Glossary

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A

Allowance for Credit Losses
Represents an amount deemed adequate by management to absorb credit-related losses on loans and acceptances and other credit instruments. Allowances for credit losses can be specific or general and are recorded on the balance sheet as a deduction from loans and acceptances or, as they relate to credit instruments, as other liabilities.
See the 2010 Financial Performance Review (344KB - PDF) and Enterprise-Wide Risk Management (548 KB - PDF) sections of the MD&A, and Note 4 (PDF, 70 KB).
Assets under Administration and under Management
Assets administered or managed by a financial institution that are beneficially owned by clients and therefore not reported on the balance sheet of the administering or managing financial institution.
Asset-Backed Commercial Paper (ABCP)
A short-term investment with a maturity that is typically less than 180 days. The commercial paper is backed by physical assets such as trade receivables, and is generally used for short-term financing needs.
Assets-to-Capital Multiple
Assets plus guarantees and letters of credit, net of specified deductions (or adjusted assets), divided by total capital.
Average Earning Assets
Represents the daily or monthly average balance of deposits with other banks and loans and securities, over a one-year period.

B

Bankers’ Acceptances (BAs)
Bills of exchange or negotiable instruments drawn by a borrower for payment at maturity and accepted by a bank. BAs constitute a guarantee of payment by the bank and can be traded in the money market. The bank earns a “stamping fee” for providing this guarantee.
Basis Point
One one-hundredth of a percentage point.
Business Risk
Arises from the specific business activities of a company and the effects these could have on its earnings.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.

C

Credit and Counterparty Risk
The potential for loss due to the failure of a borrower, endorser, guarantor or counterparty to repay a loan or honour another predetermined financial obligation.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.

D

Derivatives
Contracts whose value is “derived” from movements in interest or foreign exchange rates, or equity or commodity prices. Derivatives allow for the transfer, modification or reduction of current or expected risks from changes in rates and prices.
Dividend Payout Ratio
Common dividends as a percentage of net income after preferred share dividends.

E

Earnings per Share (EPS)
Calculated by dividing net income, after deduction of preferred dividends, by the average number of common shares outstanding. Diluted EPS, which is our basis for measuring performance, adjusts for possible conversions of financial instruments into common shares if those conversions would reduce EPS.
See Earnings Per Share Growth in the Value Measures (202KB - PDF) section of the MD&A and Note 25 (PDF, 52 KB).
Earnings Volatility (EV)
A measure of the adverse impact of potential changes in market parameters on the projected 12-month after-tax net income of a portfolio of assets, liabilities and off-balance sheet positions, measured at a 99% confidence level over a specified holding period.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.
Economic Capital
Our internal assessment of the risks underlying BMO’s business activities. It represents management’s estimation of the likely magnitude of economic losses that could occur if adverse situations arise, and allows returns to be adjusted for risks. Economic capital is calculated for various types of risk – credit, market (trading and nontrading), operational and business – where measures are based on a time horizon of one year. (For further discussion of these risks, refer to the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.) Economic capital is a key element of our risk-based capital management process.
See Net Economic Profit Growth in the Value Measures (202KB - PDF) section and the Non-GAAP Measures (PDF, 45 KB) section of the MD&A.
Environmental Risk
The risk of loss or damage to BMO’s reputation resulting from environmental concerns related to BMO or its customers. Environmental risk is often associated with credit and operational risk.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.

F

Fair Value
The amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.
Forwards and Futures
Contractual agreements to either buy or sell a specified amount of a currency, commodity, interest-rate-sensitive financial instrument or security at a specific price and date in the future. Forwards are customized contracts transacted in the over-the-counter market. Futures are transacted in standardized amounts on regulated exchanges and are subject to daily cash margining.
See Note 10 (PDF, 87 KB).

G

General Allowance
Maintained to cover impairment in the existing credit portfolio that cannot yet be associated with specific credit assets. Our approach to establishing and maintaining the general allowance is based on the guideline issued by our regulator, OSFI. The general allowance is reviewed on a quarterly basis and a number of factors are considered when determining its appropriate level. We employ a general allowance model that applies historical expected and unexpected loss rates, based on probabilities of default and loss given default factors, to current balances.
See the 2010 Financial Performance Review (344KB - PDF) and Enterprise-Wide Risk Management (548 KB - PDF) sections of the MD&A, and Note 4 (PDF, 70 KB).

H

Hedging
A risk management technique used to neutralize or manage interest rate, foreign currency, equity, commodity or credit exposures arising from normal banking activities.

I

Impaired Loans
Loans for which there is no longer reasonable assurance of the timely collection of principal or interest.
Innovative Tier 1 Capital
OSFI allows banks to issue instruments that qualify as “Innovative” Tier 1 capital. In order to qualify, these instruments must be issued indirectly through a special purpose vehicle, be permanent in nature and receive acceptable accounting treatment. Innovative Tier 1 capital cannot comprise more than 20% of net Tier 1 capital, at time of issue, with 15% qualifying as Tier 1 capital and the remaining 5% included in total capital.
Insurance Risk
The risk of loss due to actual experience being different than that assumed when an insurance product was designed and priced. Insurance risk exists in all our insurance businesses, including annuities and life, accident and sickness, and creditor insurance, as well as our reinsurance business.
Issuer Risk
Arises in BMO’s trading and underwriting portfolios, and measures the adverse impact of credit spread, credit migration and default risks on the market value of fixed income instruments and similar securities. Issuer risk is measured at a 99% confidence level over a specified holding period.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.

