2018
ANNUAL REPORT
FAI MURRAY, AVP Commercial Banking, Park Place Branch, Vancouver, BC
QUENTIN SMITH, President, Pacific Coastal Airlines
PERFORMANCE DASHBOARD (1)
CWB Financial Group (CWB) operates with a clear focus to meet the unique financial needs of business owners. Clients recognize CWB for
our in-depth knowledge of targeted segments within Canada’s commercial banking industry, our uncommon brand of personal service and
our full suite of relevant financial solutions. Shareholders value CWB’s strong track record of high-quality balance sheet and dividend growth,
conservative approach to risk management and consistent profitability.
DIVERSIFYING LOANS
BY PROVINCE (%)
DIVERSIFYING LOANS
BY LENDING SECTOR (%)
Growing a more balanced
geographic footprint through
targeted growth in Ontario
Growing a more balanced industry mix
through targeted growth of full-service
relationships with business owners
British Columbia
Alberta
Ontario and other
Saskatchewan
Manitoba
2018
2008
34
32
26
5
3
36
53
5
4
2
General commercial loans
Personal loans and mortgages
Commercial mortgages
Equipment financing and leasing
Real estate project loans
Oil and gas production loans
2018 2008
28
20
19
18
15
-
27
15
21
14
21
2
GROWTH AND DIVERSIFICATION OF FUNDING SOURCES -
COMPOSITION OF TOTAL FUNDING (%)
DEEP AND
LIQUID FUNDING
SOURCES
Increased demand and notice, and two additional
sources of funding.
Branch demand and notice
Branch term
Broker term
Capital markets term
Securitization
2018
2008
30
18
33
12
7
26
39
34
1
0
2018
10YR CAGR
(2)
TOTAL LOANS*
$ 26.3B
12%
TOTAL ASSETS
$ 29.0B
11%
TOTAL DEPOSITS
$ 23.7B
10%
ASSETS UNDER
MANAGEMENT
$2.1B
ASSETS UNDER
ADMINISTRATION
$8.4B
* EXCLUDING THE
ALLOWANCE FOR
CREDIT LOSSES
2
CWB Financial Group 2018 Annual Report STRONG CREDIT QUALITY
5YR AVERAGE AS A % OF TOTAL LOANS
0.53%
0.18%
$ GROSS IMPAIRED LOANS
$ WRITE-OFFS
GROSS IMPAIRED LOANS AND WRITE-OFFS AS A % OF TOTAL LOANS
STRONG EFFICIENCY RATIO(3)
45.7%
CWB
54.1%
CANADIAN BANK AVERAGE(4)
1.5
1.0
0.5
0.0
60
40
20
00
09
10
11
12
13
14
15
16
17
18
14
15
16
17
18
LOW PROVISION FOR CREDIT LOSSES
5YR AVERAGE AS A % OF AVERAGE LOANS
LOW LEVERAGE
TOTAL ASSETS-TO-EQUITY
0.23%
CWB
CDN Bank Avg.
BMO
CIBC
National
RBC
Scotia
TD
11.2X
CWB
17.0X
CANADIAN BANK AVERAGE(4)
0.23
0.20
0.30
0.29
0.25
0.24
21.0
14.0
7.0
0.0
0.45
0.37
09 10
11
12
13
14
15
16
17
18
STRONG REGULATORY CAPITAL RATIOS BASED ON THE STANDARDIZED APPROACH
CWB | CWB’S REGULATORY MINIMUM
9.2% | 7.0%
COMMON EQUITY
TIER 1 CAPITAL (CET1)
10.3% | 8.5%
TIER 1 CAPITAL
11.9% | 10.5%
TOTAL CAPITAL
8.0% | 3.0%
BASEL III LEVERAGE RATIO
(1) Financial results presented include certain metrics which do not have standardized meanings prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other financial
institutions; see page 20 for definitions and discussions of non-IFRS measures.
(2) CAGR - compound annual growth rate.
(3) Efficiency ratio is calculated as non-interest expenses, excluding the pre-tax amortization of acquisition-related intangible assets, divided by total revenues.
(4) “Canadian Bank Average” is calculated based on information contained in the publicly available company reports of Canada’s six largest banks (TSX trading symbols: BMO, CM, NA, RY, BNS, TD).
3
CWB Financial Group 2018 Annual Report
COMMON SHAREHOLDERS’
NET INCOME ($ MILLIONS)
CONSISTENT GROWTH OF
BOOK VALUE / SHARE
CONSISTENT GROWTH
OF DIVIDENDS PAID /
COMMON SHARE
$249
$26.09
(5)
9%
10YR
CAGR
$1.00
9%
10YR
CAGR
225
150
75
00
24.00
16.00
8.00
0.00
0.90
0.60
0.30
0.00
14
15
16
17
18
08
10
12
14
16
18
08
10
12
14
16
18
MEDIUM-TERM PERFORMANCE TARGET RANGES
KEY METRICS
MEDIUM-TERM PERFORMANCE
TARGET RANGES(6)
FISCAL 2018 PERFORMANCE
Adjusted cash earnings per
common share growth
Adjusted return on common
shareholders’ equity
7 - 12%
Delivered 14%.
12 - 15%
Delivered 11.9%, up 90 basis points from fiscal 2017.
Operating leverage
Positive
Delivered positive 1.9%.
Common equity Tier 1 capital ratio
under the Standardized approach
Strong
Delivered a very strong ratio of 9.2%.
Common share dividend
payout ratio
~30%
Delivered 36%, with an 8% increase to the annual
common share dividend, and a higher annual dividend
for the 26th consecutive year.
INVESTMENT GRADE CREDIT RATINGS (DBRS) - STABLE TREND (CONFIRMED NOVEMBER 29, 2018)
A (low)
LONG-TERM DEPOSITS /
LONG-TERM SENIOR DEBT
R-1 (low)
SHORT-TERM
INSTRUMENTS
BBB (high)
Pfd-3
SUBORDINATED DEBT
PREFERRED SHARES
(5) As of 2011, financial results are reported under International Financial Reporting Standards (IFRS), as opposed to Generally Accepted Accounting Principles (GAAP), and are not directly comparable.
(6) See page 20 for definitions and discussion of non-IFRS measures.
4
CWB Financial Group 2018 Annual Report QUENTIN SMITH, President, Pacific Coastal Airlines
CONTENTS
02 PERFORM A N CE DA SH BOARD
06 CW B FI N A N CI A L GROU P A N D OU R
BA L A N CED GROW T H S T R AT EGY
07 S T R AT EGI C O BJ ECT I V ES A N D H IGH L IGH T S
09 L I N ES O F BUSI N ESS
11 M ESSAGE FROM PRESI DEN T A N D CEO
13 E X ECU T I V E COM M I T T EE
15 M ESSAGE FROM CHA I R O F T HE BOARD
16 BOARD O F DI RECTOR S
18 M A N AGEM EN T’S DISCUSSI O N A N D A N A LYSIS
77 CO NSO L I DAT ED FI N A N CI A L S TAT EM EN T S
114 SHAREHO L DER I N FORM AT I O N
115 LOCAT I O NS
116 FI V E Y E AR FI N A N CI A L SU M M ARY
5
CWB Financial Group 2018 Annual Report
CWB FINANCIAL GROUP AND
OUR BALANCED GROWTH STRATEGY
CWB Financial Group (TSX: CWB) is a conservative, growth-oriented
full-service financial institution serving businesses and individuals
across Canada. Our clients recognize CWB for our in-depth
knowledge of targeted segments within Canada’s commercial
banking industry, our uncommon brand of personal service and
our full suite of relevant financial solutions. Through disciplined
execution of our Balanced Growth strategy, CWB has grown to
become the seventh largest publicly traded Schedule 1 bank in
Canada in terms of market capitalization.
Balanced Growth has been the cornerstone of our strategic
direction for a number of years. We’ve been clear that it means
growth of full-service client relationships, with a focus on delivering
a unique combination of business banking, personal banking and
wealth management offerings tailored for business owners, their
employees and their families. It also means delivering further
geographic and industry diversification; growth and diversification
of funding sources; and optimized capital and risk management
through our transition to the model-enabled methodology for
calculating and managing regulatory capital.
For our people, we drive a collaborative, performance-based culture
within a well-defined performance management framework. We
aim to provide strong long-term returns for shareholders and give
back in the communities where we live and work.
Our teams focus on key activities that contribute the greatest impact
toward the achievement of our goal to create the best full-service
bank for business owners in Canada. We track both financial and
non-financial measures to monitor progress toward achievement of
our strategic objectives to become the best choice for our clients,
for our people and for our investors.
QC 3
MONTREAL
QUEBEC CITY (2)
NB 3
FREDERICTON
MONCTON
SAINT JOHN
NS 1
HALIFAX
PEI 1
CHARLOTTETOWN
NL 1
ST. JOHN’S
AB 18
SK 5
CALGARY (6)
EDMONTON (5)
LLOYDMINSTER
REGINA
ON 10
BARRIE
LONDON
GRANDE PRAIRIE
SASKATOON (2)
MISSISSAUGA
LEDUC
LETHBRIDGE
MEDICINE HAT
RED DEER
YORKTON
MB 2
WINNIPEG (2)
ORILLIA
OSHAWA
OTTAWA
RICHMOND HILL
TORONTO (2)
WOODBRIDGE
LOCATIONS
BC 16
ABBOTSFORD
COQUITLAM
COURTENAY
KAMLOOPS
KELOWNA
LANGLEY
NANAIMO
PRINCE GEORGE
SHERWOOD PARK
ST. ALBERT
RICHMOND
SURREY (2)
VANCOUVER (4)
VICTORIA
6
CWB Financial Group 2018 Annual Report STRATEGIC OBJECTIVES AND HIGHLIGHTS
BALANCED GROWTH OBJECTIVES
STRATEGIC EXECUTION DURING FISCAL 2018
FULL-SERVICE CLIENT GROWTH WITH A
FOCUS ON BUSINESS OWNERS, INCLUDING
FURTHER GEOGRAPHIC AND INDUSTRY
DIVERSIFICATION
GROWTH AND DIVERSIFICATION OF
FUNDING SOURCES
OPTIMIZED CAPITAL AND RISK MANAGEMENT
PROCESSES THROUGH TRANSITION TO THE
ADVANCED INTERNAL RATINGS BASED (AIRB)
APPROACH
• Very strong 13% annual loan growth, including 9% growth in both BC and
•
•
Alberta, and 27% growth in Central and Eastern Canada.
Increased the proportion of CWB’s loan portfolio in Central and Eastern
Canada to 26%, with Ontario up to 21% from 19% in 2017.
Increased business diversification with 18% overall growth of general
commercial loans, and 23% growth of equipment loans and leases.
• Growth in debt capital markets funding with five successful senior deposit
note issuances or re-openings totaling $1.1 billion over the past 12 months.
• Growth in securitization funding for both equipment loans and leases and
residential mortgages.
• Growth of branch-raised deposits.
• Decrease in broker deposits as a proportion of total funding.
• On track to apply in fiscal 2019 for transition to the AIRB approach.
FINANCIAL HIGHLIGHTS
STRONG FINANCIAL PERFORMANCE
• Very strong performance with common shareholders’ net
income of $249 million, up 16%, and pre-tax, pre-provision
income of $436 million, up 12%.
• Diluted and adjusted cash earnings per common share of
$2.79 and $3.01, up 15% and 14%, respectively.
• Total revenue of $803 million, up 11%, with 13% growth of
net interest income.
• Positive operating leverage of 1.9%, reflecting strong business
growth and efficient execution of CWB’s focused business
transformation initiatives.
• Very strong loan growth of 13%, including 3% from the
acquisition of business lending assets on January 31, 2018.
• Continued execution of CWB’s Balanced Growth strategy for
funding diversification, including record issuance of senior
deposit notes in capital markets, growth of securitization, and
continued growth of branch-raised deposits.
• Provision for credit losses as a percentage of average loans of
20 basis points, down from 23 basis points.
•
Increased CWB’s annual common share dividend for the 26th
consecutive year.
NON-FINANCIAL HIGHLIGHTS
CLIENT EXPERIENCE AND BUSINESS TRANSFORMATION
• Significant progress toward the upcoming transformation of
CWB’s capital and risk management processes through transition
to the AIRB approach.
• Realigned CWB’s credit support function to improve efficiency,
scalability and data integrity through centralized and
standardized processes, as well as effective leverage of CWB’s
investment in strong core technology.
•
•
•
•
Implemented a contemporary human capital management
system to streamline decision-making capabilities for strategic
people-related processes and information.
Launched the CWB Virtual Branch in a pilot phase to offer a
differentiated remote banking experience for business owners,
and enable growth of full-service relationships across the
country.
Improved digital capabilities with remote deposit capture and
Click Switch features to automatically transfer pre-authorized
debits and credits from competitors to CWB.
Launched Enhanced Online Banking for Business to improve
CWB’s client experience for small- and medium-sized
businesses.
• Enhanced foreign exchange facilitation services to better
support clients who transact outside of Canada.
AWARDS AND COMMUNITY INVESTMENT
• Carolyn Graham, CWB’s Executive Vice President and Chief
Financial Officer, named one of WXN Canada’s Most Powerful
Women: Top 100.
• CWB National Leasing selected as one of Canada’s Top 100
Employers and Manitoba’s Top Employers, and awarded the
Equipment Leasing and Finance Association’s Operations and
Technology Excellence Award.
• Gave back over $2 million to charitable and community
organizations through CWB’s Community Investment Program.
• Community Investment Program giving included $125,000 to
Enactus Canada to present the Financial Education Challenge
and $100,000 to YWCA locations across Canada to support
girls’ empowerment programming.
• Raised more than $320,000 for the United Way through
special events, employee pledges and corporate matching.
7
CWB Financial Group 2018 Annual Report THEY’RE
DOWN TO EARTH,
SOLUTION FINDERS
WHO BELIEVE THAT NOT EVERYTHING HAS TO FIT
IN A SINGLE BOX.
photo
SCOTT WARD, President and COO; BRUCE FOX, Executive Vice President of Business Development,
Browns Restaurant Group
8
CWB Financial Group 2018 Annual Report LINES OF BUSINESS
BANKING
At CWB Financial Group we set ourselves apart through our
CWB Optimum Mortgage, our broker-sourced provider of “A” and
commitment to provide a best-in-class client experience for business
alternative mortgages, offers personalized borrowing solutions for
owners, coupled with our deep understanding of the markets
clients who fall within and outside of traditional lending guidelines.
Motive Financial is for savers. Motive offers services to clients across
Canada seeking enhanced flexibility for their personal saving and
investment needs. Round-the-clock online account access and a
dedicated customer service team available by phone five days a
week allow our clients to manage their finances with ease.
TRUST SERVICES
We offer a wide variety of comprehensive trustee and custodial
solutions for individuals and businesses through Canadian Western
Trust (CWT). CWT has a proven reputation for comprehensive
delivery of fiduciary expertise, safety of assets and dedicated service.
Our philosophy is centred on providing clients a rapid response,
strong attention to detail and a flexible, solution-oriented approach
to doing business.
WEALTH MANAGEMENT
We understand that a business owner’s wealth is integrated with his
or her business. CWB Wealth Management uses a ‘whole person’
approach to deliver sound service, helpful solutions and ongoing
support to help clients achieve their vision for the future.
High net-worth individuals and institutions looking for discretionary
wealth management will find value in working with the boutique
portfolio management companies of CWB Wealth Management,
including McLean & Partners Wealth Management. With distinct
investment strategies, clients have access to various approaches
that are well-suited to their risk appetite.
Financial planning and investment products are offered at CWB
branches through CWB Wealth Management. Under the CWB
Financial Group banner, clients have access to a range of investment
products from Canada’s leading mutual fund companies, including
CWB’s proprietary Core and Onyx Portfolio Series mutual funds.
where our clients do business.
BUSINESS BANKING
We take an uncommon approach to business banking. Our full
suite of accounts, lending, and cash management solutions allow
business owners to streamline financial management so they can
focus on what matters most: growing their business. We specialize
in general commercial banking, financing for commercial real estate
and real estate construction.
CWB Maxium Financial Inc. provides financing solutions to a
growing and diversified base of clients in specialized areas of
health care, golf, transportation, real estate, general corporate
and program financing. CWB Maxium’s head office is located in
Richmond Hill, Ontario, and the majority of its business is in Central
Canada.
CWB Franchise Finance provides financing across Canada to a
diverse group of established companies in the hospitality and
restaurant industries.
EQUIPMENT FINANCING AND LEASING
Branch-based equipment lenders specialize in financing standard
industrial equipment for borrowers operating within our branch
footprint in Western Canada.
With operations across Canada, our equipment leasing subsidiary,
CWB National Leasing, is the largest Canadian lessor in small and
mid-size commercial equipment transactions. Financing solutions
are available in all business sectors, with a focus on general
commercial, transportation, construction, forestry, agriculture,
health care, and golf and turf.
Our Broker Buying Centre selectively acquires loan portfolios from
select brokers and the finance divisions of original equipment
manufacturers.
PERSONAL BANKING FOR BUSINESS OWNERS, THEIR
FAMILIES AND EMPLOYEES
We understand that a business owner’s life extends beyond their
business. Our specialized approach is supported by a full complement
of personal banking services delivered today through our branch
network across Western Canada and CWB Virtual Branch pilot.
Services include chequing and savings accounts, mortgages, home
equity lines of credit, personal loans and investment products.
9
CWB Financial Group 2018 Annual Report 10
CWB Financial Group 2018 Annual Report MESSAGE FROM
CHRIS FOWLER
PRESIDENT AND CEO
CONTINUED EXECUTION OF OUR
BALANCED GROWTH STRATEGY
These goals include profitable, balanced growth of both loans
and relationship-based funding sources, progress toward a more
balanced geographic footprint with broader industry diversification,
At CWB Financial Group, our Balanced Growth strategy has created
and enhanced risk and capital management.
an incredible opportunity to extend our reputation for exceptional
personal service from coast-to-coast. I’m proud of our continued
strategic execution, and confident that further progress against
our well-defined plan will build on CWB’s history of consistent,
profitable growth.
CWB has always been focused on business owners. We know
that successful business owners have unique financial needs,
and our targeted approach to meeting those needs has been the
cornerstone of CWB’s growth story for more than thirty years.
I want to share a couple of client stories that speak to our unique
strengths. Daryl Smith founded Pacific Coastal Airlines more than
fifty years ago to provide a commuting option between remote
forestry camps in British Columbia. Today, the business is led by
Daryl’s son, Quentin Smith, and Pacific Coastal Airlines has grown
to represent the sixth largest airline operating out of Vancouver
PROACTIVE, PERSONAL SERVICE AND
SPECIALIZED EXPERTISE
Success for CWB means delivering best-in-class client experiences
for business owners. To deliver on this commitment we use every
tool at our disposal – from the way our people dig deeper to truly
understand a business owner’s vision, to the way we invest in
technology and process transformation to make business banking
easier, and more convenient.
Increased use of technology will be a permanent feature of our
business model going forward. We have fundamentally reshaped
CWB’s technology infrastructure over the past several years and
created a powerful core technology platform that positions us well
for future growth. We also continue to strengthen our competitive
Proactive, personal service and
specialized expertise will remain
at the heart of our differentiated
client experience and at the core of
our competitive advantage.
position and support growth initiatives through
an ongoing
strategic
focus on business
transformation and process improvement. We
are working toward end-to-end alignment of
processes, structure and business focus that will
ensure CWB teams are equipped to continue
delivering highly responsive client service in a
scalable manner.
And having said all of that, we know that
delivering for business owners comes down to
more than technology bells and whistles, or
ticking boxes on a checklist. For us, proactive,
personal service and specialized expertise will
International Airport. Our hands-on approach, high level of service
remain at the heart of our differentiated client experience and at the
and shared entrepreneurial values were key drivers as the Smith
core of our competitive advantage.
chose CWB to be their main bank over twenty years ago. We’ve
been there for Daryl and Quentin every step of the way as the
business has grown and thrived. Our full-service relationship now
includes lending, cash management and deposit products, and we
credit the effort of CWB’s tremendous teams for Quentin’s assertion
that, “CWB has become part of the DNA of our company.” We
couldn’t hope for a stronger endorsement.
CWB is built on the care we demonstrate for clients like Daryl and
Quentin. Through our focus on relationship-based banking we have
made notable progress toward achieving our key strategic goals.
Our work with Browns Restaurant Group perfectly illustrates
this commitment. Bruce Fox, Browns’ Executive Vice President
of Business Development, values the practical experience and
dedicated resources that our team at CWB Franchise Finance
provides. “They’re specialists,” says Bruce. “They have different
teams who do different things, but they also have a dedicated team
who understands the hospitality, restaurant and franchise markets
across Canada.” Bruce appreciates that our people are “willing to
look at a lot of different ways to get something done, which is
great. They’re down to earth, practical solution finders who believe
that not everything has to fit in a single box.”
11
CWB Financial Group 2018 Annual Report challenging and very competitive market for core deposits. We
branch-raised deposits compared to last year, while our funding
diversification strategy supported profitable growth through record
funding from capital markets and increased use of securitization
funding.
It’s important to note that further balance sheet diversification
ties directly to our strategic objective to optimize capital and risk
management. A more diversified business is better suited to create
maximum value from our planned transition to the advanced
approach for managing regulatory capital. This
important transformation will benefit shareholders
by increasing our addressable market and putting us
on more equal footing with our competition. It will
equip us to target business that generates the most
attractive risk-adjusted returns, which will support
further increases in return on common shareholders’
equity. I’m pleased to report that progress toward
our transition is on schedule.
CWB IS A FULL-SERVICE BANK
COMMITTED TO DELIVER FOR BUSINESS
OWNERS IN CANADA
Our goal to create the best full-service bank for business owners
in Canada is ambitious, and it will take time. But I believe we can
get there through continued disciplined execution of our Balanced
Growth strategy.
I want to thank our clients and my fellow shareholders for your
continued trust in us. I also want to thank our people for the
passion and commitment they bring to CWB Financial Group. It is
their dedication and caring that drives our continued success. Today
we have an incredible opportunity to create exceptional experiences
for CWB clients across the country. There is no doubt in my mind
that our future looks more exciting than ever before. I know that
our teams will continue to work together to grow our businesses,
nurture our culture, and take care of our clients and each other.
A CULTURE TO SUPPORT THE FUTURE WE
ENVISION
Bruce’s recognition of our unique team approach speaks to CWB’s
greatest competitive advantage. The strength of our people is an
essential part of CWB’s success. It’s thanks to their commitment
and dedication that we continue to deliver on our strategic goals.
And as our ongoing transformation efforts create an immense
amount of change, we are committed to ensure that our culture
evolves to support our people, and matches the future we envision.
The strength of our people is an
essential part of CWB’s success.
We want top talent to continue to choose CWB because they know
they can thrive in a collaborative, performance-based environment
that is progressive, fair, diverse, inclusive and opportunity rich.
We are taking purposeful steps to ensure that our culture is fully
aligned with our Balanced Growth strategy, and that we live our
values every day. We expect our continued evolution toward CWB’s
target culture will create value for shareholders by helping us to
attract and retain the right talent to support our future growth and
attract clients who want to work with people who remind them of
themselves.
STRONG GROWTH AND EXCELLENT
FINANCIAL PERFORMANCE
Strong growth and excellent financial performance through a
number of business cycles has resulted from our teams consistently
going the extra mile for our clients. Our strong results in fiscal 2018
demonstrate the benefits of this determined approach, as more and
more business owners choose CWB to meet their financial needs.
Performance highlights included strong, double-digit growth for
both total revenue and pre-tax, pre-provision income, positive
operating leverage, strong credit quality and the 26th consecutive
annual increase to our common share dividend. This resulted in very
strong performance against our medium-term financial performance
targets, with growth of adjusted cash earnings per common share
of 14% and adjusted return on common shareholders’ equity of
11.9%, all while maintaining a very strong common equity Tier 1
capital ratio of 9.2%.
At the same time, our double-digit loan growth delivered further
industry and geographic diversification. Strong performance from
our western Canadian branches and our cross-Canada business
lines was complemented by an immediately accretive and strategic
acquisition of business lending assets concentrated in Central and
Eastern Canada. More than 25% of our overall portfolio is now
represented in Central and Eastern Canada up significantly from
5% ten years ago.
This year we also balanced strong and well-diversified loan growth
with growth and diversification of funding sources amidst a
12
CWB Financial Group 2018 Annual Report E
E
T
T
I
M
M
O
C
E
V
I
T
U
C
E
X
E
Front row | DARRELL JONES, Executive Vice President and Chief Information Officer; KELLY BLACKETT, Executive Vice
President, Human Resources and Corporate Communications; CAROLYN GRAHAM, Executive Vice President and Chief
Financial Officer; GLEN EASTWOOD, Executive Vice President, Business Transformation.
Back row | STEPHEN MURPHY, Executive Vice President, Banking; CHRIS FOWLER, President and Chief Executive
Officer; H. BOGIE OZDEMIR, Executive Vice President and Chief Risk Officer.
13
CWB Financial Group 2018 Annual Report
14
CWB Financial Group 2018 Annual Report MESSAGE FROM
ROBERT PHILLIPS
CHAIR OF THE BOARD
Your Board of Directors oversees development and implementation
of the strategic direction for CWB Financial Group and maintains
an effective governance framework. Our focus is to ensure CWB
continues to deliver strong, profitable growth for investors,
exceptional client experiences and a positive, rewarding and
collaborative environment for CWB’s people.
since 2014, was recognized this year among WXN Canada’s Most
Powerful Women: Top 100. Sarah joins fellow CWB directors Peggy
Mulligan, a two-time recipient, and Linda Hohol as past winners of
the award. Sarah’s achievement makes it back-to-back wins for a
CWB leader, after Carolyn Graham, CWB’s Executive Vice President
and Chief Financial Officer, was recognized last year.
EXECUTING OUR FOCUSED TRANSFORMATION
CWB accomplished much to be proud of over the past year. I’m
pleased to report that our performance in 2018 was outstanding as
we continue to deliver on our Balanced Growth strategy. Through
our focus on relationship-based banking, we made notable progress
to deliver profitable growth of both loans and funding sources,
a more balanced geographic footprint with broader industry
diversification, and enhanced risk and capital management. We
also made key investments in technology and business process
improvement to enhance our product and service offering, and to
drive operational excellence. We are committed to creating the best
full-service bank for business owners in Canada by becoming the
best choice for our clients, for our people, and for our investors.
A strong risk culture and a sound enterprise risk management
framework are also critical components to delivering long-term
value for CWB’s stakeholders. Your Board is committed to providing
diligent oversight of these areas. Our focus is to ensure risk
management priorities are embedded in CWB’s strategic agenda,
and that CWB’s plan to execute an ambitious transformation,
deliver strong growth and create long-term value for shareholders
is consistent with our risk appetite.
We continue to be pleased with CWB’s progress toward our
transition to the advanced approach for managing regulatory
capital. We anticipate submitting our final application to the
regulator in fiscal 2019. This transformation will provide CWB with
critical insight to achieve profitable, balanced growth, and risk
measurement under the advanced approach will support effective
capital deployment to maximize shareholder return. Your Board
is highly engaged to provide diligent oversight of this important
transformation as we seek to balance the value derived from 30
years of highly successful common-sense decision-making with the
benefits of quantitative sophistication.
DEMONSTRATING THE POWER OF
DIVERSITY AND INCLUSION IN LEADERSHIP
We are dedicated to good corporate governance and we
continually monitor evolving trends and assess ways to improve
the effectiveness of CWB’s Board of Directors. We believe having
a diversity of experience, perspectives, and skills is critical to the
Board’s effective oversight. As part of this commitment to diversity
and inclusion, women now comprise 27% of the Board, which
exceeds our gender diversity target of 25% for independent
directors. I am confident that the women of CWB are among the
most formidable leaders in the country. In fact, for the second
year in a row, one of Canada’s Most Powerful Women is proudly
our own. Sarah Morgan-Silvester, a CWB Financial Group director
Sarah, Peggy, Linda and Carolyn are exceptional leaders, inspiring
role models and tremendous contributors to CWB’s ongoing success.
Along with their fellow directors and the rest of CWB’s exceptional
management team, we are fully aligned to invest in developing and
recruiting a diverse, inclusive complement of talented leaders that
will continue to meet the evolving needs of our customer base and
fully reflect the markets we serve.
WELL-POSITIONED FOR FUTURE GROWTH
Within an operating environment characterized by large and
aggressive competitors, your Board is confident that our focus on
business owners and our Balanced Growth strategy are right for
CWB. At the core of our strategy is an enduring commitment to
compete effectively by making our smaller size and entrepreneurial
spirit an advantage. We believe that business owners understand the
value of trusted, personal relationships. They know what it means
to create value, and we believe they prefer to deal with a bank that
understands the same things. CWB is determined to be nimbler
and more relevant to our targeted clients. Where competitors seek
to use technology to simulate a high-touch client experience, our
teams compete by remaining personal and authentic as we invest to
make dealing with CWB smoother and more efficient.
Achieving these outcomes at scale requires rapid transformation
of many parts of our business model. In fact, with the pace of
technology-driven change apparent all around us, it’s fair to say that
transformation is set to be a permanent feature of our business. We
know it will take the right culture to support our transformation
efforts. This is why the board’s priorities for the coming year include
oversight and support for management in their work to ensure
CWB’s target culture is aligned with our strategy, and that effective
change management capabilities remain in place.
On behalf of the Board, I would like to thank CWB’s team members.
Against a rapidly changing and volatile backdrop over the past
several years, our teams have consistently executed on CWB’s
strategy to create new opportunities and a much larger addressable
market. I would also like to thank my fellow directors for their
ongoing commitment to CWB’s continued success. In particular, I
would like to recognize Mr. Albrecht Bellstedt. Al has served on your
board since 1995, and his roots with CWB go back to the formation
of our predecessor organization, the Bank of Alberta. Al has been
an exceptional director and has significantly influenced CWB’s
evolution from a small, regional bank to the full-service financial
services institution we are today. Al’s contributions will be missed
when he retires from the board this year. To my fellow shareholders,
be assured that your board and management are working diligently
to position CWB for significant future growth. We are confident
that CWB will prosper from the changes to come.
15
CWB Financial Group 2018 Annual Report BOARD OF DIRECTORS
FRONT ROW (LEFT TO RIGHT)
RAYMOND J. PROTTI
LINDA M.O. HOHOL
ALBRECHT W. A. BELLSTEDT
ROBERT L. PHILLIPS (CHAIR)
SARAH A. MORGAN-SILVESTER
MARGARET J. MULLIGAN
ANDREW J. BIBBY
Corporate Director
Corporate Director
President, A.W.A. Bellstedt Professional Corporation
President and CEO, R.L. Phillips Investments Inc.
Corporate Director
Corporate Director
CEO and Director, Grosvenor Americas Partners
BACK ROW (LEFT TO RIGHT)
IAN M. REID
H. SANFORD RILEY
CHRIS H. FOWLER
ALAN M. ROWE
ROBERT A. MANNING
Corporate Director
President and CEO, Richardson Financial Group Limited
President and CEO, Canadian Western Bank
Partner, Crown Realty Partners
President, Cathton Investments Ltd.
CORPORATE GOVERNANCE
CWB Financial Group strives to earn and maintain the trust of our
stakeholders through high standards of corporate governance.
Active oversight of our leadership team and operations and a
robust governance framework are core to our business processes
and key to our success. We work continuously to enhance our
governance practices to ensure the sound functioning of CWB
Financial Group and provide value to our fellow shareholders.
Detailed information about CWB Financial Group’s corporate
governance practices are available in CWB’s Management Proxy
Circular and in the Corporate Governance section at cwb.com.
Shareholders are encouraged to review CWB’s management proxy
circular for information on how they can attend and participate in
the annual shareholder meeting on April 4, 2019 in Edmonton.
16
CWB Financial Group 2018 Annual Report I’M PROUD TO BE PART OF A
DYNAMIC GROUP
WOMEN
OF
AT CWB
WHO ARE
SUPPORTING ONE ANOTHER
TO BE BETTER LEADERS.
WE’RE STARTING CONVERSATIONS THAT
EMPOWER WOMEN TO GROW
LEAD.
- JENNIFER YUEN
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DIVERSITY | The strength of our people is an essential part of CWB’s success. We want top talent to continue to choose CWB because they
know they can thrive in a collaborative, performance-based environment that is progressive, fair, diverse, inclusive and opportunity rich. That
is why CWB supports initiatives like CWB Women to help us make strides toward further diversity and inclusion, particularly in leadership
positions. We also support diversity and inclusion in our communities. This year we partnered with the YWCA through a gift of $100,000 to
support girls’ empowerment programs, to ensure girls in our communities have ample opportunities to build the skills and confidence they
need to create and achieve their life goals.
17
CWB Financial Group 2018 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
TABLE OF CONTENTS
BUSINESS PROFILE
18
19
BALANCED GROWTH STRATEGY
FISCAL 2018 STRATEGIC HIGHLIGHTS 19
20
FORWARD-LOOKING STATEMENTS
NON-IFRS MEASURES
20
CWB FINANCIAL GROUP
PERFORMANCE
OVERVIEW
NET INTEREST INCOME
NON-INTEREST INCOME
NON-INTEREST EXPENSES, EFFICIENCY
AND OPERATING LEVERAGE
ACQUISITION-RELATED FAIR VALUE
CHANGES
INCOME TAXES
COMPREHENSIVE INCOME
CASH AND SECURITIES
22
22
27
28
30
32
32
33
33
34
LOANS
38
CREDIT QUALITY
DEPOSITS AND FUNDING
41
OTHER ASSETS AND OTHER LIABILITIES 42
43
LIQUIDITY MANAGEMENT
CAPITAL MANAGEMENT
45
FINANCIAL INSTRUMENTS AND
OTHER INSTRUMENTS
OFF-BALANCE SHEET
SUMMARY OF QUARTERLY
48
49
RESULTS AND FOURTH QUARTER 50
50
51
QUARTERLY RESULTS
FOURTH QUARTER OF 2018
ACCOUNTING POLICIES
AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
52
52
CHANGES IN ACCOUNTING POLICIES
AND FINANCIAL STATEMENT
PRESENTATION
FUTURE CHANGES IN
ACCOUNTING POLICIES
RISK MANAGEMENT
RISK MANAGEMENT OVERVIEW
RISK UNIVERSE - REPORT ON
PRINCIPAL RISKS
OTHER RISK FACTORS
UPDATED SHARE INFORMATION
CONTROLS AND PROCEDURES
54
54
57
58
63
75
76
76
BUSINESS PROFILE
Canadian Western Bank is the only Schedule 1 chartered bank in Canada with a clear focus to meet the unique financial needs of business owners.
Together, Canadian Western Bank and its operating subsidiaries are known as CWB Financial Group (CWB). Operating from corporate headquarters in
Edmonton, Alberta, with capabilities to deliver for clients across Canada, CWB delivers full-service business banking, personal banking, trust services and
wealth management offerings specifically tailored for business owners, their employees and their families.
p
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Business Line
Client Offering
Geographic Footprint
CWB Bank
Full-service banking for business owners, their
employees and their families
CWB Real Estate and Specialized
Lending
Commercial real estate activities, corporate
lending (including syndicated loans led by
major Canadian banks), and loans and leases
to franchised hotels and restaurants
Branch locations from Vancouver Island to Winnipeg,
with growing digital capabilities to offer full-service
banking beyond CWB’s branch footprint; full-service
online personal banking provided through Motive
Financial in all provinces except Quebec
Real estate activity primarily in Western Canada
with targeted participation in Ontario; corporate
lending activity in all provinces with a head office in
Edmonton, Alberta; CWB Franchise Finance activity in
all provinces, with a head office in Montreal, Quebec
CWB National Leasing Inc.
(CWB National Leasing)
Small- and mid-sized commercial equipment
leases
All provinces with a head office in Winnipeg,
Manitoba
CWB Equipment Finance
CWB Maxium Financial Inc.
(CWB Maxium)
CWB Optimum Mortgage
(CWB Optimum)
Larger-ticket standard industrial equipment
loans and leases
Primarily in Western Canada with a growing presence
in Ontario
Commercial loans, leases and structured
financing
Primarily concentrated in Ontario, with a head office
in Richmond Hill, Ontario
Residential mortgages sourced through an
extensive network of mortgage brokers
Ontario, Western Canada and Atlantic Canada, with
a head office in Edmonton, Alberta
Canadian Western Trust Company
(CWT)
Personalized pension, trustee and custodial
solutions for businesses and individuals
All provinces except Quebec, with a head office in
Vancouver (BC)
CWB Wealth Management Ltd.
including McLean & Partners Wealth
Management Ltd.
(McLean & Partners) and Canadian
Western Financial Ltd. (CWF)
Comprehensive wealth advisory services,
including discretionary wealth management
primarily for high net-worth individuals, as
well as third-party and proprietary funds
offered with financial and investment
planning advice
Primarily in Western Canada with offices in
Vancouver, Edmonton and Calgary
18
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
19
BALANCED GROWTH STRATEGY
Key strategic objectives defined within CWB’s Balanced Growth strategy
include profitable full-service client growth with a focus on business owners,
including further geographic and industry diversification; ongoing growth
and diversification of funding sources; and, optimized capital management
through transition to the Advanced Internal Ratings Based (AIRB) approach
for capital and risk management. Management is confident that continued
execution of CWB’s Balanced Growth strategy will create the best full-
service bank for business owners in Canada.
In support of this long-term objective, strategic execution is focused to
ensure CWB is the best choice for clients, for people and for investors.
