BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal -
Third Quarter 2012 Report to Shareholders
BMO Financial Group Reports Strong Quarterly Results, Increasing Net Income by
37% Year Over Year to $970 Million, and Increases Dividend by 3%
Financial Results Highlights(1):
Third Quarter 2012 Compared with Third Quarter 2011:
-- Net income of $970 million, up $262 million or 37%
-- Adjusted net income(2) of $1,013 million, up $157 million or 18%
-- Reported EPS(3) of $1.42, up 30%
-- Adjusted EPS(2)(3) of $1.49, up 11%
-- Reported ROE of 14.5%, compared with 13.3%
-- Adjusted ROE(2) of 15.2%, compared with 16.4%
-- Reported provisions for credit losses of $237 million; adjusted
provisions of $116 million, down $129 million
-- Common Equity Ratio strengthens to 10.31%, using a Basel II approach
-- Announced a $0.72 dividend per common share for the fourth quarter, up
$0.02 or 3%
Year-to-Date 2012 Compared with Year-to-Date 2011:
-- Net income of $3,107 million, up $761 million or 32%
-- Adjusted net income(2) of $2,967 million, up $524 million or 21%
-- Reported EPS(3) of $4.56, up 22%
-- Adjusted EPS(2)(3) of $4.35, up 11%
-- Reported provisions for credit losses of $573 million; adjusted
provisions of $358 million, down $469 million
For the third quarter ended July 31, 2012, BMO Financial Group reported strong
net income of $970 million or $1.42 per share. On an adjusted basis, net income
was $1,013 million or $1.49 per share.
"BMO has reported strong quarterly financial results," said Bill Downe,
President and Chief Executive Officer, BMO Financial Group. "Our business
continues to deliver consistent and attractive profitability within a sound risk
framework and the growth we are experiencing remains consistent with our
strategy.
"We increased the dividend, reflecting our strong capital position and our
confidence in our continued ability to generate sustained earnings growth. We
also moved the target payout range to 40 to 50 per cent, which gives us more
flexibility to grow the bank.
"Our core franchise, P&C Canada, experienced good volume growth across most
product lines, including residential mortgages; we are attracting new customers
and steadily increasing the amount of business existing customers are choosing
to entrust to us. The recent changes to Canada's mortgage market announced by
the Minister of Finance were prudent, responsible and timely; they align with
BMO's risk practices and ongoing efforts to encourage Canadians to borrow
smartly.
"Consistent with the confidence we expressed throughout our U.S. investor day in
June, this quarter's earnings reflect strong performance from our U.S.
businesses. The U.S. P&C business continues to generate healthy organic growth
in commercial loans and is executing against its plans.
"Earnings in our wealth business were up quarter over quarter when adjusted to
exclude the unfavourable impact of movements in long-term interest rates on the
bank's insurance business.
"BMO Capital Markets delivered good performance with higher revenue and net
income than last quarter. These results reflect the benefits of the diversified
revenue mix of our capital markets' business.
"Across BMO, our sharp focus on improving efficiency will ensure we are
investing in what our customers value most. Mobile PayPass, North American
mobile banking and e-statements, BMO alerts that send account updates to
customers' mobile devices and online appointment booking are just a few examples
of the type of functionality we've rolled out for customers in the past twelve
months - this in addition to a complete refresh of retail online banking in
Canada that gained high approval ratings from customers and industry analysts
alike.
"Overall, each of our businesses is delivering against a high standard of
customer experience and is on track to finish the year with strong performance
in a highly competitive environment," concluded Mr. Downe.
Concurrent with the release of results, BMO announced a fourth quarter dividend
of $0.72 per common share, a two cents per share increase from the preceding
quarter and equivalent to an annual dividend of $2.88 per common share.
(1) Effective the first quarter of 2012, BMO's consolidated financial statements
and the accompanying Interim Management's Discussion and Analysis (MD&A) are
prepared in accordance with International Financial Reporting Standards (IFRS),
as described in Note 1 to the unaudited interim consolidated financial
statements for the quarter ended April 30, 2012. Amounts in respect of
comparative periods for 2011 have been restated to conform to the current
presentation. References to GAAP mean IFRS, unless indicated otherwise.
(2) Results and measures in this document are presented on a GAAP basis. They
are also presented on an adjusted basis that excludes the impact of certain
items. Items excluded from third quarter 2012 results in the determination of
adjusted results totalled a charge of $43 million after tax, comprised of a $47
million after-tax net benefit of credit-related items in respect of the acquired
Marshall & Ilsley Corporation (M&I) performing loan portfolio; costs of $105
million ($65 million after tax) for the integration of the acquired business; a
$33 million ($24 million after tax) charge for amortization of
acquisition-related intangible assets on all acquisitions; a loss on run-off
structured credit activities of $15 million ($15 million after tax); and a
decrease in the collective allowance for credit losses of $15 million ($14
million after tax). Items excluded from the year-to-date adjusted results
totalled net income of $140 million after tax and consisted of a $216 million
after-tax net benefit of credit-related items in respect of the acquired M&I
performing loan portfolio; a $249 million ($155 million after tax) charge for
the integration of the acquired business; a $100 million ($72 million after tax)
charge for amortization of acquisition-related intangible assets; the benefit of
run-off structured credit activities of $197 million ($194 million after tax);
restructuring charges of $99 million ($69 million after tax) to align our cost
structure with the current and future business environment; and a decrease in
the collective allowance for credit losses of $33 million ($26 million after
tax). All of the adjusting items are reflected in results of Corporate Services
except for the amortization of acquisition-related intangible assets, which is
charged across the operating groups. Management assesses performance on both a
GAAP basis and adjusted basis and considers both bases to be useful in assessing
underlying, ongoing business performance. Presenting results on both bases
provides readers with an enhanced understanding of how management views results
and may enhance readers' analysis of performance. Adjusted results and measures
are non-GAAP and are detailed in the Adjusted Net Income section, and (for all
reported periods) in the Non-GAAP Measures section of the MD&A, where such
non-GAAP measures and their closest GAAP counterparts are disclosed.
(3) All Earnings per Share (EPS) measures in this document refer to diluted EPS
unless specified otherwise. EPS is calculated using net income after deductions
for net income attributable to non-controlling interest in subsidiaries and
preferred share dividends.
Note: All ratios and percentage changes in this report are based on unrounded
numbers.
Operating Segment Overview
P&C Canada
Net income was $453 million, up $10 million or 2.4% from a year ago. Reported
results reflect provisions for credit losses in BMO's operating groups on an
expected loss basis. On a basis that adjusts reported results to reflect
provisions on an actual loss basis, P&C Canada's net income was up $20 million
or 4.6%. Results reflect higher revenues from increased volume across most
products, partially offset by lower net interest margins. The volume growth was
achieved while managing expenses prudently and continuing to invest in our
business. There was good quarter-over-quarter growth, with loans increasing 2.9%
and deposits up 1.6%, as well as improvements in market share for these
products.
We are focused on our customers and helping them make money make sense. Our
continued investment in our branches, automated banking machines (ABMs) and
online and mobile banking platforms are making it easier for more customers to
access our products and services. This year we have opened or upgraded 28
locations across the country. Our ABM network continues to grow as we have added
more than 300 cash dispensing ABMs so far this year. More and more of our
customers are using our online and mobile banking services including 'Tap & Go'
and email notice features. In addition, cross-selling of products to both
personal and commercial customers continues to grow, while customer loyalty, as
measured by net promoter score, continues to improve in both our personal and
commercial businesses.
In personal banking our award winning mortgage product continues to help
customers become mortgage free faster, pay less interest and protect themselves
against rising interest rates. With the success of this product, we have also
seen improved customer retention and the foundation for new and expanded
long-term relationships. We are confident that we are well positioned for future
growth.
In commercial banking, our goal is to become the bank of choice for businesses
across Canada by providing the knowledge, advice and guidance that customers
value. BMO was the only Canadian bank to receive the prestigious 2012 Model Bank
Award from the research group Celent, for our Online Banking for Business
Platform. This annual award program identifies model banks and recognizes them
for their achievements in the strategic development, effective deployment, and
improvements to business and customer experience with banking technology. We
continue to rank #2 in Canadian business banking loan market share.
P&C U.S. (all amounts in US$)
Net income of $127 million increased $32 million or 34% from $95 million in the
third quarter a year ago. Adjusted net income was $143 million, up $40 million
or 37% from a year ago as a result of the acquisition of Marshall & Ilsley
Corporation in July 2011. Adjusted net income increased 4.1% from the second
quarter.
The core commercial loan portfolio continues to grow, having now increased in
three sequential quarters.
BMO Harris Bank recently launched a free mobile application for iPhone and
Google Android devices. Our retail customers can now check account balances,
transfer funds, locate branches, pay bills, and use remote cheque deposit with
this application. We registered more than 41,500 new users in the first month of
the offering in July.
On August 1, BMO Harris Bank launched its social media platform on the largest
social media sites including Facebook, Twitter and LinkedIn. Social media was
identified as a way to deliver on our vision to be the bank that defines a great
customer experience. Through social media, we will be able to deliver more great
service, more convenience, more helpful guidance and more smart advice.
During the quarter, BMO Harris Bank received the 2012 Corporate Philanthropic
Award from the West Suburban Philanthropic Network for our commitment to
financial support, leadership and volunteerism in Illinois' western suburbs. BMO
Harris is the only financial institution to have ever received the Corporate
Philanthropic Award.
Preparation for our systems conversion and rebranding of all remaining legacy
M&I and Harris Bank locations under the BMO Harris Bank banner is progressing
and we have successfully completed a number of technology projects to enhance
system features and functionality. In addition, associated employee readiness
and customer outreach programs are underway.
Private Client Group
Net income was $109 million, up $5 million or 5.7% from a year ago. Adjusted net
income was $115 million, up $10 million or 8.4% from a year ago. Lower interest
rates reduced net income in the insurance business by $45 million in the current
quarter and by $36 million a year ago. Adjusted net income in PCG excluding
insurance was $97 million, up $11 million or 10% from a year ago. Results
benefited from acquisitions and higher spread-based and fee-based revenue,
partly offset by lower brokerage revenue.
Assets under management and administration grew by approximately $14 billion
from a year ago to $445 billion as we continue to attract new client assets.
On June 11, 2012, we completed our acquisition of CTC Consulting, LLC, a
U.S.-based independent investment consulting firm. This acquisition expands and
enhances our manager research and advisory capabilities, especially in the area
of alternative investments, benefiting our high net worth clients in the United
States as well as in Canada and Asia.
On August 1, 2012, we completed our acquisition of a 19.99% interest in COFCO
Trust Co., a subsidiary of COFCO Group, one of China's largest state-owned
enterprises with operations across a variety of sectors, including agriculture
and financial services. COFCO Trust Co. had assets under management of
approximately US$5.7 billion at December 31, 2011. The acquisition provides an
effective vehicle to expand our offering to high net worth and institutional
clients in China through a local partner. In addition, this strategic
partnership opens more doors, broadens our capabilities and helps grow our
domestic wealth management business in China.
BMO Harris Private Banking was named the Best Private Bank in Canada for the
second consecutive year by World Finance. This recognition is a clear
demonstration of the quality of our client relationships.
BMO's Exchange Traded Fund (ETF) business marked its three-year anniversary by
surpassing $6 billion in assets under management. In the first six months of
2012, the total assets of BMO ETFs grew by 62 per cent.
BMO Capital Markets
Net income for the current quarter was $232 million, down from a strong $270
million in the prior year, but up $7 million or 2.9% from the previous quarter.
The increase in net income from the previous quarter was driven by higher
trading revenue and corporate banking revenue.
During the quarter we earned a number of awards, recognizing our commitment to
customer experience. BMO Capital Markets was named Best Investment Bank in
Canada for 2012 by World Finance. We also won Trade Finance magazine's "Best
Trade Bank" in Canada award for the third year in a row. BMO Capital Markets was
selected as share leader for Overall Canadian Fixed-Income Market Share and
Quality Leader for Canadian Fixed-Income Research Quality by Greenwich
Associates for 2012, a designation that reflects client recognition for
providing unmatched coverage and quality of service for Canadian Fixed Income
markets. BMO Capital Markets was also recognized for its Prime Brokerage
business, earning the top spot in Canada for its capital introduction
capabilities in a survey conducted by Global Custodian magazine.
BMO Capital Markets participated in 125 new issues in the quarter including 51
corporate debt deals, 29 government debt deals, 32 common equity transactions
and 13 issues of preferred shares, raising $46 billion dollars.
Corporate Services
Net income for the quarter was $47 million, an increase of $246 million from a
year ago. On an adjusted basis, net income was $65 million, an improvement of
$127 million from a year ago. Adjusting items are detailed in the Adjusted Net
Income section and in the Non-GAAP Measures section. Adjusted provisions for
credit losses were lower by $164 million due in part to a $118 million ($73
million after-tax) recovery of provisions for credit losses on the M&I purchased
credit impaired loan portfolio. The remaining decrease was attributable to lower
provisions charged to Corporate Services under BMO's expected loss provisioning
methodology, which is explained in the Corporate Services section at the end of
this MD&A.
Acquisition of Marshall & Ilsley Corporation (M&I)
On July 5, 2011, BMO completed the acquisition of M&I. In this document, M&I is
generally referred to as the 'acquired business' and other acquisitions are
specifically identified. Activities of the acquired business are primarily
reflected in the P&C U.S., Private Client Group and Corporate Services segments,
with a small amount included in BMO Capital Markets.
The acquired business contributed $117 million to reported net income and $165
million to adjusted net income for the quarter. It contributed $557 million to
reported net income and $561 million to adjusted net income for the year to
date.
Adjusted Net Income
Management has designated certain amounts as adjusting items and has adjusted
GAAP results so that we can discuss and present financial results without the
effects of adjusting items to facilitate understanding of business performance
and related trends. Management assesses performance on a GAAP basis and on an
adjusted basis and considers both to be useful in the assessment of underlying
business performance. Presenting results on both bases provides readers with a
better understanding of how management assesses results. Adjusted results and
measures are non-GAAP and, together with items excluded in determining adjusted
results, are disclosed in more detail in the Non-GAAP Measures section, along
with comments on the uses and limitations of such measures. Items excluded from
third quarter 2012 results in the determination of adjusted results totalled a
charge of $43 million or $0.07 per share and were comprised of:
-- the $47 million after-tax net benefit for credit-related items in
respect of the acquired M&I performing loan portfolio, including $212
million for the recognition in net interest income of a portion of the
credit mark on the portfolio (including $93 million for the release of
the credit mark related to early repayment of loans), net of a $136
million provision for credit losses (comprised of an increase in the
collective allowance of $23 million and specific provisions of $113
million) and related income taxes of $29 million. These credit-related
items in respect of the acquired M&I performing loan portfolio can
significantly impact both net interest income and the provision for
credit losses in different periods over the life of the acquired M&I
performing loan portfolio;
-- costs of $105 million ($65 million after tax) for integration of the
acquired business including amounts related to system conversions,
restructuring and other employee-related charges, consulting fees and
marketing costs in connection with customer communications and
rebranding activities;
-- a $15 million ($15 million after-tax) loss on run-off structured credit
activities (our credit protection vehicle and structured investment
vehicle). These vehicles are consolidated on our balance sheet under
IFRS and results primarily reflect valuation changes associated with
these activities that have been included in trading revenue;
-- a decrease in the collective allowance for credit losses of $15 million
($14 million after tax) on loans other than the M&I acquired loan
portfolio; and
-- the amortization of acquisition-related intangible assets of $33 million
($24 million after tax).
Adjusted net income was $1,013 million for the third quarter of 2012, up $157
million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11%
from $1.34 a year ago. All of the above adjusting items were recorded in
Corporate Services except the amortization of acquisition-related intangible
assets, which is charged to the operating groups. The impact of adjusting items
for comparative periods is summarized in the Non-GAAP Measures section.
Caution
The foregoing sections contain forward-looking statements. Please see the
Caution Regarding Forward-Looking Statements.
The foregoing sections contain adjusted results and measures, which are
non-GAAP. Please see the Non-GAAP Measures section.
Financial Highlights
(Unaudited)
(Canadian $ in
millions,
except as
noted) For the three months ended
----------------------------------------------------------------------------
Change
from
July
July April January October July 31,
31, 2012 30, 2012 31, 2012 31, 2011 31, 2011 2011
----------------------------------------------------------------------------
Income
Statement
Highlights
Total revenue $ 3,878 $ 3,959 $ 4,117 $ 3,822 $ 3,320 16.8 %
Provision for
credit losses 237 195 141 362 230 2.7
Non-interest
expense 2,484 2,499 2,554 2,432 2,221 11.9
Net income 970 1,028 1,109 768 708 36.9
Adjusted net
income (a) 1,013 982 972 832 856 18.4
----------------------------------------------------------------------------
Net income
attributable
to non-
controlling
interest in
subsidiaries 19 18 19 19 18 1.7
Net income
attributable
to Bank
shareholders 951 1,010 1,090 749 690 37.8
Adjusted net
income
attributable
to Bank
shareholders
(a) 994 964 953 813 838 18.7
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Reported Net
Income by
Operating
Segment
Personal &
Commercial
Banking Canada 453 446 446 439 443 2.4 %
Personal &
Commercial
Banking U.S. 129 121 137 155 90 42.7
Private Client
Group 109 145 105 137 104 5.7
BMO Capital
Markets 232 225 198 143 270 (14.1)
Corporate
Services
(including
Technology and
Operations) 47 91 223 (106) (199) nm
----------------------------------------------------------------------------
Common Share
Data ($)
Diluted
earnings per
share $ 1.42 $ 1.51 $ 1.63 $ 1.11 $ 1.09 $ 0.33
Diluted
adjusted
earnings per
share (a) 1.49 1.44 1.42 1.20 1.34 0.15
Dividends
declared per
share 0.70 0.70 0.70 0.70 0.70 -
Book value per
share 39.43 38.06 37.85 36.76 35.38 4.05
Closing share
price 57.44 58.67 58.29 58.89 60.03 (2.59)
Total market
value of
common shares
($ billions) 37.2 37.7 37.3 37.6 38.3 (1.1)
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in
millions,
except as
noted) For the nine months ended
-----------------------------------------------
Change
from
July July July
31, 2012 31, 2011 31, 2011
-----------------------------------------------
Income
Statement
Highlights
Total revenue $ 11,954 $ 10,121 18.1 %
Provision for
credit losses 573 850 (32.7)
Non-interest
expense 7,537 6,309 19.5
Net income 3,107 2,346 32.4
Adjusted net
income (a) 2,967 2,443 21.4
-----------------------------------------------
Net income
attributable
to non-
controlling
interest in
subsidiaries 56 54 1.9 %
Net income
attributable
to Bank
shareholders 3,051 2,292 33.2
Adjusted net
income
attributable
to Bank
shareholders
(a) 2,911 2,389 21.9
-----------------------------------------------
Reported Net
Income by
Operating
Segment
Personal &
Commercial
Banking Canada 1,345 1,334 0.8 %
Personal &
Commercial
Banking U.S. 387 197 96.0
Private Client
Group 359 339 6.1
BMO Capital
Markets 655 759 (13.6)
Corporate
Services
(including
Technology and
Operations) 361 (283) nm
-----------------------------------------------
Common Share
Data ($)
Diluted
earnings per
share $ 4.56 $ 3.74 $ 0.82
Diluted
adjusted
earnings per
share (a) 4.35 3.91 0.44
Dividends
declared per
share 2.10 2.10 -
Book value per
share 39.43 35.38 4.05
Closing share
price 57.44 60.03 (2.59)
Total market
value of
common shares
($ billions) 37.2 38.3 (1.1)
-----------------------------------------------
As at
----------------------------------------------------------------------------
Change
from
July April January October July July
31, 2012 30, 2012 31, 2012 31, 2011 31, 2011 31, 2011
----------------------------------------------------------------------------
Balance Sheet
Highlights
Assets $ 542,248 $ 525,503 $ 538,260 $ 500,575 $ 502,036 8.0 %
Net loans and
acceptances 253,352 245,522 242,621 238,885 235,327 7.7
Deposits 328,968 316,067 316,557 302,373 292,047 12.6
Common
shareholders'
equity 25,509 24,485 24,238 23,492 22,549 13.1
----------------------------------------------------------------------------
For the three months ended (b)
----------------------------------------------------------------------------
July April January October July
31, 2012 30, 2012 31, 2012 31, 2011 31, 2011
----------------------------------------------------------------------------
Financial
Measures and
Ratios (%
except as
noted)
Average annual
five year
total
shareholder
return 2.5 2.0 1.6 1.9 3.9
Diluted
earnings per
share growth
(c) 30.3 14.4 21.6 (10.5) (3.5)
Diluted
adjusted
earnings per
share growth
(a)(c) 11.2 15.2 7.6 (4.8) 17.5
Return on
equity 14.5 16.2 17.2 12.7 13.3
Adjusted return
on equity (a) 15.2 15.4 15.0 13.9 16.4
Net economic
profit
($millions)
(a) 278 366 434 150 151
Net economic
profit (NEP)
growth (a)(c) 84.5 16.2 33.4 (21.1) 31.0
Operating
leverage 4.9 (4.4) (5.4) (1.8) (2.6)
Adjusted
operating
leverage (a) (4.4) (3.3) (7.6) (2.6) 6.9
Revenue growth
(c) 16.8 18.8 18.7 18.1 13.9
Adjusted
revenue growth
(a)(c) 8.8 14.9 8.5 13.4 16.0
Non-interest
expense growth
(c) 11.9 23.2 24.1 19.9 16.5
Adjusted non-
interest
expense growth
(a)(c) 13.2 18.2 16.1 16.0 9.1
Non-interest
expense-to-
revenue ratio 64.1 63.1 62.0 63.7 66.9
Adjusted non-
interest
expense-to-
revenue ratio
(a) 63.7 63.2 63.5 63.8 61.2
Net interest
margin on
average
earning assets 1.88 1.89 2.05 2.01 1.76
Adjusted net
interest
margin on
average
earning assets
(a) 1.70 1.76 1.85 1.78 1.78
Provision for
credit losses-
to-average
loans and
acceptances
(annualized) 0.38 0.32 0.23 0.60 0.43
Effective tax
rate 16.2 18.7 22.0 25.3 18.5
Adjusted
effective tax
rate 16.9 19.5 23.7 20.7 19.7
Gross impaired
loans and
acceptances-
to-equity and
allowance for
credit losses 9.15 9.34 8.74 8.98 7.94
Cash and
securities-to-
total assets
ratio 31.3 32.0 32.2 29.5 32.0
Common equity
ratio (based
on Basel II) 10.31 9.90 9.65 9.59 9.11
Basel II tier 1
capital ratio 12.40 11.97 11.69 12.01 11.48
Basel II total
capital ratio 14.78 14.89 14.58 14.85 14.21
Credit rating
(d)
DBRS AA AA AA AA AA
Fitch AA- AA- AA- AA- AA-
Moody's Aa2 Aa2 Aa2 Aa2 Aa2
Standard &
Poor's A+ A+ A+ A+ A+
Twelve month
total
shareholder
return 0.5 (1.0) 5.7 2.4 0.0
Dividend yield 4.87 4.77 4.80 4.75 4.66
Price-to-
earnings ratio
(times) 10.1 11.0 11.3 12.1 12.0
Market-to-book
value (times) 1.46 1.54 1.54 1.49 1.58
Return on
average assets 0.68 0.76 0.81 0.56 0.59
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------
For the nine months
ended (b)
-----------------------------------
July July
31, 2012 31, 2011
-----------------------------------
Financial
Measures and
Ratios (%
except as
noted)
Average annual
five year
total
shareholder
return 2.5 3.9
Diluted
earnings per
share growth
(c) 21.9 6.6
Diluted
adjusted
earnings per
share growth
(a)(c) 11.3 10.1
Return on
equity 15.9 16.1
Adjusted return
on equity (a) 15.2 16.8
Net economic
profit
($millions)
(a) 1,078 791
Net economic
profit (NEP)
growth (a)(c) 36.3 53.5
Operating
leverage (1.4) (0.5)
Adjusted
operating
leverage (a) (5.1) 2.0
Revenue growth
(c) 18.1 12.4
Adjusted
revenue growth
(a)(c) 10.7 11.9
Non-interest
expense growth
(c) 19.5 12.9
Adjusted non-
interest
expense growth
(a)(c) 15.8 9.9
Non-interest
expense-to-
revenue ratio 63.1 62.3
Adjusted non-
interest
expense-to-
revenue ratio
(a) 63.5 60.7
Net interest
margin on
average
earning assets 1.94 1.79
Adjusted net
interest
margin on
average
earning assets
(a) 1.77 1.80
Provision for
credit losses-
to-average
loans and
acceptances
(annualized) 0.31 0.55
Effective tax
rate 19.2 20.8
Adjusted
effective tax
rate 20.1 22.0
Gross impaired
loans and
acceptances-
to-equity and
allowance for
credit losses 9.15 7.94
Cash and
securities-to-
total assets
ratio 31.3 32.0
Common equity
ratio (based
on Basel II) 10.31 9.11
Basel II tier 1
capital ratio 12.40 11.48
Basel II total
capital ratio 14.78 14.21
Credit rating
(d)
DBRS AA AA
Fitch AA- AA-
Moody's Aa2 Aa2
Standard &
Poor's A+ A+
Twelve month
total
shareholder
return 0.5 0.0
Dividend yield 4.87 4.66
Price-to-
earnings ratio
(times) 10.1 12.1
Market-to-book
value (times) 1.46 1.58
Return on
average assets 0.75 0.68
-----------------------------------
-----------------------------------
nm-not meaningful
(a) These are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP
Measures section.
(b) For the period ended, or as at, as appropriate.
(c) Amounts for periods prior to fiscal 2011 have not been restated for
IFRS. As a result, growth measures for 2011 may not be meaningful.
(d) For a discussion of the significance of these credit ratings, see the
Liquidity and Funding Risk section on pages 88 to 90 of BMO's Annual
Management's Discussion and Analysis.
Management's Discussion and Analysis
Management's Discussion and Analysis (MD&A) commentary is as of August 28, 2012.
Unless otherwise indicated, all amounts are in Canadian dollars and have been
derived from financial statements prepared in accordance with International
Financial Reporting Standards (IFRS). References to GAAP mean IFRS, unless
indicated otherwise. The MD&A should be read in conjunction with the unaudited
interim consolidated financial statements for the period ended July 31, 2012,
included in this document, the unaudited interim consolidated financial
statements for the quarter ended April 30, 2012, which outline the impacts of
our IFRS transition, and the annual MD&A for the year ended October 31, 2011,
included in BMO's 2011 Annual Report. The material that precedes this section
comprises part of this MD&A.
Bank of Montreal uses a unified branding approach that links all of the
organization's member companies. Bank of Montreal, together with its
subsidiaries, is known as BMO Financial Group. As such, in this document, the
names BMO and BMO Financial Group mean Bank of Montreal, together with its
subsidiaries.
Summary Data - Reported
Increase Increase
(Unaudited) (Canadian $ in (Decrease) (Decrease)
millions, except as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income 2,225 422 23% 105 5%
Non-interest revenue 1,653 136 9% (186) (10%)
----------------------------------------------------------------------------
Revenue 3,878 558 17% (81) (2%)
----------------------------------------------------------------------------
Specific provision for credit
losses 229 (16) (7%) 34 17%
Collective provision for
credit losses 8 23 nm 8 nm
----------------------------------------------------------------------------
Total provision for credit
losses 237 7 3% 42 21%
Non-interest expense 2,484 263 12% (15) (1%)
Provision for income taxes 187 26 16% (50) (21%)
----------------------------------------------------------------------------
Net income 970 262 37% (58) (6%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to bank
shareholders 951 261 38% (59) (6%)
Attributable to non-
controlling interest in
subsidiaries 19 1 2% 1 1%
----------------------------------------------------------------------------
Net income 970 262 37% (58) (6%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share - basic
($) 1.42 0.32 29% (0.10) (7%)
Earnings per share - diluted
($) 1.42 0.33 30% (0.09) (6%)
Return on equity 14.5% 1.2% (1.7%)
Productivity ratio 64.1% (2.8%) 1.0%
Operating leverage 4.9% nm nm
Net interest margin on
earning assets 1.88% 0.12% (0.01%)
Effective tax rate 16.2% (2.3%) (2.5%)
Capital Ratios Reported
Basel II Tier 1 Capital
Ratio 12.40% 0.92% 0.43%
Common Equity Ratio - using
a Basel II approach 10.31% 1.20% 0.41%
Net income by operating
group:
Personal and Commercial
Banking 582 49 9% 15 3%
P&C Canada 453 10 2% 7 1%
P&C U.S. 129 39 43% 8 8%
Private Client Group 109 5 6% (36) (25%)
BMO Capital Markets 232 (38) (14%) 7 3%
Corporate Services, including
T&O 47 246 nm (44) (50%)
----------------------------------------------------------------------------
BMO Financial Group net
income 970 262 37% (58) (6%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Data - Reported
Increase
(Unaudited) (Canadian $ in (Decrease)
millions, except as noted) YTD-2012 vs. YTD-2011
----------------------------------------------------------
Net interest income 6,663 1,451 28%
Non-interest revenue 5,291 382 8%
----------------------------------------------------------
Revenue 11,954 1,833 18%
----------------------------------------------------------
Specific provision for credit
losses 546 (281) (34%)
Collective provision for
credit losses 27 4 17%
----------------------------------------------------------
Total provision for credit
losses 573 (277) (33%)
Non-interest expense 7,537 1,228 19%
Provision for income taxes 737 121 20%
----------------------------------------------------------
Net income 3,107 761 32%
----------------------------------------------------------
----------------------------------------------------------
Attributable to bank
shareholders 3,051 759 33%
Attributable to non-
controlling interest in
subsidiaries 56 2 2%
----------------------------------------------------------
Net income 3,107 761 32%
----------------------------------------------------------
----------------------------------------------------------
Earnings per share - basic
($) 4.59 0.79 21%
Earnings per share - diluted
($) 4.56 0.82 22%
Return on equity 15.9% (0.2%)
Productivity ratio 63.1% 0.8%
Operating leverage (1.4%) nm
Net interest margin on
earning assets 1.94% 0.15%
Effective tax rate 19.2% (1.6%)
Capital Ratios Reported
Basel II Tier 1 Capital
Ratio 12.40% 0.92%
Common Equity Ratio - using
a Basel II approach 10.31% 1.20%
Net income by operating
group:
Personal and Commercial
Banking 1,732 201 13%
P&C Canada 1,345 11 1%
P&C U.S. 387 190 96%
Private Client Group 359 20 6%
BMO Capital Markets 655 (104) (14%)
Corporate Services, including
T&O 361 644 nm
----------------------------------------------------------
BMO Financial Group net
income 3,107 761 32%
----------------------------------------------------------
----------------------------------------------------------
T&O means Technology and Operations.
nm - not meaningful
Summary Data - Adjusted(1)
Increase Increase
(Unaudited) (Canadian $ in (Decrease) (Decrease)
millions, except as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Adjusted net interest income 2,012 194 11% 43 2%
Adjusted non-interest
revenue 1,665 103 7% (93) (5%)
----------------------------------------------------------------------------
Adjusted revenue 3,677 297 9% (50) (1%)
----------------------------------------------------------------------------
Adjusted specific provision
and adjusted total
provision for credit losses 116 (129) (53%) (35) (23%)
Adjusted non-interest
expense 2,342 273 13% (15) (1%)
Adjusted provision for
income taxes 206 (4) (2%) (31) (14%)
----------------------------------------------------------------------------
Adjusted net income 1,013 157 18% 31 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to bank
shareholders 994 156 19% 30 3%
Attributable to non-
controlling interest in
subsidiaries 19 1 2% 1 1%
----------------------------------------------------------------------------
Adjusted net income 1,013 157 18% 31 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted earnings per share
- basic ($) 1.49 0.14 10% 0.04 3%
Adjusted earnings per share
- diluted ($) 1.49 0.15 11% 0.05 3%
Adjusted return on equity 15.2% (1.2%) (0.2%)
Adjusted productivity ratio 63.7% 2.5% 0.5%
Adjusted operating leverage (4.4%) nm nm
Adjusted net interest margin
on earning assets 1.70% (0.08%) (0.06%)
Adjusted effective tax rate 16.9% (2.8%) (2.6%)
Adjusted net income by
operating group:
Personal and Commercial
Banking 601 58 11% 16 3%
P&C Canada 456 12 2% 7 1%
P&C U.S. 145 46 48% 9 7%
Private Client Group 115 10 8% (35) (24%)
BMO Capital Markets 232 (38) (14%) 6 3%
Corporate Services,
including T&O 65 127 nm 44 +100%
----------------------------------------------------------------------------
BMO Financial Group adjusted
net income 1,013 157 18% 31 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Summary Data - Adjusted(1)
Increase
(Unaudited) (Canadian $ in (Decrease)
millions, except as noted) YTD-2012 vs. YTD-2011
---------------------------------------------------------
Adjusted net interest income 6,073 821 16%
Adjusted non-interest
revenue 5,074 254 5%
---------------------------------------------------------
Adjusted revenue 11,147 1,075 11%
---------------------------------------------------------
Adjusted specific provision
and adjusted total
provision for credit losses 358 (469) (57%)
Adjusted non-interest
expense 7,077 965 16%
Adjusted provision for
income taxes 745 55 8%
---------------------------------------------------------
Adjusted net income 2,967 524 21%
---------------------------------------------------------
---------------------------------------------------------
Attributable to bank
shareholders 2,911 522 22%
Attributable to non-
controlling interest in
subsidiaries 56 2 2%
---------------------------------------------------------
Adjusted net income 2,967 524 21%
---------------------------------------------------------
---------------------------------------------------------
Adjusted earnings per share
- basic ($) 4.37 0.41 10%
Adjusted earnings per share
- diluted ($) 4.35 0.44 11%
Adjusted return on equity 15.2% (1.6%)
Adjusted productivity ratio 63.5% 2.8%
Adjusted operating leverage (5.1%) nm
Adjusted net interest margin
on earning assets 1.77% (0.03%)
Adjusted effective tax rate 20.1% (1.9%)
Adjusted net income by
operating group:
Personal and Commercial
Banking 1,788 233 15%
P&C Canada 1,353 13 1%
P&C U.S. 435 220 +100%
Private Client Group 375 32 9%
BMO Capital Markets 656 (103) (14%)
Corporate Services,
including T&O 148 362 nm
---------------------------------------------------------
BMO Financial Group adjusted
net income 2,967 524 21%
---------------------------------------------------------
---------------------------------------------------------
(1) The above results and statistics are presented on an adjusted basis.
These are non-GAAP amounts or non-GAAP measures. Please see the Non-
GAAP Measures section.
nm - not meaningful
Management's Responsibility for Financial Information
Bank of Montreal's Chief Executive Officer and Chief Financial Officer have
signed certifications relating to the appropriateness of the financial
disclosures in our interim MD&A and unaudited interim consolidated financial
statements for the period ended July 31, 2012, and relating to the design of our
disclosure controls and procedures and internal control over financial
reporting. Bank of Montreal's management, under the supervision of the CEO and
CFO, has evaluated the effectiveness, as at July 31, 2012, of Bank of Montreal's
disclosure controls and procedures (as defined in the rules of the Securities
and Exchange Commission and the Canadian Securities Administrators) and has
concluded that such disclosure controls and procedures are effective.
Bank of Montreal's internal control over financial reporting 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; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements in
accordance with Canadian generally accepted accounting principles and the
requirements of the Securities and Exchange Commission in the United States, as
applicable; ensure receipts and expenditures of BMO are being made only in
accordance with authorizations of management and directors of Bank of Montreal;
and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of BMO assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting
can provide only reasonable assurance and may not prevent or detect
misstatements. Further, 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.
There were no changes in our internal control over financial reporting during
the quarter ended July 31, 2012, that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
As in prior quarters, Bank of Montreal's Audit and Conduct Review Committee
reviewed this document, including the unaudited interim consolidated financial
statements, and Bank of Montreal's Board of Directors approved the document
prior to its release.
