
exchanged in different currencies.
• Equity swaps – counterparties exchange the
return on an equity security or a group of
equity securities for a return based on a fixed
or floating interest rate or the return on
another equity security or group of equity
securities.
• Interest rate swaps – counterparties generally
exchange fixed-rate and floating-rate interest
payments based on a notional value in a
single currency.
• Total return swaps – one counterparty agrees
to pay or receive from the other cash amounts
based on changes in the value of a reference
asset or group of assets, including any returns
such as interest earned on these assets, in
exchange for amounts that are based on
prevailing market funding rates.
Tangible Common Equity is calculated as
common shareholders’ equity, less goodwill
and acquisition-related intangible assets, net
of related deferred tax liabilities.
Taxable Equivalent Basis (teb): Operating
segment revenue is presented on a taxable
equivalent basis (teb). Revenue and the
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.
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 a daily
basis. Trading-related revenue also includes
income (expense) and gains (losses) from both
on-balance sheet instruments and interest rate,
foreign exchange (including spot positions),
equity, commodity and credit contracts.
Value-at-Risk (VaR) measures the maximum
loss likely to be experienced in the trading and
underwriting portfolios, measured at a 99%
confidence level over a one-day holding period.
VaR is calculated for specific classes of risk in
BMO’s trading and underwriting activities
related to interest rates, foreign exchange rates,
credit spreads, equity and commodity prices and
their implied volatilities.
BMO Financial Group 206th Annual Report 2023 137
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 given 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, 2023, 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, 2023 is set forth on page 144.
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, 2023 and have issued their report below.
Darryl White
Chief Executive Officer
Tayfun Tuzun
Chief Financial Officer
Toronto, Canada
December 1, 2023
138 BMO Financial Group 206th Annual Report 2023
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:
‰
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‰
‰
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‰ and notes to the consolidated financial statements, including a summary of significant accounting policies
the consolidated balance sheets as at October 31, 2023 and October 31, 2022;
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 accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of
the Bank as at October 31, 2023 and October 31, 2022, 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 (IASB).
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, 2023. 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.
Valuation of the Loans Acquired in the Bank of the West Acquisition
Refer to Notes 1, 4 and 10 to the consolidated financial statements.
On February 1, 2023, the Bank completed the acquisition of Bank of the West and its subsidiaries for a cash purchase price of $18.4 billion. The
transaction has been accounted for as a business combination and the assets acquired and liabilities assumed from Bank of the West were recorded
at fair value as of the acquisition date. As part of the transaction, the Bank acquired intangible assets of $2,883 million, goodwill of $10,582 million
and recorded the assets acquired and liabilities assumed at fair value as at the date of the acquisition. The fair value of the acquired loans on the
acquisition date was $76,483 million. The fair value is based on a discounted cash flow methodology that includes certain key assumptions such as
expected credit losses and discount rates.
We identified the assessment of the initial measurement of the fair value of the acquired loans as part of the Bank of the West acquisition as a
key audit matter. Significant auditor judgment was required because there was a high degree of measurement uncertainty in the key assumptions
used to determine fair value. Significant auditor attention and complex auditor judgment was required to evaluate the results of the audit procedures
performed. Further, specialized skills and knowledge, including experience in the industry, were required to apply the 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 the acquired loan portfolio. This included controls
related to the development of the assumptions for expected credit losses and discount rates. We tested the completeness and accuracy of the
underlying loan data. With the involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, we tested
the fair value of a selection of acquired loans by developing an independent estimate of fair value using valuation assumptions that were consistent
with what market participants would use in pricing the acquired loans and compared it to the fair value determined by the Bank.
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, 2023 were $3,807 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 macroeconomic 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.
BMO Financial Group 206th Annual Report 2023 139
INDEPENDENT AUDITOR’S REPORT
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.
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 $204,104 million of securities as at October 31, 2023 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) independent price verification, and (2) review of third-party NAVs or fair
value determined by model-based valuation approaches. 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 (1) compared the
NAVs to external information or (2) tested management’s process of estimating the fair value by testing the appropriateness of the methods used,
evaluating the reasonableness of certain assumptions, and testing the mathematical accuracy of calculations.
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, 2023 were $12,340 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. The significant
assumptions include mortality, policy lapses and future investment yields.
We identified the assessment of insurance-related liabilities as a key audit matter. Significant auditor judgment was required because there was
a high degree of measurement uncertainty in the significant assumptions. Significant and complex auditor judgment was required to evaluate the
results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit procedures
and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this key audit matter. With the assistance of actuarial professionals with
specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of internal controls
over 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 studies for policy lapses and mortality, and examining management’s calculations and
comparing certain inputs into the future investment yields to externally available data.
140 BMO Financial Group 206th Annual Report 2023
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; and
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.
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
IASB, 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, 2023
BMO Financial Group 206th Annual Report 2023 141
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, 2023 and 2022, 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, 2023 and 2022, and its financial performance and its cash flows for the years then ended, in
conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
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, 2023, 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, 2023 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.
Valuation of the Loans Acquired in the Bank of the West Acquisition
As discussed in Notes 1, 4 and 10 to the consolidated financial statements, on February 1, 2023, the Bank completed the acquisition of Bank of the
West and its subsidiaries for a cash purchase price of $18.4 billion. The transaction has been accounted for as a business combination and the assets
acquired and liabilities assumed from Bank of the West were recorded at fair value as of the acquisition date. As part of the transaction, the Bank
acquired intangible assets of $2,883 million, goodwill of $10,582 million and recorded the assets acquired and liabilities assumed at fair value as at
the date of the acquisition. The fair value of the acquired loans on the acquisition date was $76,483 million. The fair value is based on a discounted
cash flow methodology that includes certain key assumptions such as expected credit losses and discount rates.
We identified the assessment of the initial measurement of the fair value of the acquired loans as part of the Bank of the West acquisition as a
critical audit matter. Significant auditor judgment was required because there was a high degree of measurement uncertainty in the key assumptions
used to determine fair value. Significant auditor attention and complex auditor judgment was required to evaluate the results of the audit procedures
performed. Further, specialized skills and knowledge, including experience in the industry, were required to apply the 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 the acquired loan portfolio. This included controls
related to the development of the assumptions for expected credit losses and discount rates. We tested the completeness and accuracy of the
underlying loan data. With the involvement of valuation professionals with specialized skills, industry knowledge and relevant experience, we tested
the fair value of a selection of acquired loans by developing an independent estimate of fair value using valuation assumptions that were consistent
with what market participants would use in pricing the acquired loans and compared it to the fair value determined by the Bank.
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, 2023
were $3,807 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 macroeconomic 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.
142 BMO Financial Group 206th Annual Report 2023
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.
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 $204,104 million of securities as at
October 31, 2023 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) independent price verification, and (2) review of third-party NAVs or fair
value determined by model-based valuation approaches. 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 (1) compared the
NAVs to external information or (2) tested management’s process of estimating the fair value by testing the appropriateness of the methods used,
evaluating the reasonableness of certain assumptions, and testing the mathematical accuracy of calculations.
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, 2023
were $12,340 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. The significant assumptions include mortality, policy lapses and future investment yields.
We identified the assessment of insurance-related liabilities as a critical audit matter. Significant auditor judgment was required because there
was a high degree of measurement uncertainty in the significant assumptions. Significant and complex auditor judgment was required to evaluate
the results of audit procedures. Further, specialized skills and knowledge, including experience in the industry, were required to apply audit
procedures and evaluate the results of those audit procedures.
The following are the primary procedures we performed to address this critical audit matter. With the assistance of actuarial professionals with
specialized skills, industry knowledge and relevant experience, we evaluated the design and tested the operating effectiveness of internal controls
over 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 studies for policy lapses and mortality, and examining management’s calculations and
comparing certain inputs into the future investment yields to externally available data.
Chartered Professional Accountants, Licensed Public Accountants
We have served as the Bank’s auditor since 2004 and as joint auditor for the prior 14 years.
Toronto, Canada
December 1, 2023
BMO Financial Group 206th Annual Report 2023 143
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, 2023, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, Bank of
Montreal (the “Bank”) maintained, in all material respects, effective internal control over financial reporting as of October 31, 2023, 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, 2023 and 2022, the related consolidated statements of income, comprehensive income,
changes in equity, and cash flows for each of the years then ended, and the related notes (collectively, the consolidated financial statements), and
our report dated December 1, 2023 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 125 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, 2023
144 BMO Financial Group 206th Annual Report 2023
Consolidated Statement of Income
For the Year Ended October 31 (Canadian $ in millions, except as noted)
2023
2022
Interest, Dividend and Fee Income
Loans
Securities (Notes 3 and 10) (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 (losses) (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 (loss)
Share of profit in associates and joint ventures
Other
Total Revenue
Provision for Credit Losses (Notes 4 and 10)
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
Attributable to:
Bank shareholders
Non-controlling interest in subsidiaries
Net Income
Earnings Per Common Share (Canadian $) (Note 23)
Basic
Diluted
Dividends per common share
$
$
40,169
11,392
4,013
55,574
26,547
430
9,916
36,893
18,681
1,025
1,517
(216)
1,548
700
1,851
1,244
1,107
181
235
2,498
185
643
12,518
31,199
2,178
1,939
11,515
4,879
1,015
814
368
1,147
1,481
21,219
5,863
1,486
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
$
4,377
$
13,537
4,365
12
4,377
5.69
5.68
5.80
$
$
$
$
13,537
–
13,537
20.04
19.99
5.44
$
$
$
$
(1) Includes interest income on securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, calculated using the effective interest rate method, of $6,027 million
for the year ended October 31, 2023 ($1,945 million in 2022).
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 206th Annual Report 2023 145
C
o
n
s
o
l
i
d
a
t
e
d
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 (losses) on cash flow hedges
(Losses) on derivatives designated as cash flow hedges arising during the year (Note 8)
Reclassification to earnings/goodwill of (gains) losses on derivatives designated as cash flow hedges
during the year (Note 10)
Net gains on translation of net foreign operations
Unrealized gains on translation of net foreign operations
Unrealized (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
Net unrealized gains on fair value through OCI equity securities arising during the year
Net gains (losses) on remeasurement of pension and other employee future benefit plans (Note 21)
Net gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value
Other Comprehensive Income (Loss), net of taxes (Note 22)
Total Comprehensive Income
Attributable to:
Bank shareholders
Non-controlling interest in subsidiaries
Total Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
2023
2022
$
4,377
$
13,537
(74)
(31)
(105)
(520)
(11)
(531)
(1,292)
(4,999)
973
(319)
1,399
(373)
–
1,026
–
(1)
(291)
(292)
310
(315)
(5,314)
3,202
(332)
29
2,899
1
659
1,282
1,942
(1,004)
$
4,687
$
12,533
4,675
12
12,533
–
$
4,687
$
12,533
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
d
e
t
a
d
i
l
o
s
n
o
C
146 BMO Financial Group 206th Annual Report 2023
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 (Notes 3 and 10)
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, 6 and 10)
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 (Note 9)
Goodwill (Notes 10 and 11)
Intangible assets (Notes 10 and 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)
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 shareholders’ equity
Non-controlling interest in subsidiaries (Note 16)
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
2023
2022
$
77,934
$
4,125
124,556
16,720
62,828
116,814
1,461
322,379
115,662
177,250
104,040
12,294
366,701
660,285
(3,807)
656,478
39,976
8,111
6,241
16,728
5,216
2,052
3,081
35,293
116,698
1,293,276
909,676
50,193
8,111
43,781
106,108
27,094
63,048
298,335
8,228
$
$
$
$
87,466
5,734
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
45,332
290,533
8,150
1,216,239
1,068,161
6,958
22,941
328
44,920
1,862
77,009
28
77,037
6,308
17,744
317
45,117
1,552
71,038
–
71,038
$
1,293,276
$
1,139,199
BMO Financial Group 206th Annual Report 2023 147
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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 align capital position with increased regulatory requirements as announced by OSFI (Note 16)
Issued for acquisitions (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 attributable to bank shareholders
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 (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 (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/goodwill of (gains) losses on derivatives designated as cash flow hedges during the year (Note 10)
Balance at End of Year
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes (Note 22)
Balance at beginning of year
Unrealized gains on translation of net foreign operations
Unrealized (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 on Pension and Other Employee Future Benefit Plans, net of taxes (Note 21)
Balance at beginning of year
Gains (losses) on remeasurement of pension and other employee future benefit plans (Note 21)
Balance at End of Year
Accumulated Other Comprehensive Income 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 Shareholders’ Equity
Non-Controlling Interest in Subsidiaries
Balance at beginning of year
Acquisition (Note 10)
Net income attributable to non-controlling interest in subsidiaries
Balance at End of Year
Total Equity
The accompanying notes are an integral part of these consolidated financial statements.
148 BMO Financial Group 206th Annual Report 2023
$
2023
2022
$
6,308
650
–
6,958
17,744
1,609
61
14
3,360
153
22,941
317
11
–
328
45,117
4,365
(331)
(4,148)
(73)
(10)
44,920
(359)
(74)
–
(31)
(464)
(5,129)
(1,292)
973
(5,448)
5,168
1,399
(373)
–
6,194
944
(1)
943
928
(291)
637
1,862
77,009
–
16
12
28
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
71,038
–
–
–
–
$
77,037
$
71,038
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Consolidated Statement of Cash Flows
For the Year Ended October 31 (Canadian $ in millions)
Cash Flows from Operating Activities
Net Income
Adjustments to determine net cash flows provided by operating activities:
Securities (gains), other than trading (Note 3)
Depreciation of premises and equipment (Note 9)
Depreciation of other assets
Amortization of intangible assets (Note 11)
Provision for credit losses (Note 4)
Deferred taxes (Note 22)
Net loss on divestitures (Note 10)
Changes in operating assets and liabilities:
Trading securities
Derivative asset
Derivative liability
Current income taxes
Accrued interest receivable and payable
Other items and accruals, net
Deposits
Loans
Securities sold but not yet purchased
Securities lent or sold under repurchase agreements
Securities borrowed or purchased under resale agreements
Securitization and structured entities’ liabilities
Net Cash Provided by Operating Activities
Cash Flows from Financing Activities
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, 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 Financing Activities
Cash Flows from Investing Activities
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)
Acquisitions (Note 10) (1)
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 (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:
Interest paid in the year (2)
Income taxes paid in the year
Interest received in the year
Dividends received in the year
2023
2022
$
4,377
$
13,537
(181)
1,022
62
1,015
2,178
(732)
–
(14,563)
14,373
(14,924)
(990)
1,954
6,713
38,587
(25,382)
2,219
(5,130)
(885)
(122)
(281)
780
96
604
313
475
29
1,698
(13,376)
27,800
484
142
(6,222)
45,232
(74,748)
7,515
810
(954)
1,023
9,591
4,957
2,068
8,027
(10,743)
1,150
(1,179)
648
–
3,339
14
(2,703)
(353)
268
1,680
(50,149)
20,905
23,186
(885)
(15,102)
(792)
–
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
(21,157)
(29,471)
1,766
(9,532)
87,466
2,739
(5,795)
93,261
$
77,934
$
87,466
$
$
$
$
33,747
2,591
52,112
2,349
$
$
$
$
9,557
2,374
24,046
1,823
(1) This amount is net of cash and cash equivalents of $3,646 million acquired as part of acquisitions during the year ended October 31, 2023. To mitigate changes in the Canadian dollar equivalent of the
Bank of the West purchase price on closing, we entered into forward contracts, which qualified for hedge accounting.
(2) 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.
BMO Financial Group 206th Annual Report 2023 149
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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 (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 FVOCI; financial assets and 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, 2023.
Basis of Consolidation
These consolidated financial statements are inclusive of the financial statements of our subsidiaries as at October 31, 2023. 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 an
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
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156
159
167
167
168
171
180
181
183
185
185
186
188
Note Topic
Equity
16
Fair Value of Financial Instruments and Trading-Related
17
Revenue
Offsetting of Financial Assets and Financial Liabilities
Capital Management
Employee Compensation – Share-Based Compensation
Employee Compensation – Pension and Other Employee
Future Benefits
Income Taxes
Earnings Per Share
Commitments, Guarantees, Pledged Assets, Provisions
and Contingent Liabilities
Operating and Geographic Segmentation
Significant Subsidiaries
Related Party Transactions
18
19
20
21
22
23
24
25
26
27
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198
199
199
201
205
207
208
211
213
213
Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and present our consolidated financial statements in Canadian dollars, which is our functional
currency. Monetary assets and liabilities, as well as non-monetary assets and liabilities measured at fair value, that are denominated in foreign
currencies are translated into Canadian dollars at the exchange rate in effect at the balance sheet date. Non-monetary assets and liabilities not
measured at fair value are translated into Canadian dollars at historical rates. Revenues and expenses denominated in foreign currencies are
translated using the average exchange rate for the year.
Unrealized gains and losses arising from translating our net investment in foreign operations into Canadian dollars, net of related hedging
activities and applicable income taxes, are included in our Consolidated Statement of Comprehensive Income within net gains (losses) on translation
of net foreign operations. When we dispose of a foreign operation such that control, significant influence or joint control is lost, the cumulative
amount of the gain (loss) on translation and any applicable hedging activities and related income taxes is reclassified to our Consolidated Statement
of Income as part of the gain or loss on disposition.
Foreign currency translation gains and losses on equity securities measured at FVOCI that are denominated in foreign currencies are included in
accumulated other comprehensive income on FVOCI equity securities, net of taxes, in our Consolidated Statement of Changes in Equity. All other
foreign currency translation gains and losses are included in foreign exchange gains, other than trading, in our Consolidated Statement of Income as
they arise.
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150 BMO Financial Group 206th Annual Report 2023
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 for hedge accounting are
recorded in our Consolidated Statement of Comprehensive Income within net change in unrealized gains (losses) on cash flow hedges, with the spot/
forward differential (the difference between the foreign currency exchange rate at the inception of the contract and the rate at the end of the
contract) recorded in interest income (expense) over the term of the hedge.
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 (BMO WM) and BMO Capital Markets (BMO CM) 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 them 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 (P&C) 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 are earned in P&C 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 when redeemed.
Investment management and custodial fees are earned in BMO WM 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 are earned in BMO WM as fees for 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 CM 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 term 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.
Interbank Offered Rate 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 Interbank Offered Rate (IBOR) reform, as IBORs will be
replaced with alternative reference rates (ARRs). As at October 31, 2023, BMO had transitioned all exposure to sterling, euro, Swiss franc, Japanese
yen and USD LIBOR settings to ARRs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 16, 2022, Refinitiv Benchmark Services UK Limited announced that it will cease publication of all remaining 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, all new
derivative contracts and securities were expected to reference the Canadian Overnight Repo Rate Average (CORRA), with the exception of derivatives
that hedge or reduce CDOR exposures from derivatives or securities that were transacted before June 30, 2023, or loan agreements entered into before
June 28, 2024. All remaining CDOR exposures are to be transitioned to CORRA by June 28, 2024, marking the end of the second stage. On July 27, 2023,
the Canadian Alternative Reference Rate (CARR) working group announced that lenders may not offer new CDOR and bankers’ acceptance (BA) loans
after November 1, 2023. The announcement does not impact our project plans.
With the transition from CDOR and BAs to ARRs well underway, and as both a holder and an issuer of CDOR-based instruments, BMO continues to
be exposed to financial, operational, legal and regulatory, and reputational risks. These risks arise principally either from amending legacy contracts
from CDOR to an ARR or from existing fallback clauses for new ARRs and the resulting impact on economic risk management, as well as from
updating hedge designations as the new ARRs emerge. Our enterprise IBOR Transition Office (ITO) continues to coordinate and oversee the transition
from CDOR to ARRs, with a focus on managing and mitigating internal risks, as well as managing our client relationships. The ITO is sponsored and
supported by senior management and has a global mandate 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 continue to incorporate contractual fallback provisions in new CDOR-based
cash products in order to ensure there is an ARR at the time of the relevant CDOR cessation.
The following table presents quantitative information as at October 31, 2023, which includes financial instruments that referenced remaining CDOR
and BA rate settings, or are demand facilities that will be subject to remediation to amend the benchmark interest rate. The quantitative information
as at October 31, 2022, which 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 BA rate settings, or are demand facilities that will be subject to remediation to amend the benchmark interest
rate. Changes in our holdings of financial instruments during fiscal 2023 reduced our exposure to transition risks since adoption of these Phase 2
amendments. In the ordinary 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 (1)
Non-derivative liabilities (1)
Derivative notional amounts (2)(3)
Authorized and committed loan commitments (4)(5)(6)
CDOR
2023
44,370
4,584
1,779,140
55,548
CDOR
2022
37,101
4,583
1,554,518
26,106
USD LIBOR (7)
2022
48,162
3,335
1,870,472
90,797
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) Includes loan commitments where our customers have the option to draw from their facility in multiple currencies. Amounts drawn will be subject to prevailing IBORs for the foreign currency,
including those that are in scope of IBOR reform.
(6) Commitments also include backstop liquidity facilities provided by the bank to external parties.
(7) As at October 31, 2023, BMO had transitioned all exposure to USD LIBOR settings to ARRs.
