Bank of Montreal 2012 Annual Report Download - page 187

GLOSSARY OF FINANCIAL TERMS
Market Value Exposure (MVE) is a
measure of the adverse impact of
changes in market parameters on
the market value of a portfolio of
assets, liabilities and off-balance
sheet positions, measured at a 99%
confidence level over a specified
holding period. The holding period
considers current market conditions
and/or composition of the portfolio
to determine how long it would take
to neutralize the market risk without
adversely affecting market prices. For
trading and underwriting activities,
MVE is comprised of Value at Risk
and Issuer Risk.
P82
Model Risk is the potential for loss
due to the risk of a model not per-
forming or capturing risk as
designed. It also arises from the
possibility of the use of an
inappropriate model or the
inappropriate use of a model.
P90
Net Economic Profit (NEP) repre-
sents net income available to
common shareholders, before
deduction for the after-tax impact of
the amortization of acquisition-
related intangible assets, less a
charge for capital. Adjusted NEP is
computed using adjusted net income.
NEP is an effective measure of added
economic value. NEP and adjusted
NEP are non-GAAP measures.
P33
Net Interest Income is comprised of
earnings on assets, such as loans and
securities, including interest and
dividend income and BMO’s share of
income from investments accounted
for using the equity method of
accounting, less interest expense
paid on liabilities, such as deposits.
P37
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.
P37
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 include 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, secu-
rities lending, documentary and
commercial letters of credit, and
other indemnifications.
Office of the Superintendent of
Financial Institutions Canada (OSFI)
is the government agency respon-
sible for regulating banks, insurance
companies, trust companies, loan
companies and pension plans in
Canada.
Operating Leverage is the differ-
ence between revenue and expense
growth rates. Adjusted operating
leverage is the difference between
adjusted revenue and adjusted
expense growth rates.
P25
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.
P88
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 cur-
rency, commodity, interest-rate-
sensitive financial instrument or
security at a fixed future date or at
any time within a fixed future period.
P 141
Provision for Credit Losses is a
charge to income that represents an
amount deemed adequate by
management to fully provide for
impairment in a portfolio of loans
and acceptances and other credit
instruments, given the composition
of the portfolio, the probability of
default, the economic environment
and the allowance for credit losses
already established.
P 40, 81, 131
Reputation Risk is the risk of a
negative impact on BMO that results
from a deterioration in stakeholders’
perception of BMO’s reputation.
These potential impacts include
revenue loss, litigation, regulatory
sanction or additional oversight,
declines in client loyalty and declines
in BMO’s share price.
P91
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 compre-
hensive income (loss) and retained
earnings. Adjusted ROE is calculated
using adjusted net income.
P34
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.
Securitization is the practice of
selling pools of contractual debts,
such as residential mortgages,
commercial mortgages, auto loans
and credit card debt obligations, to
third parties.
P 138
Special Purpose Entities (SPEs)
include entities created to accom-
plish a narrow and well-defined
objective. We are required to con-
solidate an SPE if we control the SPE
by having the power to govern the
financial and operating policies of
the SPE so as to obtain benefits from
the SPE’s activities.
P 70, 71, 139
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, 131
Strategic Risk is the potential for
loss due to fluctuations in the
external business environment and/
or failure to properly respond to
these fluctuations due to inaction,
ineffective strategies or poor
implementation of strategies.
P91
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-rate and
floating-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 counter-
party agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
•Cross-currency interest rate
swaps – fixed-rate 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 secu-
rities 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 – counter-
parties generally exchange fixed-
rate and floating-rate interest
payments based on a notional
value in a single currency.
P 140
Taxable Equivalent Basis (teb):
Revenues of operating groups
reflected in our MD&A are presented
on a taxable equivalent basis (teb).
To facilitate comparisons, the teb
adjustment increases reported
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 statutory rate.
P36
Tier 1 Capital is primarily comprised
of regulatory common equity, pre-
ferred shares and Innovative Tier 1
capital.
Tier 1 Capital Ratio reflects Tier 1
capital divided by risk-weighted
assets.
P 61, 158
Total Capital includes Tier 1 and
Tier 2 capital, net of certain
deductions. Tier 2 capital is primarily
comprised of subordinated
debentures and a portion of the
collective allowance for credit losses.
Total Capital Ratio reflects total
capital divided by risk-weighted
assets.
P 61, 158
Total Shareholder Return: 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 dividends received
were reinvested in additional
common shares. The one-year TSR
also assumes that dividends were
reinvested in shares.
P31
Trading-Related Revenues include
net interest income and non-interest
revenue earned from on- and
off-balance sheet positions under-
taken for trading purposes. The
management of these positions
typically includes marking them to
market on a daily basis. Trading-
related revenues include income
(expense) and gains (losses) from
both on-balance sheet instruments
and interest rate, foreign exchange
(including spot positions), equity,
commodity and credit contracts.
P39
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 loss likely to
be experienced in the portfolios,
measured at a 99% confidence level
over a specified holding period.
P82
184 BMO Financial Group 195th Annual Report 2012