FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

 

For the month of: February, 2020    Commission File Number: 001-13354

BANK OF MONTREAL

(Name of Registrant)

 

100 King Street West  
1 First Canadian Place   129 rue Saint-Jacques
Toronto, Ontario   Montreal, Quebec
Canada, M5X 1A1   Canada, H2Y 1L6
(Executive Offices)   (Head Office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F              Form 40-F  

 

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  

 

 

INCORPORATION BY REFERENCE

The information contained in this Form 6-K and any exhibits hereto shall be deemed filed with the Securities and Exchange Commission (“SEC”) solely for purposes of incorporation by reference into and as part of the following registration statements of the registrant on file with and declared effective by the SEC:

 

  1.

Registration Statement – Form F-3 – File No. 333-217200

 

  2.

Registration Statement – Form F-3 – File No. 333-214934

 

  3.

Registration Statement – Form S-8 – File No. 333-191591

 

  4.

Registration Statement – Form S-8 –File No. 333-180968

 

  5.

Registration Statement – Form S-8 – File No. 333-177579

 

  6.

Registration Statement – Form S-8 – File No. 333-177568

 

  7.

Registration Statement – Form S-8 – File No. 333-176479

 

  8.

Registration Statement – Form S-8 – File No. 333-175413

 

  9.

Registration Statement – Form S-8 – File No. 333-175412

 

  10.

Registration Statement – Form S-8 – File No. 333-113096

 

  11.

Registration Statement – Form S-8 – File No. 333-14260

 

  12.

Registration Statement – Form S-8 – File No. 33-92112

 

  13.

Registration Statement – Form S-8 – File No. 333-207739

 

 

 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

BANK OF MONTREAL

    By:  

/s/ Thomas E. Flynn

    Name:   Thomas E. Flynn
    Title:   Chief Financial Officer
Date: February 25, 2020     By:  

/s/ Barbara M. Muir

    Name:   Barbara M. Muir
    Title:   Corporate Secretary


EXHIBIT INDEX

 

Exhibit    Description of Exhibit
99.1    First Quarter 2020 Management’s Discussion and Analysis of Results of Operations and Financial Condition
99.2    First Quarter 2020 Consolidated Financial Statements
99.3    Consolidated Capitalization of Bank of Montreal
101.    Interactive Data File

LOGO

BMO Financial Group Reports First Quarter 2020 Results

 

 

REPORT TO SHAREHOLDERS

Financial Results Highlights

First Quarter 2020 Compared With First Quarter 2019:

 

 

Net income of $1,592 million and adjusted net income1 of $1,617 million, both up 5%

 

 

Reported EPS2 of $2.37 and adjusted EPS1 of $2.41, both up 4%

 

 

Revenue, net of CCPB3, of $6,031 million, up 8%

 

 

Provision for credit losses (PCL) of $349 million; includes PCL on performing loans of $25 million

 

 

ROE of 13.3%, compared with 13.6%; adjusted ROE1 of 13.5%, compared with 13.9%

 

 

Common Equity Tier 1 Ratio of 11.4%

Toronto, February 25, 2020 – For the first quarter ended January 31, 2020, BMO Financial Group recorded net income of $1,592 million or $2.37 per share on a reported basis, and net income of $1,617 million or $2.41 per share on an adjusted basis.

“We had a strong quarter, delivering adjusted earnings per share of $2.41, with 8% year-over-year revenue growth, 16% pre-provision, pre-tax earnings growth and 5% net income growth. All our businesses performed well, each delivering operating leverage over 2% with total bank operating leverage of 4.6% driving a 270 basis point improvement in efficiency. Canadian P&C had another good quarter, with net income growth of 8% and continued robust loan and deposit growth in both personal and commercial. Capital Markets had a strong quarter in all businesses, demonstrating its earnings potential, with an increased contribution from our U.S. segment resulting in 38% total net income growth. Wealth Management and U.S. P&C also performed well, delivering positive operating leverage with both revenue growth and disciplined expense management. Overall portfolio credit quality remains stable, even as credit provisions this quarter were elevated, largely as a result of activity in two specific sectors,” said Darryl White, Chief Executive Officer, BMO Financial Group.

“We have significant momentum, with businesses increasing market share. Our segments are winning on the strength of our customer value proposition and our ability to compete effectively. Our commitment to growing our business, improving efficiency and building a stronger BMO for our customers, employees and communities will continue to drive our focus on delivering consistently strong relative performance and long-term shareholder value,” concluded Mr. White.

Return on equity (ROE) was 13.3%, compared with 13.6% in the prior year, and adjusted ROE was 13.5%, compared with 13.9% in the prior year. Return on tangible common equity (ROTCE) was 15.7%, compared with 16.5% in the prior year, and adjusted ROTCE was 15.8%, compared with 16.6% in the prior year.

Concurrent with the release of results, BMO announced a second quarter 2020 dividend of $1.06 per common share, unchanged from the prior quarter and up $0.06 per share or 6% from the prior year. The quarterly dividend of $1.06 per common share is equivalent to an annual dividend of $4.24 per common share.

Our complete First Quarter 2020 Report to Shareholders, including our unaudited interim consolidated financial statements for the period ended January 31, 2020, is available online at www.bmo.com/investorrelations and at www.sedar.com.

 

 (1)

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

 (2)

All Earnings per Share (EPS) measures in this document refer to diluted EPS, unless specified otherwise. EPS is calculated using net income after deducting total dividends on preferred shares and distributions payable on other equity instruments.

 (3)

On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue.

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


First Quarter Operating Segment Overview

Canadian P&C

Reported net income was $700 million, an increase of $52 million or 8% and adjusted net income was $700 million, an increase of $51 million or 8% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Strong revenue growth was partially offset by higher provisions for credit losses and higher expenses.

During the quarter, we extended our partnership with Canadian Forces Morale and Welfare Services, as we continue to be the official bank and exclusive provider of unique banking services and financial products to members of the Canadian Defence Community, supporting current and former troops, Department of National Defence personnel, RCMP and Canadian Coast Guard members and their families, to help make their financial goals a reality. We also introduced a new personal financial management solution, BMO Insights, to help customers gain better control of their financial lives. The solution leverages artificial intelligence to deliver personalized, automated and actionable insights for everyday banking customers to help them manage their day-to-day finances and cash flow.

U.S. P&C

Reported net income was $351 million, compared with $444 million in the prior year, and adjusted net income was $361 million, compared with $454 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets.

Reported net income was US$267 million, compared with US$332 million, and adjusted net income was US$275 million, compared with US$340 million in the prior year, due to higher provisions for credit losses, in part due to a recovery in the prior year, partially offset by higher revenue.

During the quarter, BMO opened a new commercial banking office in Los Angeles, California, providing businesses in Southern California with access to BMO’s full array of industry expertise, financial solutions and capabilities, complemented by local market knowledge.

BMO Wealth Management

Reported net income was $291 million, an increase of $53 million or 22%, and adjusted net income was $300 million, an increase of $52 million or 21% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Traditional Wealth reported net income was $209 million, an increase of $36 million or 21%, and adjusted net income was $218 million, an increase of $35 million or 19%, primarily driven by higher revenue from a higher level of client assets and lower expenses. Insurance reported and adjusted net income was $82 million, an increase of $17 million or 26%, primarily due to a benefit from market movements in the current quarter, relative to the unfavourable impact of market movements in the prior year, partially offset by lower underlying business results.

In support of responsible investing and customers’ increasing preference to align financial and social goals, BMO Asset Management launched a suite of indexed Environmental, Social and Governance (ESG) ETFs. BMO was also recognized by Investment Week’s Sustainable and ESG Investment Awards 2019, winning Best ESG Research Team for the second consecutive year and Best ESG Investment Fund for our BMO Responsible Global Equity Fund.

BMO Capital Markets

Reported net income was $356 million, an increase of $100 million or 39%, and adjusted net income was $362 million, an increase of $99 million or 38% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Strong revenue growth in both Global Markets and Investment and Corporate Banking was partially offset by higher expenses and higher oil and gas provisions.

On January 21, 2020, we entered into an agreement to acquire Clearpool Group Inc. (Clearpool), a New York-based provider of electronic trading solutions, operating in the United States and Canada. This acquisition delivers powerful new capabilities to BMO’s electronic trading platform and demonstrates our commitment to providing leading edge trading technology to our global client base. The transaction is subject to regulatory approvals and other customary closing conditions, and is expected to close in the calendar second quarter of 2020.

Corporate Services

Reported and adjusted net loss was $106 million, compared with a reported and adjusted net loss of $76 million in the prior year. Results decreased, primarily due to lower treasury related revenue, in part due to a stronger prior year level, and higher expenses.

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

Capital

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at January 31, 2020. The CET1 Ratio was unchanged from the prior quarter, as retained earnings growth was offset by impacts from business growth, regulatory changes, and the adoption of IFRS 16, Leases.

 

1 BMO Financial Group First Quarter Report 2020


Provision for Credit Losses

Total provision for credit losses was $349 million, an increase of $212 million from the prior year. The provision for credit losses ratio was 31 basis points, compared with a below trend level of 13 basis points in the prior year. The provision for credit losses on impaired loans of $324 million increased $197 million from $127 million in the prior year, primarily due to higher provisions in our P&C businesses and BMO Capital Markets. The prior year’s provision for credit losses included the benefit of a recovery on U.S. consumer loans. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 12 basis points in the prior year. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $10 million provision for credit losses on performing loans in the prior year. The $25 million provision for credit losses on performing loans in the current quarter was due to credit migration and portfolio growth.

Caution

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

Regulatory Filings

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

 

 

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

 

 

 

 

BMO Financial Group First Quarter Report 2020 2


Management’s Discussion and Analysis

Management’s Discussion and Analysis (MD&A) commentary is as at February 25, 2020. The material that precedes this section comprises part of this MD&A. The MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the period ended January 31, 2020, included in this document, as well as the audited consolidated financial statements for the year ended October 31, 2019, and the MD&A for fiscal 2019, contained in our 2019 Annual Report.

BMO’s 2019 Annual Report includes a comprehensive discussion of our businesses, strategies and objectives, and can be accessed on our website at www.bmo.com/investorrelations. Readers are also encouraged to visit the site to view other quarterly financial information.

 

 

 

Table of Contents
4    Caution Regarding Forward-Looking Statements    23    Transactions with Related Parties
4    Economic Review and Outlook    23    Select Financial Instruments and Off-Balance Sheet Arrangements
5    Financial Highlights    24    Accounting Policies and Critical Accounting Estimates
6    Non-GAAP Measures        24    Allowance for Credit Losses
7    Foreign Exchange    24    Changes in Accounting Policies
7    Net Income    25    Future Changes in Accounting Policies
8    Revenue    25    Disclosure for Domestic Systemically Important Banks (D-SIBs)
9    Provision for Credit Losses    25    Other Regulatory Developments
9    Impaired Loans    25    Risk Management
10    Insurance Claims, Commissions and Changes in Policy Benefit Liabilities        26    Market Risk
10    Non-Interest Expense        27    Liquidity and Funding Risk
10    Income Taxes        30    Credit Ratings
11    Capital Management        33    European Exposures
14    Review of Operating Groups’ Performance    34    Interim Consolidated Financial Statements
    14    Personal and Commercial Banking (P&C)        34    Consolidated Statement of Income
       15    Canadian Personal and Commercial Banking (Canadian P&C)        35    Consolidated Statement of Comprehensive Income
       16    U.S. Personal and Commercial Banking (U.S. P&C)        36    Consolidated Balance Sheet
    18    BMO Wealth Management        37    Consolidated Statement of Changes in Equity
    20    BMO Capital Markets        38    Consolidated Statement of Cash Flows
    21    Corporate Services        39    Notes to Consolidated Financial Statements
22    Summary Quarterly Earnings Trends    51    Investor and Media Information
23    Balance Sheet      

 

 

Bank of Montreal’s management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness, as at January 31, 2020, of Bank of Montreal’s disclosure controls and procedures (as defined in the rules of the U.S. Securities and Exchange Commission and the Canadian Securities Administrators) and has concluded that such disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting during the quarter ended January 31, 2020, which materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

 

3 BMO Financial Group First Quarter Report 2020


Caution Regarding Forward-Looking Statements

Bank of Montreal’s public communications often include written or oral forward-looking statements. Statements of this type are included in this document, and may be included in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission, or in other communications. All such statements are made pursuant to the “safe harbor” provisions of, and are intended to be forward-looking statements under, the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation. Forward-looking statements in this document may include, but are not limited to, statements with respect to our objectives and priorities for fiscal 2020 and beyond, our strategies or future actions, our targets, expectations for our financial condition or share price, the regulatory environment in which we operate and the results of or outlook for our operations or for the Canadian, U.S. and international economies, and include statements of our management. Forward-looking statements are typically identified by words such as “will”, “would”, “should”, “believe”, “expect”, “anticipate”, “project”, “intend”, “estimate”, “plan”, “goal”, “target”, “may” and “could.”

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

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

We caution that the foregoing list is not exhaustive of all possible factors. Other factors and risks could adversely affect our results. For more information, please refer to the discussion in the Risks That May Affect Future Results section, and the sections related to credit and counterparty, market, insurance, liquidity and funding, operational, legal and regulatory, business, strategic, environmental and social, and reputation risk, in the Enterprise-Wide Risk Management section that begins on page 68 of BMO’s 2019 Annual Report, and the Risk Management section on page 25 in this document, all of which outline certain key factors and risks that may affect our future results. Investors and others should carefully consider these factors and risks, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by the organization or on its behalf, except as required by law. The forward-looking information contained in this document is presented for the purpose of assisting our shareholders in understanding our financial position as at and for the periods ended on the dates presented, as well as our strategic priorities and objectives, and may not be appropriate for other purposes.

Material economic assumptions underlying the forward-looking statements contained in this document are set out in the Economic Developments and Outlook section on page 18 of BMO’s 2019 Annual Report and updated in the Economic Review and Outlook section set forth in this document. Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, we primarily consider historical economic data, past relationships between economic and financial variables, changes in government policies, and the risks to the domestic and global economy. Please refer to the following Economic Review and Outlook section.

 

 

Economic Review and Outlook

After slowing to an estimated rate of 1.6% in 2019 amid weaker global demand and uncertain trade policies, Canada’s economic growth is expected to improve slightly to 1.7% in 2020, in response to federal tax cuts, an easing in trade policy tensions and a relaxation of restrictions on Alberta’s oil production. Business investment is anticipated to strengthen, due to an initial trade deal between the United States and China and the ratification of the United States-Mexico-Canada Agreement. After rebounding last year, the housing market should remain well supported by low mortgage rates and the fastest increase in the population in three decades. However, despite a healthy labour market, consumer spending will be restrained by high debt-service payments. A slow-growing global economy, partially in response to the impact of the coronavirus on the tourism industry and China’s economy, will continue to restrain exports. A likely moderation in Canadian job growth should keep the unemployment rate steady near recent 45-year lows. The Bank of Canada has kept policy rates unchanged at 1.75% since late 2018, and it is expected to pursue a steady policy course this year with inflation remaining near the 2% target. However, should the economy weaken further, the central bank would be inclined to reduce policy rates. The risk of easier monetary policy and an ongoing trade deficit will likely keep the Canadian dollar close to current low levels against the U.S. dollar. Growth in industry-wide consumer credit is anticipated to remain modest at 3.2% in 2020, while residential mortgage credit is projected to pick up to a 4.8% rate, the fastest in three years. Non-financial business credit is anticipated to grow at a healthy rate of 5.4% in 2020, supported by an increase in business spending.

