BMO Financial Group (TSX:BMO)(NYSE:BMO) and BMO Bank of Montreal
-
Second Quarter 2012 Report to Shareholders
BMO Financial Group Reports Another Quarter of Strong Results,
Increasing Net Income by 27% Year Over Year to $1.03 Billion
Financial Results Highlights(1):
Second Quarter 2012 Compared with Second Quarter 2011:
-- Net income of $1,028 million, up $215 million or 27%
-- Adjusted net income(2) of $982 million, up $212 million or 28%
-- Reported EPS(3) of $1.51, up 14%
-- Adjusted EPS(2,3) of $1.44, up 15%
-- Reported ROE of 16.2%, compared with 17.5%
-- Adjusted ROE(2) of 15.4%, compared with 16.6%
-- Provisions for credit losses of $195 million, down $102 million
-- Common Equity Ratio remains strong at 9.90%, using a Basel II approach
Year-to-Date 2012 Compared with Year-to-Date 2011:
-- Net income of $2,137 million, up $499 million or 31%
-- Adjusted net income(2) of $1,954 million, up $367 million or 23%
-- Reported EPS(3) of $3.14, up 18%
-- Adjusted EPS(2,3) of $2.86, up 11%
-- Provisions for credit losses of $336 million, down $284 million
For the second quarter ended April 30, 2012, BMO Financial Group
(TSX:BMO)(NYSE:BMO) reported strong net income of $1,028 million or
$1.51 per share. On an adjusted basis, net income was $982 million
or $1.44 per share.
"BMO produced strong financial results again in the second
quarter," said Bill Downe, President and Chief Executive Officer,
BMO Financial Group. "The consistent focus we have on customers and
their success is underpinned by a strong, consistent brand and is
grounded in the belief that a relationship bank is relevant to
households and companies, as they manage their finances and improve
their financial position. Simply stated, the importance we place on
giving our customers increased confidence has helped us carve out a
distinct position in the marketplace - and is the key to
accelerating profitable growth.
"In P&C Canada, our sales efforts are driving higher volumes
across most products and higher fee revenues. We continue to
benefit from a deeper understanding of customers' evolving needs.
In anticipation of market conditions, we acted to introduce offers
that we believe are more suitable for all customers - and we are
helping to move the market as a consequence, to a better place.
"The integration of our U.S. banking platform is on track. The
business has been materially strengthened with expanded access to
existing and new regions, increased brand awareness and a better
ability to compete in highly attractive markets. The commercial
team continues to outperform, and there's visible, strong growth in
our commercial and industrial book.
"BMO Capital Markets delivered good performance with higher
revenue and net income than last quarter. Obviously, market
uncertainty persists, but our diversified portfolio of businesses
and broad client base position us well to take advantage of revenue
opportunities.
"Private Client Group's net income was up sharply - its best
financial performance in two years. The results were strong and we
continue to grow. We entered into two definitive agreements to
acquire businesses that further enhance our wealth management
capabilities and expand our geographic reach. Earlier this month,
we opened a representative office in the Gulf Cooperation Council
states to get closer to clients we have been dealing with for
decades - and raise the visibility of our global asset management
capability.
"Our businesses delivered strong performance in a highly
competitive environment. Last fall, we embarked on a significant
long-term plan to further increase the competitiveness of the bank
and enhance our return on equity; the work is well underway, and
we're simplifying structures and processes. Ultimately, the BMO
brand and the message it carries is our best resource in building
the business - and it's also our best protection against
uncertainty. There can be no element more important in managing the
complexity of regulatory change than our established commitment to
making money make sense," concluded Mr. Downe.
Concurrent with the release of results, BMO announced a third
quarter dividend of $0.70 per common share, unchanged from the
preceding quarter and equivalent to an annual dividend of $2.80 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.
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 second
quarter 2012 results in the determination of adjusted results
totalled net income of $46 million after tax, comprised of a $55
million after-tax net benefit of credit-related items in respect of
the acquired Marshall & Ilsley Corporation (M&I) performing
loan portfolio; costs of $74 million ($47 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; the benefit of run-off
structured credit activities of $76 million ($73 million after
tax); restructuring charges of $31 million ($23 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 $18 million ($12 million after tax). Items excluded from
the year-to-date adjusted results totalled net income of $183
million after tax and consisted of a $169 million after-tax net
benefit of credit-related items in respect of the acquired M&I
performing loan portfolio; a $144 million ($90 million after tax)
charge for the integration of the acquired business; a $67 million
($48 million after tax) charge for amortization of
acquisition-related intangible assets; the benefit of run-off
structured credit activities of $212 million ($209 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 $18 million ($12 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. Earnings per share is
calculated using net income after deductions for net income
attributable to non-controlling interest in subsidiaries and
preferred share dividends.
Operating Segment Overview
P&C Canada
Net income was $446 million, up $32 million or 7.8% from a year
ago. Results reflect higher revenues from increased volume across
most products and increased fee revenue, partially offset by lower
net interest margins. Expenses were basically unchanged, reflecting
cost management discipline, resulting in positive operating
leverage of 2.3%.
Net income was consistent with the first quarter, despite fewer
days in the current period.
As we remain focused on making money make sense for our
customers, we are seeing our innovative products and enhanced
multichannel capabilities make a difference. We are seeing further
increases in the average number of product categories used by both
personal and commercial customers and customer loyalty, as measured
by net promoter score, continues to improve in both our personal
and commercial businesses. Through the first half of 2012, we
strengthened our branch network, opening or upgrading 17 locations
across the country and adding 200 Cash Automated Banking Machines
(ABMs). We recently announced plans to add more than 800 ABMs
overall across Canada by the end of 2014, which will increase our
network to almost 3,000 machines.
In personal banking, our award winning mortgage product is
helping new and existing customers become mortgage free faster
while improving retention and forming the foundation for new and
expanded long-term relationships. For two years now, we have been
actively promoting fixed rate products with shorter amortization
periods. With these products, Canadians can pay less interest,
become mortgage free faster, protect themselves against rising
rates and potentially retire debt free.
In commercial banking, we continued to rank #2 in Canadian
business banking loan market share. Our Open for Business campaign
is underway and we are making $10 billion available to Canadian
businesses over the course of the next three years to help them
boost productivity and expand into new markets. We saw further
growth in sales of our cash management solutions due to our strong
Online Banking for Business capability, combined with our growing
cash management sales force. Our goal is to become the bank of
choice for businesses across Canada by providing the knowledge,
advice and guidance that our customers value.
P&C U.S. (all amounts in US$)
Net income of $122 million increased $68 million from $54
million in the second quarter a year ago. Adjusted net income was
$137 million, up $78 million from a year ago as a result of the
acquisition of Marshall & Ilsley Corporation.
Adjusted net income decreased $15 million from the first quarter
primarily due to reductions in net interest income related to lower
loan spreads.
Commercial loans, excluding the commercial real estate and
run-off portfolios, have seen two sequential quarters of
growth.
Average deposits increased $0.8 billion from the prior quarter,
due to continued deposit growth in our commercial business.
During the quarter, we celebrated the opening of the first
branch built under the BMO Harris Bank brand. Through the
transparency and openness of its design, the branch layout supports
our commitment to be the bank that defines a great customer
experience by making it easier for employees to focus on the
customer. The branch is more than just a place to conduct financial
transactions; it is a destination for comprehensive financial
education, planning and guidance.
Our Commercial Bank team recently launched a new initiative that
demonstrates our commitment to market leadership. The Thought
Leadership initiative delivers to our customers and prospects
valuable insights and information from our industry and financial
experts. These tools are available on the Resource Center on the
BMO Harris Commercial Bank website, which includes frequently
updated blogs, newsletters, white papers, webinars and client
success stories. In addition, we've partnered with the Wall Street
Journal to create "Boss Talk," a weekly editorial segment where
global business leaders discuss their points of view on business
and industry challenges and opportunities. We've also partnered
with Forbes to produce two custom research studies that will dive
into issues that affect mid-market businesses.
During the quarter, we officially kicked off phase two of our
rebranding efforts, during which we will rebrand all remaining
legacy M&I and Harris Bank locations under the BMO Harris Bank
banner upon systems conversion. The momentum and lessons learned
from phase one are serving as a strong foundation for our work.
Private Client Group
Net income was $145 million, up $54 million or 59% from a year
ago. Adjusted net income was $150 million, up $57 million or 62%
from a year ago. Adjusted net income in PCG excluding insurance was
$98 million, up $5 million from a year ago. Results benefited from
acquisitions and higher spread-based and fee-based revenue, partly
offset by lower transaction volumes in brokerage. Adjusted net
income in insurance was $52 million. Prior year insurance results
were negatively affected by the $47 million impact of unusually
high earthquake-related reinsurance claims. Compared to the first
quarter, adjusted net income was up $40 million or 37%, as the
prior quarter was negatively impacted by unfavourable movements in
long-term interest rates.
Assets under management and administration grew by $159 billion
from a year ago to $445 billion primarily due to acquisitions.
Compared to the first quarter, assets under management and
administration increased 2.4%. We continue to attract new client
assets and are benefiting from improved equity market
conditions.
On April 12, 2012, BMO announced that it had entered into a
definitive agreement to acquire CTC Consulting, a U.S.-based
independent investment consulting firm providing dynamic investment
research, advice and advisory services to clients and select
multi-family offices and wealth advisors. This acquisition expands
and enhances our manager research and advisory capabilities and
investment offering to ultra-high net worth clients and will
further strengthen and expand our presence in the United States.
The transaction is expected to close by June 30, 2012, subject to
customary closing conditions.
BMO also entered into a definitive agreement in the second
quarter 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
and had assets under management of almost $2 billion as at March
31, 2012. The deal is subject to certain closing conditions
including regulatory approvals and is expected to close by early
2013.
For the second consecutive year, Global Banking and Finance
Review named BMO Harris Private Banking the Best Private Bank in
Canada, citing its industry-leading quality of service and wealth
of expertise.
During the quarter, Private Asset Management Magazine presented
U.S. Harris MyCFO with its 2012 award for Best Client Service by a
Multi-Family Office, recognizing our success serving high net worth
individuals and families in an increasingly complex economic and
legislative environment.
BMO Capital Markets
Net income for the current quarter was $225 million, largely
consistent with the $229 million of a year ago. Net income
increased $27 million or 14% from the first quarter in a better
capital markets environment. The current quarter saw some
improvement in investment and corporate banking market activity,
especially in Canada, while trading revenues declined slightly
relative to the first quarter.
During the quarter, we were named the Best Investment Bank,
Canada for the second time as well as the Best Metals and Mining
Investment Bank for the third year in a row by Global Finance
magazine. In addition, BMO Capital Markets received the Best FX
Bank - North America award at the Dealmakers Monthly Country awards
2012, and Best Foreign Exchange Provider China 2012 award at the
Global Banking and Finance Review 2012 awards. These designations
reflect our clients' recognition of BMO Capital Markets for
distinguished service over the course of the year.
BMO Capital Markets participated in 128 new issues in the
quarter including 40 corporate debt deals, 27 government debt
deals, 49 common equity transactions and 12 issues of preferred
shares, raising $57 billion.
Corporate Services
Corporate Services' net income for the quarter was $91 million,
an increase of $65 million from a year ago. On an adjusted basis,
net income was $21 million, an improvement of $47 million from a
year ago. Adjusting items are detailed in the Adjusted Net Income
section and in the Non-GAAP Measures section. Adjusted revenues
were $62 million lower, mainly due to the interest received on the
settlement of certain tax matters in the prior year. Adjusted
non-interest expense was $38 million higher, primarily due to the
impact of the acquired business. Adjusted provisions for credit
losses were better by $162 million, due to a $117 million ($72
million after-tax) recovery of provisions for credit losses on
M&I purchased credit impaired loans, as well as 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 $171 million to reported net
income and $181 million to adjusted net income for the quarter. It
contributed $440 million to reported net income and $396 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 second quarter 2012 results in the determination of
adjusted results totalled $46 million of net income or $0.07 per
share and were comprised of:
-- the $55 million after-tax net benefit for credit-related items in
respect of the acquired M&I performing loan portfolio, including $152
million for the recognition in net interest income of a portion of the
credit mark on the portfolio (including $49 million for the release of
the credit mark related to early repayment of loans), net of a $62
million provision for credit losses (comprised of an increase in the
collective allowance of $18 million and specific provisions of $44
million) and related income taxes of $35 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 $74 million ($47 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;
-- the $76 million ($73 million after-tax) benefit from 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 restructuring charge of $31 million ($23 million after tax) to align
our cost structure with the current and future business environment.
This action is part of the broader effort underway in the bank to
improve productivity;
-- a decrease in the collective allowance for credit losses of $18 million
($12 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 $982 million for the second quarter of
2012, up $212 million or 28% from a year ago. Adjusted earnings per
share were $1.44, up 15% from $1.25 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.
Management's Discussion and Analysis
Management's Discussion and Analysis (MD&A) commentary is as
of May 23, 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 April 30, 2012, included in this document, 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) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income 2,120 428 25% (198) (9%)
Non-interest revenue 1,839 198 12% 40 2%
----------------------------------------------------------------------------
Revenue 3,959 626 19% (158) (4%)
----------------------------------------------------------------------------
Specific provision for credit
losses 195 (70) (26%) 73 60%
Collective provision for credit
losses - (32) (100%) (19) (100%)
----------------------------------------------------------------------------
Total provision for credit losses 195 (102) (34%) 54 38%
Non-interest expense 2,499 469 23% (55) (2%)
Provision for income taxes 237 44 23% (76) (24%)
----------------------------------------------------------------------------
Net income 1,028 215 27% (81) (7%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to bank
shareholders 1,010 215 27% (80) (7%)
Attributable to non-controlling
interest in subsidiaries 18 - - (1) (3%)
----------------------------------------------------------------------------
Net income 1,028 215 27% (81) (7%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share - basic ($) 1.52 0.18 13% (0.13) (8%)
Earnings per share - diluted ($) 1.51 0.19 14% (0.12) (7%)
Return on equity (ROE) 16.2% (1.3%) (1.0%)
Productivity ratio 63.1% 2.2% 1.1%
Operating leverage (4.4%) nm nm
Net interest margin on earning
assets 1.89% 0.07% (0.16%)
Effective tax rate 18.7% (0.5%) (3.3%)
Capital Ratios Reported
Basel II Tier 1 Capital Ratio 11.97% (1.85%) 0.28%
Common Equity Ratio - using a
Basel II approach 9.90% (0.77%) 0.25%
Net income by operating group:
Personal and Commercial Banking 567 100 22% (16) (3%)
P&C Canada 446 32 8% - -
P&C U.S. 121 68 +100% (16) (12%)
Private Client Group 145 54 59% 40 39%
BMO Capital Markets 225 (4) (1%) 27 14%
Corporate Services, including T&O 91 65 +100% (132) (59%)
----------------------------------------------------------------------------
BMO Financial Group net income 1,028 215 27% (81) (7%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Unaudited) (Canadian $ in YTD- (Decrease)
millions, except as noted) 2012 vs. YTD-2011
-----------------------------------------------------------
Net interest income 4,438 1,029 30%
Non-interest revenue 3,638 246 7%
-----------------------------------------------------------
Revenue 8,076 1,275 19%
-----------------------------------------------------------
Specific provision for credit
losses 317 (265) (46%)
Collective provision for credit
losses 19 (19) (50%)
-----------------------------------------------------------
Total provision for credit losses 336 (284) (46%)
Non-interest expense 5,053 965 24%
Provision for income taxes 550 95 21%
-----------------------------------------------------------
Net income 2,137 499 31%
-----------------------------------------------------------
-----------------------------------------------------------
Attributable to bank
shareholders 2,100 498 31%
Attributable to non-controlling
interest in subsidiaries 37 1 2%
-----------------------------------------------------------
Net income 2,137 499 31%
-----------------------------------------------------------
-----------------------------------------------------------
Earnings per share - basic ($) 3.16 0.46 17%
Earnings per share - diluted ($) 3.14 0.48 18%
Return on equity (ROE) 16.7% (1.0%)
Productivity ratio 62.6% 2.5%
Operating leverage (4.9%) nm
Net interest margin on earning
assets 1.97% 0.17%
Effective tax rate 20.5% (1.3%)
Capital Ratios Reported
Basel II Tier 1 Capital Ratio 11.97% (1.85%)
Common Equity Ratio - using a
Basel II approach 9.90% (0.77%)
Net income by operating group:
Personal and Commercial Banking 1,150 152 15%
P&C Canada 892 1 -
P&C U.S. 258 151 +100%
Private Client Group 250 15 6%
BMO Capital Markets 423 (66) (13%)
Corporate Services, including T&O 314 398 +100%
-----------------------------------------------------------
BMO Financial Group net income 2,137 499 31%
-----------------------------------------------------------
-----------------------------------------------------------
T&O means Technology and Operations.
nm - not meaningful.
Summary Data - Adjusted(1)
Increase Increase
(Unaudited) (Canadian $ in (Decrease) (Decrease)
millions, except as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
Adjusted net interest income 1,969 261 15% (123) (6%)
Adjusted non-interest revenue 1,758 222 14% 107 6%
----------------------------------------------------------------------------
Adjusted revenue 3,727 483 15% (16) -
----------------------------------------------------------------------------
Adjusted specific provision and
adjusted total provision for
credit losses 151 (114) (43%) 60 66%
Adjusted non-interest expense 2,357 363 18% (21) (1%)
Adjusted provision for income
taxes 237 22 10% (65) (22%)
----------------------------------------------------------------------------
Adjusted net income 982 212 28% 10 1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to bank
shareholders 964 212 28% 11 1%
Attributable to non-controlling
interest in subsidiaries 18 - - (1) (3%)
----------------------------------------------------------------------------
Adjusted net income 982 212 28% 10 1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted earnings per share -
basic ($) 1.45 0.19 15% 0.02 1%
Adjusted earnings per share -
diluted ($) 1.44 0.19 15% 0.02 1%
Adjusted return on equity 15.4% (1.2%) 0.4%
Adjusted productivity ratio 63.2% 1.7% (0.3%)
Adjusted operating leverage (3.3%) nm nm
Adjusted net interest margin on
earning assets 1.76% (0.07%) (0.09%)
Adjusted effective tax rate 19.5% (2.3%) (4.2%)
Capital Ratios - Reported
Basel II Tier 1 Capital Ratio 11.97% (1.85%) 0.28%
Common Equity Ratio - using a
Basel II approach 9.90% (0.77%) 0.25%
Adjusted net income by operating
group:
Personal and Commercial Banking 585 111 24% (17) (3%)
P&C Canada 449 32 8% 1 -
P&C U.S. 136 79 +100% (18) (11%)
Private Client Group 150 57 62% 40 37%
BMO Capital Markets 226 (3) (1%) 28 14%
Corporate Services, including T&O 21 47 +100% (41) (68%)
----------------------------------------------------------------------------
BMO Financial Group adjusted net
income 982 212 28% 10 1%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Unaudited) (Canadian $ in YTD- (Decrease)
millions, except as noted) 2012 vs. YTD-2011
Adjusted net interest income 4,061 627 18%
Adjusted non-interest revenue 3,409 151 5%
-----------------------------------------------------------
Adjusted revenue 7,470 778 12%
-----------------------------------------------------------
Adjusted specific provision and
adjusted total provision for
credit losses 242 (340) (58%)
Adjusted non-interest expense 4,735 692 17%
Adjusted provision for income
taxes 539 59 12%
-----------------------------------------------------------
Adjusted net income 1,954 367 23%
-----------------------------------------------------------
-----------------------------------------------------------
Attributable to bank
shareholders 1,917 366 24%
Attributable to non-controlling
interest in subsidiaries 37 1 2%
-----------------------------------------------------------
Adjusted net income 1,954 367 23%
-----------------------------------------------------------
-----------------------------------------------------------
Adjusted earnings per share -
basic ($) 2.88 0.27 10%
Adjusted earnings per share -
diluted ($) 2.86 0.29 11%
Adjusted return on equity 15.2% (1.9%)
Adjusted productivity ratio 63.4% 3.0%
Adjusted operating leverage (5.5%) nm
Adjusted net interest margin on
earning assets 1.81% -
Adjusted effective tax rate 21.7% (1.5%)
Capital Ratios - Reported
Basel II Tier 1 Capital Ratio 11.97% (1.85%)
Common Equity Ratio - using a
Basel II approach 9.90% (0.77%)
Adjusted net income by operating
group:
Personal and Commercial Banking 1,187 175 17%
P&C Canada 897 1 -
P&C U.S. 290 174 +100%
Private Client Group 260 22 9%
BMO Capital Markets 424 (65) (13%)
Corporate Services, including T&O 83 235 +100%
-----------------------------------------------------------
BMO Financial Group adjusted net
income 1,954 367 23%
-----------------------------------------------------------
-----------------------------------------------------------
(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
April 30, 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 April 30,
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 April 30, 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 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
BCBS and 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. 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 April 30, 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. Legislative and 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, but restrained by the strong Canadian dollar. The
economy is expected to expand 2% in 2012, before picking up to 2.5%
in 2013 on firmer U.S. demand. Households are spending more
cautiously in the face of elevated debt levels and higher gasoline
prices. Housing market activity has softened in most regions and
mortgage growth is showing tentative signs of slowing. Governments
are reining in spending to reduce budget deficits. Business
investment continues to lead the expansion, notably in
resource-rich Alberta and Saskatchewan, as most commodity prices
remain elevated. The Canadian dollar is expected to generally trade
above parity with the U.S. dollar for several years and improved
U.S. demand should support exports in 2013. Amid modest growth,
subdued inflation and a strong currency, the Bank of Canada will
likely hold interest rates steady for the rest of this year.
However, there is some risk of earlier rate increases should the
economy outperform expectations.
The U.S. economy continues to expand moderately, abetted by low
interest rates and improved household finances. The economy is
expected to grow 2.4% in 2012 and 2.6% in 2013, a moderate rate but
the highest of the Group of Seven nations. Despite the weak
European economy, U.S. export growth remains healthy due to
improved labour costs relative to other countries and the U.S.
dollar's past depreciation. Rising employment levels have lifted
consumer confidence and spending, offsetting the adverse impact of
higher fuel costs. Housing market activity is stabilizing, though
home prices remain weak due to the still-large number of
foreclosures. Business investment continues to lead the expansion
and earnings growth remains strong. Although improved household
finances should encourage a moderate pickup in consumer spending
and housing market activity in 2013, restrictive fiscal policies
will likely restrain growth. Unemployment is expected to decline
very slowly, encouraging the Federal Reserve to keep short-term
interest rates low for at least two more years.
The U.S. Midwest economy continues to grow moderately, supported
by increased automotive production, solid global demand for
agricultural products and rising output from the Bakken shale oil
reserve, though held back by restrictive fiscal policies.
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 second 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 lowered relative
to the first quarter of 2012 by a slight weakening 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 3.1% from a year ago and fell by 2.1% from the
average of the first quarter. The average rate for the year to date
increased by 1.8%. 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, Q2-2012 YTD-2012
except as noted) vs. Q2-2011 vs. Q1-2012 vs. YTD-2011
----------------------------------------------------------------------------
Canadian/U.S. dollar exchange rate
(average)
Current period 0.9917 0.9917 1.0026
Prior period 0.9623 1.0133 0.9852
Effects on reported results
Increased (decreased) net interest
income 26 (19) 32
Increased (decreased) non-interest
revenue 14 (10) 17
----------------------------------------------------------------------------
Increased (decreased) revenues 40 (29) 49
Decreased (increased) expenses (27) 18 (32)
Decreased (increased) provision for
credit loses 1 - -
Decreased (increased) income taxes (1) 1 (1)
----------------------------------------------------------------------------
Increased (decreased) net income 13 (10) 16
----------------------------------------------------------------------------
Effects on adjusted results
Increased (decreased) net interest
income 21 (16) 26
Increased (decreased) non-interest
revenues 14 (10) 17
----------------------------------------------------------------------------
Increased (decreased) revenues 35 (26) 43
Decreased (increased) expenses (23) 17 (28)
Decreased (increased) provision for
credit loses 1 - -
Decreased (increased) income taxes (1) - (1)
----------------------------------------------------------------------------
Increased (decreased) adjusted net
income 12 (9) 14
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted results in this section are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
At the start of each quarter, BMO assesses whether to enter into
hedging transactions that are expected to partially offset the
pre-tax effects of exchange rate fluctuations in the quarter on our
expected U.S.-dollar-denominated net income for that quarter. As
such, these activities partially mitigate the impact of exchange
rate fluctuations, but only within that quarter. The impact of
these hedging activities was insignificant.
The gain or loss from hedging transactions in future periods
will be determined by both future currency fluctuations and the
amount of underlying future hedging transactions, since the
transactions are entered into each quarter in relation to expected
U.S.-dollar-denominated net income for the next three months.
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 April 30, 2012, was 2.0%.
Net economic profit (NEP) was $366 million, compared with $434
million in the first quarter and $315 million in the second quarter
of 2011. Adjusted NEP was $296 million, compared with $273 million
in the first quarter and $264 million in the second quarter of
2011. Changes in adjusted NEP relative to a year ago are reflective
of higher earnings and increased capital, due largely to the
M&I acquisition. Changes relative to the first quarter were
attributable to improved earnings. NEP of $366 million represents
the net income that is attributable to shareholders ($1,010
million), less preferred share dividends ($34 million), plus the
after-tax amortization of intangible assets ($24 million), net of a
charge for capital ($634 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
Q2 2012 vs Q2 2011
Net income was $1,028 million for the second quarter of 2012, up
$215 million or 27% from a year ago. Earnings per share were $1.51,
up 14% from $1.32 a year ago.
Adjusted net income was $982 million for the second quarter of
2012, up $212 million or 28% from a year ago. Adjusted earnings per
share were $1.44, up 15% from $1.25 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 both
acquisitions and organic growth. There was significant growth in
P&C U.S. as a result of the acquired business and in Private
Client Group, as its results a year ago were negatively affected by
unusually high earthquake-related reinsurance claims that lowered
net income by $47 million. There was good growth in P&C Canada
due largely to higher revenues from increased volumes across most
products, while expenses were relatively unchanged. BMO Capital
Markets was modestly lower and adjusted net income was higher in
Corporate Services.
Provisions for credit losses were lower due to the impact of a
$72 million after-tax recovery of provisions for credit losses on
M&I purchased credit impaired loans. The effective tax rate was
also lower, as explained in the Income Taxes section.
Q2 2012 vs Q1 2012
Net income decreased $81 million or 7.3% from the first quarter
and earnings per share decreased $0.12 or 7.4%. Adjusted net income
increased $10 million or 1.0% and adjusted earnings per share
increased $0.02 or 1.4%.
On an adjusted basis, there were strong increases in Private
Client Group and BMO Capital Markets. P&C Canada adjusted net
income was consistent with the first quarter despite fewer days in
the current quarter. There were reduced earnings in P&C U.S.
and Corporate Services.
Adjusted revenues and expenses were slightly lower than in the
first quarter, due in part to the impact of two fewer days in the
current quarter. Provisions for credit losses increased due to
higher provisions charged to Corporate Services under our expected
loss provisioning methodology and lower recoveries of credit losses
on M&I purchased credit impaired loans. The effective tax rate
was lower in the current quarter.
Q2 YTD 2012 vs Q2 YTD 2011
Net income increased $499 million or 31% to $2,137 million.
Earnings per share were $3.14, up $0.48 or 18% from a year ago.
Adjusted net income increased $367 million or 23% to $1,954
million. Adjusted earnings per share were $2.86, up $0.29 or 11%
from a year ago. The acquired business added $396 million to
year-to-date adjusted net income.
This section contains adjusted results and measures which are
non-GAAP. Please see the Non-GAAP Measures section.
Revenue
Total revenue increased $626 million or 19% from a year ago.
Adjusted revenue increased $483 million or 15% primarily due to the
acquired business. P&C Canada revenues were relatively
consistent while Private Client Group revenues were appreciably
higher due to the effects of acquisitions and increased insurance
revenues, as the prior year included a $50 million charge due to
earthquake-related reinsurance claims. The stronger U.S. dollar
increased adjusted revenue growth by $35 million.
Revenue decreased $158 million or 3.8% from the first quarter.
Adjusted revenue decreased $16 million or 0.4%. There were lower
revenues in both P&C Canada and P&C U.S. due to fewer days
in the second quarter as well as reduced margins. There was
significant growth in Private Client Group due to the effect of
unfavourable movements in long-term interest rates in the prior
quarter. There was growth in BMO Capital Markets due to increases
in merger and acquisition fees and higher net investment securities
gains and underwriting revenues. The weaker U.S. dollar decreased
adjusted revenue growth by $26 million.
Revenue for the year to date increased $1,275 million or 19% and
adjusted revenue increased $778 million or 12% due to the acquired
business.
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 $428 million or 25%
from a year ago to $2,120 million. Adjusted net interest income
increased $261 million or 15% to $1,969 million. The increase in
adjusted net interest income was primarily in P&C U.S., due to
the acquired business, with solid increases in Private Client Group
and more modest increases in P&C Canada and BMO Capital
Markets. Corporate Services adjusted net interest income was lower
mainly due to interest received on the settlement of certain tax
matters in the prior year.
BMO's overall net interest margin increased by 7 basis points
year over year to 1.89%. Adjusted net interest margin decreased by
7 basis points to 1.76% with decreases in each of the operating
groups. Decreased margin in P&C Canada was primarily driven by
competitive pressures and lower deposit spreads in the low interest
rate environment. In P&C U.S., the decrease was due to deposit
spread compression, which more than offset increased deposit
balances, a favourable change in loan mix 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
deposit and loan balances in private banking. The decrease in net
interest margin in BMO Capital Markets was primarily attributable
to lower spreads in our corporate banking business. Corporate
Services adjusted net interest income decreased year over year and
contributed to BMO's overall margin reduction.
Average earning assets in the second quarter increased $73
billion or 19% relative to a year ago, with a $5 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 strong organic
commercial loan growth, and in Private Client Group, which
benefited from personal loan growth in Canadian private banking.
There were increased assets in BMO Capital Markets due to increased
holdings of reverse repos as a result of client demand and higher
deposits at the Federal Reserve. There was solid growth in P&C
Canada loan balances across most products.
Relative to the first quarter, net interest income decreased
$198 million or 8.5%. Adjusted net interest income decreased $123
million or 5.9%, in part due to fewer days in the current quarter.
There was good growth in BMO Capital Markets with decreases across
each of the other groups including Corporate Services.
BMO's overall net interest margin decreased 16 basis points from
the first quarter. Adjusted net interest margin decreased 9 basis
points. Net interest margin improved in BMO Capital markets due to
higher trading net interest income. There were decreases in the
other groups. P&C Canada's margin decreased primarily due to
lower deposit spreads, as loan spreads remained relatively stable.
The P&C U.S. decrease was due to lower loan spreads, resulting
primarily from competitive pricing. The decrease in Private Client
Group was largely due to higher than usual asset management
revenues from a strategic investment in the first quarter.
Average earning assets increased $6 billion or 1.4% from the
first quarter. There was growth in BMO Capital Markets due to
higher trading assets. There was modest growth in P&C Canada
and in Private Client Group and a slight net decrease in P&C
U.S.
Year to date, net interest income increased $1,029 million or
30%. Adjusted net interest income increased $627 million or 18% to
$4,061 million due primarily to the acquired business. There was a
modest increase in P&C Canada. There was a decrease in BMO
Capital Markets, as well as in Corporate Services mainly due to the
interest received on the settlement of certain tax matters in
2011.
BMO's overall net interest margin increased by 17 basis points
to 1.97% for the year to date. On an adjusted basis, net interest
margin was consistent with the prior year at 1.81%. Increases in
P&C U.S. and Private Client Group, due in large part to the
impact of the acquired business, offset reductions in P&C
Canada and BMO Capital Markets and the impact of reduced adjusted
net interest income in Corporate Services.
Average earning assets for the year to date increased $70
billion or 18%, and by $67 billion adjusted to exclude the impact
of the stronger U.S. dollar. There were higher assets due to the
acquisition and organic commercial loan growth in P&C U.S., and
in Private Client Group, which also benefited from growth in
Canadian personal banking. There was also growth in BMO Capital
Markets, 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) Q2-2012 vs. Q2-2011 vs. Q1-2012 YTD-2012 vs. YTD-2011
----------------------------------------------------------------------------
P&C Canada 281 (12) (9) 286 (11)
P&C U.S. 435 (15) (8) 439 3
----------------------------------------------------------------------------
Personal and
Commercial Client
Group 323 6 (8) 327 9
Private Client Group 298 (18) (82) 339 32
BMO Capital Markets 65 (12) 4 63 (17)
Corporate Services,
including T&O(ii) nm nm nm nm nm
----------------------------------------------------------------------------
Total BMO adjusted
net interest margin
(1) 176 (7) (9) 181 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total BMO reported
net interest margin 189 7 (16) 197 17
----------------------------------------------------------------------------
Total Canadian
Retail (reported
and adjusted)(iii) 281 (13) (9) 285 (13)
----------------------------------------------------------------------------
(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 $198 million or 12% from the
second quarter a year ago to $1,839 million. Adjusted non-interest
revenue increased $222 million or 14% to $1,758 million. There was
strong growth in deposit and payment service charges in P&C
U.S. and in investment management fees and other revenue in Private
Client Group, due to the acquired business. There was also strong
growth in Private Client Group insurance revenues as the prior
year's results were negatively affected by $50 million of
earthquake-related reinsurance claims. There were decreases in
trading non-interest revenues, and in underwriting and merger and
acquisition fees in BMO Capital Markets.