A comprehensive discussion of our businesses, strategies and objectives can be
found in Management's Discussion and Analysis in BMO's 2011 Annual Report, which
can be accessed on our website at www.bmo.com/investorrelations. Readers are
also encouraged to visit the site to view other quarterly financial information.
Caution Regarding Forward-Looking Statements
Bank of Montreal's public communications often include written or oral
forward-looking statements. Statements of this type are included in this
document, and may be included in other filings with Canadian securities
regulators or the U.S. Securities and Exchange Commission, or in other
communications. All such statements are made pursuant to the "safe harbor"
provisions of, and are intended to be forward-looking statements under, the
United States Private Securities Litigation Reform Act of 1995 and any
applicable Canadian securities legislation. Forward-looking statements may
involve, but are not limited to, comments with respect to our objectives and
priorities for 2012 and beyond, our strategies or future actions, our targets,
expectations for our financial condition or share price, and the results of or
outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and
are subject to inherent risks and uncertainties. There is significant risk that
predictions, forecasts, conclusions or projections will not prove to be
accurate, that our assumptions may not be correct and that actual results may
differ materially from such predictions, forecasts, conclusions or projections.
We caution readers of this document not to place undue reliance on our
forward-looking statements as a number of factors could cause actual future
results, conditions, actions or events to differ materially from the targets,
expectations, estimates or intentions expressed in the forward-looking
statements.
The future outcomes that relate to forward-looking statements may be influenced
by many factors, including but not limited to: general economic and market
conditions in the countries in which we operate; weak, volatile or illiquid
capital and/or credit markets; interest rate and currency value fluctuations;
changes in monetary, fiscal or economic policy; the degree of competition in the
geographic and business areas in which we operate; changes in laws or in
supervisory expectations or requirements, including capital, interest rate and
liquidity requirements and guidance; judicial or regulatory proceedings; the
accuracy and completeness of the information we obtain with respect to our
customers and counterparties; our ability to execute our strategic plans and to
complete and integrate acquisitions; critical accounting estimates and the
effect of changes to accounting standards, rules and interpretations on these
estimates; operational and infrastructure risks; changes to our credit ratings;
general political conditions; global capital markets activities; the possible
effects on our business of war or terrorist activities; disease or illness that
affects local, national or international economies; natural disasters and
disruptions to public infrastructure, such as transportation, communications,
power or water supply; technological changes; and our ability to anticipate and
effectively manage risks associated with all of the foregoing factors.
We caution that the foregoing list is not exhaustive of all possible factors.
Other factors could adversely affect our results. For more information, please
see the discussion on pages 30 and 31 of BMO's 2011 annual MD&A, which outlines
in detail certain key factors that may affect Bank of Montreal's future results.
When relying on forward-looking statements to make decisions with respect to
Bank of Montreal, investors and others should carefully consider these factors,
as well as other uncertainties and potential events, and the inherent
uncertainty of forward-looking statements. Bank of Montreal does not undertake
to update any forward-looking statements, whether written or oral, that may be
made from time to time by the organization or on its behalf, except as required
by law. The forward-looking information contained in this document is presented
for the purpose of assisting our shareholders in understanding our financial
position as at and for the periods ended on the dates presented, as well as our
strategic priorities and objectives, and may not be appropriate for other
purposes.
In calculating the pro-forma impact of Basel III on our regulatory capital,
risk-weighted assets (including Counterparty Credit Risk and Market Risk) and
regulatory capital ratios, we have assumed that our interpretation of the
proposed rules and proposals announced by the Basel Committee on Banking
Supervision (BCBS) as of this date, and our models used to assess those
requirements, are consistent with the final requirements that will be
promulgated by the Office of the Superintendent of Financial Institutions Canada
(OSFI). We have also assumed that the proposed changes affecting capital
deductions, risk-weighted assets, the regulatory capital treatment for
non-common share capital instruments (i.e. grandfathered capital instruments)
and the minimum regulatory capital ratios are adopted by OSFI as proposed by
BCBS, unless OSFI has expressly advised otherwise. We have also assumed that
existing capital instruments that are non-Basel III compliant but are Basel II
compliant can be fully included in the July 31, 2012, pro-forma calculations.
The full impact of the Basel III proposals has been quantified based on our
financial and risk positions at quarter end or as close to quarter end as was
practical. In setting out the expectation that we will be able to refinance
certain capital instruments in the future, as and when necessary to meet
regulatory capital requirements, we have assumed that factors beyond our
control, including the state of the economic and capital markets environment,
will not impair our ability to do so.
Assumptions about the level of asset sales, expected asset sale prices, net
funding cost, credit quality, risk of default and losses on default of the
underlying assets of the structured investment vehicle were material factors we
considered when establishing our expectations regarding the structured
investment vehicle discussed in this interim MD&A, including the adequacy of
first-loss protection. Key assumptions included that assets will continue to be
sold with a view to reducing the size of the structured investment vehicle,
under various asset price scenarios, and that the level of default and losses
will be consistent with the credit quality of the underlying assets and our
current expectations regarding continuing difficult market conditions.
Assumptions about the level of default and losses on default were material
factors we considered when establishing our expectations regarding the future
performance of the transactions into which our credit protection vehicle has
entered. Among the key assumptions were that the level of default and losses on
default will be consistent with historical experience. Material factors that
were taken into account when establishing our expectations regarding the future
risk of credit losses in our credit protection vehicle and risk of loss to BMO
included industry diversification in the portfolio, initial credit quality by
portfolio, the first-loss protection incorporated into the structure and the
hedges that BMO has entered.
In determining the impact of reductions to interchange fees in the U.S.
Regulatory Developments section, we have assumed that business volumes remain
consistent with our expectations and that certain management actions are
implemented that will modestly reduce the impact of the rules on our revenues.
Assumptions about the performance of the Canadian and U.S. economies, as well as
overall market conditions and their combined effect on our business, are
material factors we consider when determining our strategic priorities,
objectives and expectations for our business. In determining our expectations
for economic growth, both broadly and in the financial services sector, we
primarily consider historical economic data provided by the Canadian and U.S.
governments and their agencies. See the Economic Outlook and Review section of
this interim MD&A.
Regulatory Filings
Our continuous disclosure materials, including our interim filings, annual MD&A
and audited consolidated financial statements, Annual Information Form and
Notice of Annual Meeting of Shareholders and Proxy Circular are available on our
website at www.bmo.com/investorrelations, on the Canadian Securities
Administrators' website at www.sedar.com and on the EDGAR section of the SEC's
website at www.sec.gov.
Economic Outlook and Review
The Canadian economy is growing modestly, supported by low interest rates and a
vibrant resource sector but restrained by the strong Canadian dollar and weak
global demand. The economy is expected to achieve real growth of 2% this year,
maintaining the unemployment rate near 7%. Households will likely continue to
spend cautiously in the face of elevated debt and more restrictive credit rules.
Similarly, housing market activity should moderate in response to recent changes
in mortgage rules and high valuations in some markets. Fiscal policies should
remain restrictive as a result of budget deficits. While exporters, consumers
and governments all face challenging conditions, Canadian businesses should
maintain their strong rate of investment, particularly in the resource-rich
provinces of Alberta, Saskatchewan, and Newfoundland & Labrador. In addition,
lower office and industrial vacancy rates will continue to support commercial
construction. The Canadian dollar is expected to trade near parity with the U.S.
dollar in 2013, supported by strong inflows of foreign capital. Inflation should
stay low, despite expected increases in food prices, allowing the Bank of Canada
to maintain its overnight rate target at 1% well into next year.
The U.S. economy continues to grow modestly, as concerns about the European debt
situation and domestic fiscal issues have discouraged companies from spending
and hiring. Expected real GDP growth of approximately 2% will likely result in
the unemployment rate staying above 8% through 2013. Despite lower gasoline
prices and improved finances, many households are struggling with weak job
prospects and still-high (though declining) foreclosures. Restrictive fiscal
policies will likely continue to restrain economic expansion, especially in 2013
when special tax breaks expire and scheduled spending reductions begin. However,
the housing market should improve further in response to attractive
affordability and growing demand due to the rising number of young prospective
buyers. In the face of high unemployment and low inflation, the Federal Reserve
is expected to maintain its near-zero interest rate policy for at least a couple
of more years and to implement additional measures to reduce longer-term
borrowing costs.
The U.S. Midwest economy is growing in line with the national trend, supported
by rising automotive production and increased oil output in North Dakota but
restrained by restrictive fiscal policies and weak global demand. The Midwest
economy is expected to grow about 2% this year, held back by sharply lower
agricultural production due to the severe drought. Growth will likely improve
slightly next year, as stimulative fiscal and monetary policies in China and
other emerging-market economies should support a pickup in global exports.
This Economic Outlook and Review section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income,
revenues, expenses, provisions for credit losses and income taxes were increased
relative to the third quarter of 2011 and for the year to date relative to the
comparable period in 2011 by the strengthening of the U.S. dollar. They were
also raised relative to the second quarter of 2012, by a modest strengthening of
the U.S. dollar. The average Canadian/U.S. dollar exchange rate for the quarter,
expressed in terms of the Canadian dollar cost of a U.S. dollar, increased by
5.7% from a year ago and increased by 2.7% from the average of the second
quarter. The average rate for the year to date increased by 3.1%. The following
table indicates the relevant average Canadian/U.S. dollar exchange rates and the
impact of changes in the rates.
Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results
(Canadian $ in millions, Q3-2012 YTD-2012
except as noted) vs. Q3-2011 vs. Q2-2012 vs. YTD-2011
----------------------------------------------------------------------------
Canadian/U.S. dollar exchange rate
(average)
Current period 1.0180 1.0180 1.0078
Prior period 0.9628 0.9917 0.9777
Effects on reported results
Increased (decreased) net interest
income 54 26 86
Increased (decreased) non-interest
revenue 26 12 43
----------------------------------------------------------------------------
Increased (decreased) revenues 80 38 129
Decreased (increased) expenses (50) (24) (82)
Decreased (increased) provision for
credit losses (7) (3) (4)
Decreased (increased) income taxes (7) (3) (8)
----------------------------------------------------------------------------
Increased (decreased) net income 16 8 35
----------------------------------------------------------------------------
Effects on adjusted results
Increased (decreased) net interest
income 43 20 180
Increased (decreased) non-interest
revenues 25 12 43
----------------------------------------------------------------------------
Increased (decreased) revenues 68 32 223
Decreased (increased) expenses (42) (20) (217)
Decreased (increased) provision for
credit losses (7) (3) (4)
Decreased (increased) income taxes (8) (4) 50
----------------------------------------------------------------------------
Increased (decreased) adjusted net
income 11 5 52
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
The effect of currency fluctuations on our investments in foreign operations is
discussed in the Income Taxes section.
Other Value Measures
BMO's average annual total shareholder return for the five-year period ended
July 31, 2012, was 2.5%.
Net economic profit (NEP) was $278 million, compared with $366 million in the
second quarter and $151 million in the third quarter of 2011. Adjusted NEP was
$297 million, compared with $296 million in the second quarter and $287 million
in the third quarter of 2011. Changes in adjusted NEP relative to a year ago are
reflective of higher earnings, including the impact of two additional months of
results of the acquired business in the current year, and increased capital.
Changes relative to the second quarter were attributable to increased capital,
offset in part by improved earnings. NEP of $278 million represents the net
income that is attributable to shareholders ($951 million), less preferred share
dividends ($32 million), plus the after-tax amortization of intangible assets
($24 million), net of a charge for capital ($665 million), and is considered an
effective measure of added economic value. Adjusted NEP is calculated in the
same manner using adjusted net income rather than reported net income and
excluding the addition of the amortization of intangible assets. NEP and
adjusted NEP are non-GAAP measures. Please see the Non-GAAP Measures section for
a discussion on the use and limitations of non-GAAP measures.
Net Income
Q3 2012 vs Q3 2011
Net income was $970 million for the third quarter of 2012, up $262 million or
37% from a year ago. Earnings per share were $1.42, up 30% from $1.09 a year
ago.
Adjusted net income was $1,013 million for the third quarter of 2012, up $157
million or 18% from a year ago. Adjusted earnings per share were $1.49, up 11%
from $1.34 a year ago. Adjusted results and items excluded in determining
adjusted results are disclosed in more detail in the preceding Adjusted Net
Income section and in the Non-GAAP Measures section, together with comments on
the uses and limitations of such measures.
Adjusted net income growth reflects the benefits from acquisitions and organic
growth. There was significant growth in P&C U.S., due largely to inclusion of
results of the acquired business for three months compared to one month a year
ago. PCG results improved despite lower insurance results, and P&C Canada net
income was higher due to volume growth across most products, partially offset by
lower net interest margin. BMO Capital Markets results were lower than the
strong results of a year ago. Adjusted net income increased in Corporate
Services due in large part to lower adjusted provisions for credit losses.
Provisions for credit losses increased modestly, but adjusted provisions were
down $81 million after-tax due to a recovery of provisions for credit losses on
M&I purchased credit impaired loans and lower specific provisions on the legacy
portfolio. The effective tax rate was lower, as explained in the Income Taxes
section.
Q3 2012 vs Q2 2012
Net income decreased $58 million or 5.8% from the second quarter and earnings
per share decreased $0.09 or 6.0%. Adjusted net income increased $31 million or
3.1% and adjusted earnings per share increased $0.05 or 3.5%.
On an adjusted basis, there were increases in P&C U.S, P&C Canada, BMO Capital
Markets and Corporate Services and a reduction in Private Client Group.
Adjusted revenues were lower than in the second quarter, and adjusted expenses
also decreased, reflective of effective expense management. Adjusted provisions
for credit losses decreased and the adjusted effective tax rate was also lower
in the current quarter.
Q3 YTD 2012 vs Q3 YTD 2011
Net income increased $761 million or 32% to $3,107 million. Earnings per share
were $4.56, up $0.82 or 22% from a year ago.
Adjusted net income increased $524 million or 21% to $2,967 million and adjusted
earnings per share were $4.35, up $0.44 or 11% from a year ago. Eight additional
months of results of the acquired business added $527 million to year-to-date
adjusted net income compared to the same period a year ago.
This section contains adjusted results and measures which are non-GAAP. Please
see the Non-GAAP Measures section.
Revenue
Total revenue increased $558 million or 17% from the third quarter a year ago.
Adjusted revenue increased $297 million or 8.8%. The inclusion of results of the
acquired business for three months compared to one month in the prior year
increased adjusted revenue by $320 million. The stronger U.S. dollar increased
adjusted revenue growth by $41 million or 1.3%, on a basis that excludes the
impact of the acquired business. Excluding these two items, adjusted revenue
decreased by $64 million or 2.0%, primarily due to lower BMO Capital Markets
revenues, as market conditions were more favourable a year ago, lower insurance
revenue and decreased revenues in Corporate Services.
Revenue decreased $81 million or 2.1% from the second quarter. Adjusted revenue
decreased $50 million or 1.4%. The stronger U.S. dollar increased adjusted
revenue growth by $33 million or 0.9%. Excluding the impact of the stronger U.S.
dollar, adjusted revenue decreased by $83 million or 2.2%, primarily due to
lower insurance revenue. P&C Canada revenues increased due to two extra days and
good volume growth across all products, offset in part by lower margins.
Adjusted revenues in Corporate Services were down due to a number of small
items.
Revenue for the year to date increased $1,833 million or 18% and adjusted
revenue increased $1,075 million or 11%. The inclusion of results of the
acquired business for eight additional months in the current year to date
increased adjusted revenue by $1,254 million. The stronger U.S. dollar increased
adjusted revenue growth by $68 million or 0.7%, on a basis that excludes the
impact of the acquired business. Excluding these two items, adjusted revenue
decreased by $248 million or 2.5%, primarily due to less favourable market
conditions for BMO Capital Markets.
Changes in net interest income and non-interest revenue are reviewed in the
sections that follow.
This section contains adjusted results and measures which are non-GAAP. Please
see the Non-GAAP Measures section.
Net Interest Income
Net interest income in the quarter increased $422 million or 23% from a year ago
to $2,225 million. Adjusted net interest income increased $194 million or 11% to
$2,012 million. The increase in adjusted net interest income was primarily in
P&C U.S., due to the inclusion of results of the acquired business for two
additional months in the current quarter relative to the same period a year ago.
There was strong growth in Private Client Group due in part to the impact of the
acquired business. There was a modest reduction in P&C Canada. BMO Capital
Markets net interest income was consistent with results of a year ago, while
Corporate Services adjusted net interest income was lower.
BMO's overall net interest margin increased by 12 basis points year over year to
1.88%. Adjusted net interest margin decreased by 8 basis points to 1.70% with
decreases in each of the operating groups. The decrease in BMO Capital Markets
was attributable to reduced market spreads. Decreased margin in P&C Canada was
primarily driven by deposit spread compression in the low rate environment lower
personal lending margins resulting from customer behaviours in our cards
business and competitive pressures and loan growth exceeding deposit growth,
particularly mortgages. In P&C U.S., the decrease was due to deposit spread
compression, partially offset by the favourable effect of deposit growth
exceeding loan growth and the positive impact from the acquired business. In
Private Client Group, the decrease was mainly due to lower deposit spreads,
offset in part by higher loan and deposit balances in private banking and the
impact of the acquired business. Corporate Services adjusted net interest income
decreased year over year and contributed to BMO's overall margin reduction.
Average earning assets in the third quarter increased $64.9 billion or 16%
relative to a year ago, with a $10.3 billion increase as a result of the
stronger U.S. dollar. There were higher assets in P&C U.S. due to the acquired
business and good organic commercial loan growth. There were increased assets in
BMO Capital Markets due to increased holdings of securities purchased under
resale agreements (reverse repos) as a result of client demand and higher
deposits at the Federal Reserve. There was growth in P&C Canada, driven by
volume growth across most products, and Private Client Group benefited from
personal loan growth in private banking and higher insurance assets.
Relative to the second quarter, net interest income increased $105 million or
4.9%. Adjusted net interest income increased $43 million or 2.1%, in part due to
two more days in the current quarter. There was growth across all operating
groups, partially offset by a decrease in Corporate Services.
BMO's overall net interest margin decreased 1 basis point from the second
quarter. Adjusted net interest margin decreased 6 basis points. There was a
modest decline in BMO Capital Markets. P&C Canada's margin decrease was
primarily due to lower personal lending margins resulting from customer
behaviours in our cards business and competitive pressures, deposit spread
compression in the low rate environment and loan growth exceeding deposit
growth, particularly mortgages. The margin decrease in Private Client Group was
driven by lower deposit balances. Adjusted net interest margin increased
modestly in P&C U.S. while Corporate Services adjusted net interest income
decreased, which had an unfavourable impact on overall spread.
Average earning assets increased $16.0 billion or 3.5% from the second quarter,
with a $4.9 billion increase as a result of the stronger U.S. dollar. There was
growth in BMO Capital Markets due to higher reverse repos and securities
balances. There was solid growth in P&C Canada and in Private Client Group and a
more modest increase in P&C U.S.
Year to date, net interest income increased $1,451 million or 28%. Adjusted net
interest income increased $821 million or 16% to $6,073 million, primarily due
to the inclusion of results of the acquired business for eight additional months
in P&C U.S. and Private Client Group, compared to a year ago. Private Client
Group also benefited from higher earnings from a strategic investment and good
organic growth. There was a decrease in BMO Capital Markets due to reduced
margins, while P&C Canada net interest income was consistent with the same
period a year ago. Corporate Services adjusted net interest income was lower,
due in part to interest received on the settlement of certain tax matters in the
prior year.
BMO's overall net interest margin increased by 15 basis points to 1.94% for the
year to date. On an adjusted basis, net interest margin decreased by 3 basis
points. There were reductions across most operating groups and reduced net
interest income in Corporate Services. There was an increase in Private Client
Group, due in large part to the impact of the acquired business and higher
earnings from a strategic investment.
Average earning assets for the year to date increased $68.1 billion or 17%, and
by $62.6 billion adjusted to exclude the impact of the stronger U.S. dollar.
There were higher assets in P&C U.S. and in Private Client Group, due to the
inclusion of results of the acquired business and organic growth. There was also
strong growth in BMO Capital Markets and more modest growth in P&C Canada and
Corporate Services.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Adjusted Net Interest Margin on Earning Assets (teb)(i)
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
(In basis points) Q3-2012 vs. Q3-2011 vs. Q2-2012 YTD-2012 vs. YTD-2011
----------------------------------------------------------------------------
P&C Canada 274 (17) (7) 282 (13)
P&C U.S. 438 (11) 3 439 (2)
----------------------------------------------------------------------------
Personal and
Commercial Client
Group 316 (4) (7) 323 4
Private Client Group 289 (6) (9) 322 19
BMO Capital Markets 63 (11) (2) 63 (15)
Corporate Services,
including T&O(ii) nm nm nm nm nm
----------------------------------------------------------------------------
Total BMO adjusted
net interest margin
(1) 170 (8) (6) 177 (3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total BMO reported
net interest margin 188 12 (1) 194 15
----------------------------------------------------------------------------
Total Canadian Retail
(reported and
adjusted)(iii) 273 (18) (8) 282 (14)
----------------------------------------------------------------------------
(i) Net interest margin is disclosed and computed with reference to
average earning assets, rather than total assets. This basis provides
a more relevant measure of margins and changes in margins. Operating
group margins are stated on a teb basis while total BMO margin is
stated on a GAAP basis.
(ii) Corporate Services adjusted net interest income is negative in all
periods and its variability affects changes in net interest margin.
(iii) Total Canadian retail margin represents the net interest margin of the
combined Canadian business of P&C Canada and Private Client Group.
(1) These are non-GAAP amounts or non-GAAP measures. Please see the Non-
GAAP Measures section.
nm - not meaningful
Non-Interest Revenue
Non-interest revenue increased $136 million or 9.0% from the third quarter a
year ago to $1,653 million. Adjusted non-interest revenue increased $103 million
or 6.7% to $1,665 million. There was strong growth in deposit and payment
service charges and fees in P&C U.S. and in investment management fees in
Private Client Group, due to the inclusion of results of the acquired business
for two additional months relative to a year ago. There were also increased
other revenues in P&C U.S. due to higher gains on sale of mortgages and
increased lending and other fees. There were increased trading revenues in BMO
Capital Markets and decreases in equity underwriting and advisory fees.
Securities commissions and fees were lower in both BMO Capital Markets and
Private Client Group, where insurance revenues also decreased. Non-interest
revenues in P&C Canada were higher across a number of categories.
Relative to the second quarter, non-interest revenue decreased $186 million or
10%. Adjusted non-interest revenue decreased $93 million or 5.3%. Lower interest
rates reduced insurance revenue by $61 million in the current quarter. There
were reductions in securities commissions and fees, and in gains on securities,
foreign exchange other than trading and equity underwriting fees.
Year to date, non-interest revenue increased $382 million or 7.8% to $5,291
million. Adjusted non-interest revenue increased $254 million or 5.3% to $5,074
million. Increases from the inclusion of results of the acquired business for
eight additional months relative to a year ago were partially offset by declines
in underwriting and advisory fees, securities commissions and fees, securities
gains and insurance revenues.
Non-interest revenue is detailed in the attached summary unaudited interim
consolidated financial statements.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Non-Interest Expense
Non-interest expense increased $263 million or 12% from the third quarter a year
ago to $2,484 million. Adjusted non-interest expense increased $273 million or
13% to $2,342 million. The inclusion of results of the acquired business for two
additional months compared to a year ago increased adjusted expense by $248
million. The stronger U.S. dollar increased adjusted expense growth by $26
million or 1.3%, on a basis that excludes the impact of the acquired business.
Excluding these two items, expenses decreased by $1 million or 0.1% as the
benefit from disciplined expense management was largely offset by investment in
strategic initiatives.
Relative to the second quarter, non-interest expense decreased $15 million or
0.6%. Adjusted non-interest expense decreased $15 million or 0.6%. The stronger
U.S. dollar increased adjusted expense growth by $20 million or 0.9%. Excluding
the impact of the stronger U.S. dollar, expenses decreased by $35 million or
1.5%, due to lower employee-related costs and cost containment, despite an
increase from two more days in the quarter. Our increased focus on productivity
has contributed to quarter-over-quarter adjusted operating leverage of 1.2% on a
basis that excludes the impact of long-term interest rates on our insurance
business.
Non-interest expense for the year to date increased $1,228 million or 19% to
$7,537 million. Adjusted non-interest expense increased $965 million or 16% to
$7,077 million. The inclusion of results of the acquired business for eight
additional months in the current year to date increased adjusted expense by $867
million. The stronger U.S. dollar increased adjusted expense growth by $44
million or 0.7%, on a basis that excludes the impact of the acquired business.
Excluding these two items, expenses increased by $54 million or 0.9%, primarily
due to continued investment in our businesses, including technology development
initiatives, as well as increased support costs.
Non-interest expense is detailed in the attached summary unaudited interim
consolidated financial statements.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Risk Management
Starting in the first quarter of 2012, provisions for credit losses for the
current and prior periods are reported on an IFRS basis, and as such include
provisions resulting from the recognition of our securitized loans and certain
special purpose entities on our balance sheet. IFRS also requires that we
recognize interest income on impaired loans with a corresponding increase in
provision for credit losses.
The provision for credit losses totalled $237 million in the third quarter of
2012. The adjusted provision for credit losses was $116 million, after adjusting
for a $113 million specific provision for the M&I purchased performing loan
portfolio. Adjusting items also include a $23 million increase in the collective
allowance for the M&I purchased performing loan portfolio and a $15 million
reduction in the collective allowance on other loans.
The adjusted provision for credit losses of $116 million represents an
annualized 21 basis points of average net loans and acceptances, compared with
$151 million or an annualized 28 basis points in the second quarter of 2012 and
$245 million or an annualized 48 basis points in the third quarter of 2011.
Included in the adjusted specific provision for credit losses is a recovery of
$118 million related to the M&I purchased credit impaired loans this quarter,
compared with a $117 million recovery in the second quarter of 2012.
On a geographic basis, specific provisions in Canada and all other countries
(excluding the United States) were $138 million in the third quarter of 2012,
$177 million in the second quarter of 2012 and $151 million in the third quarter
of 2011. Specific provisions in the United States were $91 million in the third
quarter of 2012, $18 million in the second quarter of 2012 and $94 million in
the third quarter of 2011. On an adjusted basis, specific provisions in the
United States for the comparable periods were a $22 million recovery, a $26
million recovery and a charge of $94 million, respectively.
BMO employs a methodology for segmented reporting purposes whereby credit losses
are charged to the client operating groups quarterly, based on their share of
expected credit losses. The difference between quarterly charges based on
expected losses and required quarterly provisions based on actual losses is
charged (or credited) to Corporate Services. The table that follows outlines
credit losses by client operating group based on actual credit losses.
Impaired loan formations in BMO's legacy portfolio (which excludes the M&I
purchased performing loan portfolio) totalled $405 million in the current
quarter, down from $455 million in the second quarter of 2012 and $429 million a
year ago. Impaired loan formations related to the M&I purchased performing loan
portfolio were $386 million in the current quarter, down from $444 million in
the second quarter. At acquisition, we recognized the likelihood of impairment
in the purchased performing loan portfolio and losses on these loans that have
now been identified as impaired were adequately provided for in the credit mark
established at the time of acquisition.
Total gross impaired loans, excluding the purchased credit impaired loans, were
$2,867 million at the end of the current quarter, up from $2,837 million in the
second quarter of 2012 and $2,290 million a year ago. At the end of the quarter,
there were $926 million of gross impaired loans related to the acquired
portfolios, of which $133 million is subject to a loss-sharing agreement that
expires in 2015 for commercial loans and 2020 for retail loans.
An active housing market in Canada with low interest rates and high consumer
debt levels could imply potential risk if there were an economic downturn or
increase in interest rates. BMO's Canadian residential mortgage portfolio
represents 6.5% of the total Canadian residential mortgage market of $1,142
billion (Bank of Canada, June 2012). Approximately 65% of the portfolio is
insured, with an average loan-to-value ratio of 64% (adjusted for current
housing values). The remaining 35% of the portfolio is uninsured, with an
average loan-to-value ratio of 56%. BMO's Home Equity Line of Credit portfolio
is uninsured, but 95% of the exposures represent a priority claim and there are
no exposures that had a loan-to-value ratio greater than 80% at time of
origination. We remain satisfied with our prudent and consistent lending
standards throughout the credit cycle and will continue to monitor the portfolio
closely.
BMO's liquidity and funding, market and insurance risk management practices and
key measures are outlined on pages 88 to 91 of BMO's 2011 annual MD&A.
There were no significant changes to our level of liquidity and funding risk
over the quarter. We remain satisfied that our liquidity and funding management
framework provides us with a sound liquidity position.
Trading and Underwriting Market Value Exposure (MVE) decreased over the period,
mainly due to reduced fixed income activity. Exposure in the bank's
available-for-sale portfolios was relatively unchanged over the period.
There were no significant changes in our structural market risk management
practices during the quarter. Structural MVE is driven by rising interest rates
and primarily reflects a lower market value for fixed-rate loans. Structural
Earnings Volatility (EV) is driven by falling interest rates and primarily
reflects the risk of prime-based loans repricing at lower rates. MVE and
economic value exposures under rising interest rates decreased from the prior
quarter largely due to higher U.S. mortgage prepayments as a result of lower
interest rates. MVE also decreased due to lower modelled interest rate
volatility. EV and earnings exposure under the 100 basis point falling interest
rate scenario were largely unchanged from the prior quarter. Earnings exposure
under the 200 basis point falling interest rate scenario increased largely due
to the increased impact of interest rate floors, which limit the extent that
interest expense can decline when interest rates fall.
There were no significant changes in the risk management practices or risk
levels of our insurance business during the quarter.
This Risk Management section contains forward-looking statements. Please see the
Caution Regarding Forward-Looking Statements.
Provision for Credit Losses
----------------------------------------------------------------------------
(Canadian $ in millions,
except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
New specific provisions 484 458 344 1,354 1,080
Reversals of previously
established allowances (59) (66) (38) (192) (83)
Recoveries of loans
previously written-off (196) (197) (61) (616) (170)
----------------------------------------------------------------------------
Specific provision for
credit losses 229 195 245 546 827
Change in collective
allowance 8 - (15) 27 23
----------------------------------------------------------------------------
Provision for credit losses
(PCL) 237 195 230 573 850
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted specific provision
for credit losses (1) 116 151 245 358 827
PCL as a % of average net
loans and acceptances
(annualized) 0.38% 0.32% 0.43% 0.31% 0.55%
PCL as a % of average net
loans and acceptances
excluding purchased
portfolios (annualized) (2) 0.39% 0.46% 0.44% 0.45% 0.56%
Specific PCL as a % of
average net loans and
acceptances (annualized) 0.37% 0.32% 0.46% 0.30% 0.53%
Adjusted specific PCL as a %
of average net loans and
acceptances (annualized)
(1) 0.21% 0.28% 0.48% 0.22% 0.55%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted specific provision for credit losses excludes provisions
related to the M&I purchased performing loan portfolio.
(2) Ratio is presented excluding purchased portfolios, to provide for
better historical comparisons.
Provision for Credit Losses by Operating Group, on an Actual Loss Basis
--------------------------------------------------------------------------
(Canadian $ in millions,
except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
--------------------------------------------------------------------------
P&C Canada 141 161 150 451 469
P&C U.S. 71 55 54 182 265
--------------------------------------------------------------------------
Personal and Commercial
Banking 212 216 204 633 734
Private Client Group 4 1 (2) 9 6
BMO Capital Markets (1) 17 8 5 14
Corporate Services,
including T&O (1) 19 34 35 88 73
Purchased Credit Impaired
Loans (2) (118) (117) - (377) -
--------------------------------------------------------------------------
Adjusted provision for
credit losses 116 151 245 358 827
--------------------------------------------------------------------------
P&C U.S. 99 39 - 162 -
Private Client Group 3 5 - 10 -
Corporate Services,
include T&O 11 - - 16 -
--------------------------------------------------------------------------
Specific provisions on
purchased performing
loans 113 44 - 188 -
--------------------------------------------------------------------------
Change in collective
allowance 8 - (15) 27 23
--------------------------------------------------------------------------
Provision for credit
losses 237 195 230 573 850
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Corporate Services includes the provision for credit losses in respect
of loans transferred from P&C U.S. to Corporate Services in Q3-2011 and
IFRS adjustments related to the interest on impaired loans.
(2) Includes recoveries related to the M&I purchased credit impaired loans,
which are reported under Corporate Services in our financial results.
Changes in Gross Impaired Loans and Acceptances (GIL) (1)
----------------------------------------------------------------------------
(Canadian $ in millions,
except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
GIL, beginning of period 2,837 2,657 2,465 2,685 2,894
Additions to impaired loans
and acceptances 791 899 429 2,314 1,260
Reductions in impaired
loans and acceptances (2) (458) (427) (367) (1,264) (1,161)
Write-offs (3) (303) (292) (237) (868) (703)
----------------------------------------------------------------------------
GIL, end of period (1) 2,867 2,837 2,290 2,867 2,290
----------------------------------------------------------------------------
----------------------------------------------------------------------------
GIL as a % of gross loans
and acceptances 1.13% 1.15% 0.98% 1.13% 0.98%
GIL as a % of gross loans
and acceptances excluding
purchased portfolios (4) 0.85% 0.98% 1.10% 0.85% 1.10%
GIL as a % of equity and
allowances for credit
losses 9.15% 9.34% 7.94% 9.15% 7.94%
GIL as a % of equity and
allowances for credit
losses excluding purchased
portfolios (4) 6.24% 7.07% 7.96% 6.24% 7.96%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) GIL excludes purchased credit impaired loans.
(2) Includes impaired amounts returned to performing status, loan sales,
repayments, the impact of foreign exchange fluctuations and effects 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 ($106 million in Q3-2012, $106 million in Q2-2012;
and $101 million in Q3-2011).
(4) Ratio is presented excluding purchased portfolios, to provide for
better historical comparisons.
This section contains adjusted results and measures which are non-GAAP.
Please see the Non-GAAP Measures section.
Total Trading and Underwriting Market Value Exposure (MVE) Summary ($
millions)(i)
----------------------------------------------------------------------------
As at As at
April October
For the quarter ended July 31, 30, 31,
2012 2012 2011
---------------------------------------------------------- -------- --------
(Pre-tax Canadian Quarter Quarter Year-
equivalent) -end Average High Low -end end
---------------------------------------------------------- -------- --------
Commodity VaR (0.6) (0.8) (1.0) (0.4) (0.5) (0.3)
Equity VaR (6.9) (5.8) (7.1) (4.4) (6.3) (5.4)
Foreign Exchange VaR (0.5) (1.6) (3.0) (0.2) (2.3) (0.9)
Interest Rate VaR (MTM) (7.8) (7.8) (9.6) (6.2) (9.5) (6.3)
Diversification 6.1 6.6 nm nm 7.9 4.2
------------------------------------------ ------------------
Trading Market VaR (9.7) (9.4) (11.2) (7.5) (10.7) (8.7)
Trading & Underwriting
Issuer Risk (3.2) (5.4) (7.3) (2.8) (5.9) (3.6)
------------------------------------------ ------------------
Total Trading &
Underwriting MVE (12.9) (14.8) (17.3) (12.3) (16.6) (12.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest Rate VaR (AFS) (14.9) (15.7) (17.8) (14.7) (15.3) (11.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) One-day measure using a 99% confidence interval. Losses are in brackets
and benefits are presented as positive numbers.