The record-long U.S. economic expansion is projected to proceed at a more moderate pace of 1.8% in 2020, compared with a 2.3% rate in 2019. While this pace would mark the slowest growth in four years, the unemployment rate should remain close to half-century lows. Business investment is expected to improve in response to the Phase One trade deal between the United States and China. The deal marks an easing in trade tensions and generally commits China to more than double its purchases of U.S. exports in the next two years. However, tariffs will remain in place until a more comprehensive agreement can be reached. Home sales have turned higher in response to lower mortgage rates and steady job growth, while record-low resale listings will encourage construction. Though moderating, consumer spending should remain well supported by record-high household wealth and record-low debt-service costs. The economy is expected to weaken early in the year due to the suspended production of Boeing’s 737 MAX aircraft, while the coronavirus could delay China’s purchases of U.S. exports. After reducing policy rates three times in 2019, the Federal Reserve is expected to maintain a steady policy stance as a result of low inflation and a stable jobless rate. Industry-wide consumer credit is expected to grow around 3.2% in 2020, while residential mortgage demand should expand 4.2%. Non-financial business credit will likely increase 4.0%, supported by firmer investment spending.

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

 

BMO Financial Group First Quarter Report 2020 4


Financial Highlights

 

(Canadian $ in millions, except as noted)

   Q1-2020                      Q4-2019                     Q1-2019         

Summary Income Statement

         

Net interest income (1)

     3,388        3,364       3,172    

Non-interest revenue

     3,359        2,723       3,345          

Revenue

     6,747        6,087       6,517    

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

     716        335       926          

Revenue, net of CCPB

     6,031        5,752       5,591          

Provision for credit losses on impaired loans

     324        231       127    

Provision for credit losses on performing loans

     25        22       10          

Total provision for credit losses

     349        253       137    

Non-interest expense (1)

     3,669        3,987       3,557    

Provision for income taxes

     421        318       387          

Net income attributable to equity holders of the bank

     1,592        1,194       1,510          

Adjusted net income

     1,617        1,607       1,538          

Common Share Data ($, except as noted)

         

Earnings per share

     2.37        1.78       2.28    

Adjusted earnings per share

     2.41        2.43       2.32    

Earnings per share growth (%)

     4.3        (30.7     59.5    

Adjusted earnings per share growth (%)

     4.0        4.8       9.5    

Dividends declared per share

     1.06        1.03       1.00    

Book value per share

     73.21        71.54       67.37    

Closing share price

     100.93        97.50       96.18    

Number of common shares outstanding (in millions)

         

End of period

     639.6        639.2       638.4    

Average diluted

     640.8        640.4       640.4    

Total market value of common shares ($ billions)

     64.6        62.3       61.4    

Dividend yield (%)

     4.2        4.2       4.2    

Dividend payout ratio (%)

     44.5        57.6       43.8    

Adjusted dividend payout ratio (%)

     43.8        42.3       43.0          

Financial Measures and Ratios (%)

         

Return on equity

     13.3        9.9       13.6    

Adjusted return on equity

     13.5        13.5       13.9    

Return on tangible common equity

     15.7        11.9       16.5    

Adjusted return on tangible common equity

     15.8        15.7       16.6    

Net income growth

     5.4        (29.6     55.1    

Adjusted net income growth

     5.1        5.0       8.1    

Revenue growth

     3.5        3.3       15.6    

Revenue growth, net of CCPB

     7.9        4.5       6.0    

Non-interest expense growth

     3.2        24.9       4.6    

Adjusted non-interest expense growth

     3.3        1.2       4.5    

Efficiency ratio, net of CCPB

     60.8        69.3       63.6    

Adjusted efficiency ratio, net of CCPB

     60.3        60.0       63.0    

Operating leverage, net of CCPB

     4.7        (20.4     1.4    

Adjusted operating leverage, net of CCPB

     4.6        3.8       1.5    

Net interest margin on average earning assets

     1.68        1.71       1.69    

Effective tax rate

     20.9        21.0       20.4    

Adjusted effective tax rate

     21.0        22.0       20.4    

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

     0.31        0.23       0.13    

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

     0.29        0.21       0.12          

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

         

Assets

     879,720        852,195       806,597    

Gross loans and acceptances

     457,098        451,537       420,761    

Net loans and acceptances

     455,075        449,687       419,133    

Deposits

     582,288        568,143       532,199    

Common shareholders’ equity

     46,828        45,728       43,009    

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

     30.0        28.9       29.3          

Capital Ratios (%)

         

CET1 Ratio

     11.4        11.4       11.4    

Tier 1 Capital Ratio

     13.0        13.0       12.7    

Total Capital Ratio

     15.2        15.2       15.1    

Leverage Ratio

     4.3        4.3       4.2          

Foreign Exchange Rates ($)

         

As at Canadian/U.S. dollar

     1.3235        1.3165       1.3131    

Average Canadian/U.S. dollar

     1.3161        1.3240       1.3351          

 

 (1)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. For the three months ended January 31, 2020, we recognized $89 million of depreciation on the right-of-use assets recorded in non-interest expense and $14 million of interest on the lease liability recorded in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

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

 

5 BMO Financial Group First Quarter Report 2020


Non-GAAP Measures

Results and measures in this document are presented on a GAAP basis. Unless otherwise indicated, all amounts are in Canadian dollars and have been derived from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). References to GAAP mean IFRS. They are also presented on an adjusted basis that excludes the impact of certain items, as set out in the table below. Results and measures that exclude the impact of Canadian/U.S. dollar exchange rate movements on our U.S. segment are non-GAAP measures. Please refer to the Foreign Exchange section on page 7 for a discussion of the effects of changes in exchange rates on our results. Management assesses performance on a reported basis and on an adjusted basis, and considers both to be useful in assessing underlying ongoing business performance. Presenting results on both bases provides readers with a better understanding of how management assesses results. It also permits readers to assess the impact of certain specified items on results for the periods presented, and to better assess results excluding those items that may not be reflective of ongoing results. As such, the presentation may facilitate readers’ analysis of trends. Except as otherwise noted, management’s discussion of changes in reported results in this document applies equally to changes in the corresponding adjusted results. Adjusted results and measures are non-GAAP and as such do not have standardized meanings under GAAP. They are unlikely to be comparable to similar measures presented by other companies and should not be viewed in isolation from, or as a substitute for, GAAP results.

Non-GAAP Measures

 

(Canadian $ in millions, except as noted)

     Q1-2020        Q4-2019        Q1-2019       

Reported Results

                

Revenue

       6,747          6,087          6,517    

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

       (716        (335        (926    

Revenue, net of CCPB

       6,031          5,752          5,591    

Total provision for credit losses

       (349        (253        (137  

Non-interest expense

       (3,669        (3,987        (3,557    

Income before income taxes

       2,013          1,512          1,897    

Provision for income taxes

       (421        (318        (387    

Net income

       1,592          1,194          1,510    

EPS ($)

       2.37          1.78          2.28      

Adjusting Items (Pre-tax) (1)

                

Acquisition integration costs (2)

       (3        (2        (6  

Amortization of acquisition-related intangible assets (3)

       (29        (38        (31  

Restructuring costs (4)

       -          (484        -    

Reinsurance adjustment (5)

       -          (25        -      

Adjusting items included in reported pre-tax income

       (32        (549        (37    

Adjusting Items (After tax) (1)

                

Acquisition integration costs (2)

       (2        (2        (4  

Amortization of acquisition-related intangible assets (3)

       (23        (29        (24  

Restructuring costs (4)

       -          (357        -    

Reinsurance adjustment (5)

       -          (25        -      

Adjusting items included in reported net income after tax

       (25        (413        (28  

Impact on EPS ($)

       (0.04        (0.65        (0.04    

Adjusted Results

                

Revenue

       6,747          6,087          6,517    

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

       (716        (310        (926    

Revenue, net of CCPB

       6,031          5,777          5,591    

Total provision for credit losses

       (349        (253        (137  

Non-interest expense

       (3,637        (3,463        (3,520    

Income before income taxes

       2,045          2,061          1,934    

Provision for income taxes

       (428        (454        (396    

Net income

       1,617          1,607          1,538    

EPS ($)

       2.41          2.43          2.32      

 

 (1)

Adjusting items are generally included in Corporate Services, with the exception of the amortization of acquisition-related intangible assets and certain acquisition integration costs, which are charged to the operating groups, and the reinsurance adjustment, which is included in CCPB, in BMO Wealth Management.

 (2)

KGS–Alpha and Clearpool acquisition integration costs are reported in BMO Capital Markets. Acquisition integration costs are recorded in non-interest expense.

(3)

These amounts were charged to the non-interest expense of the operating groups. Before-tax and after-tax amounts for each operating group are provided on pages 14, 15, 16, 18 and 20.

 (4)

Q4-2019 reported net income included a restructuring charge of $357 million after-tax ($484 million pre-tax), related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. Restructuring costs are included in non-interest expense in Corporate Services.

 (5)

Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in CCPB in BMO Wealth Management.

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

 

BMO Financial Group First Quarter Report 2020 6


Foreign Exchange

The Canadian dollar equivalents of BMO’s U.S. results that are denominated in U.S. dollars decreased relative to both the first quarter of 2019 and the fourth quarter of 2019 due to changes in the U.S. dollar exchange rate. The table below indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in those rates on our U.S. segment results. References in this document to the impact of the U.S. dollar do not include U.S. dollar-denominated amounts recorded outside of BMO’s U.S. segment.

Changes in exchange rates will affect future results measured in Canadian dollars, and the impact on those results is a function of the periods in which revenues, expenses and provisions for (recoveries of) credit losses arise.

Economically, our U.S. dollar income stream was unhedged to changes in foreign exchange rates during the current and prior year. We regularly determine whether to enter into hedging transactions in order to mitigate the impact of foreign exchange rate movements on net income.

Refer to the Enterprise-Wide Capital Management section on page 59 of the 2019 Annual Report for a discussion of the impact that changes in foreign exchange rates can have on our capital position. Changes in foreign exchange rates will also affect accumulated other comprehensive income, primarily as a result of the translation of our investment in foreign operations.

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

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

 

        Q1-2020  

(Canadian $ in millions, except as noted)

                           vs. Q1-2019                              vs. Q4-2019  

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

   

Current period

    1.3161       1.3161  

Prior period

    1.3351       1.3240  

Effects on U.S. segment reported results

   

Increased (Decreased) net interest income

    (18     (8 )     

Increased (Decreased) non-interest revenue

    (11     (5

Increased (Decreased) revenues

    (29     (13

Decreased (Increased) provision for credit losses

    -       1  

Decreased (Increased) expenses

    20       9  

Decreased (Increased) income taxes

    1       1  

Increased (Decreased) reported net income

    (8     (2

Impact on earnings per share ($)

    (0.01     -  

Effects on U.S. segment adjusted results

   

Increased (Decreased) net interest income

    (18     (8

Increased (Decreased) non-interest revenue

    (11     (5

Increased (Decreased) revenues

    (29     (13

Decreased (Increased) provision for credit losses

    -       1  

Decreased (Increased) expenses

    19       8  

Decreased (Increased) income taxes

    2       1  

Increased (Decreased) adjusted net income

    (8     (3

Impact on adjusted earnings per share ($)

    (0.01     -  

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

Net Income

Q1 2020 vs. Q1 2019

Reported net income was $1,592 million, an increase of $82 million or 5% from the prior year, and adjusted net income was $1,617 million, an increase of $79 million or 5%. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. Reported EPS of $2.37 increased $0.09 or 4%, and adjusted EPS of $2.41 increased $0.09 or 4% from the prior year.

Results reflect strong net income performance in BMO Capital Markets, BMO Wealth Management and Canadian P&C, partially offset by a decrease in U.S. P&C and a higher net loss in Corporate Services.

Q1 2020 vs. Q4 2019

Reported net income increased $398 million or 33% from the prior quarter, and adjusted net income increased $10 million or 1%. Adjusted net income excludes a $357 million restructuring charge, primarily related to severance and a $25 million reinsurance adjustment, both in the prior period, as well as the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The current quarter includes stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year. Reported EPS increased $0.59 or 33%, and adjusted EPS decreased $0.02 or 1% from the prior quarter.

Strong net income performance in BMO Capital Markets was largely offset by a decrease in our P&C businesses and a higher net loss in Corporate Services. BMO Wealth Management reported net income increased from the prior quarter, while adjusted net income was unchanged.

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

 

7 BMO Financial Group First Quarter Report 2020


Revenue (1)

Q1 2020 vs. Q1 2019

Reported revenue was $6,747 million, an increase of $230 million or 4% from the prior year. On a basis that nets insurance claims, commissions and changes in policy benefit liabilities (CCPB) against insurance revenue (net revenue), revenue was $6,031 million, an increase of $440 million or 8%.

Results reflect strong revenue performance in BMO Capital Markets, Canadian P&C and BMO Wealth Management. U.S. P&C revenue increased 1%, or 3% on a U.S. dollar basis from the prior year, with Corporate Services revenue slightly lower.

Net interest income was $3,388 million, an increase of $216 million or 7%. On an excluding trading basis, net interest income was $3,031 million, an increase of $141 million or 5%, largely due to higher deposit and loan balances across all operating groups, partially offset by lower deposit margins.

Average earning assets were $804.5 billion, an increase of $60.3 billion or 8%, or 9% excluding the impact of the weaker U.S. dollar, due to loan growth, higher securities and higher cash resources. BMO’s overall net interest margin decreased 1 basis point from the prior year, driven by lower deposit spreads in U.S. P&C, largely due to rate decreases by the Federal Reserve, partially offset by a higher margin in Canadian P&C. On an excluding trading basis, net interest margin decreased 9 basis points, largely due to a higher volume of assets in BMO Capital Markets and Corporate Services, which have a lower spread than the bank, and a lower margin in U.S. P&C, partially offset by a higher margin in Canadian P&C.

Non-interest revenue, net of CCPB, was $2,643 million, an increase of $224 million or 9%, or 10% excluding the impact of the weaker U.S. dollar, with increases in most non-interest revenue categories. On an excluding trading basis, net of CCPB, non-interest revenue was $2,502 million, an increase of $176 million or 8%.

Gross insurance revenue decreased $169 million from the prior year, primarily due to lower annuity sales in the current quarter, partially offset by a larger increase in the fair value of investments in the current quarter, compared with the prior year, resulting from decreases in long-term interest rates and the impact of stronger equity markets in the current quarter. These changes related to the fair value of investments and annuity sales are largely offset by changes in policy benefit liabilities, the impact of which is reflected in CCPB, as discussed on page 10. We generally focus on analyzing revenue, net of CCPB, given the extent to which insurance revenue can vary and that this variability is largely offset in CCPB.

Q1 2020 vs. Q4 2019

Revenue increased $660 million or 11% from the prior quarter. Revenue, net of CCPB increased $279 million or 5%. Revenue, net of adjusted CCPB, which excludes the reinsurance adjustment in the prior period, increased $254 million or 4%, or 5% excluding the impact of the weaker U.S. dollar.

Results reflect strong revenue performance in BMO Capital Markets and BMO Wealth Management. Corporate Services and Canadian P&C increased slightly, while U.S. P&C recorded a slight decrease on a Canadian dollar basis, or a slight increase on a U.S. dollar basis.