Use of Estimates and Judgments
The preparation of the consolidated financial statements requires management to make 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 (ACL);
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; consolidation of SEs; and the valuation of the assets and liabilities related to our acquisition of Bank of the West. 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 is subject to several risks that could lead to a more severe contraction of the North American economy, including elevated
inflation leading to possible further increases in interest rates, an escalation of geopolitical risks including wars in Ukraine and the Middle East, an increase in
trade tensions between the United States and China and a further deterioration in diplomatic relations between Canada and India. The impacts on our
business, results of operations, reputation, financial performance and condition, including the potential for credit, counterparty and mark-to-market losses,
and on our credit ratings and regulatory capital and liquidity ratios, as well as impacts on our 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, 2023.
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152 BMO Financial Group 206th Annual Report 2023
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 ECL, 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 ACL. The
calculation of ECLs 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 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 ECL. The allowance is sensitive to changes in both economic forecasts and the probability
weight assigned to each forecast scenario.
Additional information regarding the ACL 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 ECL model. For securities determined to have low
credit risk, the ACL is measured at a 12-month ECL.
Additional information regarding our accounting for debt securities measured at amortized cost or FVOCI and investments in associates and joint
ventures, ACL and the determination of fair value is included in Notes 3 and 17.
Income Taxes and Deferred Tax Assets
The provision for income taxes is calculated based on the expected tax treatment of transactions recorded in either our Consolidated Statement of
Income or Consolidated Statement of Changes in Equity. In determining the provision for income taxes, we interpret tax legislation, case law and
administrative positions in numerous jurisdictions and, based on our judgment, record our estimate of the amount required to settle tax obligations.
We also make assumptions about the expected timing of the reversal of deferred tax assets and liabilities. If our interpretations and assumptions
differ from those of tax authorities, or if the timing of reversals is not as expected, our provision for income taxes could increase or decrease in future
periods. The amount of any such increase or decrease cannot be reasonably estimated.
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which
deductible temporary differences or unused tax losses and tax credits may be utilized. We are required to assess whether it is probable that our
deferred 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.
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BMO Financial Group 206th Annual Report 2023 153
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining fair value less costs to sell, we employ a discounted cash flow model consistent with those we use when we acquire a business.
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 CGU 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 provisions 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. A provision is recorded at the best estimate of the amount required to settle an 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 Financial Assets
We enter into transactions in which we transfer financial 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 in order to determine whether 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.
Additional information regarding transferred financial assets is included in Note 6.
Consolidation of Structured Entities
Securitization vehicles sponsored by the bank typically have limited decision-making authority. The structure of these vehicles limits the activities
they can undertake, the types of assets they can hold and the funding of their activities. We control and consolidate these vehicles when we have the
key decision-making powers necessary to obtain the majority of the benefits from their activities.
For certain investments in limited partnerships, we exercise judgment in determining whether we control an entity. Based on an assessment of our
interests and rights, we have determined that we do not control certain entities, even though we may have an ownership interest greater than 50%.
This may be the case when we are not the general partner in an arrangement and the general partner’s rights most significantly affect the returns of
the entity. Additionally, we have determined that we control certain entities despite having an ownership interest of less than 50%. This may be the
case when we are the general partner in an arrangement and the general partner’s rights most significantly affect the returns of the entity.
Additional information regarding SEs is included in Notes 7 and 20.
Acquisition of Bank of the West – Valuation of Assets and Liabilities
Significant judgments and assumptions were used to determine the fair value of the Bank of the West assets acquired and liabilities assumed,
including the loan portfolio, core-deposit and other relationship intangible assets, and fixed maturity deposits.
For loans, the determination of fair value involved estimating the cash flows which are expected to be received on all purchased loans and
discounting these back to their present value. We estimated expected cash flows based on models that incorporate management’s best estimate of
current key assumptions such as default rates, loss severity, timing of prepayments and collateral. In determining the discount rate, we considered
various factors, including our cost to raise funds in the current market, the risk premium associated with the loans and the cost to service the
portfolios.
For core-deposit intangible assets, fair value was determined using a discounted cash flow approach, comparing the present value of the cost to
maintain the acquired deposits to the cost of alternative funding. The present value of the cost to maintain the acquired deposits includes an estimate
of future interest costs and operating expenses for the core deposits acquired. Core deposits are those that we considered to be stable, below-market
sources of funding. Deposit run-off was estimated using historical attrition data, comparing this to market sources at the date of acquisition.
We calculated the fair value of wealth management and credit card customer relationships acquired based on the excess of estimated future cash
inflows (i.e. revenue from the acquired relationships) over the related estimated cash outflows (i.e. operating costs and contributory asset charges)
over the estimated life of the customer base.
The determination of the fair value of fixed maturity deposits involved estimating the cash flows to be paid and discounting these back to their
present value. The timing and amount of cash flows include significant management judgment regarding the likelihood of early redemption and the
timing of withdrawal by the customer. Discount rates were based on the prevailing rates we were paying on similar deposits at the date of
acquisition.
154 BMO Financial Group 206th Annual Report 2023
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The fair value of all other assets and liabilities, including real estate properties, was calculated using market data where possible, as well as
management judgment, to determine the price that would be obtained in an arms-length transaction between knowledgeable, willing parties.
Additional information regarding our accounting for the acquisition is included in Notes 4 and 10.
Future Changes in IFRS and Accounting Policies
IFRS 17 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 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.
IFRS 17 will change the fundamental principles used to recognize and measure insurance contracts, including life insurance contracts, reinsurance
contracts held 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 insurance-specific risk and a contractual service margin (CSM) that represents unearned profits.
The CSM component of the insurance contract liability will be amortized into income as services/insurance coverage is provided. For groups of
onerous contracts that are expected to experience losses, we are required to record these losses in income immediately. Under IFRS 4, there is no
similar grouping requirement and gains/losses on new business are recognized in income immediately.
The discount rate we use under IFRS 4 is connected to the net yield of the assets held to support insurance contract liabilities. Under IFRS 17, the
rate used to discount our insurance contract liabilities will reflect the characteristics of those insurance contract liabilities. We have elected the
accounting policy choice under IFRS 17 to recognize changes in the discount rate and financial assumptions on insurance contract liabilities, through
the Consolidated Statement of Income.
On transition, we are required to apply a full retrospective approach where we restate prior periods as if we had always applied IFRS 17, unless
impracticable, in which case we will apply either the modified retrospective approach where we apply specific modifications to the full retrospective
approach, or the fair value approach where we determine a fair value for the CSM by taking the difference between discounted fulfilment cash flows
and risk adjustment using market participant assumptions versus using our own IFRS 17 assumptions. We have completed our assessment of IFRS 17
and will apply the full retrospective approach to our creditor business and the fair value approach to all other products written prior to
November 1, 2022.
The estimated impact of adopting IFRS 17 as at November 1, 2022 is an increase in assets of approximately $1,050 million, an increase in
liabilities of approximately $2,090 million and a decrease in shareholders’ equity of approximately $1,435 million ($1,040 million after-tax). The CSM
will qualify as Tier 1 Capital.
IAS 40 Investment Property
On transition to IFRS 17, we plan to voluntarily change our accounting policy for the measurement of investment properties, recorded in
insurance-related assets in other assets in our Consolidated Balance Sheet, from cost to fair value in order to better align returns on our investment
properties with gains and losses from our insurance business. IAS 40 Investment Property permits either measurement approach. We will apply the
change retrospectively, as if we had always accounted for investment properties at fair value. This change is expected to increase assets by
approximately $135 million and increase shareholders’ equity by approximately $185 million ($135 million after-tax) as at November 1, 2022.
The impact of these combined changes on our Common Equity Tier 1 (CET1) Ratio is not expected to be material.
IAS 12 Income Taxes
In May 2021, the IASB issued an amendment to IAS 12 Income Taxes (IAS 12), which will be effective for our fiscal year beginning November 1, 2023.
The amendment narrows the IAS 12 exemption to exclude transactions that give rise to equal and offsetting temporary differences (e.g. leases and
asset retirement obligations). Upon adoption of the amendment, we will record separate deferred tax assets and liabilities related to the assets and
liabilities that give rise to these temporary differences. There will be no impact on our Consolidated Balance Sheet, as the balances are eligible for
offset when levied by the same tax authority. This change will impact note disclosure only.
In May 2023, the IASB issued an additional amendment to IAS 12. The amendment addresses concerns around accounting for the global
minimum top-up tax as outlined in the two-pillar plan for international tax reform developed by members of the Organisation for Economic
Co-operation and Development/G20 Inclusive Framework on Base Erosion and Profit Shifting. The objective of the tax reform is to ensure that large
multinational groups are subject to a minimum tax rate of 15% on income earned in each jurisdiction that they carry on business. We will be
impacted by the tax reform once the Canadian federal government, or a foreign government of a country in which we operate, passes into law the
global minimum tax. The amendment to IAS 12 includes temporary mandatory relief from recognizing and disclosing deferred taxes for the top-up
tax, that will be applicable once the measures are substantively enacted.
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BMO Financial Group 206th Annual Report 2023 155
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
2023
75,528
2,406
77,934
2022
85,234
2,232
87,466
(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
We are required to maintain reserves or minimum balances with certain central banks, regulatory bodies and counterparties, totalling $125 million as
at October 31, 2023 ($87 million as at October 31, 2022).
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 FVTPL. Transaction costs and
changes in fair value are recorded in our Consolidated Statement of Income in trading revenues (losses).
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 (loss), 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 $9,991 million as at October 31, 2023 ($9,231 million as at October 31, 2022) is recorded in securities in our Consolidated Balance
Sheet.
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 $6,729 million as at
October 31, 2023 ($4,410 million as at October 31, 2022) is recorded in securities in our Consolidated Balance Sheet.
Investments in Low Income Housing Tax Credit (LIHTC) entities are included in this balance as they are classified as FVTPL, with both changes in
fair value of the investments and the benefit of tax credits received recorded in non-interest revenue, securities gains, other than trading. The fair
value of these investments was $808 million as at October 31, 2023 ($244 million as at October 31, 2022).
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.
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 FVTPL. 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.
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156 BMO Financial Group 206th Annual Report 2023
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 those in which we have joint control. Our share of the net income or loss, including any impairment
losses, is recorded in our Consolidated Statement of Income in non-interest revenue, share of profit in associates and joint ventures. 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 ACL is measured at a 12-month ECL. A debt security is considered to have low credit risk if it has a low risk of default, and if 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 $116,814 million as at October 31, 2023 ($106,590 million as at October 31, 2022) are net of
allowances for credit losses of $3 million as at October 31, 2023 ($3 million as at October 31, 2022).
Debt securities at FVOCI totalling $62,668 million as at October 31, 2023 ($43,408 million as at October 31, 2022) are net of allowances for credit
losses of $3 million as at October 31, 2023 ($3 million as at October 31, 2022).
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 206th Annual Report 2023 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Remaining Term to Maturity of Securities
The following table shows the remaining terms 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
Amortized cost
Fair value
Yield (%)
Canadian provincial and municipal governments
Amortized cost
Fair value
Yield (%)
U.S. federal government
Amortized cost
Fair value
Yield (%)
U.S. states, municipalities and agencies
Amortized cost
Fair value
Yield (%)
Other governments
Amortized cost
Fair value
Yield (%)
NHA MBS, U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Yield (%)
Corporate debt
Amortized cost
Fair value
Yield (%)
Corporate equity
Cost
Fair value
Total cost or amortized cost
Total fair value
Yield (%)
Amortized Cost Securities (2)
Issued or guaranteed by:
Canadian federal government
Amortized cost
Fair value
Yield (%)
Canadian provincial and municipal governments
Amortized cost
Fair value
Yield (%)
U.S. federal government
Amortized cost
Fair value
Yield (%)
U.S. states, municipalities and agencies
Amortized cost
Fair value
Yield (%)
Other governments
Amortized cost
Fair value
Yield (%)
NHA MBS, U.S. agency MBS and CMO (1)
Amortized cost
Fair value
Yield (%)
Corporate debt
Amortized cost
Fair value
Yield (%)
Total carrying value
Total fair value
Yield (%)
2,499
1,847
2,950
5
525
39
2,193
–
–
10,058
147
20
7
24
–
58
–
256
6,366
6,367
3.70
1,328
1,326
3.53
713
711
5.03
565
559
2.33
4,124
4,107
2.82
33
33
4.56
1,842
1,820
6.50
–
–
14,971
14,923
3.80
2,491
2,549
1.92
554
573
2.31
2,928
2,317
1.73
–
–
–
289
261
1.72
632
618
2.46
216
212
1.70
7,110
6,530
1.90
2,198
454
7,376
11
822
504
2,886
57
–
14,308
–
10
–
24
–
287
–
321
2,878
2,851
2.84
420
403
2.18
636
602
3.72
767
735
2.16
955
938
3.48
1,009
999
4.44
507
489
4.21
–
–
7,172
7,017
3.22
1,985
1,924
1.58
2,216
2,251
1.90
13,919
13,198
1.42
–
–
–
478
456
1.40
2,500
2,354
1.46
645
656
1.31
21,743
20,839
1.48
1,675
296
2,474
2
767
667
3,388
228
–
9,497
–
17
–
–
12
348
–
377
9,325
8,993
2.59
1,165
1,119
3.12
837
775
2.93
427
399
2.61
1,784
1,723
3.54
2,686
2,654
4.02
507
488
4.04
–
–
16,731
16,151
3.02
400
401
2.47
1,035
1,025
2.67
17,018
15,477
1.34
–
–
–
181
62
3.07
4,276
3,849
1.84
651
469
2.45
23,561
21,283
1.55
2,002
942
4,713
109
412
1,080
2,061
165
–
11,484
4
119
–
–
7
958
–
1,088
2,055
1,936
3.44
2,351
2,193
3.28
3,884
3,641
3.71
2,603
2,517
5.00
201
201
3.27
2,928
2,776
3.67
659
637
4.41
–
–
14,681
13,901
3.85
32
31
2.87
808
756
2.70
20,514
17,391
1.57
190
179
4.66
–
–
–
1,557
1,318
1.97
123
122
1.77
23,224
19,797
1.66
2,252
3,491
2,819
152
49
21,579
1,206
–
–
31,548
65
1,001
2,081
–
–
5,709
–
8,856
–
–
–
17
14
5.04
175
151
4.31
1,124
1,091
5.38
–
–
–
9,765
9,303
5.32
123
117
5.76
–
–
11,204
10,676
5.32
–
–
–
–
–
–
2,499
2,680
2.19
–
–
–
–
–
–
38,625
32,995
2.80
52
47
0.25
41,176
35,722
2.76
–
–
–
–
–
–
–
–
47,661
47,661
–
–
–
–
–
–
5,822
5,822
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
129
160
129
160
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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Investments in Associates and Joint Ventures
Carrying value
Total carrying value of securities
Total by Currency (Canadian $ equivalent)
Canadian dollar
U.S. dollar
Other currencies
Total securities
–
–
–
–
–
32,347
43,389
49,586
49,697
92,256
17,927
10,719
3,701
32,347
13,079
29,719
591
43,389
17,877
31,385
324
49,586
10,038
39,504
155
49,697
13,331
78,874
51
92,256
1,461
55,104
25,868
27,473
1,763
55,104
2023
Total
10,626
7,030
20,332
279
2,575
23,869
11,734
450
47,661
124,556
216
1,167
2,088
48
19
7,360
5,822
16,720
20,624
20,147
3.05
5,281
5,055
3.23
6,245
5,880
3.77
5,486
5,301
4.22
7,064
6,969
3.11
16,421
15,765
4.76
3,638
3,551
5.43
129
160
64,888
62,828
3.80
4,908
4,905
1.83
4,613
4,605
2.26
56,878
51,063
1.50
190
179
4.66
948
779
1.82
47,590
41,134
2.61
1,687
1,506
1.80
116,814
104,171
2.01
1,461
322,379
98,120
217,674
6,585
322,379
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
9,572
9,268
2.35
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
273,262
87,636
177,371
8,255
273,262
(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.
(2) The carrying values of securities that are part of fair value hedging relationships are adjusted for related gains (losses) on hedge contracts.
The carrying values of securities that are part of fair value hedging relationships are adjusted for related gains (losses) on hedge contracts.
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 terms to maturity included in the table above are based on the contractual maturity dates of the securities. Actual maturities could differ, as issuers may have the right to call or prepay obligations.
158 BMO Financial Group 206th Annual Report 2023
Unrealized Gains and Losses on FVOCI Securities
The following table summarizes unrealized gains and losses:
(Canadian $ in millions)
Cost or
amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
2023
Fair
value
Cost or
amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
NHA MBS, U.S. agency MBS and CMO
Corporate debt
Corporate equity
Total
20,624
5,281
6,245
5,486
7,064
16,421
3,638
129
64,888
14
2
–
5
13
12
3
31
80
491 20,147
5,055
228
5,880
365
5,301
190
108
6,969
668 15,765
3,551
160
90
–
12,498
4,724
3,403
3,863
6,532
9,572
4,203
122
2,140 62,828
44,917
11
6
–
5
4
13
25
31
95
2022
Fair
value
12,301
4,571
3,110
3,714
6,411
9,268
4,033
153
208
159
293
154
125
317
195
–
1,451
43,561
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 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 securities
FVOCI securities
Amortized cost securities
Total
2023
66
2,517
3,510
6,093
2022
28
650
1,295
1,973
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 (1)
Impairment loss
Securities gains, other than trading
(1) Gains are net of (losses) on hedge contracts.
2023
144
37
–
181
2022
268
14
(1)
281
Gains and losses on trading securities are included under trading-related revenue in Note 17.
Interest and dividend income and gains (losses) on securities held in our insurance business are recorded in non-interest revenue, insurance revenue
(loss), in our Consolidated Statement of Income. These include:
‰
Interest and dividend income of $454 million for the year ended October 31, 2023 ($397 million for the year ended October 31, 2022). Interest
income is calculated using the effective interest method;
‰ Losses on securities designated at FVTPL of $282 million for the year ended October 31, 2023 (losses of $1,954 million for the year ended
October 31, 2022); and
‰ Realized gains (losses) on FVOCI securities of $nil million for the year ended October 31, 2023 ($nil million for the year ended October 31, 2022).
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, the 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, the loans are measured at FVOCI. The effective interest method allocates interest income over the expected term of the loan by
applying the effective interest rate to the carrying amount of the loan. The effective interest rate is defined as the rate that exactly discounts
estimated future cash receipts through the expected term of the loan to the net carrying amount of the loan. Under the effective interest method, the
amount recognized in interest, dividend and fee income, loans, varies over the term of the loan based on the principal outstanding. The treatment of
interest income for impaired loans is described below.
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BMO Financial Group 206th Annual Report 2023 159
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchased Loans
Purchased loans are initially measured at fair value and identified as either purchased performing loans (those for which timely principal and interest
payments continue to be made), or purchased credit impaired (PCI) loans (those for which the timely collection of interest and principal is no longer
reasonably assured). These loans are subsequently measured at amortized cost or fair value, depending on the business model.
Purchased Performing Loans
For loans with fixed terms, the fair value/par value difference, referred to as the fair value mark, is amortized into interest income over the expected
life of the loan using the effective interest method. For loans with revolving terms, the fair value mark is amortized into net interest income on a
straight-line basis over the contractual term of the loan. As loans are repaid, the remaining unamortized fair value mark related to the loan is
recorded in interest income in the period the loan is repaid. All purchased performing loans were initially recorded in Stage 1 for purposes of
determining ECLs.
Following our acquisition of Bank of the West on February 1, 2023, we recognized purchased performing loans with a fair value of $76,068 million.
Fair value reflected estimates of expected future credit losses at the acquisition date of $1,047 million, as well as interest rate premiums or discounts
relative to prevailing market rates. Gross contractual receivables amounted to $78,931 million. As at October 31, 2023, purchased performing loans
recorded in our Consolidated Balance Sheet totalled $68,025 million, including a remaining fair value mark of $(2,317) million.
Purchased Credit Impaired Loans
We regularly re-evaluate the amounts we expect to collect on PCI loans. Increases in expected cash flows result in a recovery of the provision for
credit losses (PCL) and either a reduction in any previously recorded ACL or, if no ACL exists, an increase in the current carrying value of the purchased
loans. Decreases in expected cash flows result in a charge to the PCL and an increase in the ACL. We record interest income using the effective
interest method over the effective life of the loan. PCI loans are presented within Stage 3.
On February 1, 2023, we recognized PCI loans with a total fair value of $415 million, including a fair value mark of $(168) million.
The following table provides further details of the acquired Bank of the West PCI loans:
(Canadian $ in millions)
Unpaid principal balance (1)
Fair value adjustment
Carrying value
Stage 3 allowance
Carrying value net of related allowance
(1) Excludes loans that were fully written off prior to the acquisition date.
October 31, 2023
280
(61)
219
(1)
218
Commitments and Letters of Credit Acquired
As part of our acquisition of Bank of the West, we recorded a liability related to unfunded commitments and letters of credit. The total fair value mark
associated with unfunded commitments and letters of credit is amortized into net interest income on a straight-line basis over the contractual term of
the acquired commitments. All purchased commitments and letters of credit are included in Stage 1 for purposes of determining ECLs. ECLs are
recorded on these commitments in normal course.
On February 1, 2023, we recorded a fair value mark on unfunded commitments and letters of credit of $(37) million in other liabilities in our
Consolidated Balance Sheet. As at October 31, 2023, the remaining fair value mark of these commitments was $(30) million.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements represent the amounts we will receive as a result of our commitment to return or resell
securities that we have borrowed or purchased, back to the original lender or seller, on a specified date at a specified price. We account for these
instruments as if they were loans.
