Bank of Montreal 2015 Annual Report Download - page 190

Net Interest Income is comprised of
earnings on assets, such as loans and
securities, including interest and
dividend income and BMO’s share of
income from investments accounted
for using the equity method of
accounting, less interest expense paid
on liabilities, such as deposits.
Page 39
Net Interest Margin is the ratio of
net interest income to average
earning assets, expressed as a per-
centage or in basis points. Net
interest margin is sometimes com-
puted using total assets.
Page 39
Net Non-Interest Revenue is non-
interest revenue, net of insurance
claims, commissions and changes in
policy benefit liabilities.
Notional Amount refers to the
principal amount used to calculate
interest and other payments under
derivative contracts. The principal
amount does not change hands under
the terms of a derivative contract,
except in the case of cross-currency
swaps.
Off-Balance Sheet Financial Instru-
ments consist of a variety of financial
arrangements offered to clients,
which include credit derivatives,
written put options, backstop liquidity
facilities, standby letters of credit,
performance guarantees, credit
enhancements, commitments to
extend credit, securities lending,
documentary and commercial letters
of credit, and other indemnifications.
Office of the Superintendent of
Financial Institutions Canada (OSFI)
is the government agency responsible
for regulating banks, insurance
companies, trust companies, loan
companies and pension plans
in Canada.
Operating Leverage is the difference
between revenue and expense
growth rates. Adjusted operating
leverage is the difference between
adjusted revenue and adjusted
expense growth rates.
Page 43
Operational Risk is the potential for
loss resulting from inadequate or
failed internal processes or systems,
human interactions or external
events, but excludes business risk.
Page 111
Options are contractual agreements
that convey to the purchaser the right
but not the obligation to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at a
fixed future date or at any time within
a fixed future period.
Page 156
Provision for Credit Losses is a
charge to income that represents an
amount deemed adequate by
management to fully provide for
impairment in a portfolio of loans and
acceptances and other credit instru-
ments, given the composition of the
portfolio, the probability of default,
the economic environment and the
allowance for credit losses already
established.
Pages 42, 96, 149
Reputation Risk is the potential for a
negative impact on BMO that results
from the deterioration of BMO’s
reputation. Potential negative impacts
include revenue loss, decline in
customer loyalty, litigation, regulatory
sanction or additional oversight, and a
decline in BMO’s share price.
Page 116
Return on Equity or Return on
Common Shareholders’ Equity (ROE)
is calculated as net income, less non-
controlling interest in subsidiaries and
preferred dividends, as a percentage
of average common shareholders’
equity. Common shareholders’ equity
is comprised of common share capital,
contributed surplus, accumulated
other comprehensive income (loss)
and retained earnings. Adjusted ROE
is calculated using adjusted net
income rather than net income.
Page 35
Risk-Weighted Assets (RWA) are
defined as on- and off-balance sheet
exposures that are risk-weighted
based on counterparty, collateral,
guarantee arrangements and possibly
product and term for capital
management and regulatory reporting
purposes.
Page 73
Securities Borrowed or Purchased
under Resale Agreements are low-
cost, low-risk instruments, often
supported by the pledge of cash
collateral, which arise
from transactions that involve
the borrowing or purchasing
of securities.
Securities Lent or Sold under
Repurchase Agreements are low-
cost, low-risk liabilities, often sup-
ported by cash collateral, which arise
from transactions that involve the
lending or selling of securities.
Securitization is the practice of selling
pools of contractual debts, such as
residential mortgages, commercial
mortgages, auto loans and credit card
debt obligations, to third parties.
Page 153
Specific Allowances reduce the
carrying value of specific credit assets
to the amount we expect to recover if
there is evidence of deterioration in
credit quality.
Pages 97, 148
Strategic Risk is the potential for loss
due to fluctuations in the external
business environment and/or failure
to properly respond to these fluctua-
tions as a result of inaction, ineffective
strategies or poor implementation of
strategies.
