Bank of Montreal 2004 Annual Report Download - page 100

BMO Financial Group Annual Report 200496
Notes to Consolidated Financial Statements
Notes
Our credit exposure to securitized loans as at October 31, 2004 was
limited to our deferred purchase price of $143 million ($121 million
in 2003), cash deposits held in securitization vehicles of $12 million
($12 million in 2003) and investments in securitization vehicles
of $27 million ($45 million in 2003).
Static pool credit losses provide a measure of the credit risk
in our securitized loans. They are calculated by totalling actual and
projected future credit losses and dividing the result by the original
balance of each pool of loans. Static pool credit losses for the years
ended October 31 are as follows:
2004 2003
Residential mortgages ––
Consumer instalment and other personal loans 3.18% 1.30%
Credit card loans 1.84% 2.65%
Sensitivity Analysis
The following table outlines the key economic assumptions used
in measuring the deferred purchase price and the sensitivity of the
current value of the deferred purchase price as at October 31, 2004
to immediate 10% and 20% adverse changes in those assumptions.
The sensitivity analysis should be used with caution as it is hypo-
thetical and changes in each key assumption may not be linear.
The sensitivities in each key variable have been calculated indepen -
dently of changes in the other key variables. Actual experience may
result in changes in a number of key assumptions simultaneously.
Changes in one factor may result in changes in another, which could
amplify or reduce certain sensitivities.
Consumer
instalment
and other
Residential personal Credit card
(Canadian $ in millions, except as noted) mortgages loans loans
Carrying value of deferred purchase price $ 134 $ – $ 9
Fair value of deferred purchase price $ 137 $ – $9
Weighted-average life (in years) 3.18 0.89 0.21
Prepayment rate (%) 8.0
– 24.9 4.0 99.78
Impact of: 10% adverse change $2.4
– $1.1 – $1.06
20% adverse change $4.7 – $2.2 – $1.95
Interest rate (%) 0.47 – 2.09 – 8.66
Impact of: 10% adverse change $8.8
– $5.4 – $1.2
20% adverse change $17.6 – $10.9 – $2.5
Expected credit losses (%) – 4.03 – 6.34 2.06
Impact of: 10% adverse change $0.1
– $0.3
20% adverse change $0.2 – $0.7
Discount rate (%) 4.02–11.74 11.74 11.74
Impact of: 10% adverse change $1.2
– $0.2 – $0.1
20% adverse change $2.4 – $0.5 – $0.1
Credit Information
Information related to principal amounts, impaired amounts and net credit losses for all loans reported and securitized is as follows:
(Canadian $ in millions) 2004 2003
Total Impaired Net Total Impaired Net
loans loans write-offs(1) loans loans write-offs(1)
Residential mortgages $ 63,227 $ 132 $ 4 $ 58,161 $ 149 $ 9
Consumer instalment and other personal loans 25,494 28 78 23,063 38 67
Credit card loans 4,752 11 120 4,417 11 112
Business and government loans 50,020 957 174 51,889 1,730 332
Securities purchased under resale agreements 17,148 – – 13,276 – –
Total loans 160,641 1,128 376 150,806 1,928 520
Less loans securitized:
Residential mortgages 6,783 7 1 6,066 7 1
Consumer instalment and other personal loans 607 1 13 960 1 7
Credit card loans 1,050 1 23 1,450 2 34
Total loans reported on the Consolidated Balance Sheet $ 152,201 $ 1,119 $ 339 $ 142,330 $ 1,918 $ 478
(1) Net write-offs represent write-offs in the current year net of recoveries on previously written off loans.
Future Change in Accounting Policy
We will adopt the Canadian Institute of Chartered Accountants’
(“CICA”) guideline on the consolidation of variable interest entities
(“VIEs”) on November 1, 2004. VIEs include entities where the
equity invested is considered insufficient to finance the entity’s
activities. Under this new guideline, we will be required to
consolidate VIEs if the investments we hold in these entities and/or
the relationships we have with them result in us being exposed
to a majority of their expected losses, being able to benefit from
a majority of their expected residual returns, or both, based
on a calculation determined by the standard setters.
Customer Securitization Vehicles
Customer securitization vehicles (referred to as multi-seller con-
duits) assist our customers with the securitization of their assets
to provide them with alternate sources of funding. These vehicles
provide clients with access to liquidity in the commercial paper
markets by allowing them to sell their assets into these vehicles,
which then issue commercial paper to investors to fund the pur-
chases. The seller continues to service the transferred assets; if
there are losses on the assets, the seller is the first to take the loss.
We do not sell assets to or service the assets held by these customer
securitization vehicles. We earn fees for providing structuring advice
related to the securitizations as well as administrative fees for sup-
porting the ongoing operations of customer securitization vehicles.
In general, investors in the commercial paper have recourse
only to the assets of the related VIE and do not have recourse to us,
unless we have provided credit support for the investors or entered
into a derivative transaction involving the VIE.
We provide liquidity and credit support to these vehicles either
through backstop liquidity facilities or in the form of letters of
credit and other guarantees. The total contractual amount of this
support was $27,019 million as at October 31, 2004 ($27,139 million
in 2003). Of these amounts, $400 million as at October 31, 2004
($390 million in 2003) related to credit support. None of these
facilities were drawn upon as at year end.
Derivatives contracts entered into with these vehicles enable the
vehicles to manage their exposures to interest and foreign exchange
rate fluctuations. The fair value of derivatives outstanding with
these VIEs and recorded on our Consolidated Balance Sheet was
a derivative asset of $52 million as at October 31, 2004.
Note 8 Variable Interest Entities