Bank of Montreal 2010 Annual Report Download - page 88

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
20102009200820072006
27.2
33.1 35.0
29.1 31.9
Liquidity Ratio (%)
20102009200820072006
Core Deposits ($ billions)
22.4
32.8
Canadian $
US$ and other currency in US$
73.3
85.8
25.1
75.9
27.7 33.5
95.4 98.6
The ratio reflects a strong
liquidity position.
Core deposits provide a
strong funding base.
mismatch, concentration of funding, available unencumbered assets and
market-related monitoring tools). The LCR is the ratio of the stock of high
quality liquid assets to stressed net cash outflows over a 30-day time
period. The NSFR is the ratio of the available amount of stable funding
(one-year or greater) to the required amount of stable funding.
The BCBS has stated that unlike the capital framework, for which
extensive experience and data help inform the calibration, there is
no similar track record for liquidity standards. For this reason the BCBS
is proceeding carefully to refine the design and calibration in order
to deliver a rigorous overall liquidity standard while avoiding unintended
consequences to business models and funding structures. Additional
guidance from the BCBS is expected before December 31, 2010. Based on
the framework’s current design and calibration, the standards would
result in higher costs for the banking industry, including BMO. An obser-
vation period for the LCR is scheduled to commence on January 1, 2011
and adoption of a minimum standard is scheduled to commence on
January 1, 2015. An observation period for the NSFR is scheduled to
commence on January 1, 2012 and adoption of a minimum standard
is scheduled to commence on January 1, 2018.
Fiscal 2010 began in an environment of improving global financial
markets. Term wholesale funding volumes were increasing and credit
spreads were decreasing. Governments and central banks were reducing
the financial system support mechanisms they had introduced during
the financial crisis. By mid-year, sovereign debt concerns developed in a
number of European countries; however, these concerns were largely
restricted to the European financial system. BMO’s liquidity and funding
management framework was effective in ensuring we maintained a
strong liquidity position throughout the year, and continues to help
ensure that we maintain a strong position.
Data provided in this section reflect BMO’s consolidated position.
BMO subsidiaries include regulated and foreign entities, and therefore
movements of funds between companies in the corporate group
are subject to the liquidity, funding and capital adequacy considerations
of the subsidiaries, as well as tax considerations. In recognition of these
matters, BMO’s liquidity and funding positions are managed on both a
consolidated and key legal entity basis.
Three of the measures we use to evaluate liquidity and funding
risk are the liquidity ratio, the level of core deposits, and the customer
deposits and capital to loans ratio.
The liquidity ratio represents the sum of cash resources and secur-
ities as a percentage of total assets. BMO’s liquidity ratio was 35.0% at
October 31, 2010, up from 31.9% in 2009. The liquidity ratio averaged 29.8%
for the years 2006 to 2008. The ratio reflects a strong liquidity position.
Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).
Cash and securities totalled $144.0 billion at the end of the year,
compared with $124.1 billion in 2009. Liquidity provided by cash and
securities is supplemented by securities borrowed or purchased under
resale agreements, which also can be readily converted into cash or
cash substitutes to meet financial commitments. Securities borrowed or
purchased under resale agreements totalled $28.1 billion at the end of
the year, down from $36.0 billion in 2009.
In the ordinary course of business, a portion of cash, securities and
securities borrowed or purchased under resale agreements is pledged
as collateral to support trading activities and participation in clearing
and payment systems, in Canada and abroad. At October 31, 2010,
$49.9 billion of cash and securities and $19.6 billion of securities bor-
rowed or purchased under resale agreements had been pledged,
compared with $39.3 billion and $25.6 billion, respectively, in 2009.
These changes were driven by trading activities. Additional information
on cash and securities can be found in Table 5 on page 97 and in
Notes 2 and 3 beginning on page 116 of the financial statements.
Core deposits are comprised of customer operating and savings
account deposits and smaller fixed-date deposits (less than or equal
to $100,000). Canadian dollar core deposits totalled $98.6 billion at the
end of the year, up from $95.4 billion in 2009, and U.S. dollar and other
currency core deposits totalled US$33.5 billion at the end of the year,
up from US$27.7 billion in 2009. The increase in our U.S. dollar and other
currency core deposits reflects investor preference for bank deposits,
as well as growth through U.S. acquisitions. Larger fixed-date customer
deposits totalled $20.1 billion at the end of the year, compared with
$22.5 billion in 2009. Total deposits increased $13.1 billion during 2010
to $249.3 billion at the end of the year. The increase in total deposits
primarily reflects an increase in core deposits used to fund loan growth
and an increase in non-core deposits to fund securities growth.
Our large base of customer deposits, along with our strong capital
base, reduces our requirements for wholesale funding. Customer
deposits and capital equalled 104.1% of loans at the end of the year,
down from 106.6% in the prior year.
Our funding philosophy requires that wholesale funding used to
support loans is longer term (typically maturing in two to ten years) to
better match the terms to maturity of our loans. Wholesale funding that
supports liquid trading and underwriting assets and liquid available-
for-sale securities is generally shorter term (maturing in less than two
years). Diversification of our wholesale funding sources is an important
part of our overall liquidity management strategy. In accordance with
internal guidelines, our wholesale funding is diversified by customer,
type, market, maturity term, currency and geographic region. BMO
has the ability to raise long-term funding through various platforms,
including a European Note Issuance Program, Canadian and U.S.
Medium-Term Note Programs, a Global Covered Bond Program, Canadian
and U.S. mortgage securitizations, Canadian credit card securitizations,
and Canadian and U.S. senior (unsecured) deposits. Information on
deposit maturities can be found in Table 20 on page 106.
The credit ratings assigned to BMO’s senior debt securities by
external rating agencies are important in the raising of both capital and
funding to support our business operations. Maintaining strong credit
ratings allows us to access the capital markets at competitive pricing
levels. BMO’s ratings are indicative of high-grade, high-quality issues.
They are: DBRS (AA); Fitch Ratings (AA–); Moody’s Investors Service
(Aa2); and Standard & Poor’s Ratings Services (A+).
DBRS, Fitch, Moody’s
and S&P have a stable outlook for BMO. Should
our credit ratings
materially decrease, our cost of funds would likely increase significantly
and our access to funding and capital through capital markets could
be reduced. A material downgrade of our ratings could have additional
consequences,
including those set out in Note 10 on page 130 of the
financial statements.
86 BMO Financial Group 193rd Annual Report 2010