Interim Consolidated Financial Statements
Consolidated Statement of Income
(Unaudited) (Canadian $ in millions, except as noted) | For the three months ended | For the nine months ended | ||||||||||||||||||
July 31, 2020 | April 30, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | ||||||||||||||||
Interest, Dividend and Fee Income | ||||||||||||||||||||
Loans | $ | 4,204 | $ | 4,689 | $ | 5,120 | $ | 13,856 | $ | 14,752 | ||||||||||
Securities (Note 2) | 1,249 | 1,363 | 1,407 | 3,971 | 4,126 | |||||||||||||||
Deposits with banks | 49 | 101 | 187 | 343 | 592 | |||||||||||||||
5,502 | 6,153 | 6,714 | 18,170 | 19,470 | ||||||||||||||||
Interest Expense | ||||||||||||||||||||
Deposits | 1,292 | 1,738 | 2,224 | 5,157 | 6,413 | |||||||||||||||
Subordinated debt | 65 | 66 | 69 | 201 | 208 | |||||||||||||||
Other liabilities (Note 1) | 610 | 831 | 1,204 | 2,371 | 3,325 | |||||||||||||||
1,967 | 2,635 | 3,497 | 7,729 | 9,946 | ||||||||||||||||
Net Interest Income | 3,535 | 3,518 | 3,217 | 10,441 | 9,524 | |||||||||||||||
Non-Interest Revenue | ||||||||||||||||||||
Securities commissions and fees | 260 | 277 | 259 | 789 | 761 | |||||||||||||||
Deposit and payment service charges | 299 | 313 | 309 | 916 | 890 | |||||||||||||||
Trading revenues (losses) | 68 | (217 | ) | 115 | (8 | ) | 319 | |||||||||||||
Lending fees | 309 | 322 | 314 | 956 | 879 | |||||||||||||||
Card fees | 85 | 80 | 109 | 264 | 330 | |||||||||||||||
Investment management and custodial fees | 455 | 430 | 444 | 1,341 | 1,298 | |||||||||||||||
Mutual fund revenues | 348 | 348 | 357 | 1,062 | 1,060 | |||||||||||||||
Underwriting and advisory fees | 287 | 239 | 260 | 811 | 754 | |||||||||||||||
Securities gains (losses), other than trading | 31 | (11 | ) | 90 | 84 | 181 | ||||||||||||||
Foreign exchange gains, other than trading | 21 | 21 | 48 | 89 | 137 | |||||||||||||||
Insurance revenues (losses) | 1,321 | (166 | ) | 989 | 2,035 | 2,748 | ||||||||||||||
Investments in associates and joint ventures | 52 | 34 | 31 | 112 | 112 | |||||||||||||||
Other | 118 | 76 | 124 | 308 | 403 | |||||||||||||||
3,654 | 1,746 | 3,449 | 8,759 | 9,872 | ||||||||||||||||
Total Revenue | 7,189 | 5,264 | 6,666 | 19,200 | 19,396 | |||||||||||||||
Provision for Credit Losses (Note 3) | 1,054 | 1,118 | 306 | 2,521 | 619 | |||||||||||||||
Insurance Claims, Commissions and Changes in Policy Benefit Liabilities | 1,189 | (197 | ) | 887 | 1,708 | 2,374 | ||||||||||||||
Non-Interest Expense | ||||||||||||||||||||
Employee compensation | 1,964 | 1,902 | 1,960 | 5,994 | 6,042 | |||||||||||||||
Premises and equipment (Note 1) | 785 | 806 | 734 | 2,348 | 2,229 | |||||||||||||||
Amortization of intangible assets | 154 | 156 | 135 | 461 | 406 | |||||||||||||||
Travel and business development | 57 | 118 | 142 | 296 | 411 | |||||||||||||||
Communications | 71 | 83 | 72 | 233 | 224 | |||||||||||||||
Professional fees | 135 | 128 | 141 | 396 | 403 | |||||||||||||||
Other | 278 | 323 | 307 | 901 | 928 | |||||||||||||||
3,444 | 3,516 | 3,491 | 10,629 | 10,643 | ||||||||||||||||
Income Before Provision for Income Taxes | 1,502 | 827 | 1,982 | 4,342 | 5,760 | |||||||||||||||
Provision for income taxes (Note 11) | 270 | 138 | 425 | 829 | 1,196 | |||||||||||||||
Net Income attributable to Equity Holders of the Bank | $ | 1,232 | $ | 689 | $ | 1,557 | $ | 3,513 | $ | 4,564 | ||||||||||
Earnings Per Share (Canadian $) (Note 10) | ||||||||||||||||||||
Basic | $ | 1.81 | $ | 1.00 | $ | 2.34 | $ | 5.18 | $ | 6.90 | ||||||||||
Diluted | 1.81 | 1.00 | 2.34 | 5.18 | 6.88 | |||||||||||||||
Dividends per common share | 1.06 | 1.06 | 1.03 | 3.18 | 3.03 |
The accompanying notes are an integral part of these interim consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current period’s presentation.
46 BMO Financial Group Third Quarter Report 2020
Interim Consolidated Financial Statements
Consolidated Statement of Comprehensive Income
(Unaudited) (Canadian $ in millions) | For the three months ended | For the nine months ended | ||||||||||||||||||
July 31, 2020 | April 30, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | ||||||||||||||||
Net Income | $ | 1,232 | $ | 689 | $ | 1,557 | $ | 3,513 | $ | 4,564 | ||||||||||
Other Comprehensive Income (Loss), net of taxes | ||||||||||||||||||||
Items that may subsequently be reclassified to net income | ||||||||||||||||||||
Net change in unrealized gains on fair value through OCI debt securities | ||||||||||||||||||||
Unrealized gains on fair value through OCI debt securities arising during the period (1) | 141 | 170 | 112 | 421 | 345 | |||||||||||||||
Reclassification to earnings of (gains) in the period (2) | (18 | ) | (36 | ) | (14 | ) | (74 | ) | (43 | ) | ||||||||||
123 | 134 | 98 | 347 | 302 | ||||||||||||||||
Net change in unrealized gains on cash flow hedges | ||||||||||||||||||||
Gains on derivatives designated as cash flow hedges arising during the period (3) | 83 | 1,380 | 290 | 1,673 | 1,480 | |||||||||||||||
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period (4) | (37 | ) | 21 | 36 | 8 | 122 | ||||||||||||||
46 | 1,401 | 326 | 1,681 | 1,602 | ||||||||||||||||
Net gains (losses) on translation of net foreign operations | ||||||||||||||||||||
Unrealized gains (losses) on translation of net foreign operations | (1,180 | ) | 1,487 | (577 | ) | 516 | (46 | ) | ||||||||||||
Unrealized gains (losses) on hedges of net foreign operations (5) | 206 | (304 | ) | 94 | (145 | ) | 4 | |||||||||||||
(974 | ) | 1,183 | (483 | ) | 371 | (42 | ) | |||||||||||||
Items that will not be reclassified to net income | ||||||||||||||||||||
Gains (losses) on remeasurement of pension and other employee future benefit plans (6) | (189 | ) | 73 | (233 | ) | (244 | ) | (383 | ) | |||||||||||
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value (7) | (330 | ) | 351 | 31 | (49 | ) | 12 | |||||||||||||
(519 | ) | 424 | (202 | ) | (293 | ) | (371 | ) | ||||||||||||
Other Comprehensive Income (Loss), net of taxes | (1,324 | ) | 3,142 | (261 | ) | 2,106 | 1,491 | |||||||||||||
Total Comprehensive Income (Loss) attributable to Equity Holders of the Bank | $ | (92 | ) | $ | 3,831 | $ | 1,296 | $ | 5,619 | $ | 6,055 |
(1) | Net of income tax (provision) of $(47) million, $(62) million, $(39) million for the three months ended, and $(147) million, $(117) million for the nine months ended, respectively. |
(2) | Net of income tax provision of $6 million, $10 million, $5 million for the three months ended, and $23 million, $15 million for the nine months ended, respectively. |
(3) | Net of income tax (provision) of $(27) million, $(497) million, $(106) million for the three months ended, and $(600) million, $(536) million for the nine months ended, respectively. |
(4) | Net of income tax provision (recovery) of $13 million, $(7) million, $(13) million for the three months ended, and $(3) million, $(44) million for the nine months ended, respectively. |
(5) | Net of income tax (provision) recovery of $(74) million, $110 million, $(35) million for the three months ended, and $53 million, $(2) million for the nine months ended, respectively. |
(6) | Net of income tax (provision) recovery of $65 million, $(26) million, $83 million for the three months ended, and $85 million, $138 million for the nine months ended, respectively. |
(7) | Net of income tax (provision) recovery of $120 million, $(127) million, $(11) million for the three months ended, and $18 million, $(4) million for the nine months ended, respectively. |
The accompanying notes are an integral part of these interim consolidated financial statements.
BMO Financial Group Third Quarter Report 2020 47
Interim Consolidated Financial Statements
Consolidated Balance Sheet
(Unaudited) (Canadian $ in millions) | As at | |||||||||||
July 31, 2020 | April 30, 2020 | October 31, 2019 | ||||||||||
Assets | ||||||||||||
Cash and Cash Equivalents | $ | 76,590 | $ | 71,593 | $ | 48,803 | ||||||
Interest Bearing Deposits with Banks | 8,364 | 7,687 | 7,987 | |||||||||
Securities (Note 2) | ||||||||||||
Trading | 89,207 | 83,362 | 85,903 | |||||||||
Fair value through profit or loss | 14,053 | 13,572 | 13,704 | |||||||||
Fair value through other comprehensive income | 78,493 | 74,476 | 64,515 | |||||||||
Debt securities at amortized cost | 45,229 | 41,592 | 24,472 | |||||||||
Investments in associates and joint ventures | 923 | 906 | 844 | |||||||||
227,905 | 213,908 | 189,438 | ||||||||||
Securities Borrowed or Purchased Under Resale Agreements | 118,713 | 119,058 | 104,004 | |||||||||
Loans | ||||||||||||
Residential mortgages | 125,481 | 125,534 | 123,740 | |||||||||
Consumer instalment and other personal | 69,168 | 69,818 | 67,736 | |||||||||
Credit cards | 7,947 | 7,672 | 8,859 | |||||||||
Business and government | 245,983 | 268,695 | 227,609 | |||||||||
448,579 | 471,719 | 427,944 | ||||||||||
Allowance for credit losses (Note 3) | (3,251 | ) | (2,776 | ) | (1,850 | ) | ||||||
445,328 | 468,943 | 426,094 | ||||||||||
Other Assets | ||||||||||||
Derivative instruments | 38,796 | 41,150 | 22,144 | |||||||||
Customers’ liability under acceptances | 18,032 | 22,473 | 23,593 | |||||||||
Premises and equipment (Note 1) | 3,881 | 3,973 | 2,055 | |||||||||
Goodwill | 6,566 | 6,785 | 6,340 | |||||||||
Intangible assets | 2,470 | 2,526 | 2,424 | |||||||||
Current tax assets | 1,717 | 1,898 | 1,165 | |||||||||
Deferred tax assets | 1,456 | 1,391 | 1,568 | |||||||||
Other | 23,690 | 25,682 | 16,580 | |||||||||
96,608 | 105,878 | 75,869 | ||||||||||
Total Assets | $ | 973,508 | $ | 987,067 | $ | 852,195 | ||||||
Liabilities and Equity | ||||||||||||
Deposits (Note 5) | $ | 660,600 | $ | 653,710 | $ | 568,143 | ||||||
Other Liabilities | ||||||||||||
Derivative instruments | 39,859 | 45,909 | 23,598 | |||||||||
Acceptances | 18,032 | 22,473 | 23,593 | |||||||||
Securities sold but not yet purchased | 30,579 | 30,212 | 26,253 | |||||||||
Securities lent or sold under repurchase agreements | 99,854 | 105,943 | 86,656 | |||||||||
Securitization and structured entities’ liabilities | 27,461 | 27,888 | 27,159 | |||||||||
Current tax liabilities | 56 | 88 | 55 | |||||||||
Deferred tax liabilities | 82 | 65 | 60 | |||||||||
Other (Note 1) | 33,885 | 38,201 | 38,607 | |||||||||
249,808 | 270,779 | 225,981 | ||||||||||
Subordinated Debt (Note 5) | 8,513 | 7,344 | 6,995 | |||||||||
Equity | ||||||||||||
Preferred shares and other equity instruments (Note 6) | 5,348 | 5,348 | 5,348 | |||||||||
Common shares (Note 6) | 13,200 | 13,000 | 12,971 | |||||||||
Contributed surplus | 302 | 301 | 303 | |||||||||
Retained earnings (Note 1) | 29,902 | 29,426 | 28,725 | |||||||||
Accumulated other comprehensive income | 5,835 | 7,159 | 3,729 | |||||||||
Total Equity | 54,587 | 55,234 | 51,076 | |||||||||
Total Liabilities and Equity | $ | 973,508 | $ | 987,067 | $ | 852,195 |
The accompanying notes are an integral part of these interim consolidated financial statements.
48 BMO Financial Group Third Quarter Report 2020
Interim Consolidated Financial Statements
Consolidated Statement of Changes in Equity
(Unaudited) (Canadian $ in millions) | For the three months ended | For the nine months ended | ||||||||||||||
July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
Preferred Shares and Other Equity Instruments (Note 6) | ||||||||||||||||
Balance at beginning of period | $ | 5,348 | $ | 4,690 | $ | 5,348 | $ | 4,340 | ||||||||
Issued during the period | - | 658 | - | 1,008 | ||||||||||||
Balance at End of Period | 5,348 | 5,348 | 5,348 | 5,348 | ||||||||||||
Common Shares (Note 6) | ||||||||||||||||
Balance at beginning of period | 13,000 | 12,939 | 12,971 | 12,929 | ||||||||||||
Issued under the Shareholder Dividend Reinvestment and Share Purchase Plan | 214 | - | 214 | - | ||||||||||||
Issued under the Stock Option Plan | 1 | 19 | 30 | 49 | ||||||||||||
Repurchased for cancellation or for treasury shares | (15 | ) | - | (15 | ) | (20 | ) | |||||||||
Balance at End of Period | 13,200 | 12,958 | 13,200 | 12,958 | ||||||||||||
Contributed Surplus | ||||||||||||||||
Balance at beginning of period | 301 | 307 | 303 | 300 | ||||||||||||
Stock option expense, net of options exercised | 1 | (3 | ) | (1 | ) | 1 | ||||||||||
Other | - | (1 | ) | - | 2 | |||||||||||
Balance at End of Period | 302 | 303 | 302 | 303 | ||||||||||||
Retained Earnings | ||||||||||||||||
Balance at beginning of period | 29,426 | 27,405 | 28,725 | 25,850 | ||||||||||||
Impact from adopting IFRS 16 (Note 1) | - | na | (59 | ) | na | |||||||||||
Net income attributable to equity holders of the bank | 1,232 | 1,557 | 3,513 | 4,564 | ||||||||||||
Dividends on preferred shares and distributions payable on other equity instruments | (73 | ) | (59 | ) | (195 | ) | (159 | ) | ||||||||
Dividends on common shares | (682 | ) | (658 | ) | (2,038 | ) | (1,936 | ) | ||||||||
Share issue expense | - | (4 | ) | - | (8 | ) | ||||||||||
Common shares repurchased for cancellation (Note 6) | - | - | - | (70 | ) | |||||||||||
Net discount on sale of treasury shares | (1 | ) | - | (44 | ) | - | ||||||||||
Balance at End of Period | 29,902 | 28,241 | 29,902 | 28,241 | ||||||||||||
Accumulated Other Comprehensive Income (Loss) on Fair Value through OCI Securities, net of taxes | ||||||||||||||||
Balance at beginning of period | 250 | (111 | ) | 26 | (315 | ) | ||||||||||
Unrealized gains on fair value through OCI debt securities arising during the period | 141 | 112 | 421 | 345 | ||||||||||||
Reclassification to earnings of (gains) on fair value through OCI debt securities during the period | (18 | ) | (14 | ) | (74 | ) | (43 | ) | ||||||||
Balance at End of Period | 373 | (13 | ) | 373 | (13 | ) | ||||||||||
Accumulated Other Comprehensive Income on Cash Flow Hedges, net of taxes | ||||||||||||||||
Balance at beginning of period | 2,148 | 202 | 513 | (1,074 | ) | |||||||||||
Gains on derivatives designated as cash flow hedges arising during the period | 83 | 290 | 1,673 | 1,480 | ||||||||||||
Reclassification to earnings of (gains) losses on derivatives designated as cash flow hedges in the period | (37 | ) | 36 | 8 | 122 | |||||||||||
Balance at End of Period | 2,194 | 528 | 2,194 | 528 | ||||||||||||
Accumulated Other Comprehensive Income on Translation of Net Foreign Operations, net of taxes | ||||||||||||||||
Balance at beginning of period | 5,048 | 4,168 | 3,703 | 3,727 | ||||||||||||
Unrealized gains (losses) on translation of net foreign operations | (1,180 | ) | (577 | ) | 516 | (46 | ) | |||||||||
Unrealized gains (losses) on hedges of net foreign operations | 206 | 94 | (145 | ) | 4 | |||||||||||
Balance at End of Period | 4,074 | 3,685 | 4,074 | 3,685 | ||||||||||||
Accumulated Other Comprehensive (Loss) on Pension and Other Employee Future Benefit Plans, net of taxes | ||||||||||||||||
Balance at beginning of period | (438 | ) | 19 | (383 | ) | 169 | ||||||||||
(Losses) on remeasurement of pension and other employee future benefit plans | (189 | ) | (233 | ) | (244 | ) | (383 | ) | ||||||||
Balance at End of Period | (627 | ) | (214 | ) | (627 | ) | (214 | ) | ||||||||
Accumulated Other Comprehensive (Loss) on Own Credit Risk on Financial Liabilities Designated at Fair Value, net of taxes | ||||||||||||||||
Balance at beginning of period | 151 | (224 | ) | (130 | ) | (205 | ) | |||||||||
Gains (losses) on remeasurement of own credit risk on financial liabilities designated at fair value | (330 | ) | 31 | (49 | ) | 12 | ||||||||||
Balance at End of Period | (179 | ) | (193 | ) | (179 | ) | (193 | ) | ||||||||
Total Accumulated Other Comprehensive Income | 5,835 | 3,793 | 5,835 | 3,793 | ||||||||||||
Total Equity | $ | 54,587 | $ | 50,643 | $ | 54,587 | $ | 50,643 |
na – not applicable due to IFRS 16 adoption.
