Bank of Montreal 2007 Annual Report Download - page 107

A continuity of our allowance for credit losses is as follows:
(Canadian $ in millions) Specific allowance General allowance Total
2007 2006 2005 2007 2006 2005 2007 2006 2005
Balance at beginning of year $153 $ 169 $ 298 $905 $ 959 $ 1,010 $ 1,058 $ 1,128 $ 1,308
Provision for credit losses 303 211 219 50 (35) (40) 353 176 179
Recoveries 91 112 67 ––– 91 112 67
Write-offs (391) (338) (419) ––– (391) (338) (419)
Foreign exchange and other 1 (1) 4 (57) (19) (11) (56) (20) (7)
Balance at end of year $157 $ 153 $ 169 $898 $ 905 $ 959 $ 1,055 $ 1,058 $ 1,128
BMO Financial Group 190th Annual Report 2007 103
Notes
Concentration of Credit Risk
We are exposed to credit risk from the possibility that counterparties
may default on their financial obligations to us. Credit risk arises
predominantly with respect to loans, over-the-counter derivatives
and other credit instruments.
Concentrations of credit risk exist if a number of clients are
engaged in similar activities, are located in the same geographic
region or have similar economic characteristics such that their ability
to meet their contractual obligations could be affected similarly
by changes in economic, political or other conditions. Concentrations
of credit risk indicate a related sensitivity of our performance
to developments affecting a particular counterparty, industry or
geographic location.
Information about our credit risk exposure is provided above
in the classification of our loan assets both by type of loan and
by geographic region.
Note 5: Other Credit Instruments
We use other off-balance sheet credit instruments as a method of
meeting the financial needs of our customers. Summarized below are
the types of instruments that we use:
•
Standby letters of credit and guarantees represent our obligation
to make payments to third parties on behalf of our customers if our
customers are unable to make the required payments or meet other
contractual requirements;
•Securities lending represents our credit exposure when we lend
our securities, or our customers’ securities, to third parties should
the securities borrower default on its redelivery obligation;
•
Documentary and commercial letters of credit represent our agree-
ment to honour drafts presented by a third party upon completion
of specific activities; and
•Commitments to extend credit represent our commitment to
our customers to grant them credit in the form of loans or other
financings for specific amounts and maturities, subject to
meeting certain conditions.
The contractual amount of our other credit instruments represents
the maximum undiscounted potential credit risk if the counterparty
does not perform according to the terms of the contract, before
possible recoveries under recourse and collateral provisions. Collateral
requirements for these instruments are consistent with collateral
requirements for loans. A large majority of these commitments
expire without being drawn upon. As a result, the total contractual
amounts may not be representative of our likely funding required
for these commitments.
We strive to limit credit risk by dealing only with counterparties
that we believe are creditworthy, and we manage our credit risk
for other credit instruments using the same credit risk process that
is applied to loans and other credit assets.
The risk-weighted equivalent values of our other credit instru-
ments are determined based on the rules for capital adequacy
of the Superintendent of Financial Institutions Canada. The risk-weighted
equivalent value is used in the ongoing assessment of our capital
adequacy ratios.
Summarized information related to various commitments is as follows:
(Canadian $ in millions) 2007 2006
Contract Risk-weighted Contract Risk-weighted
amount equivalent amount equivalent
Credit Instruments
Standby letters of credit and guarantees $ 12,395 $ 7,270 $ 11,007 $ 7,542
Securities lending 1,834 59 690 21
Documentary and commercial letters of credit 1,301 116 1,621 207
Commitments to extend credit –Original maturity of one year and under 66,126 3,531 68,345 –
–Original maturity of over one year 28,372 13,066 28,104 13,543
Total $ 110,028 $ 24,042 $ 109,767 $ 21,313
Certain comparative figures have been reclassified to conform with the current year’s presentation.