EX-99.1 2 d422548dex991.htm EX-99.1 EX-99.1

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Third Quarter 2017 Report to Shareholders

 

 

BMO Financial Group Reports Net Income of $1.4 Billion for Third Quarter of 2017

 

 

Financial Results Highlights:

Third Quarter 2017 Compared with Third Quarter 2016:

 

  Net income of $1,387 million, up 11%; adjusted net income1 of $1,374 million, up 6%

 

  EPS2 of $2.05, up 10%; adjusted EPS1,2 of $2.03, up 4%

 

  ROE of 13.4%, compared with 13.0%; adjusted ROE1 of 13.3%, compared with 13.5%

 

  Provisions for credit losses of $134 million (including the benefit of a $76 million decrease in the collective allowance), compared with $257 million; specific provisions for credit losses of $210 million, compared with $257 million

 

  Common Equity Tier 1 Ratio of 11.2%

Year-to-Date 2017 Compared with Year-to-Date 2016:

 

  Net income of $4,123 million, up 25%; adjusted net income1 of $4,199 million, up 16%

 

  EPS2 of $6.11, up 25%; adjusted EPS1,2 of $6.22, up 15%

 

  ROE of 13.7%, compared with 11.4%; adjusted ROE1 of 13.9%, compared with 12.6%

 

  Provisions for credit losses of $566 million, compared with $641 million; specific provisions for credit losses of $642 million, compared with $641 million

Toronto, August 29, 2017 – For the third quarter ended July 31, 2017, BMO Financial Group recorded net income of $1,387 million or $2.05 per share on a reported basis, and net income of $1,374 million or $2.03 per share on an adjusted basis.

“BMO’s performance this quarter continues to demonstrate the strength of our differentiated operating model, delivering resilient earnings growth in an evolving environment, with adjusted earnings of $1.4 billion, up 6% from last year, and adjusted earnings per share of $2.03. Year-to-date, we delivered double-digit earnings growth with adjusted net income of $4.2 billion, driven by good underlying revenue growth, strong credit performance, and a focus on improving efficiency while making investments that strengthen customer relationships across all channels,” said Bill Downe, Chief Executive Officer, BMO Financial Group.

“We are confident in the ongoing execution against our strategic priorities, grounded in a commitment to sustainability and the dedication of our over 45,000 employees to growing customer loyalty. All of our businesses are well-positioned for continued success in the current environment and over the long term,” concluded Mr. Downe.

Return on tangible common equity (ROTCE) was 16.5% compared with 16.3% in the prior year, and adjusted ROTCE was 16.0% compared with 16.6%.

Concurrent with the release of results, BMO announced a fourth quarter 2017 dividend of $0.90 per common share, unchanged from the preceding quarter and up $0.04 per share and 5% from a year ago. The quarterly dividend of $0.90 per common share is equivalent to an annual dividend of $3.60 per common share.

Our complete Third Quarter 2017 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended July 31, 2017, is available online at www.bmo.com/investorrelations and at www.sedar.com.

(1) Results and measures in this document are presented on a GAAP basis. They are also presented on an adjusted basis that excludes the impact of certain items. Adjusted results and measures are non-GAAP and are detailed for all reported periods in the Non-GAAP Measures section, where such non-GAAP measures and their closest GAAP counterparts are disclosed.

(2) All Earnings per Share (EPS) measures in this document refer to diluted EPS unless specified otherwise. EPS is calculated using net income after deductions for net income attributable to non-controlling interest in subsidiaries and preferred share dividends.

Note: All ratios and percentage changes in this document are based on unrounded numbers.


Operating Segment Overview

Canadian P&C

Reported net income of $614 million and adjusted net income of $615 million both increased $54 million or 9% from a year ago due to higher balances across most products, increased non-interest revenue and lower provisions for credit losses, partially offset by higher expenses. Adjusted net income excludes the amortization of acquisition-related intangible assets.

During the quarter, we launched a new eBusiness Plan for small business clients who prefer to bank through self-serve electronic transactions. We also further enhanced the digital banking experience for our personal credit card customers by introducing Android Pay™, providing a simple and secure way to make purchases with a BMO credit and debit card using an Android compatible mobile device.

U.S. P&C

Reported net income of $278 million was flat and adjusted net income of $289 million was down $1 million compared to a year ago. Adjusted net income excludes the amortization of acquisition-related intangible assets.

Reported net income of US$214 million and adjusted net income of US$223 million were slightly higher compared to a year ago as higher revenue and a more favourable tax rate were largely offset by higher expenses.

During the quarter, we improved our ranking to #8 out of 39 leading American banks in the 2017 Survey of Bank Reputations conducted by the Reputation Institute and published by American Banker, which recognizes banking institutions for their governance, products and services, and innovation.

Wealth Management

Reported net income of $264 million was up $63 million or 32% from a year ago. Adjusted net income, which excludes the amortization of acquisition-related intangible assets and acquisition integration costs, of $279 million was up $52 million or 23% from a year ago due to higher net revenue, partially offset by higher expenses. Traditional wealth reported net income of $188 million increased $41 million or 28% and adjusted net income of $203 million increased $30 million or 17% from a year ago, reflecting business growth and improved equity markets. Insurance net income of $76 million increased $22 million or 43% due to unfavourable market movements a year ago relative to a modest benefit from favourable market movements in the current quarter.

BMO InvestorLine tied for Best Overall Bank-Owned Brokerage in MoneySense™ magazine’s annual report on Canada’s best brokerages. This ranking recognizes our continued commitment to provide our clients with leading-edge capabilities, products and service.

BMO Capital Markets

Reported net income of $292 million and adjusted net income of $293 million both decreased $25 million or 8% from a year ago, as lower revenue and higher expenses were partially offset by lower provisions for credit losses.

BMO Capital Markets was named a 2017 Greenwich Share Leader and Quality Leader across a range of Canadian equity sales, trading and research areas. We continue to win key cross-border mandates, including acting on behalf of Canadian-based, U.S.-backed Jamieson Wellness Inc., on its initial public offering to raise $345 million.

Corporate Services

Corporate Services net loss for the quarter was $61 million compared with a net loss of $111 million a year ago. Corporate Services adjusted net loss for the quarter was $102 million compared with an adjusted net loss of $101 million a year ago. Adjusted results in the current period exclude a $54 million after-tax decrease in the collective allowance and both periods exclude acquisition integration costs. Reported results increased due to the decrease in the collective allowance. Adjusted results were relatively unchanged as higher revenue excluding teb (taxable equivalent basis) was largely offset by lower credit recoveries and higher expenses in the current quarter.

Adjusted results in this Operating Segment Overview section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Capital

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.2% at July 31, 2017. The CET1 Ratio decreased from 11.3% at the end of the second quarter due largely to business growth and share repurchases during the quarter, partially offset by retained earnings growth.

Provision for Credit Losses

The total provision for credit losses (PCL) was $134 million, a decrease of $123 million from the prior year. There was a $76 million pre-tax decrease in the collective allowance this quarter largely as a result of positive portfolio migration, which decreased the provision for credit losses. The specific provision for credit losses of $210 million decreased $47 million due to lower provisions in BMO Capital Markets and Canadian P&C.

Caution

The foregoing sections contain forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

 

BMO Financial Group Third Quarter Report 2017 1


Regulatory Filings

Our continuous disclosure materials, including our interim filings, annual Management’s Discussion and Analysis and audited consolidated financial statements, Annual Information Form and Notice of Annual Meeting of Shareholders and Proxy Circular are available on our website at www.bmo.com/investorrelations, on the Canadian Securities Administrators’ website at www.sedar.com and on the EDGAR section of the SEC’s website at www.sec.gov.

 

 

Bank of Montreal uses a unified branding approach that links all of the organization’s member companies. Bank of Montreal, together with its subsidiaries, is known as BMO Financial Group. As such, in this document, the names BMO and BMO Financial Group mean Bank of Montreal, together with its subsidiaries.

 

 

Management’s Discussion and Analysis

Management’s Discussion and Analysis commentary is as of August 29, 2017. The material that precedes this section comprises part of this MD&A. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended July 31, 2017, included in this document, as well as the audited consolidated financial statements for the year ended October 31, 2016, and the MD&A for fiscal 2016 in BMO’s 2016 Annual Report.

The 2016 Annual MD&A includes a comprehensive discussion of our businesses, strategies and objectives, and can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

 

 

 

Table of Contents
3    Financial Highlights    23    Balance Sheet
4    Non-GAAP Measures    23    Transactions with Related Parties
5    Caution Regarding Forward-Looking Statements    24    Off-Balance Sheet Arrangements
5    Economic Review and Outlook    24    Accounting Policies and Critical Accounting Estimates
6    Foreign Exchange    24    Future Changes in Accounting Policies
6    Net Income    24    Select Financial Instruments
7    Revenue    24    Other Regulatory Developments
9    Provisions for Credit Losses    25    Risk Management
9    Impaired Loans        25    Market Risk
10    Insurance Claims, Commissions and Changes in Policy Benefit Liabilities        27    Liquidity and Funding Risk
10    Non-Interest Expense        30    Credit Rating
10    Income Taxes        31    European Exposures
11    Capital Management    33    Interim Consolidated Financial Statements
13    Eligible Dividends Designation        33    Consolidated Statement of Income
14    Review of Operating Groups’ Performance        34    Consolidated Statement of Comprehensive Income
    14    Personal and Commercial Banking (P&C)        35    Consolidated Balance Sheet
       15    Canadian Personal and Commercial Banking (Canadian P&C)        36    Consolidated Statement of Changes in Equity
       16    U.S. Personal and Commercial Banking (U.S. P&C)        37    Consolidated Statement of Cash Flows
    17    BMO Wealth Management        38    Notes to Consolidated Financial Statements
    19    BMO Capital Markets    54    Other Investor and Media Information
    20    Corporate Services         
22    Summary Quarterly Earnings Trends         

 

 

Bank of Montreal’s management, under the supervision of the CEO and CFO, has evaluated the effectiveness, as of July 31, 2017, of Bank of Montreal’s disclosure controls and procedures (as defined in the rules of the Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended July 31, 2017, which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of inherent limitations, disclosure controls and procedures and internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements.

As in prior quarters, Bank of Montreal’s Audit and Conduct Review Committee reviewed this document and Bank of Montreal’s Board of Directors approved the document prior to its release.

 

2 BMO Financial Group Third Quarter Report 2017


Financial Highlights    Table 1   

 

  (Canadian $ in millions, except as noted)

   Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016         

Summary Income Statement

                        

Net interest income

     2,533          2,409          2,474          7,472          7,374    

Non-interest revenue

     2,926          3,332          3,159          9,133          8,435          

Revenue

     5,459          5,741          5,633          16,605          15,809    

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

     253          708          691          965          1,464          

Revenue, net of CCPB

     5,206          5,033          4,942          15,640          14,345          

Specific provision for credit losses

     210          259          257          642          641    

Collective provision for (recovery of) credit losses

     (76        -          -          (76        -          

Total provision for credit losses

     134          259          257          566          641    

Non-interest expense

     3,278          3,276          3,092          9,933          9,674    

Provision for income taxes

     407          250          348          1,018          744          

Net income

     1,387          1,248          1,245          4,123          3,286          

Attributable to bank shareholders

     1,387          1,247          1,245          4,121          3,278    

Attributable to non-controlling interest in subsidiaries

     -          1          -          2          8          

Net income

     1,387          1,248          1,245          4,123          3,286          

Adjusted net income

     1,374          1,295          1,295          4,199          3,625          

Common Share Data ($ except as noted)

                        

Earnings per share

     2.05          1.84          1.86          6.11          4.90    

Adjusted earnings per share

     2.03          1.92          1.94          6.22          5.42    

Earnings per share growth (%)

     9.8          27.0          3.3          24.7          3.2    

Adjusted earnings per share growth (%)

     4.4          10.8          4.3          14.8          6.3    

Dividends declared per share

     0.90          0.88          0.86          2.66          2.54    

Book value per share

     59.65          62.22          58.06          59.65          58.06    

Closing share price

     94.56          96.66          83.70          94.56          83.70    

Total market value of common shares ($ billions)

     61.3          63.0          54.0          61.3          54.0    

Dividend yield (%)

     3.8          3.6          4.1          3.8          4.0          

Financial Measures and Ratios (%)

                        

Return on equity

     13.4          12.6          13.0          13.7          11.4    

Adjusted return on equity

     13.3          13.1          13.5          13.9          12.6    

Return on tangible common equity

     16.5          15.7          16.3          16.9          14.4    

Adjusted return on tangible common equity

     16.0          15.9          16.6          16.8          15.4    

Net income growth

     11.4          28.2          4.5          25.5          3.0    

Adjusted net income growth

     6.1          12.3          5.3          15.8          6.1    

Revenue growth

     (3.1        12.5          16.7          5.0          9.7    

Adjusted revenue growth, net of CCPB

     5.3          7.2          7.3          8.4          7.5    

Non-interest expense growth

     6.0          (1.1        4.1          2.7          6.4    

Adjusted non-interest expense growth

     6.5          4.9          3.5          5.0          5.7    

Efficiency ratio, net of CCPB

     63.0          65.1          62.6          63.5          67.4    

Adjusted efficiency ratio

     59.0          55.9          53.7          58.7          58.4    

Adjusted efficiency ratio, net of CCPB

     61.9          63.8          61.2          62.4          64.4    

Operating leverage, net of CCPB

     (0.7        8.3          3.2          6.3          0.5    

Adjusted operating leverage, net of CCPB

     (1.2        2.3          3.8          3.4          1.8    

Net interest margin on average earning assets

     1.55          1.52          1.58          1.54          1.59    

Effective tax rate

     22.7          16.7          21.9          19.8          18.5    

Adjusted effective tax rate

     22.5          17.1          22.0          19.9          19.4    

Return on average assets

     0.76          0.70          0.70          0.76          0.62    

PCL-to-average net loans and acceptances (annualized)

     0.14          0.28          0.29          0.20          0.24    

Specific PCL-to-average net loans and acceptances (annualized)

     0.22          0.28          0.29          0.23          0.24          

Balance Sheet (as at $ millions, except as noted)

                        

Assets

     708,617          718,943          691,682          708,617          691,682    

Net loans and acceptances

     375,971          381,348          364,133          375,971          364,133    

Deposits

     473,111          488,212          467,846          473,111          467,846    

Common shareholders’ equity

     38,694          40,573          37,437          38,694          37,437    

Cash and securities-to-total assets ratio (%)

     27.8          27.7          27.3          27.8          27.3          

Capital Ratios (%) (1)

                        

CET1 Ratio

     11.2          11.3          10.0          11.2          10.0    

Tier 1 Capital Ratio

     12.9          12.8          11.2          12.9          11.2    

Total Capital Ratio

     15.2          14.9          13.3          15.2          13.3    

Leverage Ratio

     4.4          4.3          4.0          4.4          4.0          

Foreign Exchange Rates

                        

As at Canadian/U.S. dollar

     1.2453          1.3650          1.3056          1.2453          1.3056    

Average Canadian/U.S. dollar

     1.2974          1.3412          1.3029          1.3223          1.3262          

  (1) Comparative figures are as amended for Q3-2016 capital ratios, other than the Leverage Ratio.

  Adjusted results are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Financial Group Third Quarter Report 2017 3


Non-GAAP Measures

Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS. They are also presented on an adjusted basis that excludes the impact of certain items as set out in Table 2 below. Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on our U.S. segment are non-GAAP measures (please see the Foreign Exchange section for a discussion of the effects of changes in exchange rates on our results). Management assesses performance on a reported basis and on an adjusted basis and considers both to be useful in assessing underlying ongoing business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. It also permits readers to assess the impact of certain specified items on results for the periods presented and to better assess results excluding those items if they consider the items to not be reflective of ongoing results. As such, the presentation may facilitate readers’ analysis of trends, as well as comparisons with our competitors. Except as otherwise noted, management’s discussion of changes in adjusted results in this document applies equally to changes in corresponding reported results. Adjusted results and measures are non-GAAP and as such do not have standardized meaning under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from or as a substitute for GAAP results.

 

Non-GAAP Measures    Table 2    

 

(Canadian $ in millions, except as noted)

     Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016       

Reported Results

                          

Revenue

       5,459          5,741          5,633          16,605          15,809    

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

       (253        (708        (691        (965        (1,464    

Revenue, net of CCPB

       5,206          5,033          4,942          15,640          14,345    

Provision for credit losses

       (134        (259        (257        (566        (641  

Non-interest expense

       (3,278        (3,276        (3,092        (9,933        (9,674    

Income before income taxes

       1,794          1,498          1,593          5,141          4,030    

Provision for income taxes

       (407        (250        (348        (1,018        (744    

Net Income

       1,387          1,248          1,245          4,123          3,286    

EPS ($)

       2.05          1.84          1.86          6.11          4.90      

Adjusting Items (Pre-tax)

                          

Amortization of acquisition-related intangible assets (1)

       (35        (43        (40        (115        (123  

Acquisition integration costs (2)

       (20        (21        (27        (63        (73  

Cumulative accounting adjustment (3)

       -          -          -          -          (85  

Restructuring cost (4)

       -          -          -          -          (188  

Decrease in the collective allowance for credit losses (5)

       76          -          -          76          -      

Adjusting items included in reported pre-tax income

       21          (64        (67        (102        (469    

Adjusting Items (After tax)

                          

Amortization of acquisition-related intangible assets (1)

       (28        (34        (31        (90        (95  

Acquisition integration costs (2)

       (13        (13        (19        (40        (50  

Cumulative accounting adjustment (3)

       -          -          -          -          (62  

Restructuring cost (4)

       -          -          -          -          (132  

Decrease in the collective allowance for credit losses (5)

       54          -          -          54          -      

Adjusting items included in reported net income after tax

       13          (47        (50        (76        (339  

Impact on EPS ($)

       0.02          (0.08        (0.08        (0.11        (0.52    

Adjusted Results

                          

Revenue

       5,459          5,741          5,633          16,605          15,893    

Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

       (253        (708        (691        (965        (1,464    

Revenue, net of CCPB

       5,206          5,033          4,942          15,640          14,429    

Provision for credit losses

       (210        (259        (257        (642        (641  

Non-interest expense

       (3,223        (3,212        (3,025        (9,755        (9,289    

Income before income taxes

       1,773          1,562          1,660          5,243          4,499    

Provision for income taxes

       (399        (267        (365        (1,044        (874    

Net income

       1,374          1,295          1,295          4,199          3,625    

EPS ($)

       2.03          1.92          1.94          6.22          5.42      

  (1) These expenses are charged to the non-interest expense of the operating groups. Before and after-tax amounts for each operating group are provided on pages 14, 15, 16, 17, and 19.