Clients recognize CWB for in-depth knowledge of targeted segments
within Canada’s commercial banking industry, a unique brand of personal
service, and CWB’s relationship-based approach.
CWB invests in a supportive environment for staff within a results-oriented
culture. CWB empowers people to deliver exceptional client experiences
and accelerate growth of full-service client relationships.
Shareholders value CWB’s strong track record of high-quality balance
sheet and dividend growth, conservative approach to risk management
and consistent profitability.
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (IFRS) and are presented
in Canadian dollars.
The following pages contain management’s discussion of the financial
performance of CWB and a summary of quarterly results. Additional
information
Information
Form, is available on SEDAR at sedar.com and on CWB’s website at
cwb.com.
the Annual
to CWB,
including
relating
FISCAL 2018 STRATEGIC HIGHLIGHTS
Table 1 - Execution of CWB’s Balanced Growth Strategy
Balanced Growth objective
Strategic execution during fiscal 2018
Full-service client growth with a focus on
business owners, including further geographic
and industry diversification
Growth and diversification of
funding sources
• Very strong 13% annual loan growth, including 9% growth in both BC and Alberta, and 27%
growth in Central and Eastern Canada.
• Increased the proportion of loan portfolio in Central and Eastern Canada to 26%, with Ontario
up to 21% from 19% in 2017.
• Increased business diversification with 18% overall growth of general commercial loans, and
23% growth of equipment loans and leases.
• Growth in debt capital markets funding with five successful senior deposit note issuances or
re-openings totaling $1.1 billion over the past 12 months.
• Growth in securitization funding for both equipment loans and leases and residential
mortgages.
• Growth of branch-raised deposits.
• Decrease in broker deposits as a proportion of total funding.
Optimized capital and risk management
processes through transition to the Advanced
Internal Ratings Based (AIRB) approach
• On track to apply in fiscal 2019 for transition to the AIRB approach.
Strategic Transactions
On October 30, 2017, CWB entered into a definitive asset purchase
agreement to acquire for cash approximately $900 million of equipment
loans and leases, and general commercial lending assets. The transaction
closed on January 31, 2018, and totaled approximately $850 million
(referred to as the acquired “business lending assets”). The business
lending assets acquired are fully aligned with CWB’s Balanced Growth
strategy, including strategic objectives for industry and geographic
diversification. The portfolio is primarily comprised of assets concentrated
within the transportation, construction and healthcare industries, with
approximately three quarters of the exposures distributed across Central
and Eastern Canada. As expected, the transaction was immediately
accretive, contributing approximately $0.10 of adjusted cash earnings per
common share in fiscal 2018, with positive impacts to return on common
shareholders’ equity, net interest margin and operating leverage, and a
negative impact within the provision for credit losses as a percentage of
average loans. CWB’s common equity Tier 1 capital (CET1) ratio remained
in a very strong position, with approximately 25 basis points of existing
CET1 capital deployed as part of the purchase. Management funded
the portfolio primarily through its securitization facilities. In view of the
portfolio’s relatively short weighted average duration, some degree of run-
off was expected. The balance of acquired assets as at October 31, 2018,
including associated renewals and new lending, was approximately $684
million.
On August 16, 2017, CWB announced that Canadian Western Trust (CWT)
will focus its activities within business lines that are most aligned with the
strategic objectives of CWB Financial Group, and will no longer offer self-
directed account services to holders of certain securities. CWT initiated a
process to appoint successor trustees for these accounts (referred to as the
“CWT strategic transactions”). As a result of this process, CWB realized
pre-tax gains on sale of approximately $4 million, or $0.04 of adjusted
cash earnings per common share in fiscal 2018, and approximately $6
million, or $0.06 of adjusted cash earnings per common share, in fiscal
2017. CWB’s annual revenue associated with the transferred accounts
was less than $1 million in fiscal 2018, compared to approximately $3
million in fiscal 2017. Approximately $30 million of CWT branch-raised
deposits (2017 – $71 million) and $2.0 billion (2017 - $1.3 billion) of assets
under administration have transferred to the successor trustees this year.
The CWT strategic transactions are now complete. No further transfers
of deposits or assets under administration to successor trustees will occur
under the agreements.
18
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
19
FORWARD-LOOKING STATEMENTS
NON-IFRS MEASURES
From time to time, CWB makes written and verbal forward-looking
statements. Statements of this type are included in the Annual Report
and reports to shareholders and may be included in filings with Canadian
securities regulators or in other communications such as press releases and
corporate presentations. Forward-looking statements include, but are not
limited to, statements about CWB’s objectives and strategies, targeted and
expected financial results and the outlook for CWB’s businesses or for the
Canadian economy. Forward-looking statements are typically identified by
the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may
increase”, “may impact”, “goal”, “focus”, “potential”, “proposed” and
other similar expressions, or future or conditional verbs such as “will”,
“should”, “would” and “could”.
By their very nature, forward-looking statements involve numerous
assumptions and are subject to inherent risks and uncertainties, which
give rise to the possibility that management’s predictions, forecasts,
projections, expectations and conclusions will not prove to be accurate,
that its assumptions may not be correct and that its strategic goals will not
be achieved.
A variety of factors, many of which are beyond CWB’s control, may cause
actual results to differ materially from the expectations expressed in the
forward-looking statements. These factors include, but are not limited to,
general business and economic conditions in Canada, including housing
market conditions, the volatility and level of liquidity in financial markets,
fluctuations in interest rates and currency values, the volatility and level
of various commodity prices, changes in monetary policy, changes in
economic and political conditions, material changes to standing free trade
agreements, legislative and regulatory developments, legal developments,
the level of competition, the occurrence of natural catastrophes, changes
in accounting standards and policies, information technology and cyber
risk, the accuracy and completeness of information CWB receives about
customers and counterparties, the ability to attract and retain key
personnel, the ability to complete and integrate acquisitions, reliance on
third parties to provide components of business infrastructure, changes in
tax laws, technological developments, unexpected changes in consumer
spending and saving habits, timely development and introduction of new
products, and management’s ability to anticipate and manage the risks
associated with these factors. It is important to note that the preceding list
is not exhaustive of possible factors.
Additional information about these factors can be found in the Risk
Management section of this Management’s Discussion and Analysis
(MD&A). These and other factors should be considered carefully, and
readers are cautioned not to place undue reliance on these forward-
looking statements as a number of important factors could cause CWB’s
actual results to differ materially from the expectations expressed in such
forward-looking statements. Unless required by securities law, CWB does
not undertake to update any forward-looking statement, whether written
or verbal, that may be made from time to time by it or on its behalf.
Assumptions about the performance of the Canadian economy over the
forecast horizon and how it will affect CWB’s businesses are material
factors considered when setting organizational objectives and targets. In
determining expectations for economic growth, CWB primarily considers
economic data and forecasts provided by the Canadian government and
its agencies, as well as certain private sector forecasts. These forecasts are
subject to inherent risks and uncertainties that may be general or specific.
Where relevant, material economic assumptions underlying forward-
looking statements are disclosed within the Outlook sections of this MD&A.
CWB uses a number of financial measures to assess its performance.
These measures provide readers with an enhanced understanding of how
management views the results. Non-IFRS measures may also provide the
ability to analyze trends and provide comparisons with competitors. These
non-IFRS measures do not have standardized meanings prescribed by IFRS,
and therefore may not be comparable to similar measures presented by
other financial institutions. The non-IFRS measures used in this MD&A are
calculated as follows:
• Pre-tax, pre-provision income – total revenue less non-interest
expenses, excluding the pre-tax amortization of acquisition-related
intangible assets (see Table 3).
• Adjusted cash earnings per common share – diluted earnings per
common share calculated with adjusted common shareholders’ net
income (see Table 2), which excludes the amortization of acquisition-
related intangible assets and contingent consideration fair value
changes, net of tax. Excluded items are not considered indicative of
ongoing business performance.
• Return on common shareholders’ equity – common shareholders’ net
income divided by average common shareholders’ equity.
• Adjusted return on common shareholders’ equity – common
shareholders’ net income excluding the amortization of acquisition-
related intangible assets and contingent consideration fair value
changes, net of tax (see Table 2), divided by average common
shareholders’ equity.
• Return on assets – common shareholders’ net income divided by
average total assets.
• Efficiency ratio – non-interest expenses, excluding the pre-tax
amortization of acquisition-related intangible assets (see Table 2),
divided by total revenue.
• Net interest margin – net interest income divided by average total
assets.
• Provision for credit losses as a percentage of average loans – provision
for credit losses divided by average total loans.
• Operating leverage – growth rate of total revenue less growth rate
of non-interest expenses, excluding the pre-tax amortization of
acquisition-related intangible assets.
• Common share dividend payout ratio – common share dividends
declared during the year divided by common shareholders’ net income.
• Basel III common equity Tier 1, Tier 1, Total capital, and leverage ratios
under the Standardized approach for calculating risk-weighted assets
– in accordance with guidelines issued by Office of the Superintendent
of Financial Institutions Canada (OSFI).
• Average balances – average daily balances.
Of note, commencing in 2018, CWB discontinued the use of the taxable
equivalent basis (teb) non-IFRS measure as it is no longer of material
significance to results. Previously, teb increased interest income and the
provision for income taxes to what they would have been had certain tax-
exempt securities been taxed at the statutory rate. Comparative figures
have been restated to conform to the current period presentation.
20
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
21
Table 2 - Adjusted Financial Measures
($ thousands)
Non-interest expenses
Adjustments (pre-tax):
Amortization of acquisition-related intangible assets
Adjusted non-interest expenses
Common shareholders' net income
Adjustments (after-tax):
Acquisition-related fair value changes
Amortization of acquisition-related intangible assets
Adjusted common shareholders' net income
Table 3 - Pre-tax, Pre-provision (PPTP) Income
($ thousands)
Total revenue
Less:
Adjusted non-interest expenses (Table 2)
Pre-tax, pre-provision income
2018
2017
$
373,483
$
345,466
(6,313)
(7,560)
$
367,170
$
337,906
$
249,256
$
214,277
14,769
4,695
13,402
5,572
$
268,720
$
233,251
2018
2017
$
803,358
$
726,635
367,170
$
436,188
$
337,906
388,729
20
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
21
CWB FINANCIAL GROUP PERFORMANCE
OVERVIEW
Highlights of 2018 (compared to 2017)
• Very strong performance with common shareholders’ net income
of $249 million, up 16%, and pre-tax, pre-provision income of
$436 million, up 12%.
• Diluted and adjusted cash earnings per common share of $2.79
• Continued execution of CWB’s funding diversification strategy,
including record issuance of capital market senior deposit notes,
increased use of securitization, and continued growth of branch-
raised deposits.
and $3.01, up 15% and 14%, respectively.
• Provision for credit losses as a percentage of average loans of 20
• The acquisition of strategically aligned business lending assets on
January 31, 2018 contributed approximately $0.10 to adjusted
cash earnings per common share and the gains on sale related to
the CWT strategic transactions contributed adjusted cash earnings
per share of approximately $0.04 (2017 – $0.06).
• Total revenue of $803 million, up 11%, with 13% growth of net
interest income and 7% lower non-interest income. Net interest
margin of 2.60%, up four basis points.
• Positive operating leverage of 1.9%.
• Continued execution of CWB’s Balanced Growth strategy with
13% loan growth, including 3% from the acquisition of business
lending assets on January 31, 2018. Loan growth included
expansion in every province, with the strategically targeted general
commercial and equipment financing and leasing categories
accounting for 68% of the growth.
basis points, down from 23 basis points.
• Gross impaired loans represented 0.53% of total loans, down
from 0.72%. Gross impaired loans in Alberta accounted for 56%
of total impairments at year end, compared to 63% last year.
• Strong Basel III regulatory capital ratios under the Standardized
approach for calculating risk-weighted assets of 9.2% common
equity Tier 1 (CET1), 10.3% Tier 1 and 11.9% Total capital.
• Significant progress toward transition to the Advanced Internal
Ratings Based (AIRB) approach for capital and risk management,
with final application for transition anticipated in fiscal 2019.
• Delivered an 8% increase to CWB’s annual common share dividend,
and a higher annual dividend for the 26th consecutive year.
Table 4 - Select Annual Financial Information(1)
($ thousands, except per share amounts)
Key Performance Indicators
Total revenue
Pre-tax, pre-provision income
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash
Return on common shareholders' equity
Adjusted return on common shareholders' equity
Return on assets
Efficiency ratio(3)
Net interest margin
Operating leverage
Provision for credit losses as a percentage of average loans
Other Financial Information
Total assets
Dividends per common share
2018
2017
2016
Change from 2017
%
$
76,723
47,459
34,979
0.38
0.37
0.38
$
803,358
$
726,635
$
657,896
$
436,188
249,256
388,729
214,277
350,603
177,761
2.81
2.79
3.01
11.0 %
11.9
0.89
45.7
2.60
1.9
0.20
2.43
2.42
2.63
10.1 %
11.0
0.85
46.5
2.56
0.3
0.23
2.13
2.13
2.26
9.3 %
9.9
0.73
46.7
2.41
0.8
0.38
$
29,021,463
$
26,447,453
$
25,222,549
$
2,574,010
1.00
0.93
0.92
0.07
11 %
12
16
16
15
14
90 bp(2)
90
4
(80)
4
160
(3)
10 %
8
(1) See page 20 for a discussion of non-IFRS measures.
(2) bp – basis points.
(3) A decrease in the ratio reflects improved efficiency, while an increase reflects deterioration.
22
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
23
Summary of Operations
Fiscal 2018 was a very strong year for CWB, both in terms of strategic
execution and financial performance. CWB expanded its geographic
footprint, delivered increased industry and funding diversification with
a continued focus on business owners, and made significant progress
toward the upcoming transition to the AIRB approach for risk and capital
management. Highlights of financial performance included double digit
growth of both total revenues and pre-tax, pre-provision income, higher net
interest margin, positive operating leverage, strong credit quality, and the
26th consecutive annual increase to CWB’s common share dividend. Early
in the fiscal year, CWB closed a strategic and highly accretive acquisition of
business lending assets, while maintaining a very strong CET1 capital ratio.
This acquisition contributed approximately 3% to annual loan growth and
approximately $0.10 to 2018 adjusted cash earnings per common share.
CWB recorded double-digit percentage growth in several key financial
metrics: total revenue of $803 million increased 11%; pre-tax, pre-
provision income of $436 million was up 12%; and, common shareholders’
net income of $249 million was 16% higher. Very strong earnings growth
resulted from the increase in total revenue, strong credit quality and
disciplined expense control.
Net interest income of $725 million was up 13% from 2017, reflecting
the combined positive impact of 13% loan growth and a four basis
point increase in net interest margin to 2.60%. As expected at the start
of fiscal 2018, the combined positive impact of successful execution of
CWB’s Balanced Growth strategy and the higher interest rate environment
supported incrementally higher net interest margin compared to last
year. CWB delivered very strong, targeted growth in higher-yielding loan
portfolios, including the contributions of business lending assets acquired
at the end of the first quarter, along with increased funding diversification.
Acceleration of loan growth was supported through planned growth of
CWB’s debt capital markets and securitization funding channels, as well as
continued growth of branch-raised and broker deposits. A further increase
in full-year net interest margin was constrained as competitive pressure
on loan yields remained apparent, and deposit costs moved incrementally
higher, reflecting both intense competition for branch-raised deposits and
the impact of Bank of Canada rate increases. An ongoing shift in depositor
preference toward longer duration fixed term deposits has also become
apparent with the rising interest rate environment.
Non-interest income of $78 million decreased 7% ($6 million), as 7%
($1 million) growth in wealth management income was more than offset
by the impact of the CWT strategic transactions, lower credit-related fee
income and decreases in other categories.
The annual provision for credit losses as a percentage of average loans
improved to 20 basis points from 23 basis points in the prior year. The level
of the provision in each of the last six quarters was consistent with CWB’s
traditional range of 18 – 23 basis points.
Non-interest expenses increased 8% ($28 million), including 8% ($17
million) higher salaries and benefits, a 14% ($9 million) increase in ‘other’
expenses, and a 4% ($2 million) increase in costs related to premises and
equipment. The acquisition-related fair value changes reflecting continued
strong performance within CWB Maxium was $2 million higher.
Diluted earnings per common share of $2.79 and adjusted cash earnings
per common share of $3.01 were up 15% and 14%, respectively. Gains
on sale related to the CWT strategic transactions contributed $0.04 (2017
– $0.06) to adjusted cash earnings per common share.
Adjusted return on common shareholders’ equity (ROE) of 11.9%
increased 90 basis points from last year. This was primarily driven by very
strong growth in common shareholders’ net income, reflecting strong
performance across CWB Financial Group from effective execution of
CWB’s Balanced Growth strategy. Total cash dividends paid to common
shareholders of $1.00 per share increased 8% ($0.07), resulting in CWB’s
26th consecutive year of dividend increases. The dividend payout ratio was
36% of total common shareholders’ net income in fiscal 2018, down from
38% last year.
Total assets increased 10% to reach $29.0 billion. Total loans, including the
allowance for credit losses, of $26.2 billion increased 13%. Loan growth
was consistent with CWB’s Balanced Growth strategy, including strategic
objectives to achieve a more balanced geographic footprint and further
industry diversification with a continued focus on business owners. Ontario
led growth by province for the third consecutive year and now accounts
for 21% of CWB’s total loan portfolio, up from 19% last year. This result
was underpinned by the acquisition of business lending assets on January
31, 2018, with approximately three quarters of the portfolio exposures
distributed across Central and Eastern Canada. Geographic diversification
was further supported by strong performance from CWB’s businesses with
a national footprint, including CWB Maxium, CWB Franchise Finance,
CWB Optimum, and CWB National Leasing. Annual growth within the
strategically targeted general commercial category was 18% overall, and
this portfolio now represents 28% of CWB’s overall portfolio, compared
to 27% in 2017.
CWB delivered strong execution against its Balanced Growth strategy
for funding diversification in fiscal 2018. Total deposits of $23.7 billion
were up 8%, including a new record for annual issuance or re-openings
of senior deposit notes in capital markets, with $1.1 billion raised across
five successful transactions. As a result, the proportion of deposits raised
through debt capital markets increased to 13% of total deposits at year
end, compared to 10% in the prior year. CWB also increased the use of
securitization to fund originations of equipment leases and residential
mortgages.
Relationship-based branch-raised funding increased 4% ($510 million)
from last year, primarily driven by strong, 13% ($557 million) growth
of branch-raised term deposits. The balance of lower-cost demand and
notice deposits was relatively stable. Changes within this category partly
reflect strong growth within CWT’s notice deposit franchise, partially
offset by the impact of $30 million transferred out as part of the CWT
strategic transactions in 2018 (2017 – $71 million). Branch-raised deposits
represented 52% of total deposits at October 31, 2018, compared to 54%
last year. Demand and notice deposits comprised 32% of total deposits,
compared to 35% in 2017.
The maintenance of solid capital levels is fundamental to CWB’s objectives
to effectively manage risks and support strong growth. CWB’s 9.2% Basel
III common equity Tier 1 (CET1) capital ratio at October 31, 2018 was
very strong. Including CWB’s Tier 1 and total capital ratios of 10.3%,
and 11.9%, respectively, all capital ratios were above both internal and
regulatory minimums. CWB’s minimum Basel III regulatory capital ratios,
which include a 250-basis point capital conservation buffer, are 7.0%
CET1, 8.5% Tier 1, and 10.5% total capital. CWB’s CET1 capital ratio
decreased 30 basis points from last year, mainly reflecting the acquisition
of business lending assets at the end of the first quarter. At 8.0%, the Basel
III leverage ratio remains very conservative.
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23
Ongoing business transformation initiatives to enhance CWB’s client experience and support development of
full-service client relationships
CWB’s focused business transformation and ongoing investment in strong
core technology has enabled progress toward enhanced client experiences
and growth of full-service relationships through further development
of targeted services and more efficient processes. During 2018, CWB
implemented remote deposit capture technology, which enables clients
to make deposits anywhere, any time. CWB also launched a third online
banking platform; Enhanced Online Banking for Business offers new
functionality and tools specific to small- and medium-sized businesses. In
addition, improved foreign exchange services were introduced to facilitate
forward contracts, swaps, spot sales, hedging, options, and other foreign
currency services for clients who transact outside of Canada. Further
improvements to CWB’s competitive position and digital capabilities also
included features to easily transfer online services from competitors to CWB.
Ongoing business transformation efforts will improve key business
processes to enhance CWB’s overall client experience and established
sources of competitive advantage. Initiatives undertaken over the past two
fiscal years have realigned CWB’s credit support function to improve focus
and scalability through centralized and standardized processes, as well as
to effectively leverage CWB’s investment in strong core technology. Related
initiatives continuing into 2019 will realign client-facing operations within
CWB’s banking branches, beginning with commercial banking teams,
followed by cash management and personal banking. The new operational
design is expected to enhance capacity to deliver on CWB’s reputation
for service excellence in a highly scalable manner, improve CWB’s client
experience within targeted market segments and enable more effective
development of full-service client relationships. Management also expects
these initiatives to increase operational efficiency and drive strong data
integrity in support of capital and risk management.
CWB is pleased to report that the rate of full-service client on-boarding
within the CWB Virtual Branch, launched in a pilot phase early this year,
exceeded expectations. The CWB Virtual Branch offers a differentiated
remote banking experience for business owners, with access to high-
touch, personal client service from experienced commercial banking
relationship managers and cash management specialists. This unique
approach to service delivery is complemented by convenient on-line
banking options, including remote deposit capture for business, electronic
signature capabilities for easy account opening, enhanced on-line wire
transfer services, and next-generation online banking tools for businesses,
which allow small business clients to house their business and personal
banking on a common platform.
Ongoing growth and development of CWB’s wealth management offering
is also a key area of focus. To be seen as a trusted source of specialized
wealth management expertise for business owners and their families is a
primary goal of CWB Wealth Management. Looking forward, CWB will
continue with efforts to enhance its proprietary wealth management
solutions, and increase the effectiveness of related business development
activities across business lines.
Management expects these product enhancements, service realignments
and process improvements to position teams to more effectively
demonstrate CWB’s unique brand of personal service and relationship-
based approach. Together, these are key steps to enhance CWB’s full-
service banking experience for business owners, and are expected to
support ongoing loan growth and accelerated growth of branch-raised
deposits.
Ongoing enhancements to CWB’s employee experience to be seen as the best choice for top talent
CWB’s continued success is built on strong collaboration between engaged,
well-trained and empowered teams. The above-mentioned realignment
of credit processes and forthcoming redesign of client-facing teams
within CWB’s banking branches is expected to enhance the employee
experience through increased career path opportunities and differentiated
compensation models. CWB also completed the second phase of a multi-
stage non-executive compensation review this year. The focus of the
previously completed phase was to benchmark CWB’s base compensation
levels against market competitors. Phase two included a detailed review
of CWB’s job level and grading structure, with a corresponding review of
total compensation. In combination, management expects these changes
to improve CWB’s ability to attract and retain top talent to drive higher
business growth, increased market share, improved profitability and
positive operating leverage.
CWB also implemented a contemporary human capital management
system this year to streamline decision-making capabilities for strategic
people-related processes and information. In 2019, CWB will further
integrate operations across the enterprise through implementation of the
new system within CWB National Leasing and CWB Maxium. Management
will continue to invest in improved people-related infrastructure, processes
and initiatives to support CWB’s objective to be seen as the best choice for
top talent, and to support a collaborative, performance-based environment
that is fair, fun, progressive, diverse, inclusive and opportunity-rich.
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25
Medium-Term Performance Target Ranges
CWB’s medium-term performance target ranges reflect key areas of
shareholder value, the objectives embedded within CWB’s Balanced
Growth strategy and a time horizon consistent with the longer-term
interests of CWB shareholders. Target ranges for key financial metrics
over a three- to five-year time horizon are presented in the following
table, and are unchanged for fiscal 2019:
Table 5 – Medium-term Performance Target Ranges
Key Metrics(1)
Adjusted cash earnings per
common share growth
Adjusted return on common
shareholders’ equity
Operating leverage
Common equity Tier 1 capital ratio under
the Standardized approach
Medium-term Performance
Target Ranges
Fiscal 2018 Performance
7 - 12%
Delivered 14%.
12 - 15%
Delivered 11.9%, up 90 basis points from fiscal 2017.
Positive
Delivered positive 1.9%.
Strong
Delivered a very strong ratio of 9.2%.
Common share dividend payout ratio
~30%
Delivered 36%, with an 8% increase to the annual common share dividend,
and a higher annual dividend for the 26th consecutive year.
(1) See page 20 for definitions and discussion of non-IFRS measures.
Medium-term target ranges are based on expectations for performance
under the more conservative Standardized approach for risk and
capital management, moderate economic growth and a relatively
stable interest rate environment in Canada over the three- to five-year
forecast horizon. Achievement of overall financial results within these
target ranges will be largely driven by CWB’s commitment to continue
Outlook
to deliver ongoing profitable client relationship growth with further
geographic and industry diversification, further optimization of CWB’s
funding mix, strong credit quality, effective expense management in
consideration of revenue growth opportunities, and prudent capital
management.
Over a three- to five-year time frame, management expects financial
performance to reflect ongoing strong execution of CWB’s Balanced
Growth strategy and to be relatively consistent with its medium-
term targets. Results are expected to benefit from an expanding
geographic footprint with increased business diversification; success
in key strategic initiatives to enhance client experiences, building core
funding sources, and leveraging current and future investment in
technology. While CWB’s planned transition to the AIRB methodology
for capital and risk management is expected to be effective within
the medium-term timeframe, benefits to financial performance from
this capital management transition are not incorporated within the
medium-term targets presented above.
expected to continue to benefit from the ongoing contributions of
CWB Maxium, CWB Franchise Finance, CWB National Leasing and
CWB Optimum Mortgage, as well as the planned opening of a CWB
Bank branch in calendar 2019.
Overall growth of residential mortgages is expected to continue to
resemble the growth rate across the rest of CWB’s loan portfolio in
fiscal 2019. With increased securitization capabilities, management
expects CWB’s residential mortgage growth to include an increased
proportion of “A” mortgages sourced both through the CWB
Optimum broker channel and CWB’s branch network. “A” mortgages
are residential mortgages eligible for bulk portfolio insurance.
Profitable loan growth with continued strategic
diversification and ongoing growth and
diversification of funding sources
CWB will continue to support high-quality borrowers with a focus
on business owners operating within targeted industry segments
across Canada. Continued strategic execution has positioned CWB to
capture increased market share within a larger addressable market,
and management remains committed to deliver double-digit annual
loan growth whenever prudent. This includes a continued focus on
secured loans that offer an appropriate return and acceptable risk
profile. CWB’s pipeline of new organic growth opportunities across
all provinces continues to expand and loan growth in fiscal 2019 is
expected to be strong across CWB’s national geographic footprint.
Notwithstanding the impact of a slowing housing market, which could
disproportionately affect BC, and lower oil prices with challenges
related to constrained energy transportation infrastructure, which
could disproportionately affect Alberta, the outlook for continued
growth in both provinces is positive. Within Ontario, growth is
to assess
the ongoing
Management continues
impacts of
macroprudential measures on housing market conditions and future
construction-related opportunities within targeted markets.
In
general, CWB expects to continue to identify opportunities to finance
well-capitalized developers on the basis of sound loan structures and
acceptable pre-sale/lease levels.
CWB’s strategic focus to grow and diversify funding sources will
continue. This includes ongoing investment in capabilities to compete
for
relationship-based, branch-raised deposits, with particular
emphasis on demand and notice deposits. This funding segment is
typically lower cost and provides associated transactional fee income.
Future growth in branch-raised funding is also expected to reflect
success in acquiring more clients and developing broader, full-service
client relationships across the country.
Continued development of new and more effective products, along
with an ongoing strategic focus on business transformation and
process improvement, will enhance the client experience, strengthen
CWB’s competitive position and support various growth initiatives
related to branch-raised funding over the medium term. CWB’s
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25
Efficient operations and operating leverage
A key priority for CWB is to deliver consistent increases in adjusted
cash earnings per share through business growth and strategic
investment while maintaining effective control of costs. Realignment
of CWB’s credit support structure, and
the complementary
forthcoming realignment of client-facing teams within CWB banking
branches, is expected to improve efficiency over the medium term
through increasingly scalable operations and effective leverage of
CWB’s investment in strong core technology. CWB’s ongoing targeted
investment in people, technology and infrastructure is expected to
contribute to long-term shareholder value through improved financial
performance in future periods.
In view of the level of necessary future investment to facilitate ongoing
business transformation in support of CWB’s Balanced Growth
strategy, management expects CWB’s efficiency ratio to fluctuate
within a relatively narrow range around 46% over the near term, and
expects to deliver a moderate level of positive operating leverage on a
full-year basis in 2019. Quarterly volatility of operating leverage may
occur based on the timing of expenditures.
Prudent capital management and dividends
With a very strong CET1 capital ratio under the more conservative
Standardized approach for calculating risk-weighted assets, CWB is
well positioned to create value for shareholders through a range of
capital deployment options consistent with management’s Balanced
Growth strategy. Ongoing support and development of each of CWB’s
businesses will remain a key priority, and management will continue to
evaluate potential strategic acquisitions.
A Normal Course Issuer Bid (NCIB) authorizing CWB to purchase for
cancellation prior to September 30, 2019, up to 1,767,000 common
shares is in place. Management may choose to activate the NCIB in
fiscal 2019 should appropriate circumstances become apparent.
Common share dividend increases are evaluated every quarter
against capital requirements under the Standardized approach and
opportunities to create value for shareholders through various forms
of capital deployment, including support for ongoing strong and
balanced asset growth.
Further guidance related to management’s expectations for specific
measures of financial performance, as well as related risk factors, is
provided within the Outlook sections of this MD&A.
growing market presence to support strong performance against these
goals will include further investment in digital banking capabilities,
including the CWB Virtual Branch offering, and targeted development
of CWB’s full-service branch network.
Continued diversification of funding sources is also expected to include
growth of both debt capital markets and securitization funding channels.
Strong revenue growth
CWB expects to deliver double-digit percentage growth of net interest
income in fiscal 2019 through the combined positive impact of strong
loan growth and higher net interest margin. CWB’s Balanced Growth
strategy includes support for net interest margin through delivery of
new capabilities to accelerate growth of branch-raised deposits, along
with a sustained focus to drive strong growth in higher yielding loan
portfolios with an acceptable risk profile. Coupled with the benefit of
rising interest rates, including current expectations for one additional
Bank of Canada rate increase in early calendar 2019, management
expects continued strategic execution to support net interest margin
improvement in 2019 similar to the level achieved in 2018. Further
improvement is possible in 2019 if competitive factors currently
affecting both deposit costs and asset yields within certain portfolios
begin to subside, or if additional Bank of Canada rate increases occur.
CWB also expects to restore positive growth of non-interest income in
fiscal 2019. Increases are expected across most categories, reflecting
CWB’s strategy to extend and deepen relationships with both new and
existing business and personal clients. ‘Other’ non-interest income is
expected to be lower, reflecting the impact of gains on sale related to
the CWT strategic transactions realized in 2018.
Strong credit quality
Overall credit quality is expected to reflect CWB’s secured lending
business model, disciplined underwriting practices and proactive loan
management. Management expects impaired loans as a percentage
of the loan portfolio to remain within CWB’s risk appetite. A higher
relative concentration of impaired loans in Alberta may persist, both
due to the lagging impacts of the 2015 – 2016 regional recession and
the potential impact of persistent regional commodity price weakness
and economic challenges related to constrained energy transportation
infrastructure. Gross impaired loans within CWB Optimum may
increase in the event of a material correction of residential home
prices. Actual loss rates on current and future impaired loans are
expected to be low, reflecting the combined positive impact of CWB’s
disciplined underwriting, secured lending practices, and proactive
account management. This expectation is consistent with CWB’s prior
experience, where write-offs have typically been low as a percentage of
impairments. Management remains confident in the strength, diversity
and underwriting structure of the overall loan portfolio and lending
exposures continue to be closely monitored for signs of weakness.
Provisions related to performing loans are expected to be more volatile
due to the implementation of a forward-looking expected credit
loss model upon transition to IFRS 9 Financial Instruments (IFRS 9)
beginning November 1, 2018. Further detail is provided under Future
Changes in Accounting Policies within this MD&A.
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27
NET INTEREST INCOME
Net interest income is the difference between interest and dividends earned
on assets, and interest paid on deposits and other liabilities, including debt.
Net interest margin is net interest income as a percentage of average total
assets.
Highlights of 2018
• Strong 13% growth of net interest income to a record $725
• Changes in funding mix primarily reflect continued execution
million, reflecting 13% loan growth and a four basis point increase
in net interest margin to 2.60%.
• The improvement in net interest margin was consistent with
management’s expectations and primarily reflects increased asset
yields from the higher interest rate environment, partially offset by
changes in funding costs and funding mix.
• Higher asset yields reflect both the impact on floating rate loan
yields from an increase in the average prime rate of 67 basis
points, as well as repricing of fixed rate loans and deposits at
maturity.
of CWB’s Balanced Growth strategy for funding diversification,
including growth in debt capital markets and securitization
funding channels, continued increases in branch-raised deposits
and decreased reliance on broker deposits as a proportion of total
funding.
• An ongoing shift in depositor preference toward longer duration
fixed-term deposits has also become apparent with the rising
interest rate environment.
Table 6 - Net Interest Income(1)(2)
($ thousands)
Assets
Cash, securities and deposits with
2018
2017
Average
Balance
Mix
Interest
Interest
Rate
Average
Balance
Mix
Interest
Interest
Rate
regulated financial institutions
$
2,731,904
10 % $
39,574
1.45 % $
2,443,633
10 % $
33,196
1.36 %
Securities purchased under
resale agreements
Loans
Personal
Business
Total interest bearing assets
Other assets
13,915
-
191
1.37
25,300
-
138
0.54
4,951,222
19,653,260
24,604,482
27,350,301
550,806
18
70
88
98
2
190,802
994,728
1,185,530
1,225,295
-
3.85
5.06
4.82
4.48
0.00
4,373,295
17,803,589
22,176,884
24,645,817
479,376
17
71
88
98
2
164,816
829,134
993,950
1,027,284
-
3.77
4.66
4.48
4.17
0.00
Total Assets
$ 27,901,107
100 % $ 1,225,295
4.39 % $ 25,125,193
100 % $ 1,027,284
4.09 %
Liabilities
Deposits
Personal
$ 13,911,075
50 % $
287,519
2.07 % $ 13,006,738
52 % $
236,274
1.82 %
Business and government
8,906,830
22,817,905
32
82
164,244
451,763
Securities sold under
repurchase agreements
Other liabilities
Debt
Shareholders' equity
Non-controlling interests
52,406
608,108
1,894,203
2,525,934
2,551
-
2
7
9
-
763
-
47,779
-
-
1.84
1.98
1.46
0.00
2.52
0.00
0.00
7,949,443
20,956,181
42,775
456,136
1,279,283
2,389,701
1,117
31
83
-
2
5
10
-
119,002
355,276
1.50
1.70
245
-
29,373
-
-
0.57
0.00
2.30
0.00
0.00
Total Liabilities and Equity
$ 27,901,107
100 % $
500,305
1.79 % $ 25,125,193
100 % $
384,894
1.53 %
Total Assets/Net Interest Income
$ 27,901,107
$
724,990
2.60 % $ 25,125,193
$
642,390
2.56 %
(1) See page 20 for a discussion of non-IFRS measures.
(2) Commencing in 2018, CWB discontinued the use of the taxable equivalent basis (teb) non-IFRS measure as the teb adjustment is no longer of material significance to CWB’s results. Previously, teb increased interest income and the
provision for income taxes to what they would have been had certain tax-exempt securities been taxed at the statutory rate. All prior period comparatives have been restated to conform to the current presentation.
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27
Net interest income increased 13% to a record $725 million. Strong growth
was primarily driven by the 11% increase in average interest-earning assets
and a four basis point increase in net interest margin to 2.60%.
The yield on CWB’s average interest-earning assets increased 31 basis
points to 4.48% in 2018. This primarily reflects the higher interest rate
environment following increases in the Bank of Canada’s overnight rate
in July 2017, September 2017, January 2018, July 2018 and October
2018, with the 2018 Bank of Canada changes resulting in a 67 basis point
increase in the average prime rate this year. Increased contributions from
the relatively higher-yielding equipment financing and general commercial
loan portfolios also contributed to the increase in yield on average
interest-earning assets. Growth in both categories was supported by the
acquisition of business lending assets on January 31, 2018, along with
ongoing contributions from CWB Maxium, CWB Franchise Finance, CWB
National Leasing and the CWB branch network.
The yield on average cash, securities and deposits with regulated financial
institutions was up nine basis points from last year, reflecting the higher
interest rate environment. Average balances of cash and securities were
lower compared to the prior year, reflecting reduced average liquidity
requirements partially driven by the increase in the average duration of
deposits.
Average deposit costs were up 28 basis points from last year and the
overall cost of average interest bearing liabilities and equity increased 26
basis points to 1.79%. The average cost of both personal and business
and government deposits were higher due to changes in the interest
rate environment as well as deposit mix. The changes in deposit mix
demonstrated depositors increasing preference for higher-cost fixed-
term deposits compared to demand and notice deposits, and competitive
factors remained apparent. Debt-related costs were 22 basis points higher
with increased use of securitization funding channels.