Net interest income increased $24 million or 1% from the prior quarter. On an excluding trading basis, net interest income increased $52 million or 2% from the prior quarter, largely due to higher deposit volumes across all operating groups and higher loan volumes in the P&C businesses, partially offset by lower margins in the P&C businesses.

Average earning assets increased $26.1 billion or 3%, or 4% excluding the impact of the weaker U.S. dollar, primarily due to higher securities, higher cash resources and loan growth. BMO’s overall net interest margin decreased 3 basis points, or 2 basis points on an excluding trading basis, primarily due to a higher volume of assets in Corporate Services and BMO Capital Markets, which have a lower spread than the bank.

Non-interest revenue, net of CCPB, increased $255 million or 11%. Non-interest revenue, net of adjusted CCPB, increased $230 million or 10%, primarily due to higher trading revenue, underwriting and advisory revenue and insurance revenue, net of CCPB. On an excluding trading basis, net of adjusted CCPB, non-interest revenue increased $68 million or 3%.

Gross insurance revenue increased $445 million from the prior quarter, primarily due to an increase in the fair value of investments in the current quarter, resulting from decreases in long-term interest rates, compared with relatively unchanged long-term interest rates in the prior quarter, higher annuity sales, and the impact of stronger equity markets in the current quarter. The increase in insurance revenue was largely offset by changes in CCPB, as discussed on page 10.

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

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

 

(1)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. For the three months ended January 31, 2020, we recognized $89 million of depreciation on the right-of-use assets recorded in non-interest expense and $14 million of interest on the lease liability recorded in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

 

BMO Financial Group First Quarter Report 2020 8


Provision for Credit Losses

Q1 2020 vs. Q1 2019

Total provision for credit losses was $349 million, an increase of $212 million from the prior year. The provision for credit losses ratio was 31 basis points, compared with a below trend level of 13 basis points in the prior year. The provision for credit losses on impaired loans of $324 million increased $197 million from $127 million in the prior year, primarily due to higher provisions in our P&C businesses and BMO Capital Markets. The prior year’s provision for credit losses included the benefit of a recovery on U.S. consumer loans. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 12 basis points in the prior year. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $10 million provision for credit losses on performing loans in the prior year. The $25 million provision for credit losses on performing loans in the current quarter was due to credit migration and portfolio growth. The year-over-year increase in the provision for credit losses on performing loans was primarily due to the difference in credit migration between periods, with credit migration increasing the allowance in the current quarter, compared with improved credit performance in the prior year, partially offset by relative changes in economic outlook.

Q1 2020 vs. Q4 2019

Total provision for credit losses increased $96 million from the prior quarter. The provision for credit losses ratio was 31 basis points, compared with 23 basis points in the prior quarter. The provision for credit losses on impaired loans increased $93 million, primarily due to higher provisions in our U.S. Commercial business and BMO Capital Markets. The provision for credit losses on impaired loans ratio was 29 basis points, compared with 21 basis points in the prior quarter. There was a $25 million provision for credit losses on performing loans in the current quarter, compared with a $22 million provision for credit losses on performing loans in the prior quarter, with the increase largely due to a change in economic outlook.

Provision for Credit Losses by Operating Group

 

(Canadian $ in millions)

   Canadian P&C              U.S. P&C             Total P&C     Wealth
Management
    BMO Capital
Markets
    Corporate
Services
    Total Bank  

Q1-2020

               

Provision for (recovery of) credit losses on impaired loans

     138        132       270       -       53       1       324  

Provision for (recovery of) credit losses on performing loans

     14        17       31       3       (3     (6     25  

Total provision for (recovery of) credit losses

     152        149       301       3       50       (5     349      

Q4-2019

               

Provision for (recovery of) credit losses on impaired loans

     134        66       200       1       32       (2     231  

Provision for (recovery of) credit losses on performing loans

     11        4       15       (1     8       -       22  

Total provision for (recovery of) credit losses

     145        70       215       -       40       (2     253  

Q1-2019

               

Provision for (recovery of) credit losses on impaired loans

     114        15       129       2       1       (5     127  

Provision for (recovery of) credit losses on performing loans

     6        (9     (3     -       14       (1     10  

Total provision for (recovery of) credit losses

     120        6       126       2       15       (6     137  

Provision for Credit Losses Performance Ratios

 

      Q1-2020                    Q4-2019                    Q1-2019  

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

     0.31           0.23           0.13      

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

     0.29             0.21             0.12  

Impaired Loans

Total gross impaired loans (GIL) were $2,822 million at the end of the current quarter, up from $2,019 million in the prior year, with the largest increase in impaired loans in oil and gas and manufacturing. GIL increased $193 million from $2,629 million in the prior quarter.

Factors contributing to the change in GIL are outlined in the table below. Loans classified as impaired during the quarter totalled $831 million, up from $467 million in the prior year, and up from $799 million in the prior quarter.

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

 

(Canadian $ in millions, except as noted)

   Q1-2020                   Q4-2019                 Q1-2019  

GIL, beginning of period

     2,629       2,432       1,936  

Classified as impaired during the period

     831       799       467  

Transferred to not impaired during the period

     (201     (220     (125

Net repayments

     (319     (219     (137 )     

Amounts written-off

     (127     (159     (119

Recoveries of loans and advances previously written-off

     -       -       -  

Disposals of loans

     -       -       -  

Foreign exchange and other movements

     9       (4     (3

GIL, end of period

     2,822       2,629       2,019  

GIL to gross loans and acceptances (%)

     0.62       0.58       0.48  

 

(1)

GIL excludes purchased credit impaired loans.

 

9 BMO Financial Group First Quarter Report 2020


Insurance Claims, Commissions and Changes in Policy Benefit Liabilities

Reported and adjusted insurance claims, commissions and changes in policy benefit liabilities (CCPB) were $716 million, a decrease of $210 million from the prior year, primarily due to lower annuity sales in the current quarter, partially offset by a larger increase in the fair value of policy benefit liabilities in the current quarter, compared with the prior year, resulting from decreases in long-term interest rates and the impact of stronger equity markets in the current quarter.

Reported CCPB increased $381 million and adjusted CCPB increased $406 million from the prior quarter. Adjusted CCPB excludes a $25 million net impact of major reinsurance claims from Japanese typhoons that were incurred in the prior quarter, after our announced decision to wind-down our reinsurance business. Results increased primarily due to an increase in the fair value of policy benefit liabilities in the current quarter, resulting from decreases in long-term interest rates, compared with relatively unchanged long-term interest rates in the prior quarter, higher annuity sales and the impact of stronger equity markets in the current quarter. The changes related to the fair value of policy benefit liabilities and annuity sales were largely offset in revenue.

Adjusted results in this Insurance Claims, Commissions and Changes in Policy Benefit Liabilities section are non-GAAP amounts or non-GAAP measures. Please refer to the Non-GAAP Measures section.

Non-Interest Expense (1)

Reported non-interest expense was $3,669 million, an increase of $112 million or 3% from the prior year, or 4% excluding the impact of the weaker U.S. dollar, and adjusted non-interest expense was $3,637 million, an increase of $117 million or 3%, or 4% excluding the impact of the weaker U.S. dollar. Adjusted non-interest expense excludes the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The increase was primarily due to higher employee-related costs, in part due to higher revenue, and higher technology costs, partially offset by activities across the bank to execute on productivity initiatives.

Reported non-interest expense decreased $318 million or 8% from the prior quarter, and adjusted non-interest expense increased $174 million or 5% from the prior quarter. Adjusted non-interest expense excludes the restructuring charge in the prior quarter and the amortization of acquisition-related intangible assets and acquisition integration costs in both periods. The increase was largely driven by higher employee-related expenses, including stock-based compensation for employees eligible to retire that are expensed in the first quarter of each year and seasonality of benefits, partially offset by lower professional fees.

Reported operating leverage on a net revenue basis was positive 4.7%, compared with positive 1.4% in the prior year. Adjusted operating leverage on a net revenue basis was positive 4.6%, compared with positive 1.5% in the prior year.

The reported efficiency ratio was 54.4%, compared with 54.6% in the prior year, and was 60.8% on a net revenue basis, compared with 63.6% in the prior year. The adjusted efficiency ratio was 53.9%, compared with 54.0% in the prior year, and 60.3% on a net revenue basis, compared with 63.0% in the prior year.

Non-interest expense is detailed in the unaudited interim consolidated financial statements.

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

Income Taxes

The provision for income taxes was $421 million, an increase of $34 million from the first quarter of 2019, and an increase of $103 million from the fourth quarter of 2019. The effective tax rate for the current quarter was 20.9%, compared with 20.4% in the first quarter of 2019, and 21.0% in the fourth quarter of 2019.

The adjusted provision for income taxes was $428 million, an increase of $32 million from the first quarter of 2019, and a decrease of $26 million from the fourth quarter of 2019. The adjusted effective tax rate was 21.0% in the current quarter, compared with 20.4% in the first quarter of 2019, and 22.0% in the fourth quarter of 2019. The change in the reported and adjusted effective tax rate in the current quarter relative to the first quarter of 2019 and the fourth quarter of 2019 was primarily due to earnings mix.

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

 

(1)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. For the three months ended January 31, 2020, we recognized $89 million of depreciation on the right-of-use assets recorded in non-interest expense and $14 million of interest on the lease liability recorded in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

 

BMO Financial Group First Quarter Report 2020 10


Capital Management

BMO continues to manage its capital within the capital management framework described on page 59 of BMO’s 2019 Annual Report.

First Quarter 2020 Regulatory Capital Review

BMO’s Common Equity Tier 1 (CET1) Ratio was 11.4% as at January 31, 2020.

The CET1 Ratio was unchanged from the fourth quarter of fiscal 2019, as retained earnings growth was offset by impacts from business growth, regulatory changes, and the adoption of IFRS 16, Leases.

CET1 capital was $37.1 billion as at January 31, 2020, up from $36.1 billion as at October 31, 2019, mainly due to retained earnings growth and to a lesser extent, lower deduction for deferred tax assets and higher unrealized gains from securities fair valued through accumulated other comprehensive income.

Risk-Weighted Assets (RWA) were $325.6 billion as at January 31, 2020, up from $317.0 billion as at October 31, 2019, mainly due to business growth, regulatory changes and the adoption of IFRS 16.

The bank’s Tier 1 and Total Capital Ratios were 13.0% and 15.2%, respectively, as at January 31, 2020, unchanged from October 31, 2019, as higher capital from increase in CET1, as discussed above, was offset by higher RWA.

The impact of foreign exchange movements on capital ratios was largely offset. BMO’s investments in foreign operations are primarily denominated in U.S. dollars, and the foreign exchange impact of U.S.-dollar-denominated RWA and capital deductions may result in variability in the bank’s capital ratios. BMO may manage the impact of foreign exchange movements on its capital ratios and did so during the current quarter. Any such activities could also impact our book value and return on equity.

BMO’s Basel III Leverage Ratio was 4.3% as at January 31, 2020, unchanged from the fourth quarter of fiscal 2019, as higher Tier 1 Capital was offset by higher leverage exposures from business growth.

Regulatory Developments

The Basel III reforms package, finalized by the Basel Committee on Banking Supervision (BCBS) in December 2017, for implementation on January 1, 2022 includes: revised standardized and internal ratings-based approaches for credit risk, revisions to the credit valuation adjustment (CVA) framework, revised standardized approach for operational risk which replaces the existing standardized and advanced measurement approaches, revised leverage ratio framework and an output floor for RWA to be phased in over a five-year period. The preliminary view of the Office of the Superintendent of Financial Institution (OSFI) on the scope and timing of implementation of the Basel III reforms in Canada is set out in its discussion paper issued for consultation in July 2018. While the BCBS outlined a five-year transition period for the RWA output floor from 50% in 2022 to 72.5% in 2027, OSFI’s discussion paper proposes to set the output floor at 72.5% upon implementation of the reforms in the first quarter of fiscal 2022.

The Minimum Capital Requirements for Market Risk (the Final Market Risk Framework), part of the Basel III reforms, was finalized by the BCBS in January 2019, with a proposed implementation date of January 1, 2022.

The Basel III reforms are expected to increase the amount of capital we are required to hold. We continue to engage with OSFI as it works to finalize the timing and approach to domestic implementation.

In January 2020, OSFI revised its capital requirements for operational risk applicable to deposit-taking institutions, reflecting the final Basel III revisions published by the BCBS in December 2017. OSFI has decided that the domestic implementation of the revised Basel III operational risk capital requirements will move from the first quarter of fiscal 2021 to the first quarter of fiscal 2022 to coincide with the implementation of the final Basel III credit risk and leverage ratio requirements.

In December 2019, OSFI set the level of the Domestic Stability Buffer (DSB), a Pillar 2 buffer applicable to Canadian domestic systemically important banks (D-SIBs) at 2.25%, up from 2.0%, effective April 30, 2020. The increase reflects OSFI’s view that key vulnerabilities to D-SIBs remain elevated, and in some cases show signs of increasing, including Canadian household indebtedness, asset imbalances and institutional indebtedness, as well as global vulnerabilities which could increase the chance of a spillover of external risks into the Canadian financial system. The DSB, which is met with CET1 capital, can be set between 0% and 2.5% of total RWA. OSFI’s long-term objective is to ensure the effectiveness of the DSB. Within that context, OSFI will review the 0%-2.5% range to determine if it is appropriate.

In the first quarter of fiscal 2020, the expiry of transitional arrangements provided by OSFI for the standardized approach for counterparty credit risk and the revised securitization framework, resulted in a modest increase in the amount of capital we are required to hold.

IFRS 16, Leases was effective November 1, 2019 and resulted in a downward adjustment to opening retained earnings on adoption. The most significant impact for BMO is the recording of real estate leases on the balance sheet.

The combined impact of IFRS 16, and the expiry of transitional arrangements was 16 basis points on our CET1 Ratio in the first quarter of fiscal 2020.

The implementation of the final version of the Large Exposure Limits Guideline, applicable to D-SIBs, in the first quarter of fiscal 2020, did not have a significant impact on our operations.

The Canadian Bail-In Regime, including OSFI’s Total Loss Absorbing Capacity (TLAC) Guideline, came into effect on September 23, 2018. Under this regime, the bank is required to meet target TLAC requirements by November 1, 2021. The targets are currently set at a risk-based TLAC ratio of 23.75% RWA (including a 2.25% DSB) and a TLAC leverage ratio of 6.75%. At January 31, 2020, our risk-based TLAC was 20.8% and our TLAC leverage ratio was 6.9%.

For a more detailed discussion of regulatory developments, see the Enterprise-Wide Capital Management section on pages 59 to 65, the Liquidity and Funding Risk section on pages 91 to 99 and the Legal and Regulatory Risk section on pages 103 to 104 of BMO’s 2019 Annual Report.

 

11 BMO Financial Group First Quarter Report 2020


Regulatory Capital

Regulatory capital requirements for BMO are determined in accordance with OSFI’s Capital Adequacy Requirements (CAR) Guideline, which is based on the capital standards developed by the BCBS. For more information, see the Enterprise-Wide Capital Management section on pages 59 to 65 of BMO’s 2019 Annual Report.

OSFI’s capital requirements are summarized in the following table.

