Bank of Montreal 1998 Annual Report Download - page 49

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BANK OF MONTREAL GROUP OF COMPANIES
PORTFOLIO AND RISK MANAGEMENT GROUP
MODERNIZATION OF PRACTICES AND PROCESSES
TO STRENGTHEN THE BUSINESS
Group Description:
Portfolio and Risk Management Group (P&RMG) is a
new group formed in 1998 following a series of initiatives
to
modernize portfolio and risk management practices.
P&RMG is comprised of: Risk Management Group, Asset
Portfolio Management, Collateralized Bond Obligation
Group, and Global Financial Institutions & Governments
including Trade Finance. Risk Management Group brings
together risk management and the corporate treasury
function on an enterprise-wide basis under one umbrella.
Risk Management Group also incorporates risk manage-
ment policy functions, including its independent enterprise-
wide mandate of maintaining an appropriate risk-return
relationship by identifying, pricing and managing risk. For
additional information on our risk management process,
please refer to page 43.
Asset Portfolio Management, through the application of
sophisticated portfolio management techniques to optimize
portfolio performance, manages corporate and institutional
loans and securities portfolios, including the retained
components of originated financings. They also support
the origination efforts of the client coverage group, and
manage credit risk taken by Global Treasury in its trading
activities. The Collateralized Bond Obligation†Group uses
state-of-the-art risk management techniques to provide
investors in high-yield instruments with leading-edge port-
f
olio management services. Global Financial Institutions
& Governments actively manages relationships with gov-
ernment and international financial institution segments,
and also serves the needs of those corporate clients with
international interests or Trade Finance requirements.
P&RMG contributed 17.6% of our total net income in
1998, and accounted for 13.4% of our total average assets.
Environmental Overview:
Financial markets have made tremendous progress in
dissecting, quantifying and managing risks. However, a
number of dynamics are setting the stage for new risks and
increasing the complexity of managing business risks for
providers of financial services: growing sophistication of
markets and products; the breakneck speed of techno-
logical innovation; growing electronic information traffic;
soaring transaction volumes; and increased dependence
on liquidity. These new risks demand new ways of thinking,
and the challenge for financial institutions is in developing
an in-depth understanding of the relationship between
risk measurement, capital allocation and reward.
Disintermediation of traditional banking activities
continues to prevail, most recently in the large corporate
loan market. Bank loans have emerged as a distinct trading
class over the past several years, and sophisticated portfolio
management teams are emerging within banks to take
advantage of this trend. Asset portfolios are optimized using
portfolio data, state-of-the-art tools and analytic models.
P&RMG has identified key business strategies to address
the complex environment and business issues it faces.
KEY BUSINESS STRATEGIES:
■establish an enterprise-wide risk management function to
maintain an appropriate risk-return relationship;
■diversification of the corporate asset portfolio through
originated and investment assets and securities that meet
our risk-reward parameters;
■build our collateralized bond obligation (CBO) portfolio
to US$3 billion by the end of fiscal 1999;
ACCOMPLISHMENTS IN 1998:
Established an Enterprise-Wide Risk Management Function
■
Risk Management Group was formed, bringing together
enterprise-wide credit, market, operational and liquidity
risk management under one umbrella to optimize risk
and return.
■Implementation of the Value at Risk (VaR) model con-
tinued, with the aim of introducing an open, flexible
system to provide risk management tools that will allow
a thorough understanding of risk and facilitate new
product introductions.
■leverage process improvements and client coverage techniques
to intensify the focus on value-added sales and distribution for
Global Financial Institutions & Governments and Trade Finance;
■retain, attract and develop teams of professionals who are
leaders in the field of portfolio and risk management.
Diversified the Corporate Asset Portfolio
■Portfolio Management’s global reputation in debt port-
folio management was instrumental in the completion
of a US$3 billion collateralized loan obligation, our first
such transaction. The issue, led by Goldman Sachs and
Nesbitt Burns, met with strong investor demand and
was oversubscribed. The transaction, which securitized
loans granted to a wide spectrum of large corporate
borrowers, was also significant as part of the continued
pro-active management of our capital and balance sheet.
†Defined in the Glossary on page 92