Outlook for Net Interest Income
CWB expects to deliver double-digit percentage growth of net interest
income in fiscal 2019 through the combined positive impact of strong
loan growth and higher net interest margin. CWB’s Balanced Growth
strategy includes support for net interest margin through delivery of
new capabilities to accelerate growth of branch-raised deposits, along
with a sustained focus to drive strong growth in higher yielding loan
portfolios with an acceptable risk profile. Coupled with the benefit of
rising interest rates, including current expectations for one additional
Bank of Canada rate increase in early calendar 2019, management
expects continued strategic execution to support net interest margin
improvement in 2019 similar to the level achieved in 2018. Further
improvement is possible in 2019 if competitive factors currently
affecting both deposit costs and asset yields within certain portfolios
begin to subside, or if additional Bank of Canada rate increases occur.
NON-INTEREST INCOME
Highlights of 2018
• Non-interest income of $78 million was down 7%, as growth
in wealth management income was more than offset by the
impact of the CWT strategic transactions and decreases in other
categories.
• Adjusted for the impact of the CWT strategic transactions in both
years, including related gains on sale and revenues associated with
transferred accounts, non-interest income in fiscal 2018 would
have been relatively stable compared to the prior year.
• Non-interest income represented 10% of total revenues, down
from 12% in 2017.
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29
Table 7 - Non-interest Income
($ thousands)
Credit related
Wealth management services
Retail services
Trust services
Gains (losses) on securities, net
Other(1)
Total Non-interest Income
2018
$
32,165
$
20,371
10,334
7,784
(217)
7,931
$
78,368
$
2017
34,012
19,073
10,758
11,305
664
8,433
84,245
$
$
Change from 2017
$
(1,847)
1,298
(424)
(3,521)
(881)
(502)
(5,877)
%
(5)%
7
(4)
(31)
nm (2)
(6)
(7)%
(1) Includes gains on CWT strategic transactions and loan portfolio sales, lease administration services, foreign exchange gains/losses, gains/losses on land, buildings and equipment disposals, and other miscellaneous non-interest
revenues.
(2) nm – not meaningful
Non-interest income of $78 million was down 7%, or $6 million, from fiscal
2017 as a $1 million increase in wealth management income, primarily
reflecting the positive impact of client acquisition, was more than offset
by the impact of the CWT strategic transactions and decreases in other
categories. Trust services income was $4 million lower, relatively consistent
with the approximately $3 million expected impact of the CWT strategic
transactions. The $2 million decrease in credit related fee income partly
relates to the shift in loan growth to emphasize general commercial loans,
which tend to be associated with lower fees as compared to real estate
project loans with more complex structures. Fiscal 2017 also included both
recognition of certain loan fees when collected, along with the remaining
amortization of fees collected prior to the banking system conversion.
‘Other’ non-interest income was $1 million lower. While foreign exchange
related income within this category increased, pre-tax gains on sale related
to the CWT strategic transactions were $4 million this year, compared to
$6 million last year, and income related to lease administration services also
declined. Nil net realized gains/losses on securities compare to a net gain
of $1 million in 2017.
Outlook for Non-interest Income
CWB expects to restore positive growth of non-interest income in
fiscal 2019. Increases are expected across most categories, reflecting
CWB’s strategy to extend and deepen relationships with both new and
existing business and personal clients. Growth of credit related fee
income is expected to accompany strong, high-quality loan growth.
Strong performance within CWB Wealth Management is expected
to reflect efforts to increase the scope and scale of discretionary
investment management services and proprietary investment products.
Management will also continue to consider strategically aligned wealth
management acquisition opportunities. Enhanced
transactional
capabilities in cash management and other retail services, including
CWB’s relationship-based, branch-raised deposit franchise, is expected
to drive increases in retail services fees. Following completion of the
CWT strategic transactions in 2018, trust services income is expected
to benefit from increased focus within CWT on lines of business that
are aligned with CWB’s Balanced Growth strategy. ‘Other’ non-interest
income is expected to be lower, reflecting the impact of gains on sale
related to the CWT strategic transactions realized in 2018.
Based on the current composition of the debt securities portfolio, net
gains and losses are not expected to contribute materially to non-
interest income in 2019; however, the magnitude and timing of gains
and losses are dependent on market factors that are difficult to predict.
Upon transition to IFRS 9 on November 1, 2018, unrealized gains
and losses on preferred shares are recorded in other comprehensive
income (OCI) and gains and losses, including those that arise upon
the sale of preferred shares, are also recorded in OCI and are not to be
subsequently recognized through earnings. Related detail is provided
under Future Changes in Accounting Policies within this MD&A.
28
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CWB Financial Group 2018 Annual Report
29
NON-INTEREST EXPENSES, EFFICIENCY AND OPERATING LEVERAGE
Highlights of 2018
• Excellent performance on measures of operational effectiveness
reflects the impact of strong, double-digit revenue growth and
disciplined control of discretionary expenses.
• Operating leverage was positive 1.9%.
• CWB’s efficiency ratio improved to 45.7% from 46.5% in 2017.
Table 8 - Non-interest Expenses and Efficiency Ratio
($ thousands)
2018
2017
$
Change from 2017
Salaries and Employee Benefits
Salaries
Employee benefits
Premises
Rent
Depreciation
Other
Equipment and Software
Depreciation
Other
General
Professional fees and services
Regulatory costs
Marketing and business development
Amortization of acquisition-related intangible assets
Banking charges
Travel
Loan-related credit reports
Postage and stationery
Employee recruitment
Employee training
Staff relations
Community investment
Communications
Capital and business taxes
Mutual fund administration
General insurance
Parking
Other
Total Non-interest Expenses
$
198,203
$
184,670
$
39,025
237,228
35,746
220,416
20,730
5,074
3,854
29,658
18,321
14,775
33,096
12,241
10,107
9,081
6,313
5,519
3,805
2,821
2,629
2,484
2,360
2,323
2,070
1,795
1,453
1,084
1,045
963
5,408
20,738
5,036
3,532
29,306
18,096
12,946
31,042
9,439
8,826
7,691
7,560
5,062
3,263
2,565
2,668
1,065
1,407
1,616
2,000
1,836
1,399
1,037
1,006
864
5,398
13,533
3,279
16,812
(8)
38
322
352
225
1,829
2,054
2,802
1,281
1,390
(1,247)
457
542
256
(39)
1,419
953
707
70
(41)
54
47
39
99
10
73,501
64,702
$
373,483
$
345,466
$
8,799
28,017
Efficiency Ratio(1)(2)
45.7%
46.5%
(1) See page 20 for a discussion of non-IFRS measures.
(2) A decrease in this ratio reflects improved efficiency, while an increase reflects deterioration.
(3) bp – basis points.
%
7 %
9
8
-
1
9
1
1
14
7
30
15
18
(16)
9
17
10
(1)
133
68
44
4
(2)
4
5
4
11
-
14
8 %
(80)bp(3)
30
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
31
Total non-interest expenses of $373 million were up 8% ($28 million).
Overall salaries and employee benefits increased 8% ($17 million). Higher
salaries and benefits mainly reflect hiring activity to support overall business
growth, as well as annual salary increments and higher incentive pay given
strong results. The net increase in overall full-time equivalent employees
was moderate at 6%.
Equipment and software costs were up 7% ($2 million) primarily due
to ongoing investment in technology infrastructure to position CWB
for future growth and improve CWB’s client and employee experience.
Premises expense was unchanged. General non-interest expenses were up
14% or $9 million mainly due to increases in fees for professional fees and
services, regulatory costs, marketing and business development, as well as
employee recruitment and training.
Operating leverage for the year was positive 1.9% and the efficiency ratio
of 45.7% improved by 80 basis points from last year. Strong performance
on both metrics reflects the combined positive impact of higher revenues
from ongoing loan growth and higher net interest margin, as well as
effective management of discretionary expense growth.
Figure 1 – Number of Full-time Equivalent Staff
2,094(1)
(+3%)
1,788
(+4%)
1,928
(+8%)
1,966
(+2%)
2,178
(+6%)
2,058
(+5%)
2000
1500
1000
500
0
2014
2015
2016
2017
2018
Continuing Operations
Discontinued Operations
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and stock transfer business. Figures
associated with the businesses sold are defined as “Discontinued Operations”. The remaining operations are
defined as “Continuing Operations”.
30
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CWB Financial Group 2018 Annual Report
31
Outlook for Non-interest Expenses, Efficiency and Operating Leverage
CWB’s medium-term targets for growth of adjusted cash earnings
per share and positive operating leverage incorporate expectations
for strong business growth supported through strategic investment
in people, technology and infrastructure, along with effective control
of expense growth. CWB’s annual efficiency ratio over the past three
years has been approximately 46%. Management expects CWB’s
efficiency ratio to fluctuate around this level over the near term, and
expects to deliver a moderate level of positive operating leverage on a
full-year basis in 2019. Quarterly volatility of operating leverage may
occur based on the timing of expenditures.
ACQUISITION-RELATED FAIR VALUE CHANGES
The estimated change in fair value of contingent consideration related to
the acquisition of CWB Maxium amounted to $20 million, compared to
$18 million last year. The change in fair value reflects the expected value of
the contingent consideration after evaluating actual earnings to date and
the estimated probability-weighted future operating performance of CWB
Maxium. CWB Maxium has delivered strong performance, consistent with
management’s expectations.
Outlook for Acquistion-related Fair Value Changes
The earn-out period related to the acquisition of CWB Maxium
concludes on February 28, 2019, with 2019 fair value changes of
approximately $8 million representing the maximum payout available
through the purchase agreement. Related detail is provided in Note 26
to the consolidated financial statements.
INCOME TAXES
The 2018 effective income tax rate was 26.8%, compared to 26.4% in
2017, with the slightly higher rate this year mainly due to the tax treatment
of CWT-related gains on sale in both years.
Deferred tax assets and liabilities represent the cumulative amount of tax
applicable to temporary differences between the carrying amount of assets
and liabilities, and their values for tax purposes. CWB’s deferred income tax
assets and liabilities relate primarily to the collective allowance for credit
losses and intangible assets.
Outlook for Income Taxes
CWB’s expected income tax rate for fiscal 2019 is approximately 27%.
Deferred tax assets and liabilities are measured using enacted or
substantively enacted tax rates anticipated to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Changes in deferred income taxes related to a change
in tax rates are recognized as income in the period of the tax rate change.
32
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
33
COMPREHENSIVE INCOME
income
is comprised of net
Comprehensive
income and other
comprehensive income (OCI), all net of income taxes. CWB’s OCI includes
changes in unrealized gains and losses on available-for-sale cash and
securities, and fair value changes for derivative instruments designated as
cash flow hedges. The increase in comprehensive income was primarily
driven by very strong 15% ($35 million) growth of net income, partially
offset by a decrease in OCI of $26 million. Changes in OCI mainly reflect
Table 9 - Comprehensive Income
($ thousands)
Net Income
Other Comprehensive Income (Loss)
Available-for-sale securities
Gains (losses) from change in fair value, net of tax
Reclassification to net income, net of tax
Derivatives designated as cash flow hedges
Losses from change in fair value, net of tax
Reclassification to net income, net of tax
Other Comprehensive Income (Loss), net of tax
Total Comprehensive Income
the combined impact of a $24 million decrease in the change in fair value
of available-for-sale securities and a $2 million decrease in the change in
fair value of derivatives designated as cash flow hedges. CWB`s portfolio of
available-for-sale securities is comprised of debt securities and investment
grade preferred shares. Fluctuations in value are generally attributed to
changes in interest rates, movements in market credit spreads and shifts in
the interest rate curve.
2018
2017
Change from 2017
$
264,647
$
229,655
$
34,992
(19,945)
158
(19,787)
(26,848)
(994)
(27,842)
(47,629)
4,021
(485)
3,536
(22,089)
(3,321)
(25,410)
(21,874)
$
217,018
$
207,781
$
(23,966)
643
(23,323)
(4,759)
2,327
(2,432)
(25,755)
9,237
CASH AND SECURITIES
Cash, securities and securities purchased under resale agreements
amounted to $2.2 billion at October 31, 2018, compared to $2.7 billion
last year. The cash and securities portfolio is mainly comprised of high-
quality debt instruments and investment grade preferred shares that are
not held for trading purposes and, where applicable, are typically held to
maturity. Fluctuations in the value of securities are generally attributed to
changes in interest rates, movements in market credit spreads, shifts in
the interest rate curve, as well as volatility in equity markets. Total net
unrealized losses before tax recorded on the balance sheet at October 31,
2018 were $67 million, compared to $40 million last year. Net unrealized
gains or losses are reflected in the following table.
Table 10 - Unrealized Gains (Losses) on Available-for-Sale Cash and Securities
($ thousands)
As at October 31, 2018
As at October 31, 2017
Amortized
Cost
Net Unrealized
Gains (Losses)
Fair
Value
Amortized
Cost
Net Unrealized
Gains (Losses)
Fair
Value
Deposits with Regulated Financial Institutions
$
26,825
$
-
$
26,825
$
503,913
$
(18)
$
503,895
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
Total
1,362,647
(36,831)
1,325,816
1,327,541
(20,243)
1,307,298
531,798
146,610
110,696
(9,973)
(3,074)
(17,121)
521,825
143,536
93,575
443,510
306,671
149,159
(4,652)
1,750
(16,749)
438,858
308,421
132,410
$ 2,178,576
$
(66,999)
$ 2,111,577
$ 2,730,794
$
(39,912)
$ 2,690,882
32
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
33
The increase in unrealized losses on securities compared to 2017 primarily
relates to lower market values of government debt securities due to
increases in the Bank of Canada’s overnight rate. The level of unrealized
losses on securities is regularly reviewed.
Impairment charges on debt securities and preferred shares are reflected
in net gains/losses on securities only in the case of an issuer credit event.
CWB has no direct investment in any non-Canadian sovereign debt or
other securities issued outside of Canada or the United States.
Net losses on securities were nil in 2018, compared to net gains of $1
million last year.
See Table 28 – Valuation of Financial Instruments of this MD&A for
additional information on significant financial assets and liabilities reported
at fair value.
The balance and mix of cash and securities are managed as part of CWB’s
overall liquidity management process; additional information, including
management’s outlook for 2019, is included in the Liquidity Management
discussion of this MD&A.
LOANS
Highlights of 2018
• Strong execution of CWB’s Balanced Growth strategy with 13%
• Achieved further industry diversification, with very strong
loan growth, including 3% from the strategic and highly accretive
acquisition of business lending assets on January 31, 2018.
• Achieved further geographic diversification, with Ontario-based
loans representing 21% of total loans at year end, compared
to 19% last year, and loans in Central and Eastern Canada
representing 26%, compared to 23% in 2017.
18% growth in general commercial loans and 23% growth in
equipment financing and leasing, including ongoing contributions
from CWB’s established lines of business and further support from
the acquisition of business lending assets.
• Strong 11% growth in personal loans and mortgages, including
the contributions of CWB Optimum.
• Strong 9% growth in both BC and Alberta, and 28% growth in
• The outstanding balance of business lending assets acquired at
Ontario.
the end of the first quarter was $684 million at October 31, 2018,
consistent with management’s expectations.
Table 11 - Outstanding Loans by Portfolio
($ millions)
General commercial loans
Personal loans and mortgages
Commercial mortgages
Equipment financing and leasing
Real estate project loans
Oil and gas production loans
Total Outstanding Loans
(1) Total loans outstanding by lending sector excludes allowance for credit losses.
Total loans before the allowance for credit losses increased 13% to reach
$26.3 billion at year end, with the business lending assets acquired on
January 31, 2018 contributing approximately 3% to annual loan growth.
Growth by lending sector was consistent with CWB’s Balanced Growth
strategy. In dollar terms, growth was led by the strategically targeted
general commercial category ($1.2 billion), including $160 million from the
acquisition of business lending assets. In percentage terms, annual growth
within this category was 18% overall, including growth of 39% in Ontario,
16% in Alberta and 14% in BC General commercial lending reflects activity
across a broad range of industries, such as manufacturing, construction,
transportation, healthcare, professional services, hospitality, and wholesale
and retail trade. Very strong performance within this category is consistent
with CWB’s Balanced Growth strategy, and reflects ongoing efforts to
leverage development of full-service relationships with business owners to
support CWB’s funding diversification objectives.
Growth of equipment financing and leasing was also very strong at 23%
($887 million) overall, with $524 million contributed from the acquisition
34
CWB Financial Group 2018 Annual Report
Change from 2017
2018
2017
$
$
7,458
$
6,307
$
1,151
5,247
4,865
4,779
3,855
129
4,726
4,267
3,892
4,030
124
521
598
887
(175)
5
$
26,333
$
23,346
$
2,987
%
18 %
11
14
23
(4)
4
13 %
of business lending assets and ongoing contributions from CWB National
Leasing and CWB’s branch-based equipment financing teams.
Commercial mortgages increased 14% ($598 million), led by growth in
BC, Alberta and Ontario.
Personal loans and mortgages increased 11% ($521 million). Overall
growth reflects continued origination of both alternative and “A”
mortgages, where “A” mortgages consist of residential mortgages eligible
for bulk portfolio insurance. Alternative mortgages originated within CWB’s
broker-sourced residential mortgage business, CWB Optimum, represent
approximately 54% of CWB’s personal loans and mortgage portfolio, or
approximately 11% of CWB’s total loans (2017 – 11%). Lending activity
in banking branches and CWB’s participation in the National Housing Act
Mortgage Backed Security (NHA MBS) program comprise the remainder
of CWB’s personal loans and mortgages exposure. The gross amount of
mortgages securitized under the NHA MBS program was $609 million
(2017 – $381 million).
CWB Financial Group 2018 Annual Report
35
The mix of CWB’s portfolio (see Figure 2) shifted in a manner consistent
with CWB’s Balanced Growth strategy. Growth was strong in general
commercial loans, equipment financing and leasing, and personal loans
and mortgages. The growth in commercial mortgages was also strong at
14%; however, the proportion of commercial mortgages as a percentage
of the total portfolio remained flat, while concentrations of real estate
project loans and oil and gas production lending declined.
The change in the mix of CWB’s portfolio based on the location of security
(see Figure 3) was also consistent with management’s Balanced Growth
strategy. BC and Alberta represented 34% and 32%, respectively, of
total loans at October 31, 2018, compared to 35% and 33% in 2017,
respectively. Ontario represented 21% of total loans at the end of
fiscal 2018, up from 19% last year. This result was underpinned by the
acquisition of business lending assets, with approximately three quarters
of the portfolio exposures distributed across Central and Eastern Canada.
Ongoing strong performance from CWB’s previously established businesses
with a national footprint, including CWB Maxium, CWB Franchise Finance,
CWB Optimum Mortgage and CWB National Leasing, also contributed to
further geographic diversification.
Net of portfolio sales, total loans of $3,013 million within CWB Optimum
increased 10% ($267 million) from last year. This compares to 20%
($463 million) growth in fiscal 2017. Growth within CWB Optimum in
fiscal 2018 was primarily driven by alternative mortgages secured via first
mortgages carrying a weighted average loan-to-value ratio at initiation of
approximately 69%. At approximately 56% of the total, Ontario represents
the largest geographic exposure by province within CWB Optimum’s
portfolio, followed by BC at 18% and Alberta at 17%. The average size of
CWB Optimum mortgages originated in 2018 was approximately $342,000
and the average size of all mortgages outstanding at October 31, 2018
was approximately $298,000. As expected, changes to OSFI’s Guideline
B-20, Residential Mortgage Underwriting Practices and Procedures (B-20),
somewhat curtailed market activity in 2018 and constrained originations
within CWB Optimum compared to prior periods. The lower growth
rate this year reflects a 5% annual decrease in alternative mortgage
originations, partially offset by an increase in the renewal rate with existing
CWB Optimum borrowers to 77%, from 70% last year.
Real estate project loans contracted $175 million, consistent with
management’s expectations, reflecting the successful completion of
development projects along with reduced new activity within Alberta.
CWB maintained a proactive approach in managing its small portfolio of oil
and gas production loans over the past year, with a 4% increase ($5 million)
from last year. This portfolio remains less than 1% of CWB’s total loans and
the majority of assets consist of syndicated loans to large producers, which
are shared with Canada’s large banks. Loans to producers directly exposed
to Western Canadian Select heavy oil comprise less than 0.05% of CWB’s
total loan portfolio.
Figure 2 – Outstanding Loans by Portfolio
(October 31, 2017 in brackets)
28% (27%)
General Commercial Loans
Oil & Gas Production
0% (1%)
20% (20%)
Personal Loans and Mortgages
Real Estate Project Loans
15% (17%)
19% (18%)
Commercial Mortgages
Equipment Financing
18% (17%)
34
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
35
Outlook for Loans
CWB will continue to support high-quality borrowers with a focus
on business owners operating within targeted industry segments
across Canada. Continued strategic execution has positioned CWB to
capture increased market share within a larger addressable market,
and management remains committed to deliver double-digit annual
loan growth whenever prudent. This includes a continued focus on
secured loans that offer an appropriate return and acceptable risk
profile. CWB’s pipeline of new organic growth opportunities across
all provinces continues to expand, and loan growth in fiscal 2019 is
expected to be strong across CWB’s national geographic footprint.
Overall growth of residential mortgages is expected to continue to
resemble the growth rate across the rest of CWB’s loan portfolio in
fiscal 2019. With increased securitization capabilities, management
expects CWB’s residential mortgage growth to include an increased
proportion of “A” mortgages sourced both through the CWB
Optimum broker channel and CWB’s branch network. Management
remains committed to the ongoing development of CWB Optimum as
it continues to produce solid returns while maintaining an acceptable
risk profile.
CWB continues to assess the ongoing impacts of macroprudential
measures on housing market conditions and future construction-
related opportunities within
In general,
management expects to continue to identify opportunities to finance
well-capitalized developers on the basis of sound loan structures and
acceptable pre-sale/lease levels.
targeted markets.
Potential risks that could have a material adverse impact on loan
growth expectations include a significant and sustained deterioration
in Canadian residential real estate prices, material changes to trade
agreements, including the imposition of tariffs, which could affect
the outlook for Canadian exports, further material weakening of
energy and other commodity prices compared to recent levels, with
persistently wide regional commodity price differentials, a material
contraction of economic growth in the U.S., or a significant disruption
in major global economies.
Diversification of Portfolio
Figure 3 – Geographical Distribution of Loans based on Location of Security
(October 31, 2017 in brackets)
32% (33%)
Alberta
34% (35%)
British Columbia
Ontario
21% (19%)
Saskatchewan
Manitoba
Quebec
Other
5% (6%)
3% (3%)
3% (2%)
2% (2%)
36
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
37
Table 12 - Total Advances Based on Industry Sector(1)
(% at October 31)
Construction
Consumer loans and residential mortgages
Real estate operations
Finance and insurance
Transportation and storage
Retail trade
Hotel/motel
Health and social services
Manufacturing
Agriculture
Oil and gas service
Utilities
Professional, scientific and technical services
Wholesale trade
Logging/forestry
Oil and gas production
Accommodation and food services
All other
Total
(1) Table is based on the North American Industry Classification System (NAICS) codes.
2018
21 %
20
18
2017
22 %
20
19
7
7
5
4
3
2
2
2
1
1
1
1
1
1
3
100 %
7
6
3
5
4
2
2
2
1
1
2
2
1
-
1
100 %
The loan portfolio is focused on areas of demonstrated lending expertise,
while concentrations measured by geographic area and industry sector are
managed within specified tolerance levels. The portfolio is well diversified
cluding a mix of business and personal loans, with significantly increased
geographic and industry diversification delivered over the past several years
and further diversification targeted through continued execution of CWB’s
Balanced Growth strategy.
Management expects the realignment to improve CWB’s reach within
defined geographic territories, enable more effective development of full-
service client relationships, and improve scalability of operations to drive
higher business growth, increased market share and improved profitability.
The acquisition of business lending assets in 2018 also enabled acceleration
of CWB’s strategy to expand its standard industrial equipment financing
operations into Ontario this year.
Branch-based lending teams continue to deliver on CWB’s unique client
value proposition with a focus on growth of targeted general commercial
relationships. Financing of standard industrial equipment will continue to
be primarily sourced by specialized lenders within CWB’s branch-based
equipment financing group.
Ahead of related work to be undertaken within client-facing teams across
CWB’s branch operations in 2019, activities within the equipment financing
group were reorganized this year to segment roles and responsibilities
between sales, operations and risk management.
Small- and mid-sized leases are offered across Canada through CWB
National Leasing. Larger, more complex commercial real estate and
corporate lending opportunities, including participation in syndicated
lending facilities primarily led by other Canadian banks, are originated
within ‘centres of excellence’ located in Western Canada. CWB Maxium
and CWB Franchise Finance both operate across the country, with their
primary focus outside of Western Canada. CWB Optimum maintains
centralized administration based in Edmonton, with a regional underwriting
centre located in Ontario, and sources residential mortgages through an
established network of mortgage brokers throughout the country. Oil and
gas production lending is conducted by specialists located in Calgary.
Outlook for Diversification of Portfolio
CWB’s Balanced Growth strategy will continue to target further
geographic and industry diversification. Higher relative growth rates
are expected in Central Canada, as compared to Western Canada, and
in general commercial loans, equipment financing and leasing, and
personal loans and mortgages as compared to real estate project loans
and commercial mortgages.
CWB’s pipeline of new organic growth opportunities across all
provinces continues to expand. Notwithstanding the impact of a
slowing housing market, which could disproportionately affect BC,
and lower regional oil prices with challenges related to constrained
energy transportation infrastructure, which could disproportionately
affect Alberta, the outlook for continued growth in both provinces is
positive. Growth in Ontario is expected to continue to reflect ongoing
contributions from CWB Maxium, CWB Franchise Finance, CWB
National Leasing and CWB Optimum Mortgage, as well as the planned
opening of CWB branch premises in calendar 2019.
Progress toward CWB’s strategic goal for Ontario to represent a third
of the overall portfolio is expected to moderate somewhat compared
to the significant progress achieved over the past several years. This
reflects expectations for strengthening relative contributions from
CWB’s lending teams in Western Canada, some degree of continuing
portfolio run-off within the Ontario-centric portfolio of business
lending assets acquired this year, normalization of very high non-
acquisition-related growth within CWB Maxium and CWB Franchise,
and continuing expectations for growth within CWB Optimum to
resemble organic growth across the rest of the portfolio.
Expectations for moderate growth, with the potential for further
incremental contraction, of real estate project loans reflects the combined
impact of this portfolio’s relatively short duration and management’s
strategic focus to grow other portfolios more quickly. Within the
parameters of its established risk appetite, CWB will continue to finance
well-capitalized developers on the basis of sound loan structures
and acceptable pre-sale/lease levels as such opportunities arise.
36
CWB Financial Group 2018 Annual Report
CWB Financial Group 2018 Annual Report
37
Commercial mortgages are often subject to a higher level of pricing
competition compared to other types of lending. CWB will remain
focused on maintaining this portfolio based on existing client
relationships within targeted markets and adequate risk-adjusted
returns. Overall growth in this category in fiscal 2019 is expected to
be moderate.
Management will continue with initiatives to develop and/or acquire
sources of high quality growth that are complementary to the
geographic and industry diversification objectives defined within
CWB’s Balanced Growth strategy.
CREDIT QUALITY
Highlights of 2018
• The 2018 provision for credit losses represented 20 basis points
of average loans, consistent with both CWB’s traditional range
of 18 – 23 basis points and management’s previously stated
expectations.
• Gross impaired loans represented 0.53% of total loans, down
from 0.72% last year.
• The total allowance for credit losses as a percentage of gross
impaired loans (coverage ratio) was 106%, compared to 81% in
2017.
Impaired Loans
The loan portfolio is delineated through the assignment of internal risk
ratings to each borrower. The rating is based on assessments of key
evaluation factors for the nature of the exposure applied on a consistent
basis across the portfolio. Risk ratings are updated at least annually for all
loans, with the exception of consumer loans and single-unit residential
mortgages.
last year. Gross impairments outside of Alberta represented 0.34% of non-
Alberta loans at October 31, 2018, down from 0.40% last year. The ten
largest accounts classified as impaired, measured by dollars outstanding,
represented 41% of total gross impaired loans at year end, down from
42%. New formations of impaired loans totaled $97 million, down 46%
from last year.
As shown in the table below, the dollar level of gross impaired loans at
October 31, 2018 totaled $138 million, down from $168 million last
year. This amount represented 0.53% of total loans, compared to 0.72%
at the end of 2017. Gross impaired loans within Alberta of $77 million
accounted for 56% of total impairments at year end, compared to 63%
The overall lower balance of impaired loans as a percentage of total loans
with a higher relative concentration of impaired loans in Alberta continues
to be consistent with management’s expectations and reflects the lagging
impacts of the 2015 – 2016 regional recession.
Table 13 - Change in Gross Impaired Loans
($ thousands)
Gross impaired loans, beginning of period
New formations
Reductions, impaired accounts paid down
or returned to performing status
Write-offs
Total, end of period(1)
Change from 2017
2018
2017
$
$
168,261
$
127,212
$
41,049
96,729
180,170
(83,441)
(81,759)
(45,359)
(92,027)
(47,094)
10,268
1,735
%
32 %
(46)
(11)
(4)
$
137,872
$
168,261
$
(30,389)
(18)%
Balance of the ten largest impaired accounts
Total number of accounts classified as impaired(2)
Total number of accounts classified as impaired under $1 million(2)
Gross impaired loans as a percentage of total loans(3)
$
56,748
$
70,935
$
(14,187)
(20)%
214
195
0.53 %
237
206
0.72 %
(23)
(11)
(10)
(5)
(19)bp(4)
(1) Gross impaired loans includes foreclosed assets held for sale with a carrying value of $6,628 (2017 – $1,983). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(2) Total number of accounts excludes CWB National Leasing.
(3) Total loans do not include an allocation for credit losses or deferred revenue and premiums.
(4) bp – basis point change.
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39
The overall loan portfolio is reviewed regularly with credit decisions
undertaken on a case-by-case basis to provide early identification of
possible adverse trends. The level of gross impaired loans fluctuates as
loans become impaired and are subsequently resolved, and does not
directly reflect the dollar value of expected write-offs given tangible security
held in support of lending exposures. Loans that have become impaired
are monitored closely by a specialized team with regular reviews of each
loan and its realization plan. Specific allowances for expected write-offs
are established through detailed analyses of both the overall quality and
marketability of security held against each impaired account. Please see the
Risk Management section of this MD&A for further information.
Outlook for Impaired Loans
Overall credit quality is expected to reflect CWB’s secured lending
business model, disciplined underwriting practices and proactive loan
management. Management expects impaired loans as a percentage
of total loans to remain within CWB’s risk appetite. A higher relative
concentration of impaired loans in Alberta may persist, both due to the
lagging impacts of the 2015 – 2016 regional recession and the potential
impact of persistent regional commodity price weakness and economic
challenges related to constrained energy transportation infrastructure.
Gross impaired loans within CWB Optimum may increase in the event
of a material correction of residential home prices. Actual loss rates on
Allowance for Credit Losses
Current estimates of expected write-offs for existing loans classified as
impaired are reflected in the specific provisions for credit losses, which
totaled $27 million, compared to $17 million a year earlier. Estimates
are established through detailed analysis of both the overall quality and
ultimate marketability of the security held against each impaired account.
Table 14 - Allowance for Credit Losses
($ thousands)
Specific Allowance
Equipment financing and leasing
General commercial loans
Commercial mortgages
Real estate project loans
Personal loans and mortgages
Oil and gas production loans
Collective Allowance
Total
Represented by:
current and future impaired loans are expected to be low, reflecting
the combined positive impact of CWB’s disciplined underwriting,
secured lending practices, and proactive account management. This
expectation is consistent with CWB’s prior experience, where write-
offs have typically been low as a percentage of impairments.
Management remains confident in the strength, diversity and
underwriting structure of the overall loan portfolio, and lending
exposures continue to be closely monitored for signs of weakness.
The year-over-year change in the allowance for credit losses split between
the specific allowance by category of impaired loans and the collective
allowance for credit risk is provided in the following table.
2018
Opening
Balance
Provision
for Credit
Losses
Write-Offs,
net of
Recoveries(1)
2018
Ending
Balance
$
10,132
$
28,026
$
(22,552)
$
15,606
3,071
385
2,020
209
800
16,617
119,298
17,709
2,905
(1,289)
1,410
(972)
47,789
468
(15,296)
-
1,269
(972)
172
(37,379)
-
5,484
3,290
2,000
647
-
27,027
119,766
$
135,915
$
48,257
$
(37,379)
$
146,793
Loans
Committed but undrawn credit exposures and letters of credit(2)
Total
$
128,529
18,264
$
146,793
(1) Recoveries in 2018 totaled $7,980.
(2) The collective allowance for credit losses related to committed but undrawn credit exposures and letters of credit is included in Other Liabilities on the consolidated balance sheets.
Allowances for credit losses are maintained to absorb both identified
and unidentified losses in the loan portfolio and, at October 31, 2018,
consisted of the above-mentioned $27 million (2017 - $17 million) of
specific allowances and $120 million (2017 – $119 million) in the collective
allowance for credit losses. The specific allowance includes the amount of
accumulated provisions for losses required to reduce the carrying value of
identified impaired loans to their estimated realizable value. The collective
allowance includes allowances for losses inherent in the portfolio that are
not presently identifiable on an account-by-account basis. Policies and
methodology governing the management of the collective allowance are
in place.
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The total allowance for credit losses as a percentage of gross impaired
loans (coverage ratio) increased to 106% from 81% in 2017 and the dollar
level of the collective allowance was stable compared to October 31, 2018.
An assessment of the adequacy of the collective allowance for credit
losses is conducted quarterly in consideration of:
• historical trends in loss experience during economic cycles;
• the current portfolio composition and profile;
• historical loss experience in portfolios that display similar credit risk
characteristics;
Outlook for Allowance for Credit Losses
• the estimated period of time between when the impairment occurs
and when the loss is identified; and,
• management’s judgment as to whether current economic and credit
conditions are such that the actual level of inherent losses at the
balance sheet date is likely to be greater or less than that suggested by
historical experience.
Specific allowances will continue to be determined on an account-by-
account basis and reviewed at least quarterly. Lower levels of specific
allowances are expected in strong economic times and higher levels of
specific allowances in weaker economic times. Allowances for credit
losses related to performing loans are expected to fluctuate as a result
of portfolio growth, normal progress through the credit cycle and the
adoption of IFRS 9 impairment requirements. Related detail is provided
under Future Changes in Accounting Policies within this MD&A.
Provision for Credit Losses
The 2018 provision for credit losses of $48 million was down 5% from
$51 million last year. The 2018 provision represented 20 basis points of
average loans, consistent with CWB’s traditional range of 18 – 23 basis
points and management’s previously stated expectations. This year’s
provision was three basis points lower than last year. Net new specific
provisions represented 19 basis points of average loans, unchanged
Table 15 - Provision for Credit Losses
($ thousands)
from 2017. CWB has a long history of strong credit quality and low loan
losses, both of which compare very favourably to the Canadian banking
industry. Macroeconomic and other external factors that may impact
core geographic regions and/or industry sectors in which CWB customers
operate are continually analyzed.
Provision for credit losses(1)
Net new specific provisions (net of recoveries)(2)
Write-offs(1)
Collective allowance
Coverage ratio(4)
2018
0.20 %
0.19
0.18
2017
0.23 %
0.19
0.21
2016(3)
0.38 %
0.32
0.34
2015
0.17 %
0.12
0.06
2014
0.15 %
0.07
0.09
$
119,766
$
119,298
$
110,943
$
99,613
$
90,075
106 %
81 %
100 %
122 %
154 %
(1) As a percentage of average loans.
(2) Portion of the year’s provision for credit losses allocated to specific provisions as a percentage of average loans.
(3) Provision for credit losses, net new specific provisions and write-offs in 2016 reflected the credit performance of oil and gas production loans, including the impact of regulatory factors on the liquidity of assets securing those loans.
(4) Allowance for credit losses as a percentage of gross impaired loans.
Outlook for the Provision for Credit Losses
Provisions related to performing loans are expected to be more volatile
due to the implementation of a forward-looking expected credit loss
model upon transition to IFRS 9 beginning November 1, 2018, which
incorporates key economic variables such as unemployment rates,
residential mortgage rates, gross domestic product growth, housing
resale price growth, the Canadian dollar/U.S. dollar exchange rate,
interest rates and oil price. The use of an expected loss methodology to
estimate the provision for credit losses is generally expected to recognize
credit losses earlier compared to the incurred loss methodology used
prior to November 1, 2018. While IFRS 9 will change the timing of
the recognition of credit losses, the actual amount of credit losses
realized over the life of a particular loan, represented by write-offs net
of recoveries, will not be impacted by this accounting change. Related
detail is provided under Future Changes in Accounting Policies within
this MD&A.
Actual write-offs are expected to continue to reflect CWB’s secured
lending business model and disciplined underwriting processes.
Potential risks that could have a material adverse impact on actual
write-offs include a significant and sustained deterioration in Canadian
residential real estate prices, material changes to trade agreements,
including the imposition of tariffs, which could affect the outlook
for Canadian exports, further material weakening of energy and
other commodity prices compared to recent levels, with persistently
wide regional commodity price differentials, a material contraction
of economic growth in the U.S., or a significant disruption in major
global economies.
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41
DEPOSITS AND FUNDING
Highlights of 2018
• Continued progress against CWB’s Balanced Growth strategy for
• Branch-raised deposits comprised 52% of total deposits,
funding diversification.
compared to 54% in 2017.
• Growth of debt capital markets with five successful senior deposit
note issuances or re-openings totaling $1.1 billion.
• Growth of securitization to fund both equipment loans and leases,
• Decrease in broker deposits as a percentage of funding, with this
category comprising 35% of total deposits at year end, down
from 36% in 2017.
and residential mortgages.