The accompanying notes are an integral part of these interim consolidated financial statements.
BMO Financial Group Third Quarter Report 2020 49
Interim Consolidated Financial Statements
Consolidated Statement of Cash Flows
(Unaudited) (Canadian $ in millions) | For the three months ended | For the nine months ended | ||||||||||||||
July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net Income | $ | 1,232 | $ | 1,557 | $ | 3,513 | $ | 4,564 | ||||||||
Adjustments to determine net cash flows provided by (used in) operating activities | ||||||||||||||||
Provision on securities, other than trading | 1 | 1 | 2 | 2 | ||||||||||||
Net (gain) on securities, other than trading | (32 | ) | (91 | ) | (86 | ) | (183 | ) | ||||||||
Net (increase) decrease in trading securities | (7,319 | ) | 5,290 | (1,624 | ) | 4,814 | ||||||||||
Provision for credit losses (Note 3) | 1,054 | 306 | 2,521 | 619 | ||||||||||||
Change in derivative instruments – (increase) decrease in derivative asset | 5,863 | (196 | ) | (14,158 | ) | 5,348 | ||||||||||
– increase (decrease) in derivative liability | (6,918 | ) | 350 | 15,342 | (2,595 | ) | ||||||||||
Amortization of premises and equipment | 198 | 110 | 598 | 326 | ||||||||||||
Amortization of other assets | 48 | 56 | 152 | 163 | ||||||||||||
Amortization of intangible assets | 154 | 135 | 461 | 406 | ||||||||||||
Net (increase) decrease in deferred income tax asset | (90 | ) | 84 | 132 | 386 | |||||||||||
Net increase (decrease) in deferred income tax liability | 16 | 5 | (1 | ) | 2 | |||||||||||
Net (increase) decrease in current income tax asset | 90 | 11 | (492 | ) | 257 | |||||||||||
Net (decrease) in current income tax liability | (19 | ) | (6 | ) | (9 | ) | (17 | ) | ||||||||
Change in accrued interest – (increase) decrease in interest receivable | 242 | 80 | 319 | (117 | ) | |||||||||||
– increase (decrease) in interest payable | 14 | 131 | (198 | ) | 303 | |||||||||||
Changes in other items and accruals, net | (334 | ) | (1,934 | ) | (6,870 | ) | (2,232 | ) | ||||||||
Net increase in deposits | 19,630 | 9,149 | 88,368 | 33,047 | ||||||||||||
Net (increase) decrease in loans | 14,938 | (7,568 | ) | (19,327 | ) | (34,470 | ) | |||||||||
Net increase (decrease) in securities sold but not yet purchased | 724 | (4,445 | ) | 4,081 | (1,430 | ) | ||||||||||
Net increase (decrease) in securities lent or sold under repurchase agreements | (3,645 | ) | 3,772 | 11,616 | 23,561 | |||||||||||
Net (increase) decrease in securities borrowed or purchased under resale agreements | (1,979 | ) | 2,528 | (13,514 | ) | (22,086 | ) | |||||||||
Net increase (decrease) in securitization and structured entities’ liabilities | (101 | ) | 18 | 191 | 483 | |||||||||||
Net Cash Provided by Operating Activities | 23,767 | 9,343 | 71,017 | 11,151 | ||||||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Net increase (decrease) in liabilities of subsidiaries | (5,326 | ) | 81 | (8,113 | ) | (1,267 | ) | |||||||||
Proceeds from issuance of covered bonds | - | 2,290 | 4,425 | 4,168 | ||||||||||||
Redemption/buyback of covered bonds | (1,371 | ) | (1,511 | ) | (6,868 | ) | (3,765 | ) | ||||||||
Proceeds from issuance of subordinated debt (Note 5) | 1,250 | - | 1,250 | - | ||||||||||||
Proceeds from issuance of preferred shares and other equity instruments (Note 6) | - | 658 | - | 1,008 | ||||||||||||
Share issue expense | - | (4 | ) | - | (8 | ) | ||||||||||
Net proceeds from issuance (repurchase) of common shares or treasury shares (Note 6) | (15 | ) | 17 | (48 | ) | 43 | ||||||||||
Common shares repurchased for cancellation (Note 6) | - | - | - | (90 | ) | |||||||||||
Cash dividends and distributions paid | (516 | ) | (687 | ) | (1,974 | ) | (2,035 | ) | ||||||||
Repayment of lease liabilities (1) | (82 | ) | - | (250 | ) | - | ||||||||||
Net Cash Provided by (Used in) Financing Activities | (6,060 | ) | 844 | (11,578 | ) | (1,946 | ) | |||||||||
Cash Flows from Investing Activities | ||||||||||||||||
Net (increase) decrease in interest bearing deposits with banks | (950 | ) | 508 | (280 | ) | 1,420 | ||||||||||
Purchases of securities, other than trading | (20,449 | ) | (16,754 | ) | (73,897 | ) | (43,019 | ) | ||||||||
Maturities of securities, other than trading | 5,050 | 2,749 | 12,539 | 10,538 | ||||||||||||
Proceeds from sales of securities, other than trading | 5,223 | 7,710 | 30,556 | 20,033 | ||||||||||||
Premises and equipment – net (purchases) | (74 | ) | (117 | ) | (273 | ) | (303 | ) | ||||||||
Purchased and developed software – net (purchases) | (125 | ) | (153 | ) | (490 | ) | (457 | ) | ||||||||
Acquisitions | - | - | (186 | ) | - | |||||||||||
Net Cash (Used in) Investing Activities | (11,325 | ) | (6,057 | ) | (32,031 | ) | (11,788 | ) | ||||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (1,385 | ) | (1,031 | ) | 379 | (621 | ) | |||||||||
Net increase (decrease) in Cash and Cash Equivalents | 4,997 | 3,099 | 27,787 | (3,204 | ) | |||||||||||
Cash and Cash Equivalents at Beginning of Period | 71,593 | 35,839 | 48,803 | 42,142 | ||||||||||||
Cash and Cash Equivalents at End of Period | $ | 76,590 | $ | 38,938 | $ | 76,590 | $ | 38,938 | ||||||||
Supplemental Disclosure of Cash Flow Information | ||||||||||||||||
Net cash provided by operating activities includes: | ||||||||||||||||
Interest paid in the period | $ | 1,974 | $ | 3,382 | $ | 7,905 | $ | 9,648 | ||||||||
Income taxes paid in the period | $ | 140 | $ | 432 | $ | 1,732 | $ | 1,145 | ||||||||
Interest received in the period | $ | 5,241 | $ | 6,339 | $ | 16,988 | $ | 17,979 | ||||||||
Dividends received in the period | $ | 466 | $ | 431 | $ | 1,289 | $ | 1,274 |
(1) | Prior to adoption of IFRS 16, repayments of finance lease liabilities were included in “Net Cash Provided by Operating Activities“. |
The accompanying notes are an integral part of these interim consolidated financial statements.
Certain comparative figures have been reclassified to conform with the current period’s presentation.
50 BMO Financial Group Third Quarter Report 2020
Notes to Consolidated Financial Statements
July 31, 2020 (Unaudited)
Note 1: Basis of Presentation
Bank of Montreal (“the bank”) is a chartered bank under the Bank Act (Canada) and is a public company incorporated in Canada. We are a highly diversified financial services company, providing a broad range of personal and commercial banking, wealth management and investment banking products and services. The bank’s head office is at 129 rue Saint Jacques, Montreal, Quebec. Our executive offices are at 100 King Street West, 1 First Canadian Place, Toronto, Ontario. Our common shares are listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange.
These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”) using the same accounting policies as disclosed in our annual consolidated financial statements for the year ended October 31, 2019, with the exception of the adoption of IFRS 16 Leases, IFRS Interpretations Committee Interpretation 23 Uncertainty Over Income Tax Treatments (“IFRIC 23”) and Amendments to IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”) and IFRS 7 Financial Instruments: Disclosures (“IFRS 7”), as a result of interest rate benchmark reform discussed below. These condensed interim consolidated financial statements should be read in conjunction with the notes to our annual consolidated financial statements for the year ended October 31, 2019 as set out on pages 142 to 207 of our 2019 Annual Report. We also comply with interpretations of International Financial Reporting Standards (“IFRS”) by our regulator, the Office of the Superintendent of Financial Institutions of Canada (“OSFI”). These interim consolidated financial statements were authorized for issue by the Board of Directors on August 25, 2020.
Changes in Accounting Policy
Leases
Effective November 1, 2019, we adopted IFRS 16 Leases (“IFRS 16”), which provides guidance whereby lessees are required to recognize a liability for the present value of future lease payments and record a corresponding asset on the balance sheet for most leases. There are minimal changes to the accounting from the lessor’s perspective.
The main impact for the bank is recording real estate leases on the balance sheet. Previously most of our real estate leases were classified as operating leases, whereby we recorded the lease expense over the lease term with no asset or liability recorded on the balance sheet other than related leasehold improvements. On adoption, we elected to exclude intangibles from the scope of lease accounting.
We recalculated the right-of-use asset as if we had always applied IFRS 16 for a selection of leases and for the remaining leases, we set the right-of-use asset equal to the lease liability. We will continue to account for low dollar value leases as executory contracts with lease expense recorded over the lease term and no corresponding right-of-use asset or lease liability. In addition, we combined lease and non-lease components (for example maintenance and utilities that have fixed payments) in the calculation of right-of-use assets and lease liabilities when applicable.
On transition, we recognized the cumulative effect of adoption in opening retained earnings as at November 1, 2019 with no changes to prior periods. The impact to the Consolidated Balance Sheet as at November 1, 2019 was an increase in premises and equipment of $1,965 million, an increase in other liabilities of $2,024 million, and a decrease in retained earnings of $80 million ($59 million after tax).
The following table sets out a reconciliation of our operating lease commitments, as disclosed under IAS 17 Leases as at October 31, 2019, which were used to derive the lease liabilities as at November 1, 2019.
(Canadian $ in millions) | November 1, 2019 | |||
Operating lease commitment at October 31, 2019 as disclosed in our consolidated financial statements | 3,800 | |||
Discounted using the incremental borrowing rate at November 1, 2019 | (310 | ) | ||
Finance lease liabilities recognized as at October 31, 2019 | 41 | |||
Recognition exemption for low-value asset leases | (13 | ) | ||
Extension and termination options reasonably certain to be exercised | 37 | |||
Executory costs not included in the lease liability | (166 | ) | ||
Leases signed but not yet started | (1,222 | ) | ||
Lease liabilities recognized at November 1, 2019 | 2,167 |
When measuring lease liabilities, we discounted lease payments using our incremental borrowing rate at November 1, 2019. The weighted-average rate applied was 2.52%.
When we enter into new arrangements as a lessee, a right-of-use asset is recognized equal to the lease liability, which is calculated based on the future lease payments discounted at our incremental borrowing rate over the lease term. The lease term is based on the non-cancellable period and includes any options to extend or terminate which we are reasonably certain to exercise.
The right-of-use asset is depreciated on a straight-line basis, based on the shorter of useful life of the underlying asset or the lease term, and is adjusted for impairment losses, if any.
The lease liability accretes interest which is recognized in interest expense, other liabilities, based on the effective interest method over the lease term. The lease liability is remeasured when decisions are made to exercise options under the lease arrangement or when the likelihood of exercising an option within the lease changes.
Amounts relating to leases of low value are expensed when incurred in non-interest expense, premises and equipment.
BMO Financial Group Third Quarter Report 2020 51
Uncertainty Over Income Tax Treatment
Effective November 1, 2019, we adopted IFRIC 23. The Interpretation clarifies the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The Interpretation had no impact on our financial results on adoption.
Interbank Offered Rate (“IBOR”) Reform
Effective November 1, 2019, we early adopted the IASB’s Phase 1 amendments to IAS 39 and IFRS 7, which provide hedge accounting relief from the uncertainty arising from IBOR reform during the period prior to replacement of IBORs. These amendments modify certain hedge accounting requirements, allowing us to assume the interest rate benchmark on which the cash flows of the hedged item and the hedging instrument are based are not altered as a result of IBOR reform, allowing hedge accounting to continue. They also provide an exception from the requirement to discontinue hedge accounting if a hedging relationship does not meet the effectiveness requirements as a result of IBOR reform.
Mandatory application of the amendments ends at the earlier of when the uncertainty regarding the timing and amount of interest rate benchmark-based cash flows is no longer present and discontinuation of the hedging relationship.
Under IBOR reform, certain benchmark rates may be subject to discontinuance, changes in methodology, increased volatility or decreased liquidity during the transition from IBORs to alternative rates. Banks will cease rate submissions for the calculation of the London Interbank Offered Rates after December 31, 2021.
In order to manage the transition from IBORs to alternative rates, our enterprise-wide IBOR Transition Office is evaluating potential changes to market infrastructures on our risk framework, models, systems and processes, and reviewing legal documents to ensure the bank is prepared prior to the cessation of IBORs. We will apply judgment with respect to the need for new or revised hedging relationships; however, given market uncertainty, the assessment of the impact on the bank’s hedging relationships and its mitigation plans are in the early stages. The notional amount of the derivatives likely subject to IBOR reform designated as hedging instruments that mature after December 31, 2021 was $85,727 million of USD LIBOR and $1,560 million of other potentially impacted IBORs as at November 1, 2019.
Future changes in IFRS
Insurance Contracts
In June 2020, the IASB issued amendments to IFRS 17 Insurance Contracts (“IFRS 17”), which included a deferral of the effective date, resulting in a new adoption date for the bank of November 1, 2023 instead of November 1, 2022. The amendments also simplify some requirements, such as excluding certain credit cards from the scope of IFRS 17 and providing a policy choice to exclude certain loan contracts from IFRS 17, allowing us to continue accounting for them as we do today. We continue to assess the impact of the standard on our future financial results.
Use of Estimates and Judgments
The preparation of the consolidated financial statements requires management to use estimates and assumptions that affect the carrying amounts of certain assets and liabilities, certain amounts reported in net income and other related disclosures. The most significant assets and liabilities for which we must make estimates and judgments include the allowance for credit losses; financial instruments measured at fair value; pension and other employee future benefits; impairment of securities; income taxes and deferred tax assets; goodwill and intangible assets; insurance-related liabilities; provisions; and transfer of financial assets and consolidation of structured entities. If actual results were to differ from the estimates, the impact would be recorded in future periods.