Relative to the first quarter, non-interest revenue increased
$40 million or 2.2%. Adjusted non-interest revenue increased $107
million or 6.5%. Increased insurance revenues primarily resulted
from the unfavourable effect of movements in long-term interest
rates in the prior quarter. There was significant growth in merger
and acquisition fees as well as growth in securities commissions
and fees. Trading non-interest revenues were appreciably lower,
while lending fees also decreased.
Year to date, non-interest revenue increased $246 million or
7.2% to $3,638 million. Adjusted non-interest revenue increased
$151 million or 4.6% to $3,409 million. Increases from the acquired
business were partially offset by declines in underwriting and
advisory fees.
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 $469 million or 23% from a year
ago to $2,499 million. Adjusted non-interest expense increased $363
million or 18% from a year ago to $2,357 million. The acquired
business increased adjusted expense by $311 million. The stronger
U.S. dollar increased adjusted expense growth by $23 million or
1.2%. The remaining increase was due to the acquisition of Lloyd
George Management (LGM) that was completed on April 28, 2011,
investments in strategic initiatives, as well as increases in
advertising, risk management and other support costs.
Relative to the first quarter, non-interest expense decreased
$55 million or 2.1%. Adjusted non-interest expense decreased $21
million or 0.9%, due to disciplined expense management and two
fewer days in the quarter. Decreases due to a litigation expense
recognized in the prior quarter in P&C U.S. and employee
compensation costs in respect of employees that are eligible to
retire, which are expensed each year in the first quarter, were
offset in part by higher revenue-based costs in certain businesses
and investments in strategic initiatives.
Our increased focus on productivity has resulted in
quarter-over-quarter adjusted operating leverage of 0.4% and an
improvement in the adjusted productivity ratio of 0.3 percentage
points.
Non-interest expense for the year to date increased $965 million
or 24% to $5,053 million. Adjusted non-interest expense increased
$692 million or 17% to $4,735, due to $618 million in expenses of
the acquired business and the impact of continued investment in our
businesses including technology development initiatives.
Non-interest expense is detailed in the attached 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
Uncertainty regarding the success of the austerity measures and
bailouts in Europe continues to impact the global economic
recovery. In the United States, the economy continues to grow
moderately, with unemployment levels slowly improving and the
housing market starting to stabilize.
Provisions for credit losses for the current and prior periods
are reported on an IFRS basis starting in the first quarter of
2012, 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 $195 million in the
second quarter of 2012. The adjusted provision for credit losses
was $151 million, after adjusting for a $44 million specific
provision for the M&I purchased performing loan portfolio.
Adjusting items also include an $18 million increase in the
collective allowance for the M&I purchased performing loan
portfolio and an $18 million reduction in the collective allowance
on other loans.
The adjusted specific provision for credit losses was $151
million, or an annualized 28 basis points of average net loans and
acceptances, compared with $91 million or an annualized 17 basis
points in the first quarter of 2012 and $265 million or an
annualized 52 basis points in the second quarter of 2011. Included
in the adjusted specific provision for credit losses is a recovery
of $117 million related to the M&I purchased credit impaired
loans this quarter, compared with a $142 million recovery in the
first quarter of 2012.
On a geographic basis, specific provisions in Canada and all
other countries (excluding the United States) were $177 million in
the second quarter of 2012, $153 million in the first quarter of
2012 and $161 million in the second quarter of 2011. Specific
provisions in the United States were $18 million in the second
quarter of 2012, a $31 million recovery in the first quarter of
2012 and a charge of $104 million in the second quarter of 2011. On
an adjusted basis, specific provisions in the United States for the
comparable periods were a $26 million recovery, a $62 million
recovery and a charge of $104 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 following paragraphs outline
credit losses by client operating group based on actual credit
losses, rather than their share of expected credit losses.
Actual credit losses in the second quarter of 2012 were: $161
million in P&C Canada; $94 million in P&C U.S. ($55 million
on an adjusted basis); $17 million in BMO Capital Markets; $6
million in Private Client Group ($1 million on an adjusted basis);
and $34 million in Corporate Services, which included loans
transferred from P&C U.S. to Corporate Services in the third
quarter of 2011 and IFRS adjustments related to the interest on
impaired loans. These actual credit losses exclude the $117 million
recovery related to the M&I purchased credit impaired
loans.
Actual credit losses in the first quarter of 2012 were: $149
million in P&C Canada; $80 million in P&C U.S. ($56 million
on an adjusted basis); $11 million recovery in BMO Capital Markets;
$6 million charge in Private Client Group ($4 million on an
adjusted basis); and $40 million in Corporate Services ($35 million
on an adjusted basis), which included loans transferred from
P&C U.S. to Corporate Services in the third quarter of 2011 and
IFRS adjustments related to the interest on impaired loans. These
actual credit losses exclude the $142 million recovery related to
the M&I purchased credit impaired loans.
Actual credit losses in the second quarter of 2011, on both a
reported and adjusted basis, were: $159 million in P&C Canada;
$80 million in P&C U.S.; $3 million in BMO Capital Markets; $5
million in Private Client Group; and $18 million in Corporate
Services due to the IFRS adjustments related to the interest on
impaired loans.
Impaired loan formations in BMO's core portfolio (excluding the
M&I purchased performing portfolio) totalled $455 million in
the current quarter, up from $392 million in the first quarter of
2012 and $357 million a year ago. Impaired loan formations related
to the M&I purchased performing portfolio were $444 million in
the current quarter, up from $232 million in the first quarter of
2012. At acquisition, we recognized the likelihood of impairment in
the purchased performing portfolio and losses on these impaired
loans were adequately provided for in the credit mark.
Total gross impaired loans, excluding the purchased credit
impaired loans, were $2,837 million at the end of the current
quarter, up from $2,657 million in the first quarter of 2012 and
$2,465 million a year ago. At the end of the quarter, there were
$705 million of gross impaired loans related to the acquired
portfolios, of which $116 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 continues to imply potential risk. BMO's
Canadian residential mortgage portfolio represents 6.3% of the
total Canadian residential mortgage market, which totalled $1,116
billion (Bank of Canada, March 2012). The portfolio is 70% insured,
with an average loan-to-value ratio of 65% (adjusted for current
housing values). The remaining 30% 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 an
average 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) increased
over the period, mainly due to an increase in fixed income
activity. Exposure in the bank's available-for-sale (AFS)
portfolios decreased over the same period, mainly as a result of a
recent model calibration.
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 increased from the prior
quarter largely due to book capital growth and customers'
preference for fixed rate mortgages. EV and earnings exposures
under falling interest rate scenarios decreased from the prior
quarter largely due to customers' preference for fixed rate
mortgages.
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) Q2-2012 Q1-2012 Q2-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
New specific
provisions 458 412 336 870 736
Reversals of
previously
established
allowances (66) (67) (21) (133) (45)
Recoveries of loans
previously written-
off (197) (223) (50) (420) (109)
----------------------------------------------------------------------------
Specific provision
for credit losses 195 122 265 317 582
Change in collective
allowance - 19 32 19 38
----------------------------------------------------------------------------
Provision for credit
losses (PCL) 195 141 297 336 620
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted specific
provision for credit
losses(1) 151 91 265 242 582
PCL as a % of average
net loans and
acceptances
(annualized)(2) 0.32% 0.23% 0.58% 0.28% 0.61%
PCL as a % of average
net loans and
acceptances
excluding purchased
portfolios
(annualized)(3) 0.46% 0.49% 0.61% 0.47% 0.63%
Specific PCL as a %
of average net loans
and acceptances
(annualized)(2) 0.32% 0.20% 0.52% 0.26% 0.57%
Adjusted specific PCL
as a % of average
net loans and
acceptances
(annualized)(1) 0.28% 0.17% 0.52% 0.23% 0.57%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted specific provision for credit losses excludes provisions
related to the acquired M&I performing portfolio.
(2) Ratio is presented including purchased portfolios.
(3) Ratio is presented excluding purchased portfolios, to provide for
better historical comparisons.
Changes in Gross Impaired Loans and Acceptances (GIL)(1)
(Canadian $ in
millions, except as
noted) Q2-2012 Q1-2012 Q2-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
GIL, beginning of
period 2,657 2,685 2,739 2,685 2,894
Additions to impaired
loans and acceptances 899 624 357 1,523 831
Reductions in impaired
loans and
acceptances(2) (427) (379) (398) (806) (794)
Write-offs(3) (292) (273) (233) (565) (466)
----------------------------------------------------------------------------
GIL, end of period(1) 2,837 2,657 2,465 2,837 2,465
----------------------------------------------------------------------------
----------------------------------------------------------------------------
GIL as a % of gross
loans and
acceptances(4) 1.15% 1.09% 1.19% 1.15% 1.19%
GIL as a % of gross
loans and acceptances
excluding purchased
portfolios(4) 0.98% 1.04% 1.20% 0.98% 1.20%
GIL as a % of equity
and allowances for
credit losses(4) 9.32% 8.74% 10.18% 9.32% 10.18%
GIL as a % of equity
and allowances for
credit losses
excluding purchased
portfolios(4) 7.06% 7.39% 10.20% 7.06% 10.20%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 Q2-2012, $104 million in Q1-2012;
and $105 million in Q2-2011).
(4) Ratio is presented including purchased portfolios. Ratio is also
presented excluding purchased portfolios, to provide for better
historical comparisons.
This section contains adjusted results and measures which are non-GAAP.
Please see the Non-GAAP Measures section.
Total Trading and Underwriting Market Value Exposure (MVE) Summary ($
millions)(i)
----------------------------------------------------------------------------
As at As at
For the quarter ended April 30, January 31, October 31,
2012 2012 2011
------------------------------------------------ ------------- -------------
(Pre-tax
Canadian Quarter-
equivalent) end Average High Low Quarter-end Year-end
------------------------------------------------ ------------- -------------
Commodity VaR (0.5) (0.5) (0.9) (0.3) (0.3) (0.3)
Equity VaR (6.3) (5.6) (7.0) (4.0) (4.9) (5.4)
Foreign Exchange
VaR (2.3) (3.2) (4.7) (1.8) (3.3) (0.9)
Interest Rate
VaR (MTM) (9.5) (8.8)(12.7) (6.1) (6.7) (6.3)
Diversification 7.9 8.6 nm nm 7.6 4.2
----------------------------------- ---------------------------
Trading Market
VaR (10.7) (9.5)(12.0) (7.6) (7.6) (8.7)
Trading &
Underwriting
Issuer Risk (5.9) (5.5) (6.4) (4.9) (4.7) (3.6)
----------------------------------- ---------------------------
Total Trading &
Underwriting
MVE (16.6) (15.0)(18.2) (12.7) (12.3) (12.3)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest Rate
VaR (AFS) (15.3) (17.8)(23.1) (13.7) (17.6) (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 For the quarter As at As at
Canadian ended April 30, 2012 January 31, October
equivalent) 2012 31, 2011
Quarter-end Average High Low Quarter-end Year-end
---------------------------------------------------- ------------ ----------
Commodity
Stressed
VaR (1.1) (1.1) (2.5) (0.4) (0.9) (0.3)
Equity
Stressed
VaR (9.9) (9.3) (11.5) (5.7) (7.2) (6.4)
Foreign
Exchange
Stressed
VaR (2.4) (4.8) (6.6) (2.4) (5.0) (1.2)
Interest
Rate
Stressed
VaR (Mark-
to-Market) (19.9) (15.1) (19.9) (12.3) (14.7) (13.2)
Diversificat
ion 14.0 13.9 nm nm 12.2 6.7
-------------------------------- -----------------------
Trading
Market
Stressed
VaR (19.3) (16.4) (19.5) (13.2) (15.6) (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)
----------------------------------------------------------------------------
April 30, January 31, October 31,
(Canadian equivalent) 2012 2012 2011
----------------------------------------------------------------------------
Market value exposure (MVE)
(pre-tax) (685.8) (619.1) (685.9)
12-month earnings volatility
(EV) (after-tax) (83.2) (96.2) (95.0)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) 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 April January October April 30, January October
equivalent) 30, 2012 31, 2012 31, 2011 2012 31, 2012 31, 2011
--------------------------------------------- ------------------------------
100 basis point
increase (562.6) (553.6) (614.3) 26.1 19.3 24.8
100 basis point
decrease 307.1 364.3 441.8 (81.1) (104.5) (102.5)
200 basis point
increase (1,244.6) (1,220.4) (1,295.7) 4.3 52.6 69.3
200 basis point
decrease 724.6 667.0 829.4 (34.7) (94.3) (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 April 30, 2012, results in an increase in earnings after tax
of $96 million and an increase in before tax economic value of $553
million ($95 million and $544 million, respectively, at January 31,
2012; and $88 million and $436 million, respectively, at October 31,
2011). A 100 basis point decrease in interest rates at April 30, 2012,
results in a decrease in earnings after tax of $86 million and a
decrease in before tax economic value of $634 million ($85 million and
$653 million, respectively, at January 31, 2012; and $82 million and
$494 million, respectively, at October 31, 2011). These impacts are
not reflected in the table above.
Income Taxes
The provision for income taxes of $237 million increased $44
million from the second quarter of 2011 and decreased $76 million
from the first quarter of 2012. The effective tax rate for the
quarter was 18.7%, compared with 19.2% a year ago and 22.0% in the
first quarter. The lower effective tax rate in the current quarter
relative to the second quarter of 2011 was primarily due to a 1.7
percentage point reduction in the statutory Canadian income tax
rate in 2012 and higher recoveries of prior periods' taxes,
partially offset by an increased proportion of income from higher
tax-rate jurisdictions. The lower effective tax rate in the current
quarter relative to the first quarter of 2012 was primarily due to
higher recoveries of prior periods' taxes. The adjusted effective
tax rate was 19.4% in the current quarter, compared with 21.8% in
the second quarter of 2011 and 23.7% in the first 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 expense in shareholders' equity of $23
million for the quarter and $6 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 described in
the Capital Management Q2 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 Q4- Q3- Q2- Q1- Q4- Q3-
noted) Q2-2012 Q1-2012 2011 2011 2011 2011 2010(2) 2010(2)
----------------------------------------------------------------------------
Total revenue 3,959 4,117 3,822 3,320 3,333 3,468 3,236 2,914
Provision for
credit losses
- specific 195 122 299 245 265 317 253 214
Provision for
credit losses
- collective - 19 63 (15) 32 6 - -
Non-interest
expense 2,499 2,554 2,432 2,221 2,030 2,058 2,030 1,905
Reported net
income 1,028 1,109 768 708 813 825 757 688
Adjusted net
income 982 972 832 856 770 817 766 697
----------------------------------------------------------------------------
Basic earnings
per share ($) 1.52 1.65 1.12 1.10 1.34 1.36 1.25 1.13
Diluted
earnings per
share ($) 1.51 1.63 1.11 1.09 1.32 1.34 1.24 1.13
Adjusted
diluted
earnings per
share ($) 1.44 1.42 1.20 1.34 1.25 1.32 1.26 1.14
Net interest
margin on
earning assets
(%) 1.89 2.05 2.01 1.76 1.82 1.78 1.89 1.88
Adjusted net
interest
margin on
earning assets
(%) 1.76 1.85 1.78 1.78 1.83 1.79 1.89 1.88
Effective
income tax
rate (%) 18.7 22.0 25.3 18.0 19.2 24.1 20.6 13.4
Canadian/U.S.
dollar
exchange rate
(average) 0.99 1.01 1.01 0.96 0.96 1.01 1.04 1.05
Reported net
income:
P&C Canada 446 446 439 443 414 477 427 431
P&C U.S. 121 137 155 90 53 54 46 52
----------------------------------------------------------------------------
Personal and
Commercial
Banking 567 583 594 533 467 531 473 483
Private Client
Group 145 105 137 104 91 144 120 98
BMO Capital
Markets 225 198 143 270 229 260 214 130
Corporate
Services,
including T&O 91 223 (106) (199) 26 (110) (50) (23)
----------------------------------------------------------------------------
BMO Financial
Group net
income 1,028 1,109 768 708 813 825 757 688
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net
income:
P&C Canada 449 448 441 444 417 479 429 433
P&C U.S. 136 154 172 99 57 59 51 57
----------------------------------------------------------------------------
Personal and
Commercial
Banking 585 602 613 543 474 538 480 490
Private Client
Group 150 110 143 105 93 145 121 100
BMO Capital
Markets 226 198 143 270 229 260 214 130
Corporate
Services,
including T&O 21 62 (67) (62) (26) (126) (49) (23)
----------------------------------------------------------------------------
BMO Financial
Group adjusted
net income 982 972 832 856 770 817 766 697
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted results in this chart are non-GAAP amounts or non-GAAP
measures. Please see the Non-GAAP Measures section.
(2) Amounts for Q3-2010 and 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 third quarter of fiscal 2010 through the
second 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 quarters in fiscal year
2010, 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 maintained our focus on our
vision and strategy, while also reporting results in 2011 and in
the first half of 2012 that were stronger than in 2010.
Results in 2011 and in the first half of 2012 strengthened,
generally, reflecting 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. Results in
the first two quarters of 2012 were strong. Expenses increased in
2011, reflecting acquisitions, initiative spending and business
growth.
P&C Canada has performed well with generally increasing
revenues and profitability, and good revenue increases in both
personal and commercial businesses, driven by volume growth across
most products. Net income has generally trended higher in 2011 and
into the first half 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 in 2010 led to a drop in loan
utilization, which affected revenue growth and net income. Results
improved significantly in 2011 and into the first half of 2012,
after the acquisition of M&I late in the third quarter, and
commercial loan utilization is starting to increase.
Beginning in the third quarter of 2011, Private Client Group
results reflect the acquisitions of LGM 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 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 2010 varied by quarter, with
strong results in the second quarter and particularly weak net
income in the third quarter. 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 and, to a lesser degree, in the first
quarter of 2012 due to a difficult, but improving market
environment, and improved in the most recent quarter.
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, then
weakened in the second 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 $525.5 billion at April 30, 2012, increased
$24.9 billion from October 31, 2011. The increase primarily
reflects increases in cash and cash equivalents and interest
bearing deposits with banks of $15.5 billion, net loans and
acceptances of $6.6 billion, securities of $5.0 billion and
securities borrowed or purchased under resale agreements of $4.3
billion. All remaining assets declined by a combined $6.5
billion.
The $15.5 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 $6.6 billion increase in net loans and acceptances was
primarily due to an increase in loans to businesses and governments
of $5.0 billion and residential mortgages of $1.2 billion. Other
loans and acceptances had a net increase totalling $0.4
billion.
The $5.0 billion increase in securities resulted primarily from
an increase in available-for-sale securities.
The $4.3 billion increase in securities borrowed or purchased
under resale agreements was mainly due to increased client-driven
activities.
The $6.5 billion decrease in other items was primarily related
to decreases in derivative assets, primarily in interest rate
contracts and U.S. equities. There was a comparable decrease in
derivative financial liabilities.
Liabilities and equity increased $24.9 billion from October 31,
2011. The change primarily reflects increases in securities lent or
sold under repurchase agreements of $14.0 billion, deposits of
$13.7 billion, securities sold but not yet purchased of $3.6
billion and shareholders' equity of $0.6 billion. All remaining
liabilities decreased by a combined $7.0 billion.
The $14.0 billion increase in securities lent or sold under
repurchase agreements was mainly due to increased client-driven
activities.
The $13.7 billion increase in deposits was largely driven by a
$12.3 billion increase in business and government deposits
including wholesale funding and increased deposits in the United
States. Deposits by banks increased $1.6 billion, while deposits by
individuals decreased $0.2 billion due to the weaker U.S.
dollar.
The $3.6 billion increase in securities sold but not yet
purchased was primarily due to increased hedging requirements.
The increase in shareholders' equity of $0.6 billion in the
second quarter reflects growth in retained earnings.
The $7.0 billion decrease in other items was primarily related
to decreases in derivative liabilities.
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
Q2 2012 Regulatory Capital Review
BMO remains well capitalized, with a Common Equity Ratio (based
on Basel II) of 9.90%, and a Basel II Tier 1 Capital Ratio of
11.97% at April 30, 2012. Common Equity and Tier 1 capital were
$20.5 and $24.8 billion, respectively. Risk-weighted assets (RWA)
were $207 billion at April 30, 2012.
This Common Equity Ratio increased 31 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 was relatively
unchanged from the end of fiscal 2011. Relative to the first
quarter, this Common Equity Ratio and Tier 1 Capital Ratio were
higher by 25 and 28 basis points, respectively.
Effective November 1, 2011, BMO adopted IFRS, which impacts our
capital ratios. The transition to IFRS reduced RWA and lowered
retained earnings, which 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. Under OSFI transition guidance, BMO has elected
to phase in the impact of lower Tier 1 capital over a five quarter
period. The impacts of the IFRS transition on our Basel II Tier 1
Capital Ratio and Total Capital Ratio at the end of the second
quarter were 19 and 15 basis point reductions, respectively. The
impact of lower RWA is not phased in and was fully recognized in
the first quarter of 2012.
RWA of $207 billion at April 30, 2012, was $2 billion lower than
October 31, 2011, due to lower RWA related to the transition to
IFRS described above, improved risk assessments, lower RWA related
to securitized assets and the impact of the strengthening Canadian
dollar on U.S.-dollar-denominated RWA. These factors were partly
offset by the requirements for additional Stress VaR RWA under the
Basel 2.5 rules.
Common equity (on a Basel II basis) at April 30, 2012, increased
$0.5 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 $1.2 billion.
The bank's Basel II Tier 1 capital decreased $0.3 billion from
October 31, 2011, as the growth in common equity was offset by the
redemption of $400 million BMO BOaTS - Series C in December 2011
and US$300 million Class B Preferred Shares Series 10 announced in
January and completed in February 2012.
BMO's Basel II Total Capital Ratio was 14.89% at April 30, 2012.
The ratio was relatively unchanged from 14.85% at the end of 2011
and 31 basis points higher than the first quarter. Total capital
decreased $0.2 billion from the end of 2011 to $30.8 billion,
primarily due to the factors outlined above.
BMO's Assets-to-Capital Multiple, a leverage ratio monitored by
OSFI, was 15.09 at April 30, 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 above in the 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 (without attracting 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 above in the Income
Taxes section, partially hedge this foreign exchange risk by
funding its foreign investment in U.S. dollars and may, to reduce
the impact of foreign exchange rate changes on the bank's capital
ratios, 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 start to come into
effect in January 2013, have now been largely outlined 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 April 30, 2012, Common Equity Ratio would be 7.6%,
approximately 40 basis points higher than the pro-forma ratio at
the end of the prior quarter. 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 exceeds such 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 $2.7 billion from $19.6 billion under Basel II, based
on full phase in of IFRS impacts, to $16.9 billion under Basel III,
both as at April 30, 2012.
Our RWA at April 30, 2012, would increase by approximately $13
billion from $207 billion under Basel II to $220 billion under
Basel III, primarily due to higher counterparty credit risk RWA of
$11.3 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 April 30, 2012,
would be 9.5%, an increase of approximately 40 basis points from
the prior quarter.
Under Basel III, Tier 1 capital at April 30, 2012, would
decrease by approximately $2.8 billion from $23.9 billion under
Basel II to $21.1 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 the 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 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
On May 4, 2012, BMO announced its intention to redeem all of its
$1.2 billion subordinated Series D Medium-Term Notes Second Tranche
on June 21, 2012, which will have the effect of lowering the Basel
II Total Capital ratio by 60 basis points.
During the quarter, 2,984,000 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 US$300 million of our
Non-cumulative Perpetual Class B Preferred Shares Series 10.
On May 23, 2012, BMO announced that the Board of Directors
declared a quarterly dividend payable to common shareholders of
$0.70 per share, unchanged from a year ago and from the preceding
quarter. The dividend is payable August 28, 2012, to shareholders
of record on August 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. At this
time, the common shares purchased under the Plan will be issued
from treasury with 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) Q2-2012 Q4-2011
----------------------------------------------------------------------------
Gross common shareholders' equity 25,060 24,455
IFRS phase in not applicable to common equity 66 -
Goodwill and excess intangible assets (3,702) (3,585)
Securitization-related deductions (35) (168)
Expected loss in excess of allowance - AIRB Approach (164) (205)
Substantial investments/Investments in insurance
subsidiaries (673) (481)
Other deductions (80) -
----------------------------------------------------------------------------
Adjusted common shareholders' equity 20,472 20,016
Non-cumulative preferred shares 2,465 2,861
Innovative Tier 1 Capital Instruments 1,866 2,156
Non-controlling interest in subsidiaries 21 38
IFRS phase in only applicable to Tier 1 capital (66) -
----------------------------------------------------------------------------
Adjusted Tier 1 Capital 24,758 25,071
----------------------------------------------------------------------------
Subordinated debt 5,721 5,896
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains on available-
for-sale equity securities 65 7
Eligible portion of collective allowance for credit
losses 335 309
----------------------------------------------------------------------------
Total Tier 2 Capital 6,921 7,012
Securitization-related deductions (35) (31)
Expected loss in excess of allowance - AIRB Approach (164) (205)
Substantial Investments/Investment in insurance
subsidiaries (673) (855)
----------------------------------------------------------------------------
Adjusted Tier 2 Capital 6,049 5,921
----------------------------------------------------------------------------
Total Capital 30,807 30,992
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Risk-Weighted Assets
(Canadian $ in millions) Q2-2012 Q4-2011
---------------------------------------------------------------------------
Credit risk 174,013 179,092
Market risk 7,546 4,971
Operational risk 25,294 24,609
---------------------------------------------------------------------------
Total risk-weighted assets 206,853 208,672
---------------------------------------------------------------------------
---------------------------------------------------------------------------
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 May 23, 2012 dollar amount
----------------------------------------------------------------------------
Common shares 643,365,000
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 9,246,000
- non-vested 8,022,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 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 their 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 attached unaudited
interim consolidated financial statements. 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 April 30, 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 Note 1
to the attached unaudited interim consolidated financial
statements, 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 the
attached unaudited interim consolidated financial statements 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, and Offsetting. Additional information on the new
standards and amendments to existing standards can be found in Note
1 of the attached unaudited interim consolidated financial
statements.
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$2.1 billion at the end of the quarter, down from
US$2.3 billion at January 31, 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$407 million, compared with US$420
million at January 31, 2012, and US$440 million at October 31,
2011. During the quarter, our other structured investment vehicle,
Parkland Finance Corporation, sold its remaining assets, fully
repaid its BMO liquidity facility and distributed the remaining
proceeds to capital noteholders.
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 April 30,
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 exposure
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 in GIIPS are primarily to banks for
trade finance and trading products. Net exposures remain modest at
$160 million, plus $47 million of unfunded commitments. In
addition, our Irish subsidiary is required to maintain reserves
with the Irish central bank. These totalled $84 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 67% 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 $3.2 billion, of which 95% 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 $0.86
billion, predominantly in the form of tradeable cash products, as
well as $0.66 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%, 1.3% 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 14.2% of total
notional exposure, of which 78.4% was rated investment grade by
S&P (69.2% by Moody's). The notional exposure to the remainder
of Europe was 16.3% of the total notional exposure, with 70.3%
rated investment grade by S&P (63.7% 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 2.7% of loans or securities originated by entities in
Europe. Exposure to Germany is the largest at 1.0%. Exposure to
Spain is approximately 0.1% and there is no exposure to Italy,
Ireland, Greece or Portugal.
The structured investment vehicle's par value exposure to
entities in European countries totalled $923 million, of which $0.1
million is exposure to GIIPS, $292 million to the other Eurozone
countries and $631 million to the rest of Europe. The largest
exposures include the United Kingdom at $567 million and
Netherlands at $176 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
EUR1,255 million in securities issued by entities in European
countries and EUR392 million of cash collateral at April 30, 2012.
Of this amount, EUR38 million was held in GIIPS related securities
and EUR509 million was in German securities.
Indirect exposure by way of guarantees from entities in European
countries totalled $371 million, of which $1 million is exposure to
GIIPS, $179 million to the other Eurozone countries and $191
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
EUR45 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.
BMO's direct credit exposures in North Africa and the Middle
East totalled $0.9 billion, of which $638 million was exposure in
Turkey, $131 million in Morocco and $63 million in United Arab
Emirates. Of the total exposure, $233 million is insured through
approved Export Credit Agencies, with the largest in Turkey at $180
million. Exposure to the remaining countries is modest, and the
bank has no direct exposure in Syria. The exposure is almost
entirely with bank counterparties, in trade finance or trade
related products.
European Exposure(7) by Country (Canadian $ in millions)
As at April 30, 2012
Lending(1) Securities(2) Repo-Style Trans.(3)
--------------------- -------------------- --------------------
Country Commitments Funded Gross Net Gross Net
--------------------------------- -------------------- --------------------
GIIPS
Greece 2 2 - - - -
Ireland(5) - - 28 - 151 3
Italy 1 1 255 26 209 -
Portugal 69 22 123 - - -
Spain 88 88 301 - - -
----------------------------------------------------------------------------
Total -
GIIPS 160 113 707 26 360 3
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 38 38 1,161 892 2,239 3
Germany 119 119 2,122 1,625 2,523 18
Netherlands 278 175 711 565 916 5
Other(6) 429 289 878 668 9 1
----------------------------------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 864 621 4,872 3,750 5,687 27
----------------------------------------------------------------------------
Rest of
Europe
Denmark 11 11 706 705 725 -
Norway 14 14 1,030 1,030 - -
Sweden 2 2 153 50 336 1
United
Kingdom 412 197 1,497 827 3,198 7
Other(6) 189 180 706 - 139 5
----------------------------------------------------------------------------
Total - Rest
of Europe 628 404 4,092 2,612 4,398 13
----------------------------------------------------------------------------
Total - All
of Europe 1,652 1,138 9,671 6,388 10,445 43
----------------------------------------------------------------------------
European Exposure(7) by Country (Canadian $ in
millions)
As at April 30, 2012
Derivatives(4) Total
-------------------- --------------------
Country Gross Net Gross Net
-------------------------------- --------------------
GIIPS
Greece - - 2 2
Ireland(5) 53 6 232 9
Italy 9 5 474 32
Portugal - - 192 22
Spain 13 7 402 95
-----------------------------------------------------
Total -
GIIPS 75 18 1,302 160
-----------------------------------------------------
Eurozone
(excluding
GIIPS)
France 322 38 3,760 971
Germany 115 18 4,879 1,780
Netherlands 80 6 1,985 751
Other(6) 92 48 1,408 1,006
-----------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 609 110 12,032 4,508
-----------------------------------------------------
Rest of
Europe
Denmark - - 1,442 716
Norway 21 21 1,065 1,065
Sweden 5 - 496 53
United
Kingdom 536 119 5,643 1,150
Other(6) 24 10 1,058 195
-----------------------------------------------------
Total - Rest
of Europe 586 150 9,704 3,179
-----------------------------------------------------
Total - All
of Europe 1,270 278 23,038 7,847
-----------------------------------------------------
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 $3.1 billion.
(5) Does not include Irish subsidiary reserves with Irish Central Bank of
$84 million.
(6) Includes countries with less than $500 million in gross exposure. Other
Eurozone includes exposures to Austria, Belgium, Cyprus, 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 April 30, 2012
Lending (1)
-----------------------------------------------------------------
Commitments Funded
-------------------------------- --------------------------------
Country Bank Corporate Sovereign Total Bank Corporate Sovereign Total
------------------------------------------- --------------------------------
GIIPS
Greece 2 - - 2 2 - - 2
Ireland(5) - - - - - - - -
Italy 1 - - 1 1 - - 1
Portugal 20 49 - 69 20 2 - 22
Spain 88 - - 88 88 - - 88
----------------------------------------------------------------------------
Total -
GIIPS 111 49 - 160 111 2 - 113
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 38 - - 38 38 - - 38
Germany 48 5 66 119 48 5 66 119
Netherlands 28 250 - 278 28 147 - 175
Other(6) 356 73 - 429 221 68 - 289
----------------------------------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 470 328 66 864 335 220 66 621
----------------------------------------------------------------------------
Rest of
Europe
Denmark 11 - - 11 11 - - 11
Norway 14 - - 14 14 - - 14
Sweden 2 - - 2 2 - - 2
United
Kingdom 69 343 - 412 69 128 - 197
Other(6) 175 14 - 189 175 5 - 180
----------------------------------------------------------------------------
Total -
Rest of
Europe 271 357 - 628 271 133 - 404
----------------------------------------------------------------------------
Total - All
of Europe 852 734 66 1,652 717 355 66 1,138
----------------------------------------------------------------------------
Refer to footnotes in first table.
