Bank of Montreal 2003 Annual Report Download - page 47

Enterprise-Wide Capital Management
Tier 1 Capital Ratio (%) Total Capital Ratio (%) Assets-to-Capital multiple (times)
7.72
10.77
8.83
11.97
8.15
12.12
8.80
12.23
9.55
12.09
16.3x
14.8x 14.2x
15.8x 16.4x
1999 2003200220012000
BMO Financial Group 186th Annual Report 2003 43
Strategy and Approach
Our Capital Management Framework is designed to maintain an
optimum level of capital in a cost-effective structure that: meets
our target regulatory ratios; supports our internal assessments of
required capital (i.e. economic capital); results in targeted credit
ratings; funds our selected operating group business strategies;
and builds long-term shareholder value. Our approach includes
establishing limits, goals and performance measures for manage-
ment of balance sheet positions, risk levels and minimum capital
amounts, as well as issuing and redeeming capital instruments
to obtain the most cost-effective capital structure possible. These
are approved by the Board of Directors pursuant to its annual
review of our capital management policy and capital plan.
At the consolidated enterprise level, our targeted capital levels
are set in support of our risk appetite, while still satisfying
regulatory and legal requirements. At the line of business level,
performance measurement is assessed on allocated economic
capital, which is based primarily on the assessment and mea-
s ure ment of capital at risk outlined on page 46.
Internal capital allocation ensures that we maintain a well-
capitalized position to protect our stakeholders from the risks
inherent in our various businesses, while still allowing the
flexibility to deploy resources in high-return or strategic growth
activities of our operating groups to meet or exceed established
enterprise targets. Generally, BMO generates earnings that are
sufficient to meet new capital requirements. As such, manage-
ment’s primary challenge is achieving the most cost-effective
capital structure, rather than procuring sufficient capital to fund
expansion initiatives.
Dividends are generally increased in line with long-term trends
in earnings per share growth, while sufficient earnings are
retained to support anticipated business growth, fund strategic
investments and provide continued support for depositors.
BMO’s policy is to achieve a dividend payout ratio of 35% to
45% of net income available to shareholders, over time.
Performance Review
Our common shareholders’ equity exceeded our assessment of
required economic capital by $636 million, an improvement
of $723 million from a year ago. The components of regulatory
capital and the measures we monitor are outlined in Tables 20
and 21 on page 65. The Tier 1 capital ratio, our primary measure
of capital adequacy, rose to 9.55% from 8.80% a year ago. It is
defined as Tier 1 capital divided by risk-weighted assets. Tier 1
capital, representing more permanent forms of capital, increased
during the year to $12,337 million, as outlined in the adjacent
table. Risk-weighted assets decreased during the year to
$129.2 billion, as strong mortgage and personal loan growth in
Personal and Commercial Client Group was more than offset
by a change in the asset mix due to lower corporate lending in
Investment Banking Group. Our Total Capital Ratio, which is
defined as total capital divided by risk-weighted assets, declined
to 12.09% from 12.23% a year ago. The decline related to reduced
subordinated debt, as we chose to redeem two issues during the
year to optimize our capital level. In 2004, we anticipate contin-
uing controlled growth in risk-weighted assets and redeployment
of capital to strategically advantaged businesses.
Dividends declared per common share in 2003 totalled $1.34,
up from $1.20 in 2002, resulting in a 38.2% payout ratio, in
keeping with our long-term goal. BMO increased its quarterly
dividends twice during the year, as the quarterly dividend rose
to $0.35 per share in the fourth quarter, up 16.7% from $0.30 in
the fourth quarter of 2002.
On August 5, 2003, we announced our intention to repurchase
up to 15 million common shares for cancellation. The bid expires
on August 6, 2004. In the fourth quarter of the year, we acquired
and cancelled 282,800 shares at an average cost of $43.95 per
share, for a total cost of $12.4 million.
BMO’s credit rating, as measured by Standard & Poor’s (S&P)
senior debt ratings, remained unchanged at AA–, the highest,
along with one of our competitors, of the six major Canadian
banks. Our rating, as measured by Moody’s senior debt ratings,
remained unchanged at Aa3, slightly below only one of the six
major Canadian banks. During the fourth quarter, S&P upgraded
its ratings outlook on BMO to stable from negative. Moody’s
similarly upgraded its outlook earlier in the year. These ratings
represent a high-grade, high-quality rating.
Enterprise-Wide Capital Management
Tier 1 Capital
($ millions) 2003 2002
Beginning of year 11,529 11,066
Net income 1,825 1,417
Dividends (748) (668)
Goodwill and excess intangible assets 213 (749)
Issuance of common shares 205 84
Repurchase of common shares (12) –
Other issues and redemptions – 471
Translation and other (675) (92)
End of year 12,337 11,529
Risk-Weighted Assets
($ millions) 2003 2002
Beginning of year 131,078 135,768
Increases (decreases)
Personal and Commercial Client Group 5,397 5,463
Private Client Group (644) 764
Investment Banking Group (4,670) (12,039)
Corporate Support (1,998) 1,122
End of year 129,163 131,078