Bank of Montreal 2012 Annual Report Download - page 186

Glossary of Financial Terms
Adjusted Earnings and Measures
present results adjusted to exclude
the impact of certain items as set out
in the Non-GAAP Measures section.
Management considers both
reported and adjusted results to be
useful in assessing underlying
ongoing business performance.
Allowance for Credit Losses repre-
sents an amount deemed adequate
by management to absorb credit-
related losses on loans and accept-
ances and other credit instruments.
Allowances for credit losses can be
specific or collective and are
recorded on the balance sheet as a
deduction from loans and accept-
ances or, as they relate to credit
instruments, as other liabilities.
P 70, 81, 131
Assets under Administration and
under Management refers to assets
administered or managed by a finan-
cial institution that are beneficially
owned by clients and therefore not
reported on the balance sheet of the
administering or managing financial
institution.
Asset-Backed Commercial Paper
(ABCP) is a short-term investment
with a maturity that is typically less
than 180 days. The commercial paper
is backed by physical assets such as
trade receivables, and is generally
used for short-term financing needs.
Assets-to-Capital Multiple reflects
total assets, including specified
off-balance sheet items net of other
specified deductions, divided by
total capital.
P 61, 158
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and
loans and securities, over a
one-year period.
Bankers’ Acceptances (BAs) are
bills of exchange or negotiable
instruments drawn by a borrower for
payment at maturity and accepted
by a bank. BAs constitute a
guarantee of payment by the bank
and can be traded in the money
market. The bank earns a “stamping
fee” for providing this guarantee.
Basis Point is one one-hundredth of
a percentage point.
Business Risk arises from the
specific business activities of a
company and the effects these could
have on its earnings.
P90
Collective Allowance (previously
referred to as the General Allow-
ance) is maintained to cover impair-
ment in the existing credit portfolio
that cannot yet be associated with
specific credit assets. Our approach
to establishing and maintaining the
collective allowance is based on the
guideline issued by our regulator,
OSFI. The collective allowance is
assessed on a quarterly basis and a
number of factors are considered
when determining its level, including
the long-run expected loss amount
and management’s credit judgment
with respect to current macro-
economic and portfolio conditions.
P 40, 81, 131
Common Equity Ratio reflects
common shareholders’ equity less
capital adjustments, divided by risk-
weighted assets.
P 61, 158
Common Shareholders’ Equity is
the most permanent form of capital.
Adjusted common shareholders’
equity is comprised of common
shareholders’ equity less capital
adjustments.
Credit and Counterparty Risk is the
potential for loss due to the failure of
a borrower, endorser, guarantor or
counterparty to repay a loan or
honour another predetermined
financial obligation.
P80
Derivatives are contracts whose
value is “derived” from movements
in interest or foreign exchange rates,
or equity or commodity prices.
Derivatives allow for the transfer,
modification or reduction of current
or expected risks from changes in
rates and prices.
Dividend Payout Ratio represents
common share dividends as a per-
centage of net income available to
common shareholders. It is com-
puted by dividing dividends per
share by basic earnings per share.
Earnings Per Share (EPS) is calcu-
lated by dividing net income, after
deduction of preferred dividends, by
the average number of common
shares outstanding. Diluted EPS,
which is our basis for measuring
performance, adjusts for possible
conversions of financial instruments
into common shares if those con-
versions would reduce EPS. Adjusted
EPS is calculated in the same man-
ner, using adjusted net income.
P 32, 166
Earnings Volatility (EV) is a
measure of the adverse impact of
potential changes in market parame-
ters on the projected 12-month
after-tax net income of a portfolio of
assets, liabilities and/or off-balance
sheet positions, measured at a 99%
confidence level over a specified
holding period.
