Bank of Montreal 1998 Annual Report Download - page 58

CAPITAL MANAGEMENT
50
BANK OF MONTREAL GROUP OF COMPANIES
CAPITAL ADEQUACY ($ millions except as noted)
As at October 31 1998 1997 199 6 1995 1994
Canadian Basis
Tier 1
Common shareholders’ equity 8,650 7,629 6,729 6,174 5,678
Non-cumulative preferred shares 1,958 1,274 857 858 860
Non-controlling interest in subsidiaries 40 80 101 121 144
Goodwill (494) (521) (557) (411) (450)
Tier 1 capital 10,154 8,462 7,130 6,742 6,232
Tier 2
Cumulative preferred shares 00000
Subordinated debt 4,670 3,582 3,179 2,268 1,999
General allowance for credit losses (a) 873 775 0 0 0
Tier 2 capital 5,543 4,357 3,179 2,268 1,999
Less: First loss protection 323 113 na na na
Investment in non-consolidated subsidiaries/
substantial investments 858 697 625 0 0
Total capital 14,516 12,009 9,684 9,010 8,231
Risk-weighted assets 139,782 124,348 106,267 96,075 86,589
Risk-weighted capital ratios (%)
Tier 1 7.26 6.80 6.71 7.02 7.20
Total*10.38 9.66 9.11 9.38 9.51
U.S. basis Tier 1 6.95 6.35 6.26 6.82 6.91
U.S. basis total*10.86 9.92 9.81 9.97 10.07
Assets-to-capital multiple 16.0 18.0 19.0 17.6 17.7
Equity to assets (%) 5.0 4.4 4.6 4.7 4.8
*The October 31, 1996 Total Capital Ratio and Tier 2 capital reflect the inclusion of the $300 million in subordinated debentures
issued November 1, 1996. Excluding this issue, the Total Capital Ratio would be 8.83%, and 9.53% on a U.S. basis.
(a) General allowance included with the approval of OSFI beginning in 1997. OSFI approved the inclusion of the lesser of the
balance of our general allowance for credit losses or 0.625% of risk-weighted assets outstanding.
na – Not applicable
SECURITIZATION CONTINUES IN 1998
What is securitization?
Securitizing assets involves selling financial assets to trusts or special-purpose vehicles that are indepen-
dent from us. We undertook our first securitization of credit card receivables in 1997, and continued in
1998 by securitizing mortgages, corporate loans and additional credit card receivables.
Why do we securitize?
Securitization serves as an effective balance sheet management tool by reducing or eliminating the
need to hold capital against higher risk-weighted assets, enabling capital to be redeployed to alternative
revenue-generating purposes. It also serves as an effective liquidity management tool by diversifying
funding sources. The nature of securitization changes our role from that of lender to loan servicer, thereby
removing the loans from our balance sheet. Loan securitization also affects the manner in which our
revenue and provision for credit losses are reported in the income statement. Amounts for the securitized
loans that would otherwise have been reported as net interest revenue, as fee and commission revenue,
and as credit losses on loans are instead reported as securitization revenues, included in other income.
Revenue from securitized portfolios is received in the form of cash flows paid out from the trust. Credit
losses are a component of the cash flows on the securitized portfolio, so our revenues on the securitized
credit card portfolio may be lower depending on the performance of the securitized receivables. However,
our exposure to credit losses on the securitized credit card receivables is contractually limited
to the cash flows on that portfolio.
What have we securitized?
In 1998 we securitized $5.0 billion of uninsured mortgage loans, $145 million of insured mortgage loans,
$4.1 billion (US$2.8 billion) of commercial loans and $0.5 billion of credit card receivables (in addition
to the $2.0 billion securitized in 1997). The impact of the securitizations on 1998 and 1997 results is
shown below:
How does this affect us? 1998 1997
Reduced net interest revenue (128) (17)
Increased other income 68 16
Reduced provision for credit losses (50) –
Impact on net income before tax (10) (1)
Improved Tier 1 Ratio (basis points) 35 10
For additional information refer to note 7 to the consolidated financial statements.