Bank of Montreal 2013 Annual Report Download - page 73

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
standards, qualified professional risk managers, a robust monitoring and
review process, the redistribution of exposures, and the purchase or sale
of insurance through guarantees or credit default swaps.
Collateral Management
Collateral is used for credit risk mitigation purposes and minimizes
losses that would otherwise be incurred. Depending on the type of
borrower, the assets available and the structure and term of the credit
obligations, collateral can take various forms. Investment grade liquid
securities are regularly pledged in support of treasury counterparty
facilities. For corporate and commercial borrowers, collateral can take
the form of pledges of the assets of a business, such as accounts receiv-
able, inventory, machinery and real estate, or personal assets pledged in
support of guarantees. On an ongoing basis, collateral is subject to
regular revaluation specific to asset type.
For loans, collateral values are initially established at the time of
origination, and the frequency of revaluation is dependent on the type
of collateral. For investor-owned commercial real estate, a full external
appraisal of the property is obtained at the time of loan origination,
except where the loan is below a specified threshold amount, in which
case an internal evaluation and a site inspection are completed. Internal
evaluation methods may consider tax assessments, purchase price, real
estate listing or realtor opinion. The case for an updated appraisal is
reviewed annually, with consideration given to the borrower risk rating,
existing tenants and lease contracts, as well as current market con-
ditions. In the event a loan is classified as impaired, depending on its
size, a current external appraisal, evaluation or restricted use appraisal is
obtained and updated every twelve months while the loan is classified
as impaired. For residential real estate, an external property appraisal is
routinely obtained at the time of loan origination. For high LTV ratio
insured mortgages, BMO relies on acceptance by the insurer to confirm
the property’s value. In limited low LTV ratio circumstances, BMO may
use an external service provided by Canada Mortgage and Housing
Corporation to assist in determining if a full property appraisal is
required. Full external appraisals are obtained for all loans held for sale
in the secondary market (i.e., through securitization vehicles) regardless
of the LTV ratio.
Credit Quality Information
Portfolio Review
Total enterprise-wide outstanding credit exposures were $508 billion at
October 31, 2013, comprised of $323 billion in Canada, $156 billion in
the United States and $29 billion in other jurisdictions. This represents
an increase of $12 billion or 2% from the prior year.
BMO’s loan book continues to be well diversified by industry and
geographic region and, consistent with the prior year, the consumer
portfolio represented the majority of loans. Gross loans and acceptances
increased by $25 billion or 10% from the prior year to $281 billion at
October 31, 2013. The geographic mix of our Canadian and U.S. portfo-
lios was relatively unchanged from the prior year, and represented
72.9% and 24.5% of total loans, respectively, compared with 73.1% and
25.0% in 2012. The consumer loan portfolio represented 59.8% of the
total portfolio, relatively unchanged from 60.0% in 2012, with approx-
imately 88% of the portfolio secured in Canada and 97% in the
United States. Corporate and commercial loans represented 40.2% of the
total portfolio, relatively unchanged from 40.0% in 2012. The chart
below provides a breakdown of our loan book by product and industry.
Our loan portfolio is well-diversified by industry and we continue to
proactively monitor industry sectors that we consider warrant closer
attention, including Canadian consumer loans and U.S. real estate.
Further details on our loan book, including detailed breakdowns
by industry and geographic region, can be found in Tables 11 to 19
on pages 112 to 118 and in Note 6 on page 142 of the financial
statements.
Gross Loans and Acceptances by Product and Industry
As at October 31, 2013
Other
Government
Financial institutions
Service industries
Forest products
Utilities
Transportation
Oil and gas
Mining
Manufacturing
Communications
Agriculture
Wholesale trade
Retail trade
Commercial mortgages
Commercial real estate
Construction
Personal loans
– Canada
Personal loans
– U.S.
Residential mortgages
– Canada
Credit cards
Residential mortgages
– U.S.
Details related to our credit exposures are discussed in Note 4, on
page 137 of the financial statements. Our European exposure by country
and counterparty is also summarized in the Select Geographic Exposures
section on page 67 and in Tables 20 to 22 on pages 119 and 120.
Real Estate Secured Lending
Residential mortgage and home equity line of credit (HELOC) exposures
are areas of interest in the current environment. BMO regularly performs
stress testing on its residential mortgage and HELOC portfolios to eval-
uate the potential impact of high-impact events. These stress tests
incorporate moderate to severe adverse scenarios. The credit losses
forecast in these tests vary depending on the severity of the scenario
and are considered to be manageable.
In 2012, new residential real estate lending rules were introduced
for federally regulated lenders in Canada, including restrictions on LTV
ratios for revolving HELOCs, on the waiver of confirmation of income and
on debt service ratio maximums, as well as a maximum amortization of
25 years and a maximum home value of $1 million for high LTV ratio
insured mortgages (LTV greater than 80%). The regulatory changes
resulted in some adjustments to loan underwriting practices, including
reducing the maximum LTV ratio on revolving HELOCs to 65% from the
previous maximum of 80%.
Provision for Credit Losses (PCL)
Total PCL was $589 million in the current year, down 23% from
$765 million in 2012. Detailed discussion of our PCL, including historical
trends in PCL, is provided on page 42, on Table 19 on page 118 and in
Note 4 on page 139 of the financial statements.
Gross Impaired Loans (GIL)
Total GIL, which excludes purchased credit impaired loans, decreased by
$432 million or 15% from 2012 to $2,544 million in 2013 reflecting
decreases in both Canada and the United States. This amount includes
$928 million of GIL related to the purchased performing loan portfolio,
of which $146 million is subject to a loss-sharing agreement with the
Federal Deposit Insurance Corporation that expires in 2015 for commer-
cial loans and 2020 for retail loans. GIL as a percentage of gross loans
and acceptances also decreased over the prior year from 1.17% in 2012
to 0.91% in 2013.
Factors contributing to the change in GIL are outlined in the table
below. Loans classified as impaired during the year, excluding the
purchased performing loan portfolio, decreased from $1,680 million in
2012 to $1,563 million in 2013. Impaired loan formations related to the
purchased performing loan portfolio were $886 million in 2013, down
from $1,421 million in 2012. On a geographic basis, the United States
Material in blue-tinted font above is an integral part of the 2013 annual consolidated financial statements (see page 77).
84 BMO Financial Group 196th Annual Report 2013