  (2) Acquisition integration costs related to F&C Asset Management plc (F&C) are charged to Wealth Management. Acquisition integration costs related to the acquired BMO Transportation Finance business are charged to Corporate Services, since the acquisition impacts both Canadian and U.S. P&C businesses. Acquisition costs are primarily recorded in non-interest expense.

  (3) Cumulative accounting adjustment recognized in other non-interest revenue related to foreign currency translation that largely impacted prior periods.

  (4) Restructuring cost is recorded in non-interest expense.

  (5) Adjustments to the collective allowance for credit losses are recorded in Corporate Services provision for (recovery of) credit losses.

  Adjusted results and measures in this table are non-GAAP amounts or non-GAAP measures.

 

4 BMO Financial Group Third Quarter Report 2017


Caution Regarding Forward-Looking Statements

Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives and priorities for fiscal 2017 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, and the results of or outlook for our operations or for the Canadian, U.S. and international economies.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that our assumptions may not be correct and that actual results may differ materially from such predictions, forecasts, conclusions or projections. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

The future outcomes that relate to forward-looking statements may be influenced by many factors, including but not limited to: general economic and market conditions in the countries in which we operate; weak, volatile or illiquid capital and/or credit markets; interest rate and currency value fluctuations; changes in monetary, fiscal, tax or economic policy; the level of competition in the geographic and business areas in which we operate; changes in laws or in supervisory expectations or requirements, including capital, interest rate and liquidity requirements and guidance and the effect of such changes on funding costs; judicial or regulatory proceedings; the accuracy and completeness of the information we obtain with respect to our customers and counterparties; our ability to execute our strategic plans and to complete and integrate acquisitions, including obtaining regulatory approvals; critical accounting estimates and the effect of changes to accounting standards, rules and interpretations on these estimates; operational and infrastructure risks; changes to our credit ratings; political conditions, including changes relating to or affecting economic or trade matters; global capital markets activities; the possible effects on our business of war or terrorist activities; outbreaks of disease or illness that affect local, national or international economies; natural disasters and disruptions to public infrastructure, such as transportation, communications, power or water supply; technological changes; information and cyber-security; and our ability to anticipate and effectively manage risks arising from all of the foregoing factors.

We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please see the Enterprise-Wide Risk Management section on pages 79 to 112 of BMO’s 2016 Annual Report, which outlines certain key factors and risks that may affect Bank of Montreal’s future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Bank of Montreal does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, and financial services, we primarily consider historical economic data provided by governments, historical relationships between economic and financial variables, and the risks to the domestic and global economy. See the Economic Review and Outlook section of our Third Quarter 2017 Report to Shareholders.

 

 

Economic Review and Outlook

Canada’s economy continues to outperform expectations amid strength in consumer spending, with record motor vehicle sales, and an improvement in business investment and exports. Real GDP grew an annualized 3.7% in the first quarter of 2017 and is expected to grow 4.0% in the second quarter. The fastest annual employment growth in almost a decade has reduced the unemployment rate to a nine-year low of 6.3%. The economy is projected to grow 3.0% in 2017, which would be a six-year high, topping all other G7 nations. Together with a continued recovery in energy-producing regions, we expect the economy to be supported by still-low interest rates, steady U.S. demand and increased federal infrastructure spending. Consumer spending will likely moderate as a result of elevated household debt. While Southern Ontario’s overheated housing market is now slowing in response to policy measures undertaken by the Ontario Government, real estate markets across the rest of the country are expected to remain healthy amid increased signs of stabilization in Vancouver and Alberta following earlier declines. Consumer loan growth is expected to remain steady at 3.0% this year, while residential mortgage demand is projected to slow to below 6.0%. In 2018, economic growth is projected to moderate to 2.0% in response to higher interest rates and a recently strengthening Canadian dollar. The Bank of Canada raised its main policy rate for the first time in seven years in July, and is expected to gradually tighten monetary policy in the year ahead. Canada’s economy faces external risks from increased protectionist measures by the U.S. government if North American Free Trade Agreement renegotiations are unsuccessful, potential global market turbulence stemming from elections in Germany and Italy, and uncertain Brexit talks between the United Kingdom and European Union.

The U.S. economy advanced slowly at the start of the year, but real GDP picked up in the second quarter and is expected to continue growing moderately in the third quarter. Consumer spending growth and housing market activity remain steady, while business investment has improved in anticipation of expansionary fiscal policies and deregulation. The economy is projected to grow 2.1% this year and 2.2% in 2018. Household fundamentals are strong, with confidence high and income and wealth expected to continue rising. Personal spending is projected to remain steady, keeping consumer loan growth above 5.0% in the year ahead. Although businesses are having increased difficulty finding qualified workers due to the low jobless rate, employment remains strong. The unemployment rate is expected to decline from a 16-year low of 4.3% currently to 4.0% by the end of 2018. Housing market activity is expected to continue expanding in response to low unemployment, increased household formation and healthy affordability. Mortgage rates have steadied after increasing sharply following the presidential election, and the still-low rates are expected to support an improvement in residential mortgage growth to over 5.0% in 2017 and 2018. Increased business spending on new equipment has helped the manufacturing sector recover, and is expected to encourage robust business loan growth in the year ahead. Interest rates are projected to continue rising moderately, with the Federal Reserve expected to increase its main policy rate a further 100 basis points before the end of 2018, after having lifted it a similar amount since December 2015. The U.S. economic outlook faces risks related to possible delays in proposed personal and corporate income tax reductions, protectionist trade measures, and increased geopolitical tensions.

The pace of expansion in the U.S. Midwest region, which includes the six contiguous states within the BMO footprint, is expected to improve moderately from 1.1% in 2016 to 1.9% in both 2017 and 2018. We expect the expansion to be supported by increased manufacturing production due to recent weakness in the U.S. dollar and by the ongoing recovery in housing markets. The region is expected to lag the national economy, however, owing to slower population growth and, in Illinois, restrained fiscal spending due to budgetary constraints.

This Economic Review and Outlook section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

 

BMO Financial Group Third Quarter Report 2017 5


Foreign Exchange

The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars were decreased relative to the second quarter of 2017, the third quarter of 2016 and the prior year to date by the weaker U.S. dollar. Table 3 indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates on our U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S.-dollar-denominated amounts recorded outside of BMO’s U.S. segment.

Economically, our U.S. dollar income stream was unhedged to changes in foreign exchange rates during the current year to date and the third quarter of 2016. A portion of BMO Capital Markets U.S. dollar net income was economically hedged in the first half of 2016. We regularly determine whether to execute hedging transactions to mitigate the impact of foreign exchange rate movements on net income.

See the Capital Management section of the 2016 Annual MD&A for discussion on the impact that changes in foreign exchange rates can have on our capital position. Changes in foreign exchange rates will also affect accumulated other comprehensive income primarily from the translation of our investments in foreign operations.

This Foreign Exchange section contains forward-looking statements. Please see the Caution Regarding Forward Looking Statements.

 

Effects of Changes in Exchange Rates on BMO’s U.S. Segment Reported and Adjusted Results    Table 3     

 

                           Q3-2017                 YTD- 2017  
  (Canadian $ in millions, except as noted)                          vs Q3-2016                                vs Q2-2017                         vs YTD-  2016  

Canadian/U.S. dollar exchange rate (average)

       

Current period

    1.2974       1.2974         1.3223  

Prior period

    1.3029       1.3412         1.3262  

Effects on U.S. segment reported results

       

Decreased net interest income

    (4     (32       (6

Decreased non-interest revenue

    (3     (27         -  

Decreased revenues

    (7     (59       (6

(Increased) Decreased provision for credit losses

    -       4         (5

Decreased expenses

    5       43         7  

Decreased income taxes

    1       2           1  

Decreased reported net income before impact of hedges

    (1     (10       (3

Hedging losses in current period, after tax

    -       -           -  

Decreased reported net income

    (1     (10         (3

Effects on U.S. segment adjusted results

       

Decreased net interest income

    (4     (32       (6

Decreased non-interest revenue

    (3     (27         -  

Decreased revenues

    (7     (59       (6

(Increased) Decreased provision for credit losses

    -       4         (2

Decreased expenses

    5       41         7  

Decreased income taxes

    1       3           -  

Decreased adjusted net income before impact of hedges

    (1     (11       (1

Hedging losses in current period, after tax

    -       -           -  

Decreased adjusted net income

    (1     (11         (1

  Adjusted results in this section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Net Income

Q3 2017 vs Q3 2016

Net income was $1,387 million for the third quarter of 2017, up $142 million or 11% from the prior year. Adjusted net income excludes a decrease in the collective allowance in the current period and the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. Adjusted net income was $1,374 million for the third quarter of 2017, up $79 million or 6% from the prior year. EPS of $2.05 was up $0.19 or 10% and adjusted EPS of $2.03 was up $0.09 or 4% from the prior year.

Canadian P&C reported and adjusted net income both increased 9% due to higher balances across most products, increased non-interest revenue and lower provisions for credit losses, partially offset by higher expenses. U.S. P&C reported net income was flat and adjusted net income was down $1 million on a Canadian dollar basis. On a U.S. dollar basis, US P&C reported and adjusted net income were slightly higher compared to a year ago as higher revenue and a more favourable tax rate were largely offset by higher expenses. Wealth Management reported net income was $264 million compared to $201 million a year ago and adjusted net income was $279 million compared to $227 million due to higher net revenue, partially offset by higher expenses. Traditional wealth reported net income increased 28% and adjusted net income increased 17% reflecting business growth and improved equity markets. Insurance net income increased 43% due to unfavourable market movements a year ago relative to a modest benefit from favourable market movements in the current quarter. BMO Capital Markets reported and adjusted net income both decreased 8%, as lower revenue and higher expenses were partially offset by lower provisions for credit losses. Corporate Services reported results increased due to a $54 million after-tax decrease in the collective allowance in the current quarter. Corporate Services adjusted results were relatively unchanged as higher revenue excluding teb was largely offset by lower credit recoveries and higher expenses in the current quarter.

 

6 BMO Financial Group Third Quarter Report 2017


Q3 2017 vs Q2 2017

Net income increased $139 million or 11% and adjusted net income increased $79 million or 6% from the prior quarter. Adjusted net income excludes a decrease in the collective allowance in the current period and the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. EPS increased $0.21 or 11% and adjusted EPS increased $0.11 or 6%.

Canadian P&C reported and adjusted net income both increased 16% mainly due to increased non-interest revenue, the impact of three more days in the current quarter, higher balances across most products and higher net interest margin. U.S. P&C reported net income increased 12% and adjusted net income increased 11% on a Canadian dollar basis. On a U.S. dollar basis, U.S. P&C reported net income increased 16% and adjusted net income increased 15% due to higher deposit revenue, a more favourable tax rate, more days and lower provisions for credit losses, partially offset by higher expenses. Wealth Management reported net income was $264 million compared to $251 million in the prior quarter and adjusted net income was $279 million compared to $272 million. Traditional wealth reported net income increased 7% and adjusted net income increased 3% due to more days. Insurance net income increased $3 million due to a modest benefit from more favourable market movements in the current quarter. BMO Capital Markets reported and adjusted net income both decreased 9% primarily due to lower revenue, partially offset by lower provisions for credit losses and a more favourable tax rate. Corporate Services adjusted results decreased due to lower revenue compared to above-trend revenue excluding teb in the prior quarter, a less favourable tax rate and lower credit recoveries, partially offset by lower expenses in the current quarter. Corporate Services reported results increased due to the decrease in the collective allowance in the current quarter, partially offset by the net impact of the drivers noted above.

Q3 YTD 2017 vs Q3 YTD 2016

Net income was $4,123 million, up $837 million or 25%. Adjusted net income excludes a decrease in the collective allowance in the current year and a negative cumulative accounting adjustment and a restructuring charge in the prior year, as well as the amortization of acquisition-related intangible assets and acquisition integration costs in both year-to-date periods. Adjusted net income was $4,199 million, up $574 million or 16% from a year ago. EPS was $6.11, up $1.21 or 25%, and adjusted EPS was $6.22, up $0.80 or 15%. Year-to-date growth was positively impacted by a net gain of $133 million in the current year, attributed to a gain on the sale of Moneris US and a loss on the sale of a portion of the U.S. indirect auto loan portfolio, and a $79 million after-tax write-down of an equity investment in the prior year. On an adjusted basis, net income increased in Canadian P&C, Wealth Management and BMO Capital Markets from the prior year. US P&C results declined slightly and Corporate Services results also declined.

Adjusted results in this Net Income section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Revenue

Q3 2017 vs Q3 2016

Revenue of $5,459 million decreased $174 million or 3% from the third quarter a year ago. On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue of $5,206 million increased $264 million or 5%, driven by good performance in Canadian P&C and Wealth Management.

Canadian P&C revenue increased 5%, primarily due to higher balances across most products and increased non-interest revenue. U.S. P&C revenue increased 2% on both a Canadian dollar basis and a U.S. dollar basis, mainly due to higher deposit revenue, net of loan spread compression. Traditional wealth revenue increased 7% driven by improved equity markets and businesses growth. Net insurance revenue increased due to unfavourable market movements a year ago relative to a modest benefit from favourable market movements in the current quarter. BMO Capital Markets revenue decreased 1% as increased Investment and Corporate Banking revenue, driven by good mergers and acquisitions advisory activity and higher corporate banking-related revenue, was more than offset by lower Trading Products revenue due to markets and lower levels of client activity. Corporate Services revenue increased due to a lower group teb adjustment and higher revenue excluding teb in the current quarter.

Net interest income increased $59 million or 2% from a year ago to $2,533 million, or 3% excluding the weaker U.S. dollar, due to a higher margin in US P&C and loan growth, partially offset by lower net interest income from trading businesses. Average earning assets increased $23.9 billion or 4% to $646.6 billion from a year ago due to higher securities and loan growth. BMO’s overall net interest margin decreased 3 bps from the prior year to 1.55% primarily due to lower net interest income from trading businesses, partially offset by improved deposit spreads and a benefit from a reduction in low spread assets in US P&C. Net interest margin (excluding trading) improved 3 bps from the prior year due to improved deposit spreads in US P&C.

Net non-interest revenue of $2,673 million increased $205 million or 8%. There were increases in most types of non-interest revenue.

Gross insurance revenue decreased $403 million from a year ago, largely due to increases in long-term interest rates decreasing the fair value of insurance investments compared to decreases in long-term interest rates increasing the fair value of insurance investments in the prior year, partially offset by higher annuity premiums. Insurance revenue can experience variability arising from fluctuations in the fair value of insurance assets. The investments which support policy benefit liabilities are predominantly fixed income assets recorded at fair value with changes in fair value recorded in insurance revenue in the Consolidated Statement of Income. These fair value changes are largely offset by changes in the fair value of policy benefit liabilities, the impact of which is reflected in insurance claims, commissions and changes in policy benefit liabilities (CCPB), as discussed on page 10. Given the extent to which insurance revenue can vary and that this variability is largely offset in CCPB, we generally focus on analyzing revenue net of CCPB.

 

BMO Financial Group Third Quarter Report 2017 7


Q3 2017 vs Q2 2017

Revenue decreased $282 million or 5% from the prior quarter. Net revenue increased $173 million or 3%, or 5% excluding the impact of the weaker U.S. dollar.

Canadian P&C revenue increased 8% primarily due to increased non-interest revenue, the impact of three more days in the current quarter, higher balances across most products and higher net interest margin. U.S. P&C revenue increased 2% on a Canadian dollar basis. U.S. P&C revenue increased 6% on a U.S. dollar basis mainly due to more days and higher deposit revenue. Traditional wealth revenue increased 2% due to more days. Net insurance revenue increased due to a modest benefit from more favourable market movements in the current quarter. BMO Capital Markets revenue decreased 11%. Trading Products revenue decreased primarily due to lower trading revenues, partly reflecting reduced activity with certain clients in our equities business, in part as a result of recent tax law changes. Investment and Corporate Banking revenue decreased from a strong second quarter due to reduced mergers and acquisitions advisory and underwriting activity. Corporate Services revenue increased due to a lower group teb adjustment in the current quarter, partially offset by lower revenue compared to above-trend revenue excluding teb in the prior quarter.

Net interest income increased $124 million or 5% to $2,533 million from the prior quarter, or 7% excluding the impact of the weaker U.S. dollar, due to more days and improved margins in Canadian and US P&C. Average earning assets decreased $4.0 billion or 1% to $646.6 billion. Excluding the impact of the weaker U.S. dollar average earning assets increased $4.1 billion or 1% primarily due to loan growth. BMO’s overall net interest margin increased 3 basis points, and 6 basis points on an excluding trading basis, from the prior quarter mainly due to the P&C businesses, including improved deposit spreads in U.S. P&C and improved spreads on lending products and changes in product mix including deposits growing faster than loans in Canadian P&C.

Non-interest revenue increased $49 million or 2% on a net revenue basis.

Gross insurance revenue decreased $443 million from the prior quarter, largely due to increases in long-term interest rates decreasing the fair value of insurance investments compared to decreases in long-term interest rates in the prior quarter increasing the fair value of investments, partially offset by higher annuity sales. The decrease in insurance revenue was largely offset by lower insurance claims, commissions and changes in policy benefit liabilities as discussed on page 10.

Q3 YTD 2017 vs Q3 YTD 2016

Year-to-date total reported revenue increased $796 million or 5% to $16,605 million and adjusted revenue, which excludes a negative cumulative accounting adjustment in the prior year, increased $712 million or 4% to $16,605 million. On a net basis, revenue increased $1,295 million or 9% to $15,640 million and adjusted revenue increased $1,211 million or 8% to $15,640 million.