Lending Fees
Lending fees primarily arise in P&C and BMO CM. The accounting treatment for lending fees varies depending on the transaction. Certain 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.
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Impaired Loans
We classify a loan as impaired (Stage 3) when one or more loss events have occurred, such as bankruptcy or 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 United States 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 payment is one year past due. In the United States, all consumer loans are generally written off
when payment is 180 days past due, except for non-real estate term loans, which are generally written off when payment is 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.
160 BMO Financial Group 206th Annual Report 2023
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 has been 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 $161 million was recognized for the year ended
October 31, 2023 ($55 million in 2022).
Allowance for Credit Losses
The ACL 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 ACL amounted to $4,267 million as at October 31, 2023 ($2,998 million as at October 31, 2022), of which
$3,807 million ($2,617 million as at October 31, 2022) was recorded in loans and $460 million ($381 million as at October 31, 2022) 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 ACL.
In addition, ECL on the purchased performing loans we acquired in the Bank of the West acquisition was recorded on the acquisition date, consistent
with the process we follow for loans that we originate. An initial PCL of $705 million was recorded in our Consolidated Statement of Income.
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 ECL on financial assets regardless of whether there has been an actual
impairment. We recognize an ACL at an amount generally equal to 12-month ECLs, if the credit risk at the reporting date has not increased
significantly since initial recognition (Stage 1). We will record ECLs over the remaining life of performing financial assets that 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 a significant increase in credit risk is based on the change in 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 using experienced credit judgment to reflect factors not captured in ECL
models.
PD represents the likelihood that a loan will not be repaid and will go into default in either a 12-month horizon for Stage 1 or a lifetime horizon
for Stage 2. PD for each individual instrument is modelled based on historical data and is estimated based on current market conditions and
reasonable and supportable information about future economic conditions.
EAD is modelled based on historical data and represents an estimate of the amount of credit exposure outstanding at the time a default may
occur. For off-balance sheet and undrawn amounts, EAD includes an estimate of any further amounts to be drawn at the time of default.
LGD is the amount that may not be recovered in the event of default and is modelled based on historical data and reasonable and supportable
information about future economic conditions, where appropriate. LGD takes into consideration the amount and quality of any collateral held.
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 ACL 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.
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.
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BMO Financial Group 206th Annual Report 2023 161
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Individually Significant Impaired Loans
To determine the amount we expect to recover from an individually significant impaired loan, we use the value of the estimated future cash flows
discounted at the loan’s original effective interest rate. The determination of estimated future cash flows of a collateralized impaired loan reflects the
expected realization of the underlying security, net of expected costs and any amounts legally required to be paid to the borrower. Security can vary
by type of loan and may include cash, securities, real estate properties, accounts receivable, guarantees, inventory or other capital assets.
Individually Insignificant Impaired Loans
Residential mortgages, consumer instalment loans, other personal loans and some small business loans are individually insignificant and may be
assessed individually or collectively for losses at the time of impairment, taking into account historical loss experience and expectations of future
economic conditions.
Collectively assessed loans are grouped together by similar risk characteristics, such as type of instrument, geographic location, industry, type of
collateral and term to maturity.
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162 BMO Financial Group 206th Annual Report 2023
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, 2023 and 2022.
Stage 1 includes performing loans carried with up to a 12-month ECL, Stage 2 includes performing loans carried with a lifetime ECL, and Stage 3
includes loans with a lifetime ECL that are credit impaired.
(Canadian $ in millions)
Loans: Residential mortgages
Exceptionally low
Very low
Low
Medium
High
Not rated (2)
Impaired
Gross residential mortgages
ACL
Carrying amount
Loans: Consumer instalment and other personal
Exceptionally low
Very low
Low
Medium
High
Not rated (2)
Impaired
Gross consumer instalment and other personal
ACL
Carrying amount
Loans: Credit cards (3)
Exceptionally low
Very low
Low
Medium
High
Not rated (2)
Impaired
Gross credit cards
ACL
Carrying amount
Loans: Business and government (4)
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
ACL
Carrying amount
Total gross loans and acceptances
Total net loans and acceptances
Commitments and financial guarantee contracts
Acceptable
Investment grade
Sub-investment grade
Watchlist
Impaired
Stage 1
Stage 2
Stage 3 (7)
Stage 1
Stage 2
Stage 3 (1)(7)
2
85,423
51,366
5,289
282
15,906
–
–
171
10,820
5,434
2,015
118
–
–
–
–
–
–
–
424
2023
Total
2
85,594
62,186
10,723
2,297
16,024
424
7
94,743
31,617
13,474
138
1,126
–
158,268
18,558
424
177,250
141,105
73
146
5
224
59
2022
Total
7
94,824
34,751
17,345
479
1,179
295
148,880
135
–
81
3,134
3,871
341
53
–
7,480
66
–
–
–
–
–
–
295
295
10
158,195
18,412
419
177,026
141,046
7,414
285
148,745
1,545
37,924
21,406
7,971
759
24,426
–
94,031
208
4
180
1,052
5,686
2,127
411
–
9,460
415
–
–
–
–
–
–
549
1,549
38,104
22,458
13,657
2,886
24,837
549
1,792
33,554
24,369
13,536
873
4,052
–
549
104,040
78,176
152
775
101
93,823
9,045
397
103,265
78,075
1,605
1,946
1,884
3,860
533
651
–
–
1
70
890
763
91
–
10,479
1,815
134
267
10,345
1,548
–
–
–
–
–
–
–
–
–
–
1,605
1,947
1,954
4,750
1,296
742
–
12,294
401
2,920
442
1,569
2,918
316
90
–
8,255
69
11,893
8,186
35
83
1,307
4,633
1,525
32
–
7,615
288
7,327
–
1
51
792
563
1
–
1,408
207
1,201
–
–
–
–
–
–
312
312
102
210
–
–
–
–
–
–
–
–
–
–
1,827
33,637
25,676
18,169
2,398
4,084
312
86,103
491
85,612
2,920
443
1,620
3,710
879
91
–
9,663
276
9,387
202,731
126,350
1,078
–
3,886
26,260
11,520
–
–
–
–
2,987
206,617
152,610
12,598
2,987
187,245
98,451
–
–
6,765
22,390
6,310
–
–
–
–
1,384
194,010
120,841
6,310
1,384
849
1,031
527
2,407
608
675
329,310
40,635
2,460
372,405
285,088
34,790
432
952
1,715
320,830
592,937
71,499
3,960
668,396
513,232
51,968
1,991
567,191
591,673
69,640
3,276
664,589
512,395
50,732
1,447
564,574
Gross business and government
330,159
41,666
2,987
374,812
285,696
35,465
1,384
322,545
195,149
54,148
254
–
1,721
14,158
4,137
–
–
–
–
687
196,870
68,306
4,391
687
182,153
45,920
2
–
5,134
14,047
2,176
–
–
–
–
292
292
13
187,287
59,967
2,178
292
249,724
381
Gross commitments and financial guarantee contracts
249,551
20,016
687
270,254
228,075
21,357
ACL
Carrying amount (5)(6)
260
189
11
460
194
174
249,291
19,827
676
269,794
227,881
21,183
279
249,343
(1) Includes Bank of the West PCI loans. As at October 31, 2023, PCI loan gross carrying amounts were $34 million in residential mortgages, $48 million in consumer instalment and other personal loans
and $137 million in business and government loans.
(2) Includes purchased portfolios and certain cases where an internal risk rating is not assigned. Alternative credit risk assessments, rating methodologies, policies and tools are used to manage credit
risk for these portfolios.
(3) 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.
(4) Includes customers’ liability under acceptances.
(5) 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.
(6) Certain commercial borrower commitments are conditional and may include recourse to counterparties.
(7) 93% of Stage 3 loans were either fully or partially collateralized as at October 31, 2023 (92% as at October 31, 2022).
BMO Financial Group 206th Annual Report 2023 163
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the continuity in the loss allowance, by product type, for the years ended October 31, 2023 and 2022. 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 remeasurement represents 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
Loan purchases
Derecognitions and maturities
Model changes
Total PCL (2)
Write-offs (3)
Recoveries of previous write-offs
Foreign exchange and other
Balance as at end of year
Loans: Consumer instalment and other personal
Balance as at beginning of year
Transfer to Stage 1
Transfer to Stage 2
Transfer to Stage 3
Net remeasurement of loss allowance
Loan originations
Loan purchases
Derecognitions and maturities
Model changes
Total PCL (2)
Write-offs (3)
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
Loan purchases
Derecognitions and maturities
Model changes
Total PCL (2)
Write-offs (3)
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
Loan purchases
Derecognitions and maturities
Model changes
Total PCL (2)
Write-offs (3)
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 (4)
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Stage 1
Stage 2
Stage 3 (1)
59
92
(18)
(1)
(94)
26
31
(4)
(19)
13
–
–
1
73
111
265
(52)
(18)
(264)
58
179
(34)
(26)
108
–
–
1
220
115
172
(45)
(3)
(146)
77
25
(7)
–
73
–
–
–
67
(92)
27
(12)
106
–
–
(9)
63
83
–
–
1
151
304
(254)
93
(104)
438
6
–
(43)
(8)
128
–
–
2
434
250
(172)
45
(147)
366
1
–
(36)
–
57
–
–
1
188
308
746
306
(173)
(25)
(446)
276
470
(126)
(17)
265
–
–
32
1,043
1,524
1,264
260
789
(291)
236
(161)
735
4
–
(193)
(51)
279
–
–
87
1,155
2,048
1,859
189
16
–
(9)
13
15
–
–
–
–
19
(10)
7
(22)
10
102
(11)
(41)
122
309
–
–
–
–
379
(371)
74
(32)
152
–
–
–
150
216
–
–
–
–
366
(436)
103
(33)
–
439
(15)
(63)
186
308
–
–
–
–
416
(372)
81
(31)
533
695
684
11
2023
Total
142
–
–
–
27
26
31
(13)
44
115
(10)
7
(20)
234
517
–
–
–
483
64
179
(77)
(34)
615
(371)
74
(29)
806
365
–
–
–
436
78
25
(43)
–
496
(436)
103
(32)
496
1,974
–
–
–
597
280
470
(319)
(68)
960
(372)
81
88
2,731
4,267
3,807
460
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
(1) Includes changes in allowance for PCI loans of $1 million for the year ended October 31, 2023. The total amount of ECLs at initial recognition on PCI loans was $79 million.
(2) Excludes PCL on other assets of $(8) million for the year ended October 31, 2023 ($2 million for the year ended October 31, 2022).
(3) 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.
(4) Other credit instruments, including off-balance sheet items, are recorded in other liabilities in our Consolidated Balance Sheet.
164 BMO Financial Group 206th Annual Report 2023
Loans and ACL by geographic region as at October 31, 2023 and 2022 are as follows:
(Canadian $ in millions)
By geographic region (1)
Canada
United States
Other countries
Total
Gross
amount
ACL on
impaired loans (2)
ACL on
performing loans (3)
2023
Net
amount
Gross
amount
ACL on
impaired loans (2)
ACL on
performing loans (3)
2022
Net
amount
365,268
283,355
11,662
660,285
457
227
–
684
1,272 363,539
1,833 281,295
11,644
18
342,430
200,439
11,087
3,123 656,478
553,956
363
176
5
544
1,102 340,965
959 199,304
11,070
12
2,073 551,339
(1) Geographic region is based upon the country of ultimate risk.
(2) Excludes ACL on impaired loans of $11 million for other credit instruments, which is included in other liabilities ($13 million as at October 31, 2022).
(3) Excludes ACL on performing loans of $449 million for other credit instruments, which is included in other liabilities ($368 million as at October 31, 2022).
Impaired (Stage 3) loans, including the related allowances, as at October 31, 2023 and 2022 are as follows:
(Canadian $ in millions)
2023
2022
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
ACL on
impaired loans (3)
Net impaired
amount
Gross impaired
amount
ACL on
impaired loans (3)
Net impaired
amount
424
549
2,987
3,960
1,629
2,331
–
3,960
5
152
527
684
457
227
–
684
419
397
2,460
3,276
1,172
2,104
–
3,276
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
(1) Includes customers’ liability under acceptances.
(2) Geographic region is based upon the country of ultimate risk.
(3) Excludes ACL on impaired loans of $11 million for other credit instruments, which is included in other liabilities ($13 million as at October 31, 2022).
Loans Past Due Not Impaired
Loans that are past due but not classified as impaired are loans for which 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 that are held at fair value. The following table presents
loans that are past due but not classified as impaired as at October 31, 2023 and 2022. Loans for which payment is less than 30 days past due have
been 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 (1)
707
1,003
826
2,536
9
129
18
156
2023
Total
716
1,132
844
2,692
411
392
198
1,001
2022
Total
430
476
236
19
84
38
141
1,142
30 to 89 days
90 days or more (1)
(1) Fully secured loans with amounts between 90 and 180 days past due that we have not classified as impaired totalled $10 million as at October 31, 2023 ($43 million as at October 31, 2022).
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, 2023, our benign scenario involves a materially stronger economic environment than the base case forecast with a
considerably lower unemployment rate.
As at October 31, 2023, our base case scenario depicts a period of economic stagnation in the near term, largely in response to higher interest
rates and tighter lending conditions, and a moderate economic recovery over the medium term as inflation is expected to ease and lead to lower
interest rates in the second half of 2024. Our base case economic forecast as at October 31, 2022 depicted a slightly weaker economic environment in
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 $2,625 million as at
October 31, 2023 ($1,900 million as at October 31, 2022) compared to the reported allowance for performing loans of $3,572 million ($2,441 million
as at October 31, 2022).
As at October 31, 2023, our adverse scenario depicts a sizeable contraction in the Canadian and U.S. economy in the near term followed by a
moderate recovery over the medium term. The adverse case as at October 31, 2022 depicted a broadly similar economic environment over the
projection period. 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 $6,025 million as
at October 31, 2023 ($3,250 million as at October 31, 2022) compared to the reported allowance for performing loans of $3,572 million
($2,441 million as at October 31, 2022).
Actual results in a recession will differ, as our loan 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.
BMO Financial Group 206th Annual Report 2023 165
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023
As at October 31, 2022
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)
3.2%
4.1%
1.7%
1.4%
4.2%
2.9%
9.9%
2.7%
2.6%
2.5%
0.4%
1.4%
1.9%
2.0%
(3.9)%
(3.5)%
1.2%
1.4%
3.7%
2.4%
2.2%
2.1%
1.5%
0.2%
1.1%
1.3%
(2.3)%
(3.3)%
1.8%
1.7%
2.4%
2.2%
2.0%
2.1%
4.2%
4.6%
3.5%
3.5%
1.9%
1.8%
1.9%
1.9%
2.4%
2.2%
2.2%
2.2%
3.7%
4.2%
3.7%
2.5%
5.9%
4.2%
5.7%
4.1%
9.3%
7.5%
10.1%
8.3%
4.3%
3.2%
3.6%
2.6%
5.9%
4.2%
6.5%
4.8%
8.0%
6.5%
0.4%
0.6%
3.9%
3.9%
9.9%
8.4%
5.5%
6.9%
3.7% (0.5)%
4.5% (20.2)%
2.3% (19.2)%
(5.0)%
(4.3)%
(6.7)%
1.6%
2.1% (10.0)%
(0.9)%
(0.7)%
(1.0)% (13.6)%
(7.5)%
(2.6)%
(8.0)%
(8.4)%
(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 Housing Price Index Benchmark Composite.
(4) In the United States, we use the National Case-Shiller House Price Index.
The ECL approach requires the recognition of credit losses generally based on 12 months of expected losses for performing loans (Stage 1) and the
recognition of lifetime expected losses on performing loans that have experienced a significant increase in credit risk since origination (Stage 2).
Under our current probability-weighted scenarios, if all our performing loans were in Stage 1, our models would generate an allowance for
performing loans of approximately $2,800 million ($1,850 million as at October 31, 2022) compared to the reported allowance for performing loans
of $3,572 million as at October 31, 2023 ($2,441 million as at October 31, 2022).
Renegotiated Loans
From time to time we modify the contractual terms of a loan due to the poor financial condition of the borrower. Modifications may include
reductions in interest rates, maturity date extensions, payment holidays or payment forgiveness. We assess renegotiated loans for impairment in line
with our existing policies for impairment. When an impaired loan is renegotiated, it will return to performing status when none of the criteria for
classification as impaired continue to apply and the borrower has demonstrated good payment behaviour on the restructured terms over a period of
time.
The carrying value of loans with lifetime ACL modified during the year ended October 31, 2023 was $1,005 million ($91 million in 2022). As at
October 31, 2023, $26 million ($13 million as at October 31, 2022) of loans previously modified saw their loss allowance during the year change from
lifetime to 12-month ECL.
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, 2023, we foreclosed on impaired loans and received $35 million of real estate properties that we classified
as held-for-sale ($24 million in 2022). As at October 31, 2023, real estate properties held-for-sale totalled $18 million ($13 million as at
October 31, 2022). 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.
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166 BMO Financial Group 206th Annual Report 2023
Note 5: Risk Management
We have an enterprise-wide approach to the identification, assessment, management (including mitigation), monitoring and reporting 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 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. We assess whether substantially all of the risks
and rewards of, or control over, the loans have been transferred in order to determine whether they qualify for derecognition. Under these programs,
we are entitled to 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.
For some of these sales, we continue to be exposed to substantially all the prepayment, interest rate and credit risk associated with the
securitized mortgages, so they did 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 PCL. During the year ended October 31, 2023, we
sold $4,950 million of mortgages to these programs ($5,495 million in 2022).
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, 2023, the carrying values of securities lent and securities sold
under repurchase agreements were $13,559 million and $92,549 million, respectively ($13,473 million and $90,490 million, respectively, as at
October 31, 2022). The interest expense related to these liabilities is recorded on an accrual basis in interest expense, other liabilities, in our
Consolidated Statement of Income.
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BMO Financial Group 206th Annual Report 2023 167
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying values and fair values of transferred assets that did not qualify for derecognition and the associated
liabilities relating to loan securitizations:
(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
2023
2022
277
7,317
8,430
–
–
–
1,062
7,503
10,012
–
–
–
16,024
15,266
18,577
17,764
14,937
14,244
17,471
16,846
(1) Carrying value of loans is net of allowance for credit losses, where applicable.
(2) Trading securities represent CMO 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 value of the securitized assets in the table above.
(4) Associated liabilities are recognized in securitization and structured entities’ liabilities 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
United States that have been sold and derecognized. During the year ended October 31, 2023, we sold and derecognized $364 million of these
loans ($556 million in 2022) and recognized a gain of $10 million ($17 million in 2022) in non-interest revenue, other. As at October 31, 2023, the
carrying value of the mortgage servicing rights was $94 million ($39 million as at October 31, 2022) and the fair value was $120 million ($54 million
as at October 31, 2022).
We retain residual interests, representing our continuing involvement, for certain commercial mortgage loans purchased or originated in the
United States that have been sold and derecognized. During the year ended October 31, 2023, we sold and derecognized $1,302 million of these
loans ($4,014 million in 2022) and recognized a gain of $28 million upon transfer ($7 million in 2022). The carrying values of our retained
interests classified as debt securities at amortized cost and loans carried at amortized cost were $8 million and $38 million, respectively, as at
October 31, 2023 ($8 million and $37 million, respectively, as at October 31, 2022). Fair value was equal to carrying value on these dates.
In addition, we hold U.S. government agency CMO issued by third-party sponsored vehicles, which we may further securitize by packaging them
into new CMO prior to selling to third-party investors. If we have not substantially transferred all of the risks and rewards of ownership to third-party
investors, we continue to recognize these CMO and the related cash proceeds as secured financing in our Consolidated Balance Sheet. During the year,
we sold CMO that qualified for derecognition, where retained interests represent our continuing involvement and are managed as part of larger
portfolios held for trading, liquidity or hedging purposes. Where we sold these CMO, associated gains and losses are recognized in non-interest
revenue, trading revenues (losses). As at October 31, 2023, the fair value of our retained interests in these CMO was $9 million, classified as trading
securities in our Consolidated Balance Sheet ($10 million as at October 31, 2022). Refer to Note 3 for further information.
As noted above, 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 NHA MBS program. Some of these sales qualified for derecognition as we have transferred
substantially all of the risks and rewards associated with the securitized mortgages. During the year ended October 31, 2023, we sold and
derecognized $1,186 million of these loans ($67 million in 2022) and recognized a gain of $53 million ($3 million in 2022) in non-interest revenue,
other. We retain some residual interests associated with the loans, representing our continuing involvement. The carrying value of our retained
interests, classified as loans carried at fair value, was $56 million as at October 31, 2023 ($3 million as at October 31, 2022).
Note 7: Structured Entities
We enter into certain transactions in the ordinary course of business which involve the establishment of SEs to facilitate or secure customer
transactions and to obtain alternate sources of funding. We are required to consolidate a SE if we control the entity. We control a SE when we have
power over the SE, exposure to variable returns as a result of our involvement, and the ability to exercise power to affect the amount of our returns.
In assessing whether we control a SE, we consider the entire arrangement to determine the purpose and design of the SE, the nature of any
rights held through contractual arrangements, and whether we are acting as principal or agent.