 

(% of risk-weighted assets)

   Minimum capital
requirements
           Total Pillar 1 Capital
Buffer (1)
           Domestic Stability
Buffer (2)
    

OSFI capital
requirements including

capital buffers

     BMO Capital and
      Leverage Ratios as at
January 31, 2020
 

Common Equity Tier 1 Ratio

     4.5%        3.5%        2.0%        10.0%        11.4%      

Tier 1 Capital Ratio

     6.0%        3.5%        2.0%        11.5%        13.0%  

Total Capital Ratio

     8.0%        3.5%        2.0%        13.5%        15.2%  

Leverage Ratio

     3.0%        na        na        3.0%        4.3%  

 

(1)

The minimum 4.5% CET1 Ratio requirement is augmented by the 3.5% Total Pillar 1 Capital Buffers, which can absorb losses during periods of stress. The Pillar 1 Capital Buffers include a 2.5% Capital Conservation Buffer, a 1.0% Common Equity Surcharge for D-SIBs and a Countercyclical Buffer, as prescribed by OSFI (immaterial for the first quarter of 2020). If a bank’s capital ratios fall within the range of this combined buffer, restrictions on discretionary distributions of earnings (such as dividends, share repurchases and discretionary compensation) would ensue, with the degree of such restrictions varying according to the position of the bank’s ratios within the buffer range.

(2)

OSFI requires all D-SIBs to hold a Domestic Stability Buffer (DSB) against Pillar 2 risks associated with systemic vulnerabilities. The DSB can range from 0% to 2.5% of total RWA and is currently set at 2.0%, which will increase to 2.25% effective April 30, 2020. Breaches of the DSB do not result in a bank being subject to automatic constraints on capital distributions.

na – not applicable

Regulatory Capital Position

 

(Canadian $ in millions, except as noted)

   Q1-2020                             Q4-2019                             Q1-2019  

Gross common equity (1)

     46,828          45,728          43,009  

Regulatory adjustments applied to common equity

     (9,684              (9,657              (9,283

Common Equity Tier 1 capital (CET1)

     37,144                36,071                33,726  

Additional Tier 1 eligible capital (2)

     5,348          5,348          4,340  

Regulatory adjustments applied to Tier 1

     (214              (218              (219

Additional Tier 1 capital (AT1)

     5,134                5,130                4,121  

Tier 1 capital (T1 = CET1 + AT1)

     42,278                41,201                37,847  

Tier 2 eligible capital (3)

     7,216          7,189          7,068  

Regulatory adjustments applied to Tier 2

     (56              (50              (126

Tier 2 capital (T2)

     7,160                7,139                6,942  

Total capital (TC = T1 + T2)

     49,438                48,340                44,789  

Risk-weighted Assets (4)

     325,647                317,029                296,987  

Leverage Ratio Exposures

     985,382                956,493                902,532  

Capital ratios (%)

            

CET1 Ratio

     11.4          11.4          11.4  

Tier 1 Capital Ratio

     13.0          13.0          12.7  

Total Capital Ratio

     15.2          15.2          15.1  

Leverage Ratio

     4.3                4.3                4.2  

 

(1)

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

(2)

Additional Tier 1 Eligible Capital includes directly and indirectly issued qualifying Additional Tier 1 instruments.

(3)

Tier 2 Eligible Capital includes subordinated debentures and may include certain loan loss allowances.

(4)

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

Other Capital Developments

During the quarter, 392,291 common shares were issued through the exercise of stock options.

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) for up to 12 million common shares, commencing on or around June 3, 2020. Once approvals are obtained, the share repurchase program will permit BMO to purchase its common shares for the purpose of cancellation. The NCIB is a regular part of BMO’s capital management strategy. The timing and amount of purchases under the NCIB are subject to regulatory approvals and to management discretion based on factors such as market conditions and capital levels. We will consult with OSFI before making purchases under the bid.

If a non-viable contingent capital (NVCC) trigger event were to occur, our NVCC capital instruments would be converted into BMO common shares pursuant to automatic conversion formulas, with 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 at the time of the trigger event (calculated using a 10-day weighted average). Based on a floor price of $5.00, these NVCC capital instruments would be converted into approximately 3.08 billion BMO common shares, assuming no accrued interest and no declared and unpaid dividends.

 

BMO Financial Group First Quarter Report 2020 12


Outstanding Shares and Securities Convertible into Common Shares (1)

 

As at January 31, 2020

  

Number of shares

or dollar amount

(in millions)

 

Common shares

     639.6  

Class B Preferred shares

  

Series 25

     $236  

Series 26

     $54  

Series 27*

     $500  

Series 29*

     $400  

Series 31*

     $300    

Series 33*

     $200  

Series 35*

     $150  

Series 36*

     $600  

Series 38*

     $600  

Series 40*

     $500  

Series 42*

     $400  

Series 44*

     $400  

Series 46*

     $350  

Additional Tier 1 Capital Notes

  

4.800% Additional Tier 1 Capital Notes*

     US$500  

Medium-Term Notes*

  

Series H - Second Tranche

     $1,000  

Series I - First Tranche

     $1,250  

Series I - Second Tranche

     $850  

3.803% Subordinated Notes due 2032

     US$1,250  

4.338% Subordinated Notes due 2028

     US$850  

Series J - First Tranche

     $1,000  

Stock options

  

Vested

     3.8  

Non-vested

     2.9  

 

*

Convertible into common shares

(1)

Details on the Medium-Term Notes are outlined in Note 15 to the audited annual consolidated financial statements on page 176 of BMO’s 2019 Annual Report. Details on share capital and Additional Tier 1 Capital Notes are outlined in Note 7 to the unaudited interim consolidated financial statements and Note 16 to the audited annual consolidated financial statements on page 177 of BMO’s 2019 Annual Report.

Dividends

On February 25, 2020, BMO announced that the Board of Directors had declared a quarterly dividend on common shares of $1.06 per share, unchanged from the preceding quarter, and up $0.06 per share or 6% from the prior year. The dividend is payable on May 26, 2020, to shareholders of record on May 1, 2020. Common shareholders may elect to have their cash dividends reinvested in common shares of BMO, in accordance with the Shareholder Dividend Reinvestment and Share Purchase Plan.

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

Caution

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

 

13 BMO Financial Group First Quarter Report 2020


Review of Operating Groups’ Performance

How BMO Reports Operating Group Results

The following sections review the financial results of each of our operating groups and operating segments for the first quarter of 2020.

Periodically, certain business lines and units within the business lines are transferred between client and corporate support groups to more closely align BMO’s organizational structure with its strategic priorities. In addition, allocations of revenue, provisions for credit losses and expenses are updated to better align with current experience.

Effective November 1, 2019, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior years. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. Depreciation on the right-of-use assets has been recorded in non-interest expense and interest on the lease liability in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

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

Personal and Commercial Banking (P&C)

 

(Canadian $ in millions, except as noted)

                   Q1-2020                     Q4-2019                      Q1-2019  

Net interest income (teb)

     2,608       2,599        2,494  

Non-interest revenue

     830       839        794  

Total revenue (teb)

     3,438       3,438        3,288  

Provision for (recovery of) credit losses on impaired loans

     270       200        129  

Provision for (recovery of) credit losses on performing loans

     31       15        (3 )     

Total provision for credit losses

     301       215        126  

Non-interest expense

     1,747       1,766        1,723  

Income before income taxes

     1,390       1,457        1,439  

Provision for income taxes (teb)

     339       354        347  

Reported net income

     1,051       1,103        1,092  

Amortization of acquisition-related intangible assets (1)

     10       11        11  

Adjusted net income

     1,061       1,114        1,103  

Net income growth (%)

     (3.8     5.0        14.0  

Adjusted net income growth (%)

     (3.8     4.9        13.8  

Revenue growth (%)

     4.6       6.5        7.1  

Non-interest expense growth (%)

     1.4       4.0        5.1  

Adjusted non-interest expense growth (%)

     1.5       4.1        5.2  

Return on equity (%)

     16.3       17.7        18.3  

Adjusted return on equity (%)

     16.4       17.9        18.5  

Operating leverage (teb) (%)

     3.2       2.5        2.0  

Adjusted operating leverage (teb) (%)

     3.1       2.4        1.9  

Efficiency ratio (teb) (%)

     50.8       51.4        52.4  

Adjusted efficiency ratio (teb) (%)

     50.4       50.9        51.9  

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

     2.91       2.92        2.99  

Average earning assets

     356,467       352,478        331,037  

Average gross loans and acceptances

     366,696       362,612        338,084  

Average net loans and acceptances

     364,948       360,933        336,522  

Average deposits

     306,155       293,977        272,960  

 

 (1)

Total P&C before tax amounts of $13 million in Q1-2020, and $15 million in both Q4-2019 and Q1-2019 are included in non-interest expense.

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

The Personal and Commercial Banking (P&C) operating group represents the sum of our two retail and commercial operating segments, Canadian Personal and Commercial Banking (Canadian P&C) and U.S. Personal and Commercial Banking (U.S. P&C). The P&C banking business reported net income was $1,051 million, compared with $1,092 million in the prior year. Adjusted net income was $1,061 million, compared with $1,103 million in the prior year, and excludes the amortization of acquisition-related intangible assets. These operating segments are reviewed separately in the sections that follow.

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

 

BMO Financial Group First Quarter Report 2020 14


Canadian Personal and Commercial Banking (Canadian P&C)

 

(Canadian $ in millions, except as noted)

                   Q1-2020                      Q4-2019                      Q1-2019  

Net interest income

     1,557        1,543        1,435  

Non-interest revenue

     525        535        515      

Total revenue

     2,082        2,078        1,950  

Provision for credit losses on impaired loans

     138        134        114  

Provision for credit losses on performing loans

     14        11        6  

Total provision for credit losses

     152        145        120  

Non-interest expense

     986        976        956  

Income before income taxes

     944        957        874  

Provision for income taxes

     244        247        226  

Reported net income

     700        710        648  

Amortization of acquisition-related intangible assets (1)

     -        -        1  

Adjusted net income

     700        710        649  

Personal revenue

     1,287        1,293        1,220  

Commercial revenue

     795        785        730  

Net income growth (%)

     8.0        5.0        0.3  

Revenue growth (%)

     6.8        7.1        2.8  

Non-interest expense growth (%)

     3.2        5.6        2.5  

Adjusted non-interest expense growth (%)

     3.2        5.6        2.5  

Return on equity (%)

     26.0        28.3        27.6  

Adjusted return on equity (%)

     26.0        28.3        27.6  

Operating leverage (%)

     3.6        1.5        0.3  

Adjusted operating leverage (%)

     3.6        1.5        0.3  

Efficiency ratio (%)

     47.3        47.0        49.0  

Net interest margin on average earning assets (%)

     2.68        2.69        2.61  

Average earning assets

     231,286        227,124        217,683  

Average gross loans and acceptances

     247,421        243,395        230,448  

Average net loans and acceptances

     246,457        242,457        229,583  

Average deposits

     191,462        183,975        168,150  

 

 (1)

Before tax amounts of $nil in both Q1-2020 and Q4-2019, and $1 million in Q1-2019 are included in non-interest expense.

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

Q1 2020 vs. Q1 2019

Canadian P&C reported net income was $700 million, an increase of $52 million or 8% and adjusted net income was $700 million, an increase of $51 million or 8% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Strong revenue growth was partially offset by higher provisions for credit losses and higher expenses.

Revenue was $2,082 million, an increase of $132 million or 7% from the prior year, primarily due to higher balances across all products, higher margins and increased non-interest revenue. Net interest margin of 2.68% increased 7 basis points, due to a favourable product mix and the benefit of a widening Prime rate to the Banker’s Acceptances rate.

Personal revenue increased $67 million or 6%, due to higher balances across all products and higher margins. Commercial revenue increased $65 million or 9%, due to higher balances across all products and higher non-interest revenue.

Total provision for credit losses was $152 million, an increase of $32 million from the prior year. The provision for credit losses on impaired loans increased $24 million, due to higher commercial provisions. There was a $14 million provision for credit losses on performing loans in the current quarter, compared with a $6 million provision for credit losses on performing loans in the prior year.

Non-interest expense was $986 million, an increase of $30 million or 3%, primarily due to higher technology and pension costs.

Average gross loans and acceptances increased $17.0 billion or 7% from the prior year to $247.4 billion. Total personal lending balances (excluding retail cards) increased 4%, including 6% growth in proprietary mortgages and amortizing home equity line of credit loans. Commercial loan balances (excluding corporate cards) increased 15%. Average deposits increased $23.3 billion or 14% to $191.5 billion. Personal deposit balances and commercial deposit balances both increased 14%.

Q1 2020 vs. Q4 2019

Reported and adjusted net income decreased $10 million or 1% from the prior quarter.

Revenue increased $4 million, primarily due to higher balances across all products, partially offset by lower margins and lower non-interest revenue. Net interest margin of 2.68% decreased 1 basis point from the prior quarter.

Personal revenue decreased $6 million, primarily due to lower non-interest revenue and lower margins, partially offset by higher balances across all products. Commercial revenue increased $10 million or 1%, primarily due to higher balances across all products, partially offset by lower margins.

Total provision for credit losses increased $7 million. The provision for credit losses on impaired loans increased $4 million with higher commercial provisions, partially offset by lower consumer provisions in the current quarter. There was a $14 million provision for credit losses on performing loans in the current quarter, compared with a $11 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense increased $10 million or 1% from the prior quarter.

Average gross loans and acceptances increased $4.0 billion or 2% from the prior quarter, and average deposits increased $7.5 billion or 4%.

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

 

15 BMO Financial Group First Quarter Report 2020


U.S. Personal and Commercial Banking (U.S. P&C)

 

(US$ in millions, except as noted)

                   Q1-2020                     Q4-2019                      Q1-2019  

Net interest income (teb)

     798       798        793  

Non-interest revenue

     232       230        209  

Total revenue (teb)

     1,030       1,028        1,002  

Provision for (recovery of) credit losses on impaired loans

     100       51        12  

Provision for (recovery of) credit losses on performing loans

     13       3        (7 )     

Total provision for credit losses

     113       54        5  

Non-interest expense

     578       597        575  

Income before income taxes

     339       377        422  

Provision for income taxes (teb)

     72       80        90  

Reported net income

     267       297        332  

Amortization of acquisition-related intangible assets (1)

     8       8        8  

Adjusted net income

     275       305        340  

Personal revenue

     328       337        341  

Commercial revenue

     702       691        661  

Net income growth (%)

     (19.7     3.6        33.5  

Adjusted net income growth (%)

     (19.4     3.3        32.2  

Revenue growth (%)

     2.8       4.1        7.6  

Non-interest expense growth (%)

     0.6       0.7        2.3  

Adjusted non-interest expense growth (%)

     0.7       0.9        2.5  

Return on equity (%)

     9.2       10.5        12.3  

Adjusted return on equity (%)

     9.5       10.8        12.6  

Operating leverage (teb) (%)

     2.2       3.4        5.3  

Adjusted operating leverage (teb) (%)

     2.1       3.2        5.1  

Efficiency ratio (teb) (%)

     56.1       58.1        57.4  

Adjusted efficiency ratio (teb) (%)

     55.2       57.1        56.3  

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

     3.34       3.35        3.71  

Average earning assets

     95,114       94,682        84,901  

Average gross loans and acceptances

     90,626       90,047        80,617  

Average net loans and acceptances

     90,030       89,488        80,095  

Average deposits

     87,155       83,085        78,490  

(Canadian $ equivalent in millions)

                      

Net interest income (teb)

     1,051       1,056        1,059  

Non-interest revenue

     305       304        279  

Total revenue (teb)

     1,356       1,360        1,338  

Provision for credit losses on impaired loans

     132       66        15  

Provision for (recovery of) credit losses on performing loans

     17       4        (9

Total provision for credit losses

     149       70        6  

Non-interest expense

     761       790        767  

Income before income taxes

     446       500        565  

Provision for income taxes (teb)

     95       107        121  

Reported net income

     351       393        444  

Adjusted net income

     361       404        454  

Net income growth (%)

     (21.0     5.0        42.4  

Adjusted net income growth (%)

     (20.7     4.7        41.1  

Revenue growth (%)

     1.3       5.6        14.3  

Non-interest expense growth (%)

     (0.8     2.2        8.5  

Adjusted non-interest expense growth (%)

     (0.7     2.4        8.8  

Average earning assets

     125,181       125,354        113,354  

Average gross loans and acceptances

     119,275       119,217        107,636  

Average net loans and acceptances

     118,491       118,476        106,939  

Average deposits

     114,693       110,002        104,810  

 

 (1)

Before tax amounts of US$10 million in Q1-2020, US$11 million in Q4-2019 and US$10 million Q1-2019 are included in non-interest expense.

