Bank of Montreal 2015 Annual Report Download - page 189

GLOSSARY OF FINANCIAL TERMS
Glossary of Financial Terms
Adjusted Earnings and Measures
present results adjusted to exclude
the impact of certain items, as set out
in the Non-GAAP Measures section.
Management considers both reported
and adjusted results to be useful in
assessing underlying ongoing busi-
ness performance.
Adjusted Return on Tangible
Common Equity is calculated as
adjusted net income available to
common shareholders as a
percentage of average tangible
common equity.
Page 35
Allowance for Credit Losses repre-
sents an amount deemed adequate
by management to absorb credit-
related losses on loans and accept-
ances and other credit instruments.
Allowances for credit losses can be
specific or collective and are recorded
on the balance sheet as a deduction
from loans and acceptances or, as
they relate to credit instruments, as
other liabilities.
Pages 78, 97, 148
Assets under Administration and
under Management refers to assets
administered or managed by a finan-
cial institution that are beneficially
owned by clients and therefore not
reported on the balance sheet of the
administering or managing financial
institution.
Asset-Backed Commercial Paper
(ABCP) is a short-term investment.
The commercial paper is backed by
physical assets such as trade receiv-
ables, and is generally used for short-
term financing needs.
Page 71
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and
loans and securities, over a one-year
period.
Bankers’ Acceptances (BAs) are
bills of exchange or negotiable
instruments drawn by a borrower for
payment at maturity and accepted by
a bank. BAs constitute a guarantee of
payment by the bank and can be
traded in the money market. The
bank earns a “stamping fee” for
providing this guarantee.
Basis Point is one one-hundredth of
a percentage point.
Business Risk arises from the
specific business activities of a
company and the effects these could
have on its earnings.
Page 116
Collective Allowance is maintained
to cover impairment in the existing
credit portfolio that cannot yet be
associated with specific credit assets.
Our approach to establishing and
maintaining the collective allowance
is based on the requirements of IFRS,
considering guidelines issued by our
regulator, OSFI. The collective allow-
ance is assessed on a quarterly basis
and a number of factors are consid-
ered when determining its level,
including the long-run expected loss
amount and management’s credit
judgment with respect to current
macroeconomic and portfolio
conditions.
Pages 42, 97, 148
Common Equity Tier 1 (CET1)
capital is comprised of common
shareholders’ equity less deductions
for goodwill, intangible assets, pen-
sion assets, certain deferred tax
assets and certain other items.
Pages 70, 181
Common Equity Tier 1 Ratio reflects
CET1 capital, divided by risk-weighted
assets for CET1.
Pages 35, 72, 182
Common Shareholders’ Equity is
the most permanent form of capital.
For regulatory capital purposes,
common shareholders’ equity is
comprised of common shareholders’
equity, net of capital deductions.
Credit and Counterparty Risk is the
potential for loss due to the failure of
a borrower, endorser, guarantor or
counterparty to repay a loan or
honour another predetermined finan-
cial obligation.
Pages 94, 151
Derivatives are contracts with a
value that is “derived” from move-
ments in interest or foreign exchange
rates, equity or commodity prices or
other indices. Derivatives allow for
the transfer, modification or reduction
of current or expected risks from
changes in rates and prices.
Dividend Payout Ratio represents
common share dividends as a
percentage of net income available to
common shareholders. It is computed
by dividing dividends per share by
basic earnings per share.
Earnings Per Share (EPS) is calcu-
lated by dividing net income attribut-
able to bank shareholders, after
deduction of preferred dividends, by
the average number of common
shares outstanding. Diluted EPS,
which is our basis for measuring
performance, adjusts for possible
conversions of financial instruments
into common shares if those con-
versions would reduce EPS. Adjusted
EPS is calculated in the same manner,
using adjusted net income.
Pages 34, 191
Earnings Sensitivity is a measure of
the impact of potential changes in
interest rates on the projected
12-month after-tax net income of a
portfolio of assets, liabilities and
off-balance sheet positions in
response to prescribed parallel
interest rate movements.
