Bank of Montreal 2008 Annual Report Download - page 65

MD&A
BMO Financial Group 191st Annual Report 2008 | 61
BMO Capital Markets carried
the largest share of economic
capital in 2008.
Credit risk remains the largest
component of economic capital by
risk type.
Total Economic Capital
by Risk Type
As at October 31, 2008
Market 19%
Business 12%
Credit 57%
Operational 12%
Total Economic Capital
by Operating Group
As at October 31, 2008
P&C 38%
BMO CM 54%
PCG 6%
Corp 2%
As noted in the Provisions for Income Taxes section, BMO hedges
the foreign exchange risk arising from our net investment in our U.S.
operations by funding the net investment in U.S. dollars. This strategy
reduces the impact on BMO’s capital ratios of changes in foreign exchange
rates, as the effect of foreign currency adjustments to Tier 1 capital
arising from an increase or decrease in the value of the Canadian dollar
is largely offset by the change in the Canadian dollar equivalent of
U.S.-dollar-denominated risk-weighted assets.
Economic Capital Review
Economic capital is our internal assessment of the risks underlying
BMO’s business activities. It represents management’s estimation
of the likely magnitude of economic losses that could occur if adverse
situations arise, and allows returns to be adjusted for risks. Economic
capital is calculated for various types of risk –credit, market (trading
and non-trading), operational and business –where measures are based
on a time horizon of one year. For further discussion of these risks,
refer to the Enterprise-Wide Risk Management section on page 73.
Economic capital is a key element of our risk-based capital management
and ICAAP process.
Basel II Regulatory Capital ($ millions)
2008
Common shareholders’ equity 15,974
Non-cumulative preferred shares 1,996
Innovative Tier 1 Capital instruments 2,486
Non-controlling interest in subsidiaries 39
Goodwill and excess intangible assets (1,635)
Accumulated net after-tax unrealized loss
from available-for-sale equity securities (15)
Net Tier 1 Capital 18,845
Securitization-related deductions (115)
Expected loss in excess of allowance (AIRB Approach) –
Other deductions (1)
Adjusted Tier 1 Capital 18,729
Subordinated debt 4,175
Trust subordinated notes 800
Eligible portion of general allowance for credit losses 494
Total Tier 2 Capital 5,469
Securitization-related deductions (6)
Investments in non-consolidated
subsidiaries/substantial investments (871)
Adjusted Tier 2 Capital 4,592
Total Capital 23,321
The Tier 1 Capital Ratio is our key measure of capital adequacy.
Our Tier 1 Capital Ratio was 9.77% as at October 31, 2008. The ratio is
strong and was well above our target for 2008 of maintaining a ratio
of at least 8.0%. In 2009, our target continues to be to maintain a strong
regulatory position, with a Tier 1 Ratio in excess of 8.0%.
Our Total Capital Ratio was 12.17% as at October 31, 2008. Both
our Tier 1 and Total Capital Ratios remain well above OSFI’s stated mini-
mum capital ratios of 7% and 10%, respectively, for a well-capitalized
financial institution. BMO’s Assets-to-Capital Multiple was 16.4 as
at October 31, 2008. The multiple remains well below the maximum
permitted by OSFI.
As a result of the implementation of Basel II in fiscal 2008, amounts
reported for risk-weighted assets, capital and capital ratios are not com-
parable on a year-over-year basis. On a Basel I basis, at October 31, 2008
our Tier 1 Capital Ratio was 9.41% and our Total Capital Ratio was 12.06%.
In fiscal 2007, they were 9.51% and 11.74%, respectively.
Note: 2004 – 2007 under Basel I; 2008 under Basel II. There is no comparability between 2008 and
the prior years. On a Basel I basis, at October 31, 2008, our Tier I Capital Ratio was 9.41%,
our Total Capital Ratio was 12.06% and our Assets-to-Capital Multiple was 16.2.
Capital Measures
Tier 1 Capital Ratio (%) Total Capital Ratio (%) Assets-to-Capital Multiple (times)
10.30
11.82
9.77
10.22
12.17
9.51
11.74
11.76
9.84
11.35
16.8x 16.3x 16.1x 16.4x
17.2x
2004 2008200720062005
Capital Management Activities
As part of ongoing efforts to manage capital on a cost-effective
basis, BMO undertook a number of issuances and redemptions during
2008. We issued $250 million of 5.80% Class B Preferred shares,
Series 15 and $300 million of 5.20% Class B Preferred shares, Series 16.
On November 25, 2008, we announced a public offering of $150 million
of 6.50% Class B Preferred shares, Series 18. We also issued $900 million
of Series F Medium-Term Notes, First Tranche. We redeemed our
$150 million 5.75% Debentures, Series A MTN, Second Tranche in fiscal
2008 and our $250 million Class B Preferred shares, Series 6 on
November 25, 2008. Further details are provided in Notes 18 and 21
on pages 132 and 135 of the financial statements.
On September 4, 2008, we announced a new normal course issuer
bid, commencing September 8, 2008 and ending September 7, 2009,
under which we may repurchase for cancellation up to 15 million BMO
common shares, representing approximately 3% of our common shares.
No common shares were repurchased under our previous 12-month
normal course issuer bid, which expired on September 5, 2008.
Our share repurchase program is primarily used to offset,
over time, the impact of dilution caused by issuing shares through
the exercise of stock options, our dividend reinvestment plan
and exchangeable shares. During the year ended October 31, 2008,
7.5 million shares were issued as consideration for the Ozaukee
acquisition and for the reasons mentioned above. In 2007, BMO
repurchased 2.2 million more shares than were issued.