MTM - mark-to-market
nm - not meaningful
Total Trading Market Stressed Value at Risk (VaR) Summary ($ millions)(i)
----------------------------------------------------------------------------
(Pre-tax Canadian As at As at
equivalent) For the quarter April October
ended July 31, 30, 31,
2012 2012 2011
Quarter Quarter Year-
-end Average High Low -end end
---------------------------------------------------------- -------- --------
Commodity Stressed VaR (0.8) (1.2) (2.5) (0.7) (1.1) (0.3)
Equity Stressed VaR (13.2) (10.5) (13.4) (7.4) (9.9) (6.4)
Foreign Exchange Stressed
VaR (0.7) (2.2) (4.7) (0.5) (2.4) (1.2)
Interest Rate Stressed VaR
(Mark-to-Market) (13.0) (14.6) (21.4) (10.9) (19.9) (13.2)
Diversification 9.3 11.6 nm nm 14.0 6.7
----------------------------------------------------------------------------
Trading Market Stressed
VaR (18.4) (16.9) (21.0) (12.2) (19.3) (14.4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) One-day measure using a 99% confidence interval. Losses are in brackets
and benefits are presented as positive numbers.
nm - not meaningful
Structural Balance Sheet Market Value Exposure and Earnings Volatility ($
millions)(i)
----------------------------------------------------------------------------
July 31, April 30, October
(Canadian equivalent) 2012 2012 31, 2011
----------------------------------------------------------------------------
Market value exposure (MVE) (pre-tax) (608.9) (685.8) (685.9)
12-month earnings volatility (EV) (after-
tax) (80.4) (83.2) (95.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Losses are in brackets. Measured at a 99% confidence interval.
Structural Balance Sheet Earnings and Value Sensitivity to Changes in
Interest Rates ($ millions)(i) (ii)
----------------------------------------------------------------------------
Economic value sensitivity Earnings sensitivity over the
(Pre-tax) next 12 months (After-tax)
--------------------------------------------- ------------------------------
(Canadian July 31, April 30, October July 31, April 30, October
equivalent) 2012 2012 31, 2011 2012 2012 31, 2011
----------------------------------------------------------------------------
100 basis point
increase (538.9) (562.6) (614.3) 16.5 26.1 24.8
100 basis point
decrease 402.5 307.1 441.8 (79.7) (81.1) (102.5)
200 basis point
increase (1,242.9) (1,244.6) (1,295.7) 24.2 43.0 69.3
200 basis point
decrease 806.7 724.6 829.4 (74.9) (34.7) (63.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Losses are in brackets and benefits are presented as positive numbers.
(ii) For BMO's insurance businesses, a 100 basis point increase in interest
rates at July 31, 2012, results in an increase in earnings after tax of
$94 million and an increase in before tax economic value of $646
million ($96 million and $553 million, respectively, at April 30, 2012;
and $88 million and $436 million, respectively, at October 31, 2011). A
100 basis point decrease in interest rates at July 31, 2012, results in
a decrease in earnings after tax of $89 million and a decrease in
before tax economic value of $742 million ($86 million and $634
million, respectively, at April 30, 2012; and $82 million and $494
million, respectively, at October 31, 2011). These impacts are not
reflected in the table above.
Income Taxes
As explained in the Revenue section, management assesses BMO's consolidated
results and associated provisions for income taxes on a GAAP basis. We assess
the performance of the operating groups and associated income taxes on a taxable
equivalent basis and report accordingly.
The provision for income taxes of $187 million increased $26 million from the
third quarter of 2011 and decreased $50 million from the second quarter of 2012.
The effective tax rate for the quarter was 16.2%, compared with 18.5% a year ago
and 18.7% in the second quarter. The lower effective tax rate in the current
quarter relative to the third quarter of 2011 was primarily due to a 1.6
percentage point reduction in the statutory Canadian income tax rate in 2012 and
a change in Ontario statutory tax rates that resulted in a positive revaluation
of deferred tax assets. The lower effective tax rate in the current quarter
relative to the second quarter of 2012 was primarily due to higher tax exempt
income and the change in Ontario statutory tax rates.
The adjusted effective tax rate was 16.9% in the current quarter, compared with
19.7% in the third quarter of 2011 and 19.5% in the second quarter of 2012. The
adjusted tax rate is computed using adjusted net income rather than net income
in the determination of income subject to tax.
As explained in the Provision for Income Taxes section of BMO's 2011 annual
MD&A, to manage the impact of foreign exchange rate changes on BMO's investments
in foreign operations, BMO may hedge foreign exchange risk by partially or fully
funding its foreign investment in U.S. dollars. The gain or loss from such
hedging and the unrealized gain or loss from translation of the investments in
U.S. operations are charged or credited to shareholders' equity. For income tax
purposes, the gain or loss on the hedging activities results in an income tax
charge or credit in the current period in shareholders' equity, while the
associated unrealized gain or loss on the investments in U.S. operations does
not incur income taxes until the investments are liquidated. The income tax
charge or benefit arising from such hedging gains or losses is a function of the
fluctuation in the Canadian/U.S. exchange rate from period to period. This
hedging of the investments in U.S. operations has given rise to an income tax
recovery in shareholders' equity of $24 million for the quarter and $18 million
for the year to date. Refer to the Consolidated Statement of Comprehensive
Income included in the unaudited interim consolidated financial statements for
further details. Information on additional hedging of our foreign exchange
exposure due to investments in foreign operations is, with respect to the
mitigation of potential volatility in our capital ratios, described below in the
Capital Management Q3 2012 Regulatory Capital Review section.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Summary Quarterly Results Trends (1) (2)
(Canadian $
in millions,
except as Q1- Q4- Q3- Q2- Q1- Q4-
noted) Q3-2012 Q2-2012 2012 2011 2011 2011 2011 2010(2)
----------------------------------------------------------------------------
Total revenue 3,878 3,959 4,117 3,822 3,320 3,333 3,468 3,236
Provision for
credit
losses -
specific 229 195 122 299 245 265 317 253
Provision for
credit
losses -
collective 8 - 19 63 (15) 32 6 -
Non-interest
expense 2,484 2,499 2,554 2,432 2,221 2,030 2,058 2,030
Reported net
income 970 1,028 1,109 768 708 813 825 757
Adjusted net
income 1,013 982 972 832 856 770 817 766
----------------------------------------------------------------------------
Basic
earnings per
share ($) 1.42 1.52 1.65 1.12 1.10 1.34 1.36 1.25
Diluted
earnings per
share ($) 1.42 1.51 1.63 1.11 1.09 1.32 1.34 1.24
Adjusted
diluted
earnings per
share ($) 1.49 1.44 1.42 1.20 1.34 1.25 1.32 1.26
Net interest
margin on
earning
assets (%) 1.88 1.89 2.05 2.01 1.76 1.82 1.78 1.89
Adjusted net
interest
margin on
earning
assets (%) 1.70 1.76 1.85 1.78 1.78 1.83 1.79 1.89
Effective
income tax
rate (%) 16.2 18.7 22.0 25.3 18.5 19.2 24.1 20.6
Canadian/U.S.
dollar
exchange
rate
(average) 1.02 0.99 1.01 1.01 0.96 0.96 1.01 1.04
Reported net
income:
P&C Canada 453 446 446 439 443 414 477 427
P&C U.S. 129 121 137 155 90 53 54 46
----------------------------------------------------------------------------
Personal and
Commercial
Banking 582 567 583 594 533 467 531 473
Private
Client Group 109 145 105 137 104 91 144 120
BMO Capital
Markets 232 225 198 143 270 229 260 214
Corporate
Services,
including
T&O 47 91 223 (106) (199) 26 (110) (50)
----------------------------------------------------------------------------
BMO Financial
Group net
income 970 1,028 1,109 768 708 813 825 757
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net
income:
P&C Canada 456 449 448 441 444 417 479 429
P&C U.S. 145 136 154 172 99 57 59 51
----------------------------------------------------------------------------
Personal and
Commercial
Banking 601 585 602 613 543 474 538 480
Private
Client Group 115 150 110 143 105 93 145 121
BMO Capital
Markets 232 226 198 143 270 229 260 214
Corporate
Services,
including
T&O 65 21 62 (67) (62) (26) (126) (49)
----------------------------------------------------------------------------
BMO Financial
Group
adjusted net
income 1,013 982 972 832 856 770 817 766
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted results in this chart are non-GAAP amounts or non-GAAP
measures. Please see the Non-GAAP Measures section.
(2) Amounts for Q4-2010 have not been restated to conform to IFRS. See
discussion that follows.
BMO's quarterly earning trends were reviewed in detail on pages 98 and 99 of
BMO's 2011 annual MD&A. Readers are encouraged to refer to that review for a
more complete discussion of trends and factors affecting past quarterly results
including the modest impact of seasonal variations in results. The above table
outlines summary results for the fourth quarter of fiscal 2010 through the third
quarter of fiscal 2012.
Effective November 1, 2011, BMO's financial statements are prepared in
accordance with IFRS. The consolidated financial statements for comparative
periods in fiscal year 2011 have been restated. Our financial results for the
one quarter in fiscal 2010 listed above, however, have not been restated and are
still being presented in accordance with Canadian GAAP as defined at that time.
We have remained focused on our objectives and priorities and have made good
progress in embracing a culture that places the customer at the centre of
everything we do. Economic conditions were at times challenging for some of our
businesses in 2011, but overall conditions improved and we have maintained our
focus on our vision and strategy, while also reporting improved results in 2011
and 2012. These improved results generally reflect a trend toward stronger
revenues, reduced provisions for credit losses and increased net income,
although adjusted results in the fourth quarter of 2011 were weaker due to the
impact of concerns over the European debt situation. Expenses increased in 2011,
reflecting acquisitions, initiative spending and business growth. Results in the
first three quarters of 2012 were strong.
In July 2011, we completed the acquisition of M&I for share consideration,
significantly growing our operations in the United States.
P&C Canada has performed well with generally increasing revenues and
profitability, and good revenue increase in the commercial businesses, driven by
volume growth across most products. Net income has generally trended higher in
2011 and into the first nine months of 2012, with revenue and expense growth
moderating during that period.
P&C U.S. has operated in a difficult economic environment since 2007. The
economic environment led to a drop in loan utilization, which affected revenue
growth and net income. Results improved significantly in 2011 and into 2012 as
we are realizing the benefit of the acquired business late in the third quarter
of 2011 and seeing commercial loan utilization starting to increase.
Beginning in the third quarter of 2011, Private Client Group results reflect the
acquisitions of the Lloyd George Management group of companies and the M&I
wealth management business. Recent quarterly results have generally reflected
continued growth in Private Client Group excluding insurance. Insurance results
were lowered in the first quarter and third quarter of 2012 by the effects of
changes in long-term interest rates. Private Client Group results are subject to
variability due to reinsurance charges and the effects of long-term interest
rate movements on our insurance business.
BMO Capital Markets results in the first quarter of 2011 were particularly
strong, while second quarter results returned to normal levels and third quarter
results benefited from tax recoveries related to prior periods. Results were
down in the fourth quarter of 2011 due to a difficult market environment. Net
income has trended higher in 2012 although the market environment remains
uncertain.
Corporate Services reported results are affected by adjusting items. Adjusted
results have been generally more consistent, reflecting decreased provisions for
credit losses and better revenues.
The effective income tax rate can vary as it depends on the timing of resolution
of certain tax matters, recoveries of prior periods' income taxes and the
relative proportion of earnings attributable to the different jurisdictions in
which we operate.
The U.S. dollar has generally weakened over the past two years. It weakened
further in 2011 to levels close to parity, although the decrease in its value
was less pronounced than in 2010. The U.S. dollar strengthened slightly in the
first quarter of 2012, weakened in the second quarter, and then strengthened
again in the third quarter. A stronger U.S. dollar increases the translated
values of BMO's U.S.-dollar-denominated revenues and expenses.
Balance Sheet
Total assets of $542.2 billion at July 31, 2012, increased $41.7 billion from
October 31, 2011, with minimal impact from the stronger U.S. dollar. The
increase primarily reflects growth in net loans and acceptances of $14.5
billion, cash and cash equivalents and interest bearing deposits with banks of
$13.9 billion, securities of $8.1 billion and securities borrowed or purchased
under resale agreements of $7.6 billion. All remaining assets declined by a
combined $2.4 billion.
The $14.5 billion increase in net loans and acceptances was primarily due to an
increase in loans to businesses and governments of $8.0 billion across most
operating groups and an increase in residential mortgages of $4.5 billion in P&C
Canada. Other loans and acceptances had a net increase totalling $2.0 billion.
The $13.9 billion increase in cash and cash equivalents and interest bearing
deposits with banks was primarily due to increased balances held with the
Federal Reserve.
The $8.1 billion increase in securities resulted primarily from an increase in
available-for-sale securities.
The $7.6 billion increase in securities borrowed or purchased under resale
agreements was mainly due to increased client-driven activities.
The $2.4 billion decrease in other items was primarily related to decreases in
derivative assets primarily related to U.S. equities.
Liabilities and equity increased $41.7 billion from October 31, 2011. The change
primarily reflects increases in deposits of $26.6 billion, securities lent or
sold under repurchase agreements of $15.1 billion, securities sold but not yet
purchased of $2.3 billion and shareholders' equity of $1.6 billion. All
remaining liabilities decreased by a combined $3.9 billion.
The $26.6 billion increase in deposits was largely driven by a $24.5 billion
increase in business and government deposits, which grew in both the United
States and Canada. Deposits by banks increased $2.4 billion, while deposits by
individuals decreased $0.3 billion.
The $15.1 billion increase in securities lent or sold under repurchase
agreements was mainly due to increased client-driven activities.
The $3.9 billion decrease in other items was largely related to the windup of
one of the bank's mortgage securitization vehicles.
The $2.3 billion increase in securities sold but not yet purchased was primarily
due to increased hedging requirements in BMO Capital Markets.
The increase in shareholders' equity of $1.6 billion reflects growth in retained
earnings.
Contractual obligations by year of maturity are outlined in Table 20 on page 110
of BMO's 2011 Annual Report, in accordance with Canadian GAAP as defined at that
time. On this basis, there have been no material changes to contractual
obligations that are outside the ordinary course of our business.
Capital Management
Q3 2012 Regulatory Capital Review
BMO's capital position remains strong, with a Common Equity Ratio (based on
Basel II) of 10.31%, and a Basel II Tier 1 Capital Ratio of 12.40% at July 31,
2012. Common Equity and Tier 1 capital were $21.1 and $25.4 billion,
respectively. Risk-weighted assets (RWA) were $205 billion at July 31, 2012.
The Common Equity Ratio increased 72 basis points from the end of fiscal 2011
due to higher common equity and lower RWA, as described below. The Basel II Tier
1 Capital Ratio increased 39 basis points from the end of fiscal 2011. Relative
to the second quarter, the Common Equity Ratio and Tier 1 Capital Ratio
increased 41 and 43 basis points, respectively.
Effective November 1, 2011, BMO adopted IFRS, which impacts our capital ratios.
The transition to IFRS reduces RWA and lowers retained earnings. As such, the
adoption of IFRS will ultimately reduce BMO's Basel II Tier 1 Capital Ratio and
Total Capital Ratio by approximately 60 and 55 basis points, respectively, and
increase the assets to capital multiple by 1.45x. Using transition guidance from
the Office of the Superintendent of Financial Institutions Canada (OSFI), BMO
has elected to phase in the impact of lower Tier 1 capital over a five-quarter
period and, as such, the impact of IFRS lowered our Basel II Tier 1 Capital
Ratio and Total Capital Ratio at the end of the third quarter by 32 and 28 basis
points, respectively. The impact of lower RWA is not phased in and was fully
recognized in the first quarter of 2012.
Basel II RWA of $205 billion at July 31, 2012, was $4 billion lower than October
31, 2011, due mainly to lower RWA related to the adoption of IFRS described
above, improved risk assessments and lower RWA related to securitized assets.
These factors were partly offset by the requirements for additional Stress VaR
RWA under the Basel 2.5 rules and the impact of the weakening Canadian dollar on
U.S.-dollar-denominated RWA.
Common equity (on a Basel II basis) at July 31, 2012, increased $1.1 billion
from $20.0 billion at October 31, 2011, due to retained earnings growth and the
issuance of common shares through the Shareholder Dividend Reinvestment and
Share Purchase Plan and the exercise of stock options. These factors were partly
offset by higher deductions under Basel 2.5 rules.
Common equity growth was partly offset by adjustments to retained earnings as
part of the transition to IFRS, which, as noted above, is phased in over five
quarters, and by higher Basel II capital deductions due to the expiry of
grandfathering rules related to capital deductions for insurance subsidiaries
held prior to January 1, 2007. Excluding these adjustments, common equity
increased by $2.2 billion.
The bank's Basel II Tier 1 capital increased $0.3 billion from October 31, 2011,
with growth in common equity partially offset by the redemption of $400 million
BMO BOaTS - Series C in December 2011 and US$300 million Class B Preferred
Shares Series 10 in February 2012.
BMO's Basel II Total Capital Ratio was 14.78% at July 31, 2012. The ratio was
down modestly from the end of 2011 and from the second quarter. Total capital
decreased $0.7 billion from the end of 2011 to $30.3 billion, primarily due to
the factors outlined above and the redemption of $1.2 billion of subordinated
Series D Medium-Term Notes Second Tranche in June 2012.
BMO's Assets-to-Capital Multiple, a leverage ratio monitored by OSFI, was 15.8
at July 31, 2012. Under OSFI rules, a bank's total assets should be no greater
than 20 times its available capital, but OSFI may prescribe a lower multiple or
approve a multiple of up to 23, depending on a bank's circumstances.
BMO's investments in U.S. operations are primarily denominated in U.S. dollars.
As discussed in the preceding Income Taxes section, foreign exchange gains or
losses on the translation of the investments in foreign operations to Canadian
dollars are reported in shareholders' equity (although they do not attract tax
until realized). When coupled with the foreign exchange impact of
U.S.-dollar-denominated RWA on Canadian-dollar equivalent RWA, and with the
impact of U.S.-dollar-denominated capital deductions on our Canadian dollar
capital, this may result in volatility in the bank's capital ratios. BMO may, as
discussed in the Income Taxes section, partially hedge this foreign exchange
risk by funding its foreign investment in U.S. dollars and, to reduce the impact
of foreign exchange rate changes on the bank's capital ratios, may enter into
forward currency contracts or elect to fund its investment in Canadian dollars.
Pending Basel III Regulatory Capital Changes
The Basel III capital rules, which will come into effect in January 2013, have
now been described by OSFI in drafts disclosed for public consultation and BMO's
Basel III capital ratios are well-positioned for the adoption of the new
requirements.
We consider the Common Equity Ratio to be the primary capital ratio under Basel
III. Based on our analysis and assumptions, BMO's pro-forma July 31, 2012,
Common Equity Ratio would be 8.3%, approximately 65 basis points higher than the
pro-forma ratio at the end of the prior quarter. This increase was primarily due
to common equity growth (largely from retained earnings) and lower capital
deductions. OSFI indicated in a public letter dated February 1, 2011, that it
expects deposit-taking institutions to meet the Basel III capital requirements,
including a 7% Common Equity Ratio target (4.5% minimum plus 2.5% capital
conservation buffer), early in the Basel III transition period, which commences
at the start of 2013. BMO currently surpasses these expectations on a pro-forma
basis.
The bank's regulatory common equity, defined as common equity net of applicable
regulatory capital adjustments, would decrease by approximately $2.3 billion
from $20.5 billion under Basel II, based on full phase in of IFRS impacts, to
$18.2 billion under Basel III, both as at July 31, 2012.
Our RWA at July 31, 2012, would increase by approximately $16 billion from $205
billion under Basel II to $221 billion under Basel III, primarily due to higher
counterparty credit risk RWA of $13.3 billion as well as the conversion of
certain existing Basel II capital deductions to RWA.
The Basel III pro-forma Tier 1 Capital Ratio at July 31, 2012, would be 9.9%, an
increase of approximately 35 basis points from the prior quarter.
Under Basel III, Tier 1 capital at July 31, 2012, would decrease by
approximately $3.1 billion from $24.9 billion under Basel II to $21.8 billion,
based on full phase in of IFRS impacts.
BMO's pro-forma Tier 1 Capital Ratio, Total Capital Ratio and Leverage Ratio
exceed Basel III minimum requirements.
The pro-forma calculations and statements in this section assume full
implementation of announced Basel III regulatory capital requirements and
proposals. In calculating the bank's Basel III Tier 1 Capital Ratio, Basel III
Total Capital Ratio and Leverage Ratio, we also assumed that BMO's current
non-common share Tier 1 and Tier 2 capital instruments were fully included in
regulatory capital. These instruments do not meet Basel III capital requirements
and will be subject to grandfathering provisions and phased out at 10% per annum
over a nine-year period beginning January 1, 2013. We expect to be able to
refinance non-common share capital instruments as and when necessary in order to
meet applicable non-common share capital requirements.
The Basel III pro-forma ratios do not reflect future management actions that may
be taken to help mitigate the impact of the changes, the benefit of future
growth in retained earnings, additional rule changes or factors beyond
management's control.
Additional information on Basel III regulatory capital changes is available in
the Enterprise-Wide Capital Management section on pages 61 to 65 of BMO's 2011
annual MD&A.
Other Capital Developments
During the quarter, 3,574,000 common shares were issued through the Shareholder
Dividend Reinvestment and Share Purchase Plan and the exercise of stock options.
During the quarter, we redeemed all $1.2 billion of subordinated Series D
Medium-Term Notes Second Tranche.
On August 28, 2012, BMO announced that the Board of Directors declared a
quarterly dividend payable to common shareholders of $0.72 per share, an
increase of two cents per share from a year ago and from the preceding quarter.
The increase in our dividend reflects our strong capital position, the success
of our business strategies and our confidence in our continued ability to
generate sustained earnings growth.
The bank also changed its target dividend payout range (common share dividends
as a percentage of net income attributable to shareholders less preferred share
dividends) to 40-50% from 45-55%.
This change is consistent with our objective of maintaining capital flexibility
to execute on our growth strategies and considers the higher capital
expectations resulting from Basel III.
The dividend is payable November 28, 2012, to shareholders of record on November
1, 2012. Common shareholders may elect to have their cash dividends reinvested
in common shares of the bank in accordance with the bank's Shareholder Dividend
Reinvestment and Share Purchase Plan ("Plan"). Under the Plan, the Board of
Directors determines whether the common shares will be purchased in the
secondary market or issued by the bank from treasury. For the dividend payable
on November 28 2012, given the strength of the bank's capital position, the
common shares purchased under the Plan will be issued from treasury without a
discount. Previously, common shares purchased under the Plan were issued at a
two per cent discount from the average market price of the common shares, as
defined in the Plan.
Qualifying Regulatory Capital
Basel II Regulatory Capital and Risk-Weighted Assets
(Canadian $ in millions) Q3-2012 Q4-2011
----------------------------------------------------------------------------
Gross common shareholders' equity 25,605 24,455
IFRS phase in not applicable to common equity 44 -
Goodwill and excess intangible assets (3,732) (3,585)
Securitization-related deductions (31) (168)
Expected loss in excess of allowance - AIRB Approach (75) (205)
Substantial investments/Investments in insurance
subsidiaries (607) (481)
Other deductions (86) -
----------------------------------------------------------------------------
Adjusted common shareholders' equity 21,118 20,016
Non-cumulative preferred shares 2,465 2,861
Innovative Tier 1 Capital Instruments 1,847 2,156
Non-controlling interest in subsidiaries 16 38
IFRS phase in only applicable to Tier 1 capital (44) -
----------------------------------------------------------------------------
Adjusted Tier 1 Capital 25,402 25,071
----------------------------------------------------------------------------
Subordinated debt 4,386 5,896
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on
available-for-sale equity securities 68 7
Eligible portion of collective allowance for credit
losses 331 309
----------------------------------------------------------------------------
Total Tier 2 Capital 5,585 7,012
Securitization-related deductions (31) (31)
Expected loss in excess of allowance - AIRB Approach (75) (205)
Substantial Investments/Investment in insurance
subsidiaries (607) (855)
----------------------------------------------------------------------------
Adjusted Tier 2 Capital 4,872 5,921
----------------------------------------------------------------------------
Total Capital 30,274 30,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk-Weighted Assets
(Canadian $ in millions) Q3-2012 Q4-2011
----------------------------------------------------------------------------
Credit risk 172,050 179,092
Market risk 7,320 4,971
Operational risk 25,417 24,609
----------------------------------------------------------------------------
Total risk-weighted assets 204,787 208,672
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Caution
The foregoing Capital Management sections contain forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
The foregoing Capital Management sections contain adjusted results and measures,
which are non-GAAP. Please see the Non-GAAP Measures section.
Outstanding Shares and Securities Convertible into Common Shares
Number of shares or
As at August 22, 2012 dollar amount
------------------------------------------------------------------------
Common shares 646,944,000
Class B Preferred Shares
Series 5 $ 200,000,000
Series 13 $ 350,000,000
Series 14 $ 250,000,000
Series 15 $ 250,000,000
Series 16 $ 300,000,000
Series 18 $ 150,000,000
Series 21 $ 275,000,000
Series 23 $ 400,000,000
Series 25 $ 290,000,000
Stock options
- vested 8,934,000
- non-vested 7,955,000
------------------------------------------------------------------------
------------------------------------------------------------------------
Details on share capital are outlined in the 2011 Annual Report in Note 20
to the audited consolidated financial statements on pages 154 to 155.
Eligible Dividends Designation
For the purposes of the Income Tax Act (Canada) and any similar provincial and
territorial legislation, BMO designates all dividends paid or deemed to be paid
on both its common and preferred shares as "eligible dividends", unless
indicated otherwise.
Credit Rating
The credit ratings assigned to BMO's short-term and senior long-term debt
securities by external rating agencies are important in the raising of both
capital and funding to support our business operations. Maintaining strong
credit ratings allows us to access the capital markets at competitive pricing
levels. Should our credit ratings experience a material downgrade, our cost of
funds would likely increase significantly and our access to funding and capital
through capital markets could be reduced. A material downgrade of our ratings
could have other consequences, including those set out in Note 10 on page 140 of
our annual consolidated financial statements.
BMO's senior debt credit ratings were unchanged in the quarter and have a stable
outlook. All four ratings are indicative of high-grade, high-quality issues. The
ratings are as follows: DBRS (AA); Fitch (AA-); Moody's (Aa2); and Standard &
Poor's (S&P) (A+). These credit ratings are also disclosed for the current and
prior periods in the Financial Highlights section located near the beginning of
this document.
Transactions with Related Parties
In the ordinary course of business, we provide banking services to our directors
and executives and affiliated entities, joint ventures and equity-accounted
investees on the same terms that we offer to our customers for those services. A
select suite of customer loan and mortgage products is offered to our employees
at rates normally made available to our preferred customers. We also offer
employees a fee-based subsidy on annual credit card fees.
Stock options and deferred share units granted to directors and preferred rate
loan agreements for executives, relating to transfers we initiate, are all
discussed in Note 27 to the audited consolidated financial statements on page
169 of BMO's 2011 Annual Report.
Off-Balance-Sheet Arrangements
BMO enters into a number of off-balance-sheet arrangements in the normal course
of operations. The most significant of these are Credit Instruments, Special
Purpose Entities and Guarantees, which are described on pages 66 to 68 and 70 of
BMO's 2011 annual MD&A as well as in Notes 5 and 7 to the unaudited interim
consolidated financial statements for the quarter ended April 30, 2012. Under
IFRS, we now consolidate our structured credit vehicles, U.S. customer
securitization vehicle, BMO Capital Trust II and BMO Subordinated Notes Trust.
See the Select Financial Instruments section for comments on any significant
changes to these arrangements during the quarter ended July 31, 2012.
Accounting Policies and Critical Accounting Estimates
Effective the first quarter of 2012, BMO's consolidated financial statements are
prepared in accordance with IFRS. Significant accounting policies under IFRS are
described in the notes to our unaudited interim consolidated financial
statements for the quarter ended April 30, 2012, together with a discussion of
certain accounting estimates that are considered particularly important as they
require management to make significant judgments, some of which relate to
matters that are inherently uncertain. Readers are encouraged to review that
discussion. The consolidated financial statements for comparative periods have
been restated to conform to the current presentation. Our consolidated financial
statements were previously prepared in accordance with Canadian GAAP as defined
at that time. Changes in accounting as a result of conforming to IFRS are
described more fully in Note 19 to our unaudited interim consolidated financial
statements for the quarter ended April 30, 2012, and on pages 73 to 77 of BMO's
2011 annual MD&A.
Future Changes in Accounting Policies
The International Accounting Standards Board has issued amendments to the
standard for financial instrument disclosures, which require additional
disclosure on the transfer of financial assets, including the possible effects
of any residual risks that the transferring entity retains. These amendments
will be effective for BMO for our annual disclosures as at October 31, 2012. In
addition, effective November 1, 2013, we will also adopt new standards on
Employee Benefits, Fair Value Measurement, Consolidated Financial Statements,
Investment in Associates and Joint Ventures, Offsetting, and Disclosure of
Interests in Other Entities. Additional information on the new standards and
amendments to existing standards can be found in Note 1 to the unaudited interim
consolidated financial statements for the quarter ended April 30, 2012.
The above Future Changes in Accounting Policies section contains forward-looking
statements. Please see the Caution Regarding Forward-Looking Statements.
Select Financial Instruments
Pages 65 to 69 of BMO's 2011 annual MD&A provide enhanced disclosure relating to
select financial instruments that, commencing in 2008 and based on subsequent
assessments, markets had come to regard as carrying higher risk. Readers are
encouraged to review that disclosure to assist in understanding the nature and
extent of BMO's exposures. We follow a practice of reporting on significant
changes in the select financial instruments, if any, in our interim MD&A.
Under IFRS, we now consolidate our structured investment vehicle, our Canadian
credit protection vehicle and our U.S. customer securitization vehicle. There
has been no change to the structure of our economic exposure.
The amount drawn on the liquidity facility BMO provides for the structured
investment vehicle Links Finance Corporation (Links) was lowered to US$1.8
billion at the end of the quarter, down from US$2.1 billion at April 30, 2012,
and US$2.6 billion at the end of fiscal 2011. The decrease was attributable to
asset sales and asset maturities. The book value of the Links' subordinated
capital notes at quarter-end was US$399 million, compared with US$407 million at
April 30, 2012, and US$440 million at October 31, 2011.
Select Geographic Exposures
BMO's geographic exposure is subject to a country risk management framework that
incorporates economic and political assessments, and management of exposure
within limits based on product, entity and the country of ultimate risk. We are
closely monitoring our European exposure, and our risk management processes
incorporate stress tests where appropriate to assess our potential risk. Our
exposure to select countries of interest, as at July 31, 2012, is set out in the
tables that follow, which summarize our exposure to Greece, Ireland, Italy,
Portugal and Spain (GIIPS) along with a broader group of countries of interest
in Europe with gross exposures greater than $500 million.
The first table outlines portfolio total gross and net exposures for lending,
securities (inclusive of credit exposures arising from credit default swap (CDS)
activity), repo-style transactions and derivatives (counterparty). These totals
are broken down by counterparty type in the subsequent tables. For greater
clarity, CDS exposure by counterparty is detailed separately.
The bank's direct exposures to GIIPS are primarily to banks for trade finance
and trading products. Net exposures remain modest at $149 million, plus $48
million of unfunded commitments. In addition, our Irish subsidiary is required
to maintain reserves with the Irish central bank. These totalled $78 million at
the end of the quarter.
Our net direct exposure to the other Eurozone countries (the other 12 countries
that share a common Euro currency) totalled approximately $4.5 billion, of which
70% was to counterparties in countries with a Aaa/AAA rating by both Moody's and
S&P, with approximately 96% rated Aaa/AAA by one or other of the rating
agencies. Our net direct exposure to the rest of Europe totalled approximately
$3.5 billion, of which 93% was to counterparties in countries with a Moody's/S&P
rating of Aaa/AAA. A significant majority of our sovereign exposure consists of
tradeable cash products, while exposure to banks was comprised of trading
instruments, short-term debt, derivative positions and letters of credit and
guarantees.
In addition to the exposures shown in the table, we have exposure to European
supranational institutions totalling $0.47 billion, predominantly in the form of
tradeable cash products, as well as $0.13 billion of European Central Bank
exposure.
The bank also has exposure to entities in a number of European countries through
our credit protection vehicle, U.S. customer securitization vehicle and
structured investment vehicle. These exposures are not included in the tables
due to the credit protection incorporated in their structures. The bank has
direct credit exposure to those structures, which in turn have exposures to
loans or securities originated by entities in Europe. As noted on pages 67 to 68
of BMO's 2011 annual MD&A, these structures all have first-loss protection and
hedges are in place for our credit protection vehicle.
The notional exposure held in our credit protection vehicle to issuers in
Greece, Italy and Spain represented 0.5%, 1.4% and 1.1%, respectively, of its
total notional exposure. The credit protection vehicle had notional exposure to
7 of the other 12 countries that share the Euro currency. This exposure
represented 14.3% of total notional exposure, of which 77.0% was rated
investment grade by S&P (68.0% by Moody's). The notional exposure to the
remainder of Europe was 16.8% of the total notional exposure, with 69.9% rated
investment grade by S&P (64.9% by Moody's). The bank is well protected as a
result of both first-loss protection and hedges that are in place.
The bank has exposure to GIIPS and other European countries through our U.S.
customer securitization vehicle, which has reliance on 1.88% of loans or
securities originated by entities in Europe. Exposure to Germany is the largest
at 0.63%. Exposure to Spain is approximately 0.11%, to Italy is 0.01% and there
is no exposure to Ireland, Greece or Portugal.
The structured investment vehicle's par value exposure to entities in European
countries totalled $817 million, of which $0.2 million is exposure to GIIPS,
$283 million to the other Eurozone countries and $534 million to the rest of
Europe. The largest exposures include the United Kingdom at $469 million and
Netherlands at $179 million. These values include exposure through
collateralized bond obligation (CBO), collateralized loan obligation (CLO)
investments and residential mortgage-backed securities, which have credit
exposures to borrowers or issuers operating in Europe.
BMO's indirect exposure to Europe in the form of Euro-denominated collateral to
support trading activity was EUR473 million in securities issued by entities in
European countries and EUR259 million of cash collateral at July 31, 2012. Of
this amount, EUR5 million was held in GIIPS related securities and EUR261
million was in German securities.
Indirect exposure by way of guarantees from entities in European countries
totalled $436 million, of which $2 million is exposure to GIIPS, $208 million to
the other Eurozone countries and $226 million to the rest of Europe. Indirect
exposure is managed through our credit risk management framework, with a robust
assessment of the counterparty. Reliance may be placed on collateral or
guarantees as part of specific product structures, such as repurchase
agreements.
The bank's CDS exposures in Europe are also outlined in a table that follows. As
part of our credit risk management framework, purchased CDS risk is controlled
through a regularly reviewed list of approved counterparties. The majority of
CDS exposures are offsetting in nature, typically contain matched contractual
terms and are attributable to legacy credit trading strategies that have been in
run-off since 2008. Maturity mismatches in the run-off portfolio are not
material, and where they exist, the purchased credit protection generally
extends beyond the maturity date of the offsetting bond or CDS contract. There
is one exception where the purchased protection expires prior to the maturity of
the offsetting sold protection contract, and on this exception the open credit
exposure is not material and extends for less than one month. This exposure is
outside of the GIIPS countries and has been netted in the tables. In addition,
two European exposures totalling EUR50 million of sold protection are hedged on
a proxy basis. The credit benefit realized through the proxy hedge has not been
netted in the tables. Of this exposure, EUR20 million is to Italian
counterparties while the remainder is outside of the GIIPS countries.
