Bank of Montreal 2012 Annual Report Download - page 79

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Level of new impaired formations
was higher year over year due to
the M&l purchased performing loan
portfolio, but trending lower in
BMO’s legacy portfolio.
Gross Impaired
Loan Formations ($ millions)
Gross Impaired
Loan Balances* ($ millions)
Provision for
Credit Losses ($ millions)
Total Allowance for
Credit Losses* ($ millions)
2009
2,690
2010
1,525
20122011
1,992
3,101
2009
3,297
The total provision for credit losses
was lower year over year, reflecting
recoveries on the M&I purchased
credit impaired loans and an
improved credit environment.
2009
60
1,543
2010
1,049
The total allowance for credit
losses was lower in 2012 and
remains adequate.
*Excludes allowances related
to Other Credit Instruments.
*Excludes purchased credit impaired loans.
2009 2010 20122011
2010
2,894
20122011
Specific allowances
Collective allowance
M&I purchased performing loan portfolio
BMO legacy loan portfolio
M&I purchased performing loan portfolio
BMO legacy loan portfolio Collective provision
Specific provisions
Adjusted specific provisions
20122011
1,108
1,126
86 471
762
3
596
1,306
581
1,297
514
1,269
447
1,259
Gross impaired loans were higher
in 2012, due to the M&I purchased
performing loans, but were lower
in BMO’s legacy portfolio.
2,581 2,098
2,685 2,976
2010 and prior are based on CGAAP.
1,888 1,680
2012 Group Objectives and Achievements
Enhance the risk management function and ensure consistent
practice across the enterprise.
‰Executed a formalized risk practice benchmarking program to assess
our processes, identify best practices and implement enhancements in
select high-priority risk areas.
‰Expanded our risk management capabilities and frameworks in sev-
eral areas, including enhancements to model risk and our stress
testing program.
‰Made significant progress towards achieving certification under the
Operational Risk Advanced Measurement Approach (AMA).
‰Focused on bringing more rigour to performance management and
organizational design to increase productivity and streamline
activities.
Continue to embed our strong risk culture across the enterprise,
including our acquired businesses.
‰Developed and implemented risk appetite and performance metrics at
the line of business level and integrated them into our strategic
planning process.
‰Reinforced our risk independence and our three-lines-of-defence
approach to managing risk across the enterprise.
‰Enhanced our foundational risk management and operational risk
programs, to increase awareness and understanding of risk.
‰Utilized our rotation program to spread our risk culture across the
enterprise by transferring talented risk professionals to our
business groups.
Maximize the value of our impaired loans and effectively manage
problem accounts.
‰Successfully migrated and integrated the M&I loan portfolio onto our
risk platform and systems.
‰Reduced exposure to certain stressed real estate assets ahead of
schedule.
‰BMO’s legacy impaired loans were lower year over year, and levels
are trending down.
Our Approach to Risk Management
‰Understand and manage
‰Protect our reputation
‰Diversify. Limit tail risk
‰Maintain strong capital and liquidity
‰Optimize risk return
Overview
We are exposed to a variety of risks that are inherent in carrying out our
business activities. As such, having a disciplined and integrated
approach to managing risk is key to the success of our operations. Our
risk management framework seeks to provide appropriate and
independent risk oversight across the enterprise and is essential to
building competitive advantage and stability for our enterprise. All
elements of our risk management framework work together in
facilitating prudent measured risk-taking and achieving an appropriate
balance between risk and return.
In 2012, our primary challenges were the continuing global
economic slowdown, heightened regulatory expectations and the need
to achieve balance between risk-taking and rewards in the low growth
economy. Our strong disciplined approach to managing risk was integral
to withstanding these economic challenges and enabled us to deliver
strong results, serve our customers well and maintain our solid reputa-
tion in the marketplace. We continue to build upon our robust risk
management foundation and strive for continuous improvement,
including benchmarking against best practices and enhancing our risk
management infrastructure, processes and capabilities. We believe that
the steps we have taken and the initiatives we continue to pursue posi-
tion us to successfully execute our business strategy.
76 BMO Financial Group 195th Annual Report 2012