Bank of Montreal 1998 Annual Report Download - page 53

BANK OF MONTREAL GROUP OF COMPANIES
Continued Strong Performance
The provisioning ratio of 9 basis points (down from 23 basis points in 1997) represents an
improvement in asset quality performance. A lower provisioning ratio indicates a lower level
of loss in the portfolio. The provision for credit losses in 1998 was $130 million and included
a specific provision of $20 million and a $110 million increase to the general allowance. The
provision was $145 million lower than 1997 due to a $90 million lower addition to the general
allowance and a reduction of approximately $100 million relating to credit card portfolios
which were sold or securitized, offset by a higher level of net specific provisions. The provi-
sioning ratio of 9 basis points marks the lowest level in more than two decades, attributable
to continuing favourable economic conditions and strong asset quality management.
The total general allowance now stands at $885 million. We maintain a general allowance in
recognition of the fact that not all of the impairment in the loan portfolio can be specifically
identified on a loan-by-loan basis. The general allowance is based upon statistical analysis of
past performance, the level of allowance already in place and management’s judgement.
The general allowance would normally increase in a strong business/economic cycle and
would be drawn down during a weak business/economic cycle when specific allowances
would normally increase in relation to our exposures. Our primary regulator, the Office of
the Superintendent of Financial Institutions, Canada (OSFI), permitted the amount of the
general allowance to qualify as Tier 2 capital, up to a maximum of 0.625% of risk-weighted
assets
†
. OSFI will formally introduce its general allowance assessment criteria in 1999, with
application to the general allowance balances for 1999 year ends and the following periods.
OSFI will be working with deposit-taking institutions on the transition to its new criteria.
The potential effects, if any, of such criteria cannot yet be determined.
There were no material credit losses for individual accounts in 1998 or 1997, with the prob-
ability of single large losses reduced as a result of both the diversification of the portfolios and
good management discipline. The methodologies employed are aimed at restricting larger
credit exposures to higher-quality risks and to short-term situations. 1997 was considered to
be the most favourable point on the current credit cycle, and as a result recoveries of previous
write-offs on larger problem loans that originated several years ago were higher in 1997 than
in the current year. Recoveries in 1997 amounted to $158 million, reflecting the strength of
the North American economy, with recoveries in 1998 of $64 million by comparison.
Overall, the performance of the consumer portfolio has remained strong and good asset
growth has been achieved. The natural diversification in the consumer credit portfolio means
that our losses from that portfolio largely follow the general business cycle.
Impaired Loans More Than Covered by Allowance
The ratio of gross impaired loans (GIL) to equity and allowance for credit losses (ACL) is
another primary performance measure of asset quality.
As a result of the reduced incidence of new impaired loans and strong recoveries in the early
part of 1998, as well as increased equity, the ratio improved to 6.66% at year-end, compared to
7.65% at October 31, 1997.
The negative net impaired loans position at October 31, 1998 of $342 million, was little
changed from negative $358 million in 1997; that is, the allowance for credit losses continued
to exceed the gross amount of impaired loans by the amounts noted. This resulted from
significant reductions in gross impaired loans over recent years partially offset by a $37 million
increase in 1998, and the prudential build-up of the general allowance in 1998 to $885 million.
The most significant factor leading to lower impaired loan totals in recent years was the gen-
erally favourable economic environment in our major markets. In addition, our monitoring
models for larger corporate loans assisted us in detecting quality deterioration early, providing
us with a broader range of options to address emerging problems with these borrowers. Our
ongoing investment in enhanced portfolio management and monitoring techniques has
contributed to a reduced incidence of impaired loans. We have not been major lenders in Asia,
Russia and Eastern Europe, regions that are currently experiencing economic trouble, with
our net outstanding exposure in those countries less than $3.2 billion at October 31, 1998
LOANS TO INDIVIDUALS
BY PRODUCT
1.6
32.0
66.4
Residential mortgages (%)
Other personal (%)
Cards (%)
9897969594
PROVISIONING RATIO
PCL as % of average loans and
acceptances
0.09
0.230.23
0.30
0.63
9897969594
GROSS IMPAIRED
LOANS RATIO
GIL as % of equity and ACL
6.66
7. 6 5
15.71
20.48
29.86
9897969594
ALLOWANCE FOR
CREDIT LOSS RATIO
ACL as % of GIL
153.3
157.2
81.7
72.5
61.1
Note: For more information see Table 10 on page 60.
Note: For more information see Table 9 on page 60.
Note: For more information see Table 12 on page 62.
Note: For more information see Tables 10 and 11 on
pages 60 and 62.
45
†Defined in the Glossary on page 92