European Exposure(7) by Country (Canadian $ in millions)
As at July 31, 2012
Repo-Style
Lending(1) Securities(2) Trans(3)
-------------------- ---------------- ----------------
Country Commitments Funded Gross Net Gross Net
----------------------------------------- ---------------- ----------------
GIIPS
Greece 2 2 - - - -
Ireland(5) - - 28 - - -
Italy 2 2 248 25 65 5
Portugal 67 19 125 - - -
Spain 85 85 254 - - -
----------------------------------------------------------------------------
Total - GIIPS 156 108 655 25 65 5
----------------------------------------------------------------------------
Eurozone (excluding
GIIPS)
France 40 40 1,013 768 1,828 1
Germany 164 164 2,229 1,735 1,924 12
Netherlands 285 169 667 542 1,311 2
Other(6) 398 248 914 703 - -
----------------------------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 887 621 4,823 3,748 5,063 15
----------------------------------------------------------------------------
Rest of Europe
Denmark 7 7 704 703 212 -
Norway 12 12 1,045 1,045 - -
Sweden 58 25 279 207 261 1
United Kingdom 360 188 1,086 553 2,362 4
Other(6) 610 601 597 - 132 2
----------------------------------------------------------------------------
Total - Rest of
Europe 1,047 833 3,711 2,508 2,967 7
----------------------------------------------------------------------------
Total - All of Europe 2,090 1,562 9,189 6,281 8,095 27
----------------------------------------------------------------------------
European Exposure(7) by Country (Canadian $ in
millions)
As at July 31, 2012
Derivatives(4) Total
---------------- ----------------
Country Gross Net Gross Net
------------------------------------- ----------------
GIIPS
Greece - - 2 2
Ireland(5) 58 1 86 1
Italy 11 7 326 39
Portugal - - 192 19
Spain 7 3 346 88
------------------------------------------------------
Total - GIIPS 76 11 952 149
------------------------------------------------------
Eurozone (excluding
GIIPS)
France 336 41 3,217 850
Germany 85 29 4,402 1,940
Netherlands 92 11 2,355 724
Other(6) 116 56 1,428 1,007
------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 629 137 11,402 4,521
------------------------------------------------------
Rest of Europe
Denmark 2 - 925 710
Norway 19 19 1,076 1,076
Sweden 5 - 603 233
United Kingdom 516 101 4,324 846
Other(6) 47 26 1,386 629
------------------------------------------------------
Total - Rest of
Europe 589 146 8,314 3,494
------------------------------------------------------
Total - All of Europe 1,294 294 20,668 8,164
------------------------------------------------------
Details of the summary amounts reflected in the columns above are
provided in the tables that follow.
(1) Lending includes loans and trade finance. Amounts are net of write-offs
and gross of specific allowances, both of which are not considered
material.
(2) Securities include cash products, insurance investments and traded
credit. Gross traded credit includes only the long positions and
excludes offsetting short positions.
(3) Repo-style transactions are all with bank counterparties.
(4) Derivatives amounts are marked-to-market, incorporating transaction
netting and, for counterparties where a Credit Support Annex is in
effect, collateral offsets. Derivative replacement risk net of
collateral for all of Europe is approximately $3.0 billion.
(5) Does not include Irish subsidiary reserves with Irish Central Bank of
$78 million.
(6) Includes countries with less than $500 million in gross exposure. Other
Eurozone includes exposures to Austria, Belgium, Finland, Luxembourg,
Slovakia and Slovenia . Other Europe includes exposures to Croatia,
Czech Republic, Hungary, Iceland, Poland, Russian Federation and
Switzerland.
(7) The bank also has exposure to entities in a number of European
countries through our credit protection vehicle, U.S. customer
securitization vehicle and structured investment vehicle. These
exposures are not included in the tables due to the credit protection
incorporated in their structures.
(8) Sovereign includes sovereign-backed bank cash products.
European Lending Exposure(7) by Country and Counterparty (Canadian $ in
millions)
As at July 31, 2012
Lending(1)
-----------------------------------------------------------------
Commitments Funded
-------------------------------- --------------------------------
Country Bank Corporate Sovereign Total Bank Corporate Sovereign Total
------------------------------------------- --------------------------------
GIIPS
Greece 2 - - 2 2 - - 2
Ireland(5) - - - - - - - -
Italy 2 - - 2 2 - - 2
Portugal 19 48 - 67 19 - - 19
Spain 85 - - 85 85 - - 85
----------------------------------------------------------------------------
Total -
GIIPS 108 48 - 156 108 - - 108
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 40 - - 40 40 - - 40
Germany 78 5 81 164 78 5 81 164
Netherlands 28 257 - 285 28 141 - 169
Other(6) 344 54 - 398 207 41 - 248
----------------------------------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 490 316 81 887 353 187 81 621
----------------------------------------------------------------------------
Rest of
Europe
Denmark 7 - - 7 7 - - 7
Norway 12 - - 12 12 - - 12
Sweden 23 35 - 58 23 2 - 25
United
Kingdom 85 275 - 360 85 103 - 188
Other(6) 246 364 - 610 246 355 - 601
----------------------------------------------------------------------------
Total -
Rest of
Europe 373 674 - 1,047 373 460 - 833
----------------------------------------------------------------------------
Total - All
of Europe 971 1,038 81 2,090 834 647 81 1,562
----------------------------------------------------------------------------
Refer to footnotes in first table.
European Securities Exposure(7) by Country and Counterparty (Canadian $ in
millions)
As at July 31, 2012
Securities(2)
-----------------------------------------------------------------
Gross Net
-------------------------------- --------------------------------
Sovereign Sovereign
Country Bank Corporate (8) Total Bank Corporate (8) Total
------------------------------------------- --------------------------------
GIIPS
Greece - - - - - - - -
Ireland(5) - 3 25 28 - - - -
Italy 56 81 111 248 - 25 - 25
Portugal - - 125 125 - - - -
Spain 127 83 44 254 - - - -
----------------------------------------------------------------------------
Total -
GIIPS 183 167 305 655 - 25 - 25
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 78 97 838 1,013 - - 768 768
Germany 232 327 1,670 2,229 26 39 1,670 1,735
Netherlands 457 102 108 667 433 8 101 542
Other(6) 160 108 646 914 131 37 535 703
----------------------------------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 927 634 3,262 4,823 590 84 3,074 3,748
----------------------------------------------------------------------------
Rest of
Europe
Denmark 263 1 440 704 263 - 440 703
Norway 392 - 653 1,045 392 - 653 1,045
Sweden 206 72 1 279 206 - 1 207
United
Kingdom 188 423 475 1,086 36 42 475 553
Other(6) 16 52 529 597 - - - -
----------------------------------------------------------------------------
Total -
Rest of
Europe 1,065 548 2,098 3,711 897 42 1,569 2,508
----------------------------------------------------------------------------
Total - All
of Europe 2,175 1,349 5,665 9,189 1,487 151 4,643 6,281
----------------------------------------------------------------------------
Refer to footnotes in first table.
European Repo & Derivatives Exposure(7)by Country and Counterparty (Canadian
$ in millions)
As at July 31, 2012
Repo-Style
Trans.(3) Derivatives(4)
------------------- -------------------------------------
Net of
Gross Collateral Gross
------------------- ------------------------------------
Country Total Total Bank Corporate Sovereign Total
-------------------------------------- ------------------------------------
GIIPS
Greece - - - - - -
Ireland(5) - - 58 - - 58
Italy 65 5 6 5 - 11
Portugal - - - - - -
Spain - - 7 - - 7
----------------------------------------------------------------------------
Total - GIIPS 65 5 71 5 - 76
----------------------------------------------------------------------------
Eurozone (excluding
GIIPS)
France 1,828 1 336 - - 336
Germany 1,924 12 85 - - 85
Netherlands 1,311 2 90 2 - 92
Other(6) - - 107 5 4 116
----------------------------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 5,063 15 618 7 4 629
----------------------------------------------------------------------------
Rest of Europe
Denmark 212 - 2 - - 2
Norway - - 1 - 18 19
Sweden 261 1 5 - - 5
United Kingdom 2,362 4 499 11 6 516
Other(6) 132 2 47 - - 47
----------------------------------------------------------------------------
Total - Rest of
Europe 2,967 7 554 11 24 589
----------------------------------------------------------------------------
Total - All of
Europe 8,095 27 1,243 23 28 1,294
----------------------------------------------------------------------------
European Repo & Derivatives Exposure(7)by Country and
Counterparty (Canadian $ in millions)
As at July 31, 2012
Derivatives(4)
------------------------------------
Net of Collateral
------------------------------------
Country Bank Corporate Sovereign Total
-------------------------------------------------------
GIIPS
Greece - - - -
Ireland(5) 1 - - 1
Italy 2 5 - 7
Portugal - - - -
Spain 3 - - 3
-------------------------------------------------------
Total - GIIPS 6 5 - 11
-------------------------------------------------------
Eurozone (excluding
GIIPS)
France 41 - - 41
Germany 29 - - 29
Netherlands 9 2 - 11
Other(6) 47 5 4 56
-------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 126 7 4 137
-------------------------------------------------------
Rest of Europe
Denmark - - - -
Norway 1 - 18 19
Sweden - - - -
United Kingdom 84 11 6 101
Other(6) 26 - - 26
-------------------------------------------------------
Total - Rest of
Europe 111 11 24 146
-------------------------------------------------------
Total - All of
Europe 243 23 28 294
-------------------------------------------------------
Refer to footnotes in first table.
Credit Default Swaps by Country and Credit Quality
(Canadian $ in millions)
As at July 31, 2012
Fair Value
------------------------------------------
Purchased Written
---------------- -------------------------
Inv.Non-Inv. Inv. Non-Inv. Total
Country Grade Grade Grade Grade Exposure
-------------------------------- -------------------------
GIIPS
Greece - - - - -
Ireland(5) 5 - (5) - -
Italy 16 - (16) - -
Portugal 28 - (28) - -
Spain 15 - (15) - -
----------------------------------------------------------
Total - GIIPS 64 - (64) - -
----------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 2 - (2) - -
Germany 4 - (3) - 1
Netherlands - - - - -
Other(6) 2 - (2) - -
----------------------------------------------------------
Total - Eurozone
(excluding
GIIPS) 8 - (7) - 1
----------------------------------------------------------
Rest of Europe
Denmark - - - - -
Norway - - - - -
Sweden - - 1 - 1
United Kingdom 7 - (5) - 2
Other(6) 17 - (15) - 2
----------------------------------------------------------
Total - Rest of
Europe 24 - (19) - 5
----------------------------------------------------------
Total - All of
Europe 96 - (90) - 6
----------------------------------------------------------
Credit Default Swaps by Country and Credit Quality (Canadian $ in millions)
As at July 31, 2012
Notional
----------------------------------------------------------
Purchased Written
------------------------ -----------------------
Non-
Inv. Inv. Inv.Non-Inv. Total
Country Grade Grade Total Grade Grade Total Exposure
---------------- ------------------------ ----------------------------------
GIIPS
Greece - - - - - - -
Ireland(5) (29) - (29) 29 - 29 -
Italy (236) - (236) 254 - 254 18
Portugal (125) - (125) 125 - 125 -
Spain (214) (6) (220) 210 11 221 1
----------------------------------------------------------------------------
Total - GIIPS (604) (6) (610) 618 11 629 19
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France (330) - (330) 304 - 304 (26)
Germany (733) - (733) 697 25 722 (11)
Netherlands (167) (6) (173) 132 12 144 (29)
Other(6) (241) - (241) 278 - 278 37
----------------------------------------------------------------------------
Total - Eurozone
(excluding
GIIPS) (1,471) (6) (1,477) 1,411 37 1,448 (29)
----------------------------------------------------------------------------
Rest of Europe
Denmark (30) - (30) 30 - 30 -
Norway - - - - - - -
Sweden (97) (6) (103) 103 - 103 -
United Kingdom (603) - (603) 546 43 589 (14)
Other(6) (903) (25) (928) 717 8 725 (203)
----------------------------------------------------------------------------
Total - Rest of
Europe (1,633) (31) (1,664) 1,396 51 1,447 (217)
----------------------------------------------------------------------------
Total - All of
Europe (3,708) (43) (3,751) 3,425 99 3,524 (227)
----------------------------------------------------------------------------
Refer to footnotes in first table.
Notes:
- All purchased and written exposures are with bank counterparties, with the
exception of $56 million (notional) of written protection on German ($31
million) and British ($25 million) reference obligations where the
counterparties are two Canadian domiciled non-bank financial counterparties.
- 25% of purchased and 28% of written exposure is subject to complete
restructuring trigger events.
- 75% of purchased and 71% of written exposure is subject to modified-
modified restructuring trigger events.
U.S. Regulatory Developments
On July 21, 2010, U.S. President Obama signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Act is broad
in scope and the reforms include heightened consumer protection, regulation of
the over-the-counter derivatives markets, restrictions on proprietary trading
and sponsorship of private investment funds by banks (referred to as the Volcker
Rule), imposition of heightened prudential standards and broader application of
leverage and risk-based capital requirements. The reforms also include greater
supervision of systemically significant payment, clearing or settlement systems,
restrictions on interchange fees, and the creation of a new financial stability
oversight council of regulators with the objective of increasing stability by
monitoring systemic risks posed by financial services companies and their
activities. Many provisions of the Dodd-Frank Act continue to be subject to
rulemaking and will take effect over several years, making it difficult to
anticipate at this time the overall impact on BMO or the financial services
industry as a whole. As rulemaking evolves, we are continually monitoring
developments to ensure we are well-positioned to respond to and implement any
required changes. We anticipate an increase in regulatory compliance costs, and
will be focused on managing the complexity and breadth of the regulatory
changes.
The U.S. federal banking agencies, the Securities and Exchange Commission and
the Commodity Futures Trading Commission have issued proposed rules to implement
the Volcker Rule, which prohibits banking entities and their affiliates from
certain proprietary trading and specified relationships with hedge funds and
private equity funds. The agencies recently confirmed that banking entities have
two years from July 21, 2012, to conform all of their activities and
investments, or longer if the period is extended. Banking entities are expected
to engage in good-faith planning efforts and work toward compliance during this
period.
In addition, under the Dodd-Frank Act, over-the-counter derivatives will be
subject to a comprehensive regulatory regime. Certain derivatives will be
required to be centrally cleared or traded on an exchange. Registration,
reporting and business conduct requirements in respect of derivatives have been
finalized and are expected to become effective in October. Capital and margin
requirements relating to derivatives are currently being reviewed by national
and international regulators.
The Board of Governors of the Federal Reserve System (FRB) has issued for
comment a proposed rulemaking (the Proposed Rule) that would implement the
Dodd-Frank Act's enhanced prudential standards and early remediation
requirements. The Proposed Rule would establish new requirements relating to
risk-based capital, leverage limits, liquidity standards, risk-management
framework, concentration and credit exposure limits, resolution planning and
credit exposure reporting. If implemented in its current form, the Proposed Rule
would apply to BMO's U.S. bank holding company subsidiary but not to BMO. The
FRB has indicated that it intends to propose later this year a rule designed
specifically for the top level of foreign-domiciled bank holding companies, such
as BMO.
BMO is currently assessing and preparing for the impact of these proposed rules
on its operations.
The restrictions on interchange fees under the Dodd-Frank Act became effective
on October 1, 2011, and are expected to lower P&C U.S. pre-tax net income on an
annual basis by approximately US$40 million, after the mitigating effects of
related management actions.
Pursuant to FRB requirements, our U.S. subsidiary BMO Financial Corp. (BFC)
submitted a three year capital plan to the FRB in January 2012. The FRB has
informed BFC that it completed its 2012 Capital Plan Review and it did not
object to the proposed capital actions submitted to the FRB pursuant to the
Capital Plan Review. Under current FRB rules, as a bank holding company with
more than $50 billion in assets, BFC is required to participate in an annual
stress test exercise conducted by the FRB and to submit an annual capital plan
to the FRB.
This U.S. Regulatory Developments section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
Review of Operating Groups' Performance
Operating Groups' Summary Income Statements and Statistics for Q3-2012
Q3-2012
---------------------------------------
(Canadian $ in millions, except as Total
noted) P&C PCG BMO CM Corp BMO
----------------------------------------------------------------------------
Net interest income (teb)(1) 1,699 132 317 77 2,225
Non-interest revenue 608 546 489 10 1,653
----------------------------------------------------------------------------
Total revenue (teb)(1) 2,307 678 806 87 3,878
Provision for credit losses 228 4 25 (20) 237
Non-interest expense 1,272 544 480 188 2,484
----------------------------------------------------------------------------
Income before income taxes 807 130 301 (81) 1,157
Income taxes (recovery) (teb)(1) 225 21 69 (128) 187
----------------------------------------------------------------------------
Reported net income Q3-2012 582 109 232 47 970
Reported net income Q2-2012 567 145 225 91 1,028
Reported net income Q3-2011 533 104 270 (199) 708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income Q3-2012 601 115 232 65 1,013
Adjusted net income Q2-2012 585 150 226 21 982
Adjusted net income Q3-2011 543 105 270 (62) 856
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other statistics
----------------------------------------------------------------------------
Net economic profit(2) 251 56 102 (131) 278
Return on equity 17.9% 19.8% 19.3% nm 14.5%
Adjusted return on equity 18.5% 20.8% 19.3% nm 15.2%
Operating leverage (4.0%) (2.9%) (7.6%) nm 4.9%
Adjusted operating leverage (3.1%) (2.1%) (7.6%) nm (4.4%)
Productivity ratio (teb) 55.1% 80.3% 59.6% nm 64.1%
Adjusted productivity ratio (teb) 54.0% 79.2% 59.6% nm 63.7%
Net interest margin on earning assets
(teb) 3.16% 2.89% 0.63% nm 1.88%
Adjusted net interest margin (teb) 3.16% 2.89% 0.63% nm 1.70%
Average common equity 12,536 2,164 4,587 5,921 25,208
Average earning assets ($ billions) 214.0 18.1 200.7 38.3 471.1
Full-time equivalent staff 23,990 6,502 2,271 13,831 46,594
----------------------------------------------------------------------------
----------------------------------------------------------------------------
YTD-2012
---------------------------------------
(Canadian $ in millions, except as Total
noted) P&C PCG BMO CM Corp BMO
----------------------------------------------------------------------------
Net interest income (teb)(1) 5,101 424 912 226 6,663
Non-interest revenue 1,798 1,692 1,455 346 5,291
----------------------------------------------------------------------------
Total revenue (teb)(1) 6,899 2,116 2,367 572 11,954
Provision for credit losses 676 11 73 (187) 573
Non-interest expense 3,823 1,654 1,434 626 7,537
----------------------------------------------------------------------------
Income before income taxes 2,400 451 860 133 3,844
Income taxes (recovery) (teb)(1) 668 92 205 (228) 737
----------------------------------------------------------------------------
Reported net income Q3-2012 1,732 359 655 361 3,107
Reported net income Q2-2012
Reported net income Q3-2011 1,531 339 759 (283) 2,346
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income Q3-2012 1,788 375 656 148 2,967
Adjusted net income Q2-2012
Adjusted net income Q3-2011 1,555 343 759 (214) 2,443
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other statistics
----------------------------------------------------------------------------
Net economic profit(2) 735 202 270 (129) 1,078
Return on equity 17.7% 22.2% 18.5% nm 15.9%
Adjusted return on equity 18.3% 23.2% 18.5% nm 15.2%
Operating leverage (4.3%) (3.7%) (10.9%) nm (1.4%)
Adjusted operating leverage (2.9%) (2.7%) (11.0%) nm (5.1%)
Productivity ratio (teb) 55.4% 78.2% 60.6% nm 63.1%
Adjusted productivity ratio (teb) 54.3% 77.2% 60.6% nm 63.5%
Net interest margin on earning assets
(teb) 3.23% 3.22% 0.63% nm 1.94%
Adjusted net interest margin (teb) 3.23% 3.22% 0.63% nm 1.77%
Average common equity 12,636 2,129 4,543 5,407 24,715
Average earning assets ($ billions) 210.7 17.6 193.2 36.9 458.4
Full-time equivalent staff
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Operating group revenues, income taxes and net interest margin are
stated on a taxable equivalent basis (teb). The group teb adjustments
are offset in Corporate Services, and Total BMO revenue, income taxes
and net interest margin are stated on a GAAP basis.
(2) Net economic profit is a non-GAAP measure. Please see the Non-GAAP
Measures section.
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Corp means Corporate Services including T&O.
nm - not meaningful
The following sections review the financial results of each of our operating
segments and operating groups for the third quarter of 2012.
Periodically, certain business lines and units within the business lines are
transferred between client groups to more closely align BMO's organizational
structure with its strategic priorities. Results for prior periods are restated
to conform to the current presentation.
Effective in the first quarter of 2012, Private Client Group and P&C Canada
entered into a revised agreement sharing the financial results related to retail
Mutual Fund sales. Prior periods have been restated.
Corporate Services is generally charged (or credited) with differences between
the periodic provisions for credit losses charged to the client groups under our
expected loss provisioning methodology and the periodic provisions required
under GAAP.
BMO analyzes revenue at the consolidated level based on GAAP revenues reflected
in the consolidated financial statements rather than on a taxable equivalent
basis (teb), which is consistent with our Canadian peer group. Like many banks,
we continue to analyze revenue on a teb basis at the operating group level. This
basis includes an adjustment that increases GAAP revenues and the GAAP provision
for income taxes by an amount that would raise revenues on certain tax-exempt
items to a level equivalent to amounts that would incur tax at the statutory
rate. The offset to the group teb adjustments is reflected in Corporate Services
revenues and income tax provisions. The teb adjustments for the third quarter of
2012 totalled $67 million, up from $55 million in the third quarter of 2011 and
up from $56 million in the second quarter.
Personal and Commercial Banking (P&C)
Increase Increase
(Canadian $ in millions, except (Decrease) (Decrease)
as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income (teb) 1,699 207 14% 38 2%
Non-interest revenue 608 73 14% 14 2%
----------------------------------------------------------------------------
Total revenue (teb) 2,307 280 14% 52 2%
Provision for credit losses 228 39 21% 4 2%
Non-interest expense 1,272 193 18% 27 2%
----------------------------------------------------------------------------
Income before income taxes 807 48 6% 21 3%
Income taxes (teb) 225 (1) - 6 3%
----------------------------------------------------------------------------
Reported net income 582 49 9% 15 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 601 58 11% 16 3%
----------------------------------------------------------------------------
Return on equity 17.9% (5.9%) 0.1%
Adjusted return on equity 18.5% (5.8%) 0.1%
Operating leverage (4.0%) nm nm
Adjusted operating leverage (3.1%) nm nm
Productivity ratio (teb) 55.1% 1.9% (0.1%)
Adjusted productivity ratio
(teb) 54.0% 1.5% (0.1%)
Net interest margin on earning
assets (teb) 3.16% (0.04%) (0.07%)
Average earning assets ($
billions) 214.0 29.0 16% 4.9 2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except (Decrease)
as noted) YTD-2012 vs. YTD-2011
-----------------------------------------------------------
Net interest income (teb) 5,101 864 20%
Non-interest revenue 1,798 240 15%
-----------------------------------------------------------
Total revenue (teb) 6,899 1,104 19%
Provision for credit losses 676 144 27%
Non-interest expense 3,823 725 23%
-----------------------------------------------------------
Income before income taxes 2,400 235 11%
Income taxes (teb) 668 34 6%
-----------------------------------------------------------
Reported net income 1,732 201 13%
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted net income 1,788 233 15%
-----------------------------------------------------------
Return on equity 17.7% (8.0%)
Adjusted return on equity 18.3% (7.8%)
Operating leverage (4.3%) nm
Adjusted operating leverage (2.9%) nm
Productivity ratio (teb) 55.4% 1.9%
Adjusted productivity ratio
(teb) 54.3% 1.3%
Net interest margin on earning
assets (teb) 3.23% 0.04%
Average earning assets ($
billions) 210.7 33.1 19%
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
The Personal and Commercial Banking (P&C) operating group represents the sum of
our two retail and business banking operating segments, Personal and Commercial
Banking Canada (P&C Canada) and Personal and Commercial Banking U.S. (P&C U.S.).
These operating segments are reviewed separately in the sections that follow.
Personal and Commercial Banking Canada (P&C Canada)
Increase Increase
(Canadian $ in millions, except (Decrease) (Decrease)
as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income (teb) 1,087 (8) (1%) 24 2%
Non-interest revenue 469 22 5% 9 2%
----------------------------------------------------------------------------
Total revenue (teb) 1,556 14 1% 33 2%
Provision for credit losses 143 6 5% 2 3%
Non-interest expense 795 10 1% 19 2%
----------------------------------------------------------------------------
Income before income taxes 618 (2) (1%) 12 2%
Provision for income taxes
(teb) 165 (12) (7%) 5 2%
----------------------------------------------------------------------------
Reported net income 453 10 2% 7 1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 456 12 2% 7 1%
----------------------------------------------------------------------------
Personal revenue 963 - - 2 -
Commercial revenue 593 14 3% 31 6%
Operating leverage (0.5%) nm nm
Productivity ratio (teb) 51.1% 0.2% 0.1%
Net interest margin on earning
assets (teb) 2.74% (0.17%) (0.07%)
Average earning assets ($
billions) 157.7 8.2 5% 4.1 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except (Decrease)
as noted) YTD-2012 vs. YTD-2011
-----------------------------------------------------------
Net interest income (teb) 3,259 (4) -
Non-interest revenue 1,376 29 2%
-----------------------------------------------------------
Total revenue (teb) 4,635 25 1%
Provision for credit losses 422 13 3%
Non-interest expense 2,384 44 2%
-----------------------------------------------------------
Income before income taxes 1,829 (32) (2%)
Provision for income taxes
(teb) 484 (43) (8%)
-----------------------------------------------------------
Reported net income 1,345 11 1%
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted net income 1,353 13 1%
-----------------------------------------------------------
Personal revenue 2,887 27 1%
Commercial revenue 1,748 (2) -
Operating leverage (1.4%) nm
Productivity ratio (teb) 51.4% 0.6%
Net interest margin on earning
assets (teb) 2.82% (0.13%)
Average earning assets ($
billions) 154.6 6.5 4%
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q3 2012 VS Q3 2011
P&C Canada net income of $453 million was up $10 million or 2.4% from a year
ago. Reported results reflect provisions for credit losses in BMO's operating
groups on an expected loss basis. On a basis that adjusts reported results to
reflect provisions on an actual loss basis, P&C Canada's net income was up $20
million or 4.6%.
Revenue increased $14 million or 0.8%. Results reflect higher volumes across
most products, partially offset by lower net interest margin. Net interest
margin declined 17 basis points primarily driven by deposit spread compression
in the low rate environment, lower personal lending margins resulting from
customer behaviours in our cards business and competitive pressures and loan
growth exceeding deposit growth, particularly mortgages.
In the personal banking segment, revenue was relatively unchanged. Higher volume
growth across most products was offset by lower net interest margin. Total
personal lending balances (including mortgages, Homeowner ReadiLine and other
consumer lending products) increased 6.3% year over year, while total personal
lending market share was up slightly and further increased from the second
quarter.
Our goal is to grow market share while remaining attentive to the credit quality
of the portfolio. We continue to focus on improving the total personal lending
business through focused investment and improved productivity in the sales
force.
Personal deposit balances increased 4.0% year over year due to increases in
retail operating deposits. Market share for personal deposits decreased year
over year.
In the commercial banking segment, revenue increased by $14 million mainly due
to higher volume growth across most products, partially offset by lower deposit
spreads in the low interest rate environment.
Commercial loan balances increased 6.6% year over year. We continue to rank
second in Canadian business banking market share of small and mid-sized business
loans.
Commercial deposit balances grew 3.6% while commercial cards balances were flat.
Non-interest expense was up $10 million or 1.3% from the prior year due to
higher initiative spending, partially offset by lower employee-related costs. We
continue to actively manage costs while still investing in the business.
Average current loans and acceptances increased $9.0 billion or 5.9% from a year
ago, while personal and commercial deposits grew $3.9 billion or 3.8%.
Q3 2012 vs Q2 2012
Net income was up $7 million or 1.5% from the second quarter. On a basis that
adjusts reported results to reflect provisions on an actual loss basis, net
income was up $22 million or 5.3% from the second quarter.
Revenue increased $33 million or 2.1% as a result of two extra days in the
quarter and good volume growth across all products, partially offset by lower
net interest margin. Net interest margin was down 7 basis points. The decline
was primarily due to lower personal lending margins resulting from customer
behaviours in our cards business and competitive pressures, deposit spread
compression in the low rate environment and loan growth exceeding deposit
growth, particularly mortgages. Personal revenue was consistent with the prior
quarter as the effects of good volume growth across all products and two extra
days were offset by lower net interest margin. Quarter-over-quarter personal
lending market share was up 16 basis points and personal deposits market share
was up 5 basis points.
Commercial revenue benefited from two more days and good volume growth.
Non-interest expense was $19 million or 2.3% higher due to increased initiative
spending and two extra days, partially offset by lower employee-related costs.
Average current loans and acceptances increased $4.5 billion or 2.9% from last
quarter, while personal and commercial deposits increased $1.7 billion or 1.6%.
There was good growth in loan and deposit balances and improvements in market
share for these products in the third quarter.
Q3 YTD 2012 vs Q3 YTD 2011
Net income increased $11 million or 0.8% year over year. Revenue increased $25
million or 0.5% due to higher volumes across most products, partially offset by
lower net interest margin and a securities gain in the first quarter a year ago.
Net interest margin declined by 13 basis points primarily due to lower deposit
spreads in the low rate environment and competitive pricing pressure.
Non-interest expense increased $44 million or 1.9% primarily due to higher
initiative spending, partially offset by lower employee-related costs and the
benefit of our focus on productivity.
Average current loans and acceptances increased $7.2 billion or 4.8%, while
personal and commercial deposits increased $4.5 billion or 4.4%.
Personal and Commercial Banking U.S. (P&C U.S.)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
---------------------------------------------------------------------------
Net interest income (teb) 612 215 54% 14 2%
Non-interest revenue 139 51 59% 5 5%
---------------------------------------------------------------------------
Total revenue (teb) 751 266 55% 19 3%
Provision for credit losses 85 33 63% 2 2%
Non-interest expense 477 183 62% 8 2%
---------------------------------------------------------------------------
Income before income taxes 189 50 38% 9 6%
Provision for income taxes
(teb) 60 11 26% 1 4%
---------------------------------------------------------------------------
Reported net income 129 39 43% 8 8%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Adjusted net income 145 46 48% 9 7%
---------------------------------------------------------------------------
Operating leverage (6.9%) nm nm
Adjusted operating leverage (5.2%) nm nm
Productivity ratio (teb) 63.3% 2.7% (0.8%)
Adjusted productivity ratio
(teb) 60.2% 2.0% (0.7%)
Net interest margin on earning
assets (teb) 4.38% (0.11%) 0.03%
Adjusted net interest margin
on earning assets 4.38% (0.11%) 0.03%
Average earning assets ($
billions) 56.2 20.8 59% 0.9 2%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
U.S. Select Financial Data
(US$ in millions)
Net interest income (teb) 602 189 46% (2) -
Non-interest revenue 137 46 51% 3 2%
---------------------------------------------------------------------------
Total revenue (teb) 739 235 47% 1 -
Non-interest expense 468 163 53% (5) (1%)
Reported net Income 127 32 34% 5 5%
Adjusted net income 143 40 37% 6 4%
Average earning assets (US$
billions) 55.2 18.4 50% (0.6) (1%)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2012 vs. YTD-2011
---------------------------------------------------------
Net interest income (teb) 1,842 868 89%
Non-interest revenue 422 211 100%
---------------------------------------------------------
Total revenue (teb) 2,264 1,079 91%
Provision for credit losses 254 131 +100%
Non-interest expense 1,439 681 90%
---------------------------------------------------------
Income before income taxes 571 267 88%
Provision for income taxes
(teb) 184 77 72%
---------------------------------------------------------
Reported net income 387 190 96%
---------------------------------------------------------
---------------------------------------------------------
Adjusted net income 435 220 +100%
---------------------------------------------------------
Operating leverage 1.3% nm
Adjusted operating leverage 5.0% nm
Productivity ratio (teb) 63.5% (0.5%)
Adjusted productivity ratio
(teb) 60.4% (1.6%)
Net interest margin on earning
assets (teb) 4.39% (0.02%)
Adjusted net interest margin
on earning assets 4.39% (0.02%)
Average earning assets ($
billions) 56.1 26.6 90%
---------------------------------------------------------
---------------------------------------------------------
U.S. Select Financial Data
(US$ in millions)
Net interest income (teb) 1,829 830 83%
Non-interest revenue 419 203 94%
---------------------------------------------------------
Total revenue (teb) 2,248 1,033 85%
Non-interest expense 1,428 652 84%
Reported net Income 384 181 90%
Adjusted net income 432 211 95%
Average earning assets (US$
billions) 55.7 25.4 84%
---------------------------------------------------------
---------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q3 2012 vs Q3 2011 (in U.S. $)
Net income of $127 million increased $32 million or 34% from $95 million a year
ago. Adjusted net income, which adjusts for the amortization of
acquisition-related intangible assets, was $143 million, up $40 million or 37%
from a year ago primarily due to the acquired business.
Revenue of $739 million increased $235 million from a year ago due to the $236
million of incremental revenue from two additional months of the acquired
business' results, compared with a year ago. The effects of deposit spread
compression, a change in mix of loan balances, a reduction in interchange fees
and lower securities gains were largely offset by increased deposit balances,
higher gains on sale of mortgages and higher lending fees.
Net interest margin decreased by 11 basis points due to deposit spread
compression, partially offset by the favourable effect of deposit growth
exceeding loan growth and the positive impact from the acquired business.
Non-interest expense of $468 million increased $163 million. Adjusted
non-interest expense of $445 million was $151 million higher, with $141 million
due to the inclusion of the acquired business' results for two additional months
in the current year. The remaining increase was primarily attributable to
increased regulatory and other support costs.
Average current loans and acceptances increased $16.8 billion year over year to
$50.2 billion as a result of the acquired business and strong organic commercial
loan growth.
Average deposits increased $21.9 billion year over year to $58.9 billion as a
result of the acquired business and growth in our organic commercial business.
Q3 2012 vs Q2 2012 (in U.S. $)
Net income increased $5 million or 4.7% from the prior quarter. Adjusted net
income increased 4.1%, primarily due to the benefit of lower expenses.
Revenue increased $1 million or 0.1% and net interest margin increased 3 basis
points.
Non-interest expense and adjusted non-interest expense both decreased $5
million, or 1.0% and 1.1%, respectively.
Average current loans and acceptances decreased $0.6 billion from the prior
quarter as commercial banking loan growth in key segments was more than offset
by decreases in personal banking loans and a decline in the commercial run-off
portfolio, as expected. Commercial loans, excluding the commercial real estate
and run-off portfolio, have seen three sequential quarters of growth post
acquisition.
Average deposits decreased $0.2 billion from the prior quarter, as reductions in
personal money market accounts and time deposits outpaced increases in chequing
and savings accounts in the low rate environment.
Q3 YTD 2012 vs Q3 YTD 2011 (in U.S. $)
Net income of $384 million increased $181 million from $203 million a year ago.
Adjusted net income was $432 million, up $211 million from a year ago primarily
due to the acquired business.
Revenue of $2,248 million increased $1,033 million from a year ago, of which
$1,008 million was attributable to the acquired business. The remaining increase
of $25 million or 2.1% was primarily due to higher gains on the sale of
mortgages and higher lending fees.
Net interest margin decreased by 2 basis points.
Non-interest expense of $1,428 million increased $652 million. Adjusted
non-interest expense of $1,357 million was $604 million higher, with $560
million due to the impact of the acquired business. The remaining increase of
$44 million was largely attributable to increased regulatory and other support
costs and litigation accruals.
Average current loans and acceptances increased $23.6 billion year over year to
$50.7 billion primarily due to the acquired business and strong organic
commercial loan growth.