• Branch-raised deposit growth of 4%, including very strong 13%
growth of term deposits and relatively stable balances of lower-
cost demand and notice deposits.
Table 16 - Deposits
($ thousands)
2018
Personal
Business and government
Capital markets
Total Deposits
% of Total
2017
Personal
Business and government
Capital markets
Total Deposits
% of Total
Demand
Notice
Term
Total
% of Total
$
35,889
$
3,684,259
$ 10,763,538
$ 14,483,686
716,156
3,157,875
-
-
2,335,785
3,006,455
6,209,816
3,006,455
$
752,045
$
6,842,134
$ 16,105,778
$ 23,699,957
3 %
29 %
68 %
100 %
61 %
26
13
100 %
Demand
Notice
Term
Total
% of Total
$
37,984
$
3,699,356
$
9,657,222
$ 13,394,562
791,358
3,112,419
-
-
2,440,643
2,164,000
6,344,420
2,164,000
$
829,342
$
6,811,775
$ 14,261,865
$ 21,902,982
4 %
31 %
65 %
100 %
61 %
29
10
100 %
CWB delivered strong execution against its funding diversification strategy
in fiscal 2018. Total deposits of $23.7 billion were up 8% ($1.8 billion).
The proportion of deposits raised through the capital markets increased
to 13% of total deposits, compared to 10% in the prior year. CWB also
increased the use of securitization to fund originations of equipment leases
and residential mortgages. Personal deposits increased 8% ($1.1 billion),
including deposits issued through the deposit broker network, while
business and government deposits fell 2% ($134 million).
Relationship-based, branch-raised funding increased 4% ($509 million)
from last year, primarily driven by strong, 13% ($556 million) growth
of branch-raised term deposits. The balance of lower-cost demand and
notice deposits was relatively stable, including the impact of $30 million
transferred out in 2018 as part of the CWT strategic transactions (2017
- $71 million). Branch-raised deposits represented 52% of total deposits
at October 31, 2018, compared to 54% last year. Demand and notice
deposits comprised 32% of total deposits, compared to 35% in 2017.
Table 17 - Deposits by Source
(as a percentage of total deposits at October 31)
Branches
Deposit brokers
Capital markets
Total
2018
2017
52 %
35
13
100 %
54 %
36
10
100 %
References to branch-raised deposits within this MD&A include all deposits
generated through CWB’s full-service banking branches, including the CWB
Virtual Branch, as well as certain deposits raised via CWT, Motive Financial
and Valiant Trust’s deposit-taking franchise. Increasing the level of branch-
raised business and personal deposits is an ongoing strategic focus for CWB
as success in this area provides the most reliable and stable sources of funding.
CWT raises deposits through notice accounts, including cash balances held
in self-directed registered accounts as well as corporate trust deposits, and
through the CWB’s branch network. CWT’s notice account line of business
was a strong contributor to branch-raised deposit growth in fiscal 2018.
Motive Financial offers various deposit products to customers in all provinces
and territories except Quebec. In light of heightened competitive factors in
fiscal 2018, management chose to take a less aggressive growth strategy
with this channel. Client deposits in Motive Financial at October 31, 2018
totaled $305 million, unchanged from last year.
The fixed-term deposit franchises of CWT and Valiant Trust provide additional
channels for CWB to raise insured deposits.
Consistent with CWB’s commercial focus, a considerable portion of branch-
raised deposits are generated from business clients that tend to hold larger
balances compared to personal clients, which can increase the volatility of
demand and notice deposits (see the Liquidity Management section of this
MD&A).
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41
Other types of deposits are primarily sourced through a deposit broker
network and debt capital markets. Deposits raised through deposit
brokers are primarily insured, and the broker deposit market remains an
efficient and liquid, source of funding. Although these funds are subject to
commissions, this cost is countered by a reduced dependence on a more
extensive branch network and the benefit of generating insured fixed
term retail deposits over a wide geographic base. Of note, CWB actively
raises only fixed-term deposits through this funding channel, with terms to
maturity between one and five years, and does not offer a High Interest
Savings Account (HISA) product. Broker deposits comprised 35% of total
deposits at year end, down from 36% in 2017.
CWB also increased the use of securitization funding through continued
participation in the NHA MBS program and the Canada Mortgage Bond
(CMB) program. Fiscal 2018 funding from the securitization of leases,
loans and mortgages was $1.2 billion (2017 – $739 million), including
$182 million from participation in the CMB program.
Outlook for Deposits and Funding
CWB’s strategic focus to grow and diversify funding sources will
continue. This includes ongoing investment in CWB’s capabilities to
compete for relationship-based, branch-raised deposits, with particular
emphasis on demand and notice deposits. This funding segment is
typically lower cost and provides associated transactional fee income.
Future growth in branch-raised funding is also expected to reflect
success in acquiring more clients and developing broader, full-service
client relationships across the country.
initiatives related to branch-raised funding over the medium term.
New products to support strong performance against these goals
were introduced in fiscal 2018, including remote deposit capture
technology, a third online banking platform, capabilities to easily
transfer online services from competitors to CWB, and improved
foreign exchange facilitation services. CWB’s growing market presence
will also include further development of the CWB Virtual Branch, and
targeted development of CWB’s full-service branch network.
Continued development of new and more effective products, along
with an ongoing strategic focus on business transformation and
process improvement, is expected to enhance CWB’s client experience,
strengthen CWB’s competitive position and support various growth
Continued diversification of funding sources is also expected to
include growth of both debt capital markets and securitization
funding channels.
OTHER ASSETS AND OTHER LIABILITIES
Other assets at October 31, 2018 totaled $579 million (2017 – $509
million). Goodwill and intangible assets recorded on the balance sheet at
October 31, 2018 were $85 million (2017 – $86 million) and $161 million
(2017 – $150 million), respectively.
Other liabilities totaled $725 million at October 31, 2018 (2017 – $604
million). The higher balance of other liabilities relates to accounts payable
and accrued liabilities for derivatives used in liquidity management.
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43
LIQUIDITY MANAGEMENT
Highlights of 2018
• Maintained a prudent liquidity position and conservative
• Average balances of cash and securities compared to last year
investment profile.
• CWB’s Treasury Infrastructure Program has enhanced reporting,
forecasting and control activities for both liquidity and
asset/liability management which will support forthcoming
implementation of a more robust Funds Transfer Pricing (FTP)
framework.
partly reflects reduced liquidity requirements driven by the increase
in the average duration of deposits.
A schedule outlining the consolidated securities portfolio at October 31,
2018 is provided in Note 5 to the consolidated financial statements. A
conservative liquid asset profile is maintained by ensuring:
CWB’s liquidity management is a comprehensive process that includes,
but is not limited to:
• maintaining a pool of high-quality liquid assets;
• all investments are high quality and include government debt securities
• comprehensive liquidity scenario stress testing;
(both Canadian and U.S. government debt securities), short-term
money market instruments, and other marketable securities;
• specific investment criteria and procedures are in place;
• regular review, monitoring and approval of the Structural Market Risk
Policy is completed by CWB’s Asset and Liability Committee (ALCo);
and
• quarterly reports on the composition of the portfolio are provided to
the Board Risk Committee. The Board, or the Board Risk Committee,
annually reviews and approves structural interest rate and liquidity risk
policies and risk appetite statements.
Table 18 - Liquid Assets
($ thousands)
• monitoring the quality of the cash and securities portfolio;
• monitoring liability diversification and maturity profile;
• monitoring deposit behaviour;
• maintaining access to deposit and capital market funding sources; and
• monitoring microeconomic and macroeconomic factors and early
warning indicators.
2018
2017
Change from
2017
Cash and non-interest bearing deposits with financial institutions
$
73,822
$
17,491
$
Deposits with regulated financial institutions
Cheques and other items in transit
Total Cash Resources
Government of Canada, provincial and municipal debt, term to maturity 1 year or less
Government of Canada, provincial and municipal debt, term to maturity more than 1 year
Other debt securities
NHA mortgage-backed securities(1)
Securities sold under repurchase agreements
Total Securities Sold Under Repurchase Agreements and Marketable Securities
Total Liquid Assets
Total Assets
Liquid Assets as a Percentage of Total Assets
Total Cash and Securities
Cash and Securities as a Percentage of Total Assets
Total Deposit Liabilities
Liquid Assets as a Percentage of Total Deposit Liabilities
26,825
52,574
153,221
377,657
1,469,984
143,536
330,599
(95,126)
2,226,650
2,379,871
29,021,463
503,895
410
521,796
17,763
1,728,393
293,561
262,213
(58,358)
2,243,572
2,765,368
26,447,453
$
$
$
$
8 %
10 %
$
2,237,973
$
8 %
2,708,783
10
$
$
$
56,331
(477,070)
52,164
(368,575)
359,894
(258,409)
(150,025)
68,386
(36,768)
(16,922)
(385,497)
2,574,010
(200)bp(2)
(470,810)
(200)bp(2)
$
23,699,957
$
21,902,982
$
1,796,975
10 %
13 %
(300)bp(2)
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43
Includes securitized mortgages that were not transferred to third parties. These are reported in loans on the consolidated balance sheet at amortized cost.
(1)
(2) bp – basis points.
Liquid assets, as defined by OSFI, comprised of cash, deposits, securities
sold under repurchase agreements and marketable debt securities totaled
$2.4 billion at October 31, 2018 (2017 - $2.8 billion). Liquid assets
represented 8% (2017 - 10%) of total assets and 10% (2017 - 13%) of
total deposit liabilities at year end.
CWB’s liquidity management is based on an internal stressed cash flow
model, with the level of cash and securities driven primarily by the term
structure of both assets and liabilities, and the liquidity structure of
the liabilities. The composition of total liquid assets supports ongoing
compliance with the OSFI Liquidity Adequacy Requirements guideline.
Lower balances of cash and securities compared to last year partly reflect
reduced liquidity requirements driven by the increase in the average
duration of deposits. Other key changes in the composition of liquid assets
at October 31, 2018 compared to the prior year include:
• maturities within one year comprising 39% (2017 - 33%);
• Government of Canada, provincial and municipal debt securities and
unencumbered NHA MBS comprising 92% (2017 - 73%);
• deposits with regulated financial institutions comprising 6% (2017 -
19%); and,
• other marketable securities and securities sold under repurchase
agreements comprising 2% (2017 - 8%).
Table 19 - Deposit Maturities Within One Year
($ millions)
Additional sources of liquidity and funding in 2018 included $1.2 billion
(2017 - $739 million) from the securitization of leases and mortgages,
including $608 million (2017 - $381 million) of residential mortgages
which represent utilization of CWB’s NHA MBS allocation and $182 million
from participation in the CMB program (2017 - $40 million). The primary
source of incremental new funding was from senior deposit notes issued
through debt capital markets, as well as securitizations. A summary of all
outstanding deposits by contractual maturity date is presented in the two
following tables.
October 31, 2018
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
October 31, 2017 Total
Table 20 - Total Deposit Maturities
($ millions)
October 31, 2018
Demand deposits
Notice deposits
Deposits payable on a fixed date
Total
Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Total
Within 1 Year
$
752
$
6,842
607
$
-
-
$
-
-
1,216
4,285
752
6,842
6,108
$
8,201
$
1,216
$
4,285
$
13,702
$
8,173
$
921
$
5,070
$
14,164
Within
1 year
1 to 2
Years
2 to 3
Years
3 to 4
Years
4 to 5
Years
More than
5 Years
$
752
$
6,842
6,108
$
-
-
$
-
-
$
-
-
$
-
-
3,831
3,345
1,321
1,501
$
13,702
$
3,831
$
3,345
$
1,321
$
1,501
$
-
-
-
-
$
$
Total
752
6,842
16,106
23,700
October 31, 2017 Total
$
14,164
$
3,098
$
1,870
$
1,833
$
938
$
-
$
21,903
A breakdown of deposits by source is provided in Table 17. Target limits by
source have been established as part of the overall liquidity policy and are
monitored regularly to ensure an acceptable level of funding diversification
is maintained. Management continues to develop and implement strategies
to compete more effectively for branch-raised deposits to ensure it remains
the core source of funding, as discussed within the outlook for deposits
and funding.
Deposits raised through deposit brokers remain an effective incremental
funding source. Senior and bearer deposit notes raised in the capital
markets provide a further source of funding and liquidity.
In addition to deposit liabilities, CWB has subordinated debentures and
notional debt securities related to the securitization of loans, leases and
mortgages to third parties (refer to Note 9 and 16 of the consolidated
financial statements for additional information). A summary of the
subordinated debentures outstanding is presented in the following table:
Table 21 - Subordinated Debentures Outstanding
($ thousands)
Interest Rate
3.463%(1)
Maturity Date
Earliest Date Redeemable by CWB at Par
As at
October 31
2018
As at
October 31
2017
December 17, 2024
December 17, 2019 $
250,000
$
250,000
(1) These conventional debentures have a 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be reset quarterly at the 3-month Canadian Dollar Offered Rate (CDOR) rate plus 160 basis points.
Outlook for Liquidity Management
Internal methodologies for managing liquidity risk are continuously
refined. Management has initiated a multi-year program to upgrade
CWB’s treasury infrastructure, with expected benefits related to
all aspects of liquidity and asset/liability management, including
implementation of a FTP framework. CWB utilizes comprehensive
stress testing to manage, measure and monitor liquidity risk, and will
maintain prudent liquidity levels in 2019 while ensuring compliance
with the OSFI Liquidity Adequacy Requirements guideline.
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45
CAPITAL MANAGEMENT
Highlights of 2018
• Very strong Basel III common equity Tier 1 (CET1) regulatory
capital ratio of 9.2% under the Standardized approach for
calculating risk-weighted assets.
• Significant progress toward the upcoming transformation of
CWB’s capital and risk management processes through transition
to the AIRB approach.
• Cash dividends of $1.00 per share paid to common shareholders,
up 8%, resulting in CWB’s 26th consecutive annual dividend
increase.
• Very conservative Basel III leverage ratio of 8.0%, compared to the
regulatory minimum of 3.0%, where a higher ratio indicates lower
leverage.
• A NCIB authorizing CWB to purchase for cancellation prior
to September 30, 2019, up to 1,767,000 common shares,
representing approximately 2% of the issued and outstanding
common shares, was approved by OSFI and the Toronto Stock
Exchange (TSX). No shares were repurchased under the prior NCIB,
which expired on September 30, 2018.
Subsequent Highlights
• On December 5, 2018, the Board of Directors declared a cash
dividend of $0.26 per common share, unchanged from the prior
quarter and up 8% from the dividend declared in the same period
last year. The Board also declared a cash dividend of $0.275 per
Series 5 Preferred Share, and a cash dividend of $0.390625 per
Series 7 Preferred Share.
Capital is managed in accordance with policies and plans that are regularly
reviewed and approved by the Board Risk Committee. Capital management
takes into account forecasted capital needs with consideration of
anticipated profitability, asset growth, market and economic conditions,
regulatory changes, and common and preferred share dividends. The
overriding goal is to remain well-capitalized in order to protect depositors,
and provide capacity for internally generated growth and strategic
opportunities that do not otherwise require accessing the capital markets,
all while providing a satisfactory return for common shareholders. CWB has
implemented an Internal Capital Adequacy Assessment Process (ICAAP) to
establish target capital levels deemed prudent to effectively manage risks,
including potential capital shocks from unexpected macroeconomic and/
or CWB-specific events.
Basel III Capital Adequacy Accord
Regulatory capital and capital ratios are calculated in accordance with the
requirements of OSFI, and capital is managed and reported in accordance
with the requirements of the Basel III Capital Adequacy Accord (Basel III).
CWB’s minimum Basel III regulatory capital ratios, including a 250 basis
point capital conservation buffer, are 7.0% CET1, 8.5% Tier 1 and 10.5%
Total capital, and a 3.0% leverage ratio. The Basel III rules provide for
transitional adjustments whereby certain aspects of the new rules are
phased in between 2013 and 2019, with Canadian implementation
extending out to 2022. The only available transition adjustment in the
Basel III capital standards permitted by OSFI for Canadian banks relates to
the multi-year phase out of non-qualifying capital instruments.
CWB provides a share incentive plan to officers and employees who are
in a position to materially impact the longer term financial success of the
organization, as measured by overall profitability, earnings growth, share
price appreciation and dividends. Note 18 to the consolidated financial
statements details the number of options outstanding, the weighted
average exercise price and the amounts exercisable at year end.
In June 2018, OSFI clarified additional requirements for its Domestic
Stability Buffer, an amount of CET1 capital required to be held by Domestic
Systemically Important Banks (D-SIB) against risks associated with systemic
vulnerabilities. The buffer is currently set at 1.5% of a D-SIB’s total risk-
weighted assets. As CWB is not a D-SIB, it is not required to hold capital
to meet this buffer.
Holders of CWB common shares and holders of any other class of shares
deemed eligible by the Board are offered the choice to direct cash
dividends paid toward the purchase of common shares through a dividend
reinvestment plan (DRIP). Further details regarding CWB’s DRIP are available
at cwb.com/investor_relations.
CWB currently reports its regulatory capital ratios using the Standardized
approach for calculating risk-weighted assets. This approach requires CWB
to carry significantly more capital for certain credit exposures compared
to requirements under the Advanced Internal Ratings Based (AIRB)
methodology used by larger Canadian financial institutions.
CWB complied with all internal and external capital requirements in 2018.
A NCIB authorizing CWB to purchase for cancellation prior to September
30, 2019, up to 1,767,000 common shares, representing approximately
2% of the issued and outstanding common shares, has been approved
by OSFI and the TSX. No shares have been purchased through the NCIB,
and no shares were repurchased under the prior NCIB, which expired
on September 30, 2018 and allowed for cancellation up to 1,767,000
common shares, representing approximately 2% of the issued and
outstanding common shares.
For this reason, regulatory capital ratios of banks that utilize the
Standardized approach versus the AIRB methodology are not directly
comparable.
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45
Table 22 - Capital Structure and Regulatory Ratios at Year End
($ thousands)
Regulatory Capital, Net of Deductions
Common equity Tier 1
Tier 1
Total
Capital Ratios
Common equity Tier 1
Tier 1
Total
Leverage Ratio
(1) bp - basis points
2018
2017
Change from
2017
$
2,153,019
$
2,009,530
$
143,489
2,418,231
2,788,048
2,274,727
2,644,071
143,504
143,977
9.2 %
10.3
11.9
8.0
9.5 %
10.8
12.5
8.3
(30)bp(1)
(50)
(60)
(30)
CWB’s CET1 capital ratio decreased 30 basis points from last year, mainly
reflecting the acquisition of business lending assets at the end of the first
quarter. The Tier 1 and Total capital ratios declined 50 basis points and 60
basis points, respectively, also mainly reflecting the acquisition. At 8.0%
(8.3% as at October 31, 2017), the Basel III leverage ratio remains very
conservative.
Table 23 - Regulatory Capital
($ thousands)
Common equity Tier 1 capital instruments and reserves
Directly issued qualifying common share capital plus related share-based payment reserve
Retained earnings
Accumulated other comprehensive income and other reserves
Common equity Tier 1 capital before regulatory adjustments
Regulatory adjustments to Common equity Tier 1(1)
Common equity Tier 1 capital
Additional Tier 1 capital instruments
Directly issued capital instruments qualifying as Additional Tier 1 instruments
Additional Tier 1 instruments issued by subsidiaries and held by third parties
Additional Tier 1 capital
Tier 1 capital
Tier 2 Capital instruments and allowances
Directly issued capital instruments subject to phase out from Tier 2(2)
Tier 2 instruments issued by subsidiaries and held by third parties
Collective allowance for credit losses
Tier 2 capital before regulatory adjustments
Total capital
As at
October 31
2018
As at
October 31
2017
$
768,638
$
756,864
1,649,196
1,488,634
(48,962)
2,368,872
(215,853)
2,153,019
(29,174)
2,216,324
(206,794)
2,009,530
265,000
212
265,212
265,000
197
265,197
2,418,231
2,274,727
250,000
250,000
51
119,766
369,817
46
119,298
369,344
$
2,788,048
$
2,644,071
(1) CET1 deductions include goodwill and intangible assets, net of related tax.
(2) The 2018 inclusion of non-qualifying capital instruments in regulatory capital under Basel III is capped at 40% (2017 – 50%) of the balance of non-common equity instruments outstanding at January 1, 2013. At October 31, 2018 and
2017, there were no exclusions from regulatory capital related to outstanding subordinated debentures.
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47
Table 24 - Risk-Weighted Assets
($ thousands)
Corporate
Sovereign
Bank
Retail residential mortgages
Other retail
Excluding small business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
As at October 31, 2018
As at October 31, 2017
Table 25 - Risk-Weighting Category
($ thousands)
Cash, Securities
and Resale
Agreements
Loans
Other
Items
Total
Risk-
Weighted
Assets
As at October 31, 2018
$
17,572
$
16,257,814
$
1,982,723
75,779
3,921
-
-
94,043
-
-
-
-
11,655
103
5,219,692
181,658
3,076,732
-
314,041
-
167,116
214,801
$
$
2,174,038
2,695,268
$
$
25,443,612
22,745,246
$
$
-
-
-
-
-
-
-
-
104,998
-
584,490
689,488
561,835
$
16,275,386
$
16,297,110
1,994,378
75,882
5,223,613
181,658
3,076,732
94,043
314,041
104,998
167,116
799,291
2,331
15,259
1,585,255
122,560
2,352,293
94,043
311,011
1,312,469
849,974
543,937
$
$
28,307,138
26,002,349
$
$
23,486,242
21,082,164
0%
20%
35%
50%
75%
100%
As at October 31, 2018
150% and
Greater
Balance
Weighted
$
21,599 $
20,267 $
- $
5,023 $
- $ 16,104,401 $ 124,096 $ 16,275,386 $ 16,297,110
Corporate
Sovereign
Bank
1,982,723
-
11,655
75,779
-
-
Retail residential mortgages
766,569
-
4,412,605
Other retail
Excluding small
business entities
Small business entities
Equity
Undrawn commitments
Operational risk
Securitization risk
Other
17,307
8,840
1,299
1,200
-
-
-
-
-
-
-
-
255,510
78,188
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
103
14,383
30,056
-
-
-
1,994,378
75,882
2,331
15,259
5,223,613
1,585,255
163,035
3
14
181,658
122,560
2,900,083
145,845
20,764
3,076,732
2,352,293
-
94,043
12,899
300,752
-
390
94,043
94,043
314,041
311,011
-
-
43,433
-
104,998
104,998
1,312,469
107,737
376,248
59,379
45,912
167,116
799,291
849,974
543,937
As at October 31, 2018
$ 3,052,548 $ 188,388 $ 4,412,605 $
5,023 $ 3,133,833 $ 17,159,188 $ 355,553 $ 28,307,138 $ 23,486,242
As at October 31, 2017
$ 3,005,417 $ 649,943 $ 3,846,024 $ 15,124 $ 2,477,473 $ 15,720,022 $ 288,346 $ 26,002,349 $ 21,082,164
AIRB transition plan
CWB’s project continues in support of an application to OSFI for transition
to the AIRB methodology for capital and risk management, including an
anticipated three-year time frame ending in fiscal 2019. Transition to the
AIRB approach will benefit shareholders by putting CWB on more equal
footing with its competition and increasing CWB’s addressable market.
It will add risk sensitivity to CWB’s framework for capital management,
increase risk quantification processes, improve risk-based pricing capabilities
and economic capital estimations, improve CWB’s stress testing capabilities
and enhance CWB’s ability to comply with new accounting standards and
ICAAP requirements. These improved risk management capabilities will
better equip CWB to allocate resources to target business segments that
generate the most attractive risk-adjusted returns.
CWB’s AIRB transition project is separated into several discrete phases,
including: establishment of formalized project governance; creation of
models including data collection, development and testing, deployment,
operationalization and use test; model validation; and, submission of the
final application to OSFI.
All material AIRB models and related scorecards have been deployed
into the business. Work continues toward development of an enhanced
enterprise data warehouse to serve as the repository for required data.
Model validation and enhancement of existing models continues. Further
development of CWB’s risk function is also ongoing, including three lines
of defence enhancement, stress testing capabilities, and economic capital
estimation. Implementation of CWB’s risk-weighted asset production and
capital reporting tools is underway.
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47
Outlook for Capital Management
CWB will maintain strong capital ratios under the Standardized
approach for calculating risk-weighted assets, above its target
thresholds and OSFI’s required minimums, and is well positioned to
manage future business growth and unexpected events. Target capital
ratios, including an appropriate capital buffer over the prescribed OSFI
minimums, are reconfirmed regularly through CWB’s regulatory capital
plan. The ongoing retention of earnings, net of expected common and
preferred share dividends, is expected to support capital requirements
associated with continued execution of CWB’s Balanced Growth
strategy and the anticipated achievement of CWB’s medium-term
performance target for a strong common equity Tier 1 ratio. With a
very conservative Basel III leverage ratio of 8.0% at October 31, 2018,
CWB is not constrained by OSFI’s requirement for banks to maintain a
minimum leverage ratio of 3.0%.
The Basel Committee on Banking Supervision finalized Basel III reforms
in December 2017 and OSFI has launched a public consultation on
the proposed Canadian adoption. OSFI’s proposal includes potential
revisions to the credit risk, operational risk, leverage ratio, and credit
valuation adjustment frameworks included in the Basel III reforms
as well as the implementation timelines. Management’s preliminary
assessment of the proposed domestic implementation of the Basel III
reforms indicates no material impact to CWB’s regulatory capital ratios
under the Standardized approach.
Management continues to evaluate alternatives to deploy capital for
the long-term benefit of CWB shareholders, which includes support for
ongoing organic growth, potential strategic acquisitions and common
share dividend increases. CWB may also choose to activate the NCIB in
fiscal 2019 should appropriate circumstances become apparent.
FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS
As a financial institution, most of CWB’s balance sheet is comprised of
financial instruments and the majority of net income results from revenues,
expenses, gains and losses related to the same.
Further information on how the fair value of financial instruments is
determined is included in the Financial Instruments Measured at Fair Value
discussion in the Accounting Policies and Estimates section of this MD&A.
Financial instrument assets include cash resources, securities, securities
purchased under resale agreements, loans, securities sold under repurchase
agreements, derivative financial instruments and certain other assets.
Financial instrument liabilities include deposits, debt, derivative financial
instruments and certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity and
market risk. A discussion of how these and other risks are managed can be
found in the Risk Management section of this MD&A.
Income and expenses are classified as to source, either securities or loans
for income, and deposits or borrower funds for expense. Net realized gains
(losses) on securities are shown separately in non-interest income.
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Derivative Financial Instruments
More detailed information on the nature of derivative financial instruments
is shown in Note 12 to the consolidated financial statements. The notional
amounts of derivative financial instruments are not reflected on the
consolidated balance sheets.
Table 26 - Derivative Financial Instruments
($ thousands)
Notional Amounts
Interest rate contracts designated as accounting hedges(1)
Foreign exchange contracts(2)
Equity swaps designated as accounting hedges(3)
Bond forwards designated as accounting hedges(4)
Equity swaps not designated as accounting hedges(5)
Total
2018
2017
$
4,908,000
$
3,553,000
189,128
170,194
18,285
18,222
15,000
-
5,842
4,237
$
5,136,255
$
3,745,653
(1) CWB receives interest at a fixed contractual rate and pays interest on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps designated as accounting hedges outstanding at October 31, 2018 mature
between January 2019 and October 2023.
(2) Foreign exchange contracts outstanding at October 31, 2018 mature between November and December 2018. The contractual interest rate is not meaningful for foreign exchange contracts.
(3) Equity swaps designated as accounting hedges outstanding at October 31, 2018 mature between June 2019 and June 2021.
(4) Bond forward contracts designated as accounting hedges outstanding at October 31, 2018 mature in December 2018.
(5) Equity swaps not designated as accounting hedges outstanding at October 31, 2018 mature in June 2019.
The active use of interest rate contracts remains an integral component
to manage the interest rate gap position. Derivative financial instruments
are entered into only for CWB’s own account. CWB does not act as an
intermediary in derivatives markets. Transactions are entered into on
the basis of industry standard contracts with approved counterparties
subject to periodic and at least annual review, including an assessment
of the credit worthiness of the counterparty. Policies regarding the use of
derivative financial instruments are approved, reviewed and monitored on
a regular basis by ALCo, and are reviewed and approved by the Board Risk
Committee no less than annually.
OFF-BALANCE SHEET
Off-balance sheet items include assets under administration and assets
under management. Total assets under administration, which are
comprised of trust assets under administration, third-party leases under
administration, and mortgages under service agreements, totaled $8.4
billion at October 31, 2018 (2017 – $10.4 billion). Approximately $2.0
billion (2017 – $1.3 billion) of assets under administration transferred
to successor trustees as part of the CWT strategic transactions over the
past year. The CWT strategic transactions are now complete. No further
transfers of deposits or assets under administration to successor trustees
will occur under the agreements.
Assets under management held within CWB Wealth Management,
including McLean & Partners Wealth Management, were $2.1 billion at
year end, unchanged from last year.
Other off-balance sheet items are comprised of standard industry credit
instruments (guarantees, standby letters of credit and commitments
to extend credit). CWB does not utilize, nor does it have exposure to,
collateralized debt obligations or credit default swaps. For additional
information regarding other off-balance sheet items refer to Note 20 of
the consolidated financial statements.
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49
SUMMARY OF QUARTERLY RESULTS AND FOURTH QUARTER
QUARTERLY RESULTS
The financial results for each of the last eight quarters are summarized
in Table 27. In general, CWB’s performance reflects a consistent growth
trend, although the second quarter contains three fewer revenue-earning
days, and two fewer days during leap years. Non-interest income includes
gains on sale related to the CWT strategic transactions of $0.6 million in
the fourth quarter of fiscal 2018, $0.4 million in the third quarter of fiscal
2018, $3.0 million in the first quarter of fiscal 2018, and $5.7 million in the
fourth quarter of fiscal 2017.
Table 27 - Quarterly Financial Highlights(1)
($ thousands, except per share amounts)
Among other things, quarterly results can also fluctuate from the
recognition of periodic income tax items.
Detailed management’s discussion and analysis along with unaudited
interim consolidated financial statements for each quarter, except
for the fourth quarters, are available for review on SEDAR at
sedar.com and on CWB’s website at cwb.com. Copies of the quarterly
reports to shareholders can also be obtained, free of charge, by contacting
InvestorRelations@cwbank.com.
Results from Operations
Net interest income
Non-interest income
Total revenue
Pre-tax, pre-provision income
Common shareholders' net income
Earnings per common share
Basic
Diluted
Adjusted cash
Return on common
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
$ 189,093
$ 186,644
$ 177,986
$ 171,267
$ 170,494
$ 163,991
$ 152,156
$ 155,749
19,473
208,566
111,182
64,501
18,345
204,989
110,695
62,362
18,600
196,586
107,247
60,464
21,950
193,217
107,064
61,929
24,628
195,122
103,902
60,833
19,852
183,843
100,360
56,308
20,287
19,478
172,443
175,227
90,203
47,594
94,264
49,542
0.73
0.72
0.78
0.70
0.70
0.75
0.68
0.68
0.73
0.70
0.69
0.75
0.69
0.68
0.74
0.64
0.64
0.69
0.54
0.54
0.59
0.56
0.56
0.61
shareholders’ equity
11.1 %
10.8 %
11.1 %
11.1 %
11.2 %
10.4 %
9.2 %
9.5 %
Adjusted return on common
shareholders’ equity
Return on assets
Efficiency ratio
Net interest margin
Operating leverage
Provision for credit losses as
11.9
0.89
46.7
2.61
0.1
11.7
0.88
46.0
2.64
(1.4)
12.0
0.89
45.4
2.61
5.4
12.0
0.91
44.6
2.52
3.9
12.0
0.94
46.8
2.63
1.0
11.3
0.89
45.4
2.59
0.4
10.1
0.79
47.7
2.54
(1.7)
10.4
0.78
46.2
2.46
2.4
a percentage of average loans
0.19
0.21
0.20
0.18
0.20
0.20
0.25
0.27
(1) See page 20 for a discussion of non-IFRS measures.
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Efficient Operations and Positive Operating Leverage
The fourth quarter efficiency ratio of 46.7%, which measures non-interest
expenses, excluding the pre-tax amortization of acquisition-related
intangible assets, divided by total revenues, was relatively unchanged
from 46.8% in the same period last year, and up 70 basis points from last
quarter. Year-over-year stability reflects the combined positive impact of
higher revenues from very strong growth of net interest income and higher
non-interest income, as well as effective management of discretionary
expense growth. The increase in CWB’s efficiency ratio from the prior
quarter primarily reflects the customary seasonal increase of non-interest
expenses across most categories in the final quarter of the fiscal year.
Operating leverage, which is calculated as the growth rate of total
revenue less the growth rate of non-interest expenses, excluding the pre-
tax amortization of acquisition-related intangible assets, over the past 12
months, was positive 1.9% compared to 0.3% last year.
FOURTH QUARTER OF 2018
Overview of Operations
Q4 2018 vs. Q4 2017
Common shareholders’ net income of $65 million and pre-tax, pre-provision
income of $111 million were up 6% and 7%, respectively. Earnings growth
was primarily driven by record quarterly revenues of $209 million, up 7%
from the same period last year. Net interest income of $189 million was up
11%, as the positive impact of very strong 13% loan growth was partially
offset by a two basis point decrease in net interest margin to 2.61%. Within
net interest margin, higher asset yields and favourable changes in asset mix
were more than offset by increased funding costs and changes in funding
mix, including an ongoing shift in depositor preference toward longer
duration fixed term deposits with the rising interest rate environment. The
provision for credit losses as a percentage of average loans of 19 basis
points improved from 20 basis points. These factors were partially offset by
6% higher non-interest expenses to support business growth, lower non-
interest income, higher income taxes and increased acquisition-related fair
value changes. Non-interest income of $19 million was 21% lower, and
CWB’s income tax provision was 13% higher, primarily due to the gain
on sale, and the associated tax treatment, related to the CWT strategic
transactions in the fourth quarter last year. Diluted earnings per common
share of $0.72 and adjusted cash earnings per common share of $0.78
increased 6% and 5%, respectively, reflecting the factors noted above. The
CWT-related gains on sale contributed nil (2017 – $0.06) to adjusted cash
earnings per common share.
Q4 2018 vs. Q3 2018
Sequential growth of common shareholders’ net income was strong at 3%
and pre-tax, pre-provision income was slightly higher compared to the prior
quarter. Total revenue growth was 2%, reflecting 1% higher net interest
income and a 6% increase in non-interest income. Higher net interest
income reflects the positive impact of 3% loan growth, partially offset by
a three basis point decrease in net interest margin as increased funding
costs and changes in funding mix similar to those described above more
than offset higher asset yields. The increase in non-interest income mainly
reflects higher credit related fee income and increased ‘other’ non-interest
income. ‘Other’ non-interest income this quarter includes $1 million of
gains on sale related to the CWT strategic transactions. The provision for
credit losses was 19 basis points of average loans, compared to 21 basis
points last quarter. Non-interest expenses to support business growth were
3% higher. Diluted earnings per common share was up 3% and adjusted
cash earnings per common share increased 4%.
Adjusted ROE and ROA
Fourth quarter adjusted return on common shareholders’ equity (ROE) of
11.9% was down 10 basis points from the same period last year.
Adjusted ROE was up 20 basis points compared to the prior quarter.
Return on assets (ROA) was 0.89% in the fourth quarter, compared to
0.94% in the same period last year and 0.88% last quarter.
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ACCOUNTING POLICIES AND ESTIMATES
CRITICAL ACCOUNTING ESTIMATES
Financial Instruments Measured at Fair Value
Cash resources, securities, securities purchased under resale agreements,
securities sold under repurchase agreements, contingent consideration and
derivative financial instruments are reported on the consolidated balance
sheets at fair value.
CWB categorizes its fair value measurements of financial instruments
recorded on the consolidated balance sheets according to a three-level
hierarchy. Level 1 fair value measurements reflect published market prices
quoted in active markets. Level 2 fair value measurements were estimated
using a valuation technique based on observable market data. Level 3 fair
value measurements were determined using a valuation technique based
on non-market observable input.
CWB’s significant accounting policies are outlined in Note 1 to the audited
consolidated financial statements with related financial note disclosures
by major caption. The policies discussed below are considered particularly
important, as they require management to make significant estimates
or judgments, some of which may relate to matters that are inherently
uncertain.
Allowance for Credit Losses
An allowance for credit losses is maintained to absorb probable credit-
related losses in the loan portfolio based on management’s estimate at
the balance sheet date. In assessing existing credit losses, management
must rely on estimates and exercise judgment regarding matters for
which the ultimate outcome is unknown. These matters include economic
factors, developments affecting particular industries and specific issues
with respect to single borrowers. Changes in circumstances may cause
future assessments of credit risk to be significantly different than current
assessments and may require an increase or decrease in the allowance
for credit losses. Establishing a range for the allowance for credit losses
is difficult due to the number of uncertainties involved. The collective
allowance for credit losses is intended to address this uncertainty. At
October 31, 2018, CWB’s total allowance for credit losses was $147 million
(2017 – $136 million) which included specific allowances of $27 million
(2017 – $17 million) and a collective allowance of $120 million (2017 –
$119 million). Additional information on the process and methodology for
determining the allowance for credit losses and the implementation of a
forward-looking expected credit loss model upon transition to IFRS 9 on
November 1, 2018, can be found in the discussions of Credit Quality and
Future Changes in Accounting Policies, respectively, in this MD&A and in
Note 8 to the consolidated financial statements.
