OSFI advised banks in a letter dated August 21, 2013, that it will begin phasing in the CVA risk capital charge for Canadian banks in the first quarter of 2014. The CET1 CVA risk capital charge applicable to BMO during fiscal 2014 will be 57% of the fully-implemented charge, and this will increase each year until it reaches 100% by 2019. BMO estimates that its third quarter 2013 CET1 Ratio would be reduced by approximately 20 basis points if the 2014 CVA risk capital charge was currently in effect.
The bank's Basel III Tier 1 and Total Capital Ratios were 11.2% and 13.5%, respectively, at July 31, 2013, compared with 11.3% and 13.7%, respectively, in the second quarter and 10.5% and 12.9%, respectively, on a pro-forma basis at October 31, 2012. These ratios declined from the second quarter primarily due to the same factors that caused the decline in the CET1 Ratio from the second quarter. These ratios improved from the pro-forma estimates at October 31, 2012, due to higher CET1 capital and lower RWA, as described above, partly offset by the phase-out of non-common instruments that do not meet OSFI's Basel III requirements, including the non-viability contingent capital requirements, and by the redemption of $200 million Class B Preferred Shares Series 5 and US$250 million Exchangeable Preferred Stock, Series A during the second quarter.
BMO's Assets-to-Capital Multiple (ACM), a leverage ratio monitored by OSFI and calculated using the transitional total capital prescribed by OSFI, was 16.2 at July 31, 2013. BMO's ACM decreased from 16.3 in the second quarter, primarily due to increased capital, and increased from 15.2 at October 31, 2012, on a Basel II basis, primarily due to balance sheet growth and Basel III transitional modifications.
Additional details on the Basel III regulatory capital changes can be found in the Enterprise-Wide Capital Management section on pages 60 to 64 of BMO's 2012 Annual Report.
BMO's investments in foreign operations are primarily denominated in U.S. dollars. Foreign exchange gains or losses on the translation of the investments in foreign operations to Canadian dollars are reported in shareholders' equity (although they do not attract tax until realized). When coupled with the foreign exchange impact of U.S.-dollar-denominated RWA on Canadian-dollar equivalent RWA, and with the impact of U.S.-dollar-denominated capital deductions on our Canadian dollar capital, this may result in volatility in the bank's capital ratios. BMO may hedge this risk of foreign exchange gains or losses by funding its foreign investments in U.S. dollars or, alternatively, to offset the impact of foreign exchange rate changes on the bank's capital ratios, may enter into derivative contracts, such as forward currency contracts, or elect to fund its investment in Canadian dollars.
Other Capital Developments
In the third quarter, we purchased four million shares under the bank's NCIB share repurchase program, for an aggregate repurchase of eight million shares since the inception of the program in February 2013. The timing and amount of purchases under the program are subject to management discretion based on factors such as market conditions and capital adequacy. The bank only initiates purchases under the program after consulting with OSFI.
During the quarter, 951,000 common shares were issued through the DRIP and the exercise of stock options.
On July 22, 2013, the Bank announced that it did not intend to exercise its right to redeem the currently outstanding Non-Cumulative 5-Year Rate Reset Class B Preferred Shares, Series 16 (Series 16 Preferred Shares) of the Bank on August 25, 2013. As a result, subject to certain conditions, the holders of the Series 16 Preferred Shares had the right, at their option, to elect by August 12, 2013, to convert all or part of their Series 16 Preferred Shares on a one-for-one basis into Non-Cumulative Floating Rate Class B Preferred Shares, Series 17 (Series 17 Preferred Shares) of the Bank, effective August 26, 2013. As a result, approximately 6.3 million Series 16 and approximately 5.7 million Series 17 Preferred Shares will be outstanding for the 5-year period commencing on August 26, 2013, and ending on August 25, 2018. The reset dividend rate on the Series 16 Preferred Shares for the next 5 years will be 3.39% and the initial quarterly dividend rate on the Series 17 Preferred Shares will be 2.669%, in each case a reduction from the original 5.2% rate. In 2018, BMO may decide to call the Series 16 and Series 17 Preferred Shares (subject to regulatory approval) or to reset the fixed rate for another five years; if BMO elects to reset, the holders of the Series 16 and Series 17 Preferred Shares will again have the right to elect to hold either fixed rate Series 16 Preferred Shares or floating rate Series 17 Preferred Shares.
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