European Securities Exposure(7) by Country and Counterparty (Canadian $ in
millions)
As at April 30, 2012
Securities(2)
----------------------------------------------------------------
Gross Net
-------------------------------- -------------------------------
Sovereign Sovereign
Country Bank Corporate (8) Total Bank Corporate (8) Total
-------------------------------------------- -------------------------------
GIIPS
Greece - - - - - - - -
Ireland(5) - 3 25 28 - - - -
Italy 59 86 110 255 - 26 - 26
Portugal - - 123 123 - - - -
Spain 154 103 44 301 - - - -
----------------------------------------------------------------------------
Total -
GIIPS 213 192 302 707 - 26 - 26
----------------------------------------------------------------------------
Eurozone
(excluding
GIIPS)
France 82 92 987 1,161 - 2 890 892
Germany 88 325 1,709 2,122 13 - 1,612 1,625
Netherlands 486 106 119 711 460 7 98 565
Other(6) 128 107 643 878 98 39 531 668
----------------------------------------------------------------------------
Total -
Eurozone
(excluding
GIIPS) 784 630 3,458 4,872 571 48 3,131 3,750
----------------------------------------------------------------------------
Rest of
Europe
Denmark 257 1 448 706 257 - 448 705
Norway 381 - 649 1,030 381 - 649 1,030
Sweden 49 103 1 153 49 - 1 50
United
Kingdom 268 485 744 1,497 36 47 744 827
Other(6) 16 138 552 706 - - - -
----------------------------------------------------------------------------
Total - Rest
of Europe 971 727 2,394 4,092 723 47 1,842 2,612
----------------------------------------------------------------------------
Total - All
of Europe 1,968 1,549 6,154 9,671 1,294 121 4,973 6,388
----------------------------------------------------------------------------
Refer to footnotes in first table.
European Repo & Derivatives Exposure(7) by Country and Counterparty
(Canadian $ in millions)
As at April 30, 2012
Repo-Style
Trans.(3) Derivatives(4)
------------------ -------------------------------------
Net of
Gross Collateral Gross
------------------ ------------------------------------
Country Total Total Bank Corporate Sovereign Total
-------------------------------------- ------------------------------------
GIIPS
Greece - - - - - -
Ireland(5) 151 3 48 5 - 53
Italy 209 - 7 2 - 9
Portugal - - - - - -
Spain - - 13 - - 13
----------------------------------------------------------------------------
Total - GIIPS 360 3 68 7 - 75
----------------------------------------------------------------------------
Eurozone (excluding
GIIPS)
France 2,239 3 322 - - 322
Germany 2,523 18 115 - - 115
Netherlands 916 5 80 - - 80
Other(6) 9 1 86 2 4 92
----------------------------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 5,687 27 603 2 4 609
----------------------------------------------------------------------------
Rest of Europe
Denmark 725 - - - - -
Norway - - 1 - 20 21
Sweden 336 1 5 - - 5
United Kingdom 3,198 7 519 8 9 536
Other(6) 139 5 24 - - 24
----------------------------------------------------------------------------
Total - Rest of
Europe 4,398 13 549 8 29 586
----------------------------------------------------------------------------
Total - All of
Europe 10,445 43 1,220 17 33 1,270
----------------------------------------------------------------------------
European Repo & Derivatives Exposure(7) by Country and
Counterparty (Canadian $ in millions)
As at April 30, 2012
Derivatives(4)
-----------------------------------
Net of Collateral
-----------------------------------
Country Bank Corporate Sovereign Total
-------------------------------------------------------
GIIPS
Greece - - - -
Ireland(5) 1 5 - 6
Italy 3 2 - 5
Portugal - - - -
Spain 7 - - 7
-------------------------------------------------------
Total - GIIPS 11 7 - 18
-------------------------------------------------------
Eurozone (excluding
GIIPS)
France 38 - - 38
Germany 18 - - 18
Netherlands 6 - - 6
Other(6) 42 2 4 48
-------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 104 2 4 110
-------------------------------------------------------
Rest of Europe
Denmark - - - -
Norway 1 - 20 21
Sweden - - - -
United Kingdom 102 8 9 119
Other(6) 10 - - 10
-------------------------------------------------------
Total - Rest of
Europe 113 8 29 150
-------------------------------------------------------
Total - All of
Europe 228 17 33 278
-------------------------------------------------------
Refer to footnotes in first table.
Credit Default Swaps by Country and Credit Quality (Canadian $
in millions)
As at April 30, 2012
Fair Value
-----------------------------------------
Purchased Written
--------------- ---------------
Inv. Non-Inv. Inv. Non-Inv. Total
Country Grade Grade Grade Grade Exposure
------------------------------------ -------------------------
GIIPS
Greece - - - - -
Ireland(5) 6 - (6) - -
Italy 16 - (17) - (1)
Portugal 34 - (34) - -
Spain 15 - (14) - 1
---------------------------------------------------------------
Total - GIIPS 71 - (71) - -
---------------------------------------------------------------
Eurozone (excluding
GIIPS)
France 4 - (3) - 1
Germany 4 - (3) - 1
Netherlands - - - - -
Other(6) 4 - (2) - 2
---------------------------------------------------------------
Total - Eurozone
(excluding GIIPS) 12 - (8) - 4
---------------------------------------------------------------
Rest of Europe
Denmark - - - - -
Norway - - - - -
Sweden (1) - 2 - 1
United Kingdom 7 - (6) - 1
Other(6) 15 - (18) - (3)
---------------------------------------------------------------
Total - Rest of
Europe 21 - (22) - (1)
---------------------------------------------------------------
Total - All of Europe 104 - (101) - 3
---------------------------------------------------------------
Credit Default Swaps by Country and Credit Quality (Canadian $ in millions)
As at April 30, 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 (259) - (259) 264 - 264 5
Portugal (127) - (127) 127 - 127 -
Spain (259) (7) (266) 253 12 265 (1)
----------------------------------------------------------------------------
Total - GIIPS (674) (7) (681) 673 12 685 4
----------------------------------------------------------------------------
Eurozone (excluding
GIIPS)
France (353) - (353) 326 - 326 (27)
Germany (765) - (765) 726 26 752 (13)
Netherlands (177) (20) (197) 153 13 166 (31)
Other(6) (254) - (254) 294 - 294 40
----------------------------------------------------------------------------
Total - Eurozone
(excluding GIIPS) (1,549) (20)(1,569) 1,499 39 1,538 (31)
----------------------------------------------------------------------------
Rest of Europe
Denmark (32) - (32) 32 - 32 -
Norway - - - - - - -
Sweden (134) (7) (141) 140 - 140 (1)
United Kingdom (783) - (783) 730 46 776 (7)
Other(6) (855) (25) (880) 861 8 869 (11)
----------------------------------------------------------------------------
Total - Rest of
Europe (1,804) (32)(1,836) 1,763 54 1,817 (19)
----------------------------------------------------------------------------
Total - All of Europe (4,027) (59)(4,086) 3,935 105 4,040 (46)
----------------------------------------------------------------------------
Refer to footnotes in first table.
Notes:
- All purchased and written exposures are with bank counterparties, with
the exception being $33 million (notional) of written protection on a
German reference obligation transacted with a Canadian non-Bank financial
counterparty.
- 36% of purchased and 37% of written exposure is subject to complete
restructuring trigger events.
- 64% of purchased and 63% of written exposure is subject to modified-
modified restructuring trigger events.
U.S. Legislative and 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 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, business conduct
and capital and margin requirements in respect of derivatives are
also being finalized.
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. Legislative and 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
Q2-2012
Q2-2012
--------------------------------------
(Canadian $ in millions, except Total
as noted) P&C PCG BMO CM Corp BMO
-----------------------------------------------------------------------
Net interest income (teb)(1) 1,661 128 308 23 2,120
Non-interest revenue 594 615 481 149 1,839
-----------------------------------------------------------------------
Total revenue (teb)(1) 2,255 743 789 172 3,959
Provision for credit losses 224 3 24 (56) 195
Non-interest expense 1,245 553 471 230 2,499
-----------------------------------------------------------------------
Income before income taxes 786 187 294 (2) 1,265
Income taxes (recovery)
(teb)(1) 219 42 69 (93) 237
-----------------------------------------------------------------------
Reported net income Q2-2012 567 145 225 91 1,028
Reported net income Q1-2012 583 105 198 223 1,109
Reported net income Q2-2011 467 91 229 26 813
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Adjusted net income Q2-2012 585 150 226 21 982
Adjusted net income Q1-2012 602 110 198 62 972
Adjusted net income Q2-2011 474 93 229 (26) 770
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Other statistics
-----------------------------------------------------------------------
Net economic profit(2) 242 93 93 (62) 366
Return on equity 17.8% 27.3% 18.6% nm 16.2%
Adjusted return on equity 18.4% 28.3% 18.6% nm 15.4%
Operating leverage (1.2%) 5.0% (5.5%) nm (4.4%)
Adjusted operating leverage 0.3% 6.3% (5.5%) nm (3.3%)
Productivity ratio (teb) 55.2% 74.4% 59.7% nm 63.1%
Adjusted productivity ratio
(teb) 54.1% 73.4% 59.7% nm 63.2%
Net interest margin on earning
assets (teb) 3.23% 2.98% 0.65% nm 1.89%
Adjusted net interest margin
(teb) 3.23% 2.98% 0.65% nm 1.76%
Average common equity 12,512 2,135 4,734 5,190 24,571
Average earning assets ($
billions) 209.0 17.5 192.6 36.0 455.1
Full-time equivalent staff 24,066 6,481 2,238 13,781 46,566
-----------------------------------------------------------------------
-----------------------------------------------------------------------
YTD-2012
-----------------------------------------
(Canadian $ in millions, except Total
as noted) P&C PCG BMO CM Corp BMO
------------------------------------------------------------------------
Net interest income (teb)(1) 3,402 292 595 149 4,438
Non-interest revenue 1,190 1,146 966 336 3,638
------------------------------------------------------------------------
Total revenue (teb)(1) 4,592 1,438 1,561 485 8,076
Provision for credit losses 448 7 48 (167) 336
Non-interest expense 2,551 1,110 954 438 5,053
------------------------------------------------------------------------
Income before income taxes 1,593 321 559 214 2,687
Income taxes (recovery)
(teb)(1) 443 71 136 (100) 550
------------------------------------------------------------------------
Reported net income Q2-2012 1,150 250 423 314 2,137
Reported net income Q1-2012
Reported net income Q2-2011 998 235 489 (84) 1,638
------------------------------------------------------------------------
------------------------------------------------------------------------
Adjusted net income Q2-2012 1,187 260 424 83 1,954
Adjusted net income Q1-2012
Adjusted net income Q2-2011 1,012 238 489 (152) 1,587
------------------------------------------------------------------------
------------------------------------------------------------------------
Other statistics
------------------------------------------------------------------------
Net economic profit(2) 484 146 168 2 800
Return on equity 18.2% 23.4% 18.0% nm 16.7%
Adjusted return on equity 17.6% 24.4% 18.0% nm 15.2%
Operating leverage (4.4%) (4.3%) (12.4%) nm (4.9%)
Adjusted operating leverage (2.8%) (3.2%) (12.4%) nm (5.5%)
Productivity ratio (teb) 55.6% 77.2% 61.1% nm 62.6%
Adjusted productivity ratio nm
(teb) 54.4% 76.2% 61.1% 63.4%
Net interest margin on earning nm
assets (teb) 3.27% 3.39% 0.63% 1.97%
Adjusted net interest margin
(teb) 3.27% 3.39% 0.63% nm 1.81%
Average common equity 12,687 2,111 4,521 5,148 24,467
Average earning assets ($
billions) 209.0 17.3 189.5 36.1 451.9
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 second 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 second quarter of 2012
totalled $56 million, up from $53 million in the second quarter of
2011 and up from $52 million in the first quarter.
Personal and Commercial Banking (P&C)
Increase Increase
(Canadian $ in millions, except (Decrease) (Decrease)
as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income (teb) 1,661 319 24% (80) (5%)
Non-interest revenue 594 106 22% (2) -
----------------------------------------------------------------------------
Total revenue (teb) 2,255 425 23% (82) (3%)
Provision for credit losses 224 54 31% - -
Non-interest expense 1,245 244 24% (61) (5%)
----------------------------------------------------------------------------
Income before income taxes 786 127 19% (21) (2%)
Income taxes (teb) 219 27 14% (5) (2%)
----------------------------------------------------------------------------
Reported net income 567 100 22% (16) (3%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 585 111 24% (17) (3%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Return on equity 17.8% (8.0%) 0.4%
Adjusted return on equity 18.4% (7.8%) 0.4%
Operating leverage (1.2%) nm nm
Adjusted operating leverage 0.3% nm nm
Productivity ratio (teb) 55.2% 0.5% (0.7%)
Adjusted productivity ratio
(teb) 54.1% (0.2%) (0.6%)
Net interest margin on earning
assets (teb) 3.23% 0.06% (0.08%)
Average earning assets ($
billions) 209.0 35.4 20% - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 3,402 657 24%
Non-interest revenue 1,190 167 16%
----------------------------------------------------------
Total revenue (teb) 4,592 824 22%
Provision for credit losses 448 105 30%
Non-interest expense 2,551 532 26%
----------------------------------------------------------
Income before income taxes 1,593 187 13%
Income taxes (teb) 443 35 9%
----------------------------------------------------------
Reported net income 1,150 152 15%
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 1,187 175 17%
----------------------------------------------------------
----------------------------------------------------------
Return on equity 17.6% (9.2%)
Adjusted return on equity 18.2% (9.0%)
Operating leverage (4.4%) nm
Adjusted operating leverage (2.8%) nm
Productivity ratio (teb) 55.6% 2.0%
Adjusted productivity ratio
(teb) 54.4% 1.2%
Net interest margin on earning
assets (teb) 3.27% 0.09%
Average earning assets ($
billions) 209.0 35.2 20%
----------------------------------------------------------
----------------------------------------------------------
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) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income (teb) 1,063 5 - (46) (4%)
Non-interest revenue 460 30 7% 13 3%
----------------------------------------------------------------------------
Total revenue (teb) 1,523 35 2% (33) (2%)
Provision for credit losses 141 5 2% 3 1%
Non-interest expense 776 - - (37) (4%)
----------------------------------------------------------------------------
Income before income taxes 606 30 5% 1 -
Provision for income taxes
(teb) 160 (2) (1%) 1 1%
----------------------------------------------------------------------------
Reported net income 446 32 8% - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 449 32 8% 1 -
----------------------------------------------------------------------------
Personal revenue 961 32 4% (2) -
Commercial revenue 562 3 1% (31) (5%)
Operating leverage 2.3% nm nm
Productivity ratio (teb) 51.0% (1.2%) (1.2%)
Net interest margin on earning
assets (teb) 2.81% (0.12%) (0.09%)
Average earning assets ($
billions) 153.7 5.6 4% 1.4 0.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 2,172 4 -
Non-interest revenue 907 7 1%
----------------------------------------------------------
Total revenue (teb) 3,079 11 -
Provision for credit losses 279 7 2%
Non-interest expense 1,589 34 2%
----------------------------------------------------------
Income before income taxes 1,211 (30) (2%)
Provision for income taxes
(teb) 319 (31) (8%)
----------------------------------------------------------
Reported net income 892 1 -
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 897 1 -
----------------------------------------------------------
Personal revenue 1,924 27 1%
Commercial revenue 1,155 (16) (1%)
Operating leverage (1.8%) nm
Productivity ratio (teb) 51.6% 0.9%
Net interest margin on earning
assets (teb) 2.86% (0.11%)
Average earning assets ($
billions) 153.0 5.7 4%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q2 2012 vs Q2 2011
P&C Canada net income of $446 million was up $32 million or
7.8% 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 $34
million or 8.5%.
Revenue increased $35 million or 2.4%. Results reflect higher
volumes across most products and improving fee revenues, partially
offset by lower net interest margin. Net interest margin declined
12 basis points, driven by competitive pressures and lower deposit
spreads in the low interest rate environment.
In the personal banking segment, revenue was $32 million higher.
Higher volumes across most products were partially offset by
competitive pressure and lower deposit spreads. Total personal
lending balances (including mortgages, Homeowner ReadiLine and
other consumer lending products) increased 4.8% year over year,
while total personal lending market share decreased. Personal cards
loan balances increased 0.4% and market share increased year over
year.
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 3.8% year over year due to
increases in retail operating deposits. Market share for both
retail operating and term deposits decreased year over year.
In the commercial banking segment, revenue was consistent with
the prior year as higher volumes across most products were offset
by competitive pressure and lower deposit spreads.
Commercial loan balances increased 3.2% year over year. We
continue to rank second in Canadian business banking market share
of small and mid-sized business loans with a year-over-year decline
of 27 basis points.
Commercial cards balances decreased 0.6%, while commercial
deposit balances grew 4.8%.
Non-interest expense was unchanged from the prior year as we
continue to aggressively manage our expenses, consistent with our
focus on improving productivity over time. The group's operating
leverage was 2.3%.
Average current loans and acceptances increased $6.2 billion or
4.1% from a year ago, while personal and commercial deposits grew
$4.3 billion or 4.2%.
Q2 2012 vs Q1 2012
Net income was consistent with the first quarter. On a basis
that adjusts reported results to reflect provisions on an actual
loss basis, net income was $6 million lower than in the first
quarter.
Revenue decreased $33 million or 2.1% as a result of two fewer
days and lower net interest margin, partially offset by higher
cards revenue. Net interest margin was down 9 basis points
primarily due to lower deposit spreads, as loan spreads remained
relatively stable.
Personal revenue was stable, as higher volumes in retail cards
and higher mortgage refinancing fees were offset by the impact of
two fewer days.
Commercial revenue was affected by two less days, lower
commercial card volumes and competitive pressure across most
products.
Non-interest expense was $37 million lower, mainly due to
reduced employee related costs, fewer days, moderated initiative
spending and the expense for performance-based compensation in
respect of employees eligible to retire that is recorded in the
first quarter.
Average current loans and acceptances increased $1.6 billion or
1.0% from last quarter, while personal and commercial deposits
decreased $0.9 billion or 0.8%.
Q2 YTD 2012 vs Q2 YTD 2011
Net income was essentially unchanged year over year, at $892
million. Revenue increased $11 million or 0.4%, driven by volume
growth across most products including fee revenues, offset by a
significant securities gain in last year's first quarter results.
Net interest margin declined by 11 basis points primarily due to
competitive pressures across most products and lower deposit
spreads in a low interest rate environment.
Non-interest expense increased $34 million or 2.2% primarily due
to the current impact of 2011 initiative spending including higher
front-line staffing levels. We remain focused on improving
productivity over time.
Average current loans and acceptances, including securitized
loans, increased $6.2 billion or 4.2%, while personal and
commercial deposits increased $4.7 billion or 4.7%.
Personal and Commercial Banking U.S. (P&C U.S.)
Increase Increase
(Canadian $ in millions, except (Decrease) (Decrease)
as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income (teb) 598 314 +100 % (34) (5%)
Non-interest revenue 134 76 +100 % (15) (11%)
----------------------------------------------------------------------------
Total revenue (teb) 732 390 +100 % (49) (6%)
Provision for credit losses 83 49 +100 % (3) (3%)
Non-interest expense 469 244 +100 % (24) (5%)
----------------------------------------------------------------------------
Income before income taxes 180 97 +100 % (22) (11%)
Provision for income taxes
(teb) 59 29 97 % (6) (8%)
----------------------------------------------------------------------------
Reported net income 121 68 +100 % (16) (12%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 136 79 +100 % (18) (11%)
----------------------------------------------------------------------------
Operating leverage 5.4 % nm nm
Adjusted operating leverage 10.6 % nm nm
Productivity ratio (teb) 64.1 % (1.6%) 0.9 %
Adjusted productivity ratio
(teb) 60.9 % (3.2%) 0.8 %
Net interest margin on earning
assets (teb) 4.35 % (0.15%) (0.08%)
Adjusted net interest margin on
earning assets 4.35 % (0.15%) (0.08%)
Average earning assets ($
billions) 55.4 29.7 +100 % (1.4) (2%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 604 309 +100 % (19) (3%)
Non-interest revenue 134 74 +100 % (14) (9%)
----------------------------------------------------------------------------
Total revenue (teb) 738 383 +100 % (33) (4%)
Non-interest expense 473 239 +100 % (14) (3%)
Reported net Income 122 68 +100 % (13) (10%)
Adjusted net income 137 78 +100 % (15) (9%)
Average earning assets (US$
billions) 55.8 29.2 +100 % (0.2) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 1,230 653 +100 %
Non-interest revenue 283 160 +100 %
----------------------------------------------------------
Total revenue (teb) 1,513 813 +100 %
Provision for credit losses 169 98 +100 %
Non-interest expense 962 498 +100 %
----------------------------------------------------------
Income before income taxes 382 217 +100 %
Provision for income taxes
(teb) 124 66 +100 %
----------------------------------------------------------
Reported net income 258 151 +100 %
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 290 174 +100 %
----------------------------------------------------------
Operating leverage 8.6 % nm
Adjusted operating leverage 13.7 % nm
Productivity ratio (teb) 63.6 % (2.6%)
Adjusted productivity ratio
(teb) 60.5 % (4.1%)
Net interest margin on earning
assets (teb) 4.39 % 0.03 %
Adjusted net interest margin on
earning assets 4.39 % 0.03 %
Average earning assets ($
billions) 56.1 29.5 +100 %
----------------------------------------------------------
----------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Net interest income (teb) 1,227 641 +100 %
Non-interest revenue 282 157 +100 %
----------------------------------------------------------
Total revenue (teb) 1,509 798 +100 %
Non-interest expense 960 489 +100 %
Reported net Income 257 149 +100 %
Adjusted net income 289 171 +100 %
Average earning assets (US$
billions) 55.9 29.0 +100 %
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q2 2012 vs Q2 2011 (in U.S. $)
Net income of $122 million increased $68 million from $54
million a year ago. Adjusted net income, which adjusts for the
amortization of acquisition-related intangible assets, was $137
million, up $78 million from a year ago primarily due to the
acquired business.
Revenue of $738 million increased $383 million from a year ago,
of which $379 million was attributable to the acquired business.
The remaining increase was due to a combination of increased
deposit and loan balances, higher lending fees and gains on sale of
mortgages, together with deposit spread compression and lower
interchange fees.
Net interest margin decreased by 15 basis points due to deposit
spread compression, which more than offset the effects of increased
deposit balances, a favourable change in loan mix and the positive
impact from the acquired business.
Non-interest expense of $473 million increased $239 million.
Adjusted non-interest expense of $452 million was $222 million
higher, with $206 million due to the impact of the acquired
business.
Average current loans and acceptances more than doubled,
increasing $27.3 billion year over year to $50.8 billion as a
result of the acquired business and strong organic commercial loan
growth.
Average deposits also more than doubled, increasing $33.0
billion year over year to $59.2 billion as a result of the acquired
business and growth in our organic commercial business.
Q2 2012 vs Q1 2012 (in U.S. $)
Net income decreased $13 million or 10% from the prior quarter.
Adjusted net income decreased $15 million or 9.4%, as the benefit
of lower expenses was more than offset by decreased revenue.
Revenue decreased $33 million or 4.2%, primarily due to lower
net interest margin, decreased securities gains and fewer days in
the current quarter.
Net interest margin decreased by 8 basis points, primarily due
to lower loan spreads.
Non-interest expense and adjusted non-interest expense both
decreased $14 million or 3.0%, due to a litigation expense
recognized in the prior quarter.
Average current loans and acceptances decreased $0.2 billion
from the prior quarter as commercial banking loan growth in key
segments was more than offset by decreases in personal banking
loans and declines in commercial real estate and run-off
portfolios, as expected. Commercial loans, excluding the commercial
real estate and run-off portfolios, have seen two sequential
quarters of growth post acquisition.
Average deposits increased $0.8 billion from the prior quarter,
due to continued deposit growth in our commercial business.
Q2 YTD 2012 vs Q2 YTD 2011 (in U.S. $)
Net income of $257 million increased $149 million from $108
million a year ago. Adjusted net income was $289 million, up $171
million from a year ago primarily due to the acquired business.
Revenue of $1,509 million increased $798 million from a year
ago, of which $772 million was attributable to the acquired
business. The remaining increase of $26 million or 3.6% was due to
increased securities gains and higher lending fees.
Net interest margin increased by 3 basis points.
Non-interest expense of $960 million increased $489 million.
Adjusted non-interest expense of $913 million was $453 million
higher, with $419 million due to the impact of the acquired
business.
Average current loans and acceptances more than doubled,
increasing $27.1 billion year over year to $50.9 billion primarily
due to the acquired business and strong organic commercial loan
growth.
Average deposits also more than doubled, increasing $32.5
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, except (Decrease) (Decrease)
as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income (teb) 128 16 15% (36) (22%)
Non-interest revenue 615 139 29% 84 16%
----------------------------------------------------------------------------
Total revenue (teb) 743 155 27% 48 7%
Provision for credit losses 3 1 69% (1) -
Non-interest expense 553 98 21% (4) (1%)
----------------------------------------------------------------------------
Income before income taxes 187 56 43% 53 40%
Provision for income taxes
(teb) 42 2 7% 13 42%
----------------------------------------------------------------------------
Reported net income 145 54 59% 40 39%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 150 57 62% 40 37%
----------------------------------------------------------------------------
Adjusted return on equity 28.3% (1.5%) 7.8%
Return on equity 27.3% (2.0%) 7.7%
Operating leverage 5.0% nm nm
Productivity ratio (teb) 74.4% (3.1%) (5.8%)
Adjusted productivity ratio
(teb) 73.4% (3.8%) (5.8%)
Net interest margin on earning
assets (teb) 2.98% (0.18%) (0.82%)
Average earning assets 17,511 2,997 21% 356 2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 166 90 +100% (24) (13%)
Non-interest expense 136 73 +100% (3) (2%)
Reported net income 17 10 +100% (15) (46%)
Adjusted net income 22 14 +100% (13) (40%)
Average earning assets 2,960 831 39% (11) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 292 73 34%
Non-interest revenue 1,146 108 10%
----------------------------------------------------------
Total revenue (teb) 1,438 181 14%
Provision for credit losses 7 3 68%
Non-interest expense 1,110 176 19%
----------------------------------------------------------
Income before income taxes 321 2 1%
Provision for income taxes
(teb) 71 (13) (14%)
----------------------------------------------------------
Reported net income 250 15 6%
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 260 22 9%
----------------------------------------------------------
Adjusted return on equity 24.4% (13.6%)
Return on equity 23.4% (14.1%)
Operating leverage (4.3%) nm
Productivity ratio (teb) 77.2% 2.8%
Adjusted productivity ratio
(teb) 76.2% 2.1%
Net interest margin on earning
assets (teb) 3.39% 0.32%
Average earning assets 17,331 2,993 21%
----------------------------------------------------------
----------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 356 207 +100%
Non-interest expense 275 147 +100%
Reported net income 49 37 +100%
Adjusted net income 57 44 +100%
Average earning assets 2,966 826 39%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q2 2012 vs Q2 2011
Net income was $145 million, up $54 million or 59% from a year
ago. Adjusted net income, which adjusts for the amortization of
acquisition-related intangible assets, was $150 million, up $57
million or 62% from a year ago. Adjusted net income in PCG
excluding insurance was $98 million, up $5 million or 7.1% from a
year ago. Adjusted insurance net income was $52 million.
Revenue was $743 million, up $155 million or 27% from a year
ago. Revenue in PCG excluding insurance was up 18% from a year ago.
Higher revenues from our acquisitions and from our spread-based and
fee-based products were partly offset by the effects of lower
transaction volumes in brokerage. Insurance revenue increased as
results a year ago were negatively affected by a $50 million charge
due to earthquake-related reinsurance claims. There was also a
modest benefit from the effects of favourable movements in
long-term interest rates relative to a year ago. Net interest
income grew from the prior year due to earnings from acquisitions
and higher private banking loan and deposit balances. The stronger
U.S. dollar increased revenue by $5 million or 0.9%.
Non-interest expense was $553 million, up $98 million or 21%.
Adjusted non-interest expense was $545 million, up $92 million or
20% primarily due to acquisitions and investments in strategic
initiatives. The stronger U.S. dollar increased expense by $4
million or 0.8%.
Assets under management and administration grew by $159 billion
to $445 billion due primarily to acquisitions.
Q2 2012 vs Q1 2012
Net income increased $40 million or 39% from the first quarter.
Adjusted net income increased $40 million or 37%. Adjusted net
income in PCG excluding insurance increased 1.6% and was up 11% on
a basis that adjusts for the prior quarter's higher than usual
asset management revenue and the impact of stock-based compensation
for employees eligible to retire that is expensed each year in the
first quarter. Adjusted insurance net income increased $40 million
primarily due to the effects of unfavourable movements in long-term
interest rates in the prior quarter.
Revenue increased $48 million or 7.0%. PCG revenue excluding
insurance decreased a modest 1.4% but increased 3.5% on a basis
that excludes the prior quarter's higher than usual asset
management revenues, driven by higher transaction volumes and
higher fee-based revenue. Increased insurance revenue was primarily
due to the effects of unfavourable movements in long-term interest
rates in the prior quarter as there was only a modest benefit in
the current quarter. Net interest income decreased primarily due to
the impact of higher than usual asset management earnings in the
first quarter. The weaker U.S. dollar decreased revenue by $4
million or 0.6%.
Adjusted non-interest expense decreased $4 million or 0.9%. The
prior quarter's expenses included stock-based compensation costs
for employees eligible to retire. The weaker U.S. dollar decreased
expenses by $3 million or 0.6%.
Assets under management and administration improved by $10
billion or 2.4% from the prior quarter due to improved equity
market conditions and new client assets.
Q2 YTD 2012 vs Q2 YTD 2011
Net income was $250 million, up $15 million or 6.2% from a year
ago. Adjusted net income was $260 million, up $22 million or 9.2%
from a year ago. Adjusted net income in PCG excluding insurance was
$196 million, up $30 million or 18% from the prior year. Adjusted
net income in insurance was $64 million, down $8 million or 12%
from the prior year.
Revenue was $1,438 million, up $181 million or 14% from a year
ago. Revenue in PCG excluding insurance was up 19% as higher
revenues from our acquisitions and spread-based and fee-based
products were partly offset by lower transaction volumes in
brokerage. Insurance revenue declined primarily due to lower profit
from new business and lower investment gains. The current year
effects of unfavourable movements in long-term interest rates were
largely offset by the prior year's higher than usual
earthquake-related reinsurance claims. 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 $7 million
or 0.4%.
Non-interest expense was $1,110 million, up $176 million or 19%.
Adjusted non-interest expense was $1,096 million, up $165 million
or 18% primarily due to acquisitions. The stronger U.S. dollar
increased expenses by $5 million or 0.4%.
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, except (Decrease) (Decrease)
as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income (teb) 308 10 3% 21 7%
Non-interest revenue 481 (46) (9%) (4) (1%)
----------------------------------------------------------------------------
Total revenue (teb) 789 (36) (4%) 17 2%
Provision for credit losses 24 (6) (19%) - -
Non-interest expense 471 5 1% (12) (2%)
----------------------------------------------------------------------------
Income before income taxes 294 (35) (11%) 29 11%
Provision for income taxes
(teb) 69 (31) (32%) 2 2%
----------------------------------------------------------------------------
Reported net income 225 (4) (1%) 27 14%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted net income 226 (3) (1%) 28 14%
----------------------------------------------------------------------------
Trading Products revenue 473 (8) (2%) (40) (8%)
Investment and Corporate
Banking revenue 316 (28) (8%) 57 22%
Return on equity 18.6% (5.7%) 1.2%
Operating leverage (5.5%) nm nm
Productivity ratio (teb) 59.7% 3.2% (2.9%)
Adjusted productivity ratio
(teb) 59.7% 3.3% (2.9%)
Net interest margin on earning
assets (teb) 0.65% (0.12%) 0.04%
Average earning assets ($
billions) 192.6 33.1 21% 6.1 3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 241 (10) (4%) (3) (1%)
Non-interest expense 205 9 5% 5 2%
Reported net income 14 (12) (49%) (7) (37%)
Adjusted net income 14 (12) (48%) (7) (37%)
Average earning assets (US$
billions) 70.8 12.7 22% 1.6 2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BMO Capital Markets
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income (teb) 595 (44) (7%)
Non-interest revenue 966 (179) (16%)
----------------------------------------------------------
Total revenue (teb) 1,561 (223) (13%)
Provision for credit losses 48 (12) (19%)
Non-interest expense 954 (1) -
----------------------------------------------------------
Income before income taxes 559 (210) (27%)
Provision for income taxes
(teb) 136 (144) (52%)
----------------------------------------------------------
Reported net income 423 (66) (13%)
----------------------------------------------------------
----------------------------------------------------------
Adjusted net income 424 (65) (13%)
----------------------------------------------------------
Trading Products revenue 986 (90) (8%)
Investment and Corporate
Banking revenue 575 (133) (19%)
Return on equity 18.0% (7.1%)
Operating leverage (12.4%) nm
Productivity ratio (teb) 61.1% 7.6%
Adjusted productivity ratio
(teb) 61.1% 7.6%
Net interest margin on earning
assets (teb) 0.63% (0.17%)
Average earning assets ($
billions) 189.5 28.1 17%
----------------------------------------------------------
----------------------------------------------------------
U.S. Select Financial Data (US$
in millions, except as noted)
Total revenue (teb) 485 (49) (9%)
Non-interest expense 405 14 4%
Reported net income 35 17 94%
Adjusted net income 35 17 93%
Average earning assets (US$
billions) 70.0 11.5 20%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
nm - not meaningful
Q2 2012 vs Q2 2011
Net income was $225 million, in line with the previous year.
