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Bank of Montreal (NYSE:BMO)

Q4 FY07 Earnings Call

November 27, 2007, 2:00 PM ET

Executives

Viki Lazaris - Sr. VP, IR

William A. Downe - President and CEO

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Yvan J.P. Bourdeau - CEO, BMO Capital Markets and Head of Investment Banking Group

Frank Techar - President and CEO, Personal and Commercial Banking Canada

Gilles G. Ouellette - President and CEO, Private Client Group

Analysts

James Bantis - Credit Suisse

Ian de Verteuil - BMO Capital Markets

André-Philippe Hardy - RBC Capital Markets

Darko Mihelic - CIBC World Markets

Michael Goldberg - Desjardins Securities

John Aiken - Dundee Securities

SumitMalhotra - Merrill Lynch

Mario Mendonca - Genuity Capital Markets

Robert Sedran - National Bank Financial

Presentation

Operator

All participantsplease stand by, your meeting is about to begin. Please be advised that this conference is being recorded. Good afternoon and welcome to the BMO Financial Group's Fourth Quarter 2007 Conference Call for November 27th. Your host for today is Viki Lazaris, Senior Vice President of Investor Relations. Ms. Lazaris, please go ahead.

Viki Lazaris - Senior Vice President, Investor Relations

Thank you. Good afternoon everyone and thanks for joining us today. Presenting today are Bill Downe, BMO CEO, Tom Flynn, Treasurer and Acting Chief Financial Officer, and Bob McGlashan, our Chief Risk Officer.

The following members of management team are also here this afternoon. Yvan Bourdeau from BMO Capital Markets, Gilles Ouellette from the Private Client Group, Frank Techar, Head of P&C, Canada, Ellen Costello from P&C U.S. and Barry Gilmour, Head of Technology and Operation.

After the presentation the management team will be available to answer questions from pre-qualified analysts. To give everyone an opportunity to participate, we ask that you please ask one or two questions then re-queue.

At this time, I would like to caution our listeners by stating the following on behalf of those speaking today. Forward-looking statements may be made during this call and there are risks that actual results could differ materially from forecasts, projections or conclusions in the forward-looking statements. Certain material factors and assumptions were applied in drawing the conclusions or making the forecasts or projections in the forward-looking statements. You may find additional information about such material factors and assumptions and the material factors that could cause actual results to so differ in the caution regarding forward-looking statements set forth in the news release or on our Investor Relations website.

With that said I'll hand things over to Bill.

William A. Downe - President and Chief Executive Officer

Thanks Viki, and good afternoon everyone. As noted my comments may also include forward-looking statements.

Before reviewing our results I would like take a moment to acknowledge the many calls and e-mails that we have received on regarding our Chief Financial Officer, Karen Maidment. As many of you know Karen has taken in the illness related leave from the bank and on her behalf, I would like to thank everyone for the best wishes they have sent along and like them look forward to Karen's return to work. As Viki said until that time Tom Flynn, our Executive Vice President Finance and Treasurer is acting as Chief Financial Officer and will be participating in the call.

Moving to today's business as we look back on the year and the fourth quarter, our core business has performed well in the face of very significant issues. We had record earnings in P&C Canada, in the Private Client Group and the best quarter ever for P&C U.S measured in U.S. dollars.

Looking back on the challenges of the last nine months I take great confidence in the resiliency of our businesses. In the fourth quarter of 2007, we reported net income of $452 million after $275 million in after-tax charges related to various items most notably in capital markets. Excluding these items, the bank generated net income of $727 million and return on equity of 20%. Tom is going to review the numbers in more detail in a few minutes.

For the full year, we reported net income of $2.1 billion, and as you know we dealt with a number of significant issues in 2007 both internal and external. These resulted in $787 million in after-tax charges which are included in these results. Charges which related to capital markets, commodities, restructuring and an increase in our general allowance clearly weighed heavily on our reported results in 2007 and despite these conditions, we earned a return of 14.4%. This is a testament to the diversified earning power of the bank both by geography and source of earnings.

Over and above this our annual results excluding the charges reflect ROE of 19.8%, once again highlighting the resiliency of the business on the strong fundamentals in our core operations.

Moving to slide 4 let me briefly review the year's highlights by business. P&C Canada delivered a record $1.25 billion in net income, up 9% for the year. This business is fundamentally stronger and better positioned than it was 18 months ago, reflecting our success in executing against the clearly defined personnel and commercial strategy, showing up in our numbers with visible growth in high spread loans and cards. As you know underpinning our growth plan is our commitment to customers, and we put dollars behind the commitment in 2007 by adding 22 branches and redeveloping 31 branches that's the most we've completed in a year.

We also added over 900 full time employees to the group, over 90% of those in client facing role, 25% of new hires are part of our specialized workforce which include mortgage specialists, commercial account managers and financial planners. Profitability of mortgages in our portfolio was improving due to a higher proportion of branch originate mortgages. And our focus on deposits has been successful with good growth in commercial deposits. I might add the priority for the group is to grow personnel deposits.

And P&C U.S. has very good story earning a $105 million which includes acquisition-related expanses, and looking at the performance excluding this costs Q4 represented the fourth consecutive quarterly increase in net income. While the story is definitely lined up in this quarter with 51% year-over-year growth, the fundamentals of the business are stable. The cash productivity ratio, excluding acquisition integration costs, improved to 69.7% in the quarter. We have a high quality portfolio and we've recruited qualified senior bankers from the competition. As competitors in the mortgages business will drive in the current environment, our consistent approach stands out in the marketplace.

Private Client Group also had a record year with net income up 15% to $408 million. Cash productivity for the year was $69.2% while we continue to invest in the business and add more clients facing staff. In fact we added 75 private bankers.

Q4 net income was up 27% compared to the year prior and all lines contributing to growth. Earlier this year we announced the acquisitions, or this month rather we announced the acquisition of U.K based Pyrford International to strengthen our institutional asset management business with the addition of international equities.

Moving to BMO capital markets, net income of $425 million was down significantly from the prior year. The reported results should not obscure the fact that a number of our businesses performed very well. Investment and corporate banking, our client origination business generated great results in both Canada and the U.S. driven by strong balance growth and an increase in the customer base which translated into revenue growth. Clearly our trading business had a more challenging year with charges related commodities and capital markets.

On November 16, we released advanced information of our asset revaluation in the quarter and at this time I would like to talk briefly about our statement that we would participate in the senior debt of two SIVs. I know you are going to have questions about our position and market conditions in general, and we are going to have an opportunity to discuss those in the Q&A. But Bob is also going to provide additional detail on the risk of the bank relative to the current market events.

The assets in the SIVs are high quality and from our perspective, we believe our decision to purchase senior notes combined with the purchases by other investors will assist the SIVs in restructuring, and we should know that they have made the progress to date. Loss in the commodities business in the fourth quarter was $24 million down significantly from the three prior quarters. This improvement is a reflection of success in reducing both the size and the risk of the portfolio. We are on track and we are comfortable with our progress.