The full extent of the impact that COVID-19, including government and/or regulatory responses to the outbreak, will have on the Canadian and US economies and the bank’s business remains uncertain and difficult to predict at this time. By their very nature, the judgments and estimates we make for the purposes of preparing our financial statements relate to matters that are inherently uncertain. However, we have detailed policies and internal controls that are intended to ensure these judgments and estimates are well controlled, independently reviewed, and our policies are consistently applied from period to period. We believe that our estimates of the value of our assets and liabilities are appropriate as at July 31, 2020.
Allowance for Credit Losses
As detailed further in Note 1 of our annual consolidated financial statements for the year ended October 31, 2019 on page 144 of the Annual Report, the allowance for credit losses (“ACL”) consists of allowances on impaired loans, which represent estimated losses related to impaired loans in the portfolio provided for but not yet written off, and allowances on performing loans, which is our best estimate of impairment in the existing portfolio for loans that have not yet been individually identified as impaired.
The expected credit loss model requires the recognition of credit losses generally based on 12 months of expected losses for performing loans and the recognition of lifetime losses on performing loans that have experienced a significant increase in credit risk since origination.
The determination of a significant increase in credit risk takes into account many different factors and varies by product and risk segment. The main factors considered in making this determination are relative changes in probability of default since origination, and certain other criteria, such as 30-day past due and watchlist status. We may apply experienced credit judgment to reflect factors not captured in the ECL models, based on the results produced by the ECL models as we deem necessary. In cases where borrowers have opted to participate in payment deferral programs we offered as a result of the COVID-19 pandemic, deferred payments are not considered to be past due and do not on their own indicate a significant increase in credit risk.
The judgments we apply in determining the ACL include changes in circumstances that may cause future assessments of credit risk to be materially different from current assessments, which could require an increase or decrease in the allowance for credit losses.
Additional information regarding the allowance for credit losses is included in Note 3.
52 BMO Financial Group Third Quarter Report 2020
Financial Instruments Measured at Fair Value
Our fair value measurement techniques have not changed from those outlined in Note 17 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 180 to 181 of the Annual Report. Additional information on fair value of financial instruments is included in Note 7.
Income Taxes and Deferred Tax Assets
Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences or unused taxes losses and tax credits may be realized. On the evidence available, including management projections of income, we believe that it is probable there will be sufficient taxable income generated by our business operations to recognize these deferred tax assets.
Additional information on income taxes is included in Note 11.
Goodwill and Intangible Assets
As a result of the current economic conditions due to the COVID-19 pandemic and the impact on our business performance, we reassessed the recoverable value of goodwill for certain cash-generating units (“CGUs”) by updating key assumptions, including the estimated cost of capital, discount rates as well as the actual and future business performance of the CGUs. Indefinite-life intangible assets were also reviewed for impairment. We concluded that the fair value less costs to sell continue to exceed the carrying value of these CGUs and indefinite-life intangible assets and therefore no impairment write-downs were recorded in the three and nine-months ended July 31, 2020.
Provisions
A provision, including for restructuring, is recognized if, as a result of a past event, the bank has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recorded at the best estimate of the amounts required to settle the obligation as at the balance sheet date, taking into account the risks and uncertainties associated with the obligation. Management and external experts are involved in estimating any provision, as necessary. The actual costs of settling some obligations may be substantially higher or lower than the amounts of the provisions.
Additional information on legal proceedings is included in Note 13.
Transfer of Assets and Consolidation of Structured Entities
We enter into transactions in which we transfer assets to a structured entity or third party to obtain alternate sources of funding. We assess whether substantially all of the risks and rewards of or control over the loans have been transferred to determine if they qualify for derecognition. Where we continue to be exposed to substantially all of the repayment, interest rate and/or credit risk associated with the securitized loans, they do not qualify for derecognition. We continue to recognize the loans and the related cash proceeds as secured financing in our Consolidated Balance Sheet.
Further details of our assessment of certain government offered programs launched in response to the impact of COVID-19 against the derecognition criteria is discussed in Note 3.
BMO Financial Group Third Quarter Report 2020 53
Note 2: Securities
Classification of Securities
The bank’s fair value through profit or loss (“FVTPL”) securities of $14,053 million ($13,704 million as at October 31, 2019) are comprised of $2,361 million mandatorily measured at fair value and $11,692 million investment securities held by insurance subsidiaries designated at fair value ($2,899 million and $10,805 million, respectively, as at October 31, 2019).
Our fair value through other comprehensive income (“FVOCI”) securities totalling $78,493 million ($64,515 million as at October 31, 2019), are net of an allowance for credit losses of $4 million ($2 million as at October 31, 2019).
Amortized cost securities totalling $45,229 million ($24,472 million as at October 31, 2019), are net of an allowance for credit losses of $1 million ($1 million as at October 31, 2019).
Unrealized Gains and Losses on FVOCI Securities
The following table summarizes the unrealized gains and losses:
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||
Cost/ | Gross | Gross | Cost/ | Gross | Gross | |||||||||||||||||||||||||||
Amortized cost | unrealized gains | unrealized losses | Fair value | Amortized cost | unrealized gains | unrealized losses | Fair value | |||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||
Canadian federal government | 27,329 | 253 | – | 27,582 | 11,876 | 72 | 4 | 11,944 | ||||||||||||||||||||||||
Canadian provincial and municipal governments | 4,585 | 140 | – | 4,725 | 5,907 | 106 | 1 | 6,012 | ||||||||||||||||||||||||
U.S. federal government | 17,646 | 1,039 | 6 | 18,679 | 15,363 | 617 | 5 | 15,975 | ||||||||||||||||||||||||
U.S. states, municipalities and agencies | 5,196 | 169 | 2 | 5,363 | 4,091 | 74 | 4 | 4,161 | ||||||||||||||||||||||||
Other governments | 6,949 | 205 | 4 | 7,150 | 7,179 | 158 | 2 | 7,335 | ||||||||||||||||||||||||
National Housing Act (“NHA”) mortgage-backed securities (“MBS”) | 1,614 | 51 | 2 | 1,663 | 1,953 | 18 | 1 | 1,970 | ||||||||||||||||||||||||
U.S. agency MBS and collateralized mortgage obligations (“CMO”) | 9,543 | 336 | 4 | 9,875 | 11,966 | 106 | 42 | 12,030 | ||||||||||||||||||||||||
Corporate debt | 3,241 | 129 | 1 | 3,369 | 4,899 | 110 | 2 | 5,007 | ||||||||||||||||||||||||
Corporate equity | 85 | 2 | – | 87 | 79 | 2 | - | 81 | ||||||||||||||||||||||||
Total | 76,188 | 2,324 | 19 | 78,493 | 63,313 | 1,263 | 61 | 64,515 |
Unrealized gains (losses) may be offset by related (losses) gains on hedge contracts.
Interest Income on Debt Securities
The following table presents interest income calculated using the effective interest method:
(Canadian $ in millions) | For the three months ended | For the nine months ended | ||||||||||||||
July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
FVOCI - Debt | 185 | 403 | 823 | 1,202 | ||||||||||||
Amortized cost | 144 | 75 | 455 | 163 | ||||||||||||
Total | 329 | 478 | 1,278 | 1,365 |
54 BMO Financial Group Third Quarter Report 2020
Note 3: Loans and Allowance for Credit Losses
Credit Risk Exposure
The following table sets out our credit risk exposure for all loans carried at amortized cost, FVOCI or FVTPL as at July 31, 2020 and October 31, 2019. Stage 1 represents those performing loans carried with up to a 12 month expected credit loss, Stage 2 represents those performing loans carried with a lifetime expected credit loss, and Stage 3 represents those loans with a lifetime credit loss that are credit impaired.
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||
Loans: Residential mortgages | ||||||||||||||||||||||||||||||||
Exceptionally low | 1 | - | - | 1 | - | - | - | - | ||||||||||||||||||||||||
Very low | 79,472 | 278 | - | 79,750 | 79,011 | 242 | - | 79,253 | ||||||||||||||||||||||||
Low | 22,654 | 2,765 | - | 25,419 | 20,853 | 2,821 | - | 23,674 | ||||||||||||||||||||||||
Medium | 11,594 | 6,560 | - | 18,154 | 13,651 | 4,578 | - | 18,229 | ||||||||||||||||||||||||
High | 91 | 362 | - | 453 | 124 | 397 | - | 521 | ||||||||||||||||||||||||
Not rated | 1,082 | 192 | - | 1,274 | 1,531 | 118 | - | 1,649 | ||||||||||||||||||||||||
Impaired | - | - | 430 | 430 | - | - | 414 | 414 | ||||||||||||||||||||||||
Allowance for credit losses | 65 | 58 | 17 | 140 | 15 | 32 | 17 | 64 | ||||||||||||||||||||||||
Carrying amount | 114,829 | 10,099 | 413 | 125,341 | 115,155 | 8,124 | 397 | 123,676 | ||||||||||||||||||||||||
Loans: Consumer instalment and other personal | ||||||||||||||||||||||||||||||||
Exceptionally low | 1,584 | 33 | - | 1,617 | 21,023 | 25 | - | 21,048 | ||||||||||||||||||||||||
Very low | 25,827 | 43 | - | 25,870 | 16,491 | 194 | - | 16,685 | ||||||||||||||||||||||||
Low | 20,281 | 873 | - | 21,154 | 9,894 | 346 | - | 10,240 | ||||||||||||||||||||||||
Medium | 9,921 | 4,856 | - | 14,777 | 10,510 | 4,264 | - | 14,774 | ||||||||||||||||||||||||
High | 367 | 1,493 | - | 1,860 | 397 | 1,423 | - | 1,820 | ||||||||||||||||||||||||
Not rated | 3,349 | 108 | - | 3,457 | 2,594 | 107 | - | 2,701 | ||||||||||||||||||||||||
Impaired | - | - | 433 | 433 | - | - | 468 | 468 | ||||||||||||||||||||||||
Allowance for credit losses | 115 | 420 | 127 | 662 | 82 | 318 | 136 | 536 | ||||||||||||||||||||||||
Carrying amount | 61,214 | 6,986 | 306 | 68,506 | 60,827 | 6,041 | 332 | 67,200 | ||||||||||||||||||||||||
Loans: Credit cards | ||||||||||||||||||||||||||||||||
Exceptionally low | 2,155 | - | - | 2,155 | 2,418 | - | - | 2,418 | ||||||||||||||||||||||||
Very low | 1,076 | 16 | - | 1,092 | 1,214 | 16 | - | 1,230 | ||||||||||||||||||||||||
Low | 904 | 164 | - | 1,068 | 970 | 158 | - | 1,128 | ||||||||||||||||||||||||
Medium | 1,700 | 965 | - | 2,665 | 2,020 | 876 | - | 2,896 | ||||||||||||||||||||||||
High | 49 | 388 | - | 437 | 140 | 440 | - | 580 | ||||||||||||||||||||||||
Not rated | 530 | - | - | 530 | 606 | 1 | - | 607 | ||||||||||||||||||||||||
Impaired | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Allowance for credit losses | 60 | 270 | - | 330 | 43 | 193 | - | 236 | ||||||||||||||||||||||||
Carrying amount | 6,354 | 1,263 | - | 7,617 | 7,325 | 1,298 | - | 8,623 | ||||||||||||||||||||||||
Loans: Business and government (1) | ||||||||||||||||||||||||||||||||
Acceptable | ||||||||||||||||||||||||||||||||
Investment grade | 124,728 | 6,757 | - | 131,485 | 134,587 | 1,028 | - | 135,615 | ||||||||||||||||||||||||
Sub-investment grade | 93,201 | 27,697 | - | 120,898 | 96,731 | 11,553 | - | 108,284 | ||||||||||||||||||||||||
Watchlist | - | 8,082 | - | 8,082 | - | 5,556 | - | 5,556 | ||||||||||||||||||||||||
Impaired | - | - | 3,550 | 3,550 | - | - | 1,747 | 1,747 | ||||||||||||||||||||||||
Allowance for credit losses | 573 | 971 | 575 | 2,119 | 263 | 441 | 310 | 1,014 | ||||||||||||||||||||||||
Carrying amount | 217,356 | 41,565 | 2,975 | 261,896 | 231,055 | 17,696 | 1,437 | 250,188 | ||||||||||||||||||||||||
Commitments and financial guarantee contracts | ||||||||||||||||||||||||||||||||
Acceptable | ||||||||||||||||||||||||||||||||
Investment grade | 132,838 | 1,491 | - | 134,329 | 134,920 | 884 | - | 135,804 | ||||||||||||||||||||||||
Sub-investment grade | 42,765 | 17,614 | - | 60,379 | 45,178 | 6,435 | - | 51,613 | ||||||||||||||||||||||||
Watchlist | - | 3,419 | - | 3,419 | - | 2,133 | - | 2,133 | ||||||||||||||||||||||||
Impaired | - | - | 1,164 | 1,164 | - | - | 324 | 324 | ||||||||||||||||||||||||
Allowance for credit losses | 212 | 232 | 12 | 456 | 119 | 103 | 22 | 244 | ||||||||||||||||||||||||
Carrying amount (2) | 175,391 | 22,292 | 1,152 | 198,835 | 179,979 | 9,349 | 302 | 189,630 |
(1) | Includes customers’ liability under acceptances. |
(2) | Represents the total contractual amounts of undrawn credit facilities and other off-balance sheet exposures, excluding personal lines of credit and credit cards that are unconditionally cancellable at our discretion. |
Allowance for Credit Losses (“ACL”)
The allowance for credit losses recorded in our Consolidated Balance Sheet is maintained at a level we consider adequate to absorb credit-related losses on our loans and other credit instruments. The allowance for credit losses amounted to $3,707 million at July 31, 2020 ($2,094 million at October 31, 2019) of which $3,251 million ($1,850 million at October 31, 2019) was recorded in loans and $456 million ($244 million at October 31, 2019) was recorded in other liabilities in our Consolidated Balance Sheet.
Significant changes in the gross balances, including originations, maturities and repayments in the normal course of operations, impact the allowance for credit losses.
BMO Financial Group Third Quarter Report 2020 55
The following table shows the continuity in the loss allowance by product type. Transfers represent the amount of expected credit loss (“ECL”) that moved between stages during the period, for example, moving from a 12-month (Stage 1) to lifetime (Stage 2) ECL measurement basis. Net remeasurements represent the ECL impact due to stage transfers, changes in economic forecasts and credit quality.