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53
The following table summarizes the significant financial assets and liabilities recorded on the consolidated balance sheets at fair value.
Table 28 - Valuation of Financial Instruments
($ thousands)
As at October 31, 2018
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Securities sold under repurchase agreements
Debt
Contingent consideration(1)
Derivative related
Total Financial Liabilities
As at October 31, 2017
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Securities sold under repurchase agreements
Debt
Contingent consideration(1)
Derivative related
Total Financial Liabilities
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
-
-
-
-
$
153,221
$
144,019
$
9,202
$
219,570
1,865,182
2,084,752
26,551,146
2,496
-
-
-
26,551,146
2,496
-
$ 28,791,615
$
363,589
$
1,876,880
$ 26,551,146
$ 23,502,200
$
95,126
1,942,472
29,814
69,581
$ 25,639,193
$
-
-
-
-
-
-
$ 23,502,200
$
95,126
1,942,472
-
-
-
-
29,814
69,581
-
$ 25,609,379
$
29,814
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
521,796
$
27,440
$
494,356
$
285,998
1,900,989
2,186,987
23,649,806
12,393
-
-
-
23,649,806
12,393
-
$ 26,370,982
$
313,438
$
2,407,738
$ 23,649,806
$ 21,874,990
$
58,358
1,437,516
32,920
35,381
$ 23,439,165
$
-
-
-
-
-
-
$ 21,874,990
$
58,358
1,437,516
-
-
-
-
32,920
35,381
-
$ 23,406,245
$
32,920
(1) The Level 3 financial liabilities at October 31, 2018 and 2017 are related to the acquisition of CWB Maxium and the CWT strategic transactions.
Notes 2, 4, 5, 6, 7, 12, 14, 16, 25 and 26 to the consolidated financial statements provide additional information regarding these financial instruments.
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53
CHANGES IN ACCOUNTING POLICIES AND
FINANCIAL STATEMENT PRESENTATION
New and amended accounting pronouncements issued by the International
Accounting Standards Board (IASB) did not result in a change in CWB’s
accounting policies during 2018.
FUTURE CHANGES IN ACCOUNTING POLICIES
A number of standards and amendments have been issued by the IASB,
and the following changes may have an impact on CWB’s future financial
statements.
IFRS 9 – Financial Instruments
In July 2014, the IASB issued the complete version of IFRS 9, which replaces
IAS 39 Financial Instruments: Recognition and Measurement (IAS 39).
IFRS 9 addresses classification and measurement of financial assets and
liabilities, impairment and hedge accounting.
Additional guidance from regulatory bodies has been issued since the final
release of IFRS 9. The Basel Committee on Banking Supervision (BCBS)
issued Guidance on credit risk and accounting for expected credit losses
and OSFI issued IFRS 9 Financial Instruments and Disclosure. OSFI’s guidance
sets the Canadian expectations for IFRS 9 adoption and is consistent with
the BCBS guidance.
IFRS 9 is effective for CWB’s fiscal year beginning on November 1, 2018.
Amendments made to IFRS 7 Financial Instruments: Disclosures related to
IFRS 9 are also effective November 1, 2018.
Transition
IFRS 9 is required to be applied on a retrospective basis, with certain
exceptions. CWB will not restate prior period comparative figures within
the consolidated financial statements upon transition to IFRS 9 and will
recognize an adjustment to opening retained earnings and accumulated
other comprehensive income to reflect the application of the new
requirements at the adoption date. Based on current estimates, the IFRS 9
transition is expected to increase retained earnings by approximately $23
million, after tax, and the CET1 ratio by approximately 10 basis points.
The estimated impact relates primarily to the implementation of the new
impairment guidelines under IFRS 9. CWB will continue to monitor and
refine certain elements of the impairment process and related controls
leading up to the interim consolidated financial statements for the period
ended January 31, 2019.
The adoption of IFRS 9 is a significant initiative for CWB supported by a
formal governance framework and a robust implementation plan. CWB’s
IFRS 9 transition activities in fiscal 2018 focused on operationalizing
impairment models, building and refining an expected credit loss (ECL)
estimation process, developing a comprehensive impairment governance
framework and building required financial and regulatory disclosures to
be provided on transition to IFRS 9 and going forward on a quarterly and
annual basis. All material AIRB models, which are being leveraged to satisfy
IFRS 9 requirements with consideration for specific differences between
regulatory and accounting standards, were deployed into the business
during 2018 and related scorecards are being populated to generate risk
parameters for use in the estimation of ECL.
The transition to an expected credit loss approach under IFRS 9 is a
significant accounting policy change compared to the IAS 39 incurred loss
model. The two methodologies are fundamentally different and are not
directly comparable, although both reflect CWB’s conservative approach to
managing credit quality and historical loss experience. The reduction in the
allowance for credit losses related to performing loans upon transition to
IFRS 9 is supported by the implementation of a robust, risk-based estimation
approach, built on the foundation of CWB’s AIRB models, that allows
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for enhanced projections of expected future credit losses, considering
both CWB’s historic strong underwriting and robust credit management
processes, combined with forward looking economic forecasts. The new
methodology also provides management with enhanced stress testing
capabilities.
During the year, CWB updated governance frameworks impacted by the
transition to IFRS 9 and implemented new controls related to key processes
and significant areas of judgment. An Expected Credit Loss Committee,
which includes senior management representation from Risk, Finance
and the business was established to provide oversight to the IFRS 9
impairment process. The Expected Credit Loss Committee is responsible to
review key inputs and assumptions used in ECL estimates and assess the
appropriateness of performing loan allowances for credit losses.
The following is a summary of significant changes related to the
implementation of IFRS 9:
Impairment
The most significant impact to CWB with the transition to IFRS 9 is
the introduction of an ECL approach for calculating impairment that is
applicable for financial assets measured at amortized cost, debt securities
measured at fair value through other comprehensive income (FVOCI), and
off-balance sheet loan commitments and financial guarantee contracts,
which were previously provided for under IAS 37 Provisions, Contingent
Liabilities and Contingent Assets. The implementation of an ECL approach
under IFRS 9, which results in the recognition of allowances for credit
losses being recorded on financial assets regardless of whether there has
been an actual loss event, is a significant change from the incurred loss
model under IAS 39, with the largest impact being to loans.
The ECL approach categorizes financial assets into three stages based on
changes in credit risk since inception. A financial asset can move between
stages depending on improvement or deterioration of credit risk.
Stage one: From initial recognition until the date on which a
financial asset has experienced a significant increase in credit risk
(SICR), the allowance for credit losses is measured based on ECL
from defaults occurring in the next 12 months.
Stage two: A financial asset migrates to stage two if it has
experienced a SICR since initial recognition and the allowance for
credit losses is measured based on ECL from defaults occurring over
the remaining life of the asset.
Stage three: When a financial asset is identified as credit-impaired,
it migrates to stage three and an allowance for credit losses equal to
full lifetime ECL is recognized. Interest income is recognized on the
carrying amount of the asset, net of the allowance for credit losses.
CWB’s specific allowances under IAS 39 will be replaced by stage three
allowances under IFRS 9, while the collective allowance will be replaced
by stage one and stage two allowances. The determination of impairment
under IFRS 9 is expected to be generally consistent with the definition
under IAS 39, with one exception. Under IAS 39, residential mortgages
guaranteed or insured for both principal and interest by the Canadian
government, a province or a Canadian government agency and loans
that are fully secured and in the process of collection are not classified as
impaired until payments are 365 days and 180 days in arrears, respectively.
Under IFRS 9, all loans are classified as impaired when payments are
contractually past due 90 or more days. The policy for the write-off of
loans remains unchanged.
ECL represents the difference between all contractual cash flows that are
due to CWB in accordance with the contract and the cash flows that are
expected to be received, discounted to the reporting date using the original
effective interest rate. ECL calculations are a function of the probability
CWB Financial Group 2018 Annual Report
55
of default (PD), loss given default (LGD) and exposure at default (EAD).
PD, which represents the estimate of the likelihood of default, considers
past events, current market conditions and forward-looking information
over the 12-month or lifetime horizon. LGD represents an estimate of loss
arising from default based on the difference between the contractual cash
flows due and those that CWB expects to receive, including consideration
for the amount and quality of collateral held. EAD represents an estimate
of the exposure at a future default date, taking into account estimated
future repayments of principal and draws on committed facilities. CWB
is leveraging the models being developed for AIRB purposes within IFRS
9 ECL calculations, with consideration for specific differences between
regulatory and accounting requirements.
For most financial instruments, CWB will measure ECL on an individual
basis. Financial instruments for which allowances for credit losses will be
measured on a collective basis are grouped based on similar credit risk
characteristics.
There are several key concepts, which are subject to significant judgment,
that will impact the level of allowances for credit losses and may increase
the volatility of provisions upon transition to IFRS 9, including the
determination of when a SICR has occurred, the measurement of both
12-month and lifetime ECL and the incorporation of forward-looking
information through the use of multiple probability-weighted scenarios.
Assessment of SICR
The identification of a SICR is done on a relative basis by comparing
the risk of a default occurring over the asset’s remaining expected
life at the reporting date and the date of initial recognition. The
assessment is symmetrical in nature, allowing financial assets to
migrate from stage two to stage one if it is no longer considered
that credit risk has increased significantly relative to the date of
initial recognition.
Movement between stages is impacted by changes in borrower-
specific risk characteristics as well as changes in applicable forward-
looking information. For CWB’s loans, the main drivers considered
in assessing whether a SICR has occurred will be relative changes
in internal risk ratings since initial recognition, which incorporate
borrower-specific risk factors and probability-weighted forward-
looking macroeconomic factors, and certain other criteria, such as
30 days past due and watchlist status.
Expected Life
In respect to the lifetime of a financial asset, CWB considers the
maximum contractual period over which CWB is exposed to credit
risk. For most instruments, the expected life will be limited to the
remaining contractual life, including prepayment and extension
options. For certain revolving credit facilities, the expected life will
be estimated based on the period over which CWB is exposed to
credit risk and how credit losses are mitigated by management
actions, including those taken as part of the credit review cycle.
Forecasting Forward-looking Information
The estimation of ECL and the assessment of SICR consider
information about past events and current conditions as well
as reasonable and supportable projections of future events and
economic conditions. With consideration of several external sources,
CWB formulates a ‘base case’ view of the future direction of relevant
economic variables, which is updated quarterly. A representative
range of other possible forecast scenarios is developed to capture
a wide range of probability-weighted outcomes. The ‘base case’
represents the expected outcome while other scenarios represent
more optimistic or pessimistic outcomes. Key economic variables
incorporated into CWB’s estimate of ECL will include unemployment
rates, residential mortgage rates, gross domestic product growth,
housing resale price growth, the Canadian dollar/U.S. dollar
exchange rate, interest rates and oil price. Where relevant, each
macroeconomic scenario used in ECL estimations will include a
projection of all relevant macroeconomic variables used in the
models for a five-year period.
Expert Credit Judgment
The inputs and models used for estimating ECL may not always
fully capture market conditions and risks at the reporting date and,
as such, qualitative adjustments based on expert credit judgment
that consider reasonable and supportable information may be
incorporated.
Classification and Measurement
IFRS 9 introduces a principles-based approach for the classification of
financial assets. Debt instruments, including loans and debt securities,
are initially measured at fair value and are subsequently classified and
measured at fair value through profit or loss (FVTPL), fair value through
other comprehensive income (FVOCI) or amortized cost based on the
contractual cash flow characteristics of the instrument and the business
model under which the asset is held. These categories replace the
existing IAS 39 classifications of FVTPL, available-for-sale (AFS), loans and
receivables, and held-to-maturity. With the exception of the impairment
provisions discussed above, subsequent measurement of debt instruments
classified at FVOCI under IFRS 9 is consistent with AFS debt instruments
under IAS 39, with changes in fair value recorded in other comprehensive
income, net of taxes, until the security is sold. Gains and losses realized
on disposal of debt instruments classified at FVOCI are included in the
consolidated statements of income. CWB has defined its significant
business models and assessed the cash flow characteristics for all debt
instruments under the scope of IFRS 9. As a result of the application of
the classification and measurement requirements of IFRS 9, CWB expects
to make the following reclassifications, none of which impact the carrying
value of the assets:
• Interest bearing deposits with regulated financial institutions totaling
approximately $27 million at October 31, 2018 will be reclassified from
AFS under IAS 39 to FVOCI under IFRS 9.
• Debt securities totaling approximately $2.0 billion at October 31, 2018
will be reclassified from AFS under IAS 39 to FVOCI under IFRS 9.
Equity instruments are classified and measured at FVTPL unless an
irrevocable election is made to designate them at FVOCI at the time of
initial recognition. Unlike AFS equity securities under IAS 39, if the election
is applied, gains and losses, including those that arise upon the sale of
security, are recorded in OCI and are not subsequently reclassified to the
consolidated statement of income. Equity securities are not subject to an
impairment assessment under IFRS 9. Upon transition to IFRS9, preferred
share securities totaling approximately $94 million at October 31, 2018
classified as AFS under IAS 39 will be designated as FVOCI.
Classification of financial liabilities is unchanged, but for financial liabilities
measured at fair value, changes in fair value of an entity’s own credit risk will
be recognized in other comprehensive income rather than in profit or loss.
Hedge Accounting
IFRS 9 introduces a new hedge accounting model that expands the scope
of eligible hedged items and risks eligible for hedge accounting, and aligns
hedge accounting more closely with risk management practices. IFRS 9
includes a policy choice to retain IAS 39 for hedging purposes pending
the completion of the IASB’s project on macro hedge accounting. CWB
has elected to continue to apply the hedge accounting requirements of
IAS 39 and will implement the revised hedge accounting disclosures that
are required by the IFRS 9-related amendments to IFRS 7 in its fiscal 2019
Annual Report.
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55
IFRS 15 – Revenue from Contracts with Customers
IFRS 2 – Share-based Payment Transactions
In June 2016, the IASB issued amendments to IFRS 2 Share Based Payment
Transactions which provides additional guidance on the classification
and measurement of cash-settled share-based payment transactions,
share-based payment transactions with a net settlement feature for
withholding tax obligations, and on the modification of share-based
payment transactions changing from cash-settled to equity-settled. These
amendments are effective for CWB’s fiscal year beginning November 1,
2018 and will be applied prospectively. CWB will not have a significant
impact from adopting the amendments.
Conceptual Framework for Financial Reporting
In March 2018, the IASB issued a revised version of the Conceptual
Framework for Financial Reporting which assists the IASB in developing
IFRS standards and serves as an accounting policy guide when no IFRS
standard applies. The revision is effective for CWB’s fiscal year beginning
November 1, 2020 with early adoption permitted. CWB is in the process of
assessing the impact of the framework.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers
(IFRS 15), which establishes the principles for recognizing revenue and cash
flows arising from contracts with customers and prescribes the application
of a five-step recognition and measurement model. The standard excludes
from its scope revenue arising from items such as financial instruments and
leases as these fall within the scope of other IFRSs. IFRS 15 is effective for
CWB’s fiscal year beginning on November 1, 2018.
On transition, there are two methods by which the new standard can
be adopted: (1) a full retrospective approach with a restatement of all
prior periods presented, or (2) a modified retrospective approach with a
cumulative-effect adjustment recognized in retained earnings as of the
date of adoption. CWB will adopt IFRS 15 using the modified retrospective
approach with the cumulative effect of the adjustment, if any, recognized
as of November 1, 2018, subject to allowable and elected practical
expedients.
CWB has performed detailed analysis on each revenue stream that is
within the scope of the new standard and is finalizing its assessment of
the impact upon adoption, including timing and measurement of revenue
recognition, presentation of certain revenue and expense items, as well
as additional qualitative and quantitative disclosures. As the majority of
CWB’s revenues are outside the scope of IFRS 15, CWB will not have a
significant impact as a result of adopting the new standard.
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which will replace
IAS 17 Leases, introducing a single lessee accounting model for all leases
by eliminating the distinction between operating and financing leases. IFRS
16 requires lessees to recognize right-of-use assets and lease liabilities for
most leases. Lessees will also recognize depreciation expense on the right-
of-use asset and interest expense on the lease liability in the consolidated
statements of income. Short-term leases, which are defined as those that
have a lease term of twelve months or less, and leases of low-value assets
are exempt. Lessor accounting remains substantially unchanged. IFRS 16
is effective for CWB’s fiscal year beginning November 1, 2019. CWB is
currently assessing the impact of adopting this standard.
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57
RISK MANAGEMENT
CWB’s Approach to Risk Management
Maintaining an integrated and disciplined approach to risk management
is a key success factor for CWB. Effective risk management supports
the creation of long-term shareholder value by providing a framework
to optimize risk-adjusted returns on capital. CWB’s risk management
framework guides us in prudent, balanced and measured risk-taking
aligned with CWB’s Balanced Growth strategy.
The Enterprise Risk Management (ERM) group develops and maintains
CWB’s risk management framework. This framework encompasses
risk culture, risk governance, risk appetite, risk policies, and risk
management processes. The framework also provides independent
review and oversight across the enterprise on risk-related issues.
CWB’s Balanced Growth strategy and its long-term objective to be the
best full-service bank for business owners in Canada requires continuous
consideration, understanding and responsible management of all key
risks at both the strategic and operational levels. CWB’s core strategic
objectives include an effective balance of risk and reward. This requires
that each team member make common-sense business decisions by
assessing risk and reward trade-offs considering CWB’s Balanced
Growth strategy and risk appetite, along with regulatory and legal
requirements. Management consciously accepts risks to create long-
term value for stakeholders and support the responsible and efficient
delivery of products and services to valued clients, provided those risks:
• Are aligned with CWB’s strategic objectives;
• Are thoroughly understood, measured and managed within the
confines of well-communicated risk tolerances, including the
highest ethical standards; and,
• Serve the interests of stakeholders, including clients, shareholders,
creditors, employees, regulators and communities.
Highlights of 2018
Further enhancements to CWB’s risk management framework
were undertaken in 2018 as part of the ongoing development and
implementation of CWB’s risk management processes. Key initiatives
included:
• Further developed CWB’s ERM function and the three lines of
defence framework to provide consistent, transparent and clearly
documented allocation of accountabilities and segregation of
functional responsibilities;
• Significant progress of CWB’s multi-year project in support
of an application for transition to the AIRB approach for risk
and capital management. This transition will enhance CWB’s
competitive position and facilitate risk-based pricing, enable
further optimization of capital allocation, facilitate business
mix optimization, and enhance CWB’s risk quantification, stress
testing, and overall ERM capabilities;
• Developed and operationalized AIRB models and AIRB-based stress
testing capabilities;
• Developed risk models and processes in support of IFRS 9 adoption
on November 1, 2018;
• Developed a data governance framework and further enhanced
CWB’s framework for model governance;
• Continued to enhance risk analytics, economic forecasting and
portfolio and systematic risk management capabilities;
• Continued to develop and implement a second line for risk-based
pricing to support profitable growth;
• Continued to implement an operational risk management
framework; and,
• Continued to enhance regulatory compliance risk management
capabilities.
Outlook for Risk Management
CWB will continue to support enhanced risk management capabilities
through further development of enterprise risk management and risk
appetite frameworks, and related risk policies. Key risk management
priorities for 2019 include: submission of CWB’s final application for
regulatory approval to transition to the AIRB approach for risk and
capital management; further development of second line frameworks
for liquidity and technology risk; development of CWB’s economic
capital framework; utilization of CWB’s newly developed systematic
risk management capabilities, including stress testing applications;
and, production of an AIRB model-enabled ICAAP.
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57
The shaded areas of this MD&A represent a discussion of risk management policies and procedures relating to credit, market and liquidity risks as required under IFRS, which permits these specific disclosures to be included in the MD&A. Therefore, the shaded areas presented on pages 58 to 75 of this MD&A form an integral part of the audited consolidated financial statements for the year ended October 31, 2018. • Increasing volume and complexity of regulatory requirements and
expectations; and,
• The potential impact of higher interest rates on demand for credit and
credit quality.
RISK MANAGEMENT PRINCIPLES
CWB’s risk management principles are based on the premise that CWB is in
the business of accepting risks for appropriate return. Management does
not seek to eliminate financial risk, but seeks to manage risk appropriately
and optimize risk-adjusted returns on capital. In conducting its business
activities, CWB will take financial risks that are aligned with management’s
Balanced Growth strategy in a manner which is expected to create long-
term value for shareholders. Risk management principles are therefore
aligned with CWB’s strategic objectives, and embedded within CWB’s
management practices.
The following principles guide the management of risks across all of
CWB’s operations:
• An effective balance of risk and reward through alignment of business
strategy with risk appetite, diversifying risk, pricing appropriately for
risk, and mitigating risk through sound preventative and detection
controls;
• An enterprise-wide view of risk and the acceptance of risks required to
build the business with continuous consideration for how those risks
may affect CWB’s reputation;
• The belief that every employee is accountable to understand and
manage the risks inherent in their respective day-to-day activities
including identification of risk exposures, with communication and
escalation of risk-based concerns;
• Use of common sense, sound judgment and fulsome risk-based
discussions;
• Recognition that “knowing your client” reduces risks by ensuring the
services provided are suitable for, and understood by, the client; and,
• Ongoing commitment to a three lines of defence risk governance
framework with independent oversight and effective challenge from
the second line, and an independent and effective Internal Audit
function comprising the third line.
The mandate of CWB’s ERM function is to provide independent oversight
of risk-taking decisions, independent assessment of risk and effective
challenge to the business. ERM establishes the enterprise-wide risk
management framework to identify, measure, aggregate and report
all material risks managed by the first line within CWB’s three lines of
defence framework. This includes oversight of risk governance policies,
establishment of risk appetites and key risk metrics, and development of
risk infrastructure, including all risk management processes and practices.
ERM measures and reports risk exposures against risk appetite limits for all
risk types, independent of the business.
RISK MANAGEMENT OVERVIEW
Risk management processes are designed to complement CWB’s overall
size, level of complexity, risk profile and philosophy regarding risk. CWB’s
risk management philosophy emphasizes risk measurement, sound
controls, effective governance, transparency and accountability. Selectively
choosing and managing acceptable risks has been integral to CWB’s ability
to grow profitably in both favourable and adverse market conditions. A
strong risk culture continues to be a cornerstone of CWB’s approach to
risk management.
As with all financial institutions, CWB is in the business of managing risk
and is therefore exposed to various risk factors that could adversely affect
its operating environment, financial condition and financial performance.
Exposure to risk may also influence a client’s decision to take loans and/or
make deposits, and an investor’s decision to buy, sell or hold CWB shares
or other securities. Each of CWB’s businesses is subject to certain risks that
require unique mitigation strategies.
CWB has demonstrated its ability to effectively manage risks through
conservative management practices based on a strong risk culture and a
disciplined risk management approach; however, not all risks are within
CWB’s direct control.
A description of key internal and external risk factors management
considers is included in this risk management discussion. CWB actively
evaluates existing and potential risks to develop, implement and continually
enhance appropriate risk mitigation strategies.
RISK MANAGEMENT STRENGTHS
• Secured lending business model;
• Disciplined underwriting with demonstrated strength through multiple
credit cycles;
• Strong risk culture with robust risk management framework which
addresses risks throughout CWB;
• Low operational risk profile;
• No trading book;
• In-depth knowledge of CWB’s clients;
• Increasing geographic diversification;
• Low balance sheet leverage;
• Low average duration of lending portfolios; and,
• Relatively low exposure to economically sensitive unsecured retail
lending portfolios.
RISK MANAGEMENT CHALLENGES
• Capital requirements under the Standardized approach which are
insensitive to the underlying economic risk, and do not adequately
reflect CWB’s demonstrated risk management strengths through
multiple credit cycles;
• Macroeconomic volatility, including the impacts of a protracted
economic recovery from the 2015 – 2016 regional recession, recent
regional commodity price differences, and constrained energy
transportation infrastructure in Western Canada;
• Uncertainty related to renegotiation of standing free trade agreements
which could affect the outlook for Canadian exports and future
economic growth;
• Market volatility related to factors outside of CWB’s control which
affect investors’ decisions to buy, sell or hold CWB shares or other
securities;
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59
RISK MANAGEMENT FRAMEWORK
The primary goal of risk management is to ensure that the outcomes of
risk-taking are consistent with CWB’s Balanced Growth strategy, related
business activities and overall risk appetite. The enterprise risk management
framework provides the foundation for achieving this goal. CWB utilizes
the ISO 31000 Standard for Risk Management as a comprehensive
framework to help ensure risk is managed effectively and efficiently.
Figure 4 – CWB’s Risk Management Framework
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CWB’s risk culture is the core of the enterprise risk management framework,
including risk management principles, values and accountabilities as
defined within a three lines of defence framework. Key elements of CWB’s
risk management framework include Risk Governance, the Risk Universe,
Risk Management Policies, and Risk Appetite Framework.
Principal risks within CWB’s Risk Universe include: credit risk; capital risk;
market risk, including interest rate risk, foreign exchange risk, liquidity
and funding risk; and, operational risk. Reputational risk arises as a
consequence of not managing other risks effectively.
RISK CULTURE
A strong risk culture emphasizes transparency and accountability.
Organizations with a strong risk culture have a consistent and repeatable
approach to risk management when making key business decisions,
including regular discussions of risk and reviews of risk scenarios that can
help management and the Board understand the inter-relationships and
potential impacts of risks.
CWB’s strong risk culture starts with an appropriate “tone at the top”
that demonstrates and sends consistent and clear messages throughout
the organization. Risk culture is demonstrated throughout CWB and is
emphasized by the actions of senior management and the Board.
CWB’s risk culture includes:
• “Tone at the top” as established through the CWB Code of Conduct
and governance processes;
• CWB’s core values of integrity, accountability, respect, common sense
and caring;
• Effective integration of CWB’s compensation strategy with desired risk
behaviours; and,
• Risk management principles, policies and processes, including
implementation of a three lines of defence framework.
CWB’s three lines of defence framework provides a consistent, transparent,
and clearly documented allocation of accountability and segregation of
functional responsibilities. This segregation of responsibilities helps to
establish a robust control framework that demonstrates CWB’s risk culture,
contributes to effective risk management and encourages continuous
improvement of risk management practices. CWB’s three lines of defence
framework is described in table 29.
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Table 29 – Three Lines of Defence Framework
First Line
Second Line
Business and Support Areas
ERM and Support Functions
Third Line
Internal Audit
Own and manage all risks within their lines of
business
Pursue suitable business opportunities within
their established risk appetite and limits
Act within their delegated risk-taking authority
as set out in established policies
Establish appropriate operating policies and
internal control structures in accordance with
the risk policies
Establish an enterprise risk management
framework to provide a consistent and
integrated view of risk exposures across CWB
Set key risk metrics on which risk appetite and
limits are based
Establish policies, processes and practices that
address all significant risks across CWB
Independently assess, quantify, monitor, control
and report all significant risk exposures against
the risk appetite and limits
Provide independent oversight, effective
challenge and independent assessment of risk
Provide independent assurance to the Audit
Committee as to the effectiveness and
appropriateness of (and adherence to) the risk
framework
Independently audit first and second lines
and report on their effectiveness in regard to
respective functional responsibilities
Independently review adherence to controls,
policies, rules and regulations
Identify operational weaknesses; recommend
and track remediation actions
RISK APPETITE FRAMEWORK
CWB’s risk appetite framework includes policies and processes to establish
and monitor adherence to CWB’s risk appetite, and outlines accountabilities
for those overseeing its implementation. The purpose of the risk appetite
framework is to define the type and amount of risk CWB is willing to
assume through its business activities, while considering the priorities
of all stakeholders. The risk appetite framework is forward-looking and
integrates with CWB’s Balanced Growth strategy, including consideration
for CWB’s capital plan and budget processes.
Key components of CWB’s risk appetite framework include:
• A philosophy to emphasize business lines where management has
extensive knowledge and experience; for example, CWB has no direct
exposure to wholesale banking businesses (investment banking,
brokerage and trading) which are subject to significant earnings
volatility and can lead to large unexpected losses compared to typical
spread lending;
• Careful and diligent management of risks at all levels led by a
knowledgeable and experienced management team committed to
sound management practices and the promotion of a highly ethical
culture;
• Risk Capacity - the maximum level of risk CWB can assume before
breaching regulatory or other stakeholders’ constraints;
• Risk Appetite - the aggregate level and type of risk CWB is willing to
• Targeted financial performance which supports maintenance of
investment grade credit ratings to allow for competitive access to
funding;
assume; and,
• Risk Limits - the allocation of risk to specific risk categories, to business
units, and/or to lines of business at the portfolio or product level. ERM
measures, monitors, and manages CWB’s risk profile to ensure the
overall level of risk remains within specified risk limits. Early warning
indicators are reported to the Executive Risk Committee and the Board
Risk Committee, along with proposed actions to reduce the level of
risk to within the approved risk appetite.
Key attributes of CWB’s overall risk appetite include the following:
• A conservative risk culture that is prevalent throughout CWB, from the
Board to senior management to front-line staff;
• A philosophy to only take risks that are aligned with CWB’s Balanced
Growth strategy and are expected to create long-term value for
shareholders;
• A philosophy to only take risks that are transparent and understood,
and that can be measured, monitored and managed;
• Maintenance of effective policies, procedures, guidelines, compliance
standards and controls, training and oversight to guide the business
practices and risk-taking activities of all employees in support of CWB’s
reputation and adherence to all legal and regulatory obligations; and,
• Risk Appetites for key risk types are established based on both
quantitative and qualitative risk types by ERM as the second line,
endorsed by senior management and ultimately approved by the Board
Risk Committee.
CWB conducts stress testing of relevant metrics on a regular basis to
enable the identification and monitoring of potential vulnerabilities. The
results from stress testing also help inform the Risk Appetite, and quarterly
sensitivity testing of earnings and capital ratios ensures that CWB operates
within Risk Limits.
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Risk Management Governance StructureThe foundation of CWB’s enterprise risk management framework is a governance approach, consistent with OSFI’s Corporate Governance Guidelines, which includes a robust committee structure and a comprehensive set of corporate policies and limits approved by the Board of Directors, as well as supporting corporate standards and operating guidelines. The Risk Management Framework is governed through a hierarchy of committees and individual responsibilities as outlined in Figure 5:Figure 5 – CWB’s Enterprise-Wide Risk Management FrameworkModel Risk and Deployment CommitteesBoard of Directors – responsible for overseeing management and the business of CWB. The Board, either directly or through its Committees, is responsible for oversight in the following areas: strategic planning, risk appetite, identification and management of risk, capital management, promoting a culture of integrity, internal controls, evaluation of senior management and succession planning, public disclosure and corporate governance.Board Risk Committee – assists the Board in fulfilling its oversight responsibilities in relation to CWB’s identification and management of risk, adherence to corporate risk management policies and procedures, and compliance with risk-related regulatory requirements. The Board Risk Committee also includes a Loan Adjudication Panel. Board Governance Committee – assists the Board in fulfilling its oversight responsibilities with respect to developing CWB’s corporate governance policies and practices. Board Audit Committee – assists the Board in fulfilling its oversight responsibilities for the integrity of CWB’s financial reporting, effectiveness of CWB’s internal controls, and the performance of its internal and external audit functions.Board Human Resources Committee – provides oversight of people-related risks, including employment practices and workplace health and safety, and ensures compensation programs appropriately align to, and support, CWB’s risk appetite framework.Chief Executive Officer (CEO) – directly accountable to the Board for all of CWB’s risk-taking activities. The CEO is supported by the Executive Risk Committee and its sub-committees, as well as the Enterprise Risk Management (ERM) function.Chief Risk Officer (CRO) – as head of ERM, responsible to provide independent review and oversight of enterprise-wide risks and leadership on risk issues, developing and maintaining a Risk Management Framework which includes key risk metrics and risk policies, and fostering a strong risk culture across the enterprise. The CRO reports functionally to the Board Risk Committee. The following CWB oversight functions provide key support within the
enterprise-wide risk management framework:
Oversight departments within ERM include:
• Credit Risk Management – responsible to assess, recommend, process
and adjudicate credit applications and credit reviews within delegated
loan approval authorities; and to provide second line oversight of credit
risk.
• Regulatory Compliance Risk Management – responsible to provide
second line oversight of regulatory compliance risk by establishing
and maintaining the regulatory compliance risk-related policies,
standards and protocols used by the first and second lines to identify,
measure, communicate, respond to and control regulatory compliance
risk, including risks related to anti-money laundering, anti-terrorist
financing, and privacy. Regulatory Compliance assesses, monitors,
and reports on regulatory compliance risk against the risk appetite
framework.
• Risk Data Aggregation, Analytics, and Reporting (RDAAR) – responsible
to develop, implement, and monitor risk measurement processes and
validation methodologies to provide a comprehensive view of overall
credit risk exposures. Ensures that credit risk exposures are measurable,
and that adequate reporting is produced to facilitate the management
of the portfolio within established limits, appetite and standards; and
that regulatory requirements are satisfied.
RISK MANAGEMENT POLICIES
In order to support effective communication, implementation, and
governance of CWB’s risk management framework, ERM codifies processes
and operational requirements in comprehensive management policies and
operating guidelines. These policies and guidelines promote the application
• Integrated Risk Management – responsible for CWB’s interest rate and
liquidity risk management framework, providing second line oversight
for interest rate and liquidity risk management; implements the
operational risk management framework; operationalizes second line
oversight of risk-based pricing; responsible for profitability reporting
and analysis; as well as CWB’s ICAAP.
• Model Vetting Team – responsible for development and maintenance
of an enterprise-wide model risk management framework; and to
monitor, effectively challenge and report on enterprise-wide model risk
in accordance with related policy and guidelines.
• Risk Capital and IFRS 9 – produces risk-based expected credit losses
(ECL) under IFRS 9.
• Risk Technology Group – responsible to deploy AIRB and other risk
models within CWB’s risk technology infrastructure and produce AIRB
risk ratings.
ERM oversees the demand side of capital management, including risk
capital and economic capital. Separate from ERM, CWB’s Finance team
provides independent oversight of processes to manage financial reporting
and capital risk. In effect, Finance oversees the supply of capital adequacy
and capital management. Finance also provides oversight on financial
reporting, external credit ratings, regulatory reporting on accounting-
related functions, finance-related issues and tax. This activity is overseen by
CWB’s CFO, who reports functionally to the Audit Committee.
of a consistent approach to managing risk exposures across the enterprise.
All risk policies are developed by the second line and approved by the
Board Risk Committee or the full Board of Directors, on an annual basis.
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Executive Risk Committee – provides risk oversight and governance at the highest levels of management. The Executive Risk Committee reviews and discusses significant risk issues and action plans that arise in executing the enterprise-wide strategy. The Committee is chaired by the CRO and membership includes the full Executive Committee.Sub-Committees of the Executive Risk Committee – the various sub-committees provide oversight of the processes whereby the risks assumed across the enterprise are identified, measured, monitored, held within delegated limits and reported in accordance with policy guidelines. They include:Group Credit Risk Committee – approves loans within delegated limits and is responsible for ensuring that appropriate credit policies are in place. An escalation sub-committee of the Group Credit Risk Committee considers credit-related pricing and reputational issues that may be relevant to specific loans.Group Asset Liability Committee (ALCo) – reviews and endorses operational policies and programs for liquidity management and control, funding sources, investments, foreign exchange risk, structural interest rate risk and derivatives risk. Group Capital Risk Committee – responsible for the oversight of capital adequacy, CWB’s regulatory capital plan, ICAAP and stress testing. Group Operational Risk Committee – reviews the operational risk management framework, operational loss reporting and business continuity plans. Reviews action plans for mitigating and improving the management of operational risk. Group Disclosure Committee – supports CEO/CFO certification over public disclosures. Responsible for reviewing CWB’s internal control over financial reporting and disclosure controls and procedures to help ensure the accuracy, completeness and timeliness of public disclosures. Economic Forecasting Committee – develops an enterprise view of the economic outlook.Group Model Risk Committee – develops and oversees CWB’s model risk management framework. Group Model Deployment Committee – oversees enterprise-wide model deployment. RISK UNIVERSE – REPORT ON PRINCIPAL RISKS
CWB pursues risks that are aligned with CWB’s Balanced Growth strategy
and are expected to create value for shareholders. While CWB’s operations
are exposed to numerous types of risk, certain risks, identified as principal
risks, have the greatest potential to materially impact operations and
financial performance. These risks materially comprise CWB’s risk universe
as defined as part of its enterprise risk framework.
CREDIT RISK
Credit risk is the risk that a financial loss will be incurred due to the failure of a counterparty to fulfil its contractual commitment or obligation to
CWB. Credit risk is comprised of default risk and credit migration, or downgrade risk. Credit default risk is defined as the potential that a bank
borrower or counterparty will fail to meet its obligations in accordance with the agreed terms. Credit migration or downgrade risk refers to the
risk of deterioration of credit quality of a borrower or counterparty.
Risk Overview
CWB’s credit risk results from granting loans and leases to businesses and
individuals. CWB’s credit risk management culture reflects the unique
combination of policies, practices, experience and management attitudes
that support growth within chosen industries and geographic markets.
Underwriting standards are designed to ensure an appropriate balance
of risk and return, and are supported by established loan exposure limits
in areas of demonstrated lending expertise. Concentration is measured
against specified tolerance levels by geographic region, industry sector and
product type. In order to minimize its potential loss given default, the vast
majority of loans are secured by tangible collateral. CWB’s approach to
managing credit risk has proven to be very effective, as demonstrated by
CWB’s relatively stable long-term average annual provision for credit losses
and customarily low write-offs measured as a percentage of total loans.
