Bank of Montreal 1997 Annual Report Download - page 54

Download and view the complete annual report

Please find page 54 of the 1997 Bank of Montreal annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 104

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104

Bank of Montreal 180th Annual Report 199748
Strategy
To maintain a consistently strong capital position in support
of building long-term shareholder value. A consistently
strong capital position means we will:
•exceed minimum regulatory requirements at all times;
•cover the economic risks generated by our portfolio
of businesses;
•meet the expectations of the market and our regulators;
and
•return unneeded capital to the shareholders.
Capital Management
Results
Our Tier 1 ratio increased to 6.80% in 1997 from 6.71%
in 1996. The increase in the Tier 1 ratio was driven by an
18.7% increase in our Tier 1 capital and a 17.0% increase in
risk-weighted assets
†
. The Tier 1 capital increase was due to
retained earnings growth and the issuance of $400 million
of preferred shares in the second quarter. The growth in
risk-weighted assets was moderated to a level more support-
able
by internally generated
capital by a balance sheet
efficiency initiative we
launched during the year.
Transactions undertaken
within this initiative included
t
he securitization of $2 bil-
lion in credit card receivables and the purchase of portfolio
insurance on $8 billion of conventional residential mort-
gages in Canada.
In April, we announced a share repurchase program
which enables us to purchase up to 7.5 million Bank of
Montreal common shares issued and outstanding until
April 16, 1998. In order to preserve our strong capital posi-
tion given the sustained growth in the balance sheet, no
shares were bought back under the share repurchase program
during the year.
Principal Sources and Applications of Tier 1 Capital
($ millions)
For the year ended October 31
1997 1996 1995 1994 1993
Tier 1 Capital Generation
Net income 1,305 1,168 986 825 709
Amortization of goodwill 51 41 40 21 20
Net common share/minority
interest issuance 324 17 448 86
Preferred share issuance 400 – – – –
Other (FX, translation, etc.) 98 (41) (10) 31 67
Total Tier 1 generated 1,857 1,192 1,033 1,325 882
Tier 1 Capital Applications
Dividends declared – common (427) (386) (350) (305) (278)
– preferred (83) (69) (69) (69) (68)
Common share repurchases –(162) (103) – –
Purchased goodwill –(192) – (310) –
Support for gross RWA
growth
(a)
(1,686) (713) (664) (736) (78)
Balance sheet efficiency
initiatives
(a) (b)
420 – – – –
Total Tier 1 applications (1,776) (1,522) (1,186) (1,420) (424)
Net Tier 1 capital generated 81 (330) (153) (95) 458
Tier 1 ratio
(%)
6.80 6.71 7.02 7.20 7.35
Target Tier 1 ratio
(%)
7.00
(a) Required support at target Tier 1 ratio at 7%.
(b) Includes $2 billion credit card securitizations and purchase of portfolio insurance on
$8 billion of conventional residential mortgages.
Process Overview
We need to maintain sufficient capital to support the risks
of our businesses, allow for needed investments in the future
and protect depositors from the risk of loss. Capital is a
more permanent type of funding and is subordinated to the
claims of depositors and other general creditors. It includes
common and preferred equity and subordinated debt.
Determining the amount and mix of capital needed
requires balancing the needs of three key stakeholders:
depositors, rating agencies and shareholders. Striking this
balance involves the trade-off of financial condition (flexi-
bility) and financial performance (value creation) objectives.
Measure:
The Tier 1 ratio is our primary
measure of capital adequacy. This
measure is defined by the OSFI
as Tier 1 capital as a percentage
of risk-weighted assets.
†
Defined in the Glossary on page 90