(Canadian $ in millions) | ||||||||||||||||||||||||||||||||
For the three months ended | July 31, 2020 | July 31, 2019 | ||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||
Loans: Residential mortgages | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 29 | 37 | 27 | 93 | 16 | 37 | 44 | 97 | ||||||||||||||||||||||||
Transfer to Stage 1 | 8 | (7 | ) | (1 | ) | - | 7 | (6 | ) | (1 | ) | - | ||||||||||||||||||||
Transfer to Stage 2 | (1 | ) | 4 | (3 | ) | - | (1 | ) | 2 | (1 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | - | (1 | ) | 1 | - | - | (3 | ) | 3 | - | ||||||||||||||||||||||
Net remeasurement of loss allowance | 27 | 30 | 10 | 67 | (9 | ) | 6 | - | (3 | ) | ||||||||||||||||||||||
Loan originations | 4 | - | - | 4 | 2 | - | - | 2 | ||||||||||||||||||||||||
Derecognitions and maturities | - | (2 | ) | - | (2 | ) | (1 | ) | (1 | ) | - | (2 | ) | |||||||||||||||||||
Model changes | (1 | ) | (3 | ) | - | (4 | ) | - | - | - | - | |||||||||||||||||||||
Total Provision for Credit Losses (“PCL”) (1) | 37 | 21 | 7 | 65 | (2 | ) | (2 | ) | 1 | (3 | ) | |||||||||||||||||||||
Write-offs (2) | - | - | (3 | ) | (3 | ) | - | - | (6 | ) | (6 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 2 | 2 | - | - | 7 | 7 | ||||||||||||||||||||||||
Foreign exchange and other | (1 | ) | - | (6 | ) | (7 | ) | - | - | (8 | ) | (8 | ) | |||||||||||||||||||
Balance as at end of period | 65 | 58 | 27 | 150 | 14 | 35 | 38 | 87 | ||||||||||||||||||||||||
Loans: Consumer instalment and other personal | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 116 | 407 | 125 | 648 | 86 | 324 | 128 | 538 | ||||||||||||||||||||||||
Transfer to Stage 1 | 59 | (57 | ) | (2 | ) | - | 44 | (42 | ) | (2 | ) | - | ||||||||||||||||||||
Transfer to Stage 2 | (10 | ) | 21 | (11 | ) | - | (4 | ) | 18 | (14 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | (1 | ) | (27 | ) | 28 | - | (1 | ) | (32 | ) | 33 | - | ||||||||||||||||||||
Net remeasurement of loss allowance | (50 | ) | 103 | 56 | 109 | (40 | ) | 66 | 52 | 78 | ||||||||||||||||||||||
Loan originations | 9 | - | - | 9 | 12 | - | - | 12 | ||||||||||||||||||||||||
Derecognitions and maturities | (4 | ) | (9 | ) | - | (13 | ) | (4 | ) | (13 | ) | - | (17 | ) | ||||||||||||||||||
Model changes | 11 | 8 | - | 19 | - | - | - | - | ||||||||||||||||||||||||
Total PCL (1) | 14 | 39 | 71 | 124 | 7 | (3 | ) | 69 | 73 | |||||||||||||||||||||||
Write-offs (2) | - | - | (81 | ) | (81 | ) | - | - | (80 | ) | (80 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 22 | 22 | - | - | 25 | 25 | ||||||||||||||||||||||||
Foreign exchange and other | (3 | ) | (3 | ) | (10 | ) | (16 | ) | (1 | ) | (1 | ) | (7 | ) | (9 | ) | ||||||||||||||||
Balance as at end of period | 127 | 443 | 127 | 697 | 92 | 320 | 135 | 547 | ||||||||||||||||||||||||
Loans: Credit cards | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 115 | 319 | - | 434 | 77 | 231 | - | 308 | ||||||||||||||||||||||||
Transfer to Stage 1 | 50 | (50 | ) | - | - | 28 | (28 | ) | - | - | ||||||||||||||||||||||
Transfer to Stage 2 | (9 | ) | 9 | - | - | (5 | ) | 5 | - | - | ||||||||||||||||||||||
Transfer to Stage 3 | - | (48 | ) | 48 | - | (1 | ) | (46 | ) | 47 | - | |||||||||||||||||||||
Net remeasurement of loss allowance | (44 | ) | 105 | 20 | 81 | (24 | ) | 79 | 24 | 79 | ||||||||||||||||||||||
Loan originations | 5 | - | - | 5 | 5 | - | - | 5 | ||||||||||||||||||||||||
Derecognitions and maturities | (1 | ) | (7 | ) | - | (8 | ) | (1 | ) | (6 | ) | - | (7 | ) | ||||||||||||||||||
Model changes | (1 | ) | (10 | ) | - | (11 | ) | - | - | - | - | |||||||||||||||||||||
Total PCL (1) | - | (1 | ) | 68 | 67 | 2 | 4 | 71 | 77 | |||||||||||||||||||||||
Write-offs (2) | - | - | (80 | ) | (80 | ) | - | - | (91 | ) | (91 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 19 | 19 | - | - | 20 | 20 | ||||||||||||||||||||||||
Foreign exchange and other | (3 | ) | (1 | ) | (7 | ) | (11 | ) | - | 1 | - | 1 | ||||||||||||||||||||
Balance as at end of period | 112 | 317 | - | 429 | 79 | 236 | - | 315 | ||||||||||||||||||||||||
Loans: Business and government | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 580 | 795 | 586 | 1,961 | 336 | 423 | 260 | 1,019 | ||||||||||||||||||||||||
Transfer to Stage 1 | 45 | (45 | ) | - | - | 31 | (30 | ) | (1 | ) | - | |||||||||||||||||||||
Transfer to Stage 2 | (65 | ) | 66 | (1 | ) | - | (16 | ) | 17 | (1 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | (4 | ) | (163 | ) | 167 | - | (1 | ) | (14 | ) | 15 | - | ||||||||||||||||||||
Net remeasurement of loss allowance | 145 | 510 | 134 | 789 | (23 | ) | 91 | 89 | 157 | |||||||||||||||||||||||
Loan originations | 53 | - | - | 53 | 53 | - | - | 53 | ||||||||||||||||||||||||
Derecognitions and maturities | (21 | ) | (36 | ) | - | (57 | ) | (28 | ) | (22 | ) | - | (50 | ) | ||||||||||||||||||
Model changes | (7 | ) | (4 | ) | - | (11 | ) | - | - | - | - | |||||||||||||||||||||
Total PCL (1) | 146 | 328 | 300 | 774 | 16 | 42 | 102 | 160 | ||||||||||||||||||||||||
Write-offs (2) | - | - | (300 | ) | (300 | ) | - | - | (52 | ) | (52 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 37 | 37 | - | - | 2 | 2 | ||||||||||||||||||||||||
Foreign exchange and other | (5 | ) | 10 | (46 | ) | (41 | ) | (1 | ) | (4 | ) | (15 | ) | (20 | ) | |||||||||||||||||
Balance as at end of period | 721 | 1,133 | 577 | 2,431 | 351 | 461 | 297 | 1,109 | ||||||||||||||||||||||||
Total as at end of period | 1,025 | 1,951 | 731 | 3,707 | 536 | 1,052 | 470 | 2,058 | ||||||||||||||||||||||||
Comprised of: Loans | 813 | 1,719 | 719 | 3,251 | 409 | 946 | 447 | 1,802 | ||||||||||||||||||||||||
Other credit instruments (3) | 212 | 232 | 12 | 456 | 127 | 106 | 23 | 256 |
(1) | Excludes PCL on other assets of $24 million for the three months ended July 31, 2020 ($(1) million for the three months ended July 31, 2019). |
(2) | Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts to collect. |
(3) | Recorded in other liabilities on the Consolidated Balance Sheet. |
56 BMO Financial Group Third Quarter Report 2020
The following table shows the continuity in the loss allowance by each product type:
(Canadian $ in millions) | ||||||||||||||||||||||||||||||||
For the nine months ended | July 31, 2020 | July 31, 2019 | ||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Total | Stage 1 | Stage 2 | Stage 3 | Total | |||||||||||||||||||||||||
Loans: Residential mortgages | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 15 | 33 | 38 | 86 | 20 | 38 | 44 | 102 | ||||||||||||||||||||||||
Transfer to Stage 1 | 19 | (17 | ) | (2 | ) | - | 21 | (19 | ) | (2 | ) | - | ||||||||||||||||||||
Transfer to Stage 2 | (2 | ) | 7 | (5 | ) | - | (2 | ) | 5 | (3 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | - | (4 | ) | 4 | - | - | (7 | ) | 7 | - | ||||||||||||||||||||||
Net remeasurement of loss allowance | 29 | 47 | 17 | 93 | (29 | ) | 21 | 7 | (1 | ) | ||||||||||||||||||||||
Loan originations | 8 | - | - | 8 | 5 | - | - | 5 | ||||||||||||||||||||||||
Derecognitions and maturities | (1 | ) | (4 | ) | - | (5 | ) | (1 | ) | (3 | ) | - | (4 | ) | ||||||||||||||||||
Model changes | (3 | ) | (5 | ) | - | (8 | ) | - | - | - | - | |||||||||||||||||||||
Total PCL (1) | 50 | 24 | 14 | 88 | (6 | ) | (3 | ) | 9 | - | ||||||||||||||||||||||
Write-offs (2) | - | - | (9 | ) | (9 | ) | - | - | (13 | ) | (13 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 6 | 6 | - | - | 12 | 12 | ||||||||||||||||||||||||
Foreign exchange and other | - | 1 | (22 | ) | (21 | ) | - | - | (14 | ) | (14 | ) | ||||||||||||||||||||
Balance as at end of period | 65 | 58 | 27 | 150 | 14 | 35 | 38 | 87 | ||||||||||||||||||||||||
Loans: Consumer instalment and other personal | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 89 | 333 | 136 | 558 | 90 | 326 | 144 | 560 | ||||||||||||||||||||||||
Transfer to Stage 1 | 138 | (131 | ) | (7 | ) | - | 131 | (122 | ) | (9 | ) | - | ||||||||||||||||||||
Transfer to Stage 2 | (20 | ) | 66 | (46 | ) | - | (13 | ) | 62 | (49 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | (3 | ) | (79 | ) | 82 | - | (4 | ) | (84 | ) | 88 | - | ||||||||||||||||||||
Net remeasurement of loss allowance | (112 | ) | 247 | 162 | 297 | (134 | ) | 168 | 112 | 146 | ||||||||||||||||||||||
Loan originations | 32 | - | - | 32 | 35 | - | - | 35 | ||||||||||||||||||||||||
Derecognitions and maturities | (12 | ) | (27 | ) | - | (39 | ) | (12 | ) | (30 | ) | - | (42 | ) | ||||||||||||||||||
Model changes | 16 | 33 | - | 49 | - | - | - | - | ||||||||||||||||||||||||
Total PCL (1) | 39 | 109 | 191 | 339 | 3 | (6 | ) | 142 | 139 | |||||||||||||||||||||||
Write-offs (2) | - | - | (248 | ) | (248 | ) | - | - | (233 | ) | (233 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 64 | 64 | - | - | 97 | 97 | ||||||||||||||||||||||||
Foreign exchange and other | (1 | ) | 1 | (16 | ) | (16 | ) | (1 | ) | - | (15 | ) | (16 | ) | ||||||||||||||||||
Balance as at end of period | 127 | 443 | 127 | 697 | 92 | 320 | 135 | 547 | ||||||||||||||||||||||||
Loans: Credit cards | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 80 | 225 | - | 305 | 74 | 219 | - | 293 | ||||||||||||||||||||||||
Transfer to Stage 1 | 107 | (107 | ) | - | - | 78 | (78 | ) | - | - | ||||||||||||||||||||||
Transfer to Stage 2 | (25 | ) | 25 | - | - | (16 | ) | 16 | - | - | ||||||||||||||||||||||
Transfer to Stage 3 | (1 | ) | (129 | ) | 130 | - | (1 | ) | (125 | ) | 126 | - | ||||||||||||||||||||
Net remeasurement of loss allowance | (57 | ) | 332 | 68 | 343 | (68 | ) | 221 | 58 | 211 | ||||||||||||||||||||||
Loan originations | 13 | - | - | 13 | 15 | - | - | 15 | ||||||||||||||||||||||||
Derecognitions and maturities | (3 | ) | (19 | ) | - | (22 | ) | (3 | ) | (18 | ) | - | (21 | ) | ||||||||||||||||||
Model changes | (1 | ) | (10 | ) | - | (11 | ) | - | - | - | - | |||||||||||||||||||||
Total PCL (1) | 33 | 92 | 198 | 323 | 5 | 16 | 184 | 205 | ||||||||||||||||||||||||
Write-offs (2) | - | - | (257 | ) | (257 | ) | - | - | (250 | ) | (250 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 66 | 66 | - | - | 66 | 66 | ||||||||||||||||||||||||
Foreign exchange and other | (1 | ) | - | (7 | ) | (8 | ) | - | 1 | - | 1 | |||||||||||||||||||||
Balance as at end of period | 112 | 317 | - | 429 | 79 | 236 | - | 315 | ||||||||||||||||||||||||
Loans: Business and government | ||||||||||||||||||||||||||||||||
Balance as at beginning of period | 338 | 496 | 311 | 1,145 | 298 | 408 | 209 | 915 | ||||||||||||||||||||||||
Transfer to Stage 1 | 109 | (102 | ) | (7 | ) | - | 139 | (135 | ) | (4 | ) | - | ||||||||||||||||||||
Transfer to Stage 2 | (118 | ) | 121 | (3 | ) | - | (41 | ) | 53 | (12 | ) | - | ||||||||||||||||||||
Transfer to Stage 3 | (6 | ) | (226 | ) | 232 | - | (1 | ) | (41 | ) | 42 | - | ||||||||||||||||||||
Net remeasurement of loss allowance | 321 | 883 | 558 | 1,762 | (141 | ) | 230 | 159 | 248 | |||||||||||||||||||||||
Loan originations | 153 | - | - | 153 | 163 | - | - | 163 | ||||||||||||||||||||||||
Derecognitions and maturities | (63 | ) | (86 | ) | - | (149 | ) | (75 | ) | (57 | ) | - | (132 | ) | ||||||||||||||||||
Model changes | (30 | ) | 8 | - | (22 | ) | - | - | - | - | ||||||||||||||||||||||
Total PCL (1) | 366 | 598 | 780 | 1,744 | 44 | 50 | 185 | 279 | ||||||||||||||||||||||||
Write-offs (2) | - | - | (516 | ) | (516 | ) | - | - | (123 | ) | (123 | ) | ||||||||||||||||||||
Recoveries of previous write-offs | - | - | 60 | 60 | - | - | 61 | 61 | ||||||||||||||||||||||||
Foreign exchange and other | 17 | 39 | (58 | ) | (2 | ) | 9 | 3 | (35 | ) | (23 | ) | ||||||||||||||||||||
Balance as at end of period | 721 | 1,133 | 577 | 2,431 | 351 | 461 | 297 | 1,109 | ||||||||||||||||||||||||
Total as at end of period | 1,025 | 1,951 | 731 | 3,707 | 536 | 1,052 | 470 | 2,058 | ||||||||||||||||||||||||
Comprised of: Loans | 813 | 1,719 | 719 | 3,251 | 409 | 946 | 447 | 1,802 | ||||||||||||||||||||||||
Other credit instruments (3) | 212 | 232 | 12 | 456 | 127 | 106 | 23 | 256 |
(1) | Excludes PCL on other assets of $27 million for the nine months ended July 31, 2020 ($(4) million for the nine months ended July 31, 2019). |
(2) | Generally, we continue to seek recovery on amounts that were written off during the year, unless the loan is sold, we no longer have the right to collect or we have exhausted all reasonable efforts to collect. |
(3) | Recorded in other liabilities on the Consolidated Balance Sheet. |
BMO Financial Group Third Quarter Report 2020 57
Loans and allowance for credit losses by geographic region as at July 31, 2020 and October 31, 2019 are as follows:
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||
Gross amount | Allowance for credit losses on impaired loans (2) | Allowance for credit losses on performing loans (3) | Net Amount | Gross amount | Allowance for credit losses on impaired loans (2) | Allowance for credit losses on performing loans (3) | Net Amount | |||||||||||||||||||||||||
By geographic region (1): | ||||||||||||||||||||||||||||||||
Canada | 270,348 | 345 | 1,335 | 268,668 | 258,842 | 207 | 740 | 257,895 | ||||||||||||||||||||||||
United States | 166,278 | 374 | 1,164 | 164,740 | 158,454 | 256 | 630 | 157,568 | ||||||||||||||||||||||||
Other countries | 11,953 | - | 33 | 11,920 | 10,648 | - | 17 | 10,631 | ||||||||||||||||||||||||
Total | 448,579 | 719 | 2,532 | 445,328 | 427,944 | 463 | 1,387 | 426,094 |
(1) | Geographic region is based upon country of ultimate risk. |
(2) | Excludes allowance for credit losses on impaired loans of $12 million for other credit instruments, which is included in other liabilities ($22 million as at October 31, 2019). |
(3) | Excludes allowance for credit losses on performing loans of $444 million for other credit instruments, which is included in other liabilities ($222 million as at October 31, 2019). |
Impaired (Stage 3) loans, including the related allowances, as at July 31, 2020 and October 31, 2019 are as follows:
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||
Gross impaired amount (3) | Allowance for credit losses on impaired loans (4) | Net impaired amount (3) | Gross impaired amount (3) | Allowance for credit losses on impaired loans (4) | Net impaired amount (3) | |||||||||||||||||||
Residential mortgages | 430 | 17 | 413 | 414 | 17 | 397 | ||||||||||||||||||
Consumer instalment and other personal | 433 | 127 | 306 | 468 | 136 | 332 | ||||||||||||||||||
Business and government (1) | 3,550 | 575 | 2,975 | 1,747 | 310 | 1,437 | ||||||||||||||||||
Total | 4,413 | 719 | 3,694 | 2,629 | 463 | 2,166 | ||||||||||||||||||
By geographic region (2): | ||||||||||||||||||||||||
Canada | 1,469 | 345 | 1,124 | 914 | 207 | 707 | ||||||||||||||||||
United States | 2,885 | 374 | 2,511 | 1,715 | 256 | 1,459 | ||||||||||||||||||
Other countries | 59 | - | 59 | - | - | - | ||||||||||||||||||
Total | 4,413 | 719 | 3,694 | 2,629 | 463 | 2,166 |
(1) | Includes customers’ liability under acceptances. |
(2) | Geographic region is based upon the country of ultimate risk. |
(3) | Gross impaired loans and net impaired loans exclude purchased credit impaired loans. |
(4) | Excludes allowance for credit losses on impaired loans of $12 million for other credit instruments, which is included in other liabilities ($22 million as at October 31, 2019). |
Loans Past Due Not Impaired
Loans that are past due but not classified as impaired are loans where our customers have failed to make payments when contractually due but for which we expect the full amount of principal and interest payments to be collected, or loans which are held at fair value. The following table presents loans that are past due but not classified as impaired as at July 31, 2020 and October 31, 2019. In cases where borrowers have opted to participate in payment deferral programs we offered as a result of the COVID-19 pandemic, deferred payments are not considered past due and do not on their own indicate a significant increase in credit risk. As a result, they have not been included in the table below.