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

Q1 2020 vs. Q1 2019

U.S. P&C reported net income was $351 million, compared with $444 million in the prior year, and adjusted net income was $361 million, compared with $454 million in the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income was $267 million, compared with $332 million, and adjusted net income was $275 million, compared with $340 million in the prior year, due to higher provisions for credit losses, in part due to a recovery in the prior year, partially offset by higher revenue.

Revenue was $1,030 million, an increase of $28 million or 3% from the prior year, primarily due to higher loan and deposit balances and higher fee income, partially offset by a lower net interest margin. Net interest margin of 3.34% decreased 37 basis points, primarily due to lower deposit product margins driven by the impact of a lower interest rate environment, as well as changes in deposit product mix and loan margin compression.

Personal revenue was $328 million, compared with $341 million in the prior year, due to lower deposit revenue. Commercial revenue was $702 million, an increase of $41 million or 6%, primarily due to higher loan and deposit balances and fee income, partially offset by lower margins.

Total provision for credit losses was $113 million, an increase of $108 million from the prior year. The provision for credit losses on impaired loans increased $88 million, due to higher commercial provisions in the current year and higher consumer provisions as a result of a recovery on consumer loans in the prior year. There was a $13 million provision for credit losses on performing loans in the current quarter, compared with a $7 million recovery of credit losses on performing loans in the prior year.

Non-interest expense was $578 million and adjusted non-interest expense was $568 million, with both increasing $3 million or 1% from the prior year.

 

BMO Financial Group First Quarter Report 2020 16


Average gross loans and acceptances increased $10.0 billion or 12% from the prior year to $90.6 billion, driven by growth in commercial loans of 13% and personal loans of 9%. Average deposits increased $8.7 billion or 11% to $87.2 billion, with 13% growth in commercial deposit balances and 9% growth in personal deposit balances.

Q1 2020 vs. Q4 2019

Reported net income was $351 million, compared with $393 million, and adjusted net income was $361 million, compared with $404 million in the prior quarter. All amounts in the remainder of this section are on a U.S. dollar basis.

Reported net income was $267 million, compared with $297 million, and adjusted net income was $275 million, compared with $305 million in the prior quarter, due to higher provisions for credit losses, partially offset by lower expenses.

Revenue was $1,030 million, an increase of $2 million from the prior quarter, primarily due to higher deposit balances and fees, partially offset by lower deposit margins. Net interest margin of 3.34% decreased 1 basis point, primarily due to lower deposit margins, reflecting the impact of lower rates and change in deposit product mix, partially offset by the benefit of deposits growing faster than loans.

Personal revenue was $328 million, compared with $337 million in the prior quarter, due to lower deposit revenue and lower fee income. Commercial revenue of $702 million increased $11 million, primarily due to higher deposit balances, higher fee income and loan revenue.

Total provision for credit losses increased $59 million. The provision for credit losses on impaired loans increased $49 million, due to higher commercial provisions. There was a $13 million provision for credit losses on performing loans in the current quarter, compared with a $3 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense decreased $19 million or 3% and adjusted non-interest expense decreased $18 million or 3%, primarily due to lower technology, employee-related and other costs, partially offset by higher premises costs.

Average gross loans and acceptances increased $0.6 billion or 1% from the prior quarter, driven by growth in commercial loans and personal loans. Average deposits increased $4.1 billion or 5%, with growth in commercial and personal deposit balances.

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

 

17 BMO Financial Group First Quarter Report 2020


BMO Wealth Management

 

(Canadian $ in millions, except as noted)

                 Q1-2020                   Q4-2019                   Q1-2019  

Net interest income

     231       236       232  

Non-interest revenue

     1,794       1,331       1,908  

Total revenue

     2,025       1,567       2,140  

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

     716       335       926  

Revenue, net of CCPB

     1,309       1,232       1,214  

Provision for (recovery of) credit losses on impaired loans

     -       1       2  

Provision for (recovery of) credit losses on performing loans

     3       (1     -  

Total provision for (recovery of) credit losses

     3       -       2  

Non-interest expense

     912       860       896  

Income before income taxes

     394       372       316  

Provision for income taxes

     103       106       78  

Reported net income

     291       266       238  

Amortization of acquisition-related intangible assets (1)

     9       9       10  

Reinsurance adjustment (2)

     -       25       -  

Adjusted net income

     300       300       248  

Traditional Wealth businesses reported net income

     209       236       173  

Traditional Wealth businesses adjusted net income

     218       245       183  

Insurance reported net income

     82       30       65  

Insurance adjusted net income

     82       55       65  

Net income growth (%)

     22.2       22.0       (10.4 )     

Adjusted net income growth (%)

     20.9       31.3       (10.2

Revenue growth (%)

     (5.3     (0.2     33.3  

Revenue growth, net of CCPB (%)

     7.9       4.4       (2.5

Adjusted CCPB

     716       310       926  

Revenue growth, net of adjusted CCPB (%)

     7.9       6.5       (2.5

Non-interest expense growth (%)

     1.8       (2.6     -  

Adjusted non-interest expense growth (%)

     2.0       (2.4     0.1  

Return on equity (%)

     18.4       16.6       15.3  

Adjusted return on equity (%)

     19.0       18.7       15.9  

Operating leverage, net of CCPB (%)

     6.1       7.0       (2.5

Adjusted operating leverage, net of CCPB (%)

     5.9       8.9       (2.6

Reported efficiency ratio (%)

     45.0       54.9       41.9  

Reported efficiency ratio, net of CCPB (%)

     69.7       69.8       73.8  

Adjusted efficiency ratio (%)

     44.5       54.2       41.3  

Adjusted efficiency ratio, net of CCPB (%)

     68.8       67.5       72.8  

Assets under management

     482,268       471,160       438,540  

Assets under administration (3)

     410,544       393,576       377,528  

Average assets

     44,219       42,750       38,744  

Average gross loans and acceptances

     25,433       24,660       22,296  

Average net loans and acceptances

     25,402       24,628       22,264  

Average deposits

     39,413       38,123       35,288  

 

 (1)

Before tax amounts of $11 million in Q1-2020, $11 million in Q4-2019 and $13 million in Q1-2019 are included in non-interest expense.

 (2)

Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB for the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment was included in CCPB.

 (3)

We have certain assets under management that are also administered by us and included in assets under administration.

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

Q1 2020 vs. Q1 2019

BMO Wealth Management reported net income was $291 million, an increase of $53 million or 22%, and adjusted net income was $300 million, an increase of $52 million or 21% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets. Traditional Wealth reported net income was $209 million, an increase of $36 million or 21%, and adjusted net income was $218 million, an increase of $35 million or 19%, primarily driven by higher revenue from a higher level of client assets and lower expenses. Insurance reported and adjusted net income was $82 million, an increase of $17 million or 26%, primarily due to a benefit from market movements in the current quarter, relative to the unfavourable impact of market movements in the prior year, partially offset by lower underlying business results.

Revenue was $2,025 million, compared with $2,140 million in the prior year. Revenue, net of CCPB, was $1,309 million, an increase of $95 million or 8%. Revenue in Traditional Wealth was $1,161 million, an increase of $59 million or 5%, primarily driven by higher fee-based revenue. Insurance revenue, net of CCPB, increased $36 million, primarily due to the drivers noted above.

Reported non-interest expense was $912 million, an increase of $16 million or 2%, and adjusted non-interest expense was $901 million, an increase of $18 million or 2%, primarily due to higher revenue-based costs given business performance, partially offset by lower employee-related expense.

Assets under management increased $43.7 billion or 10% from the prior year, and assets under administration increased $33.0 billion or 9%, primarily driven by stronger equity markets and favourable foreign exchange. Average gross loans and average deposits increased 14% and 12%, respectively.

 

BMO Financial Group First Quarter Report 2020 18


Q1 2020 vs. Q4 2019

Reported net income increased $25 million or 9%, and adjusted net income was unchanged, compared with the prior quarter. Adjusted net income in the previous quarter excludes the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. Traditional Wealth reported net income was $209 million, compared with $236 million in the prior quarter. Adjusted net income was $218 million, compared with $245 million in the prior quarter, primarily due to higher expenses, including stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year. Insurance reported net income of $82 million increased $52 million, and adjusted net income increased $27 million, primarily due to the benefit from favourable market movements in the current quarter, relative to the unfavourable impact of market movements in the prior quarter.

Revenue was $2,025 million, compared with $1,567 million in the prior quarter. Revenue, net of reported CCPB, increased $77 million or 6%. Revenue, net of adjusted CCPB, increased $52 million or 4%. Revenue in Traditional Wealth increased $6 million or 1%. Insurance revenue, net of CCPB, increased $71 million and Insurance revenue, net of adjusted CCPB, increased $46 million, due to the drivers noted above.

Reported and adjusted non-interest expense both increased $52 million or 6%, primarily due to higher employee-related expenses, including stock-based compensation for employees eligible to retire.

Assets under management increased $11.1 billion or 2% from the prior quarter, and assets under administration increased $17.0 billion or 4%, primarily driven by stronger equity markets and favourable foreign exchange. Average gross loans and average deposits both increased 3% from the prior quarter.

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

 

19 BMO Financial Group First Quarter Report 2020


BMO Capital Markets

 

(Canadian $ in millions, except as noted)

                 Q1-2020                   Q4-2019                   Q1-2019  

Net interest income (teb)

     696       695       560  

Non-interest revenue

     673       484       577  

Total revenue (teb)

     1,369       1,179       1,137  

Provision for (recovery of) credit losses on impaired loans

     53       32       1  

Provision for (recovery of) credit losses on performing loans

     (3     8       14  

Total provision for (recovery of) credit losses

     50       40       15  

Non-interest expense

     852       792       796  

Income before income taxes

     467       347       326  

Provision for income taxes (teb)

     111       76       70  

Reported net income

     356       271       256  

Acquisition integration costs (1)

     2       2       4  

Amortization of acquisition-related intangible assets (2)

     4       9       3  

Adjusted net income

     362       282       263  

Global Markets revenue

     823       686       631  

Investment and Corporate Banking revenue

     546       493       506  

Net income growth (%)

     39.1       (9.6     (5.8

Adjusted net income growth (%)

     37.6       (9.3     (3.3

Revenue growth (%)

     20.4       3.6       4.4  

Non-interest expense growth (%)

     7.0       3.0       9.7  

Adjusted non-interest expense growth (%)

     7.3       3.1       8.5  

Return on equity (%)

     12.9       9.8       9.1  

Adjusted return on equity (%)

     13.1       10.2       9.4  

Operating leverage (teb) (%)

     13.4       0.6       (5.3

Adjusted operating leverage (teb) (%)

     13.1       0.5       (4.1

Efficiency ratio (teb) (%)

     62.3       67.3       70.0  

Adjusted efficiency ratio (teb) (%)

     61.7       66.1       69.2  

Average assets

     351,330       342,025       340,535  

Average gross loans and acceptances

     62,286       63,005       56,507  

Average net loans and acceptances

     62,126       62,895       56,443  

 

 (1)

KGS-Alpha and Clearpool acquisition integration costs before tax amounts of $3 million in Q1-2020, $2 million in Q4-2019, and $6 million in Q1-2019 are included in non-interest expense.

 (2)

Before tax amounts of $5 million in Q1-2020, $12 million in Q4-2019 and $3 million in Q1-2019 are included in non-interest expense.

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

Q1 2020 vs. Q1 2019

BMO Capital Markets reported net income was $356 million, an increase of $100 million or 39%, and adjusted net income was $362 million, an increase of $99 million or 38% from the prior year. Adjusted net income excludes the amortization of acquisition-related intangible assets and acquisition integration costs. Strong revenue growth in both Global Markets and Investment and Corporate Banking was partially offset by higher expenses and higher oil and gas provisions.

Revenue was $1,369 million, an increase of $232 million or 20%, or 21% excluding the impact of the weaker U.S. dollar. Global Markets revenue increased, primarily driven by higher interest rate trading revenue, as well as new debt and equity issuances. Investment and Corporate Banking revenue increased, driven by higher corporate banking-related revenue and higher underwriting and advisory revenue.

Total provision for credit losses was $50 million, an increase of $35 million from the prior year. The provision for credit losses on impaired loans increased $52 million. There was a net recovery of credit losses on performing loans of $3 million in the current quarter, compared with a $14 million provision for credit losses on performing loans in the prior year.

Non-interest expense was $852 million, an increase of $56 million, and adjusted non-interest expense was $844 million, an increase of $57 million, both increasing 7%, or 8% excluding the impact of the weaker U.S. dollar. The increase was primarily due to higher employee-related costs given business performance, as well as higher technology costs.

Q1 2020 vs. Q4 2019

Reported net income was $356 million, an increase of $85 million or 31%, or 32% excluding the impact of the weaker U.S. dollar, and adjusted net income was $362 million, an increase of $80 million or 29% from the prior quarter.

Revenue increased $190 million or 16%. Global Markets revenue increased, primarily due to higher equities and interest rate trading revenue. Investment and Corporate Banking revenue increased, primarily due to higher underwriting and advisory revenue.

Total provision for credit losses increased $10 million. The provision for credit losses on impaired loans increased $21 million in the current quarter. There was a net recovery of credit losses on performing loans of $3 million in the current quarter, compared with a $8 million provision for credit losses on performing loans in the prior quarter.

Non-interest expense increased $60 million or 7%, or 8% excluding the impact of the weaker U.S. dollar, and adjusted non-interest expense increased $66 million or 8%, or 9% excluding the impact of the weaker U.S. dollar. The increase was primarily due to higher employee-related expenses, given both business performance and the impact of stock-based compensation for employees eligible to retire that is expensed in the first quarter of each year.

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

 

BMO Financial Group First Quarter Report 2020 20


Corporate Services

 

(Canadian $ in millions, except as noted)

   Q1-2020                Q4-2019                Q1-2019  

Net interest income before group teb offset

     (69        (89        (47

Group teb offset

     (78        (77        (67

Net interest income (teb)

     (147        (166        (114

Non-interest revenue

     62          69          66  

Total revenue (teb)

     (85        (97        (48

Provision for (recovery of) credit losses on impaired loans

     1          (2        (5

Provision for (recovery of) credit losses on performing loans

     (6        -          (1

Total provision for (recovery of) credit losses

     (5        (2        (6

Non-interest expense

     158          569          142  

Income (loss) before income taxes

     (238        (664        (184

Provision for (recovery of) income taxes (teb)

     (132        (218        (108

Reported net income (loss)

     (106        (446        (76

Restructuring costs (1)

     -          357          -  

Adjusted net loss

     (106        (89        (76

Adjusted non-interest expense

     158          85          142  

 

 (1)

Q4-2019 reported net income included a $357 million after-tax ($484 million pre-tax) restructuring charge, related to severance and a small amount of real estate-related costs, to continue to improve our efficiency, including accelerating delivery against key bank-wide initiatives focused on digitization, organizational redesign and simplification of the way we do business. Restructuring charges are included in non-interest expense.