Revenue decreased $36 million or 4.4% from the levels of a year ago
to $789 million. In the current quarter we saw solid investment
banking activity, particularly in mergers and acquisitions,
although not at the levels observed in the comparative period a
year ago. Trading revenues improved this quarter, benefiting from
more market opportunities relative to the same period in 2011, and
revenues from our interest-rate-sensitive businesses were also
higher. Offsetting these improvements were declines in equity
underwriting fees, securities commissions and net investment
securities gains. Early market stability eroded towards the end of
the current quarter as uncertainty in Europe returned and there was
slower than expected performance of the U.S. economy. The stronger
U.S. dollar increased revenue by $9 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 $5 million or 1.1%, primarily due to increases in
technology and support costs as a result of making investments to
respond to the changing regulatory environment. This was partially
offset by lower employee expenses. The stronger U.S. dollar
increased expenses by $5 million relative to a year ago.
Return on equity was 18.6%, compared with 24.3% a year ago.
Q2 2012 vs Q1 2012
Net income increased $27 million or 14% from the previous
quarter. Revenue was $17 million or 2.2% higher. Growth in revenue
was driven by an improvement in the investment and corporate
banking business, primarily merger and acquisition fees, as well as
higher net investment securities gains. The weaker U.S. dollar
decreased revenue by $7 million relative to the previous
quarter.
Non-interest expense decreased $12 million as we continue to
focus on expense management. Employee expenses were down, mainly
because the first quarter of every year includes the costs of
stock-based compensation for employees that are eligible to retire.
A reduction in technology and support costs was partially offset by
higher professional fees. The weaker U.S. dollar decreased expenses
by $3 million relative to the previous quarter.
Q2 YTD 2012 vs Q2 YTD 2011
Net income decreased $66 million or 13% from the previous year
to $423 million. Revenue was $223 million or 13% lower due to
reductions in investment banking fees, securities commissions and
net investment securities gains. Trading revenue also decreased
compared to the very strong results in the first half of the prior
year. The stronger U.S. dollar increased revenue by $11 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 was relatively consistent with the prior
year. Lower employee costs were partially offset by higher
technology and support costs that arose in response to the changing
regulatory environment. The stronger U.S. dollar increased expenses
by $6 million relative to a year ago.
Return on equity was 18.0%, compared with 25.1% a year ago.
Corporate Services, Including Technology and Operations
Increase Increase
(Canadian $ in millions, except (Decrease) (Decrease)
as noted) Q2-2012 vs. Q2-2011 vs. Q1-2012
----------------------------------------------------------------------------
Net interest income before
group teb offset 79 86 +100% (99) (56%)
Group teb offset (56) (3) (5) (4) (8%)
----------------------------------------------------------------------------
Net interest income (teb) 23 83 +100% (103) (82%)
Non-interest revenue 149 (1) (1%) (38) (21%)
----------------------------------------------------------------------------
Total revenue (teb) 172 82 90% (141) (45%)
Provision for (recovery of)
credit losses (56) (151) (+100%) 55 50%
Non-interest expense 230 122 +100% 22 10%
----------------------------------------------------------------------------
Profit before income taxes (2) 111 +100% (218) (+100%)
Provision for (recovery of)
income taxes (teb) (93) 46 33% (86) (+100%)
----------------------------------------------------------------------------
Reported net income 91 65 +100% (132) (59%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted total revenue (teb) (60) (62) (+100%) - -
Adjusted provision for
(recovery of) credit losses (100) (162) (+100%) 61 38%
Adjusted non-interest expense 121 38 46% 55 83%
Adjusted net income 21 47 +100% (41) (68%)
----------------------------------------------------------------------------
U.S. Select Financial Data (US$
in millions)
Total revenue (teb) 89 109 +100% (100) (52%)
Provision for (recovery of)
credit losses (80) (118) (+100%) 68 47%
Non-interest expense 124 80 +100% 25 26%
Provision for (recovery of)
income taxes (teb) 4 67 +100% (61) (96%)
Reported net income 41 80 +100% (132) (76%)
Adjusted net income 27 47 +100% (76) (74%)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Increase
(Canadian $ in millions, except YTD- (Decrease)
as noted) 2012 vs. YTD-2011
----------------------------------------------------------
Net interest income before
group teb offset 257 337 +100%
Group teb offset (108) 6 6%
----------------------------------------------------------
Net interest income (teb) 149 343 +100%
Non-interest revenue 336 150 80%
----------------------------------------------------------
Total revenue (teb) 485 493 +100%
Provision for (recovery of)
credit losses (167) (380) (+100%)
Non-interest expense 438 258 69%
----------------------------------------------------------
Profit before income taxes 214 615 +100%
Provision for (recovery of)
income taxes (teb) (100) 217 69%
----------------------------------------------------------
Reported net income 314 398 +100%
----------------------------------------------------------
----------------------------------------------------------
Adjusted total revenue (teb) (120) (4) (3%)
Adjusted provision for
(recovery of) credit losses (261) (436) (+100%)
Adjusted non-interest expense 187 33 21%
Adjusted net income 83 235 +100%
----------------------------------------------------------
U.S. Select Financial Data (US$
in millions)
Total revenue (teb) 278 355 +100%
Provision for (recovery of)
credit losses (228) (351) (+100%)
Non-interest expense 223 178 +100%
Provision for (recovery of)
income taxes (teb) 69 215 +100%
Reported net income 214 313 +100%
Adjusted net income 130 212 +100%
----------------------------------------------------------
----------------------------------------------------------
Adjusted results in this chart are non-GAAP amounts or non-GAAP measures.
Please see the Non-GAAP Measures section.
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 $91 million,
an improvement of $65 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. The adjusting items include a
restructuring charge of $23 million after tax to align our cost
structure with the current and future business environment. This
action to improve our efficiency is part of the broader effort
underway in the bank to improve productivity.
Adjusted net income was $21 million, an improvement of $47
million from a year ago. Adjusted revenues were $62 million lower,
mainly due to interest received on the settlement of certain tax
matters in the prior year. Adjusted expenses were $38 million
higher, primarily due to the impact of the acquired business.
Adjusted provisions for credit losses were lower by $162 million.
Corporate Services adjusted net income includes a $117 million ($72
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 improved credit conditions.
Corporate Services net income in the current quarter decreased
$132 million relative to the first quarter. Adjusted net income
decreased $41 million. Adjusted revenues were unchanged. Adjusted
expenses were $55 million higher, mainly due to the timing of
benefit costs and technology investment spending. Adjusted
provisions for credit losses increased $61 million due to higher
provisions charged to Corporate Services under our expected loss
provisioning methodology and lower recoveries of credit losses on
M&I purchased credit impaired loans.
Adjusted net income for the year to date was $83 million, an
improvement of $235 million from a year ago. Adjusted revenues were
$4 million lower. Adjusted expenses were $33 million higher
primarily due to the impact of the acquired business. Adjusted
provisions for credit losses were $436 million lower as a result of
improved credit conditions. The year to date results include the
$259 million ($160 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.
GAAP and Related Non-GAAP Measures used in the MD&A(1)
(Canadian $ in millions,
except as noted) Q2-2012 Q1-2012 Q2-2011 YTD-2012 YTD-2011
----------------------------------------------------------------------------
Reported Results
Revenue 3,959 4,117 3,333 8,076 6,801
Non-interest expense (2,499) (2,554) (2,030) (5,053) (4,088)
----------------------------------------------------------------------------
Pre-provision, pre-tax
earnings 1,460 1,563 1,303 3,023 2,713
Provision for credit
losses (195) (141) (297) (336) (620)
Provision for income taxes (237) (313) (193) (550) (455)
----------------------------------------------------------------------------
Net Income 1,028 1,109 813 2,137 1,638
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reported Measures
EPS ($) 1.51 1.63 1.32 3.14 2.66
Net income growth (%) 26.5 34.4 6.5 30.5 13.8
EPS growth (%) 14.4 21.6 4.8 18.0 11.8
Revenue growth (%) 18.8 18.7 9.0 18.7 11.7
Non-interest expense
growth (%) 23.2 24.1 10.4 23.6 11.0
Productivity ratio (%) 63.1 62.0 60.9 62.6 60.1
Operating leverage (%) (4.4) (5.4) (1.4) (4.9) 0.7
Return on equity (%) 16.2 17.2 17.5 16.7 17.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting Items (Pre-tax)
Credit-related items on
the acquired M&I
performing loan
portfolio(2) 90 184 - 274 -
Run-off structured credit
activities(3) 76 136 100 212 120
Hedge costs related to
foreign currency risk on
purchase of M&I - - (11) - (11)
M&I integration costs(4) (74) (70) (25) (144) (25)
Amortization of
acquisition-related
intangible assets(4) (33) (34) (10) (67) (20)
Decrease (increase) in the
collective allowance for
credit losses 18 - (32) 18 (38)
Restructuring costs(4) (31) (68) - (99) -
----------------------------------------------------------------------------
Adjusting items included
in reported pre-tax
income 46 148 22 194 26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting Items (After-
tax)
Credit-related items on
the acquired M&I
performing loan portfolio 55 114 - 169 -
Run-off structured credit
activities 73 136 100 209 120
Hedge costs related to
foreign currency risk on
purchase of M&I - - (8) - (8)
M&I integration costs (47) (43) (17) (90) (17)
Amortization of
acquisition-related
intangible assets (24) (24) (9) (48) (17)
Decrease (increase) in the
collective allowance for
credit losses 12 - (23) 12 (27)
Restructuring costs (23) (46) - (69) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusting items included
in reported after-tax net
income 46 137 43 183 51
EPS ($) 0.07 0.21 0.07 0.28 0.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted Results(1)
Revenue 3,727 3,743 3,244 7,470 6,692
Non-interest expense (2,357) (2,378) (1,994) (4,735) (4,043)
----------------------------------------------------------------------------
Pre-provision, pre-tax
earnings 1,370 1,365 1,250 2,735 2,649
Provision for credit
losses (151) (91) (265) (242) (582)
Provision for income taxes (237) (302) (215) (539) (480)
----------------------------------------------------------------------------
Adjusted net Income 982 972 770 1,954 1,587
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Adjusted Measures(1)(5)
EPS ($) 1.44 1.42 1.25 2.86 2.57
Net income growth (%) 27.5 18.9 - 23.1 9.3
EPS growth (%) 15.2 7.6 (2.3) 11.3 6.6
Revenue growth (%) 14.9 8.5 6.1 11.6 9.9
Non-interest expense
growth (%) 18.2 16.1 9.0 17.1 10.3
Productivity ratio (%) 63.2 63.5 61.5 63.4 60.4
Operating leverage (%) (3.3) (7.6) (2.9) (5.5) (0.4)
Return on equity (%) 15.4 15.0 16.6 15.2 17.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted results in this chart are non-GAAP amounts or non-GAAP
measures. Please see the Non-GAAP Measures section.
(2) Comprised of $152 million of net interest income, $44 million of
specific provisions for credit losses and $18 million of collective
provisions in Q2-2012; and $234 million of net interest income, $31
million of specific provisions for credit losses and $19 million of
collective provisions in Q1-2012.
(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
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
GAAP and Related Non-GAAP Measures used in the MD&A 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 second quarter of 2012, adjusting items totalled a net
benefit of $46 million after tax, 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
amortization of acquisition-related intangible assets on all
acquisitions; the benefit of run-off structured credit activities
of $76 million ($73 million after tax) 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. This action is part of the broader
effort underway in the bank to improve productivity. The $62
million provision included in the credit-related items above
included an $18 million increase in the collective allowance for
credit losses on the acquired M&I performing loan portfolio.
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. $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).
In the second quarter of 2011, adjusting items totalled a net
benefit of $43 million after tax. Adjusting items consisted of a
$25 million charge ($17 million after tax) for the integration
costs of the acquired business; a $10 million ($9 million after
tax) charge for amortization of acquisition-related intangible
assets on all acquisitions; a $100 million benefit ($100 million
after tax) from the results of run-off structured credit
activities, primarily included in trading revenue; a $32 million
($23 million after tax) decrease in the collective allowance; and
an $11 million charge ($8 million after tax) on the hedge of
foreign currency risk on the purchase of M&I. 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. $5 million ($4 million
after tax); and Private Client Group $2 million ($2 million after
tax).
In the first quarter of 2012, adjusting items totalled a net
benefit of $137 million, comprised of a $114 million after-tax net
benefit of credit-related items in respect of the acquired M&I
performing loan portfolio (including $234 million in net interest
income, net of a $50 million provision for credit losses and
related income taxes of $70 million); costs of $70 million ($43
million after tax) for the integration of the acquired business;
$136 million ($136 million after tax) benefit due to run-off
structured credit activities, primarily included in trading
revenue; a $34 million ($24 million after tax) charge for the
amortization of acquisition-related intangible assets; and a
restructuring charge of $68 million ($46 million after tax) related
to restructuring parts of BMO Capital Markets to position it for
the future. 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 ($2 million
after tax); P&C U.S. $24 million ($17 million after tax); and
Private Client Group $7 million ($5 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 Wednesday, May 23, 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, August 27, 2012,
by calling 905-694-9451 (from within Toronto) or 1-800-408-3053
(toll-free outside Toronto) and entering passcode 6850310.
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, August 27, 2012.
Media Relations Contacts
Ralph Marranca, Toronto, ralph.marranca@bmo.com, 416-867-3996
Ronald Monet, Montreal, ronald.monet@bmo.com, 514-877-1873
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
February 2012 $58.23 Shareholder Services
March 2012 $59.48 Corporate Secretary's Department
April 2012 $58.92 One First Canadian Place, 21st Floor
Toronto, Ontario M5X 1A1
For dividend information, change in Telephone: (416) 867-6785
shareholder address Fax: (416) 867-6793
or to advise of duplicate mailings, E-mail: corp.secretary@bmo.com
please contact
Computershare Trust Company of Canada For further information on this
100 University Avenue, 9th Floor report, please contact
Toronto, Ontario M5J 2Y1 Bank of Montreal
Telephone: 1-800-340-5021 (Canada and Investor Relations Department
the United States) P.O. Box 1, One First Canadian Place,
Telephone: (514) 982-7800 18th Floor
(international) Toronto, Ontario M5X 1A1
Fax: 1-888-453-0330 (Canada and the To review financial results online,
United States) please visit our website at
Fax: (416) 263-9394 (international) www.bmo.com.
E-mail: service@computershare.com
----------------------------------------------------------------------------
® Registered trademark of Bank of Montreal
Financial Highlights
(Unaudited)
(Canadian $ in
millions,
except as
noted) For the three months ended
----------------------------------------------------------------------------
Change
from
April
April January October July April 30,
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011 2011
----------------------------------------------------------------------------
Income
Statement
Highlights
Total revenue $ 3,959 $ 4,117 $ 3,822 $ 3,320 $ 3,333 18.8%
Provision for
credit losses 195 141 362 230 297 (34.4)
Non-interest
expense 2,499 2,554 2,432 2,221 2,030 23.2
Reported net
income 1,028 1,109 768 708 813 26.5
Adjusted net
income (b) 982 972 832 856 770 27.5
----------------------------------------------------------------------------
Net income
attributable
to non-
controlling
interest in
subsidiaries 18 19 19 18 18 1.1
Net income
attributable
to Bank
shareholders 1,010 1,090 749 690 795 27.1
Adjusted net
income
attributable
to Bank
shareholders
(b) 964 953 813 838 752 28.1
----------------------------------------------------------------------------
Reported Net
Income by
Operating
Segment
Personal &
Commercial
Banking Canada 446 446 439 443 414 7.8%
Personal &
Commercial
Banking U.S. 121 137 155 90 53 +100
Private Client
Group 145 105 137 104 91 59.3
BMO Capital
Markets 225 198 143 270 229 (1.5)
Corporate
Services (a) 91 223 (106) (199) 26 +100
----------------------------------------------------------------------------
Common Share
Data ($)
Diluted
earnings per
share $ 1.51 $ 1.63 $ 1.11 $ 1.09 $ 1.32 0.19
Diluted
adjusted
earnings per
share (b) 1.44 1.42 1.20 1.34 1.25 0.19
Dividends
declared per
share 0.70 0.70 0.70 0.70 0.70 -
Book value per
share 38.06 37.85 36.76 35.38 31.38 6.68
Closing share
price 58.67 58.29 58.89 60.03 62.14 (3.47)
Total market
value of
common shares
($ billions) 37.7 37.3 37.6 38.3 35.4 2.3
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in
millions,
except as
noted) For the six months ended
----------------------------------------------
Change
from
April
April April 30,
30, 2012 30, 2011 2011
----------------------------------------------
Income
Statement
Highlights
Total revenue $ 8,076 $ 6,801 18.7%
Provision for
credit losses 336 620 (45.9)
Non-interest
expense 5,053 4,088 23.6
Reported net
income 2,137 1,638 30.5
Adjusted net
income (b) 1,954 1,587 23.1
----------------------------------------------
Net income
attributable
to non-
controlling
interest in
subsidiaries 37 36 2.0%
Net income
attributable
to Bank
shareholders 2,100 1,602 31.1
Adjusted net
income
attributable
to Bank
shareholders
(b) 1,917 1,551 23.6
----------------------------------------------
Reported Net
Income by
Operating
Segment
Personal &
Commercial
Banking Canada 892 891 0.1%
Personal &
Commercial
Banking U.S. 258 107 +100
Private Client
Group 250 235 6.1
BMO Capital
Markets 423 489 (13.4)
Corporate
Services (a) 314 (84) +100
----------------------------------------------
Common Share
Data ($)
Diluted
earnings per
share $ 3.14 $ 2.66 $ 0.48
Diluted
adjusted
earnings per
share (b) 2.86 2.57 0.29
Dividends
declared per
share 1.40 1.40 -
Book value per
share 38.06 31.38 6.68
Closing share
price 58.67 62.14 (3.47)
Total market
value of
common shares
($ billions) 37.7 35.4 2.3
----------------------------------------------
As at
----------------------------------------------------------------------------
Change
from
April
April January October July April 30,
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011 2011
----------------------------------------------------------------------------
Balance Sheet
Highlights
Assets $ 525,503 $ 538,260 $ 500,575 $ 502,036 $ 439,548 19.6%
Net loans and
acceptances 245,522 242,621 238,885 235,327 204,921 19.8
Deposits 316,067 316,557 302,373 292,047 254,271 24.3
Common
shareholders'
equity 24,485 24,238 23,492 22,549 17,874 37.0
------------------------------------------------------------------
For the three months ended
------------------------------------------------------------------
April January October July April
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011
------------------------------------------------------------------
Financial
Measures and
Ratios (% except
as noted) (c)
Average annual
five year total
shareholder
return 2.0 1.6 1.9 3.9 4.4
Diluted earnings
per share growth 14.4 21.6 (10.5) (3.5) 4.8
Diluted adjusted
earnings per
share growth (b) 15.2 7.6 (4.8) 17.5 (2.3)
Return on equity 16.2 17.2 12.7 13.3 17.5
Adjusted return
on equity (b) 15.4 15.0 13.9 16.4 16.6
Net economic
profit ($
millions) (b) 366 434 150 151 315
Net economic
profit (NEP)
growth (b) 16.2 33.4 (21.1) 31.0 30.9
Operating
leverage (4.4) (5.4) (1.8) (2.6) (1.4)
Adjusted
operating
leverage (b) (3.3) (7.6) (2.6) 6.9 (2.9)
Revenue growth 18.8 18.7 18.1 13.9 9.0
Adjusted revenue
growth (b) 14.9 8.5 13.4 16.0 6.1
Non-interest
expense growth 23.2 24.1 19.9 16.5 10.4
Adjusted non-
interest expense
growth (b) 18.2 16.1 16.0 9.1 9.0
Non-interest
expense-to-
revenue ratio 63.1 62.0 63.7 66.9 60.9
Adjusted non-
interest
expense-to-
revenue ratio
(b) 63.2 63.5 63.8 61.2 61.5
Net interest
margin on
average earning
assets 1.89 2.05 2.01 1.76 1.82
Adjusted net
interest margin
on average
earning assets
(b) 1.76 1.85 1.78 1.78 1.83
Provision for
credit losses-
to-average loans
and acceptances
(annualized) 0.32 0.23 0.60 0.43 0.58
Effective tax
rate 18.72 22.02 25.31 18.04 19.18
Gross impaired
loans and
acceptances-to-
equity and
allowance for
credit losses 9.34 8.74 8.98 7.94 10.18
Cash and
securities-to-
total assets
ratio 32.0 32.2 29.5 32.0 32.9
Common equity
ratio (based on
Basel II) 9.90 9.65 9.59 9.11 10.67
Basel II tier 1
capital ratio 11.97 11.69 12.01 11.48 13.82
Basel II total
capital ratio 14.89 14.58 14.85 14.21 17.03
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 (1.0) 5.7 2.4 0.0 3.2
Dividend yield 4.77 4.80 4.75 4.66 4.51
Price-to-earnings
ratio (times) 11.0 11.3 12.1 12.0 12.4
Market-to-book
value (times) 1.54 1.54 1.49 1.58 1.82
Return on average
assets 0.76 0.81 0.56 0.59 0.74
Equity-to-assets
ratio 5.1 5.0 5.3 5.1 4.7
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------
For the six months
ended
------------------------------------
April April
30, 2012 30, 2011
------------------------------------
Financial
Measures and
Ratios (% except
as noted) (c)
Average annual
five year total
shareholder
return 2.0 4.4
Diluted earnings
per share growth 18.0 11.8
Diluted adjusted
earnings per
share growth (b) 11.3 6.6
Return on equity 16.7 17.7
Adjusted return
on equity (b) 15.2 17.1
Net economic
profit ($
millions) (b) 800 640
Net economic
profit (NEP)
growth (b) 24.9 61.7
Operating
leverage (4.9) 0.7
Adjusted
operating
leverage (b) (5.5) (0.4)
Revenue growth 18.7 11.7
Adjusted revenue
growth (b) 11.6 9.9
Non-interest
expense growth 23.6 11.0
Adjusted non-
interest expense
growth (b) 17.1 10.3
Non-interest
expense-to-
revenue ratio 62.6 60.1
Adjusted non-
interest
expense-to-
revenue ratio
(b) 63.4 60.4
Net interest
margin on
average earning
assets 1.97 1.80
Adjusted net
interest margin
on average
earning assets
(b) 1.81 1.81
Provision for
credit losses-
to-average loans
and acceptances
(annualized) 0.28 0.61
Effective tax
rate 20.47 21.74
Gross impaired
loans and
acceptances-to-
equity and
allowance for
credit losses 9.34 10.18
Cash and
securities-to-
total assets
ratio 32.0 32.9
Common equity
ratio (based on
Basel II) 9.90 10.67
Basel II tier 1
capital ratio 11.97 13.82
Basel II total
capital ratio 14.89 17.03
Credit rating (d)
DBRS AA AA
Fitch AA- AA-
Moody's Aa2 Aa2
Standard &
Poor's A+ A+
Twelve month
total
shareholder
return (1.0) 3.2
Dividend yield 4.77 4.51
Price-to-earnings
ratio (times) 11.0 12.4
Market-to-book
value (times) 1.54 1.82
Return on average
assets 0.78 0.73
Equity-to-assets
ratio 5.1 4.7
------------------------------------
------------------------------------
All ratios in this report are based on unrounded numbers.
(a) Corporate Services includes Technology and Operations.
(b) These are Non-GAAP measures. Refer to the Non-GAAP Measures section at
the end of the Financial Review for an explanation of the use and
limitations of Non-GAAP measures and detail on the items that have been
excluded from results in the determination of adjusted measures. Earnings
and other measures adjusted to a basis other than generally accepted
accounting principles (GAAP) do not have standardized meanings under GAAP
and are unlikely to be comparable to similar measures used by other
companies.
(c) For the period ended, or as at, as appropriate.
(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.
Amounts for periods prior to fiscal 2011 have not been restated for IFRS. As
a result, growth measures for 2011 may not be meaningful.
Interim Consolidated Financial Statements
Consolidated Statement of Income
(Unaudited)
(Canadian $ in millions,
except as noted) For the three months ended
----------------------------------------------------------------------------
April January October July April
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011
----------------------------------------------------------------------------
Interest, Dividend and
Fee Income
Loans $ 2,680 $ 2,868 $ 3,020 $ 2,462 $ 2,332
Securities 536 591 484 574 542
Deposits with banks 64 45 44 39 38
----------------------------------------------------------------------------
3,280 3,504 3,548 3,075 2,912
----------------------------------------------------------------------------
Interest Expense
Deposits 570 628 674 674 651
Subordinated debt 47 49 43 43 38
Capital trust securities
(Note 12) 11 16 18 18 18
Other liabilities 532 493 551 537 513
----------------------------------------------------------------------------
1,160 1,186 1,286 1,272 1,220
----------------------------------------------------------------------------
Net Interest Income 2,120 2,318 2,262 1,803 1,692
----------------------------------------------------------------------------
Non-Interest Revenue
Securities commissions
and fees 303 285 292 297 317
Deposit and payment
service charges 227 240 246 205 188
Trading revenues (losses) 228 345 (15) 100 220
Lending fees 137 160 152 146 142
Card fees 174 167 188 171 159
Investment management and
custodial fees 179 172 176 131 94
Mutual fund revenues 159 159 157 164 158
Underwriting and advisory
fees 130 78 76 141 143
Securities gains, other
than trading 40 42 61 31 47
Foreign exchange, other
than trading 51 39 11 38 52
Insurance income 105 46 74 47 40
Other 106 66 142 46 81
----------------------------------------------------------------------------
1,839 1,799 1,560 1,517 1,641
----------------------------------------------------------------------------
Total Revenue 3,959 4,117 3,822 3,320 3,333
----------------------------------------------------------------------------
Provision for credit
losses (Note 3) 195 141 362 230 297
----------------------------------------------------------------------------
Non-Interest Expense
Employee compensation
(Note 15) 1,391 1,446 1,311 1,212 1,110
Premises and equipment 461 455 464 388 380
Amortization of
intangible assets 82 83 81 58 42
Travel and business
development 118 128 106 100 90
Communications 72 72 75 63 61
Business and capital
taxes 11 12 14 12 14
Professional fees 141 123 154 223 141
Other 223 235 227 165 192
----------------------------------------------------------------------------
2,499 2,554 2,432 2,221 2,030
----------------------------------------------------------------------------
Income Before Provision
for Income Taxes 1,265 1,422 1,028 869 1,006
Provision for income
taxes 237 313 260 161 193
----------------------------------------------------------------------------
Net Income $ 1,028 $ 1,109 $ 768 $ 708 $ 813
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 1,010 1,090 749 690 795
Non-controlling
interest in
subsidiaries 18 19 19 18 18
----------------------------------------------------------------------------
Net Income $ 1,028 $ 1,109 $ 768 $ 708 $ 813
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings Per Share
(Canadian $) (Note 16)
Basic $ 1.52 $ 1.65 $ 1.12 $ 1.10 $ 1.34
Diluted 1.51 1.63 1.11 1.09 1.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in millions, For the six months
except as noted) ended
---------------------------------------------
April April
30, 2012 30, 2011
---------------------------------------------
Interest, Dividend and
Fee Income
Loans $ 5,548 $ 4,721
Securities 1,127 1,118
Deposits with banks 109 62
---------------------------------------------
6,784 5,901
---------------------------------------------
Interest Expense
Deposits 1,198 1,345
Subordinated debt 96 71
Capital trust securities
(Note 12) 27 40
Other liabilities 1,025 1,036
---------------------------------------------
2,346 2,492
---------------------------------------------
Net Interest Income 4,438 3,409
---------------------------------------------
Non-Interest Revenue
Securities commissions
and fees 588 626
Deposit and payment
service charges 467 383
Trading revenues (losses) 573 464
Lending fees 297 295
Card fees 341 330
Investment management and
custodial fees 351 189
Mutual fund revenues 318 312
Underwriting and advisory
fees 208 295
Securities gains, other
than trading 82 97
Foreign exchange, other
than trading 90 81
Insurance income 151 162
Other 172 158
---------------------------------------------
3,638 3,392
---------------------------------------------
Total Revenue 8,076 6,801
---------------------------------------------
Provision for credit
losses (Note 3) 336 620
---------------------------------------------
Non-Interest Expense
Employee compensation
(Note 15) 2,837 2,304
Premises and equipment 916 726
Amortization of
intangible assets 165 92
Travel and business
development 246 176
Communications 144 121
Business and capital
taxes 23 25
Professional fees 264 247
Other 458 397
---------------------------------------------
5,053 4,088
---------------------------------------------
Income Before Provision
for Income Taxes 2,687 2,093
Provision for income
taxes 550 455
---------------------------------------------
Net Income $ 2,137 $ 1,638
---------------------------------------------
---------------------------------------------
Attributable to:
Bank shareholders 2,100 1,602
Non-controlling
interest in
subsidiaries 37 36
---------------------------------------------
Net Income $ 2,137 $ 1,638
---------------------------------------------
---------------------------------------------
Earnings Per Share
(Canadian $) (Note 16)
Basic $ 3.16 $ 2.70
Diluted 3.14 2.66
---------------------------------------------
---------------------------------------------
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
----------------------------------------------------------------------------
April January October July April
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011
----------------------------------------------------------------------------
Net income $ 1,028 $ 1,109 $ 768 $ 708 $ 813
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
$(2), $10,
$(20),$(33),
$30, $8 and $42) 6 (30) 23 54 (33)
Reclassification
to earnings of
(gains) losses
in the period
(net of income
tax provision
(recovery) of
$(11), $22, $37,
$(1), $(4), $11
and $15) (23) (33) (67) (7) 7
----------------------------------------------------------------------------
(17) (63) (44) 47 (26)
----------------------------------------------------------------------------
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 $99,
$(19), $(89),
$(84), $(19),
$80 and $36) (300) 46 230 208 40
Reclassification
to earnings of
(gains) losses
on cash flow
hedges (net of
income tax
provision
(recovery) of
$15, $nil, $11,
$(1), $10, $15
and $(1)) (38) - (30) 2 (22)
----------------------------------------------------------------------------
(338) 46 200 210 18
----------------------------------------------------------------------------
Net gain (loss) on
translation of net
foreign operations
Unrealized gain
(loss) on
translation of
net foreign
operations (255) 133 759 64 (679)
Impact of hedging
unrealized gain
(loss) on
translation of
net foreign
operations (net
of income tax
(provision)
recovery of
$(23), $17,
$144, $10,
$(116), $(6) and
$(180)) 66 (48) (317) (23) 299
----------------------------------------------------------------------------
(189) 85 442 41 (380)
----------------------------------------------------------------------------
Other Comprehensive
Income (Loss) (544) 68 598 298 (388)
----------------------------------------------------------------------------
Total Comprehensive
Income $ 484 $ 1,177 $ 1,366 $ 1,006 $ 425
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 466 1,158 1,347 988 407
Non-controlling
interest in
subsidiaries 18 19 19 18 18
----------------------------------------------------------------------------
Total Comprehensive
Income $ 484 $ 1,177 $ 1,366 $ 1,006 $ 425
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Unaudited)
(Canadian $ in For the six months
Millions) ended
-------------------------------------------
April April
30, 2012 30, 2011
-------------------------------------------
Net income $ 2,137 $ 1,638
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
$(2), $10,
$(20),$(33),
$30, $8 and $42) (24) (59)
Reclassification
to earnings of
(gains) losses
in the period
(net of income
tax provision
(recovery) of
$(11), $22, $37,
$(1), $(4), $11
and $15) (56) (30)
-------------------------------------------
(80) (89)
-------------------------------------------
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 $99,
$(19), $(89),
$(84), $(19),
$80 and $36) (254) (110)
Reclassification
to earnings of
(gains) losses
on cash flow
hedges (net of
income tax
provision
(recovery) of
$15, $nil, $11,
$(1), $10, $15
and $(1)) (38) 7
-------------------------------------------
(292) (103)
-------------------------------------------
Net gain (loss) on
translation of net
foreign operations
Unrealized gain
(loss) on
translation of
net foreign
operations (122) (913)
Impact of hedging
unrealized gain
(loss) on
translation of
net foreign
operations (net
of income tax
(provision)
recovery of
$(23), $17,
$144, $10,
$(116), $(6) and
$(180)) 18 463
-------------------------------------------
(104) (450)
-------------------------------------------
Other Comprehensive
Income (Loss) (476) (642)
-------------------------------------------
Total Comprehensive
Income $ 1,661 $ 996
-------------------------------------------
-------------------------------------------
Attributable to:
Bank shareholders 1,624 960
Non-controlling
interest in
subsidiaries 37 36
-------------------------------------------
Total Comprehensive
Income $ 1,661 $ 996
-------------------------------------------
-------------------------------------------
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
----------------------------------------------------------------------------
April January October July April November
30, 2012 31, 2012 31, 2011 31, 2011 30, 2011 1, 2010
----------------------------------------------------------------------------
Assets
Cash and Cash
Equivalents $ 34,117 $ 39,553 $ 19,676 $ 33,126 $ 24,500 $ 17,460
----------------------------------------------------------------------------
Interest Bearing
Deposits with
Banks 7,010 7,603 5,980 7,049 5,309 5,157
----------------------------------------------------------------------------
Securities
Trading 71,432 71,018 69,925 72,671 72,548 72,704
Available-for-
sale 54,906 54,545 51,426 47,141 41,594 45,924
Other 781 825 764 810 797 884
----------------------------------------------------------------------------
127,119 126,388 122,115 120,622 114,939 119,512
----------------------------------------------------------------------------
Securities
Borrowed or
Purchased Under
Resale
Agreements
(Note 3) 42,253 42,608 37,970 38,301 33,040 28,102
----------------------------------------------------------------------------
Loans (Notes 3
and 6)
Residential
mortgages 82,260 81,317 81,075 80,977 74,507 74,782
Consumer
instalment and
other personal 60,002 59,688 59,445 58,035 52,189 51,159
Credit cards 7,861 7,871 8,038 8,026 7,688 7,777
Businesses and
governments 89,800 88,719 84,883 82,995 65,680 66,512
----------------------------------------------------------------------------
239,923 237,595 233,441 230,033 200,064 200,230
Customers'
liability under
acceptances 7,406 6,782 7,227 7,000 6,620 7,001
Allowance for
credit losses
(Note 3) (1,807) (1,756) (1,783) (1,706) (1,763) (1,964)
----------------------------------------------------------------------------
245,522 242,621 238,885 235,327 204,921 205,267
----------------------------------------------------------------------------
Other Assets
Derivative
instruments 46,760 58,219 55,113 47,359 43,901 49,086
Premises and
equipment 2,033 2,020 2,061 1,921 1,465 1,507
Goodwill (Note
9) 3,702 3,656 3,649 3,442 1,592 1,619
Intangible
assets 1,541 1,558 1,562 1,511 848 812
Current tax
assets 2,187 1,504 1,319 1,177 1,105 1,459
Deferred tax
assets (Note
19) 2,820 3,090 3,355 3,369 1,167 1,078
Other 10,439 9,440 8,890 8,832 6,761 6,651
----------------------------------------------------------------------------
69,482 79,487 75,949 67,611 56,839 62,212
----------------------------------------------------------------------------
Total Assets $525,503 $538,260 $500,575 $502,036 $439,548 $437,710
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
Equity
Deposits (Note
10)
Banks $ 22,508 $ 20,150 $ 20,877 $ 22,950 $ 18,944 $ 19,409
Businesses and
governments 171,539 173,852 159,209 148,848 136,130 131,892
Individuals 122,020 122,555 122,287 120,249 99,197 99,043
----------------------------------------------------------------------------
316,067 316,557 302,373 292,047 254,271 250,344
----------------------------------------------------------------------------
Other
Liabilities
Derivative
instruments 46,472 55,157 50,934 43,596 40,978 47,632
Acceptances 7,406 6,782 7,227 7,000 6,620 7,001
Securities sold
but not yet
purchased 23,834 21,269 20,207 21,892 20,693 14,245
Securities lent
or sold under
repurchase
agreements 46,076 51,952 32,078 48,426 38,954 40,987
Current tax
liabilities 1,017 634 591 456 497 570
Deferred tax
liabilities
(Note 19) 207 225 314 329 297 332
Other 50,295 51,342 52,846 55,311 49,006 49,953
----------------------------------------------------------------------------
175,307 187,361 164,197 177,010 157,045 160,720
----------------------------------------------------------------------------
Subordinated
Debt (Note 11) 5,276 5,362 5,348 5,284 5,208 3,776
----------------------------------------------------------------------------
Capital Trust
Securities
(Note 12) 462 450 821 821 809 1,187
----------------------------------------------------------------------------
Equity
Share capital
(Note 13) 14,033 14,260 14,193 14,114 9,951 9,498
Contributed
surplus 215 119 113 111 101 91
Retained
earnings 12,512 11,986 11,381 11,117 10,913 10,181
Accumulated
other
comprehensive
income (loss) 190 734 666 68 (230) 412
----------------------------------------------------------------------------
Total
shareholders'
equity 26,950 27,099 26,353 25,410 20,735 20,182
Non-controlling
interest in
subsidiaries 1,441 1,431 1,483 1,464 1,480 1,501
----------------------------------------------------------------------------
Total Equity 28,391 28,530 27,836 26,874 22,215 21,683
----------------------------------------------------------------------------
Total
Liabilities and
Equity $525,503 $538,260 $500,575 $502,036 $439,548 $437,710
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Changes in Equity
(Unaudited) For the three months For the six months
(Canadian $ in millions) ended ended
----------------------------------------------------------------------------
April April April April
30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Preferred Shares
Balance at beginning of period $ 2,861 $ 2,571 $ 2,861 $ 2,571
Issued during the period - 290 - 290
Redeemed during the period (Note
13) (396) - (396) -
----------------------------------------------------------------------------
Balance at End of Period 2,465 2,861 2,465 2,861
----------------------------------------------------------------------------
Common Shares
Balance at beginning of period 11,399 7,001 11,332 6,927
Issued under the Shareholder
Dividend Reinvestment and Share
Purchase Plan 152 42 198 92
Issued under the Stock Option
Plan 17 47 38 71
----------------------------------------------------------------------------
Balance at End of Period 11,568 7,090 11,568 7,090
----------------------------------------------------------------------------
Contributed Surplus
Balance at beginning of period 119 100 113 91
Stock option expense/exercised - 1 6 10
Foreign exchange on redemption
of preferred shares (Note 13) 96 - 96 -
----------------------------------------------------------------------------
Balance at End of Period 215 101 215 101
----------------------------------------------------------------------------
Retained Earnings
Balance at beginning of period 11,986 10,556 11,381 10,181
Net income attributable to Bank
shareholders 1,010 795 2,100 1,602
Dividends
- Preferred shares (34) (36) (71) (70)
- Common shares (450) (398) (898) (796)
Share issue expense - (4) - (4)
----------------------------------------------------------------------------
Balance at End of Period 12,512 10,913 12,512 10,913
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income on Available-for-Sale
Securities
Balance at beginning of period 259 345 322 408
Unrealized gains (losses) on
available-for-sale securities
arising during the period (net
of income tax (provision)
recovery of $(2), $30, $8 and
$42) 6 (33) (24) (59)
Reclassification to earnings of
(gains) losses in the period
(net of income tax provision
(recovery) of $(11), $(4), $11
and $15) (23) 7 (56) (30)
----------------------------------------------------------------------------
Balance at End of Period 242 319 242 319
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Income (Loss) on Cash Flow
Hedges
Balance at beginning of period 357 (117) 311 4
Gains (losses) on cash flow
hedges arising during the
period (net of income tax
(provision) recovery of $99,
$(19), $80 and $36) (300) 40 (254) (110)
Reclassification to earnings of
(gains) losses on cash flow
hedges (net of income tax
provision (recovery) of $15,
$10, $15 and $(1)) (38) (22) (38) 7
----------------------------------------------------------------------------
Balance at End of Period 19 (99) 19 (99)
----------------------------------------------------------------------------
Accumulated Other Comprehensive
Loss on Translation of Net
Foreign Operations
Balance at beginning of period 118 (70) 33 -
Unrealized loss on translation
of net foreign operations (255) (679) (122) (913)
Impact of hedging unrealized
loss on translation of net
foreign operations (net of
income tax (provision) of
$(23), $(116), $(6) and $(180)) 66 299 18 463
----------------------------------------------------------------------------
Balance at End of Period (71) (450) (71) (450)
----------------------------------------------------------------------------
Total Accumulated Other
Comprehensive Income (Loss) 190 (230) 190 (230)
----------------------------------------------------------------------------
Total Shareholders' Equity $ 26,950 $ 20,735 $ 26,950 $ 20,735
----------------------------------------------------------------------------
Non-controlling Interest in
Subsidiaries
Balance at beginning of period 1,431 1,465 1,483 1,501
Net income attributable to non-
controlling interest 18 18 37 36
Dividends to non-controlling
interest (5) (4) (36) (35)
Other (3) 1 (43) (22)
----------------------------------------------------------------------------
Balance at End of Period 1,441 1,480 1,441 1,480
----------------------------------------------------------------------------
Total Equity $ 28,391 $ 22,215 $ 28,391 $ 22,215
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim
consolidated financial statements.