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||
1 to 29 days | 30 to 89 days | 90 days or more | Total | 1 to 29 days | 30 to 89 days | 90 days or more | Total | |||||||||||||||||||||||||
Residential mortgages | 598 | 335 | 28 | 961 | 806 | 465 | 16 | 1,287 | ||||||||||||||||||||||||
Credit card, consumer instalment and other personal | 1,261 | 328 | 81 | 1,670 | 1,590 | 426 | 87 | 2,103 | ||||||||||||||||||||||||
Business and government | 387 | 293 | 32 | 712 | 351 | 207 | 59 | 617 | ||||||||||||||||||||||||
Total | 2,246 | 956 | 141 | 3,343 | 2,747 | 1,098 | 162 | 4,007 |
Fully secured loans with amounts past due between 90 and 180 days that we have not classified as impaired totalled $43 million and $54 million as at July 31, 2020 and October 31, 2019, respectively.
ECL Sensitivity and Key Economic Variables
The expected credit loss model requires the recognition of credit losses generally based on 12 months of expected losses for performing loans and the recognition of lifetime losses on performing loans that have experienced a significant increase in credit risk since origination.
The allowance for performing loans is sensitive to changes in both economic forecasts and the probability-weight assigned to each forecast scenario. We incorporate multiple economic forecasts and those used are representative of our view of future economic conditions and considering external data, developed internally by our Economics group. Many of the variables used in our forecasts have a high degree of interdependency, and as such there is no single factor to which loan impairment allowances as a whole are sensitive. We apply experienced credit judgment to reflect factors not captured in the ECL models as we deem necessary. In Q3 2020, we have applied experienced credit judgment to reflect the impact of the extraordinary and highly uncertain environment on credit conditions and the economy.
As at July 31, 2020, our base case economic forecast depicts a contracting Canadian economy, with real GDP falling in 2020 as a result of a sharp decline in the first half of the year, as a result of the COVID-19 pandemic. This is in contrast to our base case economic forecast as at October 31, 2019 which depicted moderate economic growth in both Canada and the U.S. over the projection period. In addition, the outlook for the economy and labour markets is moderately weaker compared to the second quarter of 2020. If we assume a 100% base case economic forecast and include the impact of loan migration by restaging, with other assumptions held constant, including the application of experienced credit judgment, the allowance on performing loans would be approximately $2,725 million as at July 31, 2020 ($1,325 million as at October 31, 2019), compared to the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).
As at July 31, 2020, our adverse case economic forecast also depicts a contracting Canadian economy, with real GDP declining in 2020, with an increase in 2021. In our adverse case scenario, the dislocations caused by the pandemic are more significant and persist for a longer period of time compared with our base case scenario. This is in contrast to the adverse scenario forecast as at October 31, 2019 which depicted a typical recession, with the economy contracting in the first year followed by a steady recovery through the end of the projection period. If we assume a 100% adverse economic forecast and include the impact of loan migration by restaging, with other assumptions held constant, including the application of
58 BMO Financial Group Third Quarter Report 2020
experienced credit judgment, the allowance on performing loans would be approximately $3,550 million as at July 31, 2020 ($2,800 million as at October 31, 2019), compared to the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).
The following table shows the key economic variables we use to estimate our allowance on performing loans during the forecast period. This table is typically provided on an annual basis. However, given the significant level of change in the forward-looking information since the end of 2019, the disclosures have been provided as an update to the bank’s Annual Report for the year ended October 31, 2019. The values shown represent the national average values for calendar 2020 and calendar 2021. The base case scenario reflects our view of the most probable outcome. While the values disclosed below are national variables, we use regional variables in our underlying models where considered appropriate and consider factors impacting particular industries.
Benign scenario | Base scenario | Adverse scenario (1) | ||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2020 | 2021 | 2020 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
All figures are average annual values | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||||||||
Real gross domestic product (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Canada | (4.6)% | 2.9% | 8.9% | 2.5% | (6.0)% | 1.7% | 6.0% | 1.6% | (7.6)% | (2.3)% | 3.7% | 0.5% | ||||||||||||||||||||||||||||||||||||
United States | (4.1)% | 2.4% | 7.8% | 2.4% | (5.5)% | 1.8% | 5.0% | 1.9% | (7.1)% | (2.0)% | 2.5% | 0.6% | ||||||||||||||||||||||||||||||||||||
Corporate BBB 10-year spread | ||||||||||||||||||||||||||||||||||||||||||||||||
Canada | 2.1% | 2.0% | 1.9% | 2.1% | 2.4% | 2.3% | 2.3% | 2.3% | 2.8% | 4.5% | 3.1% | 4.1% | ||||||||||||||||||||||||||||||||||||
United States | 2.2% | 1.8% | 1.9% | 2.0% | 2.5% | 2.3% | 2.4% | 2.4% | 3.0% | 4.1% | 3.2% | 3.6% | ||||||||||||||||||||||||||||||||||||
Unemployment rates | ||||||||||||||||||||||||||||||||||||||||||||||||
Canada | 8.5% | 5.1% | 6.5% | 5.0% | 9.5% | 5.7% | 8.0% | 5.9% | 10.9% | 8.5% | 10.0% | 9.0% | ||||||||||||||||||||||||||||||||||||
United States | 7.5% | 3.3% | 5.4% | 3.2% | 8.9% | 3.7% | 7.0% | 3.8% | 10.3% | 6.1% | 8.9% | 6.8% | ||||||||||||||||||||||||||||||||||||
Housing Price Index (“HPI”) (2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Canada (3) | 5.3% | 3.7% | 5.4% | 3.7% | 3.5% | 2.0% | 0.0% | 2.5% | 0.8% | (12.3)% | (7.5)% | (4.7)% | ||||||||||||||||||||||||||||||||||||
United States (4) | 2.4% | 4.4% | 4.6% | 4.2% | 1.0% | 3.0% | 1.6% | 2.7% | (0.4)% | (5.7)% | (1.9)% | (2.2)% |
(1) | In Q4 2019, the adverse scenario was reflective of a typical recession that extends for four quarters. However, beginning Q2 2020, the adverse scenario used is reflective of a more adverse outcome compared with our base case forecast. |
(2) | Real gross domestic product and housing price index are year-over-year growth rates. |
(3) | In Canada, we use the HPI Benchmark Composite. |
(4) | In the United States, we use the National Case-Shiller House Price Index. |
The ECL approach requires the recognition of credit losses generally based on 12 months of expected losses for performing loans (Stage 1) and the recognition of lifetime expected losses for performing loans that have experienced a significant increase in credit risk since origination (Stage 2). Under our current probability-weighted scenarios and based on the current risk profile of our loan exposures, if all our performing loans were in Stage 1, our allowance for performing loans would be approximately $2,300 million ($1,050 million as at October 31, 2019), compared with the reported allowance for performing loans of $2,976 million ($1,609 million as at October 31, 2019).
Transfer of Assets
In the normal course, we sell Canadian mortgage loans to third-party Canadian securitization programs. Beginning in the second quarter, we participated in the Insured Mortgage Purchase Program (“IMPP”), launched by the Government of Canada as part of their response to COVID-19.
Under the IMPP, we assessed whether substantially all of the risks and rewards of the loans have been transferred, in order to determine if the mortgages qualify for derecognition. Since we continue to be exposed to substantially all of the risks and rewards of ownership associated with these securitized mortgages, they do not qualify for derecognition. We continue to recognize the loans and recognize the related cash proceeds as secured financing in our Consolidated Balance Sheet.
The government also launched the Canada Emergency Business Account (“CEBA”) Program in the second quarter, where we issue loans that are funded by the government. We determined these loans qualify for derecognition as the risks and rewards were transferred to the government, therefore we do not recognize these loans on our Consolidated Balance Sheet.
Note 4: Risk Management
We have an enterprise-wide approach to the identification, measurement, monitoring and control of risks faced across our organization. The key risks related to our financial instruments are classified as credit and counterparty, market, and liquidity and funding risk. Our risk management policies and processes have not changed significantly from those outlined in the Enterprise-Wide Risk Management sections on pages 68 to 106 of the bank’s Annual Report for the year ended October 31, 2019. However, the COVID-19 pandemic has resulted in an increase in certain risks outlined in the Risk Management section of our interim Management’s Discussion and Analysis. We have provided an update on each of the key risks below.
Credit and Counterparty Risk
Credit and counterparty risk is the potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour another predetermined financial obligation. Credit risk arises predominantly with respect to loans, over-the-counter and centrally cleared derivatives and other credit instruments. This is the most significant measurable risk that we face. Updated information on credit risk related to loans is included in Note 3.
BMO Financial Group Third Quarter Report 2020 59
Market Risk
Market risk is the potential for adverse changes in the value of our assets and liabilities resulting from changes in market variables such as interest rates, foreign exchange rates, equity prices, dividend policies and commodity prices and their implied volatilities, and credit spreads, and includes the risk of credit migration and default in our trading book. We incur market risk in our trading and underwriting activities and in the management of structural market risk in our banking and insurance activities. Updated market risk measures are included on page 36 of our interim Management’s Discussion and Analysis.
Liquidity and Funding Risk
Liquidity and funding risk is the potential for loss if we are unable to meet our financial commitments in a timely manner at reasonable prices as they become due. It is our policy to ensure that sufficient liquid assets and funding capacity are available to meet financial commitments, including liabilities to depositors and suppliers, and lending, investment and pledging commitments, even in times of stress. Managing liquidity and funding risk is essential to maintaining a safe and sound enterprise, depositor confidence and earnings stability. Updated contractual maturities of assets, liabilities and off-balance sheet commitments, a tool used to manage liquidity and funding risk, are included on pages 43 and 44 of our interim Management’s Discussion and Analysis.
Note 5: Deposits and Subordinated Debt
Deposits
Payable on demand | Payable | Payable on | ||||||||||||||||||||||||||||||||||||||
(Canadian $ in millions) | Interest bearing | Non-interest bearing | after notice | a fixed date (4)(5) | Total | |||||||||||||||||||||||||||||||||||
July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | |||||||||||||||||||||||||||||||
Deposits by: | ||||||||||||||||||||||||||||||||||||||||
Banks (1) (6) | 3,245 | 1,996 | 1,773 | 1,530 | 1,240 | 1,017 | 35,641 | 19,273 | 41,899 | 23,816 | ||||||||||||||||||||||||||||||
Business and government | 45,320 | 29,083 | 41,901 | 33,853 | 115,048 | 85,022 | 195,436 | 195,199 | 397,705 | 343,157 | ||||||||||||||||||||||||||||||
Individuals | 4,213 | 3,361 | 28,729 | 23,084 | 107,521 | 94,304 | 80,533 | 80,421 | 220,996 | 201,170 | ||||||||||||||||||||||||||||||
Total (2) (3) | 52,778 | 34,440 | 72,403 | 58,467 | 223,809 | 180,343 | 311,610 | 294,893 | 660,600 | 568,143 | ||||||||||||||||||||||||||||||
Booked in: | ||||||||||||||||||||||||||||||||||||||||
Canada | | 39,943 | | 27,338 | 62,427 | 49,911 | 107,555 | 90,630 | 201,878 | 181,835 | 411,803 | 349,714 | ||||||||||||||||||||||||||||
United States | 11,254 | 6,043 | 9,935 | 8,531 | 114,926 | 88,604 | 77,713 | 86,368 | 213,828 | 189,546 | ||||||||||||||||||||||||||||||
Other countries | 1,581 | 1,059 | 41 | 25 | 1,328 | 1,109 | 32,019 | 26,690 | 34,969 | 28,883 | ||||||||||||||||||||||||||||||
Total | 52,778 | 34,440 | 72,403 | 58,467 | 223,809 | 180,343 | 311,610 | 294,893 | 660,600 | 568,143 |
(1) | Includes regulated and central banks. |
(2) | Includes structured notes designated at fair value through profit or loss (Note 7). |
(3) | As at July 31, 2020 and October 31, 2019, total deposits payable on a fixed date included $40,757 million and $25,438 million, respectively, of federal funds purchased and commercial paper issued and other deposit liabilities. Included in deposits as at July 31, 2020 and October 31, 2019 are $318,088 million and $279,860 million, respectively, of deposits denominated in U.S. dollars, and $38,861 million and $36,680 million, respectively, of deposits denominated in other foreign currencies. |
(4) | Includes $276,218 million of deposits, each greater than one hundred thousand dollars, of which $173,167 million were booked in Canada, $71,037 million were booked in the United States and $32,014 million were booked in other countries ($258,862 million, $152,499 million, $79,682 million and $26,681 million, respectively, as at October 31, 2019). Of the $173,167 million of deposits booked in Canada, $27,729 million mature in less than three months, $11,351 million mature in three to six months, $41,220 million mature in six to twelve months and $92,867 million mature after twelve months ($152,499 million, $26,234 million, $8,400 million, $31,155 million and $86,710 million, respectively, as at October 31, 2019). Certain comparative figures have been reclassified to conform with the current period’s presentation. |
(5) | Includes $24,990 million of senior unsecured debt as at July 31, 2020 subject to the Bank Recapitalization (Bail-In) regime ($16,248 million as at October 31, 2019). The Bail-In regime provides certain statutory powers to the Canada Deposit Insurance Corporation, including the ability to convert specified eligible shares and liabilities into common shares if the bank becomes non-viable. |
(6) | Includes $12,741 million of deposits with the Bank of Canada, where we have used our own bearer deposit notes as collateral under its term repo facility ($nil as at October 31, 2019). |
Subordinated Debt
On June 17, 2020, we issued $1,250 million of 2.077% unsecured subordinated notes under our Canadian Medium-Term Note Program. The issue, Series J Medium-Term Notes Second Tranche, is due June 17, 2030. The notes reset to a floating rate on June 17, 2025.
During the three and nine months ended July 31, 2020, we did not redeem any subordinated debt.