P82
Economic Capital is our internal
assessment of the risks underlying
BMO’s business activities. It repre-
sents management’s estimate of the
likely magnitude of economic losses
that could occur if adverse situations
arise, and allows returns to be
measured on a basis that considers
the risks taken. Economic Capital is
calculated for various types of risk –
credit, market (trading and
non-trading), operational and
business – where measures are
based on a time horizon of one year.
Economic Capital is a key element of
our risk-based capital management
and ICAAP framework.
P 63, 79
Efficiency Ratio (or
Expense-to-Revenue Ratio)
(previously referred to as the Pro-
ductivity Ratio) is a key measure of
efficiency. It is calculated as
non-interest expense divided by total
revenues, expressed as a percent-
age. The adjusted efficiency ratio is
calculated in the same manner,
utilizing adjusted revenues and
non-interest expense.
P42
Environmental and Social Risk is
the risk of loss or damage to BMO’s
reputation resulting from environ-
mental and social concerns related to
BMO or its customers. Environmental
and social risk is often associated
with credit, operational and reputa-
tion risk.
P92
Fair Value is the amount of consid-
eration that would be agreed upon in
an arm’s length transaction between
knowledgeable, willing parties who
are under no compulsion to act.
Forwards and Futures are con-
tractual agreements to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
specific price and date in the future.
Forwards are customized contracts
transacted in the over-the-counter
market. Futures are transacted in
standardized amounts on regulated
exchanges and are subject to daily
cash margining.
P 141
Hedging is a risk management
technique used to neutralize,
manage or offset interest rate, for-
eign currency, equity, commodity or
credit exposures arising from normal
banking activities.
Impaired Loans are loans for which
there is no longer reasonable assur-
ance of the timely collection of
principal or interest.
Innovative Tier 1 Capital is a form
of Tier 1 capital that can be included
in calculating a bank’s Tier 1 Capital
Ratio, Total Capital Ratio and
Assets-to-Capital Multiple. Innovative
Tier 1 capital cannot comprise more
than 20% of net Tier 1 capital, at
time of issue, with 15% qualifying as
Tier 1 capital and the remaining 5%
included in Tier 2 capital.
Insurance Risk is the risk of loss due
to actual experience being different
from that assumed when an
insurance product was designed and
priced. It generally entails inherent
unpredictability that can arise from
assuming long-term policy liabilities
or from the uncertainty of future
events. Insurance risk exists in all our
insurance businesses, including
annuities and life, accident and
sickness, and creditor insurance, as
well as our reinsurance business.
P89
Issuer Risk arises in BMO’s trading
and underwriting portfolios, and
measures the adverse impact of
credit spread, credit migration and
default risks on the market value of
fixed-income instruments and similar
securities. Issuer risk is measured at
a 99% confidence level over a speci-
fied holding period.
P82
Legal and Regulatory Risk is the
risk of not complying with laws,
contractual agreements or other
legal requirements, as well as regu-
latory requirements and regulators’
expectations. Failure to properly
manage legal and regulatory risk
may result in litigation claims, finan-
cial losses, regulatory sanctions, an
inability to execute our business
strategies, and potential harm to our
reputation.
P90
Leverage Ratio is defined as Tier 1
capital divided by the sum of
on-balance sheet items and specified
off-balance sheet items net of speci-
fied deductions.
P62
Liquidity and Funding Risk is the
potential for loss if BMO is unable to
meet financial commitments in a
timely manner at reasonable prices
as they fall due. Financial commit-
ments include liabilities to depositors
and suppliers, and lending, invest-
ment and pledging commitments.
P 86, 136
Mark-to-Market represents the
valuation of financial instruments at
market rates as of the balance sheet
date, where required by accounting
rules.
Market Risk is the potential for
adverse changes in the value of
BMO’s assets and liabilities resulting
from changes in market variables
such as interest rates, foreign
exchange rates, equity and
commodity prices and their implied
volatilities, and credit spreads, as
well as the risk of credit migration
and default.
P 82, 136
BMO Financial Group 195th Annual Report 2012 183