Bank of Montreal 2004 Annual Report Download - page 97

BMO Financial Group Annual Report 2004 93
Notes
Concentration of Credit Risk
We are exposed to credit risk from the possibility that counter-
parties may default on their financial obligations to us. Credit risk
arises predominantly with respect to loans, over-the-counter
derivatives and other credit instruments.
Concentrations of credit risk exist if a number of clients are
engaged in similar activities, are located in the same geographic
region or have similar economic characteristics such that their
ability to meet contractual obligations could be similarly affected by
changes in economic, political or other conditions. Concentrations
of credit risk indicate a related sensitivity of our performance
to developments affecting a particular counterparty, industry or
geographic location.
We use other off-balance sheet credit instruments as a method of
meeting the financial needs of our customers. Summarized below
are the types of instruments that we use:
●Standby letters of credit and guarantees represent our obligation
to make payments to third parties on behalf of our customers if
our customers are unable to make the required payments or meet
other contractual requirements;
●Securities lending represents our credit exposure when we lend
our securities, or our customers’ securities, to third parties should
the securities borrower default on its redelivery obligation;
●Documentary and commercial letters of credit represent our
agreement to honour drafts presented by a third party upon
completion of specific activities; and
●Commitments to extend credit represent our commitment to our
customers to grant them credit in the form of loans or other finan-
cings for specific amounts and maturities, subject to meeting
certain conditions.
The contractual amount of our other credit instruments rep-
resents the maximum undiscounted potential credit risk if the
counterparty does not perform according to the terms of the
contract, before possible recoveries under recourse and collateral
provisions. Collateral requirements for these instruments are
consistent with collateral requirements for loans. A large majority
of these commitments expire without being drawn upon. As a
result, the total contractual amounts may not be representative
of our likely credit exposure or liquidity requirements for these
commitments.
The risk-weighted equivalent values of our other credit instru-
ments are determined based on the rules for capital adequacy of the
Superintendent of Financial Institutions Canada. The risk-weighted
equivalent value is used in the ongoing assessment of our capital
adequacy ratios.
A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions) Specific allowance General allowance Total
2004 2003 2002 2004 2003 2002 2004 2003 2002
Balance at beginning of year $ 611 $ 769 $ 769 $ 1,180 $ 1,180 $ 1,180 $ 1,791 $ 1,949 $ 1,949
Provision for credit losses 67 455 820 (170)
–– (103) 455 820
Recoveries 131 88 68
– –– 131 88 68
Write-offs (470) (566) (884)
– –– (470) (566) (884)
Foreign exchange and other (41) (135) (4) – –– (41) (135) (4)
Balance at end of year $ 298 $ 611 $ 769 $ 1,010 $ 1,180 $ 1,180 $ 1,308 $ 1,791 $ 1,949
Comprised of: Loans $ 298 $ 605 $ 769 $ 1,010 $ 1,180 $ 1,180 $ 1,308 $ 1,785 $ 1,949
Other credit instruments – 6 –– ––– 6 –
Summarized information related to various commitments is as follows:
(Canadian $ in millions) 2004 2003
Contract Risk-weighted Contract Risk-weighted
amount equivalent amount equivalent
Credit Instruments
Standby letters of credit and guarantees $ 13,042 $ 9,379 $ 11,170 $ 7,666
Securities lending 548 20 553 37
Documentary and commercial letters of credit 706 75 714 74
Commitments to extend credit
– Original maturity of one year and under 66,826 – 67,200 –
– Original maturity of over one year 18,830 9,103 21,655 10,596
Total $ 99,952 $ 18,577 $ 101,292 $ 18,373
Commitments to extend credit in respect of consumer instalment and credit card loans are excluded as the lines are revocable at our discretion.
Note 5 Other Credit Instruments