Bank of Montreal 2013 Annual Report Download - page 56

Select Geographic Exposures
BMO’s geographic exposure is subject to a country risk management
framework that incorporates economic and political assessments, and
management of exposure within limits based on product, entity and the
country of ultimate risk. We closely monitor our European exposure, and
our risk management processes incorporate stress tests where appro-
priate to assess our potential risk. Our exposure to select countries of
interest, as at October 31, 2013, is set out in the tables that follow,
which summarize our exposure to Greece, Ireland, Italy, Portugal and
Spain (GIIPS) along with a broader group of countries of interest in
Europe where our gross exposure is greater than $500 million.
The first table outlines total gross and net portfolio exposures for
lending, securities (inclusive of credit default swap (CDS) activity), repo-
style transactions and derivatives. These totals are further broken down
by counterparty type in Tables 20 to 22 on pages 119 and 120.
For greater clarity, BMO’s CDS exposures in Europe are outlined
separately in the second table that follows. As part of our credit risk
management framework, purchased CDS risk is controlled through a
regularly reviewed list of approved counterparties. The majority of CDS
exposures are offsetting in nature, typically contain matched contractual
terms and are attributable to legacy credit trading strategies that have
been in run-off mode since 2008.
European Exposure by Country and Counterparty (9) (Canadian $ in millions)
As at October 31, 2013 Lending (1) Securities (2) Repo-style transactions (3) Derivatives (4) Total
Country Commitments Funded Gross Net Gross Net Gross Net Gross Net
GIIPS
Greece – – – – – – – – – –
Ireland (5) – – 26 – 27 1 33 4 86 5
Italy 2 2 196 – 54 – 5 1 257 3
Portugal – – 130 – – – – – 130 –
Spain 77 77 125 – – – 7 1 209 78
Total – GIIPS (6) 79 79 477 – 81 1 45 6 682 86
Eurozone (excluding GIIPS)
France 22 22 634 494 2,966 9 190 45 3,812 570
Germany 21 21 1,660 1,347 1,098 2 54 30 2,833 1,400
Netherlands 338 163 811 737 1,112 4 52 15 2,313 919
Other (7) 421 256 340 201 23 2 62 13 846 472
Total – Eurozone (excluding GIIPS) (8) 802 462 3,445 2,779 5,199 17 358 103 9,804 3,361
Rest of Europe
Denmark 15 15 1,126 1,124 69 – 7 7 1,217 1,146
Norway 16 16 1,250 1,250 – – – – 1,266 1,266
Sweden 121 64 280 276 111 – 1 – 513 340
Switzerland 546 163 48 – 330 7 3 19 927 189
United Kingdom 485 222 365 122 3,534 50 251 89 4,635 483
Other (7) 476 476 341 – – – – – 817 476
Total – Rest of Europe (8) 1,659 956 3,410 2,772 4,044 57 262 115 9,375 3,900
Total – All of Europe 2,540 1,497 7,332 5,551 9,324 75 665 224 19,861 7,347
As at October 31, 2012 Lending (1) Securities (2) Repo-style transactions (3) Derivatives (4) Total
Country Commitments Funded Gross Net Gross Net Gross Net Gross Net
Total – GIIPS 116 69 500 – 242 8 69 6 927 83
Total – Eurozone (excluding GIIPS) 934 608 4,074 3,306 3,746 10 600 76 9,354 4,000
Total – Rest of Europe 1,167 916 3,711 2,771 3,986 15 468 126 9,332 3,828
Total – All of Europe 2,217 1,593 8,285 6,077 7,974 33 1,137 208 19,613 7,911
MD&A
Note: Further breakdown by country and counterparty is provided in Tables 20 to 22 on
pages 119 to 120.
(1) Lending includes loans and trade finance. Amounts are net of write-offs and gross of specific
allowances, both of which are not considered material.
(2) Securities includes cash products, insurance investments and traded credit. Gross traded
credit includes only the long positions and excludes offsetting short positions.
(3) Repo-style transactions are all with bank counterparties.
(4) Derivatives amounts are marked-to-market, incorporating transaction netting and, for
counterparties where a Credit Support Annex is in effect, collateral offsets. Derivative
replacement risk net of collateral for all of Europe is approximately $3.0 billion as at
October 31, 2013.
(5) Does not include Irish subsidiary reserves we are required to maintain with the Irish Central
Bank of $86 million as at October 31, 2013.
(6) BMO’s direct exposures to GIIPS are primarily to banks for trade finance and trading
products. Net exposures remain modest at $86 million, with no unfunded commitments as
at October 31, 2013.
(7) Includes countries with less than $500 million in gross exposure. Other Eurozone includes
exposures to Austria, Belgium, Cyprus, Finland, Luxembourg, Slovakia and Slovenia. Other
Rest of Europe includes exposures to Croatia, Czech Republic, Hungary, Iceland, Poland and
Russian Federation.
(8) BMO’s net direct exposure to the other Eurozone countries (the other 12 countries that share
the common euro currency) as at October 31, 2013, totalled approximately $3.4 billion, of
which 79% was to counterparties in countries with a rating of Aaa/AAA by both Moody’s and
S&P, with approximately 83% rated Aaa/AAA by one of the two rating agencies. Our net direct
exposure to the rest of Europe totalled approximately $3.9 billion, of which 64% was to
counterparties in countries with a Moody’s/S&P rating of Aaa/AAA. A significant majority of
our sovereign exposure consists of tradeable cash products, while exposure related to banks
was comprised of trading instruments, short-term debt, derivative positions and letters of
credit and guarantees.
(9) Other exposures (including indirect exposures) not included in the tables as at
October 31, 2013:
‰ BMO also has exposure to entities in a number of European countries through our credit
protection vehicle and U.S customer securitization vehicle. These exposures are not included
in the tables due to the credit protection incorporated in their structures.
– BMO has direct exposure to those credit structures, which in turn have exposures to loans
or securities originated by entities in Europe. As noted on page 66 in the Credit Protection
Vehicle section, this structure has first-loss protection and hedges are in place.
– The notional exposure held in the credit protection vehicle to issuers in Greece, Italy and
Spain represented 3.9%, of its total notional exposure. The credit protection vehicle had
notional exposure to five of the other 12 countries that share the euro currency. This
exposure represented 12% of total notional exposure, of which 87% was rated
investment grade by both S&P and Moody’s. The notional exposure to the rest of Europe
was 14% of total notional exposure, with 77% rated investment grade by S&P (68% by
Moody’s). The vehicle benefits from significant risk loss protection and as a result
residual credit risk is very low.
– BMO has exposure to GIIPS and other European countries through our U.S. customer
securitization vehicle, which has commitments that involve reliance on collateral of
which 0.29% represents loans or securities originated by entities in Europe. At year end,
exposure to Luxembourg was the largest component at 0.10%. Exposure to Spain was
approximately 0.06%, and there was no exposure to Italy, Ireland, Greece or Portugal.
‰ BMO has exposure to European supranational institutions totalling $0.4 billion,
predominantly in the form of tradeable cash products.
‰ BMO’s indirect exposure to Europe in the form of euro-denominated collateral to support
trading activity was €413 million in securities issued by entities in European countries, of
which €3.5 million was held in securities related to GIIPS and €288 million was in French
securities. In addition, €323 million of cash collateral was also held at October 31, 2013.
‰ Indirect exposure by way of guarantees from entities in European countries totalled
$558.6 million, of which $5 million was exposure to GIIPS, $250.8 million to the other
Eurozone countries and $302.8 million to the rest of Europe.
BMO Financial Group 196th Annual Report 2013 67