Page 116
Stressed Value at Risk (SVaR) is
measured for specific classes of risk in
BMO’s trading and underwriting activ-
ities related to interest rates, foreign
exchange rates, credit spreads, equity
and commodity prices and their
implied volatilities, where model
inputs are calibrated to historical data
from a period of significant financial
stress. This measure calculates the
maximum loss likely to be experi-
enced in the portfolios, measured at a
99% confidence level over a specified
holding period.
Page 100
Structured Entities (SEs) include
entities for which voting or similar
rights are not the dominant factor in
determining control of the entity. We
are required to consolidate an SE if we
control the entity by having power
over the entity, exposure to variable
returns as a result of our involvement
and the ability to exercise power to
affect the amount of our returns.
Pages 77, 154
Swaps are contractual agreements
between two parties to exchange a
series of cash flows. The various swap
agreements that we enter into are as
follows:
•Commodity swaps – counterparties
generally exchange fixed-rate and
floating-rate payments based on
a notional value of a single
commodity.
•Credit default swaps – one counter-
party pays the other a fee in
exchange for that other counter-
party agreeing to make a payment
if a credit event occurs, such as
bankruptcy or failure to pay.
•Cross-currency interest rate swaps –
fixed-rate and floating-rate interest
payments and principal amounts are
exchanged in different currencies.
•Cross-currency swaps – fixed-rate
interest payments and principal
amounts are exchanged in different
currencies.
•Equity swaps – counterparties
exchangethereturnonanequity
security or a group of equity secu-
rities for the return based on a fixed
or floating interest rate or the return
on another equity security or group
of equity securities.
•Interest rate swaps – counterparties
generally exchange fixed-rate and
floating-rate interest payments
basedonanotionalvalueinasingle
currency.
Page 156
Tangible Common Equity is
calculated as common shareholders’
equity less goodwill and acquisition-
related intangible assets, net of
related deferred tax liabilities.
Page 35
Taxable Equivalent Basis (teb):
Revenues of operating groups are
presented in our MD&A on a taxable
equivalent basis (teb). To facilitate
comparisons, the teb adjustment
increases GAAP revenue and the
provision for income taxes by an
amount that would increase revenue
on certain tax-exempt securities to a
level that would incur tax at the stat-
utory rate.
Pages 38, 194
Tier 1 Capital is comprised of CET1
capital, preferred shares and
innovative hybrid instruments, less
certain regulatory deductions.
Pages 70, 181
Tier 1 Capital Ratio reflects Tier 1
capital divided by Tier 1 capital risk-
weighted assets.
Pages 72, 181
Total Capital includes Tier 1 and Tier 2
capital. Tier 2 capital is primarily com-
prised of subordinated debentures and
a portion of the collective and individual
allowances for credit losses, less certain
regulatory deductions.
Pages 70, 181
Total Capital Ratio reflects Total
capital divided by Total capital
risk-weighted assets.
Pages 72, 182
Total Shareholder Return: The three-
year and five-year average annual
total shareholder return (TSR) repre-
sents the average annual total return
earned on an investment in BMO
common shares made at the begin-
ning of a three-year and five-year
period, respectively. The return
includes the change in share price and
assumes that dividends received were
reinvested in additional common
shares. The one-year TSR also assumes
that dividends were reinvested in
shares.
Page 32
Trading-Related Revenues include
net interest income and non-interest
revenue earned from on- and off-
balance sheet positions undertaken for
trading purposes. The management of
these positions typically includes
marking them to market on a daily
basis. Trading-related revenues include
income (expense) and gains (losses)
from both on-balance sheet
instruments and interest rate, foreign
exchange (including spot positions),
equity, commodity and credit
contracts.
Page 41
Value at Risk (VaR) is measured for
specific classes of risk in BMO’s trading
and underwriting activities related to
interest rates, foreign exchange rates,
credit spreads, equity and commodity
prices and their implied volatilities. This
measure calculates the maximum loss
likely to be experienced in the portfo-
lios, measured at a 99% confidence
level over a specified holding period.
Pages 100, 101
BMO Financial Group 198th Annual Report 2015 203