Bank of Montreal 1998 Annual Report Download - page 60

ECONOMIC OUTLOOK AND GLOBAL DEVELOPMENTS
52
BANK OF MONTREAL GROUP OF COMPANIES
Recent monetary easing by the Fed, along with reform
measures undertaken by the Japanese and Brazilian gov-
ernments, have bolstered investor confidence and steadied
global capital markets. We believe that calm markets should
persist through 1999 as the economies of East Asia and
Latin America begin the slow process of recovery. None-
the less, the risk of a renewed period of market turbulence
is not insignificant. A wild card is whether recent fiscal
stimulus will achieve a self-sustained recovery in Japan.
Our approach to these expectations is to continue with our
diversification strategy, which helps provide earnings stability.
GLOBAL ECONOMIES IN CRISIS
The Asian crisis that started in 1997 continued in fiscal
1998, resulting in severe problems in the Asian financial
sector. During the current year problems were also experi-
enced in the Russian economy and certain Eastern
European countries. The impact of globalization, and the
resulting interconnection between world economies and
markets, were clearly evident. Turmoil on the other side of
the globe can, and did affect North American markets. We
prepared ourselves for this global marketplace, and as a
result our direct exposure to the troubled economies is not
significant. Details of our direct credit exposures in the
affected regions are set out in the table below.
Our strategy for dealing with the challenge of fragile
emerging markets is to restrict our exposures to:
■short-term treasury activities with leading banks;
■
trade finance primarily in support of our North American
exporting clients; and
■selective project and corporate financings predicated on
hard-currency cash flow generating capacity.
No significant losses were experienced on these port-
folios in 1998.
Some of the problems experienced in Asia and Eastern
Europe were also felt in Latin America. However, these
developments did not result in any new impaired loans in
our portfolios. Although Mexico falls in this general geo-
graphic region, the Mexican economy is differentiated by,
among other things, its NAFTA standing, and has more
recently begun to show signs of recovery, albeit slow. We
continue to view the Mexican economy as fundamentally
sound. Our strategic investment in Mexico included equity
and debenture holdings of $671 million in Bancomer. Our
net loans and acceptances outstanding at October 31, 1998
for Mexican clients totalled $790 million and our other sig-
nificant exposures included guarantees and letters of credit
totaling $185 million and trade financing of $112 million.
Apart from Mexico, our largest exposure in the geographic
region is Brazil, which suffered a setback in its economic
plans but received international support to foster its ongo-
ing progress. Our net exposure in Brazil consisted primarily
of loans and acceptances of $202 million, trade financing of
$119 million, $89 million in guarantees and letters of credit
a nd equity holdings of $113 million (Brazilian Conversion
Fund). Our total net exposure to clients in other Latin
American countries was $525 million at October 31, 1998.
For additional comments on our credit risk management
process, refer to the Enterprise-wide Risk Management
section on page 44.
DIRECT EXPOSURE TO ASIAN, RUSSIAN AND EASTERN EUROPEAN ECONOMIES ($ millions)
Money Loans Off-Balance Gross
Treasury Market Trade and Sheet Total Net
As at October 31, 1998 Products1Placements Finance Acceptances Exposures Exposure Allowance Exposure
Asia
South Korea2– – 5 683 6 694 – 694
Indonesia – – 39 135 – 174 16 158
Malaysia –39––443–43
Thailand – – 514 120 812
Philippines –––7–7–7
Sub-total – 39 49 839 11 938 24 914
Other Asia327 494 43 113 100 777 – 777
Total, excluding Japan 27 533 92 952 111 1,715 24 1,691
Japan 155 1,209 4 33 33 1,434 – 1,434
Total Asia 182 1,742 96 985 144 3,149 24 3,125
Russia and Eastern Europe411 –34440832
Tot al 183 1,743 96 1,019 14853,189 3263,157
1. The treasury product exposures represent the sum of counterparties in the respective countries with net positive mark-to-market positions; i.e. the aggregate of all counter-
parties who would owe money (net) to ourselves and excluding all counterparties to whom we would owe money upon settlement.
2. We participated with other international banks in the International Monetary Fund/Group of Seven†sponsored initiatives in South Korea. As a result, the Republic of Korea has
guaranteed part of our current exposure to Korean banks, with $572 million (US$398 million) of debt exchanged under the plan.
3. Other Asia includes: Taiwan, China, Singapore, India, Pakistan and Hong Kong.
4. Eastern Europe includes: Czech Republic, Slovak Republic, Estonia, Latvia, Romania, Lithuania, Hungary, Poland, Slovenia and Croatia.
5. Off-balance sheet exposures includes primarily guarantees and letters of credit.
6. This allowance does not include any portion of the general allowance for credit losses of $885 million as at October 31, 1998.
†Defined in the Glossary on page 92