Page 104
Economic Capital is a measure of 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
should severely adverse situations
arise, and allows returns to be
measured on a basis that considers
the risks undertaken. Economic
capital is calculated for various types
of risk – credit, market (trading and
non-trading), operational and
business – based on a one-year time
horizon using a defined confidence
level.
Pages 73, 93
Economic Value Sensitivity is a
measure of the impact of potential
changes in interest rates on the
market value of a portfolio of assets,
liabilities and off-balance sheet posi-
tions in response to prescribed
parallel interest rate movements.
Page 104
Efficiency Ratio (or Expense-to-
Revenue Ratio) is a key measure of
productivity. It is calculated as non-
interest expense divided by total
revenue, expressed as a percentage.
The adjusted efficiency ratio is calcu-
lated in the same manner, utilizing
adjusted total revenue and non-
interest expense.
Page 43
Environmental and Social Risk is
the potential for loss or damage to
BMO’s reputation resulting from
environmental or social concerns
related to BMO or its customers.
Environmental and social risk is often
associated with credit, operational
and reputation risk.
Page 117
Fair Value is the amount of consid-
eration that would be agreed upon in
an arm’s-length transaction between
knowledgeable, willing parties who
are under no compulsion to act.
Forwards and Futures are con-
tractual agreements to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
specific price and date in the future.
Forwards are customized contracts
transacted in the over-the-counter
market. Futures are transacted in
standardized amounts on regulated
exchanges and are subject to daily
cash margining.
Page 156
Hedging is a risk management tech-
nique used to neutralize, manage or
offset interest rate, foreign currency,
equity, commodity or credit
exposures arising from normal
banking activities.
Impaired Loans are loans for which
there is no longer reasonable assur-
ance of the timely collection of
principal or interest.
Innovative Tier 1 Capital is a form
of Tier 1 capital issued by structured
entities that can be included in calcu-
lating a bank’s Tier 1 Capital Ratio,
Total Capital Ratio and Leverage
Ratio. Under Basel III, Innovative Tier
1 Capital is non-qualifying and is part
of the grandfathered capital being
phased out between 2013 and 2022.
Insurance Risk is the potential for
loss due to actual experience being
different from that assumed when an
insurance product was designed and
priced. It generally entails inherent
unpredictability that can arise from
assuming long-term policy liabilities
or from the uncertainty of future
events. Insurance risk is inherent in
all our insurance products, including
annuities and life, accident and sick-
ness, and creditor insurance, as well
as in our reinsurance business.
Page 114
Legal and Regulatory Risk is the
potential for loss or harm that arises
from legislation, contracts, non-
contractual rights and obligations,
and disputes. This includes the risks
of failing to: comply with the law (in
letter or in spirit) or maintain stan-
dards of care; implement legislative
or regulatory requirements; enforce
or comply with contractual terms;
assert non-contractual rights; effec-
tively manage disputes; and act in a
manner so as to maintain our
reputation.
Page 114
Leverage Ratio is defined as Tier 1
capital, divided by the sum of on-
balance sheet items and specified
off-balance sheet items, net of
specified adjustments.
Page 72
Liquidity and Funding Risk is the
potential for loss if BMO is unable to
meet financial commitments in a
timely manner at reasonable prices
as they fall due. Financial commit-
ments include liabilities to depositors
and suppliers, and lending, invest-
ment and pledging commitments.
Pages 105, 153
Market Risk is the potential for
adverse changes in the value of
BMO’s assets and liabilities resulting
from changes in market variables
such as interest rates, foreign
exchange rates, equity and
commodity prices and their implied
volatilities, and credit spreads, and
includes the risk of credit migration
and default in our trading book.
Pages 100, 153
Mark-to-Market represents the
valuation of financial instruments
at market rates as of the balance
sheet date, where required by
accounting rules.
Model Risk is the potential for
adverse consequences following
decisions based on incorrect or
misused model outputs. These
adverse consequences can include
financial loss, poor business decision-
making or damage to reputation.
Page 112
202 BMO Financial Group 198th Annual Report 2015