Net interest income increased $98 million or 1% to $7,472 million primarily due to loan growth, partially offset by lower net interest income from certain trading businesses. Average earning assets increased by $28.4 billion or 5% to $648.2 billion due to higher securities and loan growth. BMO’s overall net interest margin decreased 5 basis points to 1.54% due to lower net interest income from certain trading businesses. Net interest margin (excluding trading) increased 1 basis point from the prior year to 1.86%.

Year-to-date non-interest revenue increased $1,197 million or 17% to $8,168 million on a net revenue basis. Adjusted net non-interest revenue increased $1,113 million or 16% to $8,168 million mainly due to increased underwriting and advisory fees, trading revenues and insurance revenue, as well as the net gain in the current year and the investment write-down in the prior year.

Net interest income and non-interest revenue are detailed in the unaudited interim consolidated financial statements.

Adjusted results in this Revenue section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

Net Interest Margin on Average Earning Assets (teb) (1)    Table 4   

 

  (In basis points)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

Canadian P&C

     254          249          255          251          254  

U.S. P&C

     380          373          357          374          364  

Personal and Commercial Banking

     293          288          288          290          290  

Wealth Management

     243          250          236          246          236  

BMO Capital Markets (2)

     35          57          55          48          60  

Corporate Services (3)

     nm          nm          nm          nm          nm  

Total BMO net interest margin

     155          152          158          154          159  

Total BMO net interest margin (excluding trading)

     190          184          187          186          185  

Total Canadian Retail (4)

     251          247          252          249          251     

  (1) Net interest margin is disclosed and computed with reference to average earning assets, rather than total assets. This basis provides a more relevant measure of margins and changes in margins. Operating group margins are stated on a taxable equivalent basis (teb) while total BMO margin is stated on a GAAP basis.

  (2) Decreases in BMO Capital Markets net interest margin Q-Q, Y-Y and over YTD related to teb are offset by increases in Corporate Services.

  (3) Corporate Services adjusted net interest income is negative in all periods and its variability affects changes in net interest margin.

  (4) Total Canadian Retail margin represents the net interest margin of the combined Canadian businesses of Canadian P&C and Wealth Management.

  nm - not meaningful.

 

8 BMO Financial Group Third Quarter Report 2017


Provisions for Credit Losses

Q3 2017 vs Q3 2016

The total provision for credit losses was $134 million, a decrease of $123 million from the prior year. There was a $76 million pre-tax decrease in the collective allowance this quarter largely as a result of positive portfolio migration, which decreased the provision for credit losses. The specific provision for credit losses of $210 million decreased $47 million due to lower provisions in BMO Capital Markets and Canadian P&C.

Canadian P&C provisions decreased $27 million to $125 million mainly due to lower commercial provisions. U.S. P&C provisions of $79 million increased $4 million due to lower recoveries, partially offset by lower new provisions. Net recoveries of credit losses in BMO Capital Markets were $2 million compared with a net provision of $37 million in the prior year, primarily due to lower new oil and gas provisions. Corporate Services specific provision increased $14 million primarily due to lower credit recoveries.

Q3 2017 vs Q2 2017

The total provision for credit losses decreased $125 million. The specific provision for credit losses decreased $49 million due to lower provisions in BMO Capital Markets and U.S. P&C.

Canadian P&C provisions decreased $3 million due to lower provisions in the consumer and commercial portfolios. U.S. P&C provisions decreased $11 million due to lower new provisions, partially offset by lower recoveries. Net recoveries of credit losses in BMO Capital Markets were $2 million compared with a net provision of $46 million in the prior quarter, primarily due to lower new provisions. Corporate Services specific provision increased $9 million primarily due to lower credit recoveries.

 

Provision for Credit Losses by Operating Group

   Table 5    

 

  (Canadian $ in millions)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

Canadian P&C

     125          128          152          371          419  

U.S. P&C

     79          90          75          229          191  

Personal and Commercial Banking

     204          218          227          600          610  

Wealth Management

     5          1          4          8          8  

BMO Capital Markets

     (2        46          37          40          89  

Corporate Services

     3          (6        (11        (6        (66

Specific provision for credit losses

     210          259          257          642          641  

Decrease in the collective allowance for credit losses

     (76        -          -          (76        -  

Provision for credit losses

     134          259          257          566          641  
                           

Changes to Provision for Credit Losses

     Table 6      
  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

New specific provisions

     318          403          400          1,030          1,047  

Reversals of previously established allowances

     (47        (80        (74        (194        (143

Recoveries of loans previously written-off

     (61        (64        (69        (194        (263

Specific provision for credit losses

     210          259          257          642          641  

Decrease in the collective allowance for credit losses

     (76        -          -          (76        -  

Provision for credit losses

     134          259          257          566          641  

PCL-to-average net loans and acceptances (annualized) (%)

     0.14          0.28          0.29          0.20          0.24  

Specific PCL-to-average net loans and acceptances (annualized) (%)

     0.22          0.28          0.29          0.23          0.24  

Impaired Loans

Total gross impaired loans (GIL) were $2,109 million at the end of the current quarter, down from $2,307 million a year ago primarily due to a decrease in BMO Capital Markets and the impact of the weaker U.S. dollar, partially offset by an increase in U.S. P&C. GIL decreased from $2,399 million in the second quarter of 2017 due to the impact of the weaker U.S. dollar, and a decrease in BMO Capital Markets and U.S. P&C.

Factors contributing to the change in GIL are outlined in Table 7 below. Loans classified as impaired during the quarter totalled $405 million, down from $752 million in the second quarter of 2017 and $645 million a year ago.

 

Changes in Gross Impaired Loans (GIL) and Acceptances (1)

     Table 7      
  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  GIL, beginning of period

     2,399          2,196          2,196          2,332          1,959  

  Classified as impaired during the period

     405          752          645          1,666          1,957  

  Transferred to not impaired during the period

     (159        (160        (144        (472        (444

  Net repayments

     (242        (284        (297        (823        (708

  Amounts written-off

     (150        (179        (153        (476        (456

  Recoveries of loans and advances previously written-off

     -          -          -          -          -  

  Disposals of loans

     1          (1        -          (1        (6

  Foreign exchange and other movements

     (145        75          60          (117        5  

  GIL, end of period

     2,109          2,399          2,307          2,109          2,307  

  GIL-to-gross loans and acceptances (%)

     0.56          0.63          0.63          0.56          0.63  
  (1) GIL excludes purchased credit impaired loans.                       

 

BMO Financial Group Third Quarter Report 2017 9


Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $253 million in the third quarter of 2017, down from $691 million in the third quarter of 2016 and from $708 million in the second quarter of 2017 due to increases in long-term interest rates decreasing the fair value of policy benefit liabilities compared to decreases in long-term interest rates in the third quarter of 2016 and the second quarter of 2017 increasing the fair value of policy benefit liabilities, partially offset by increased annuity liabilities due to higher sales. These decreases were largely offset in revenue.

Non-Interest Expense

Reported non-interest expense of $3,278 million increased $186 million or 6% from the third quarter a year ago. Adjusted non-interest expense excludes acquisition integration costs and the amortization of acquisition-related intangible assets in both periods. Adjusted non-interest expense of $3,223 million increased $198 million or 7% primarily due to higher employee-related expenses, in part due to foreign currency translation on deferred compensation, higher technology investments and other costs.

Reported and adjusted non-interest expense were relatively unchanged from the second quarter of 2017. Adjusted non-interest expense increased 2% excluding the impact of the weaker U.S. dollar. The impact of three more days and foreign exchange translation on deferred compensation increased reported and adjusted non-interest expense by approximately 2.6%.

Reported operating leverage, on a net revenue basis, was negative 0.7% year over year. Adjusted operating leverage, on a net revenue basis, was negative 1.2% year over year. The reported efficiency ratio was 60.0% compared to 54.9% in the prior year, and was 63.0% on a net revenue basis compared to 62.6% in the prior year. The adjusted efficiency ratio was 59.0% compared to 53.7% in the prior year, and was 61.9% on a net revenue basis compared to 61.2% in the prior year.

Reported non-interest expense for the year to date increased $259 million or 3% from the prior year. Adjusted non-interest expense excludes a restructuring charge recorded in the second quarter of the prior year in addition to the items noted above. Adjusted non-interest expense increased $466 million or 5%. Non-interest expense is detailed in the unaudited interim consolidated financial statements. Year-to-date reported operating leverage and adjusted operating leverage, on a net revenue basis, were 6.3% and 3.4% respectively.

Adjusted results in this Non-Interest Expense section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Income Taxes

The provision for income taxes of $407 million increased $59 million from the third quarter of 2016 and increased $157 million from the second quarter of 2017. The effective tax rate for the quarter was 22.7%, compared with 21.9% a year ago and 16.7% in the second quarter of 2017.

The adjusted provision for income taxes of $399 million increased $34 million from a year ago and increased $132 million from the second quarter of 2017. The adjusted effective tax rate was 22.5% in the current quarter, compared with 22.0% a year ago and 17.1% in the second quarter of 2017. The higher reported and adjusted tax rates in the current quarter relative to both the third quarter of 2016 and second quarter of 2017 were primarily due to lower tax-exempt income from securities, partially offset by a favourable tax item. On a teb basis, the reported effective tax rate for the quarter was 25.3%, compared with 26.7% a year ago and 27.0% in the second quarter of 2017. On a teb basis, the adjusted effective tax rate for the quarter was 25.1%, compared with 26.7% a year ago and 27.0% in the second quarter of 2017.

Adjusted results in this Income Taxes section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures Section.

 

10 BMO Financial Group Third Quarter Report 2017


Capital Management

Third Quarter 2017 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.2% at July 31, 2017.

The CET1 Ratio decreased from 11.3% at the end of the second quarter due largely to business growth and share repurchases during the quarter, partially offset by retained earnings growth. The CET1 Ratio increased from 10.1% at October 31, 2016, mainly due to higher retained earnings and lower risk-weighted assets (RWA). The impact of foreign exchange movements on the CET1 Ratio was largely offset, as outlined below.

CET1 Capital at July 31, 2017, was $29.6 billion, down from $30.6 billion at April 30, 2017, mainly due to foreign exchange movement impacts on accumulated other comprehensive income and share repurchases during the quarter, partially offset by higher retained earnings. CET1 Capital was up $1.4 billion from October 31, 2016, mainly due to higher retained earnings, partially offset by the impact of foreign exchange movements.

RWA was $265 billion at July 31, 2017, down from $271 billion at April 30, 2017, largely due to the impact of foreign exchange movements, partially offset by business growth. RWA was down $13 billion from October 31, 2016, which primarily reflects the impact of foreign exchange movements and executing on risk mitigation and management opportunities, partially offset by business growth.

The bank’s Tier 1 and Total Capital Ratios were 12.9% and 15.2%, respectively, at July 31, 2017, compared with 12.8% and 14.9%, respectively, at April 30, 2017. The Tier 1 Capital Ratio was higher than April 30, 2017 mainly due to the issuance of preferred shares. The Total Capital Ratio was higher due to the issuance of preferred shares and subordinated notes. The Tier 1 and Total Capital Ratios were 11.6% and 13.6%, respectively, at October 31, 2016. The July 31, 2017 Tier 1 Capital Ratio was higher than October 31, 2016 primarily due to higher CET1 Capital, discussed above, and the issuance of preferred shares. The Total Capital Ratio was higher compared with October 31, 2016, primarily due to higher Tier 1 Capital and the issuance of subordinated notes.

BMO’s Basel III Leverage Ratio was 4.4% at July 31, 2017, up from 4.3% at April 30, 2017. The July 31, 2017 Basel III Leverage Ratio was up from 4.2% at October 31, 2016 mainly due to higher Tier 1 Capital.

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 offset the impact of foreign exchange movements on its capital ratios and did so during the third quarter. Any such activities could also impact our book value and return on equity.

Regulatory Developments

In December 2016, the Office of the Superintendent of Financial Institutions (OSFI) released the final version of the Capital Adequacy Requirements (CAR) Guideline for implementation in the first quarter of fiscal 2017. Updates included revisions to the treatment of insured residential mortgages, final guidance on the downturn loss given default floor which applies to banks using an internal rating-based approach for loans secured by residential real estate and rules for equity investment in funds. In August 2017, OSFI released for public consultation revisions to the CAR for implementation in the first quarter of fiscal 2018. The revisions mainly related to the treatment of allowances as a result of the expected adoption of IFRS 9. OSFI also expressed its intention to implement in the first quarter of fiscal 2019 the Standardized Approach to Counterparty Credit Risk and the revisions to the capital requirements for bank exposures to central counterparties, subject to the implementation readiness of key foreign market counterparties, and the revised securitization framework which was released by the Basel Committee on Banking Supervision (BCBS) in July 2016.

OSFI also implemented the countercyclical capital buffer in the first quarter of fiscal 2017. It is calculated as the weighted average of buffers in effect in jurisdictions where the bank has private sector credit exposures. The impact of the countercyclical capital buffer has been immaterial.

In March 2017, the BCBS issued a press release which reaffirmed their commitment to finalize reforms to the Basel III framework. BCBS stated that the finalization is taking more time than originally expected, but they are committed to reaching agreement on remaining differences, with OSFI noting in April 2017 that their preference is for BCBS to reach an agreement that all member jurisdictions will support and implement. OSFI also stated that Canada is preparing to move ahead on its own, with a Canada-specific plan for improving the capital regime. If OSFI concludes the negotiation is unlikely to restart in the near future, they have said they will put that plan into action in a measured way.

In March 2017, BCBS issued a Pillar 3 standard which aims to improve comparability and consistency of financial regulatory disclosures through more standardized formats. The standard includes new disclosure requirements in respect of the Total Loss-Absorbing Capacity (TLAC) regime.

In June 2017, OSFI released a draft guideline on TLAC for comment. OSFI’s draft guideline will apply to Canada’s Domestic Systemically Important Banks (D-SIBs) as part of the federal government’s Bail-in Regime. The draft TLAC guideline is consistent with international standards developed by the Financial Stability Board, but is tailored to the Canadian context. Public disclosure of D-SIBs’ TLAC ratios is anticipated to begin in the first quarter of fiscal 2019, and D-SIBs are expected to fully meet the TLAC requirements by November 2021. OSFI expects to release the final TLAC guideline later in 2017.

In conjunction with OSFI’s release of the draft guideline on TLAC, the Department of Finance introduced draft regulations setting out the details of the bail-in framework for Canada’s six D-SIBs. The bail-in regulations will likely be finalized this fall and effective 180 days later. The new regulations enable a conversion of bail-in instruments with an original term to maturity greater than 400 days into common shares if the Canada Deposit Insurance Corporation deems appropriate. The bail-in regulations and TLAC guideline are not expected to have a material impact on BMO’s funding strategy.

 

BMO Financial Group Third Quarter Report 2017 11


In July 2017, OSFI extended the Canadian implementation of the Minimum Capital Requirements for Market Risk (Fundamental Review of the Trading Book, or FRTB) rules by at least one year, with the first regulatory reporting under the FRTB rules commencing no earlier than the first quarter of fiscal 2021.

For a more detailed discussion of regulatory developments, see the Enterprise-Wide Capital Management section on pages 70 to 76, the Liquidity and Funding Risk section on pages 100 to 105 and the Legal and Regulatory Risk section on pages 110 to 111 of BMO’s 2016 Annual Report.

Other Capital Developments

We renewed our normal course issuer bid (NCIB) effective May 1, 2017 for one year. Under the NCIB, we may repurchase up to 15 million of our common shares for cancellation. In June 2017, the Toronto Stock Exchange (TSX) approved amendments to the NCIB to allow us to repurchase common shares under the NCIB by way of private agreement or under a specific share repurchase program. The timing and amount of purchases under the NCIB are subject to management discretion based on factors such as market conditions and capital levels. The bank will periodically consult with OSFI before making purchases under the NCIB. During the quarter, we repurchased and cancelled 4 million common shares as part of the NCIB at an average cost of $87.38 per share, totalling $349 million, all of which were purchased pursuant to a specific share repurchase program. Such purchases were made from an arm’s length third party seller and at a discount to the prevailing market price of our common shares on the TSX at the time of purchases.

During the quarter, 0.6 million common shares were issued through the Shareholder Dividend Reinvestment and Share Purchase Plan (DRIP) and the exercise of stock options.

On May 31, 2017, we completed our domestic public offering of $850 million of subordinated notes, Series I Medium-Term Notes, Second Tranche, through our Canadian Medium-Term Note Program.

On June 29, 2017, we completed our domestic public offering of $400 million Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 42 (Non-Viability Contingent Capital (NVCC)).

On August 29, 2017, BMO announced that the Board of Directors had declared a quarterly dividend payable to common shareholders of $0.90 per common share, unchanged from the preceding quarter and up $0.04 per share and 5% from a year ago.

The dividend is payable on November 28, 2017, to shareholders of record on November 1, 2017. Common shareholders may elect to have their cash dividends reinvested in common shares of the bank in accordance with the DRIP.

 

Qualifying Regulatory Capital and Risk-Weighted Assets (All-in (1))    Table 8    

 

  (Canadian $ in millions, except as noted)

     Q3-2017          Q2-2017          Q4-2016  

Gross Common Equity (2)

     38,694          40,573          38,464  

Regulatory adjustments applied to Common Equity

     (9,090        (10,018        (10,305

  Common Equity Tier 1 Capital (CET1)

     29,604          30,555          28,159  

Additional Tier 1 Eligible Capital (3)

     4,690          4,290          4,290  

Regulatory adjustments applied to Tier 1

     (213        (217        (213

  Additional Tier 1 Capital (AT1)

     4,477          4,073          4,077  

  Tier 1 Capital (T1 = CET1 + AT1)

     34,081          34,628          32,236  

Tier 2 Eligible Capital (4)

     6,339          5,721          5,677  

Regulatory adjustments applied to Tier 2

     (56        (50        (51

  Tier 2 Capital (T2)

     6,283          5,671          5,626  

  Total Capital (TC = T1 + T2)

     40,364          40,299          37,862  

  Risk-weighted assets (5) (6)

            

  CET1 Capital Risk-Weighted Assets

     264,819          270,791          277,562  

  Tier 1 Capital Risk-Weighted Assets

     264,819          270,791          277,562  

  Total Capital Risk-Weighted Assets

     264,819          270,791          277,562  

  Capital Ratios (%)

            

  CET1 Ratio

     11.2          11.3          10.1  

  Tier 1 Capital Ratio

     12.9          12.8          11.6  

  Total Capital Ratio

     15.2          14.9          13.6      

  (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.

