Bank of Montreal 2008 Annual Report Download - page 124

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
120 | BMO Financial Group 191st Annual Report 2008
Credit Information
Information related to principal amounts, impaired amounts and net credit losses for all loans reported and securitized is as follows:
(Canadian $ in millions) 2008 2007
Total Impaired Net Total Impaired Net
loans loans write-offs (1) loans loans write-offs (1)
Residential mortgages $ 77,641 $ 235 $ 6 $ 74,002 $ 133 $ 2
Consumer instalment and other personal loans 43,737 19 120 33,189 41 37
Credit card loans 6,839 163 264 5,993 14 214
Business and government loans 84,151 1,981 519 62,650 539 83
Securities borrowed or purchased under resale agreements 28,033 – – 37,093 – –
Total loans 240,401 2,398 909 212,927 727 336
Less mortgage-backed securities retained and
classified as available-for-sale securities 9,477 – – 8,882 – –
Less loans securitized:
Residential mortgages 18,821 11 – 12,691 7 –
Credit card loans 4,719 – 53 1,500 – 36
Total loans reported in the Consolidated Balance Sheet $ 207,384 $ 2,387 $ 856 $ 189,854 $ 720 $ 300
(1) Net write-offs represent write-offs in the year net of recoveries on loans previously written off. Certain comparative figures have been reclassified to conform with the current year’s presentation.
Our credit exposure to securitized assets as at October 31, 2008 was
limited to our deferred purchase price of $607 million ($302 million in
2007), certain cash deposits of $12 million ($12 million in 2007) and in-
vestments in securitization vehicles of $263 million ($74 million in 2007).
Static pool credit losses provide a measure of the credit risk in our
securitized assets. They are calculated by totalling actual and projected
future credit losses and dividing the result by the original balance
of each pool of assets. Static pool credit losses for the years ended
October 31, 2008 and 2007 were as follows:
2008 2007
Residential mortgages n/a n/a
Consumer instalment and other personal loans 2.61% 2.61%
Credit card loans 1.01% 0.91%
n/a –not applicable
Sensitivity Analysis
The following table outlines the key economic assumptions used in
measuring the deferred purchase price and servicing liability and the sen -
sitivity of these retained interests as at October 31, 2008 to immediate
10% and 20% adverse changes in those assumptions. The sensitivity
analysis should be used with caution as it is hypothetical and changes
in each key assumption may not be linear. The sensitivities in each
key variable have been calculated independently of changes in the other
key variables. Actual experience may result in changes in a number
of key assumptions simultaneously. Changes in one factor may result in
changes in another, which could amplify or reduce certain sensitivities.
Residential Credit card
(Canadian $ in millions, except as noted) mortgages loans
Fair value of deferred purchase price $ 495 $ 112
Weighted-average life (years) 3 0.37
Weighted-average prepayment rate (%) 15 n/a
Repayment term (years) n/a 1
Impact of: 10% adverse change ($) 77
20% adverse change ($) 20 13
Interest rate (%) 1–2 12
Impact of: 10% adverse change ($) 46 7
20% adverse change ($) 90 14
Expected credit losses (%) 0–0.01 3
Impact of: 10% adverse change ($) 0.09 2
20% adverse change ($) 0.18 3
Weighted-average discount rate (%) 610
Impact of: 10% adverse change ($) 8 0.30
20% adverse change ($) 11 0.61
Note 9: Variable Interest Entities
Variable interest entities (“VIEs”) include entities where the equity
is considered insufficient to finance the entity’s activities or for
which the equity holders do not have a controlling financial interest.
We are required to consolidate VIEs if the investments we hold in these
entities and/or the relationships we have with them result in us
being exposed to the majority of their expected losses, being able
to benefit from a majority of their expected residual returns, or both,
based on a qualitative estimation process involving estimating the
future cash flows and performance of the VIE.
Canadian Customer Securitization Vehicles
Customer securitization vehicles (also referred to as bank-sponsored
multi-seller conduits) assist our customers with the securitization of
their assets to provide them with alternate sources of funding. These
vehicles provide clients with access to financing in the commercial
paper markets by allowing them to sell their assets into these vehicles,
which then issue commercial paper to investors to fund the purchases.
In almost all cases, the seller continues to service the transferred assets.
If there are losses on the assets, the seller is the first to take the loss.
We do not sell assets to or service the assets held by these customer
securitization vehicles. We earn fees for providing services related to the
securitizations, including liquidity, distribution and financial arrangement
fees for supporting the ongoing operations of the vehicles.
Assets held by our unconsolidated Canadian customer securiti-
zation vehicles amounted to $11,106 million as at October 31, 2008
($17,536 million in 2007). In general, investors in the commercial paper
have recourse only to the assets of the related VIE and do not have
recourse to us. Our exposure to losses relates to our investment in
commercial paper issued by the vehicles, derivative contracts we have
entered into with the vehicles and the liquidity support we provide
through backstop liquidity facilities. We use our credit adjudication
process in deciding whether to enter into these agreements just as
we do when extending credit in the form of a loan. To the extent that
we have purchased commercial paper, our exposure under the liquidity
facilities is reduced by an equal amount. As at October 31, 2008,
we had an exposure of $2,139 million from commercial paper held
($5,564 million in 2007) classified as trading securities.
During the year ended October 31, 2007, we changed the nature
of the liquidity lines offered to certain of our Canadian customer
securitization vehicles to global style liquidity lines, which have objective
criteria for determining when they can be drawn upon. Previously,
we offered market disruption liquidity lines, which had more subjective