Bank of Montreal 2010 Annual Report Download - page 173

BMO Financial Group 193rd Annual Report 2010 171
Net Interest Margin is the ratio of
net interest income to earning assets,
expressed as a percentage or in basis
points. Net interest margin is some-
times computed using total assets.
P 37
Notional Amount refers to the
principal used to calculate interest
and other payments under derivative
contracts. The principal amount does
not change hands under the terms
of a derivative contract, except in the
case of cross-currency swaps.
Off-Balance Sheet Financial
Instruments: A variety of financial
arrangements offered to clients, which
include credit derivatives, written put
options, backstop liquidity facilities,
standby letters of credit, performance
guarantees, credit enhancements,
commitments to extend credit,
securities lending, documentary
and commercial letters of credit,
and other indemnifications.
Operating Leverage is the difference
between revenue and expense
growth rates. Cash operating leverage
is the difference between revenue
and cash-based expense growth rates.
P 27
Operational Risk is the potential
for loss resulting from inadequate or
failed internal processes or systems,
human interactions or external events,
but excludes business risk.
P 87
Options are contractual agreements
that convey to the buyer the right
but not the obligation to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
fixed future date or at any time within
a fixed future period.
P 130
Productivity Ratio (or Expense-to-
Revenue Ratio or Efficiency Ratio)
is our key measure of productivity.
It is calculated as non-interest
expense divided by total revenues,
expressed as a percentage. The cash
productivity ratio is calculated in the
same manner, after removing the
amortization of acquisition-related
intangible assets from non-interest
expenses.
P 41, 91
Provision for Credit Losses is a
charge to income that represents
an amount deemed adequate by
management to fully provide for
impairment in loans and acceptances
and other credit instruments, given
the composition of the portfolios, the
probability of default, the economic
rate payments based on a notional
value of a single commodity.
• Credit default swaps – one counter-
party pays the other a fee in
exchange for that other counterparty
agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
• Cross-currency interest rate swaps –
fixed and floating rate interest
payments and principal amounts are
exchanged in different currencies.
• Cross-currency swaps – fixed rate
interest payments and principal
amounts are exchanged in different
currencies.
• Equity swaps – counterparties
exchange the return on an equity
security or a group of equity
securities for the return based on
a fixed or floating interest rate or
the return on another equity security
or group of equity securities.
• Interest rate swaps – counterparties
generally exchange fixed and float-
ing rate interest payments based on
a notional value in a single currency.
P 130
Tangible Common Equity reflects
common equity net of certain deduc-
tions. There is no standard industry
definition of this measure.
P 60
Tangible Common Equity to Risk-
Weighted Assets Ratio represents
tangible common equity divided by
risk-weighted assets.
P 60
Taxable Equivalent Basis (teb): Rev-
enues of operating groups reflected in
our MD&A are presented on a taxable
equivalent basis (teb). The teb adjust-
ment increases GAAP revenues and
the provision for income taxes by an
amount that would increase revenues
on certain tax-exempt securities to a
level that would incur tax at the statu-
tory rate, to facilitate comparisons.
P 37
Tier 1 Capital represents more per-
manent forms of capital, and primarily
consists of common shareholders’
equity, preferred shares and innova-
tive hybrid instruments, less a deduc-
tion for goodwill and excess intangible
assets and certain other deductions
required under Basel II.
Tier 1 Capital Ratio is defined as
Tier 1 capital divided by risk-weighted
assets.
P 60, 147
environment and the allowance for
credit losses already established.
P 40, 81, 120
Regulatory Risk is the risk of
not complying with regulatory
requirements, regulatory change
or regulators’ expectations. Failing
to properly manage regulatory
risk may result in regulatory sanctions
being imposed and could harm
our reputation.
Reputation Risk is the risk of a
negative impact to BMO that results
from the deterioration of BMO’s
reputation among stakeholders.
These potential impacts include
revenue loss, reduced client loyalty,
litigation, regulatory sanction or
additional oversight, and declines
in BMO’s share price.
P 90
Return on Equity or Return on
Common Shareholders’ Equity (ROE)
is calculated as net income, less
preferred dividends, as a percentage
of average common shareholders’
equity. Common shareholders’ equity
is comprised of common share capital,
contributed surplus, accumulated
other comprehensive income (loss)
and retained earnings.
P 34
Securities Borrowed or Purchased
under Resale Agreements are
low-cost, low-risk instruments, often
supported by the pledge of cash
collateral, which arise from trans-
actions that involve the borrowing
or purchasing of securities.
Securities Lent or Sold under
Repurchase Agreements are
low-cost, low-risk liabilities, often
supported by cash collateral, which
arise from transactions that involve
the lending or selling of securities.
Specific Allowances reduce the
carrying value of specific credit assets
to the amount we expect to recover
if there is evidence of deterioration
in credit quality.
P 40, 81, 120
Strategic Risk is the potential for
loss due to fluctuations in the external
business environment and/or failure to
property respond to these fluctuations
due to inaction, ineffective strategies
or poor implementation of strategies.
Swaps are contractual agreements
between two parties to exchange
a series of cash flows. The various
swap agreements that we enter into
are as follows:
• Commodity swaps – counterparties
generally exchange fixed and floating
Total Capital includes Tier 1 and
Tier 2 capital, net of certain deductions.
Tier 2 capital is primarily comprised of
subordinated debentures and the eligi-
ble portion of the general allowance
for credit losses. Deductions from Tier 2
capital are primarily comprised of our
investments in non-consolidated subsid-
iaries and other substantial investments.
Total Capital Ratio is defined as total
capital divided by risk-weighted assets.
P 60, 147
Total Shareholder Return (TSR): The
five-year average annual total share-
holder return (TSR) represents the
average annual total return earned on
an investment in BMO common shares
made at the beginning of a five-year
period. The return includes the change
in share price and assumes that divi-
dends received were reinvested in
additional common shares. The one-
year TSR also assumes that dividends
were reinvested in shares.
P 32
Trading-Related Revenues include
net interest income and non-interest
revenue earned from on- and off-
balance sheet positions undertaken
for trading purposes. The manage-
ment of these positions typically
includes marking them to market
on a daily basis. Trading revenues
include income (expense) and gains
(losses) from both cash instruments
and interest rate, foreign exchange
(including spot positions), equity,
commodity and credit contracts.
P 39
Value at Risk (VaR) is measured for
specific classes of risk in BMO’s trading
and underwriting activities: interest
rate, foreign exchange rate, equity and
commodity prices and their implied
volatilities. This measure calculates the
maximum likely loss from portfolios,
measured at a 99% confidence level
over a specified holding period.
P 82
Variable Interest Entities (VIEs)
include entities with equity that is
considered insufficient to finance the
entity’s activities or in which the equity-
holders do not have a controlling
financial interest. We are required to
consolidate VIEs if the investments we
hold in these entities and/or the rela-
tionships we have with them result
in us being exposed to the majority
of their expected losses and/or
being able to benefit from a majority
of their expected residual returns,
based on a calculation determined
by standard setters.
P 69