Bank of Montreal 2008 Annual Report Download - page 45

Provision for Credit Losses
Credit conditions during 2008 were difficult as the U.S. housing market
softened significantly and the North American economic environment
weakened.
BMO recorded a $1,330 million provision for credit losses in 2008,
consisting of $1,070 million of specific provisions and a $260 million
increase in the general allowance for credit losses. These amounts
compare to the $353 million provision recorded in 2007, comprised
of specific provisions of $303 million and a $50 million increase
in the general allowance. The 2008 increase in the general allowance
was primarily due to credit deterioration within the loans portfolio
and to the weakening economy.
As illustrated in the adjoining table, specific provisions for credit
losses during the year were higher than in prior periods. The 2008
specific provisions included provisions of $336 million for two corporate
accounts related to the U.S. housing market that were identified as
impaired during the year. The size of these provisions reflected the
continued weakness in the U.S. residential real estate market and the
specific nature of the underlying loans. One of the accounts provided
funding to a company that was in the business of buying distressed
mortgages and the other was related to the residential real estate
development business.
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 adjacent Changes in
Gross Impaired Loans and Acceptances table. As with specific provisions,
impaired loan formations increased from the low levels of 2007 and
2006, totalling $2,506 million in 2008, up from $588 million in 2007.
Exposures related primarily to the manufacturing, oil and gas and
U.S. residential real estate sectors increased formations in 2008.
In 2008, formations of $621 million were attributable to the U.S. com-
mercial real estate sector and $426 million to the manufacturing sector.
BMO’s credit portfolio showed the effects of some erosion of loan
quality, primarily in the U.S. markets, with gross impaired loans increas-
ing this year to $2,387 million from $720 million in 2007. Factors
contributing to the change are outlined in the accompanying table.
In 2008, sales of gross impaired loans totalled $16 million, with
related reversals and recoveries of $3 million. This compares with sales of
$28 million and related reversals and recoveries of $5 million in 2007.
The total allowance for credit losses increased $692 million in 2008
to $1,747 million, comprised of a specific allowance of $426 million
and a general allowance of $1,321 million.
The general allowance is maintained to absorb impairment
in the existing credit portfolio that cannot yet be associated with
specific credit assets. It is assessed on a quarterly basis and has
increased $423 million from the end of the previous fiscal year.
Of this, $260 million was due to increases in the allowance recorded
during the year, with the remainder attributable to the impact of
changes in the Canadian/U.S. dollar exchange rate and the acquisition
of Merchants and Manufacturers and Ozaukee. The general allowance
remains adequate and, as at October 31, 2008, represented 0.69%
of risk-weighted assets.
Overall, BMO’s loan book continues to be comprised primarily
of the more stable consumer and commercial portfolios that, excluding
securities borrowed or purchased under resale agreements, represented
73.8% of the loan portfolio at year-end, declining from 78.6% in 2007
on strong growth in the corporate portfolio. Residential mortgages
represented 21.5% of the portfolio, down from 24.4% in 2007. Business
and government loans represented 44.4% of the portfolio, up from
38.6% in 2007. We continue to monitor industry sectors that we consider
to be of most concern in the current economic conditions, including the
automotive, real estate and forestry sectors. BMO’s exposure to these
sectors remains within acceptable levels.
Provision for (Recovery of) Credit Losses (PCL)
($ millions, except as noted)
For the year ended October 31 2008 2007 2006 2005 2004 2003 2002
New specific provisions 1,242 460 410 407 510 846 1,063
Reversals of previous
allowances (58) (66) (87) (121) (312) (303) (175)
Recoveries of
prior write-offs (114) (91) (112) (67) (131) (88) (68)
Specific provisions
for credit losses 1,070 303 211 219 67 455 820
Increase in (reduction of)
general allowance 260 50 (35) (40) (170) – –
Provision for (recovery of)
credit losses 1,330 353 176 179 (103) 455 820
PCL as a % of
average net loans
and acceptances (%) 0.60 0.17 0.09 0.11 (0.07) 0.30 0.56
Changes in Gross Impaired Loans (GIL) and Acceptances
($ millions, except as noted)
2008 2007 2006 2005 2004 2003 2002
GIL, beginning of year 720 666 804 1,119 1,918 2,337 2,014
Additions to
impaired loans
and acceptances 2,506 588 420 423 607 1,303 1,945
Reductions in
impaired loans
and acceptances (1) 131 (143) (220) (319) (936)(1,156) (738)
Write-offs (970) (391) (338) (419) (470) (566) (884)
GIL, end of year 2,387 720 666 804 1,119 1,918 2,337
GIL as a % of
gross loans and
acceptances (%) 1.10 0.36 0.35 0.46 0.71 1.30 1.54
(1) Includes the impact of foreign exchange and write-offs of consumer loans included in
additions to impaired loans in the period.
2008200720062005200420032002
17.4
11.3
13.9
7.5
4.9 3.8 4.1
Gross Impaired Loans and
Acceptances as a % of Equity
and Allowances for Credit Losses
2008200720062005200420032002
0.56
0.48
0.30
0.04
0.13 0.11 0.15
Specific Provision for Credit
Losses as a % of Average
Net Loans and Acceptances
Fiscal 2008 marked a sharp
return to the weaker phase of
the credit cycle.
Provisions have increased in
conjunction with the levels of
impaired loans.
Looking forward, we expect the credit environment to continue
to be challenging through 2009 given the probability of continuing
economic contraction.
Credit risk management is discussed further on page 76. Note 4
on page 113 of the financial statements and Tables 11 to 19 on pages 96
to 99 provide details of BMO’s loan portfolio, impaired loans and provi-
sions and allowances for credit losses.
MD&A
BMO Financial Group 191st Annual Report 2008 | 41