Bank of Montreal 2010 Annual Report Download - page 42

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
Provision for (Recovery of) Credit Losses (PCL)
($ millions, except as noted)
For the year ended October 31 2010 2009 2008 2007 2006 2005 2004
New specific provisions 1,419 1,765 1,242 460 410 407 510
Reversals of previous
allowances (187) (77) (58) (66) (87) (121) (312)
Recoveries of
prior write-offs (183) (145) (114) (91) (112) (67) (131)
Specific provisions
for credit losses 1,049 1,543 1,070 303 211 219 67
Increase in (reduction of)
general allowance – 60 260 50 (35) (40) (170)
Provision for (recovery of)
credit losses 1,049 1,603 1,330 353 176 179 (103)
PCL as a % of
average net loans
and acceptances
(excluding repos)
(%) 0.61 0.88 0.76 0.21 0.11 0.13 (0.08)
Changes in Gross Impaired Loans (GIL) and Acceptances
($ millions, except as noted)
For the year ended October 31 2010 2009 2008 2007 2006 2005 2004
GIL, beginning of year 3,297 2,387 720 666 804 1,119 1,918
Additions to
impaired loans
and acceptances 1,525 2,690 2,506 588 420 423 607
Net additions to
impaired
loans and
acceptances due
to acquisitions
(1) 327 – – – – – –
Reductions in
impaired loans
and acceptances
(2) (712) (288) 131 (143) (220) (319) (936)
Write-offs (1,216) (1,492) (970) (391) (338) (419) (470)
GIL, end of year 3,221 3,297 2,387 720 666 804 1,119
GIL as a % of
gross loans and
acceptances
(excluding repos)
(%) 1.80 1.94 1.26 0.44 0.41 0.55 0.83
(1) See Table 15 on page 103.
(2) Includes the impact of foreign exchange and write-offs of consumer loans included
in additions to impaired loans in the period.
Provision for Credit Losses
During 2010, we saw an improvement in the overall global economic
environment, but conditions in some sectors remained challenging.
This was particularly evident in the slower pace of recovery in the United
States, most notably in the real estate sector, which faced continuing
pressure. However, with an economic recovery underway and evidence
of stabi lization in much of the credit market, we believe the overall
improvement will continue into 2011, with some potential for variability.
BMO recorded $1,049 million of specific provisions for credit losses
in the current year, with no change to the general allowance for credit
losses. This compares to the $1,603 million provision recorded in 2009,
which comprised specific provisions of $1,543 million and a $60 million
increase in the general allowance. Provisions as a percentage of average
net loans and acceptances decreased to 0.61% in 2010 from 0.88% in
2009. The majority of our provisions continue to relate to our U.S. port-
folio, although we have seen an improving trend develop across both
our Canadian and U.S. portfolios in 2010.
A significant factor influencing both provisions for credit losses and
write-offs 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
and consistent with a year ago, impaired loan formations were well
above the low levels of 2007 and 2006, but decreased to $1,525 million
(excluding acquired impaired loans) in 2010 from a peak of $2,690 million
in 2009. On a geographic basis, the United States again accounted for
the majority of the impaired formations, with the commercial real estate
and commercial mortgage sectors providing the largest contributions.
Gross impaired loans decreased to $3,221 million from $3,297 million
in 2009. Gross impaired loans include an amount of $302 million (net
$327 million acquired) related to the acquisition of a U.S.-based portfolio
in an FDIC-assisted transaction. The loss sharing arrangement with the
FDIC on this transaction indemnifies BMO against 80% of any losses on
the acquired portfolio. Additional factors contributing to the change
in impaired loans are outlined in the accompanying table. In 2010, sales
of gross impaired loans totalled $29 million, with related reversals and
recoveries of $9 million. This compares with sales of $97 million and
related reversals and recoveries of $9 million in 2009.
The general allowance is maintained to cover impairment in
the existing credit portfolio that cannot yet be associated with specific
loans, and is assessed on a quarterly basis. The general allowance
decreased $9 million from the prior fiscal year. While the general allowance
was increased by our acquisition of the Diners Club business credit card
receivables early in fiscal 2010, this was more than offset by the impact
of the weaker U.S. dollar. The general allowance remains adequate
and, as at October 31, 2010, represented 0.95% of credit risk-weighted
assets. The total allowance for credit losses decreased $24 million
in 2010 to $1,878 million (excluding a $9 million allowance included in
Other Liabilities related to letters of credit that are considered Other
Credit Instruments).
BMO’s loan book continues to comprise primarily the more stable
consumer and commercial portfolios, which represented 86.2% of
the
loan portfolio at year end, an increase from 80% in 2009 mainly due
to reduced levels of corporate loans. The consumer loans portfolio repre-
sents 56.6% of the portfolio, up from 53.9% in 2009, with approximately
87.0% of the portfolio secured. The corporate and commercial loans port-
folio represents 43.4% of the portfolio, down from 46.1% in 2009. We
continue to monitor industry sectors that we consider to be of concern,
including real estate services, financial institutions and manufacturing.
BMO’s exposure to sectors of concern remains within acceptable limits.
Credit risk management is discussed further on page 80. Note 4
on page 120 of the financial statements and Tables 11 to 19 on pages
102 to 105 provide details of BMO’s loan portfolio, impaired loans and
provisions and allowances for credit losses.
2010200920082007200620052004
0.61 0.61
0.05
0.16 0.14 0.18
Specific Provision for Credit
Losses as a % of Average
Net Loans and Acceptances
0.85
2010200920082007200620052004
12.1
7.5
5.1 4.1 4.4
Gross Impaired Loans and
Acceptances as a % of Equity
and Allowances for Credit Losses*
14.9 13.6
In 2010, credit conditions began
to improve.
*Restated. See Table 12 on page 102.
Provisions remain elevated,
but have returned to the
lower levels of 2008.
Caution
This Provision for Credit Losses section contains forward-looking statements.
Please see the Caution Regarding Forward-Looking Statements.
40 BMO Financial Group 193rd Annual Report 2010