  (2) Gross Common Equity includes issued qualifying common shares, retained earnings, accumulated other comprehensive income and eligible common share capital issued by subsidiaries.

  (3) Additional Tier 1 Eligible Capital includes directly and indirectly issued qualifying Additional Tier 1 instruments and directly and indirectly issued capital instruments, to the extent eligible, which are subject to phase-out under Basel III.

  (4) Tier 2 Eligible Capital includes directly and indirectly issued qualifying Tier 2 instruments and directly and indirectly issued capital instruments, to the extent eligible, that are subject to phase-out under Basel III.

  (5) Due to the phased-in implementation of the Credit Valuation Adjustment (CVA) which commenced in Q1-2014, the scalars applied to the fully implemented CVA charge for CET1, Tier 1 Capital and Total Capital are 72%, 77% and 81%, respectively, in 2017.

  (6) For institutions using advanced approaches for credit risk or operational risk, there is a capital floor as prescribed in OSFI’s CAR Guideline.

 

12 BMO Financial Group Third Quarter Report 2017


Outstanding Shares and Securities Convertible into Common Shares    Table 9  
  As at Aug 21, 2017   

Number of shares  

or dollar amount  

(in millions)  

 

  Common shares

     649    

  Class B Preferred shares

  

Series 16

     $157    

Series 17

     $143    

Series 25

     $236    

Series 26

     $54    

Series 27

     $500    

Series 29

     $400    

Series 31

     $300    

Series 33

     $200    

Series 35

     $150    

Series 36

     $600    

Series 38

     $600    

Series 40

     $500    

Series 42

     $400    

  Medium-Term Notes

  

Series H - First Tranche (1)

     $1,000    

Series H - Second Tranche (1)

     $1,000    

Series I - First Tranche (1)

     $1,250    

Series I - Second Tranche (2)

     $850    

  Stock options

  

Vested

     5.1    

Non-vested

     2.9    

  (1) Details on the Series H Medium-Term Notes, First Tranche and Second Tranche and Series I Medium-Term Notes, First Tranche are outlined in Note 15 to the audited consolidated financial statements on page 173 of BMO’s 2016 Annual Report

  (2) Details on the Series I Medium-Term Notes, Second Tranche, are outlined in Note 7 of the unaudited interim consolidated financial statements.

 

 

Details on share capital are outlined in Note 8 to the unaudited interim consolidated financial statements and Note 16 to the audited annual consolidated financial statements on page 174 of BMO’s 2016 Annual Report.

 

Caution

The foregoing Capital Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Eligible Dividends Designation

For the purposes of the Income Tax Act (Canada) and any similar provincial and territorial legislation, BMO designates all dividends paid or deemed to be paid on both its common and preferred shares as “eligible dividends”, unless indicated otherwise.

 

BMO Financial Group Third Quarter Report 2017 13


Review of Operating Groups’ Performance

How BMO Reports Operating Group Results

The following sections review the financial results of each of our operating segments and operating groups for the third quarter of 2017.

Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more closely align BMO’s organizational structure with its strategic priorities. In addition, revenue and expense allocations are updated to better align with current experience. Results for prior periods are restated to conform to the current presentation.

BMO analyzes revenue at the consolidated level based on GAAP revenue reflected in the consolidated financial statements rather than on a taxable equivalent basis (teb), which is consistent with our Canadian peer group. Like many banks, we analyze revenue on a teb basis at the operating group level. Revenue and the provision for income taxes are increased on tax-exempt securities to an equivalent before-tax basis to facilitate comparisons of income between taxable and tax-exempt sources. The offset to the group teb adjustments is reflected in Corporate Services revenue and provision for income taxes.

 

Personal and Commercial Banking (P&C)    Table 10     
  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income (teb)

     2,243          2,136          2,163          6,591          6,398  

  Non-interest revenue

     805          752          776          2,461          2,225  

  Total revenue (teb)

     3,048          2,888          2,939          9,052          8,623  

  Provision for credit losses

     204          218          227          600          610  

  Non-interest expense

     1,653          1,612          1,573          4,905          4,745  

  Income before income taxes

     1,191          1,058          1,139          3,547          3,268  

  Provision for income taxes (teb)

     299          279          301          873          857  

  Reported net income

     892          779          838          2,674          2,411  

Amortization of acquisition-related intangible assets (1)

     12          12          13          37          39  

  Adjusted net income

     904          791          851          2,711          2,450  

  Net income growth (%)

     6.4          (1.8        7.5          10.9          11.1  

  Adjusted net income growth (%)

     6.2          (1.8        7.3          10.6          10.8  

  Revenue growth (%)

     3.7          2.5          12.1          5.0          13.4  

  Non-interest expense growth (%)

     5.1          2.8          8.3          3.4          11.8  

  Adjusted non-interest expense growth (%)

     5.2          2.8          8.4          3.5          12.0  

  Return on equity (%)

     16.9          14.9          16.1          16.7          15.6  

  Adjusted return on equity (%)

     17.1          15.2          16.4          17.0          15.9  

  Operating leverage (%) (teb)

     (1.4        (0.3        3.8          1.6          1.6  

  Adjusted operating leverage (%) (teb)

     (1.5        (0.3        3.7          1.5          1.4  

  Efficiency ratio (%) (teb)

     54.2          55.8          53.5          54.2          55.0  

  Adjusted efficiency ratio (%) (teb)

     53.7          55.2          52.9          53.6          54.4  

  Net interest margin on average earning assets (%) (teb)

     2.93          2.88          2.88          2.90          2.90  

  Average earning assets

     303,524          303,819          298,455          303,497          294,776  

  Average net loans and acceptances

     305,971          305,287          297,932          305,093          294,115  

  Average deposits

     238,998          239,063          230,418          239,130          228,204      

  (1) Before tax amounts of: $17 million in each of Q3-2017 and Q3-2016; $16 million in Q2-2017; $50 million for YTD-2017 and $53 million for YTD-2016 are included in non-interest expense.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and business banking operating segments, Canadian Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The P&C banking business net income of $892 million and adjusted net income of $904 million were both up 6% from a year ago. Adjusted net income excludes the amortization of acquisition-related intangible assets. These operating segments are reviewed separately in the sections that follow.

Adjusted results in this P&C section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section

 

14 BMO Financial Group Third Quarter Report 2017


Canadian Personal and Commercial Banking (Canadian P&C)    Table 11     
  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income

     1,334          1,254          1,285          3,891          3,761  

  Non-interest revenue

     521          470          485          1,667          1,406  

  Total revenue

     1,855          1,724          1,770          5,558          5,167  

  Provision for credit losses

     125          128          152          371          419  

  Non-interest expense

     904          882          864          2,687          2,578  

  Income before income taxes

     826          714          754          2,500          2,170  

  Provision for income taxes

     212          183          194          612          556  

  Reported net income

     614          531          560          1,888          1,614  

Amortization of acquisition-related intangible assets (1)

     1          -          1          2          2  

  Adjusted net income

     615          531          561          1,890          1,616  

  Personal revenue

     1,203          1,113          1,154          3,487          3,372  

  Commercial revenue

     652          611          616          2,071          1,795  

  Net income growth (%)

     9.4          1.2          1.1          16.9          4.7  

  Revenue growth (%)

     4.8          3.2          4.3          7.6          4.8  

  Non-interest expense growth (%)

     4.7          4.8          2.2          4.2          3.4  

  Adjusted non-interest expense growth (%)

     4.7          4.8          2.2          4.2          3.4  

  Operating leverage (%)

     0.1          (1.6        2.1          3.4          1.4  

  Adjusted operating leverage (%)

     0.1          (1.6        2.1          3.4          1.4  

  Efficiency ratio (%)

     48.7          51.1          48.8          48.3          49.9  

  Net interest margin on average earning assets (%)

     2.54          2.49          2.55          2.51          2.54  

  Average earning assets

     208,682          206,757          200,709          207,042          198,066  

  Average net loans and acceptances

     216,878          214,139          207,240          214,573          204,168  

  Average deposits

     154,102          151,358          142,926          151,871          140,836      

  (1) Before tax amounts of: $1 million in each of Q3-2017 and Q3-2016; $nil in Q2-2017; and $2 million for each of YTD 2017 and YTD 2016 are included in non-interest expense.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Q3 2017 vs Q3 2016

Canadian P&C reported net income of $614 million and adjusted net income of $615 million both increased $54 million or 9% from a year ago. Adjusted net income excludes the amortization of acquisition-related intangible assets. Revenue of $1,855 million increased $85 million or 5% from the prior year, primarily due to higher balances across most products and increased non-interest revenue. Net interest margin of 2.54% was down 1 basis point.

Personal revenue increased $49 million or 4% due to higher balances across most products and increased non-interest revenue.

Commercial revenue increased $36 million or 6% primarily due to higher balances across most products and increased non-interest revenue.

Provisions for credit losses decreased $27 million to $125 million mainly due to lower commercial provisions. Non-interest expense of $904 million increased $40 million or 5% reflecting continued investment in the business, including select sales force investment and a focus on our digital strategy.

Average net loans and acceptances of $216.9 billion increased $9.6 billion or 5% from a year ago. Total personal lending balances (excluding retail cards) increased 4% and commercial loan balances (excluding corporate cards) grew 8%. Average deposits of $154.1 billion increased $11.2 billion or 8%. Personal deposit balances increased 7% mainly due to growth in chequing accounts and term deposits, while commercial deposit balances grew 9%.

Q3 2017 vs Q2 2017

Reported and adjusted net income both increased 16% from the prior quarter. Revenue increased $131 million or 8% primarily due to increased non-interest revenue, the impact of three more days in the current quarter, higher balances across most products and higher net interest margin. Net interest margin of 2.54% was up 5 basis points primarily due to improved spreads on lending products, and changes in product mix including deposits growing faster than loans.

Personal revenue increased $90 million or 8% and commercial revenue increased $41 million or 7% due to higher non-interest revenue, more days, higher balances across most products and higher net interest margin.

Provisions for credit losses decreased $3 million due to lower provisions in both the consumer and commercial portfolios. Non-interest expense increased $22 million or 3% mainly due to the impact of more days.

Average net loans and acceptances increased $2.7 billion or 1%, while average deposits increased $2.7 billion or 2%.

Q3 YTD 2017 vs Q3 YTD 2016

Reported net income of $1,888 million and adjusted net income of $1,890 million both increased $274 million or 17% from the prior year. Revenue of $5,558 million increased $391 million or 8% due to higher balances across most products, the gain on sale in the first quarter of 2017 and increased non-interest revenue, partially offset by lower net interest margin.

Provisions for credit losses of $371 million decreased $48 million due to lower commercial and consumer provisions. Non-interest expense of $2,687 million increased $109 million or 4% reflecting continued investment in the business.

Average net loans and acceptances of $214.6 billion increased $10.4 billion or 5%, while average deposits of $151.9 billion increased $11.0 billion or 8%.

Adjusted results in this Canadian P&C section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Financial Group Third Quarter Report 2017 15


U.S. Personal and Commercial Banking (U.S. P&C)    Table 12    
  (US$ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income (teb)

     701          657          674          2,042          1,989  

  Non-interest revenue

     219          210          223          601          618  

  Total revenue (teb)

     920          867          897          2,643          2,607  

  Provision for credit losses

     59          68          58          172          144  

  Non-interest expense

     577          545          544          1,678          1,634  

  Income before income taxes

     284          254          295          793          829  

  Provision for income taxes (teb)

     70          69          82          198          227  

  Reported net income

     214          185          213          595          602  

Amortization of acquisition-related intangible assets (1)

     9          9          9          27          28  

  Adjusted net income

     223          194          222          622          630  

  Net income growth (%)

     0.7          (10.5        20.7          (1.1        18.5  

  Adjusted net income growth (%)

     0.4          (10.2        18.9          (1.2        16.8  

  Revenue growth (%)

     2.4          (1.6        23.1          1.4          20.3  

  Non-interest expense growth (%)

     6.1          (2.5        13.5          2.7          15.2  

  Adjusted non-interest expense growth (%)

     6.4          (2.4        14.1          2.9          15.9  

  Operating leverage (%) (teb)

     (3.7        0.9          9.6          (1.3        5.1  

  Adjusted operating leverage (%) (teb)

     (4.0        0.8          9.0          (1.5        4.4  

  Efficiency ratio (%) (teb)

     62.8          62.8          60.6          63.5          62.7  

  Adjusted efficiency ratio (%) (teb)

     61.5          61.4          59.2          62.1          61.2  

  Net interest margin on average earning assets (%) (teb)

     3.80          3.73          3.57          3.74          3.64  

  Average earning assets

     73,130          72,363          75,021          72,954          72,958  

  Average net loans and acceptances

     68,700          67,954          69,607          68,466          67,856  

  Average deposits

     65,424          65,396          67,155          65,984          65,900  
  (Canadian $ equivalent in millions)                                           

  Net interest income (teb)

     909          882          878          2,700          2,637  

  Non-interest revenue

     284          282          291          794          819  

  Total revenue (teb)

     1,193          1,164          1,169          3,494          3,456  

  Provision for credit losses

     79          90          75          229          191  

  Non-interest expense

     749          730          709          2,218          2,167  

  Income before income taxes

     365          344          385          1,047          1,098  

  Provision for income taxes (teb)

     87          96          107          261          301  

  Reported net income

     278          248          278          786          797  

  Adjusted net income

     289          260          290          821          834  

  Net income growth (%)

     0.2          (7.5        23.6          (1.3        27.0  

  Adjusted net income growth (%)

     (0.1        (7.3        21.8          (1.5        25.1  

  Revenue growth (%)

     2.0          1.4          26.5          1.1          29.3  

  Non-interest expense growth (%)

     5.6          0.4          16.8          2.4          23.9  

  Adjusted non-interest expense growth (%)

     5.9          0.5          17.4          2.6          24.6  

  Average earning assets

     94,842          97,062          97,746          96,455          96,710  

  Average net loans and acceptances

     89,093          91,148          90,692          90,520          89,947  

  Average deposits

     84,896          87,705          87,492          87,259          87,368      

  (1) Before tax amounts of: US$12 million in each of Q3-2017 and Q2-2017; US$13 million in Q3-2016; US$36 million for YTD 2017 and US$39 million for YTD 2016 are included in non-interest expense.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Q3 2017 vs Q3 2016

Reported net income of $278 million was flat and adjusted net income of $289 million was down $1 million compared to a year ago. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income of $214 million and adjusted net income of $223 million were slightly higher compared to a year ago as higher revenue and a more favourable tax rate were largely offset by higher expenses. Revenue of $920 million increased $23 million or 2%, mainly due to higher deposit revenue, net of loan spread compression. Net interest margin increased 23 basis points to 3.80%, driven by higher deposit revenue and a benefit from a reduction in low spread assets, net of loan spread compression.

Provisions for credit losses of $59 million increased $1 million due to lower recoveries, partially offset by lower new provisions. Non-interest expense of $577 million and adjusted non-interest expense of $565 million both increased 6%, reflecting higher employee-related expenses, technology investments and marketing costs.

Average net loans and acceptances decreased $0.9 billion or 1% from the prior year to $68.7 billion, due to declines in personal loan volumes including the indirect auto loan sale, partially offset by commercial loan growth of 5%.

Average deposits decreased $1.7 billion or 3% from the prior year due to expected declines in commercial volumes given higher interest rates, partially offset by growth in personal volumes across all deposit products.

Q3 2017 vs Q2 2017

Reported net income increased 12% and adjusted net income increased 11% from the prior quarter. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income increased 16% and adjusted net income increased 15% from the prior quarter due to higher deposit revenue, a more favourable tax rate, three more days in the current quarter and lower provisions for credit losses, partially offset by higher expenses. Revenue increased $53 million or 6% mainly due to more days and higher deposit revenue. Net interest margin increased 7 basis points driven by higher deposit spreads, net of loan spread compression.

 

16 BMO Financial Group Third Quarter Report 2017


Provisions for credit losses decreased $9 million due to lower new provisions, partially offset by lower recoveries. Non-interest expense and adjusted non-interest expense both increased $32 million or 6% mainly due to more days, and increases in other areas including technology and marketing.

Average net loans and acceptances increased $0.7 billion or 1% from the prior quarter. Average deposits were relatively stable.

Q3 YTD 2017 vs Q3 YTD 2016

Reported net income of $786 million and adjusted net income of $821 million were both slightly lower compared to the prior year. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income of $595 million and adjusted net income of $622 million were both slightly lower compared to the prior year. Revenue of $2,643 million increased $36 million mainly due to higher deposit revenue and increased loan volumes, net of loan spread compression and the impact of the loss on the loan sale. Net interest margin increased 10 basis points to 3.74%, driven by higher deposit revenue and a benefit from a reduction in low spread assets, net of loan spread compression.

Provisions for credit losses of $172 million increased $28 million due to higher new provisions and lower recoveries. Non-interest expense of $1,678 million and adjusted non-interest expense of $1,642 million both increased 3%.

Average net loans and acceptances increased $0.6 billion or 1% from the prior year to $68.5 billion, driven by commercial loan growth of 9%, partially offset by declines in personal loan volumes, including the loan sale.

Average deposits of $66.0 billion were stable compared to the prior year as growth in personal volumes across all deposit products was offset by a decline in commercial volumes.

