Bank of Montreal 2010 Annual Report Download - page 31

MD&A
Caution Regarding Forward-Looking Statements
Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this Annual Report, and may be included in other filings
with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and
are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements
may involve, but are not limited to, comments with respect to our objectives and priorities for 2011 and beyond, our strategies or future actions, our targets, expectations for our financial condition
or share price, and the results of or outlook for our operations or for the Canadian and U.S. economies.
By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or
projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution
readers of this Annual Report not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially
from the targets, expectations, estimates or intentions expressed in the forward-looking statements.
The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in
which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal or economic policy; the degree of competition
in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital and liquidity requirements and guidance; judicial
or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete
and integrate acquisitions; critical accounting estimates; operational and infrastructure risks; general political conditions; global capital markets activities; the possible effects on our business of
war or terrorist activities; disease or illness that affects local, national or international economies; disruptions to public infrastructure, such as transportation, communications, power or water supply;
and technological changes.
We caution that the foregoing list is not exhaustive of all possible factors. Other factors could adversely affect our results. For more information, please see the discussion below, which outlines
in detail certain key factors that may affect Bank of Montreal’s future results. When relying on forward-looking statements to make decisions with respect to Bank of Montreal, investors and
others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake
to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking
information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented,
as well as our strategic priorities and objectives, and may not be appropriate for other purposes.
In calculating the pro-forma impact of Basel III on our regulatory capital, regulatory capital ratios, and risk-weighted assets (including Counterparty Credit Risk and Market Risk), we have assumed
our interpretation of the proposed rules announced by the Basel Committee on Banking Supervision (BCBS) as of this date and our models used to assess those requirements are consistent with the final
requirements that will be promulgated by BCBS and the Office of the Superintendent of Financial Institutions Canada (OSFI). We have also assumed that the proposed changes affecting capital deductions,
risk-weighted assets, the regulatory capital treatment for non-common share capital instruments (i.e. grandfathered capital instruments) and the minimum regulatory capital ratios are adopted
as proposed by BCBS and OSFI. We also assumed that existing capital instruments that are non-Basel III compliant but are Basel II compliant can be fully included in the October 31, 2010 pro-forma
calculations. The full impact of the Basel III proposals has been quantified based on our financial and risk positions at year end or as close to year end as was practical. The Basel rules are not yet finalized
and are subject to change, which may impact the results of our analysis. In setting out the expectation that we will be able to refinance certain capital instruments in the future, as and when necessary
to meet regulatory capital requirements, we have assumed that factors beyond our control, including the state of the economic and capital markets environment, will not impair our ability to do so.
Assumptions about the level of asset sales, expected asset sale prices, net funding cost, credit quality and risk of default and losses on default of the underlying assets of the structured
investment vehicles were material factors we considered when establishing our expectations regarding the structured investment vehicles discussed in this document, including the amount to be
drawn under the BMO liquidity facilities, whether consolidation will be required and the expectation that the first-loss protection provided by the subordinate capital notes will exceed future losses.
Key assumptions included that assets would continue to be sold with a view to reducing the size of the structured investment vehicles, under various asset price scenarios, and that the level of
defaults and losses will be consistent with the credit quality of the underlying assets and our current expectations regarding continuing difficult market conditions. In determining amounts of asset
maturities by year, we made assumptions as to which issuers will redeem subordinated debt prior to its maturity date, where permitted.
Assumptions about the level of defaults and losses on defaults were material factors we considered when establishing our expectations of the future performance of the transactions that
Apex Trust has entered into. Among the key assumptions were that the level of defaults and losses on defaults would be consistent with historical experience. Material factors that were taken into
account when establishing our expectations of the future risk of credit losses in Apex Trust and risk of loss to BMO included industry diversification in the portfolio, initial credit quality by portfolio,
the first-loss protection incorporated into the structure and the hedges that BMO has entered into.
Our expectations regarding the key impacts of our transition to International Financial Reporting Standards (IFRS) are based on IFRS as issued by the International Accounting Standards Board
(IASB) that are in effect as of this date. Should IFRS change prior to our transition to IFRS, our expectations of the key impacts of transition could change.
Assumptions about the performance of the Canadian and U.S. economies in 2011 and how that will affect our businesses were material factors we considered when setting our strategic priorities
and objectives, and our outlook for our businesses. Key assumptions included that the Canadian and U.S. economies will grow moderately in 2011, that interest rates will remain low and that
our assumptions regarding regulatory reforms will be consistent with the implementation of such reforms. We also assumed that housing markets will strengthen in Canada and the United States.
We assumed that conditions in capital markets will improve somewhat and that the Canadian dollar will strengthen modestly relative to the U.S. dollar. In determining our expectations for
economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies.
Factors That May Affect Future Results
As noted in the above Caution Regarding Forward-Looking Statements,
all forward-looking statements and information, by their nature, are
subject to inherent risks and uncertainties, both general and specific,
which may cause our actual results to differ materially from the expecta-
tions expressed in any forward-looking statements. The Enterprise-Wide
Risk Management section starting on page 75 describes a number of
risks, including credit and counterparty, market, liquidity and funding,
insurance, operational, business, model, strategic, reputation and
environmental risks. The sections that follow outline some additional
risks and uncertainties.
General Economic and Market Conditions in the Countries
in which We Conduct Business
We conduct business in Canada, the United States and other countries.
Factors such as the general health of capital markets, including liquidity,
level of activity, volatility and stability, could have a material impact on
our business. As well, interest rates, foreign exchange rates, consumer
spending, business investment, government spending, the rate of inflation
and the threat of terrorism affect the business and economic environ-
ments in which we operate. Therefore, the amount of business we conduct
in a specific geographic region and its local economic and business con-
ditions may have an effect on our revenues and earnings. For example,
a regional economic decline may result in an increase in credit losses,
a decrease in loan growth and reduced capital markets activity.
Fiscal and Monetary Policy
Our earnings are affected by fiscal, monetary and economic policies
that are adopted by Canadian, U.S. and other regulatory authorities.
Such policies can have the effect of reducing competition and increasing
uncertainty in the markets. As well, bond and money market expecta-
tions about inflation and central bank monetary policy have an impact on
the level of interest rates. Changes in market expectations and monetary
policy are difficult to anticipate and predict. Fluctuations in interest
rates that result from these changes can have an impact on our earnings.
Refer to the Market Risk section on pages 82 to 85 for a more complete
discussion of our interest rate risk exposures.
Level of Competition
The level of competition among financial services companies is
high. Furthermore, non-financial companies have increasingly been
offering services traditionally provided by banks. Customer loyalty
and retention can be influenced by a number of factors, including service
levels, prices for products or services, our reputation and the actions
of our competitors. Also, laws and regulations enacted by regulatory
authorities in the United States and other jurisdictions in which
we operate may provide benefits to our international competitors
that could impact our ability to compete. Changes in these factors
or a loss of market share could adversely affect our earnings.
BMO Financial Group 193rd Annual Report 2010 29