Bank of Montreal 2015 Annual Report Download - page 86

MD&A
Changes in Gross Impaired Loans and Acceptances (1)
(Canadian $ in millions, except as noted)
For the year ended October 31 2015 2014 2013
GIL, beginning of year 2,048 2,544 2,976
Classified as impaired during the year 1,921 2,142 2,449
Transferred to not impaired during the year (556) (669) (728)
Net repayments (700) (1,059) (1,058)
Amounts written off (704) (801) (939)
Recoveries of loans and advances previously written off –––
Disposals of loans (252) (220) (343)
Foreign exchange and other movements 202 111 187
GIL, end of year 1,959 2,048 2,544
GIL as a % of gross loans and acceptances 0.58 0.67 0.91
(1) GIL excludes purchased credit impaired loans.
Allowance for Credit Losses (ACL)
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 collective allowances for credit losses. Specific allowances reduce the
aggregate carrying value of credit assets for which there is evidence of deterioration in credit quality. We also maintain a collective allowance in order
to cover any impairment in the existing loan portfolio that cannot yet be associated with individually identified impaired loans. Our approach to
establishing and maintaining the collective allowance is based on the requirements of IFRS, in conjunction with guidelines issued by our regulator,
OSFI. Our collective allowance methodology groups loans on the basis of similar credit risk characteristics, and applies quantitative and qualitative
factors to determine the appropriate level for the collective allowance. The quantitative component of the methodology measures long-run expected
losses based on the PD, LGD and EAD risk parameters used to estimate risk-based capital. For commercial and corporate loans, key determinants of
incurred but not identified losses include the underlying risk rating of the borrower, industry sector, credit product and amount and quality of
collateral held. For consumer and small business loans, exposures are pooled based on similar risk characteristics and the levels of incurred but not
identified losses are determined from the long-run default and historical loss experience of each pool. The qualitative component of the methodology
reflects management’s judgment with respect to current and near-term macroeconomic and business conditions, portfolio-specific considerations,
credit quality trends, changes in lending practices and model factors. We review the collective allowance on a quarterly basis.
BMO maintains the allowance for credit losses at a level that we consider adequate to absorb credit-related losses. As at October 31, 2015, our
ACL was $2,052 million, comprised of specific allowances of $392 million and collective allowance of $1,660 million. This includes specific allowance
of $35 million and collective allowance of $162 million related to undrawn commitments and letters of credit that are considered other credit
instruments and recorded in other liabilities. Total ACL increased slightly year over year by $86 million, primarily due to the impact of the stronger
U.S. dollar. Our coverage ratios are trending positively, with ACL as a percentage of GIL increasing year over year.
The collective allowance increased by $118 million from 2014 to $1,660 million in 2015 due to the impact of the stronger U.S. dollar.
The collective allowance remains adequate and at year end represented 0.83% of credit risk-weighted assets, consistent with the prior year.
Factors contributing to the change in ACL are outlined in the table below. Further details on changes in ACL by country and portfolio can be found
in Tables 12 and 13 on page 128 and in Note 4 on page 148 of the financial statements.
Changes in Allowance for Credit Losses (1)
(Canadian $ in millions, except as noted)
For the year ended October 31 2015 2014 2013
Specific ACL, beginning of year 424 485 476
Specific PCL (charge to income statement) 612 561 597
Recoveries of amounts written off in previous years 456 624 772
Write-offs (1,065) (1,149) (1,297)
Foreign exchange and other movements (35) (97) (63)
Specific ACL, end of year 392 424 485
Collective ACL, beginning of year 1,542 1,485 1,460
Collective PCL (charge to income statement) –– (10)
Foreign exchange and other movements 118 57 35
Collective ACL, end of year 1,660 1,542 1,485
Total ACL 2,052 1,966 1,970
Comprised of:
Loans 1,855 1,734 1,665
Specific allowance for other credit instruments 35 50 41
Collective allowance for other credit instruments 162 182 264
ACL as a % of GIL (2) 103.0 93.6 75.8
(1) Includes allowances related to other credit instruments that are included in other liabilities.
(2) Ratio excludes specific allowances for other credit instruments that are included in other liabilities.
BMO Financial Group 198th Annual Report 2015 97