Bank of Montreal 1998 Annual Report Download - page 57

BANK OF MONTREAL GROUP OF COMPANIES
CAPITAL MANAGEMENT
STRATEGY:
To maintain a consistently
strong capital position, while
earning appropriate returns
on capital to support long-term
shareholder value.
MEASURE:
The Tier 1 Ratio is our primary
measure of capital adequacy.
The Office of the Superintendent
of Financial Institutions, Canada
(OSFI) defines this measure
as Tier 1 capital as a percentage
of risk-weighted assets.
Note: For more information see table on page 50.
9897969594
REGULATORY CAPITAL
RATIOS†
9.7 10.4
9.1
9.4
9.5
Total Capital Ratio (%)
Tier 1 Ratio (%)
7. 3
6.8
6.7
7. 0
7. 2
Note: For more information see table on page 50.
9897969594
ASSETS-TO-CAPITAL
MULTIPLE
16.0
18.0
19.0
17.6
17.7
CAPITAL MANAGED IN LINE WITH STRONG BALANCE SHEET GROWTH
Capital is defined as investor resources, typically shareholders’ equity plus subordinated debt,
available to provide support for our risk-taking activities. Capital is a strategic resource, which
requires a disciplined management program to ensure efficient and effective deployment.
A consistently strong capital position enables us to:
■Ensure the quantity and quality of capital is adequate to cover the economic risks arising
from our business operations;
■Meet or exceed the expectations of the market;
■Optimize our capital usage; and
■Exceed minimum regulatory requirements at all times.
Approach:
In managing our capital, we need to balance the needs and requirements of stakeholders,
including shareholders, regulators and rating agencies. Accordingly, capital management
is
an integral part of our risk management strategy.
Management of our capital takes into account economic, regulatory and legal entity
requirements. Capital is managed at two levels – the consolidated Bank level, and the line
of business level.
At the consolidated Bank level, total capital determines the amount of risk that we can
assume and we work to ensure that regulatory and legal capital requirements are met. For
internal
management purposes, our focus is equity capital. At the line of business level,
equity is managed on an economic basis. Equity is allocated to support the economic
risks associated with a particular transaction, activity or line of business. Its primary use is
evaluating investment decisions and measuring performance through RAROC.
Improved Capital Ratios
Our Tier 1 Ratio increased to 7.26% in 1998 from 6.80% in 1997, while risk-weighted assets
increased 12.4%. This was made possible by active balance sheet management, with various
initiatives undertaken in 1998 to optimize our balance sheet, including the securitization
of corporate loans, mortgages and credit cards. Approximately $9.7 billion of assets were
securitized in 1998 (see page 50 for a description of the securitizations and their impact),
which helped to moderate risk-weighted asset growth to a level more supportable by
internally generated capital. Another 1998 initiative was the issuance of preferred shares,
which resulted in an increase of $650 million in Tier 1 capital. The Tier 1 Ratio improved by
79 basis points as a result of these initiatives.
We also use secondary measures for monitoring regulatory capital requirements, namely
the Total Capital Ratio and the assets-to-capital multiple, both defined by OSFI. OSFI requires
banks to meet the minimum capital requirements of 4% and 8% in terms of Tier 1 and Total
Capital Ratios respectively, and also requires them to not exceed an assets-to-capital multiple
of 20. Our Total Capital Ratio, the ratio of total capital to risk-weighted assets, was 10.38% as
at October 31, 1998. This was up from 9.66% at the end of 1997, due primarily to the strength-
ening
of the Bank’s Tier 1 Ratio mentioned above and the issuance of subordinated debt. The
assets-to-capital multiple is the multiple of adjusted assets (including guarantees and letters
of
credit) to total capital. Our assets-to-capital multiple as at October 31, 1998 was 16.0,
improved
from 18.0 at the end of last year. The reasons for the improved multiple are the
same as noted
above for the improvement in the Total Capital Ratio.
In 1997 our Tier 1 Ratio increased to 6.80% from 6.71% in 1996. This improvement was
driven by an increase in Tier 1 capital of 18.7%, offset by the impact of a 17.0% increase
in
risk-weighted assets. Tier 1 capital increased through retained earnings growth and the
issuance of $400 million of preferred shares. Risk-weighted asset growth was moderated by
various balance sheet risk management initiatives, including our first asset securitization.
OUTLOOK
Capital ratios in 1998 were managed in line with strong balance sheet growth. Management expects
to continue to maintain the Tier 1 and Total Capital Ratios above 7% and 10% respectively, in line
with OSFI expectations.
49
†Defined in the Glossary on page 92