L

Liquidity and Funding Risk
The potential for loss if BMO is unable to meet financial commitments in a timely manner at reasonable prices as they fall due. Financial commitments include liabilities to depositors and suppliers, and lending, investment and pledging commitments.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A and Note 6 (PDF, 63 KB).

M

Mark-to-Market
Represents the valuation of securities and derivatives at market rates as of the balance sheet date, where required by accounting rules.
Market Risk
The potential for a negative impact on the balance sheet and/or income statement resulting from adverse changes in the value of financial instruments as a result of changes in certain market variables. These variables include interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, as well as credit spreads, credit migration and default.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A and Note 6 (PDF, 63 KB).
Market Value Exposure (MVE)
A measure of the adverse impact of changes in market parameters on the market value of a portfolio of assets, liabilities and off-balance sheet positions, measured at a 99% confidence level over a specified holding period. The holding period considers current market conditions and the composition of the portfolios to determine how long it would take to neutralize the market risk without adversely affecting market prices. For trading and underwriting activities, MVE is comprised of Value at Risk and Issuer Risk.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.
Model Risk
The potential loss due to the risk of a model not performing or capturing risk as designed. It also arises from the possibility of the use of an inappro priate model or the inappropriate use of a model.

N

Net Economic Profit (NEP)
Represents cash net income available to common shareholders, less a charge for capital. NEP is an effective measure of economic value added. NEP is a non-GAAP measure.
See Net Economic Profit Growth in the Value Measures (202KB - PDF) section and the Non-GAAP Measures (PDF, 45 KB) section of the MD&A.
Net Interest Income
Comprised of earnings on assets, such as loans and securities, including interest and dividend income and BMO’s share of income from investments accounted for using the equity method of accounting, less interest expense paid on liabilities, such as deposits.
See the 2010 Financial Performance Review (344KB - PDF) section of the MD&A.
Net Interest Margin
The ratio of net interest income to earning assets, expressed as a percentage or in basis points. Net interest margin is sometimes computed using total assets.
See the 2010 Financial Performance Review (344KB - PDF) section of the MD&A.
Notional Amount
Refers to the principal used to calculate interest and other payments under derivative contracts. The principal amount does not change hands under the terms of a derivative contract, except in the case of cross-currency swaps.

O

Off-Balance Sheet Financial Instruments
A variety of financial arrangements offered to clients, which include credit derivatives, written put options, backstop liquidity facilities, standby letters of credit, performance guarantees, credit enhancements, commitments to extend credit, securities lending, documentary and commercial letters of credit, and other indemnifications.
Operating Leverage
The difference between revenue and expense growth rates. Cash operating leverage is the difference between revenue and cash-based expense growth rates.
See Productivity in the 2010 Financial Performance Review (344KB - PDF) section of the MD&A.
Operational Risk
The potential for loss resulting from inadequate or failed internal processes or systems, human interactions or external events, but excludes business risk.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.
Options
Contractual agreements that convey to the buyer the right but not the obligation to either buy or sell a specified amount of a currency, commodity, interest-rate-sensitive financial instrument or security at a fixed future date or at any time within a fixed future period.
See Note 10 (PDF, 87 KB).

P

Productivity Ratio (or Expense-to-Revenue Ratio or Efficiency Ratio)
Our key measure of productivity. It is calculated as non-interest expense divided by total revenues, expressed as a percentage. The cash productivity ratio is calculated in the same manner, after removing the amortization of acquisition-related intangible assets from non-interest expenses.
See Productivity in the 2010 Financial Performance Review (344KB - PDF) section and the Non-GAAP Measures (PDF, 45 KB) section of the MD&A.
Provision for Credit Losses
A charge to income that represents an amount deemed adequate by management to fully provide for impairment in loans and acceptances and other credit instruments, given the composition of the portfolios, the probability of default, the economic environment and the allowance for credit losses already established.
See the 2010 Financial Performance Review (344KB - PDF) and Enterprise-Wide Risk Management (548 KB - PDF) sections of the MD&A, and Note 4 (PDF, 70 KB).

R

Regulatory Risk
The risk of not complying with regulatory requirements, regulatory change or regulators’ expectations. Failing to properly manage regulatory risk may result in regulatory sanctions being imposed and could harm our reputation.
Reputation Risk
The risk of a negative impact to BMO that results from the deterioration of BMO’s reputation among stakeholders. These potential impacts include revenue loss, reduced client loyalty, litigation, regulatory sanction or additional oversight, and declines in BMO’s share price.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.
Return on Equity or Return on Common Shareholders’ Equity (ROE)
Calculated as net income, less preferred dividends, as a percentage of average common shareholders’ equity. Common shareholders’ equity is comprised of common share capital, contributed surplus, accumulated other comprehensive income (loss) and retained earnings.
See Return on Equity in the Value Measures (202KB - PDF) section of the MD&A.

