Bank of Montreal 2007 Annual Report Download - page 43

Provision for Credit Losses
Credit conditions in 2007 softened from the favourable credit environ-
ment of 2006 as BMO recorded a $353 million provision for credit losses,
consisting of $303 million of specific provisions and a $50 million increase
in the general allowance for credit losses. These amounts compare to
a $176 million provision recorded in 2006, comprised of specific provisions
of $211 million and a $35 million reduction in the general allowance.
The 2007 increase in the general allowance was primarily due to portfolio
growth and risk migration.
As illustrated in the adjoining table, in the current credit cycle, spe-
cific provisions for credit losses peaked in the 2001-2002 period, declined
sharply by 2004, returned to more moderate but still low levels in 2005
and 2006, and increased somewhat in 2007. As expected, the effect of
lower levels of new specific provisions over the past few years has con-
tinued to result in declining levels of reversals of previous allowances and
recoveries of past write-offs, which peaked in 2004. The relatively high
level of reversals and recoveries in 2004 was largely due to the success
of our effective loan realization practices, including strong cash collections
and loan sales, driven in large part by high levels of gross impaired
loans from which to effect sales, as well as a receptive secondary market.
In 2007, sales of gross impaired loans totalled $28 million, with
resulting reversals and recoveries of $5 million. This compares with
sales of $53 million and related reversals and recoveries of $34 million
in 2006.
The most significant factor influencing the provision for credit losses
is the level of formations of new impaired loans –identified as addi-
tions to impaired loans and acceptances in the adjacent Changes in
Gross Impaired Loans and Acceptances table. As with specific provisions,
these formations peaked in 2001-2002, steadily declining thereafter
to a low of $420 million in 2006, and increasing to $588 million in 2007.
Correspondingly, gross impaired loans and acceptances have increased
to $720 million from the historically low level of $666 million recorded
in 2006. This increase was expected at this point in the credit cycle.
At October 31, 2007, the allowance for credit losses totalled
$1,055 million, almost unchanged from $1,058 million a year earlier.
The general allowance, which totalled $898 million at year-end, remains
adequate, representing 50 basis points of risk-weighted assets. In
addition, BMO uses credit default swaps to mitigate single-name credit
exposures. At October 31, 2007, the notional value of these instruments
totalled $1,011 million, compared with $1,084 million a year earlier.
BMO’s loan book continues to be comprised largely of more stable
consumer and commercial portfolios that, excluding securities borrowed
or purchased under resale agreements, represented 78.6% of the loan
portfolio at year-end, declining from 83.1% in 2006 on strong growth
in the corporate portfolio. We continue to monitor those industry sectors
considered to be of most concern in the current economic conditions,
including automotive and forestry, as well as those sectors particularly
sensitive to high energy prices, a strong Canadian dollar and a soften-
ing of the U.S. economy. BMO’s exposure to these sectors remains well
within acceptable levels.
Looking forward, we expect the credit environment to remain
volatile through 2008, with uncertainty arising from recent subprime
loan and capital markets concerns as well as high energy prices, a
high Canadian dollar and the potential for further softening of the U.S.
economy. Accordingly, we expect the 2008 provision for credit losses
to be $475 million or less, with the increase over the current year
largely related to the credit cycle and an expectation of increasing
levels of new specific provisions and lower levels of reversals
and recoveries.
Credit risk management is discussed further on page 67. Note 4
on page 101 of the financial statements and Tables 11 to 19 on pages 84
to 87 provide details of BMO’s loan portfolio, impaired loans and provi-
sions and allowances for credit losses.
Provision for (Recovery of) Credit Losses (PCL)
($ millions, except as noted)
For the year ended October 31 2007 2006 2005 2004 2003 2002 2001
New specific provisions 460 410 407 510 846 1,063 1,023
Reversals of previous
allowances (66) (87) (121) (312) (303) (175) (103)
Recoveries of
prior write-offs (91) (112) (67) (131) (88) (68) (40)
Specific provisions
for credit losses 303 211 219 67 455 820 880
Increase in (reduction of):
General allowance 50 (35) (40) (170) –– 100
Provision for (recovery of)
credit losses 353 176 179 (103) 455 820 980
PCL as a % of
average net loans
and acceptances (%) 0.17 0.09 0.11 (0.07) 0.30 0.56 0.66
Changes in Gross Impaired Loans (GIL) and Acceptances
($ millions, except as noted)
2007 2006 2005 2004 2003 2002 2001
GIL, beginning of year 666 804 1,119 1,918 2,337 2,014 1,501
Additions to
impaired loans
and acceptances 588 420 423 607 1,303 1,945 2,041
Reductions in
impaired loans
and acceptances (143) (220) (319) (936)(1,156) (738) (830)
Write-offs (391) (338) (419) (470) (566) (884) (698)
GIL, end of year 720 666 804 1,119 1,918 2,337 2,014
GIL as a % of
gross loans and
acceptances (%) 0.36 0.35 0.46 0.71 1.30 1.54 1.37
2007200620052004200320022001
17.4
16.5
13.9
7.5
4.9 3.8 4.1
Gross Impaired Loans and
Acceptances as a % of Equity
and Allowances for Credit Losses
2007200620052004200320022001
0.56
0.60
0.30
0.04
0.13 0.11 0.15
Specific Provision for Credit
Losses as a % of Average
Net Loans and Acceptances
Gross impaired loans have edged
higher amid more volatile credit
markets.
Provisions remain low but credit
conditions softened in 2007.
MD&A
BMO Financial Group 190th Annual Report 2007 39