Glossary of Financial Terms

A

Adjusted Earnings and Measures
Present results adjusted to exclude the impact of certain items as set out in the Non-GAAP Measures section (PDF, 39 KB). Management considers both reported and adjusted results to be useful in assessing underlying ongoing business performance.
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 collective 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 Critical Accounting Estimates in the Accounting Matters and Disclosure and Internal Control (PDF, 62 KB) and page 81 of the Enterprise-Wide Risk Management (PDF, 279 KB) sections of the MD&A, and Note 4 (PDF, 60 KB).
Assets under Administration and under Management
Refers to 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
Reflects total assets, including specified off-balance sheet items net of other specified deductions, divided by total capital.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) section of the MD&A and Note 21 (PDF, 46 KB).
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 Risk Management (PDF, 279 KB) section of the MD&A.

C

Collective Allowance
Previously referred to as the General Allowance, it is 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 collective allowance is based on the guideline issued by our regulator, OSFI. The collective allowance is assessed on a quarterly basis and a number of factors are considered when determining its level, including the long-run expected loss amount and management's credit judgment with respect to current macroeconomic and portfolio conditions.
See Provision for Credit Losses and Other Credit Quality Information in the 2012 Financial Performance Review (PDF, 204 KB) section and page 81 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A, and Note 4 (PDF, 60 KB).
Common Equity Ratio
Reflects common shareholders' equity less capital adjustments, divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) section of the MD&A and Note 21 (PDF, 46 KB).
Common Shareholders' Equity
The most permanent form of capital. Adjusted common shareholders' equity is comprised of common shareholders' equity less capital adjustments.
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 page 80 of the Enterprise-Wide Risk Management (PDF, 279 KB) 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
Represents common share dividends as a percentage of net income available to common shareholders. It is computed by dividing dividends per share by basic earnings per share.

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. Adjusted EPS is calculated in the same manner, using adjusted net income.
See Earnings Per Share Growth in the Value Measures (PDF, 141 KB) section of the MD&A and Note 25 (PDF, 39 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/or off-balance sheet positions, measured at a 99% confidence level over a specified holding period.
See page 82 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
Economic Capital
Our internal assessment of the risks underlying BMO's business activities. It represents management's estimate of the likely magnitude of economic losses that could occur if adverse situations arise, and allows returns to be measured on a basis that considers the risks taken. Economic Capital is calculated for various types of risk – credit, market (trading and non-trading), operational and business – where measures are based on a time horizon of one year. Economic Capital is a key element of our risk-based capital management and ICAAP framework.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) section and page 79 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
Efficiency Ratio (or Expense-to-Revenue Ratio)
Previously referred to as the Productivity Ratio, it is a key measure of efficiency. It is calculated as non-interest expense divided by total revenues, expressed as a percentage. The adjusted efficiency ratio is calculated in the same manner, utilizing adjusted revenues and non-interest expense.
See Non-Interest Expense in the 2012 Financial Performance Review (PDF, 204 KB) section of the MD&A.
Environmental and Social Risk
The risk of loss or damage to BMO's reputation resulting from environmental and social concerns related to BMO or its customers. Environmental and social risk is often associated with credit, operational and reputation risk.
See page 92 of the Enterprise-Wide Risk Management (PDF, 279 KB) 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, 72 KB).

H

Hedging
A risk management technique used to neutralize, manage or offset 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
A form of Tier 1 capital that can be included in calculating a bank's Tier 1 Capital Ratio, Total Capital Ratio and Assets-to-Capital Multiple. 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 Tier 2 capital.
Insurance Risk
The risk of loss due to actual experience being different from that assumed when an insurance product was designed and priced. It generally entails inherent unpredictability that can arise from assuming long-term policy liabilities or from the uncertainty of future events. Insurance risk exists in all our insurance businesses, including annuities and life, accident and sickness, and creditor insurance, as well as our reinsurance business.
See page 89 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
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 page 82 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.

L

The risk of not complying with laws, contractual agreements or other legal requirements, as well as regulatory requirements and regulators' expectations. Failure to properly manage legal and regulatory risk may result in litigation claims, financial losses, regulatory sanctions, an inability to execute our business strategies, and potential harm to our reputation.
See page 90 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
Leverage Ratio
Defined as Tier 1 capital divided by the sum of on-balance sheet items and specified off-balance sheet items net of specified deductions.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) section of the MD&A.
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 page 86 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A and page 136 of Note 6 (PDF, 52 KB).

M

Mark-to-Market
Represents the valuation of financial instruments at market rates as of the balance sheet date, where required by accounting rules.
Market Risk
The potential for adverse changes in the value of BMO's assets and liabilities resulting from changes in market variables such as interest rates, foreign exchange rates, equity and commodity prices and their implied volatilities, and credit spreads, as well as the risk of credit migration and default.
See page 82 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A and page 136 of Note 6 (PDF, 52 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/or composition of the portfolio 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 page 82 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
Model Risk
The potential for 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 inappropriate model or the inappropriate use of a model.
See page 90 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.