S

Securities Borrowed or Purchased under Resale Agreements
Low-cost, low-risk instruments, often supported by the pledge of cash collateral, which arise from transactions that involve the borrowing or purchasing of securities.
Securities Lent or Sold under Repurchase Agreements
Low-cost, low-risk liabilities, often supported by cash collateral, which arise from transactions that involve the lending or selling of securities.
Specific Allowances
Reduce the carrying value of specific credit assets to the amount we expect to recover if there is evidence of deterioration in credit quality.
See the 2010 Financial Performance Review (344KB - PDF) and Enterprise-Wide Risk Management (548 KB - PDF) sections of the MD&A, and Note 4 (PDF, 70 KB).
Strategic Risk
The potential for loss due to fluctuations in the external business environment and/or failure to property respond to these fluctuations due to inaction, ineffective strategies or poor implementation of strategies.
Swaps
Contractual agreements between two parties to exchange a series of cash flows. The various swap agreements that we enter into are as follows:
  • Commodity swaps – counterparties generally exchange fixed and floating rate payments based on a notional value of a single commodity.
  • Credit default swaps – one counterparty pays the other a fee in exchange for that other counterparty agreeing to make a payment if a credit event occurs, such as bankruptcy or failure to pay.
  • Cross-currency interest rate swaps – fixed and floating rate interest payments and principal amounts are exchanged in different currencies.
  • Cross-currency swaps – fixed rate interest payments and principal amounts are exchanged in different currencies.
  • Equity swaps – counterparties exchange the return on an equity security or a group of equity securities for the return based on a fixed or floating interest rate or the return on another equity security or group of equity securities.
  • Interest rate swaps – counterparties generally exchange fixed and floating rate interest payments based on a notional value in a single currency.

See Note 10 (PDF, 87 KB).

T

Tangible Common Equity
Reflects common equity net of certain deductions. There is no standard industry definition of this measure.
See Enterprise-Wide Capital Management in the Financial Condition Review (264 KB - PDF) section of the MD&A.
Tangible Common Equity to Risk-Weighted Assets Ratio
represents tangible common equity divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (264 KB - PDF) section of the MD&A.
Taxable Equivalent Basis (teb)
Revenues of operating groups reflected in our MD&A are presented on a taxable equivalent basis (teb). The teb adjustment increases GAAP revenues and the provision for income taxes by an amount that would increase revenues on certain tax-exempt securities to a level that would incur tax at the statutory rate, to facilitate comparisons.
See the 2010 Financial Performance Review (344KB - PDF) section of the MD&A.
Tier 1 Capital
Represents more permanent forms of capital, and primarily consists of common shareholders’ equity, preferred shares and innovative hybrid instruments, less a deduction for goodwill and excess intangible assets and certain other deductions required under Basel II.
Tier 1 Capital Ratio
Defined as Tier 1 capital divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (264 KB - PDF) section of the MD&A and Note 21 (PDF, 46 KB).
Total Capital
Includes Tier 1 and Tier 2 capital, net of certain deductions. Tier 2 capital is primarily comprised of subordinated debentures and the eligible portion of the general allowance for credit losses. Deductions from Tier 2 capital are primarily comprised of our investments in non-consolidated subsidiaries and other substantial investments.
Total Capital Ratio
Defined as total capital divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (264 KB - PDF) section of the MD&A and Note 21 (PDF, 46 KB).
Total Shareholder Return (TSR)
The five-year average annual total shareholder return (TSR) represents the average annual total return earned on an investment in BMO common shares made at the beginning of a five-year period. The return includes the change in share price and assumes that dividends received were reinvested in additional common shares. The oneyear TSR also assumes that dividends were reinvested in shares.
See Total Shareholder Return in the Value Measures (202KB - PDF) section of the MD&A.
Include net interest income and non-interest revenue earned from on- and off-balance sheet positions undertaken for trading purposes. The management of these positions typically includes marking them to market on a daily basis. Trading revenues include income (expense) and gains (losses) from both cash instruments and interest rate, foreign exchange (including spot positions), equity, commodity and credit contracts.
See the 2010 Financial Performance Review (344KB - PDF) section of the MD&A.

V

Value at Risk (VaR)
Measured for specific classes of risk in BMO’s trading and underwriting activities: interest rate, foreign exchange rate, equity and commodity prices and their implied volatilities. This measure calculates the maximum likely loss from portfolios, measured at a 99% confidence level over a specified holding period.
See the Enterprise-Wide Risk Management (548 KB - PDF) section of the MD&A.
Variable Interest Entities (VIEs)
Include entities with equity that is considered insufficient to finance the entity’s activities or in which the equityholders do not have a controlling financial interest. We are required to consolidate VIEs if the investments we hold in these entities and/or the relationships we have with them result in us being exposed to the majority of their expected losses and/or being able to benefit from a majority of their expected residual returns based on a calculation determined by standard setters.
See the Critical Accounting Estimates (PDF, 108 KB) section of the MD&A.

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