60 BMO Financial Group Third Quarter Report 2020
Note 6: Equity
Preferred and Common Shares Outstanding and Other Equity Instruments (1)
(Canadian $ in millions, except as noted) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||
Number of shares | Amount | Number of shares | Amount | Convertible into... | ||||||||||||||||||
Preferred Shares - Classified as Equity | ||||||||||||||||||||||
Class B – Series 25 | 9,425,607 | 236 | 9,425,607 | 236 | Class B -Series 26 | (2) | ||||||||||||||||
Class B – Series 26 | 2,174,393 | 54 | 2,174,393 | 54 | Class B -Series 25 | (2) | ||||||||||||||||
Class B – Series 27 | 20,000,000 | 500 | 20,000,000 | 500 | Class B -Series 28 | (2)(3) | ||||||||||||||||
Class B – Series 29 | 16,000,000 | 400 | 16,000,000 | 400 | Class B -Series 30 | (2)(3) | ||||||||||||||||
Class B – Series 31 | 12,000,000 | 300 | 12,000,000 | 300 | Class B -Series 32 | (2)(3) | ||||||||||||||||
Class B – Series 33 | 8,000,000 | 200 | 8,000,000 | 200 | Class B -Series 34 | (2)(3) | ||||||||||||||||
Class B – Series 35 | 6,000,000 | 150 | 6,000,000 | 150 | Not convertible | (3) | ||||||||||||||||
Class B – Series 36 | 600,000 | 600 | 600,000 | 600 | Class B -Series 37 | (2)(3) | ||||||||||||||||
Class B – Series 38 | 24,000,000 | 600 | 24,000,000 | 600 | Class B -Series 39 | (2)(3) | ||||||||||||||||
Class B – Series 40 | 20,000,000 | 500 | 20,000,000 | 500 | Class B - Series 41 | (2)(3) | ||||||||||||||||
Class B – Series 42 | 16,000,000 | 400 | 16,000,000 | 400 | Class B -Series 43 | (2)(3) | ||||||||||||||||
Class B – Series 44 | 16,000,000 | 400 | 16,000,000 | 400 | Class B -Series 45 | (2)(3) | ||||||||||||||||
Class B – Series 46 | 14,000,000 | 350 | 14,000,000 | 350 | Class B -Series 47 | (2)(3) | ||||||||||||||||
Preferred Shares - Classified as Equity | 4,690 | 4,690 | ||||||||||||||||||||
Other Equity Instruments (4) | 658 | 658 | ||||||||||||||||||||
Common Shares (5) (6) (7) | 642,804,880 | 13,200 | 639,232,276 | 12,971 | ||||||||||||||||||
Share Capital and Other Equity Instruments | 18,548 | 18,319 |
(1) | For additional information refer to Notes 16 and 20 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 177 and 188 of our 2019 Annual Report. |
(2) | If converted, the holders have the option to convert back to the original preferred shares on subsequent redemption dates. |
(3) | The shares issued include a non-viability contingent capital provision, which is necessary for the shares to qualify as regulatory capital under Basel III. As such, the shares are convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to avoid non-viability. In such an event, each preferred share is convertible into common shares pursuant to an automatic conversion formula and a conversion price based on the greater of: (i) a floor price of $5.00 and (ii) the current market price of our common shares based on the volume weighted average trading price of our common shares on the TSX. The number of common shares issued is determined by dividing the share value of the preferred share issuance (including declared and unpaid dividends on such preferred share issuance) by the conversion price and then times the multiplier. |
(4) | The other equity instruments (notes) issued include a non-viability contingent capital provision, which is necessary for the notes to qualify as regulatory capital under Basel III. As such, the notes are convertible into a variable number of our common shares if OSFI announces that the bank is, or is about to become, non-viable or if a federal or provincial government in Canada publicly announces that the bank has accepted or agreed to accept a capital injection, or equivalent support, to avoid non-viability. In such an event, the notes are convertible into common shares of the bank determined by dividing (a) the product of the Multiplier of 1.25, and the Note Value, by (b) the Conversion Price which is the greater of the Floor price of $5 and the current market price. |
(5) | The stock options issued under the Stock Option Plan are convertible into 6,635,228 common shares as at July 31, 2020 (6,108,307 common shares as at October 31, 2019). |
(6) | During the three and nine months ended July 31, 2020, we issued 3,355,394 common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan and 8,614 and 423,737 common shares under the Stock Option Plan. |
(7) | Common shares are net of 206,527 treasury shares as at July 31, 2020. |
Other Equity Instruments
The bank’s US$500 million (CAD $658 million) 4.800% Additional Tier 1 Capital Notes (“notes”) are classified as equity and form part of our additional Tier 1 non-viability contingent capital. The notes are compound financial instruments that have both equity and liability features. On the date of issuance, we assigned an insignificant value to the liability component of the notes and, as a result, the full amount of proceeds has been classified as equity. Semi-annual distributions on the notes will be recorded as a reduction in retained earnings when payable in May and December. The rights of the holders of our notes are subordinate to the claims of the depositors and certain other creditors but rank above our common and preferred shares.
Preferred Shares
On June 29, 2020, we announced that we did not intend to exercise our right to redeem the current outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares Series 33 (“Preferred Shares Series 33”) on August 25, 2020. As a result, subject to certain conditions, the holders of Preferred Shares Series 33 had the right, at their option, by August 10, 2020, to convert any or all of their Preferred Shares Series 33 on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares Series 34 (“Preferred Shares Series 34”). During the conversion period, July 27, 2020 to August 10, 2020, 118,563 Preferred Shares Series 33 were tendered for conversion into Preferred Shares Series 34, which is less than the minimum 1,000,000 required to give effect to the conversion, as described in the Preferred Shares Series 33 prospectus supplement dated May 29, 2015. As a result, no Preferred Shares Series 34 were issued and holders of Preferred Shares Series 33 retained their shares. The dividend rate for the Preferred Shares Series 33 for the five year period commencing on August 25, 2020, and ending on August 24, 2025, is 3.054%.
During the three and nine months ended July 31, 2020, we did not issue or redeem any preferred shares.
Common Shares
On February 25, 2020, we announced our intention, subject to the approval of OSFI and the Toronto Stock Exchange, to establish a new normal course issuer bid (“NCIB”) that will permit us to purchase for cancellation up to 12 million common shares over a 12-month period, commencing on or about June 3, 2020. As previously noted, in light of OSFI’s announcement on March 13, 2020 that all share buybacks by federally regulated financial institutions should be halted for the time being, we have put the process on hold. We will proceed with the new NCIB based on OSFI’s future guidance. Our previous NCIB expired on June 2, 2020.
BMO Financial Group Third Quarter Report 2020 61
Shareholder Dividend Reinvestment and Share Purchase Plan
On August 25, 2020, we announced that commencing with common share dividend declared for the fourth quarter of fiscal 2020, and subsequently until further notice, common shares under the Shareholder Dividend Reinvestment and Share Purchase Plan (the “Plan”) will be purchased on the open market without a discount.
During the three and nine months ended July 31, 2020, we issued 3,355,394 common shares under the Plan.
Note 7: Fair Value of Financial Instruments
Fair Value of Financial Instruments Not Carried at Fair Value on the Balance Sheet
Set out in the following table are the amounts that would be reported if all financial assets and liabilities not currently carried at fair value were reported at their fair values. Refer to Note 17 to our annual consolidated financial statements for the year ended October 31, 2019 on pages 179 to 186 for further discussion on the determination of fair value.
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||
Carrying value | Fair value | Carrying value | Fair value | |||||||||||||
Securities | ||||||||||||||||
Amortized cost | 45,229 | 45,875 | 24,472 | 24,622 | ||||||||||||
Loans (1) | ||||||||||||||||
Residential mortgages | 125,341 | 127,108 | 123,676 | 124,093 | ||||||||||||
Consumer instalment and other personal | 68,506 | 69,181 | 67,200 | 67,516 | ||||||||||||
Credit cards | 7,617 | 7,617 | 8,623 | 8,623 | ||||||||||||
Business and government (2) | 240,352 | 242,295 | 224,442 | 225,145 | ||||||||||||
441,816 | 446,201 | 423,941 | 425,377 | |||||||||||||
Deposits (3) | 643,133 | 645,402 | 552,314 | 553,444 | ||||||||||||
Securitization and structured entities’ liabilities | 27,461 | 28,159 | 27,159 | 27,342 | ||||||||||||
Subordinated debt | 8,513 | 8,790 | 6,995 | 7,223 |
This table excludes financial instruments with a carrying value approximating fair value, such as cash and cash equivalents, interest bearing deposits with banks, securities borrowed or purchased under resale agreements,
customers’ liability under acceptances, other assets, acceptances, securities lent or sold under repurchase agreements and other liabilities.
(1) | Carrying value of loans is net of allowance. |
(2) | Excludes $3,562 million of loans classified as FVTPL and $50 million of loans classified as FVOCI as at July 31, 2020, respectively ($2,156 million and $22 million as at October 31, 2019). |
(3) | Excludes $17,467 million of structured note liabilities designated at FVTPL and accounted for at fair value ($15,829 million as at October 31, 2019). |
Fair Value Hierarchy
We use a fair value hierarchy to categorize financial instruments according to the inputs we use in valuation techniques to measure fair value.
Valuation Techniques and Significant Inputs
We determine the fair value of publicly traded fixed maturity debt and equity securities using quoted prices in active markets (Level 1) when these are available. When quoted prices in active markets are not available, we determine the fair value of financial instruments using models such as discounted cash flows with observable market data for inputs such as yield and prepayment rates or broker quotes and other third-party vendor quotes (Level 2). Fair value may also be determined using models where significant market inputs are not observable due to inactive markets or minimal market activity (Level 3). We maximize the use of observable market inputs to the extent possible. We have considered the current market conditions due to COVID-19 and their impact on the determination of fair value, applying judgment in the selection of inputs where applicable.
Our Level 2 trading and FVOCI securities are primarily valued using discounted cash flow models with observable spreads or third-party vendor quotes. Level 2 structured note liabilities are valued using models with observable market information. Level 2 derivative assets and liabilities are valued using industry standard models and observable market information.
62 BMO Financial Group Third Quarter Report 2020
The extent of our use of actively quoted market prices (Level 1), internal models using observable market information as inputs (Level 2) and models without observable market information as inputs (Level 3) in the valuation of securities, business and government loans classified as FVTPL, fair value liabilities, derivative assets and derivative liabilities is presented in the following tables:
(Canadian $ in millions) | July 31, 2020 | October 31, 2019 | ||||||||||||||||||||||||||||||
Valued using quoted market prices | Valued using models (with observable inputs) | Valued using models (without observable inputs) | Total | Valued using quoted market prices | Valued using models (with observable inputs) | Valued using models (without observable inputs) | Total | |||||||||||||||||||||||||
Trading Securities | ||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||
Canadian federal government | 4,746 | 3,898 | - | 8,644 | 6,959 | 1,371 | - | 8,330 | ||||||||||||||||||||||||
Canadian provincial and municipal governments | 2,056 | 6,967 | - | 9,023 | 3,871 | 3,656 | - | 7,527 | ||||||||||||||||||||||||
U.S. federal government | 8,000 | 1,210 | - | 9,210 | 8,001 | 762 | - | 8,763 | ||||||||||||||||||||||||
U.S. states, municipalities and agencies | 38 | 370 | - | 408 | 48 | 626 | - | 674 | ||||||||||||||||||||||||
Other governments | 1,406 | 1,485 | - | 2,891 | 888 | 697 | - | 1,585 | ||||||||||||||||||||||||
NHA MBS, U.S. agency MBS and CMO | 5 | 9,113 | 584 | 9,702 | 14 | 10,494 | 538 | 11,046 | ||||||||||||||||||||||||
Corporate debt | 3,694 | 6,765 | - | 10,459 | 2,620 | 5,091 | 7 | 7,718 | ||||||||||||||||||||||||
Trading loans | - | 45 | - | 45 | - | 103 | - | 103 | ||||||||||||||||||||||||
Corporate equity | 38,825 | - | - | 38,825 | 40,155 | 2 | - | 40,157 | ||||||||||||||||||||||||
58,770 | 29,853 | 584 | 89,207 | 62,556 | 22,802 | 545 | 85,903 | |||||||||||||||||||||||||
FVTPL Securities | ||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||
Canadian federal government | 627 | 108 | - | 735 | 410 | 107 | - | 517 | ||||||||||||||||||||||||
Canadian provincial and municipal governments | 239 | 1,231 | - | 1,470 | 364 | 915 | - | 1,279 | ||||||||||||||||||||||||
U.S. federal government | 9 | 35 | - | 44 | - | 48 | - | 48 | ||||||||||||||||||||||||
Other governments | - | 95 | - | 95 | - | 49 | - | 49 | ||||||||||||||||||||||||
NHA MBS, U.S. agency MBS and CMO | - | 3 | - | 3 | - | 5 | - | 5 | ||||||||||||||||||||||||
Corporate debt | 97 | 8,140 | - | 8,237 | 146 | 8,071 | - | 8,217 | ||||||||||||||||||||||||
Corporate equity | 1,654 | 8 | 1,807 | 3,469 | 1,536 | 69 | 1,984 | 3,589 | ||||||||||||||||||||||||
2,626 | 9,620 | 1,807 | 14,053 | 2,456 | 9,264 | 1,984 | 13,704 | |||||||||||||||||||||||||
FVOCI Securities | ||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||
Canadian federal government | 21,492 | 6,090 | - | 27,582 | 11,168 | 776 | - | 11,944 | ||||||||||||||||||||||||
Canadian provincial and municipal governments | 1,944 | 2,781 | - | 4,725 | 3,798 | 2,214 | - | 6,012 | ||||||||||||||||||||||||
U.S. federal government | 17,046 | 1,633 | - | 18,679 | 15,068 | 907 | - | 15,975 | ||||||||||||||||||||||||
U.S. states, municipalities and agencies | 6 | 5,356 | 1 | 5,363 | 1 | 4,159 | 1 | 4,161 | ||||||||||||||||||||||||
Other governments | 2,748 | 4,402 | - | 7,150 | 4,396 | 2,939 | - | 7,335 | ||||||||||||||||||||||||
NHA MBS, U.S. agency MBS and CMO | - | 11,538 | - | 11,538 | - | 14,000 | - | 14,000 | ||||||||||||||||||||||||
Corporate debt | 590 | 2,779 | - | 3,369 | 2,205 | 2,802 | - | 5,007 | ||||||||||||||||||||||||
Corporate equity | - | - | 87 | 87 | - | - | 81 | 81 | ||||||||||||||||||||||||
43,826 | 34,579 | 88 | 78,493 | 36,636 | 27,797 | 82 | 64,515 | |||||||||||||||||||||||||
Business and government loans | - | 1,409 | 2,203 | 3,612 | - | 442 | 1,736 | 2,178 | ||||||||||||||||||||||||
Fair Value Liabilities | ||||||||||||||||||||||||||||||||
Securities sold but not yet purchased | 25,323 | 5,256 | - | 30,579 | 22,393 | 3,860 | - | 26,253 | ||||||||||||||||||||||||
Structured note liabilities and other note liabilities (1) | - | 17,467 | - | 17,467 | - | 15,829 | - | 15,829 | ||||||||||||||||||||||||
Annuity liabilities (2) | - | 1,232 | - | 1,232 | - | 1,043 | - | 1,043 | ||||||||||||||||||||||||
25,323 | 23,955 | - | 49,278 | 22,393 | 20,732 | - | 43,125 | |||||||||||||||||||||||||
Derivative Assets | ||||||||||||||||||||||||||||||||
Interest rate contracts | 24 | 17,333 | - | 17,357 | 14 | 10,443 | - | 10,457 | ||||||||||||||||||||||||
Foreign exchange contracts | 9 | 15,804 | - | 15,813 | 7 | 9,262 | - | 9,269 | ||||||||||||||||||||||||
Commodity contracts | 457 | 1,555 | - | 2,012 | 329 | 817 | - | 1,146 | ||||||||||||||||||||||||
Equity contracts | 743 | 2,860 | - | 3,603 | 226 | 997 | - | 1,223 | ||||||||||||||||||||||||
Credit default swaps | - | 11 | - | 11 | - | 49 | - | 49 | ||||||||||||||||||||||||
1,233 | 37,563 | - | 38,796 | 576 | 21,568 | - | 22,144 | |||||||||||||||||||||||||
Derivative Liabilities | ||||||||||||||||||||||||||||||||
Interest rate contracts | 31 | 12,836 | - | 12,867 | 11 | 7,943 | - | 7,954 | ||||||||||||||||||||||||
Foreign exchange contracts | 12 | 18,723 | - | 18,735 | 20 | 10,843 | - | 10,863 | ||||||||||||||||||||||||
Commodity contracts | 603 | 2,247 | - | 2,850 | 218 | 1,462 | - | 1,680 | ||||||||||||||||||||||||
Equity contracts | 478 | 4,907 | - | 5,385 | 103 | 2,896 | - | 2,999 | ||||||||||||||||||||||||
Credit default swaps | - | 19 | 3 | 22 | - | 101 | 1 | 102 | ||||||||||||||||||||||||
1,124 | 38,732 | 3 | 39,859 | 352 | 23,245 | 1 | 23,598 |
(1) | These structured note liabilities and other note liabilities included in deposits have been designated at FVTPL. |
(2) | These investment contract liabilities in our insurance business have been designated at FVTPL. |
BMO Financial Group Third Quarter Report 2020 63
Quantitative Information about Level 3 Fair Value Measurements
The table below presents the fair values of our significant Level 3 financial instruments that are measured at a fair value on a recurring basis, the valuation techniques used to determine their fair values and the value ranges of significant unobservable inputs used in the valuations. We have not applied any other reasonably possible alternative assumption to the significant Level 3 categories of private equity investments, as the net asset values are provided by the investment or fund managers.