Adjusted results in this U.S. P&C section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Wealth Management    Table 13  

 

  (Canadian $ in millions, except as noted)     Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income

     175          169          154          511          452  

  Non-interest revenue

     1,262          1,695          1,618          4,002          4,154  

  Total revenue

     1,437          1,864          1,772          4,513          4,606  

  Insurance claims, commissions and changes in policy benefit liabilities (CCPB)

     253          708          691          965          1,464  

  Revenue, net of CCPB

     1,184          1,156          1,081          3,548          3,142  

  Provision for credit losses

     5          1          4          8          8  

  Non-interest expense

     832          821          810          2,507          2,504  

  Income before income taxes

     347          334          267          1,033          630  

  Provision for income taxes

     83          83          66          252          148  

  Reported net income

     264          251          201          781          482  

Acquisition integration costs (1)

     -          -          9          -          23  

Amortization of acquisition-related intangible assets (2)

     15          21          17          51          55  

  Adjusted net income

     279          272          227          832          560  

  Traditional Wealth businesses reported net income

     188          178          147          528          338  

  Traditional Wealth businesses adjusted net income

     203          199          173          579          416  

  Insurance reported net income

     76          73          54          253          144  

  Net income growth (%)

     31.6          86.5          (4.0        61.9          (20.4

  Adjusted net income growth (%)

     22.7          72.4          (2.0        48.3          (17.9

  Revenue growth (%)

     (18.9        33.4          32.6          (2.0        7.0  

  Revenue growth, net of CCPB (%)

     9.5          16.7          (3.3        12.9          (5.3

  Non-interest expense growth (%)

     2.6          0.6          (3.5        0.1          -  

  Adjusted non-interest expense growth (%)

     4.5          1.0          (3.8        1.6          0.1  

  Return on equity (%)

     17.6          17.0          13.2          17.1          10.5  

  Adjusted return on equity (%)

     18.5          18.4          15.0          18.2          12.2  

  Operating leverage, net of CCPB (%)

     6.9          16.1          0.2          12.8          (5.3

  Adjusted operating leverage, net of CCPB (%)

     5.0          15.7          0.5          11.3          (5.4

  Efficiency ratio, net of CCPB (%)

     70.3          71.1          75.0          70.7          79.7  

  Adjusted efficiency ratio (%)

     56.7          42.7          43.9          54.2          52.3  

  Adjusted efficiency ratio, net of CCPB (%)

     68.8          68.8          72.0          68.9          76.6  

  Assets under management and administration

     878,423          920,345          863,027          878,423          863,027  

  Average earning assets

     28,444          27,846          25,982          27,781          25,592  

  Average net loans and acceptances

     18,323          17,932          16,598          17,904          16,291  

  Average deposits

     33,778          33,919          30,189          33,291          29,604  

  U.S. Select Financial Data (US$ in millions)

                      

  Total revenue

     165          159          165          482          433  

  Non-interest expense

     137          133          140          406          436  

  Reported net income

     22          19          17          58          (2

  Adjusted net income

     25          22          21          67          9  

  Average earning assets

     3,386          3,328          3,502          3,331          3,460  

  Average net loans and acceptances

     3,345          3,283          3,293          3,282          3,198  

  Average deposits

     5,820          5,767          5,445          5,749          5,642      

  (1) F&C acquisition integration costs before tax amounts of: $10 million in Q3-2016 and $28 million for YTD-2016 are included in non-interest expense.

  (2) Before tax amounts of: $17 million in Q3-2017; $26 million in Q2-2017; $22 million in Q3-2016; $62 million for YTD-2017 and $69 million for YTD-2016 are included in non-interest expense.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Financial Group Third Quarter Report 2017 17


Q3 2017 vs Q3 2016

Reported net income of $264 million was up $63 million or 32% and adjusted net income of $279 million was up $52 million or 23% from a year ago. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Traditional wealth reported net income of $188 million increased $41 million or 28% and adjusted net income of $203 million increased $30 million or 17% from a year ago, reflecting business growth and improved equity markets. Insurance net income of $76 million increased $22 million or 43% due to unfavourable market movements a year ago relative to a modest benefit from favourable market movements in the current quarter.

Revenue was $1,437 million compared to $1,772 million a year ago. Revenue, net of CCPB, of $1,184 million increased $103 million or 9%. Revenue in traditional wealth of $1,051 million increased $70 million or 7% driven by improved equity markets and business growth. Insurance revenue, net of CCPB, was $133 million, up $33 million from a year ago due to the factors noted above.

Non-interest expense of $832 million increased $22 million or 3% and adjusted non-interest expense of $815 million increased $37 million or 5% mainly due to higher revenue-based costs and technology costs.

Assets under management and administration increased $15 billion or 2% from a year ago to $878 billion due to equity market appreciation and growth in new client assets, partially offset by unfavourable foreign exchange movements. Year-over-year loans and deposits grew by 10% and 12%, respectively, as we continue to diversify our product mix.

Q3 2017 vs Q2 2017

Reported net income was $264 million compared to $251 million in the prior quarter and adjusted net income was $279 million compared to $272 million. Traditional wealth reported net income increased $10 million or 7% and adjusted net income increased $4 million or 3% due to the impact of three more days in the current quarter. Insurance net income of $76 million increased $3 million due to a modest benefit from more favourable market movements in the current quarter.

Revenue, net of CCPB, increased 2% from the prior quarter. Revenue in traditional wealth increased $19 million or 2% due to the impact of more days. Net insurance revenue increased $9 million due to the factor noted above.

Non-interest expense increased $11 million or 1% and adjusted non-interest expense increased $20 million or 2% mainly due to the impact of more days.

Assets under management and administration decreased $42 billion or 5% mainly due to unfavourable foreign exchange movements, partially offset by growth in new client assets. Quarter over quarter, loans grew 2% and deposits were relatively unchanged.

Q3 YTD 2017 vs Q3 YTD 2016

Reported net income was $781 million compared to $482 million a year ago. Adjusted net income was $832 million compared to $560 million in the prior year. Adjusted net income in traditional wealth of $579 million increased $163 million from the prior year primarily due to an investment write-down a year ago, business growth and improved equity markets. Insurance net income of $253 million was up $109 million from a year ago primarily due to the favourable benefits from market movements in the current year relative to unfavourable impacts a year ago and business growth.

Net revenue was $3,548 million compared to $3,142 million in the prior year. Revenue in traditional wealth of $3,123 million was up $267 million or 9% due to the investment write-down a year ago, improved market conditions and business growth, partially offset by the impact of the weaker British pound. Insurance revenue, net of CCPB, was $425 million, up $139 million from a year ago, due to the factors noted above.

Non-interest expense of $2,507 million was up $3 million and adjusted non-interest expense of $2,445 million was up $38 million from the prior year mainly due to higher revenue-based costs, partially offset by the benefits from productivity initiatives, the impact of the weaker British pound and divestitures.

Adjusted results in this BMO Wealth Management section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

18 BMO Financial Group Third Quarter Report 2017


BMO Capital Markets    Table 14  

 

  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income (teb)

     234          377          351          959          1,144  

  Non-interest revenue

     833          823          731          2,536          2,015  

  Total revenue (teb)

     1,067          1,200          1,082          3,495          3,159  

  Provision for (recovery of) credit losses

     (2        46          37          40          89  

  Non-interest expense

     691          686          621          2,099          1,914  

  Income before income taxes

     378          468          424          1,356          1,156  

  Provision for income taxes (teb)

     86          147          107          367          295  

  Reported net income

     292          321          317          989          861  

Amortization of acquisition-related intangible assets (1)

     1          1          1          2          1  

  Adjusted net income

     293          322          318          991          862  

  Trading Products revenue

     616          685          695          2,080          2,012  

  Investment and Corporate Banking revenue

     451          515          387          1,415          1,147  

  Net income growth (%)

     (7.8        12.0          18.5          15.0          11.3  

  Revenue growth (%)

     (1.3        13.0          9.0          10.6          8.7  

  Non-interest expense growth (%)

     11.3          8.4          (0.1        9.7          3.0  

  Return on equity (%)

     13.7          15.8          16.0          15.7          14.5  

  Operating leverage (%) (teb)

     (12.6        4.6          9.1          0.9          5.7  

  Efficiency ratio (%) (teb)

     64.7          57.1          57.4          60.0          60.6  

  Net interest margin on average earning assets (%) (teb)

     0.35          0.57          0.55          0.48          0.60  

  Average earning assets

     267,224          271,298          254,093          269,404          254,506  

  Average assets

     307,265          308,914          300,601          309,282          305,691  

  Average net loans and acceptances

     52,745          52,239          46,943          51,741          45,434  

  Average deposits

     144,768          152,543          149,099          149,209          149,585  

  U.S. Select Financial Data (US$ in millions)

                      

  Total revenue (teb)

     317          339          281          1,003          824  

  Non-interest expense

     244          224          207          695          637  

  Reported net income

     55          68          50          211          114  

  Average earning assets

     90,347          86,830          78,141          87,355          78,021  

  Average assets

     95,292          92,138          85,394          92,710          85,741  

  Average net loans and acceptances

     15,703          15,443          15,615          15,569          14,834  

  Average deposits

     53,824          51,948          53,291          51,052          53,079      

  (1) Before tax amounts of: $1 million in each of Q3-2017, Q2-2017 and Q3-2016; $3 million for YTD-2017 and $1 million for YTD-2016 are included in non-interest expense.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Q3 2017 vs Q3 2016

Reported net income of $292 million and adjusted net income, which excludes the amortization of acquisition-related intangible assets, of $293 million both decreased $25 million or 8% from a year ago, as lower revenue and higher expenses were partially offset by lower provisions for credit losses. Return on equity was 13.7% compared to 16.0% in the prior year.

Revenue of $1,067 million decreased $15 million or 1% as increased Investment and Corporate Banking revenue, driven by good mergers and acquisitions advisory activity and higher corporate banking-related revenue, was more than offset by lower Trading Products revenue due to markets and lower levels of client activity.

Net recoveries of credit losses in BMO Capital Markets were $2 million compared with a net provision of $37 million in the prior year, primarily due to lower new oil and gas provisions. Non-interest expense increased $70 million or 11%, reflecting higher employee-related costs, including foreign exchange translation on deferred compensation, as well as business growth.

Q3 2017 vs Q2 2017

Reported net income and adjusted net income both decreased $29 million or 9% from the prior quarter, primarily due to lower revenue, partially offset by lower provisions for credit losses and a more favourable tax rate.

Revenue decreased $133 million or 11%. Trading Products revenue decreased primarily due to lower trading revenues, partly reflecting reduced activity with certain clients in our equities business, in part as a result of recent tax law changes. Investment and Corporate Banking revenue decreased from a strong second quarter due to reduced mergers and acquisitions advisory and underwriting activity.

Net recoveries of credit losses in BMO Capital Markets were $2 million compared with a net provision of $46 million in the prior quarter, primarily due to lower new provisions. Non-interest expense increased $5 million or 1%.

Q3 YTD 2017 vs Q3 YTD 2016

Reported net income of $989 million and adjusted net income of $991 million both increased 15% from the prior year.

Revenue of $3,495 million increased $336 million or 11%, primarily due to increases in investment banking activities and corporate banking-related revenue.

Provisions for credit losses of $40 million were $49 million lower than the prior year due to lower provisions and higher recoveries. Non-interest expense of $2,099 million increased $185 million or 10% due to higher employee-related costs, given growth, and other costs associated with business growth, including costs related to the acquired Greene Holcomb Fisher business.

Adjusted results in this BMO Capital Markets section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Financial Group Third Quarter Report 2017 19


Corporate Services    Table 15  

 

  (Canadian $ in millions, except as noted)    Q3-2017        Q2-2017        Q3-2016        YTD-2017        YTD-2016  

  Net interest income before group teb offset

     (57        (61        (88        (198        (234

  Group teb offset

     (62        (212        (106        (391        (386

  Net interest income (teb)

     (119        (273        (194        (589        (620

  Non-interest revenue

     26          62          34          134          41  

  Total revenue (teb)

     (93        (211        (160        (455        (579

  Recovery of credit losses

     (73        (6        (11        (82        (66

  Non-interest expense

     102          157          88          422          511  

  Loss before income taxes

     (122        (362        (237        (795        (1,024

  Recovery of income taxes (teb)

     (61        (259        (126        (474        (556

  Reported net loss

     (61        (103        (111        (321        (468

Acquisition integration costs (1)

     13          13          10          40          27  

Cumulative accounting adjustment (2)

     -          -          -          -          62  

Restructuring costs (3)

     -          -          -          -          132  

Decrease in the collective allowance for credit losses (4)

     (54        -          -          (54        -  

  Adjusted net loss

     (102        (90        (101        (335        (247

  Corporate Services Recovery of Credit Losses

                      

  Impaired real estate loans

     -          (3        (7        (4        (14

  Interest on impaired loans

     -          -          -          -          -  

  Purchased credit impaired loans

     3          (3        (4        (2        (52

  Purchased performing loans

     -          -          -          -          -  

  Provision for (recovery of) credit losses, adjusted basis

     3          (6        (11        (6        (66

  Decrease in the collective allowance for credit losses

     (76        -          -          (76        -  

  Recovery of credit losses, reported basis

     (73        (6        (11        (82        (66

  Average loans and acceptances

     58          61          84          66          101  

  Period-end loans and acceptances

     55          60          84          55          84  

  U.S. Select Financial Data (US$ in millions)

                      

  Total revenue (teb)

     (25        (20        (26        (78        (94

  Recovery of credit losses

     (13        (5        (9        (35        (93

  Non-interest expense

     33          70          42          161          152  

  Recovery of income taxes (teb)

     (14        (35        (14        (66        (48

  Reported net loss

     (31        (50        (45        (138        (105

  Adjusted total revenue (teb)

     (25        (20        (26        (78        (94

  Adjusted provision for (recovery of) credit losses

     3          (5        (9        (4        (49 )     

  Adjusted non-interest expense

     19          56          30          118          67  

  Adjusted net loss

     (33        (41        (37        (131        (79

  (1) Acquisition integration costs related to the acquired BMO Transportation Finance business are primarily included in non-interest expense.

  (2) Cumulative accounting adjustment recognized in other non-interest revenue related to foreign currency translation that largely impacted prior periods.

  (3) Restructuring charges before tax amounts of: $188 million in Q2-2016. Restructuring cost is included in non-interest expense.

  (4) Decrease in the collective allowance for credit losses before-tax amount of $76 million in Q3-2017.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Corporate Services

Corporate Services consists of Corporate Support Areas (CSAs), including Technology and Operations (T&O). CSAs provide enterprise-wide expertise and governance support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, marketing, communications and human resources. T&O manages, maintains and provides governance over information technology, operations services, real estate and procurement for BMO Financial Group.

The costs of these CSA services are largely transferred to the three client operating groups (P&C, Wealth Management and BMO Capital Markets), with remaining amounts retained in Corporate Services results. As such, Corporate Services results largely reflect the impact of residual treasury-related activities, the elimination of taxable equivalent adjustments, residual unallocated expenses, certain acquisition integration costs, restructuring costs and adjustments to the collective allowance for credit losses.

Q3 2017 vs Q3 2016

Corporate Services net loss for the quarter was $61 million compared with a net loss of $111 million a year ago. Corporate Services adjusted net loss for the quarter was $102 million compared with an adjusted net loss of $101 million a year ago. Adjusted results in the current period exclude a $54 million after-tax decrease in the collective allowance and both periods exclude acquisition integration costs. Reported results increased due to the decrease in the collective allowance. Adjusted results were relatively unchanged as higher revenue excluding teb was largely offset by lower credit recoveries and higher expenses in the current quarter.

Q3 2017 vs Q2 2017

Corporate Services net loss for the quarter was $61 million compared with a net loss of $103 million in the prior quarter. Corporate Services adjusted net loss was $102 million, compared with an adjusted net loss of $90 million in the prior quarter. Adjusted results in the current period exclude a $54 million after-tax decrease in the collective allowance and both periods exclude acquisition integration costs. Adjusted results decreased due to lower revenue compared to above-trend revenue excluding teb in the prior quarter, a less favourable tax rate and lower credit recoveries, partially offset by lower expenses in the current quarter. Reported results increased due to the decrease in the collective allowance, partially offset by the net impact of the drivers noted above.

 

20 BMO Financial Group Third Quarter Report 2017


Q3 YTD 2017 vs Q3 YTD 2016

Corporate Services net loss for the year to date was $321 million, compared with a net loss of $468 million a year ago. Corporate Services adjusted net loss for the year to date was $335 million, compared with an adjusted net loss of $247 million a year ago. Adjusted results in the current period exclude the decrease in the collective allowance and both periods exclude acquisition integration costs. The prior year adjusted results also excluded a restructuring charge and negative cumulative accounting adjustment. Adjusted results declined due to higher expenses and lower credit recoveries, partially offset by higher revenue excluding teb. Reported results increased due to the items excluded from adjusted results, partially offset by the net impact of the drivers noted above.