Refer to the Loans and Credit Quality sections of this MD&A for additional
information.
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Risk GovernanceThe credit approval process is centrally controlled, with all significant credit requests submitted to Credit Risk Management for adjudication. Credit Risk Management is independent of the originating business. Requests for credit approval beyond the lending limit of the CEO are referred to the Group Credit Risk Committee or the Board Risk Committee’s Loan Adjudication Panel.Risk ManagementCWB is committed to a number of important principles to manage credit exposures, which include:• Oversight provided by the Board Risk Committee; • Delegated lending authorities that are clearly communicated to lenders and other personnel engaged in the credit granting process;• Credit policies, guidelines and directives which are communicated within all branches, business lines and to officers whose activities and responsibilities include credit granting and risk assessment;• Appointment of personnel engaged in credit granting who are both qualified and experienced;• A standard credit risk-rating classification established for all credits;• A review at least annually of credit risk-rating classifications and individual credit facilities (except consumer loans and single-unit residential mortgages);• Quarterly review of risk diversification by geographic area, industry sector and product measured against assigned portfolio limits;• Ongoing development of RDAAR reporting to assess portfolio risks at a granular level;• Pricing of credits commensurate with risk to ensure an appropriate financial return;• Management of growth while maintaining the quality of loans;• Early recognition of problem accounts and immediate action to protect the safety of CWB’s capital;• Delegation of loans deemed to carry higher risks to a specialized loan workout group that performs an appropriate level of regular monitoring and close management; • Independent reviews of credit evaluation, risk classification and credit management procedures by Internal Audit, which includes direct reporting of results to senior management, the CEO and the Audit Committee of the Board; and• Detailed quarterly reviews of accounts rated less than satisfactory. Reviews include a recap of action plans for each less than satisfactory account, the completion of a watch list report recording accounts with evidence of weakness and an impaired report covering loans that show impairment to the point where a loss is possible. Subject to independent oversight, effective challenge and independent assessment by the second line. A summary report of less than satisfactory accounts is reviewed on a quarterly basis by the Board Risk Committee. Environmental Risk
Portfolio Quality
While the day-to-day operations of CWB do not have a material impact on
the environment, environmental risks include the risk of loss given default
if a borrower is unable to repay loans due to environmental cleanup costs,
and the risk of damage to CWB’s reputation resulting from the same. In
order to manage these risks, and to help mitigate CWB’s overall impact on
the environment, CWB evaluates potential environmental risks as part of its
credit granting process. If potential environmental risks are identified that
cannot be resolved to CWB’s satisfaction, the application will be denied.
Reports on environmental inspections and findings are provided quarterly
to the Board Risk Committee. Where financing is provided, Internal Audit
will sample test loan files to ensure environmental studies required as a
condition of financing are in place, including review for a transmittal letter
from the author of the environmental study indicating that it may be relied
upon for financing purposes.
CWB’s strategy is to maintain a quality, secured and diversified loan
portfolio by engaging experienced personnel who provide a hands-on
approach in credit granting, account management and timely action
when problems develop. Lending is targeted to small- and medium-sized
businesses, and to individuals. Relationship banking and “knowing your
client” are important tenets of effective account management. Earning
an appropriate financial return for the level of risk is also fundamental.
Geographic diversification of the loan portfolio outside of Western Canada
is achieved through ongoing strong growth within CWB’s established
businesses with a national footprint, including CWB Optimum, CWB
National Leasing, CWB Maxium, CWB Franchise Finance, as well as
participation in syndicated lending facilities primarily led by other Canadian
banks, and periodically through acquisition.
For additional information, see the Loans and Credit Quality sections of
this MD&A.
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Credit Risk ConcentrationRisk diversification is addressed by establishing portfolio limits by geographic area, industry sector and product. The policy is to limit loans to connected corporate borrowers to not more than 10% of CWB’s shareholders’ equity. During 2018, CWB amended its Credit Risk Concentration policy to increase the single risk exposure lending limit to $75 million from $50 million. The single risk exposure Credit Risk Concentration policy was last revised in 2005, when shareholders’ equity was less than $0.5 billion, compared to more than $2.5 billion at October 31, 2018. For certain quality connections that confirm debt service capacity and loan security from more than one source, the connection limit was amended to $150 million from $100 million. CWB clients with larger borrowing requirements can be accommodated through loan syndications with other financial institutions. MARKET RISK
Market risk is the impact on earnings and on economic value of equity resulting from changes in financial market variables such as interest rates
and foreign exchange rates. CWB’s market risk is primarily comprised of structural interest rate risk on the balance sheet, and liquidity and funding
risk. A smaller amount of market risk relates to investment risk in the relatively small discretionary investment portfolio, and foreign exchange risk.
Risk Overview
The most material market risks for CWB are those related to changes in
interest rates. CWB does not have a trading book; it does not undertake
market activities such as market making, arbitrage or proprietary trading
and, therefore, does not have direct risks related to those activities.
to price fluctuations based on movements in interest rates and volatility in
financial markets. CWB has limited direct exposure to foreign exchange
risk. CWB maintains exposure to preferred shares through its discretionary
investment portfolio.
A diversified cash and securities portfolio is maintained that is primarily
comprised of high-quality debt instruments. These instruments are subject
Subcategories of Market Risk
Interest Rate Risk
Interest rate risk is the impact on earnings and economic value of equity resulting from changes in interest rates.
Structural interest rate risk arises when changes in interest rates affect
the cash flows, earnings and values of assets and liabilities. The objective
of structural interest rate risk management is to maintain an appropriate
balance between earnings volatility and economic value volatility while
keeping both within their respective risk appetite limits.
Structural interest rate risk arises due to the duration mismatch between
assets and liabilities. Adverse interest rate movements may cause a
reduction in earnings; and/or a reduction in the economic value of CWB’s
assets; and/or an increase in the economic value of CWB’s liabilities.
Structural interest rate risk is primarily comprised of duration mismatch
risk and option risk embedded within the structure of products. Duration
mismatch risk arises when there are differences in the scheduled maturity,
repricing dates or reference rates of assets, liabilities and derivatives. The
net duration mismatch, representing residual assets funded by common
shareholders’ equity, is managed to a target profile through interest rate
swaps and CWB’s cash and securities portfolio. Product-embedded option
risk arises when product features allow customers to alter scheduled
maturity or repricing dates. Such features include loan prepayment, deposit
redemption privileges and interest rate commitments on un-advanced
mortgages.
Variation in market interest rates can affect net interest income by altering
cash flows and spreads. Variation in market interest rates can also affect
the economic value of CWB’s assets, liabilities and off-balance sheet (OBS)
positions. Thus the sensitivity of CWB’s economic value to fluctuations in
interest rates is an important consideration for management, regulators
and shareholders. The economic value of an instrument represents an
assessment of the present value of the expected net cash flows, discounted
to reflect market rates. By extension, the economic value of CWB’s equity
can be viewed as the present value of its expected net cash flows, defined
as the expected cash flows on interest-sensitive assets minus the expected
cash flows on interest-sensitive liabilities plus the expected net cash flows
on OBS positions. In this sense, the economic value perspective reflects one
view of the sensitivity of net worth to fluctuations in interest rates.
Management of structural interest rate risk balances short-term income
volatility against volatility in the long-term value of CWB’s equity. Treasury
manages the economic value of the banking book to a “benchmark
duration” which reflects this trade-off. Benchmark duration is approved
by ALCo. The benchmark duration considers an appropriate trade-off
between:
• Earnings volatility and volatility in the value of CWB’s equity;
• Risk and return (e.g. increasing duration increases the exposure to
rising interest rates, but also benefits net interest income when there is
a positively sloping yield curve); and,
• Expected interest rate movements.
While management of the benchmark duration is the responsibility of the
first line of defence (recommended by Treasury and approved by ALCo),
the resulting risk exposure is maintained within CWB’s risk appetite.
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Risk GovernanceMarket risk is managed in accordance with the approved second line market risk policy and the accompanying first line policies. As the first line of defence, Treasury owns and manages CWB’s market risk on a daily basis. ALCo provides tactical and strategic direction and is responsible for ongoing oversight, review and endorsement of operational policies. Integrated Risk Management monitors market risk exposure and reports to the Board Risk Committee against CWB’s risk appetite. Risk Metrics
Structural interest rate risk is measured using simulations, earnings
sensitivity and economic value sensitivity analysis, stress testing and gap
analysis, in addition to other traditional risk metrics.
• Earnings at Risk - Earnings at risk (EaR) is defined as the potential
reduction in net interest income due to adverse interest rate
movements over a one-year horizon. It is measured both against
stress scenarios historically observed (historical simulation or historical
Value at Risk (VaR)) and standard parallel interest shocks (interest rate
sensitivity).
• Economic Value of Equity at Risk - Economic value of equity at risk
(EVaR) is defined as the potential reduction in economic value of
CWB’s equity due to adverse interest rate movements. This is not an
earnings measure, but rather a value measure; and it is also measured
against both stress scenarios historically observed (historical simulation
or historical VaR) and standard parallel interest shocks (interest rate
sensitivity).
CWB’s Interest Rate Risk Exposures
Exposure to interest rate risk is controlled by managing the size of the
static gap positions between interest sensitive assets and interest sensitive
liabilities for future periods. This is supplemented by historical VaR for
economic value of CWB’s equity, estimated by applying historical interest
rate scenarios to interest sensitive assets and interest sensitive liabilities.
These analyses are supplemented by stress testing of the asset liability
portfolio structure, duration analysis and dollar estimates of net interest
income sensitivity for periods of up to one year after Treasury hedging
activity. The interest rate gap is measured at least monthly. Note 25 to the
consolidated financial statements shows the gap position at October 31,
2018 for select time intervals.
The analysis in Note 25 is a static measurement of interest rate sensitivity
gaps at a specific point in time, and there is potential for these gaps to
change significantly over a short period. The impact on earnings from
changes in market interest rates will depend on both the magnitude of and
speed with which interest rates change, as well as the size and maturity
structure of the cumulative interest rate gap position and the management
of those positions over time.
The one-year and under cumulative gap represented 0.8% of total assets
at October 31, 2018, compared to 2.5% one year ago, while the one-
month and under gap was negative 1.8% compared to positive 1.2% one
year earlier.
The estimated sensitivity of net interest income to a change in interest rates
is presented in Table 30. The amounts represent the estimated change
in net interest income over the time period shown resulting from a one
percentage point change in interest rates. The estimates are based on a
number of assumptions and factors, which include:
• A constant structure in the interest sensitive asset liability portfolio;
• Floor levels for various deposit liabilities;
• Interest rate changes affecting interest sensitive assets and liabilities
by proportionally the same amount and applied at the appropriate
repricing dates; and,
• No early redemptions.
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Interest rate risk is managed to ensure sustainable earnings over time, balancing the impact on current year earnings against changes in economic value at risk over the life of the asset and liability portfolios. Table 30 – Estimated Sensitivity of Net Interest Income as a Result of One Percentage Point Change in Interest Rates
($ thousands)
Impact of 1% increase in interest rates
Period
90 days
1 year
1 year percentage change
Impact of 1% decrease in interest rates
Period
90 days
1 year
1 year percentage change
It is estimated that a one-percentage point increase in all interest rates at
October 31, 2018 would decrease unrealized gains related to available-
for-sale securities and the fair value of interest rate swaps designated
as hedges, and result in a reduction in other comprehensive income of
approximately $105 million, net of tax (October 31, 2017 – $77 million);
it is estimated that a one-percentage point decrease in all interest rates at
October 31, 2018 would result in a higher level of unrealized gains related
to available-for-sale securities and increase the fair value of interest rate
swaps designated as hedges, which would increase other comprehensive
income by approximately $107 million, net of tax (October 31, 2017 – $76
million).
Foreign Exchange Risk
$
$
2018
3,987
6,234
$
2017
1,637
8,324
0.86 %
1.39 %
2018
(5,075)
(7,467)
$
2017
(1,068)
(13,226)
(1.03)%
(2.21)%
Management maintains the asset liability structure and interest rate
sensitivity within CWB’s established policies through pricing and product
initiatives, as well as the use of interest rate swaps and other appropriate
strategies. Differences in the respective sensitivity of net interest income
and other comprehensive income to changes in interest rates compared
to last year primarily reflects the current interest rate environment and
balance sheet composition.
Foreign exchange risk is the risk to changes in earnings or economic value arising from changes in foreign exchange rates. This risk arises when
various assets and liabilities are denominated in different currencies.
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In providing financial services to its customers, CWB has assets and liabilities denominated in U.S. dollars. At October 31, 2018, assets denominated in U.S. dollars were 1.4% (2017 – 1.2%) of total assets and U.S. dollar liabilities were 1.6% (2017 – 1.4%) of total liabilities. Currencies other than U.S. dollars are not bought or sold other than to meet specific client needs. CWB has no material exposure to currencies other than U.S. dollars.Policies have been established that include limits on the maximum allowable differences between U.S. dollar assets and liabilities. The difference is measured daily and managed by use of U.S. dollar forward contracts or other means. Policy respecting foreign exchange exposure is reviewed and approved at least annually by the Board Risk Committee. Any deviations from policy are reported regularly to ALCo and quarterly to the Board Risk Committee.
Liquidity And Funding Risk
Liquidity risk is the risk that CWB cannot meet a demand for cash or fund its financial obligations in a cost efficient or timely manner as they
become due. These financial obligations can arise from withdrawals of deposits, debt maturities or commitments to provide credit.
Risk Overview
CWB maintains a sound, prudent and conservative approach to managing
exposure to liquidity risk, including targeting a contingency planning
horizon under stressed operating conditions that may be caused by CWB-
specific or systemic stress scenarios. The contingency planning horizon
and related liquidity and funding management strategies comprise an
integrated liquidity risk management program designed to ensure that
CWB manages liquidity risk within an appropriate threshold.
CWB’s key risk mitigation strategies include:
• An appropriate balance between the level of risks CWB undertakes
and the corresponding cost of risk mitigation that considers the
potential impact of extreme but plausible events;
• Broad funding access, including preserving and growing a reliable base
of core deposits and continual access to diversified sources of funding;
• A comprehensive group-wide liquidity contingency plan supported
by a pool of unencumbered high-quality liquid assets and marketable
securities that would provide assured access to liquidity in a crisis; and,
• The maintenance of a liquidity position to manage current and future
liquidity requirements while also contributing to the flexibility, safety
and soundness of CWB under times of stress.
Refer to the Liquidity Management sections of this MD&A for additional
information.
CWB remains in compliance with OSFI’s Liquidity Adequacy Requirements guideline.
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Risk GovernanceLiquidity management is centralized to better facilitate the effective management of liquidity risk. The Board Risk Committee approves market risk management policies and delegates liquidity risk authorities to senior management. As the first line of defence, Treasury is responsible for managing the liquidity and funding risk. ALCo oversees the treasury function and provides tactical and strategic direction. Integrated Risk Management, as the second line, is responsible for independent oversight.Risk ManagementCWB has a comprehensive liquidity risk management policy. The key elements of managing liquidity risk for CWB include the following:• Policies – Liquidity management policies establish targets for minimum liquidity, set the monitoring regime, and define authority levels and responsibilities. Policies are reviewed at a minimum annually by ALCo, Executive Risk Committee and the Board Risk Committee. Limit setting establishes acceptable thresholds for liquidity risk;• Monitoring – Trends and behaviours regarding how clients manage their deposits and loans are monitored to determine appropriate liquidity levels. Active monitoring of the external environment is performed using a wide-range of sources and economic barometers;• Measurement and modeling – CWB’s liquidity model measures and forecasts cash inflows and outflows, including any cash flows related to applicable off-balance sheet activities over various risk scenarios; • Reporting – Treasury oversight of all significant liquidity risks that support analysis, risk measurement, stress testing, monitoring and reporting to both ALCo and the Board Risk Committee;• Stress testing – CWB performs liquidity stress testing on a regular basis to evaluate the potential effect of both systemic and CWB-specific (idiosyncratic) disruptions on CWB’s liquidity position. Liquidity stress tests consider the effect of changes in funding assumptions, depositor behaviour and the market behaviour of liquid assets. CWB stress tests liquidity as per guidance from OSFI as described in the Liquidity Adequacy Requirement guideline. Stress test results are reviewed by ALCo and considered in making liquidity management decisions. Liquidity stress testing has many purposes, including, but not limited to: -helping the Board Risk Committee and senior management understand the potential behaviour of various positions on CWB’s balance sheet in circumstances of stress; and, -facilitating the development of effective funding, risk mitigation and contingency plans.• Contingency planning – A liquidity contingency plan is maintained that defines a liquidity event and specifies the desired approaches for analyzing and responding to actual and potential liquidity events. The plan outlines an appropriate governance structure for the management and monitoring of liquidity events, processes for effective internal and external communication, and identifies potential countermeasures to be considered at various stages of an event; • Funding diversification – CWB actively manages the diversification of its deposit liabilities by source, type of depositor, instrument and term. Supplementary funding sources currently include securitization, capital market issuance and whole loan sales; and, • Core liquidity – CWB maintains a pool of highly liquid, unencumbered assets that can be readily sold, or pledged to secure borrowings, under stressed market conditions or due to company-specific events. Contractual Obligations
CWB enters into contracts in the normal course of business that give rise
to commitments of future minimum payments that may affect the liquidity
position. In addition to the obligations related to deposits and subordinated
debentures discussed in the Deposits and Liquidity Management sections
Table 31 – Contractual Obligations
($ thousands)
of this MD&A, as well as Notes 14, 16, 20 and 24 of the consolidated
financial statements, the following contractual obligations are outstanding
at October 31, 2018:
Lease commitments
Purchase obligations for operating and capital expenditures
October 31, 2018
October 31, 2017
Credit Ratings
Within 1
Year
$
$
$
13,912
1,856
15,768
17,288
$
$
$
1 to 3
Years
35,220
2,493
37,713
31,235
$
$
$
4 to 5
Years
8,971
-
8,971
19,828
$
$
$
More than
5 Years
24,338
-
24,338
31,236
$
$
$
Total
82,441
4,349
86,790
99,587
CWB’s ability to efficiently access capital markets funding on a cost-
effective basis is partially dependent upon the maintenance of satisfactory
credit ratings. Such credit ratings, accompanied with a stable or positive
outlook, increase the breadth of clients and investors able to participate
in various deposit and debt offerings, while also lowering CWB’s overall
cost of capital.
Credit ratings are largely determined by the quality of earnings, the
adequacy of capital, the effectiveness of risk management programs and
the opinions of rating agencies related to creditworthiness of the financial
sector as a whole. There can be no assurance that CWB’s credit ratings
and the corresponding outlook will not be changed, potentially resulting
in adverse consequences for funding capacity or access to capital markets.
Changes in credit ratings may also affect the ability and/or the cost of
establishing normal course derivative or hedging transactions. Credit
ratings do not consider market price or address the suitability of any
financial instrument for a particular investor and are not recommendations
to purchase, sell or hold securities. Ratings are subject to revision or
withdrawal at any time by the rating organization.
The following table summarizes the credit ratings issued by DRBS for CWB,
as well as the corresponding rating agency outlook, last confirmed with no
changes on November 29, 2018.
Table 32 – Credit Ratings
Long-term senior
debt and long-term
deposits
Short-term
instruments
Subordinated debt
Preferred shares
Outlook
A (low)
R1 (low)
BBB (high)
Pfd-3
Stable
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CAPITAL RISK
Capital risk is the risk that CWB has insufficient capital resources, in either quantity or quality, to support economic risk taken, regulatory
requirements, strategic initiatives and current or planned operations.
Risk Overview
• The objective of capital management is to ensure:
CWB follows three main principles to facilitate the effective management
of capital risk:
• Capital management involves a dynamic and ongoing process to
determine, allocate and maintain appropriate amounts of capital.
• The optimal amount and composition of capital must consider
regulatory requirements, as well as the expectation of CWB
shareholders and other stakeholders.
- capital is, and will continue to be, adequate to maintain confidence
in the safety and stability of CWB while also complying with
required regulatory standards;
- CWB has the capability to access appropriate sources of capital in a
timely and cost-effective manner; and,
-
return on capital is sufficient to support projected business growth
and satisfy the expectations of investors.
For additional information, please refer to the Capital Management section of this MD&A.
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Risk GovernanceThe Board approves the annual regulatory capital plan, and the Board Risk Committee approves the periodic ICAAP and capital management policies. The Group Capital Risk Committee is responsible for capital risk management. The CFO as the head of Finance is responsible for the available capital as the supply side, while the CRO as the head of Risk is responsible for risk capital as the demand side. In addition, Integrated Risk Management and Finance comprise the ICAAP core team and are closely involved in capital management. The core team is closely supported by other key departments, including Treasury, Credit Risk Management, Strategy and RDAAR.Risk ManagementThe following are key elements of capital risk management:• The annual regulatory capital plan, inclusive of the capital management policy and three-year capital projections; • A quarterly regulatory capital risk update provided to the Board Risk Committee;• Forecast models used to analyze the likely capital impact of projected operations, various balance sheet and income statement scenarios, approaches used to calculate regulatory capital, and/or significant transactions; and,• Regulatory capital ratios reported to senior management and the Board on a monthly basis. OPERATIONAL RISK
Operational risk is defined as the risk of loss due to unanticipated outcomes that result from inadequate or failed systems, processes, or human
errors, as well as from external events. Exposure to operational risks arises from the people, processes, and systems that are established to serve
CWB’s clients and maintain the required functions of the enterprise.
Risk Overview
trust, and wealth management, and operational
Operational risk is inherent in all of CWB’s business activities including
banking,
risk
managament is embedded in processes that support the management
of principal risks such as credit, liquidity, market, and capital risk. CWB
is exposed to operational risk from internal business activities, external
threats and outsourced business activities. Its impact can be financial loss,
loss of reputation, loss of competitive position, regulatory penalties, or
failure in the management of other risks. While operational risk cannot
be completely eliminated, proactive operational risk management is a key
strategy to mitigate this risk. The primary financial measure of operational
risk is actual losses incurred. CWB incurred no material losses related to
operational risk in 2018 or 2017.
The regulatory framework requires certain amounts of capital to be
allocated to support operational risk. CWB uses the Standardized
approach to measure operational risk. CWB has a group-wide Operational
Risk Management Policy to ensure that all employees understand
their responsibilities with respect to operational risk management. The
Operational Risk Management Policy encompasses a common language
of risk coupled with programs and methodologies for identification,
measurement, control, and management of operational risk.
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Risk GovernanceBusiness and support areas as the first line of defence are fully accountable for the management and mitigation of operational risks to which they are exposed. The CWB Group Operational Risk Committee oversees the implementation and adoption of the Operational Risk Management Policy across the enterprise and facilitates the involvement of necessary stakeholders in the first and second line of defence across the Group. Integrated Risk Management, as the second line is responsible for the continual enhancement of the Group Operational Risk Management Framework and supporting policies. The Board Risk Committee has ultimate oversight and approves the Group’s Operational Risk Management Policy.Risk ManagementFollowing is a summary of strategies and factors that assist with the effective management of operational risk:• Management remains close to operations, which helps to facilitate effective internal communication and operational control; • Communication of, and training related to, the importance of effective operational risk management to all levels; • Management that is very engaged with promoting CWB’s operational risk tolerance and appetite; and,• Ongoing enhancement of group-wide operational risk management processes. Key elements of the Operational Risk Management Framework include:
Additional key components include:
• Common definitions of operational risk – CWB incorporates standard
risk terms and certain key operational risk definitions as part of its
operational risk management framework and supporting policies;
• Implementation of policies and procedural controls appropriate to
address identified risks (including segregation of duties and other
fundamental checks and balances);
• Risk Control Assessments (RCA) – are utilized to develop a forward-
• Continual enhancements to fraud prevention processes, policies and
looking view of operational risk exposure based on proactive
identification of key sources of operational risk exposures. The results
of RCAs are aggregated across the enterprise to evaluate the key
sources of operational risks and compare relative exposures from
different business activities;
• Operational risk reporting – Loss data monitoring is important to
maintain awareness of identified operational risks and to assist
management in taking constructive action to reduce exposures to
future losses;
• Root cause analysis – For significant operational risk events CWB
employs a standardized methodology for identifying the underlying
cause of the operational failure and documenting the corrective
actions taken by the affected areas to avoid similar breakdowns in the
future; and,
• New initiative risk assessments – Integrated with CWB’s change
management process, requires project owners to proactively identify all
relevant stakeholders across significant functional areas and conduct
detailed RCAs for new initiatives.
communication;
• Established “whistleblower” processes and employee code of conduct;
• Maintenance of an outsourcing management program;
• At least annual assessment and benchmarking of business insurance;
• Human resource policies and processes to ensure staff are adequately
trained for the tasks for which they are responsible and to enable
retention and recruitment;
• A Regulatory Compliance team focused on key regulatory compliance
areas such as privacy, anti-money laundering, anti-terrorist financing
and consumer regulations;
• Use of technology that incorporates automated systems with built-
in controls and active management of configuration and change
management along with information security management programs;
• Enhanced focus on data quality as an important and strategic asset;
• Effective project management processes supported by a designated
committee comprised of representatives of senior management; and,
• Continual updating and testing of procedures and contingency plans
for disaster recovery and business continuity (including pandemic
planning).
CWB has adopted an Operational Risk Taxonomy as part of its Operational
Risk Management Framework. This taxonomy forms the basis for all
operational risk management reporting, with loss events and identified
risks categorized consistently. The taxonomy is based on 15 distinct risk
types that are aligned within the seven Basel Operational Risk categories.
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Table 33 – Operational Risk Taxonomy
Operational Risk Level
Description
Financial crime risk
Regulatory compliance risk
The risk of loss and reputational damage due to crimes committed against CWB,
against its customers, or by its customers. Loss in this context refers to economic
loss including time, recovery costs, and overhead.
The risk of potential non-conformance with laws, rules, regulations and
prescribed practices (“regulatory requirements”) in any jurisdiction in which it
operates. It does not include risk arising from non-conformance with ethical
standards.
Category
External Fraud And
Internal Fraud
Clients, Products, and
Business Practices
Damage to physical assets
(excludes investment assets)
The risk of loss and reputational damage to physical assets caused by natural
disaster, mechanical failures, or intentional or unintentional human actions.
Damage to Physical
Assets
People risk
The risk that CWB cannot retain and attract sufficient qualified resources to
implement its strategies and/or achieve its objectives.
Employment Practices
and Workplace Safety
Business disruption risk
The risk of loss and reputational damage due to the failure to ensure the
ongoing continuation of critical business operations caused by disruptions
impacting the availability of staff, systems, and/or CWB premises.
Business Disruption and
System Failure
Technology risk
Information and cyber
security risk
The risk related to the operational performance, confidentiality, integrity and
availability of our information, systems and infrastructure. The risk of loss
and reputational damage due to information systems and services (including
application systems and supporting technology infrastructure) failing to satisfy
business requirements, caused by inadequately designed, maintained, and/or
supported systems, applications and technology.
The risk of loss and reputational damage due to the compromising of CWB
information assets (i.e., the unauthorized use, loss, damage, disclosure, or
modification of company information and information systems) caused by a
failure to protect CWB information assets. Cyber security risk is specifically
related to the ongoing threat that systems and their data may be attacked,
damaged or subject to unauthorized access.
Business Disruption and
System Failure
External Fraud And
Client, Products, and
Business Practices
Accounting risk (excludes
model errors related to
financial statements)
The risk of loss and reputational damage due to misstatements of assets,
liabilities and or/income, caused by internal financial control failures or
deficiencies.
Execution, Delivery, and
Process Management
Model risk
Reporting risk
Outsourcing and third-party
supplier risk
Change management risk
(excludes technology change)
The risk of loss and reputational damage due to inaccurate model outputs or
incorrect interpretations of model outputs, caused by inadequate model design,
use and/or assumptions.
Execution, Delivery, and
Process Management
The risk of loss and reputational damage due to inadequate risk-related
information being provided to senior management, the Board, and/or regulatory
bodies, caused by incomplete, inaccurate or untimely risk reporting processes,
systems and/or un-actioned risk reporting.
Execution, Delivery, and
Process Management
The risk of loss and reputational damage due to a third-party service provider
failing to deliver functionality and performance required to effectively support
underlying business objectives, caused by inadequate selection, retention,
oversight and/or monitoring of the relationship, or by inadequate contractual
terms and conditions.
The risk of loss and reputational damage due to a failure to effectively manage
change to achieve the desired business requirements and objectives, caused by
inadequate management (i.e., planning, execution, monitoring, oversight, and
reporting) of significant business change.
Execution, Delivery, and
Process Management
Execution, Delivery, and
Process Management
Process and execution risk
The risk of loss and reputational damage due to a failure to achieve the desired
outcome caused by inadequately designed or executed processes.
Execution, Delivery, and
Process Management
Product and customer/client
selection risk (includes design,
development, distribution,
and sales)
The risk of loss and/or reputational damage due to the inability to effectively
design, develop, distribute, and sell and/or attract/select profitable customers/
clients caused by a breakdown of the product development and sales
distribution process, and/or the failure to properly vet customers/clients.
Fiduciary risk
Risk of loss and reputational damage due to CWB failing to meet professional
obligations to its customers, clients and/or shareholders, caused by an
inadequate understanding and/or execution of the obligation/ suitability
requirements.
Clients, Products, and
Business Practices
Clients, Products, and
Business Practices
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parties, could adversely affect the ability of CWB to conduct regular
business and/or deliver products and services to clients. Ongoing diligence
is required to ensure systems are secure from threats. CWB currently
has a number of technology projects underway which increase risk
exposure related to information systems and technology. Management
continuously identifies and assesses key services to ensure potential failure
points are highlighted and related risk is mitigated the best possible way
(i.e. upgrades, enhancements, new products). In the last year, CWB’s
technology team has worked closely with ERM to put further governance
and rigour around the identification and evaluation of potential risks in the
technology environment.
Information And Cyber Security Risk
CWB manages
information security risk by ensuring appropriate
technologies, processes and practices are effectively designed and
implemented to help prevent, detect and respond to threats as they emerge
and evolve. CWB relies upon a complete suite of advanced controls to
protect itself and its customers from attack and has partnered with leading
third-party service providers to provide counsel and support should the
need arise. CWB regularly tests the completeness and effectiveness of its
information and cyber security program and through ongoing vigilance has
not experienced an information or cyber security event of any materiality.
Risks To CWB’s Reputation
Damage to a financial institution’s reputation and negative public
perception is a common outcome of operational risk events that result
from breakdowns in internal processes, people and systems or from
external events. Negative public opinion can result from actual or alleged
misconduct in any number of activities, either on the part of employees
or external partners. Significant operational risk events typically lead to
questions about business ethics and integrity, competence, corporate
governance practices, quality and accuracy of financial reporting
disclosures, or quality of products and service.
Negative public opinion could adversely affect CWB’s ability to attract and
retain clients and/or employees and could expose CWB to litigation and/
or regulatory action. Responsibility for managing the impact of operational
(and other) risks on CWB’s reputation falls to all CWB employees, including
senior management and the Board.
All directors, officers and employees have a responsibility to conduct their
activities in accordance with the CWB Group’s personal conduct policies
and in a manner that minimizes Operational Risks. In addition to members
of senior management, Strategy and Corporate Development, Regulatory
Compliance, and Legal departments are particularly involved in managing
the potential impact of operational risks on CWB’s reputation.
A discussion of several of CWB’s key operational risks follows:
Regulatory Compliance Risk
The businesses operated by CWB are highly regulated through laws, rules,
regulations and prescribed practices that have been put in place by various
federal and provincial governments and regulators. Changes to applicable
regulatory requirements, including changes in their interpretation or
implementation, could adversely affect CWB. CWB’s failure to comply
with applicable laws, rules, regulations, and practices could result in
sanctions, financial penalties and costs associated with litigation that could
adversely impact earnings and damage reputation. Although most sources
of regulatory compliance risk are outside of management’s direct control,
CWB takes what it believes to be reasonable and prudent measures
designed to support compliance with governing laws and regulations.
CWB has implemented a robust Regulatory Compliance Risk Management
(RCRM) Policy and set of supporting protocols to identify, assess,
communicate, manage, monitor and report on regulatory compliance risk
across the enterprise.
Over the past several years, the intensity of supervisory oversight of
all federally regulated Canadian financial institutions has increased
significantly in terms of both regulation and new standards. This includes
amplified supervisory activities, an increase in the volume of regulation,
more frequent data and information requests from regulators, and
shorter implementation time frames for regulatory requirements. Certain
regulations may also impact CWB’s ability to compete against both federally
regulated and non-federally regulated entities. Effective management of
regulatory risk and compliance in the current environment requires, and
is expected to continue to require, considerable internal resources and the
active involvement of senior management and the Board.
Notwithstanding the additional resources, the volume, pace and
implementation of new and amended regulations and standards increases
the risk of unintended consequences and non-compliance for all regulated
entities. CWB continues to enhance its regulatory compliance risk
management capabilities. A number of initiatives are underway to further
its compliance risk management capabilities, in alignment with the RCRM
Policy and CWB’s three lines of defence risk governance framework.
People Risk
Competition for qualified employees in CWB’s key markets remains
apparent, reflecting the general level of economic activity and the needs of
other financial services participants within and outside CWB’s geographic
footprint.
CWB intends to continually attract and retain sufficient qualified
employees to successfully execute against its Balanced Growth strategy.
Key related tactics include ongoing investment in a positive, rewarding
and collaborative environment, a competitive total rewards offering, a
specialized talent acquisition team, complemented by efforts to empower
staff to deliver exceptional client experiences.
Inability to attract and retain an appropriate staff complement would
adversely affect CWB’s ability to achieve its strategic objectives.
Technology Risk
CWB is highly dependent upon information technology and supporting
infrastructure, such as voice, data and network access. In addition to
internal resources, various third-parties provide key components of the
infrastructure and applications. Disruptions in information technology
and infrastructure, whether attributed to internal or external factors, and
including potential disruptions in the services provided by various third-
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75
ADEQUACY OF CWB’S RISK MANAGEMENT
FRAMEWORK
The Risk Management Framework is made up of various processes and
strategies for managing risk exposure. Given the structure and scope of
its operations, CWB is primarily subject to credit, market (mainly interest
rate), liquidity, operational, reputation, regulatory, environmental, and
other risks. There can be no assurance that the framework to manage risks,
including the framework’s underlying assumptions and models, will be
effective under all conditions and circumstances. If the risk management
framework proves ineffective, CWB could be materially affected by
unexpected financial losses and/or other harm.
CHANGES IN ACCOUNTING STANDARDS AND
ACCOUNTING POLICIES AND ESTIMATES
The International Accounting Standards Board continues to change the
financial accounting and reporting standards that govern the preparation
of CWB’s financial statements. These types of changes can be significant
and may materially impact how CWB records and reports its financial
condition and results of operations. Where CWB is required to retroactively
apply a new or revised standard, it may be required to restate prior period
financial statements.
OTHER FACTORS
CWB cautions that the above discussion of risk factors is not exhaustive.
Other factors beyond CWB’s control that may affect future results include
changes in tax laws, technological changes, unexpected changes in
consumer spending and saving habits, timely development and introduction
of new products, and the anticipation of and success in managing the
associated risks.
OTHER RISK FACTORS
In addition to the risks described above, other risk factors, including those
below and those identified in the forward-looking statements section, may
adversely affect CWB’s businesses and financial results.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
CWB’s overall financial performance is impacted by general business and
economic conditions across the country. Several factors that could impact
general business and economic conditions in CWB’s markets include, but
are not limited to, changes in: short-term and long-term interest rates;
energy and other commodity prices, including regional commodity price
differentials and the related impact of constrained energy transportation
infrastructure; real estate prices; adverse global economic events and/
or elevated economic uncertainties; inflation; exchange rates; levels
of consumer, business and government spending; levels of consumer,
business and government debt; and consumer confidence.
LEVEL OF COMPETITION
CWB’s performance is impacted by the intensity of competition in the
markets in which it operates. Client retention may be influenced by many
factors, including relative client experience, the prices and attributes of
products and services, changes in products and services, and actions taken
by competitors.
ACCURACY AND COMPLETENESS OF INFORMATION ON
CLIENTS AND COUNTERPARTIES
CWB depends on the accuracy and completeness of information about
customers and counterparties. In deciding whether to extend credit or
enter into other transactions with clients and counterparties, CWB may
rely on information furnished by them, including financial statements,
appraisals, external credit ratings and other financial information.
CWB may also rely on the representations of clients and counterparties
as to the accuracy and completeness of that information and, with
respect to financial statements, on the reports of auditors. CWB’s financial
condition and earnings could be negatively impacted to the extent it relies
on financial statements that do not comply with standard accounting
practices, that are materially misleading, or that do not fairly present, in all
material respects, the financial condition and results of operations of the
customer or counterparties.
ABILITY TO EXECUTE GROWTH INITIATIVES AND
STRATEGIC INFRASTRUCTURE PROJECTS
As part of its Balanced Growth strategy, CWB intends to continue growing
its business through a combination of organic growth and strategic
acquisitions. The ability to successfully grow its business organically will
be dependent on successful execution of key business transformation
efforts and infrastructure projects. The ability to successfully grow
through acquisition will be dependent on a number of factors, including
identification of accretive new business or acquisition opportunities,
negotiation of purchase agreements on satisfactory terms and prices,
approval of acquisitions by regulatory authorities, securing satisfactory
regulatory capital and financing arrangements, and effective integration of
newly acquired operations into the existing business. All of these activities
may be more difficult to implement or may take longer to execute than
management anticipates.