We perform a reassessment of consolidation if facts and circumstances indicate that there have been changes to one or more of the elements of
control over the SE. If the reassessment determines that we no longer control the SE, 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
difference recognized as a gain or loss in our Consolidated Statement of Income. Information regarding our basis of consolidation is included in
Note 1.
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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.
168 BMO Financial Group 206th Annual Report 2023
The following table presents the carrying values and fair values of assets and liabilities related to these consolidated 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
2023
2022
9,506
4,695
–
9,506
4,670
–
8,223
4,769
125
8,223
4,738
124
14,201
14,176
13,117
13,085
10,376
10,177
9,274
9,072
(1) Carrying value of loans is net of ACL.
(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 the holders of 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 have established a funding vehicle that issues commercial paper to third parties. We pledge collateral to secure the commercial paper in
exchange for an intercompany loan. The amount of commercial paper issued by the vehicle totalled $6,054 million as at October 31, 2023
($nil million as at October 31, 2022). Refer to Note 13 for further information on our commercial paper deposit liabilities.
For those vehicles that purchase assets from us or are designed to pass on our credit risk, we have determined that, based on either 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 SEs, created to meet the needs of the bank and its customers. Aside from the exposure resulting from our involvement
as a sponsor, we do not have other contractual or non-contractual arrangements that require us to provide financial support to these consolidated SEs.
Unconsolidated Structured Entities
The table below presents amounts related to our interests in unconsolidated SEs:
(Canadian $ in millions)
Interests recorded in our Consolidated Balance Sheet
Financial Assets
Cash and cash equivalents
Trading securities
FVTPL securities
FVOCI securities
Derivatives
Other
Total
Financial Liabilities
Deposits
Derivatives
Other
Total
Maximum exposure to loss (2)
Total assets of the entities
Customer
securitization
vehicles (1)
Capital vehicles
2023
Other
securitization
vehicles
Customer
securitization
vehicles (1)
2022
Other
securitization
vehicles
Capital vehicles
184
518
23
1,393
23
9
2,150
184
–
–
184
21,740
13,936
5,182
–
–
–
–
–
5,182
5,182
–
79
5,261
–
3,346
–
–
–
100
3,446
–
–
–
–
68
573
119
1,079
–
11
1,850
68
17
–
85
3,483
–
–
–
–
–
3,483
3,483
–
48
3,531
–
1,795
–
–
–
80
1,875
–
–
–
–
1
3,446
5,260
30,877
20,141
12,364
1
1,875
3,531
11,845
(1) Securities held that are issued by our Canadian and U.S. customer securitization vehicles are comprised of asset-backed commercial paper (ABCP) 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.
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BMO Financial Group 206th Annual Report 2023 169
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Customer Securitization Vehicles
We sponsor customer securitization vehicles (also referred to as bank-sponsored multi-seller conduits) that provide our customers with alternate
sources of funding through the securitization of their assets. These vehicles provide clients with access to financing either from BMO or in the ABCP
markets by allowing them to either sell their assets directly into the vehicle or indirectly by selling an interest in the securitized assets into the
vehicle, which then issues ABCP to either investors or BMO to fund the purchases. The sellers remain responsible for servicing the transferred assets
and are first to absorb any losses realized on those assets. We are not responsible for servicing or absorbing the first loss and none of the sellers are
affiliated with BMO. We earn fees for providing services related to the securitizations, including liquidity, distribution and financial arrangement fees
for supporting the ongoing operations of the vehicles. We have determined that we act as agent on behalf of the sellers and therefore do not control
these vehicles.
We provide liquidity facilities to the market-funded vehicles, which may require that we provide them with additional financing if certain events
occur. The total committed and undrawn amounts under these liquidity facilities, as well as the undrawn amount under the liquidity facility related to
BMO funded vehicles, as at October 31, 2023 was $19,775 million ($18,359 million as at October 31, 2022). This is included within commitments
outlined in Note 24. Our interests in these vehicles as at October 31, 2023 and 2022 have 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 involve holdings in asset-backed securitizations. Where we sponsor SEs that securitize MBS into CMO, we may have
interests through our holdings of CMO but we 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 CMO 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 securitization and structured entities’ liabilities. As at October 31, 2023, these transferred assets were
carried at fair value totalling $3,127 million ($1,385 million as at October 31, 2022), with $1,781 million ($323 million as at October 31, 2022)
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 (losses). We may also retain an interest in the CMO sold, which represents our continuing
involvement. As at October 31, 2023, we held retained interests of $219 million ($410 million as at October 31, 2022) carried at fair value in our
Consolidated Balance Sheet in securities, trading.
During the year ended October 31, 2023, we sold $11,779 million of MBS to these sponsored securitization vehicles ($8,342 million in 2022) and
divested all interests in the securitized MBS, with any gains and losses recorded in non-interest revenue, trading revenues (losses).
We retain residual interests in certain commercial mortgage loans that have been either purchased or originated in the United States and then
sold and derecognized through bank-sponsored SEs, which securitize these loans into MBS. During the year ended October 31, 2023, we sold and
derecognized $1,170 million of these loans ($2,142 million in 2022) and recognized a gain of $25 million ($3 million in 2022). The carrying values of
our retained interests classified as loans carried at amortized cost were $100 million as at October 31, 2023 ($80 million as at October 31, 2022). 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 consolidate only those funds that we control. Our total interest in unconsolidated BMO managed funds was $870 million as
at October 31, 2023 ($948 million as at October 31, 2022), with $181 million included in FVTPL securities and $689 million included in trading
securities in our Consolidated Balance Sheet as at October 31, 2023 ($185 million and $763 million, respectively, as at October 31, 2022).
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, LIHTC entities, 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 Unconsolidated Structured Entities table above.
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Financial Support Provided to Structured Entities
During the years ended October 31, 2023 and 2022, 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 can be 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 – counterparties exchange fixed rate interest payments and principal amounts in different currencies.
‰ Cross-currency interest rate swaps – counterparties exchange fixed and/or floating rate interest payments and principal amounts in different
Interest rate swaps – counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.
currencies.
‰ Commodity swaps – counterparties generally exchange fixed and floating rate payments based on a notional value of a single commodity.
‰ Equity swaps – counterparties exchange the return on an equity security or a group of equity securities for the return based on a fixed or floating
interest rate or the return on another equity security or group of equity securities.
‰ Credit default swaps – one counterparty pays the other a fee in exchange for that other counterparty agreeing to make a payment if a credit event
occurs, such as bankruptcy or failure to pay.
‰ Total return swaps – one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a reference asset or
group of assets, including 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 financial instrument or security at a fixed future date or at any time within a fixed future period.
For options written by us, we receive a premium from the purchaser for accepting market risk.
For options purchased by us, we pay a premium for the right to exercise the option. Since we have no obligation to exercise the option, our
primary exposure to risk is the potential credit risk if the writer of an over-the-counter contract fails to meet the terms of the contract.
Caps, collars and floors are specialized types of written and purchased options. They are contractual agreements in which the writer agrees to
pay the purchaser, based on a specified notional amount, the difference between the market rate and the prescribed rate of the cap, collar or floor.
The writer receives a premium for selling this instrument.
A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap.
A futures option is an option contract in which the underlying instrument is a single futures contract.
The main risks associated with these derivative instruments are related to exposure to movements in interest rates, foreign exchange rates,
credit quality, value of the underlying financial instrument or commodity, as applicable, and the possible inability of counterparties to meet the terms
of the contracts.
Embedded Derivatives
From time to time, we purchase or issue financial instruments containing embedded derivatives. The embedded derivative in a financial liability is
separated from the host contract and carried at fair value if the economic characteristics of the derivative are not closely related to those of the host
contract, the terms of the embedded derivative are the same as those of a stand-alone derivative, and the combined contract is not measured at fair
value. To the extent that we cannot reliably identify and measure the embedded derivative, the entire contract is carried at fair value, with changes
in fair value reflected in our Consolidated Statement of Income. Embedded derivatives in certain of our guaranteed investment certificate deposits are
accounted for separately from the host instrument and presented within deposits in our Consolidated Balance Sheet.
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BMO Financial Group 206th Annual Report 2023 171
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2023 was $10,323 million ($12,413 million
as at October 31, 2022), for which we have posted collateral of $9,084 million ($10,464 million as at October 31, 2022).
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 entered 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 (losses), in our Consolidated Statement of Income. We entered into economic hedges
in relation to the definitive agreement with BNP Paribas to acquire Bank of the West and its subsidiaries, which were then settled upon completion of
the acquisition. 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 (losses), in our Consolidated Statement of Income. Unrealized gains and losses on derivatives used to economically hedge certain exposures
may be recorded in our 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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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
Cash flow hedges (1)
Fair value hedges
Net investment hedges
Total foreign exchange contracts
Equity Contracts
Cash flow hedges
Total equity contracts
Gross
assets
Gross
liabilities
4,193
360
3,221
–
6
1,887
10,340
6,685
575
–
1,029
850
–
143
4,690
13
12
(9,393)
(84)
–
(3,129)
(21)
(1,397)
(10,081)
(5,469)
–
(448)
(743)
–
(787)
(127)
(11,460)
(18)
(9)
2023
Net
(5,200)
276
3,221
(3,129)
(15)
490
259
1,216
575
(448)
286
850
(787)
16
(6,770)
(5)
3
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)
34,004
(43,166)
(9,162)
45,537
(46,803)
(1,266)
693
4,877
5,570
333
69
–
402
–
–
(3,784)
(1,390)
(5,174)
(1,801)
(1)
(8)
(1,810)
(43)
(43)
(3,091)
3,487
396
(1,468)
68
(8)
(1,408)
(43)
(43)
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
Total fair value – hedging derivatives (4)
5,972
(7,027)
(1,055)
Total fair value – trading and hedging derivatives
39,976
(50,193)
(10,217)
2,623
48,160
(13,153)
(10,530)
(59,956)
(11,796)
Less: impact of master netting agreements
(26,674)
26,674
–
(31,878)
31,878
–
Total
13,302
(23,519)
(10,217)
16,282
(28,078)
(11,796)
(1) Includes derivatives entered into in relation to our acquisition of Bank of the West and its subsidiaries, which were settled upon completion of the transaction. 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 $nil million as at October 31, 2023 ($nil million as at October 31, 2022).
(4) 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 presented net of liabilities to customers where we have a legally enforceable right to offset amounts and we intend to settle contracts on
a net basis.
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BMO Financial Group 206th Annual Report 2023 173
Total interest rate contracts
1,443,479
9,636,161
11,079,640
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notional Amounts of Trading Derivatives
The notional amounts of our derivatives represent the amount to which a rate or price is applied in order to calculate the amount of cash that must be
exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our Consolidated Balance Sheet.
Exchange-traded
Over-the-counter
2023
Total
Exchange-traded
Over-the-counter
(Canadian $ in millions)
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
Futures
Total foreign exchange contracts
Commodity Contracts
Swaps
Purchased options
Written options
Futures
Total commodity contracts
Equity Contracts
Credit Contracts
Purchased
Written
Total credit contracts
Total
–
–
37,264
38,256
1,367,959
9,254,984
132,653
130,000
118,524
–
9,254,984
132,653
167,264
156,780
1,367,959
–
–
–
1,851
2,282
4,035
8,168
–
30,397
31,351
35,285
97,033
54,169
677,765
563,716
51,143
55,370
–
54,169
677,765
563,716
52,994
57,652
4,035
1,402,163
1,410,331
18,574
5,319
4,218
–
18,574
35,716
35,569
35,285
28,111
125,144
189,112
115,689
304,801
–
–
–
16,927
10,010
26,937
16,927
10,010
26,937
–
–
23,854
11,073
401,965
436,892
–
–
–
1,127
5,421
1,032
7,580
–
34,177
34,245
44,836
113,258
162,102
–
–
–
2022
Total
5,683,145
22,397
121,967
99,014
401,965
5,683,145
22,397
98,113
87,941
–
5,891,596
6,328,488
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
–
35,222
104,825
16,771
11,099
27,870
24,525
39,863
39,256
44,836
148,480
266,927
16,771
11,099
27,870
1,737,792
11,209,061
12,946,853
719,832
7,320,582
8,040,414
(1) Includes derivatives entered into in relation to our acquisition of Bank of the West and its subsidiaries, which were settled upon completion of the transaction. Refer to Note 10 for further details.
(2) Gold contracts are included in foreign exchange contracts.
Table excludes loan commitment derivatives with a notional amount of $1,805 million ($4,183 million as at October 31, 2022).
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 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.
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 range of 0.8 to 1.25; 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 a hedging relationship is recognized as it arises in non-interest revenue, other, in our Consolidated Statement of Income.
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174 BMO Financial Group 206th Annual Report 2023
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 allow 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 continued to apply these amendments at October 31, 2023, and
application will end at the earlier of the discontinuation of the impacted hedge relationship and the time at which there is no longer uncertainty
arising from IBOR reform over the timing and amount of IBOR-based cash flows. Effective November 1, 2020, we early adopted the IASB’s Phase 2
amendments to IAS 39 and IFRS 7, which require us to amend hedge relationship documentation to reflect the changes required by IBOR reform
when Phase 1 comes to an end, without discontinuing the existing hedge relationships.
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)
Remaining term to maturity
Within 1 year
1 to 3 years
3 to 5 years
5 to 10 years Over 10 years
2023
Total
2022
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
Average fixed interest rate
Average exchange rate:
CAD-Non USD/EUR
Equity price risk – Total return swap (5)
Notional amount
Fair Value Hedges
Interest rate risk – Interest rate swaps
Notional amount (6)
Average fixed interest rate
Interest rate risk – Bond futures (exchange-traded
derivatives)
Notional amount
Average price in dollars
Foreign exchange risk – Cross-currency swaps (7)
USD-EUR pair
Notional amount
Average fixed interest rate
Average exchange rate: USD-EUR
Notional amount
Average fixed interest rate
Average exchange rate: USD-JPY
USD-JPY pair
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps
and foreign exchange forwards
Notional amount
CAD-CNH pair
Foreign exchange risk – Deposit liabilities
USD denominated deposit – carrying amount
GBP denominated deposit – carrying amount
69,605
4.85%
39,250
4.33%
38,041
3.50%
34,962
3.57%
4,821
3.69%
186,679
4.20%
167,945
3.06%
8,897
2.47%
1.3340
1,924
2.41%
1.5395
1,155
2.21%
15,121
3.04%
1.3130
7,449
3.90%
1.4205
6,141
2.62%
12,977
3.17%
1.3118
4,973
2.79%
1.4015
1,901
4.20%
6,300
1.67%
1.3474
1,839
1.89%
1.4711
514
4.45%
327
3.42%
1.3076
201
2.97%
1.4870
76
5.24%
43,622
2.77%
1.3218
16,386
3.15%
1.4352
9,787
2.99%
62,703
1.31%
1.3196
19,429
2.47%
1.4489
7,718
2.42%
1.1310
1.6699
1.5040
0.7940
0.9038
1.5221
1.3956
–
451
–
–
–
451
455
42,073
4.97%
24,340
3.79%
46,219
3.61%
27,242
3.48%
29,494
3.35%
169,368
3.91%
103,671
2.42%
2,825
105
–
–
–
476
(0.08)%
0.0076
650
13,154
157
–
–
21
3.25%
0.9706
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,825
105
21
3.25%
0.9706
476
(0.08)%
0.0076
109
104
19
3.25%
0.9706
–
–
–
650
–
13,154
157
1,251
–
(1) The notional amount of the interest rate swaps likely subject to IBOR reform was $21,718 million of CDOR maturing after June 28, 2024, as at October 31, 2023 ($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).
(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 EUR-USD cross-currency swap split into EUR-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) As at October 31, 2022, amounts include derivatives entered into in relation to our acquisition of 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 $nil million of CDOR maturing after June 28, 2024 as at October 31, 2023 ($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).
(5) The notional amount of the total return swaps likely subject to IBOR reform was $451 million of CDOR maturing after June 28, 2024 as at October 31, 2023 ($455 million as at October 31, 2022).
(6) The notional amount of the interest rate swaps likely subject to IBOR reform was $22,328 million of CDOR maturing after June 28, 2024 as at October 31, 2023 ($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).
(7) The notional amount of the cross-currency swaps likely subject to IBOR reform was $nil million of CDOR maturing after June 28, 2024 as at October 31, 2023 ($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).
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BMO Financial Group 206th Annual Report 2023 175
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, Secured Overnight Financing Rate or CORRA.
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 derivatives that hedge interest rate risk or foreign exchange risk in net interest income in our
Consolidated Statement of Income over the life of the hedge. Interest paid on derivatives that hedge equity price risk on certain share-based
payments is recorded in employee compensation expense.
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 or settlement
frequencies between hedging instruments and hedged items, and using hedging instruments without a floor in relationships for hedged items with a
floor.
Net Investment Hedges
Net investment hedges mitigate our exposure to foreign exchange rate fluctuations related to our net investment in foreign operations.
Deposits denominated in foreign currencies, cross-currency swaps and foreign exchange forwards are designated as a hedging instrument for a
portion of our 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 either the dollar offset method with spot foreign currency rates or a
quantitative statistical regression analysis. As the notional amount of the hedging instruments and the hedged net investment in foreign operations
are the same, there are no significant sources of ineffectiveness in these hedging relationships.
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176 BMO Financial Group 206th Annual Report 2023
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, 2023 and 2022.
(Canadian $ in millions)
2023
Carrying amount of
hedging instruments (1)
Hedge ineffectiveness
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps and
foreign exchange forwards (3)
Equity price risk – Total return swaps
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps and
foreign exchange forwards
Foreign exchange risk – Deposit liabilities
Total
Cash Flow Hedges
Interest rate risk – Interest rate swaps
Foreign exchange risk – Cross-currency swaps and
foreign exchange forwards (3)
Equity price risk – Total return swaps
Net Investment Hedges
Foreign exchange risk – Cross-currency swaps and
foreign exchange forwards
Foreign exchange risk – Deposit liabilities
Total
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
(1,543)
(245)
(80)
(1,868)
23
(485)
(2,330)
(8,481)
1,684
(29)
(6,826)
429
(886)
(7,283)
1,511
245
80
1,836
(22)
485
2,299
8,588
(1,684)
29
6,933
(429)
886
7,390
–
–
–
–
1
–
1
2022
(33)
–
–
(33)
–
–
(33)
Asset
Liability
693
(3,784)
333
–
(1,801)
(43)
1,026
(5,628)
–
–
(8)
(13,311)
1,026
(18,947)
41
(6,824)
629
18
688
(3,342)
–
(10,166)
–
–
–
(1,251)
688
(11,417)
(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 acquisition of Bank of the West and its subsidiaries, which were settled upon completion of the transaction. 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, 2023 and 2022.
(Canadian $ in millions)
Cash Flow Hedges
Interest rate risk
Foreign exchange risk (3)
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
Cash Flow Hedges
Interest rate risk
Foreign exchange risk
Equity price risk
Net Investment Hedges
Foreign exchange risk
Total
2023
Balance in cash flow hedge AOCI /
net foreign operations AOCI
Balance
October 31, 2022
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income/goodwill as
the hedged item affects
net income/goodwill
Balance
October 31, 2023 (1)(2)
Active hedges
Discontinued hedges
(8,204)
1,223
33
(1,543)
(245)
(80)
(6,948)
(1,868)
(1,723)
(463)
(8,671)
(2,331)
1,732
(368)
(25)
1,339
–
1,339
(8,015)
610
(72)
(7,477)
(2,186)
(9,663)
(2,720)
610
(72)
(2,182)
(2,186)
(4,368)
(5,295)
–
–
(5,295)
–
(5,295)
2022
Balance
October 31, 2021
Gains /
(losses)
recognized
in OCI
Amount reclassified to
net income as the
hedged item affects
net income
Balance
October 31, 2022 (1)(2)
Active hedges
Discontinued hedges
Balance in cash flow hedge AOCI /
net foreign operations AOCI
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)
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(1) Tax balance related to cash flow hedges accumulated other comprehensive income was $2,029 million as at October 31, 2023 ($1,819 million as at October 31, 2022).
(2) Tax balance related to net investment hedges accumulated other comprehensive income was $555 million as at October 31, 2023 ($466 million as at October 31, 2022).
(3) On closing our acquisition of Bank of the West on February 1, 2023, we settled the foreign exchange forward contracts entered to mitigate foreign exchange risk of the purchase price of Bank of the
West and reclassified gain of $269 million after-tax to goodwill. Refer to Note 10 for further details.
BMO Financial Group 206th Annual Report 2023 177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 differences 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, 2023 and 2022 are as follows:
(Canadian $ in millions)
Carrying amount of
hedging derivatives (1)
Hedge ineffectiveness
2023
Accumulated amount of fair value
hedge gains (losses) on hedged items
Fair Value Hedge (3)
Interest rate swaps
Cross-currency swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
Asset
Liability
4,877
69
–
(1,390)
(1)
–
–
–
4,946
(1,391)
Fair Value Hedge (3)
Interest rate swaps
Cross-currency swaps
Securities and loans
Deposits, subordinated debt
and other liabilities
Total
1,935
–
–
(2,987)
–
–
–
–
1,935
(2,987)
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
–
–
4,071
(1,078)
2,993
–
–
2,633
(3,113)
(480)
–
–
(3,955)
1,139
(2,816)
–
–
(2,625)
3,128
503
–
–
116
61
177
–
–
8
15
23
–
–
87,043
–
–
(4,373)
(77,358)
1,015
9,685
(3,358)
–
–
36,394
(61,307)
(24,913)
–
–
(2,603)
2,841
238
–
–
(404)
1,867
1,463
2022
–
–
122
425
547
(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 our Consolidated Balance Sheet and includes amortized cost, before ACL, plus fair value hedge adjustments, except for FVOCI securities that are carried at fair value.