Adjusted results in this Corporate Services section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

 

BMO Financial Group Third Quarter Report 2017 21


Summary Quarterly Earnings Trends    Table 16  

 

(Canadian $ in millions, except as noted)

   Q3-2017     Q2-2017     Q1-2017     Q4-2016     Q3-2016     Q2-2016     Q1-2016     Q4-2015  

Revenue

     5,459       5,741       5,405       5,278       5,633       5,101       5,075       4,982  

Insurance claims, commissions and changes in

  policy benefit liabilities (CCPB)

     253       708       4       79       691       407       366       265  

Revenue, net of CCPB

     5,206       5,033       5,401       5,199       4,942       4,694       4,709       4,717  

Specific provision for credit losses

     210       259       173       174       257       201       183       128  

Collective provision for (recovery of) credit losses

     (76     -       -       -       -       -       -       -  

Non-interest expense

     3,278       3,276       3,379       3,323       3,092       3,312       3,270       3,093  

Income before income taxes

     1,794       1,498       1,849       1,702       1,593       1,181       1,256       1,496  

Provision for income taxes

     407       250       361       357       348       208       188       282  

Reported net income (see below)

     1,387       1,248       1,488       1,345       1,245       973       1,068       1,214  

Acquisition integration costs (1)

     13       13       14       21       19       16       15       17  

Amortization of acquisition-related intangible assets (2)

     28       34       28       29       31       31       33       33  

Cumulative accounting adjustment (3)

     -       -       -       -       -       -       62       -  

Restructuring costs (4)

     -       -       -       -       -       132       -       -  

Decrease in the collective allowance for credit losses (5)

     (54     -       -       -       -       -       -       -  

Adjusted net income (see below)

     1,374       1,295       1,530       1,395       1,295       1,152       1,178       1,264  

Basic earnings per share ($)

     2.05       1.85       2.23       2.03       1.87       1.46       1.59       1.83  

Diluted earnings per share ($)

     2.05       1.84       2.22       2.02       1.86       1.45       1.58       1.83  

Adjusted diluted earnings per share ($)

     2.03       1.92       2.28       2.10       1.94       1.73       1.75       1.90  

Net interest margin on average earning assets (%)

     1.55       1.52       1.55       1.57       1.58       1.61       1.58       1.53  

PCL-to-average net loans and acceptances (annualized) (%)

     0.14       0.28       0.19       0.19       0.29       0.23       0.21       0.15  

Specific PCL-to-average net loans and acceptances (annualized) (%)

     0.22       0.28       0.19       0.19       0.29       0.23       0.21       0.15  

Effective income tax rate (%)

     22.7       16.7       19.5       21.0       21.9       17.6       15.0       18.8  

Adjusted effective income tax rate (%)

     22.5       17.1       19.8       21.2       22.0       19.6       16.2       18.9  

Canadian/U.S. dollar exchange rate (average)

     1.2974       1.3412       1.3288       1.3216       1.3029       1.3016       1.3737       1.3191  

Operating group reported net income:

                

Canadian P&C reported net income

     614       531       743       588       560       525       529       560  

Amortization of acquisition-related intangible assets (2)

     1       -       1       -       1       -       1       1  

Canadian P&C adjusted net income

     615       531       744       588       561       525       530       561  

U.S. P&C reported net income

     278       248       260       288       278       268       251       210  

Amortization of acquisition-related intangible assets (2)

     11       12       12       13       12       12       13       14  

U.S. P&C adjusted net income

     289       260       272       301       290       280       264       224  

Wealth Management reported net income

     264       251       266       279       201       134       147       243  

Acquisition integration costs (1)

     -       -       -       7       9       5       9       11  

Amortization of acquisition-related intangible assets (2)

     15       21       15       16       17       19       19       17  

Wealth Management adjusted net income

     279       272       281       302       227       158       175       271  

BMO Capital Markets reported net income

     292       321       376       392       317       287       257       236  

Amortization of acquisition-related intangible assets (2)

     1       1       -       -       1       -       -       1  

BMO Capital Markets adjusted net income

     293       322       376       392       318       287       257       237  

Corporate Services reported net loss

     (61     (103     (157     (202     (111     (241     (116     (35

Acquisition integration costs (1)

     13       13       14       14       10       11       6       6  

Cumulative accounting adjustment (3)

     -       -       -       -       -       -       62       -  

Restructuring costs (4)

     -       -       -       -       -       132       -       -  

Decrease in the collective allowance for credit losses (5)

     (54     -       -       -       -       -       -       -  

Corporate Services adjusted net loss

     (102     (90     (143     (188     (101     (98     (48     (29 )     

  (1) Acquisition integration costs before tax are included in non-interest expense. Wealth Management amounts of: $10 million in each of Q4-2016 and Q3-2016; $6 million in Q2-2016; $12 million in Q1-2016; and $13 million in Q4-2015. Corporate Services amounts of: $20 million in Q3-2017; $21 million in Q2-2017; $22 million in Q1-2017; $21 million in Q4-2016; $17 million in Q3-2016; $18 million in Q2-2016; $10 million in Q1-2016; and $7 million in Q4-2015.

  (2) Amortization of acquisition-related intangible assets before tax is charged to the non-interest expense of the operating groups. Canadian P&C amounts of: $1 million in Q3-2017; $nil in Q2-2017; $1 million in each of Q1-2017, Q4-2016 and Q3-2016; $nil in Q2-2016; $1 million in Q1-2016; and $2 million in Q4-2015. U.S. P&C amounts of: $16 million in each of Q3-2017, Q2-2017 and Q1-2017; $17 million in Q4-2016; $16 million in Q3-2016; $17 million in Q2-2016; $18 million in each of Q1-2016 and Q4-2015. BMO Wealth Management amounts of: $17 million in Q3-2017; $26 million in Q2-2017; $19 million in each of Q1-2017 and Q4-2016; $22 million in Q3-2016; $23 million in Q2-2016; $24 million in Q1-2016; and $22 million in Q4-2015. BMO Capital Markets amounts of: $1 million in each of Q3-2017, Q2-2017 and Q1-2017; $nil in Q4-2016; $1 million in Q3-2016; $nil in each of Q2-2016 and Q1-2016; and $1 million in Q4-2015.

  (3) Cumulative accounting adjustment recognized in other non-interest revenue related to foreign currency translation that largely impacted prior periods.

  (4) Restructuring charges before tax amount included in non-interest expense in Corporate Services of $188 million in Q2-2016.

  (5) Adjustments to the collective allowance for credit losses before-tax amount of $76 million in Q3-2017 is recorded in Corporate Services provision for (recovery of) credit losses.

  Adjusted results in this table are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

BMO’s quarterly earnings trends were reviewed in detail on pages 66 and 67 of BMO’s 2016 Annual Report. Readers are encouraged to refer to that review for a more complete discussion of trends and factors affecting past quarterly results including the modest impact of seasonal variations in results. Quarterly earnings are also impacted by foreign currency translation. Table 16 outlines summary results for the fourth quarter of fiscal 2015 through the third quarter of fiscal 2017.

Earnings Trends

Reported and adjusted results have generally trended upwards over the past eight quarters, with the exception of the impact of lower equity markets on Wealth Management in the first half of 2016 and an investment write-down in the second quarter of 2016. Reported results were also impacted by a decrease in the collective allowance in the current period, a cumulative accounting adjustment in the first quarter of 2016 and a restructuring charge in the second quarter of 2016. Canadian P&C delivered positive year-over-year net income growth in each of the last eight quarters, reflecting revenue growth driven by higher balances and non-interest revenue. Canadian P&C results in the first quarter of 2017 included a $168 million after-tax gain on sale. U.S. P&C growth in 2016 largely reflected the results of the acquired BMO Transportation Finance business in addition to organic revenue growth and good expense management. U.S. P&C results increased in the third quarter of 2017 reflecting higher revenue and a more favourable tax rate, after being impacted by higher

 

22 BMO Financial Group Third Quarter Report 2017


provisions for credit losses in the second quarter of 2017 and an after-tax loss of $35 million on the sale of a portion of the indirect auto loan portfolio in the first quarter of 2017. Wealth Management’s results in the first half of 2016 were impacted by lower equity markets, improving in the second half of 2016. Equity markets in Canada have been relatively flat in 2017 but remain strong in the United States. Wealth Management results in the third quarter of 2017 reflect year-over-year net revenue growth of 9% and positive net operating leverage for a fifth consecutive quarter. The fourth quarter of 2015 benefited from a gain on sale of a business and the fourth quarter of 2016 benefited from a gain on sale of an equity investment. Quarterly insurance results have been subject to variability, resulting primarily from impacts of interest rates and equity markets, as well as methodology and actuarial assumptions changes. BMO Capital Markets’ results reflected improved performance from fiscal 2015 with continued momentum driving results throughout 2016 and into 2017. Results in the third quarter of 2017 decreased due to reduced investment banking activity and lower trading revenues. Corporate Services results can vary from quarter to quarter and are impacted in part by the variability associated with benefits from the purchased loan portfolio, which has lessened over time due to the run-off of the portfolio.

BMO’s provision for credit losses measured as a percentage of average net loans and acceptances has been relatively stable, with some quarter-to-quarter variability. The decrease this quarter from the prior quarter was driven by a decrease in the collective allowance and lower provisions in BMO Capital Markets and U.S. P&C.

The effective income tax rate can vary, as it depends on tax law changes, the timing of resolution of certain tax matters, adjustments of prior periods’ income taxes, the relative proportion of earnings attributable to the different jurisdictions in which we operate and the amount of tax-exempt income from securities.

Adjusted results in this Summary Quarterly Earnings Trends section are non-GAAP amounts or non-GAAP measures. Please see the Non-GAAP Measures section.

Caution

This Summary Quarterly Earnings Trends section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

Balance Sheet

Total assets of $708.6 billion as at July 31, 2017 increased $20.7 billion from October 31, 2016. There was a $20.7 billion decrease as a result of the weaker U.S. dollar, excluding the impact on derivative financial assets, of which $9.9 billion was in loans. Derivative financial assets decreased $4.2 billion and derivative financial liabilities decreased $1.0 billion due to the decrease in the fair value of interest rate contracts, partially offset by an increase in foreign exchange contracts.

The following discussion excludes the impact of changes in the U.S. dollar. Securities increased $13.0 billion due to higher trading and available-for-sale securities in BMO Capital Markets and Corporate Services. Net loans increased $12.6 billion due to an increase in business and government loans across all operating groups and higher residential mortgages in Canadian P&C, partially offset by the sale of a portion of the U.S. indirect auto loan portfolio in the first quarter of 2017 reflected in consumer instalment and other personal loans. Excluding the impact of the sale, consumer instalment and other personal loans increased $0.2 billion. Securities borrowed or purchased under resale agreements increased $9.7 billion, driven by higher client activity in BMO Capital Markets. Cash and cash equivalents and interest bearing deposits with banks increased $5.3 billion primarily due to higher balances held with central banks. Customers’ liability under acceptances increased $1.6 billion. Other assets, excluding derivative financial assets, increased $3.5 billion.

Liabilities increased $20.1 billion from October 31, 2016. The weaker U.S. dollar resulted in a decrease of $19.9 billion, excluding the impact on derivative financial liabilities. Derivative financial liabilities decreased $1.0 billion as discussed above.

The following discussion excludes changes due to the weaker U.S. dollar. Securities lent or sold under repurchase agreements increased $22.7 billion due to higher client activity in BMO Capital Markets. Deposits increased $16.4 billion, reflecting higher levels of customer and wholesale deposits, with a $12.3 billion increase in business and government deposits and a $5.9 billion increase in deposits by individuals, partially offset by a $1.8 billion decrease in deposits by banks. Securities sold but not yet purchased increased $1.7 billion. Acceptances increased $1.6 billion. The above increases were partially offset by a $2.0 billion decrease in other liabilities.

Total equity increased $0.6 billion from October 31, 2016, due to a $2.0 billion increase in retained earnings, a $0.5 billion increase in common shares and a $0.4 billion increase in preferred shares, partially offset by a $2.3 billion decrease in accumulated other comprehensive income. Accumulated other comprehensive income decreased primarily due to an accumulated other comprehensive income on translation of net foreign operations decrease of $1.7 billion, net of hedging impacts, mainly due to the weaker U.S. dollar. The increase in share capital was driven by the issuance of common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan (DRIP) and Stock Option Plan as well as the issuance of preferred shares, partially offset by common shares repurchased for cancellation.

Contractual obligations by year of maturity are outlined in Note 15 to the unaudited interim consolidated financial statements.

Transactions with Related Parties

In the ordinary course of business, we provide banking services to our key management personnel on the same terms that we offer to our preferred customers for those services. Key management personnel are defined as those persons having authority and responsibility for planning, directing and/or controlling the activities of an entity, being the directors and most senior executives of the bank. We provide banking services to our joint ventures and equity-accounted investees on the same terms offered to our customers for these services.

The bank’s policies and procedures for related party transactions did not materially change from October 31, 2016, as described in Note 28 to the audited consolidated financial statements on page 201 of BMO’s 2016 Annual Report.

 

BMO Financial Group Third Quarter Report 2017 23


Off-Balance Sheet Arrangements

BMO enters into a number of off-balance sheet arrangements in the normal course of operations. The most significant of these are Credit Instruments, Structured Entities and Guarantees, which are described on page 78 of BMO’s 2016 Annual Report. We consolidate all of our Structured Entities, except for our Canadian customer securitization vehicles, structured finance vehicles, certain capital and funding vehicles and various BMO managed and non-managed investment funds. There have been no changes of substance during the quarter ended July 31, 2017.

Accounting Policies and Critical Accounting Estimates

Significant accounting policies are described in our 2016 annual MD&A and in the notes to our audited consolidated financial statements for the year ended October 31, 2016 and in Note 1 to the unaudited interim consolidated financial statements for the quarter ended July 31, 2017, together with a discussion of certain accounting estimates that are considered particularly important as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to review that discussion on pages 113 to 115 and 145 to 147 in BMO’s 2016 Annual Report.

Future Changes in Accounting Policies

BMO monitors the potential changes proposed by the International Accounting Standards Board (IASB), and analyzes the effect that changes in the standards may have on BMO’s financial reporting and accounting policies. New standards and amendments to existing standards, which are effective for the bank in the future, can be found on pages 115 to 117 and in Note 1 to the audited annual consolidated financial statements on pages 147 to 148 of BMO’s 2016 Annual Report, and in Note 1 to the unaudited interim consolidated financial statements for the quarter ended July 31, 2017. The most significant standard is the adoption of IFRS 9 Financial Instruments (IFRS 9) which is effective for BMO on November 1, 2017. The impact of this standard and the bank’s implementation approach is provided in Note 1 to the unaudited interim consolidated financial statements for the quarter ended July 31, 2017. IFRS 9 addresses impairment, classification and measurement, and hedge accounting.

In March 2017, the Basel Committee on Banking Supervision (BCBS) released its standard on Regulatory treatment of accounting provisions – interim approach and transitional arrangements. The BCBS clarified it will retain its current treatment of provisions under both Standardized Approach and Advanced Internal Ratings Based frameworks during an interim period. Further, the BCBS allows local jurisdictions the option to choose whether to apply a transitional arrangement for the impact of IFRS 9 on regulatory capital. In August 2017, the bank’s regulator OSFI released for public consultation revisions to its Capital Adequacy Requirements Guideline. During the consultation OSFI will gather information to determine the need for a transition arrangement for regulatory capital purposes.

Select Financial Instruments

Pages 77 to 78 of BMO’s 2016 Annual Report provide enhanced disclosure relating to select financial instruments that, commencing in 2008 and based on subsequent assessments, markets regard as carrying higher risk, including information on sectors of interest: oil and gas and mining. BMO’s oil and gas outstanding loans continue to be approximately 2% and loans in respect of the mining sector continue to be less than 1% of total loans. Readers are encouraged to review that disclosure to assist in understanding the nature and extent of BMO’s exposures.

The Financial Stability Board (FSB) issued a report encouraging enhanced disclosure related to financial instruments that market participants had come to regard as carrying higher risk. An index of where the disclosures recommended by the Enhanced Disclosure Task Force (EDTF) of the FSB are located is provided on our website at www.bmo.com/investorrelations.

We follow a practice of reporting on significant changes in select financial instruments since year end, if any, in our interim MD&A. There have been no changes of substance from the disclosure in our 2016 Annual Report.

Other Regulatory Developments

We continue to monitor and prepare for regulatory developments, including those referenced elsewhere in this Report to Shareholders.

In June 2016, the synthetic equity arrangement rules (SEA Rules) were passed into law in Canada. The SEA Rules impact the tax deductibility of Canadian dividends in certain circumstances and were effective as of May 1, 2017. The impact of the SEA Rules will be to increase our effective tax rate and negatively impact BMO Capital Markets earnings. The Canada Revenue Agency has reassessed us for transactions similar to those addressed by the SEA Rules. For further discussion see note 13 to the unaudited interim consolidated financial statements, as well as our 2016 Annual Report.

For a comprehensive discussion of regulatory developments, see the Enterprise-Wide Capital Management section starting on page 70, the Liquidity and Funding Risk section starting on page 100, and the Legal and Regulatory Risk section starting on page 110 of BMO’s 2016 Annual Report.

 

24 BMO Financial Group Third Quarter Report 2017


Risk Management

Our risk management policies and processes to measure, monitor and control credit and counterparty, market, liquidity and funding, operational, model, legal and regulatory, business, strategic, environmental and social and reputation risk have not changed significantly from those outlined in the Enterprise-Wide Risk Management section on pages 79 to 112 of BMO’s 2016 annual MD&A.

Market Risk

Linkages between Balance Sheet Items and Market Risk Disclosures

Table 17 below presents items reported in our Consolidated Balance Sheet that are subject to market risk, comprised of balances that are subject to either traded risk or non-traded risk measurement techniques.

 

Linkages Between Balance Sheet Items and Market Risk Disclosures    Table 17  

 

   

As at July 31, 2017

       

As at October 31, 2016

   
   

    Consolidated

Balance

Sheet

 

    Subject to market risk

 

    Not subject

to market  

risk  

       

Consolidated

Balance

Sheet

 

Subject to market risk

 

Not subject  

to market  

risk  

 

Main risk factors for

non-traded risk

balances

  (Canadian $ in millions)    

 

Traded

risk (1)

 

    Non-traded  

risk (2)  

            

Traded

risk (1)

 

Non-traded  

risk (2)  

   

Assets Subject to Market Risk

                   

Cash and cash equivalents

  32,574   -   32,574   -     31,653   -   31,653   -   Interest rate

Interest bearing deposits with banks

  5,907   308   5,599   -     4,449   258   4,191   -   Interest rate

Securities

                   

Trading

  95,154   86,733   8,421   -     84,458   76,297   8,161   -   Interest rate, credit spread, equity

Available-for-sale

  53,801   -   53,801   -     55,663   -   55,663   -   Interest rate, credit spread

Held-to-maturity

  8,809   -   8,809   -     8,965   -   8,965   -   Interest rate

Other

  882   -   882   -     899   -   899   -   Equity

Securities borrowed or purchased

   under resale agreements

  73,928   -   73,928   -     66,646   -   66,646   -   Interest rate

Loans (net of allowance

   for credit losses)

  361,372   -   361,372   -     358,730   -   358,730   -   Interest rate, foreign exchange        

Derivative instruments

  35,003   33,451   1,552   -     39,183   37,571   1,612   -   Interest rate, foreign exchange

Customer’s liabilities

   under acceptances

  14,599   -   14,599   -     13,021   -   13,021   -   Interest rate

Other assets

  26,588   -   11,664   14,924           24,268   -   9,149   15,119   Interest rate

Total Assets

  708,617       120,492   573,201   14,924           687,935   114,126   558,690   15,119    

Liabilities Subject to Market Risk

                   

Deposits

  473,111   12,461   460,650   -     473,372   11,604   461,768   -   Interest rate, foreign exchange

Derivative instruments

  37,228   35,509   1,719   -     38,227   36,132   2,095   -   Interest rate, foreign exchange

Acceptances

  14,599   -   14,599   -     13,021   -   13,021   -   Interest rate

Securities sold but not yet

   purchased

  26,311   26,311   -   -     25,106   25,106   -   -  

Securities lent or sold under

   repurchase agreements

  61,517   -   61,517   -     40,718   -   40,718   -   Interest rate

Other liabilities

  47,854   -   47,589   265     50,724   -   50,401   323   Interest rate

Subordinated debt

  5,063   -   5,063   -           4,439   -   4,439   -   Interest rate

Total Liabilities

  665,683   74,281   591,137   265           645,607   72,842   572,442   323    

 

  (1) Primarily comprised of BMO’s balance sheet items that are subject to the trading and underwriting risk management framework and fair valued through profit or loss.