Wrapping up the review of 2007, I would like to give you an update on the $135 million restructuring charge that we announced in January. At this point, we are ahead of schedule, and since January we have eliminated 840 jobs. Program has been very successful in highlighting additional opportunities in support of this initiative, and in the fourth quarter, we took a further $40 million charge in part offset by a reversal of $16 million of the initial charges we have been able to redeploy more staff than initially anticipated.

Moving to slide 5, today's press release also highlights our 2008 financial targets. Tom will discuss the specific measures. But these targets reflect earnings momentum and solid growth across all of our businesses while anticipating a weaker credit environment. They reflect confidence in our underlying business and their teams, their increased focus we're placing on the customer. Our expectation is that the latter half of the year will be stronger than the first half.

In P&C Canada, we expect margin pressure resulting from higher wholesale funding costs to continue in the first half of the year or to improve thereafter while competitive pressure on spreads will continue throughout the year.

The group remains committed to maintain revenue to expense growth differential of 300 basis points over time, underlying the continuing emphasis on the control of expense. We are introducing attractive new products and offers on a frequent basis. Just last week for example, we announced that we will pay a portion of the new City of Toronto land transfer tax on behalf of customers who arrange the mortgage by February 29, 2008. I am hoping that many people on the call today will be submitting applications for loans.

In P&C U.S. our focus is on improving our net income, net of integration costs, acquisition integration costs will recur in 2008, although the timing may be lumpy as we integrate another two acquisitions. While the first quarter would have to be extraordinary to match Q4 I am looking for a stronger 2008 than 2007.

PCG has consistently delivered strong performance and we expect that to continue. The systematic approach to sales force productivity and new product for the client continues to strengthen our competitive position. And the environment in which BMO Capital Markets operates will continue to be unsettled at least for the first half of 2008. But the focus will be on lower volatility in our trading businesses as the losses in 2007 were outside our tolerance [ph] notwithstanding a difficult market environment, and our goal is that this business will generate a return on equity in excess of 20% consistently.

To be sure, 2007 was a challenging year. However, I can say with equal certainty that it was a year in which we made tangible progress in each one of our business... businesses and that's progress that I expect to see in our financial results.

And with that Tom I will turn it over to you.

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Thank you, Bill and good afternoon. Certain of my comments may be forward-looking so please note the caution regarding forward-looking statements.

On slide 3 on the far left hand side of the chart you can see that fourth quarter earnings were $452 million or $0.87 per share, down 36% year-over-year. There were a number of significant items this quarter that lowered earnings by $275 million or $0.55 per share. Excluding these items, earnings were $727 million and revenue and expenses increased 3.7% and 1.1% respectively. Our return on activity was over 12% on a reported basis and almost 20% excluding significant items. The tier 1 ratio remained strong at 9.51%.

Slide 4 shows the significant items in Q4 that make up the $275 million charge. The first three items on the slide totaled $318 million pre-tax and are related difficult capital market conditions. We recorded a charge of $169 million related to trading structured credit related positions and preferred shares. These losses largely reflect difficulties in credit markets. We recorded a charge of $134 million related to Canadian asset backed commercial paper. This includes $80 million related to holdings and BMO sponsored conduits for which we do not provide backup liquidity commitments and $54 million for holdings of commercial paper issued by non-bank sponsored conduits. Both write-downs reflect a 15% discount.

We also recorded a charge of $15 million or are approximately $70 million investment in capital notes of the Links and Parkland SIVs. In addition to these market-related items, this quarter we had commodity losses of $24 million, a general allowance increased a $50 million, and $24 million net restructuring charge. In total these items reduced earnings by $275 million after-tax.

As you are aware there were other items recorded in P&C, Canada. A gain on the sale of MasterCard shares of $83 million after tax and the recovery of prior years income taxes of $43 million. These items were offset by $120 million after tax adjustment to increase the liability for future customer redemptions in our credit card loyalty rewards program. Together these items largely net, adjusting for the significant items totaling $275 million after tax, the P&C, Canada items I mentioned and an $18 million prior year's income tax recovery EPS, cash EPS would have been approximately $1.39.

On slide 5 you can see that quarter-over-quarter EPS is down $0.41 to $0.89 on a reported basis. Removing the significant items in each quarter, the decrease is $0.05. The negative operating growth in the quarter was due to lower net interest income in P&C Canada and softer capital market performance.

On a year-over-year basis, EPS is up $0.11 to $1.44 excluding significant items. There was volume growth in a number of areas in P&C Canada, strong results in P&C U.S. broad based revenue growth in the Private Client Group and improved performance in lending, foreign exchange trading and commission revenue in BMO Capital Markets, all contributing to this growth.

On slide 6, looking at fiscal 2007, operating growth was strong despite the significant items recorded. P&C Canada achieved record net income with good volume growth in a number of product areas. Private client group also had record net earnings with all of its lines of business contributing and P&C Canada was up year-over-year in U.S. dollars.

Excluding commodity losses and the charges in the fourth quarter BMO Capital Markets performed well with strong growth and a number of its businesses.

Moving to slide 7, you'll see that revenues were down 14% quarter-over-quarter or 6% excluding the significant items. The impact of the loyalty rewards program liability and MasterCard share gain netted to a $78 million decrease. This represents approximately half of the revenue decline excluding the significant items. Lower margins in P&C, Canada, weaker capital markets and the exchange rate also contributed to lower revenue. Year-over-year revenues decreased to 10% on a reported basis but increased 3.7% excluding the significant items.

BMO Capital Markets had increases in trading products, foreign exchange and interest rate sensitive businesses. P&C Canada's commercial banking segment was up 4.5% as both commercial loans and deposits grew offsetting lower margins.

Turning to slide 8 on net interest margin. Net interest income was $1.2 billion in Q4 flat year-over-year and down 4.7% quarter-over-quarter. The net interest margin was down 15 basis points. BMO Capital Markets declined due to lower spreads on money market assets and growth in lower spread corporate loans. P&C Canada's margins were down largely due to increased wholesale cost of funds and lower mortgage refinancing fees. Year-over-year margins were down 30 basis points. The main drivers were BMO Capital Markets representing a larger share of assets, and within BMO Capital Markets an increase in lower spread asset.

On slide 9, non-interest revenue decreased $304 million quarter-over-quarter and $242 million year-over-year. Excluding the significant items as well as the MasterCard share sale and charge for the royalty reward program, non-interest revenue decreased $44 million quarter-over-quarter and increased $168 million year-over-year. On this basis Q4's trading revenue was down $20 million versus Q3 due to lower interest rate and equity trading.

On slide 11 you can see that we are focusing on expense management with expenses reasonably flat over the year.

Turning to expenses again on slide 12, expenses were down 0.2% quarter-over-quarter and up 2.6% or $42 million year-over-year. The increase in expenses year-over-year is primarily due to higher computer costs and professional fees offset in part by lower capital tax expense and performance based comp. There has been significant increase in frontline staff in P&C Canada and the Private Client Group. The resulting increase in cost has been offset by lower cost in corporate. On a quarter-over-quarter basis, the decrease in expenses was primarily due to lower performance based comp in line with slowing capital markets activities as Q3 was strong. This decrease was in part offset by net restructuring costs and higher business promotion costs.