(3) Includes the fair value of bond futures rounded down to $nil million as at October 31, 2023 ($nil million as at October 31, 2022).
Derivative-Related Market Risk
Derivative instruments are subject to market risk arising 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 our exposure to 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 normally represents an amount that is 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. Credit risk is represented by the positive fair value of the derivative instrument. We strive to limit our exposure to 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
we apply 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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178 BMO Financial Group 206th Annual Report 2023
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 risk 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)
2023
2022
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
1,265
571
45
1
1,882
171
3
–
174
5,133
2,219
174
140
7,666
296
4
–
300
1,006
471
61
77
1,615
6
–
–
6
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
2,056
7,966
1,621
5,525
11,389
1,319
1,921
2,300
149
2
4,372
–
3
–
3
6,517
9,296
448
118
16,379
–
8
–
8
1,313
1,908
129
39
3,389
–
–
–
–
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
–
–
–
–
Total foreign exchange contracts
4,375
16,387
3,389
4,225
14,657
2,330
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
468
4
47
519
243
329
3
575
1,094
684
1,640
2,324
446
1,957
280
331
2,568
869
535
83
1,487
4,055
8,274
4,635
12,909
1,093
683
110
106
899
17
11
2
30
929
2,123
93
2,216
81
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
7,879
10,295
42,410
8,236
17,511
50,096
(1) Replacement cost and credit risk equivalent are presented after the impact of master netting agreements and calculated using the Standardized Approach for Counterparty Credit Risk (SA-CCR) in
accordance with the CAR Guideline issued by OSFI. The table therefore excludes loan commitment derivatives.
(2) Gold contracts are included in foreign exchange contracts.
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BMO Financial Group 206th Annual Report 2023 179
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2023
2022
Within 1
year
1 to 3
years
3 to 5
years
5 to 10
years
Over 10
years
Total notional
amounts
Total notional
amounts
Interest Rate Contracts
Swaps (1)
Forward rate agreements, futures and options
3,738,351 2,297,285 1,587,033 1,410,529 577,832
4,000
1,352,524
360,014
87,506
23,438
9,611,030
1,827,482
5,954,761
645,452
Total interest rate contracts
5,090,875 2,657,299 1,674,539 1,433,967 581,832 11,438,512
6,600,213
Foreign Exchange Contracts (2)
Swaps
Forward foreign exchange contracts (1)
Futures
Options
175,365
539,912
4,021
96,332
266,699
19,531
14
13,086
164,341
3,449
–
1,228
133,125
1,457
–
–
41,424
17
–
–
780,954
564,366
4,035
110,646
702,068
481,773
1,032
153,322
Total foreign exchange contracts
815,630
299,330
169,018
134,582
41,441
1,460,001
1,338,195
Commodity Contracts
Swaps
Futures
Options
Total commodity contracts
Equity Contracts
Credit Contracts
Total notional amount
9,823
18,182
33,856
7,777
15,634
36,444
61,861
59,855
549
1,372
879
2,800
425
97
106
628
–
–
–
–
18,574
35,285
71,285
24,525
44,836
79,119
125,144
148,480
220,096
67,747
15,097
1,557
755
305,252
267,382
453
925
16,749
6,877
1,933
26,937
27,870
6,188,915 3,085,156 1,878,203 1,577,611 625,961 13,355,846
8,382,140
(1) Includes derivatives entered into in relation to our acquisition of Bank of the West and its subsidiaries, which were settled upon close of the transaction. Refer to Note 10 for further details.
(2) Gold contracts are included in foreign exchange contracts.
Under the SA-CCR, this table 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 no write-downs of premises and equipment during the years ended October 31, 2023 and 2022. 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. Impairment is assessed when there is a change in use. We recorded impairment in our right-of-use assets
of $40 million during the year ended October 31, 2023 ($6 million in 2022).
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.
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180 BMO Financial Group 206th Annual Report 2023
Amounts related to leases of low value are expensed when incurred in non-interest expense, premises and equipment, in our Consolidated
Statement of Income.
The total cost and associated accumulated depreciation for premises and equipment that we own or lease are set out below:
(Canadian $ in millions)
2023
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
2022
Total
Cost
Balance at beginning of year
Additions/lease modifications
Acquisitions
Disposals (1)
Foreign exchange and other
119
13
213
(28)
6
1,688
91
276
(26)
18
2,671
280
63
(109)
18
945
125
12
(30)
8
2,054
413
25
(97)
18
3,435 10,912 99
406 1,328 18
523 1,112
–
(350)
(60)
(8)
121 10
53
1,354
59
–
(44)
319
2,292
319
–
(53)
113
Balance at end of year
323
2,047
2,923
1,060
2,413
4,357 13,123 119
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
–
–
–
–
–
1,188
(25)
70
5
2,007
(106)
306
21
1,238
2,228
Net carrying value
323
809
695
667
(29)
65
1
704
356
1,270
(94)
169
11
1,356
1,057
939 6,071
(50)
(304)
412 1,022
93
55
1,356 6,882
–
–
–
–
–
867
(35)
50
306
1,724
(48)
225
106
1,188
2,007
3,001 6,241 119
500
664
685
105
–
(29)
184
945
471
(25)
53
168
667
278
1,941
281
–
(246)
78
3,201 9,572
329 1,111
–
(615)
844
–
(235)
140
2,054
3,435 10,912
1,338
(243)
116
59
1,270
718 5,118
(504)
(153)
780
336
677
38
939 6,071
784
2,496 4,841
(1) Includes fully depreciated assets written off and assets sold as part of divestitures in 2022. 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.
AIR MILES Reward Program
On June 1, 2023, we completed the acquisition of the AIR MILES Reward Program (AIR MILES) business of LoyaltyOne Co., a subsidiary of Loyalty
Ventures Inc., pursuant to a process under the Companies’ Creditors Arrangement Act for a cash purchase price of US$157 million (CAD$213 million).
The AIR MILES business operates as a wholly-owned subsidiary of BMO. The acquisition was accounted for as a business combination, and the
acquired business and corresponding goodwill are included in our Canadian Personal and Commercial Banking (Canadian P&C) reporting segment.
We acquired intangible assets of $151 million and goodwill of $233 million. Customer relationship and software intangible assets are amortized
to income over 5 to 14 years. The trade name intangible asset has an indefinite life and is not amortized to income. A portion of the goodwill related
to this acquisition is deductible for tax purposes.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
Securities
Goodwill and intangible assets
Other assets
Total assets
Deferred revenue (1)
Other liabilities
Total liabilities
Purchase price
June 1, 2023
668
384
141
1,193
916
64
980
213
(1) Deferred revenue reflects our obligation to fulfill the redemption of miles that were outstanding at the acquisition date and is included in other liabilities in our Consolidated Balance Sheet.
The purchase price allocation for AIR MILES is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.
Bank of the West
On February 1, 2023, we completed the acquisition of Bank of the West, including its subsidiaries, from BNP Paribas for a cash purchase price
of US$13.8 billion (CAD$18.4 billion). Bank of the West provides a broad range of banking products and services primarily in the Western and
Midwestern regions of the United States. The merger enables BMO’s market extension in Bank of the West’s primary markets, including California,
and accelerates BMO’s commercial banking expansion. The acquisition has been reflected in our results as a business combination, primarily in the
U.S. Personal and Commercial Banking (U.S. P&C) and BMO WM reporting segments.
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BMO Financial Group 206th Annual Report 2023 181
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the acquisition, we acquired a 51% interest in Bank of the West’s subsidiary, CLAAS Financial Services, LLC, which provides lease and
loan financing to commercial entities acquiring agricultural equipment. We control this LLC and its results are included in our consolidated financial
statements. We have recorded the ownership interests of the other partners in CLAAS Financial Services, LLC as non-controlling interest in our
Consolidated Balance Sheet.
We acquired intangible assets of $2,883 million and goodwill of $10,582 million. Core-deposit and customer relationship intangible assets are
being amortized to income over the period during which we believe the assets will benefit us, on an accelerated basis, over a period not to
exceed 15 years. Goodwill consists largely of the synergy and economies of scale expected from the combined operations of BMO and Bank of the
West. Goodwill related to this acquisition is not deductible for tax purposes.
We recorded the assets acquired and liabilities assumed at fair value as at the date of acquisition, as shown in the table below.
(Canadian $ in millions)
Purchase consideration
Impact of forward contracts (1)
Net purchase consideration
Fair value of identifiable assets acquired
Securities
Loans
Residential mortgages
Consumer installment and other personal
Credit cards
Business and government
Total loans
Other assets (2)
Intangible assets
Total fair value of identifiable assets acquired
Fair value of identifiable liabilities assumed
Deposits
Other liabilities (2)
Total fair value of identifiable liabilities assumed
Non-controlling interest
Goodwill
Net purchase consideration
February 1, 2023
18,382
(269)
18,113
28,437
11,912
20,268
885
43,418
76,483
9,152
2,883
116,955
91,711
17,697
109,408
16
10,582
18,113
(1) To mitigate changes in the Canadian dollar equivalent of the purchase price between our announcement of the acquisition and its closing, we entered into forward contracts, which qualified for hedge
accounting. Changes in the fair value of these forward contracts of $269 million (after-tax) was accounted for as a reduction of the Canadian dollar equivalent of the purchase price.
(2) The net deferred tax asset recorded in the opening balance sheet is $1,273 million.
The purchase price allocation for Bank of the West is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.
The accounting for purchased loans, including the initial PCL, is discussed in Note 4.
Since the acquisition date, Bank of the West has contributed revenue of $3,143 million and net income of $361 million to our consolidated
results. Net income of $361 million excludes the initial PCL of $705 million ($517 million after-tax) and integration and acquisition-related costs
of $1,792 million ($1,342 million after-tax). If we assume the acquisition had occurred on November 1, 2022 and the same fair values were applied,
we estimate that our combined consolidated year-to-date revenue and net income would have been $32 billion and $4.5 billion, respectively.
Impact of Fair Value Management Actions
The fair value of fixed rate loans, securities and deposits is largely dependent on interest rates. As interest rates increased between our
announcement of the acquisition and close, the fair value of the acquired fixed rate instruments (in particular, loans, securities and deposits)
decreased, resulting in goodwill on closing that was higher than our estimates on the announcement date. Conversely, the fair value of floating
rate assets (liabilities) and non-maturity deposits approximates par. Changes in goodwill relative to our original assumptions announced on
December 20, 2021 impacted capital ratios on close because goodwill is treated as a deduction from capital under OSFI Basel III rules.
Upon announcement of the agreement to acquire Bank of the West, we entered into pay fixed/receive float interest rate swaps and purchased a
portfolio of matched duration U.S. Treasuries and other balance sheet instruments to economically hedge the impact of changes in interest rates on
our capital ratios at close. We recorded net interest income and mark-to-market gains of $5.7 billion on these instruments in interest income and
non-interest revenue between December 20, 2021 and February 1, 2023, at which time the interest rate swaps were neutralized. The gains provided
additional capital to offset the impact of higher goodwill on close.
On close, we placed the majority of these U.S. Treasuries and other balance sheet instruments, which were in an unrealized loss position, in fair
value hedge relationships with new pay fixed/receive float interest rate swaps. The fair value hedges, coupled with other actions taken to manage
our interest rate risk profile to its target position, crystallized a $5.7 billion loss on these instruments, which will be recognized as a reduction in
interest income over their remaining life through accounting for the new fair value hedges. We recorded an $877 million reduction in interest,
dividend and fee income – securities related to the fair value hedge in our Consolidated Statement of Income for the year ended October 31, 2023.
The fair values of the loans, securities and deposits we acquired are below par. This discount will accrete to interest income in our Consolidated
Statement of Income over the remaining terms of these instruments. We recorded $725 million related to these purchased loans and $383 million
related to these purchased securities in our Consolidated Statement of Income in net interest income for the year ended October 31, 2023. More
information on the purchased loans is included in Note 4.
Leasing Solutions Canada Inc.
On February 1, 2023, we acquired Leasing Solutions Canada Inc. from BNP Paribas. The acquisition was reflected in our results beginning in the second
quarter of 2023 as a business combination, in the Canadian P&C reporting segment and was not material to the bank.
182 BMO Financial Group 206th Annual Report 2023
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Radicle Group Inc.
On December 1, 2022, we completed the acquisition of Radicle Group Inc. (Radicle), a Calgary-based leader in sustainability advisory services and
solutions, and technology-driven emissions measurement and management, for 1.2 million BMO common shares with a total value of $153 million
plus cash consideration of $42 million. The acquisition was accounted for as a business combination, and the acquired business and corresponding
goodwill are included in our BMO CM reporting segment.
We acquired intangible assets of $60 million and goodwill of $85 million. The intangible assets are being amortized over 3 to 15 years. Goodwill
related to this acquisition is not deductible for tax purposes.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions)
Goodwill and intangible assets
Other assets
Total assets
Liabilities
Purchase price
December 1, 2022
145
85
230
35
195
The purchase price allocation for Radicle is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.
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 WM 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 related to foreign currency translation reclassified from accumulated other comprehensive
income to non-interest revenue, foreign exchange gains, other than trading, in our Consolidated Statement of Income in 2022. The transaction also
included the opportunity for certain BMO asset management clients in the United States to move to Ameriprise. These transfers were completed
in 2022, resulting in tax expense of $22 million. Further transfers of certain other U.S. asset management clients were completed in 2022 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 was not considered material to the bank.
Note 11: Goodwill and Intangible Assets
Goodwill
When we complete an acquisition, we allocate the purchase price to the assets acquired, including identifiable intangible assets, and the liabilities
assumed. Any portion of the consideration transferred that is in excess of the fair value of those net assets is considered to be goodwill. Goodwill is
not amortized and is instead tested for impairment annually.
In performing the impairment test, we utilize the fair value less costs to sell for each group of CGUs based on discounted cash flow projections.
Cash flows were projected for the first 10 years based on actual operating results, expected future business performance and past experience.
Beyond 10 years, cash flows were assumed to grow at perpetual annual rates of up to 2.0% (3.0% in 2022). The discount rates we applied in
determining the recoverable amounts in 2023 ranged from 8.9% to 11.4% (6.8% to 11.2% in 2022) 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.
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BMO Financial Group 206th Annual Report 2023 183
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A continuity of our goodwill by group of CGUs for the years ended October 31, 2023 and 2022 is as follows:
(Canadian $ in millions)
Personal and Commercial Banking
BMO Wealth Management BMO Capital Markets
Total
Balance – October 31, 2021
Disposals (7)
Foreign exchange and other (1)
Balance – October 31, 2022
Acquisitions (7)
Foreign exchange and other (1)
Canadian
P&C
97
–
–
97
233
–
U.S. P&C
3,567
–
362
3,929
10,345
515
Total
3,664
–
362
4,026
10,578
515
Wealth and
Asset
Management
Insurance
1,310
(538)
50
822
237
20
2
–
–
2
–
–
Total
1,312
(538)
50
824
237
20
402
–
33
435
85
8
5,378
(538)
445
5,285
10,900
543
Balance – October 31, 2023
330 (2)
14,789 (3)
15,119
1,079 (4)
2 (5)
1,081
528 (6) 16,728
(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 AIR MILES, bcpbank Canada, Diners Club, Aver Media LP and GE Transportation Finance.
(3) Relates primarily to Bank of the West, First National Bank & Trust, Ozaukee Bank, Merchants and Manufacturers Bancorporation, Inc., Diners Club, AMCORE, M&I Marshall and Ilsley Banks (M&I) and
GE Transportation Finance.
(4) Relates primarily to Bank of the West, CTC Consulting LLC, M&I, Stoker Ostler Wealth Advisors, Inc., myCFO, Inc., Guardian Group of Funds Ltd. and BMO Nesbitt Burns Inc. Pyrford International Limited,
LGM Investments Limited and F&C Asset Management plc were divested in fiscal 2022.
(5) Relates to AIG Life Holdings (Canada), ULC.
(6) Relates to Radicle, Clearpool, KGS-Alpha Capital Markets, Gerard Klauer Mattison, BMO Nesbitt Burns Inc., Paloma Securities L.L.C., M&I and Greene Holcomb Fisher.
(7) Refer to Note 10 for further information.
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, 2021
Additions
Transfers
Disposals (2)
Foreign exchange and other
Cost as at October 31, 2022
Additions
Acquisitions (3)
Transfers
Disposals (2)(3)
Foreign exchange and other
Cost as at October 31, 2023
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
Other
Total
719
–
–
(247)
49
521
–
311
–
–
18
894
–
–
–
84
978
–
2,453
–
–
122
5,548
11
611
(53)
120
6,237 (1)
58
103
672
(29)
30
204
662
(611)
(1)
5
259
739
–
(672)
(2)
–
601
20
–
(319)
20
322
33
227
–
(21)
11
7,966
693
–
(620)
278
8,317
830
3,094
–
(52)
181
850
3,553
7,071 (1)
324
572 12,370
(1) Includes $6,172 million of internally generated software as at October 31, 2023 ($5,486 million as at October 31, 2022).
(2) Includes fully depreciated assets written off and assets sold as part of divestitures in 2022.
(3) 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, 2021
Amortization
Disposals (2)(3)
Foreign exchange and other
Accumulated amortization at October 31, 2022
Amortization
Disposals (2)(3)
Foreign exchange and other
Accumulated amortization at October 31, 2023
Carrying value at October 31, 2023
Carrying value at October 31, 2022
Customer
relationships
Core
deposits
Software –
amortizing
Software under
development
616
22
(247)
44
435
44
–
8
894
–
–
84
978
291
–
26
3,821
556
(49)
94
4,422 (1)
653
(22)
20
487
1,295
5,073 (1)
–
–
–
–
–
–
–
–
–
363
2,258
86
–
1,998
1,815
324
259
Other
Total
369
26
(123)
17
5,700
604
(419)
239
289
6,124
27 1,015
(43)
(21)
58
4
299 7,154
273 5,216
33
2,193
(1) Includes $4,420 million of internally generated software as at October 31, 2023 ($3,819 million as at October 31, 2022).
(2) Includes fully depreciated assets written off and assets sold as part of divestitures in 2022. Refer to Note 10 for further information.
(3) Includes impairment charges.
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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 $227 million as at October 31, 2023 ($nil million as at October 31, 2022) in
intangible assets with indefinite lives that relate primarily to card processing and trade name contracts.
The useful lives of intangible assets are reviewed annually for any changes in circumstances. We test definite-life intangible assets for
impairment when events or changes in circumstances indicate that their carrying value may not be recoverable. Indefinite-life intangible assets are
tested annually for impairment. If any intangible assets are determined to be impaired, we write them down to their recoverable amount, the higher
of value in use and fair value less costs to sell.
There were write-downs of software-related intangible assets of $9 million during the year ended October 31, 2023 ($5 million in 2022).
184 BMO Financial Group 206th Annual Report 2023
Note 12: Other Assets
Customers’ Liability Under Acceptances
Acceptances represent a form of negotiable short-term debt issued by our customers, which we guarantee for a fee. The fees earned are recorded in
non-interest revenue, lending fees, in our Consolidated Statement of Income over the term of the acceptance. The amount potentially due under
acceptances is recorded in other liabilities in our Consolidated Balance Sheet. We record the bank’s equivalent claim against our customers in the
event of a call on these commitments in other assets in our Consolidated Balance Sheet.
Other
The components of other within other assets are as follows:
(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
2023
5,278
4,097
6,306
124
9,939
381
3,161
81
1,225
4,701
35,293
2022
3,634
2,726
4,509
263
13,586
313
2,575
51
1,267
2,970
31,894
(1) Includes $1,073 million of investment properties ($1,001 million as at October 31, 2022) 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 $1,326 million and categorized as Level 3 (refer to Note 17 for further information on fair
value levels) using models with unobservable market inputs ($1,184 million as at October 31, 2022).
(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)(4)
2023
2022
Deposits by:
Banks (1)
Business and government
Individuals
Total (3)
Booked in:
Canada
United States
Other countries
Total
4,237
57,781
4,318
66,336
54,328
11,899
109
66,336
1,855
45,648
34,959
82,462
68,495
13,957
10
82,462
1,609
183,610
137,978
323,197
127,523
193,457
2,217
323,197
21,886
287,631
128,164
437,681
312,863
81,751
43,067
437,681
29,587
574,670
305,419
909,676
563,209
301,064
45,403
909,676
30,901
495,831
242,746
769,478
515,290
217,720
36,468
769,478
(1) Includes regulated and central banks.
(2) Includes $63,925 million of senior unsecured debt as at October 31, 2023 subject to the Bank Recapitalization (Bail-In) regime ($51,746 million as at October 31, 2022). 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, 2023 and 2022 are $491,201 million and $384,080 million, respectively, of deposits denominated in U.S. dollars, and $55,705 million and $46,830 million,
respectively, of deposits denominated in other foreign currencies.
