Bank of Montreal 2012 Annual Report Download - page 66

MD&A
OSFI’s draft Basel III capital rules include rules to implement the
BCBS guidance on non-viability contingent capital (NVCC). The guidance
stipulates that in order to qualify as regulatory capital, a bank’s non-
common share capital instruments must ensure that investors bear
losses before taxpayers in the event the bank’s national authorities
determine that it is non-viable and its rescue is in the public interest. All
instruments issued after December 31, 2012, must meet these NVCC
requirements to qualify as regulatory capital.
OSFI’s draft Basel III rules provide guidance on the treatment of
non-common share capital instruments that do not meet Basel III
requirements, including NVCC requirements. Instruments that do not
meet Basel III requirements will be subject to grandfathering provisions,
and their recognition as regulatory capital will be phased out over a
nine-year period beginning January 1, 2013. Using a base equal to the
total value of such instruments outstanding as at January 1, 2013, their
recognition is to be capped at 90% from January 1, 2013, with the cap
reducing by one-tenth of the base in each subsequent year. Under Basel
III, BMO’s existing innovative Tier 1 capital (BMO Capital Trust Securities
and BMO Tier 1 Notes) and Tier 2 subordinated debt instruments will not
qualify as regulatory capital and will be phased out at 10% each year
commencing January 1, 2013. OSFI’s guidance also outlines the require-
ments for redemption of these regulatory capital instruments through a
regulatory capital event. BMO currently does not expect to redeem any
outstanding regulatory capital instruments through a regulatory capital
event.
A number of other potential regulatory changes are still pending.
For example, OSFI may implement a “solo” capital framework that
would assess a bank’s stand-alone capital adequacy by reducing such
bank’s capital by any of its investments in subsidiaries that are not
considered sufficiently liquid. These changes could affect the amount of
capital that we hold or are required to hold or the attractiveness of
certain investments in subsidiaries. We cannot forecast the timing or the
potential consequences of such potential changes.
Economic Capital Review
Economic capital is a measure of our internal assessment of the risks
underlying BMO’s business activities. It represents management’s
estimation of the likely magnitude of economic losses that could occur
should 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, based on a one-year time horizon. For further
discussion of these risks, refer to the Enterprise-Wide Risk Management
section on page 75. Economic capital is a key element of our risk-based
capital management and ICAAP framework.
Credit risk remains the largest
component of economic capital
by risk type.
P&C U.S. was the largest contributer
to economic capital in 2012,
followed by BMO CM and
P&C Canada.
Total Economic Capital
by Operating Group
As at October 31, 2012
Total Economic Capital
by Risk Type
As at October 31, 2012
Credit 72%
Operational 12%
Business 4%
Market 12%
PCG 8%
P&C Canada 24%
Corporate Services,
including T&O 2%
BMO CM 25%
P&C U.S. 41%
Capital Management Activities
BMO issued 12 million shares during 2012 under our Shareholder Divi-
dend Reinvestment and Share Purchase Plan and due to the exercise of
stock options. On December 31, 2011, we redeemed the $400 million
BMO Capital Trust Securities – Series C, and on February 25, 2012, we
redeemed all of our US$300 million Non-cumulative Perpetual Class B
Preferred shares, Series 10. On June 21, 2012, we redeemed all of the
outstanding $1.2 billion subordinated Series D Medium-Term Notes,
Tranche 2. Further details are provided in Notes 17, 18 and 20 on pages
153, 154 and 156 of the financial statements.
On December 4, 2012, we announced our intention, subject to the
approval of OSFI and the Toronto Stock Exchange (TSX), to initiate a
normal course issuer bid for up to 15,000,000 of BMO’s common shares.
Once approvals are obtained, the share repurchase program will permit
us to purchase BMO’s common shares on the TSX for the purpose of
cancellation. BMO’s previous normal course issuer bid expired on
December 15, 2011, and no common shares were repurchased under
that program. The timing and amount of any purchases under the pro-
gram are subject to regulatory approvals and to management discretion
based on factors such as market conditions.
Outstanding Shares and Securities Convertible into
Common Shares
As at
November 27, 2012
Number of shares
or dollar amount
Dividends declared per share
2012 2011 2010
Common shares 650,767,000 $2.82 $2.80 $2.80
Class B Preferred shares
Series 5 $200,000,000 $1.33 $1.33 $1.33
Series 13 $350,000,000 $1.13 $1.13 $1.13
Series 14 $250,000,000 $1.31 $1.31 $1.31
Series 15 $250,000,000 $1.45 $1.45 $1.45
Series 16 $300,000,000 $1.30 $1.30 $1.30
Series 18 $150,000,000 $1.63 $1.63 $1.63
Series 21 $275,000,000 $1.63 $1.63 $1.63
Series 23 $400,000,000 $1.35 $1.35 $1.35
Series 25 $290,000,000 $0.98 $0.69 –
Convertible into common
shares:
Class B Preferred shares
Series 10 (1) US$0.37 US$1.49 US$1.49
Stock options
– vested 7,849,000
– nonvested 7,898,000
(1) Redeemed in February 2012.
Note 20 on page 156 of the financial statements includes details on share capital.
BMO Financial Group 195th Annual Report 2012 63