On slide 14 you can see that the tier 1 capital ratio of 9.51% increased quarter-over-quarter. The ratio remains strong and is well above our minimum target. The tier 1 capital increased this quarter with the issuance of preferred shares and the reclassification of a Harris Capital Security to tier 1 capital.

Risk weighted assets decreased due to lower mortgage risk weighted assets in P&C Canada as a result of initiatives to manage capital on a cost effective basis and lower U.S. risk weighted assets due to the stronger Canadian dollar. The increase in BMO Capital Markets risk weighted assets in Q3 was, as we said at the time, largely a result of higher market risk due to the adoption of a more conservative translation of certain of our risk positions for regulatory capital purposes.

In Q4 the majority of the increase in capital markets is due to the adoption of global style backup liquidity line on our Canadian asset backed commercial paper. Our total capital ratio you can see was 11.74% at the end of the year.

Turning now to slide 15 and our 07 target, given the commodity losses, the capital market issues in the fourth quarter, we did not hit our 07 target with the exception of the PCL target.

Moving to 08 on slide 16, you can see the targets that we announced today. These targets reflect the management team's commitment to continuing to improve operating performance. The targets are based on our expectation of achieving economic growth in line with the growth talked about in our comments in the press release and based on the expectation that momentum will build through the year as capital markets return to more normal level. With this somewhat offset higher credit costs our targets are as follows: EPS growth of 10% to 15% off a base of $5.24 per share. This base excludes the commodity losses, the restructuring charges and the increase in the general that we had in Q4. This translates to an 08 EPS of $5.76 to $6.03. Specific PCL's of $4.74 or less and Bob will address this further. Operating leverage of 2% and ROE of 18% to 20% and tier 1 capital ratio of at least 8%.

In 2008 the bank... the total bank tax rate will be reported on a non-TEB basis, and we expect the current sustainable tax rate to be 21% to 24% in fiscal 08 on a non-TEB basis. And this is effectively 1% below our previous guidance... the guidance for 07 which was 25% to 28% on a TEB basis.

And with that I'll turn things over to Bob.

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Thanks Tom and good afternoon. Before I begin, I would like to draw your attention to the caution regarding forward-looking statements on slide 2. I'll begin with a review of our participation in the asset-backed commercial paper market followed by an update on our commodities portfolio and finish with a review of credit quality.

Turning to current market concerns, slide 3 provides an update on exposure to sub-prime and asset-backed commercial paper. The slide also summarizes the Q4 write-downs excluding the $169 million in trading and structured credit related positions of preferred shares referenced by Tom. As noted in the prior year, we have no material exposure to U.S sub-prime mortgages and neither BMO nor of its subsidiaries originates the sub-prime mortgages.

With respect to BMO sponsored Canadian ABCP programs that we provide liquidity for the paper issued by these conduits continues to roll in the market. However, due to reduced demand in the Canadian market we held higher levels than normal of inventory for our Canadian conduit at $6.2 billion at year-end. This has since been reduced to $5.6 billion.

Our inventory continues to decline with returning demand for this high quality paper. Of note, the underlying assets within these programs all remain investment grade rated. As noted previously, nominal exposure to U.S. sub-prime residential mortgages within the U.S. $11.4 billion program was held in a form of warehouse facility provided for the purchase at a discount of defaulted mortgages some of which are sub-prime.

The risk associated with the facility has increased over the quarter, and in order to not affect the continued access to funding for the conduit we will be removing this facility which represents less than 5% of the total from the program. There is no incremental risk to the bank as we already provide the liquidity backs up line, and there is no P&L impact from this action.

At this time, we do not anticipate any material loss from this transaction which has a solid loan to value in the 75% range for two-thirds of the book with the balance at a stronger coverage ratio, as well we hold the first loss protection note. As a commercial paper market maker for BMO sponsored Canadian conduits where we do not provide the liquidity backs-up facility is in the third section from the top. We've acquired $546 million of paper. The underlying assets are AAA rated supper senior advances and CDOs comprise of diversified corporate exposures with no direct exposure to U.S. residential sub-prime mortgages.

The aggregate paper is held by a small number of investors, and we are in discussions on restructuring alternatives regarding this conduit. We hope to have a resolution by the end of Q1.

We provide U.S. $1.1 billion in liquidity backup facilities to third party asset-backed conduits in the U.S. made up of auto related securitizations and financial based conduits. There is no exposure to U.S. residential sub-prime mortgages. Two of the three financial based conduits have drawn under the liquidity lines given market concerns which have impacted their ability to fund. Current advances are U.S. $174 million. However, asset quality remains acceptable and we do not anticipate any losses. The auto based securitizations are not experiencing any funding issues to date.

We do not provide liquidity backup facilities to non-bank sponsored asset-backed programs in Canada. Acting in our capacity as a commercial paper market maker, however, we held $362 million of paper prior to this sector becoming frozen, the majority of which is under the Montreal accord. Our realization on these investments will be affected by the outcome of the accord.

BMO is also the sponsor and manager of two U.K. based structured investment vehicles Links and Parkland. You'll find more details on these vehicles on slide 15, 16 and 17 in the appendix.

Overall, Links and Parkland have high quality portfolios with minimal direct exposure to sub-prime mortgages. The weighted average rating of the portfolio is AA with a blend of exposures to financial institutions and securitization. Amongst the securitizations nothing has been downgraded by either rating agency. Since the turmoil began in August despite of widespread downgrades within the industry during that period. Links has a current asset value of U.S. $18.7 billion and Parkland at €2.5 billion. Since late August, sales of these assets have accumulated to U.S. $4 billion for Links and €820 million for Parkland. None of these asset sales have been to BMO. Sales have represented a fairly good cross-section of the assets and total discounts on sales to date have not exceeded 40 basis points, providing some evidence of the high quality of the assets in these vehicles.

We hold equity investments of U.S. $50 million in Links and €14 million in Parkland out of a total capital of U.S. $1.87 billion and €244 euros... €244 million respectively. To put the 20% valuation adjustment to the equity investments in perspective and recognizing the leverage in these vehicles, discount on the sale of the remaining assets would have to be five times as great as the average we've experienced to date to equate to this adjustment.

Consequently, we believe it is unlikely that any meaningful loss to senior debtholders in Links and Parkland would occur. In light of this we've made available up to U.S. $1.6 billion to participate in the senior debt to provide the vehicles with the time to execute their shorter term liquidity strategies and to develop longer term solutions. This accord includes the existing liquidity lines of U.S. $125 million and €75 million which are not expected to be drawn.

Our view of the strong asset quality of these vehicles is shared by both existing senior debtholders and capital noteholders as U.S. $500 million of additional senior debt funding has been made available from the capital noteholders in addition to U.S. $600 million of additional senior debt funding from existing senior debt investors. Collectively, these facilities in conjunction with the provision of $1.6 billion of repo facilities provided by third party and continued asset sales cause us to remain confident we can effectively work through the current market issues without meaningful additional loss.

