So how much of a problem does the BoM have with SIVs?  It’s on the same scale as the Israeli problem with Iran’s nuclear program.

According to the BOM’s published Q3 Supplementary Financial Information, the total Regulatory Capital of the bank is $24 B.  That’s the amount of real investor capital put into the BoM.  As previously described in earlier posts, banks inflate this asset by also counting the loans that they have made as “assets” since those loans generate interest revenue.

The total BoM’s “asset” base of $334 B includes $65 B of derivatives of which $49 B are securitized assets.  According to the Q3 Supplementary Report, 90% of the $49 B is impaired and a full $37 B is rated as having a high risk of default ( Risk weight >7%).

Prudently the BoM has reserved $735 M of capital against this risk, however, that provision will be about as effective as a fart in a thunderstorm should these derivatives prove worthless.

Given the recent signs of economic recovery, it is likely that not all of the $37 B will tank.  A risk weight of >7% means that roughly 1/2 of these loans will likely default in 5 years (1.07^6 = 1.50).  Many analysts believe that the $6 B in SIV loans made to support Link SIV and Parkland SIV are at greatest risk however.

To put the danger posed by $6 B in bad loans in perspective, the BoM’s entire quarterly revenue in Q3 was $3 B and its net income is currently approximately $1 B / quarter.

Hence, a $6 B default can cause a life-threatening liquidity crisis that would require a government bailout to prevent outright bank failure.

BMO’s Q3 results are not encouraging.  At best, the bank is treading water.

For example, despite having $413 B in assets, it’s cash position of $10.7 B is basically flat compared to the previous quarter.  Although liquidity improved by about $500 M, 80% of this was due to the fact that BMO issued $400 M in preferred shares during the 3rd quarter.

Thin liquidity is very dangerous for a bank.  A bank may crow about Tier 1 capital ratios, but it is liquidity that determines whether they stay in business or not.

BMO’s loan book is still toxic.   The sum of PCL+GIL (sick and sicker loans) is 3.3 B largely unchanged from Q2 to Q3.  PCL is Provision for Credit Losses (loans the bank admits are dead) and GIL is Gross Impaired Loans (loans that are not being paid back).  And of the loans that BMO has yet to admit are bad, according to the BMO’s own risk weights, $37 B (nearly 10% of the entire loan book) are so risky that they are statistically likely to default within 5 years.

To put this in perspective, BMO’s non-investment grade loans  is 10x higher than the amount (in total dollars) the Royal Bank has in the same risk categories.

Looking at BMO’s Canadian delinquency ratios, Q3 personal loan and mortgage delinquency ratios are unimproved in Q3 over the past 3 quarters, and credit card delinquency ratio has increased quarter over quarter for the past 4 quarters.  BMO’s US delinquency ratios have deteriorated in all categories quarter over quarter for the past 4 quarters.

Meanwhile BMO’s market share is slipping with quarter over quarter declines in Canadian personal loans, mortgages, retail deposits and commercial loans.

Overall Moody’s rates the BMO’s financial strength as B-grade risk with a negative outlook.  For the most part, BMO’s ratings by S&P, Moody’s,  DBRS and Fitch are generally one notch less than the Royal Bank’s ratings.