Bank of Montreal 2010 Annual Report Download - page 83

MD&A
As evidenced in the table below, our internal risk rating system maps in
a logical manner to the External Rating Agencies.
Borrower Risk Rating Scale
Moody’s Investors
BMO Service implied Standard & Poor’s
rating Description of risk equivalent implied equivalent
Investment grade
I-1 Undoubted
and Sovereign Aaa Sovereign AAA Sovereign
I-2 Undoubted Aaa/Aa1 AAA/AA+
I-3 Minimal Aa2/Aa3 AA/AA–
I-4 Modest A1/A2/A3 A+/A/A–
I-5 Modest Baa1 BBB+
I-6 Average Baa2 BBB
I-7 Average Baa3 BBB
Non-investment grade
S-1 Acceptable Ba1 BB+
S-2 Acceptable Ba2 BB
S-3 Marginal Ba3 BB–
S-4 Marginal B1 B+
Watchlist
P-1 Uncertain B2 B
P-2 Watchlist B3 B–
P-3 Watchlist Caa/C CCC/C
Default and Impaired
D-1 Default C D
D-2 Default
and Impaired C D
Policies and Standards
BMO’s credit risk management framework is built on governing principles
defined in a series of corporate policies and standards, which flow through
to more specific guidelines and procedures. These
are reviewed on a
regular basis to ensure they are current and consistent
with BMO’s risk
appetite. The structure, limits, collateral requirements, ongoing manage-
ment, monitoring and reporting of our credit exposures are all governed
by these credit risk management principles.
Credit Risk Governance
The Risk Review Committee of the Board of Directors ultimately provides
oversight for the management of all risks faced by the enterprise,
including credit risk. Operating practices include the ongoing monitoring
of credit risk exposures and regular portfolio and sector reporting to
the board and senior management committees. Performing accounts
are reviewed on a regular basis, with most commercial and corporate
accounts reviewed at least annually. The credit review process provides
an appropriate structure, including covenant monitoring, for each
account. The frequency of review is increased in accordance with the
likelihood and size of potential credit losses, with deteriorating higher-
risk situations referred to specialized account management groups
for closer attention, when appropriate. Corporate Audit Group reviews
and tests management processes and controls and samples credit trans-
actions for adherence to credit terms and conditions, as well as to
governing policies, standards and procedures. In addition, we carry out
regular portfolio sector reviews, including stress testing and scenario
analysis based on current, emerging or prospective risks.
Portfolio Management
BMO’s credit risk governance policies provide for an acceptable level
of diversification. Limits are in place for several portfolio dimensions,
including industry, country, product and single-name concentrations,
as well as transaction-specific limits. At year end, our credit assets
consisted of a well-diversified portfolio comprised of millions of clients,
the majority of them consumers and small to medium-sized businesses.
BMO employs a number of measures to mitigate and manage credit
risk. These measures include but are not limited to strong underwriting
standards, qualified professional risk managers, a robust monitoring
and review process, the redistribution of exposures, and the
purchase
or sale of insurance through guarantees or credit default swaps.
Total enterprise-wide outstanding credit exposures were
$378 billion at October 31, 2010, comprised of $251 billion in Canada,
$102 billion in the United States and $25 billion in other jurisdictions.
Credit portfolio quality is discussed on page 40. 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 portfolios, impaired loans and provisions and
allowances for credit losses.
Collateral Management
The purpose of collateral for credit risk mitigation is to minimize losses
that would otherwise be incurred and to protect funds employed in
credit risk activities. Depending on the type of borrower, the assets avail-
able and the structure and term of the credit requirements, collateral
can take various forms. Investment grade liquid securities are regularly
pledged in support of treasury counterparty facilities. For corporate and
commercial borrowers, collateral can take the form of pledges of the
assets of a business, such as accounts receivable, inventory, machinery
and real estate, or personal assets pledged in support of guarantees.
On an ongoing basis, collateral is subject to regular valuation as prescribed
in the relevant governing policies and standards, which incorporate
set formulas for certain asset types in the context of current economic
and market circumstances.
Allowance for Credit Losses
Across all loan portfolios, BMO employs a disciplined approach to
provisioning and loan loss evaluation, with the prompt identification of
problem loans being a key risk management objective. BMO maintains
both specific and general allowances for credit losses, the sum of
which is sufficient to reduce the book value of credit assets to their
estimated value. Specific allowances reduce the aggregate carrying
value of credit assets for which there is evidence of deterioration in
credit quality. We also maintain a general allowance in order to cover
any impairment in the existing portfolio that cannot yet be associated
with specific loans. Our approach to establishing and maintaining the
general allowance is based on the guideline issued by our regulator,
OSFI. The general allowance is reviewed on a quarterly basis and a
number of factors are considered when determining the appropriate
level of the general allowance. This includes a general allowance model
that applies historical expected and unexpected loss rates, based on
probabilities of default and loss given default factors, to current
Other
Government
Financial institutions
Service industries
Forest products
Utilities
Transportation
Oil and gas
Mining
Manufacturing
Communications
Agriculture
Wholesale trade
Retail trade
Commercial mortgages
Commercial real estate
Construction
Personal loans – Canada
Personal loans
– U.S.
Residential mortgages
– Canada
Residential mortgages
– U.S.
Home equity loans
– Canada
Credit cards
Home equity loans
– U.S.
Gross Loans and Acceptances
Diversification by Industry
As at October 31, 2010
Material in blue-tinted font above is an integral part of the 2010 annual consolidated financial statements (see page 75).
BMO Financial Group 193rd Annual Report 2010 81