Interim Consolidated Financial Statements
Consolidated Statement of Cash Flows
(Unaudited) (Canadian $ in For the three months For the six months
millions) ended ended
----------------------------------------------------------------------------
April April April April
30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Cash Flows from Operating
Activities
Net income $ 1,028 $ 813 $ 2,137 $ 1,638
Adjustments to determine net
cash flows provided by (used
in) operating activities
Impairment write-down of
securities, other than
trading 2 - 3 1
Net (gain) on securities,
other than trading (42) (48) (85) (99)
Net (increase) decrease in
trading securities (662) 544 (1,768) (1,812)
Provision for credit losses
(Note 3) 195 297 336 620
Change in derivative
instruments
- (increase) decrease in
derivative asset 11,113 (4,717) 7,930 4,983
- increase (decrease) in
derivative liability (8,277) 4,078 (4,026) (5,607)
Amortization of premises and
equipment 87 75 179 144
Amortization of intangible
assets 82 42 165 92
Net (increase) decrease in
deferred income tax asset 234 (86) 516 (115)
Net (decrease) in deferred
income tax liability (18) (6) (107) (35)
Net (increase) decrease in
current income tax asset (712) (39) (878) 163
Net increase (decrease) in
current income tax liability 387 (18) 429 (64)
Change in accrued interest
- (increase) in interest
receivable (83) (167) (93) (8)
- Increase (decrease) in
interest payable 33 125 (79) (49)
Changes in other items and
accruals, net (2,103) (119) (3,531) (2,652)
Net increase in deposits 1,809 6,973 13,553 9,839
Net (increase) in loans (3,569) (2,982) (7,520) (3,652)
Net increase in securities
sold but not yet purchased 2,634 2,580 3,711 6,864
Net increase (decrease) in
securities lent or sold under
repurchase agreements (5,454) (6,527) 14,480 (354)
Net (increase) decrease in
securities borrowed or
purchased under resale
agreements 5 1,765 (4,623) (6,307)
----------------------------------------------------------------------------
Net Cash Provided by (Used in)
Operating Activities (3,311) 2,583 20,729 3,590
----------------------------------------------------------------------------
Cash Flows from Financing
Activities
Net increase (decrease) in
liabilities of subsidiaries (323) 81 (305) 81
Proceeds from issuance of
Covered Bonds (Note 10) - - 2,000 1,500
Proceeds from issuance of
subordinated debt - 1,500 - 1,500
Proceeds from issuance of
preferred shares - 290 - 290
Redemption of preferred shares
(Note 13) (396) - (396) -
Redemption of Capital Trust
Securities (Note 12) - - (400) (400)
Share issue expense - (4) - (4)
Proceeds from issuance of common
shares 18 47 41 74
Cash dividends paid (333) (391) (774) (777)
Cash dividends paid to non-
controlling interest (5) (4) (36) (35)
----------------------------------------------------------------------------
Net Cash Provided by (Used in)
Financing Activities (1,039) 1,519 130 2,229
----------------------------------------------------------------------------
Cash Flows from Investing
Activities
Net (increase) decrease in
interest bearing deposits with
banks 537 (164) (1,074) (540)
Purchases of securities, other
than trading (8,863) (4,807) (19,612) (9,144)
Maturities of securities, other
than trading 3,103 2,746 5,981 7,515
Proceeds from sales of
securities, other than trading 4,885 3,085 9,453 4,982
Premises and equipment - net
purchases (110) (77) (155) (110)
Purchased and developed software
- net purchases (79) (51) (152) (118)
Acquisitions (Note 8) - (86) - (106)
----------------------------------------------------------------------------
Net Cash Provided by (Used in)
Investing Activities (527) 646 (5,559) 2,479
----------------------------------------------------------------------------
Effect of Exchange Rate Changes
on Cash and Cash Equivalents (559) (1,017) (859) (1,258)
----------------------------------------------------------------------------
Net Increase (Decrease) in Cash
and Cash Equivalents (5,436) 3,731 14,441 7,040
Cash and Cash Equivalents at
Beginning of Period 39,553 20,769 19,676 17,460
----------------------------------------------------------------------------
Cash and Cash Equivalents at End
of Period $ 34,117 $ 24,500 $ 34,117 $ 24,500
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Represented by:
Cash and non-interest bearing
deposits with Bank of Canada
and other banks $ 34,220 $ 23,636 $ 34,220 $ 23,636
Cheques and other items in
transit, net (103) 864 (103) 864
----------------------------------------------------------------------------
$ 34,117 $ 24,500 $ 34,117 $ 24,500
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental Disclosure of Cash
Flow Information:
Net cash provided by (used in)
operating activities include:
Amount of Interest paid in the
period $ 1,130 $ 1,111 $ 2,430 $ 2,542
Amount of Income taxes paid in
the period $ 280 $ 298 $ 459 $ 275
Amount of interest and
dividend income received in
the period $ 3,178 $ 2,751 $ 6,644 $ 5,882
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to Consolidated Financial Statements
April 30, 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.
As required under IFRS, we have:
- provided comparative financial information including an
opening balance sheet as at the transition date;
- retroactively applied all IFRS, other than in respect of
elections taken under IFRS 1; and
- applied all mandatory exceptions as applicable for first-time
adopters of IFRS.
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, Consolidated Balance Sheet, and Consolidated Statement of
Changes in Equity. These interim consolidated financial statements
have been prepared in accordance with the accounting policies we
expect to use in our October 31, 2012 annual consolidated financial
statements. Those accounting policies are based on the IFRSs that
we expect to be applicable at that time.
Our interim consolidated financial statements have been prepared
on a historic cost basis, except the revaluation of the following
items: assets and liabilities held for trading; financial
instruments designated at fair value through profit or loss;
available-for-sale financial assets; financial assets and financial
liabilities designated as hedged items in qualifying fair value
hedge relationships; cash-settled share-based payment liabilities
and defined benefit pension and other employee future benefit
liabilities.
These interim consolidated financial statements were authorized
for issue by the Board of Directors on May 23, 2012.
(a) Basis of Consolidation
The consolidated financial statements of the bank comprise the
financial statements of the bank and its subsidiaries as at April
30, 2012. We conduct business through a variety of corporate
structures, including subsidiaries, joint ventures, associates and
special purpose entities ("SPEs"). Subsidiaries are those where we
exercise control through our ownership of the majority of the
voting shares. Joint ventures are those where we exercise joint
control through an agreement with other shareholders. We also hold
interests in SPEs, which we consolidate where we control the SPE,
as determined under IFRS. These are more fully described in Note 7.
All of the assets, liabilities, revenues and expenses of our
subsidiaries, consolidated SPEs and our proportionate share of the
assets, liabilities, revenues and expenses of our joint venture are
included in our consolidated financial statements. All significant
intercompany transactions and balances are eliminated.
We also hold investments in companies in which we exert
significant influence over operating, investing and financing
decisions (companies in which we own between 20% and 50% of the
voting shares). These are initially recorded at cost and then
subsequently adjusted for our proportionate share of any net income
or loss, other comprehensive income or loss, and dividends. They
are recorded as other securities in our Consolidated Balance Sheet
and our proportionate share of the net income or loss of these
companies is recorded in interest, dividend and fee income,
securities, in our Consolidated Statement of Income.
Non-controlling interests in subsidiaries is presented on the
Consolidated Balance Sheet as a separate component of equity that
is distinct from the bank's shareholders' equity. The net income
attributable to non-controlling interest in subsidiaries is
presented separately in the Consolidated Statement of Income.
(b) Translation of Foreign Currencies
We conduct business in a variety of foreign currencies and
present our consolidated financial statements in Canadian dollars,
which is our functional currency. Monetary assets and liabilities
as well as non-monetary assets and liabilities measured at fair
value that are denominated in foreign currencies are translated
into Canadian dollars at the exchange rate in effect at the balance
sheet date. Non-monetary assets and liabilities are translated into
Canadian dollars at historical rates. Revenues and expenses
denominated in foreign currencies are translated using the average
exchange rate for the period.
Unrealized gains and losses arising from translating net
investments in foreign operations into Canadian dollars, net of
related hedging activities and applicable income taxes, are
included in our Consolidated Statement of Comprehensive Income
within net gain (loss) on translation of net foreign operations.
When we dispose of a foreign operation such that control,
significant influence or joint control is lost, the cumulative
amount of the translation gain/(loss), and applicable hedging
activity and related income taxes are reclassified to profit or
loss as part of the gain or loss on disposition. All other foreign
currency translation gains and losses are included in foreign
exchange, other than trading in our Consolidated Statement of
Income as they arise.
Foreign currency translation gains and losses on
foreign-currency denominated available-for-sale debt securities are
included in foreign exchange, other than trading in our
Consolidated Statement of Income.
From time to time, we enter into foreign exchange hedge
contracts to reduce our exposure to changes in the value of foreign
currencies. Realized and unrealized gains and losses that arise
when we mark-to-market foreign exchange contracts related to
economic hedges are included in foreign exchange, other than
trading in our Consolidated Statement of Income. Changes in fair
value on forward contracts that qualify as accounting hedges are
recorded in other comprehensive income, with the spot/forward
differential (the difference between the foreign currency rate at
inception of the contract and the rate at the end of the contract)
being recorded in interest income/expense over the term of the
hedge.
(c) Securities
Securities are divided into three types, each with a different
purpose and accounting treatment. The types of securities we hold
are as follows:
Trading securities are securities that we purchase for resale
over a short period of time. We report these securities at their
fair value and record the fair value changes and transaction costs
in our Consolidated Statement of Income in trading revenues.
Securities Designated at Fair Value
Securities designated at fair value through profit or loss are
financial instruments that are accounted for at fair value, with
changes in fair value recorded in income provided they meet certain
criteria. Securities designated at fair value through profit or
loss must have reliably measurable fair values and satisfy one of
the following criteria: (1) accounting for them at fair value
eliminates or significantly reduces an inconsistency in measurement
or recognition that would otherwise arise from measuring assets or
liabilities or recognizing the gains and losses on them on
different bases; (2) the securities are part of a group of
financial assets, financial liabilities or both that is managed and
its performance evaluated on a fair value basis, in accordance with
a documented risk management or investment strategy, and is
reported to key management personnel on a fair value basis; or (3)
the securities are hybrid financial instruments with one or more
embedded derivatives that would otherwise be required to be
bifurcated and accounted for separately from the host contract.
Financial instruments must be designated on initial recognition,
and the designation is irrevocable. If these securities were not
designated at fair value, they would be accounted for as
available-for-sale securities with unrealized gains and losses
recorded in other comprehensive income.
Securities held by our insurance subsidiaries that support our
insurance liabilities are designated 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,
designating these securities at fair value through profit or loss
aligns the accounting result with the way the portfolio is
managed.
We designate certain securities held and liabilities issued by
our structured investment vehicles, our credit protection vehicle
and securities held by our merchant banking business at fair value
through profit or loss, which aligns the accounting result with the
way the portfolio is managed.
Available-for-sale securities consist of debt and equity
securities that may be sold in response to or in anticipation of
changes in interest rates and resulting prepayment risk, changes in
foreign currency risk, changes in funding sources or terms, or to
meet liquidity needs.
Available-for-sale securities are initially measured at fair
value plus transaction costs. They are subsequently re-measured at
fair value with unrealized gains and losses recorded in unrealized
gains (losses) on available-for-sale securities in our Consolidated
Statement of Comprehensive Income until the security is sold. If an
unrealized loss is considered to be an impairment, it is recorded
in the Consolidated Statement of Income. Gains and losses on
disposal and impairment losses are recorded in our Consolidated
Statement of Income in securities gains (losses), other than
trading. Interest income earned and dividends received on
available-for-sale securities are recorded in our Consolidated
Statement of Income in interest, dividend and fee income,
securities.
Investments made by our insurance operations are classified as
available-for-sale or other securities, except for investments that
support the policy benefit liabilities on our insurance contracts,
which are designated at fair value through profit or loss as
discussed above. Interest and other fee income on
available-for-sale securities is recognized when earned in our
Consolidated Statement of Income in non-interest revenue, insurance
income.
Other securities are investments in companies where we exert
significant influence over operating, investing and financing
decisions (companies in which we own between 20 and 50% of the
voting share) and certain securities held by our merchant banking
business. We have not classified any of our securities as
held-to-maturity.
We account for all of our securities transactions using
settlement date accounting on our Consolidated Balance Sheet.
Changes in fair value between the trade date and settlement date
are recorded in net income. For available-for-sale securities,
changes in fair value between the trade date and settlement date
are recorded in other comprehensive income.
Impairment Review
For available-for-sale and other securities, impairment losses
are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows of
the security and the impact can be reliably estimated.
For equity securities, a significant or prolonged decline in its
fair value below its cost is objective evidence of impairment.
If there is objective evidence of impairment, a write-down is
recorded in our Consolidated Statement of Income in securities
gains (losses), other than trading.
For debt securities, a previous impairment loss is reversed
through net income if an event occurs after the impairment was
recognized that can be objectively attributed to an increase in
fair value. For equity securities, previous impairment losses are
not reversed through net income and any subsequent increases in
fair value are recorded in other comprehensive income.
Fair Value Measurement
For traded securities, quoted market value is considered to be
fair value. Quoted market value is based on bid prices. For
securities where market quotes are not available, we use estimation
techniques to determine fair value. These estimation techniques
include discounted cash flows, internal models that utilize
observable market data or comparisons with other securities that
are substantially the same. In limited circumstances, we use
internal models where the inputs are not based on observable market
data. See Note 18: Financial Instruments.
(d) Offsetting Financial Assets and Financial Liabilities
Financial assets and financial liabilities are offset and the
net amount reported in the Consolidated Balance Sheet when there is
a legally enforceable right to offset the recognized amounts and
there is an intention to settle on a net basis, or realize the
asset and settle the liability simultaneously.
(e) Derivative Instruments
Derivative instruments are financial contracts that derive their
value from underlying changes in interest rates, foreign exchange
rates or other financial or commodity prices or indices.
Derivative instruments are either regulated exchange-traded
contracts or negotiated over-the-counter contracts. We use these
instruments for trading purposes, as well as to manage our
exposures, mainly to currency and interest rate fluctuations, as
part of our asset/liability management program.
Trading Derivatives
Trading derivatives are marked to fair value. Realized and
unrealized gains and losses are recorded in trading revenues
(losses) in our Consolidated Statement of Income. Unrealized gains
on trading derivatives are recorded as derivative instrument assets
and unrealized losses are recorded as derivative instrument
liabilities in our Consolidated Balance Sheet.
Accounting Hedges
In order for a derivative to qualify as an accounting hedge, the
hedging relationship must be designated and formally documented at
its inception, detailing the particular risk management objective
and strategy for the hedge and the specific asset, liability or
cash flow being hedged, as well as how its effectiveness is being
assessed. Changes in the fair value of the derivative must be
highly effective in offsetting either changes in the fair value of
on-balance sheet items caused by the risk being hedged or changes
in the amount of future cash flows.
Hedge effectiveness is evaluated at the inception of the hedging
relationship and on an ongoing basis, retrospectively and
prospectively, primarily using quantitative statistical measures of
correlation. Any ineffectiveness in the hedging relationship is
recognized in non-interest revenue, other in our Consolidated
Statement of Income as it arises.
Cash Flow Hedges
Cash flow hedges modify exposure to variability in cash flows
for variable rate interest bearing instruments and assets and
liabilities denominated in foreign currencies. Our cash flow
hedges, which have a maximum remaining term to maturity of seven
years, are hedges of floating rate loans and deposits as well as
assets and liabilities denominated in foreign currencies.
We record interest that we pay or receive on these derivatives
as an adjustment to net interest income in our Consolidated
Statement of Income over the life of the hedge.
To the extent that changes in the fair value of the derivative
offset changes in the fair value of the hedged item, they are
recorded in other comprehensive income. The excess of the change in
fair value of the derivative that does not offset changes in the
fair value of the hedged item (the ineffectiveness of the hedge) is
recorded directly in non-interest revenue, other in our
Consolidated Statement of Income.
For cash flow hedges that are discontinued before the end of the
original hedge term, the unrealized gain or loss recorded in other
comprehensive income is amortized to net interest income, in our
Consolidated Statement of Income as the hedged item affects
earnings. If the hedged item is sold or settled, the entire
unrealized gain or loss is recognized in net interest income, in
our Consolidated Statement of Income.
Fair Value Hedges
Fair value hedges modify exposure to changes in a fixed rate
instrument's fair value caused by changes in interest rates. These
hedges convert fixed rate assets and liabilities to floating rate.
Our fair value hedges include hedges of fixed rate securities,
deposits and subordinated debt.
We record interest receivable or payable on these derivatives as
an adjustment to net interest income in our Consolidated Statement
of Income over the life of the hedge.
For fair value hedges, not only is the hedging derivative
recorded at fair value but fixed rate assets and liabilities that
are part of a hedging relationship are adjusted for the changes in
value of the risk being hedged ("quasi fair value"). To the extent
that the change in the fair value of the derivative does not offset
changes in the quasi fair value of the hedged item (the
ineffectiveness of the hedge), the net amount is recorded directly
in non-interest revenue, other in our Consolidated Statement of
Income.
For fair value hedges that are discontinued, we cease adjusting
the hedged item to quasi fair value. The quasi fair value
adjustment of the hedged item is then amortized as an adjustment to
the net interest income on the hedged item over its remaining term
to maturity. If the hedged item is sold or settled, any remaining
quasi fair value adjustment is included in the determination of the
gain or loss on sale or settlement.
Net Investment Hedges
Net investment hedges mitigate our exposure to foreign currency
fluctuations in our net investment in foreign operations. Deposit
liabilities denominated in foreign currencies are designated as
hedges of this exposure. The foreign currency translation on the
net investment in foreign operations and the corresponding hedging
instrument is recorded in net gain (loss) on translation of net
foreign operations in other comprehensive income. To the extent
that the hedging instrument is not effective, amounts are included
in the Consolidated Statement of Income in foreign exchange, other
than trading.
Embedded Derivatives
From time to time, we purchase or issue financial instruments
containing embedded derivatives. The embedded derivative is
separated from the host contract and carried at fair value if the
economic characteristics of the derivative are not closely related
to those of the host contract, the terms of the embedded derivative
are the same as those of a stand-alone derivative, and the combined
contract is not held for trading or designated at fair value. To
the extent that we cannot reliably identify and measure the
embedded derivative, the entire contract is carried at fair value,
with changes in fair value reflected in income. Embedded
derivatives in certain of our equity linked notes are accounted for
separately from the host instrument.
Fair Value
Fair value represents point-in-time estimates that may change in
subsequent reporting periods due to market conditions or other
factors. Fair value for exchange-traded derivatives is considered
to be the price quoted on derivatives exchanges. Fair value for
over-the-counter derivatives is determined from discount curves
adjusted for credit, model and liquidity risks, as well as
administration costs. Discount curves are created using generally
accepted valuation techniques from underlying instruments such as
cash, bonds, swaps and futures observable in the market. Option
implied volatilities, an input into the valuation model, are either
obtained directly from market sources or calculated from market
prices. Multi-contributor sources are used wherever possible. See
Note 18: Financial Instruments.
(f) Premises and Equipment
We record all premises and equipment at cost less accumulated
amortization, except land, which is recorded at cost. Buildings,
computer equipment and operating system software, other equipment
and leasehold improvements are amortized on a straight-line basis
over their estimated useful lives. The maximum estimated useful
lives we use to amortize our assets are as follows:
----------------------------------------------------------------------------
Buildings 10 to 40 years
Computer equipment and operating system
software 15 years
Other equipment 10 years
Leasehold improvements Lease term to a maximum of 10 years
----------------------------------------------------------------------------
Gains and losses on disposal are included in other non-interest
expense in our Consolidated Statement of Income.
Amortization methods, useful lives and the values of premises
and equipment are reviewed regularly for any change in
circumstances and are adjusted if appropriate. At least annually,
we review whether there are any indications that premises and
equipment need to be tested for impairment. If there is an
indication that an asset may be impaired, we test for impairment by
comparing the asset's carrying value to its recoverable amount. The
recoverable amount is calculated as the higher of the value in use
and the fair value less costs to sell. Value in use is the present
value of the future cash flows expected to be derived from the
asset. An impairment charge is recorded when the recoverable amount
is less than the carrying value.
When major components of buildings have different useful lives,
they are accounted for separately and depreciated over each
component's useful life.
(g) Intangible Assets
Intangible assets related to our acquisitions are recorded at
their fair value at the acquisition date. Software is recorded at
cost.
Intangible assets are amortized to income over the period during
which we believe the assets will benefit us on either a
straight-line or an accelerated basis, over a period not to exceed
15 years. We have no intangible assets with indefinite lives.
The useful lives of intangible assets are reviewed annually for
any change in circumstances. We test intangible assets for
impairment when events or changes in circumstances indicate that
their carrying value may not be recoverable.
We write them down to their recoverable amount; the higher of
the value in use and the fair value less costs to sell, when this
is less than the carrying value.
(h) Other Liabilities
Acceptances
Acceptances represent a form of negotiable short-term debt that
is issued by our customers and which we guarantee for a fee. We
have an offsetting claim, equal to the amount of the acceptances,
against our customers. The amount due under acceptances is recorded
as a liability and our corresponding claim is recorded as a loan in
our Consolidated Balance Sheet.
Securities Lending and Borrowing
Securities lending and borrowing transactions are generally
collateralized by securities or cash. Cash advanced or received as
collateral is recorded in Other Assets or Other Liabilities,
respectively. The transfer of the securities to counterparties is
only reflected on the Consolidated Balance Sheet if the risks and
rewards of ownership have also been transferred. Securities
borrowed are not recognized on the Consolidated Balance Sheet,
unless they are then sold to third parties, in which case the
obligation to return the securities is recorded in Securities sold
but not yet purchased.
Securities Sold but not yet Purchased
Securities sold but not yet purchased represent our obligation
to deliver securities that we did not own at the time of sale.
These obligations are recorded at their market value. Adjustments
to the market value as at the balance sheet date and gains and
losses on the settlement of these obligations are recorded in
trading revenues (losses) in our Consolidated Statement of
Income.
Securities Lent or Sold Under Repurchase Agreements
Securities lent or sold under repurchase agreements represent
short-term funding transactions in which we sell securities that we
own and simultaneously commit to repurchase the same securities at
a specified price on a specified date in the future. The obligation
to repurchase these securities is recorded at the amount owing. The
interest expense related to these liabilities is recorded on an
accrual basis.
Provisions
Provisions are recognized when we have an obligation as a result
of past events; such as contractual commitments, legal claims or
other obligations. We recognize as a provision the best estimate of
the amount required to settle the obligation as of the balance
sheet date, taking into account the risks and uncertainties
surrounding the obligation.
Contingent liabilities are possible obligations that arise from
past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more future events not
wholly within the control of the bank. Contingent liabilities are
disclosed in our financial statements.
(i) Dividend and Fee Income
Dividend income
Dividend income is recognized when the right to receive payment
is established. This is the ex-dividend date for listed equity
securities.
Fee Income
Fee income (including commissions) is recognized based on the
purpose of the fees and the basis of accounting for any associated
financial instrument. See Note 3 for the accounting treatment for
lending fees.
Securities commissions and fees and underwriting and advisory
fees are recorded as revenue when the related services are
completed.
Deposit and payment service charges and insurance fees are
recognized over the period that the related services are
provided.
Card fees primarily include interchange income, late fees, cash
advance fees and annual fees. Card fees are recorded as billed,
except for annual fees which are recorded evenly throughout the
year.
(j) Stock-Based Compensation
Stock Option Plan
We maintain a Stock Option Plan for designated officers and
employees. Options are granted at an exercise price equal to the
closing price of our common shares on the day before the grant
date. Options vest over a four-year period starting from their
grant date. Each tranche (i.e. the 25% portion that vests each
year) is treated as a separate award with a different vesting
period. A portion of the options can only be exercised once certain
performance targets are met. All options expire 10 years from their
grant date.
We determine the fair value of stock options on their grant date
and record this amount as compensation expense over the period that
the stock options vest, with a corresponding increase to
contributed surplus. When these stock options are exercised, we
issue shares and record the amount of proceeds, together with the
amount recorded in contributed surplus, in share capital. Stock
options granted to employees eligible to retire are expensed at the
date of grant.
Share Purchase Plan
We offer our employees the option of directing a portion of
their gross salary toward the purchase of our common shares. We
match 50% of employee contributions up to 6% of their individual
gross salary. The shares held in the employee share purchase plan
are purchased on the open market and are considered outstanding for
purposes of computing earnings per share. The dividends earned on
our common shares held by the plan are used to purchase additional
common shares on the open market.
We account for our contribution as employee compensation expense
when it is contributed to the plan.
Mid-Term Incentive Plans
We offer mid-term incentive plans for executives and certain
senior employees. Depending on the plan, these pay either a single
cash payment at the end of the three-year period of the plan, or
three annual cash payments in each of the three years of the plan.
The amount of the payment is adjusted to reflect reinvested
dividends and changes in the market value of our common shares.
We entered into agreements with third parties to assume most of
our obligations related to these plans in exchange for cash
payments. Amounts paid under these agreements were recorded in our
Consolidated Balance Sheet in other assets and are recorded as
employee compensation expense evenly over the period prior to
payment to employees.
For the remaining obligations related to plans for which we have
not entered into agreements with third parties, the fair value of
the amount of compensation expense is recognized as an expense and
a liability over the period from the grant date to payment date to
employees. This liability is remeasured to fair value each
reporting period. Amounts related to employees who are eligible to
retire are expensed at the time of grant.