N

Net Economic Profit (NEP)
Represents net income available to common shareholders, before deduction for the after-tax impact of the amortization of acquisition-related intangible assets, less a charge for capital. Adjusted NEP is computed using adjusted net income. NEP is an effective measure of added economic value. NEP and adjusted NEP are non-GAAP measures.
See Net Economic Profit Growth in the Value Measures (PDF, 141 KB) section and the Non-GAAP Measures (PDF, 39 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 Net Interest Income in the 2012 Financial Performance Review (PDF, 204 KB) 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 Net Interest Income in the 2012 Financial Performance Review (PDF, 204 KB) 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.
Office of the Superintendent of Financial Institutions Canada (OSFI)
The government agency responsible for regulating banks, insurance companies, trust companies, loan companies and pension plans in Canada.
Operating Leverage
The difference between revenue and expense growth rates. Adjusted operating leverage is the difference between adjusted revenue and adjusted expense growth rates.
See the Who We Are (PDF, 28 KB) 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 page 88 of the Enterprise-Wide Risk Management (PDF, 279 KB) 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 page 141 of Note 10 (PDF, 72 KB).

P

Provision for Credit Losses
A charge to income that represents an amount deemed adequate by management to fully provide for impairment in a portfolio of loans and acceptances and other credit instruments, given the composition of the portfolio, the probability of default, the economic environment and the allowance for credit losses already established.
See Provision for Credit Losses and Other Credit Quality Information in the 2012 Financial Performance Review (PDF, 204 KB) section and page 81 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A, and Note 4 (PDF, 60 KB).

R

Reputation Risk
The risk of a negative impact on BMO that results from a deterioration in stakeholders' perception of BMO's reputation. These potential impacts include revenue loss, litigation, regulatory sanction or additional oversight, declines in client loyalty and declines in BMO's share price.
See page 91 of the Enterprise-Wide Risk Management (PDF, 279 KB) 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. Adjusted ROE is calculated using adjusted net income.
See Return on Equity in the Value Measures (PDF, 141 KB) 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.
Securitization
The practice of selling pools of contractual debts, such as residential mortgages, commercial mortgages, auto loans and credit card debt obligations, to third parties.
See Note 8 (PDF, 34 KB).
Special Purpose Entities (SPEs)
Entities created to accomplish a narrow and well-defined objective. We are required to consolidate an SPE if we control the SPE by having the power to govern the financial and operating policies of the SPE so as to obtain benefits from the SPE's activities.
See Off-Balance Sheet Arrangements in the Financial Condition Review (PDF, 168 KB) and Critical Accounting Estimates in the Accounting Matters and Disclosure and Internal Control (PDF, 62 KB) sections of the MD&A, and Note 9 (PDF, 45 KB).
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 Provision for Credit Losses and Other Credit Quality Information in the 2012 Financial Performance Review (PDF, 204 KB) section and page 81 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A, and page 131 of Note 4 (PDF, 60 KB).
Strategic Risk
The potential for loss due to fluctuations in the external business environment and/or failure to properly respond to these fluctuations due to inaction, ineffective strategies or poor implementation of strategies.
See page 91 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.
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-rate 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-rate 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-rate and floating-rate interest payments based on a notional value in a single currency.

See Note 10 (PDF, 72 KB).

T

Taxable Equivalent Basis (teb)
Revenues of operating groups reflected in our MD&A are presented on a taxable equivalent basis (teb). To facilitate comparisons, the teb adjustment increases reported 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.
See Revenue in the 2012 Financial Performance Review (PDF, 204 KB) section of the MD&A.
Tier 1 Capital
Primarily comprised of regulatory common equity, preferred shares and Innovative Tier 1 capital.
Tier 1 Capital Ratio
Reflects Tier 1 capital divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) 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 a portion of the collective allowance for credit losses.
Total Capital Ratio
Reflects total capital divided by risk-weighted assets.
See Enterprise-Wide Capital Management in the Financial Condition Review (PDF, 168 KB) 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 one-year TSR also assumes that dividends were reinvested in shares.
See Total Shareholder Return in the Value Measures (PDF, 141 KB) 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-related revenues include income (expense) and gains (losses) from both on-balance sheet instruments and interest rate, foreign exchange (including spot positions), equity, commodity and credit contracts.
See Trading-Related Revenues in the 2012 Financial Performance Review (PDF, 204 KB) 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 loss likely to be experienced in the portfolios, measured at a 99% confidence level over a specified holding period.
See page 82 of the Enterprise-Wide Risk Management (PDF, 279 KB) section of the MD&A.

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