And finally on slide 3, we have normal exposure to LBO underwriting and continue to manage our exposure to hedge funds on a conservative and well defined basis.

Given the related concern with the viability of monoline insurance providers, and the exposures they may have to the U.S. sub-prime markets we've completed a review of our reliance on these insurers across our portfolios. We've only one monoline with which we have some concern and have them under review. Our mark-to-market exposure should that company fail, would be approximately $90 million. However at this time we do not anticipate any losses.

The sum of our direct mark-to-market exposure to all of the other monoline insurers is less than $135 million. And at this point there are no others in the group that we are particularly concerned about.

Turning to slide 4, and our commodities book, you can see the material reductions in MVE fair value, notional outstanding and net open interest from the peak of our risk exposure last January.

Q4 continued that trend with MVE operating at our target level. We are on track with our risk reduction plan for this book, and while the book is still larger than required to support our client business flow the majority of the target risk reduction has been achieved. The significantly reduced pretax loss of $24 million in Q4 related primary to risk reduction activities and provides further evidence of a risk position that is getting close to our sustainable target. However, the volatility associated with this book is high by its nature making future gains and losses difficult to predict.

As you can see on slide 5, BMO's credit performance met our revised expectations for the year with 2007 specific PCL coming in at $303 million in line with our revised estimate of $300 million or less and while up 44% over 06 it is still less than our original forecast of $400 million for the year.

Recognizing the purpose of the general allowance is to provide for losses not yet identified within our performing portfolio, we booked $50 million increase to reflect portfolio growth in Q4 as well as some negative risk migration. As adjusted, we are comfortable with the coverage this provides relative to our performing portfolio at this point in the credit cycle.

Slide 6 shows an increase in U.S. consumer delinquencies. However, delinquencies are still low and the portfolio is sound.

On slide 7 provisions for credit losses were $151 million for the quarter including the $50 million increase in the general allowance. The increase over the prior quarter and year are primarily related to a single credit that was designated as impaired in the quarter, most of which has been written off. Q3 as you recall included an isolated loss in our Canadian mortgages business unrelated to sub-prime.

On slide 8, new specific provisions have increased. However, allowing for the loss related to single transaction remained in line with our prior eight quarters experience.

On slide 9 a comparative basis... on a comparative basis fiscal 07 specific PCL represents 15 basis points of average net loans in acceptances and remains below our 15 year average of 34 points and the Canadian peer group average of 56 for the same period.

As seen on slide 10, growth both... gross impaired loan formation and balances remain at historical lows.

Turning to slide 11 and looking forward, we are anticipating current market events to produce a weaker credit environment of fiscal 2008 with additional pressure provided by high energy prices and a strong Canadian dollar. The weakness is being led by the U.S. off the back of sub-prime mortgage problem and poses associated risk for the Canadian economy.

Overall, for fiscal 2008 we expect new specific provisions to be higher and reversals and recoveries to be lower than in fiscal 2007. We anticipate specific provisions in fiscal 08 to be $475 million or less or 24 basis points of average net loans in acceptances consistent with this period in the cycle and still well below our 15-year average of 34 points.

As shown on slide 12, absent the large losses on August 31st and October 31st which were driven by the valuation adjustments addressed in Tom's remarks, our trading and underwriting portfolio remained relatively stable and profitable during the quarter. The largest daily P&L gains for the quarter were $18.7 million on September 26, primarily related to gains in Canadian equity position and $16.9 million on October 29, driven in part by dividend payments on equity position.

With that, I'll turn it back to the operator to take questions.

Question And Answer

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions]. The first question is from Jim Bantis with Credit Suisse. Please go ahead.

James Bantis - Credit Suisse

Hi good afternoon. Just got two questions. And Bob, I certainly appreciate all the data you provided us with respect to the SIV exposure. But I am wondering perhaps without a lot of the numbers you can just walk us through in terms of the confidence you see that the $1.6 billion really won't become impaired and there won't be another restructuring. You talked about asset sales, you talked about the level of capital, if you can just kind of simply walk through that where you get that confidence from.

And then secondly the question I have got is for P&C Canada for Frank, as your management's optimism in terms of some of the measures that you are showing in terms of improvements within the regional operations. But if you look at the $286 million contributed this quarter, actually the lowest of the four quarters this year, maybe we can... outside of the three adjustments that were highlighted, what are some of the issues that may be taking down revenues or highlighted expenses this quarter that won't be your run rate going forward? Thank you.

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Thanks Jim. First question, a couple of times I've mentioned, the ones we've sold a fair volume of assets in both of those vehicles to date and they represent a pretty good cross-section of all the asset classes in there. There is a slight bias to the more liquid assets but it's still pretty representative and a discount write-up to an including very recent days has been pretty modest that we have had to take on those assets. We know what's in there and looking at the asset quality of what's there we're very comfortable with that kind of it would produce a loss given the opportunity to run to maturity. Compounded with what we are able to sell into a pretty tough market at a very, very low discount, it's hard to see how we would end up burning through the equity notes 40 basis points. As I mentioned we have to experience discounts five times that large just to address the size of the adjustments that we've already taken in capital notes. So it's pretty hard for us to see how we ever get to the point of having to burn through the capital and into the senior debt. And Yvan may want to add something as well.

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

The only other point that I would like to add is that, to reinforce some of the points that Bob mentioned earlier, the weighted average rating of the portfolio is AA. And the... it's a mix of exposure to financial institution and securitization and the financial institutions are a blend of banks investment banks and insurance company and among the securitization not a single one has been either downgraded or watched by other rating agencies since the turmoil began in August. So I think all of these really demonstrate the quality of the portfolio. And once again I would like to reinforce the point that Bob just made if you think about the amount of asset sale that has taken place since the month of August which is substantial approximately 20% of the portfolio and yet under the condition that we had to operate the discount is about 40 basis points which is again a clear illustration that the portfolio is of high quality.

The other point that I would add is as Bob has mentioned throughout this period we've been able to actually bring into the vehicle a large number of the third party participants that contributed to the senior notes and the amounts were approximately $1.1 billion and in terms of repo close to $1.6 billion. So all of those in our minds are clear signs that we have put in place a plan that will enable us to lead towards a resolution, a permanent resolution for both SIV.

James Bantis - Credit Suisse

Great.I certainly appreciate that. And I guess what we are trying to understand is we have seen a large global bank HSBC make the decision to take their SIVs on balance sheet. And I know each SIV is different in each bank role is within the SIV is different as well but I think that's what perhaps doors will open in that regards?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

I think that's exactly the point, if I look at the information that is available publicly then you would see that our SIV is definitely a high quality. And I think each SIV has to come up with their own plan to come up with the resolution for their vehicle. And at this point in time, we feel the plan that we are progressing on and then discussing with the stakeholders is actually the proper one. So it's on that basis that we are continuing to execute it.

James Bantis - Credit Suisse

Great thank you. And if Frank is there that'll be helpful.