Deferred Incentive Plans
We offer deferred incentive plans for members of our Board of
Directors, executives, and key employees in BMO Capital Markets and
Private Client Group. Under these plans, fees, annual incentive
payments and/or commissions can be deferred as stock units of our
common shares. These stock units are fully vested on the grant
date. The value of these stock units is adjusted to reflect
reinvested dividends and changes in the market value of our common
shares.
Deferred incentive payments are paid upon retirement or
resignation. The deferred incentive payments can be made in cash or
shares.
Employee compensation expense for these plans is recorded in the
year the fees, incentive payments and/or commissions are earned.
Changes in the amount of the incentive payments as a result of
dividends and share price movements are recorded as employee
compensation expense in the period of the change.
(k) Income Taxes
We report our provision for income taxes in our Consolidated
Statement of Income based upon transactions recorded in our
consolidated financial statements regardless of when they are
recognized for income tax purposes, with the exception of
repatriation of retained earnings from our foreign subsidiaries, as
noted below.
In addition, we record an income tax expense or benefit directly
in shareholders' equity when the taxes relate to amounts recorded
in shareholders' equity. For example, income tax expense (recovery)
on hedging gains (losses) related to our net investment in foreign
operations is recorded in our Consolidated Statement of
Comprehensive Income as part of net gain (loss) on translation of
net foreign operations.
Deferred income tax assets and liabilities are measured at the
tax rates expected to apply when these differences reverse. Changes
in deferred income tax assets and liabilities related to a change
in tax rates are recorded in income in the period the tax rate is
substantially enacted. See Note 19 for certain fiscal 2011 income
tax disclosures prepared under IFRS.
Income that we earn in foreign countries through our branches or
subsidiaries is generally subject to tax in those countries. We are
also subject to Canadian taxation on the income earned in our
foreign branches. Canada allows a credit for foreign taxes paid on
this income. Upon repatriation of earnings from certain foreign
subsidiaries, we would be required to pay tax on certain of these
earnings. As repatriation of such earnings is not planned in the
foreseeable future, we have not recorded the related deferred
income tax liability.
(l) Use of Estimates
The most significant assets and liabilities for which we must
make estimates include: allowance for credit losses; securitization
of loans; consolidation of special purpose entities; fair value of
assets acquired and liabilities assumed as a result of acquisitions
including loans and deposits; impairment of assets other than
loans; pension and other employee future benefits; fair value of
financial instruments; insurance-related liabilities; income taxes;
and contingent liabilities. If actual results differ from the
estimates, the impact would be recorded in future periods.
We have established detailed policies and control procedures
that are intended to ensure these judgments are well controlled,
independently reviewed and consistently applied from period to
period. We believe that our estimates of the value of our assets
and liabilities are appropriate.
We make judgments as it relates to the assessment of whether
substantially all risks and rewards have been transferred in
respect of transfers of financial assets and whether we control
special purpose entities. These judgments are discussed in Note 6
and 7, respectively.
Note 18 discusses the judgment used in determining fair
value.
Allowance for Credit Losses
The allowance for credit losses adjusts the value of loans to
reflect their estimated realizable value. In assessing their
estimated realizable value, we must rely on estimates and exercise
judgment regarding matters for which the ultimate outcome is
unknown. These include economic factors, developments affecting
companies in particular industries and specific issues with respect
to single borrowers. Changes in circumstances may cause future
assessments of credit risk to be materially different from current
assessments, which could require an increase or decrease in the
allowance for credit losses.
Purchased Loans
Significant judgment and assumptions were applied to determine
the fair value of the Marshall & Ilsley Corporation ("M&I")
loan portfolio. Loans are either purchased performing loans or
purchased credit impaired loans ("PCI" loans), both of which are
recorded at fair value at the time of acquisition. This involves
estimating the expected cash flows to be received and determining
the discount rate applied to the cash flows from the loan
portfolio. The timing and amount of cash flows include significant
management judgment regarding key assumptions, including the
probability of default, severity of loss, timing of payment
receipts and the valuation of collateral. All of these factors are
inherently subjective and can result in significant changes in the
cash flow estimates over the life of a loan. In determining the
possible discount rates, we considered various factors including
our cost to raise funds in the current market, the risk premium
associated with the loans and the cost to service the
portfolios.
Subsequent to the determination of the initial fair value, the
purchased performing loans are subject to the credit review
processes applied to bank originated loans.
PCI loans have experienced a deterioration of credit quality
from origination to acquisition, and it is probable that the bank
will be unable to collect all contractually required payments,
including both principal and interest. Subsequent to the
acquisition of a loan, we continue to estimate cash flows expected
to be collected over the life of the loan. The measurement of
expected cash flows involves assumptions and judgments consistent
with those described above for determining the initial fair value.
Changes in expected cash flows could result in the recognition of
impairment or a recovery through provision for credit losses.
Acquired Deposits
M&I deposit liabilities were recorded at fair value at
acquisition. The determination of fair value involves estimating
the expected cash flows to be paid and determining the discount
rate applied to the cash flows. The timing and amount of cash flows
include significant management judgment regarding the likelihood of
early redemption by the bank and the timing of withdrawal by the
client. Discount rates were based on the prevailing rates paid by
the bank on similar deposits at the date of acquisition.
Pension and Other Employee Future Benefits
The bank's pension and other employee future benefits expense is
calculated by our independent actuaries using assumptions
determined by management. If actual experience differs from the
assumptions used, pension and other employee future benefits
expense could increase or decrease in future years. The expected
rate of return on plan assets is a management estimate that
significantly affects the calculation of pension expense. Our
expected rate of return on plan assets is determined using the
plan's target asset allocation and estimated rates of return for
each asset class. Estimated rates of return are based on expected
returns from fixed-income securities, which take into consideration
bond yields. An equity risk premium is then applied to estimate
equity returns. Expected returns from other asset classes are
established to reflect the risks of these asset classes relative to
fixed-income and equity assets. The impact of changes in expected
rates of return on plan assets is not significant for our other
employee future benefits expense since only small amounts of assets
are held in these plans.
Pension and other employee future benefits expense and
obligations are also sensitive to changes in discount rates. We
determine discount rates at each year end for our Canadian and U.S.
plans using high-quality corporate bonds with terms matching the
plans' specific cash flows.
Additional information regarding our accounting for pension and
other employee future benefits, is included in Note 19.
Impairment
We have investments in securities issued or guaranteed by
Canadian or U.S. governments, corporate debt and equity securities,
mortgage-backed securities and collateralized mortgage obligations,
which are classified as available-for-sale securities. We review
available-for-sale and other securities at each quarter-end
reporting period to identify and evaluate investments that show
indications of possible impairment.
For available-for-sale and other securities, impairment losses
are recognized if there is objective evidence of impairment as a
result of an event that reduces the estimated future cash flows of
the security and the impact can be reliably estimated.
Objective evidence of impairment includes default or delinquency
by a debtor, restructuring of an amount due to us on terms that we
would not consider otherwise, indications that a debtor or issuer
will enter bankruptcy, or the disappearance of an active market for
a security. In addition, for equity securities, a significant or
prolonged decline in its fair value below its cost is objective
evidence of impairment.
The decision to record a write-down, its amount and the period
in which it is recorded could change if management's assessment of
those factors were different. We do not record impairment
write-downs on debt securities when impairment is due to changes in
market interest rates, if future contractual cash flows associated
with the debt security are still expected to be recovered.
Additional information regarding our accounting for
available-for-sale securities and other securities and the
determination of fair value is included in the Securities section
of this note.
Income Taxes
The provision for income taxes is calculated based on the
expected tax treatment of transactions recorded in our Consolidated
Statements of Income or Changes in Equity. In determining the
provision for income taxes, we interpret tax legislation in a
variety of jurisdictions and make assumptions about the expected
timing of the reversal of deferred tax assets and liabilities. If
our interpretations differ from those of tax authorities or if the
timing of reversals is not as expected, our provision for income
taxes could increase or decrease in future periods. The amount of
any such increase or decrease cannot be reasonably estimated.
Additional information regarding our accounting for income taxes
is included in Note 19.
Goodwill and Intangible Assets
For the purpose of impairment testing, goodwill is allocated to
the bank's cash generating units ("CGUs") which represent the
lowest level within the bank at which goodwill is monitored for
internal management purposes. Impairment testing is performed at
least annually, and whenever there is an indication that the CGU
may be impaired, by comparing the recoverable amount of a CGU with
the carrying value of its net assets, including attributable
goodwill. The recoverable amount of an asset is the higher of its
fair value less cost to sell, and its value in use. Value in use is
the present value of the expected future cash flows from a CGU. If
the recoverable amount is less than carrying value, an impairment
loss is charged to income.
Fair value less costs to sell was used to perform the impairment
test in 2011. In determining fair value less costs to sell, we
employ internal valuation models, such as discounted cash flow
models, consistent with those used when we acquire businesses.
These models are dependent on assumptions related to revenue
growth, discount rates, synergies achieved on acquisition and the
availability of comparable acquisition data. Changes in each of
these assumptions would affect the determination of fair value for
each of the business units in a different manner. Management must
exercise judgment and make assumptions in determining fair value
less costs to sell, and differences in judgments and assumptions
could affect the determination of fair value and any resulting
impairment write-down.
Additional information regarding goodwill is included in Note
9.
Insurance-Related Liabilities
Insurance claims and policy benefit liabilities represent
current claims and estimates for future insurance policy benefits.
Liabilities for life insurance contracts are determined using the
Canadian Asset Liability Method, which incorporates best-estimate
assumptions for mortality, morbidity, policy lapses, surrenders,
future investment yields, policy dividends, administration costs
and margins for adverse deviation. These assumptions are reviewed
at least annually and updated to reflect actual experience and
market conditions. The most significant impact on the valuation of
a liability results from a change in the assumption for future
investment yields. Future investment yields may be sensitive to
variations in reinvestment interest rates and accordingly may
affect the valuation of policy benefit liabilities.
Provisions
The bank and its subsidiaries are involved in various legal
actions in the ordinary course of business.
Provisions are recorded at the best estimate of the amount
required to settle the obligation as of the balance sheet date,
taking into account the risks and uncertainties surrounding the
obligation. The bank's management and internal and external experts
are involved in estimating any amounts involved. The actual costs
of resolving these claims may be substantially higher or lower than
the amount of the provisions.
Future Changes in IFRS Standards
Employee Benefits
The International Accounting Standards Board ("IASB") has
revised the standard on employee benefits. Actuarial gains and
losses will be recognized immediately in equity and may no longer
be deferred and amortized. Under the revised standard, service
costs and net investment income (expense), which is calculated by
applying the discount rate to the net benefit asset (liability),
are recorded in income. As a result, a funding deficit will result
in interest expense and a funding surplus will result in interest
income, reflecting the financing effect of the amount owed to or
from the plan. Under the existing standard, interest income could
be earned on a plan with a funding deficit if the expected return
on assets exceeded the interest cost on the benefit liability. This
new standard is effective for our fiscal year beginning November 1,
2013. We cannot currently determine the impact of this revised
standard on our consolidated financial statements as this will be
dependent on the funded status of our plans and the net benefit
asset (liability) position on adoption.
Fair Value Measurement
The IASB has issued a new standard for fair value measurement
that provides a common definition of fair value and establishes a
framework for measuring fair value. This new standard is effective
for our fiscal year beginning November 1, 2013. We do not expect
this new standard will have a significant impact on how we
determine fair value.
Consolidated Financial Statements
The IASB has issued a new standard on consolidation that will
replace the existing standard. This new standard provides a single
consolidation model that identified control as the basis for
consolidation for all types of entities. This new standard is
effective for our fiscal year beginning November 1, 2013. We are
currently assessing the impact of this revised standard on our
future financial results.
Investment in Associates and Joint Ventures
The IASB has amended the standard for investment in joint
ventures to require that they be accounted for using the equity
method. The new standard is effective for our fiscal year beginning
on November 1, 2013. We do not expect this new standard will have a
significant impact on future financial results.
Offsetting Financial Assets and Financial Liabilities
The IASB has issued amendments to the standards for financial
instruments classification and disclosure which clarify that an
entity currently has a legally enforceable right to set-off if that
right is not contingent on a future event; and enforceable both in
the normal course of business and in the event of default,
insolvency or bankruptcy of the entity and all counterparties.
These amendments also contain new disclosure requirements for
financial assets and financial liabilities that are offset in the
statement of financial position or subject to master netting
agreements or similar agreements. The disclosure amendments are
effective for our fiscal year beginning on November 1, 2013 and the
classification amendments are effective for our fiscal year
beginning on November 1, 2014. We are currently assessing the
impact of these amendments on our future financial results.
Disclosure of Interests in Other Entities
The IASB has issued a new standard on the disclosure
requirements for all forms of interest in other entities, including
subsidiaries, joint arrangements, associates and unconsolidated
structured entities. This new standard requires disclosure of the
nature of, and risks associated with an entity's interests in other
entities and the effects of these interests on its financial
position, financial performance and cash flows. This new standard
is effective for our fiscal year beginning on November 1, 2013. We
are currently assessing the impact of this new standard on our
future financial disclosures.
Financial Instruments
The IASB released a new standard for the classification and
measurement of financial assets and financial liabilities. This is
the first phase of a three-phase project to replace the current
standard for accounting for financial instruments. The new standard
specifies that financial assets are measured at either amortized
cost or fair value on the basis of the reporting entity's business
model for managing the financial assets and the contractual cash
flow characteristics of the financial assets. The classification
and measurement of financial liabilities remain generally
unchanged; however, fair value changes attributable to changes in
the credit risk for financial liabilities designated at fair value
through profit or loss are to be recorded in other comprehensive
income unless the treatment would create or enlarge an accounting
mismatch in profit or loss. These amounts are not subsequently
reclassified to income but may be transferred within equity. The
remaining change in the fair value of the liability continues to be
recorded in income. The other phases of this project, which are
currently under development, address impairment and hedge
accounting. The IASB has deferred the effective date of this new
standard for two years from the originally proposed effective date,
which will make it effective for us on November 1, 2015. We are
currently assessing the impact of this new standard on our future
financial results in conjunction with the completion of the other
phases of the IASB's financial instruments project.
Note 2: Securities
Unrealized Gains and Losses
The following table summarizes the unrealized gains and losses
as at April 30, 2012, October 31, 2011 and November 1, 2010:
April
(Canadian $ in millions) Available-for-sale securities 30, 2012
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses Value
----------------------------------------------------------------------------
Issued or guaranteed by:
Canadian federal government 20,075 252 47 20,280
Canadian provincial municipal
governments 2,400 13 14 2,399
U.S. federal government 6,598 200 6 6,792
U.S. states, municipalities
and agencies 3,531 68 15 3,584
Other governments 7,437 11 14 7,434
Mortgage backed securities and
collateralized mortgage
obligations - Canada (1) 723 5 - 728
Mortgage backed securities and
collateralized mortgage
obligations - U.S. 5,344 76 24 5,396
Corporate debt 6,859 83 8 6,934
Corporate equity 1,299 63 3 1,359
----------------------------------------------------------------------------
Total 54,266 771 131 54,906
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oct
(Canadian $ in millions) Available-for-sale securities 31, 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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nov
(Canadian $ in millions) Available-for-sale securities 1, 2010
----------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------------------------------------------------------------------------
Issued or guaranteed by:
Canadian federal government 18,020 252 2 18,270
Canadian provincial municipal
governments 1,623 74 2 1,695
U.S. federal government 5,440 218 - 5,658
U.S. states, municipalities
and agencies 4,182 77 2 4,257
Other governments 10,012 32 3 10,041
Mortgage backed securities and
collateralized mortgage
obligations - Canada (1) 795 284 - 1,079
Mortgage backed securities and
collateralized mortgage
obligations - U.S. 652 31 - 683
Corporate debt 3,324 138 22 3,440
Corporate equity 777 28 4 801
----------------------------------------------------------------------------
Total 44,825 1,134 35 45,924
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) These amounts are supported by guaranteed mortgages.
Note 3: Loans and Allowance for Credit Losses
Loans
Loans are recorded at amortized cost using the effective
interest method except for purchased loans which are described in
the Purchased Loans section below. The effective interest method
allocates interest income over the expected term by applying the
effective interest rate to the carrying amount of the loan. The
effective interest rate is defined as the rate that exactly
discounts estimated future cash receipts through the expected term
of the loan to the net carrying amount of the loan. The treatment
of interest income for impaired loans is described below.
We amortize deferred loan origination costs that are directly
attributable and incremental to the origination of a loan using the
effective interest method. We record the amortization as a
reduction to interest, dividend and fee income, loans, over the
term of the resulting loan. Under the effective interest method,
the amount recognized in interest, dividend and fee income, loans,
varies over the term of the loan based on the principal
outstanding.
Securities Borrowed or Purchased Under Resale Agreements
Securities borrowed or purchased under resale agreements
represent the amounts we will receive as a result of our commitment
to resell securities that we have purchased back to the original
seller, on a specified date at a specified price. We account for
these instruments as if they were loans.
Lending Fees
The accounting treatment for lending fees varies depending on
the transaction. Some loan origination, restructuring and
renegotiation fees are recorded as interest income over the term of
the loan, while other lending fees, to a certain threshold, are
taken into income at the time of loan origination. Commitment fees
are recorded as interest income over the term of the loan, unless
we believe the loan commitment will not be used. In the latter
case, commitment fees are recorded as lending fees over the
commitment period. Loan syndication fees are included in lending
fees as the syndication is completed, unless the yield on any loans
we retain is less than that of other comparable lenders involved in
the financing. In the latter case, an appropriate portion of the
syndication fee is recorded as interest income over the term of the
loan.
Customers' Liability under Acceptances
Acceptances represent a form of negotiable short-term debt that
is issued by our customers and which we guarantee for a fee. We
have offsetting claims, equal to the amount of the acceptances,
against our customers in the event of a call on these commitments.
The amount due under acceptances is recorded in other liabilities
and our corresponding claim is recorded as a loan in our
Consolidated Balance Sheet.
Fees earned are recorded in lending fees in our Consolidated
Statement of Income over the term of the acceptance.
Impaired Loans
We classify residential mortgages as impaired when payment is
contractually 90 days past due, or one year past due if guaranteed
by the Government of Canada. Credit card loans are classified as
impaired and immediately written off when principal or interest
payments are 180 days past due. Consumer instalment loans, other
personal loans and some small business loans are classified as
impaired when principal or interest payments are 90 days past due,
and are normally written off when they are one year past due. For
the purpose of measuring the amount to be written off, the
determination of the recoverable amount includes an estimate of
future recoveries.
Corporate and commercial loans are classified as impaired when
we are no longer reasonably assured that principal or interest will
be collected in its entirety on a timely basis. Generally,
corporate and commercial loans are considered impaired when
payments are 90 days past due, or for fully secured loans, when
payments are 180 days past due.
Once a loan is identified as impaired, interest income continues
to be recognized based on the original effective interest rate of
the loan.
A loan will be reclassified back to performing status when we
determine that there is reasonable assurance of full and timely
repayment of interest and principal in accordance with the terms
and conditions of the loan, and that none of the criteria for
classification of the loan as impaired continue to apply.
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 April 30, 2012, there was $196
million ($162 million as at April 30, 2011) allowance for credit
losses related to other credit instruments included in other
liabilities.
The allowance comprises the following two components:
Specific Allowance
These allowances are recorded for individually identified
impaired loans to reduce their book value to the amount we expect
to recover. We review our loans and acceptances on an ongoing basis
to assess whether any loans should be classified as impaired and
whether an allowance or write-off should be recorded (other than
credit card loans, which are classified as impaired and written off
when principal or interest payments are 180 days past due, as
discussed under impaired loans). Our review of problem loans is
conducted at least quarterly by our account managers, each of whom
assesses the ultimate collectability and estimated recoveries for a
specific loan based on all events and conditions that the manager
believes are relevant to the condition of the loan. This assessment
is then reviewed and approved by an independent credit officer.
To determine the amount we expect to recover from an impaired
loan, we use the value of the estimated future cash flows
discounted at the financial asset's original effective interest
rate. The determination of estimated future cash flows of a
collateralized loan reflects the expected realization of the
underlying security net of expected costs and any amounts legally
required to be paid to the borrower. Security can vary by type of
loan and may include cash, securities, real property, accounts
receivable, guarantees, inventory or other capital assets.
Certain personal loans are individually identified as impaired
however the provision is calculated on a pooled basis, taking into
account historical loss experience. In the periods following the
recognition of impairment, adjustments to the loan allowance
reflecting the time value of money are recognized and presented as
interest income.
Collective Allowance
We maintain a collective allowance (previously referred to as
general allowance) in order to cover any impairment in the existing
portfolio that cannot yet be associated with loans that are
individually identified as impaired. Our approach to establishing
and maintaining the collective allowance is based on the guideline
issued by OSFI. The collective allowance is reviewed on a quarterly
basis. For purposes of calculating the collective allowance, we
group loans on the basis of similar credit risk characteristics.
The collective allowance methodology incorporates both quantitative
and qualitative factors to determine an appropriate level of the
collective allowance.
The quantitative component consists of a collective allowance
model which utilizes statistical analysis of past performance to
derive a long-run estimate of loss experience. The loss experience
is then adjusted to reflect qualitative factors such as
management's experienced credit judgment with respect to current
macroeconomic and business conditions, portfolio specific
considerations, model factors and the level of non-performing
balances (impaired loans) for which a specific allowance has not
yet been assessed.
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 April April April April April April
ended 30, 2012 30, 2011 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Specific Allowance at
beginning of period 72 65 63 56 364 477
Provision for credit
losses 34 24 184 167 (23) 84
Recoveries 17 - 41 30 139 20
Write-offs (46) (19) (219) (193) (133) (126)
Foreign exchange and
other (17) (2) (10) (1) 72 (28)
----------------------------------------------------------------------------
Specific Allowance at
end of period 60 68 59 59 419 427
----------------------------------------------------------------------------
Collective Allowance
at beginning of
period 36 30 624 514 794 787
Provision for credit
losses 6 2 9 35 (18) 3
Foreign exchange and
other - - - - (12) (38)
----------------------------------------------------------------------------
Collective Allowance
at end of period 42 32 633 549 764 752
----------------------------------------------------------------------------
Total Allowance 102 100 692 608 1,183 1,179
----------------------------------------------------------------------------
Comprised of: Loans 100 100 692 608 989 1,017
Other credit
instruments 2 - - - 194 162
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------
Customers'
liability
under acceptances Total
----------------------------------------------------------
For the three months April April April April
ended 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------
Specific Allowance at
beginning of period - 10 499 608
Provision for credit
losses - (10) 195 265
Recoveries - - 197 50
Write-offs - - (398) (338)
Foreign exchange and
other - - 45 (31)
----------------------------------------------------------
Specific Allowance at
end of period - - 538 554
----------------------------------------------------------
Collective Allowance
at beginning of
period 23 46 1,477 1,377
Provision for credit
losses 3 (8) - 32
Foreign exchange and
other - - (12) (38)
----------------------------------------------------------
Collective Allowance
at end of period 26 38 1,465 1,371
----------------------------------------------------------
Total Allowance 26 38 2,003 1,925
----------------------------------------------------------
Comprised of: Loans 26 38 1,807 1,763
Other credit
instruments - - 196 162
----------------------------------------------------------
----------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------------------------
Credit card,
consumer
instalment and
Residential other Business and
mortgages personal loans government loans
----------------------------------------------------------------------------
For the six months April April April April April April
ended 30, 2012 30, 2011 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Specific Allowance at
beginning of period 74 52 59 47 426 481
Provision for credit
losses 42 60 344 339 (69) 193
Recoveries 50 3 79 60 291 46
Write-offs (90) (42) (411) (387) (274) (245)
Foreign exchange and
other (16) (5) (12) - 45 (48)
----------------------------------------------------------------------------
Specific Allowance at
end of period 60 68 59 59 419 427
----------------------------------------------------------------------------
Collective Allowance
at beginning of
period 36 23 565 477 817 839
Provision for credit
losses 6 9 68 72 (47) (37)
Foreign exchange and
other - - - - (6) (50)
----------------------------------------------------------------------------
Collective Allowance
at end of period 42 32 633 549 764 752
----------------------------------------------------------------------------
Total Allowance 102 100 692 608 1,183 1,179
----------------------------------------------------------------------------
Comprised of: Loans 100 100 692 608 989 1,017
Other credit
instruments 2 - - - 194 162
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------
Customers'
liability
under acceptances Total
----------------------------------------------------------
For the six months April April April April
ended 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------
Specific Allowance at
beginning of period - 10 559 590
Provision for credit
losses - (10) 317 582
Recoveries - - 420 109
Write-offs - - (775) (674)
Foreign exchange and
other - - 17 (53)
----------------------------------------------------------
Specific Allowance at
end of period - - 538 554
----------------------------------------------------------
Collective Allowance
at beginning of
period 34 44 1,452 1,383
Provision for credit
losses (8) (6) 19 38
Foreign exchange and
other - - (6) (50)
----------------------------------------------------------
Collective Allowance
at end of period 26 38 1,465 1,371
----------------------------------------------------------
Total Allowance 26 38 2,003 1,925
----------------------------------------------------------
Comprised of: Loans 26 38 1,807 1,763
Other credit
instruments - - 196 162
----------------------------------------------------------
----------------------------------------------------------
Interest income on impaired loans of $36 million and $73 million was
recognized respectively, for the three months and six months ended April 30,
2012 ($28 million and $51 million, respectively, for the three months and
six months ended April 30, 2011).
Foreclosed Assets
Property or other assets that we have received from borrowers to
satisfy their loan commitments are recorded at fair value and are
classified as either held for use or held for sale according to
management's intention. Fair value is determined based on market
prices where available. Otherwise, fair value is determined using
other methods, such as analysis of discounted cash flows or market
prices for similar assets.
Insured Mortgages
Included in the residential mortgages balance are Canadian
government and corporate insured mortgages of $49,010 million as at
April 30, 2012 ($47,974 million as at October 31, 2011). Included
in the consumer instalment and other personal loans balance are
Canadian government-insured real estate personal loans of $nil as
at April 30, 2012 ($nil as at October 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 will be recorded as
they arise in a manner that is consistent with our accounting
policy for originated loans. The incurred credit losses will be
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 will be recorded in the provision for credit losses
until the accumulated collective allowance is exhausted. Any
additional decrease will be 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 will 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 April 30, 2012, the remaining credit mark on performing
term loans, revolving loans and other performing loans was $1,065
million, $440 million and $32 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 $1,537
million, $801 million will be amortized over the remaining life of
the portfolio. The portion that will not be amortized was $736
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 will 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 April 30, 2012, the remaining credit mark related to
purchased credit impaired loans was $857 million ($1,209 million as
at October 31, 2011).
Unfunded Commitments and Letters of Credit Acquired
As part of our purchase of 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 April 30, 2012, the remaining credit mark on unfunded
commitments and letters of credit was $146 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 six months ended April 30, 2012, we recorded
new provisions for credit losses and recoveries of $1.5 million and
$1.1 million, respectively, related to loans covered by the FDIC
loss share agreement (recoveries of $11.3 million and $15.3
million, respectively, for the three and six months ended April 30,
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 April 30, 2012 are outlined in the Risk
Management section on pages 12 to 14 of Management's Discussion and
Analysis of the Second 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 $11,795 million
as at April 30, 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 April 30, 2012, $25 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 April 30, 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 $4,310 million as at April 30, 2012
($3,708 million as at October 31, 2011). As at April 30, 2012, $77
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 $300
million. No amounts were drawn as at April 30, 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 $32,002 million as at April 30, 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 $324 million as at April 30, 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 $5,101 million as at April
30, 2012 ($5,139 million as at October 31, 2011). No amount was
included in our Consolidated Balance Sheet as at April 30, 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.
We use bank securitization vehicles to securitize our Canadian
mortgage loans and Canadian credit card loans. We are required to
consolidate these vehicles. See Note 7 for further information. We
also sell Canadian mortgage loans to third party Canadian
securitization programs including the Canadian Mortgage Bond
program and the National Housing Act Mortgage-Backed Securities
program.
Contracts with the third party securitization programs provide
for the payment to us over time of the excess of the sum of
interest and fees collected from customers, in connection with the
loans that were sold, over the yield paid to investors in the
securitization vehicle or third party securitization program, less
credit losses and other costs.
We assess whether the loans qualify for off-balance sheet
treatment based on the transfer of the risks and rewards, as
determined under the derecognition criteria contained in the IFRS
financial instruments standard.
The loans sold to third party securitization programs do not
qualify for off-balance sheet recognition as we have determined
that the transfer of these loans has not resulted in the transfer
of substantially all the risks and rewards. We continue to
recognize the loans on our balance sheet and recognize the
instruments issued as a liability representing a secured financing.
The interest and fees collected, net of the yield paid to investors
is recorded in net interest income using the effective interest
method over the term of the securitization. Credit losses
associated with the loans are recorded in the provision for credit
losses. During the three and six months ended April 30, 2012, we
sold $954 million and $2,339 million of loans to third party
securitization programs ($1,444 million and $2,153 million for the
three and six months ended April 30, 2011).
The following table shows the carrying amounts related to
securitization activities with third parties that are recorded on
our balance sheet, together with the associated liabilities, for
each category of asset on the balance sheet:
(Canadian $ April 30, October 31, November 1,
in millions) 2012(1) 2011 2010
---------------------------------------------------------------
Carrying Carrying Carrying
amount amount amount
of Associated of Associated of Associated
assets liabilities assets liabilities assets liabilities
----------------------------------------------------------------------------
Available-
for-sale
securities 719 874 1,077
Residential
mortgages 11,006 11,758 13,384
----------------------------------------------------------------------------
11,725 12,632 14,461
Other Related
Assets 9,080 8,004 8,754
----------------------------------------------------------------------------
Total 20,805 20,902 20,636 20,462 23,215 23,047
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The fair value of the securitized assets is $21,047 million and the fair
value of the associated liabilities is $21,203 million, for a net position
of $(156) million. Securitized assets are those which the bank has
transferred to third parties, including other related assets.
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. See Note 7 for
details of securitization activities with bank securitization
vehicles.
Note 7: Special Purpose Entities
We enter into certain transactions with customers in the
ordinary course of business that involve the establishment of
special purpose entities ("SPE"s) to facilitate or secure customer
transactions. We are required to consolidate a SPE if we control
the vehicle, as determined under the criteria contained in IFRS.
The following circumstances are considered when assessing whether
the bank, in substance, controls and consequently is required to
consolidate a SPE:
- the activities of the SPE are being conducted on behalf of the
bank according to its specific business needs so that the bank
obtains benefits from the SPE's operation;
- the bank has the decision-making powers to obtain the majority
of the benefits of the activities of the SPE or, by setting up an
'autopilot' mechanism, the bank has delegated these decision-making
powers;
- the bank has rights to obtain the majority of the benefits of
the SPE and therefore may be exposed to risks incidental to the
activities of the SPE; or
- the bank retains the majority of the residual or ownership
risks related to the SPE or its assets in order to obtain benefits
from its activities.
We consider all aspects of the relationship between the bank and
the SPE to determine whether the bank ultimately has the power to
govern the financial and operating policies of the SPE so as to
obtain the benefits from the SPE's activities.
We perform a re-assessment of consolidation whenever there is a
change in the substance of the relationship between the bank and an
SPE.
Total assets in our unconsolidated SPEs and our exposure to
losses are summarized in the following table:
(Canadian $ in
millions) April 30, 2012
----------------------------------------------------------------------------
Total
Exposure to loss assets
-------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative
facilities(1) provided held assets Total
----------------------------------------------------------------------------
Unconsolidated
SPEs
Canadian
customer
securitization
vehicles(2) 3,627 - 522 - 4,149 3,068
Structured
finance
vehicles(3) na na 8,861 - 8,861 21,839
----------------------------------------------------------------------------
Total 3,627 - 9,383 - 13,010 24,907
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) October 31, 2011
----------------------------------------------------------------------------
Total
Exposure to loss assets
-------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative
facilities(1) provided held assets Total
----------------------------------------------------------------------------
Unconsolidated
SPEs
Canadian
customer
securitization
vehicles(2) 3,012 - 343 2 3,357 2,450
Structured
finance
vehicles(3) na na 7,331 - 7,331 19,117
----------------------------------------------------------------------------
Total 3,012 - 7,674 2 10,688 21,567
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) November 1, 2010
-------------------------------------
Exposure to Total
loss assets
----------------------
Total
-------------------------------------
Unconsolidated
SPEs
Canadian
customer
securitization
vehicles(2) 3,085 2,976
Structured
finance
vehicles(3) 4,772 6,979
-------------------------------------
Total 7,857 9,955
-------------------------------------
-------------------------------------
(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 April 30, 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) April 30, 2012
----------------------------------------------------------------------------
Total
Exposure to loss assets
------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative
facilities provided held assets Total(1)
----------------------------------------------------------------------------
Consolidated
SPEs
Canadian
customer
securitization
vehicles 14 - 179 - 193 179
U.S customer
securitization
vehicle 4,068 71 - 3 4,142 3,307
Bank
securitization
vehicles(2) 5,100 - 1,031 34 6,165 10,595
Credit
protection
vehicle - Apex 1,030 - 1,367 196 2,593 2,223
Structured
investment
vehicles 49 2,068 - 7 2,124 2,105
Capital and
funding trusts 3,234 11,109 842 57 15,242 14,333
----------------------------------------------------------------------------
Total 13,495 13,248 3,419 297 30,459 32,742
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) October 31, 2011
----------------------------------------------------------------------------
Total
Exposure to loss assets
------------------------------------------------------------
Drawn
facilities
Undrawn and loans Securities Derivative
facilities provided held assets Total(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 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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions) November 1, 2010
--------------------------------------
Exposure to Total
loss assets
----------------------
Total(1)
--------------------------------------
Consolidated
SPEs
Canadian
customer
securitization
vehicles 396 196
U.S customer
securitization
vehicle 4,158 4,074
Bank
securitization
vehicles(2) 5,577 9,469
Credit
protection
vehicle - Apex 2,827 2,208
Structured
investment
vehicles 5,298 5,225
Capital and
funding trusts 11,873 10,950
--------------------------------------
Total 30,129 32,122
--------------------------------------
--------------------------------------
(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 $9,621 million of ABCP and term asset-
backed securities funding our bank securitization vehicles.