(4) We have unencumbered liquid assets of $360,213 million as at October 31, 2023 to support these and other deposit liabilities ($335,299 million as at October 31, 2022).
Deposits are measured at amortized cost, except structured notes, structured deposits and metals 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 $30,852 million as at October 31, 2023 ($29,966 million as at
October 31, 2022) 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 $52,884 million as at October 31, 2023 ($42,138 million as at October 31, 2022).
‰ Covered bonds, which totalled $28,400 million as at October 31, 2023 ($29,076 million as at October 31, 2022).
The following table presents deposits payable on a fixed date and greater than one hundred thousand dollars:
(Canadian $ in millions)
As at October 31, 2023
As at October 31, 2022
Canada
United States
Other
Total
269,262
230,475
73,226
50,542
43,106
34,241
385,594
315,258
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BMO Financial Group 206th Annual Report 2023 185
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, 2023
As at October 31, 2022
Less than 3 months
3 to 6 months
6 to 12 months
Over 12 months
Total
55,070
46,792
38,509
28,826
61,370
55,288
114,313
99,569
269,262
230,475
Structured Note Liabilities
Most of our structured note liabilities included in deposits have been designated at FVTPL, 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 (losses), 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, 2023
As at October 31, 2022
Notional amount
due at contractual
maturity
42,437
32,507
Fair value
35,300
26,305
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 recognized in
AOCI (before tax)
1,336
4,617
(379)
1,653
865
1,245
(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 (losses), in our Consolidated Statement of Income.
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 non-interest revenue, trading revenues (losses), 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 NHA MBS 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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186 BMO Financial Group 206th Annual Report 2023
Other
The components of other within other liabilities are as follows:
(Canadian $ in millions)
Accounts payable, accrued expenses and other items
Accrued interest payable
ACL on off-balance sheet items
Cash collateral
Credit card loyalty rewards
Current tax liabilities
Deferred tax liabilities (Note 22)
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
2023
2022
11,987
5,299
460
6,406
1,432
44
16
12,340
3,506
18,120
823
2,436
179
63,048
11,206
2,319
381
5,042
441
425
102
11,201
2,835
7,494
832
2,966
88
45,332
Credit Card Loyalty Rewards
We earn interchange fees on our proprietary cards and fees on our AIR MILES business. We defer the fees related to our obligation to fulfill
redemption of rewards/miles and record them in other liabilities, other in our Consolidated Balance Sheet. We recognize these fees in non-interest
revenue in our Consolidated Statement of Income when the rewards/miles are redeemed.
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 businesses at FVTPL, 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 (loss).
The following table presents the fair value and changes in fair value in our investment contract liabilities:
(Canadian $ in millions)
As at October 31, 2023
As at October 31, 2022
Fair value
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)
708
770
1,397
1,459
(13)
(114)
(15)
94
8
22
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
2023
2022
11,201
12,845
1,424
(261)
(21)
–
1,142
(3)
354
(1,938)
201
3
(1,380)
(264)
12,340
11,201
Reinsurance
In the ordinary course of business, our insurance subsidiaries reinsure risks with 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 in order to minimize our exposure to losses from reinsurer insolvency.
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BMO Financial Group 206th Annual Report 2023 187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance premiums ceded are recorded net against direct premium income and are included in non-interest revenue, insurance revenue (loss), in
our Consolidated Statement of Income for the years ended October 31, 2023 and 2022, as shown in the table below:
(Canadian $ in millions)
Direct premium income
Ceded premiums
2023
2022
2,879
(646)
1,623
(399)
2,233
1,224
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, 2023 was $92 million ($59 million in 2022). Total cash outflow for lease liabilities for the
year ended October 31, 2023 was $435 million ($342 million in 2022). Variable lease payments (for example maintenance, utilities and property
taxes) not included in the measurement of lease liabilities for the year ended October 31, 2023 were $218 million ($206 million in 2022).
The maturity profile of our undiscounted lease liabilities is $439 million for 2024, $440 million for 2025, $427 million for 2026, $404 million
for 2027, $375 million for 2028 and $2,089 million for 2029 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 (%) Reset premium (%)
Redeemable at our option (2)
2023
Total
2022
Total
Debentures Series 20
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)
Series M Medium-Term Notes, First Tranche (1)
Total (8)
150 December 2025 to 2040
US 1,250 December 2032
US 850 October 2028
1,000 September 2029
1,250
1,000
US 1,250
June 2030
July 2031
January 2037
750 October 2032
1,150 September 2033
8.25
3.80
4.34
2.88
2.08
1.93
3.09
6.53
6.03
na Not redeemable
1.43 (3) December 2027
na October 2023 (4)
1.18 (5) September 2024
1.32 (5) June 2025
0.59 (5) July 2026
1.40 (6) January 2032
2.70 (7) October 2027
2.02 (7) September 2028
147
146
1,510 1,497
– 1,135
998
999
988
1,248 1,248
984
1,439 1,393
749
–
749
1,148
8,228 8,150
(1) These notes include a NVCC 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.
Interest rate will reset at a rate equal to the 5-year mid-swap rate plus the reset premium noted.
(2) Redeemable at par with accrued and unpaid interest to and excluding the redemption date.
(3)
(4) All US$850 million 4.338% Subordinated Notes due 2028 were redeemed on October 5, 2023 for 100% of the principal amount, plus accrued interest to and excluding the redemption date.
(5)
(6)
(7)
(8) 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, 2023
by $539 million (decreased by $565 million in 2022); 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.
Interest rate will reset at a rate equal to the 3-month CDOR plus the reset premium noted.
Interest rate will reset at a rate equal to the 5-year U.S. treasury bill rate plus the reset premium noted.
Interest rate will reset at a rate equal to the CORRA plus the reset premium noted.
na – not applicable
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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188 BMO Financial Group 206th Annual Report 2023
Note 16: Equity
Preferred and Common Shares Outstanding and Other Equity Instruments
(Canadian $ in millions, except as noted)
2023
2022
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 44
Class B – Series 46
Class B – Series 50 (1)
Class B – Series 52 (2)
Preferred Shares – Classified as Equity
Other Equity Instruments
4.800% Additional Tier 1 Capital Notes (AT1 Notes)
4.300% Series 1 LRCNs
5.625% Series 2 LRCNs
7.325% Series 3 LRCNs
Preferred Shares and Other Equity Instruments
Common Shares
Balance at beginning of year
Issued under the Shareholder Dividend
Reinvestment and Share Purchase Plan
Issued under the Stock Option Plan and
20,000,000
16,000,000
12,000,000
8,000,000
16,000,000
14,000,000
500,000
650,000
500
400
300
200
400
350
500
650
3,300
658
1,250
750
1,000
6,958
0.96
0.91
0.96
0.76
1.21
1.28
73.73
57.52
20,000,000
16,000,000
12,000,000
8,000,000
16,000,000
14,000,000
500,000
–
0.96
0.91
0.96
0.76
1.21
1.28
24.64
–
500
400
300
200
400
350
500
–
2,650
658
1,250
750
1,000
6,308
677,106,878
17,744
648,136,472
13,599
13,482,314
1,609
7,531,233
999
other stock-based compensation plans (Note 20)
Treasury shares sold/(purchased)
Issued to align capital position with increased regulatory
requirements as announced by OSFI
Issued for acquisitions (Note 10)
724,853
101,178
61
14
28,331,227
1,162,711
3,360
153
733,591
(138,168)
57
(17)
–
20,843,750
–
3,106
Balance at End of Year (3)
720,909,161
22,941
5.80
677,106,878
17,744
5.44
(1) On July 27, 2022, we issued Class B Series 50 Preferred Shares for $500 million.
(2) On January 31, 2023, we issued Class B Series 52 Preferred Shares for $650 million.
(3) Common shares are net of 73,511 treasury shares as at October 31, 2023 (174,689 treasury shares as at October 31, 2022).
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
Class B – Series 52
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
1,000.00
$
$
$
$
$
$
$
$
0.240750 (2)
0.226500 (2)
0.240688 (2)
0.190875 (2)
0.303125 (2)
0.318750 (2)
36.865000 (2)
35.285000 (2)
2.33%
2.24%
2.22%
2.71%
2.68%
3.51%
4.25%
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)
May 26, 2028 (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)
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 and 52 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 NVCC 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 October 19, 2023, we announced that we did not intend to exercise our right to redeem the current outstanding Non-Cumulative 5-Year Rate
Reset Class B Preferred Shares, Series 44 (Preferred Shares Series 44) on November 25, 2023. As a result, subject to certain conditions, the holders of
Preferred Shares Series 44 had the right, at their option, by November 10, 2023, to convert any or all of their Preferred Shares Series 44 on a one-for-
one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 45 (Preferred Shares Series 45). During the conversion period, which ran
from October 25, 2023 to November 10, 2023, 93,870 Preferred Shares Series 44 were tendered for conversion into Preferred Shares Series 45, which
is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 44 prospectus supplement
dated September 10, 2018. As a result, no Preferred Shares Series 45 were issued and the holders of Preferred Shares Series 44 retained their shares.
The dividend rate for the Preferred Shares Series 44 for the five-year period commencing November 25, 2023 to, but excluding, November 25, 2028
will be 6.816%.
On January 31, 2023, we issued 650,000 Non-Cumulative 5-Year Fixed Rate Reset Class B Preferred Shares, Series 52 (NVCC) at a price of $1,000
per share for gross proceeds of $650 million. For the initial fixed rate period to, but excluding, May 26, 2028, the shares pay non-cumulative
preferential fixed semi-annual cash dividends, as and when declared, in the amount of $70.57 per share per annum, to yield 7.057% annually. The
dividend rate will reset on May 26, 2028 and every five years thereafter at a rate equal to the 5-year Government of Canada bond yield plus 4.250%.
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BMO Financial Group 206th Annual Report 2023 189
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Equity Instruments
The $1,250 million 4.300% Series 1 LRCNs (NVCC), $750 million 5.625% Series 2 LRCNs (NVCC) and $1,000 million 7.325% Series 3 LRCNs (NVCC) are
classified as equity and form part of our Additional Tier 1 Capital. Upon the occurrence of a recourse event, the noteholders will have recourse to
assets held in a consolidated trust managed by a third-party trustee. The trust assets are currently comprised of $1,250 million of BMO issued
Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 48 (NVCC) (Preferred Shares Series 48), $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% 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 instruments and, as a result, the full amount of proceeds have 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, 2023 and 2022.
(Canadian $ in millions, except as noted)
4.800% AT1 Notes
4.300% Series 1 LRCNs
5.625% Series 2 LRCNs
7.325% Series 3 LRCNs
Total
Face value
Interest rate (%)
Redeemable at our option
Convertible to
US$ 500
$1,250
$ 750
$1,000
4.800 (1)
4.300 (4)
5.625 (4)
7.325 (4)
August 2024 (2)
November 2025 (2)
May 2027 (2)
November 2027 (2)
Variable number of common shares (3)
Variable number of common shares (3)(4)
Variable number of common shares (3)(4)
Variable number of common shares (3)(4)
2023
Total
658
1,250
750
1,000
2022
Total
658
1,250
750
1,000
3,658
3,658
(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 NVCC 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, with the noteholders’ sole remedy being their proportionate share of trust assets, then comprised of common shares of the bank received by the
trust on conversion.
Common Shares
On December 16, 2022, we issued 13,575,750 common shares for $1,610 million through a public offering and 8,431,700 common shares
for $1,000 million under a private placement. On January 25, 2023, we issued an additional 6,323,777 common shares for $750 million to
BNP Paribas S.A. under a private placement. In total, we issued 28,331,227 common shares for $3,360 million to align our capital position with
increased regulatory requirements as announced by OSFI on December 8, 2022.
On December 1, 2022, we issued 1,162,711 common shares for $153 million for the acquisition of Radicle Group Inc. 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.
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.
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Non-Viability Contingent Capital
Our preferred shares, AT1 Notes and LRCNs, by virtue of the recourse to the preferred shares held in the consolidated trusts, include a NVCC provision,
which is necessary for them to qualify as regulatory capital under Basel III. As such, they are convertible into a variable number of our common shares if
OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank
has accepted, or agreed to accept, a capital injection, or equivalent support, to avoid non-viability. In such an event, each preferred share or other equity
instrument is convertible into common shares pursuant to an automatic conversion formula and a conversion price based on the greater of: (i) a floor
price of $5.00 and (ii) the current market price of our common shares based on the volume weighted-average trading price of our common shares on the
TSX. The number of common shares issued is determined by dividing the value of the preferred share or other equity instrument issuance, including
declared and unpaid dividends on such preferred share or other equity instrument issuance, by the conversion price and then applying the multiplier.
Normal Course Issuer Bid
We did not establish a normal course issuer bid in the current fiscal year.
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.
Until further notice, common shares under the Plan are 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 13,482,314 common shares under the Plan for the year ended October 31, 2023 (7,531,233 for the year ended October 31, 2022).
Potential Share Issuances
As at October 31, 2023, we had reserved 12,187,362 common shares (25,669,677 as at October 31, 2022) for potential issuance in respect of the
Plan. We have also reserved 6,312,576 common shares (5,976,870 as at October 31, 2022) for the potential exercise of stock options, as further
described in Note 20.
Non-Controlling Interest
Non-controlling interest in subsidiaries, relating to our acquisition of Bank of the West, was $28 million as at October 31, 2023 ($nil million as at
October 31, 2022). Refer to Note 10 for further information.
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.
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BMO Financial Group 206th Annual Report 2023 191
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Governance Over the Determination of Fair Value
Senior executive oversight of our valuation processes is provided through various valuation and risk committees. In order to ensure that all financial
instruments carried at fair value are accurately and appropriately 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 type of 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 CM. 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 MBS and CMO 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 MBS and CMO 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 determined using 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 by using valuation techniques,
which include discounted cash flow analysis and earnings multiples.
Privately Issued Securities
Privately issued debt and equity securities are valued using prices observed in recent market transactions, where available. Otherwise, fair value is
derived from valuation models using a market or income approach. These models consider various factors, including projected cash flows, earnings,
revenue and other third-party evidence, as available. The fair value of our privately issued securities includes net asset values published by third-party
fund managers, as applicable.
Prices obtained 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
obtaining multiple third-party quotes for external market prices and input values. We review the approach taken by third-party vendors to ensure that
they 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 risk profiles. 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 to reflect any credit protection purchased to mitigate credit risk.
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192 BMO Financial Group 206th Annual Report 2023
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
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 share prices, correlation for multiple assets, interest rates, foreign exchange rates, yield curves and
volatilities.
We calculate a credit valuation adjustment (CVA) to recognize the credit risk related to the possibility that the 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 risk profiles. 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 FVTPL. The fair value of these structured notes is estimated using internally validated
valuation models incorporating 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 market prices or inputs are not available, management
judgment is required to determine the fair value by assessing other relevant sources of information, such as historical data and proxy information
from similar transactions.
Securities Sold But Not Yet Purchased
The fair value of these obligations is based on the fair value of the underlying securities, which can be equity or debt securities. As these obligations
are fully collateralized, the method used to determine fair value would be the same as that used for the relevant underlying equity or debt securities.
Securitization and Structured Entities’ Liabilities
The determination of the fair value of our securitization and structured entities’ liabilities is based on quoted market prices or quoted market prices
for similar financial instruments, where available. Where quoted prices are not available, fair value is determined using valuation techniques, such as
discounted cash flow models, that maximize the use of observable inputs.
Subordinated Debt
The fair value of our subordinated debt is determined by referring to current market prices for the same or similar instruments.
Financial Instruments with a Carrying Value Approximating Fair Value
Carrying value is considered to be a reasonable estimate of fair value for our cash and cash equivalents.
The carrying value of certain financial assets and liabilities, such as interest bearing deposits with banks, securities borrowed or purchased under
resale agreements, customers’ liability under acceptances and certain other assets, as well as acceptances, securities lent or sold under repurchase
agreements and certain other liabilities, is a reasonable estimate of fair value because of 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 categorize financial instruments in a fair value hierarchy according to the inputs we use in valuation techniques to measure fair value.
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BMO Financial Group 206th Annual Report 2023 193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Fair value (6)
Carrying value
Fair value (6)
2023
2022
116,814
104,171
106,590
94,832
175,350
103,265
11,893
358,527
649,035
873,831
24,631
4,160
8,228
167,863
101,021
11,893
356,842
637,619
870,573
23,739
3,287
7,849
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
(1) Carrying value is net of ACL.
(2) Excludes $1,676 million of residential mortgages classified as FVTPL, $5,720 million of business and government loans classified as FVTPL and $58 million of business and government loans classified
as FVOCI ($176 million, $5,496 million and $60 million, respectively, as at October 31, 2022).
(3) Excludes $35,300 million of structured note liabilities ($26,305 million as at October 31, 2022), $341 million of structured deposits ($536 million as at October 31, 2022) and $204 million of metals
deposits ($218 million as at October 31, 2022) measured at fair value.
(4) Excludes $2,463 million of securitization and structured entities’ liabilities classified as FVTPL ($1,252 million as at October 31, 2022).
(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 $21,229 million categorized as Level 1 ($39,622 million as at October 31, 2022) and $82,942 million categorized as Level 2 ($55,210 million as at October 31, 2022).
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 observable market data is not available 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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194 BMO Financial Group 206th Annual Report 2023
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)
2023
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)
2022
Total
Trading Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal
governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
NHA MBS, and U.S. agency MBS and CMO
Corporate debt
Trading loans
Corporate equity
FVTPL Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal
governments
U.S. federal government
Other governments
NHA MBS, and U.S. agency MBS and CMO
Corporate debt
Corporate equity
FVOCI Securities
Issued or guaranteed by:
Canadian federal government
Canadian provincial and municipal
governments
U.S. federal government
U.S. states, municipalities and agencies
Other governments
NHA MBS, and U.S. agency MBS and CMO
Corporate debt
Corporate equity
Loans
Residential mortgages
Business and government loans
Other Assets (1)
Fair Value Liabilities
Securities sold but not yet purchased
Structured note liabilities (2)
Structured deposits (3)
Other liabilities (4)
Derivative Assets
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Derivative Liabilities
Interest rate contracts
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
6,728
3,898
–
10,626
6,981
3,955
–
10,936
3,560
8,645
–
408
–
2,551
3
47,422
69,317
211
445
5
–
–
25
809
3,470
11,687
279
2,167
22,973
9,071
447
202
54,194
5
722
2,083
48
19
7,308
805
–
–
–
–
896
112
–
37
7,030
20,332
279
2,575
23,869
11,734
450
47,661
1,045 124,556
1,120
7,326
56
1,085
–
1,445
–
46,073
64,086
4,990
9,373
83
2,885
13,327
8,144
346
–
43,103
–
–
–
–
985
3
–
–
6,110
16,699
139
3,970
14,312
9,592
346
46,073
988 108,177
–
216
319
174
–
493
–
–
–
–
27
4,208
1,167
2,088
48
19
7,360
5,822
36
–
–
–
62
1,440
1,857
1,044
4
87
8
6,409
6
7,732
–
–
–
–
8
4,044
1,080
4
87
8
6,479
5,490
4,052
13,641
1,495
10,990
4,235
16,720
13,297
6,850
–
20,147
3,544
8,757
–
12,301
610
727
–
480
–
406
–
15,520
–
–
–
6,020
20,989
–
–
1,479
22,468
21
28
668
58
–
775
52
1
589
160
–
802
4,445
5,153
5,301
6,489
15,765
3,145
–
47,148
1,676
5,592
7,268
33
22,792
35,300
341
3,250
61,683
13,329
19,861
1,349
4,632
25
39,196
17,749
19,204
1,067
11,335
25
49,380
–
–
–
–
–
–
160
160
–
186
186
397
–
–
–
5
5
–
–
5
–
–
5
–
–
1
8
2
5,055
5,880
5,301
6,969
15,765
3,551
160
62,828
1,676
5,778
7,454
6,450
43,781
35,300
341
4,734
84,156
13,350
19,889
2,022
4,690
25
39,976
17,801
19,205
1,657
11,503
27
11
50,193
972
1,443
–
1,795
–
355
–
8,109
–
–
–
4,148
18,465
–
–
1,179
19,644
80
21
1,514
939
–
2,554
58
2
1,523
1,203
–
2,786
3,599
1,667
3,713
4,616
9,268
3,678
–
35,298
176
5,536
5,712
60
22,514
26,305
536
2,298
51,653
12,682
22,475
4,810
5,552
61
45,580
16,540
25,108
2,066
13,381
73
57,168
–
–
1
–
–
–
153
154
–
20
20
49
–
–
–
2
2
–
26
–
–
–
26
–
–
–
–
2
2
4,571
3,110
3,714
6,411
9,268
4,033
153
43,561
176
5,556
5,732
4,257
40,979
26,305
536
3,479
71,299
12,762
22,522
6,324
6,491
61
48,160
16,598
25,110
3,589
14,584
75
59,956
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(1) Other assets include precious metals, segregated fund assets in our insurance business, carbon credits, certain receivables and other items measured at fair value.
(2) This represents the structured note liabilities included in deposits that have been designated at FVTPL.
(3) This represents certain embedded options related to structured deposits carried at amortized cost.
(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
certain securitization and structured entities’ liabilities measured at FVTPL.