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

Corporate Services consists of Corporate Units and Technology and Operations (T&O). Corporate Units provide enterprise-wide expertise, governance and support in a variety of areas, including strategic planning, risk management, finance, legal and regulatory compliance, human resources, communications, marketing, real estate, procurement, data and analytics. T&O develops, monitors, manages and maintains governance of information technology, and also provides cyber security and operations services.

The costs of these Corporate Units and T&O services are largely transferred to the three operating groups (Personal and Commercial Banking, BMO Wealth Management and BMO Capital Markets), with any remaining amounts retained in Corporate Services results. As such, Corporate Services results largely reflect the impact of residual treasury-related activities, the elimination of taxable equivalent adjustments, and residual unallocated expenses. Reported results in the prior quarter include a restructuring charge, primarily related to severance.

Q1 2020 vs. Q1 2019

Corporate Services reported and adjusted net loss was $106 million, compared with a reported and adjusted net loss of $76 million in the prior year. Results decreased, primarily due to lower treasury related revenue, in part due to a stronger prior year level, and higher expenses.

Q1 2020 vs. Q4 2019

Reported and adjusted net loss for the quarter was $106 million, compared with a reported net loss of $446 million and an adjusted net loss of $89 million, in the prior quarter. Adjusted results in the prior quarter exclude the restructuring charge, primarily related to severance. Adjusted results decreased, primarily due to the seasonality of benefits and stock-based compensation for employees eligible to retire that are expensed in the first quarter of each year, partially offset by lower taxes and higher revenue excluding teb.

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

 

21 BMO Financial Group First Quarter Report 2020


Summary Quarterly Earnings Trends

 

(Canadian $ in millions, except as noted)

   Q1-2020              Q4-2019              Q3-2019              Q2-2019              Q1-2019              Q4-2018             Q3-2018              Q2-2018  

Revenue (1)(2)

     6,747        6,087        6,666        6,213        6,517        5,893       5,794        5,580  

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

     716        335        887        561        926        390       269        332  

Revenue, net of CCPB (1)(2)

     6,031        5,752        5,779        5,652        5,591        5,503       5,525        5,248  

Provision for (recovery of) credit losses on impaired loans

     324        231        243        150        127        177       177        172  

Provision for (recovery of) credit losses on performing loans

     25        22        63        26        10        (2     9        (12

Total provision for credit losses

     349        253        306        176        137        175       186        160  

Non-interest expense (1)(2)

     3,669        3,987        3,491        3,595        3,557        3,193       3,359        3,525  

Income before income taxes

     2,013        1,512        1,982        1,881        1,897        2,135       1,980        1,563  

Provision for income taxes

     421        318        425        384        387        438       443        317  

Reported net income (see below)

     1,592        1,194        1,557        1,497        1,510        1,697       1,537        1,246  

Acquisition integration costs (3)

     2        2        2        2        4        13       7        2  

Amortization of acquisition-related intangible assets (4)

     23        29        23        23        24        24       22        23  

Restructuring costs (5)

     -        357        -        -        -        -       -        192  

Reinsurance adjustment (6)

     -        25        -        -        -        -       -        -  

Benefit from the remeasurement of an employee benefit liability (7)

     -        -        -        -        -        (203     -        -  

Adjusted net income (see below)

     1,617        1,607        1,582        1,522        1,538        1,531       1,566        1,463  

Basic earnings per share ($)

     2.38        1.79        2.34        2.27        2.28        2.58       2.32        1.87  

Diluted earnings per share ($)

     2.37        1.78        2.34        2.26        2.28        2.58       2.31        1.86  

Adjusted diluted earnings per share ($)

     2.41        2.43        2.38        2.30        2.32        2.32       2.36        2.20  

 

 (1)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16), recognizing the cumulative effect of adoption in opening retained earnings with no changes to prior periods. Under IFRS 16, the bank as lessee is required to recognize a right-of-use asset and a corresponding lease liability for most leases. For the three months ended January 31, 2020, we recognized $89 million of depreciation on the right-of-use assets recorded in non-interest expense and $14 million of interest on the lease liability recorded in interest expense. Refer to the Changes in Accounting Policies section on page 24 for further details.

 (2)

Effective the first quarter of 2019, the bank adopted IFRS 15, Revenue from Contracts with Customers (IFRS 15) and elected to retrospectively present prior periods as if IFRS 15 had always been applied. As a result, loyalty rewards and cash promotion costs on cards previously recorded in non-interest expense are presented as a reduction in non-interest revenue. In addition, certain out-of-pocket expenses reimbursed to BMO from customers have been reclassified from a reduction in non-interest expense to non-interest revenue.

 (3)

Acquisition integration costs before tax are included in non-interest expense.

 (4)

Amortization of acquisition-related intangible assets before tax is charged to the non-interest expense of the operating groups.

 (5)

Restructuring charges recorded in Q4-2019 of $357 million after-tax ($484 million pre-tax) and in Q2-2018 of $192 million after-tax ($260 million pre-tax). Restructuring costs are included in non-interest expense in Corporate Services.

 (6)

Q4-2019 reported net income included a reinsurance adjustment of $25 million (pre-tax and after-tax) in CCPB, related to the net impact of major reinsurance claims from Japanese typhoons that were incurred after our announced decision to wind down our reinsurance business. This reinsurance adjustment is included in CCPB in BMO Wealth Management.

 (7)

Q4-2018 included a benefit of $203 million after-tax ($277 million pre-tax) from the remeasurement of an employee benefit liability as a result of an amendment to our other employee future benefits plan for certain employees that was announced in the fourth quarter of 2018. This amount has been included in Corporate Services in non-interest expense.

Certain comparative figures have been reclassified to conform with the current period’s presentation.

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

BMO’s quarterly earnings trends were reviewed in detail on pages 52 and 53 of BMO’s 2019 Annual Report. Please refer to that review for a more complete discussion of trends and factors affecting past quarterly results, including the modest impact of seasonal variations in results. Quarterly earnings are also impacted by foreign currency translation. The table above outlines summary results for the second quarter of fiscal 2018 through the first quarter of fiscal 2020.

Earnings Trends

BMO’s underlying results have generally trended upwards over the past eight quarters, largely reflecting continued growth in the P&C businesses, while market sensitive businesses have been impacted by variability resulting from changes in interest rates and equity markets.

Reported results were impacted by a restructuring charge, primarily related to severance, and a reinsurance adjustment, both in the fourth quarter of 2019, a benefit from the remeasurement of an employee future benefit liability in the fourth quarter of 2018, and a restructuring charge in the second quarter of 2018.

Canadian P&C delivered positive operating leverage and year-over-year net income growth in the past eight quarters, largely reflecting revenue growth driven by higher balances. U.S. P&C delivered year-over-year revenue growth in the past eight quarters, with good growth in loan and deposit balances, as well as continued good expense management. Traditional Wealth Management results have generally seen moderate increases, largely due to equity markets. Insurance results were subject to variability resulting from changes in interest rates, equity markets and reinsurance claims. BMO Capital Markets results have reflected good revenue performance, with year-over-year growth in the most recent seven quarters, due to strong U.S. segment performance, and benefits from our diversified businesses. The second quarter of 2019 included a severance expense. Corporate Services reported results can fluctuate quarter-over-quarter, in large part due to the inclusion of adjusting items, which are largely recorded in Corporate Services.

The bank’s results reflect the impact of IFRS 16, Leases (IFRS 16), which was adopted in the first quarter of 2020, and IFRS 15, Revenue from Contracts with Customers (IFRS 15), which was adopted retrospectively in the first quarter of 2019. Please refer to the Changes in Accounting Policies section on page 24 and on pages 142 to 146 of BMO’s 2019 Annual Report.

BMO’s total provision for credit losses measured as a percentage of net loans and acceptances has ranged between 13 basis points and 31 basis points since the second quarter of 2018.

The effective income tax rate has varied with legislative changes; changes in tax policy, including their interpretation by tax authorities and the courts; earnings mix, including the relative proportion of earnings attributable to the different jurisdictions in which we operate; and the level of tax-exempt income from securities.

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

 

BMO Financial Group First Quarter Report 2020 22


Balance Sheet

Total assets were $879.7 billion as at January 31, 2020, an increase of $27.5 billion from October 31, 2019. The stronger U.S. dollar at quarter-end increased assets by $2.2 billion, excluding the impact on derivative financial assets.

The following discussion excludes the impact of changes in the U.S. dollar. Securities increased $21.5 billion, primarily due to higher balances in BMO Capital Markets and Corporate Services. Net loans increased $3.7 billion, largely driven by an increase of $2.3 billion in business and government loans, mainly in Canadian P&C, and a $0.8 billion increase in consumer instalment and other personal loans, due to growth in our P&C businesses. Securities borrowed or purchased under resale agreements increased $1.2 billion, driven by higher client activity in BMO Capital Markets, partially offset by lower balances in Corporate Services. Cash and cash equivalents and interest bearing deposits with banks decreased $4.2 billion, primarily due to lower balances held with central banks. All other assets, excluding derivative financial assets, increased $3.3 billion, in part due to the adoption of IFRS 16, Leases, which resulted in the recording of a right-of-use asset and lease liability on the balance sheet.

Liabilities increased $26.4 billion from October 31, 2019. The stronger U.S. dollar increased liabilities by $2.0 billion, excluding the impact on derivative financial liabilities.

The following discussion excludes the impact of changes in the U.S. dollar. Deposits increased $12.7 billion. Deposits by individuals increased $4.4 billion, due to growth in the P&C businesses and BMO Wealth Management. Business and government deposits increased $4.2 billion, primarily reflecting growth in customer balances. Deposits by banks increased $4.0 billion. Securities lent or sold under repurchase agreements increased $13.1 billion and securities sold but not yet purchased increased $1.3 billion, driven by client activity in BMO Capital Markets. All other liabilities, excluding derivative financial liabilities, decreased $2.1 billion, in part due to lower secured funding, partially offset by the impact of the adoption of IFRS 16, Leases.

Derivative financial assets decreased $0.1 billion and derivative financial liabilities decreased $0.4 billion, including the impact of changes in the U.S. dollar. The decline in derivative assets was primarily driven by a decrease in the fair value of foreign exchange contracts, partially offset by an increase in the fair value of equity contracts. The decline in derivative liabilities was primarily driven by a decrease in the fair value of foreign exchange and interest rate contracts, partially offset by an increase in the fair value of commodity and equity contracts.

Total equity increased $1.1 billion from October 31, 2019. Retained earnings increased $0.8 billion, as a result of net income earned in the current quarter, partially offset by dividends and the impact of the adoption of IFRS 16, Leases on the opening balance. Accumulated other comprehensive income increased $0.3 billion.

Contractual obligations by year of maturity are outlined on page 31 of this Report to Shareholders.

Transactions with Related Parties

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

The bank’s policies and procedures for related party transactions did not materially change from October 31, 2019, as described in Note 27 to the audited consolidated financial statements on page 204 of BMO’s 2019 Annual Report.

Select Financial Instruments and Off-Balance Sheet Arrangements

The Financial Stability Board (FSB) issued a report in 2012 encouraging enhanced disclosure related to financial instruments that market participants had come to regard as carrying higher risk. An index of where the disclosures recommended by the Enhanced Disclosure Task Force (EDTF) of the FSB are located is provided on our website at www.bmo.com/investorrelations. We follow a practice of reporting on significant changes in select financial instruments since year end, if any, in our interim MD&A. There have been no material changes from the disclosure on page 66 in our 2019 Annual Report.

We also enter into a number of off-balance sheet arrangements in the normal course of operations. The most significant of these are credit instruments, structured entities and guarantees, which are described on page 67 of BMO’s 2019 Annual Report. We consolidate all of our structured entities, except for our Canadian customer securitization vehicles, structured finance vehicles, certain capital and funding vehicles, as well as various BMO-managed and non-managed investment funds. There have been no significant changes to the bank’s off-balance sheet arrangements since October 31, 2019.

 

23 BMO Financial Group First Quarter Report 2020


Accounting Policies and Critical Accounting Estimates

Significant accounting policies are described in our 2019 Annual Report and in the notes to our audited consolidated financial statements for the year ended October 31, 2019, and in Note 1 to the unaudited interim consolidated financial statements, together with a discussion of certain accounting estimates that are considered particularly important as they require management to make significant judgments, some of which relate to matters that are inherently uncertain. Readers are encouraged to review that discussion on pages 107 to 111 and 142 to 146 in BMO’s 2019 Annual Report.

Allowance for Credit Losses

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. For additional information, refer to pages 107 to 108 and Note 4 of our audited annual consolidated financial statements on pages 151 to 158 of BMO’s 2019 Annual Report.

In establishing our allowance for performing loans, we attach probability weightings to three economic scenarios, which are representative of our view of forecast economic and market conditions – a base scenario, which in our view represents the most probable outcome, as well as benign and adverse scenarios, all developed by our Economics group. Our economic forecasts are largely in line with those from October 31, 2019, and our scenario weightings remain unchanged as at January 31, 2020.

Our total allowance for credit losses as at January 31, 2020 was $2,262 million ($2,094 million as at October 31, 2019), comprised of an allowance on performing loans of $1,643 million and an allowance on impaired loans of $619 million ($1,609 million and $485 million, respectively, as at October 31, 2019). The allowance on performing loans increased $34 million since the fourth quarter of 2019, primarily driven by credit migration and portfolio growth.

Our assessment of the allowance for performing loans under a 100% base case and a 100% adverse scenarios as at January 31, 2020, both increased consistent with the change in the overall allowance for loans, compared with October 31, 2019.

Information on the Provision for Credit Losses for the three months ended January 31, 2020, can be found on page 9 of this MD&A.

This Allowance for Credit Losses section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements section.

Changes in Accounting Policies

IFRS 16, 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. The impact to our Equipment Finance and Transportation Finance businesses are minimal. The most significant impact for the bank is the recording of 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.

On transition, we chose to recognize the cumulative effect of adoption of IFRS 16 in opening retained earnings 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).

As at January 31, 2020, the right-of-use asset recognized in premises and equipment was $1,974 million, with a corresponding lease liability of $2,142 million recorded in other liabilities in the Consolidated Balance Sheet. In addition, for the three months ended January 31, 2020, we recognized interest expense of $14 million in interest expense, other liabilities, and $89 million of right-of-use asset depreciation in non-interest expense, premises and equipment in the Consolidated Statement of Income. We would previously have recorded approximately $95 million of rent expense in non-interest expense, premises and equipment.

Interbank Offered Rate (IBOR) Reform

Effective November 1, 2019, we early adopted the Phase 1 amendments to IAS 39, Financial Instruments: Recognition and Measurement and IFRS 7, Financial Instruments: Disclosures. The amendments provide relief from the uncertainty arising from IBOR reform during the period prior to replacement of IBORs. The 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, thereby 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 the discontinuation of the hedging relationship.