Further, the initiation of any new growth initiatives or infrastructure projects,
and any significant expansion of the business may increase the operating
complexity and divert management’s attention away from established or
ongoing business activities. Any failure to successfully manage strategic
execution or acquisition strategies could have a material adverse impact on
CWB’s business, financial condition and results of operations.
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the dividend declared one year ago. The Board of Directors also declared a
cash dividend of $0.275 per Series 5 Preferred Share, and a cash dividend
of $0.390625 per Series 7 Preferred Share, both payable on January 31,
2019 to shareholders of record on January 22, 2019.
There were no changes in CWB’s ongoing internal controls over financial
reporting that occurred during the year ended October 31, 2018 that have
materially affected, or are reasonably likely to materially affect, CWB’s
internal controls over financial reporting. Prior to its release, this MD&A
was reviewed by the Audit Committee and, on the Audit Committee’s
recommendation, approved by the Board of Directors of CWB.
This Management’s Discussion and Analysis is dated December 5, 2018.
UPDATED SHARE INFORMATION
As at November 29, 2018, there were 88,952,099 common shares and
2,833,461 stock options outstanding. On December 5, 2018, CWB’s Board
of Directors declared a cash dividend of $0.26 per common share, payable
on January 3, 2019 to shareholders of record on December 14, 2018. This
quarterly dividend is consistent with the prior quarter and 8% higher than
CONTROLS AND PROCEDURES
As of October 31, 2018, an evaluation was carried out on the effectiveness
of CWB’s disclosure controls and procedures. Based on that evaluation, the
CEO and CFO have certified that the design and operating effectiveness of
CWB’s disclosure controls and procedures were effective.
Also at October 31, 2018, an evaluation was carried out on the
effectiveness of internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with IFRS. Based on that
evaluation, the CEO and CFO have certified that the design and operating
effectiveness of internal controls over financial reporting were effective.
These evaluations were conducted using the framework and criteria
established in accordance with Internal Control – Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). A Disclosure Committee, comprised
of members of senior management, assists the CEO and CFO in their
responsibilities. Management’s evaluation of controls can only provide
reasonable, not absolute, assurance that all control issues that may result
in material misstatement, if any, have been detected.
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PB
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING
The consolidated financial statements of Canadian Western Bank (CWB)
and related financial information presented in this annual report have
been prepared by management, who are responsible for the integrity
and fair presentation of the information presented, which includes the
consolidated financial statements, Management’s Discussion and Analysis
(MD&A) and other information. The consolidated financial statements
were prepared in accordance with International Financial Reporting
Standards, including the requirements of the Bank Act and related rules
and regulations issued by the Office of the Superintendent of Financial
Institutions Canada. The MD&A has been prepared in accordance with the
requirements of securities regulators, including National Instrument 51-
102 of the Canadian Securities Administrators (CSA).
The consolidated financial statements, MD&A and related financial
information reflect amounts which must, of necessity, be based on
informed estimates and judgments of management with appropriate
consideration to materiality. The financial
information represented
elsewhere in this annual report is fairly presented and consistent with that
in the consolidated financial statements.
Management has designed the accounting system and related internal
controls, and supporting procedures are maintained to provide reasonable
assurance that financial records are complete and accurate, assets are
safeguarded and CWB is in compliance with all regulatory requirements.
These supporting procedures include the careful selection and training of
qualified staff, defined division of responsibilities and accountability for
performance, and the written communication of policies and guidelines of
business conduct and risk management throughout CWB.
We, as CWB’s Chief Executive Officer and Chief Financial Officer, will certify
CWB’s annual filings with the CSA as required by National Instrument 52-
109 Certification of Disclosure in Issuers’ Annual and Interim Filings.
The system of internal controls is also supported by our internal audit
function, which carries out periodic internal audits of all aspects of CWB’s
operations. The Chief Internal Auditor has full and free access to the Audit
Committee and to the external auditors.
The Audit Committee, appointed by the Board of Directors, is comprised
entirely of independent directors who are not officers or employees of
CWB. The Committee is responsible for reviewing the consolidated financial
statements and annual report, including the MD&A, and recommending
them to the Board of Directors for approval. Other key responsibilities
of the Audit Committee include meeting with management, the Chief
Internal Auditor and the external auditors to discuss the effectiveness
of certain internal controls over the financial reporting process and the
planning and results of the external audit. The Committee also meets
regularly with the Chief Financial Officer, Chief Internal Auditor and the
external auditors without management present.
The Governance Committee, appointed by the Board of Directors, is
comprised of directors who are not officers or employees of CWB. Their
responsibilities include reviewing related party transactions and reporting
to the Board of Directors, those related party transactions which may have
a material impact on CWB.
The Office of the Superintendent of Financial Institutions Canada, at least
once a year, makes such examination and inquiry into the affairs of CWB
and its federally regulated subsidiaries as is deemed necessary or expedient
to satisfy themselves that the provisions of the relevant Acts, having
reference to the safety of depositors, are being duly observed and that
CWB is in a sound financial condition.
KPMG LLP, the independent auditors appointed by the shareholders of
CWB, have performed an audit of the consolidated financial statements
and their report follows. The external auditors have full and free access to,
and meet periodically with, the Audit Committee to discuss their audit and
matters arising therefrom.
Chris H. Fowler
President and Chief Executive Officer
December 5, 2018
Carolyn J. Graham, FCPA, FCA
Executive Vice President and Chief Financial Officer
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CWB Financial Group 2018 Annual Report
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Canadian Western Bank
We have audited the accompanying consolidated financial statements of
Canadian Western Bank, which comprise the consolidated balance sheets
as at October 31, 2018 and October 31, 2017, the consolidated statements
of income and comprehensive income, changes in equity and cash flows
for the years then ended, and notes, comprising a summary of significant
accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated
Financial Statements
Management is responsible for the preparation and fair presentation of
these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud
or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements. The
procedures selected depend on our judgment, including the assessment of
the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, we
consider internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design
audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is
sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Canadian Western
Bank as at October 31, 2018 and October 31, 2017 and its consolidated
financial performance and its consolidated cash flows for the years then
ended in accordance with International Financial Reporting Standards.
KPMG LLP
Chartered Professional Accountants
December 5, 2018
Edmonton, Canada
78
CWB Financial Group 2018 Annual Report CONSOLIDATED BALANCE SHEETS
($ thousands)
Assets
Cash Resources
Cash and non-interest bearing deposits with financial institutions
Interest bearing deposits with regulated financial institutions
Cheques and other items in transit
Securities
Issued or guaranteed by Canada
Issued or guaranteed by a province or municipality
(Note 4)
$
(Note 5)
Other debt securities
Preferred shares
Loans
Personal
Business
Allowance for credit losses
Other
Property and equipment
Goodwill
Intangible assets
Derivative related
Other assets
Total Assets
Liabilities and Equity
Deposits
Personal
Business and government
Other
Cheques and other items in transit
Securities sold under repurchase agreements
Derivative related
Other liabilities
Debt
Debt securities
Subordinated debentures
Equity
Preferred shares
Common shares
Retained earnings
Share-based payment reserve
Other reserves
Total Shareholders’ Equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
(Note 7)
(Note 8)
(Note 10)
(Note 11)
(Note 11)
(Note 12)
(Note 13)
(Note 14)
(Note 6 and 9)
(Note 12)
(Note 15)
(Note 9 and 16)
(Note 16)
(Note 17)
(Note 17)
(Note 18)
(Note 19)
The accompanying notes are an integral part of the consolidated financial statements.
Robert L. Phillips
Chair of the Board
Chris H. Fowler
President and Chief Executive Officer
As at
October 31
2018
As at
October 31
2017
73,822
26,825
52,574
153,221
$
17,491
503,895
410
521,796
1,325,816
1,307,298
521,825
143,536
93,575
438,858
308,421
132,410
2,084,752
2,186,987
5,247,160
21,085,968
26,333,128
(128,529)
26,204,599
59,098
85,168
160,790
2,496
271,339
578,891
4,725,715
18,619,853
23,345,568
(116,329)
23,229,239
56,115
85,669
149,730
12,393
205,524
509,431
$
29,021,463
$
26,447,453
$
14,483,686
$
13,394,562
9,216,271
23,699,957
8,508,420
21,902,982
28,489
95,126
69,581
531,953
725,149
1,757,854
250,000
2,007,854
265,000
744,701
55,545
58,358
35,381
455,009
604,293
1,226,336
250,000
1,476,336
265,000
731,885
1,649,196
1,488,634
23,937
(97,082)
2,585,752
2,751
2,588,503
24,979
(49,453)
2,461,045
2,797
2,463,842
$
29,021,463
$
26,447,453
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CWB Financial Group 2018 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended October 31
($ thousands, except per share amounts)
Interest Income
Loans
Securities
Deposits with regulated financial institutions
Interest Expense
Deposits
Debt
Net Interest Income
Non-interest Income
Credit related
Wealth management services
Retail services
Trust services
Gains (losses) on securities, net
Other
Total Revenue
Provision for Credit Losses
Acquisition-related Fair Value Changes
Non-interest Expenses
Salaries and employee benefits
Premises and equipment
Other expenses
Net Income before Income Taxes
Income Taxes
Net Income
Net income attributable to non-controlling interests
Shareholders' Net Income
Preferred share dividends
Common Shareholders' Net Income
Average number of common shares (in thousands)
Average number of diluted common shares (in thousands)
Earnings Per Common Share
Basic
Diluted
The accompanying notes are an integral part of the consolidated financial statements.
2018
2017
$
1,185,530
$
993,950
35,529
4,236
25,136
8,198
1,225,295
1,027,284
452,526
47,779
500,305
724,990
32,165
20,371
10,334
7,784
(217)
7,931
78,368
803,358
48,257
20,094
237,228
62,754
73,501
373,483
361,524
96,877
264,647
1,141
263,506
14,250
355,521
29,373
384,894
642,390
34,012
19,073
10,758
11,305
664
8,433
84,245
726,635
50,986
18,295
220,416
60,348
64,702
345,466
311,888
82,233
229,655
1,128
228,527
14,250
(Note 8)
(Note 26)
(Note 22)
$
249,256
$
214,277
88,806
89,285
88,297
88,592
(Note 23)
$
$
2.81
2.79
2.43
2.42
80
CWB Financial Group 2018 Annual Report CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended October 31
($ thousands)
Net Income
Available-for-sale securities
Gains (losses) from change in fair value(1)
Reclassification to net income(2)
Derivatives designated as cash flow hedges
Losses from change in fair value(3)
Reclassification to net income(4)
Other Comprehensive Loss, Net of Tax
Comprehensive Income
Comprehensive income for the year attributable to:
Shareholders
Non-controlling interests
Comprehensive Income
(1) Net of income tax of $7,351 (2017 – $1,463).
(2) Net of income tax of $59 (2017 – $179).
(3) Net of income tax of $9,930 (2017 – $8,128).
(4) Net of income tax of $367 (2017 – $1,222).
2018
2017
$
264,647
$
229,655
(19,945)
158
(19,787)
(26,848)
(994)
(27,842)
(47,629)
4,021
(485)
3,536
(22,089)
(3,321)
(25,410)
(21,874)
$
217,018
$
207,781
$
215,877
$
206,653
1,141
1,128
$
217,018
$
207,781
Items presented in other comprehensive income will be subsequently reclassified to the Consolidated Statements of Income when specific conditions are met.
The accompanying notes are an integral part of the consolidated financial statements.
81
CWB Financial Group 2018 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended October 31
($ thousands)
Retained Earnings
Balance at beginning of year
Shareholders' net income
Dividends - Preferred shares
- Common shares
Increase in equity attributable to non-controlling interests ownership change
Balance at end of year
Other Reserves
Balance at beginning of year
Changes in available-for-sale securities
Changes in derivatives designated as cash flow hedges
Balance at end of year
Preferred Shares
Balance at beginning and end of year
Common Shares
Balance at beginning of year
Issued on acquisition-related contingent consideration instalment payment
Issued under dividend reinvestment plan
Transferred from share-based payment reserve on the exercise or exchange of options
Balance at end of year
Share-based Payment Reserve
Balance at beginning of year
Amortization of fair value of options
Transferred to common shares on the exercise or exchange of options
Balance at end of year
Total Shareholders' Equity
Non-controlling Interests
Balance at beginning of year
Net income attributable to non-controlling interests
Dividends to non-controlling interests
Partial ownership increase (decrease)
Increase in equity attributable to non-controlling interests
Balance at end of year
Total Equity
The accompanying notes are an integral part of the consolidated financial statements.
2018
2017
(Note 17)
(Note 17)
$
1,488,634
$
1,354,966
263,506
(14,250)
(88,819)
125
228,527
(14,250)
(82,107)
1,498
1,649,196
1,488,634
(Note 17)
(Note 17)
(Note 26)
(Note 18)
(Note 19)
(49,453)
(19,787)
(27,842)
(97,082)
(27,579)
3,536
(25,410)
(49,453)
265,000
265,000
731,885
718,377
5,750
4,248
2,818
-
5,280
8,228
744,701
731,885
24,979
1,776
(2,818)
23,937
31,276
1,931
(8,228)
24,979
2,585,752
2,461,045
2,797
1,141
(1,431)
244
-
2,751
773
1,128
(670)
(117)
1,683
2,797
$
2,588,503
$
2,463,842
82
CWB Financial Group 2018 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended October 31
($ thousands)
Cash Flows from Operating Activities
Net income
Adjustments to determine net cash flows:
Provision for credit losses
Depreciation and amortization
Current income taxes receivable and payable, net
Amortization of fair value of employee stock options
Accrued interest receivable and payable, net
Deferred income taxes, net
Net gains on CWT strategic transactions
Losses (gains) on securities, net
Fair value change in contingent consideration
Change in operating assets and liabilities
Deposits, net
Loans, net
Securities sold under resale agreements, net
Securities purchased under resale agreements, net
Other items, net
Cash Flows from Financing Activities
Debt securities issued
Debt securities repaid
Dividends
Contributions by non-controlling interests
Dividends to non-controlling interests
Debentures redeemed
Cash Flows from Investing Activities
Interest bearing deposits with regulated financial institutions, net
Securities, purchased
Securities, sales proceeds
Securities, matured
Proceeds from CWT strategic transactions
Partial ownership increase
Property, equipment and intangible assets
Acquisition-related contingent consideration instalment payment
Change in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year *
* Represented by:
Cash and non-interest bearing deposits with financial institutions
Cheques and other items in transit (included in Cash Resources)
Cheques and other items in transit (included in Other Liabilities)
Cash and Cash Equivalents at End of Year
Supplemental Disclosure of Cash Flow Information
Interest and dividends received
Interest paid
Income taxes paid
The accompanying notes are an integral part of the consolidated financial statements.
2018
2017
$
264,647
$
229,655
48,257
29,708
(3,456)
1,776
28,415
(7,677)
(4,030)
217
20,094
1,796,975
(3,024,939)
36,768
-
17,436
(795,809)
1,245,427
(713,909)
(98,821)
1,316
(1,431)
-
432,582
477,070
(2,892,129)
1,266,827
1,704,328
4,135
-
(44,203)
(17,250)
498,778
135,551
(37,644)
97,907
$
50,986
30,692
12,134
1,931
(19,061)
(10,638)
(5,726)
(664)
18,295
708,429
(1,322,714)
58,358
163,318
46,543
(38,462)
739,177
(456,039)
(91,077)
3,401
(670)
(75,000)
119,792
386,621
(5,843,898)
4,338,132
1,031,966
7,164
(1,838)
(28,846)
(10,132)
(120,831)
(39,501)
1,857
(37,644)
(Note 8)
(Note 18)
(Note 3)
(Note 26)
(Note 3)
(Note 26)
$
$
73,822
52,574
(28,489)
$
17,491
410
(55,545)
(37,644)
$
97,907
$
$
1,237,809
$
1,031,937
462,691
88,116
392,413
66,009
83
CWB Financial Group 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended October 31, 2018 and 2017
($ thousands, except per share amounts)
e) Significant Judgments
Information on critical judgments in applying accounting policies that have
the most significant effect on the amounts recognized in the consolidated
financial statements is described in the following notes:
• Impairment of loans (Note 7)
• Allowance for credit losses (Note 8)
f) Business Combinations
for using
Business combinations are accounted
the acquisition
method. The cost of an acquisition is measured at the fair value of the
consideration, including contingent consideration, given at the acquisition
date. Contingent consideration is considered a financial instrument and, as
such, is remeasured each period thereafter with the adjustment recorded
to acquisition-related fair value changes in the consolidated statements
of income. Acquisition-related costs are recognized as an expense in the
income statement in the period in which they are incurred. The acquired
identifiable assets, liabilities and contingent liabilities are measured at their
fair values at the date of acquisition. Goodwill is measured as the excess of
the aggregate of the consideration transferred, including any amount of
any non-controlling interest in the acquiree, over the net of the recognized
amounts of the identifiable assets acquired and the liabilities assumed.
CWB elects on a transaction-by-transaction basis whether to measure
non-controlling interest at its fair value or at its proportionate share of the
recognized amount of the identifiable net assets, at the acquisition date.
g) Functional and Foreign Currencies
The consolidated financial statements are presented in Canadian dollars,
which is CWB’s functional currency. Assets and liabilities denominated in
foreign currencies are translated into Canadian dollars at rates prevailing
at the balance sheet date. Revenue and expenses in foreign currencies
are translated at the average exchange rates prevailing during the period.
Realized and unrealized gains and losses on foreign currency positions are
included in non-interest income.
h) Provisions and Contingent Liabilities
Management exercises judgment in determining whether a past event or
transaction may result in the recognition of a provision or the disclosure of
a contingent liability. Provisions are recognized in the consolidated financial
statements when management determines that it becomes probable
that an outflow of resources will be required to settle the obligation and
the amount can be reliably estimated, considering all relevant risks and
uncertainties. Management as well as internal and external experts are
involved in estimating any amounts required. The actual costs of resolving
these obligations may be significantly higher or lower than the recognized
provision.
1. NATURE OF OPERATIONS AND BASIS OF
PRESENTATION
a) Reporting Entity
Canadian Western Bank (CWB) is a publicly traded, federally-regulated
Canadian bank headquartered in Edmonton, Alberta. CWB is a diversified
financial services organization serving businesses and individuals across
Canada.
The consolidated financial statements were authorized for issue by the
Board of Directors on December 5, 2018.
b) Basis of Consolidation
The consolidated financial statements include the assets, liabilities and
results of operations of CWB and all of its subsidiaries, after the elimination
of intercompany transactions and balances. Subsidiaries are defined as
entities whose operations are controlled by CWB and are corporations
in which CWB is the beneficial owner. Non-controlling interest in
subsidiaries is presented on the consolidated balance sheets as a separate
component of equity that is distinct from shareholders’ equity. The net
income attributable to non-controlling interest in subsidiaries is presented
separately in the consolidated income statements. See Note 30 for details
of the subsidiaries.
The consolidated financial statements have been prepared on a historic
cost basis, except the revaluation of the following items: available-for-
sale financial assets, derivative financial instruments and contingent
consideration.
c) Statement of Compliance
These consolidated financial statements of CWB have been prepared in
accordance with International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standards Board (IASB) and in
accordance with subsection 308 (4) of the Bank Act and the accounting
requirements of the Office of the Superintendent of Financial Institutions
Canada (OSFI).
The significant accounting policies used in the preparation of these
financial statements, including the accounting requirements of OSFI, are
summarized below and in the following notes.
d) Use of Estimates and Assumptions
The preparation of financial statements in conformity with IFRS requires
CWB to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities
as at the date of the consolidated financial statements as well as the
reported amount of revenues and expenses during the period. Key areas
of estimation where CWB has made subjective judgments, often as a
result of matters that are inherently uncertain, include those relating to
the allowance for credit losses, fair value of financial instruments, goodwill
and intangible assets, deferred tax assets and liabilities, impairment of
available-for-sale securities and fair value of stock options. Therefore,
actual results could differ from these estimates.
84
CWB Financial Group 2018 Annual Report
i) Specific Accounting Policies
The accounting policies set out below have been applied consistently to
all periods presented in these consolidated financial statements, except as
noted. To facilitate a better understanding of CWB’s consolidated financial
statements, the significant accounting policies are disclosed in the notes,
where applicable, with related financial disclosures by major caption:
Note Topic
Note Topic
2
3
4
5
6
7
8
9
10
11
12
13
14
Financial instruments
Strategic transactions
Cash resources
Securities
Securities sold under
repurchase agreements
and purchased
under resale agreements
Loans
Allowance for credit
losses
Financial assets
transferred but not
derecognized
Property and equipment
Goodwill and intangible
assets
Derivative financial
instruments
Other assets
Deposits
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
Other liabilities
Debt
Capital stock
Share-based payments
Non-controlling interests
Contingent liabilities and
commitments
Employee future benefits
Income taxes
Earnings per common
share
Related party
transactions
Interest rate sensitivity
Fair value of financial
instruments
Financial instruments -
offsetting
Risk management
Capital management
Subsidiaries
j) Future Accounting Changes
A number of standards and amendments have been issued by the IASB,
and the following changes may have an impact on CWB’s future financial
statements.
IFRS 9 – Financial Instruments
In July 2014, the IASB issued the complete version of IFRS 9 Financial
Instruments (IFRS 9), which will replace IAS 39 Financial Instruments:
Recognition and Measurement (IAS 39). IFRS 9 addresses classification
and measurement of financial assets and liabilities, impairment and hedge
accounting. IFRS 9 is effective for CWB’s fiscal year beginning on November
1, 2018. Amendments made to IFRS 7 Financial Instruments: Disclosures
related to IFRS 9 are also effective November 1, 2018.
Transition
IFRS 9 is required to be applied on a retrospective basis, with certain
exceptions. CWB does not plan to restate prior period comparative
figures within the consolidated financial statements upon transition to
IFRS 9 and will recognize an adjustment to opening retained earnings and
accumulated other comprehensive income to reflect the application of the
new requirements at the adoption date. Based on current estimates, the
IFRS 9 transition is expected to increase retained earnings by approximately
$23 million, after tax, and the common equity Tier 1 capital ratio by
approximately 10 basis points. The estimated impact relates primarily to
the implementation of the new impairment guidelines under IFRS 9. CWB
will continue to monitor and refine certain elements of the impairment
process and related controls leading up to the interim consolidated
financial statements for the period ending January 31, 2019.
The adoption of IFRS 9 is a significant initiative for CWB supported by
a formal governance framework and a robust implementation plan. For
more details related to CWB’s transition to IFRS 9, see the Future Changes
in Accounting Policies section of the Management’s Discussion and
Analysis (MD&A).
Classification and Measurement
IFRS 9 introduces a principles-based approach for the classification of
financial assets. Debt instruments, including loans and debt securities,
are initially measured at fair value and are subsequently classified and
measured at fair value through profit or loss (FVTPL), fair value through
other comprehensive income (FVOCI) or amortized cost based on the
contractual cash flow characteristics of the instrument and the business
model under which the asset is held. These categories replace the
existing IAS 39 classifications of FVTPL, available-for-sale (AFS), loans and
receivables, and held-to-maturity. With the exception of the impairment
provisions discussed below, subsequent measurement of debt instruments
classified at FVOCI under IFRS 9 is consistent with AFS debt instruments
under IAS 39, with changes in fair value recorded in other comprehensive
income, net of taxes, until the security is sold. Gains and losses realized
on disposal of debt instruments classified at FVOCI are included in the
consolidated statements of income.
CWB has defined its significant business models and assessed the cash flow
characteristics for all debt instruments under the scope of IFRS 9. As a result
of the application of the classification and measurement requirements of
IFRS 9, CWB expects to make the following reclassifications, none of which
impact the carrying value of the assets:
• Interest bearing deposits with regulated financial institutions totaling
$26,825 at October 31, 2018 will be reclassified from AFS under IAS 39
to FVOCI under IFRS 9; and
• Debt securities totaling $1,991,177 at October 31, 2018 will be
reclassified from AFS under IAS 39 to FVOCI under IFRS 9.
Equity instruments are classified and measured at FVTPL unless an
irrevocable election is made to designate them at FVOCI at the time of
initial recognition. Unlike AFS equity securities under IAS 39, if the election
is applied, gains and losses, including those that arise upon the sale of
the security, are recorded in other comprehensive income and are not
subsequently reclassified to the consolidated statements of income. Equity
securities are not subject to an impairment assessment under IFRS 9. Upon
transition to IFRS 9, preferred share securities totaling $93,575 at October
31, 2018 classified as AFS under IAS 39 will be designated at FVOCI.
Classification of financial liabilities will be unchanged, except for financial
liabilities measured at fair value, where changes in fair value of an entity’s
own credit risk will be recognized in other comprehensive income rather
than in profit or loss.
Impairment
IFRS 9 also introduces a new expected credit loss (ECL) approach for
estimating impairment on all financial assets measured at amortized
cost, debt securities measured at FVOCI, and off-balance sheet loan
commitments and financial guarantee contracts, which were previously
provided for under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets. The implementation of an ECL approach under IFRS 9, which
results in the recognition of allowances for credit losses on financial assets
regardless of whether there has been an actual loss event, is a significant
change from the incurred loss model under IAS 39, with the largest impact
being to loans reported on the consolidated balance sheets.
For performing assets, the IFRS 9 impairment model requires an entity
to record 12-month ECL from the date an asset is first recognized and
to record lifetime ECL if the asset has experienced a significant increase
85
CWB Financial Group 2018 Annual Report
in credit risk (SICR) since initial recognition. For CWB’s loans, the main
drivers considered in assessing whether a SICR has occurred will be relative
changes in internal risk ratings since initial recognition, which incorporate
borrower-specific risk factors and probability-weighted forward-looking
macroeconomic factors, and certain other criteria, such as 30 days past due
and watchlist status. When a financial asset is identified as credit-impaired,
an allowance for credit losses equal to full lifetime ECL is recognized, which
is expected to be similar to CWB’s current specific allowances.
IFRS 9 requires that the estimation of ECL and the assessment of SICR
consider information about past events and current conditions as well as
reasonable and supportable projections of future events and economic
conditions.
Hedging
IFRS 9 introduces a new hedge accounting model that expands the scope
of eligible hedged items and risks eligible for hedge accounting, and aligns
hedge accounting more closely with risk management practises. IFRS 9
includes a policy choice to retain IAS 39 for hedging purposes pending
the completion of the IASB’s project on macro hedge accounting. CWB
has elected to continue applying IAS 39 hedging requirements and will
implement the revised hedge accounting disclosures that are required by
the IFRS 9-related amendments to IFRS 7 for the annual period ending
October 31, 2019.
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers
(IFRS 15), which establishes the principles for recognizing revenue and cash
flows arising from contracts with customers and prescribes the application
of a five-step recognition and measurement model. The standard excludes
from its scope revenue arising from items such as financial instruments and
leases as these fall within the scope of other IFRSs. IFRS 15 is effective for
CWB’s fiscal year beginning on November 1, 2018.
On transition, there are two methods by which the new standard can
be adopted: (1) a full retrospective approach with a restatement of all
prior periods presented, or (2) a modified retrospective approach with a
cumulative-effect adjustment recognized in retained earnings as of the
date of adoption. CWB will adopt IFRS 15 using the modified retrospective
approach with the cumulative effect of the adjustment, if any, recognized
as of November 1, 2018, subject to allowable and elected practical
expedients.
CWB has performed detailed analysis on each revenue stream that is
within the scope of the new standard and is finalizing its assessment of
the impact upon adoption, including timing and measurement of revenue
recognition, presentation of certain revenue and expense items, as well
as additional qualitative and quantitative disclosures. As the majority of
CWB’s revenues are outside the scope of IFRS 15, CWB will not have a
significant impact as a result of adopting the new standard.
IFRS 2 – Share-based Payment Transactions
In June 2016, the IASB issued amendments to IFRS 2 Share Based Payment
Transactions which provides additional guidance on the classification
and measurement of cash-settled share-based payment transactions,
share-based payment transactions with a net settlement feature for
withholding tax obligations and on the modification of share-based
payment transactions changing from cash-settled to equity-settled. These
amendments are effective for CWB’s fiscal year beginning November 1,
2018 and will be applied prospectively. CWB will not have a significant
impact from adopting the amendments.
86
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 Leases (IFRS 16), which will replace
IAS 17 Leases, introducing a single lessee accounting model for all leases
by eliminating the distinction between operating and financing leases. IFRS
16 requires lessees to recognize right-of-use assets and lease liabilities for
most leases. Lessees will also recognize depreciation expense on the right-
of-use asset and interest expense on the lease liability in the consolidated
statements of income. Short-term leases, which are defined as those that
have a lease term of twelve months or less, and leases of low-value assets
are exempt. Lessor accounting remains substantially unchanged. IFRS 16
is effective for CWB’s fiscal year beginning November 1, 2019. CWB is
currently assessing the impact of adopting this standard.
Conceptual Framework for Financial Reporting
In March 2018, the IASB issued a revised version of the Conceptual
Framework for Financial Reporting which assists the IASB in developing
IFRS standards and serves as an accounting policy guide when no IFRS
standard applies. The revision is effective for CWB’s fiscal year beginning
November 1, 2020 with early adoption permitted. CWB is in the process of
assessing the impact of the framework.
2. FINANCIAL INSTRUMENTS
As a financial institution, most of CWB’s balance sheet is comprised of
financial instruments and the majority of net income results from gains,
losses, income and expenses related to the same.
Financial assets include cash resources, securities, securities purchased
under resale agreements, loans, derivative financial instruments and
certain other assets. Financial liabilities include deposits, securities sold
under repurchase agreements, derivative financial instruments, debt and
certain other liabilities.
The use of financial instruments exposes CWB to credit, liquidity and
market risk. A discussion of how these are managed can be found in the
Risk Management section of the MD&A.
Income and expenses are classified as to source, either securities or loans
for income, and deposits or debt for expense. Gains (losses) on the sale of
securities, net and fair value changes in certain derivatives are classified
to non-interest income. Contingent consideration fair value changes are
classified as acquisition-related fair value changes in the consolidated
statements of income.
3. STRATEGIC TRANSACTIONS
Equipment Loans and Leases and General Commercial
Lending Assets
On January 31, 2018, CWB acquired a portfolio of equipment loans and
leases and general commercial lending assets, which added $845,990
to performing loans at fair value. No goodwill or intangible assets were
included in the purchase. No allowance for credit losses was recorded
on the acquisition date and loans are evaluated for impairment at each
balance sheet date using the same methodology as CWB loans.
Canadian Western Trust (CWT)
On August 16, 2017, CWB announced that CWT, a wholly-owned
subsidiary of CWB, will no longer offer self-directed account services to
clients holding certain securities, and CWT initiated a process to appoint
successor trustees for these accounts. Pre-tax gains of $4,030 in 2018
(2017 – $5,726) related to these transactions are recorded in other non-
interest income on the consolidated statements of income, reflecting sales
proceeds less the carrying value of assets sold and related transaction costs.
The carrying value of deposits transferred in fiscal 2018 totaled $30,409
(2017 – $71,259).
CWB Financial Group 2018 Annual Report 4. CASH RESOURCES
Cash resources include highly liquid investments that are readily convertible
to cash and which are subject to an insignificant risk of change in value.
Cheques and other items in transit included in cash resources are recorded
at cost and represent the net position of uncleared cheques and other
items in transit.
Interest-bearing deposits with regulated financial institutions included in
cash resources have been designated as available-for-sale and are reported
on the consolidated balance sheets at fair value with changes in fair value
reported in other comprehensive income, net of income taxes. At October
31, 2018, the fair value of deposits with regulated financial institutions
was $26,825 (October 31, 2017 – $503,895), which is equal to amortized
cost (October 31, 2017 – $18 lower than amortized cost). At October 31,
2018, $20,310 (October 31, 2017 – $17,895) of interest-bearing deposits
with regulated financial institutions was restricted from use in relation to
the securitization of equipment financing leases and loans.
5. SECURITIES
Available-for-sale securities are accounted for at settlement date and
recorded on the consolidated balance sheets at fair value with changes
in fair value recorded in other comprehensive income, net of income
taxes, until the security is sold or becomes impaired. Interest income
from securities, which includes amortization of premiums and discounts,
is recognized using the effective interest method in the consolidated
statements of income. Dividend income is recognized when the right to
receive payment is established, which is typically on the ex-dividend date.
Securities are purchased with the original intention to hold the instrument
to maturity or until market conditions render alternative investments
more attractive. Gains and losses realized on disposal of securities and
adjustments to record any impairment in value are included in non-interest
income.
At each reporting date, CWB assesses whether there is objective evidence
that available-for-sale securities are impaired. Objective evidence that a
security is impaired can include significant financial difficulty of the issuer,
indications that an issuer will enter bankruptcy or the lack of an active
market for a security.
Impairment losses on available-for-sale securities are recognized by
reclassifying the cumulative loss recognized in other comprehensive
income to the income statement as gains (losses) on securities, net. The
reclassified amount is the difference between the cost, net of any principal
repayment and amortization, and the fair value, less any impairment
previously recognized in net income.
If, in a subsequent period, the fair value of an impaired available-for-sale
debt security increases and the increase can be objectively related to an
event occurring after the impairment loss was recognized in net income,
the impairment loss is reversed, with the reversal recognized in net income.
The analysis of securities at carrying value, by type and maturity or reprice date, is as follows:
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
Total
Maturity/Reprice
Within
1 Year
1 to
3 Years
3 to
5 Years
As at
October 31
2018
As at
October 31
2017
$
322,435
$
599,537
$
403,844
$
1,325,816
$
1,307,298
55,222
61,205
14,022
257,475
209,128
54,951
57,654
27,380
21,899
521,825
143,536
93,575
438,858
308,421
132,410
$
452,884
$
969,617
$
662,251
$
2,084,752
$
2,186,987
The analysis of unrealized gains and losses on securities reflected on the balance sheet is as follows:
As at October 31, 2018
As at October 31, 2017
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Securities Issued or Guaranteed by
Canada
A province or municipality
Other Debt Securities
Preferred Shares
$
$ 1,362,647
531,798
146,610
110,696
$
-
-
1
-
36,831
9,973
3,075
17,121
$ 1,325,816
521,825
143,536
93,575
$ 1,327,541
443,510
306,671
149,159
$
$
1,014
137
2,930
11
21,257
4,789
1,180
16,760
$ 1,307,298
438,858
308,421
132,410
Total
$ 2,151,751
$
1
$
67,000
$ 2,084,752
$ 2,226,881
$
4,092
$
43,986
$ 2,186,987
The securities portfolio is primarily comprised of high-quality debt and
equity instruments that are not held for trading purposes. Fluctuations in
value are generally attributed to changes in interest rates, market credit
spreads and shifts in the interest rate curve as well as volatility in equity
markets.
As at October 31, 2018, CWB assessed the securities with unrealized losses
and, based on available objective evidence, concluded that the unrealized
losses resulted from changes in interest rates and not from deterioration in
the creditworthiness of the issuers. No impairment charges were included
in gains (losses) on securities, net (2017 – nil).
87
CWB Financial Group 2018 Annual Report 6. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND PURCHASED UNDER RESALE
AGREEMENTS
Securities sold under repurchase agreements represent a sale of
Government of Canada securities by CWB effected with a simultaneous
agreement to purchase them back at a specified price on a future date,
which is generally short term. The difference between the proceeds of
the sale and the predetermined cost to be paid on a resale agreement is
recorded as deposit interest expense.
Securities purchased under resale agreements represent a purchase of
Government of Canada securities by CWB effected with a simultaneous
agreement to sell them back at a specified price on a future date, which
is generally short term. The difference between the cost of the purchase
and the predetermined proceeds to be received on a resale agreement is
recorded as securities interest income.
Securities purchased under resale agreements have been designated as
available-for-sale and are reported on the consolidated balance sheets
at fair value with changes in fair value reported in other comprehensive
income, net of income taxes.
7. LOANS
Loans, including leases, are recorded at amortized cost and stated net
of unearned income, unamortized premiums and allowance for credit
losses (see Note 8). Interest income is recorded using the effective interest
method.
Loans are determined to be impaired when payments are contractually
past due 90 days, or where CWB has commenced realization proceedings,
or where CWB is of the opinion that the loan should be regarded as
impaired based on objective evidence. Objective evidence that a loan is
impaired can include significant financial difficulty of the borrower, default
or delinquency of a borrower, breach of loan covenants or conditions, or
indications that a borrower will enter bankruptcy. An exception may be
made where CWB determines that the loan is well secured and in the
process of collection, and the collection efforts are reasonably expected
to result in either repayment of the loan or restoring it to current status
within 180 days from the date the payment went in arrears. All loans
are classified as impaired when a payment is 180 days in arrears other
than loans guaranteed or insured for both principal and interest by the
Canadian government, a province or a Canadian government agency.
These loans are classified as impaired when payment is 365 days in arrears.
Impairment is measured as the difference between the carrying value of
the loan at the time it is classified as impaired and the present value of
the expected cash flows (estimated realizable amount), using the original
effective interest rate of the loan. When the amounts and timing of future
cash flows cannot be reliably estimated, either the fair value of the security
underlying the loan, net of any expected realization costs, or the current
market price for the loan may be used to measure the estimated realizable
amount. Impaired loans are returned to performing status when the
timely collection of both principal and interest is reasonably assured, all
delinquent principal and interest payments are brought current, and all
charges for loan impairment have been reversed.
Loan fees integral to the yield on the loan, net of directly related costs, are
amortized to interest income using the effective interest method. Premiums
paid on the acquisition of loan portfolios are amortized to interest income
using the effective interest method.