  (2) Primarily comprised of BMO’s balance sheet items that are subject to the structural balance sheet and insurance risk management framework, or are available-for-sale securities.

 

BMO Financial Group Third Quarter Report 2017 25


Trading, Underwriting and Non-Trading (Structural) Market Risk

Total Trading Value at Risk (VaR) increased from the prior quarter due to increased interest rate risk, as well as increased Credit VaR driven by a methodology change relating to market risk associated with the valuation of uncollateralized derivatives. Trading SVaR was higher mainly due to this methodology change which primarily affected the credit risk component.

There were no significant changes in our structural market risk management framework during the quarter.

Structural economic value exposure to rising interest rates primarily reflects a lower market value for fixed-rate loans. Structural economic value sensitivity to falling interest rates primarily reflects the impact of a higher market value for fixed rate loans and minimum modelled client deposit rates. Structural economic value exposure to rising interest rates increased relative to April 30, 2017 primarily owing to modelled deposit pricing being more rate-sensitive at higher rate levels following the increase in market rates in the quarter. Structural economic value benefit to falling interest rates relative to April 30, 2017 increased due to the greater extent to which interest rates can now fall. Structural earnings sensitivity quantifies the potential impact of interest rate changes on structural balance sheet revenues over the next twelve months. Structural earnings exposure to falling interest rates primarily reflects the risk of fixed- and floating-rate loans repricing at lower rates and the more limited ability to reduce deposit pricing as rates fall. Structural earnings exposure to falling rates remained relatively stable. Structural earnings benefit to rising interest rates primarily reflects the benefit of widening deposit spreads as interest rates rise. The structural earnings benefit to rising interest rates decreased relative to April 30, 2017 primarily owing to the impact of the weaker U.S. dollar and a lower modelled benefit to subsequent interest rate increases over the next 12 months following the increase in market rates in the third quarter.

BMO’s market risk management practices and key measures are outlined on pages 95 to 99 of BMO’s 2016 Annual Report.

 

Total Trading Value at Risk (VaR) Summary (1)    Table 18  

 

                                                                                                                                                                             
     For the quarter ended July 31, 2017                As at April 30, 2017        As at October 31, 2016
  

 

 

    

 

  

 

(Pre-tax Canadian $ equivalent in millions)

     Quarter-end        Average        High        Low     

Quarter-end

  

Quarter-end

 

    

 

  

 

Commodity VaR

     (0.8)        (0.8)        (1.4)        (0.5)      (0.6)    (0.7)

Equity VaR

     (2.3)        (3.0)        (4.0)        (2.3)      (2.6)    (4.5)

Foreign exchange VaR

     (0.5)        (0.9)        (2.9)        (0.2)      (0.7)    (1.8)

Interest rate VaR

     (5.7)        (4.9)        (6.0)        (4.1)      (5.2)    (10.3)

Credit VaR

     (3.4)        (2.4)        (4.1)        (1.5)      (2.3)    (2.0)

Diversification

     6.8         6.7         nm         nm       6.5     9.3 

 

          

 

  

 

Total Trading VaR

     (5.9)        (5.3)        (6.3)        (4.3)      (4.9)    (10.0)

 

  (1) One-day measure using a 99% confidence interval. Losses are in brackets and benefits are presented as positive numbers.

  nm - not meaningful

 

Total Trading Stressed Value at Risk (SVaR) Summary (1) (2)    Table 19  

 

                                                                                                                                                                             
     For the quarter ended July 31, 2017                As at April 30, 2017        As at October 31, 2016 
  

 

 

    

 

  

 

(Pre-tax Canadian $ equivalent in millions)

     Quarter-end      Average      High      Low   

Quarter-end

  

Quarter-end 

 

    

 

  

 

Commodity SVaR

     (0.9)        (1.6)        (2.3)        (0.9)      (6.0)    (1.4) 

Equity SVaR

     (11.3)        (12.1)        (16.5)        (8.9)      (14.1)    (18.7) 

Foreign exchange SVaR

     (0.4)        (1.6)        (4.5)        (0.2)      (0.7)    (3.2) 

Interest rate SVaR

     (14.5)        (14.8)        (18.4)        (12.7)      (12.9)    (23.1) 

Credit SVaR

     (31.2)        (16.4)        (33.8)        (8.8)      (10.4)    (6.5) 

Diversification

     29.9         25.7         nm         nm       26.0     25.8  

 

          

 

  

 

Total Trading SVaR

     (28.4)        (20.8)        (34.6)        (13.4)      (18.1)    (27.1) 

 

  (1) One-day measure using a 99% confidence interval. Losses are in brackets and benefits are presented as positive numbers.

  (2) Stressed VaR is produced weekly.

  nm - not meaningful

 

Structural Balance Sheet Earnings and Value Sensitivity to Changes in Interest Rates (1) (2) (3) (4)    Table 20  

 

     Economic value sensitivity (Pre-tax)      Earnings sensitivity over the next 12 months (Pre-tax)  

(Canadian $ equivalent in millions)

             July 31, 2017                 April 30, 2017                 October 31, 2016                 July 31, 2017                 April 30, 2017                 October 31, 2016   

 

    

 

 

 

100 basis point increase

     (935.9)        (811.4)        (680.2)        86.1         119.8         149.0   

100 basis point decrease

     267.1         165.3         7.3         (330.2)        (343.4)        (168.9)  

 

 

  (1) Earnings and value sensitivities to falling interest rates assume Canadian and U.S. central banks do not decrease overnight interest rates below nil. The scenarios with decreasing interest rates therefore limit the decrease in both Canadian and U.S. short-term interest rates to 75 and 100 basis points for shorter terms respectively as of July 31, 2017. Longer-term interest rates do not decrease below the assumed level of short-term interest rates.

  (2) Certain non-trading AFS holdings are managed under the bank’s trading risk framework.

  (3) Losses are in brackets and benefits are presented as positive numbers.

  (4) For BMO’s Insurance businesses, a 100 basis point increase in interest rates at July 31, 2017, results in an increase in earnings before tax of $58 million and an increase in economic value before tax of $423 million ($69 million and $504 million, respectively, at April 30, 2017; $90 million and $623 million, respectively, at October 31, 2016). A 100 basis point decrease in interest rates at July 31, 2017, results in a decrease in earnings before tax of $59 million and a decrease in economic value before tax of $515 million ($69 million and $612 million, respectively, at April 30, 2017; $87 million and $744 million, respectively, at October 31, 2016). These impacts are not reflected in the table above.

 

26 BMO Financial Group Third Quarter Report 2017


Liquidity and Funding Risk

Liquidity and funding risk is managed under a robust risk management framework. There were no material changes in the framework during the quarter.

BMO’s liquid assets are primarily held in our trading businesses, as well as in supplemental liquidity pools that are maintained for contingent liquidity risk management purposes. Liquid assets include unencumbered, high-quality assets that are marketable, can be pledged as security for borrowings and can be converted to cash in a time frame that meets our liquidity and funding requirements. BMO’s liquid assets are summarized in Table 21.

In the ordinary course of business, BMO may encumber a portion of cash and securities holdings as collateral in support of trading activities and our participation in clearing and payment systems in Canada and abroad. In addition, BMO may receive liquid assets as collateral and may re-pledge these assets in exchange for cash or as collateral in support of trading activities. Net unencumbered liquid assets, defined as on-balance sheet assets such as BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other off-balance sheet eligible collateral received, less collateral encumbered, totalled $199.1 billion at July 31, 2017, compared with $209.7 billion at April 30, 2017. The decrease in unencumbered liquid assets was primarily due to the impact of the weaker U.S. dollar. Net unencumbered liquid assets are primarily held at the parent bank level, at our U.S. legal entity BMO Harris Bank, and in our broker/dealer operations. In addition to liquid assets, BMO has access to the Bank of Canada’s lending assistance programs, the Federal Reserve Bank discount window in the United States and European Central Bank standby liquidity facilities. We do not consider central bank facilities to be a source of available liquidity when assessing the strength of BMO’s liquidity position.

In addition to cash and securities holdings, BMO may also pledge other assets, including mortgages and loans, to raise long-term secured funding. Table 22 provides a summary of total encumbered and unencumbered assets.

 

Liquid Assets    Table 21  

 

     As at July 31, 2017             As at April 30, 2017  
  

 

 

   

 

 

 
   (Canadian $ in millions)   

 

  Carrying value/on

balance sheet

assets (1)

    

  Other cash &

securities

received

    

 

  Total gross
assets (2)

    

 

  Encumbered
assets

    

Net

unencumbered

assets (3)

   

Net

unencumbered

assets (3) 

 

 

   

 

 

 

  Cash and cash equivalents

     32,574         -        32,574        1,500        31,074         33,788   

  Deposits with other banks

     5,907         -        5,907        -        5,907         6,360   

  Securities and securities borrowed or purchased under resale agreements

                

  Sovereigns / Central banks / Multilateral development banks

     124,275         17,676        141,951        90,053        51,898         53,885   

  Mortgage-backed securities and collateralized mortgage obligations

     21,453         289        21,742        4,563        17,179         19,317   

  Corporate debt

     18,486         6,796        25,282        3,432        21,850         24,170   

  Corporate equity

     68,360         19,955        88,315        38,463        49,852         51,109   

 

   

 

 

 

  Total securities and securities borrowed or purchased under resale agreements

     232,574         44,716        277,290        136,511        140,779         148,481   

  NHA mortgage-backed securities (reported as loans at amortized cost) (4)

     23,478         -        23,478        2,164        21,314         21,064   

 

   

 

 

 

  Total liquid assets

     294,533         44,716        339,249        140,175        199,074         209,693   

 

   

 

 

 

  Other eligible assets at central banks (not included above) (5)

     66,168         -        66,168        389        65,779         65,874   

  Undrawn credit lines granted by central banks

            -        -        -        -          

 

   

 

 

 

  Total liquid assets and other sources

     360,701         44,716        405,417        140,564        264,853         275,567   

 

 

  (1) The carrying values outlined in this table are consistent with the carrying values reported in BMO’s balance sheet as at July 31, 2017.

  (2) Gross assets include on-balance sheet and off-balance sheet assets.

  (3) Net unencumbered liquid assets are defined as on-balance sheet assets, such as BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other off-balance sheet eligible collateral received, less encumbered assets.

  (4) Under IFRS, NHA mortgage-backed securities that include mortgages owned by BMO as the underlying collateral are classified as loans. Unencumbered NHA mortgage-backed securities have liquidity value and are included as liquid assets under BMO’s Liquidity and Funding Management Framework. This amount is shown as a separate line item, NHA mortgage-backed securities.

  (5) Represents loans currently lodged at central banks that could potentially be used to access central bank funding. Loans available for pledging as collateral do not include other sources of additional liquidity that may be realized from the loan portfolio, including incremental securitization, covered bond issuances and Federal Home Loan Bank (FHLB) advances.

 

BMO Financial Group Third Quarter Report 2017 27


Asset Encumbrance (Canadian $ in millions)    Table 22   

 

     Total gross assets (1)             Encumbered (2)          Net unencumbered  
  As at July 31, 2017              

 

                Pledged as

collateral

    

Other     

encumbered     

         

Other     

unencumbered (3)     

    

Available as     

collateral (4)     

 

  Cash and deposits with other banks

     38,481            -        1,500              11            36,970      

  Securities (5)

     300,768            110,198        28,477              9,419            152,674      

  Loans

     337,894            58,055        389              213,671            65,779      

  Other assets

                   

  Derivative instruments

     35,003            -        -              35,003            -      

  Customers’ liability under acceptances

     14,599            -        -              14,599            -      

  Premises and equipment

     1,968            -        -              1,968            -      

  Goodwill

     6,041            -        -              6,041            -      

  Intangible assets

     2,125            -        -              2,125            -      

  Current tax assets

     1,396            -        -              1,396            -      

  Deferred tax assets

     2,799            -        -              2,799            -      

  Other assets

     12,259                  -        -                12,259            -      

  Total other assets

     76,190                  -        -                76,190            -      

  Total assets

     753,333                  168,253        30,366                299,291            255,423      
     Total gross assets (1)             Encumbered (2)          Net unencumbered  
  As at April 30, 2017              

Pledged as

collateral

    

Other     

encumbered     

         

Other     

unencumbered (3)     

    

Available as     

collateral (4)     

 

  Cash and deposits with other banks

     41,888            -        1,740              12            40,136      

  Securities (5)

     311,288            115,281        26,462              9,393            160,152      

  Loans

     344,068            57,278        448              220,468            65,874      

  Other assets

                   

  Derivative instruments

     31,943            -        -              31,943            -      

  Customers’ liability under acceptances

     13,773            -        -              13,773            -      

  Premises and equipment

     2,067            -        -              2,067            -      

  Goodwill

     6,556            -        -              6,556            -      

  Intangible assets

     2,207            -        -              2,207            -      

  Current tax assets

     1,450            -        -              1,450            -      

  Deferred tax assets

     3,170            -        -              3,170            -      

  Other assets

     10,318                  -        -                10,318            -      

  Total other assets

     71,484                  -        -                71,484            -      

  Total assets

     768,728                  172,559        28,650                301,357            266,162      

  (1) Gross assets include on-balance sheet and off-balance sheet assets.

  (2) Pledged as collateral refers to the portion of on-balance sheet assets and other cash and securities that is pledged through repurchase agreements, securities lent, derivative contracts, minimum required deposits at central banks and requirements associated with participation in clearing houses and payment systems. Other encumbered assets include assets that are restricted for legal or other reasons, such as restricted cash and short sales.

  (3) Other unencumbered assets include select liquid asset holdings that management believes are not readily available to support BMO’s liquidity requirements. These include cash and securities of $9.4 billion as at July 31, 2017, which include securities held at BMO’s insurance subsidiary, significant equity investments, and certain investments held at our merchant banking business. Other unencumbered assets also include mortgages and loans that may be securitized to access secured funding.

  (4) Loans included as available as collateral represent loans currently lodged at central banks that could potentially be used to access central bank funding. Loans available for pledging as collateral do not include other sources of additional liquidity that may be realized from the loan portfolio, including incremental securitization, covered bond issuances and FHLB advances.

  (5) Includes securities, securities borrowed or purchased under resale agreements and NHA mortgage-backed securities (reported as loans at amortized cost).

 

 

 

 

 

BMO’s Liquidity Coverage Ratio (LCR) is summarized in Table 23. The average daily LCR for the quarter ended July 31, 2017 is 148%. The LCR is calculated on a daily basis as the ratio of the stock of High-Quality Liquid Assets (HQLA) to total net stressed cash outflows over the next 30 calendar days. The average LCR ratio is up from 136% last quarter, due to a decrease in net cash outflows. Net cash outflows decreased primarily due to higher inflows associated with certain types of trading activities. While banks are required to maintain an LCR greater than 100% in normal conditions, banks are also expected to be able to utilize HQLA in a period of stress, which may result in an LCR of less than 100% during that period. BMO’s HQLA are primarily comprised of cash, highly-rated debt issued or backed by governments, highly-rated covered bonds and non-financial corporate debt and non-financial equities that are part of a major stock index. Net cash flows include outflows from deposits, secured and unsecured wholesale funding, commitments and potential collateral requirements offset by permitted inflows from loans, securities lending and trading activities and other non-HQLA debt maturing over a 30-day horizon. OSFI prescribed weights are applied to cash flows and HQLA to arrive at the weighted values and the LCR. The LCR is only one measure of a bank’s liquidity position and does not fully capture all of the bank’s liquid assets or the funding alternatives that may be available in a period of stress. BMO’s total liquid assets are shown in Table 21.

Additional information on Liquidity and Funding Risk Governance can be found starting on page 100 of BMO’s 2016 Annual Report.

 

28 BMO Financial Group Third Quarter Report 2017


Liquidity Coverage Ratio    Table 23  

 

  (Canadian $ in billions, except as noted)

  For the quarter ended July 31, 2017

   Total unweighted value
(average) (1) (2)
     Total weighted value    
(average) (2) (3)    
 

 

 

High-Quality Liquid Assets

     

Total high-quality liquid assets (HQLA)

     *        129.8      

 

 

Cash Outflows

     

Retail deposits and deposits from small business customers, of which:

     164.7        10.3      

Stable deposits

     89.2        2.7      

Less stable deposits

     75.5        7.6      

Unsecured wholesale funding, of which:

     138.7        79.0      

Operational deposits (all counterparties) and deposits in networks of cooperative banks

     52.1        12.8      

Non-operational deposits (all counterparties)

     57.3        36.9      

Unsecured debt

     29.3        29.3      

Secured wholesale funding

     *        13.2      

Additional requirements, of which:

     134.0        27.6      

Outflows related to derivatives exposures and other collateral requirements

     10.9        5.2      

Outflows related to loss of funding on debt products

     2.7        2.7      

Credit and liquidity facilities

     120.4        19.7      

Other contractual funding obligations

     0.4        -      

Other contingent funding obligations

     323.1        5.7      

 

 

Total cash outflows

     *        135.8      

 

 

Cash Inflows

     

Secured lending (e.g. reverse repos)

     112.1        17.2      

Inflows from fully performing exposures

     12.4        9.6      

Other cash inflows

     21.2        21.2      

 

 

Total cash inflows

     145.7        48.0      

 

 
            Total adjusted value (4)      

 

 

Total HQLA

        129.8      

Total net cash outflows

        87.8      

 

 

Liquidity Coverage Ratio (%)

        148      

 

 
  For the quarter ended April 30, 2017           Total adjusted value (4)      

 

 

Total HQLA

        134.7      

Total net cash outflows

        99.7      

 

 

Liquidity Coverage Ratio (%)

        136      

 

 

  * Disclosure is not required under the LCR disclosure standard.

  (1) Unweighted values are calculated at market value (for HQLA) or as outstanding balances maturing or callable within 30 days (for inflows and outflows).

  (2) Values are calculated based on the simple average of the daily LCR over 64 business days in Q3 2017.