Effective November 1, 2019, we also adopted IFRS Interpretations Committee Interpretation 23, Uncertainty over income tax treatments (IFRIC 23), which had no impact on our financial results upon adoption. Note 1 to the unaudited interim consolidated financial statements provides further details on the impact of adoption of IFRIC 23 and the other new standards.

 

BMO Financial Group First Quarter Report 2020 24


Future Changes in Accounting Policies

We monitor the potential changes proposed by the International Accounting Standards Board (IASB) and analyze the effect that changes in the standards may have on BMO’s financial reporting and accounting policies. Information on new standards and amendments to existing standards, which are effective for the bank in the future, can be found on page 111 and in Note 1 to the audited annual consolidated financial statements on page 146 of BMO’s 2019 Annual Report, and in Note 1 to the unaudited interim consolidated financial statements on page 39.

Disclosure for Domestic Systemically Important Banks (D-SIB)

As a D-SIB, OSFI requires that we disclose on an annual basis the 12 indicators utilized in the global systemically important banks’ assessment methodology. These indicators measure the impact a bank’s failure would have on the global financial system and wider economy. The indicators reflect the size of banks, their interconnectedness, the lack of alternative infrastructure for services banks provide, their global activity and complexity. This methodology is outlined in a paper, Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement, issued by the Basel Committee on Banking Supervision (BCBS) in July 2013. As required under the methodology, the indicators are calculated based on specific instructions issued by the BCBS, and as a result, the measures used may not be based on the most recent version of Basel III. Therefore, values may not be consistent with other measures used in this report.

Indicator values have been reported based on regulatory requirements for consolidation and therefore, insurance and other non-banking information is only included insofar as it is included in the regulatory consolidation of the group. This level of consolidation differs from that used in the consolidated financial statements. Results may therefore not be comparable to other disclosures in this report.

Year-over-year movements in indicators reflect normal changes in business activity.

Disclosure for Domestic Systemically Important Banks

 

          As at October 31  
  (Canadian $ in millions)         Indicators    2019                      2018  

  A. Cross-jurisdictional activity

   1. Cross-jurisdictional claims      420,719        388,922  
     2. Cross-jurisdictional liabilities      341,188        310,913  

  B. Size

   3. Total exposures as defined for use in the Basel III leverage ratio      966,938        885,217  

  C. Interconnectedness

   4. Intra-financial system assets      111,245        104,791  
   5. Intra-financial system liabilities      58,643        67,213      
     6. Securities outstanding      271,817        267,654  

  D. Substitutability/financial institution infrastructure

   7. Payments activity (1)      26,955,299        26,238,057  
   8. Assets under custody      238,617        206,913  
     9. Underwritten transactions in debt and equity markets      75,503        65,258  

  E. Complexity

   10. Notional amount of over-the-counter (OTC) derivatives      6,211,130        5,484,395  
   11. Trading, FVTPL and FVOCI securities      35,188        48,961  
     12. Level 3 assets      4,347        3,600  

 

 (1)

Includes intercompany transactions that are cleared through a correspondent bank.

 Certain comparative figures have been reclassified to conform with the current year’s presentation.

Other Regulatory Developments

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

For a comprehensive discussion of regulatory developments, see the Enterprise-Wide Capital Management section starting on page 59, the Risks That May Affect Future Results section starting on page 68, the Liquidity and Funding Risk section starting on page 91, and the Legal and Regulatory Risk section starting on page 103 of BMO’s 2019 Annual Report.

This Other Regulatory Developments section contains forward-looking statements. Please refer to the Caution Regarding Forward-Looking Statements.

Risk Management

Our risk management policies and processes to measure, monitor and control credit and counterparty, market, liquidity and funding, operational, including technology and cyber-related risks, model, legal and regulatory, business, strategic, environmental and social and reputation risk have not changed significantly from those outlined in the Enterprise-Wide Risk Management section on pages 68 to 106 of BMO’s 2019 Annual Report.

BMO’s top and emerging risks and other factors that may affect future results are described on pages 68 to 71 of BMO’s 2019 Annual Report, and have not changed significantly. BMO is monitoring the outbreak of the novel coronavirus. Should the outbreak become more wide-spread in Canada and the United States, the bank has a Business Continuity Plan in place that includes procedures which would mitigate adverse impacts to our customers and employees.

 

25 BMO Financial Group First Quarter Report 2020


Market Risk

BMO’s market risk management practices and key measures are outlined on pages 86 to 90 of BMO’s 2019 Annual Report.

Linkages between Balance Sheet Items and Market Risk Disclosures

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

Linkages between Balance Sheet Items and Market Risk Disclosures

 

   

As at January 31, 2020

       

As at October 31, 2019

   
   

    Consolidated

Balance

Sheet

 

Subject to market risk

 

    Not subject

to market
risk

       

Consolidated

Balance
Sheet

 

Subject to market risk

 

Not subject

to market
risk

 

Main risk factors for

non-traded risk

balances

(Canadian $ in millions)

 

 

Traded
risk
(1)

      Non-traded
risk
(2)
         Traded
risk (1)
  Non-traded  
risk (2)  

Assets Subject to Market Risk

                   

Cash and cash equivalents

  45,742   -   45,742   -     48,803   -   48,803   -   Interest rate

Interest bearing deposits with banks

  7,148   253   6,895   -     7,987   242   7,745   -   Interest rate

Securities

  211,459   97,515   113,944   -     189,438   85,739   103,699   -   Interest rate, credit spread, equity

Securities borrowed or purchased under resale agreements

  105,543   -   105,543   -     104,004   -   104,004   -   Interest rate

Loans (net of allowance for credit losses)

  430,713   -   430,713   -     426,094   -   426,094   -   Interest rate, foreign exchange  

Derivative instruments

  22,035   19,492   2,543   -     22,144   19,508   2,636   -   Interest rate, foreign exchange

Customer’s liabilities under acceptances

  24,362   -   24,362   -     23,593   -   23,593   -   Interest rate

Other assets (3)

  32,718   -   15,425   17,293           30,132   -   15,417   14,715   Interest rate

Total Assets

  879,720   117,260   745,167   17,293           852,195   105,489   731,991   14,715    

Liabilities Subject to Market Risk

                   

Deposits

  582,288   16,690   565,598   -     568,143   15,829   552,314   -   Interest rate, foreign exchange

Derivative instruments

  23,231   19,698   3,533   -     23,598   20,094   3,504   -   Interest rate, foreign exchange

Acceptances

  24,362   -   24,362   -     23,593   -   23,593   -   Interest rate

Securities sold but not yet purchased

  27,562   27,562   -   -     26,253   26,253   -   -  

Securities lent or sold under repurchase agreements

  100,008   -   100,008   -     86,656   -   86,656   -   Interest rate

Other liabilities (3)

  63,070   -   62,912   158     65,881   -   65,766   115   Interest rate

Subordinated debt

  7,023   -   7,023   -           6,995   -   6,995   -   Interest rate

Total Liabilities

  827,544   63,950   763,436   158           801,119   62,176   738,828   115    

 

(1)

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

(2)

Primarily comprised of balance sheet items that are subject to the structural balance sheet and insurance risk management framework.

(3)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16). As at January 31, 2020, we recognized a total right-of-use asset in other assets of $1,974 million, with a corresponding lease liability of $2,142 million in other liabilities. Refer to the Changes in Accounting Policies section on page 24 for further details.

Trading and Underwriting Market Risk

Average Total Trading Value at Risk (VaR) and Average Total Trading Stressed VaR (SVaR) increased from the prior quarter, primarily due to an amendment to the Total Trading VaR and SVaR calculation to no longer recognize diversification benefits from debt-specific risk. In addition, a modelling change enhanced the capture of name-specific equity volatility risk and foreign exchange risks. On a quarter-over-quarter basis, higher trading risks modestly increased Average Total Trading VaR and Average Total Trading SVaR.

Total Trading Value at Risk (VaR) and Trading Stressed Value at Risk (SVaR) Summary (1)(2)(3)

 

     For the quarter ended January 31, 2020           October 31, 2019          January 31, 2019  

(Pre-tax Canadian $ equivalent in millions)

     Quarter-end                       Average                           High                            Low                           Average                          Average  

Commodity VaR

     1.1       0.9       1.8        0.6           1.1          1.5  

Equity VaR

     8.0       5.6       8.0        4.2           3.9          5.4  

Foreign exchange VaR

     1.6       1.9       3.3        0.8           0.5          0.7  

Interest rate VaR (4)

     7.0       7.9       10.1        5.4           8.2          9.7  

Debt-specific risk

     1.6       2.5       3.2        1.6           2.2          1.8  

Diversification

     (7.0     (8.1     nm        nm           (7.9        (7.7

Total Trading VaR

     12.3       10.7       15.0        8.1                 8.0                11.4  

Total Trading SVaR

     48.0       49.8       56.7        39.9                 22.3                48.3  

 

(1)

One-day measure using a 99% confidence interval. Benefits are presented in parentheses and losses are presented as positive numbers.

(2)

Stressed VaR is produced weekly and at month end.

(3)

In Q1-2020, a new measurement approach was used for VaR and SVaR, which split the previously reported credit VaR into interest rate VaR for general credit spread risk and for debt-specific risk. Results in prior quarters have been provided for comparability. In addition, the Total Trading VaR and SVaR no longer recognize diversification benefits from debt-specific risk.

(4)

Interest rate VaR includes general credit spread risk.

 nm - not meaningful

 

BMO Financial Group First Quarter Report 2020 26


Structural (Non-Trading) Market Risk

Structural economic value exposure to rising interest rates and structural economic value benefit to falling interest rates increased relative to October 31, 2019, primarily due to an increase in fixed rate assets. Structural earnings benefit to rising interest rates and structural earnings exposure to falling interest rates decreased relative to October 31, 2019, as fewer net assets are scheduled to reprice over the next 12 months.

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

 

     Economic value sensitivity            Earnings sensitivity over the next 12 months  

(Pre-tax Canadian $ equivalent in millions)

             January 31, 2020               October 31, 2019               January 31, 2019                  January 31, 2020               October 31, 2019             January 31, 2019  

100 basis point increase

     (974.3     (883.4     (925.5 )           1.7       46.6       76.8  

100 basis point decrease

     274.3       215.6       111.0                (21.9     (80.3     (152.8 )     

 

(1)

Losses are in parentheses and benefits are presented as positive numbers.

(2)

Insurance market risk includes interest rate and equity market risk arising from BMO’s insurance business activities. A 100 basis point increase in interest rates as at January 31, 2020, would result in an increase in earnings before tax of $30 million ($27 million as at October 31, 2019). A 100 basis point decrease in interest rates as at January 31, 2020, would result in a decrease in earnings before tax of $29 million ($25 million as at October 31, 2019). On an unhedged basis, a 10% decrease in equity market values at January 31, 2020, would result in a decrease in earnings before tax of $59 million ($57 million as at October 31, 2019). A 10% increase in equity market values as at January 31, 2020, would result in an increase in earnings before tax of $58 million ($54 million as at October 31, 2019). BMO may enter into hedging arrangements to offset the impact of changes in equity market values on its earnings, and did so during the 2020 fiscal year. The impact of insurance market risk on earnings is reflected in insurance claims, commissions and changes in policy benefit liabilities on the Consolidated Statement of Income, and the corresponding change in the fair value of our policy benefit liabilities is reflected in other liabilities on the Consolidated Balance Sheet. The impact of insurance market risk is not reflected in the table above.

Liquidity and Funding Risk

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

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

In the ordinary course of business, BMO may encumber a portion of cash and securities holdings as collateral in support of trading activities and our participation in clearing and payment systems in Canada and abroad. In addition, BMO may receive liquid assets as collateral and may re-pledge these assets in exchange for cash or as collateral in support of trading activities. Net unencumbered liquid assets, defined as on-balance sheet assets, such as BMO-owned cash and securities and securities borrowed or purchased under resale agreements, plus other off-balance sheet eligible collateral received, less collateral encumbered, totalled $254.2 billion as at January 31, 2020, compared with $249.7 billion as at October 31, 2019. The increase in unencumbered liquid assets was primarily due to higher securities balances, partially offset by lower cash balances. Net unencumbered liquid assets are primarily held at the parent bank level, at our U.S. bank entity BMO Harris Bank, and in our broker/dealer operations. In addition to liquid assets, BMO has access to the Bank of Canada’s lending assistance programs, the Federal Reserve Bank discount window in the United States and European Central Bank standby liquidity facilities. We do not rely on central bank facilities as a source of available liquidity when assessing the soundness of BMO’s liquidity position.

In addition to cash and securities holdings, BMO may also pledge other assets, including mortgages and loans, to raise long-term secured funding. BMO’s total encumbered assets and unencumbered liquid assets are summarized in the Asset Encumbrance table on page 28.

Liquid Assets

 

     As at January 31, 2020                As at October 31, 2019  

(Canadian $ in millions)

  

 

  Bank-owned
assets

       Other cash &
securities
received
(1)
    

 

  Total gross
assets
(2)

    

 

Encumbered
assets

     Net
unencumbered
assets
(3)
          

Net

unencumbered

assets (3)

 

Cash and cash equivalents

     45,742        -        45,742        2,232        43,510          46,908  

Deposits with other banks

     7,148        -        7,148        -        7,148          7,987  

Securities and securities borrowed or purchased under resale agreements

                   

Sovereigns/Central banks/Multilateral development banks

     101,178        104,494        205,672        113,032        92,640          90,363  

NHA mortgage-backed securities and U.S. agency mortgage-backed securities and collateralized mortgage obligations

     35,849        10,190        46,039        23,445        22,594          21,406  

Corporate & other debt

     22,292        16,837        39,129        7,319        31,810          32,112      

Corporate equity

     52,140        39,841        91,981        56,716        35,265          28,436  

Total securities and securities borrowed or purchased under resale agreements

     211,459        171,362        382,821        200,512        182,309          172,317  

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

     25,366        -        25,366        4,114        21,252          22,438  

Total liquid assets

     289,715        171,362        461,077        206,858        254,219          249,650  

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

     70,410        -        70,410        809        69,601          68,246  

Total liquid assets and other sources

     360,125        171,362        531,487        207,667        323,820                317,896  

 

 (1)

Effective the first quarter of 2020, reverse repos and security borrowed transactions have been moved to other cash and securities received.

 (2)

Gross assets include bank-owned assets and cash and securities received from third parties.

 (3)

Net unencumbered liquid assets are defined as total gross assets less encumbered assets.