Range of input values (1) | ||||||||||||||||||||||||
As at July 31, 2020 (Canadian $ in millions, except as noted) | Reporting line in fair value hierarchy table | Fair value of assets | Valuation techniques | Significant unobservable inputs | Low | High | ||||||||||||||||||
Private equity (2) | Corporate equity | 1,807 | Net Asset Value | Net Asset Value | na | na | ||||||||||||||||||
EV/EBITDA | Multiple | 5x | 16x | |||||||||||||||||||||
Loans (3) | Business and government loans | 2,203 | Discounted cash flows | Discount margin | 56bps | 224bps | ||||||||||||||||||
NHA MBS and U.S. agency MBS and CMO | NHA MBS and U.S. agency MBS and CMO | 584 | Discounted cash flows | Prepayment rate | 7% | 86% | ||||||||||||||||||
Market Comparable | Comparability Adjustment (4) | (5.26) | 5.54 |
(1) | The low and high input values represent the highest and lowest actual level of inputs used to value a group of financial instruments in a particular product category. These input ranges do not reflect the level of input uncertainty, but are affected by the specific underlying instruments within each product category. The input ranges will therefore vary from period to period based on the characteristics of the underlying instruments held at each balance sheet date. |
(2) | Included in private equity is $490 million of Federal Reserve Bank and U.S. Federal Home Loan Bank shares that we carry at cost, which approximates fair value, and hold to meet regulatory requirements. |
(3) | The impact of assuming a 10 basis point increase or decrease in discount margin for business and government loans is $2 million. |
(4) | Range of input values represents price per security adjustment. |
na – not applicable
Significant Transfers
Our policy is to record transfers of assets and liabilities between fair value hierarchy levels at their fair values as at the end of each reporting period, consistent with the date of the determination of fair value. Transfers between the various fair value hierarchy levels reflect changes in the availability of quoted market prices or observable market inputs that result from changes in market conditions. Transfers from Level 1 to Level 2 were due to reduced observability of the inputs used to value the securities. Transfers from Level 2 to Level 1 were due to increased availability of quoted prices in active markets.
The following table presents significant transfers between Level 1 and Level 2 for the three and nine months ended July 31, 2020 and July 31, 2019.
(Canadian $ in millions) | ||||||||
For the three months ended | July 31, 2020 | July 31, 2019 | ||||||
Level 1 to Level 2 | Level 2 to Level 1 | Level 1 to Level 2 | Level 2 to Level 1 | |||||
Trading Securities | 994 | 2,682 | 1,734 | 901 | ||||
FVTPL Securities | 19 | 241 | 218 | 38 | ||||
FVOCI Securities | 1,768 | 4,294 | 1,834 | 2,335 | ||||
Securities sold but not yet purchased | 681 | 2,067 | 6,362 | 98 |
(Canadian $ in millions) | ||||||||
For the nine months ended | July 31, 2020 | July 31, 2019 | ||||||
Level 1 to Level 2 | Level 2 to Level 1 | Level 1 to Level 2 | Level 2 to Level 1 | |||||
Trading Securities | 5,761 | 3,952 | 5,392 | 4,260 | ||||
FVTPL Securities | 518 | 302 | 682 | 390 | ||||
FVOCI Securities | 9,032 | 7,012 | 9,723 | 3,910 | ||||
Securities sold but not yet purchased | 4,432 | 2,982 | 9,905 | 2,501 |
64 BMO Financial Group Third Quarter Report 2020
Changes in Level 3 Fair Value Measurements
The table below presents a reconciliation of all changes in Level 3 financial instruments during the three and nine months ended July 31, 2020, including realized and unrealized gains (losses) included in earnings and other comprehensive income as well as transfers into and out of Level 3. Transfers from Level 2 into Level 3 were due to an increase in unobservable market inputs used in pricing the securities. Transfers out of Level 3 into Level 2 were due to an increase in observable market inputs used in pricing the securities.
Change in fair value | ||||||||||||||||||||||||||||||||||||||||
(Canadian $ in millions) For the three months ended July 31, 2020 |
Balance |
Included in | Included in other comprehensive income (1) | Issuances/ Purchases |
Sales (2) | Maturities/ Settlement | Transfers into Level 3 | Transfers out of Level 3 | Fair Value as at July 31, 2020 | Change in for instruments | ||||||||||||||||||||||||||||||
Trading Securities | ||||||||||||||||||||||||||||||||||||||||
NHA MBS and U.S. agency MBS and CMO | 487 | (115 | ) | (18 | ) | 362 | (151 | ) | - | 41 | (22 | ) | 584 | (74 | ) | |||||||||||||||||||||||||
Corporate debt | 48 | 10 | (2 | ) | - | (56 | ) | - | - | - | - | - | ||||||||||||||||||||||||||||
Total trading securities | 535 | (105 | ) | (20 | ) | 362 | (207 | ) | - | 41 | (22 | ) | 584 | (74 | ) | |||||||||||||||||||||||||
FVTPL Securities | ||||||||||||||||||||||||||||||||||||||||
Corporate equity | 2,062 | (23 | ) | (57 | ) | 58 | (233 | ) | - | - | - | 1,807 | 2 | |||||||||||||||||||||||||||
Total FVTPL securities | 2,062 | (23 | ) | (57 | ) | 58 | (233 | ) | - | - | - | 1,807 | 2 | |||||||||||||||||||||||||||
FVOCI Securities | ||||||||||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||||||||||
U.S. states, municipalities and agencies | 1 | - | - | - | - | - | - | - | 1 | na | ||||||||||||||||||||||||||||||
Corporate equity | 83 | - | - | 4 | - | - | - | - | 87 | na | ||||||||||||||||||||||||||||||
Total FVOCI securities | 84 | - | - | 4 | - | - | - | - | 88 | na | ||||||||||||||||||||||||||||||
Business and government loans | 2,028 | - | 95 | 765 | - | (685 | ) | - | - | 2,203 | - | |||||||||||||||||||||||||||||
Fair Value Liabilities | ||||||||||||||||||||||||||||||||||||||||
Securities sold but not yet purchased | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Total fair value liabilities | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||||
Equity contracts | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Credit default swaps | 4 | - | - | - | - | - | - | (1 | ) | 3 | - | |||||||||||||||||||||||||||||
Total derivative liabilities | 4 | - | - | - | - | - | - | (1 | ) | 3 | - |
(1) | Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations. |
(2) | Includes proceeds recovered on securities sold but not yet purchased. |
(3) | Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2020 are included in earnings for the period. |
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.
na – Not applicable
Change in fair value | ||||||||||||||||||||||||||||||||||||||||
(Canadian $ in millions) For the nine months ended July 31, 2020 |
Balance |
Included in | Included in other comprehensive | Issuances/ Purchases |
Sales (2) | Maturities/ Settlement | Transfers into Level 3 | Transfers out of Level 3 | Fair Value as at July 31, 2020 | Change in in income for instruments | ||||||||||||||||||||||||||||||
Trading Securities | ||||||||||||||||||||||||||||||||||||||||
NHA MBS and U.S. agency MBS and CMO | 538 | (245 | ) | 12 | 811 | (540 | ) | - | 202 | (194 | ) | 584 | (158 | ) | ||||||||||||||||||||||||||
Corporate debt | 7 | 10 | (2 | ) | 50 | (68 | ) | - | 3 | - | - | (1 | ) | |||||||||||||||||||||||||||
Total trading securities | 545 | (235 | ) | 10 | 861 | (608 | ) | - | 205 | (194 | ) | 584 | (159 | ) | ||||||||||||||||||||||||||
FVTPL Securities | ||||||||||||||||||||||||||||||||||||||||
Corporate equity | 1,984 | (27 | ) | 23 | 244 | (418 | ) | - | 1 | - | 1,807 | 7 | ||||||||||||||||||||||||||||
Total FVTPL | 1,984 | (27 | ) | 23 | 244 | (418 | ) | - | 1 | - | 1,807 | 7 | ||||||||||||||||||||||||||||
FVOCI Securities | ||||||||||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||||||||||
U.S. states, municipalities and agencies | 1 | - | - | - | - | - | - | - | 1 | na | ||||||||||||||||||||||||||||||
Corporate equity | 81 | - | - | 6 | - | - | - | - | 87 | na | ||||||||||||||||||||||||||||||
Total FVOCI securities | 82 | - | - | 6 | - | - | - | - | 88 | na | ||||||||||||||||||||||||||||||
Business and government loans | 1,736 | (3 | ) | 183 | 1,705 | - | (1,418 | ) | - | - | 2,203 | – | ||||||||||||||||||||||||||||
Fair Value Liabilities | ||||||||||||||||||||||||||||||||||||||||
Securities sold but not yet purchased | - | - | - | - | - | - | - | - | - | – | ||||||||||||||||||||||||||||||
Total fair value liabilities | - | - | - | - | - | - | - | - | - | – | ||||||||||||||||||||||||||||||
Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||||
Equity contracts | - | - | - | - | - | - | - | - | - | – | ||||||||||||||||||||||||||||||
Credit default swaps | 1 | - | - | - | - | - | 3 | (1 | ) | 3 | – | |||||||||||||||||||||||||||||
Total derivative liabilities | 1 | - | - | - | - | - | 3 | (1 | ) | 3 | – |
(1) | Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations. |
(2) | Includes proceeds recovered on securities sold but not yet purchased. |
(3) | Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2020 are included in earnings for the period. |
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.
na – Not applicable
BMO Financial Group Third Quarter Report 2020 65
The table below presents a reconciliation of all changes in Level 3 financial instruments during the three and nine months ended July 31, 2019, including realized and unrealized gains (losses) included in earnings and other comprehensive income.
Change in fair value | ||||||||||||||||||||||||||||||||||||||||
(Canadian $ in millions) For the three months ended July 31, 2019 |
Balance |
Included in | Included in other income (1) | Issuances/ Purchases |
Sales (2) | Maturities/ Settlement | Transfers into Level 3 | Transfers out of Level 3 | Fair Value as at July 31, 2019 | Change in unrealized gains (losses) recorded in income for instruments | ||||||||||||||||||||||||||||||
Trading Securities | ||||||||||||||||||||||||||||||||||||||||
NHA MBS and U.S. agency MBS and CMO | 215 | (15 | ) | (3 | ) | 97 | (96 | ) | - | 53 | (5 | ) | 246 | (6 | ) | |||||||||||||||||||||||||
Corporate debt | 7 | - | - | 26 | (6 | ) | - | - | (1 | ) | 26 | - | ||||||||||||||||||||||||||||
Total trading securities | 222 | (15 | ) | (3 | ) | 123 | (102 | ) | - | 53 | (6 | ) | 272 | (6 | ) | |||||||||||||||||||||||||
FVTPL Securities | ||||||||||||||||||||||||||||||||||||||||
Corporate equity | 1,907 | 10 | (21 | ) | 77 | (66 | ) | (1 | ) | - | - | 1,906 | 16 | |||||||||||||||||||||||||||
Total FVTPL | 1,907 | 10 | (21 | ) | 77 | (66 | ) | (1 | ) | - | - | 1,906 | 16 | |||||||||||||||||||||||||||
FVOCI Securities | ||||||||||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||||||||||
U.S. states, municipalities and agencies | 1 | - | - | - | - | - | - | - | 1 | na | ||||||||||||||||||||||||||||||
Corporate equity | 69 | - | - | 10 | - | - | - | - | 79 | na | ||||||||||||||||||||||||||||||
Total FVOCI securities | 70 | - | - | 10 | - | - | - | - | 80 | na | ||||||||||||||||||||||||||||||
Business and government loans | 2,172 | - | (31 | ) | 155 | - | (132 | ) | - | - | 2,164 | - | ||||||||||||||||||||||||||||
Fair Value Liabilities | ||||||||||||||||||||||||||||||||||||||||
Securities sold but not yet purchased | - | - | - | - | 172 | - | - | - | 172 | - | ||||||||||||||||||||||||||||||
Total fair value liabilities | - | - | - | - | 172 | - | - | - | 172 | - | ||||||||||||||||||||||||||||||
Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||||
Equity contracts | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Credit default swaps | - | - | - | - | - | - | 1 | - | 1 | - | ||||||||||||||||||||||||||||||
Total derivative liabilities | - | - | - | - | - | - | 1 | - | 1 | - |
(1) | Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations. |
(2) | Includes proceeds recovered on securities sold but not yet purchased. |
(3) | Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2019 are included in earnings for the period. |
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.
na – Not applicable
Change in fair value | ||||||||||||||||||||||||||||||||||||||||
(Canadian $ in millions) For the nine months ended July 31, 2019 |
Balance |
Included in | Included in other comprehensive | Issuances/ Purchases |
Sales (2) | Maturities/ Settlement | Transfers into Level 3 | Transfers out of Level 3 | Fair Value as at July 31, 2019 | Change in unrealized gains (losses) recorded for instruments still held (3) | ||||||||||||||||||||||||||||||
Trading Securities | ||||||||||||||||||||||||||||||||||||||||
NHA MBS and U.S. agency MBS and CMO | 255 | (22 | ) | 1 | 280 | (326 | ) | - | 98 | (40 | ) | 246 | (13 | ) | ||||||||||||||||||||||||||
Corporate debt | 7 | - | - | 32 | (12 | ) | - | - | (1 | ) | 26 | - | ||||||||||||||||||||||||||||
Total trading securities | 262 | (22 | ) | 1 | 312 | (338 | ) | - | 98 | (41 | ) | 272 | (13 | ) | ||||||||||||||||||||||||||
FVTPL Securities | ||||||||||||||||||||||||||||||||||||||||
Corporate equity | 1,825 | 20 | 2 | 324 | (264 | ) | (1 | ) | - | - | 1,906 | 36 | ||||||||||||||||||||||||||||
Total FVTPL | 1,825 | 20 | 2 | 324 | (264 | ) | (1 | ) | - | - | 1,906 | 36 | ||||||||||||||||||||||||||||
FVOCI Securities | ||||||||||||||||||||||||||||||||||||||||
Issued or guaranteed by: | ||||||||||||||||||||||||||||||||||||||||
U.S. states, municipalities and agencies | 1 | - | - | - | - | - | - | - | 1 | na | ||||||||||||||||||||||||||||||
Corporate equity | 62 | - | - | 17 | - | - | - | - | 79 | na | ||||||||||||||||||||||||||||||
Total FVOCI securities | 63 | - | - | 17 | - | - | - | - | 80 | na | ||||||||||||||||||||||||||||||
Business and government loans | 1,450 | 7 | 13 | 1,369 | - | (675 | ) | - | - | 2,164 | - | |||||||||||||||||||||||||||||
Fair Value Liabilities | ||||||||||||||||||||||||||||||||||||||||
Securities sold but not yet purchased | - | - | - | (7 | ) | 179 | - | - | - | 172 | - | |||||||||||||||||||||||||||||
Total fair value liabilities | - | - | - | (7 | ) | 179 | - | - | - | 172 | - | |||||||||||||||||||||||||||||
Derivative Liabilities | ||||||||||||||||||||||||||||||||||||||||
Equity contracts | 1 | - | - | - | - | - | - | (1 | ) | - | - | |||||||||||||||||||||||||||||
Credit default swaps | 1 | - | - | - | - | - | 1 | (1 | ) | 1 | - | |||||||||||||||||||||||||||||
Total derivative liabilities | 2 | - | - | - | - | - | 1 | (2 | ) | 1 | - |
(1) | Foreign exchange translation on trading securities held by foreign subsidiaries is included in other comprehensive income, net foreign operations. |
(2) | Includes proceeds recovered on securities sold but not yet purchased. |
(3) | Changes in unrealized gains (losses) on Trading and FVTPL securities still held on July 31, 2019 are included in earnings for the period. |
Unrealized gains (losses) recognized on Level 3 financial instruments may be offset by related (losses) gains on hedge contracts.
na – Not applicable
66 BMO Financial Group Third Quarter Report 2020
Note 8: Capital Management
Our objective is to maintain a strong capital position in a cost-effective structure that: is appropriate given our target regulatory capital ratios and internal assessment of required economic capital; underpins our operating groups’ business strategies; supports depositor, investor and regulator confidence, while building long-term shareholder value; and is consistent with our target credit ratings.
As at July 31, 2020, we met OSFI’s target capital ratio requirements, which include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Surcharge for Domestic Systemically Important Banks (“D-SIBs”), a Countercyclical Buffer and a 1.0% Domestic Stability Buffer applicable to D-SIBs. Our capital position as at July 31, 2020 is detailed in the Capital Management section on pages 15 through 18 of our interim Management’s Discussion and Analysis.
