Bank of Montreal 2015 Annual Report Download - page 61

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
As a bank holding company with total consolidated assets of US$50 billion or more, our subsidiary BMO Financial Corp. (BFC) became subject to
the Federal Reserve Board’s (FRB) annual Comprehensive Capital Analysis and Review (CCAR) and mid-year Dodd-Frank Act stress testing (DFAST)
requirements starting in fiscal 2014. CCAR requires BFC to test its ability to meet applicable regulatory capital requirements and continue to operate
under severe stress. The quantitative and qualitative aspects of BFC’s 2015 CCAR capital plan were subject to supervisory review and the FRB applied
its own quantitative tools to evaluate BFC. The FRB announced its decision not to object to BFC’s capital plan in March 2015 and disclosed the results
of its quantitative analysis. BFC and its bank subsidiary BMO Harris Bank N.A. (BHB) also disclosed their results under the CCAR supervisory severely
adverse scenario. Under DFAST, BFC executes mid-year company-run stress tests. BFC submitted its DFAST stress tests to the FRB and disclosed the
results in July 2015.
The Common Equity Tier 1 Ratio reflects Basel III CET1 capital divided by CET1 capital RWA.
The Tier 1 Capital Ratio reflects Basel III Tier 1 capital divided by Tier 1 capital RWA.
The Total Capital Ratio reflects Basel III Total capital divided by Total capital RWA.
The Leverage Ratio is defined as Basel III Tier 1 capital divided by the sum of on-balance sheet items and specified off-balance sheet items, net
of specified adjustments.
2015 Regulatory Capital Review
BMO’s capital ratios are strong and exceed OSFI’s requirements for large Canadian banks, including the 1% D-SIB Common Equity Surcharge to be
implemented in 2016. Our CET1 Ratio was 10.7% at October 31, 2015, compared to 10.1% at October 31, 2014. The CET1 Ratio increased by 60 basis
points from the end of fiscal 2014 primarily due to higher capital from accumulated other comprehensive income and retained earnings, partially
offset by an increase in RWA. The RWA increase was attributable to foreign exchange rate movements, which we largely hedge as discussed below,
higher business volumes and higher market risk, partly offset by methodology changes and changes in book quality.
Our Tier 1 Capital and Total Capital Ratios were 12.3% and 14.4%, respectively, at October 31, 2015, compared to 12.0% and 14.3%, respectively,
at October 31, 2014. The Tier 1 and Total Capital Ratios increased by 30 basis points and 10 basis points, respectively, from the end of fiscal 2014 due
mainly to the factors impacting the CET1 Ratio discussed above and the issuances of preferred shares, partially offset by Additional Tier 1 instruments
redemptions. The increase in the Total Capital Ratio was mainly due to the factors impacting the CET1 and the Tier 1 Ratios, partially offset by the
additional 10% phase-out of non-qualifying subordinated debt.
BMO’s Leverage Ratio was 4.2% at October 31, 2015, in excess of the 3% minimum requirement established by OSFI.
On September 10, 2015, we announced the signing of an agreement to acquire GE Capital’s Transportation Finance business. The acquisition is
expected to reduce BMO’s CET1 Ratio by approximately 70 basis points on closing in the first quarter of 2016.
BMO’s investments in foreign operations are primarily denominated in U.S. dollars. The foreign exchange impact of U.S.-dollar-denominated RWA
and U.S.-dollar-denominated capital deductions may result in variability in the bank’s capital ratios. BMO may enter into hedging arrangements to
reduce the impact of foreign exchange movements on its capital ratios and did so during 2015.
Regulatory Capital (All-in basis (1))
(Canadian $ in millions)
As at October 31 2015 2014
Common Equity Tier 1 capital: instruments and reserves
Directly issued qualifying common share capital plus related stock surplus 12,612 12,661
Retained earnings 18,930 17,237
Accumulated other comprehensive income (and other reserves) 4,640 1,375
Goodwill and other intangibles (net of related tax liability) (7,752) (6,875)
Other common equity Tier 1 capital deductions (2,802) (1,977)
Common Equity Tier 1 capital (CET1) 25,628 22,421
Additional Tier 1 capital: instruments
Directly issued qualifying Additional Tier 1 instruments plus related stock surplus 2,150 1,200
Directly issued capital instruments subject to phase-out from Additional Tier 1 1,987 3,332
Additional Tier 1 instruments (and CET1 instruments not otherwise included) issued by subsidiaries and held by third parties
(amount allowed in group AT1) 97
of which: instruments issued by subsidiaries subject to phase-out 97
Total regulatory adjustments applied to Additional Tier 1 capital (358) (358)
Additional Tier 1 capital (AT1) 3,788 4,181
Tier 1 capital (T1 = CET1 + AT1) 29,416 26,602
Tier 2 capital: instruments and provisions
Directly issued qualifying Tier 2 instruments plus related stock surplus 1,034 1,002
Directly issued capital instruments subject to phase-out from Tier 2 3,548 4,027
Tier 2 instruments (and CET1 and AT1 instruments not included) issued by subsidiaries and held by third parties
(amount allowed in group Tier 2) 46 80
of which: instruments issued by subsidiaries subject to phase-out 46 80
Collective allowances 590 266
Total regulatory adjustments to Tier 2 capital (50) (50)
Tier 2 capital (T2) 5,168 5,325
Total capital (TC = T1 + T2) 34,584 31,927
(1) “All-in” regulatory capital assumes that all Basel III regulatory adjustments are applied effective January 1, 2013, and that the capital value of instruments that no longer qualify as regulatory capital
under Basel III rules is being phased out at a rate of 10% per year from January 1, 2013 to January 1, 2022.
72 BMO Financial Group 198th Annual Report 2015