Bank of Montreal 1999 Annual Report Download - page 39

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Credit Risk
Bank of Montreal Group of Companies 1999 Annual Report 33
Provision for Credit Losses Returns to More Normal Provisioning Levels
Provisioning Ratio
The provision for credit losses
†
for 1999 was $320 million, up from $130 million in 1998
.
The provision included a $235 million specific provision, up from $20 million in 1998,
and an $85 million increase to the general allowance compared to a $110 million
increase in 1998.
The provisioning ratio increased to 0.22% compared to 0.09% in 1998. The increase
reflects the fact that the ratio in 1998 was unusually low as a result of non-recurring
benefits related to collection activity on commercial real estate loans. The 1999
ratio is still considered low in relation to the average loss experience of a normal eco-
nomic cycle.
Gross Impaired Loans Ratio
Gross impaired loans grew to $1,092 million, an increase of $268 million over the previous
year, primarily due to ongoing weakness in the energy sector. While this represents a
deterioration of our loan portfolio, coverage of impaired loans remains adequate, as
the allowance for credit losses†exceeds gross impaired loans by $256 million.
Increased General Allowance
The total general allowance now amounts to $970 million, up from $885 million in
1998. The general allowance is maintained to cover any impairment in the loan port-
folio that cannot be identified on a specific loan basis. A number of factors are consid-
ered when determining the general allowance, including statistical analysis of past
performance, the level of allowance already in place and management’s judgement.
The general allowance would normally increase in a strong business/economic cycle
and would be drawn down during a weak business/economic cycle, when specific
allowances would normally increase in relation to our exposures.
1998 Compared to 1997
Our provision for credit losses in 1998 was $130 million, a reduction of $145 million
from 1997. This reflected a lower addition to the general allowance and a reduction
relating to the sale and securitization of credit card portfolios, offset by a high level of
net specific provisions. The provisioning ratio was 0.09% compared to 0.23% in 1997.
The gross impaired loans ratio declined from 7.65% to 6.66% year-over-year. This
reflected the reduction in new impaired loans and strong recoveries during the year.
Approach
Our approach to managing credit risk is further discussed in the Risk Management
section on page 38.
Outlook
We expect the provision for credit losses in 2000 to increase in line with growth in the Bank’s
businesses, and with the expected losses (as described on page 39) associated with the businesses.
Measures:
The following measures are
used to measure credit risk per-
formance. The first is focused
on financial performance, the
second on financial condition.
The provisioning ratio is cal-
culated by dividing the annual
provision for credit losses
(PCL) by the average balance
of loans and acceptances, and
is stated as a percentage.
Gross impaired loans as a
percentage of equity plus the
allowance for credit losses
is calculated by dividing the
volume of impaired loans by
the capital and reserves avail-
able to absorb loan losses.
Provisioning Ratio
0.23
0.30
0.23 0.22
0.09
9998979695
PCL as % of average loans
and acceptances
Gross Impaired
Loans Ratio
9998979695
GIL as % of equity and ACL
7.65
20.48
15.71
8.53
6.66
†Defined in the glossary on page 104.
Note:FormoreinformationseeTable13on
page 66.
Note:FormoreinformationseeTable15on
page 68.