Bank of Montreal 1997 Annual Report Download - page 53

Bank of Montreal 180th Annual Report 1997 47
Impaired Loans More Than Covered by Allowance
The other primary performance measure of asset quality is the ratio of gross impaired loans to equity plus the allowance
for credit losses. Driven by the reduced incidence of new impaired loans and strong recoveries on past problem loans,
the ratio has improved for the fourth year in succession to 7.65% at year end, compared to 15.71% at October 31, 1996.
For the first year on
record we had a negative
net impaired loans position.
That is, the allowance for
credit losses exceeded the
gross amount of impaired
loans by $358 million. This
is attributable to the strong
asset quality performance
that has resulted in a signifi-
cant reduction of gross
impaired loans and also
the prudential build-up of
the general allowance,as
described above and set out
in the table “Asset Quality
Condition”. Of course,
the most significant factor
leading to lower impaired
loan totals is the favourable
economic environment
in our major markets.
However, we have also
further strengthened our
monitoring methods
for larger corporate loans to
detect quality deterioration
even earlier. This is intended
to permit a broader range
of options for us to expedi-
tiously address emerging
problems with our clients.
Moreover, the deepening
liquidity of the secondary
market for loan assets assists
us in managing our loans
on a portfolio basis; this
is most advanced in respect
to larger corporate credit.
These enhanced portfolio management and monitoring techniques have in themselves contributed to a reduced
incidence of impaired loans.
In 1996, net impaired loans declined 56.4% from 1995 levels to $364 million as a result of the build-up of the general
allowance and the surplus allowance in Harris. Additionally, we transferred $150 million of the excess country risk
allowance to the general allowance in 1996.
Asset Quality – Condition
($ millions except as noted)
As at or for the year ended October 31 1997 1996 1995 1994 1993
Gross impaired loans 787 1,397 1,730 2,447 4,249
Net impaired loans (358) 364 835 1,376 2,263
GIL as a % of equity & ACL 7.65 15.71 20.48 29.86 54.84
NIL as a % of total net loans and acceptances (0.30) 0.35 0.89 1.49 2.91
Migration Analysis – GIL
Additions 660 959 806 1,267 1,587
Reductions (a) (936) (948) (1,073) (1,922) (747)
Net additions (reductions) (276) 11 (267) (655) 840
Segmentation of NIL
Individuals 116 149 98 84 91
Diversified commercial
(c) 301 690 1,062 1,492 2,048
General provision (775) (475) (325) (200) (100)
Designated lesser developed countries 0000224
Total NIL (358) 364 835 1,376 2,263
NIL as a % of Net Loans and Acceptances
(b)
Individuals 0.23 0.33 0.24 0.23 0.28
Diversified commercial (c) 0.57 1.56 2.50 3.64 5.44
Designated lesser developed countries 0.00 0.00 0.00 0.00 71.34
Canada (0.47) 0.09 0.26 0.79 1.68
United States 0.02 0.95 2.47 3.05 4.99
Mexico 0.00 0.00 0.00 0.00 0.00
Other countries 0.00 0.00 0.00 0.00 17.60
(a) Loans and acceptances returning to performing status, sales and repayments.
(b) Segment NIL as a percentage of segment net loans and acceptances.
(c) Excludes securities purchased under resale agreements.
Note: For more information see Table 12 on page 60.
Asset Quality – Coverage ($ millions except as noted)
As at or for the year ended October 31 1997 1996 1995 1994 1993
Allowance for credit losses, beginning of year 1,143 1,255 1,496 1,999 2,070
Provision for credit losses 275 225 275 510 675
Recoveries 158 103 52 75 59
Write-offs (a) (357) (449) (565) (1,147) (888)
Other – including foreign exchange rates 20 9(3) 59 83
Total increase (decrease) 96 (112) (241) (503) (71)
Allowance for credit losses, end of year 1,239 1,143 1,255 1,496 1,999
ACL as a % of GIL
(b) 157.2 81.7 72.5 61.1 46.7
Individuals 14.7 13.9 19.0 22.0 24.8
Diversified commercial (c) 53.4 43.2 33.7 34.6 36.8
Designated lesser developed countries 100.0 100.0 100.0 100.0 74.8
Net write-offs as a % of average loans and acceptances 0.2 0.3 0.6 1.3 1.1
(a) Write-offs on designated lesser developed countries include losses on sales of performing assets that were charged directly against
the allowance (1997 – $3 million, 1996 – $109 million, 1995 – $115 million, 1994 – $0, 1993 – $65 million).
(b) Segment ACL as a percentage of segment GIL.
(c) Excludes securities purchased under resale agreements.
Note: For more information see Tables 10 and 11 on pages 58 and 60.