 (4)

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

 (5)

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

 

27 BMO Financial Group First Quarter Report 2020


Asset Encumbrance

 

                   Encumbered (2)             Net unencumbered  

(Canadian $ in millions)

As at January 31, 2020

   Total gross assets (1)             

                Pledged as

collateral

    

Other

        encumbered

            

Other

unencumbered (3)

    

Available as

        collateral (4)

 

Cash and deposits with other banks

     52,890           -        2,232           -        50,658  

Securities (5)

     408,187           172,476        32,150           12,759        190,802  

Loans and acceptances

     405,347           64,120        809           270,817        69,601  

Other assets

                    

Derivative instruments

     22,035           -        -           22,035        -  

Customers’ liability under acceptances

     24,362           -        -           24,362        -  

Premises and equipment (6)

     3,957           -        -           3,957        -  

Goodwill

     6,396           -        -           6,396        -  

Intangible assets

     2,430           -        -           2,430        -  

Current tax assets

     1,705           -        -           1,705        -  

Deferred tax assets

     1,562           -        -           1,562        -  

Other assets

     16,668                 3,963        -                 12,705        -  

Total other assets

     79,115                 3,963        -                 75,152        -  

Total assets

     945,539                 240,559        35,191                 358,728        311,061  
                   Encumbered (2)             Net unencumbered  

(Canadian $ in millions)

As at October 31, 2019

   Total gross assets (1)              Pledged as
collateral
     Other
        encumbered
             Other
unencumbered (3)
     Available as
        collateral (4)
 

Cash and deposits with other banks

     56,790           -        1,895           -        54,895  

Securities (5)

     378,443           153,269        30,419           12,107        182,648  

Loans and acceptances

     399,968           73,073        765           257,884        68,246  

Other assets

                    

Derivative instruments

     22,144           -        -           22,144        -  

Customers’ liability under acceptances

     23,593           -        -           23,593        -  

Premises and equipment (6)

     2,055           -        -           2,055        -  

Goodwill

     6,340           -        -           6,340        -  

Intangible assets

     2,424           -        -           2,424        -  

Current tax assets

     1,165           -        -           1,165        -  

Deferred tax assets

     1,568           -        -           1,568        -  

Other assets

     16,580                 3,722        -                 12,858        -  

Total other assets

     75,869                 3,722        -                 72,147        -  

Total assets

     911,070                 230,064        33,079                 342,138        305,789  

 

 (1)

Gross assets include bank-owned assets and cash and securities received from third parties.

 (2)

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

 (3)

Other unencumbered assets include select liquid asset holdings that management believes are not readily available to support BMO’s liquidity requirements. These include cash and securities of $12.8 billion as at January 31, 2020, which include securities held at BMO’s insurance subsidiary, significant equity investments, and certain investments held in our merchant banking business. Other unencumbered assets also include mortgages and loans that may be securitized to access secured funding.

 (4)

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

 (5)

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

 (6)

Effective the first quarter of 2020, the bank adopted IFRS 16, Leases (IFRS 16). As at January 31, 2020, we recognized a total right-of-use asset in premises and equipment of $1,974 million, with a corresponding lease liability of $2,142 million in other liabilities. Refer to the Changes in Accounting Policies section on page 24 for further details.

BMO’s Liquidity Coverage Ratio (LCR) is summarized in the following table. The average daily LCR for the quarter ended January 31, 2020 was 135%. The LCR is calculated on a daily basis as the ratio of the stock of High-Quality Liquid Assets (HQLA) to total net stressed cash outflows over the next 30 calendar days. The average LCR was down from 138% last quarter as an increase in HQLA was more than offset by an increase in net cash outflows. While banks are required to maintain an LCR greater than 100% in normal conditions, banks are also expected to be able to utilize HQLA in a period of stress, which may result in an LCR of less than 100% during such a period. BMO’s HQLA are primarily comprised of cash, highly-rated debt issued or backed by governments, highly-rated covered bonds and non-financial corporate debt, and non-financial equities that are part of a major stock index. Net cash flows include outflows from deposits, secured and unsecured wholesale funding, commitments and potential collateral requirements, offset by permitted inflows from loans, securities lending activities and other non-HQLA debt maturing over a 30-day horizon. OSFI-prescribed weights are applied to cash flows and HQLA to arrive at the weighted values and the LCR. The LCR does not reflect excess liquidity in BMO Financial Corp. above 100% because of limitations on the transfer of liquidity between BMO Financial Corp. and the parent bank. The LCR is only one measure of a bank’s liquidity position and does not fully capture all of the bank’s liquid assets or the funding alternatives that may be available during a period of stress. BMO’s total liquid assets are shown in the Liquid Assets table on page 27.

Additional information on Liquidity and Funding Risk governance can be found on page 91 of BMO’s 2019 Annual Report.

 

BMO Financial Group First Quarter Report 2020 28


Liquidity Coverage Ratio

 

     For the quarter ended January 31, 2020  

(Canadian $ in billions, except as noted)

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

High-Quality Liquid Assets

     

Total high-quality liquid assets (HQLA)

     *        171.0  

Cash Outflows

     

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

     207.0        14.3  

Stable deposits

     98.4        3.0      

Less stable deposits

     108.6        11.3  

Unsecured wholesale funding, of which:

     176.2        96.2  

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

     66.5        16.5  

Non-operational deposits (all counterparties)

     75.2        45.2  

Unsecured debt

     34.5        34.5  

Secured wholesale funding

     *        20.8  

Additional requirements, of which:

     158.0        32.9  

Outflows related to derivatives exposures and other collateral requirements

     10.9        4.3  

Outflows related to loss of funding on debt products

     2.7        2.7  

Credit and liquidity facilities

     144.4        25.9  

Other contractual funding obligations

     1.0        -  

Other contingent funding obligations

     403.7        6.9  

Total cash outflows

     *        171.1  

Cash Inflows

     

Secured lending (e.g. reverse repos)

     148.6        29.4  

Inflows from fully performing exposures

     10.1        5.6  

Other cash inflows

     8.8        8.8  

Total cash inflows

     167.5        43.8  
              Total adjusted value (4)  

Total HQLA

        171.0  

Total net cash outflows

              127.3  

Liquidity Coverage Ratio (%) (2)

              135  

For the quarter ended October 31, 2019

           Total adjusted value (4)  

Total HQLA

        163.2  

Total net cash outflows

              118.1  

Liquidity Coverage Ratio (%)

              138  

 

*

Disclosure is not required under the LCR disclosure standard.

 (1)

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

 (2)

Values are calculated based on the simple average of the daily LCR over 62 business days in the first quarter of 2020.

 (3)

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

 (4)

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

Funding Strategy

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

BMO maintains a large and stable base of customer deposits that, in combination with our strong capital base, is a source of strength. It supports the maintenance of a sound liquidity position and reduces our reliance on wholesale funding. Customer deposits totalled $387.1 billion at January 31, 2020, up from $378.8 billion as at October 31, 2019, due to strong deposit growth. BMO also receives non-marketable deposits from corporate and institutional customers in support of certain trading activities. These deposits totalled $29.7 billion as at January 31, 2020, up from $22.1 billion as at October 31, 2019.

Total wholesale funding outstanding, which largely consists of negotiable marketable securities, was $201.4 billion at January 31, 2020, with $58.4 billion sourced as secured funding and $143.0 billion as unsecured funding. Wholesale funding outstanding decreased from $207.6 billion at October 31, 2019, primarily due to wholesale funding maturities. The mix and maturities of BMO’s wholesale term funding are outlined in the table below. Additional information on deposit maturities can be found on page 31. BMO maintains a sizeable portfolio of unencumbered liquid assets, totalling $254.2 billion as at January 31, 2020, that can be monetized to meet potential funding requirements, as described on page 27.

In April 2018, the Government of Canada published the final regulations on Canada’s Bank Recapitalization (Bail-In) Regime, which became effective on September 23, 2018. Bail-in debt includes senior unsecured debt issued directly by the bank on or after September 23, 2018, that has an original term greater than 400 days and is marketable, subject to certain exceptions. BMO is required to meet minimum Total Loss Absorbing Capacity (TLAC) ratio requirements by November 1, 2021. We do not expect a material impact to our funding plan as a result of Canada’s Bail-In Regime and TLAC requirements. For more information on Canada’s Bail-In Regime and TLAC requirements, please see Regulatory Developments under Capital Management on page 11.

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

BMO’s wholesale funding plan seeks to ensure sufficient funding capacity is available to execute our business strategies. The funding plan considers expected maturities, as well as asset and liability growth projected for our businesses in our forecasting and planning processes, and

 

29 BMO Financial Group First Quarter Report 2020


assesses funding needs in relation to the sources available. The funding plan is reviewed annually by the Balance Sheet and Capital Management Committee and Risk Management Committee and approved by the Risk Review Committee, and is regularly updated to reflect actual results and incorporate updated forecast information.

Wholesale Funding Maturities (1)

 

     As at January 31, 2020                                As at October 31, 2019  
  (Canadian $ in millions)  

Less than

1 month

   

1 to 3

        months

   

3 to 6

        months

    6 to 12
        months
        Subtotal less
than 1 year
   

1 to 2

        years

   

Over

        2 years

                Total           Total  

Deposits from banks

    6,775       371       34       278       7,458       -       8       7,466         4,312  

Certificates of deposit and commercial paper

    7,742       23,145       11,343       17,797       60,027       529       -       60,556         64,490    

Bearer deposit notes

    -       28       30       262       320       -       -       320         117  

Asset-backed commercial paper (ABCP)

    719       1,008       1,629       -       3,356       -       -       3,356         3,276  

Senior unsecured medium-term notes

    -       752       8,629       2,789       12,170       17,334       34,358       63,862         63,789  

Senior unsecured structured notes (2)

    -       -       -       5       5       20       3,405       3,430         3,807  

Covered bonds and securitizations

                   

Mortgage and HELOC securitizations

    -       1,324       369       1,580       3,273       3,111       13,180       19,564         19,602  

Covered bonds

    -       -       1,398       2,201       3,599       6,503       13,285       23,387         25,497  

Other asset-backed securitizations (3)

    -       -       -       184       184       2,671       4,153       7,008         7,628  

Subordinated debt

    -       -       -       -       -       -       7,290       7,290         7,189  

Other (4)

    -       3,673       -       -       3,673       -       1,456       5,129         7,866  

Total

    15,236       30,301       23,432       25,096       94,065       30,168       77,135       201,368         207,573  

Of which:

                   

Secured

    719       6,005       3,396       3,965       14,085       12,285       32,074       58,444         63,869  

Unsecured

    14,517       24,296       20,036       21,131       79,980       17,883       45,061       142,924         143,704  

Total (5)

    15,236       30,301       23,432       25,096       94,065       30,168       77,135       201,368         207,573  

 

 (1)

Wholesale unsecured funding primarily includes funding raised through the issuance of marketable, negotiable instruments. Wholesale funding excludes repo transactions and bankers’ acceptances, which are disclosed in the contractual maturity table on page 31, and also excludes ABCP issued by certain ABCP conduits that are not consolidated for financial reporting purposes.

 (2)

Primarily issued to institutional investors.

 (3)

Includes credit card, auto and transportation finance loan securitizations.

 (4)

Refers to FHLB advances.

 (5)

Total wholesale funding consists of Canadian-dollar-denominated funding totalling $54.9 billion and U.S.-dollar-denominated and other foreign-currency-denominated funding totalling $146.5 billion as at January 31, 2020.

Regulatory Developments

The Net Stable Funding Ratio (NSFR) is a regulatory liquidity metric that assesses the stability of a bank’s funding profile in relation to the liquidity value of a bank’s assets. OSFI finalized the domestic implementation of the NSFR in the second quarter of 2019. Canadian domestic systemically important banks (D-SIBs), including BMO, are required to maintain a minimum NSFR of 100%, effective January 1, 2020, and to publicly disclose their NSFR, effective for the quarter ending January 31, 2021. BMO’s NSFR exceeds the regulatory minimum as at January 31, 2020. In addition, OSFI made changes to the LCR and other liquidity metrics under the Liquidity Adequacy Requirements (LAR) Guideline and B-6 Guideline, effective January 1, 2020. There was no material impact on our liquidity and funding management approach as a result of these changes.

Credit Ratings

The credit ratings assigned to BMO’s short-term and senior long-term debt securities by external rating agencies are important in the raising of both capital and funding to support our business operations. Maintaining strong credit ratings allows us to access capital markets at competitive pricing levels. Should our credit ratings experience a downgrade, our cost of funding would likely increase and our access to funding and capital through capital markets could be reduced. A material downgrade of our ratings could also have other consequences, including those set out in Note 8 starting on page 162 of BMO’s 2019 Annual Report.

The credit ratings assigned to BMO’s senior debt by rating agencies are indicative of high-grade, high-quality issues. Moody’s, Standard & Poor’s (S&P), Fitch and DBRS have a stable outlook on BMO.

On January 17, 2020, Fitch upgraded BMO’s legacy senior debt and long-term deposit ratings to ‘AA’ from ‘AA-’, reflecting BMO’s build-up of TLAC to a level that is close to the bank’s minimum TLAC requirement.

 

  As at January 31, 2020
  Rating agency      Short-term debt               Senior debt (1)             Long-term
deposits/
Legacy senior        
debt (2)
   Subordinated
debt (NVCC)        
  Outlook            

Moody’s

     P-1       A2     Aa2    Baa1   Stable

S&P

     A-1       A-     A+    BBB+   Stable

Fitch

     F1+       AA-     AA    A+   Stable

DBRS

     R-1 (high)       AA (low)     AA    A (low)   Stable

 

 (1)

Subject to conversion under the Bank Recapitalization (Bail-In) Regime.

 (2)

Long-term deposits/Legacy senior debt includes senior debt issued prior to September 23, 2018, and senior debt issued on or after September 23, 2018, that is excluded from the Bank Recapitalization (Bail-In) Regime.

We are required to deliver collateral to certain counterparties in the event of a downgrade to our current credit rating. The incremental collateral required is based on mark-to-market exposure, collateral valuations, and collateral threshold arrangements, as applicable. As at January 31, 2020, we would be required to provide additional collateral to counterparties totalling $87 million, $338 million and $724 million under a one-notch, two-notch and three-notch downgrade, respectively.

 

BMO Financial Group First Quarter Report 2020 30


Contractual Maturities of Assets and Liabilities and Off-Balance Sheet Commitments

The tables below show the remaining contractual maturity of on-balance sheet assets and liabilities and off-balance sheet commitments. The contractual maturity of financial assets and liabilities is an input to, but is not necessarily consistent with, the expected maturity of assets and liabilities that is used in the management of liquidity and funding risk. We forecast asset and liability cash flows, both under normal market conditions and under a number of stress scenarios, to manage liquidity and funding risk. Stress scenarios include assumptions for loan repayments, deposit withdrawals, and credit commitment and liquidity facility drawdowns by counterparty and product type. Stress scenarios also consider the time horizon over which liquid assets can be monetized and the related haircuts and potential collateral requirements that may result from both market volatility and credit rating downgrades, among other assumptions.

 

(Canadian $ in millions)

         January 31, 2020  
     0 to 1
month
         1 to 3
months
           3 to 6
months
           6 to 9
months
           9 to 12
months
           1 to 2
years
           2 to 5
years
           Over 5
years
           No
maturity
         Total  

On-Balance Sheet Financial Instruments

                                     

Assets

                                     

Cash and Cash Equivalents

    44,865           -               -               -               -               -               -               -               877           45,742  

Interest Bearing Deposits with Banks

    3,473           1,745               882               266               769               13               -               -               -           7,148  

Securities

    3,033           2,487               4,606               3,914               7,955               17,597               47,167               72,560               52,140           211,459  

Securities Borrowed or Purchased under Resale Agreements

    69,144           30,363               3,988               1,425               299               324               -               -               -           105,543  

Loans

                                     

Residential mortgages

    1,637         3,470         6,562         6,887         5,167         20,436         70,330         9,952         -         124,441  

Consumer instalment and other personal

    631         770         1,114         1,395         1,195         4,518         23,406         12,325         23,275         68,629  

Credit cards

    -         -         -         -         -         -         -         -         8,763         8,763  

Business and government

    13,153         6,983         8,779         5,368         6,210         26,100         89,004         19,542         55,764         230,903  

Allowance for credit losses

    -           -               -               -               -               -               -               -               (2,023         (2,023

Total Loans, net of allowance

    15,421           11,223               16,455               13,650               12,572               51,054               182,740               41,819               85,779           430,713  

Other Assets