Customer Securitization Vehicles
We sponsor Canadian and U.S. customer securitization vehicles
(also referred to as bank-sponsored multi-seller conduits) that
assist our customers with the securitization of their assets to
provide them with alternate sources of funding. These vehicles
provide clients with access to financing in the asset-backed
commercial paper ("ABCP") markets by allowing them to sell their
assets into these vehicles, which then issue ABCP to investors to
fund the purchases. In all cases, we do not service the transferred
assets. If there are losses on the assets, the seller is the first
to take the loss. We do not sell assets to these customer
securitization vehicles. We earn fees for providing services
related to the securitizations, including liquidity, distribution
and financial arrangement fees for supporting the ongoing
operations of the vehicles. For our Canadian customer
securitization vehicles, we determined that we control and must
consolidate four of these vehicles (three in 2011) as we have the
right to obtain the majority of the benefits though our ownership
of ABCP. We are not required to consolidate five of our nine (five
of our eight in 2011) Canadian customer securitization vehicles.
For our U.S. customer securitization vehicle, we determined that we
control and must consolidate this vehicle, as we have key
decision-making powers.
Bank Securitization Vehicles
We use bank securitization vehicles to securitize our Canadian
mortgage loans and Canadian credit card loans in order to obtain
alternate sources of funding. The structure of these vehicles
limits the types of activities they can undertake and the types of
assets they can hold, and they have limited decision making
authority. These vehicles issue ABCP or term asset-backed
securities to fund their activities. We control and must
consolidate these vehicles, as we have key decision-making
powers.
Credit Protection Vehicle
We sponsor a credit protection vehicle, Apex Trust ("Apex") that
provides credit protection to investors on investments in corporate
debt portfolios through credit default swaps. In May 2008, upon the
restructuring of Apex, we entered into credit default swaps with
swap counterparties and offsetting swaps with Apex. As at April 30,
2012 and 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. Since 2008, a third party has held its exposure
to Apex through a total return swap with us on $600 million of
notes. We control and must consolidate this vehicle, through our
ownership of medium term notes.
Structured Investment Vehicles
Structured investment vehicles ("SIVs") provide investment
opportunities in customized, diversified debt portfolios in a
variety of asset and rating classes. We hold interests in Links
Finance Corporation ("Links") and act as asset manager for Links
and Parkland Finance Corporation. We control and must consolidate
these vehicles, as we have key decision-making powers. During the
quarter, Parkland sold its remaining assets, fully repaid its BMO
liquidity facility and distributed the remaining proceeds to
Capital note holders.
Structured Finance Vehicles
We facilitate development of investment products by third
parties, including mutual funds, unit investment trusts and other
investment funds that are sold to retail investors. We hedge our
exposure related to these derivatives by investing in other funds
through SPEs. We are not required to consolidate these vehicles
under IFRS.
Capital and Funding Trust
Capital and Funding Trusts (the "Trusts") are created to issue
notes or capital trust securities or to guarantee payments due to
bondholders on bonds issued by the bank. These Trusts purchase
notes from the bank or we may sell assets to the Trusts in exchange
for promissory notes. We control and must consolidate these Trusts,
as the majority of the activities of these Trusts are conducted on
behalf of the bank.
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.
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 year ended
October 31, 2011, we decreased our estimate of the contingent
consideration to $8 million, 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 February 20, 2012, the bank announced a definitive agreement
to acquire a 20% 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. This acquisition is subject to
regulatory approval. COFCO Trust Co. will be part of our PCG
reporting segment.
CTC Consulting
On April 12, 2012, the bank announced a definitive agreement to
acquire United States-based CTC Consulting, LLC. The acquisition
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. CTC Consulting will be
part of our PCG 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 PCG 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)
----------------------------------------------------------------------------
LGM M&I
----------------------------------------------------------------------------
Cash resources(1) 11 2,838
Securities 3 5,980
Loans - 29,046
Premises and equipment - 426
Goodwill 70 1,950
Intangible assets 31 649
Deferred tax assets - 2,160
Other assets 21 2,265
----------------------------------------------------------------------------
Total assets 136 45,314
----------------------------------------------------------------------------
Deposits - 33,799
Other liabilities 26 7,404
----------------------------------------------------------------------------
Total liabilities 26 41,203
----------------------------------------------------------------------------
Purchase price 110 4,111
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The allocation of the purchase price for M&I 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.
Fair value less costs to sell was used to perform the impairment
test in 2011. The fair value less costs to sell for each cash
generating unit ("CGU") was determined by discounting cash flow
projections. Cash flows were projected for the first 10 years based
on actual operating results, the expected future business
performance and past experience. Beyond the first 10 years, cash
flows were assumed to grow at perpetual annual rates of up to 3%, a
rate that is consistent with long-term nominal GDP growth. Discount
rates applied in determining the recoverable amounts range from
10.9% to 14.7%, and are based on our estimate of the cost of
capital for each CGU. The cost of capital for each CGU was
estimated using the Capital Asset Pricing Model, based on the
historical betas of publicly traded peer companies that are
comparable to the CGU.
There were no write-downs of goodwill due to impairment during
the three and six months ended April 30, 2012 and the year ended
October 31, 2011.
The key assumptions described above may change as market and
economic conditions change. However, the bank estimates that
reasonably possible changes in these assumptions are not expected
to cause recoverable amounts to decline below carrying amounts.
A continuity of our goodwill by CGU for the year ended October
31, 2011 and the six months April 30, 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) - 41 41 -
----------------------------------------------------------------------------
Goodwill as at April 30, 2012 122(2) 2,586(3) 2,708 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 - - - -
Other(1) 4 6 - 10
----------------------------------------------------------------------------
Goodwill as at April 30, 2012 381(5) 350(6) 2 801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 - -
Other(1) 2 53
------------------------------------------------------
Goodwill as at April 30, 2012 193(7) 3,702
------------------------------------------------------
------------------------------------------------------
(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. and M&I.
(7) Relates to Gerard Klauer Mattison Co., Inc., BMO Nestbitt Burns
Corporation Limited, Griffin, Kubik, Stephens & Thompson, Inc., Paloma
Securities LLC and M&I.
Note 10: Deposits
Payable on demand
------------------------------------
(Canadian $ in Non-interest Payable
millions) Interest bearing bearing after notice
----------------------------------------------------------------------------
April October April October April October
30, 2012 31, 2011 30, 2012 31, 2011 30, 2012 31, 2011
----------------------------------------------------------------------------
Deposits by:
Banks 653 747 514 541 3,820 2,423
Businesses and
governments(1) 14,072 11,839 18,829 18,769 39,723 37,953
Individuals 5,355 7,170 10,077 9,438 62,732 59,313
----------------------------------------------------------------------------
Total(2)(3) 20,080 19,756 29,420 28,748 106,275 99,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Booked In
Canada 18,878 18,845 23,386 21,059 55,013 51,340
United States 967 496 5,915 7,562 49,635 47,767
Other Countries 235 415 119 127 1,627 582
----------------------------------------------------------------------------
Total 20,080 19,756 29,420 28,748 106,275 99,689
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in Payable on
millions) a fixed date Total
-------------------------------------------------------------------
April October April October November
30, 2012 31, 2011 30, 2012 31, 2011 1, 2010
-------------------------------------------------------------------
Deposits by:
Banks 17,521 17,166 22,508 20,877 19,409
Businesses and
governments(1) 98,915 90,648 171,539 159,209 131,892
Individuals 43,856 46,366 122,020 122,287 99,043
-------------------------------------------------------------------
Total(2)(3) 160,292 154,180 316,067 302,373 250,344
-------------------------------------------------------------------
-------------------------------------------------------------------
Booked In
Canada 92,054 96,434 189,331 187,678 171,310
United States 55,143 43,881 111,660 99,706 64,077
Other Countries 13,095 13,865 15,076 14,989 14,957
-------------------------------------------------------------------
Total 160,292 154,180 316,067 302,373 250,344
-------------------------------------------------------------------
-------------------------------------------------------------------
(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 April 30, 2012 and October 31, 2011, total deposits payable on a
fixed date included $19,518 million and $18,190 million, respectively,
of federal funds purchased, commercial paper issued and other deposit
liabilities.
During the quarter ended April 30, 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 in 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
April 30, 2012, we had borrowed $318 million of federal funds ($831
million as at October 31, 2011).
-- Commercial paper, which totalled $5,171 million as at April 30, 2012
($3,804 million as at October 31, 2011).
-- Covered bonds, which totalled $9,104 million as at April 30, 2012
($7,087 million as at October 31, 2011).
The following table presents the maturity schedule for our
deposits payable on a fixed date:
Payable on a fixed
(Canadian $ in millions) date (2)
----------------------------------------------------------------------------
April October
30, 31,
2012 2011
----------------------------------------------------------------------------
Within 1 year 114,733 106,655
1 to 2 years 11,183 15,944
2 to 3 years 10,356 10,107
3 to 4 years 7,960 7,078
4 to 5 years 9,766 8,644
Over 5 years (1) 6,294 5,752
----------------------------------------------------------------------------
Total (1) 160,292 154,180
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes structured notes designated under the fair value option.
(2) Includes $134,304 million of deposits, each greater than one hundred
thousand dollars, of which $72,053 million were booked in Canada,
$49,157 million were booked in the United States and $13,094 million
were booked in other countries ($125,533 million, $76,972 million,
$34,695 million and $13,866 million, respectively, in 2011). Of the
$72,053 million of deposits booked in Canada, $28,529 million mature
in less than three months, $5,399 million mature in three to six
months, $7,573 million mature in six to 12 months and $30,552 million
mature after 12 months ($76,972 million, $34,842 million, $1,846
million, $6,154 million and $34,130 million, respectively, in 2011).
We have liquid assets of $169,694 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 April 30, 2012 we did not issue or
redeem any subordinated debt.
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.
On May 4, 2012, we announced our intention to redeem 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.
Note 12:Capital Trust Securities
During the quarter ended April 30, 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 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, April October
except as noted) 30, 2012 31, 2011
---------------------------------------------------------------------------
Number Number
of of
shares Amount shares Amount
---------------------------------------------------------------------------
Preferred Shares -
Classified as Equity
Class B - Series 5 8,000,000 200 8,000,000 200
Class B - Series 10 (2) - - 12,000,000 396
Class B - Series 13 14,000,000 350 14,000,000 350
Class B - Series 14 10,000,000 250 10,000,000 250
Class B - Series 15 10,000,000 250 10,000,000 250
Class B - Series 16 12,000,000 300 12,000,000 300
Class B - Series 18 6,000,000 150 6,000,000 150
Class B - Series 21 11,000,000 275 11,000,000 275
Class B - Series 23 16,000,000 400 16,000,000 400
Class B - Series 25 11,600,000 290 11,600,000 290
---------------------------------------------------------------------------
2,465 2,861
Common Shares 643,364,159 11,568 638,999,563 11,332
---------------------------------------------------------------------------
Share Capital 14,033 14,193
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(Canadian $ in millions, November
except as noted) 1, 2010
----------------------------------------------------------------------------
Number
of
shares Amount Convertible into...
----------------------------------------------------------------------------
Preferred Shares -
Classified as Equity
Class B - Series 5 8,000,000 200 -
Class B - Series 10 (2) 12,000,000 396 common shares (3)
Class B - Series 13 14,000,000 350 -
Class B - Series 14 10,000,000 250 -
Class B - Series 15 10,000,000 250 -
Class B - Series 16 12,000,000 300 preferred shares - class
B - series 17 (4)
Class B - Series 18 6,000,000 150 preferred shares - class
B - series 19 (4)
Class B - Series 21 11,000,000 275 preferred shares - class
B - series 22 (4)
Class B - Series 23 16,000,000 400 preferred shares - class
B - series 24 (4)
Class B - Series 25 - - preferred shares - class
B - series 26 (4)
----------------------------------------------------------------------------
2,571
Common Shares 566,468,440 6,927
----------------------------------------------------------------------------
Share Capital 9,498
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 17,858,838 common shares as at April 30, 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 April 30, 2012. Our capital position as at April 30, 2012 is
detailed in the Capital Management section on pages 16 to 17 of
Management's Discussion and Analysis of the Second Quarter Report
to Shareholders.
Note 15: Employee Compensation
Stock Options
During the six months ended April 30, 2012, we granted a total
of 2,526,345 stock options (1,798,913 stock options during the six
months ended April 30, 2011). The weighted-average fair value of
options granted during the six months ended April 30, 2012 was
$5.54 per option ($7.26 per option for the six months ended April
30, 2011).
The fair value of options granted was estimated using a binomial
option pricing model. Expected dividend yield is based on market
expectations of future dividends on our common shares. Expected
volatility is determined based on the market consensus implied
volatility for traded options on our common shares. The risk-free
rate is based on the yields of Canadian strip bonds with maturities
similar to the expected period until exercise of the 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 six months April April
ended 30, 2012 30, 2011
----------------------------------------------------------------------------
Expected dividend yield 6.8%-7.2% 6.0%-6.4%
Expected share price volatility 21.3%-22.3% 22.1%-22.8%
Risk-free rate of return 1.5%-1.8% 2.7%-3.0%
Expected period until exercise (in years) 5.5-7.0 5.5-7.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
April April April April
For the three months ended 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Benefits earned by employees 46 39 5 5
Interest cost on accrued benefit
liability 65 63 13 13
Actuarial loss recognized in expense 1 - - -
Plan amendment costs recognized in
expense - - (1) (1)
Expected return on plan assets (78) (80) (1) (1)
----------------------------------------------------------------------------
Benefits expense 34 22 16 16
Canada and Quebec pension plan
expense 24 23 - -
Defined contribution expense 3 3 - -
----------------------------------------------------------------------------
Total pension and other employee
future benefit expenses 61 48 16 16
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
----------------------------------------------------------------------------
Other employee
Pension benefit future benefit
plans plans
----------------------------------------------------------------------------
April April April April
For the six months ended 30, 2012 30, 2011 30, 2012 30, 2011
----------------------------------------------------------------------------
Benefits earned by employees 92 77 9 11
Interest cost on accrued benefit
liability 132 126 26 26
Actuarial loss recognized in expense 1 - - -
Plan amendment costs recognized in
expense - - (2) (2)
Expected return on plan assets (157) (162) (2) (2)
----------------------------------------------------------------------------
Benefits expense 68 41 31 33
Canada and Quebec pension plan
expense 40 38 - -
Defined contribution expense 5 5 - -
----------------------------------------------------------------------------
Total pension and other employee
future benefit expenses 113 84 31 33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 six months
noted) months ended ended
----------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net income attributable to Bank
shareholders 1,010 795 2,100 1,602
Dividends on preferred share (34) (36) (71) (70)
----------------------------------------------------------------------------
Net income available to common
shareholders 976 759 2,029 1,532
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 642,491 568,980 641,248 568,203
----------------------------------------------------------------------------
Basic earnings per share (Canadian
$) 1.52 1.34 3.16 2.70
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share
(Canadian $ in millions, except as For the three For the six months
noted) months ended ended
----------------------------------------------------------------------------
April 30, April 30, April 30, April 30,
2012 2011 2012 2011
----------------------------------------------------------------------------
Net income available to common
shareholders adjusted for dilution
effect 976 770 2,037 1,555
----------------------------------------------------------------------------
Average number of common shares
outstanding (in thousands) 642,491 568,980 641,248 568,203
----------------------------------------------------------------------------
Convertible shares 1,906 12,658 6,045 14,717
Stock options potentially
exercisable (1) 8,420 8,740 6,111 9,226
Common shares potentially
repurchased (7,137) (6,379) (4,822) (6,807)
----------------------------------------------------------------------------
Average diluted number of common
shares outstanding (in thousands) 645,680 583,999 648,582 585,339
----------------------------------------------------------------------------
Diluted earnings per share (Canadian
$) 1.51 1.32 3.14 2.66
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) In computing diluted earnings per share we excluded average stock
options outstanding of 7,058,072 and 7,653,687 with a weighed-average
exercise price of $125.46 and $121.72, respectively, for the three
months and six months ended April 30, 2012 (2,994,156 and 2,702,179
with a weighted-average exercise price of $64.18 and $64.30,
respectively, for the three months and six months ended April 30, 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 Note 1 and throughout the consolidated financial
statements. 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)
----------------------------------------------------------------------------
For the three months Corporate
ended April 30, 2012 P&C P&C Services
(2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 1,063 598 128 308 23 2,120
Non-interest revenue 460 134 615 481 149 1,839
----------------------------------------------------------------------------
Total Revenue 1,523 732 743 789 172 3,959
Provision for credit
losses 141 83 3 24 (56) 195
Amortization 38 45 16 9 61 169
Non-interest expense 738 424 537 462 169 2,330
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 606 180 187 294 (2) 1,265
Income taxes 160 59 42 69 (93) 237
Non-controlling
interest in
subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 446 121 145 225 73 1,010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 159,166 60,886 20,065 248,286 49,788 538,191
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 2,586 801 193 - 3,702
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months Corporate
ended April 30, 2011 P&C P&C Services
(2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 1,058 284 112 298 (60) 1,692
Non-interest revenue 430 58 476 527 150 1,641
----------------------------------------------------------------------------
Total Revenue 1,488 342 588 825 90 3,333
Provision for credit
losses 136 34 2 30 95 297
Amortization 36 18 8 7 49 118
Non-interest expense 740 207 447 459 59 1,912
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 576 83 131 329 (113) 1,006
Income taxes 162 30 40 100 (139) 193
Non-controlling
interest in
subsidiaries - - - - 18 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 414 53 91 229 8 795
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 152,635 28,250 16,587 202,365 37,736 437,573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 946 415 109 - 1,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in
millions)
----------------------------------------------------------------------------
For the six months Corporate
ended April 30, 2012 P&C P&C Services
(2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 2,172 1,230 292 595 149 4,438
Non-interest revenue 907 283 1,146 966 336 3,638
----------------------------------------------------------------------------
Total Revenue 3,079 1,513 1,438 1,561 485 8,076
Provision for credit
losses 279 169 7 48 (167) 336
Amortization 77 93 32 19 123 344
Non-interest expense 1,512 869 1,078 935 315 4,709
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 1,211 382 321 559 214 2,687
Income taxes 319 124 71 136 (100) 550
Non-controlling
interest in
subsidiaries - - - - 37 37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 892 258 250 423 277 2,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 158,364 61,679 19,746 248,507 49,894 538,190
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 2,586 801 193 - 3,702
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months Corporate
ended April 30, 2011 P&C P&C Services
(2) Canada U.S. PCG BMO CM (1) Total
----------------------------------------------------------------------------
Net interest income 2,168 577 219 639 (194) 3,409
Non-interest revenue 900 123 1,038 1,145 186 3,392
----------------------------------------------------------------------------
Total Revenue 3,068 700 1,257 1,784 (8) 6,801
Provision for credit
losses 272 71 4 60 213 620
Amortization 70 37 17 14 99 237
Non-interest expense 1,485 427 917 941 81 3,851
----------------------------------------------------------------------------
Income before taxes
and non-controlling
interest in
subsidiaries 1,241 165 319 769 (401) 2,093
Income taxes 350 58 84 280 (317) 455
Non-controlling
interest in
subsidiaries - - - - 36 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 891 107 235 489 (120) 1,602
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 151,954 29,265 16,330 204,674 38,817 441,040
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 122 946 415 109 - 1,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 April 30, United Other
2012 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 1,312 797 11 2,120
Non-interest revenue 1,263 445 131 1,839
----------------------------------------------------------------------------
Total Revenue 2,575 1,242 142 3,959
Provision for credit losses 169 26 - 195
Amortization 98 69 33 200
Non-interest expense 1,399 882 18 2,299
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in subsidiaries 909 265 91 1,265
Income taxes 158 76 3 237
Non-controlling interest in
subsidiaries 13 5 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 738 184 88 1,010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 330,030 187,905 20,256 538,191
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 467 3,214 21 3,702
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended April 30, United Other
2011 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 1,330 359 3 1,692
Non-interest revenue 1,215 308 118 1,641
----------------------------------------------------------------------------
Total Revenue 2,545 667 121 3,333
Provision for credit losses 194 94 9 297
Amortization 90 27 1 118
Non-interest expense 1,351 510 51 1,912
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in subsidiaries 910 36 60 1,006
Income taxes 204 (13) 2 193
Non-controlling interest in
subsidiaries 14 4 - 18
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 692 45 58 795
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 297,178 120,291 20,104 437,573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 446 1,125 21 1,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended April 30, United Other
2012 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 2,652 1,761 25 4,438
Non-interest revenue 2,457 916 265 3,638
----------------------------------------------------------------------------
Total Revenue 5,109 2,677 290 8,076
Provision for credit losses 352 (16) - 336
Amortization 197 144 34 375
Non-interest expense 2,843 1,768 67 4,678
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in subsidiaries 1,717 781 189 2,687
Income taxes 317 230 3 550
Non-controlling interest in
subsidiaries 27 10 - 37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,373 541 186 2,100
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 325,692 192,117 20,381 538,190
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 467 3,214 21 3,702
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended April 30, United Other
2011 Canada States Countries Total
----------------------------------------------------------------------------
Net interest income 2,685 729 (5) 3,409
Non-interest revenue 2,528 637 227 3,392
----------------------------------------------------------------------------
Total Revenue 5,213 1,366 222 6,801
Provision for credit losses 363 238 19 620
Amortization 178 57 2 237
Non-interest expense 2,740 1,007 104 3,851
----------------------------------------------------------------------------
Income before taxes and non-
controlling interest in subsidiaries 1,932 64 97 2,093
Income taxes 431 17 7 455
Non-controlling interest in
subsidiaries 27 9 - 36
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income 1,474 38 90 1,602
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Average Assets 296,825 122,668 21,547 441,040
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Goodwill (As At) 446 1,125 21 1,592
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Prior periods have been restated to give effect to the current period's
organizational structure and presentation changes.
Note 18: Financial Instruments
Fair Value of Financial Instruments
We record trading assets and liabilities, derivatives,
available-for-sale securities and securities sold but not yet
purchased at fair value and other non-trading assets and
liabilities at amortized cost less allowances or write-downs for
impairment. Where there is no quoted market value, fair value is
determined using a variety of valuation techniques and assumptions.
These fair values are based upon the estimated amounts for
individual assets and liabilities and do not include an estimate of
the fair value of any of the legal entities or underlying
operations that comprise our business.
Fair value amounts disclosed represent point-in-time estimates
that may change in subsequent reporting periods due to market
conditions or other factors. Fair value represents our estimate of
the amounts for which we could exchange the financial instruments
with willing third parties who were interested in acquiring the
instruments. In most cases, however, the financial instruments are
not typically exchangeable or exchanged and therefore it is
difficult to determine their fair value. In those cases, we have
estimated fair value taking into account only changes in interest
rates and credit risk that have occurred since we acquired them or
entered into the underlying contracts. These calculations represent
management's best estimates based on a range of methodologies and
assumptions; since they involve uncertainties, the fair values may
not be realized in an actual sale or immediate settlement of the
instruments.
Interest rate changes are the main cause of changes in the fair
value of our financial instruments.
Financial Instruments Whose Book Value Approximates Fair
Value
Fair value is assumed to equal book value for acceptance-related
liabilities and securities lent or sold under repurchase
agreements, due to the short-term nature of these assets and
liabilities. Fair value is also assumed to equal book value for our
cash resources, certain other assets and certain other
liabilities.
Loans
In determining the fair value of our fixed rate and floating
rate performing loans and customers' liability under acceptances,
we discount the remaining contractual cash flows, adjusted for
estimated prepayment, at market interest rates currently offered
for loans with similar terms.
The value of our loan balances determined using the above
assumption is further adjusted by a credit mark that represents an
estimate of the expected credit losses in our loan portfolio.
Securities
The methods used to determine the fair value of securities are
provided in Note 1.
Derivative Instruments
The methods used to determine the fair value of derivative
instruments are provided in Note 1.
Deposits
In determining the fair value of our deposits, we incorporate
the following assumptions:
-- For fixed rate, fixed maturity deposits, we discount the remaining
contractual cash flows for these deposits, adjusted for expected
redemptions, at market interest rates currently offered for deposits
with similar terms and risks.
-- For fixed rate deposits with no defined maturities, we consider fair
value to equal book value based on book value being equivalent to the
amount payable on the reporting date.
-- For floating rate deposits, changes in interest rates have minimal
impact on fair value since deposits reprice to market frequently. On
that basis, fair value is assumed to equal book value.
Subordinated Debt and Capital Trust Securities
The fair value of our subordinated debt and capital trust
securities is determined by referring to current market prices for
similar 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.
(Canadian $ in April 30, 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 34,117 34,117 - 19,676 19,676 -
Interest bearing
deposits with banks 7,010 7,010 - 5,980 5,980 -
Securities 127,119 127,266 147 122,115 122,263 148
Securities borrowed or
purchased under
resale agreements 42,253 42,253 - 37,970 37,970 -
Loans
Residential
mortgages 82,260 83,289 1,029 81,075 82,337 1,262
Consumer instalment
and other personal 60,002 59,482 (520) 59,445 58,682 (763)
Credit cards 7,861 7,861 - 8,038 8,038 -
Business and
governments 89,800 89,108 (692) 84,883 83,951 (932)
----------------------------------------------------------------------------
239,923 239,740 (183) 233,441 233,008 (433)
Customers' liability
under acceptances 7,406 7,373 (33) 7,227 7,180 (47)
Allowance for credit
losses (1,807) (1,807) - (1,783) (1,783) -
----------------------------------------------------------------------------
Total loans and
customers' liability
under acceptances,
net of allowance for
credit losses 245,522 245,306 (216) 238,885 238,405 (480)
Derivative instruments 46,760 46,760 - 55,113 55,113 -
Premises and equipment 2,033 2,033 - 2,061 2,061 -
Goodwill 3,702 3,702 - 3,649 3,649 -
Intangible assets 1,541 1,541 - 1,562 1,562 -
Current tax assets 2,187 2,187 - 1,319 1,319 -
Deferred tax assets 2,820 2,820 - 3,355 3,355 -
Other assets 10,439 10,439 - 8,890 8,950 60
----------------------------------------------------------------------------
525,503 525,434 (69) 500,575 500,303 (272)
----------------------------------------------------------------------------
Liabilities
Deposits 316,067 316,385 318 302,373 302,617 244
Derivative instruments 46,472 46,472 - 50,934 50,934 -
Acceptances 7,406 7,406 - 7,227 7,227 -
Securities sold but
not yet purchased 23,834 23,834 - 20,207 20,207 -
Securities lent or
sold under repurchase
agreements 46,076 46,076 - 32,078 32,078 -
Current tax
liabilities 1,017 1,017 - 591 591 -
Deferred tax
liabilities 207 207 - 314 314 -
Other liabilities 50,295 50,694 399 52,846 53,132 286
Subordinated debt 5,276 5,475 199 5,348 5,507 159
Capital trust
securities 462 626 164 821 982 161
Equity 28,391 28,391 - 27,836 27,836 -
----------------------------------------------------------------------------
525,503 526,583 1,080 500,575 501,425 850
----------------------------------------------------------------------------
Total fair value
adjustment (1,149) (1,122)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in November 1,
millions) 2010
-------------------------------------------------
Fair
value
over
(under)
Book Fair book
value value value
-------------------------------------------------
Assets
Cash and cash
equivalents 17,460 17,460 -
Interest bearing
deposits with banks 5,157 5,157 -
Securities 119,512 119,560 48
Securities borrowed or
purchased under
resale agreements 28,102 28,102 -
Loans
Residential
mortgages 74,782 76,331 1,549
Consumer instalment
and other personal 51,159 50,650 (509)
Credit cards 7,777 7,777 -
Business and
governments 66,512 65,773 (739)
-------------------------------------------------
200,230 200,531 301
Customers' liability
under acceptances 7,001 6,918 (83)
Allowance for credit
losses (1,964) (1,964) -
-------------------------------------------------
Total loans and
customers' liability
under acceptances,
net of allowance for
credit losses 205,267 205,485 218
Derivative instruments 49,086 49,086 -
Premises and equipment 1,507 1,507 -
Goodwill 1,619 1,619 -
Intangible assets 812 812 -
Current tax assets 1,459 1,459 -
Deferred tax assets 1,078 1,078 -
Other assets 6,651 6,651 -
-------------------------------------------------
437,710 437,976 266
-------------------------------------------------
Liabilities
Deposits 250,344 250,637 293
Derivative instruments 47,632 47,632 -
Acceptances 7,001 7,001 -
Securities sold but
not yet purchased 14,245 14,245 -
Securities lent or
sold under repurchase
agreements 40,987 40,987 -
Current tax
liabilities 570 570 -
Deferred tax
liabilities 332 332 -
Other liabilities 49,953 50,545 592
Subordinated debt 3,776 3,947 171
Capital trust
securities 1,187 1,354 167
Equity 21,683 21,683 -
-------------------------------------------------
437,710 438,933 1,223
-------------------------------------------------
Total fair value
adjustment (957)
-------------------------------------------------
-------------------------------------------------
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 a decrease in non-interest revenue, trading revenues of
$5 million and an increase of $28 million, respectively, for the
three and six months ended April 30, 2012 (decrease of $1 million
and an increase of $45 million, respectively, for the three and six
months ended April 30, 2011). This includes a decrease of $37
million and $31 million, respectively, for the three and six months
ended April 30, 2012 attributable to changes in our credit spread
(a decrease of $11 million and $7 million, respectively, for the
three and six months ended April 30, 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 April 30, 2012 was an unrealized loss of
$10 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 April 30, 2012 were $4,279 million and
$4,298 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 April 30, 2012 of $5,197 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 a decrease of
$38 million and an increase of $133 million in non-interest
revenue, insurance income, respectively, for the three and six
months ended April 30, 2012 (increase of $40 million and a decrease
of $19 million in non-interest revenue, respectively, for the three
and six months ended April 30, 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 April 30, 2012 of $256
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 an increase of $1
million and a decrease of $11 million in non-interest revenue,
insurance income, respectively, for the three and six months ended
April 30, 2012 ($nil and an increase of $8 million, respectively,
for the three and six months ended April 30, 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 vehicles (our "structured credit
vehicles") 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 April 30, 2012 of $4,392 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 an
increase in non-interest revenue, trading revenues of $69 million
and $64 million, respectively, for the three and six months ended
April 30, 2012 (increase of $188 million and $111 million,
respectively, for the three and six months ended April 30, 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 vehicles 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 April 30, 2012 of $825
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 $63
million and $108 million, respectively, in non-interest revenue,
trading revenues for the three and six months ended April 30, 2012
(decrease of $127 million and $150 million, respectively, for the
three and six months ended April 30, 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 April 30, 2012 of $562 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 $0.3 million and a
decrease of $26 million, respectively, for the three and six months
ended April 30, 2012 (decrease of $17 million and $23 million,
respectively, for the three and six months ended April 30,
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:
(Canadian $ in millions) April 30, 2012
----------------------------------------------------------------------------
Valued using
Valued using Valued using models
quoted models (with (without
market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal government 13,608 938 -
Canadian provincial and municipal
governments 3,407 1,732 -
U.S. federal government 6,329 - -
U.S. states, municipalities and
agencies 230 364 -
Other governments 749 - -
Mortgage-backed securities and
collateralized mortgage obligations 434 742 431
Corporate debt 8,737 4,568 1,306
Corporate equity 23,622 4,235 -
----------------------------------------------------------------------------
57,116 12,579 1,737
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 20,280 - -
Canadian provincial and municipal
governments 2,101 298 -
U.S. federal government 6,792 - -
U.S. states, municipalities and
agencies 527 3,036 21
Other governments 6,628 806 -
Mortgage-backed securities and
collateralized mortgage obligations 3,791 2,333 -
Corporate debt 4,167 2,723 44
Corporate equity 208 142 1,009
----------------------------------------------------------------------------
44,494 9,338 1,074
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 82 - 480
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet
purchased 23,834 - -
Structured notes and other note
liabilities - 5,104 -
----------------------------------------------------------------------------
23,834 5,104 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 11 35,458 6
Foreign exchange contracts 32 8,113 -
Commodity contracts 2,044 268 -
Equity contracts 49 382 8
Credit default swaps - 334 55
----------------------------------------------------------------------------
2,136 44,555 69
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 11 34,380 33
Foreign exchange contracts 10 7,387 -
Commodity contracts 1,937 361 -
Equity contracts 82 1,893 54
Credit default swaps - 322 2
----------------------------------------------------------------------------
2,040 44,343 89
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions) October 31, 2011
----------------------------------------------------------------------------
Valued Valued using
using Valued using models
quoted models (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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions) November 1, 2010
----------------------------------------------------------------------------
Valued Valued using
Valued using using models
quoted models (with (without
market observable observable
prices inputs) inputs)
----------------------------------------------------------------------------
Trading Securities
Issued or guaranteed by:
Canadian federal government 12,372 64 -
Canadian provincial and municipal
governments 3,909 6 -
U.S. federal government 8,061 - -
U.S. states, municipalities and
agencies 848 206 -
Other governments 1,365 - -
Mortgage-backed securities and
collateralized mortgage obligations 859 2,396 780
Corporate debt 7,433 4,930 1,605
Corporate equity 27,239 631 -
----------------------------------------------------------------------------
62,086 8,233 2,385
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-Sale Securities
Issued or guaranteed by:
Canadian federal government 18,248 - -
Canadian provincial and municipal
governments 1,442 253 -
U.S. federal government 5,658 - -
U.S. states, municipalities and
agencies - 4,237 20
Other governments 9,454 587 -
Mortgage-backed securities and
collateralized mortgage obligations 683 1,101 -
Corporate debt 2,959 134 347
Corporate equity 137 229 435
----------------------------------------------------------------------------
38,581 6,541 802
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 128 - 537
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fair Value Liabilities
Securities sold but not yet
purchased 14,245 - -
Structured notes and other note
liabilities - 4,747 -
----------------------------------------------------------------------------
14,245 4,747 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate contracts 24 33,189 217
Foreign exchange contracts 45 10,089 -
Commodity contracts 2,207 382 -
Equity contracts 1,028 617 8
Credit default swaps - 1,120 160
----------------------------------------------------------------------------
3,304 45,397 385
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Liabilities
Interest rate contracts 38 32,255 48
Foreign exchange contracts 20 9,517 -
Commodity contracts 2,087 501 -
Equity contracts 53 2,109 71
Credit default swaps - 930 3
----------------------------------------------------------------------------
2,198 45,312 122
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 April 30, 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 $431 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 $1,185
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 $676 million that relates to U.S. Federal Reserve Banks and U.S.