Frank Techar - President and Chief Executive Officer, Personal and Commercial Banking Canada

Yes, Jim hi. With respect to your question, two things in the quarter. The first one was the pressure we felt on our margins as a result of the increased cost of funds in the marketplace. And we had some lower mortgage refinancing fees in the quarter as well. So revenue was put under pressure as a result of that, and as I have mentioned in previous quarters we are continuing to invest in the business. And our expenses were up in Q4 as a result of that. Bill already touched on the fact that we've increased our staff and some of our specialized sales forces. We've invested in branches. And so looking forward, my expectation is we are going to continue to invest in the business but we have great momentum in our balance sheet. And my expectation is also that if the margin issue in the marketplace comes back to us over the first couple of quarters that our revenue growth is going to higher next year as well. So we are going to continue to invest, although we are going to do it prudently. And our long term objective as well as Bill mentioned was to manage that operating leverage to 3%. So the quarter was a little soft as a result of the margin pressure in particular, and the fact that we knew we had some expense build-up over the year.

James Bantis - Credit Suisse

All right, thanks very much, I will re-queue.

Operator

Thank you. Next question is from Ian de Verteuil from BMO Capital Markets. Please go ahead.

Ian de Verteuil - BMO Capital Markets

Thanks. The question relates to the loan book page 27. We continue to see a fairly material ramp in loans to financial institutions, and I believe your loan loss this quarter Bob which you highlighted as being unusual was $40 million, I think to financial institutions. What color can you provide to us on what kind of institutions, are they hedge funds and why did you have a particular name go about it [ph]?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Yes, I will start here and then Yvan can jump in. The transaction that I referenced to you was in the business of funds management as opposed to some of the other categories you might be wondering about, relatively isolated. They suffered a side swipe as a result of current market events that everyone is battling. And in terms of what's driving the growth in financial industry sector, I'll let Yvan speak to that.

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Ianthe main factor that contributed to that growth is really the environmental change and we do have now positive yield flow and in that kind of environment especially very short end of it we were able to deploy some discretionary asset, in other words, placement with other financial institutions and that is the main reason behind the growth that's replacing that in that category.

Ian de Verteuil - BMO Capital Markets

But these are loans?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

But it would be... it's a loan in a sense that it's a money market placements with the bank, another bank for instance it would be classified as a loan.

Ian de Verteuil - BMO Capital Markets

So it's short term money market high quality?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Yes that is correct.

Ian de Verteuil - BMO Capital Markets

Okay. And fund management I must admit that when I think funds management Bob I don't know what you mean by that. Hedge fund is funds management and asset and mutual funds company's funds management, what do you mean by funds management?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

I knewyou are going to ask that. I get... there is a limit to how far I can go. It's not a hedge fund, if that helps you.

Ian de Verteuil - BMO Capital Markets

Okay. Second question relates to securitization. It looked... I think it's a question for Tom, it looked as if you insured about $10 billion with the residential mortgages or your purchase insurance on those in the quarter. Can you talk through what the thinking is behind that and what the P&L impact is on buying insurance on these mortgages?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Sure. The thinking behind the purchase of insurance is that it's a low cost way to provide capital for the business, and buying insurance transfers the mortgages from being 50% risk weighted to not being risk weighted. And with that we get both total capital and tier 1 capital credit and the cost of buying the insurance is basically in line with the cost of raising sub-debt. So it's cost effective tier 1 and is also attractive because it provides us with diversification in terms of sources of our capital. There is really no unusual P&L impact in that the capital ratios are roughly in line with where we would expect them to be. And so we would have incurred the costs associated with the capital either in the form of spread on capital securities issued into the market or the payment of insurance premiums to the providers.

Ian de Verteuil - BMO Capital Markets

So when Frank in his section talked about the spreads in the domestic retail bank being down because of funding cost, is that saying that securitization, buying insurance effectively boost your funding cost, is that the same thing or might --

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

No I think the reference that Frank made was to the prime to be a compression that took place during the quarter. And our book is exposed to prime to be a compression and because of events in the market there was compression that contributed about half of the decline in P&C Canada's margin during the quarter.

Ian de Verteuil - BMO Capital Markets

So the securitization does it... is it a long term effect on spread?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

No the securitization.... Well I mean they are two different things.

Ian de Verteuil - BMO Capital Markets

I'msorry, the insurance repurchase is that a long-term impact on spread?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

The insurance purchase has no impact on spread.

Ian de Verteuil - BMO Capital Markets

Okay. I have to follow up. Thank you.

Operator

Thank you. The next question is from André Hardy from RBC Capital Markets. Please go ahead.

André-Philippe Hardy - RBC Capital Markets

Thanks. Two things, one on the tier 1 capital objective which I believe is a new objective. And correct me if I am wrong. Why have a number that so far below the current tier 1 ratio? And are you trying to tell us something by having a number that so low? And secondly, Frank could you address the deposit share... we hear about the success of AIR MILES in terms of opening new accounts yet the deposit share continues to decline. So is this an issue of term versus checking account or perhaps new deposit accounts haven't yet been funded if you wish?

William A. Downe - President and Chief Executive Officer

André it's Bill. I will take the first question that the tier 1 capital ratio is consistent with the prior periods in it. It recognizes our long term tier 1 capital target assuming that we don't have prospective redeployment opportunities and turn it over to Frank?

Frank Techar - President and Chief Executive Officer, Personal and Commercial Banking Canada

Yes, André, on the deposit side I think I've mentioned in the past that in order to get on the right track, we are going to have to do a number of things differently and we are doing a number of things differently. I think, adding the branches and redeveloping branches is going to put us in a better position going forward for deposit growth. Bill mentioned that this year we were the most active in the market ever and I think and again continuing to invest there going forward is going to help us out.

We have just starting this fiscal year significantly improved our performance management system whereby we are focusing much more attention on individual targets on deposit growth and retention. And so my expectation is that's going to have some help or that's going to help out moving forward. You mentioned the AIR MILES campaign we are early into this program, we launched in June and the early results showed that account openings were up significantly in the 20% year-over-year range that's continuing. We are now seeing the number of new deposit customers increased and for the last three months that's up 18% over a similar period last year. We think that the next step is going to be that the deposits are going to start to move up from an operating perspective as well as you mentioned as those funds move into those accounts and those customers start to transfer funds. So, we think we are doing the right things. Obviously I would like to see the share improve a lot of faster than it is but I think it's going to take a number of initiatives which we are continuing to execute on. We clearly haven't got it right at this point in time but we think we're doing the right things and we think it's going to come.

André-Philippe Hardy - RBC Capital Markets

Thanks.

Operator

: Thank you. The next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Darko Mihelic - CIBC World Markets

Hi good afternoon. I have got a number of questions. I will promise to keep them short and re-queue I guess my question first with respect to the SIV. I guess my first question is how much time have you bought with these initiatives in other words how much is rolling in the short term? And I guess secondly, what is the spread on the SIV assets which you are adding to your balance sheet? And then third, I understand why... I have recognized the fact that you are saying that the asset that you sold have resulted in less than 50 basis points of losses, as I understand it's under review because net asset values dropped to about 83%. Now when I do the calculation given the information I have got to date that suggests for the assets declined by close to 2%. So I wonder if you can just rectify that for me. Thank you.