BMO Financial Group 206th Annual Report 2023 195
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
Reporting line in fair value hierarchy table
Fair value
of assets
Valuation techniques
Corporate equity 4,208
Net asset value
EV/EBITDA
896 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
Corporate equity
NHA MBS, U.S. agency MBS and CMO
NHA MBS, U.S. agency MBS and CMO
4,044
Net asset value
EV/EBITDA
985 Discounted cash flows
Net asset value
Multiple
Prepayment rate
Market comparable Comparability adjustment (2)
Market comparable Comparability adjustment (2)
2023
Range of input values (1)
Low
na
3x
2%
0.31
na
5x
3%
0.32
High
na
23x
65%
0.92
2022
na
19x
47%
0.88
(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 value ranges do not reflect
the level of input uncertainty but are affected by the specific underlying instruments within each product category. The value ranges will therefore vary from period to period based on the
characteristics of the underlying instruments held at each balance sheet date.
(2) Range of input values represents price per security adjustment (Canadian $).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
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. As no observable
price is available for most private equity securities, the valuation is based on the economic benefit we expect to 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 determine the fair values of our NHA MBS and U.S. agency MBS and CMO. 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 values of NHA MBS and U.S. agency MBS and CMO. This technique involves obtaining 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, 2023 and 2022.
(Canadian $ in millions)
Trading securities
FVTPL securities
FVOCI securities
Securities sold but not yet purchased
Level 1 to Level 2
Level 2 to Level 1
Level 1 to Level 2
Level 2 to Level 1
2023
2022
10,926
1,301
7,078
9,211
19,119
993
9,295
15,704
10,983
607
16,452
9,499
13,062
522
11,895
14,623
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, 2023 and 2022, 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 from Level 3 to Level 2 were
due to an increase in observable market inputs used in pricing the securities.
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196 BMO Financial Group 206th Annual Report 2023
For the year ended October 31, 2023
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS and CMO
Corporate debt
Corporate equity
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
Commodity contracts
Equity contracts
Total derivative assets
Other Liabilities
Derivative Liabilities
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Total derivative liabilities
For the year ended October 31, 2022
(Canadian $ in millions)
Trading Securities
NHA MBS and U.S. agency MBS and CMO
Corporate debt
Corporate equity
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
Commodity contracts
Equity contracts
Total derivative assets
Other Liabilities
Derivative Liabilities
Foreign exchange contracts
Commodity contracts
Equity contracts
Credit default swaps
Total derivative liabilities
Change in fair value
Movements
Transfers
Balance
October 31,
2022
Included in
earnings
Included
in other
comprehensive
income (1)
Purchases/
Issuances (3)
Maturities/
Settlement
Sales
Transfers
into
Level 3
Transfers
out of
Level 3
Fair value as
at October 31,
2023
Change in
unrealized gains
(losses)
recorded in income
for instruments
still held (2)
985
3
–
988
8
4,044
4,052
1
153
154
20
49
26
–
–
26
2
–
–
–
2
2
(137)
–
–
(137)
–
(233)
(233)
–
–
–
–
1
(17)
(8)
2
(23)
(1)
12
1
–
–
13
8
1
–
9
–
45
45
–
1
1
4
–
–
–
–
–
–
–
–
–
–
–
682
39
–
721
(473)
(7)
–
(480)
19
2,784
2,803
–
(349)
(349)
–
7
7
259
358
–
13
–
13
11
–
–
–
–
–
–
(1)
(1)
–
–
–
–
–
–
(4)
–
–
–
–
–
–
–
–
–
–
(1)
(1)
(1)
–
(1)
(97)
(11)
(9)
–
–
(9)
–
(12)
–
–
–
(12)
378
85
37
500
(547)
(9)
–
(556)
–
15
15
–
(2,097)
(2,097)
896
112
37
1,045
27
4,208
4,235
–
–
–
–
–
–
–
1
1
–
–
–
8
–
8
–
–
–
–
–
–
–
(3)
(3)
(3)
–
–
–
–
–
–
160
160
186
397
–
5
–
5
5
–
1
8
2
11
(103)
–
–
(103)
1
(39)
(38)
na
na
na
–
2
9
(8)
2
3
(1)
(38)
1
–
–
(37)
Change in fair value
Movements
Transfers
Balance
October 31,
2021
Included in
earnings
Included
in other
comprehensive
income (1)
Purchases/
Issuances
Maturities/
Settlement
Sales
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
–
176
176
1,045
11
–
1,056
(657)
(5)
–
(662)
8
1,450
1,458
–
(321)
(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
(45)
(1)
–
(46)
–
274
274
na
na
na
–
–
–
–
–
–
–
–
–
–
–
–
N
o
t
e
s
(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, 2023 and 2022 are included in earnings for the year.
(3) FVTPL securities include $969 million of Federal Home Loan Bank (FHLB) and Federal Reserve Bank equity and $587 million of investments in LIHTC entities, acquired as a result of our acquisition of
Bank of the West.
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 206th Annual Report 2023 197
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 non-interest revenue, trading revenues (losses), 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 (losses) (1)
Total trading-related revenue
2023
2022
770
638
610
192
(1,526)
684
900
(216)
684
893
571
713
189
7,556
9,922
1,672
8,250
9,922
(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 our 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
2023
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
118,128
40,513
158,641
50,730
108,574
159,304
116,309
48,494
164,803
60,290
107,078
167,368
2,466
537
3,003
537
2,466
3,003
3,115
334
3,449
334
3,115
3,449
115,662
39,976
155,638
50,193
106,108
156,301
113,194
48,160
161,354
59,956
103,963
163,919
11,386
26,674
38,060
26,674
11,386
38,060
11,757
31,878
43,635
31,878
11,757
43,635
102,852
3,266
25
4,569
106,118
4,594
7,837
94,291
7,186
106
102,128
7,292
1,399
5,467
6,866
8,496
325
8,821
2022
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
(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.
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198 BMO Financial Group 206th Annual Report 2023
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 our
internal assessment of required economic capital; underpins our operating groups’ business strategies and considers the market environment;
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.
CET1 Capital is the most permanent form of capital. It is comprised of common shareholders’ equity and may include a portion of ECL 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 ECL 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 Capital, Tier 1 Capital, 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.
The domestic implementation of Basel III reforms related to capital, leverage, liquidity and disclosure requirements was effective in the second
quarter of 2023. Capital changes under these reforms include revised rules for credit risk and operational risk. Effective February 1, 2023, the capital
floor adjustment factor was set at 65%, and will rise by an additional 2.5% on November 1 of each year to reach 72.5% in fiscal 2026. Domestic
Systemically Important Banks (D-SIBs) are also required to meet a 0.5% buffer requirement for the Leverage and TLAC Leverage Ratios, in addition to
the minimum requirements. Revisions related to market risk and credit valuation adjustment risk became effective on November 1, 2023.
As at October 31, 2023, we met OSFI’s required target regulatory capital ratios, which include a 2.5% Capital Conservation Buffer, a 1.0% CET1
Surcharge for D-SIBs, a Countercyclical Buffer and a 3.0% Domestic Stability Buffer (DSB) applicable to D-SIBs. In December 2022, OSFI increased
the DSB’s range from 0% to 2.5%, to 0% to 4.0%. Effective November 1, 2023, the DSB was increased to 3.5%. Our capital position as at
October 31, 2023 is further detailed in the Enterprise-Wide Capital Management section of Management’s Discussion and Analysis.
Regulatory Capital and Total Loss Absorbing Capacity Measures, Risk-Weighted Assets and Leverage Exposures (1)
(Canadian $ in millions, except as noted)
2023
2022
CET1 Capital
Tier 1 Capital
Total Capital
TLAC
Risk-Weighted Assets
Leverage Exposures
CET1 Ratio
Tier 1 Capital Ratio
Total Capital Ratio
TLAC Ratio
Leverage Ratio
TLAC Leverage Ratio
52,914
59,785
68,718
114,402
424,197
1,413,036
12.5%
14.1%
16.2%
27.0%
4.2%
8.1%
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%
(1) Calculated in accordance with OSFI’s CAR Guideline, Leverage Requirements Guideline and TLAC Guideline, as applicable.
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.
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BMO Financial Group 206th Annual Report 2023 199
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about our Stock Option Plan:
(Canadian $, except as noted)
Outstanding at beginning of year
Granted
Exercised
Forfeited/expired/cancelled
Outstanding at end of year
Exercisable at end of year
Available for grant
2023
Weighted-
average
exercise price
98.12
122.31
76.12
109.19
105.26
89.99
2022
Weighted-
average
exercise price
87.79
135.58
70.64
–
98.12
84.14
Number of
stock options
5,682,206
1,028,255
(733,591)
–
5,976,870
2,648,426
11,680,041
Number of
stock options
5,976,870
1,322,817
(724,853)
(262,258)
6,312,576
2,759,935
10,619,482
Employee compensation expense related to this plan for the years ended October 31, 2023 and 2022 was $20 million and $12 million, respectively.
Options outstanding and exercisable at October 31, 2023 by range of exercise price were as follows:
(Canadian $, except as noted)
2023
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
230,413
615,909
654,099
1,277,195
3,534,960
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
0.1
1.7
5.1
5.9
7.5
68.60
77.59
89.90
97.07
118.27
230,413
615,909
654,099
386,544
872,970
2023
14
55
123.01
68.60
77.59
89.90
96.90
101.38
2022
9
52
141.50
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, 2023 and 2022 was $18.94 and $14.17, 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)
2023
2022
4.5% – 4.6%
20.9%
3.2%
6.5 – 7.0
4.2%
16.8%
1.8% – 1.9%
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 remaining until exercise of the options. The weighted-average exercise price on the grant
date for the years ended October 31, 2023 and 2022 was $122.31 and $135.58, respectively.
Other Share-Based Compensation
Share Purchase Plans
We offer various employee share purchase plans. The largest of these plans provides employees with the option of directing a portion of their gross
salary toward the purchase of our common shares. We match 50% of employee contributions up to 6% of their individual gross salary to a maximum
of $75,000. 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, 2023 and 2022 was $48 million and $45 million,
respectively. There were 18.2 million and 17.8 million common shares held in these plans for the years ended October 31, 2023 and 2022,
respectively.
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Compensation Trusts
Our compensation trusts include share ownership and deferred compensation arrangements. These compensation trusts are consolidated if we control
the trust, meaning that we have power over the trust, exposure to variable returns as a result of our involvement, and the ability to exercise power
to affect the amount of our returns.
200 BMO Financial Group 206th Annual Report 2023
We sponsor various share ownership arrangements, certain of which are administered through trusts into which our matching contributions are paid
and not required to be consolidated. Total assets held related to these share ownership arrangements amounted to $1,908 million as at October 31, 2023
($2,239 million as at October 31, 2022).
We sponsor various deferred compensation arrangements, administered through trusts into which our contributions are paid to fund deferred
compensation to certain U.S. senior employees. Some of these trusts are required to be consolidated. Total consolidated trust assets are $306 million as at
October 31, 2023 as a result of our acquisition of Bank of the West ($nil million as at October 31, 2022). Total assets held related to unconsolidated trusts
amounted to $175 million as at October 31, 2023 ($154 million as at October 31, 2022).
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, 2023 and 2022 totalled 6.9 million and 5.8 million, respectively.
The weighted-average fair value of the units granted during the years ended October 31, 2023 and 2022 was $129.18 and $139.04, respectively,
and we recorded employee compensation expense of $605 million and $719 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 forwards to manage the impact of foreign exchange
translation from our U.S. businesses. Gains (losses) on total return swaps and foreign currency forwards recognized for the years ended October 31, 2023
and 2022 were $(223) million and $3 million, respectively, resulting in net employee compensation expense of $828 million and $716 million,
respectively.
A total of 17.8 million and 16.6 million mid-term incentive plan units were outstanding as at October 31, 2023 and 2022, respectively, and the
intrinsic value of those awards which had vested was $1,361 million and $1,501 million, respectively.
Deferred Incentive Plans
We offer deferred incentive plans for members of our Board of Directors, executives and key employees in BMO CM and BMO WM. Under these plans,
fees, annual incentive payments and/or commissions can be deferred and recorded 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, 2023 and 2022 totalled 0.2 million and 0.2 million, respectively, and
the weighted-average fair value of the units granted during the years ended October 31, 2023 and 2022 was $123.64 and $136.74, respectively.
Liabilities related to these plans are recorded in other liabilities in our Consolidated Balance Sheet and totalled $517 million and $585 million as
at October 31, 2023 and 2022, respectively.
Employee compensation expense (recovery) related to these plans for the years ended October 31, 2023 and 2022 was $(76) million and $(16)
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 in employee compensation expense in the period in which they arise. Gains (losses) on these derivatives recognized for the
years ended October 31, 2023 and 2022 were $(105) million and $(30) million, respectively. These gains (losses) resulted in net employee
compensation expense for the years ended October 31, 2023 and 2022 of $29 million and $14 million, respectively.
A total of 5.0 million and 4.7 million deferred incentive plan units were outstanding as at October 31, 2023 and 2022, respectively.
Note 21: Employee Compensation – Pension and Other Employee Future Benefits
Pension and Other Employee Future Benefit Plans
We sponsor a number of arrangements globally that provide pension and other employee future benefits to our retired and current employees. The
largest of these arrangements, by defined benefit obligation, are the primary defined benefit pension plans for employees in Canada and the United
States and the primary other employee future benefit plan for employees in Canada.
Pension arrangements include defined benefit pension plans, as well as supplementary arrangements that provide pension benefits in excess of
statutory limits. Generally, under these plans we provide retirement benefits based on an employee’s years of service and average annual earnings over a
period of time prior to retirement. Our pension and other employee future benefit expenses, recorded in employee compensation expense, mainly comprise
the current service cost plus or minus the interest on net defined benefit assets or liabilities. In addition, we provide defined contribution pension plans to
our employees. The costs of these plans, recorded in employee compensation expense, are equal to our contributions to the plans.
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BMO Financial Group 206th Annual Report 2023 201
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an established governance structure, with oversight exercised by 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 the
management of risk. We have implemented a liability-driven investment strategy for the primary Canadian and U.S. plans to enhance risk-adjusted
returns while reducing the plans’ surplus volatility. This strategy has reduced the impact of the plans 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.
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 exposures 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 foreign currency and interest rate risk exposures within policy limits;
‰ controls related to asset mix allocations, geographic allocations, portfolio duration, credit quality of debt securities, sector guidelines, issuer/
counterparty limits and others; and
‰ ongoing monitoring of exposures, performance and risk levels.
Pension and Other Employee Future Benefit Liabilities
Our actuaries perform valuations of our defined benefit obligations for pension and other employee future benefits as at October 31 of each year
using the projected unit credit method based on management’s assumptions about discount rates, rates of compensation increase, retirement age,
mortality and health care cost trend rates.
The discount rates for the primary Canadian and U.S. pension and other employee future benefit plans were selected based on the yields of high-
quality AA rated corporate bonds with terms matching the plans’ cash flows.
The fair value of plan assets is deducted from the defined benefit obligation to determine the net defined benefit asset or liability. For defined
benefit pension plans that are in a net defined benefit asset position, the recognized asset is limited to the present value of economic benefits
available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset ceiling). Changes in the asset ceiling
are recognized in other comprehensive income. Components of the change in our net defined benefit assets or liabilities and our pension and other
employee future benefit 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 United States 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
s
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are paid either through the respective plan or directly by us.
202 BMO Financial Group 206th Annual Report 2023
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, 2023 and the most recent
funding valuation for our primary U.S. pension plan was performed as at January 1, 2022.
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
Impact of plan amendments
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 our Consolidated Statement of Income
(1) Includes Canada Pension Plan, Quebec Pension Plan and U.S. Federal Insurance Contribution Act.
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
2023
7,513
8,559
1,046
1,209
(163)
1,046
2022
7,082
8,261
1,179
1,267
(88)
1,179
2023
880
138
(742)
81
(823)
(742)
2022
928
147
(781)
51
(832)
(781)
Pension benefit plans
Other employee future benefit plans
2023
2022
2023
2022
163
(64)
(1)
–
10
–
108
361
271
740
237
(27)
(2)
(1)
4
–
211
252
176
639
6
42
(51)
–
–
9
6
–
–
6
8
35
–
–
–
(18)
25
–
–
25
Pension benefit plans
Other employee future benefit plans
2023
2022
2023
2022
5.5%
2.3%
na
5.8%
2.1%
na
3.2%
2.2%
na
5.5%
2.3%
na
5.5%
na
4.7% (4)
5.7%
na
4.8% (3)
3.3%
na
4.8% (4)
5.5%
na
4.7% (4)
(1) The pension benefit current service cost was calculated using a separate discount rate of 5.4% and 3.7% for 2023 and 2022, respectively.
(2) The other employee future benefit plans current service cost was calculated using a separate discount rate of 5.5% and 3.6% for 2023 and 2022, respectively.
(3) Trending to 4.03% in 2040 and remaining at that level thereafter.
(4) Trending to 4.00% in 2041 and remaining at that level thereafter.
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
2023
2022
2023
23.9
24.3
24.8
25.2
23.9
24.2
24.8
25.1
21.9
23.3
23.1
24.5
N
o
t
e
s
2022
21.8
23.2
23.0
24.4
BMO Financial Group 206th Annual Report 2023 203
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
Acquisition of defined benefit obligation (1)
Divestiture of defined benefit obligation (2)
Current service cost
Interest cost
Impact of plan amendments
(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
Acquisition of plan assets (1)
Divestiture of plan assets (2)
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 (losses) on plan assets
Actuarial gains (losses) on defined benefit obligation due to:
Changes in demographic assumptions
Changes in financial assumptions
Plan member experience
Foreign exchange and other
Actuarial gains (losses) recognized in other comprehensive income for the year
Pension benefit plans
Other employee future benefit plans
2023
2022
2023
2022
7,082
563
–
163
393
(1)
–
(449)
20
–
(349)
46
45
7,513
7,350
163
7,513
8,261
487
–
457
(300)
50
20
(449)
(10)
43
8,559
1,046
1,225
(179)
1,046
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
928
28
–
6
50
(51)
–
(58)
6
(2)
(19)
(10)
2
880
57
823
880
147
–
–
8
(12)
45
6
(58)
–
2
138
1,220
–
–
8
39
–
–
(49)
6
(60)
(244)
(9)
17
928
96
832
928
166
–
–
4
(37)
40
6
(49)
–
17
147
(742)
(781)
81
(823)
(742)
51
(832)
(781)
(300)
(1,524)
(12)
(37)
–
349
(46)
(8)
(5)
–
2,386
(207)
(14)
641
14
17
9
–
28
56
228
10
–
257
(1) Relates to the defined benefit plan included in our acquisition of Bank of the West in fiscal 2023. Refer to Note 10 for further information.
(2) 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.
Plan Asset Allocations and Fair Value
Our pension and other employee future benefit plan assets are measured at fair value on a recurring basis. The asset allocation ranges, weighted-
average actual asset allocations and fair values of plan assets held by our primary plans as at October 31, 2023 and 2022 are as follows:
(Canadian $ in millions)
2023
2022
Equities
Fixed income investments
Alternative strategies
s
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Target
range % of total
15-40%
40-60%
10-40%
20%
49%
31%
Quoted
Unquoted
Total
Target
range
925
168
–
663
3,855
2,537
1,588
4,023
2,537
20-40%
40-55%
15-40%
100%
1,093
7,055
8,148
% of total
Quoted
Unquoted
Total
24%
45%
31%
100%
1,187
110
–
1,297
704
3,378
2,454
1,891
3,488
2,454
6,536
7,833
Certain comparative figures have been reclassified to conform with the current year’s presentation.
No plan assets are directly invested in securities of the bank or those of its related parties as at October 31, 2023 and 2022. As at October 31, 2023,
our primary Canadian plan did not directly hold, through pooled funds, any of our common shares and fixed income securities (less than $1 million as
at October 31, 2022). The plans do not hold any property we occupy or other assets we use.
204 BMO Financial Group 206th Annual Report 2023
Sensitivity of Assumptions
Key weighted-average assumptions for 2023 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 4.03% in 2040 and remaining at that level thereafter.
na – not applicable
Maturity Profile
The duration of the defined benefit obligation for our primary plans is as follows:
(Years)
Canadian pension plans
U.S. pension plans
Canadian other employee future benefit plans
Defined benefit obligation
Pension benefit plans
Other employee future benefit plans
5.8
(659)
807
2.1
29
(28)
114
(117)
na
na
na
5.7
(65)
77
na
na
na
16
(16)
4.8 (1)
33
(30)
2023
12.1
7.2
11.2
2022
12.1
7.5
12.5
Cash Flows
Cash payments we made during the year in connection with our employee future benefit plans are as follows:
(Canadian $ in millions)
Pension benefit plans
Other employee future benefit plans
Net contributions to defined benefit plans
Contributions to defined contribution plans
Benefits paid directly to pensioners
2023
7
271
43
321
2022
24
176
34
234
2023
2022
–
–
45
45
–
–
40
40
Our best estimate of the contributions and benefits paid directly to pensioners we expect to make for the year ending October 31, 2024 is approximately $57 million for our defined benefit pension plans
and $49 million for our other employee future benefit plans. Benefit payments from our defined benefit and other employee future benefit plans to retirees for the year ending October 31, 2024 are
estimated to be $589 million.
