Bank of Montreal 2010 Annual Report Download - page 62

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
Note: 2006 – 2007 under Basel I; 2008 – 2010 under Basel II. There is no comparability between
measures for 2008 – 2010 and the prior years.
Capital Measures
Tangible Common Equity Ratio (%)
Assets-to-Capital Multiple (times)
8.12 7.18 7.4 7
9.77
10.22
12.17
9.51
11.74
11.76
16.1x 16.4x
17.2x
2009 2010200820072006
Tier 1 Capital Ratio (%)
Common Equity Ratio (%)
Total Capital Ratio (%)
9.21
10.47
8.21 7. 33 7.4 2
8.95
10.26
12.24
13.45
14.87
15.91
14.1x 14.5x
BMO’s total RWA were $161.2 billion at October 31, 2010, down
from $167.2 billion in 2009. The decrease was primarily attributable to
the impact of the weaker U.S. dollar, which reduced the translated value
of U.S.-dollar-denominated RWA, and lower corporate and commercial
RWA. These factors were partially offset by an increase in retail loan,
securitization and operational risk RWA. The table below provides a
breakdown of our RWA by risk type.
Risk-Weighted Assets ($ millions)
As at October 31 2010 2009
Credit risk 136,290 143,098
Market risk 5,217 6,578
Operational risk 19,658 17,525
Total RWA 161,165 167,201
Tier 1 capital represents more permanent forms of capital, and primarily
includes common shareholders’ equity, preferred shares and innovative
hybrid instruments, less a deduction for goodwill and excess intangible
assets and certain other deductions required under Basel II. Our Tier 1
capital was $21.7 billion at October 31, 2010, up from $20.5 billion in 2009.
The increase was primarily attributable to growth in common shareholders’
equity, partially offset by the impact of a redemption of innovative
hybrid capital, as outlined under Capital Management Activities.
Total capital includes Tier 1 and Tier 2 capital, net of certain deduc-
tions. Tier 2 capital is primarily comprised of subordinated debentures and
the eligible portion of the general allowance for credit losses. Deductions
from Tier 2 capital are primarily comprised of our investments in insurance
subsidiaries and other substantial investments, along with other sundry
Basel II deductions. Total capital was $25.6 billion at October 31, 2010,
up from $24.9 billion in 2009. This increase was primarily attributable to
growth in common shareholders’ equity, partially offset by the impact
of capital redemptions, as outlined under Capital Management Activities.
Our objective is to maintain strong capital ratios that meet both
current and expected regulatory requirements. The Tier 1 Capital Ratio
and Tangible Common Equity Ratio are our key measures of capital
adequacy, and both were strong in 2010.
Basel II Regulatory Capital ($ millions)
As at October 31 2010 2009
Common shareholders’ equity 18,753 17,132
Non-cumulative preferred shares 2,571 2,571
Innovative Tier 1 capital instruments 2,542 2,907
Non-controlling interest in subsidiaries 23 26
Goodwill and excess intangible assets (1,619) (1,569)
Accumulated net after-tax unrealized losses
on available-for-sale equity securities – (2)
Net Tier 1 capital 22,270 21,065
Securitization-related deductions (165) (168)
Expected loss in excess of allowance (AIRB Approach) – (61)
Substantial investments and
investments in insurance subsidiaries (427) (374)
Adjusted Tier 1 capital 21,678 20,462
Subordinated debt 3,776 4,236
Trust subordinated notes 800 800
Accumulated net after-tax unrealized gains
on available-for-sale equity securities 10 –
Eligible portion of general allowance for credit losses 292 296
Total Tier 2 capital 4,878 5,332
Securitization-related deductions (29) (7)
Expected loss in excess of allowance (AIRB Approach) – (60)
Substantial investments and
investments in insurance subsidiaries (890) (868)
Adjusted Tier 2 capital 3,959 4,397
Total capital 25,637 24,859
The Tier 1 Capital Ratio was 13.45% at October 31, 2010, up from 12.24%
in 2009. The Tangible Common Equity Ratio increased from 9.21% in 2009
to 10.47% at October 31, 2010. The year-over-year increase in the ratios
reflects a reduction in RWA and an increase in capital. The ratios were
maintained at strong levels during 2010 in anticipation of pending
regulatory capital changes and the adoption of International Financial
Reporting Standards (IFRS) and in order to maintain financial strength
and flexibility as we continue to execute our growth strategy. Further
details on the potential impact of proposed regulatory capital changes
and IFRS are provided in the next section.
The Common Equity Ratio, a new measure that is increasingly
being monitored by banks, will become a regulatory capital ratio under
Basel III (see next section for further information on the definition of the
ratio and Basel III requirements). The bank’s Common Equity Ratio was
10.26% on a Basel II basis at October 31, 2010, up from 8.95% in 2009.
The Tier 1 Capital Ratio, Tangible Common Equity Ratio,
Total Capital Ratio and Assets-to-Capital Multiple are our
primary capital measures.
The Tier 1 Capital Ratio is defined as Tier 1 capital divided
by RWA.
The Tangible Common Equity Ratio is defined as common
shareholders’ equity less goodwill and intangibles, divided
by RWA.
The Total Capital Ratio is defined as total capital divided
by RWA.
The Assets-to-Capital Multiple is calculated by dividing total
assets, including specified off-balance sheet items net of other
specified deductions, by total capital.
60 BMO Financial Group 193rd Annual Report 2010