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Yes Darko I will answer this. First of all in terms of liquidity available to us we have two vehicles as you know one is Links and one is Parkland. In the case of Links we have in fact liquidity into January of next year. And in case of Parkland at this point in time towards the end of December, and we are on an ongoing basis continuing to access liquidity especially for Parkland we would like shortly to be also into January through asset sales and this is progressing very smoothly as Bob has just described earlier.

In terms of the NAV versus the spread that the haircut that we've taken on asset sales, haircuts are actually cash I mean in the sense that we had actually... actual sale that took place in the marketplace. In case of the NAV it's really a mark-to-market concept whereby it would be the net asset value of the asset that exceeds the senior note that is divided by the paid in capital. So at this point in time it is, you are right approximately around 80% as of the third week of November 21 if I recall right. So it's an indication only of the quality of the assets but as we went into the asset and as I said that's what we are saying... something representative of portfolio of both SIVs. We've actually experienced a much better discount than what is represented by the NAV. So I would take that number... that's my comment with regard to the difference between the actual haircuts and the NAV encapsulated us. Gilles, it's for you.

Gilles G. Ouellette - President and Chief Executive Officer, Private Client Group

in terms of the spread I don't know exactly what is the spread. I would have to come back to you on that. I will check with our London office and I will ask Viki to provide you with that information.

Darko Mihelic - CIBC World Markets

Okay thanks. And I'll re-queue with questions on the asset-backed commercial paper.

Operator

Thank you. The next question is from Michael Goldberg from Desjardins Securities. Please go ahead.

Michael Goldberg - Desjardins Securities

Thanks. I've got a few questions also starting with how much Canadian non-bank ABCP that you sold to clients that they still hold?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

I will answer that question Michael. Unfortunately at this point in time given what's going in the marketplace we are not in a position to disclose the client holdings. And as you can appreciate it's basically also a product of diverse investment decision on their part as well as the consensus and it's not the easiest information to be able to actually find in a very accurate way. So at this point in time I cannot provide you with the specific number.

Michael Goldberg - Desjardins Securities

I'll take a ballpark number what I am really trying to get handle on is the potential for litigation risk.

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

So I know for sure that in the case of retail holders and Gilles, you may want to comment on this there is minimal exposure hardly anything in fact. And on the institutional side as I said I don't have any exact figure.

Michael Goldberg - Desjardins Securities

Okay. Now turning to loan quality what I like to know is what caused the increase in gross formations from the third quarter going from a $106 million to $238 million I understand there is one credit in there for $43 million but, even excluding that it still close to double and could you give us some idea of what do you think this could look like going through the next few quarters?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Thanks Michael. The increased net of a single transaction is still pretty well spread, and remember we are coming off of a pretty small base to begin with. And so two times small still isn't huge. The areas that we're seeing the surface I think there was about a third in commercial... not commercial but on real estate development. And then there is another 20% I believe in manufacturing, the rest is pretty diverse. So it just corollary to the cycle is nothing that leaps out as an usual item

Michael Goldberg - Desjardins Securities

Though should we be thinking that somewhere in the area to $150 million to $200 million a quarter might be reasonable to expect over the next few quarters?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

That's hard to say. I can tell you though that I am pretty comfortable with $475 million PCL forecast that I am giving you.

Michael Goldberg - Desjardins Securities

I know that's just specific forecast though.

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Right. So we are not going to see gross impaired loans formations decline in a meaningful sense. I suspect they will continue to increase. I wouldn't expect them to go through the ceiling but we would expect to see them increase from where they are.

Michael Goldberg - Desjardins Securities

Okay. Now you are not subject to FAS 157, but if you were, how much would you be saying that of level three securities that you have in the bank?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

We are not subject to that but the level three securities would represent about 1% of assets. And the biggest items there would relate to asset-backed commercial paper and some corporate debt that we hold.

Michael Goldberg - Desjardins Securities

Okay. And just as the last one, Ian asked question about the mortgages that we insured during the quarter, was $10 billion the right number for the amount of mortgages that were actually insured during the quarter? And if so, how much did this reduce risk weighted assets and is there room to insure more mortgages?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

That is approximately the right number, it's $10 billion to $11 billion and the reduction to risk weighted assets is approximately half of that amount because the assets are 50% risk weighted and go to basically zero with the insurance. And there is some remaining capacity, but not a significant amount of remaining capacity.

Michael Goldberg - Desjardins Securities

Thank you very much.

Operator

Thank you. The next question is from John Aiken from Dundee Securities. Please go ahead.

John Aiken - Dundee Securities

Good afternoon. Bob, I was wondering if you might... maybe provide us an update about Basel II and whether or not I am asking you to give any guidance as to whether or not there'd allowance in that capital relief?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Really could not speak to any guidance that OSTI may be providing. But we along with every one else in the industry went through the fire drill to get the submission together by the end of October that we needed to. And we are comfortable with where we got to. We are expecting... the industry is expecting a response from OSTI in terms of where they believe each of us at as of the end of December. But really not much more I could add to that at the moment.

John Aiken - Dundee Securities

Well in terms of the drills that you went through Bob, are you... if OSTI accepts your models and your documentation are you expecting material capital relief albeit once when this is implemented?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

It's really basically I know what you are trying to get to. I loved it, I love to be able to tell you, that part of the process of the response is going to include things like adjustments they may feel are appropriate, multi players and so on. So yes there would be some capital relief if it set path the way it submitted, but trust me when I tell you I would not want to hesitate in or to speculate in total number out there right now, I really don't know.

John Aiken - Dundee Securities

No it's understood. And Bob just in terms of the real estate development exposure can we assume that this is fairly broad based in terms of a lot of loans as opposed to a handful of large ones.

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Yes that's a fair assumption.

John Aiken - Dundee Securities

Great. Thank you very much.

Operator

Thank you. The next question is from Sumit Malhotra from Merrill Lynch. Please go ahead.

SumitMalhotra - Merrill Lynch

Good afternoon. First question probably for Bob interest structured investment vehicles. It sounds like your additional $1.3 billion purchase of the senior notes is essentially done. Did I hear right that there have been some other members or other owners of the some of the paper that had stepped in with repurchases in the last for a while? If that's true could you give us some detail on what the size of those additional senior note purchases have been?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Yes, in fact we have recently... very recently in the last few weeks resolved two different funding buckets, one from the capital noteholder who have agreed to put up an additional $500 million of senior debt. And another from the existing senior debtholders who have agreed to put up $600 million of additional senior debt. So we got $1.1 billion there plus our $1.3 billion and then the other vehicles like repos and asset sales that I was mentioning that are still available to provide ongoing liquidity for the vehicle.

SumitMalhotra - Merrill Lynch

And I think some to the other questions have kind of focused on the same point. You know a new tier 1 target at least specifically putting a number out there, $10 billion worth of mortgage insurance purchase. Is it fair to say you are freeing up some capital here for what may be additional funding requirements, if the situations... if the environment remains as uncertain as it is?