Federal Home Loan Banks that we hold to meet regulatory
requirements in the United States and $333 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 April
30, 2012 was $61 million and $35 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 $(3) million and $3 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 six months
ended April 30, 2012.
During the three and six months ended April 30, 2012, $24
million of available-for-sale 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. In addition, $90 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 quarter.
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 six
months ended April 30, 2012, including realized and unrealized
gains (losses) included in earnings and other comprehensive
income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
--------------------------
Included in
For the three Balance, Included other
months ended January in comprehensive
April 30, 2012 31, 2012 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 427 (9) - - (77)
Corporate debt 1,323 (3) - 6 (38)
----------------------------------------------------------------------------
Total trading
securities 1,750 (12) - 6 (115)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies 21 - - - -
Corporate debt 72 - (1) 1 (2)
Corporate equity 983 (3) (12) 82 (41)
----------------------------------------------------------------------------
Total available-
for-sale
securities 1,076 (3) (13) 83 (43)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 492 12 - 1 (25)
----------------------------------------------------------------------------
Total other
securities 492 12 - 1 (25)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 7 (1) - - -
Equity contracts 7 1 - - -
Credit default
swaps 72 (17) - - -
----------------------------------------------------------------------------
Total derivative
assets 86 (17) - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 43 (10) - - -
Equity contracts 69 13 - - -
Credit default
swaps 2 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 114 3 - - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
-----------------------------------------------------------------
Transfers Fair Value Unrealized
For the three in/(out) as at Gains
months ended Maturities of April 30, (losses)
April 30, 2012 (1) Level 3 2012 (2)
-----------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations - 90 431 (9)
Corporate debt - 18 1,306 (2)
-----------------------------------------------------------------
Total trading
securities - 108 1,737 (11)
-----------------------------------------------------------------
-----------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies - - 21 1
Corporate debt (2) (24) 44 1
Corporate equity - - 1,009 (12)
-----------------------------------------------------------------
Total available-
for-sale
securities (2) (24) 1,074 (10)
-----------------------------------------------------------------
-----------------------------------------------------------------
Other Securities - - 480 12
-----------------------------------------------------------------
Total other
securities - - 480 12
-----------------------------------------------------------------
-----------------------------------------------------------------
Derivative Assets
Interest rate
contracts - - 6 (1)
Equity contracts - - 8 1
Credit default
swaps - - 55 (16)
-----------------------------------------------------------------
Total derivative
assets - - 69 (16)
-----------------------------------------------------------------
-----------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts - - 33 9
Equity contracts (28) - 54 (13)
Credit default
swaps - - 2 -
-----------------------------------------------------------------
Total derivative
liabilities (28) - 89 (4)
-----------------------------------------------------------------
-----------------------------------------------------------------
(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 April 30, 2012 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on April 30, 2012
are included in Accumulated Other Comprehensive Income.
(Canadian $ in millions)
----------------------------------------------------------------------------
Change in Fair Value
--------------------------
Balance, Included in
For the six October Included other
months ended 31, in comprehensive
April 30, 2012 2011 earnings income Purchases Sales
----------------------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations 494 (18) - - (135)
Corporate debt 1,485 8 - 6 (211)
----------------------------------------------------------------------------
Total trading
securities 1,979 (10) - 6 (346)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies 25 - (3) - -
Corporate debt 62 - 1 25 (4)
Corporate equity 1,011 (7) (7) 104 (86)
----------------------------------------------------------------------------
Total available-
for-sale
securities 1,098 (7) (9) 129 (90)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Securities 493 (5) - 18 (26)
----------------------------------------------------------------------------
Total other
securities 493 (5) - 18 (26)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative Assets
Interest rate
contracts 167 (3) - - -
Equity contracts 6 1 - 1 -
Credit default
swaps 67 (17) - 5 -
----------------------------------------------------------------------------
Total derivative
assets 240 (19) - 6 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts 38 (10) - 5 -
Equity contracts 65 21 - 1 -
Credit default
swaps 2 - - - -
----------------------------------------------------------------------------
Total derivative
liabilities 105 11 - 6 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
-----------------------------------------------------------------
-
Fair Value Unrealized
For the six Transfers as at April Gains
months ended Maturities in/(out) 30, (losses)
April 30, 2012 (1) of Level 3 2012 (2)
-----------------------------------------------------------------
Trading
Securities
Mortgage-backed
securities and
collateralized
mortgage
obligations - 90 431 (18)
Corporate debt - 18 1,306 9
-----------------------------------------------------------------
Total trading
securities - 108 1,737 (9)
-----------------------------------------------------------------
-----------------------------------------------------------------
Available-for-
Sale Securities
Issued or
guaranteed by:
U.S. states,
municipalities
and agencies (1) - 21 (2)
Corporate debt (16) (24) 44 3
Corporate equity (6) - 1,009 (7)
-----------------------------------------------------------------
Total available-
for-sale
securities (23) (24) 1,074 (6)
-----------------------------------------------------------------
-----------------------------------------------------------------
Other Securities - - 480 -
-----------------------------------------------------------------
Total other
securities - - 480 -
-----------------------------------------------------------------
-----------------------------------------------------------------
Derivative Assets
Interest rate
contracts (158) - 6 (3)
Equity contracts - - 8 1
Credit default
swaps - - 55 (16)
-----------------------------------------------------------------
Total derivative
assets (158) - 69 (18)
-----------------------------------------------------------------
-----------------------------------------------------------------
Derivative
Liabilities
Interest rate
contracts - - 33 10
Equity contracts (33) - 54 (13)
Credit default
swaps - - 2 -
-----------------------------------------------------------------
Total derivative
liabilities (33) - 89 (3)
-----------------------------------------------------------------
-----------------------------------------------------------------
(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 April 30, 2012 are included in
earnings in the period. For available-for-sale securities, the
unrealized gains or losses on securities still held on April 30, 2012
are included in Accumulated Other Comprehensive Income.
Other Items Measured at Fair Value
Certain assets such as foreclosed assets are measured at fair
value at initial recognition but are not required to be measured at
fair value on an ongoing basis.
As at April 30, 2012, we held $437 million of foreclosed assets
measured at fair value at inception, all of which were classified
as Level 2. For the six months ended April 30, 2012, we recorded
write-downs of $90 million on these assets.
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 (described below under cumulative
translation differences), 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 information reflects our first-time adoption
transition elections under IFRS 1, the standard for first-time
adoption and the significant accounting changes resulting from our
adoption of IFRS. The general principle under IFRS 1 is retroactive
application, such that our opening balance sheet as at November 1,
2010 was restated as though we had always applied IFRS with the net
impact shown as an adjustment to opening retained earnings.
However, IFRS 1 contains mandatory exceptions and permits certain
optional exemptions from full retroactive application. In preparing
our opening balance sheet in accordance with IFRS 1, we have
applied certain of the optional exemptions and the mandatory
exceptions from full retroactive application of IFRS as described
below.
Exemptions from Full Retroactive Application Elected by the
Bank
We have elected to apply the following optional exemptions from
full retroactive application:
-- Pension and other employee future benefits - We have elected to
recognize all cumulative actuarial gains and losses, as at November 1,
2010, in opening retained earnings for all of our employee benefit
plans.
-- Business combinations - We have elected not to apply IFRS 3, the current
standard for accounting for business combinations, retroactively in
accounting for business combinations that took place prior to November
1, 2010.
-- Share-based payment transactions - We have elected not to go back and
apply IFRS 2, the standard for accounting for share-based payments, in
accounting for equity instruments granted on or before November 7, 2002,
and equity instruments granted after November 7, 2002, that have vested
by the transition date. We have also elected not to go back and apply
IFRS 2 in accounting for liabilities arising from cash-settled share-
based payment transactions that were settled prior to the transition
date.
-- Cumulative translation differences - We have elected to reset the
accumulated other comprehensive loss on translation of foreign
operations to $nil at the transition date, with the adjustment recorded
in opening retained earnings.
-- Designation of previously recognized financial instruments - We have
elected to designate $3,477 million of Canada Mortgage Bonds as
available-for-sale securities on the transition date. Available-for-sale
securities are measured at fair value with unrealized gains and losses
recorded in accumulated other comprehensive income (loss). These bonds
were previously designated as held for trading and were measured at fair
value with changes in fair value recorded in trading revenues. These
bonds provided an economic hedge associated with the sale of the
mortgages through a third party securitization program under Canadian
GAAP. Under IFRS, this economic hedge is no longer required as these
mortgages will remain on our balance sheet.
-- Insurance Contracts - IFRS 1 provides the option to apply the
transitional provisions in IFRS 4, Insurance Contracts, which allow us
to follow our existing accounting policies related to our insurance-
related activities.
Mandatory Exemptions to Retroactive Application
We have applied the following mandatory exceptions to full
retroactive application:
-- Hedge accounting - Only hedging relationships that satisfied the hedge
accounting criteria of IFRS as of the transition date are recorded as
hedges in our results under IFRS.
-- Estimates - Hindsight was not used to create or revise estimates, and
accordingly, the estimates previously made by us under Canadian GAAP are
consistent with their application under IFRS.
-- Derecognition of financial assets and financial liabilities - We applied
retroactively to transfers that occurred on or after January 1, 2004.
Reconciliation of Consolidated Balance Sheet as Reported Under
Canadian GAAP to IFRS
The following is a reconciliation of our Consolidated Balance
Sheet recorded in accordance with Canadian GAAP to our Consolidated
Balance Sheet recorded in accordance with IFRS as at the transition
date of November 1, 2010:
Pension and
other future
Canadian Asset Employee
(Canadian $ in GAAP Consolidation Securitization benefits
millions) balances (a) (b) (c)
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents 17,368 27 65 -
Interest bearing
deposits with
banks 3,186 1,971 - -
Securities 123,399 4,670 (8,387) -
Securities
borrowed/
purchased under
resale
agreements 28,102 - - -
Loans 178,521 (1,975) 30,595 -
Allowance for
credit losses (1,878) 56 (138) -
Other assets 62,942 (561) (38) (1,048)
----------------------------------------------------------------------------
Total assets 411,640 4,188 22,097 (1,048)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Deposits 249,251 2,079 (986) -
Other
liabilities 135,933 1,801 23,286 171
Subordinated
debt 3,776 - - -
Capital trust
securities 800 445 - -
Shareholder's
Equity
Share capital 9,498 - - -
Contributed
surplus 92 - - -
Retained
earnings 12,848 (137) 22 (1,219)
Accumulated
other
comprehensive
income (loss) (558) - (225) -
----------------------------------------------------------------------------
Total
shareholders'
equity 21,880 (137) (203) (1,219)
Non-controlling
interest in
subsidiaries - - - -
----------------------------------------------------------------------------
Total equity 21,880 (137) (203) (1,219)
----------------------------------------------------------------------------
Total
liabilities and
equity 411,640 4,188 22,097 (1,048)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Non- Translation of
Controlling Net Foreign
(Canadian $ in interest operations Reinsurance Other
millions) (d) (e) (f) (g)- (s)
----------------------------------------------------------------------------
Assets
Cash and cash
equivalents - - - -
Interest bearing
deposits with
banks - - - -
Securities - - - (170)
Securities
borrowed/
purchased under
resale
agreements - - - -
Loans - - - 90
Allowance for
credit losses - - - (4)
Other assets - - 873 44
----------------------------------------------------------------------------
Total assets - - 873 (40)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Deposits - - - -
Other
liabilities (1,338) - 873 (6)
Subordinated
debt - - - -
Capital trust
securities - - - (58)
Shareholder's
Equity
Share capital - - - -
Contributed
surplus - - - (1)
Retained
earnings - (1,135) - (198)
Accumulated
other
comprehensive
income (loss) - 1,135 - 60
----------------------------------------------------------------------------
Total
shareholders'
equity - - - (139)
Non-controlling
interest in
subsidiaries 1,338 - - 163
----------------------------------------------------------------------------
Total equity 1,338 - - 24
----------------------------------------------------------------------------
Total
liabilities and
equity - - 873 (40)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in Total IFRS
millions) Adjustments IFRS balances
----------------------------------------------
Assets
Cash and cash
equivalents 92 17,460
Interest bearing
deposits with
banks 1,971 5,157
Securities (3,887) 119,512
Securities
borrowed/
purchased under
resale
agreements - 28,102
Loans 28,710 207,231
Allowance for
credit losses (86) (1,964)
Other assets (730) 62,212
----------------------------------------------
Total assets 26,070 437,710
----------------------------------------------
----------------------------------------------
Liabilities
Deposits 1,093 250,344
Other
liabilities 24,787 160,720
Subordinated
debt - 3,776
Capital trust
securities 387 1,187
Shareholder's
Equity
Share capital - 9,498
Contributed
surplus (1) 91
Retained
earnings (2,667) 10,181
Accumulated
other
comprehensive
income (loss) 970 412
----------------------------------------------
Total
shareholders'
equity (1,698) 20,182
Non-controlling
interest in
subsidiaries 1,501 1,501
----------------------------------------------
Total equity (197) 21,683
----------------------------------------------
Total
liabilities and
equity 26,070 437,710
----------------------------------------------
----------------------------------------------
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:
(Canadian $ in November January April July October
millions) 1, 2010 31, 2011 30, 2011 31, 2011 31, 2011
----------------------------------------------------------------------------
As reported under
Canadian GAAP 21,880 21,993 22,355 27,009 28,123
Reclassification of
non-controlling
interest in
subsidiaries to
equity under IFRS 1,338 1,320 1,320 1,319 1,348
Share Capital - - - 142 142
Contributed Surplus (1) (2) (1) (1) -
Retained Earnings
Consolidation (a) (137) (133) (49) (102) (214)
Asset
securitization (b) 22 16 (74) (64) (88)
Pension and other
employee future
benefits (c) (1,219) (1,201) (1,181) (1,178) (1,158)
Translation of net
foreign operations
(e) (1,135) (1,135) (1,135) (1,135) (1,135)
Business
combinations (o) - - - (58) (62)
Other (198) (183) (204) (209) (237)
Accumulated Other
Comprehensive Income
(Loss)
Consolidation (a) - 2 (1) - 2
Asset
securitization (b) (225) (137) (126) (147) (205)
Translation of net
foreign operations
(e) 1,135 1,135 1,135 1,135 1,135
Other 60 31 16 18 50
Non-controlling
interest in
subsidiaries (d) 163 145 160 145 135
----------------------------------------------------------------------------
As reported under
IFRS 21,683 21,851 22,215 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:
----------------------------------------------------------------------------
Six
months Year
ended ended
(Canadian $ in January April April July October October
millions) 31, 2011 30, 2011 30, 2011 31, 2011 31, 2011 31, 2011
----------------------------------------------------------------------------
Net income as
reported under
Canadian GAAP 776 800 1,576 793 897 3,266
Add back: non-
controlling
interest 18 18 36 18 19 73
Differences
increasing
(decreasing)
reported net
income:
Consolidation
(a) (1) 4 84 88 (53) (112) (77)
Asset
securitization
(b) (1) (6) (90) (96) 10 (24) (110)
Pension and
other employee
future
benefits (c) 18 20 38 3 20 61
Business
combinations
(o) - - - (58) (4) (62)
Other 15 (19) (4) (5) (28) (37)
----------------------------------------------------------------------------
Net Income
reported under
IFRS 825 813 1,638 708 768 3,114
----------------------------------------------------------------------------
Attributable to:
Bank
shareholders 807 795 1,602 690 749 3,041
Non-controlling
interest in
subsidiaries 18 18 36 18 19 73
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes decrease (increase) in collective allowance of $(4) million,
$(53) million, $11 million, $12 million and $(34) million for the three
months ended January 31, 2011, April 30, 2011, July 31, 2011, October
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:
----------------------------------------------------------------------------
Six
months Year
ended ended
(Canadian $ in January April April July October October
millions) 31, 2011 30, 2011 30, 2011 31, 2011 31, 2011 31, 2011
----------------------------------------------------------------------------
Comprehensive income
as reported under
Canadian GAAP 461 419 880 1,109 1,519 3,508
Add back: non-
controlling interest 18 18 36 18 19 73
Differences increasing
(decreasing) reported
comprehensive income
Consolidation (a) 6 81 87 (52) (110) (75)
Asset securitization
(b) 82 (79) 3 (11) (82) (90)
Pension and other
employee future
benefits (c) 18 20 38 3 20 61
Business
combinations (o) - - - (58) (4) (62)
Other (14) (34) (48) (3) 4 (47)
----------------------------------------------------------------------------
Comprehensive income
as reported under
IFRS 571 425 996 1,006 1,366 3,368
----------------------------------------------------------------------------
Attributable to:
Bank shareholders 553 407 960 988 1,347 3,295
Non-controlling
interest in
subsidiaries 18 18 36 18 19 73
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes to the Consolidated Statement of Cash Flows
Under Canadian GAAP, we classified the net changes in loans and
securities borrowed or purchased under resale agreements as Cash
Flows from Investing Activities and the net changes in deposits and
securities lent or sold under repurchase agreements as Cash Flows
from Financing Activities on the Consolidated Statement of Cash
Flows. Under IFRS, we classify the net changes in loans, deposits,
securities lent or sold under repurchase agreements and securities
borrowed or purchased under resale agreements as Cash Flows from
Operating Activities in accordance with IAS 7 Cash Flow Statements,
which requires this classification for the main revenue-producing
activities of the bank.
Under Canadian GAAP, we classified the net changes in securities
sold but not yet purchased as Cash Flows from Financing Activities.
Under IFRS, we classify the net changes in securities sold but not
yet purchased as Cash Flows from Operating Activities, in
accordance with IAS 7 Cash Flow Statements, which requires this
classification for instruments used for trading purposes.
Under Canadian GAAP, we classified the proceeds from
securitization of loans as Cash Flows from Investing Activities.
Under IFRS, as the loans sold through securitization programs do
not qualify for derecognition, they are classified as Cash Flows
from Operating Activities.
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) Reinsurance
Under Canadian GAAP, reinsurance recoverables related to our
life insurance business were offset against the related insurance
liabilities. Under IFRS, reinsurance recoverables and insurance
liabilities are presented on a gross basis on our Consolidated
Balance Sheet.
(g) Loan impairment
Under IFRS, we will continue to write off loans on a basis
consistent with the accounting under Canadian GAAP except that for
the purpose of measuring the amount to be written off, the
determination of the recoverable amount includes an estimate of
future recoveries. This difference did not have a material impact
on our opening retained earnings.
Under Canadian GAAP, we did not accrue interest income on loans
classified as impaired. Under IFRS, once a loan is identified as
impaired, the accretion of the net present value of the written
down amount of the loan due to the passage of time is recognized as
interest income using the original effective interest rate of the
loan.
(h) Sale-leaseback transactions
Under Canadian GAAP, gains or losses from sale-leaseback
transactions are deferred and amortized over the lease term,
regardless of the type of lease that is entered into. Under IFRS,
if the new lease is an operating lease and the sale took place at
fair value, the resulting gains or losses from the sale-leaseback
transaction are recognized immediately in income. This difference
did not have a material impact on opening retained earnings on
transition.
(i) Stock-based compensation
Under Canadian GAAP, for grants of stock options with graded
vesting, such as an award that vests 25% per year over four years,
an entity can elect to treat the grant as one single award or to
treat each tranche (i.e. the 25% portion that vests each year) as a
separate award with a different vesting period. The bank elected to
treat these stock option grants as one single award under Canadian
GAAP, and the fair value of the award was recognized in expense on
a straight-line basis over the vesting period. Under IFRS, each
tranche must be treated as a separate award and the fair value of
each tranche must be recognized in expense over its respective
vesting period. This difference did not have a material impact on
our opening retained earnings.
(j) Loan origination costs
Under Canadian GAAP, loan origination costs are deferred and
amortized over the term of the resulting loan. Under IFRS, only
loan origination costs that are directly attributable and
incremental to the origination of a loan can be deferred and
amortized over the term of the resulting loan. This difference
resulted in a $41 million decrease in opening retained earnings on
transition.
(k) Transaction costs
Under Canadian GAAP, it was the bank's practice to expense
transaction costs on deposit liabilities. Under IFRS, direct and
incremental transaction costs on deposit liabilities are deferred
and recorded as a reduction of their initial value of the deposit
and amortized over the term of the deposit liability. This
difference did not have a material impact on our opening retained
earnings.
(l) Available-for-sale securities
Under Canadian GAAP, available-for-sale securities are recorded
at amortized cost if their sale is restricted. Under IFRS,
available-for-sale securities are recorded at fair value even if
their sale is restricted. This difference did not have a material
impact on our opening retained earnings.
(m) Premises and equipment
Canadian GAAP does not require that significant components of
premises and equipment be amortized separately. Under IFRS,
significant components of premises and equipment are amortized
separately. This difference resulted in a $38 million decrease in
opening retained earnings on transition.
(n) Customer loyalty programs
Under Canadian GAAP, we recorded revenues and expenses related
to our reward programs on a net basis. Under IFRS, we are required
to record revenues and expenses related to certain of our reward
programs on a gross basis. This difference did not have a material
impact on our opening retained earnings.
(o) 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.
(p) Merchant banking investments
Under Canadian GAAP, our merchant banking investments are
accounted for at fair value, with changes in fair value recorded in
income as they occur. Under IFRS, we elected as of the transition
date to designate certain of these investments at fair value
through profit or loss. Subsequent changes in fair value are
recorded in income as they occur. Merchant banking investments that
we have not designated at fair value through profit or loss are
accounted for as either available-for-sale securities, investments
accounted for using the equity method of accounting, or loans,
depending on the characteristics of each investment. This
difference resulted in a $33 million decrease in opening retained
earnings on transition.
(q) Compound financial instruments
Under Canadian GAAP, Capital Trust Securities Series B and C
issued through BMO Capital Trust were classified as liabilities.
Under IFRS, these Capital Trust Securities are classified as
compound instruments comprising both a liability and equity
component. The equity component is due to certain payment features
in these instruments that do not create an unavoidable obligation
to pay cash. This difference did not have a material impact on our
opening retained earnings.
(r) Translation of preferred shares issued by a foreign
operation
Under Canadian GAAP, preferred shares held by non-controlling
interests in a self-sustaining foreign operation are translated at
the current rate of exchange. IFRS requires that equity instruments
of foreign operations be translated at the historical rate. This
difference did not have a material impact on opening retained
earnings on transition.
(s) Income taxes
Under Canadian GAAP, the tax charge or credit on items recorded
in other comprehensive income or equity is also recorded in other
comprehensive income or equity, respectively, if recognized in the
same period. Subsequent changes in tax rates and laws and the
assessment of the recoverability of deferred tax for items
previously recorded in other comprehensive income or in equity are
recorded in profit or loss. Under IFRS, income tax relating to
items recorded in other comprehensive income or equity is recorded
in other comprehensive income or equity, respectively, whether the
income tax is recorded in the same or different period.
Additional Annual Disclosures under IFRS
As this is the bank's first year of reporting in accordance with
IFRS, the following IFRS annual disclosures have been included in
these financial statements for the comparative annual period. They
were provided in our 2011 annual financial statements but prepared
on a Canadian GAAP basis. Certain information and footnote
disclosures were omitted or condensed where such information is not
considered material to the understanding of our interim financial
information.
Employee Compensation - Pension and Other Employee Future
Benefits
We have a number of arrangements in Canada, the United States
and the United Kingdom that provide pension and other employee
future benefits to our retired and current employees.
Pension arrangements include defined benefit statutory pension
plans, as well as supplemental arrangements that provide pension
benefits in excess of statutory limits. Generally, under these
plans we provide retirement benefits based on an employee's years
of service and average annual earnings over a period of time prior
to retirement. We are responsible for ensuring that the statutory
pension plans have sufficient assets to pay the pension benefits
upon retirement of employees. Some groups of employees are eligible
to make voluntary contributions in order to receive enhanced
benefits. Our pension and other employee future benefit expenses,
recorded in employee compensation expense, mainly comprises the
current service cost plus the unwinding of the discount rate on
plan liabilities less the expected return on plan assets.
We also provide defined contribution pension plans to employees
in some of our subsidiaries. Under these plans, we are responsible
for contributing a predetermined amount to a participant's
retirement savings, based on a percentage of that employee's
salary. The costs of these plans, recorded in employee compensation
expense, are equal to the bank's contributions to the plans.
We also provide other employee future benefits, including health
and dental care benefits and life insurance, for current and
retired employees.
Short-term employee benefits, such as salaries, paid absences,
bonuses and other benefits are accounted for on an accrual basis
over the period in which the employees provide the related
services.
Changes in the estimated financial positions of our pension
benefit plans and other employee future benefit plans in fiscal
2011 were as follows:
Other employee
Pension future benefit
(Canadian $ in millions, except as noted) benefit plans plans
----------------------------------------------------------------------------
2011 2011
----------------------------------------------------------------------------
Benefit Liability
Benefit liability at beginning of year 4,839 975
Opening adjustment for acquisitions 17 -
Benefits earned by employees 163 21
Interest cost on benefit liability 253 53
Benefits paid to pensioners and employees (243) (30)
Voluntary employee contributions 9 -
(Gain) loss on the benefit liability
arising from changes in assumptions 73 (66)
Plan settlement 1 -
Plan amendments 25 -
Other, primarily foreign exchange (13) (1)
----------------------------------------------------------------------------
Benefit liability at end of year 5,124 952
----------------------------------------------------------------------------
Wholly or partially funded benefit
liability 5,066 102
Unfunded benefit liability 58 850
----------------------------------------------------------------------------
Total benefit liability 5,124 952
----------------------------------------------------------------------------
Weighted-average assumptions used to
determine the benefit liability
Discount rate at end of year 5.1% 5.6%
Rate of compensation increase 3.3% 3.2%
Assumed overall health care cost trend rate na 5.5%(1)
----------------------------------------------------------------------------
Fair value of plan assets
Fair value of plan assets at beginning of
year 5,185 67
Actual return on plan assets 236 6
Employer contributions 171 30
Voluntary employee contributions 9 -
Benefits paid to pensioners and employees (239) (30)
Settlement payments (3) -
Other, primarily foreign exchange (21) (1)
----------------------------------------------------------------------------
Fair value of plan assets at end of year 5,338 72
----------------------------------------------------------------------------
Plan funded status 214 (880)
Unrecognized actuarial (gain) loss 160 (68)
Unrecognized benefit of plan amendments - (7)
----------------------------------------------------------------------------
Net benefit asset (liability) at end of
year 374 (955)
----------------------------------------------------------------------------
Recorded in:
Other assets 411 -
Other liabilities (37) (955)
----------------------------------------------------------------------------
Net benefit asset (liability) at end of
year 374 (955)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Trending to 4.5% in 2030 and remaining at that level thereafter.
Income Taxes
The components of deferred income tax asset and liability
balances in fiscal 2011 were as follows:
(Canadian $ in millions)
----------------------------------------------------------------------------
Employee Deferred Other
Deferred Income Allowance for future compensation comprehensive
Tax Assets (1) credit losses benefits benefits income
----------------------------------------------------------------------------
November 1, 2010 546 247 213 (1)
----------------------------------------------------------------------------
Acquisitions 1,136 (3) 67 -
Benefit (expense) to
income statement 74 9 9 (3)
Benefit (expense) to
equity - - - (40)
Translation and
other 53 (1) 2 1
----------------------------------------------------------------------------
October 31, 2011 1,809 252 291 (43)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Canadian $ in millions)
--------------------------------------------------------------
Tax loss
Deferred Income carry
Tax Assets (1) forwards Other Total
--------------------------------------------------------------
November 1, 2010 116 241 1,362
--------------------------------------------------------------
Acquisitions 781 144 2,125
Benefit (expense) to
income statement 194 92 375
Benefit (expense) to
equity - - (40)
Translation and
other 31 8 94
--------------------------------------------------------------
October 31, 2011 1,122 485 3,916
--------------------------------------------------------------
--------------------------------------------------------------
Goodwill and
Deferred Income Premises and Pension Intangible
Tax Liabilities (2) equipment benefits assets
----------------------------------------------------------------------------
November 1, 2010 (184) (150) (95)
----------------------------------------------------------------------------
Acquisitions (48) (2) 47
Benefit (expense) to
income statement (30) 29 (223)
Benefit (expense) to
equity - - -
Translation and
other 3 2 4
----------------------------------------------------------------------------
October 31, 2011 (259) (121) (267)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deferred Income
Tax Liabilities (2) Securities Other Total
--------------------------------------------------------------
November 1, 2010 (193) 6 (616)
--------------------------------------------------------------
Acquisitions - 3 -
Benefit (expense) to
income statement (3) (29) (256)
Benefit (expense) to
equity - - -
Translation and
other (1) (11) (3)
--------------------------------------------------------------
October 31, 2011 (197) (31) (875)
--------------------------------------------------------------
--------------------------------------------------------------
(1) Deferred tax assets of $1,078 million and $3,355 million at November 1,
2010 and October 31, 2011 are presented on the balance sheet net by
legal jurisdiction.
(2) Deferred tax liabilities of $332 million and $314 million at November
1, 2010 and October 31, 2011 are presented on the balance sheet net by
legal jurisdiction.
Set out below is a reconciliation of our statutory tax rates and
income tax that would be payable at these rates to the effective
income tax rates and provision for income taxes that we have
recorded in our Consolidated Statement of Income for fiscal
2011.
(Canadian $ in millions, except as noted) 2011
----------------------------------------------------------------------------
Combined Canadian federal and provincial income taxes at
the statutory tax rate 1,125 28.2%
Increase (decrease) resulting from:
Tax-exempt income (161) (4.0)
Foreign operations subject to different tax rates (80) (2.0)
Change in tax rate for deferred income taxes 2 0.1
Other (10) (0.3)
----------------------------------------------------------------------------
Provision for income taxes and effective tax rate 876 22.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Other Liabilities
The components of the other liabilities balance as at October
31, 2011 were as follows:
(Canadian $ in millions) 2011
----------------------------------------------------------------------------
Other
Securitization and SPE liabilities 33,576
Accounts payable, accrued expenses and other items 7,082
Accrued interest payable 1,073
Liabilities of subsidiaries, other than deposits 4,743
Insurance-related liabilities 5,380
Pension liability 37
Other employee future benefits liability 955
----------------------------------------------------------------------------
Total 52,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The increase in Other Liabilities under IFRS, as compared to
Canadian GAAP, is primarily related to consolidation of SPEs, asset
securitization transactions and reinsurance adjustments.
Contacts: Media Relations Contacts Ralph Marranca, Toronto
416-867-3996ralph.marranca@bmo.com Ronald Monet, Montreal
514-877-1873ronald.monet@bmo.com Investor Relations Contacts Sharon
Haward-Laird Head, Investor Relations
416-867-6656sharon.hawardlaird@bmo.com Michael Chase Director
416-867-5452michael.chase@bmo.com Andrew Chin Senior Manager
416-867-7019andrew.chin@bmo.com Chief Financial Officer Tom Flynn
Executive Vice-President and CFO 416-867-4689tom.flynn@bmo.com
Corporate Secretary Barbara Muir Senior Vice-President, Deputy
General Counsel, Corporate Affairs and Corporate Secretary
416-867-6423corp.secretary@bmo.com
Bank of Montreal (NYSE:BMO)
Historical Stock Chart
From Mar 2024 to Apr 2024
Bank of Montreal (NYSE:BMO)
Historical Stock Chart
From Apr 2023 to Apr 2024
