Bank of Montreal 2014 Annual Report Download - page 76

MD&A
Changes in Gross Impaired Loans and Acceptances (GIL) (1)
(Canadian $ in millions, except as noted)
For the year ended October 31 2014 2013 2012
GIL, beginning of year 2,544 2,976 2,685
Classified as impaired during the year 2,142 2,449 3,101
Transferred to not impaired during the year (669) (728) (968)
Net repayments (1,059) (1,058) (517)
Amounts written-off (801) (939) (1,179)
Disposals of loans (220) (343) (197)
Foreign exchange and other movements 111 187 51
GIL, end of year 2,048 2,544 2,976
GIL as a % of gross loans and acceptances 0.67 0.91 1.17
(1) GIL excludes purchased credit impaired loans.
Allowance for Credit Losses (ACL)
Across all loan portfolios, BMO employs a disciplined approach to provi-
sioning and loan loss evaluation, with the prompt identification of
problem loans being a key risk management objective. BMO maintains
both specific and collective allowances for credit losses. Specific allow-
ances reduce the aggregate carrying value of credit assets for which
there is evidence of deterioration in credit quality. We also maintain a
collective allowance in order to cover any impairment in the existing
loan portfolio that cannot yet be associated with individually identified
impaired loans. Our approach to establishing and maintaining the collec-
tive allowance is based on the requirements of IFRS, considering guide-
lines issued by our regulator, OSFI. For the purposes of calculating the
collective allowance, we group loans on the basis of similar credit risk
characteristics. Our methodology incorporates both quantitative and
qualitative components to determine an appropriate level for the collec-
tive allowance. The quantitative component measures long-run
expected losses based on PD and LGD risk parameters. For commercial
and corporate loans, key factors that determine the incurred but not
identified losses include the underlying risk rating of the borrower,
industry sector, credit product and amount and quality of collateral held.
For consumer and small business loans, exposures are pooled based on
similar risk characteristics and the incurred loss parameters are
determined from the long-run default and historical loss experience of
each pool. The collective allowance is adjusted to reflect qualitative
factors such as management’s credit judgment with respect to current
and near-term macroeconomic and business conditions, portfolio-
specific considerations, credit quality trends, changes in lending
practices, model factors and the level of non-performing balances
(impaired loans) for which a specific allowance has not yet been
assessed. We review the collective allowance on a quarterly basis.
BMO maintains the allowance for credit losses at a level that we
consider adequate to absorb credit-related losses. As at
October 31, 2014, the ACL was $1,966 million, comprised of
$424 million of specific allowance and $1,542 million of collective
allowance. This includes $50 million of specific allowance and
$182 million of collective allowance related to undrawn commitments
and letters of credit that are considered other credit instruments and
recorded in other liabilities. Total ACL remained relatively stable year
over year, decreasing by $4 million. Our coverage ratios are trending
positively with ACL as a percentage of GIL, including and excluding
purchased portfolios, increasing year over year.
The collective allowance increased by $57 million from 2013 to
$1,542 million in 2014 due to the strengthening U.S. dollar. The collec-
tive allowance remains adequate and at year end represented 0.83% of
credit risk-weighted assets, unchanged from 2013.
Factors contributing to the change in ACL are outlined in the table
below. Further details on changes in ACL by country and portfolio can
be found in Tables 12 and 13 on page 116 and in Note 4 on page 136 of
the financial statements.
Changes in Allowance for Credit Losses (1)
(Canadian $ in millions, except as noted)
For the year ended October 31 2014 2013 2012
Specific ACL, beginning of year 485 476 559
Specific PCL (charge to income statement) 561 597 761
Recoveries of amounts written off in
previous years 624 772 846
Write-offs (1,149) (1,297) (1,593)
Foreign exchange and other movements (97) (63) (97)
Specific ACL, end of year 424 485 476
Collective ACL, beginning of year 1,485 1,460 1,452
Collective PCL (charge to income statement) –(10) 3
Foreign exchange and other movements 57 35 5
Collective ACL, end of year 1,542 1,485 1,460
Total ACL 1,966 1,970 1,936
Comprised of:
Loans 1,734 1,665 1,706
Specific allowance for other
credit instruments 50 41 29
Collective allowance for other
credit instruments 182 264 201
ACL as a % of GIL (2) 93.6 75.8 64.1
(1) Includes allowances related to other credit instruments that are included in other liabilities.
(2) Ratio excludes specific allowances for other credit instruments that are included in other
liabilities.
BMO Financial Group 197th Annual Report 2014 87