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Bank of Montreal 180th Annual Report 1997 45
Strategy
To maintain a well-diversified asset portfolio regardless of
the economic environment and to earn a return appropriate
to the risk profile of the portfolio.
Process Overview
Our management strategy incorporates a continued com-
mitment to diversify risks within our loan and investment
portfolios as an integral element in effectively managing
risk. We seek to employ the best available technologies and
methods to manage credit risk. Management has supple-
mented traditional controls on risk concentrations with
quantitative tools that help measure and price credit
risks,
mainly those in the corporate and institutional portfolio.
Strict adherence to a clearly defined process has
enabled
us to maintain a loan portfolio that is well-diversified by
size and risk category throughout individual, commercial,
corporate, institutional and geographic markets.
Asset Quality Management
Results: A Well-Diversified Portfolio
The largest components of our overall loan portfolio are as follows:
Commercial, Corporate and Institutional Loan Portfolio (34.3% of Total Assets in 1997 versus 34.4% in 1996)
In 1997, securities purchased under resale agreements (reverse repos) and loans to financial institutions represented
the
highest weighting in the overall commercial loan portfolio (38.4%). This compares to a 38.9% weighting in 1996. The
remainder of the portfolio was broadly diversified geographically, by industry, industry
sub-sector and client relationship. Manufacturing and service industries are by their
nature diversified among many industry sub-sectors. Our exposure to commercial real
estate declined to 5.8% of total net commercial loans compared to 6.2% in 1996. This
decline was primarily due to our success in reducing our portfolio of distressed assets
and loans.
Individual Portfolio (24.1% of Total Assets in 1997 versus 26.6% in 1996)
Mortgages continue to be the predominant lending product in the loans to individuals
portfolio. This credit portfolio results from the operation of an efficient, highly disciplined
lending process which, combined with the risk diversification aspects, results in loan loss
performance that is quite predictable and has tended to follow economic cycles.
Continued Strong Performance
In terms of our performance measures for asset quality, 1997 represented a continuation
of strong performance.
The provisioning ratio was 23 basis points, unchanged from 1996. The provision for
credit losses includes a specific provision of $75 million and a $200 million increase
to the general allowance charged to provision for credit losses. A further $100 million
was transferred from Harris’ allowance for credit losses to the general allowance,
bringing the total general allowance to $775 million, an increase of $300 million from
1996. Not all of the impairment on the loan portfolio can be specifically identified
on a loan-by-loan basis. Recognizing this, we maintain a general allowance which is
based upon statistical analysis of past performance, and management’s judgement.
We prudently decided to build our general allowance in 1997. This accords with our policy of increasing the general
allowance in years when specific loan losses are less than the annual expected loss amount; the general allowance
will decline as specific allowances are determined for loans. Our primary regulator, OSFI, has permitted the amount
of the general allowance to be classified as Tier 2 capital.
Measures:
We rely on two primary measures
to monitor success in managing
the loan portfolio and as a result,
asset quality:
•The Provisioning Ratio is the most
accurate indicator of underlying
asset quality over the long term
and represents the base level
of provisions necessary to cover
losses in the lending portfolios.
The provisioning ratio is cal-
culated as the annual provision
for credit losses (PCL) as a
percentage of average loans
and acceptances (collectively
referred to as loans).
•Gross impaired loans as a
percentage of equity plus the
allowance for credit losses
(allowance) measures the finan-
cial condition of our portfolio
by comparing the volume of
impaired loans to the level of
capital and reserves available
to absorb loan losses.