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

No, the 8% target might be a little bit confusing, two years ago and I think for a few years before that we explicitly had an 8% tier 1 target. Last year we took the 8% out of our formal targets but included in our MD&A statements saying that our policy was to maintain the tier 1 above 8%. And so this year all we have done is really put the number back into the formal target. So there is no change and the 8% number reflects sort of a minimum run rate level that we think is appropriate, and we are carrying excess capital at the current time. And the mortgage insurance was done not in anticipation of taking significant new assets on balance sheet, it was really done as part of an overall capital management strategy and the capital ratio was quite strong at the end of the quarter. A portion of that relates to the currency which on a net basis increased the tier 1 by 15 basis points. So, that provided somewhat during the quarter but really it just as we see it normal capital management and looking to diversify our source of the capital and excess capital on a cost effective basis.

SumitMalhotra - Merrill Lynch

Okay. Let's stay with capital because pro forma I think after some of the deals done by your competitors recently BMO does have the best capital ratios in the group and this one is probably for Bill or Ellen, a few years ago we heard about a maximum deal size of $2 billion in the U.S. Recently the talk has been more bolt-on acquisitions. And sounds like the tone from you guys in both this call and the press release is more positive on US P&C than we've heard in a while. In other words, are we talking about capital more on the downside than the upside is your still the appetite for deals and what is the new feeling if you will in terms of acquisitions you would look at?

William A. Downe - President and Chief Executive Officer

That feeling was out there for a long time, I'm not sure I can move it. As far as acquisition goes, it represents about between $2 million and $2.5 billion of surplus capital, and I would say that in the last 60 days I've spent less time talking to other banks merely because of activity in other parts of the market. But we have been maintaining the team that works in the U.S. constantly works on prospective acquisition targets. The only thing I could say is that hope springs eternal.

SumitMalhotra - Merrill Lynch

Okay. Last one for me Private Client Group, but you don't talk about it very much but it's probably been the best performing segment for BMO for a few years now, another good result this quarter although we are starting to see the asset base say AUM and AUA start to slow a little bit. We have had both six months of softer results in equity markets. Just want to get some feedback here on especially given how domestic retail has become to all of us where wealth management specifically in Canada looks right now or are we in for a period of the slowdown in capital markets starting to move more to the retailer chain as well since this has been in my opinion a very quietly a good area for a growth of the bank for a number of years now?

William A. Downe - President and Chief Executive Officer

Yes it's true that things did slow down in the fourth quarter but so far this year here, we are two weeks into the year and things that held up well. One of the... obviously a couple of drivers now this is one of them is the transaction, the other one is the levels of the markets and because a lot of our businesses become fee business whether it's our unusual funds whether it's private banking or even within PCG the managed money side of the business is growing very rapidly. And we had 20% growth in managed money this year, and obviously that's all fee based. And so, the levels of the markets are going to be a larger [indiscernible] of our revenues going forward. As you have seen, we have seen the market come off in the last few weeks but they are still holding up at pretty good levels. So we are feeling pretty confident about next year, but it will be volatile.

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

I might just step in here for one second. We still have a number of calls in the queue, and we did agree to stay on for a while longer to get through them maybe we could... if there is time and you have another question, you may go back to... back into the queue.

SumitMalhotra - Merrill Lynch

No that's it for me anyway. Thanks a lot.

Thomas E. Flynn - Executive Vice-President Finance and Treasurer

Okay. You're welcome.

Operator

Thank you. Next question is from Mario Mendonca from Genuity Capital Markets. Please go ahead.

Mario Mendonca - Genuity Capital Markets

Two quick questions. I know your question referred to HSBC and how they are committing to buy in $45 billion or so. I don't think three months ago would a comp even thought it was possible that BMO would provide $1.6 billion in support. In that vein if the say 20 somewhat billion, BMO felt compelled to bring that on the books, on the balance sheet, what sort of capital indication would that have? Because I understand the capital implications aren't quite as great as we may have originally believed.

William A. Downe - President and Chief Executive Officer

Mario, I think it's Bill, I think it would be better off to just emphasize the point that in our initial release and again today we used the word maximum. And we are not at the present time going through the process of contemplating what the capital impact would be of doing something like HSBC has done simply because as Yvan said we have a different universe of assets in Links and Parkland, different set of managers with different reputation and we have a process underway that's making good progress.

Mario Mendonca - Genuity Capital Markets

But Bill with all due respect with last quarter when asked about what BMO's exposure was to the... mean the message was we don't have very much, for good lines are only a couple of hundred million dollars. And now we are talking about a $1.6 billion. So I mean I think it's appropriate to ask questions like this now because the word... the environment has changed so much and it keeps changing on us. And I think we sort of would be responsible to give some thought to what they would mean to BMO, if the assets are brought on.

William A. Downe - President and Chief Executive Officer

Well I know Yvan wants to comment on this. Clearly the market has yet to digest HSB... what HSBC is doing and I know probably less than you do from reading in the press what they view their capital impact to be.

Mario Mendonca - Genuity Capital Markets

Not terribly big, they don't see this big.

William A. Downe - President and Chief Executive Officer

Not terribly big. Yvan you want to?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Yes the only thing I would Mario is that compared to the last quarter when we said our exposure was what it was much lower than $1.6 billion obviously, one two things I would like to mention first of all, the $1.6 million is really $1.3 million because the $1.6 million includes the two liquidity lines for Links and Parklands. In the case of Links is $125 million which was included in our number in the last quarter, and in the case of Parkland it's $75 million. So the real number is $1.3 million. And the $1.3 million really from our part we felt it was included and a constructive thing to do. Once again giving the quality of the assets in the SIVs and also enable us to secure additional funding from outside parties, and as Bob has indicated we have been successful in doing that. So we felt it was the appropriate thing to do at this point in time given where we are with the market's reaction and also the characteristics of ourselves we feel at this point in time that there is no need for us to quote more than the $1.3 billion that I have just described to you.

Mario Mendonca - Genuity Capital Markets

Would it be fair to say that if the assets were brought on they would be mostly very, very highly rated... a lot would be AAA and therefore the capital implications would be minor, is that fair to say?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Yes, it's fair to say that capital implication would be minor, absolutely.

Mario Mendonca - Genuity Capital Markets

Okay. Now want to move on to second thing. $169 million in trading structured credits. No ones, we haven't talked about this and the reason, I want to understand what caused those types of losses? And I want to take it from the perspective of the way BMO has talked about it for the purposes of talking about your core earnings in the first few slides you removed it. For the purposes of talking about guidance you included, and it just seems, is this inconsistency? And I think maybe it relates to the nature of those losses and the nature of those instruments, could you speak to that please?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

Yes, sure. I'll give you some... I'll speak to the major elements in that number. If I... differences in the case of the pref share investment portfolio which all of them are very highly rated, I think you realize as well as I do that towards the end of September and beginning of October there was a fair amount of new pref share that were issues in the market. And on top of that the market conditions were such that the spreads have widened. So you have no alternative but to take them into consideration and apply that to the portfolio that you actually hold on your books. So, in the case of the pref share it was approximately $30 million impact on the overall at BMO Capital Markets.