Average deposits increased $28.9 billion year over year to $58.8 billion as a
result of the acquired business and growth in our organic commercial business.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Private Client Group (PCG)
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income (teb) 132 18 14% 4 2%
Non-interest revenue 546 38 7% (69) (11%)
----------------------------------------------------------------------------
Total revenue (teb) 678 56 9% (65) (9%)
Provision for credit losses 4 1 33% 1 3%
Non-interest expense 544 56 12% (9) (2%)
----------------------------------------------------------------------------
Income before income taxes 130 (1) - (57) (31%)
Provision for income taxes
(teb) 21 (6) (30%) (21) (52%)
----------------------------------------------------------------------------
Reported net income 109 5 6% (36) (25%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 115 10 8% (35) (24%)
----------------------------------------------------------------------------
Adjusted return on equity 20.8% (7.3%) (7.5%)
Return on equity 19.8% (7.8%) (7.5%)
Operating leverage (2.9%) nm nm
Productivity ratio (teb) 80.3% 2.1% 5.9%
Adjusted productivity ratio
(teb) 79.2% 1.5% 5.8%
Net interest margin on earning
assets (teb) 2.89% (0.06%) (0.09%)
Average earning assets 18,099 2,663 17% 588 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data
(US$ in millions, except as
noted)
Total revenue (teb) 171 60 54% 5 4%
Non-interest expense 136 49 56% - -
Reported net income 22 7 50% 5 27%
Adjusted net income 26 11 72% 4 22%
Average earning assets 2,913 466 19% (47) (2%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 424 91 27%
Non-interest revenue 1,692 146 9%
----------------------------------------------------------
Total revenue (teb) 2,116 237 13%
Provision for credit losses 11 4 54%
Non-interest expense 1,654 232 16%
----------------------------------------------------------
Income before income taxes 451 1 -
Provision for income taxes
(teb) 92 (19) (18%)
----------------------------------------------------------
Reported net income 359 20 6%
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 375 32 9%
----------------------------------------------------------
Adjusted return on equity 23.2% (11.1%)
Return on equity 22.2% (11.6%)
Operating leverage (3.7%) nm
Productivity ratio (teb) 78.2% 2.6%
Adjusted productivity ratio
(teb) 77.2% 1.9%
Net interest margin on earning
assets (teb) 3.22% 0.19%
Average earning assets 17,589 2,881 20%
----------------------------------------------------------
----------------------------------------------------------
U.S. Select Financial Data
(US$ in millions, except as
noted)
Total revenue (teb) 527 267 +100%
Non-interest expense 411 196 91%
Reported net income 71 44 +100%
Adjusted net income 83 55 +100%
Average earning assets 2,948 705 31%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q3 2012 vs Q3 2011
Net income was $109 million, up $5 million or 5.7% from a year ago. Adjusted net
income, which adjusts for the amortization of acquisition-related intangible
assets, was $115 million, up $10 million or 8.4% from a year ago. Lower interest
rates reduced net income in the insurance business by $45 million in the current
quarter and by $36 million a year ago. On a basis that excludes this impact, PCG
adjusted net income was $160 million, up $19 million or 13% from a year ago and
adjusted net income in insurance was $63 million, up $8 million or 16% from a
year ago. Adjusted net income in PCG excluding insurance was $97 million, up $11
million or 10% from a year ago.
Revenue was $678 million, up $56 million or 8.7% from a year ago. Revenue in PCG
excluding insurance was up 11% from a year ago. Higher revenues from
acquisitions and spread-based and fee-based products were partly offset by lower
brokerage revenue. Insurance revenue declined 22% from a year ago due to the
effects of the movements in interest rates. The stronger U.S. dollar increased
revenue by $10 million or 1.7%.
Non-interest expense was $544 million, up $56 million or 12%. Adjusted
non-interest expense was $537 million, up $52 million or 11%, primarily due to
acquisitions. The stronger U.S. dollar increased adjusted expense by $7 million
or 1.5%.
Assets under management and administration grew by approximately $14 billion to
$445 billion as we continue to attract new client assets.
Q3 2012 vs Q2 2012
Net income decreased $36 million or 25% and adjusted net income decreased $35
million or 24% from the second quarter. Adjusted net income in PCG excluding
insurance was relatively unchanged from the prior quarter. Adjusted insurance
net income declined $34 million from the prior quarter due to the effect of
lower interest rates.
Revenue decreased $65 million or 8.8%. PCG revenue excluding insurance decreased
marginally, with lower brokerage revenues partially offset by higher
spread-based and fee-based revenues. Insurance revenue declined 65% from the
prior quarter due to lower interest rates. The stronger U.S. dollar increased
revenue by $5 million or 0.7%.
Adjusted non-interest expense decreased $9 million or 1.6% on lower
revenue-driven costs in brokerage and continued cost
management. The stronger U.S. dollar increased adjusted expense by $4 million or
0.6%.
Assets under management and administration were essentially unchanged from the
prior quarter, as growth in new client assets was offset by weaker equity market
conditions.
Q3 YTD 2012 vs Q3 YTD 2011
Net income was $359 million, up $20 million or 6.1% from a year ago. Adjusted
net income was $375 million, up $32 million or 8.9% from a year ago. Adjusted
net income in PCG excluding insurance was $293 million, up $41 million or 16%
from the prior year. Adjusted net income in insurance was $82 million, down $9
million or 9.6% from the prior year.
Revenue was $2,116 million, up $237 million or 13% from a year ago. Revenue in
PCG excluding insurance was up 16% as higher revenues from acquisitions and
spread-based and fee-based products were partly offset by lower brokerage
revenue. Net interest income increased due to earnings from acquisitions, higher
earnings from a strategic investment and higher private banking loan and deposit
balances. The stronger U.S. dollar increased revenue by $17 million or 0.9%.
Insurance revenue declined 18% primarily due to lower interest rates, offset in
part by higher than usual earthquake-related reinsurance claims in the prior
year.
Non-interest expense was $1,654 million, up $232 million or 16%. Adjusted
non-interest expense was $1,633 million, up $217 million or 15% primarily due to
acquisitions. The stronger U.S. dollar increased adjusted expense by $12 million
or 0.9%.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
BMO Capital Markets
Increase Increase
(Canadian $ in millions, (Decrease) (Decrease)
except as noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income (teb) 317 - - 9 3%
Non-interest revenue 489 (16) (3%) 8 2%
----------------------------------------------------------------------------
Total revenue (teb) 806 (16) (2%) 17 2%
Provision for credit losses 25 (4) (18%) 1 1%
Non-interest expense 480 25 6% 9 2%
----------------------------------------------------------------------------
Income before income taxes 301 (37) (11%) 7 3%
Provision for income taxes
(teb) 69 1 3% - -
----------------------------------------------------------------------------
Reported net income 232 (38) (14%) 7 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 232 (38) (14%) 6 3%
----------------------------------------------------------------------------
Trading Products revenue 488 (12) (3%) 15 3%
Investment and Corporate
Banking revenue 318 (4) (1%) 2 1%
Return on equity 19.3% (9.1%) 0.7%
Operating leverage (7.6%) nm nm
Productivity ratio (teb) 59.6% 4.3% (0.1%)
Adjusted productivity ratio
(teb) 59.6% 4.4% (0.1%)
Net interest margin on earning
assets (teb) 0.63% (0.11%) (0.02%)
Average earning assets ($
billions) 200.7 29.8 17% 8.2 4%
----------------------------------------------------------------------------
U.S. Select Financial Data
(US$ in millions, except as
noted)
Total revenue (teb) 276 15 6% 35 14%
Non-interest expense 202 6 3% (3) (1%)
Reported net income 42 9 31% 28 +100%
Adjusted net income 43 10 31% 29 +100%
Average earning assets (US$
billions) 75.8 8.5 13% 5.0 7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, (Decrease)
except as noted) YTD-2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 912 (44) (5%)
Non-interest revenue 1,455 (195) (12%)
----------------------------------------------------------
Total revenue (teb) 2,367 (239) (9%)
Provision for credit losses 73 (16) (19%)
Non-interest expense 1,434 24 2%
----------------------------------------------------------
Income before income taxes 860 (247) (22%)
Provision for income taxes
(teb) 205 (143) (41%)
----------------------------------------------------------
Reported net income 655 (104) (14%)
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 656 (103) (14%)
----------------------------------------------------------
Trading Products revenue 1,474 (102) (7%)
Investment and Corporate
Banking revenue 893 (137) (13%)
Return on equity 18.5% (7.7%)
Operating leverage (10.9%) nm
Productivity ratio (teb) 60.6% 6.5%
Adjusted productivity ratio
(teb) 60.6% 6.5%
Net interest margin on earning
assets (teb) 0.63% (0.15%)
Average earning assets ($
billions) 193.2 28.7 17%
----------------------------------------------------------
U.S. Select Financial Data
(US$ in millions, except as
noted)
Total revenue (teb) 761 (34) (4%)
Non-interest expense 607 20 3%
Reported net income 77 26 52%
Adjusted net income 78 27 52%
Average earning assets (US$
billions) 72.0 10.4 17%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q3 2012 vs Q3 2011
Net income was $232 million, $38 million or 14% lower than the very strong
results of a year ago. Revenues decreased $16 million or 2.0% from the levels of
a year ago to $806 million. In the current quarter we saw improvement in trading
revenues, particularly in interest rate and commodities trading, as market
conditions were more favourable. Corporate banking revenues and debt
underwriting fees also improved from the previous year. Offsetting these
improvements were decreases in mergers and acquisitions fees and equity
underwriting fees, as market uncertainty, mainly driven by concerns over the
Eurozone and China, continues to impede activity. The stronger U.S. dollar
increased revenue by $17 million relative to a year ago.
There was a reduction in the provision for credit losses, which is charged to
the groups on an expected loss basis. Non-interest expense increased $25 million
or 5.6% primarily due to higher employee costs and increased technology and
support costs as a result of making investments in our business and responding
to the changing regulatory environment. The stronger U.S. dollar increased
expenses by $10 million relative to a year ago.
Return on equity was 19.3% compared with 28.4% a year ago, in part reflecting
increased regulatory capital requirements compared to the previous year.
Q3 2012 vs Q2 2012
Net income increased $7 million or 2.9% from the previous quarter. Revenue was
$17 million or 2.2% higher. Revenue growth was attributable to an improvement in
trading revenue, primarily commodities and interest rate trading, and increases
in corporate banking revenue and debt underwriting fees. Offsetting these
increases were lower net investment securities gains, mergers and acquisitions
fees, and equity underwriting fees. The stronger U.S. dollar increased revenue
by $8 million relative to the previous quarter.
Non-interest expense increased $9 million or 2.0% primarily due to the timing of
technology and support spending. The stronger U.S. dollar increased expenses by
$5 million relative to the previous quarter.
Q3 YTD 2012 vs Q3 YTD 2011
Net income decreased $104 million or 14% from the previous year's strong results
to $655 million. Revenue was $239 million or 9.2% lower, primarily due to less
favourable market conditions, which resulted in lower investment banking fees,
net investment securities gains, trading revenues and securities commissions.
These reductions were partly offset by increases in corporate banking revenues.
The stronger U.S. dollar increased revenue by $28 million relative to the
comparable period in 2011.
There was a reduction in the provision for credit losses, which is charged to
the groups on an expected loss basis. Non-interest expense was $24 million or
1.7% higher than in the prior year, mainly due to higher technology and support
costs as a result of making investments in our business and responding to the
changing regulatory environment. The stronger U.S. dollar increased expenses by
$15 million relative to a year ago.
Return on equity was 18.5%, compared with 26.2% a year ago.
Corporate Services, Including Technology and Operations
Increase Increase
(Canadian $ in millions, except as (Decrease) (Decrease)
noted) Q3-2012 vs. Q3-2011 vs. Q2-2012
----------------------------------------------------------------------------
Net interest income before group
teb offset 144 209 nm 65 82%
Group teb offset (67) (12) (22%) (11) (20%)
----------------------------------------------------------------------------
Net interest income (teb) 77 197 nm 54 nm
Non-interest revenue 10 41 nm (139) (94%)
----------------------------------------------------------------------------
Total revenue (teb) 87 238 nm (85) (50%)
Provision for (recovery of) credit
losses (20) (29) (+100%) 36 65%
Non-interest expense 188 (11) (5%) (42) (18%)
----------------------------------------------------------------------------
Profit before income taxes (81) 278 77% (79) nm
Provision for (recovery of) income
taxes (teb) 128 32 20% (35) (39%)
----------------------------------------------------------------------------
Reported net income 47 246 nm (44) (50%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted total revenue (teb) (114) (20) (21%) (54) (90%)
Adjusted provision for (recovery
of) credit losses (140) (164) (+100%) (40) (40%)
Adjusted non-interest expense 80 15 23% (41) (34%)
Adjusted net income 65 127 +100% 44 +100%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data (US$ in
millions)
Total revenue (teb) 120 246 nm 31 34%
Provision for (recovery of) credit
losses 26 6 33% 106 nm
Non-interest expense 119 (17) (13%) (5) (6%)
Provision for (recovery of) income
taxes (teb) (37) 74 68% (41) nm
Reported net income 12 183 nm (29) (71%)
Adjusted net income 41 114 nm 14 53%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except as (Decrease)
noted) YTD-2012 vs. YTD-2011
-----------------------------------------------------------
Net interest income before group
teb offset 400 545 nm
Group teb offset (174) (5) (3%)
-----------------------------------------------------------
Net interest income (teb) 226 540 nm
Non-interest revenue 346 191 +100%
-----------------------------------------------------------
Total revenue (teb) 572 731 nm
Provision for (recovery of) credit
losses (187) (409) nm
Non-interest expense 626 247 65%
-----------------------------------------------------------
Profit before income taxes 133 893 nm
Provision for (recovery of) income
taxes (teb) (228) 249 52%
-----------------------------------------------------------
Reported net income 361 644 nm
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted total revenue (teb) (234) (24) (11%)
Adjusted provision for (recovery
of) credit losses (401) (600) (+100%)
Adjusted non-interest expense 267 48 22%
Adjusted net income 148 362 nm
-----------------------------------------------------------
-----------------------------------------------------------
U.S. Select Financial Data (US$ in
millions)
Total revenue (teb) 398 601 nm
Provision for (recovery of) credit
losses (202) (345) nm
Non-interest expense 342 161 90%
Provision for (recovery of) income
taxes (teb) 32 289 nm
Reported net income 226 496 nm
Adjusted net income 171 326 nm
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Corporate Services
Corporate Services consists of the corporate units that provide enterprise-wide
expertise and governance support in a variety of areas, including strategic
planning, risk management, finance, legal and compliance, communications and
human resources. Operating results reflect the impact of certain asset-liability
management activities, run-off structured credit activities, the elimination of
teb adjustments and the impact of our expected loss provisioning methodology.
BMO's practice is to charge loss provisions to the client operating groups each
year, using an expected loss provisioning methodology based on each group's
share of expected credit losses. Corporate Services is generally charged (or
credited) with differences between the periodic provisions for credit losses
charged to the client operating groups under our expected loss provisioning
methodology and provisions required under GAAP.
Technology and Operations
Technology and Operations (T&O) manages, maintains and provides governance over
information technology, operations services, real estate and sourcing for BMO
Financial Group. T&O focuses on enterprise-wide priorities that improve service
quality and efficiency to deliver an excellent customer experience.
Financial Performance Review
T&O operating results are included with Corporate Services for reporting
purposes. However, the costs of T&O services are transferred to the three
operating groups (P&C, PCG and BMO Capital Markets) and only minor amounts are
retained in T&O results. As such, results in this section largely reflect the
corporate activities outlined in the preceding description of the Corporate
Services unit.
Corporate Services' net income for the quarter was $47 million, an improvement
of $246 million from a year ago. Corporate Services' results reflect a number of
items and activities that are excluded from BMO's adjusted results to help
assess BMO's performance. These adjusting items are not reflective of core
operating results. They are itemized in the following Non-GAAP Measures section.
All adjusting items are recorded in Corporate Services except the amortization
of acquisition-related intangible assets, which is included in the operating
groups.
Adjusted net income was $65 million, an improvement of $127 million from a year
ago. Adjusted revenues were $20 million lower, due to a number of small items.
Adjusted expenses were $15 million higher, primarily due to the impact of the
acquired business. Adjusted provisions for credit losses were lower by $164
million due in part to a $118 million ($73 million after-tax) recovery of
provisions for credit losses on the M&I purchased credit impaired loan
portfolio, primarily due to the repayment of loans at amounts in excess of the
fair value determined at closing. The accounting policy for purchased loans is
discussed in the Purchased Loans section of Note 3 of the attached unaudited
interim consolidated financial statements. The remaining decrease was
attributable to lower provisions charged to Corporate Services under BMO's
expected loss provisioning methodology.
Corporate Services net income in the current quarter decreased $44 million
relative to the second quarter. Adjusted net income increased $44 million.
Adjusted revenues were $54 million lower, due to a number of small items.
Adjusted expenses were $41 million lower, mainly due to reduced employee-related
costs. Adjusted provisions for credit losses decreased $40 million mainly due to
lower provisions charged to Corporate Services under our expected loss
provisioning methodology.
Adjusted net income for the year to date was $148 million, an improvement of
$362 million from a year ago. Adjusted revenues were $24 million lower, largely
due to interest on the settlement of certain tax matters in the prior year.
Adjusted expenses were $48 million higher, primarily due to the impact of the
acquired business. Adjusted provisions for credit losses were $600 million lower
as a result of improved credit conditions. The year-to-date results include the
$377 million ($233 million after-tax) recovery of provisions for credit losses
on M&I purchased credit impaired loans.
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
Non-GAAP Measures (1)
(Canadian $ in millions,
except as noted) Q3-2012 Q2-2012 Q3-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
Reported Results
Revenue 3,878 3,959 3,320 11,954 10,121
Non-interest expense (2,484) (2,499) (2,221) (7,537) (6,309)
----------------------------------------------------------------------------
Pre-provision, pre-tax
earnings 1,394 1,460 1,099 4,417 3,812
Provision for credit losses (237) (195) (230) (573) (850)
Provision for income taxes (187) (237) (161) (737) (616)
----------------------------------------------------------------------------
Net Income 970 1,028 708 3,107 2,346
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reported Measures
EPS ($) 1.42 1.51 1.09 4.56 3.74
Net income growth (%) 36.9 26.5 3.0 32.4 10.3
EPS growth (%) 30.3 14.4 (3.5) 21.9 6.6
Revenue growth (%) 16.8 18.8 13.9 18.1 12.4
Non-interest expense growth
(%) 11.9 23.2 16.5 19.5 12.9
Productivity ratio (%) 64.1 63.1 66.9 63.1 62.3
Operating leverage (%) 4.9 (4.4) (2.6) (1.4) (0.5)
Return on equity (%) 14.5 16.2 13.3 15.9 16.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting Items (Pre-tax)
Credit-related items on the
acquired M&I performing
loan portfolio(2) 76 90 - 350 -
Run-off structured credit
activities(3) (15) 76 (51) 197 69
Hedge costs related to
foreign currency risk on
purchase of M&I - - (9) - (20)
M&I integration costs(4) (105) (74) (53) (249) (82)
M&I acquisition-related
costs - - (82) - (78)
Amortization of
acquisition-related
intangible assets(4) (33) (33) (17) (100) (37)
Decrease (increase) in the
collective allowance for
credit losses 15 18 15 33 (23)
Restructuring costs(4) - (31) - (99) -
----------------------------------------------------------------------------
Adjusting items included in
reported pre-tax income (62) 46 (197) 132 (171)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting Items (After-tax)
Credit-related items on the
acquired M&I performing
loan portfolio 47 55 - 216 -
Run-off structured credit
activities (15) 73 (51) 194 69
Hedge costs related to
foreign currency risk on
purchase of M&I - - (6) - (14)
M&I integration costs (65) (47) (32) (155) (49)
M&I acquisition-related
costs - - (58) - (58)
Amortization of
acquisition-related
intangible assets (24) (24) (12) (72) (29)
Decrease (increase) in the
collective allowance for
credit losses 14 12 11 26 (16)
Restructuring costs - (23) - (69) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting items included in
reported after-tax net
income (43) 46 (148) 140 (97)
EPS ($) (0.07) 0.07 (0.25) 0.21 (0.17)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted Results(1)
Revenue 3,677 3,727 3,380 11,147 10,072
Non-interest expense (2,342) (2,357) (2,069) (7,077) (6,112)
----------------------------------------------------------------------------
Pre-provision, pre-tax
earnings 1,335 1,370 1,311 4,070 3,960
Provision for credit losses (116) (151) (245) (358) (827)
Provision for income taxes (206) (237) (210) (745) (690)
----------------------------------------------------------------------------
Adjusted net Income 1,013 982 856 2,967 2,443
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted Measures(1)(5)
EPS ($) 1.49 1.44 1.34 4.35 3.91
Net income growth (%) 18.4 27.5 22.9 21.9 13.7
EPS growth (%) 11.2 15.2 17.5 11.3 10.1
Revenue growth (%) 8.8 14.9 16.0 10.7 11.9
Non-interest expense growth
(%) 13.2 18.2 9.1 15.8 9.9
Productivity ratio (%) 63.7 63.2 61.2 63.5 60.7
Operating leverage (%) (4.4) (3.3) 6.9 (5.1) 2.0
Return on equity (%) 15.2 15.4 16.4 15.2 16.8
----------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) Adjusted results in this chart are non-GAAP amounts or non-GAAP
measures.
(2) Comprised of $212 million of net interest income, $113 million of
specific provisions for credit losses and $23 million of collective
provisions in Q3-2012; and $152 million of net interest income, $44
million of specific provisions for credit losses and $18 million of
collective provisions in Q2-2012.
(3) Substantially all included in trading revenue, in non-interest revenue.
(4) Included in non-interest expense.
(5) Amounts for periods prior to fiscal 2011 have not been restated to
conform to IFRS. As a result, growth measures for 2011 may not be
meaningful.
Non-GAAP Measures (Cont'd.)
Results and measures in the interim MD&A are presented on a GAAP basis. They are
also presented on an adjusted basis that excludes the impact of certain items as
set out in the preceding table. Management assesses performance on both a
reported and adjusted basis and considers both bases to be useful in assessing
underlying, ongoing business performance. Presenting results on both bases
provides readers with an enhanced understanding of how management views results.
It also permits readers to assess the impact of the specified items on results
for the periods presented and to better assess results excluding those items if
they consider the items to not be reflective of ongoing results. As such, the
presentation may facilitate readers' analysis of trends as well as comparisons
with our competitors. Adjusted results and measures are non-GAAP and as such do
not have standardized meaning under GAAP. They are unlikely to be comparable to
similar measures presented by other companies and should not be viewed in
isolation from or as a substitute for GAAP results. Details of adjustments are
also set out in the Adjusted Net Income section.
Certain of the adjusting items relate to expenses that arise as a result of
acquisitions including the amortization of acquisition-related intangible
assets, and are adjusted because the purchase decision may not consider the
amortization of such assets to be a relevant expense. Certain other
acquisition-related costs in respect of the acquired business have been
designated as adjusting items due to the significance of the amounts and the
fact that they can impact trend analysis. Certain other items have also been
designated as adjusting items due to their effects on trend analysis. They
include changes in the collective allowance and credit-related amounts in
respect of the acquired M&I performing loan portfolio, structured credit run-off
activities and restructuring costs.
Net economic profit represents net income available to common shareholders after
deduction of a charge for capital, and is considered an effective measure of
added economic value. Income before provision for credit losses and income taxes
(pre-provision, pre-tax earnings) is considered useful information as it
provides a measure of performance that excludes the effects of credit losses and
income taxes, which can at times mask performance because of their size and
variability.
In the third quarter of 2012, adjusting items totalled a net charge of $43
million after tax, comprised of a $47 million after-tax net benefit of
credit-related items in respect of the acquired M&I performing loan portfolio
(including $212 million in net interest income, net of a $136 million provision
for credit losses and related income taxes of $29 million); a $15 million ($14
million after tax) decrease in the collective allowance; costs of $105 million
($65 million after tax) for the integration of the acquired business; a $33
million ($24 million after tax) charge for amortization of acquisition-related
intangible assets on all acquisitions; a loss on run-off structured credit
activities of $15 million ($15 million after tax) primarily included in trading
revenue. Adjusting items were charged to Corporate Services with the exception
of the amortization of acquisition-related intangible assets, which was charged
to the operating groups as follows: P&C Canada $3 million ($3 million after
tax); P&C U.S. $23 million ($15 million after tax); and Private Client Group $7
million ($6 million after tax).
In the third quarter of 2011, adjusting items totalled a net charge of $148
million after tax. Adjusting items consisted of a $53 million charge ($32
million after tax) for the integration costs of the acquired business; a $17
million ($12 million after tax) charge for amortization of acquisition-related
intangible assets on all acquisitions; a $51 million loss ($51 million after
tax) from the results of run-off structured credit activities, primarily
included in trading revenue; a $15 million ($11 million after tax) decrease in
the collective allowance; a $9 million charge ($6 million after tax) on the
hedge of foreign currency risk on the purchase of M&I; and an $82 million charge
($58 million after tax) on M&I acquisition related costs. Adjusting items were
charged to Corporate Services with the exception of the amortization of
acquisition-related intangible assets, which was charged to the operating groups
as follows: P&C Canada $2 million ($2 million after tax); P&C U.S. $12 million
($9 million after tax); and Private Client Group $2 million ($1 million after
tax).
In the second quarter of 2012, adjusting items totalled a net benefit of $46
million, comprised of a $55 million after-tax net benefit of credit-related
items in respect of the acquired M&I performing loan portfolio (including $152
million in net interest income, net of a $62 million provision for credit losses
and related income taxes of $35 million); an $18 million ($12 million after tax)
decrease in the collective allowance; costs of $74 million ($47 million after
tax) for the integration of the acquired business; a $33 million ($24 million
after tax) charge for the amortization of acquisition-related intangible assets;
a $76 million ($73 million after tax) benefit due to run-off structured credit
activities, primarily included in trading revenue; and a restructuring charge of
$31 million ($23 million after tax) to align our cost structure with the current
and future business environment. All of the above adjusting items were charged
to Corporate Services except for the amortization of acquisition-related
intangible assets, which was charged to the operating groups as follows: P&C
Canada $3 million ($3 million after tax); P&C U.S. $21 million ($15 million
after tax); Private Client Group $8 million ($5 million after tax); and BMO
Capital Markets $1 million ($1 million after tax).
INVESTOR AND MEDIA PRESENTATION
Investor Presentation Materials
Interested parties are invited to visit our website at
www.bmo.com/investorrelations to review our 2011 annual report, this quarterly
news release, presentation materials and a supplementary financial information
package online.
Quarterly Conference Call and Webcast Presentations
Interested parties are also invited to listen to our quarterly conference call
on Tuesday, August 28, 2012, at 2:00 p.m. (EDT). At that time, senior BMO
executives will comment on results for the quarter and respond to questions from
the investor community. The call may be accessed by telephone at 416-695-9753
(from within Toronto) or 1-888-789-0089 (toll-free outside Toronto). A replay of
the conference call can be accessed until Monday, December 3, 2012, by calling
905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto)
and entering passcode 7740705.
A live webcast of the call can be accessed on our website at
www.bmo.com/investorrelations. A replay can be accessed on the site until
Monday, December 3, 2012.
Media Relations Contacts
Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Valerie Doucet, Montreal, valerie.doucet@bmo.com, 514-877-8224
Investor Relations Contacts
Sharon Haward-Laird, Head, Investor Relations, sharon.hawardlaird@bmo.com,
416-867-6656
Michael Chase, Director, michael.chase@bmo.com, 416-867-5452
Andrew Chin, Senior Manager, andrew.chin@bmo.com, 416-867-7019
Chief Financial Officer
Tom Flynn, Executive Vice-President and CFO,
tom.flynn@bmo.com, 416-867-4689
Corporate Secretary
Barbara Muir, Senior Vice-President, Deputy General Counsel,
Corporate Affairs and Corporate Secretary
corp.secretary@bmo.com, 416-867-6423
----------------------------------------------------------------------------
Shareholder Dividend Reinvestment and For other shareholder information,
Share Purchase Plan please contact
Average market price Bank of Montreal
May 2012 $54.60 ($53.61(i)) Shareholder Services
June 2012 $55.16 Corporate Secretary's Department
July 2012 $57.70 One First Canadian Place, 21st Floor
(i)reflects 2% discount for dividend Toronto, Ontario M5X 1A1
reinvestment Telephone: (416) 867-6785
Fax: (416) 867-6793
For dividend information, change in E-mail: corp.secretary@bmo.com
shareholder address
or to advise of duplicate mailings, For further information on this
please contact report, please contact
Computershare Trust Company of Canada Bank of Montreal
100 University Avenue, 9th Floor Investor Relations Department
Toronto, Ontario M5J 2Y1 P.O. Box 1, One First Canadian Place,
Telephone: 1-800-340-5021 (Canada and 18th Floor
the United States) Toronto, Ontario M5X 1A1
Telephone: (514) 982-7800
(international) To review financial results online,
Fax: 1-888-453-0330 (Canada and the please visit our website at
United States) http://www.bmo.com/
Fax: (416) 263-9394 (international)
E-mail: service@computershare.com
----------------------------------------------------------------------------
(R) Registered trademark of Bank of Montreal
---------------------------------------------------------------------------
Annual Meeting 2013
The next Annual Meeting of Shareholders will be held on
Wednesday, April 10, 2013, in Saskatoon, Saskatchewan.
