Bank of Montreal 2013 Annual Report Download - page 53

BMO
MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
qualify as regulatory capital and are being phased out as discussed
above. OSFI’s guidance also outlines the requirements for redemption of
these regulatory capital instruments due to 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 the portion of its investments in subsidiaries that are
not considered available to protect the parent bank creditors under
exceptional circumstances. 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
consequences of such potential changes.
In addition, in 2014, certain other changes will impact our regu-
latory capital. In a letter dated August 21, 2013, OSFI advised banks that
it will begin phasing in the CVA risk capital charge for Canadian banks in
the first quarter of 2014. The CVA risk capital charge applicable to BMO’s
CET1 during fiscal 2014 will be 57% of the fully implemented charge,
and this will increase each year until it reaches 100% by 2019. BMO
Economic Capital and RWA by Operating Group and Risk Type
As at October 31, 2013
estimates that its Basel III CET1 Ratio at October 31, 2013, would have
been reduced by approximately 20 basis points if the CVA risk capital
charge (at 57% of the fully implemented charge) for 2014 was in effect
on such date.
As discussed in Note 1 on page 130 of the financial statements,
effective November 1, 2013, BMO adopted International Accounting
Standard 19R Employee Benefits. If we had adopted this standard for
October 31, 2013, our Basel III CET1 Ratio at October 31, 2013, would
have been reduced by less than 5 basis points.
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. Economic
capital is a key element of our risk-based capital management and
ICAAP framework.
Operating groups: P&C
Banking
Economic Capital by Risk Type
Credit 80%
Market 3%
Operational/Other 17%
RWA by Risk Type
(Canadian $ in millions)
Credit $116,285
Market
Operational $15,441
Capital Management Activities
On December 4, 2012, we announced our intention, and subsequently
obtained the approval of OSFI and the Toronto Stock Exchange (TSX), to
initiate a normal course issuer bid (NCIB) to purchase up to 15 million of
BMO’s common shares on the TSX for the purpose of cancellation. During
fiscal 2013, we purchased 10.7 million shares under BMO’s NCIB share
repurchase program. The current NCIB is set to expire on January 31, 2014.
On December 3, 2013, BMO announced its intention, subject to the
approval of OSFI and the Toronto Stock Exchange (TSX), to initiate a new
NCIB for up to 15 million of its common shares, commencing on or about
February 1, 2014, after the expiry of the current NCIB. Once approvals are
obtained, the share repurchase program will permit BMO to purchase its
common shares on the TSX for the purpose of cancellation. Maintaining a
NCIB is part of BMO’s capital management strategy. The timing and
amount of any purchases under the program are subject to regulatory
approvals and to management discretion based on factors such as market
conditions and capital adequacy.
Wealth
Management
27%
33%
40%
$7,856
$593
$4,018
BMO Capital
Markets
Corporate
Services
50% 92%
22% 3%
28% 5%
$39,125 $16,023
$8,527 $34
$7,192
BMO issued 4.1 million shares during 2013 through the DRIP and
the exercise of stock options. On February 25, 2013, we redeemed all of
our $200 million Non-cumulative Class B Preferred shares, Series 5. On
April 30, 2013, we redeemed all of the US$250 million Non-cumulative
perpetual exchangeable Preferred shares, Series A issued by Harris
Preferred Capital Corporation.
On July 22, 2013, we announced that we did not intend to exercise
our right to redeem our $300 million Non-cumulative 5-Year rate reset
Class B Preferred shares, Series 16 (Series 16 Preferred shares). As a
result, the holders of the Series 16 Preferred shares had the right, at their
option, to convert all or part of their Series 16 Preferred shares on a one-
for-one basis into Non-cumulative Floating Rate Class B Preferred shares,
Series 17 (Series 17 Preferred shares). As a result, approximately 6.3
million Series 16 Preferred shares and approximately 5.7 million Series 17
Preferred shares will be outstanding for the five-year period commencing
on August 26, 2013.
Further details are provided in Notes 17, 18 and 20 on pages 160,
161 and 163 of the financial statements.
64 BMO Financial Group 196th Annual Report 2013