Note 9: Employee Compensation
Stock Options
We did not grant any stock options during the three months ended July 31, 2020 and 2019. During the nine months ended July 31, 2020, we granted a total of 976,087 stock options (931,047 stock options during the nine months ended July 31, 2019). The weighted-average fair value of options granted during the nine months ended July 31, 2020 was $9.46 per option ($10.23 per option for the nine months ended July 31, 2019).
To determine the fair value of the stock option tranches (i.e. the portion that vests each year) on the grant date, the following ranges of values were used for each option pricing assumption:
For stock options granted during the nine months ended | July 31, 2020 | July 31, 2019 | ||||||
Expected dividend yield | 4.3% | 5.7% | ||||||
Expected share price volatility | 15.4% | 20.0% - 20.1% | ||||||
Risk-free rate of return | 1.9% - 2.0% | 2.5% | ||||||
Expected period until exercise (in years) | 6.5 - 7.0 | 6.5 - 7.0 | ||||||
Exercise price ($) | 101.47 | 89.90 |
Changes to the input assumptions can result in different fair value estimates.
Pension and Other Employee Future Benefit Expenses
Pension and other employee future benefit expenses are determined as follows:
(Canadian $ in millions) | ||||||||||||||||
Pension benefit plans | Other employee future benefit plans | |||||||||||||||
For the three months ended | July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | ||||||||||||
Current service cost | 62 | 48 | 2 | 2 | ||||||||||||
Net interest (income) expense on net defined benefit (asset) liability | 1 | (5 | ) | 8 | 10 | |||||||||||
Administrative expenses | 1 | 1 | - | - | ||||||||||||
Benefits expense | 64 | 44 | 10 | 12 | ||||||||||||
Canada and Quebec pension plan expense | 22 | 23 | - | - | ||||||||||||
Defined contribution expense | 37 | 37 | - | - | ||||||||||||
Total pension and other employee future benefit expenses | 123 | 104 | 10 | 12 | ||||||||||||
(Canadian $ in millions) | ||||||||||||||||
Pension benefit plans | Other employee future benefit plans | |||||||||||||||
For the nine months ended | July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | ||||||||||||
Current service cost | 187 | 144 | 8 | 7 | ||||||||||||
Net interest (income) expense on net defined benefit (asset) liability | 1 | (14 | ) | 24 | 29 | |||||||||||
Past service income | - | (5 | ) | - | - | |||||||||||
Administrative expenses | 3 | 3 | - | - | ||||||||||||
Benefits expense | 191 | 128 | 32 | 36 | ||||||||||||
Canada and Quebec pension plan expense | 75 | 70 | - | - | ||||||||||||
Defined contribution expense | 135 | 127 | - | - | ||||||||||||
Total pension and other employee future benefit expenses | 401 | 325 | 32 | 36 |
BMO Financial Group Third Quarter Report 2020 67
Note 10: Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to equity holders of the bank, after deducting dividends on preferred shares and distributions payable on other equity instruments, by the daily average number of fully paid common shares outstanding throughout the period.
Diluted earnings per share is calculated in the same manner, with further adjustments made to reflect the dilutive impact of instruments convertible into our common shares.
The following tables present our basic and diluted earnings per share:
Basic Earnings Per Common Share
(Canadian $ in millions, except as noted) | For the three months ended | For the nine months ended | ||||||||||||||
July 31, 2020 | July 31, 2019 | July 31, 2020 | July 31, 2019 | |||||||||||||
Net income attributable to equity holders of the bank | 1,232 | 1,557 | 3,513 | 4,564 | ||||||||||||
Dividends on preferred shares and distributions payable on other equity instruments | (73 | ) | (59 | ) | (195 | ) | (159) | |||||||||
Net income available to common shareholders | 1,159 | 1,498 | 3,318 | 4,405 | ||||||||||||
Weighted-average number of common shares outstanding (in thousands) | 641,300 | 638,900 | 640,129 | 638,803 | ||||||||||||
Basic earnings per share (Canadian $) | 1.81 | 2.34 | 5.18 | 6.90 | ||||||||||||
Diluted Earnings Per Common Share
| ||||||||||||||||
Net income available to common shareholders adjusted for impact of dilutive instruments | 1,159 | 1,498 | 3,318 | 4,405 | ||||||||||||
Weighted-average number of common shares outstanding (in thousands) | 641,300 | 638,900 | 640,129 | 638,803 | ||||||||||||
Effect of dilutive instruments | ||||||||||||||||
Stock options potentially exercisable (1) | 2,400 | 5,734 | 3,473 | 5,697 | ||||||||||||
Common shares potentially repurchased | (2,046 | ) | (4,184 | ) | (2,721 | ) | (4,137) | |||||||||
Weighted-average number of diluted common shares outstanding (in thousands) | 641,654 | 640,450 | 640,881 | 640,363 | ||||||||||||
Diluted earnings per share (Canadian $) | 1.81 | 2.34 | 5.18 | 6.88 |
(1) | In computing diluted earnings per share we excluded average stock options outstanding of 4,238,334 and 3,124,912 with a weighted-average exercise price of $94.30 and $99.72, respectively, for the three and nine months ended July 31, 2020 (687,059 and 908,194 with a weighted-average exercise price of $104.14 and $102.98, respectively, for the three and nine months ended July 31, 2019) as the average share price for the period did not exceed the exercise price. |
Note 11: Income Taxes
The Canada Revenue Agency (“CRA”) has reassessed us for additional income tax and interest in an amount of approximately $941 million, to date, in respect of certain 2011-2015 Canadian corporate dividends. In its reassessments, the CRA denied dividend deductions on the basis that the dividends were received as part of a “dividend rental arrangement”. The tax rules raised by the CRA were prospectively addressed in the 2015 and 2018 Canadian Federal Budgets. In the future, we expect to be reassessed for significant income tax for similar activities in subsequent years. We remain of the view that our tax filing positions were appropriate and intend to challenge all reassessments.
Note 12: Operating Segmentation
Operating Groups
We conduct our business through three operating groups, each of which has a distinct mandate. Our operating groups are Personal and Commercial Banking (“P&C”) (comprised of Canadian Personal and Commercial Banking (“Canadian P&C”) and U.S. Personal and Commercial Banking (“U.S. P&C”)), BMO Wealth Management and BMO Capital Markets (“BMO CM”), along with a Corporate Services unit.
For additional information refer to Note 25 of our annual consolidated financial statements for the year ended October 31, 2019 on pages 199 to 202 of the Annual Report.
68 BMO Financial Group Third Quarter Report 2020
Our results and average assets, grouped by operating segment, are as follows:
(Canadian $ in millions) | ||||||||||||||||||||||||
For the three months ended July 31, 2020 | Canadian P&C | U.S. P&C | BMO Wealth Management | BMO CM | Corporate Services (1) | Total | ||||||||||||||||||
Net interest income (2) | 1,509 | 1,107 | 229 | 952 | (262 | ) | 3,535 | |||||||||||||||||
Non-interest revenue | 453 | 292 | 2,255 | 576 | 78 | 3,654 | ||||||||||||||||||
Total Revenue | 1,962 | 1,399 | 2,484 | 1,528 | (184 | ) | 7,189 | |||||||||||||||||
Provision for credit losses on impaired loans | 257 | 109 | 1 | 79 | - | 446 | ||||||||||||||||||
Provision for credit losses on performing loans | 313 | 223 | 7 | 58 | 7 | 608 | ||||||||||||||||||
Total Provision for credit losses | 570 | 332 | 8 | 137 | 7 | 1,054 | ||||||||||||||||||
Insurance claims, commissions and changes in policy benefit liabilities | - | - | 1,189 | - | - | 1,189 | ||||||||||||||||||
Depreciation and amortization | 117 | 131 | 93 | 59 | - | 400 | ||||||||||||||||||
Other non-interest expense | 843 | 621 | 744 | 766 | 70 | 3,044 | ||||||||||||||||||
Income (loss) before taxes | 432 | 315 | 450 | 566 | (261 | ) | 1,502 | |||||||||||||||||
Provision for (recovery of) income taxes | 112 | 52 | 109 | 140 | (143 | ) | 270 | |||||||||||||||||
Reported net income (loss) | 320 | 263 | 341 | 426 | (118 | ) | 1,232 | |||||||||||||||||
Average Assets | 252,028 | 140,615 | 46,308 | 379,131 | 159,682 | 977,764 | ||||||||||||||||||
For the three months ended July 31, 2019 | Canadian P&C | U.S. P&C | BMO Wealth Management | BMO CM | Corporate Services (1) | Total | ||||||||||||||||||
Net interest income (2) | 1,500 | 1,066 | 237 | 537 | (123 | ) | 3,217 | |||||||||||||||||
Non-interest revenue | 543 | 298 | 1,876 | 670 | 62 | 3,449 | ||||||||||||||||||
Total Revenue | 2,043 | 1,364 | 2,113 | 1,207 | (61 | ) | 6,666 | |||||||||||||||||
Provision for credit losses on impaired loans | 174 | 61 | - | 7 | 1 | 243 | ||||||||||||||||||
Provision for (recovery of) credit losses on performing loans | 30 | 37 | (2 | ) | 3 | (5 | ) | 63 | ||||||||||||||||
Provision for (recovery of) credit losses | 204 | 98 | (2 | ) | 10 | (4 | ) | 306 | ||||||||||||||||
Insurance claims, commissions and changes in policy benefit liabilities | - | - | 887 | - | - | 887 | ||||||||||||||||||
Depreciation and amortization | 87 | 111 | 68 | 35 | - | 301 | ||||||||||||||||||
Other non-interest expense | 874 | 693 | 817 | 764 | 42 | 3,190 | ||||||||||||||||||
Income (loss) before taxes | 878 | 462 | 343 | 398 | (99 | ) | 1,982 | |||||||||||||||||
Provision for (recovery of) income taxes | 228 | 94 | 93 | 84 | (74 | ) | 425 | |||||||||||||||||
Reported net income (loss) | 650 | 368 | 250 | 314 | (25 | ) | 1,557 | |||||||||||||||||
Average Assets | 239,948 | 129,098 | 41,891 | 343,292 | 82,734 | 836,963 | ||||||||||||||||||
(Canadian $ in millions) | ||||||||||||||||||||||||
For the nine months ended July 31, 2020 | Canadian P&C | U.S. P&C | BMO Wealth Management | BMO CM | Corporate Services (1) | Total | ||||||||||||||||||
Net interest income | 4,561 | 3,287 | 672 | 2,503 | (582 | ) | 10,441 | |||||||||||||||||
Non-interest revenue | 1,443 | 912 | 4,727 | 1,445 | 232 | 8,759 | ||||||||||||||||||
Total Revenue | 6,004 | 4,199 | 5,399 | 3,948 | (350 | ) | 19,200 | |||||||||||||||||
Provision for credit losses on impaired loans | 607 | 365 | 4 | 205 | 2 | 1,183 | ||||||||||||||||||
Provision for credit losses on performing loans | 612 | 315 | 13 | 390 | 8 | 1,338 | ||||||||||||||||||
Total Provision for credit losses | 1,219 | 680 | 17 | 595 | 10 | 2,521 | ||||||||||||||||||
Insurance claims, commissions and changes in policy benefit liabilities | - | - | 1,708 | - | - | 1,708 | ||||||||||||||||||
Depreciation and amortization | 373 | 417 | 250 | 171 | - | 1,211 | ||||||||||||||||||
Non-interest expense | 2,549 | 1,913 | 2,387 | 2,264 | 305 | 9,418 | ||||||||||||||||||
Income (loss) before taxes | 1,863 | 1,189 | 1,037 | 918 | (665 | ) | 4,342 | |||||||||||||||||
Provision for (recovery of) income taxes | 482 | 236 | 261 | 210 | (360 | ) | 829 | |||||||||||||||||
Reported net income (loss) | 1,381 | 953 | 776 | 708 | (305 | ) | 3,513 | |||||||||||||||||
Average Assets | 251,325 | 139,196 | 45,234 | 370,363 | 129,399 | 935,517 | ||||||||||||||||||
For the nine months ended July 31, 2019 | Canadian P&C | U.S. P&C | BMO Wealth Management | BMO CM | Corporate Services (1) | Total | ||||||||||||||||||
Net interest income | 4,342 | 3,160 | 699 | 1,695 | (372 | ) | 9,524 | |||||||||||||||||
Non-interest revenue | 1,564 | 858 | 5,396 | 1,885 | 169 | 9,872 | ||||||||||||||||||
Total Revenue | 5,906 | 4,018 | 6,095 | 3,580 | (203 | ) | 19,396 | |||||||||||||||||
Provision for (recovery of) credit losses on impaired loans | 410 | 94 | 1 | 20 | (5 | ) | 520 | |||||||||||||||||
Provision for (recovery of) credit losses on performing loans | 52 | 33 | (1 | ) | 20 | (5 | ) | 99 | ||||||||||||||||
Provision for (recovery of) credit losses | 462 | 127 | - | 40 | (10 | ) | 619 | |||||||||||||||||
Insurance claims, commissions and changes in policy benefit liabilities | - | - | 2,374 | - | - | 2,374 | ||||||||||||||||||
Depreciation and amortization | 250 | 338 | 200 | 107 | - | 895 | ||||||||||||||||||
Non-interest expense | 2,610 | 2,008 | 2,463 | 2,380 | 287 | 9,748 | ||||||||||||||||||
Income (loss) before taxes | 2,584 | 1,545 | 1,058 | 1,053 | (480 | ) | 5,760 | |||||||||||||||||
Provision for (recovery of) income taxes | 670 | 327 | 265 | 233 | (299 | ) | 1,196 | |||||||||||||||||
Reported net income (loss) | 1,914 | 1,218 | 793 | 820 | (181 | ) | 4,564 | |||||||||||||||||
Average Assets | 235,562 | 124,590 | 40,345 | 342,829 | 82,778 | 826,104 |
(1) | Corporate Services includes Technology and Operations. |
(2) | Operating groups report on a taxable equivalent basis (“teb”). 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 groups’ teb adjustments is reflected in Corporate Services revenue and provision for income taxes. |
Certain comparative figures have been reclassified to conform with the current period’s presentation.
BMO Financial Group Third Quarter Report 2020 69
Note 13: Legal Proceedings
The bank and its subsidiaries are party to legal proceedings, including regulatory investigations, in the ordinary course of business. Last quarter, an Ontario court made a liability finding and awarded an accounting of profits in a class action involving BMO Nesbitt Burns Inc., BMO InvestorLine Inc. and BMO Trust Company regarding disclosures of foreign exchange conversion spreads when converting foreign exchange in registered accounts. The monetary award will be determined at a court hearing in Q1 2021 based on profits earned during the class period, less reasonable expenses, plus pre-judgment interest. The lawsuit claimed monetary awards up to $419 million (at May 2019). We have appealed the decision. The Plaintiffs have also appealed. An appropriate provision is in place.
While there is inherent difficulty in predicting the ultimate outcome of this or other proceedings, management does not expect the outcome of any of these proceedings, individually or in the aggregate, to have a material adverse effect on the consolidated financial position or the results of operations of the bank.
Note 14: Acquisition
On April 6, 2020, we completed the acquisition of Clearpool Group Inc. (“Clearpool”), a New York-based provider of electronic trading solutions, operating in the United States and Canada, for cash consideration of US$139 million (CAD$196 million) plus contingent consideration of approximately US$8 million (CAD$11 million) based on meeting certain revenue targets over four years. The acquisition was accounted for as a business combination, and the acquired business and corresponding goodwill are included in our Capital Markets reporting segment.
As part of this acquisition, we acquired intangible assets of $85 million and goodwill of $138 million. The intangible assets are being amortized over three to twelve years. Goodwill related to this acquisition is not deductible for tax purposes.
The fair values of the assets acquired and liabilities assumed at the date of acquisition are as follows:
(Canadian $ in millions) | ||||
Clearpool | ||||
Goodwill and intangible assets | 223 | |||
Other assets | 44 | |||
Total assets | 267 | |||
Liabilities | 60 | |||
Purchase price | 207 |
The purchase price allocation for Clearpool is subject to refinement as we complete the valuation of the assets acquired and liabilities assumed.
70 BMO Financial Group Third Quarter Report 2020