---------------------------------------------------------------------------
Interim Consolidated Financial Statements
Consolidated Statement of Income
(Unaudited)
(Canadian $ in
millions, except as
noted) For the three months ended
----------------------------------------------------------------------------
July April January October July
31, 2012 30, 2012 31, 2012 31, 2011 31, 2011
----------------------------------------------------------------------------
Interest, Dividend and
Fee Income
Loans $ 2,807 $ 2,680 $ 2,868 $ 3,020 $ 2,462
Securities 568 536 591 484 574
Deposits with banks 72 64 45 44 39
----------------------------------------------------------------------------
3,447 3,280 3,504 3,548 3,075
----------------------------------------------------------------------------
Interest Expense
Deposits 680 570 628 674 674
Subordinated debt 37 47 49 43 43
Capital trust
securities (Note 12) 12 11 16 18 18
Other liabilities 493 532 493 551 537
----------------------------------------------------------------------------
1,222 1,160 1,186 1,286 1,272
----------------------------------------------------------------------------
Net Interest Income 2,225 2,120 2,318 2,262 1,803
----------------------------------------------------------------------------
Non-Interest Revenue
Securities commissions
and fees 276 303 285 292 297
Deposit and payment
service charges 232 227 240 246 205
Trading revenues
(losses) 140 228 345 (15) 100
Lending fees 169 137 160 152 146
Card fees 186 174 167 188 171
Investment management
and custodial fees 188 179 172 176 131
Mutual fund revenues 161 159 159 157 164
Underwriting and
advisory fees 123 130 78 76 141
Securities gains,
other than trading 14 40 42 61 31
Foreign exchange,
other than trading 28 51 39 11 38
Insurance income 40 105 46 74 47
Other 96 106 66 142 46
----------------------------------------------------------------------------
1,653 1,839 1,799 1,560 1,517
----------------------------------------------------------------------------
Total Revenue 3,878 3,959 4,117 3,822 3,320
----------------------------------------------------------------------------
Provision for credit
losses (Note 3) 237 195 141 362 230
----------------------------------------------------------------------------
Non-Interest Expense
Employee compensation
(Note 15) 1,337 1,391 1,446 1,311 1,212
Premises and equipment 473 461 455 464 388
Amortization of
intangible assets 86 82 83 81 58
Travel and business
development 116 118 128 106 100
Communications 79 72 72 75 63
Business and capital
taxes 10 11 12 14 12
Professional fees 161 141 123 154 223
Other 222 223 235 227 165
----------------------------------------------------------------------------
2,484 2,499 2,554 2,432 2,221
----------------------------------------------------------------------------
Income Before
Provision for Income
Taxes 1,157 1,265 1,422 1,028 869
Provision for income
taxes 187 237 313 260 161
----------------------------------------------------------------------------
Net Income $ 970 $ 1,028 $ 1,109 $ 768 $ 708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 951 1,010 1,090 749 690
Non-controlling
interest in
subsidiaries 19 18 19 19 18
----------------------------------------------------------------------------
Net Income $ 970 $ 1,028 $ 1,109 $ 768 $ 708
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
(Canadian $) (Note
16)
Basic $ 1.42 $ 1.52 $ 1.65 $ 1.12 $ 1.10
Diluted 1.42 1.51 1.63 1.11 1.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in
millions, except as For the nine
noted) months ended
------------------------------------------
July July
31, 2012 31, 2011
------------------------------------------
Interest, Dividend and
Fee Income
Loans $ 8,355 $ 7,183
Securities 1,695 1,692
Deposits with banks 181 101
------------------------------------------
10,231 8,976
------------------------------------------
Interest Expense
Deposits 1,878 2,019
Subordinated debt 133 114
Capital trust
securities (Note 12) 39 58
Other liabilities 1,518 1,573
------------------------------------------
3,568 3,764
------------------------------------------
Net Interest Income 6,663 5,212
------------------------------------------
Non-Interest Revenue
Securities commissions
and fees 864 923
Deposit and payment
service charges 699 588
Trading revenues
(losses) 713 564
Lending fees 466 441
Card fees 527 501
Investment management
and custodial fees 539 320
Mutual fund revenues 479 476
Underwriting and
advisory fees 331 436
Securities gains,
other than trading 96 128
Foreign exchange,
other than trading 118 119
Insurance income 191 209
Other 268 204
------------------------------------------
5,291 4,909
------------------------------------------
Total Revenue 11,954 10,121
------------------------------------------
Provision for credit
losses (Note 3) 573 850
------------------------------------------
Non-Interest Expense
Employee compensation
(Note 15) 4,174 3,516
Premises and equipment 1,389 1,114
Amortization of
intangible assets 251 150
Travel and business
development 362 276
Communications 223 184
Business and capital
taxes 33 37
Professional fees 425 470
Other 680 562
------------------------------------------
7,537 6,309
------------------------------------------
Income Before
Provision for Income
Taxes 3,844 2,962
Provision for income
taxes 737 616
------------------------------------------
Net Income $ 3,107 $ 2,346
------------------------------------------
------------------------------------------
Attributable to:
Bank shareholders 3,051 2,292
Non-controlling
interest in
subsidiaries 56 54
------------------------------------------
Net Income $ 3,107 $ 2,346
------------------------------------------
------------------------------------------
Earnings Per Share
(Canadian $) (Note
16)
Basic $ 4.59 $ 3.80
Diluted 4.56 3.74
------------------------------------------
------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
(Unaudited)
(Canadian $ in
millions) For the three months ended
----------------------------------------------------------------------------
July April January October July
31, 2012 30, 2012 31, 2012 31, 2011 31, 2011
----------------------------------------------------------------------------
Net income $ 970 $ 1,028 $ 1,109 $ 768 $ 708
Other Comprehensive
Income (Loss)
Net change in
unrealized gains
(losses) on
available-for-sale
securities
Unrealized gains
(losses) on
available-for-sale
securities arising
during the period
(net of income tax
(provision)
recovery of $(9),
$(2), $10, $(20),
$(33), $(1) and $9) 26 6 (30) 23 54
Reclassification to
earnings of (gains)
losses in the
period (net of
income tax
provision
(recovery) of $14,
$(11), $22, $37,
$(1), $25 and $14) 14 (23) (33) (67) (7)
----------------------------------------------------------------------------
40 (17) (63) (44) 47
----------------------------------------------------------------------------
Net change in
unrealized gains
(losses) on cash
flow hedges
Gains (losses) on
cash flow hedges
arising during the
period (net of
income tax
(provision)
recovery of $(63),
$99, $(19), $(89),
$(84), $17 and
$(48)) 177 (300) 46 230 208
Reclassification to
earnings of (gains)
losses on cash flow
hedges (net of
income tax
provision
(recovery) of $9,
$15, $nil, $11,
$(1), $24 and $(2)) (29) (38) - (30) 2
----------------------------------------------------------------------------
148 (338) 46 200 210
----------------------------------------------------------------------------
Net gain (loss) on
translation of net
foreign operations
Unrealized gain
(loss) on
translation of net
foreign operations 260 (255) 133 759 64
Impact of hedging
unrealized gain
(loss) on
translation of net
foreign operations
(net of income tax
(provision)
recovery of $24,
$(23), $17, $144,
$10, $18 and
$(170)) (70) 66 (48) (317) (23)
----------------------------------------------------------------------------
190 (189) 85 442 41
----------------------------------------------------------------------------
Other Comprehensive
Income (Loss) 378 (544) 68 598 298
----------------------------------------------------------------------------
Total Comprehensive
Income $ 1,348 $ 484 $ 1,177 $ 1,366 $ 1,006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 1,329 466 1,158 1,347 988
Non-controlling
interest in
subsidiaries 19 18 19 19 18
----------------------------------------------------------------------------
Total Comprehensive
Income $ 1,348 $ 484 $ 1,177 $ 1,366 $ 1,006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in For the nine
millions) months ended
------------------------------------------
July July
31, 2012 31, 2011
------------------------------------------
Net income $ 3,107 $ 2,346
Other Comprehensive
Income (Loss)
Net change in
unrealized gains
(losses) on
available-for-sale
securities
Unrealized gains
(losses) on
available-for-sale
securities arising
during the period
(net of income tax
(provision)
recovery of $(9),
$(2), $10, $(20),
$(33), $(1) and $9) 2 (5)
Reclassification to
earnings of (gains)
losses in the
period (net of
income tax
provision
(recovery) of $14,
$(11), $22, $37,
$(1), $25 and $14) (42) (37)
------------------------------------------
(40) (42)
------------------------------------------
Net change in
unrealized gains
(losses) on cash
flow hedges
Gains (losses) on
cash flow hedges
arising during the
period (net of
income tax
(provision)
recovery of $(63),
$99, $(19), $(89),
$(84), $17 and
$(48)) (77) 98
Reclassification to
earnings of (gains)
losses on cash flow
hedges (net of
income tax
provision
(recovery) of $9,
$15, $nil, $11,
$(1), $24 and $(2)) (67) 9
------------------------------------------
(144) 107
------------------------------------------
Net gain (loss) on
translation of net
foreign operations
Unrealized gain
(loss) on
translation of net
foreign operations 138 (849)
Impact of hedging
unrealized gain
(loss) on
translation of net
foreign operations
(net of income tax
(provision)
recovery of $24,
$(23), $17, $144,
$10, $18 and
$(170)) (52) 440
------------------------------------------
86 (409)
------------------------------------------
Other Comprehensive
Income (Loss) (98) (344)
------------------------------------------
Total Comprehensive
Income $ 3,009 $ 2,002
------------------------------------------
------------------------------------------
Attributable to:
Bank shareholders 2,953 1,948
Non-controlling
interest in
subsidiaries 56 54
------------------------------------------
Total Comprehensive
Income $ 3,009 $ 2,002
------------------------------------------
------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Balance Sheet
(Unaudited)
(Canadian $ in
millions) As at
----------------------------------------------------------------------------
July 31, April 30, January 31, October 31, July 31,
2012 2012 2012 2011 2011
----------------------------------------------------------------------------
Assets
Cash and Cash
Equivalents $ 33,592 $ 34,117 $ 39,553 $ 19,676 $ 33,126
----------------------------------------------------------------------------
Interest Bearing
Deposits with Banks 5,995 7,010 7,603 5,980 7,049
----------------------------------------------------------------------------
Securities
Trading 70,045 71,432 71,018 69,925 72,671
Available-for-sale
(Note 2) 59,297 54,906 54,545 51,426 47,141
Other 877 781 825 764 810
----------------------------------------------------------------------------
130,219 127,119 126,388 122,115 120,622
----------------------------------------------------------------------------
Securities Borrowed
or Purchased Under
Resale Agreements 45,535 42,253 42,608 37,970 38,301
----------------------------------------------------------------------------
Loans (Notes 3 and
6)
Residential
mortgages 85,595 82,260 81,317 81,075 80,977
Consumer instalment
and other personal 60,792 60,002 59,688 59,445 58,035
Credit cards 7,837 7,861 7,871 8,038 8,026
Businesses and
governments 92,870 89,800 88,719 84,883 82,995
----------------------------------------------------------------------------
247,094 239,923 237,595 233,441 230,033
Customers' liability
under acceptances 8,013 7,406 6,782 7,227 7,000
Allowance for credit
losses (Note 3) (1,755) (1,807) (1,756) (1,783) (1,706)
----------------------------------------------------------------------------
253,352 245,522 242,621 238,885 235,327
----------------------------------------------------------------------------
Other Assets
Derivative
instruments 52,263 46,760 58,219 55,113 47,359
Premises and
equipment 2,059 2,033 2,020 2,061 1,921
Goodwill (Note 9) 3,732 3,702 3,656 3,649 3,442
Intangible assets 1,572 1,541 1,558 1,562 1,511
Current tax assets 1,141 2,187 1,504 1,319 1,177
Deferred tax assets 3,000 2,820 3,090 3,355 3,369
Other 9,788 10,439 9,440 8,890 8,832
----------------------------------------------------------------------------
73,555 69,482 79,487 75,949 67,611
----------------------------------------------------------------------------
Total Assets $542,248 $525,503 $ 538,260 $ 500,575 $502,036
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Equity
Deposits (Note 10)
Banks $ 23,314 $ 22,508 $ 20,150 $ 20,877 $ 22,950
Businesses and
governments 183,698 171,539 173,852 159,209 148,848
Individuals 121,956 122,020 122,555 122,287 120,249
----------------------------------------------------------------------------
328,968 316,067 316,557 302,373 292,047
----------------------------------------------------------------------------
Other Liabilities
Derivative
instruments 53,132 46,472 55,157 50,934 43,596
Acceptances 8,013 7,406 6,782 7,227 7,000
Securities sold but
not yet purchased 22,523 23,834 21,269 20,207 21,892
Securities lent or
sold under
repurchase
agreements 47,145 46,076 51,952 32,078 48,426
Current tax
liabilities 294 1,017 634 591 456
Deferred tax
liabilities 191 207 225 314 329
Other 48,029 50,295 51,342 52,846 55,311
----------------------------------------------------------------------------
179,327 175,307 187,361 164,197 177,010
----------------------------------------------------------------------------
Subordinated Debt
(Note 11) 4,107 5,276 5,362 5,348 5,284
----------------------------------------------------------------------------
Capital Trust
Securities (Note
12) 450 462 450 821 821
----------------------------------------------------------------------------
Equity
Share capital (Note
13) 14,213 14,033 14,260 14,193 14,114
Contributed surplus 216 215 119 113 111
Retained earnings 12,977 12,512 11,986 11,381 11,117
Accumulated other
comprehensive
income 568 190 734 666 68
----------------------------------------------------------------------------
Total shareholders'
equity 27,974 26,950 27,099 26,353 25,410
Non-controlling
interest in
subsidiaries 1,422 1,441 1,431 1,483 1,464
----------------------------------------------------------------------------
Total Equity 29,396 28,391 28,530 27,836 26,874
----------------------------------------------------------------------------
Total Liabilities
and Equity $542,248 $525,503 $ 538,260 $ 500,575 $502,036
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Changes in Equity
For the three For the nine
(Unaudited) (Canadian $ in millions) months ended months ended
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Preferred Shares
Balance at beginning of period $ 2,465 $ 2,861 $ 2,861 $ 2,571
Issued during the period - - - 290
Redeemed during the period (Note 13) - - (396) -
----------------------------------------------------------------------------
Balance at End of Period 2,465 2,861 2,465 2,861
----------------------------------------------------------------------------
Common Shares
Balance at beginning of period 11,568 7,090 11,332 6,927
Issued under the Shareholder
Dividend Reinvestment and Share
Purchase Plan 169 43 367 135
Issued under the Stock Option Plan 9 17 47 88
Issued on the exchange of shares of
a subsidiary corporation 2 - 2 -
Issued on the acquisition of a
business (Note 8) - 4,103 - 4,103
----------------------------------------------------------------------------
Balance at End of Period 11,748 11,253 11,748 11,253
----------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 215 101 113 91
Stock option expense/exercised 1 10 7 20
Foreign exchange on redemption of
preferred shares (Note 13) - - 96 -
----------------------------------------------------------------------------
Balance at End of Period 216 111 216 111
----------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period 12,512 10,913 11,381 10,181
Net income attributable to Bank
shareholders 951 690 3,051 2,292
Dividends
- Preferred shares (32) (39) (103) (109)
- Common shares (454) (446) (1,352) (1,242)
Share issue expense - (1) - (5)
----------------------------------------------------------------------------
Balance at End of Period 12,977 11,117 12,977 11,117
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income on Available-for-Sale
Securities
Balance at beginning of period 242 319 322 408
Unrealized gains (losses) on
available-for-sale securities
arising during the period (net of
income tax (provision) recovery of
$(9), $(33), $(1) and $9) 26 54 2 (5)
Reclassification to earnings of
(gains) losses in the period (net
of income tax provision (recovery)
of $14, $(1), $25 and $14) 14 (7) (42) (37)
----------------------------------------------------------------------------
Balance at End of Period 282 366 282 366
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income on Cash Flow Hedges
Balance at beginning of period 19 (99) 311 4
Gains (losses) on cash flow hedges
arising during the period (net of
income tax (provision) recovery of
$(63), $(84), $17 and $(48)) 177 208 (77) 98
Reclassification to earnings of
(gains) losses on cash flow hedges
(net of income tax provision
(recovery) of $9, $(1), $24 and
$(2)) (29) 2 (67) 9
----------------------------------------------------------------------------
Balance at End of Period 167 111 167 111
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income (Loss) on Translation of Net
Foreign Operations
Balance at beginning of period (71) (450) 33 -
Unrealized gain (loss) on
translation of net foreign
operations 260 64 138 (849)
Impact of hedging unrealized gain
(loss) on translation of net
foreign operations (net of income
tax (provision) recovery of $24,
$10, $18 and $(170)) (70) (23) (52) 440
----------------------------------------------------------------------------
Balance at End of Period 119 (409) 119 (409)
----------------------------------------------------------------------------
Total Accumulated Other
Comprehensive Income 568 68 568 68
----------------------------------------------------------------------------
Total Shareholders' Equity $ 27,974 $ 25,410 $ 27,974 $ 25,410
----------------------------------------------------------------------------
Non-controlling Interest in
Subsidiaries
Balance at beginning of period 1,441 1,480 1,483 1,501
Net income attributable to non-
controlling interest 19 18 56 54
Dividends to non-controlling
interest (32) (31) (68) (66)
Other (6) (3) (49) (25)
----------------------------------------------------------------------------
Balance at End of Period 1,422 1,464 1,422 1,464
----------------------------------------------------------------------------
Total Equity $ 29,396 $ 26,874 $ 29,396 $ 26,874
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Cash Flows
For the three For the nine
(Unaudited) (Canadian $ in millions) months ended months ended
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $ 970 $ 708 $ 3,107 $ 2,346
Adjustments to determine net cash
flows provided by (used in)
operating activities
Impairment write-down of
securities, other than trading 2 1 5 2
Net (gain) on securities, other
than trading (16) (31) (101) (130)
Net (increase) decrease in trading
securities 1,645 217 (123) (1,595)
Provision for credit losses (Note
3) 237 230 573 850
Change in derivative instruments
- (increase) decrease in
derivative asset (5,769) (3,531) 2,161 1,452
- increase (decrease) in
derivative liability 6,769 2,546 2,743 (3,061)
Amortization of premises and
equipment 90 74 269 218
Amortization of intangible assets 86 58 251 150
Net (increase) decrease in
deferred income tax asset (115) 223 401 108
Net (decrease) in deferred income
tax liability (16) (195) (123) (230)
Net (increase) decrease in current
income tax asset 1,077 (63) 199 100
Net (decrease) in current income
tax liability (725) (42) (296) (106)
Change in accrued interest
- decrease in interest
receivable 182 168 89 160
- (decrease) in interest payable (107) (1) (186) (50)
Changes in other items and
accruals, net (1,230) 2,877 (4,761) 225
Net increase in deposits 10,667 3,121 24,220 12,960
Net (increase) in loans (6,507) (571) (14,027) (4,223)
Net increase (decrease) in
securities sold but not yet
purchased (1,412) 1,182 2,299 8,046
Net increase in securities lent or
sold under repurchase agreements 931 9,303 15,411 8,949
Net (increase) in securities
borrowed or purchased under
resale agreements (3,169) (5,106) (7,792) (11,413)
----------------------------------------------------------------------------
Net Cash Provided by Operating
Activities 3,590 11,168 24,319 14,758
----------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in
liabilities of subsidiaries 24 (2,192) (281) (2,111)
Proceeds from issuance of Covered
Bonds (Note 10) - - 2,000 1,500
Repayment of subordinated debt (Note
11) (1,200) - (1,200) -
Proceeds from issuance of
subordinated debt (Note 11) - - - 1,500
Redemption of preferred shares (Note
13) - - (396) -
Proceeds from issuance of preferred
shares (Note 13) - - - 290
Redemption of Capital Trust
Securities (Note 12) - - (400) (400)
Share issue expense - (1) - (5)
Proceeds from issuance of common
shares 12 19 53 93
Cash dividends paid (318) (444) (1,092) (1,221)
Cash dividends paid to non-
controlling interest (32) (31) (68) (66)
----------------------------------------------------------------------------
Net Cash (Used in) Financing
Activities (1,514) (2,649) (1,384) (420)
----------------------------------------------------------------------------
Cash Flows from Investing Activities
Net (increase) decrease in interest
bearing deposits with banks 1,063 307 (11) (233)
Purchases of securities, other than
trading (9,978) (4,589) (29,590) (13,733)
Maturities of securities, other than
trading 3,291 2,069 9,272 9,584
Proceeds from sales of securities,
other than trading 2,815 3,171 12,268 8,153
Proceeds from sales of land and
buildings - 1 - 1
Premises and equipment - net
purchases (105) (137) (260) (247)
Purchased and developed software -
net purchases (93) (69) (245) (187)
Purchase of Troubled Asset Relief
Program preferred shares and
warrants - (1,642) - (1,642)
Acquisitions (Note 8) (20) 789 (20) 683
----------------------------------------------------------------------------
Net Cash Provided by (Used in)
Investing Activities (3,027) (100) (8,586) 2,379
----------------------------------------------------------------------------
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 426 207 (433) (1,051)
----------------------------------------------------------------------------
Net Increase (Decrease) in Cash and
Cash Equivalents (525) 8,626 13,916 15,666
Cash and Cash Equivalents at
Beginning of Period 34,117 24,500 19,676 17,460
----------------------------------------------------------------------------
Cash and Cash Equivalents at End of
Period $ 33,592 $ 33,126 $ 33,592 $ 33,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Represented by:
Cash and non-interest bearing
deposits with Bank of Canada and
other banks $ 32,498 $ 31,684 $ 32,498 $ 31,684
Cheques and other items in transit,
net 1,094 1,442 1,094 $ 1,442
----------------------------------------------------------------------------
$ 33,592 $ 33,126 $ 33,592 $ 33,126
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow
Information:
Net cash provided by (used in)
operating activities include:
Amount of Interest paid in the
period $ 1,328 $ 1,298 $ 3,758 $ 3,840
Amount of Income taxes paid
(received) in the period $ (10) $ 283 $ 449 $ 558
Amount of interest and dividend
income received in the period $ 3,601 $ 3,227 $ 10,245 $ 9,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to Consolidated Financial Statements
July 31, 2012 (Unaudited)
----------------------------------------------------------------------------
Note 1: Basis of Presentation
Bank of Montreal (the "bank"), is a public company incorporated in Canada having
its registered office in Montreal, Canada. The bank is a highly diversified
financial services provider and provides a broad range of retail banking, wealth
management and investment banking products and services.
These interim consolidated financial statements have been prepared in accordance
with IAS 34 Interim Financial Reporting. This is the bank's first year of
reporting in accordance with International Financial Reporting Standards
("IFRS"), and accordingly IFRS 1 First-time Adoption of International Financial
Reporting Standards has been applied. We also comply with interpretations of
IFRS by our regulator the Office of the Superintendent of Financial Institutions
of Canada ("OSFI").
Our consolidated financial statements were previously prepared in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"), as
previously defined and as described in the notes to our annual consolidated
financial statements for the year ended October 31, 2011, on pages 119 to 180 of
our 2011 Annual Report. Canadian GAAP, as previously defined, differs in some
areas from IFRS. To comply with IFRS, we have amended certain accounting
policies, classification, measurement and disclosures previously applied in the
Canadian GAAP financial statements. Disclosure of our IFRS accounting policies,
significant estimates, future changes in IFRS standards and comparative
financial information including an opening balance sheet and impact on the
consolidated statement of cash flows as at the transition date are provided on
pages 40 to 78 in the notes to our interim consolidated financial statements for
the quarter ended April 30, 2012. During the quarter ended July 31, 2012, there
were no changes in our IFRS accounting policies.
Note 19 contains reconciliations and descriptions of the effects of the
transition from Canadian GAAP to IFRS on the Consolidated Statement of Income,
Consolidated Statement of Comprehensive Income and Consolidated Statement of
Changes in Equity for the quarters ended July, 2011 and October, 2011. These
interim consolidated financial statements have been prepared in accordance with
the accounting policies we expect to use in our annual consolidated financial
statements for the year ended October 31, 2012. Those accounting policies are
based on the IFRSs that we expect to be applicable at that time. These interim
consolidated financial statements were authorized for issue by the Board of
Directors on August 28, 2012.
Note 2: Securities
Unrealized Gains and Losses
The following table summarizes the unrealized gains and losses on
available-for-sale securities:
July 31,
(Canadian $ in millions) Available-for-sale securities 2012
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
----------------------------------------------------------------------------
Issued or guaranteed by:
Canadian federal government 20,813 300 5 21,108
Canadian provincial municipal
governments 3,101 47 11 3,137
U.S. federal government 8,479 226 - 8,705
U.S. states, municipalities and
agencies 3,882 72 7 3,947
Other governments 6,639 10 8 6,641
Mortgage-backed securities and
collateralized mortgage
obligations - Canada (1) 646 6 - 652
Mortgage-backed securities and
collateralized mortgage
obligations - U.S. 6,345 70 19 6,396
Corporate debt 7,291 134 9 7,416
Corporate equity 1,229 69 3 1,295
----------------------------------------------------------------------------
Total 58,425 934 62 59,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
October 31,
(Canadian $ in millions) Available-for-sale securities 2011
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
----------------------------------------------------------------------------
Issued or guaranteed by:
Canadian federal government 19,757 478 40 20,195
Canadian provincial municipal
governments 1,484 82 79 1,487
U.S. federal government 4,498 172 - 4,670
U.S. states, municipalities and
agencies 3,553 76 2 3,627
Other governments 8,524 13 8 8,529
Mortgage-backed securities and
collateralized mortgage
obligations - Canada (1) 856 18 - 874
Mortgage-backed securities and
collateralized mortgage
obligations - U.S. 5,022 106 2 5,126
Corporate debt 5,455 56 15 5,496
Corporate equity 1,352 78 8 1,422
----------------------------------------------------------------------------
Total 50,501 1,079 154 51,426
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) These amounts are supported by guaranteed mortgages.
Note 3: Loans and Allowance for Credit Losses
Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated Balance Sheet is
maintained at a level that we consider adequate to absorb credit-related losses
on our loans, customers' liability under acceptances and other credit
instruments. The portion related to other credit instruments is recorded in
other liabilities in our Consolidated Balance Sheet. As at July 31, 2012, there
was a $218 million ($176 million as at July 31, 2011) allowance for credit
losses related to other credit instruments included in other liabilities.
A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the three months July July July July July July
ended 31, 2012 31, 2011 31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------------------------------------------
Specific Allowance at
beginning of period 60 68 59 59 419 427
Specific provision for
credit losses 43 19 169 159 17 67
Recoveries 4 1 39 34 153 26
Write-offs (36) (22) (209) (193) (164) (123)
Foreign exchange and
other 6 1 6 6 (78) (9)
----------------------------------------------------------------------------
Specific Allowance at
end of period 77 67 64 65 347 388
----------------------------------------------------------------------------
Collective Allowance
at beginning of
period 42 32 633 549 764 752
Collective provision
for credit losses (2) (1) (23) - 35 (12)
Foreign exchange and
other - - - - 12 6
----------------------------------------------------------------------------
Collective Allowance
at end of period 40 31 610 549 811 746
----------------------------------------------------------------------------
Total Allowance 117 98 674 614 1,158 1,134
----------------------------------------------------------------------------
Comprised of: Loans 110 98 674 614 947 958
Other credit
instruments 7 - - - 211 176
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------
Customers'
liability
under acceptances Total
----------------------------------------------------------
For the three months July July July July
ended 31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------------------------
Specific Allowance at
beginning of period - - 538 554
Specific provision for
credit losses - - 229 245
Recoveries - - 196 61
Write-offs - - (409) (338)
Foreign exchange and
other - - (66) (2)
----------------------------------------------------------
Specific Allowance at
end of period - - 488 520
----------------------------------------------------------
Collective Allowance
at beginning of
period 26 38 1,465 1,371
Collective provision
for credit losses (2) (2) 8 (15)
Foreign exchange and
other - - 12 6
----------------------------------------------------------
Collective Allowance
at end of period 24 36 1,485 1,362
----------------------------------------------------------
Total Allowance 24 36 1,973 1,882
----------------------------------------------------------
Comprised of: Loans 24 36 1,755 1,706
Other credit
instruments - - 218 176
----------------------------------------------------------
----------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the nine months July July July July July July
ended 31, 2012 31, 2011 31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------------------------------------------
Specific Allowance at
beginning of period 74 52 59 47 426 481
Specific provision for
credit losses 85 79 513 498 (52) 260
Recoveries 54 4 118 94 444 72
Write-offs (126) (64) (620) (580) (438) (368)
Foreign exchange and
other (10) (4) (6) 6 (33) (57)
----------------------------------------------------------------------------
Specific Allowance at
end of period 77 67 64 65 347 388
----------------------------------------------------------------------------
Collective Allowance
at beginning of
period 36 23 565 477 817 839
Collective provision
for credit losses 4 8 45 72 (12) (49)
Foreign exchange and
other - - - - 6 (44)
----------------------------------------------------------------------------
Collective Allowance
at end of period 40 31 610 549 811 746
----------------------------------------------------------------------------
Total Allowance 117 98 674 614 1,158 1,134
----------------------------------------------------------------------------
Comprised of: Loans 110 98 674 614 947 958
Other credit
instruments 7 - - - 211 176
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------
Customers'
liability
under acceptances Total
----------------------------------------------------------
For the nine months July July July July
ended 31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------------------------
Specific Allowance at
beginning of period - 10 559 590
Specific provision for
credit losses - (10) 546 827
Recoveries - - 616 170
Write-offs - - (1,184) (1,012)
Foreign exchange and
other - - (49) (55)
----------------------------------------------------------
Specific Allowance at
end of period - - 488 520
----------------------------------------------------------
Collective Allowance
at beginning of
period 34 44 1,452 1,383
Collective provision
for credit losses (10) (8) 27 23
Foreign exchange and
other - - 6 (44)
----------------------------------------------------------
Collective Allowance
at end of period 24 36 1,485 1,362
----------------------------------------------------------
Total Allowance 24 36 1,973 1,882
----------------------------------------------------------
Comprised of: Loans 24 36 1,755 1,706
Other credit
instruments - - 218 176
----------------------------------------------------------
----------------------------------------------------------
Interest income on impaired loans of $39 million and $112 million was
recognized respectively, for the three and nine months ended July 31, 2012
($22 million and $72 million, respectively, for the three and nine months
ended July 31, 2011).
Purchased Loans
We record all loans that we purchase at fair value on the day that we acquire
the loans. The fair value of the acquired loan portfolio includes an estimate of
the interest rate premium or discount on the loans calculated as the difference
between the contractual rate of interest on the loans and prevailing interest
rates (the "interest rate mark"). Also included in fair value is an estimate of
expected credit losses (the "credit mark") as of the acquisition date. The
credit mark consists of two components: an estimate of the amount of losses that
exist in the acquired loan portfolio on the acquisition date but that haven't
been specifically identified on that date (the "incurred credit mark") and an
amount that represents future expected losses (the "future credit mark"). As a
result of recording the loans at fair value, no allowance for credit losses is
recorded in our Consolidated Balance Sheet on the day we acquire the loans. Fair
value is determined by estimating the principal and interest cash flows expected
to be collected on the loans and discounting those cash flows at a market rate
of interest. We estimate cash flows expected to be collected based on specific
loan reviews for commercial loans. For retail loans, we use models that
incorporate management's best estimate of current key assumptions such as
default rates, loss severity, timing of prepayments and collateral.
Acquired loans are classified into the following categories: those that on the
acquisition date continued to make timely principal and interest payments (the
"purchased performing loans") and those which on the acquisition date the timely
collection of interest and principal was no longer reasonably assured (the
"purchased credit impaired loans" or "PCI" loans). Because purchased credit
impaired loans are recorded at fair value at acquisition based on the amount
expected to be collected, none of the purchased credit impaired loans are
considered to be impaired at acquisition.
Subsequent to the acquisition date, we account for each type of loan as follows:
Purchased Performing Loans
For performing loans with fixed terms, the interest rate mark and future credit
mark are fully amortized to net interest income over the expected life of the
loan using the effective interest method. Specific provisions for credit losses
are recorded as they arise in a manner that is consistent with our accounting
policy for originated loans. The incurred credit losses are re-measured at each
reporting period consistent with our methodology for the collective allowance,
with any increases recorded in the provision for credit losses. Decreases in
incurred credit losses are recorded in the provision for credit losses until the
accumulated collective allowance is exhausted. Any additional decreases are
recorded in net interest income.
For loans with revolving terms, the interest rate mark as well as the incurred
and future credit marks are amortized into net interest income on a
straight-line basis over the contractual terms of the loans. As the incurred
credit mark amortizes, we record an allowance for credit losses at a level
appropriate to absorb credit-related losses on these loans, consistent with our
methodology for the collective allowance.
As loans are repaid, the remaining unamortized credit mark related to those
loans is recorded in net interest income during the period that the loan is
repaid.
As at July 31, 2012, the remaining credit mark on performing term loans,
revolving loans and other performing loans was $975 million, $354 million and
$28 million, respectively ($1,497 million, $589 million, and $47 million,
respectively as at October 31, 2011). Of the total credit mark for performing
loans of $1,357 million, $671 million will be amortized over the remaining life
of the portfolio. The portion that will not be amortized was $686 million, and
will be recognized in either net interest income or provisions for credit losses
as loans are repaid or changes in the credit quality of the portfolio occur.
Purchased Credit Impaired Loans
Subsequent to the acquisition date, we regularly re-evaluate what we expect to
collect on the purchased credit impaired loans. Increases in expected cash flows
will result in a recovery in the provision for credit losses and either a
reduction in any previously recorded allowance for credit losses or, if no
allowance exists, an increase in the current carrying value of the purchased
loans. Decreases in expected cash flows will result in a charge to the specific
provision for credit losses and an increase to the allowance for credit losses.
For purchased credit impaired loans, the interest rate mark is amortized into
net interest income using the effective interest method over the effective life
of the loan. As loans are repaid, the remaining credit mark related to those
loans is recorded in the provision for credit losses during the period that the
loan is repaid.
As at July 31, 2012, the remaining credit mark related to purchased credit
impaired loans was $619 million ($1,209 million as at October 31, 2011).
Unfunded Commitments and Letters of Credit Acquired
As part of our purchase of Marshall & Ilsley Corporation ("M&I"), we recorded a
liability of $192 million related to unfunded commitments and letters of credit.
The total credit mark and interest rate mark associated with unfunded
commitments and letters of credit are amortized into net interest income on a
straight-line basis over the contractual term of the acquired liabilities. As
the credit mark is amortized, an appropriate collective allowance is recorded,
consistent with our methodology for the collective allowance.
As at July 31, 2012, the remaining credit mark on unfunded commitments and
letters of credit was $124 million ($178 million as at October 31, 2011).
FDIC Covered Loans
Loans acquired as part of our acquisition of AMCORE Bank are subject to a loss
share agreement with the Federal Deposit Insurance Corporation ("FDIC"). Under
this agreement, the FDIC reimburses us for 80% of the net losses we incur on
these loans.
For the three and nine months ended July 31, 2012, we recorded new provisions
for credit losses and recoveries of $1 million and $2 million, respectively,
related to loans covered by the FDIC loss share agreement (provisions for credit
losses and recoveries of $5 million and $(10) million, respectively, for the
three and nine months ended July 31, 2011). These amounts are net of the amounts
expected to be reimbursed by the FDIC.
Note 4: Risk Management
We have an enterprise-wide approach to the identification, measurement,
monitoring and management of risks faced across the organization. The key
financial instruments risks are classified as credit and counterparty, market,
and liquidity and funding risk.
Credit and Counterparty Risk
We are exposed to credit risk from the possibility that counterparties may
default on their financial obligations to us. Credit risk arises predominantly
with respect to loans, over-the-counter derivatives and other credit
instruments. This is the most significant measurable risk that we face.
Market Risk
Market risk is the potential for adverse changes in the value of our assets and
liabilities resulting from changes in market variables such as interest rates,
foreign exchange rates, equity and commodity prices and their implied
volatilities, and credit spreads, as well as the risk of credit migration. We
incur market risk in our trading and underwriting activities and structural
banking activities.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet
financial commitments in a timely manner at reasonable prices as they fall due.
It is our policy to ensure that sufficient liquid assets and funding capacity
are available to meet financial commitments, including liabilities to depositors
and suppliers, and lending, investment and pledging commitments, even in times
of stress. Managing liquidity and funding risk is essential to maintaining both
depositor confidence and stability in earnings.
Key measures as at July 31, 2012 are outlined in the Risk Management section on
pages 11 to 13 of Management's Discussion and Analysis of the Third Quarter
Report to Shareholders.
Note 5: Guarantees
In the normal course of business we enter into a variety of guarantees. The most
significant guarantees are as follows:
Standby Letters of Credit and Guarantees
Standby letters of credit and guarantees represent our obligation to make
payments to third parties on behalf of another party if that party is unable to
make the required payments or meet other contractual requirements. The maximum
amount payable under standby letters of credit and guarantees totalled $11,893
million as at July 31, 2012 ($11,880 million as at October 31, 2011). 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. 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.
As at July 31, 2012, $28 million ($45 million as at October 31, 2011) was
included in other liabilities related to guaranteed parties that were unable to
meet their obligation to third parties (See Note 3). No other amount was
included in our Consolidated Balance Sheet as at July 31, 2012 and October 31,
2011 related to these standby letters of credit and guarantees.
Backstop and Other Liquidity Facilities
Backstop liquidity facilities are provided to asset-backed commercial paper
("ABCP") programs administered by either us or third parties as an alternative
source of financing in the event that such programs are unable to access ABCP
markets or when predetermined performance measures of the financial assets owned
by these programs are not met. The terms of the backstop liquidity facilities do
not require us to advance money to these programs in the event of bankruptcy of
the borrower. The facilities' terms are generally no longer than one year, but
can be several years.
The maximum amount payable under these backstop and other liquidity facilities
totalled $4,537 million as at July 31, 2012 ($3,708 million as at October 31,
2011). As at July 31, 2012, $99 million was outstanding from facilities drawn in
accordance with the terms of the backstop liquidity facilities ($84 million as
at October 31, 2011).
Credit Enhancement Facilities
Where warranted, we provide partial credit enhancement facilities to
transactions within ABCP programs administered by either us or third parties.
Credit enhancement facilities are included in backstop liquidity facilities.
Senior Funding Facilities
In addition to our investment in the notes subject to the Montreal Accord, we
have provided a senior loan facility of $296 million as at July 31, 2012 ($300
million as at October 31, 2011). No amounts were drawn as at July 31, 2012 or
October 31, 2011.
Derivatives
Certain of our derivative instruments meet the accounting definition of a
guarantee when they require the issuer to make payments to reimburse the holder
for a loss incurred because a debtor fails to make payment when due under the
terms of a debt instrument. In order to reduce our exposure to these
derivatives, we enter into contracts that hedge the related risks.
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 maximum amount payable under credit
default swaps is equal to their notional amount of $29,721 million as at July
31, 2012 ($36,135 million as at October 31, 2011). The terms of these contracts
range from less than one year to 10 years. The fair value of the related
derivative liabilities included in derivative instruments in our Consolidated
Balance Sheet was $294 million as at July 31, 2012 ($880 million as at October
31, 2011).
Indemnification Agreements
In the normal course of operations, we enter into various agreements that
provide general indemnifications. These indemnifications typically occur in
connection with sales of assets, securities offerings, service contracts,
membership agreements, clearing arrangements, derivatives contracts and leasing
transactions. As part of the acquisition of M&I, we acquired a securities
lending business that lends securities owned by clients to borrowers who have
been evaluated for credit risk using the same credit risk process that is
applied to loans and other credit assets. In connection with these activities,
we provide an indemnification to lenders against losses resulting from the
failure of the borrower to return loaned securities when due. All borrowings are
fully collateralized with cash or marketable securities. As securities are
loaned, collateral is maintained at a minimum of 100% of the fair value of the
securities and the collateral is revalued on a daily basis. The amount of
securities loaned subject to indemnification was $4,595 million as at July 31,
2012 ($5,139 million as at October 31, 2011). No amount was included in our
Consolidated Balance Sheet as at July 31, 2012 and October 31, 2011 related to
these indemnifications.
Note 6: Securitization
Periodically, we securitize loans to obtain alternate sources of funding.
Securitization involves selling loans to trusts ("securitization vehicles"),
which buy the loans and then issue either interest bearing or discounted
investor certificates.
The following table shows the carrying amounts related to securitization
activities with third parties that are recorded on our Consolidated Balance
Sheet, together with the associated liabilities, for each category of asset on
the balance sheet:
(Canadian $ in July 31, October 31,
millions) 2012 (1)(2) 2011
----------------------------------------------------------------------------
Carrying Carrying
amount of Associated amount of Associated
assets liabilities assets liabilities
----------------------------------------------------------------------------
Available-for-sale
securities 1,150 874
Residential
mortgages 10,491 11,758
----------------------------------------------------------------------------
11,641 12,632
Other Related Assets 8,084 8,004
----------------------------------------------------------------------------
Total 19,725 19,684 20,636 20,462
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The fair value of the securitized assets is $19,943 million and the
fair value of the associated liabilities is $20,190 million, for a net
position of $(247) million. Securitized assets are those which the bank
has transferred to third parties and include other related assets.
(2) During the three and nine months ended July 31, 2012, we sold $998
million and $3,337 million of loans to third-party securitization
programs ($1,003 million and $3,156 million for the three and nine
months ended July 31, 2011).
The other related assets represent payments received on account of loans pledged
under securitization that have not been applied against the associated
liabilities. The payments received are held on behalf of the investors in the
securitization vehicles until principal payments are required to be made on the
associated liabilities. In order to compare all assets supporting the associated
liabilities, this amount is added to the carrying value of the securitized
assets in the above table.
Note 7: Special Purpose Entities
Total assets in our unconsolidated special purpose entities ("SPEs") and our
exposure to losses are summarized in the following table:
(Canadian $ in millions) July 31, 2012
----------------------------------------------------------------------------
Exposure Total
to loss assets
-------------------------------------------------
Undrawn
facilities Securities Derivative
(1) held assets Total
----------------------------------------------------------------------------
Unconsolidated SPEs
Canadian customer
securitization vehicles
(2) 3,760 257 - 4,017 3,394
Structured finance vehicles
(3) na 9,663 - 9,663 23,679
----------------------------------------------------------------------------
Total 3,760 9,920 - 13,680 27,073
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions) October 31, 2011
----------------------------------------------------------------------------
Exposure Total
to loss assets
-------------------------------------------------
Undrawn
facilities Securities Derivative
(1) held assets Total
----------------------------------------------------------------------------
Unconsolidated SPEs
Canadian customer
securitization vehicles
(2) 3,012 343 2 3,357 2,450
Structured finance vehicles
(3) na 7,331 - 7,331 19,117
----------------------------------------------------------------------------
Total 3,012 7,674 2 10,688 21,567
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) These facilities are backstop liquidity facilities provided to our
Canadian customer securitization vehicles. None of the backstop
liquidity facilities provided to our Canadian customer securitization
vehicles related to credit support as at July 31, 2012 and October 31,
2011. No amounts have been drawn as at July 31, 2012 and October 31,
2011.
(2) Securities held in our Canadian customer securitization vehicles are
comprised of asset-backed commercial paper and are classified as
trading securities and available-for-sale securities. Assets held by
all these vehicles relate to assets in Canada.
