Bank of Montreal 1999 Annual Report Download - page 41

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Bank of Montreal Group of Companies 1999 Annual Report 35
Capital Adequacy
Improved Capital Ratios
Capital is defined as shareholders’ equity and subordinated debt. Our Tier 1 Capital
Ratio increased to 7.72% in 1999 from 7.26% in 1998. This was made possible by pru-
dent balance sheet management, including the implementation of integrated market
risk models, which resulted in risk-weighted assets (RWA)
†
declining by approximately
2.0% while Tier 1 capital grew by 4.2%, largely as a result of retained earnings growth
offset by dividends.
We also use secondary measures for monitoring regulatory capital requirements,
including the Total Capital Ratio and the assets-to-capital multiple, both defined by
OSFI. OSFI requires banks to meet minimum capital requirements of 4% and 8% in
terms of Tier 1 and Total Capital Ratios respectively, and also requires banks not to
exceed an assets-to-capital multiple of 20.
Our Total Capital Ratio, the ratio of total capital to RWA, was 10.77% at October 31,
1999. This increased from 10.38% at the end of fiscal 1998, primarily due to the
strengthening of our Tier 1 Capital Ratio.
The assets-to-capital multiple is the multiple of adjusted assets (on-balance sheet
assets including guarantees and letters of credit) to total capital. Our assets-to-capital
multiple at October 31, 1999 was 16.3, up from 16.0 at October 31, 1998.
1998 Compared to 1997
In 1998, our Tier 1 Capital Ratio increased to 7.26% from 6.80% in 1997. This improve-
ment
was driven by an increase in Tier 1 capital of 20.0% offset by the impact of a
12.4% increase in RWA. Tier 1 capital increased through retained earnings growth
and the issuance of $650 million in preferred shares. RWA growth was moderated by
various balance sheet management initiatives including the securitization of corpo-
rate loans, mortgages and credit cards.
Capital Adequacy ($ millions except as noted)
As at October 31 1999 1998 1997 1996 1995
Canadian Basis
Tier 1
Common shareholders’ equity 9,313 8,650 7,629 6,729 6,174
Non-cumulative preferred shares 1,668 1,958 1,274 857 858
Non-controlling interest in subsidiaries 27 40 80 101 121
Goodwill (430) (494) (521) (557) (411)
Tier 1 capital 10,578 10,154 8,462 7,130 6,742
Tier 2
Cumulative preferred shares 00000
Subordinated debt 4,522 4,670 3,582 3,179 2,268
General allowance for credit losses (a) 970 873 775 0 0
Tier 2 capital 5,492 5,543 4,357 3,179 2,268
Less: First loss protection 315 323 113 na na
Investment in non-consolidated subsidiaries/
substantial investments 1,010 858 697 625 0
Total capital 14,745 14,516 12,009 9,684 9,010
Risk-weighted assets 136,964 139,782 124,348 106,267 96,075
Risk-weighted capital ratios (%)
Tier 1 7.72 7.26 6.80 6.71 7.02
Total* 10.77 10.38 9.66 9.11 9.38
U.S. basis Tier 1 7.42 6.95 6.35 6.26 6.82
U.S. basis total* 11.34 10.86 9.92 9.81 9.97
Assets-to-capital multiple 16.3 16.0 18.0 19.0 17.6
Equity to assets (%) 4.9 5.0 4.4 4.6 4.7
*The October 31, 1996 Total Capital Ratio and Tier 2 capital reflect the inclusion of the $300 million in subordinated debentures issued
November 1, 1996. Excluding this issue, the Total Capital Ratio would be 8.83%, and 9.53% on a U.S. basis.
(a) General allowance included with the approval of OSFI beginning in 1997. OSFI approved the inclusion of the lesser of the
balance of our general allowance for credit losses or 0.75% of risk-weighted assets (1998 and 1997: 0.625%).
na
–
Not applicable
Outlook
We expect the Tier 1 Capital Ratio to be greater than 7.75% in 2000.
Measure:
The Tier 1 Capital Ratio is
our primary measure of capital
adequacy. The Office of the
Superintendent of Financial
Institutions Canada (OSFI) defines
t
his measure as Tier 1 capital
divided by risk-weighted assets.
Regulatory Capital
Ratios†
9998979695
10.38
9.66
9.11
9.38
10.77
7. 2 6
6.80
6.71
7.02 7. 72
Tier 1 Capital Ratio (%)
Total Capital Ratio (%)
Assets-to-Capital
Multiple
18.0
17.6
19.0
16.316.0
9998979695
†Defined in the glossary on page 104.