Bank of Montreal 2004 Annual Report Download - page 35

In 2004, our results included a net recovery of credit losses
of $103 million. As outlined in the Provision for (Recovery of)
Credit Losses table, the net recovery consisted of $67 million
in specific provisions offset by a $170 million reduction in the
general allowance. In 2003, there was a $455 million provision
for credit losses, comprised entirely of specific provisions.
As can be determined from the table, specific provisions
for credit losses peaked in the 2001–2002 period, declining
sharply in both 2003 and 2004. In 2004, specific provisions
for credit losses declined to 4 basis points of average net loans
and acceptances. This compares with a recent peak of 60 basis
points in 2001 and an average of 34 basis points over the past
five years. The recent improvement is attributable to favourable
credit conditions, effective loan realization practices and a
strong secondary market for loan sales.
The most significant factor influencing the provision for
credit losses is the level of formations of new impaired loans –
identified as additions to impaired loans and acceptances
in the Changes in Gross Impaired Loans and Acceptances table.
Formations peaked in 2001–2002 at approximately $2 billion
in each of those years, declining sharply in 2003 and again
in 2004 when they totalled $607 million. Partially as a result,
new specific provisions declined to $510 million from levels
exceeding $1 billion in 2001 and 2002.
Another significant factor affecting the level of specific
provisions is the amount of reductions arising from reversals
of previous allowances and recoveries of prior write-offs.
Favourable credit conditions, coupled with effective loan real-
ization practices that include strong cash collections and loan
sales, resulted in substantial reversals and recoveries during
the past two years, as indicated in the table. In 2004, sales of
gross non-performing loans totalled $440 million, with resulting
reversals and recoveries totalling $71 million. In 2003, sales
of non-performing loans totalled $288 million, with related
reversals and recoveries totalling $23 million.
Gross impaired loans and acceptances totalled $1,119 million
in 2004, compared with $1,918 million a year earlier. Significant
reductions occurred in the electric power generation, whole-
sale trade and communications sectors. At year-end, gross
impaired loans as a percentage of equity and allowance for
credit losses improved to 6.75% from 12.15% a year ago.
At October 31, 2004, the allowance for credit losses totalled
$1,308 million, compared with $1,791 million a year earlier.
The decline was attributable to improved credit quality and lower
levels of impaired loans and acceptances. The general allow-
ance, which totalled $1,010 million at year-end, remains
adequate, representing 74 basis points of risk-weighted assets.
In addition, BMO uses credit default swaps to mitigate credit
exposures; they totalled $830 million in 2004 and $323 million
in 2003.
BMO has no significant exposure to those industry sectors
considered to be of most concern in today’s economy. These
include the automotive, airline, electric power generation,
forestry, and Canadian cattle farming and related sectors.
Nonetheless, we remain attentive to those factors that could
affect credit quality, including sustained high energy prices,
the impact on export sectors of the sharp appreciation of the
Canadian dollar relative to the U.S. dollar and the potential
impact of rising interest rates.
Credit risk management is discussed further on page 60.
In addition, Tables 11 to 19 on pages 76 to 79 provide detailed
loan and loan quality data.
Looking forward, we expect the credit environment to remain
strong in 2005, an outlook supported by low corporate default
rates, low levels of impaired loan formations and an expecta-
tion of moderate to strong economic activity in North America.
Accordingly, we expect the 2005 provision for credit losses to
be $400 million or less, with the increase over the current year
largely due to lower levels of reversals and recoveries.
Provision for Credit Losses
BMO Financial Group Annual Report 2004 31
MD&A
Gross Impaired Loans and
Acceptances as a % of Equity
and Allowances for Credit Losses
20042003200220012000
6.75
10.51
14.17 15.16
12.15
Specific Provision for Credit
Losses as a % of Average
Net Loans and Acceptances
20042003200220012000
0.04
0.20
0.60 0.56
0.30
Low impaired loan formations and
effective loan remediation improved
our credit quality.
There was an unusually low provision
for credit losses in 2004 but provisions
in 2005 are expected to rise.
Provision for (Recovery of) Credit Losses (PCL) ($ millions, except as noted)
For the year ended October 31 2004 2003 2002 2001 2000
New specific provisions 510 846 1,063 1,023 458
Reversals of previous allowances (312) (303) (175) (103) (124)
Recoveries of prior write-offs (131) (88) (68) (40) (44)
Specific provisions
for credit losses 67 455 820 880 290
Increase in (reduction of):
General allowance (170) –– 100 110
Country risk allowance –––– (42)
Provision for (recovery of)
credit losses (103) 455 820 980 358
PCL as a % of average
net loans and acceptances (0.07)% 0.30% 0.56% 0.66% 0.25%
Changes in Gross Impaired Loans (GIL) and Acceptances
($ millions, except as noted)
2004 2003 2002 2001 2000
GIL, beginning of year 1,918 2,337 2,014 1,501 1,092
Additions to impaired loans
and acceptances 607 1,303 1,945 2,041 1,106
Reductions in impaired loans
and acceptances (936) (1,156) (738) (830) (446)
Write-offs (470) (566) (884) (698) (251)
GIL, end of year 1,119 1,918 2,337 2,014 1,501
GIL as a % of gross loans
and acceptances 0.71% 1.30% 1.54% 1.37% 1.04%