(3) We enter into derivative contracts with third-party investment funds to
provide their investors with specified exposures. We hedge our risk to
these derivative exposures by investing in the investment funds.
na - not applicable
Total assets in our consolidated SPEs and our exposure to losses are summarized
in the following table:
(Canadian $ in
millions) July 31, 2012
----------------------------------------------------------------------------
Exposure Total
to loss assets
------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative Total
facilities provided held assets (1)
----------------------------------------------------------------------------
Consolidated
SPEs
Canadian
customer
securitization
vehicles 11 - 559 - 570 584
U.S customer
securitization
vehicle 4,081 64 - - 4,145 3,474
Bank
securitization
vehicles (2) 2,550 - 379 24 2,953 8,095
Credit
protection
vehicle - Apex
(3) 1,030 - 1,376 201 2,607 2,225
Structured
investment
vehicles 50 1,842 - - 1,892 1,902
Capital and
funding trusts 2,907 11,762 842 99 15,610 15,001
----------------------------------------------------------------------------
Total 10,629 13,668 3,156 324 27,777 31,281
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) October 31, 2011
----------------------------------------------------------------------------
Exposure Total
to loss assets
------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative Total
facilities provided held assets (1)
----------------------------------------------------------------------------
Consolidated
SPEs
Canadian
customer
securitization
vehicles 20 - 89 - 109 89
U.S customer
securitization
vehicle 3,775 116 - 5 3,896 3,348
Bank
securitization
vehicles (2) 5,100 - 548 94 5,742 10,787
Credit
protection
vehicle - Apex
(3) 1,030 - 1,208 601 2,839 2,219
Structured
investment
vehicles 91 2,940 - 19 3,050 2,940
Capital and
funding trusts 2,459 8,596 1,162 94 12,311 12,520
----------------------------------------------------------------------------
Total 12,475 11,652 3,007 813 27,947 31,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) We consolidate the SPEs in the table and as a result, all intercompany
balances and transactions between the bank and the consolidated SPEs
are eliminated upon consolidation.
(2) Included in other liabilities is $7,766 million of ABCP and term asset-
backed securities funding our bank securitization vehicles ($10,292
million in 2011).
(3) As at July 31, 2012 and October 31, 2011, we have hedged our exposure
to our holdings of notes as well as the first $515 million of exposure
under the senior funding facility.
Note 8: Acquisitions
We account for acquisitions of businesses using the acquisition method. The cost
of an acquisition is measured at the fair value of the consideration, including
contingent consideration. Acquisition-related costs are recognized as an expense
in the period in which they are incurred. The acquired identifiable assets,
liabilities and contingent consideration are measured at their fair values at
the date of acquisition. Goodwill is measured as the excess of the aggregate of
the consideration transferred over the net of the amounts of identifiable assets
acquired and liabilities assumed. The results of operations of acquired
businesses are included in our consolidated financial statements beginning on
the date of acquisition.
CTC Consulting, LLC. ("CTC")
On June 11, 2012, we completed the acquisition of United States-based CTC
Consulting, LLC. for cash consideration of $20 million subject to a post-closing
adjustment based on equity. Acquisition costs of less than $1 million were
expensed in non-interest expense, other expenses. The acquisition of CTC will
help us to expand and enhance our manager research and advisory capabilities and
investment offering to ultra-high-net-worth clients and select multi-family
offices and wealth advisors. This will allow us to further strengthen and expand
our presence in the United States. As part of the acquisition, we acquired a
customer relationship intangible asset that is being amortized on an accelerated
basis over 15 years. Goodwill related to this acquisition is not deductible for
tax purposes. CTC is part of our Private Client Group reporting segment.
Marshall & Ilsley Corporation ("M&I")
On July 5, 2011, we completed the acquisition of Milwaukee-based Marshall &
Ilsley Corporation for consideration of approximately $4.1 billion (US $4.3
billion) paid in common shares, with fractional entitlements to our common
shares paid in cash. Each common share of M&I was exchanged for 0.1257 of a
common share, resulting in the issuance of approximately 67 million common
shares. The value of our common shares was arrived at using the market price of
the shares on the date of closing. In addition, immediately prior to the
completion of the transaction, we purchased M&I's Troubled Asset Relief Program
preferred shares and warrants from the U.S. Treasury for $1.6 billion (US $1.7
billion). Acquisition costs of $86 million were expensed in non-interest
expense, other expenses. The acquisition of M&I allows us to strengthen our
competitive position in the U.S. Midwest markets. As part of this acquisition,
we acquired a core deposit intangible asset that is being amortized on an
accelerated basis over a period of 10 years, a customer relationship intangible
asset which is being amortized on an accelerated basis over a period of 15
years, a credit card portfolio intangible asset which is being amortized on an
accelerated basis over a period of 15 years, and a trade name intangible asset
which is being amortized on an accelerated basis over a period of five years.
Goodwill related to this acquisition is not deductible for tax purposes. M&I is
part of our Personal and Commercial Banking U.S., Private Client Group, BMO
Capital Markets and Corporate Services reporting segments. Goodwill was
allocated to these segments except for Corporate Services.
Lloyd George Management ("LGM")
On April 28, 2011, we completed the acquisition of all outstanding voting shares
of Hong Kong-based Lloyd George Management, for cash consideration of $82
million subject to a post-closing adjustment based on working capital, plus
contingent consideration based on meeting certain revenue thresholds over three
years. We included contingent consideration of approximately $13 million in the
purchase price that is expected to be paid in future years related to this
acquisition. During the year ended October 31, 2011, we increased the purchase
price by $15 million to $110 million based on a revaluation of net assets
acquired and finalization of working capital adjustments. During the quarter
ended July 31, 2012, we decreased our estimate of the contingent consideration
to $5 million, resulting in a gain of $3 million ($8 million as at October 31,
2011, resulting in a gain of $5 million). Acquisition costs of $5 million were
expensed in non-interest expense, other expenses. The acquisition of LGM allows
us to expand our investment management capabilities in Asia and emerging markets
to meet clients' growing demand for global investment strategies. As part of
this acquisition, we acquired a customer relationship intangible asset which is
being amortized on a straight-line basis over a period of 15 years. Goodwill
related to this acquisition is not deductible for tax purposes. LGM is part of
our Private Client Group reporting segment.
The following acquisitions will close in subsequent quarters:
COFCO Trust Co.
On August 1, 2012, we acquired a 19.99% interest in COFCO Trust Co., a
subsidiary of COFCO Group, one of China's largest state-owned enterprises with
operations across a variety of sectors, including agriculture and financial
services. The investment provides an important opportunity for us to expand our
offering to high net worth and institutional clients in China. COFCO Trust Co.
will be part of our Private Client Group reporting segment.
Asian Wealth Management Business
On April 24, 2012, the bank reached a definitive agreement to acquire an
Asian-based wealth management business. Based in Hong Kong and Singapore, the
business provides private banking services to high net worth individuals in the
Asia-Pacific region. This acquisition provides an important opportunity for us
to expand our offering to high net worth individuals in the Asia Pacific region.
The deal is subject to regulatory approval. This Asian Wealth Management
Business will be part of our Private Client Group reporting segment.
The estimated fair values of the assets acquired and the liabilities assumed at
the date of acquisition are as follows:
(Canadian $ in millions) 2012 2011
----------------------------------------------------------------------------
CTC LGM M&I
----------------------------------------------------------------------------
Cash resources (1) 2 11 2,839
Securities - 3 5,980
Loans - - 29,046
Premises and equipment 1 - 431
Goodwill 6 70 1,958
Intangible assets 11 31 649
Deferred tax assets - - 2,160
Other assets 2 21 2,265
----------------------------------------------------------------------------
Total assets 22 136 45,328
----------------------------------------------------------------------------
Deposits - - 33,800
Other liabilities 2 26 7,417
----------------------------------------------------------------------------
Total liabilities 2 26 41,217
----------------------------------------------------------------------------
Purchase price 20 110 4,111
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The allocation of the purchase price for CTC is subject to refinement as we
complete the valuation of the assets acquired and liabilities assumed.
(1) Cash resources, acquired through the M&I acquisition include cash and
cash equivalents and interest bearing deposits.
Note 9: Goodwill
When we complete an acquisition, we allocate the purchase price paid to the
assets acquired, including identifiable intangible assets and the liabilities
assumed. Any excess of the consideration transferred over the fair value of
those net assets is considered to be goodwill. Goodwill is not amortized.
There were no write-downs of goodwill due to impairment during the three and
nine months ended July 31, 2012 and the year ended October 31, 2011.
A continuity of our goodwill by cash generating unit for the year ended October
31, 2011 and the nine months ended July 31, 2012 is as follows:
Personal and
Commercial
(Canadian $ in millions) Banking
----------------------------------------------------------------------------
P&C P&C Client
Canada U.S. Total Investing
----------------------------------------------------------------------------
Goodwill as at November 1, 2010 123 1,020 1,143 68
Acquisitions during the period - 1,478 1,478 -
Other (1) (1) 47 46 -
----------------------------------------------------------------------------
Goodwill as at October 31, 2011 122 2,545 2,667 68
Acquisitions during the period - - - -
Other (1) - 61 61 -
----------------------------------------------------------------------------
Goodwill as at July 31, 2012 122(2) 2,606(3) 2,728 68(4)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Private
Client
(Canadian $ in millions) Group
----------------------------------------------------------------------------
Investment Private
Products Banking Insurance Total
----------------------------------------------------------------------------
Goodwill as at November 1, 2010 216 77 2 363
Acquisitions during the period 157 257 - 414
Other (1) 4 10 - 14
----------------------------------------------------------------------------
Goodwill as at October 31, 2011 377 344 2 791
Acquisitions during the period - 6 - 6
Other (1) 4 9 - 13
----------------------------------------------------------------------------
Goodwill as at July 31, 2012 381(5) 359(6) 2 810
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BMO
Capital
(Canadian $ in millions) Markets Total
-------------------------------------------------------
-------------------------------------------------------
Goodwill as at November 1, 2010 113 1,619
Acquisitions during the period 76 1,968
Other (1) 2 62
-------------------------------------------------------
Goodwill as at October 31, 2011 191 3,649
Acquisitions during the period - 6
Other (1) 3 77
-------------------------------------------------------
Goodwill as at July 31, 2012 194(7) 3,732
-------------------------------------------------------
-------------------------------------------------------
(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 Moneris Solutions Corporate, bcpbank Canada and
Diners Club.
(3) Relates primarily to New Lenox State Bank, First National Bank of
Joliet, Household Bank branches, Mercantile Bancorp, Inc., Villa Park
Trust Savings Bank, First National Bank & Trust, Ozaukee Bank,
Merchants and Manufacturers Bancorporation, Inc., AMCORE and M&I.
(4) Relates to BMO Nesbitt Burns Corporation Limited.
(5) Relates to Guardian Group of Funds Ltd., Pyrford International plc,
Integra GRS, LGM and M&I.
(6) Relates primarily to Harris myCFO, Inc. and Stoker Ostler Wealth
Advisors, Inc. M&I and CTC.
(7) Relates to Gerard Klauer Mattison Co., Inc., BMO Nesbitt Burns
Corporation Limited, Griffin, Kubik, Stephens & Thompson, Inc., Paloma
Securities LLC and M&I.
Note 10: Deposits
Payable on demand
------------------------------------------
(Canadian $ Payable
in millions) Interest bearing Non-interest bearing after notice
----------------------------------------------------------------------------
July October July October July October
31, 2012 31, 2011 31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------------------------------------------
Deposits by:
Banks 735 747 612 541 3,101 2,423
Businesses
and
governments
(1) 15,700 11,839 20,313 18,769 39,400 37,953
Individuals 4,991 7,170 10,242 9,438 63,391 59,313
----------------------------------------------------------------------------
Total (2) (3) 21,426 19,756 31,167 28,748 105,892 99,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Booked In
Canada 19,730 18,845 23,678 21,059 57,456 51,340
United
States 1,406 496 7,375 7,562 47,694 47,767
Other
Countries 290 415 114 127 742 582
----------------------------------------------------------------------------
Total 21,426 19,756 31,167 28,748 105,892 99,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ Payable on
in millions) a fixed date Total
-------------------------------------------------------
July October July October
31, 2012 31, 2011 31, 2012 31, 2011
-------------------------------------------------------
Deposits by:
Banks 18,866 17,166 23,314 20,877
Businesses
and
governments
(1) 108,285 90,648 183,698 159,209
Individuals 43,332 46,366 121,956 122,287
-------------------------------------------------------
Total (2) (3) 170,483 154,180 328,968 302,373
-------------------------------------------------------
-------------------------------------------------------
Booked In
Canada 95,375 96,434 196,239 187,678
United
States 60,198 43,881 116,673 99,706
Other
Countries 14,910 13,865 16,056 14,989
-------------------------------------------------------
Total 170,483 154,180 328,968 302,373
-------------------------------------------------------
-------------------------------------------------------
(1) Included in business and government deposits payable on a fixed date
are Covered Bond issuances of EUR1 billion maturing in January 2013,
US$2 billion maturing in October 2014, US$2 billion maturing in June
2015, US$1.5 billion maturing in January 2016 and US$2 billion maturing
in January 2017 and which pay interest of 4.25%, 1.30%, 2.85%, 2.63%
and 1.95%, respectively (October 31, 2011 - EUR1 billion maturing in
January 2013, US$2 billion maturing in October 2014, US$2 billion
maturing in June 2015 and US$1.5 billion maturing in January 2016 and
which pay interest of 4.25%, 1.30%, 2.85% and 2.63% respectively).
(2) Includes structured notes designated under the fair value option.
(3) As at July 31, 2012 and October 31, 2011, total deposits payable on a
fixed date included $20,737 million and $18,190 million, respectively,
of federal funds purchased, commercial paper issued and other deposit
liabilities.
During the quarter ended July 31, 2012 and 2011, we did not issue any Covered
Bonds.
During the quarter ended January 31, 2012, we issued US$2.0 billion Covered
Bond-Series 5. This deposit pays interest of 1.95% and matures on January 30,
2017.
During the quarter ended January 31, 2011, we issued US$1.5 billion Covered
Bond-Series 3. This deposit pays interest of 2.63% and matures on January 25,
2016.
Deposits payable on demand are comprised primarily of our customers' chequing
accounts, some of which we pay interest on. Our customers need not notify us
prior to withdrawing money from their chequing accounts.
Deposits payable after notice are comprised primarily of our customers' savings
accounts, on which we pay interest.
Deposits payable on a fixed date are comprised of:
- Various investment instruments purchased by our customers to earn interest
over a fixed period, such as term deposits and guaranteed investment
certificates. The terms of these deposits can vary from one day to 10 years.
- Federal funds purchased, which are overnight borrowings of other banks' excess
reserve funds at a United States Federal Reserve Bank. As at July 31, 2012, we
had borrowed $803 million of federal funds ($831 million as at October 31,
2011).
- Commercial paper, which totalled $4,701 million as at July 31, 2012 ($3,804
million as at October 31, 2011).
- Covered bonds, which totalled $9,104 million as at July 31, 2012 ($7,087
million as at October 31, 2011).
The following table presents the maturity schedule for our deposits payable on a
fixed date:
(Canadian $ in millions) Payable on a fixed date (2)
----------------------------------------------------------------------------
July 31, October 31,
2012 2011
----------------------------------------------------------------------------
Within 1 year 129,195 106,655
1 to 2 years 9,077 15,944
2 to 3 years 13,210 10,107
3 to 4 years 5,847 7,078
4 to 5 years 9,099 8,644
Over 5 years (1) 4,055 5,752
----------------------------------------------------------------------------
Total (1) 170,483 154,180
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes structured notes designated under the fair value option.
(2) Includes $143,850 million of deposits, each greater than one hundred
thousand dollars, of which $75,678 million were booked in Canada, $53,260
million were booked in the United States and $14,912 million were booked in
other countries ($125,083 million, $75,712 million, $35,505 million and
$13,866 million, respectively, in 2011). Of the $75,678 million of deposits
booked in Canada, $32,673 million mature in less than three months, $5,639
million mature in three to six months, $9,110 million mature in six to 12
months and $28,256 million mature after 12 months ($75,712 million, $33,582
million, $1,846 million, $6,154 million and $34,130 million, respectively,
in 2011). We have liquid assets of $169,806 million to support these and
other deposit liabilities ($147,771 million in 2011). A portion of these
liquid assets have been pledged.
Note 11: Subordinated Debt
During the quarter ended July 31, 2012, we redeemed all of our Series D
Medium-Term Notes-Tranche 2 at a redemption amount equal to $1,000, representing
an aggregate redemption of $1,200 million, plus unpaid accrued interest to, but
excluding, the date fixed for redemption.
During the quarter ended April 30, 2011, we issued $1.5 billion of subordinated
debt under our Canadian Medium-Term Note Program. The issue, Series G
Medium-Term Notes, First Tranche, is due July 8, 2021. Interest on this issue is
payable semi-annually at a fixed rate of 3.979% until July 8, 2016, and at a
floating rate equal to the rate on three month Bankers' Acceptances plus 1.09%,
paid quarterly, thereafter to maturity. This issue is redeemable at our option
with the prior approval of the Office of Superintendent of Financial
Institutions of Canada ("OSFI") at par commencing July 8, 2016.
Note 12: Capital Trust Securities
During the quarter ended July 31, 2012 and 2011, we did not issue or redeem any
Capital Trust Securities.
During the quarter ended January 31, 2012, we redeemed all of our BMO Capital
Trust securities - Series C ("BMO BOaTs - Series C") at a redemption amount
equal to $1,000 for an aggregate redemption of $400 million, plus unpaid
distributions.
During the quarter ended January 31, 2011, we redeemed all of our BMO Capital
Trust Securities - Series B ("BMO BOaTs - Series B") at a redemption amount
equal to $1,000, for an aggregate redemption of $400 million, plus unpaid
distributions.
Note 13: Share Capital
During the quarter ended July 31, 2012 and 2011, we did not issue or redeem any
preferred shares.
During the quarter ended April 30, 2012, we redeemed all of our U.S dollar
denominated Non-Cumulative Perpetual Class B Preferred Shares Series 10, at a
price of US$25.00 per share plus all declared and unpaid dividends up to but
excluding the date fixed for redemption. We recognized a gain of $96 million in
contributed surplus related to foreign exchange upon redemption.
During the quarter ended July 31, 2011, we issued 66,519,673 common shares to
M&I shareholders as consideration for the acquisition of M&I.
During the quarter ended April 30, 2011, we issued 11,600,000 3.9%
Non-Cumulative 5-year Rate Reset Class B Preferred Shares, Series 25, at a price
of $25.00 per share, representing an aggregate issue price of $290 million.
We did not repurchase any shares under our previous normal course issuer bid,
which expired on December 15, 2011.
Share Capital Outstanding (1)
(Canadian $
in
millions,
except as
noted) July 31, 2012 October 31, 2011
----------------------------------------------------------------------------
Number Number
of of
shares Amount shares Amount Convertible into...
----------------------------------------------------------------------------
Preferred
Shares -
Classified
as Equity
Class B - 8,000,000 200 8,000,000 200 -
Series 5
Class B - - - 12,000,000 396 common shares (3)
Series 10
(2)
Class B - 14,000,000 350 14,000,000 350 -
Series 13
Class B - 10,000,000 250 10,000,000 250 -
Series 14
Class B - 10,000,000 250 10,000,000 250 -
Series 15
Class B - 12,000,000 300 12,000,000 300 preferred shares - class
Series 16 B - series 17 (4)
Class B - 6,000,000 150 6,000,000 150 preferred shares - class
Series 18 B - series 19 (4)
Class B - 11,000,000 275 11,000,000 275 preferred shares - class
Series 21 B - series 22 (4)
Class B - 16,000,000 400 16,000,000 400 preferred shares - class
Series 23 B - series 24 (4)
Class B - 11,600,000 290 11,600,000 290 preferred shares - class
Series 25 B - series 26 (4)
----------------------------------------------------------------------------
2,465 2,861
Common
Shares 646,938,251 11,748 638,999,563 11,332
----------------------------------------------------------------------------
Share
Capital 14,213 14,193
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) For additional information refer to Notes 20 and 22 to our consolidated
financial statements for the year ended October 31, 2011 on pages 154
to 158 of our 2011 Annual Report.
(2) Face value is US$300 million.
(3) The number of shares issuable on conversion is not determinable until
the date of conversion.
(4) If converted, the holders have the option to convert back to the
original preferred shares on subsequent redemption dates.
(5) The stock options issued under the stock option plan are convertible
into 16,936,838 common shares as at July 31, 2012 (16,989,499 common
shares as at October 31, 2011).
Note 14: Capital Management
Our objective is to maintain a strong capital position in a cost-effective
structure that: considers our target regulatory capital ratios and internal
assessment of required economic capital; is consistent with our targeted credit
ratings; underpins our operating groups' business strategies; and builds
depositor confidence and long-term shareholder value.
We have met OSFI's stated minimum capital ratios requirement as at July 31,
2012. Our capital position as at July 31, 2012 is detailed in the Capital
Management section on page 16 of Management's Discussion and Analysis of the
Third Quarter Report to Shareholders.
Note 15: Employee Compensation
Stock Options
During the nine months ended July 31, 2012, we granted a total of 2,526,345
stock options (5,475,545 stock options during the nine months ended July 31,
2011). The weighted-average fair value of options granted during the nine months
ended July 31, 2012 was $5.54 per option ($3.87 per option for the nine months
ended July 31, 2011, of which, the weighted fair value of options granted as
part of M&I acquisition was $2.22, for a total of 3,676,632 stock options).
To determine the fair value of the stock option tranches (i.e. the 25% portion
that vests each year) on the grant date, the following ranges of values were
used for each option pricing assumption:
For stock options granted during the nine months July 31, July 31,
ended 2012 2011
----------------------------------------------------------------------------
Expected dividend yield 6.8%-7.2% 5.5%-6.4%
Expected share price volatility 21.3%-22.3% 18.7%-22.8%
Risk-free rate of return 1.5%-1.8% 1.3%-3.0%
Expected period until exercise (in years) 5.5-7.0 4.6-7.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes to the input assumptions can result in different fair value
estimates.
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
Other employee
Pension benefit future benefit
plans plans
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the three months ended 2012 2011 2012 2011
----------------------------------------------------------------------------
Benefits earned by employees 50 41 5 5
Interest cost on accrued benefit
liability 67 63 13 14
Actuarial loss recognized in expense - - - -
Plan amendment costs recognized in
expense - 25 - (1)
Expected return on plan assets (79) (81) (2) (1)
----------------------------------------------------------------------------
Benefits expense 38 48 16 17
Canada and Quebec pension plan expense 16 15 - -
Defined contribution expense 2 2 - -
----------------------------------------------------------------------------
Total pension and other employee future
benefit expenses 56 65 16 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------------------------
Other employee
Pension benefit future benefit
plans plans
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
For the nine months ended 2012 2011 2012 2011
----------------------------------------------------------------------------
Benefits earned by employees 142 118 14 16
Interest cost on accrued benefit
liability 199 189 39 40
Actuarial loss recognized in expense 1 - - -
Plan amendment costs recognized in
expense - 25 (2) (3)
Expected return on plan assets (236) (243) (4) (3)
----------------------------------------------------------------------------
Benefits expense 106 89 47 50
Canada and Quebec pension plan expense 56 53 - -
Defined contribution expense 7 7 - -
----------------------------------------------------------------------------
Total pension and other employee future
benefit expenses 169 149 47 50
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Note 16: Earnings Per Share
The following tables present the bank's basic and diluted earnings per share:
Basic earnings per share
(Canadian $ in millions, except as For the three For the nine
noted) months ended months ended
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net income attributable to Bank
shareholders 951 690 3,051 2,292
Dividends on preferred share (32) (39) (103) (109)
----------------------------------------------------------------------------
Net income available to common
shareholders 919 651 2,948 2,183
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 645,715 589,999 642,748 575,548
----------------------------------------------------------------------------
Basic earnings per share (Canadian $) 1.42 1.10 4.59 3.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share
(Canadian $ in millions, except as For the three For the nine
noted) months ended months ended
----------------------------------------------------------------------------
July 31, July 31, July 31, July 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net income available to common
shareholders adjusted for dilution
effect 919 660 2,957 2,213
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 645,715 589,999 642,748 575,548
----------------------------------------------------------------------------
Convertible shares 75 11,602 4,054 13,943
Stock options potentially exercisable
(1) 5,161 8,172 6,781 8,871
Common shares potentially repurchased (4,111) (6,087) (5,550) (6,563)
----------------------------------------------------------------------------
Average diluted number of common shares
outstanding (in thousands) 646,840 603,686 648,033 591,799
----------------------------------------------------------------------------
Diluted earnings per share (Canadian $) 1.42 1.09 4.56 3.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In computing diluted earnings per share we excluded average stock
options outstanding of 9,143,126 and 6,328,013 with a weighted-average
exercise price of $107.49 and $132.92, respectively, for the three and
nine months ended July 31, 2012 (2,291,209 and 2,365,484 with a
weighted-average exercise price of $139.93 and $102.30, respectively,
for the three and nine months ended July 31, 2011) as the average share
price for the period did not exceed the exercise price.
Basic Earnings per Share
Our basic earnings per share is calculated by dividing our net income, after
deducting total preferred shares dividends by the daily average number of fully
paid common shares outstanding throughout the period.
Diluted Earnings per Share
Diluted earnings per share represents what our earnings per share would have
been if instruments convertible into common shares that had the impact of
reducing our earnings per share had been converted either at the beginning of
the period for instruments that were outstanding at the beginning of the period
or from the date of issue for instruments issued during the period.
Convertible Shares
In determining diluted earnings per share, we increase net income available to
common shareholders by dividends paid on convertible preferred shares and
interest on capital trust securities as these distributions would not have been
paid if the instruments had been converted at the beginning of the period.
Similarly, we increase the average number of common shares outstanding by the
number of shares that would have been issued had the conversion taken place at
the beginning of the period.
Employee Stock Options
In determining diluted earnings per share, we increase the average number of
common shares outstanding by the number of shares that would have been issued if
all stock options with a strike price below the average share price for the
period had been exercised. When performance targets have not been met, affected
options are excluded from the calculation. We also decrease the average number
of common shares outstanding by the number of our common shares that we could
have repurchased if we had used the proceeds from the exercise of stock options
to repurchase them on the open market at the average share price for the period.
We do not adjust for stock options with a strike price above the average share
price for the period because including them would increase our earnings per
share, not dilute it.
Note 17: Operating and Geographic Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a
distinct mandate. We determine our operating groups based on our management
structure and therefore these groups, and results attributed to them, may not be
comparable with those of other financial services companies. We evaluate the
performance of our groups using measures such as net income, revenue growth,
return on equity, net economic profit and non-interest expense-to-revenue
(productivity) ratio, as well as cash operating leverage.
Personal and Commercial Banking
Personal and Commercial Banking ("P&C") is comprised of two operating segments:
Personal and Commercial Banking Canada and Personal and Commercial Banking U.S.
Personal and Commercial Banking Canada
Personal and Commercial Banking Canada ("P&C Canada") offers a broad range of
products and services to personal and business customers, including solutions
for everyday banking, financing, investing, credit cards and creditor insurance,
as well as a broad suite of commercial and financial advisory services, through
an integrated network of branches, telephone banking, online and mobile banking
and automated banking machines as well as expertise from mortgage specialists,
financial planners and small business bankers. Effective in the first quarter of
2012, Private Client Group and P&C Canada have entered into a revised agreement
sharing the financial results related to retail Mutual Fund sales. Prior periods
have been restated.
Personal and Commercial Banking U.S.
Personal and Commercial Banking U.S. ("P&C U.S.") offers a broad range of
products and services to personal and business clients in select U.S. Midwest
markets, Arizona and Florida through branches and direct banking channels such
as telephone banking, online banking and a network of automated banking
machines.
Private Client Group
Private Client Group ("PCG"), our group of wealth management businesses, serves
a full range of client segments, from mainstream to ultra-high net worth, as
well as select institutional markets, with a broad offering of wealth management
products and solutions including insurance products. PCG operates in both Canada
and the United States, as well as in Asia and Europe. Effective in the first
quarter of 2012, PCG and P&C Canada have entered into a revised agreement
sharing the financial results related to retail Mutual Fund sales. Prior periods
have been restated.
BMO Capital Markets
BMO Capital Markets ("BMO CM") combines all of our businesses serving corporate,
institutional and government clients. In Canada and the United States, these
clients span a broad range of industry sectors. BMO CM also serves clients in
the United Kingdom, Europe, Asia and Australia. BMO CM offers clients financial
solutions, including equity and debt underwriting, corporate lending and project
financing, mergers and acquisitions, advisory services, merchant banking,
securitization, treasury and market risk management, debt and equity research
and institutional sales and trading.
Corporate Services
Corporate Services includes the corporate units that provide enterprise-wide
expertise and governance support in areas such as Technology and Operations
("T&O"), strategic planning, legal and compliance, finance, internal audit, risk
management, corporate communications, economics, corporate marketing and human
resources. Operating results include revenues and expenses associated with
certain securitization and asset-liability management activities, the
elimination of taxable equivalent adjustments, the impact of our expected loss
provisioning methodology, the results from certain impaired loan portfolios, the
impact of certain fair value adjustments, and integration and restructuring
costs relating to the M&I acquisition.
T&O manages, maintains and provides governance over our information technology,
operations services, real estate and sourcing. T&O focuses on enterprise-wide
priorities that improve quality and efficiency to deliver an excellent customer
experience.
Operating results for T&O are included with Corporate Services for reporting
purposes. However, costs of T&O services are transferred to the three operating
groups and only minor amounts are retained. As such, results for Corporate
Services largely reflect the activities outlined above.
Corporate Services also includes residual revenues and expenses representing the
differences between actual amounts earned or incurred and the amounts allocated
to operating groups.
Operating results for the structured credit vehicles are included within
Corporate Services for reporting purposes from November 1, 2010 onwards.
Previously they were recorded in BMO Capital Markets.
Basis of Presentation
The results of these operating segments 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 our interim consolidated financial statements for the
quarter ended April 30, 2012. Notable accounting measurement differences are the
taxable equivalent basis adjustment and the provisions for credit losses, as
described below.
Taxable Equivalent Basis
We analyze net interest income on a taxable equivalent basis ("teb") at the
operating group level. This basis includes an adjustment which increases
revenues and the provision for income taxes by an amount that would raise
revenues on certain tax-exempt securities to a level that incurs tax at the
statutory rate. The operating groups' teb adjustments are eliminated in
Corporate Services.
Provisions for Credit Losses
Provisions for credit losses are generally allocated to each group based on
expected losses for that group. Differences between expected loss provisions and
provisions required under IFRS are included in Corporate Services.
Acquisition of Marshall & Ilsley Corporation
Commencing on July 5, 2011, our P&C U.S., PCG, BMO CM and Corporate Services
segments include a portion of M&I's acquired business. Within Corporate Services
we have included the fair value adjustments for credit losses on the M&I loan
portfolio and the valuation of loans and deposits at current market rates. Upon
acquisition, Corporate Services also included approximately $1.5 billion of
certain M&I stressed real estate - secured assets, comprised primarily of
commercial real estate loans. Corporate Services results will include any
changes in our estimate of credit losses as well as adjustments to net interest
income. The operating groups' results will reflect the provision for credit
losses on an expected loss basis and net interest income based on the
contractual rates for loans and deposits.
Impaired Real Estate-Secured Loans
During the quarter ended July 31, 2011, approximately $1 billion of impaired
real estate-secured loans comprised primarily of commercial real estate loans
were transferred to Corporate Services from P&C U.S. to allow our businesses to
focus on ongoing customer relationships and leverage our risk management
expertise in our special assets management unit.
Inter-Group Allocations
Various estimates and allocation methodologies are used in the preparation of
the operating groups' financial information. We allocate expenses directly
related to earning revenue to the groups that earned the related revenue.
Expenses not directly related to earning revenue, such as overhead expenses, are
allocated to operating groups using allocation formulas applied on a consistent
basis. Operating group net interest income reflects internal funding charges and
credits on the groups' assets, liabilities and capital, at market rates, taking
into account relevant terms and currency considerations. The offset of the net
impact of these charges and credits is reflected in Corporate Services.
Geographic Information
We operate primarily in Canada and the United States but we also have operations
in the United Kingdom, Europe, the Caribbean and Asia, which are grouped in
Other countries. We allocated our results by geographic region based on the
location of the unit responsible for managing the related assets, liabilities,
revenues and expenses, except for the consolidated provision for credit losses,
which is allocated based upon the country of ultimate risk.
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
Corporate
For the three months P&C P&C Services
ended July 31, 2012 (2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 1,087 612 132 317 77 2,225
Non-interest revenue 469 139 546 489 10 1,653
----------------------------------------------------------------------------
Total Revenue 1,556 751 678 806 87 3,878
Provision for credit 143 85 4 25 (20) 237
losses
Amortization 37 48 17 11 63 176
Non-interest expense 758 429 527 469 125 2,308
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 618 189 130 301 (81) 1,157
Income taxes 165 60 21 69 (128) 187
Non-controlling interest
in subsidiaries - - - - 19 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 453 129 109 232 28 951
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 163,706 61,987 20,660 259,055 48,814 554,222
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 2,606 810 194 - 3,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate
For the three months P&C P&C Services
ended July 31, 2011 (2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 1,095 397 114 317 (120) 1,803
Non-interest revenue 447 88 508 505 (31) 1,517
----------------------------------------------------------------------------
Total Revenue 1,542 485 622 822 (151) 3,320
Provision for credit
losses 137 52 3 29 9 230
Amortization 35 27 10 7 52 131
Non-interest expense 750 267 478 448 147 2,090
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 620 139 131 338 (359) 869
Income taxes 177 49 27 68 (160) 161
Non-controlling interest
in subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 443 90 104 270 (217) 690
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 154,514 38,953 17,799 215,223 40,494 466,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 121 2,384 754 183 - 3,442
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------------------------
Corporate
For the nine months ended P&C P&C Services
July 31, 2012 (2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 3,259 1,842 424 912 226 6,663
Non-interest revenue 1,376 422 1,692 1,455 346 5,291
----------------------------------------------------------------------------
Total Revenue 4,635 2,264 2,116 2,367 572 11,954
Provision for credit
losses 422 254 11 73 (187) 573
Amortization 114 141 49 30 186 520
Non-interest expense 2,270 1,298 1,605 1,404 440 7,017
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 1,829 571 451 860 133 3,844
Income taxes 484 184 92 205 (228) 737
Non-controlling interest
in subsidiaries - - - - 56 56
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,345 387 359 655 305 3,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 160,158 61,782 20,053 252,049 49,531 543,573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 2,606 810 194 - 3,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate
For the nine months ended P&C P&C Services
July 31, 2011 (2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 3,263 974 333 956 (314) 5,212
Non-interest revenue 1,347 211 1,546 1,650 155 4,909
----------------------------------------------------------------------------
Total Revenue 4,610 1,185 1,879 2,606 (159) 10,121
Provision for credit
losses 409 123 7 89 222 850
Amortization 105 64 27 21 151 368
Non-interest expense 2,235 694 1,395 1,389 228 5,941
----------------------------------------------------------------------------
Income before taxes and
non-controlling interest
in subsidiaries 1,861 304 450 1,107 (760) 2,962
Income taxes 527 107 111 348 (477) 616
Non-controlling interest
in subsidiaries - - - - 54 54
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,334 197 339 759 (337) 2,292
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 152,817 32,529 16,825 208,229 39,383 449,783
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 121 2,384 754 183 - 3,442
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Corporate Services includes Technology and Operations.
(2) Operating groups report on a taxable equivalent basis - see Basis of
Presentation section.
Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.