  (3) Weighted values are calculated after the application of the weights prescribed under the OSFI Liquidity Adequacy Requirements (LAR) Guideline for HQLA and cash inflows and outflows.

  (4) Adjusted values are calculated based on total weighted values after applicable caps as defined by the LAR Guideline.

Funding Strategy

Our funding philosophy requires that secured and unsecured wholesale funding used to support loans and less liquid assets must be of a term (typically maturing in two to ten years) which will support the effective term to maturity of these assets. Wholesale secured and unsecured funding for liquid trading assets is largely shorter term (maturing in one year or less), is aligned with the liquidity of the assets being funded, and is subject to limits on aggregate maturities that are permitted across different time periods. Supplemental liquidity pools are funded with a mix of wholesale term funding.

BMO maintains a large and stable base of customer deposits that, in combination with our strong capital base, is a source of strength. It supports the maintenance of a sound liquidity position and reduces our reliance on wholesale funding. Customer deposits totalled $286.6 billion at July 31, 2017, down from $293.3 billion at April 30, 2017, due to the impact of the weaker U.S. dollar. BMO also receives deposits in support of certain trading activities, receives non-marketable deposits from corporate and institutional customers and issues retail structured notes. These deposits and notes totalled $44.2 billion at July 31, 2017.

Total wholesale funding outstanding, largely consisting of negotiable marketable securities, of $171.8 billion at July 31, 2017 decreased from $177.2 billion at April 30, 2017, due to the impact of the weaker U.S. dollar. Total wholesale funding consists of approximately $52 billion sourced as secured funding and $120 billion as unsecured funding. The mix and maturities of BMO’s wholesale term funding are outlined in Table 24. Additional information on deposit maturities can be found in Note 15 of the unaudited interim consolidated financial statements. BMO maintains a sizeable portfolio of unencumbered liquid assets, totalling $199.1 billion as at July 31, 2017, that can be monetized to meet potential funding requirements, as described on page 27.

Diversification of our wholesale funding sources is an important part of our overall liquidity management strategy. BMO’s wholesale funding activities are well-diversified by jurisdiction, currency, investor segment, instrument and maturity profile. BMO maintains ready access to long-term wholesale funding through various borrowing programs, including a European Note Issuance Program, Canadian, Australian and U.S. Medium-Term Note programs, Canadian and U.S. mortgage securitizations, Canadian credit card and home equity line of credit securitizations, covered bonds and Canadian and U.S. senior unsecured deposits.

 

BMO Financial Group Third Quarter Report 2017 29


BMO’s wholesale funding plan seeks to ensure sufficient funding capacity is available to execute business strategies. The funding plan considers expected maturities, as well as asset and liability growth projected for our businesses in our forecasting and planning process, and assesses funding needs in relation to available potential funding sources. The funding plan is reviewed annually by the Risk Review Committee and is regularly updated during the year to incorporate actual results and updated forecast information.

 

Wholesale Funding Maturities (Canadian $ in millions) (1)

   Table 24 

 

  As at July 31, 2017  

Less than

1 month

 

1 to 3

months

 

3 to 6

months

 

6 to 12

months

 

Subtotal less

than 1 year

 

1 to 2

years

 

Over

2 years

  Total 

  Deposits from banks

  3,169   60   6   -   3,235   -   158   3,393 

  Certificates of deposit and commercial paper

  15,373   20,589   14,851   9,572   60,385   3,671   -   64,056 

  Bearer deposit notes

  152   356   1,521   257   2,286   12   -   2,298 

  Asset-backed commercial paper (ABCP)

  1,218   1,801   881   125   4,025   -   -   4,025 

  Senior unsecured medium-term notes

  373   1,761   2,000   6,801   10,935   8,681   22,056   41,672 

  Senior unsecured structured notes (2)

  -   4   3   32   39   3   2,702   2,744 

  Covered bonds and securitizations

               

  Mortgage and HELOC securitizations

  -   722   570   1,436   2,728   2,524   12,380   17,632 

  Covered bonds

  -   -   534   -   534   3,683   16,241   20,458 

  Credit card securitizations

  -   -   54   593   647   1,135   2,309   4,091 

  Subordinated debt (3)

  -   -   -   -   -   -   6,031   6,031 

  Other (4)

  -   3,736   623   467   4,826   -   623   5,449 

  Total

  20,285   29,029   21,043   19,283   89,640   19,709   62,500   171,849 

  Of which:

               

  Secured

  1,218   6,259   2,662   2,621   12,760   7,342   31,553   51,655 

  Unsecured

  19,067   22,770   18,381   16,662   76,880   12,367   30,947   120,194 

  Total (5)

  20,285   29,029   21,043   19,283   89,640   19,709   62,500   171,849 

  (1) Wholesale unsecured funding primarily includes funding raised through the issuance of marketable, negotiable instruments. Wholesale funding excludes repo transactions and bankers’ acceptances, which are disclosed in the contractual maturity table in Note 15 of the unaudited interim consolidated financial statements, and excludes ABCP issued by certain ABCP conduits that is not consolidated for financial reporting purposes.

  (2) Primarily issued to institutional investors.

  (3) Includes certain subordinated debt instruments reported as deposits or other liabilities for accounting purposes. Subordinated debt is reported in this table in accordance with recommended Enhanced Disclosure Task Force disclosures.

  (4) Refers to Federal Home Loan Bank (FHLB) advances.

  (5) Total wholesale funding consists of Canadian-dollar-denominated funding of $48.6 billion and U.S.-dollar and other foreign-denominated funding of $123.2 billion as at July 31, 2017.

Regulatory Developments

The Net Stable Funding Ratio (NSFR) is a regulatory liquidity metric that was expected to come into force on January 1, 2018. Given the uncertainty whether key foreign markets will implement the revised standard by the January 2018 deadline, OSFI extended the domestic implementation timeline of the NSFR to January 2019. OSFI plans to meet with industry stakeholders in the coming months to review the guideline implementation plans and to clarify the remaining details of the NSFR rules as they relate to the Canadian market.

Credit Rating

The credit ratings assigned to BMO’s short-term and senior long-term debt securities by external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access capital markets at competitive pricing levels. The credit ratings assigned to BMO’s senior debt by rating agencies continue to be indicative of high-grade, high-quality issues. Should our credit ratings experience a downgrade, our costs of funding would likely increase and our access to funding and capital through capital markets could be reduced. A material downgrade of our ratings could also have other consequences, including those set out in Note 8 on page 161 of BMO’s 2016 Annual Report.

We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The incremental collateral required is based on mark-to-market exposure, collateral valuations, and collateral threshold arrangements, as applicable. As at July 31, 2017, the bank would be required to provide additional collateral to counterparties totalling $199 million, $466 million and $873 million under a one-notch, two-notch and three-notch downgrade, respectively.

On May 10, 2017, Moody’s downgraded the ratings of six Canadian banks, including BMO. The change reflects Moody’s expectation of a more challenging operating environment for banks in Canada. The Baseline Credit Assessment, long-term debt and deposit ratings and Counterparty Risk Assessment assigned to BMO were downgraded by one notch.

 

30 BMO Financial Group Third Quarter Report 2017


European Exposures

BMO’s European exposures were disclosed and discussed on pages 93 and 94 of BMO’s 2016 Annual Report. Our exposure to European countries, as at July 31, 2017, is set out in the tables that follow. Our net portfolio exposures are summarized in Tables 25 and 26 for funded lending, securities (inclusive of credit default swaps (CDS) activity), repo-style transactions and derivatives.

 

European Exposure by Country and Counterparty (1) (Canadian $ in millions)

   Table 25 

 

  As at July 31, 2017  
         Funded lending (2)     Securities (3)(4)      Repo-style transactions and derivatives (5)(6)      Total Net  
  

 

 

 

  

 

 

    

 

 

    
  Country    Total           Bank      Corporate      Sovereign      Total            Bank      Corporate      Sovereign      Total              Exposure    

 

    

 

 

    

 

 

    

 

 

 

GIIPS

                             

Greece

     -            -        -        -        -             -        -        -        -             -        

Ireland (7)

     24            -        -        -        -             303        36        -        339             363        

Italy

     7            -        -        -        -             -        -        -        -             7        

Portugal

     -            -        -        -        -             -        -        -        -             -        

Spain

     135            -        -        -        -             2        -        -        2             137        

 

    

 

 

    

 

 

    

 

 

 

Total – GIIPS

     166            -        -        -        -             305        36        -        341             507        

 

    

 

 

    

 

 

    

 

 

 

Eurozone (excluding GIIPS)

                             

France

     163            122        -        117        239             293        17        19        329             731        

Germany

     264            1        48        1,003        1,052             29        2        25        56             1,372        

Netherlands

     508            347        15        -        362             8        37        -        45             915        

Other (8)

     114            -        42        151        193             3        11        -        14             321        

 

    

 

 

    

 

 

    

 

 

 

Total – Eurozone (excluding GIIPS)

     1,049            470        105        1,271        1,846             333        67        44        444             3,339        

 

    

 

 

    

 

 

    

 

 

 

Rest of Europe

                             

Denmark

     8            270        -        149        419             -        -        -        -             427        

Sweden

     54            131        -        236        367             3        1        -        4             425        

United Kingdom

     1,566            77        74        185        336             278        53        23        354             2,256        

Other (8)

     222            32        -        -        32             13        11        7        31             285        

 

    

 

 

    

 

 

    

 

 

 

Total – Rest of Europe

     1,850            510        74        570        1,154             294        65        30        389             3,393        

 

    

 

 

    

 

 

    

 

 

 

Total – All of Europe (9)

     3,065                980        179        1,841        3,000                 932        168        74        1,174               7,239        

 

 

As at April 30, 2017

 

         Funded lending (2)     Securities (3)      Repo-style transactions and derivatives (5)(6)      Total Net  
  

 

 

 

  

 

 

    

 

 

    
  Country    Total           Bank      Corporate      Sovereign      Total            Bank      Corporate      Sovereign      Total                Exposure      

 

    

 

 

    

 

 

    

 

 

 

Total – GIIPS

     182            -        -        -        -             256        12        -        268             450        

 

    

 

 

    

 

 

    

 

 

 

Total – Eurozone (excluding GIIPS)

     1,005            509        26        1,237        1,772             76        42        26        144             2,921        

 

    

 

 

    

 

 

    

 

 

 

Total – Rest of Europe

     1,155            562        58        576        1,196             451        45        30        526             2,877        

 

    

 

 

    

 

 

    

 

 

 

Total – All of Europe (9)

     2,342            1,071        84        1,813        2,968             783        99        56        938             6,248        

 

 

 As at October 31, 2016

 

         Funded lending (2)     Securities (3)      Repo-style transactions and derivatives (5)(6)      Total Net  
  

 

 

 

  

 

 

    

 

 

    
  Country    Total           Bank      Corporate      Sovereign      Total            Bank      Corporate      Sovereign      Total                  Exposure        

 

    

 

 

    

 

 

    

 

 

 

Total – GIIPS

     78            6        -        -        6             302        58        -        360             444        

 

    

 

 

    

 

 

    

 

 

 

Total – Eurozone (excluding GIIPS)

     1,064            464        48        1,580        2,092             103        84        32        219             3,375        

 

    

 

 

    

 

 

    

 

 

 

Total – Rest of Europe

     881            1,133        57        605        1,795             1,357        152        9        1,518             4,194        

 

    

 

 

    

 

 

    

 

 

 

Total – All of Europe (9)

     2,023            1,603        105        2,185        3,893             1,762        294        41        2,097             8,013        

 

 

  Refer to footnotes in Table 26.

 

BMO Financial Group Third Quarter Report 2017 31


European Lending Exposure by Country and Counterparty (1) (Canadian $ in millions)

   Table 26 

 

    Lending (2)  
 

 

 
        Funded lending as at July 31, 2017                             As at July 31, 2017                             As at April 30, 2017                             As at October 31, 2016      
 

 

     

 

 

       

 

 

       

 

 

 
  Country           Bank   Corporate   Sovereign                 Commitments     Funded                     Commitments     Funded                     Commitments     Funded      

 

     

 

 

       

 

 

       

 

 

 

  GIIPS

                             

  Greece

  -     -   -           -       -               -       -               -           -      

  Ireland (7)

  -     24   -           118       24               129       26               126           25      

  Italy

  -     7   -           7       7               23       23               -           -      

  Portugal

  -     -   -           -       -               -       -               -           -      

  Spain

  129     6   -           165       135               179       133               80           53      

 

     

 

 

       

 

 

       

 

 

 

  Total – GIIPS

  129     37   -           290       166               331       182               206           78      

 

     

 

 

       

 

 

       

 

 

 

  Eurozone (excluding GIIPS)

                             

  France

  144     19   -           240       163               175       131               155           111      

  Germany

  51     212   1           352       264               232       170               207           133      

  Netherlands

  40     468   -           597       508               657       526               661           502      

  Other (8)

  84     30   -           232       114               271       178               436           318      

 

     

 

 

       

 

 

       

 

 

 

  Total – Eurozone (excluding GIIPS)

  319     729   1           1,421       1,049               1,335       1,005               1,459           1,064      

 

     

 

 

       

 

 

       

 

 

 

  Rest of Europe

                             

  Denmark

  8     -   -           8       8               14       14               11           11      

  Sweden

  13     41   -           190       54               210       57               202           59      

  United Kingdom

  648     918   -           1,816       1,566               1,162       868               808           543      

  Other (8)

  83     139   -           411       222               412       216               415           268      

 

     

 

 

       

 

 

       

 

 

 

  Total – Rest of Europe

  752     1,098   -           2,425       1,850               1,798       1,155               1,436           881      

 

     

 

 

       

 

 

       

 

 

 

  Total – All of Europe (9)

  1,200     1,864   1           4,136       3,065               3,464       2,342               3,101           2,023      

 

 

  (1) BMO has the following indirect exposures to Europe as at July 31, 2017:

      – Collateral of 1,135 million to support trading activity in securities (38 million from GIIPS) and 444 million of cash collateral held.

      – Guarantees of $1.1 billion ($28 million to GIIPS).

  (2) Funded lending includes loans.

  (3) Securities include cash products, insurance investments and traded credit.

  (4) BMO’s total net notional CDS exposure (embedded as part of the securities exposure in this table) to Europe was $221 million, with no net single-name* CDS exposure to GIIPS countries as at July 31, 2017 (*includes a net position of $192 million (bought protection) on a CDS Index, of which 19% is comprised of GIIPS domiciled entities).

  (5) Repo-style transactions are primarily with bank counterparties for which BMO holds collateral ($13 billion for Europe as at July 31 2017).

  (6) Derivatives amounts are marked-to-market, incorporating transaction netting where master netting agreements with counterparties have been entered into, and collateral offsets for counterparties where a Credit Support Annex is in effect.

  (7) Does not include Irish subsidiary reserves we are required to maintain with the Irish Central Bank of $30 million as at July 31, 2017.

  (8) Includes countries with less than $300 million net exposure, with $6 million exposure to the Russian Federation as at July 31, 2017.

  (9) Of our total net direct exposure to Europe, approximately 48% was to counterparties in countries with a rating of Aaa/AAA from at least one of Moody’s and S&P.

Caution

This Risk Management section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.

 

32 BMO Financial Group Third Quarter Report 2017


INVESTOR AND MEDIA PRESENTATION

Investor Presentation Materials

Interested parties are invited to visit our website at www.bmo.com/investorrelations to review our 2016 Annual Report, quarterly presentation materials and supplementary financial information package.

Quarterly Conference Call and Webcast Presentations

Interested parties are also invited to listen to our quarterly conference call on Tuesday, August 29, 2017, at 2:00 p.m. (EDT). At that time, senior BMO executives will comment on results for the quarter and respond to questions from the investor community. The call may be accessed by telephone at 416-641-2144 (from within Toronto) or 1-888-789-9572 (toll-free outside Toronto) Passcode: 5126346. A replay of the conference call can be accessed until Monday, December 4, 2017, by calling 905-694-9451 (from within Toronto) or 1-800-408-3053 (toll-free outside Toronto) and entering Passcode: 5740558.

A live webcast of the call can be accessed on our website at www.bmo.com/investorrelations. A replay can also be accessed on the site.

Media Relations Contacts

Paul Gammal, Toronto, paul.gammal@bmo.com, 416-867-3996

Investor Relations Contacts

Jill Homenuk, Head, Investor Relations, jill.homenuk@bmo.com, 416-867-4770

Christine Viau, Director, Investor Relations, christine.viau@bmo.com, 416-867-6956

 

 

 

Shareholder Dividend Reinvestment and Share Purchase Plan (the Plan)

Average market price as defined under the Plan

May 2017: $92.90

June 2017: $94.64

July 2017: $95.63

 

For dividend information, change in shareholder address or to advise of duplicate mailings, please contact

Computershare Trust Company of Canada

100 University Avenue, 9th Floor

Toronto, Ontario M5J 2Y1

Telephone: 1-800-340-5021 (Canada and the United States)

Telephone: (514) 982-7800 (international)

Fax: 1-888-453-0330 (Canada and the United States)

Fax: (416) 263-9394 (international)

E-mail: service@computershare.com

  

For other shareholder information, including the notice forour normal course issuer bid, please contact

Bank of Montreal

Shareholder Services

Corporate Secretary’s Department

One First Canadian Place, 21st Floor

Toronto, Ontario M5X 1A1

Telephone: (416) 867-6786

Fax: (416) 867-6793

E-mail: corp.secretary@bmo.com

 

For further information on this document, please contact

Bank of Montreal

Investor Relations Department

P.O. Box 1, One First Canadian Place, 10th Floor

Toronto, Ontario M5X 1A1

 

To review financial results and regulatory filings and
disclosures online, please visit our website at www.bmo.com/investorrelations.

 

 

Our 2016 Annual MD&A, audited annual consolidated financial statements and annual report on Form 40-F (filed with the U.S. Securities and Exchange Commission) are available online at www.bmo.com/investorrelations and at www.sedar.com. Printed copies of the bank’s complete 2016 audited financial statements are available free of charge upon request at 416-867-6785 or corp.secretary@bmo.com.

® Registered trademark of Bank of Montreal

 

Annual Meeting 2018

The next Annual Meeting of Shareholders will be held

on Thursday, April 5, 2018, in Toronto, Ontario.

 

54 BMO Financial Group Third Quarter Report 2017