In the same vein credit spreads have widened substantially during the period. And we do have a core credit trading portfolio of cash and CBS. And because of that widening in the marketplace it cost us also an amount that it reflected in the number that you've just mentioned. And finally we have some fixed income total returns swap and the same principle applies there, in terms of the credit spreads widening or the funding cost associated with those assets and those also contributed to the overall number that we quoted in the press release.

Mario Mendonca - Genuity Capital Markets

And how are those items different from any other trading revenue the banks earned in the past? And why would those specifically be highlighted either in your pre-release or as an unusual?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

We just felt it was from a transparent point of view we want to make sure that we would provide the street and institutional investor with all the different factors contributing to the loss that we would incur in Q4. So that was really the reasoning behind it.

Mario Mendonca - Genuity Capital Markets

Thank you very much.

Operator

The next question is from Robert Sedran from National Bank Financial. Please go ahead.

Robert Sedran - National Bank Financial

Hi good afternoon. I'll be very brief, just wanted to return the issue of the specific provision target that were outlined earlier. I understand that formations have picked up. But given the almost 50% of jump this quarter was in one credit and as you mentioned it was a one-time-ish provision last quarter. It seems like $475 million will be a pretty significant very, very significant deterioration if we ever got even close to that. I am wondering is there a specific segment of the market that concerns you U.S. versus Canada personnel commercial wholesale or is it just the broad deterioration we are looking for?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

No, it's the latter. There is not a big bucket of concentration, not particularly worried about, and kind of throw big number out there to address. If you look what happened this quarter, the $40 million-ish that is in there in single transaction, it's not unreasonable bank with capital markets mix that we have to expect those kinds of tickets to roll in from time to time. So it will be quite unreasonable in fact to assume that no more will for the foreseeable future. So it gets a bit lumpy I accept, but with the uncertainty in the marketplace that everyone is feeling right now as well it's hard to imagine that the PCL is not going to climb. And I accept your point that it is matter of judgment as to how steep that curve is.

Robert Sedran - National Bank Financial

And I guess just the second quick question is the commodity loss that was booked this quarter seems pretty small. The exposure has obviously come down by a significant amount. It's just the last time you think we're going to see commodity losses as a separately disclosed item or is this going to continue into 2008?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

There is no question that we did say the last quarter that we have reduced the size of the book and the risk associated with it substantially. And I think what you are seeing in Q4 is an illustration of that fact and you've seen on the chart also that Bob has given us earlier. Looking forward Bob did feel so with that we still intend to reduce risk in the coming quarters, and as we do this it is difficult to predict as to whether or not we will have yet again the loss from that line of business. Having said so because of the risk reduction that has taken place I would think that moving forward and shortly that we will be back to a level where we would feel that there is a normal level of risk and that we would carry on with this line of business on a normal basis.

Robert Sedran - National Bank Financial

Okay.Thank you.

Operator

Thank you. The next question is from Brad Smith [ph] from Black Mark Capital. Please go ahead.

Unidentified Analyst

Thanks very much, just two quick questions on the SIV. First of all I am not quite clear, what you said you can just clarify how the $1.3 billion senior note amount was brought about, is that a negotiated number? And secondly I think it was intimated a number of weeks ago that you might have been considering the initiatives in the U.S. the super SIV effort down there from your comments today would it be appropriate to conclude that is no longer on your radar screen?

William A. Downe - President and Chief Executive Officer

In terms of the latter issue are you talking about MY correct?

Unidentified Analyst

Yes.

William A. Downe - President and Chief Executive Officer

Yes it's a little early for us to know whether or not there is something there for us or not. I mean we're interested in following it. It will be a cost trade-off issue as well. I am sure as I mentioned we are able to move these assets at a reasonable price, so you wouldn't certainly want to pay any kind of premium to attract the liquidity. For the first part of the question perhaps Yvan can tackle that.

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

In the case of the amount it was not there and this is really... it's an amount that we felt that it would be appropriate to provide liquidity in the marketplace and to indicate that we're prepared to support in the short term the vehicle in order to be able to line up as Bob has described other third party investor that we provide liquidity to both vehicles. But it's in that vein that we came with that number, it was not... derived from the formula.

Unidentified Analyst

Okay, thank you. And is there a timeframe with respect to how long you anticipate that support to be required or is that you are willing to provide it perhaps that's a better way of saying it?

Yvan J.P. Bourdeau - Chief Executive Officer, BMO Capital Markets and Head of Investment Banking Group

At this point in time I cannot say really.

Unidentified Analyst

Thanks very much.

Operator

Thank you. The next question is from Darko Mihelic from CIBC World Markets. Please go ahead.

Darko Mihelic - CIBC World Markets

Hi, thanks. Just looking at slide 3, with respect to your disclosure on the asset-backed commercial paper. Looking at BMO sponsored asset-backed conduits with no BMO liquidity support should that read no global liquidity support or just no support whatsoever?

William A. Downe - President and Chief Executive Officer

No, it's right, no liquidity support.

Darko Mihelic - CIBC World Markets

Okay. So am I might right to assume that you still have sort of Canadian style liquidity support outstanding to a couple of conduits?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

No, no, the $26 billion in the section above that would be the Bank of Montreal sponsored Canadian conduits where we had in the past the market disruption and tight liquidity evolved and converted to global style. We have none of the latter.

Darko Mihelic - CIBC World Markets

Okay. So want to assume then, even Hapex [ph] and SIDCO both have say a global style liquidity support, is that correct?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

No, we provide no... that's the third section, the one you had originally tied up.

Darko Mihelic - CIBC World Markets

Okay.

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

So we don't provide liquidity backup to those.

Darko Mihelic - CIBC World Markets

So in other words that cannot grow in size, the $546 million that you have basically that is, was on the balance sheet now and it won't grow?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

It could grow. But there is nothing to prevent it from growing we can chose to take more of paper or not.

Darko Mihelic - CIBC World Markets

Okay. So maybe backtrack on that and just say, there is no liquidity agreement in place that could force you to make it grow?

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

And there is nothing contractual at this point.

Darko Mihelic - CIBC World Markets

Okay, that's what I was aiming at. Okay thank you very much.

Robert McGlashan - Executive Vice-President and Chief Risk Officer, Enterprise Risk & Portfolio Management

Okay.

Operator

Thank you. There are no further questions at this time. I'd now like to turn the meeting back over to Ms. Lazaris.

Viki Lazaris - Senior Vice President, Investor Relations

Thank you. I would like to thank everyone for joining us today. And if you have further questions please call the Investor Relations group and we'll address your questions. Thanks very much and have a good afternoon.

Operator

Thank you. The conference now ended. Please disconnect your lines at this time. Thank you for your participation and have a nice day.

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Source: Bank of Montreal F4Q07 (Qtr End 10/31/07) Earnings Call Transcript
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