Bank of Montreal 2014 Annual Report Download - page 178

Net Interest Income is comprised of
earnings on assets, such as loans and
securities, including interest and
dividend income and BMO’s share of
income from investments accounted
for using the equity method of
accounting, less interest expense
paid on liabilities, such as deposits.
Page 37
Net Interest Margin is the ratio of
net interest income to average
earning assets, expressed as a
percentage or in basis points. Net
interest margin is sometimes com-
puted using total assets.
Page 37
Notional Amount refers to the
principal used to calculate interest
and other payments under derivative
contracts. The principal amount does
not change hands under the terms of
a derivative contract, except in the
case of cross-currency swaps.
Off-Balance Sheet Financial
Instruments consist of a variety of
financial arrangements offered to
clients, which include credit
derivatives, written put options,
backstop liquidity facilities, standby
letters of credit, performance guaran-
tees, credit enhancements, commit-
ments to extend credit, securities
lending, documentary and commer-
cial letters of credit, and other
indemnifications.
Office of the Superintendent of
Financial Institutions Canada
(OSFI) is the government agency
responsible for regulating banks,
insurance companies, trust compa-
nies, loan companies and pension
plans in Canada.
Operating Leverage is the differ-
ence between revenue and expense
growth rates. Adjusted operating
leverage is the difference between
adjusted revenue and adjusted
expense growth rates.
Pages 27, 41
Operational Risk is the potential for
loss resulting from inadequate or
failed internal processes or systems,
human interactions or external
events, but excludes business risk.
Page 101
Options are contractual agreements
that convey to the buyer the right but
not the obligation to either buy or sell
a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
fixed future date or at any time
within a fixed future period.
Page 146
Provision for Credit Losses is a
charge to income that represents an
amount deemed adequate by
management to fully provide for
impairment in a portfolio of loans and
acceptances and other credit instru-
ments, given the composition of the
portfolio, the probability of default,
the economic environment and the
allowance for credit losses already
established.
Pages 40, 86, 136
Reputation Risk is the risk of a
negative impact on BMO that results
from the deterioration of BMO’s
reputation. Potential negative
impacts include revenue loss, decline
in client loyalty, litigation, regulatory
sanction or additional oversight, or
decline in BMO’s share price.
Page 105
Return on Equity or Return on
Common Shareholders’ Equity
(ROE) is calculated as net income,
less non-controlling interest in sub-
sidiaries and preferred dividends, as
a percentage of average common
shareholders’ equity. Common
shareholders’ equity is comprised of
common share capital, contributed
surplus, accumulated other compre-
hensive income (loss) and retained
earnings. Adjusted ROE is calculated
using adjusted net income.
Page 34
Risk-Weighted Assets (RWA) are
defined as on- and off-balance sheet
exposures that are risk-weighted
based on counterparty, collateral,
guarantee arrangements and
possibly product and term for capital
management and regulatory
reporting purposes.
Page 64
Securities Borrowed or Purchased
under Resale Agreements are low-
cost, low-risk instruments, often
supported by the pledge of cash
collateral, which arise
from transactions that involve
the borrowing or purchasing
of securities.
Securities Lent or Sold under
Repurchase Agreements are low-
cost, low-risk liabilities, often sup-
ported by cash collateral, which arise
from transactions that involve the
lending or selling of securities.
Securitization is the practice of
selling pools of contractual debts,
such as residential mortgages,
commercial mortgages, auto loans
and credit card debt obligations, to
third parties.
Page 143
Specific Allowances reduce the
carrying value of specific credit
assets to the amount we expect to
recover if there is evidence of
deterioration in credit quality.
Pages 87, 136
Strategic Risk is the potential for
loss due to fluctuations in the
external business environment
and/or failure to properly respond to
these fluctuations as a result of
inaction, ineffective strategies or
poor implementation of strategies.
Page 104
Stressed Value at Risk (SVaR) is
measured for specific classes of risk
in BMO’s trading and underwriting
activities: interest rate, foreign
exchange rate, credit spreads, equity
and commodity prices and their
implied volatilities, where model
inputs are calibrated to historical
data from a period of significant
financial stress. This measure calcu-
lates the maximum loss likely to be
experienced in the portfolios, meas-
ured at a 99% confidence level over
a specified holding period.
Page 91
Structured Entities (SEs) include
entities for which voting or similar
rights are not the dominant factor in
determining control of the entity. We
are required to consolidate an SE if
we control the entity by having
power over the entity, exposure or
rights to variable returns from our
involvement and the ability to
exercise power to affect the amount
of our returns.
Pages 70, 144
Swaps are contractual agreements
between two parties to exchange a
series of cash flows. The various
swap agreements that we enter into
are as follows:
• Commodity swaps – counterparties
generally exchange fixed-rate and
floating-rate payments based on
a notional value of a single
commodity.
• Credit default swaps – one
counterparty pays the other a fee
in exchange for that other counter-
party agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
• Cross-currency interest rate
swaps – fixed-rate and floating-rate
interest payments and principal
amounts are exchanged in
different currencies.
• Cross-currency swaps – fixed-rate
interest payments and principal
amounts are exchanged in
different currencies.
• Equity swaps – counterparties
exchange the return on an equity
security or a group of equity secu-
rities for the return based on a
fixed or floating interest rate or the
return on another equity security or
group of equity securities.
• Interest rate swaps – counter-
parties generally exchange fixed-
rate and floating-rate interest
payments based on a notional
value in a single currency.
Page 146
Taxable Equivalent Basis (teb):
Revenues of operating groups
reflected in our MD&A are presented
on a taxable equivalent basis (teb).
To facilitate comparisons, the teb
adjustment increases reported
revenues and the provision for
income taxes by an amount that
would increase revenues on certain
tax-exempt securities to a level that
would incur tax at the statutory rate.
Pages 36, 174
Tier 1 Capital is primarily comprised
of CET1, preferred shares and other
qualifying or grandfathered non-
common equity capital, net of certain
deductions.
Pages 64, 163
Tier 1 Capital Ratio reflects Tier 1
capital divided by Tier 1 capital risk-
weighted assets.
Pages 64, 163
Total Capital includes Tier 1 and
Tier 2 capital. Tier 2 capital is
primarily comprised of subordinated
debentures and a portion of the
collective allowance for credit losses,
net of certain deductions.
Pages 64, 163
Total Capital Ratio reflects Total
capital divided by Total capital risk-
weighted assets.
Pages 64, 163
Total Shareholder Return: The
three-year and five-year average
annual total shareholder return (TSR)
represents the average annual total
return earned on an investment in
BMO common shares made at the
beginning of a three-year and five-
year period, respectively. The return
includes the change in share price
and assumes that dividends received
were reinvested in additional
common shares. The one-year TSR
also assumes that dividends were
reinvested in shares.
Page 31
Trading-Related Revenues include
net interest income and non-interest
revenue earned from on- and off-
balance sheet positions undertaken
for trading purposes. The manage-
ment of these positions typically
includes marking them to market on
a daily basis. Trading-related rev-
enues include income (expense) and
gains (losses) from both on-balance
sheet instruments and interest rate,
foreign exchange (including spot
positions), equity, commodity and
credit contracts.
Page 39
Value at Risk (VaR) is measured for
specific classes of risk in BMO’s
trading and underwriting activities:
interest rate, foreign exchange rate,
credit spreads, equity and
commodity prices and their implied
volatilities. This measure calculates
the maximum loss likely to be
experienced in the portfolios, meas-
ured at a 99% confidence level over
a specified holding period.
Pages 91, 92
BMO Financial Group 197th Annual Report 2014 191