Our results and average assets, allocated by geographic region, are as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
For the three months ended July United Other
31, 2012 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 1,351 856 18 2,225
Non-interest revenue 1,073 497 83 1,653
----------------------------------------------------------------------------
Total Revenue 2,424 1,353 101 3,878
Provision for credit losses 104 135 (2) 237
Amortization 102 72 2 176
Non-interest expense 1,356 888 64 2,308
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in
subsidiaries 862 258 37 1,157
Income taxes 142 54 (9) 187
Non-controlling interest in
subsidiaries 14 5 - 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 706 199 46 951
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 338,213 195,293 20,716 554,222
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 447 3,192 93 3,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended July United Other
31, 2011 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 1,377 422 4 1,803
Non-interest revenue 1,141 329 47 1,517
----------------------------------------------------------------------------
Total Revenue 2,518 751 51 3,320
Provision for credit losses 133 93 4 230
Amortization 90 40 1 131
Non-interest expense 1,372 676 42 2,090
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in
subsidiaries 923 (58) 4 869
Income taxes 193 (36) 4 161
Non-controlling interest in
subsidiaries 13 5 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 717 (27) - 690
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 302,766 143,537 20,680 466,983
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 439 2,915 88 3,442
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended July 31, United Other
2012 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 4,003 2,617 43 6,663
Non-interest revenue 3,530 1,413 348 5,291
----------------------------------------------------------------------------
Total Revenue 7,533 4,030 391 11,954
Provision for credit losses 456 119 (2) 573
Amortization 299 216 5 520
Non-interest expense 4,199 2,656 162 7,017
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in
subsidiaries 2,579 1,039 226 3,844
Income taxes 459 284 (6) 737
Non-controlling interest in
subsidiaries 41 15 - 56
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 2,079 740 232 3,051
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 329,897 193,183 20,493 543,573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 447 3,192 93 3,732
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended July 31, United Other
2011 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 4,062 1,151 (1) 5,212
Non-interest revenue 3,669 966 274 4,909
----------------------------------------------------------------------------
Total Revenue 7,731 2,117 273 10,121
Provision for credit losses 496 331 23 850
Amortization 268 97 3 368
Non-interest expense 4,112 1,683 146 5,941
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in
subsidiaries 2,855 6 101 2,962
Income taxes 624 (19) 11 616
Non-controlling interest in
subsidiaries 40 14 - 54
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 2,191 11 90 2,292
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 298,827 129,701 21,255 449,783
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 439 2,915 88 3,442
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.
Note 18: Financial Instruments
Book Value and Fair Value of Financial Instruments
Set out in the following table are the amounts that would be reported if all of
our financial instrument assets and liabilities were reported at their fair
values. Refer to the notes to our interim consolidated financial statements for
the quarter ended April 30, 2012 on pages 42, 43 and 65 for further discussion
on the determination of fair value.
(Canadian $ in July 31, October 31,
millions) 2012 2011
----------------------------------------------------------------------------
Fair Fair
value value
over over
(under) (under)
Book Fair book Book Fair book
value value value value value value
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents 33,592 33,592 - 19,676 19,676 -
Interest bearing
deposits with banks 5,995 5,995 - 5,980 5,980 -
Securities 130,219 130,365 146 122,115 122,263 148
Securities borrowed or
purchased under
resale agreements 45,535 45,535 - 37,970 37,970 -
Loans
Residential
mortgages 85,595 86,559 964 81,075 82,337 1,262
Consumer instalment
and other personal 60,792 60,351 (441) 59,445 58,682 (763)
Credit cards 7,837 7,837 - 8,038 8,038 -
Business and
governments 92,870 92,092 (778) 84,883 83,951 (932)
----------------------------------------------------------------------------
247,094 246,839 (255) 233,441 233,008 (433)
Customers' liability
under acceptances 8,013 7,984 (29) 7,227 7,180 (47)
Allowance for credit
losses (1,755) (1,755) - (1,783) (1,783) -
----------------------------------------------------------------------------
Total loans and
customers' liability
under acceptances,
net of allowance for
credit losses 253,352 253,068 (284) 238,885 238,405 (480)
Derivative instruments 52,263 52,263 - 55,113 55,113 -
Premises and equipment 2,059 2,059 - 2,061 2,061 -
Goodwill 3,732 3,732 - 3,649 3,649 -
Intangible assets 1,572 1,572 - 1,562 1,562 -
Current tax assets 1,141 1,141 - 1,319 1,319 -
Deferred tax assets 3,000 3,000 - 3,355 3,355 -
Other assets 9,788 9,788 - 8,890 8,950 60
----------------------------------------------------------------------------
542,248 542,110 (138) 500,575 500,303 (272)
----------------------------------------------------------------------------
Liabilities
Deposits 328,968 329,227 259 302,373 302,617 244
Derivative instruments 53,132 53,132 - 50,934 50,934 -
Acceptances 8,013 8,013 - 7,227 7,227 -
Securities sold but
not yet purchased 22,523 22,523 - 20,207 20,207 -
Securities lent or
sold under repurchase
agreements 47,145 47,145 - 32,078 32,078 -
Current tax
liabilities 294 294 - 591 591 -
Deferred tax
liabilities 191 191 - 314 314 -
Other liabilities 48,029 48,639 610 52,846 53,673 827
Subordinated debt 4,107 4,290 183 5,348 5,507 159
Capital trust
securities 450 625 175 821 982 161
Equity 29,396 29,396 - 27,836 27,836 -
----------------------------------------------------------------------------
542,248 543,475 1,227 500,575 501,966 1,391
----------------------------------------------------------------------------
Total fair value
adjustment (1,365) (1,663)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial Instruments Designated at Fair Value
A portion of our structured note liabilities has been designated at fair value
through profit or loss and are accounted for at fair value, which aligns the
accounting result with the way the portfolio is managed. The change in fair
value of these structured notes was an increase in non-interest revenue, trading
revenues of $4 million and $32 million, respectively, for the three and nine
months ended July 31, 2012 (decrease of $76 million and $31 million,
respectively, for the three and nine months ended July 31, 2011). This includes
an increase of $24 million and a decrease of $7 million, respectively, for the
three and nine months ended July 31, 2012 attributable to changes in our credit
spread (increase of $6 million and decrease of $1 million, respectively, for the
three and nine months ended July 31, 2011). We recognized offsetting amounts on
derivatives and other financial instrument contracts that are held to hedge
changes in the fair value of these structured notes.
The change in fair value related to changes in our credit spread that has been
recognized since they were designated at fair value through profit or loss to
July 31, 2012 was an unrealized gain of $14 million. Starting in 2009, we hedged
the exposure to changes in our credit spreads.
The fair value and amount due at contractual maturity of these structured notes
as at July 31, 2012 were $4,463 million and $4,503 million, respectively ($4,301
million and $4,572 million, respectively, as at October 31, 2011). These
structured notes are recorded in Other Liabilities in our Consolidated Balance
Sheet.
We designate certain insurance investments at fair value through profit or loss
since the actuarial calculation of insurance liabilities is based on the fair
value of the investments supporting them. This designation aligns the accounting
result with the way the portfolio is managed. The fair value of these
investments as at July 31, 2012 of $5,491 million ($4,965 million as at October
31, 2011) is recorded in Trading Securities in our Consolidated Balance Sheet.
The impact of recording these investments at fair value through profit or loss
was an increase of $119 million and $252 million in non-interest revenue,
insurance income, respectively, for the three and nine months ended July 31,
2012 (increase of $107 million and $88 million in non-interest revenue,
respectively, for the three and nine months ended July 31, 2011). Changes in the
insurance liability balances are also recorded in non-interest revenue,
insurance income.
We designate the obligation related to certain annuity contracts at fair value
through profit or loss, which eliminates a measurement inconsistency that would
otherwise arise from measuring the annuity liabilities and offsetting changes in
the fair value of the investments supporting them on a different basis. The fair
value of these annuity liabilities as at July 31, 2012 of $304 million ($214
million as at October 31, 2011) is recorded in Other Liabilities in our
Consolidated Balance Sheet. The change in fair value of these annuity
liabilities resulted in a decrease of $10 million and $21 million in
non-interest revenue, insurance income, respectively, for the three and nine
months ended July 31, 2012 (increase of $17 million and $25 million,
respectively, for the three and nine months ended July 31, 2011). Changes in the
fair value of investments backing these annuity liabilities are also recorded in
non-interest revenue, insurance income.
We designate investments held by our credit protection vehicle and our
structured investment vehicle at fair value through profit or loss, which aligns
the accounting result with the way the portfolio is managed. The fair value of
these investments as at July 31, 2012 of $4,154 million ($5,266 million as at
October 31, 2011) is recorded in Trading Securities in our Consolidated Balance
Sheet. The impact of recording these at fair value through profit or loss was a
decrease in non-interest revenue, trading revenues of $11 million and an
increase of $53 million, respectively, for the three and nine months ended July
31, 2012 (decrease of $49 million and an increase of $62 million, respectively,
for the three and nine months ended July 31, 2011). We recognized offsetting
amounts on derivative contracts that are held to hedge changes in the fair value
of these investments.
Note liabilities issued by our credit protection vehicle and our structured
investment vehicle have been designated at fair value through profit or loss and
are accounted for at fair value. This eliminates a measurement inconsistency
that would otherwise arise from measuring the note liabilities and offsetting
changes in the fair value of investments and derivatives on a different basis.
The fair value of these note liabilities as at July 31, 2012 of $850 million
($784 million as at October 31, 2011) is recorded in Other Liabilities in our
Consolidated Balance Sheet. The change in fair value of these note liabilities
resulted in a decrease of $24 million and $132 million, respectively, in
non-interest revenue, trading revenues for the three and nine months ended July
31, 2012 (decrease of $11 million and $161 million, respectively, for the three
and nine months ended July 31, 2011).
We designate certain investments held in our merchant banking business at fair
value through profit or loss, which aligns the accounting result with the way
the portfolio is managed. The fair value of these investments as at July 31,
2012 of $660 million ($577 million as at October 31, 2011) is recorded in
Securities in our Consolidated Balance Sheet. The impact of recording these
investments at fair value through profit or loss was a decrease in non-interest
revenue, trading revenues of $14 million and $40 million, respectively, for the
three and nine months ended July 31, 2012 (increase of $0.3 million and a
decrease of $23 million, respectively, for the three and nine months ended July
31, 2011).
Fair Value Hierarchy
We use a fair value hierarchy to categorize the inputs we use in valuation
techniques to measure fair value. The extent of our use of quoted market prices
(Level 1), internal models using observable market information as inputs (Level
2) and internal models without observable market information as inputs (Level 3)
in the valuation of securities, fair value liabilities, derivative assets and
derivative liabilities was as follows:
July 31,
(Canadian $ in millions) 2012
----------------------------------------------------------------------------
Valued Valued
Valued using using
using models models
quoted (with (without
market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal government 12,260 901 -
Canadian provincial and municipal
governments 3,114 2,430 -
U.S. federal government 7,669 - -
U.S. states, municipalities and
agencies - 232 -
Other governments 543 - -
Mortgage-backed securities and
collateralized mortgage obligations 372 634 395
Corporate debt 6,964 5,462 1,319
Corporate equity 22,544 5,206 -
----------------------------------------------------------------------------
53,466 14,865 1,714
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 21,108 - -
Canadian provincial and municipal
governments 2,840 297 -
U.S. federal government 8,705 - -
U.S. states, municipalities and
agencies 386 3,553 8
Other governments 5,818 823 -
Mortgage-backed securities and
collateralized mortgage obligations 3,572 3,476 -
Corporate debt 4,567 2,806 43
Corporate equity 183 155 957
----------------------------------------------------------------------------
47,179 11,110 1,008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 144 - 516
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet purchased 22,523 - -
Structured notes and other note
liabilities - 5,313 -
----------------------------------------------------------------------------
22,523 5,313 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 10 40,836 4
Foreign exchange contracts 53 9,173 -
Commodity contracts 1,386 117 -
Equity contracts 52 296 6
Credit default swaps - 286 44
----------------------------------------------------------------------------
1,501 50,708 54
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 11 39,500 22
Foreign exchange contracts 20 9,028 3
Commodity contracts 1,739 307 -
Equity contracts 73 2,097 38
Credit default swaps - 292 2
----------------------------------------------------------------------------
1,843 51,224 65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
October 31,
(Canadian $ in millions) 2011
----------------------------------------------------------------------------
Valued Valued
Valued using using
using models models
quoted (with (without
market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal government 14,012 21 -
Canadian provincial and municipal
governments 5,896 129 -
U.S. federal government 5,875 - -
U.S. states, municipalities and
agencies 389 212 -
Other governments 1,149 - -
Mortgage-backed securities and
collateralized mortgage obligations 562 1,194 494
Corporate debt 8,065 4,003 1,485
Corporate equity 23,706 2,733 -
----------------------------------------------------------------------------
59,654 8,292 1,979
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 19,896 - -
Canadian provincial and municipal
governments 1,189 296 -
U.S. federal government 4,670 - -
U.S. states, municipalities and
agencies 553 3,052 25
Other governments 7,704 825 -
Mortgage-backed securities and
collateralized mortgage obligations 5,088 913 -
Corporate debt 5,634 97 62
Corporate equity 197 214 1,011
----------------------------------------------------------------------------
44,931 5,397 1,098
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 84 - 493
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet purchased 20,207 - -
Structured notes and other note
liabilities - 5,085 -
----------------------------------------------------------------------------
20,207 5,085 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 14 37,817 167
Foreign exchange contracts 31 10,422 -
Commodity contracts 1,473 138 -
Equity contracts 3,869 461 6
Credit default swaps - 648 67
----------------------------------------------------------------------------
5,387 49,486 240
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 22 35,849 38
Foreign exchange contracts 23 9,884 -
Commodity contracts 1,520 320 -
Equity contracts 141 2,192 65
Credit default swaps - 878 2
----------------------------------------------------------------------------
1,706 49,123 105
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Valuation Techniques and Significant Inputs
We determine the fair value of publicly traded fixed maturity and equity
securities using quoted market prices in active markets (Level 1) when these are
available. When quoted prices in active markets are not available, we determine
the fair value of financial instruments using models such as discounted cash
flows with observable market data for inputs such as yield and prepayment rates
or broker quotes and other third-party vendor quotes (Level 2). Fair value may
also be determined using models where the significant market inputs are
unobservable due to inactive or minimal market activity (Level 3). We maximize
the use of market inputs to the extent possible.
Our Level 2 trading securities are primarily valued using discounted cash flow
models with observable spreads or based on broker quotes. The fair value of
Level 2 available-for-sale securities is determined using discounted cash flow
models with observable spreads or third-party vendor quotes. Level 2 structured
note liabilities are valued using models with observable market information.
Level 2 derivative assets and liabilities are valued using industry standard
models and observable market information.
Sensitivity analysis at July 31, 2012 for the most significant Level 3
instruments, that is securities which represent greater than 10% of Level 3
instruments, is provided below where applicable.
Within Level 3 trading securities are mortgage-backed securities and
collateralized mortgage obligations of $395 million. The fair value of these
securities is determined using benchmarking to similar instruments and by
obtaining independent prices provided by third-party vendors, broker quotes and
relevant market indices, as applicable. Where external price data is not
available, we assess the collateral performance in assessing the fair value of
the securities. The impact of assuming a 10 basis point increase or decrease in
market spread would result in a change in fair value of $(2) million and $2
million respectively.
Within Level 3 trading securities is corporate debt of $1,200 million that
relates to securities that are hedged with total return swaps and credit default
swaps that are also considered a Level 3 instrument. The sensitivity analysis
for the structured product is performed on an aggregate basis and is described
as part of the discussion on derivatives below.
Within Level 3 available-for-sale securities is corporate equity of $659 million
that relates to United States Federal Reserve Banks and United States Federal
Home Loan Banks that we hold to meet regulatory requirements in the United
States and $298 million that relates to private equity investments. The
valuation of these investments requires management judgement due to the absence
of quoted market prices, the potential lack of liquidity and the long-term
nature of such assets. Each quarter, the valuation of these investments is
reviewed using relevant company-specific and industry data including historical
and projected net income, credit and liquidity conditions and recent
transactions, if any. Since the valuation of these investments does not use
models, a sensitivity analysis on the category is not performed.
Within derivative assets and derivative liabilities as at July 31, 2012 was $48
million and $24 million, respectively, related to the mark-to-market of credit
default swaps and total return swaps on structured products. We have determined
the valuation of these derivatives and the related securities based on external
price data obtained from brokers and dealers for similar structured products.
Where external price information is not available, we use market-standard models
to model the specific collateral composition and cash flow structure of the
deal. Key inputs to the model are market spread data for each credit rating,
collateral type and other relevant contractual features. The impact of assuming
a 10 basis point increase or decrease in the market spread would result in a
change in fair value of $(4) million and $4 million, respectively.
Significant Transfers
Transfers are made between the various fair value hierarchy levels due to
changes in the availability of quoted market prices or observable market inputs
due to changing market conditions. The following is a discussion of the
significant transfers between Level 1, Level 2 and Level 3 balances for the
three and nine months ended July 31, 2012.
During the three months ended July 31, 2012, $15 million of trading
mortgage-backed securities were transferred from Level 2 to Level 3 as a result
of fewer available prices for these securities from third-party vendors during
the quarter. In addition, $14 million of trading mortgage-backed securities were
transferred from Level 3 to Level 2 as a result of increased market prices from
third-party vendors during the quarter.
During the three and nine months ended July 31, 2012, $12 million of trading
corporate debt securities were transferred from Level 3 to Level 2 as values for
these securities are now obtained through third-party vendors and are based upon
market prices. In addition, $9 million of derivative liabilities were
transferred from Level 3 to Level 2 as market information became available for
certain over-the-counter equity contracts.
During the nine months ended July 31, 2012, $24 million of available-for-sale
corporate debt securities and $14 million of trading mortgage-backed securities
were transferred from Level 3 to Level 2 as values for these securities are now
obtained through a third-party vendor and are based on market prices. In
addition, $105 million of trading mortgage-backed securities and $18 million of
trading corporate debt securities were transferred from Level 2 to Level 3 as a
result of fewer available prices for these securities during the period.
During the year ended October 31, 2011, available-for-sale securities purchased
as part of the M&I acquisition that are classified as Level 3 totalled $326
million of which $124 million were sold during the year ended October 31, 2011.
In addition, to meet regulatory requirements after the acquisition of M&I we
purchased $430 million of additional stock in Federal Reserve Banks and Federal
Home Loan Banks.
During the year ended October 31, 2011, $139 million of trading corporate debt
securities were transferred from Level 3 to Level 2 as values for these
securities are now obtained through a third-party vendor and are based on market
prices.
During the year ended October 31, 2011, $207 million and $20 million of
mortgage-backed securities and collateralized mortgage obligations were
transferred from Level 3 to Level 2 within trading securities and
available-for-sale securities, respectively, as values for these securities are
now obtained through a third-party vendor and are based on a larger volume of
market prices.
During the year ended October 31, 2011, derivative assets of $84 million and
derivative liabilities of $13 million were transferred from Level 3 to Level 2
as market information became available for certain over-the-counter equity
contracts.
Changes in Level 3 Fair Value Measurements
The table on the following page presents a reconciliation of all changes in
Level 3 financial instruments during the three and nine months ended July 31,
2012, including realized and unrealized gains (losses) included in earnings and
other comprehensive income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
-------------------------
Included
For the three Balance Included in other
months ended July April in comprehensive
31, 2012 30, 2012 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 431 7 - - (19)
Corporate debt 1,306 14 - 15 (4)
----------------------------------------------------------------------------
Total trading
securities 1,737 21 - 15 (23)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale
Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies 21 - 2 - -
Corporate debt 44 - 2 - (2)
Corporate equity 1,009 (1) 22 18 (91)
----------------------------------------------------------------------------
Total available-
for-sale
securities 1,074 (1) 26 18 (93)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 480 11 - 64 (39)
----------------------------------------------------------------------------
Total other
securities 480 11 - 64 (39)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 6 (2) - - -
Equity contracts 8 (2) - - -
Credit default
swaps 55 (11) - - -
----------------------------------------------------------------------------
Total derivative
assets 69 (15) - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 33 (11) - - -
Foreign exchange
contracts - 3 - - -
Equity contracts 54 (1) - - (6)
Credit default
swaps 2 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 89 (9) - - (6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
--------------------------------------------------------------------
Fair
Value Unrealized
For the three Transfers as at Gains
months ended July Maturities in/(out)of July (losses)
31, 2012 (1) Level 3 31, 2012 (2)
--------------------------------------------------------------------
Trading Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations (25) 1 395 7
Corporate debt - (12) 1,319 16
--------------------------------------------------------------------
Total trading
securities (25) (11) 1,714 23
--------------------------------------------------------------------
--------------------------------------------------------------------
Available-for-Sale
Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies (15) - 8 -
Corporate debt (1) - 43 4
Corporate equity - - 957 22
--------------------------------------------------------------------
Total available-
for-sale
securities (16) - 1,008 26
--------------------------------------------------------------------
--------------------------------------------------------------------
Other Securities - - 516 -
--------------------------------------------------------------------
Total other
securities - - 516 -
--------------------------------------------------------------------
--------------------------------------------------------------------
Derivative Assets
Interest rate
contracts - - 4 (2)
Equity contracts - - 6 (2)
Credit default
swaps - - 44 (11)
--------------------------------------------------------------------
Total derivative
assets - - 54 (15)
--------------------------------------------------------------------
--------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts - - 22 11
Foreign exchange
contracts - - 3 (3)
Equity contracts - (9) 38 1
Credit default
swaps - - 2 -
--------------------------------------------------------------------
Total derivative
liabilities - (9) 65 9
--------------------------------------------------------------------
--------------------------------------------------------------------
(1) Includes cash settlement of derivative assets and derivative
liabilities.
(2) Unrealized gains or losses on trading securities, derivative assets and
derivative liabilities still held on July 31, 2012 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on July 31, 2012
are included in Accumulated Other Comprehensive Income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
--------------------------
Included
For the nine Balance Included in other
months ended October in comprehensive
July 31, 2012 31, 2011 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 494 (11) - - (154)
Corporate debt 1,485 22 - 21 (215)
----------------------------------------------------------------------------
Total trading
securities 1,979 11 - 21 (369)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies 25 - (1) - -
Corporate debt 62 - 3 25 (6)
Corporate equity 1,011 (8) 15 122 (177)
----------------------------------------------------------------------------
Total available-
for-sale
securities 1,098 (8) 17 147 (183)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 493 6 - 82 (65)
----------------------------------------------------------------------------
Total other
securities 493 6 - 82 (65)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 167 (5) - - -
Equity contracts 6 (1) - 1 -
Credit default
swaps 67 (28) - 5 -
----------------------------------------------------------------------------
Total derivative
assets 240 (34) - 6 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 38 (21) - 5 -
Foreign exchange
contracts - 3 - - -
Equity contracts 65 20 - 1 (6)
Credit default
swaps 2 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 105 2 - 6 (6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
-------------------------------------------------------------------
Transfers Fair Unrealized
For the nine in/(out) Value Gains
months ended Maturities of as at (losses)
July 31, 2012 (1) Level 3 July 31, 2012 (2)
-------------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations (25) 91 395 (11)
Corporate debt - 6 1,319 25
-------------------------------------------------------------------
Total trading
securities (25) 97 1,714 14
-------------------------------------------------------------------
-------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies (16) - 8 -
Corporate debt (17) (24) 43 5
Corporate equity (6) - 957 15
-------------------------------------------------------------------
Total available-
for-sale
securities (39) (24) 1,008 20
-------------------------------------------------------------------
-------------------------------------------------------------------
Other Securities - - 516 -
-------------------------------------------------------------------
Total other
securities - - 516 -
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative Assets
Interest rate
contracts (158) - 4 (5)
Equity contracts - - 6 (1)
Credit default
swaps - - 44 (27)
-------------------------------------------------------------------
Total derivative
assets (158) - 54 (33)
-------------------------------------------------------------------
-------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts - - 22 21
Foreign exchange
contracts - - 3 (3)
Equity contracts (33) (9) 38 1
Credit default
swaps - - 2 -
-------------------------------------------------------------------
Total derivative
liabilities (33) (9) 65 19
-------------------------------------------------------------------
-------------------------------------------------------------------
(1) Includes cash settlement of derivative assets and derivative
liabilities.
(2) Unrealized gains or losses on trading securities, derivative assets and
derivative liabilities still held on July 31, 2012 are included in earnings
in the period. For available-for-sale securities, the unrealized gains or
losses on securities still held on July 31, 2012 are included in Accumulated
Other Comprehensive Income.
Note 19: Transition to International Financial Reporting Standards
The differences between our Canadian GAAP accounting policies and IFRS
requirements, combined with our decisions on the optional exemptions from
retroactive application of IFRS, resulted in measurement and recognition
differences on transition to IFRS. The net impact of these differences was
recorded in opening retained earnings as of November 1, 2010, affecting equity,
with the exception of the accumulated other comprehensive loss on the
translation of foreign operations, as this was already recorded in equity. These
impacts also extend to our capital ratios, with the exception of the change
related to accumulated other comprehensive loss on translation of foreign
operations, which had no impact on our capital ratios. The impact on Basel II
ratios will be phased-in over five quarters.
The following tables reflect the impact of transition as of July 31 and October
31, 2011 and the related description of key differences. The impact as at the
transition date of November 1, 2010 and on prior periods in 2011 is provided in
Note 19 to our interim consolidated financial statements for the quarter ended
April 30, 2012. During the quarter ended July 31, 2012, there were no changes in
our IFRS accounting policies.
Reconciliation of Equity as Reported under Canadian GAAP to IFRS
The following is a reconciliation of our equity recorded in accordance with
Canadian GAAP to our equity in accordance with IFRS:
July 31, October 31,
(Canadian $ in millions) 2011 2011
----------------------------------------------------------------------------
As reported under Canadian GAAP 27,009 28,123
Reclassification of non-controlling interest in
subsidiaries to equity under IFRS 1,319 1,348
Share Capital 142 142
Contributed Surplus (1) -
Retained Earnings
Consolidation (a) (102) (214)
Asset securitization (b) (64) (88)
Pension and other employee future benefits (c) (1,178) (1,158)
Translation of net foreign operations (e) (1,135) (1,135)
Business combinations (f) (58) (62)
Other (209) (237)
Accumulated Other Comprehensive Income (Loss)
Consolidation (a) - 2
Asset securitization (b) (147) (205)
Translation of net foreign operations (e) 1,135 1,135
Other 18 50
Non-controlling interest in subsidiaries (d) 145 135
----------------------------------------------------------------------------
As reported under IFRS 26,874 27,836
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of Net Income as Reported under Canadian GAAP to IFRS
The following is a reconciliation of our net income reported in accordance with
Canadian GAAP to our net income in accordance with IFRS:
Three Nine Three
months months months Year
ended ended ended ended
July 31, July 31, October 31, October 31,
(Canadian $ in millions) 2011 2011 2011 2011
----------------------------------------------------------------------------
Net income as reported
under Canadian GAAP 793 2,369 897 3,266
Add back: non-
controlling interest 18 54 19 73
Differences increasing
(decreasing) reported
net income:
Consolidation (a) (1) (53) 35 (112) (77)
Asset securitization
(b) (1) 10 (86) (24) (110)
Pension and other
employee future
benefits (c) 3 41 20 61
Business combinations
(f) (58) (58) (4) (62)
Other (5) (9) (28) (37)
----------------------------------------------------------------------------
Net Income reported
under IFRS 708 2,346 768 3,114
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 690 2,292 749 3,041
Non-controlling
interest in
subsidiaries 18 54 19 73
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes decrease (increase) in collective allowance of $11 million,
$12 million, $(46) million and $(34) million for the three months ended
July 31, 2011, October 31, 2011, 9 months ended July 31, 2011 and the
year ended October 31, 2011, respectively.
Reconciliation of Comprehensive Income as Reported under Canadian GAAP to IFRS
The following is a reconciliation of our comprehensive income reported in
accordance with Canadian GAAP to our comprehensive income in accordance with
IFRS:
Three Nine Three
months months months Year
ended ended ended ended
July 31, July 31, October 31, October 31,
(Canadian $ in millions) 2011 2011 2011 2011
----------------------------------------------------------------------------
Comprehensive income as
reported under Canadian
GAAP 1,109 1,989 1,519 3,508
Add back: non-
controlling interest 18 54 19 73
Differences increasing
(decreasing) reported
comprehensive income
Consolidation (a) (52) 35 (110) (75)
Asset securitization
(b) (11) (8) (82) (90)
Pension and other
employee future
benefits (c) 3 41 20 61
Business combinations
(f) (58) (58) (4) (62)
Other (3) (51) 4 (47)
----------------------------------------------------------------------------
Comprehensive income as
reported under IFRS 1,006 2,002 1,366 3,368
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 988 1,948 1,347 3,295
Non-controlling
interest in
subsidiaries 18 54 19 73
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Explanation of differences:
(a) Consolidation
The IFRS consolidation requirements primarily impact entities defined as
variable interest entities ("VIEs") under Canadian GAAP or special purpose
entities ("SPEs") under IFRS, with which we have entered into arrangements in
the normal course. Under Canadian GAAP, the conclusion as to whether an entity
should be consolidated is determined by using three different models: voting
rights, VIEs and qualifying special purpose entities ("QSPEs"). Under the voting
rights model, ownership of the majority of the voting shares leads to
consolidation, unless control does not rest with the majority owners. Under the
VIE model, VIEs are consolidated if the investments we hold in these entities or
the relationships we have with them result in our being exposed to the majority
of their expected losses, being able to benefit from the majority of their
expected returns, or both. Under the QSPE model, an entity that qualifies as a
QSPE is not consolidated.
Under IFRS, an entity is consolidated if it is controlled by the reporting
company, as determined under the criteria contained in the IFRS consolidated and
separate financial statements standard (IAS 27) and, where appropriate, SIC-12
(an interpretation of IAS 27). As with Canadian GAAP, ownership of the majority
of the voting shares leads to consolidation, unless control does not rest with
the majority owners. For an SPE, our analysis considers whether the activities
of the SPE are conducted on our behalf, our exposure to the SPE's risks and
benefits, our decision-making powers over the SPE, and whether these
considerations demonstrate that we, in substance, control the SPE and therefore
must consolidate it. There is no concept of a QSPE under IFRS.
We consolidated certain SPEs under IFRS that were not consolidated under
Canadian GAAP, including our credit protection vehicle, our structured
investment vehicles ("SIVs"), our U.S. customer securitization vehicle, BMO
Capital Trust II and BMO Subordinated Notes Trust. For five of our eight
Canadian customer securitization vehicles and certain structured finance
vehicles, the requirements to consolidate were not met under IFRS, a result that
is consistent with the accounting treatment for the vehicles under Canadian
GAAP.
Information on all our SPEs, including total assets and our exposure to loss is
included in Note 7.
(b) Asset securitization
Securitization primarily involves the sale of loans originated by us to trusts
("securitization vehicles"). Under Canadian GAAP, we account for transfers of
loans to our securitization programs and to third-party securitization programs
as sales when control over the loans is given up and consideration other than
notes issued by the securitization vehicle has been received. Under IFRS,
financial assets are derecognized only when substantially all risks and rewards
have been transferred as determined under the derecognition criteria contained
in IAS 39. Control is only considered when substantially all risks and rewards
have been neither transferred nor retained.
Under IFRS, credit card loans and mortgages sold through these securitization
programs do not qualify for derecognition as we have determined that the
transfer of these loans and mortgages has not resulted in the transfer of
substantially all the risks and rewards. This has resulted in the associated
assets and liabilities being recognized on our Consolidated Balance Sheet and
gains previously recognized in income under Canadian GAAP being reversed at the
transition date. Under IFRS, the credit card loans and mortgages sold through
our securitization vehicles and through the Canada Mortgage Bond program and to
the National Housing Act Mortgage-Backed Securities program will remain on our
Consolidated Balance Sheet. Under Canadian GAAP, the credit card loans and
mortgages sold through these programs were removed from our Consolidated Balance
Sheet.
Under Canadian GAAP, mortgages converted into mortgage-backed securities that
have not yet been sold to one of the securitization programs are recorded at
fair value as available-for-sale securities, with all mark-to-market adjustments
recorded in accumulated other comprehensive income (loss). Under IFRS, these
mortgages are classified as loans and recorded at amortized cost; the associated
mark-to-market adjustments recorded in accumulated other comprehensive income
(loss) under Canadian GAAP are reversed through retained earnings at the
transition date.
Additional information on our asset securitizations is included in Note 6.
(c) Pension and other employee future benefits
Actuarial gains and losses consist of market-related gains and losses on pension
fund assets and the impact of changes in discount rates and other assumptions or
of plan experience being different from management's expectations for pension
and other employee future benefit obligations. Under Canadian GAAP, these
amounts are deferred and only amounts in excess of 10% of the greater of our
plan asset or benefit liability balances are recorded in pension and other
employee future benefit expense over the expected remaining service period of
active employees. Under IFRS, we elected to recognize all previously
unrecognized actuarial gains and losses as at November 1, 2010, in opening
retained earnings for all of our employee benefit plans. Under IFRS, we will
continue to defer actuarial gains and losses, consistent with the methodology
under Canadian GAAP.
Plan amendments are changes in our benefit liabilities as a result of changes to
provisions of the plans. Under Canadian GAAP, these amounts are recognized in
expense over the remaining service period of active employees for pension plans
and over the expected average remaining period to full benefit eligibility for
other employee future benefit plans. Under IFRS, plan amendments are recognized
immediately to the extent that benefits are vested and are otherwise recognized
over the average period until benefits are vested on a straight-line basis.
Under Canadian GAAP, our actuaries valued our benefit liabilities using the
projected unit benefit method. Under IFRS, our actuaries value our benefit
liabilities using the projected unit credit method. The difference in
methodology did not have a significant impact on our financial results.
Under Canadian GAAP, when plan assets exceed the benefit liability of a defined
benefit plan giving rise to a plan surplus, a valuation allowance is recognized
for any excess of the surplus over the present value of the expected future
economic benefit arising from the asset. Similarly to Canadian GAAP, IFRS limits
the recognition of the surplus to the expected future economic benefit arising
from the asset. However, the methodology for calculating the expected future
economic benefit differs from that under Canadian GAAP. The difference in
methodology did not have an impact on our financial results.
(d) Non-controlling interest
Under Canadian GAAP, non-controlling interest in subsidiaries ("NCI") are
reported as other liabilities. Under IFRS, NCI are reported as equity.
Under Canadian GAAP, the portion of income attributable to NCI is deducted prior
to the presentation of net income in the Consolidated Statement of Income. Under
IFRS, there is no comparable deduction, and instead, net income reflects income
attributable to both shareholders and NCI. This difference had no impact on our
capital ratios or return on equity.
(e) Translation of net foreign operations
We have elected to reset the accumulated other comprehensive loss on translation
of net foreign operations to $nil at the transition date, with the adjustment
recorded in opening retained earnings. This difference had no impact on our
capital ratios or return on equity.
(f) Business combinations
We elected not to apply IFRS 3 retroactively to business combinations that took
place prior to the transition date. Consequently, business combinations
concluded prior to November 1, 2010, have not been restated and the carrying
amount of goodwill under IFRS as of November 1, 2010, is equal to the carrying
amount as at that date under Canadian GAAP.
For the acquisitions of M&I and LGM that occurred in fiscal 2011, our
comparative year, we have made the following adjustments:
Measurement of purchase price
Under Canadian GAAP, the purchase price is based on an average of the market
price of the shares over a reasonable period before and after the date the terms
of the acquisition are agreed to and announced. Under IFRS, the purchase price
is based on the market price of the shares at the closing date of the
transaction. As a result, the recorded values of goodwill and common shares were
increased by $142 million as at October 31, 2011, to reflect the re-measurement
of our common shares issued as consideration for the M&I acquisition.
Acquisition costs
Under Canadian GAAP, acquisition costs are capitalized and classified as
goodwill. IFRS requires that acquisition costs be expensed. As a result,
goodwill was reduced by $91 million as of October 31, 2011, $86 million related
to the acquisition of M&I and $5 million related to the acquisition of LGM.
Contingent consideration
Under Canadian GAAP, contingent consideration is recorded when the amount can be
reasonably estimated and the outcome of the contingency can be determined beyond
a reasonable doubt. Any subsequent change in the amount of contingent
consideration is generally recorded as an adjustment to goodwill. Under IFRS,
contingent consideration is recognized initially at fair value as part of the
purchase price. Subsequent changes in the fair value of contingent consideration
classified as an asset or liability are recognized in profit or loss. As a
result, goodwill was increased by $13 million for contingent consideration and
reduced by $5 million for acquisition costs noted above for a total increase in
goodwill of $8 million for the LGM acquisition as at October 31, 2011.
Other differences
Details of the other differences between our Canadian GAAP accounting polices
and IFRS requirements are outlined in Note 19 to our interim consolidated
financial statements for the quarter ended April 30, 2012 and include:
reinsurance; loan impairment; sale-leaseback transactions; stock-based
compensation; loan origination costs; transaction costs; available-for-sale
securities; premises and equipment; customer loyalty programs; merchant banking
investments; compound financial instruments; translation of preferred shares
issued by a foreign operation; and income taxes.
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