Note 22: Income Taxes
We report our provision for income taxes in our Consolidated Statement of Income based upon transactions recorded in our consolidated financial
statements regardless of when they are recognized for income tax purposes, with the exception of repatriation of retained earnings from our
subsidiaries, as noted below.
In addition, we record an income tax expense or benefit in other comprehensive income or directly in equity when the taxes relate to amounts
recorded in other comprehensive income or equity. For example, income tax expense (recovery) on hedging gains (losses) related to our net
investment in foreign operations is recorded in our Consolidated Statement of Comprehensive Income as part of net gains (losses) on translation of
net foreign operations.
Current tax is the amount of income tax recoverable (payable) in respect of the taxable loss (profit) for a period. Deferred tax is recognized on
temporary differences between the carrying amounts of assets and liabilities for accounting and tax purposes. Deferred 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 that 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.
N
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BMO Financial Group 206th Annual Report 2023 205
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in deferred tax assets is $6 million ($nil million as at October 31, 2022) related to Canadian tax loss carryforwards and $7 million
($10 million as at October 31, 2022) related to both U.S. tax loss carryforwards and tax credits that will expire in various amounts in U.S. taxation
years from 2023 through 2042. 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, 2023
is $1,018 million ($922 million as at October 31, 2022), of which $74 million ($36 million in 2022) 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 benefits will be realized.
Income that we earn through our foreign subsidiaries is generally taxed in the country in which they operate. Income that we earn through our
foreign branches is also generally taxed in the country in which they operate. Canada also taxes the income we earn through our 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, 2023 ($24 billion as at October 31, 2022).
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/goodwill of (gains) losses on derivatives designated as cash flow hedges
Unrealized (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
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
2023
2022
2,220
(2)
(711)
(21)
1,486
(35)
(11)
(576)
366
(90)
24
(103)
–
4
(421)
1,065
3,889
(15)
475
–
4,349
(182)
(5)
(1,794)
(114)
(124)
239
465
1
5
(1,509)
2,840
2023
2022
509
278
787
(491)
(269)
(760)
27
933
105
1,038
1,065
1,178
672
1,850
148
85
233
2,083
953
(196)
757
2,840
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:
s
e
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N
(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
Income attributable to investments in associates and joint ventures
Net impact of certain Canadian tax measures
Other
Provision for income taxes in our Consolidated Statement of Income
and effective tax rate
206 BMO Financial Group 206th Annual Report 2023
2023
2022
1,630
27.8%
4,757
26.6%
(265)
(233)
(31)
371
14
(4.5)
(4.0)
(0.5)
6.3
0.2
(200)
(160)
(57)
–
9
(1.1)
(0.9)
(0.3)
–
–
1,486
25.3%
4,349
24.3%
On December 15, 2022, the Canadian government enacted legislation related to certain tax measures that are 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. 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). In the first quarter of 2023, we recorded a one-time tax expense of $371 million in income tax expense,
including $312 million relating to the CRD, and $59 million relating to the pro-rated fiscal 2022 impact of the 1.5% increase in tax rate, net of a
related remeasurement of our net deferred tax assets.
Net deferred tax assets (liabilities)
1,073
1,273
Components of Deferred Tax Balances
(Canadian $ in millions)
Deferred Tax Asset (Liability)
Allowance for credit losses
Employee future benefits
Deferred compensation benefits
Other comprehensive income
Premises and equipment
Pension benefits
Goodwill and intangible assets
Securities
Other
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
Premises and equipment
Pension benefits
Goodwill and intangible assets
Securities
Other (3)
Net deferred tax assets (liabilities)
Comprising
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets (liabilities)
Net asset,
November 1, 2022
Bank of the West
acquisition
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2023
605
256
708
573
(460)
(370)
(244)
142
(137)
96
–
115
–
(179)
25
(767)
1,086
897 (1)
182
21
(50)
–
375
(41)
134
(286)
397 (2)
732
–
(14)
–
(51)
–
(9)
–
–
(3)
(77)
10
1
10
–
(8)
–
(36)
45
42
64
1,175
(102)
1,073
–
–
–
–
893
264
783
522
(272)
(395)
(913)
987
1,196
3,065
3,081
(16)
3,065
Net asset,
November 1, 2021
Benefit (expense)
to income statement
Benefit (expense)
to equity
Translation
and other
Net asset,
October 31, 2022
651
330
685
(108)
(400)
(148)
(241)
(51)
377
1,095
1,287
(192)
1,095
(52)
(10)
18
(1)
(59)
(47)
1
193
(518)
(475)
–
(65)
–
682
–
(174)
–
–
(5)
438
6
1
5
–
(1)
(1)
(4)
–
9
15
–
–
–
605
256
708
573
(460)
(370)
(244)
142
(137)
1,073
1,175
(102)
1,073
(1) Includes the tax impact of deferred revenue and purchase accounting adjustments in connection with our acquisition of Bank of the West.
(2) Includes the tax impact of interest rate swaps and securities we purchased to mitigate the impact of changes in interest rates in our acquisition of Bank of the West (refer to Note 10 for additional
details) and the tax impact of leasing assets.
(3) Includes the tax impact of the interest rate swaps and securities we purchased to mitigate the impact of changes in interest rates on our 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.
Canadian tax authorities have reassessed us for additional income tax and interest in an amount of approximately $1,465 million, in respect of
certain 2011 – 2018 Canadian corporate dividends. These 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 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 attributable to bank shareholders, 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.
N
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s
Diluted earnings per share is calculated in the same manner, with further adjustments made to reflect the dilutive impact of instruments that are
convertible into our common shares.
BMO Financial Group 206th Annual Report 2023 207
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents our basic and diluted earnings per share:
Basic Earnings Per Common Share
(Canadian $ in millions, except as noted)
Net income attributable to bank shareholders
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
(Canadian $ in millions, except as noted)
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 $)
2023
2022
4,365
(331)
13,537
(231)
4,034
13,306
709,364
663,990
5.69
20.04
2023
2022
4,034
709,364
13,306
663,990
4,440
(3,289)
5,178
(3,461)
710,515
665,707
5.68
19.99
(1) In computing diluted earnings per common share, we excluded average stock options outstanding of 2,204,402 with a weighted-average exercise price of $135.69 for the year ended October 31,
2023 (943,741 with a weighted-average exercise price of $143.52 for the year ended October 31, 2022), as the average share price in each of the two years did not exceed the exercise price.
Note 24: Commitments, Guarantees, Pledged Assets, Provisions and Contingent Liabilities
In the ordinary 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, a liability is initially recorded at fair value, which is generally the fee received. Subsequently, guarantees are
recorded at the higher of 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 recorded 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 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, 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 generally 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 our exposure to 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 we apply to loans and other credit assets.
The maximum amounts payable related to our various commitments are as follows:
(Canadian $ in millions)
Financial Guarantees
Standby letters of credit
Credit default swaps (1)
Other Credit Instruments
Backstop liquidity facilities
Documentary and commercial letters of credit
Commitments to extend credit (2)
Other commitments (3)
Total
2023
2022
29,656
10,010
26,019
11,099
18,805
1,763
218,094
9,947
17,330
1,351
200,814
7,075
288,275
263,688
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(1) The fair value of the related derivatives included in our Consolidated Balance Sheet was $3 million as at October 31, 2023 ($(38) million as at October 31, 2022).
(2) Commitments to extend credit exclude personal lines of credit and credit cards that are unconditionally cancellable at our discretion.
(3) Other commitments include $5,611 million as at October 31, 2023 ($783 million as at October 31, 2022) 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.
208 BMO Financial Group 206th Annual Report 2023
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.
In fiscal 2022, we divested our securities lending agency business. Prior to this date, we loaned certain eligible customers’ securities to
third-party borrowers who had 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 have provided indemnification to clients against losses resulting from the failure of the borrower to return
loaned securities when due. All borrowings were fully collateralized with cash or marketable securities. As we loaned the securities, we required that
the borrowers maintain collateral equal to, or in excess of 100% of the fair value of the securities borrowed.
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 by 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.
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 re-pledging
Less: Collateral not sold or re-pledged
(Canadian $ in millions)
Uses of pledged assets and collateral
Clearing systems, payment systems and depositories
Foreign governments and central banks
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
Securities borrowing and lending (3)
Derivatives transactions
Securitization
Covered bonds
Other (4)
Total pledged assets and collateral
2023
2022
125
114,407
94,442
10,596
87
95,194
71,795
13,991
219,570
181,067
191,148
(46,324)
177,300
(42,237)
144,824
135,063
364,394
316,130
2023
2022
18,096
89
43,781
92,549
87,136
14,983
27,058
29,802
50,900
19,082
87
40,979
90,490
69,525
16,341
27,499
33,175
18,952
364,394
316,130
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(1) Includes NHA MBS of $4,481 million, which are included in loans in our Consolidated Balance Sheet ($5,277 million as at October 31, 2022).
(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.
(4) Includes $41,510 million of assets that have been pledged supporting FHLB activity ($14,013 million as at October 31, 2022).
BMO Financial Group 206th Annual Report 2023 209
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Commitments
We have entered into a number of non-cancellable leases for premises and equipment. Our computer and software leases are typically fixed for one
term. Leases that we have signed but have not yet taken possession of, totalled $94 million as at October 31, 2023 ($303 million as at
October 31, 2022).
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 related amount, 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 in our 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 the actual losses incurred 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 have been 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 Bank National Association (BBNA), formerly BMO Harris Bank N.A., as successor to M&I Marshall and Ilsley Banks (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
BBNA. On August 22, 2023, the Court awarded the plaintiff approximately US$483 million in pre-judgment interest and ordered BBNA to pay post-
judgment interest on the jury award at 4.74% and on the pre-judgment interest at 5.26%. BBNA strongly denies the plaintiff’s allegations and will
continue to defend itself vigorously. On June 27, 2023, BBNA filed its notice of appeal with the United States Court of Appeals for the Eighth Circuit, to
contest the jury verdict and award. Following the court award of pre and post-judgment interest, we revised the previous provision of $1,120 million
($830 million after-tax) to $1,169 million ($871 million after-tax), comprising $609 million in non-interest expense, other and $560 million in interest
expense, other liabilities, representing damages awarded by the jury, pre-judgment interest and accrued post-judgment interest, net of estimated
recoveries. Recoveries relate to a settlement arrangement made in 2015 in connection with another Petters matter.
Restructuring and Severance Charges
Provisions for restructuring and severance charges relate to costs incurred related to the integration of Bank of the West and accelerating operational
efficiencies across the enterprise. 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
Restructuring and
severance
Legal
Total
Total
2023
2022
109
388
(142)
(27)
7
1,168
188
(116)
(11)
14
1,277
576
(258)
(38)
21
248
1,201
(155)
(20)
3
335
1,243
1,578
1,277
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210 BMO Financial Group 206th Annual Report 2023
Note 25: Operating and Geographic Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a distinct mandate. Our operating groups reflect our organizational and
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. The acquisition of Bank of the West has been
reflected in the U.S. P&C and BMO WM reporting segments.
Personal and Commercial Banking
P&C is comprised of two operating segments: Canadian P&C and U.S. P&C.
Canadian Personal and Commercial Banking
Canadian P&C provides a full range of financial products and services to eight million customers. Personal and Business Banking provides financial
solutions through a network of almost 900 branches, contact centres, digital banking platforms and more than 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. P&C provides financial products and services to more than four million customers. Personal and Business Banking provides financial solutions
through a network of more than 1,000 branches, contact centres, digital banking platforms and more than 40,000 automated teller machines.
Commercial Banking serves clients across the United States and delivers sector and industry expertise, as well as a local presence.
BMO Wealth Management
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 CM offers a comprehensive range of products and services to corporate, institutional and government clients. Through our Investment and
Corporate Banking and Global Markets lines of business, there are 2,700 professionals, operating in 33 locations around the world.
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 unallocated
expenses, residual treasury-related activities and the elimination of taxable equivalent adjustments. We review our expense allocation methodologies
annually and update these as appropriate.
Basis of Presentation
The results of these operating groups are based on our internal financial reporting systems. The accounting policies used in these segments are
generally consistent with those followed in the preparation of our consolidated financial statements, as disclosed in Note 1 and throughout the
consolidated financial statements. Income taxes presented below may not be reflective of taxes paid in each jurisdiction in which we operate. Income
taxes are generally applied to each segment based on a statutory tax rate and may be adjusted for items and activities specific to each segment. A
notable accounting measurement difference is the taxable equivalent basis adjustment, as described below.
Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups in order 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, 2023 was $354 million ($270 million in 2022).
Inter-Group Allocations
Various estimates and allocation methodologies are used in the preparation of the operating groups’ financial information. Overhead expenses are
allocated to operating groups using allocation formulas applied on a consistent basis. Operating group net interest income reflects internal funding
charges and credits on the groups’ assets, liabilities and capital at market rates, taking into account relevant terms and currency considerations. The
offset of the net impact of these charges and credits is reflected in Corporate Services. These inter-group allocations are also applied to the
geographic segmentation.
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BMO Financial Group 206th Annual Report 2023 211
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions)
Net interest income (2)
Non-interest revenue
Total Revenue
Provision for credit losses on impaired loans
Provision for credit losses on performing loans
Total provision for credit losses
Insurance claims, commissions and changes in policy benefit liabilities
Depreciation and amortization
Non-interest expense
Income (loss) before taxes and non-controlling interest in subsidiaries
Provision for (recovery of) income taxes
Reported net income (loss)
Non-controlling interest in subsidiaries
Canadian
P&C
8,308
2,519
10,827
784
146
930
–
573
4,197
5,127
1,409
3,718
–
U.S. P&C
BMO WM
BMO CM
Corporate
Services (1)
2023 Total
7,853
1,573
9,426
380
130
510
–
889
4,613
3,414
690
1,416
5,978
7,394
5
13
18
1,939
300
3,662
1,475
349
2,724
1,126
6
–
2,553
3,897
6,450
9
9
18
–
337
3,942
2,153
471
1,682
–
(1,449)
(1,449)
(2,898)
2
700
702
–
–
2,706
(6,306)
(1,433)
(4,873)
6
18,681
12,518
31,199
1,180
998
2,178
1,939
2,099
19,120
5,863
1,486
4,377
12
Net income (loss) attributable to bank shareholders
3,718
2,718
1,126
1,682
(4,879)
4,365
Average assets (3)
317,878
218,674
58,661
416,261
236,882
1,248,356
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)
Canadian
P&C
7,449
2,419
9,868
432
(91)
341
–
516
3,833
5,178
1,352
3,826
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
2,497
1,188
3,336
4,524
2
(4)
(2)
(683)
258
3,306
1,645
394
1,251
3,197
2,975
6,172
(32)
(11)
(43)
–
282
3,573
2,360
588
1,772
(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
292,087
145,187
50,488
390,306
194,429
1,072,497
(1) Corporate Services includes T&O.
(2) Operating groups report on a teb – 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 2023 are $1,145,632 million, including $303,855 million for Canadian P&C, $202,155 million for U.S. P&C, and $639,622 million for all other operating segments, including Corporate Services
(2022 – Total: $979,341 million, Canadian P&C: $278,022 million, U.S. P&C: $138,094 million and all other operating segments: $563,225 million).
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Geographic Information
We operate primarily in Canada and the United States, but we also have operations in the United Kingdom, Europe, the Caribbean and Asia, which are
grouped in other countries in the table below. We allocate our results by geographic region based on the location of the unit responsible for
managing the related assets, liabilities, revenues and expenses.
Our results and average assets, grouped by geographic region, are as follows:
(Canadian $ in millions)
Total Revenue
Income (loss) before taxes
Reported net income
Average Assets
Total Revenue
Income before taxes
Reported net income
Average Assets
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212 BMO Financial Group 206th Annual Report 2023
Canada
United States
Other countries
2023
Total
16,884
4,407
3,025
655,887
11,967
(44)
129
541,045
2,348
1,500
1,223
31,199
5,863
4,377
51,424 1,248,356
15,977
7,335
5,557
600,607
16,980
10,526
7,894
416,885
2022
33,710
17,886
13,537
1,072,497
753
25
86
55,005
Note 26: Significant Subsidiaries
As at October 31, 2023, the bank, either directly or indirectly through its subsidiaries, controls the following significant operating subsidiaries.
Significant subsidiaries (1)(2)
AIR MILES Loyalty Inc.
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 Inc.
BMO Investments Limited
BMO Reinsurance Limited
BMO InvestorLine Inc.
BMO Nesbitt Burns Inc.
BMO Private Equity (Canada) Inc.
BMO Capital Markets Limited
BMO Capital Partners Inc.
BMO Financial Corp. and subsidiaries, including:
BMO Bank National Association
BMO Capital Markets Corp.
BMO Japan Securities Ltd.
BMO Life Insurance Company and subsidiaries, including:
BMO Life Holdings (Canada), ULC
BMO Life Assurance Company
BMO Trust Company
Head or principal office
Toronto, Canada
Beijing, China
Dublin, Ireland
Toronto, Canada
Calgary, Canada
Vancouver, Canada
Toronto, Canada
Hamilton, Bermuda
St. Michael, Barbados
Toronto, Canada
Toronto, Canada
Toronto, Canada
London, England
Toronto, Canada
Chicago, United States
Chicago, United States
New York, United States
Tokyo, Japan
Toronto, Canada
Halifax, Canada
Toronto, Canada
Toronto, Canada
Book value of shares owned by the
bank (Canadian $ in millions)
213
489
519
36,341
324
799
51,512
6
1,885
530
(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. and BMO Capital Markets Corp., which are
incorporated under the laws of the state of Delaware, 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 SEs 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 certain central banks, regulatory bodies and counterparties. Refer to Note 2 for details.
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.
2023
2022
22
2
49
73
25
3
45
73
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. As at October 31, 2023, loans and undrawn credit
commitments to key management personnel and their close family members totalled $16 million ($20 million as at October 31, 2022). We had no
specific PCL related to these amounts as at October 31, 2023 and 2022.
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.
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BMO Financial Group 206th Annual Report 2023 213
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2023
679
61
2022
585
126
2023
782
124
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.
2023
1,525
265
58
98
2022
1,190
202
61
93
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214 BMO Financial Group 206th Annual Report 2023
Where to Find More Information
Corporate Governance
Our website provides information on our
corporate governance practices, including our
code of conduct, our director independence
standards and our board mandate and
committee charters.
www.bmo.com/corporategovernance
Management Proxy Circular
Our management proxy circular contains
information on our directors, board committee
reports and a detailed discussion of our
corporate governance practices. It will be
published in March 2024 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 2023 Sustainability Report and PAS
will be available on our website in March 2024.
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.
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
37th 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 Canada
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 Nesbitt Burns: 416-359-4000
www.bmonesbittburns.com
BMO U.S.
United States: 1-888-340-2265
Outside the United States: 1-847-238-2265
www.bmo.com/en-us/
The following are trademarks owned by other parties:
LEED is a registered trademark of the U.S. Green Building Council; J.D. Power is a trademark of J.D. Power; BAI is a
registered trademark of Bank Administration Institute; The Globe and Mail is a registered trademark of The Globe and
Mail Inc./Publications Globe and Mail Inc.; Global Finance is a trademark of Global Finance Media, Inc.; World Finance is
a trademark of World News Media; World Benchmarking Alliance (WBA) is a trademark of World Benchmarking Alliance;
Bloomberg is a registered trademark of Bloomberg Finance Eight L.P.; World’s Most Ethical Companies is a trademark of
Ethisphere Institute; Fast Company is a registered trademark of Dye & Durham Corporation; Cannes Lions is a trademark
of Ascential Group Limited; GRI is a registered trademark of Stichting Global Reporting Initiative; Datos Insights is a
trademark of Datos Insights.
BMO Financial Group 206th Annual Report 2023 215
Shareholder Information
Important Dates
Fiscal Year End
Annual Meeting
October 31
April 16, 2024 | 9:30 a.m. ET
Further details will be made available on our website.
www.bmo.com/investorrelations
Reporting Dates
Q1: February 27, 2024 Q2: May 29, 2024 Q3: August 27, 2024 Q4: December 5, 2024
2024 Dividend Payment Dates*
Common and preferred
shares record dates
Common shares
payment dates
Preferred shares
payment dates**
January 30
April 29
July 30
October 30
February 27
May 28
August 27
November 26
February 26
May 27
August 26
November 25
*Subject to approval by the Board of Directors.
**The preferred shares series 50 and preferred shares series 52 payment dates are semi-annual
on May 27 and November 26, 2024.
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
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.
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 page 215 for contact information.
Reinvesting Your Dividends and Purchasing Additional Common Shares
Through the Shareholder Dividend Reinvestment and Share Purchase Plan, you can reinvest
cash dividends from your BMO common shares to purchase additional BMO common shares
without paying a commission or service charge. You can also purchase additional common
shares in amounts up to $40,000 per fiscal year. Contact Computershare Trust Company of Canada
or Shareholder Services for details.
Your vote
matters.
Watch for your proxy
circular in March and
remember to vote.
Employee Ownership*
77.9% of our Canadian employees
participate in the BMO Employee Share
Ownership Plan – a clear indication
of their commitment to BMO.
*As at October 31, 2023.
Credit Ratings
Credit rating information appears
on page 104 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
216 BMO Financial Group 206th Annual Report 2023
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BMO Financial Group 206th Annual Report 2023 1