Outstanding gross loans and impaired loans, net of the allowances for credit losses, by loan type, are as follows:
As at October 31, 2018
As at October 31, 2017
Gross
Amount
Gross
Impaired
Amount
(2)
Specific
Allowance
Net
Impaired
Loans
Gross
Amount
Gross
Impaired
Amount
(2)
Specific
Allowance
Net
Impaired
Loans
$ 5,247,160
$
28,961
$
647
$ 28,314
$ 4,725,715
$
19,816
$
209
$ 19,607
Personal
Business
General commercial loans
Commercial mortgages(1)
Real estate project loans
Equipment financing and leasing
Oil and gas production loans
7,458,010
4,865,183
3,854,681
4,779,005
129,089
21,815
29,376
9,920
47,800
-
5,484
3,290
2,000
16,331
26,086
6,307,560
4,266,702
7,920
4,029,810
15,606
32,194
3,892,150
-
-
123,631
58,183
16,571
21,391
50,760
1,540
3,071
385
2,020
10,132
800
Total
Collective Allowance(3)
Net Impaired Loans After
Collective Allowance
$ 26,333,128
$ 137,872
$
27,027
$ 23,345,568
$ 168,261
$ 16,617
110,845
(119,766)
$ (8,921)
55,112
16,186
19,371
40,628
740
151,644
(119,298)
$ 32,346
(1) Multi-family residential mortgages are included in commercial mortgages.
(2) Gross impaired loans include foreclosed assets with a carrying value of $6,628 (October 31, 2017 – $1,983). CWB pursues timely realization on foreclosed assets and does not use the assets for its own operations.
(3) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and letters of credit and is not allocated by loan type (see Note 8).
During the year, interest recognized as income on impaired loans totaled $5,743 (2017 – $3,552).
88
CWB Financial Group 2018 Annual Report
Outstanding impaired loans, net of the allowance for credit losses, by provincial location of security, are as follows:
Alberta
British Columbia
Ontario
Saskatchewan
Manitoba
Quebec
Other
Total
Collective Allowance(1)
Net Impaired Loans After Collective Allowance
As at October 31, 2018
As at October 31, 2017
Gross
Impaired
Amount
Specific
Allowance
Net
Impaired
Loans
Gross
Impaired
Amount
Specific
Allowance
$
77,018
$
12,627
$
64,391
$
105,831
$
6,270
$
13,699
16,829
8,957
9,873
4,826
6,670
2,069
3,016
1,330
4,006
2,345
1,634
11,630
13,813
7,627
5,867
2,481
5,036
17,460
19,169
8,273
6,635
3,721
7,172
2,179
3,134
1,485
1,099
1,369
1,081
$
137,872
$
27,027
110,845
$
168,261
$
16,617
(119,766)
$
(8,921)
Net
Impaired
Loans
99,561
15,281
16,035
6,788
5,536
2,352
6,091
151,644
(119,298)
$
32,346
(1) The collective allowance for credit loss includes amounts related to committed but undrawn credit exposures and letters of credit and is not allocated by province.
Loans are considered past due when a customer has not made a payment
by the contractual due date. These loans are not classified as impaired as
they are either less than 90 days past due or well secured and collection
efforts are reasonably expected to result in repayment or restoring it to
current status in accordance with CWB’s policy. Details of such past due
loans follow:
As at October 31, 2018
Personal
Business
Total
1 - 30 days
31 - 60 days
61 - 90 days
More than
90 days
Total
$
51,904
117,835
$
15,797
33,590
$
$
691
9,088
$
1,484
486
69,876
160,999
$
169,739
$
49,387
$
9,779
$
1,970
$
230,875
As at October 31, 2017
$
110,336
$
37,518
$
6,116
$
683
$
154,653
The composition of CWB’s loan portfolio by geographic region and industry sector is as follows:
($ millions)
Personal(1)
Business
BC
AB
ON
SK
MB
QC
Other
Total
Composition Percentage
Oct. 31
2018
Oct. 31
2017
$ 1,420
$ 1,359
$ 2,018
$
237
$ 113
$
-
$
100
$ 5,247
20 %
20 %
General commercial loans
Commercial mortgages
Equipment financing and leasing(2)
Real estate project loans
Oil and gas production loans
2,189
2,045
708
2,532
-
2,564
2,167
1,239
954
112
1,917
199
1,297
191
-
286
279
453
132
17
7,474
7,036
3,604
1,167
231
156
227
46
-
660
139
18
523
-
-
132
1
332
-
-
7,458
4,865
4,779
3,855
129
680
465
21,086
28
19
18
15
-
80
27
18
17
17
1
80
Total(3)
$ 8,894
$ 8,395
$ 5,622
$ 1,404
$ 773
$
680
$
565
$ 26,333
100 %
100 %
Composition Percentage
October 31, 2018
October 31, 2017
34 %
35 %
32 %
33 %
21 %
19 %
5 %
6 %
3 %
3 %
3 %
2 %
2 %
2 %
100 %
100 %
Includes mortgages securitized through the National Housing Act Mortgage Backed Securities program reported on-balance sheet of $609 (October 31, 2017 – $381) (see Note 9).
(1)
(2) Includes securitized leases and loans reported on-balance sheet of $1,622 (October 31, 2017 – $1,212) (see Note 9).
(3) This table does not include an allocation of the allowance for credit losses.
89
CWB Financial Group 2018 Annual Report 8. ALLOWANCE FOR CREDIT LOSSES
An allowance for credit losses is maintained which, in CWB’s opinion, is
adequate to absorb credit-related impairment losses incurred in its loan
portfolio. The allowance for credit losses is calculated on individual loans
(specific allowance) and on groups of loans, committed but undrawn
credit exposures and letters of credit assessed collectively (collective
allowance). The adequacy of the allowance for credit losses is reviewed at
least quarterly. The allowance for credit losses related to drawn exposures
is deducted from the outstanding loan balance. The allowance for credit
losses related to committed but undrawn credit exposures and letters of
credit is included with other liabilities. Losses expected from future events
are not recognized.
Specific Allowance
The specific allowance includes all the accumulated provisions for losses
on identified impaired loans required to reduce the carrying value of those
loans to their estimated realizable amount. See Note 7 for the identification
process of impaired loans.
If the amount of an impairment loss decreases in a subsequent period,
and the decrease can be objectively related to an event occurring after
the impairment was recognized, the specific loan impairment allowance
is reduced accordingly. The reversal of impairment is recognized in the
consolidated statements of income in provision for credit losses.
Collective Allowance
The collective allowance for credit risk includes provisions for losses that
have been incurred but have not yet been identified on an individual loan
or account basis by CWB. As soon as information becomes available which
identifies losses on individual loans within the collective group, those
loans are removed from the group and assessed on an individual basis for
impairment.
The collective allowance for credit risk is established by taking into
consideration:
• historical trends in the loss experience during economic cycles;
• the current portfolio profile;
• historical loss experience in portfolios of similar credit risk characteristics;
• the estimated period between impairment occurring and the loss being
identified; and
• CWB’s management judgment as to whether current economic and
credit conditions are such that the actual level of inherent losses at the
balance sheet date is likely to be greater or less than that suggested by
historical experience.
The following table shows the changes in the allowance for credit losses during the year:
Balance at beginning of year
Provision for credit losses
Write-offs
Recoveries
Balance at End of Year
Represented by:
Loans
Committed but undrawn credit
2018
Specific
Allowance
Collective
Allowance
Total
Specific
Allowance
2017
Collective
Allowance
Total
$
16,617
$ 119,298
$
135,915
$
16,269
$ 110,943
$
127,212
47,789
(45,359)
7,980
468
-
-
48,257
(45,359)
7,980
42,631
(47,094)
4,811
8,355
-
-
50,986
(47,094)
4,811
$
27,027
$ 119,766
$
146,793
$
16,617
$ 119,298
$
135,915
$
27,027
$ 101,502
$
128,529
$
16,617
$
99,712
$
116,329
exposures and letters of credit
(Note 15)
-
18,264
18,264
-
19,586
19,586
Total Allowance
$
27,027
$ 119,766
$
146,793
$
16,617
$ 119,298
$
135,915
90
CWB Financial Group 2018 Annual Report 9. FINANCIAL ASSETS TRANSFERRED BUT NOT DERECOGNIZED
Securitization of equipment financing leases and loans
CWB securitizes equipment financing leases and loans to third parties.
These securitizations do not qualify for derecognition as CWB continues
to be exposed to certain risks associated with the leases and loans,
therefore, CWB has not transferred substantially all of the risk and rewards
of ownership. As the leases and loans do not qualify for derecognition,
the assets are not removed from the consolidated balance sheets and
a securitization liability is recognized within debt securities for the cash
proceeds received (see Note 16).
During 2018, CWB sold securitized equipment financing leases and loans
of $1,178,726 to third parties (2017 - $679,352) for cash proceeds of
$1,063,792 (2017 - $610,201).
Securitization of residential mortgages
CWB securitizes fully insured residential mortgage loans through the
creation of mortgage-backed securities under the National Housing
Act Mortgage Backed Securities (NHA MBS) program sponsored by the
Canada Mortgage and Housing Corporation (CMHC). The mortgage-
backed securities are sold directly to third party investors, sold to the
Canada Housing Trust (CHT) as part of the Canada Mortgage Bond (CMB)
program or are held by CWB. The CHT issues CMBs, which are government
guaranteed, to third party investors and uses resulting proceeds to purchase
NHA MBS from CWB and other mortgage issuers in the Canadian market.
The third party sale of the mortgage pools that comprise the NHA MBS
does not qualify for derecognition as CWB retains the credit and interest
rate risks associated with the mortgages, which represent substantially all
of the risks and rewards associated with the transferred assets. As a result,
the mortgages remain on the consolidated balance sheets as personal
loans and are carried at amortized cost. Cash proceeds from the third
party sale of the mortgage pools, including those sold as part of the CMB
program, are recognized within debt securities (see Note 16).
During 2018, CWB sold securitized residential mortgages of $184,213 to
the CHT for cash proceeds of $181,635 (2017 - $39,957 sold for cash
proceeds of $38,973) and did not sell any securitized residential mortgage
directly to third party investors (2017 - $88,354 sold for cash proceeds of
$90,003).
Securities sold under repurchase agreements
CWB enters into repurchase agreements under which it sells previously
recognized securities, with a simultaneous agreement to purchase
them back at a specific price on a future date, but retains substantially
all of the credit, price, interest rate, and foreign exchange risks and
rewards associated with the assets (see Note 6). These securities are not
derecognized and the cash proceeds from the sale are recognized within
other liabilities on the consolidated balance sheets.
Details about the nature of transferred financial assets that do not qualify for derecognition and the associated liabilities follow:
Transferred Assets that do not Qualify for Derecognition
Securitized leases and loans
Securitized residential mortgages
Securities sold under repurchase agreements
Associated Liabilities(1)
Net Position
2018
2017
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
1,621,943
$
1,690,933
$
1,211,816
$
1,248,146
277,942
95,126
271,492
95,126
119,180
58,358
116,374
58,358
1,995,011
2,057,551
1,389,354
1,422,878
1,852,980
1,786,645
1,284,694
1,280,758
$
142,031
$
270,906
$
104,660
$
142,120
(1) Associated liabilities consist of $1,479,133 related to securitized leases and loans (2017 – $1,105,180), $278,721 related to residential mortgages securitized through the NHA MBS program (2017 – $121,156) and $95,126 related to
securities sold under repurchase agreements (2017 – $58,358).
Additionally, CWB has securitized residential mortgages through the NHA
MBS program totaling $330,599 with a fair value of $322,926
(2017 - $262,213 with a fair value of $256,038) that were not transferred
to third parties.
91
CWB Financial Group 2018 Annual Report
10. PROPERTY AND EQUIPMENT
Land is carried at cost. Buildings, equipment and furniture, and leasehold
improvements are carried at cost less accumulated depreciation and
impairment.
Depreciation is calculated primarily using the straight-line method over the
estimated useful life of the asset, as follows:
• Buildings:
• Equipment and furniture: 3 to 10 years; and
• Leasehold improvements: over the shorter of the term of the lease
20 years;
and the remaining useful life.
When components of an item of property and equipment have different
useful lives, they are accounted for as separate items. Gains and losses
on disposal are recorded in non-interest income in the period of disposal.
Property and equipment is subject to an impairment review if there are
events or changes in circumstances which indicate that the carrying
amount may not be recoverable.
Cost
Balance at November 1, 2017
$
72,398
$
18,754
$
31,444
$
40,842
$
Leasehold
Improvements
Land and
Buildings
Computer
Equipment
Office
Equipment
Additions
Disposals
Balance at October 31, 2018
Accumulated Depreciation and Impairment
Balance at November 1, 2017
Depreciation for the year
Disposals
Balance at October 31, 2018
4,179
(72)
76,505
47,263
4,133
(72)
51,324
151
-
18,905
5,580
549
-
6,129
5,262
(5)
36,701
23,461
2,684
(5)
26,140
3,573
(94)
44,321
31,019
2,816
(94)
33,741
Total
163,438
13,165
(171)
176,432
107,323
10,182
(171)
117,334
Net Carrying Amount at October 31, 2018
$
25,181
$
12,776
$
10,561
$
10,580
$
59,098
Cost
Balance at November 1, 2016
$
70,146
$
18,701
$
28,319
$
39,101
$
156,267
Additions
Disposals
Balance at October 31, 2017
Accumulated Depreciation and Impairment
Balance at November 1, 2016
Depreciation for the year
Disposals
Balance at October 31, 2017
2,486
(234)
72,398
43,399
4,098
(234)
47,263
53
-
18,754
5,016
564
-
5,580
3,918
(793)
31,444
21,921
2,333
(793)
23,461
2,777
(1,036)
40,842
28,601
2,768
(350)
31,019
9,234
(2,063)
163,438
98,937
9,763
(1,377)
107,323
Net Carrying Amount at October 31, 2017
$
25,135
$
13,174
$
7,983
$
9,823
$
56,115
92
CWB Financial Group 2018 Annual Report
11. GOODWILL AND INTANGIBLE ASSETS
Goodwill
On the date of acquisition, goodwill arises on the acquisition of subsidiaries
and represents the excess of the fair value of the purchase consideration,
including any amount of any non-controlling interest in the acquiree, over
the net recognized amounts of the identifiable assets, including identifiable
intangible assets, and liabilities assumed. For the purposes of calculating
goodwill, fair values of acquired assets and liabilities are determined by
reference to market values or by discounting expected future cash flows to
present value. This discounting is performed using either market rates, or
risk-free rates with risk-adjusted expected future cash flows.
Goodwill is stated at cost less impairment losses. Goodwill is reviewed
for impairment annually or more frequently if there are indications that
impairment may have occurred. Goodwill is allocated to cash-generating
units for the purpose of impairment testing considering the business level
at which goodwill is monitored for internal management purposes. On this
basis, CWB’s cash-generating units with goodwill allocated are:
• CWB Maxium Financial Inc. (MX);
• CWB National Leasing Inc. (NL);
• McLean & Partners Wealth Management Ltd. (M&P); and
• CWB Wealth Management Ltd. (WM).
Balance at November 1, 2017
Partial ownership change
Balance at October 31, 2018
Balance at November 1, 2016
Partial ownership change
Balance at October 31, 2017
Intangible Assets
MX
NL
$
38,869
-
$
35,776
-
$
M&P
7,099
(524)
$
WM
3,925
23
$
Total
85,669
(501)
$
38,869
$
35,776
$
6,575
$
3,948
$
85,168
$
38,869
-
$
35,776
-
$
6,306
793
$
$
3,811
114
$
38,869
$
35,776
$
7,099
$
3,925
$
84,762
907
85,669
Intangible assets represent identifiable non-monetary assets and are
acquired either separately through a business combination, or generated
internally. Intangible assets with a finite useful life are recorded at cost
less any accumulated amortization and impairment losses. The assets’
useful lives are confirmed at least annually. Certain intangible assets,
such as trademarks and trade names, have an indefinite useful life. These
indefinite life intangibles are not amortized but are tested for impairment
at least annually or more frequently if events or changes in circumstances
indicate that impairment may have occurred.
Amortization of acquisition-related intangible assets with finite useful lives
is reported in other expenses and amortization of internally generated
software is included in premises and equipment expenses on the
consolidated statements of income and calculated on a straight-line basis
from the date at which it is available for use as follows:
• Software and related assets:
• Customer relationships:
• Non-competition agreements: 4 to 5 years
3 to 5 years
• Other:
3 to 15 years
10 to 15 years
93
CWB Financial Group 2018 Annual Report Cost
Balance at November 1, 2017
$
154,761
$
59,606
$
6,632
$
11,153
$
5,150
$
237,302
Software
and Related
Assets
Customer
Relationships
Trademarks
and
Tradenames
Non-
competition
Agreements
Other
Total
Additions
Partial ownership change
Disposals
Balance at October 31, 2018
Accumulated Amortization
Balance at November 1, 2017
Amortization
Disposals
Balance at October 31, 2018
31,118
-
(1,608)
184,271
48,462
13,212
(1,608)
60,066
-
(395)
-
-
(68)
-
-
(69)
-
-
-
-
31,118
(532)
(1,608)
59,211
6,564
11,084
5,150
266,280
24,709
5,036
-
29,745
-
-
-
-
10,288
751
-
4,113
527
-
87,572
19,526
(1,608)
11,039
4,640
105,490
Net Carrying Amount at October 31, 2018
$
124,205
$
29,466
$
6,564
$
45
$
510
$
160,790
Cost
Balance at November 1, 2016
$
141,927
$
58,906
$
6,514
$
10,922
$
5,150
$
223,419
Additions
Partial ownership change
Disposals
Balance at October 31, 2017
Accumulated Amortization
Balance at November 1, 2016
Amortization
Disposals
Balance at October 31, 2017
20,298
-
(7,464)
154,761
42,557
13,369
(7,464)
48,462
-
700
-
-
118
-
-
231
-
-
-
-
20,298
1,049
(7,464)
59,606
6,632
11,153
5,150
237,302
19,607
5,102
-
24,709
-
-
-
-
8,768
1,520
-
10,288
3,175
938
-
4,113
74,107
20,929
(7,464)
87,572
Net Carrying Amount at October 31, 2017
$
106,299
$
34,897
$
6,632
$
865
$
1,037 $
149,730
Impairment
The carrying amounts of CWB’s intangible assets with finite useful lives
are reviewed at each reporting date to determine whether there is any
indication of impairment. If an indication exists, CWB tests for impairment.
For goodwill and intangible assets with indefinite useful lives, the
impairment tests are performed each year.
Impairment testing is performed by comparing the estimated recoverable
amount from a cash-generating unit with the carrying amount of its net
assets, including attributable goodwill. The recoverable amount of an asset
is the higher of its fair value less costs of disposal, and its value in use. If
the recoverable amount is less than the carrying value, an impairment loss
is charged to the consolidated statements of income.
The recoverable amounts for CWB’s cash-generating units have been
calculated based on the higher of their value in use and fair value less
costs of disposal. Fair value less costs of disposal was determined by
using a market-based approach of the associated cash-generating unit,
whereby the fair value was based on an enterprise value as approved by
management. Value in use was determined by discounting the future
cash flows expected to be generated from the continuing use of the cash-
generating unit. Unless indicated otherwise, value in use was determined
similarly as in the comparative year. The calculation of the value in use was
based on the following key assumptions:
• Cash flows were projected based on past experience, actual operating
results and the five-year future business plan. Cash flows for a further
15-year period were extrapolated using a constant growth rate of 2.0%
(2017 – 3.0%), which is based on the long-term forecast Canadian
gross domestic product growth rate. The forecast period is based on
CWB’s long-term perspective with respect to the operation of these
cash-generating units.
• A pre-tax discount rate of 10.1% (2017 – 9.8%) was applied in
determining the recoverable amounts, which was comprised of a risk-
free interest rate and a market risk premium.
The key assumptions described above may change as economic and market
conditions change. CWB estimates that reasonable possible changes in
these assumptions are not expected to cause the recoverable amounts of
the cash-generating units to decline below the carrying amounts.
No impairment losses on goodwill or intangible assets were identified
during 2018 or 2017.
94
CWB Financial Group 2018 Annual Report 12. DERIVATIVE FINANCIAL INSTRUMENTS
Interest rate, foreign exchange, bond forward and equity swaps/contracts
such as futures, options, swaps, floors and rate locks are entered into
for risk management purposes in accordance with CWB’s asset liability
management policies. It is CWB’s policy not to utilize derivative financial
instruments for trading or speculative purposes. Interest rate swaps and
floors are primarily used to reduce the impact of fluctuating interest rates.
Equity swaps are used to reduce earnings volatility related to restricted
share units and deferred share units linked to CWB’s common share price.
Bond forward contracts are used to manage interest rate risk related to
the NHA MBS program. Foreign exchange contracts are used for the
purposes of meeting the needs of clients, day-to-day business and liquidity
management.
Use of Derivatives
CWB enters into derivative financial instruments for risk management
purposes. Derivative financial instruments are financial contracts whose
value is derived from an underlying interest rate, foreign exchange rate,
equity or commodity instrument or index.
Derivative financial instruments primarily used by CWB include:
• interest rate swaps, which are agreements where two counterparties
exchange a series of payments based on different interest rates applied
to a notional amount;
• bond forward contracts, which are a contractual obligation to purchase
or sell a bond at a predetermined future date;
• foreign exchange forwards and futures, which are contractual
obligations to exchange one currency for another at a specified price for
settlement at a predetermined future date; and
• equity swaps, which are agreements where CWB makes periodic interest
payments to a counterparty and receives the capital gain or loss plus
dividends of a CWB common share.
Interest rate swaps are used as hedging instruments to manage interest
rate risk. CWB enters into these interest rate derivative instruments only
for its own account and does not act as an intermediary in this market.
The credit risk is limited to the amount of any adverse change in interest
rates applied on the notional contract should the counterparty default.
The Asset Liability Committee (ALCo) of CWB establishes and monitors
approved counterparties (including an assessment of creditworthiness).
Approved counterparties are limited to rated financial institutions or their
associated parent/affiliate with a minimum rating of A high or equivalent.
In addition to monitoring the creditworthiness of counterparties, CWB
limits its exposure to credit losses related to derivative financial instruments
by entering into Credit Support Annexes that provide for the exchange
of collateral between parties where the fair value of the outstanding
transactions exceeds an agreed upon threshold.
Bond forward transactions are used as hedging instruments to manage
interest rate risk on commitments on loans to be pooled through the
NHA MBS program and issued as a CMB. CWB enters into bond forward
transactions for its own account and does not act as an intermediary in
this market. The risk is limited to the change in price of the bond due to
adverse change in interest rates.
Exposure to foreign exchange risk is not material to CWB’s overall financial
position. Foreign exchange markets are not speculated in by taking a
trading position in currencies. Maximum exposure limits are established
and monitored by ALCo and are defined by allowable unhedged amounts.
The position is managed within the allowable target range by spot and
forward transactions or other hedging techniques.
Equity swap transactions are used as hedging instruments to manage risk
related to the payout of restricted share units and deferred share units.
CWB enters into equity swap instruments only for its own account and
does not act as an intermediary in this market. The risk is limited to the
amount of an increase in CWB’s share price applied on the notional contract
amount and any re-invested dividends should the counterparty default.
Designated Accounting Hedges
When designated as accounting hedges by CWB, certain derivative financial
instruments are designated as either a hedge of the fair value of recognized
assets or liabilities or firm commitments (fair value hedges), or a hedge of
highly probable future cash flows attributable to a recognized asset or
liability or a forecast transaction (cash flow hedges). On an ongoing basis,
the derivatives used in hedging transactions are assessed to determine
whether they are effective in offsetting changes in fair values or cash flows
of the hedged items. If a hedging transaction becomes ineffective or if the
derivative is not designated as a cash flow hedge, any subsequent change
in the fair value of the hedging instrument is recognized in net income.
Interest income received or interest expense paid on derivative financial
instruments designated as cash flow hedges is accounted for on the
accrual basis and recognized as interest expense over the term of the
hedge contract. Premiums on purchased contracts are amortized to
interest expense over the term of the contract. Accrued interest receivable
and payable and deferred gains and losses for these contracts are recorded
in other assets or liabilities as appropriate.
When a hedging instrument expires or is sold, or when a hedge no longer
meets the criteria for hedge accounting, any cumulative gain or loss
existing in other comprehensive income at that time is held separately in
accumulated other comprehensive income until the forecast transaction
is eventually recognized in the statements of income. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that
was reported in accumulated other comprehensive income is immediately
reclassified to the statements of income.
Embedded Derivatives
Certain derivatives embedded in other financial instruments are treated as
separate derivatives when their economic characteristics and risk are not
closely related to those of the host contract and the combined contract
is not carried at fair value. Identified embedded derivatives are separated
from the host contract and are recorded at fair value.
Fair Value
Derivative financial instruments are recorded on the balance sheet at fair
value as either other assets or other liabilities with changes in fair value
related to the effective portion of cash flow interest rate hedges recorded
in other comprehensive income, net of income taxes. Changes in fair value
related to the ineffective portion of a designated accounting hedge, a
derivative not designated as an accounting hedge and all other derivative
financial instruments are reported in other non-interest income on the
consolidated statements of income.
95
CWB Financial Group 2018 Annual Report The following table summarizes the derivative financial instrument portfolio
and the related credit risk. Notional amounts represent the amount to
which a rate or price is applied in order to calculate the exchange of cash
flows. The notional amounts are not recorded on the consolidated balance
sheets. They represent the volume of outstanding transactions and do
not represent the potential gain or loss associated with the market risk
or credit risk of such instruments. The replacement cost represents the
cost of replacing, at current market rates, all contracts with a positive fair
value and is inclusive of interest receivable related to the contracts, which is
included with other assets on the consolidated balance sheets. The future
credit exposure represents the potential for future changes in value and is
based on a formula prescribed by OSFI. The credit risk equivalent is the sum
of the future credit exposure and the replacement cost. The risk-weighted
balance represents the credit risk equivalent, net of cash collateral held
related to contracts with a positive fair value, weighted according to the
creditworthiness of the counterparty as prescribed by OSFI. Additional
discussion of OSFI’s capital adequacy requirements is provided within the
Capital Management section of the MD&A.
As at October 31, 2018
As at October 31, 2017
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Notional
Amount
Replace-
ment
Cost
Future
Credit
Exposure
Credit
Risk
Equivalent
Risk-
Weighted
Balance
Interest rate swaps
$ 4,908,000
$
75
$ 19,440
$
19,515
$
3,903
$ 3,553,000
$
298
$
8,365
$
8,663
$
1,733
Foreign exchange
contracts
Equity swaps
Bond forward
contracts
Total
189,128
24,127
238
2,203
1,891
1,570
2,129
3,773
429
755
170,194
22,459
2,627
9,526
1,702
1,527
4,329
11,053
582
877
15,000
55
-
55
11
-
-
-
-
-
$ 5,136,255
$
2,571
$ 22,901
$
25,472
$
5,098
$ 3,745,653
$ 12,451
$ 11,594
$ 24,045
$
3,192
The following table shows the derivative financial instruments split between those contracts that have a positive fair value (favourable contracts) and those
that have a negative fair value (unfavourable contracts):
As at October 31, 2018
As at October 31, 2017
Favourable Contracts
Unfavourable Contracts
Favourable Contracts
Unfavourable Contracts
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Notional
Amount
Fair
Value
Interest rate swaps designated
as accounting hedges
$
-
$
-
$ 4,908,000
$
(65,130)
$ 195,000
$
239
$ 3,358,000
$ (31,483)
Foreign exchange contracts
27,195
238
161,933
(2,307)
61,609
2,627
108,585
(3,898)
Equity swaps designated
as accounting hedges
Equity swaps not designated
as accounting hedges
Bond forward contracts designated
9,008
2,203
9,277
(1,339)
18,222
7,769
-
-
5,842
(805)
4,237
1,758
as accounting hedges
15,000
55
-
-
-
-
-
-
-
-
-
-
Total
$
51,203
$
2,496
$ 5,085,052
$
(69,581)
$ 279,068
$ 12,393
$ 3,466,585
$ (35,381)
The aggregate contractual or notional amount of the derivative financial
instruments on hand, the extent to which instruments are favourable or
unfavourable, and thus, the aggregate fair values of these financial assets
and liabilities can fluctuate significantly from time to time.
The average fair values of the derivative financial instruments on hand during the year are set out in the following table:
Favourable derivative financial instruments (assets)
Unfavourable derivative financial instruments (liabilities)
2018
9,248
49,001
$
$
2017
7,847
19,191
$
$
96
CWB Financial Group 2018 Annual Report The following table summarizes maturities of derivative financial instruments and weighted average interest rates paid and received on contracts:
As at October 31, 2018
Maturity
As at October 31, 2017
Maturity
1 Year or Less
More than 1 Year
1 Year or Less
More than 1 Year
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Notional
Amount
Contractual
Interest
Rate
Interest rate swaps designated
as accounting hedges(1)
$ 1,070,000
1.72% $ 3,838,000
1.98% $ 1,880,000
1.24% $ 1,673,000
1.05%
Foreign exchange contracts(2)
189,128
-
-
-
170,194
-
-
-
Equity swaps designated
as accounting hedges(3)
Equity swaps not designated
9,233
2.85%
9,052
2.86%
9,214
2.12%
9,008
2.18%
as accounting hedges(4)
5,842
2.65%
Bond forward contracts designated
as accounting hedges(5)
Total
15,000
$ 1,289,203
-
-
-
-
-
4,237
2.02%
-
-
-
-
-
-
$ 3,847,052
$ 2,063,645
$ 1,682,008
(1) CWB receives interest at a fixed contractual rate and pays interest on the one-month (30-day) Canadian Bankers’ Acceptance rate. Interest rate swaps designated as accounting hedges outstanding at October 31, 2018 mature
between January 2019 and October 2023.
(2) Foreign exchange contracts outstanding at October 31, 2018 mature between November and December 2018. The contractual interest rate is not meaningful for foreign exchange contracts.
(3) Equity swaps designated as accounting hedges outstanding at October 31, 2018 mature between June 2019 and June 2021.
(4) Equity swaps not designated as accounting hedges outstanding at October 31, 2018 mature in June 2019.
(5) Bond forward contracts outstanding at October 31, 2018 mature in December 2018.
During the year, $26,848 net unrealized after-tax losses (2017 – $ 22,089)
were recorded in other comprehensive income for changes in fair value
of the effective portion of derivatives designated as cash flow hedges.
Amounts accumulated in other comprehensive income are reclassified to
net income in the same period that the hedged items affect income.
During the year, $994 of net gains after tax (2017 – $3,321) were
reclassified to net income.
At October 31, 2018, hedged cash flows are expected to occur and affect
profit or loss within the next five years (2017 – five years).
13. OTHER ASSETS
Accrued interest receivable
Accounts receivable
Derivative collateral receivable
Deferred tax asset
Prepaid expenses
Income tax receivable
Financing costs(1)
Other
Total
(1) Amortization for the year amounted to $2,502 (2017 - $2,262).
(Note 27)
(Note 22)
As at
October 31
2018
As at
October 31
2017
$
77,004
$
60,533
55,550
45,877
9,181
7,547
6,480
9,167
67,805
36,013
34,660
39,701
7,498
3,710
5,682
10,455
$
271,339
$
205,524
97
CWB Financial Group 2018 Annual Report
14. DEPOSITS
Deposits are accounted for on an amortized cost basis. Costs relating to the issuance of fixed term deposits are amortized over the expected life of the
deposit using the effective interest method.
Payable on demand
Payable after notice
Payable on a fixed date
Total
Payable on demand
Payable after notice
Payable on a fixed date
Total
As at October 31, 2018
Individuals
Business and
Government
$
35,889
$
716,156
$
3,684,259
10,763,538
3,157,875
5,342,240
Total
752,045
6,842,134
16,105,778
$
14,483,686
$
9,216,271
$
23,699,957
As at October 31, 2017
Individuals
Business and
Government
$
37,984
$
791,358
$
3,699,356
9,657,222
3,112,419
4,604,643
Total
829,342
6,811,775
14,261,865
$
13,394,562
$
8,508,420
$
21,902,982
A summary of all outstanding deposits payable on a fixed date by contractual maturity date is as follows:
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Total
15. OTHER LIABILITIES
Accounts payable and accrued liabilities
Accrued interest payable
Contingent consideration
Provisions for committed but undrawn credit exposures and letters of credit
Income taxes payable
Deferred tax liability
Deferred revenue
Leasehold inducements
Derivative collateral payable
Other
Total
As at
October 31
2018
$
6,108,436
$
3,830,943
3,344,859
1,320,789
1,500,751
As at
October 31
2017
6,523,479
3,098,182
1,870,404
1,832,669
937,131
$
16,105,778
$
14,261,865
October 31
2018
October 31
2017
$
290,560
$
230,187
164,171
29,814
18,264
9,794
5,745
5,534
3,170
-
4,901
126,557
32,920
19,586
9,413
7,252
3,970
3,698
6,670
14,756
$
531,953
$
455,009
(Note 26)
(Note 8)
(Note 22)
(Note 27)
98
CWB Financial Group 2018 Annual Report 16. DEBT
a) Debt Securities
A summary of outstanding debt related to the securitization of equipment financing leases and loans and residential mortgages by contractual maturity
date is as follows (see Note 9):
Securitized leases and loans
Securitized residential mortgages
Total
b) Subordinated Debentures
Within
1 Year
1 to 3
Years
3 to
5 Years
As at
October 31
2018
As at
October 31
2017
$
548,218
26,299
$
713,788
103,533
$
217,127
148,889
$
1,479,133
278,721
$
1,105,180
121,156
$
574,517
$
817,321
$
366,016
$
1,757,854
$
1,226,336
Financing costs relating to the issuance of subordinated debentures are
amortized over the expected life of the related subordinated debenture
using the effective interest method.
The following qualifies as a bank debenture under the Bank Act and is
subordinate in right of payment to all deposit liabilities. All redemptions are
subject to the approval of OSFI.
Interest Rate
3.463%(1)
Maturity Date
Earliest Date Redeemable by CWB at Par
As at
October 31
2018
As at
October 31
2017
December 17, 2024
December 17, 2019
$
250,000
$ 250,000
(1) These conventional debentures have a 12-year term with a fixed interest rate for the first seven years. Thereafter, the interest rate will be reset quarterly at the 3-month CDOR plus 160 basis points.
17. CAPITAL STOCK
Authorized:
• An unlimited number of common shares without nominal or par value;
• 33,964,324 class A shares without nominal or par value; and
Issued and fully paid:
Preferred Shares - Series 5
Outstanding at beginning and end of year
Preferred Shares - Series 7
Outstanding at beginning and end of year
Common Shares
Outstanding at beginning of year
Issued on acquisition-related contingent consideration
instalment payment
Issued under dividend reinvestment plan
Issued on exercise or exchange of options(1)
Outstanding at end of year
Share Capital
• An unlimited number of first preferred shares, without nominal or
par value, issuable in series, provided that the maximum aggregate
consideration for all outstanding first preferred shares at any time does
not exceed $1,000,000.
2018
2017
Number of
Shares
Amount
Number of
Shares
Amount
5,000,000
$
125,000
5,000,000
$
125,000
5,600,000
140,000
5,600,000
10,600,000
265,000
10,600,000
140,000
265,000
88,494,353
731,885
88,103,120
718,377
(Note 26)
160,293
119,174
178,279
5,750
4,248
2,818
-
177,731
213,502
-
5,280
8,228
88,952,099
744,701
88,494,353
731,885
$ 1,009,701
$
996,885
(1) Represents shares issued and amounts transferred from the share-based payment reserve to share capital upon cashless settlement of option exercises.
CWB is prohibited by the Bank Act from declaring any dividends on
common shares when CWB is or would be placed, as a result of the
declaration, in contravention of the capital adequacy and liquidity
regulations or any regulatory directives issued under the Bank Act. This
limitation does not restrict the current level of dividends.
99
CWB Financial Group 2018 Annual Report a) Common shares
On September 27, 2018, CWB announced the approval of OFSI and the
Toronto Stock Exchange to repurchase for cancellation up to 1,767,000
common shares, representing approximately 2% of the issued and
outstanding common shares, under a normal course issuer bid (NCIB)
during the 12 month period commencing October 1, 2018. The previous
NCIB for the purchase of up to 1,767,000 common shares was for the 12
month period commencing on September 30, 2017. No common shares
have been repurchased under either NCIB.
b) Preferred Shares
Non-Viability Contingent Capital Preferred Share Rights and Privileges
Redemption
Amount
Quarterly
Non-cumulative
Dividend(1)
Preferred Shares - Series 5
Preferred Shares - Series 7
$
$
25.00
25.00
$
$
0.275 (2)
0.390625 (3)
Annual
Yield(4)
4.40%
6.25%
Date
Redeemable/
Convertible(5)(6)
April 30, 2019
July 31, 2021
Convertible to(7)
Preferred Shares - Series 6
Preferred Shares - Series 8
(1) Non-cumulative fixed dividends are payable quarterly as and when declared by the Board of Directors of CWB.
(2) The dividend rate will reset on the date redeemable and every five years thereafter at a level of 276 basis points over the then five-year Government of Canada bond yield.
(3) The dividend rate will reset on the date redeemable and every five years thereafter at a level of 547 basis points over the then five-year Government of Canada bond yield.
(4) Based on the stated issue price per share of $25.00.
(5) Redeemable by CWB, subject to the approval of OSFI, on the date noted and every five years thereafter.
(6) Convertible by the shareholders, subject to certain conditions, on the date noted and every five years thereafter if not redeemed by CWB to an equal number of First Preferred Shares Series 6 and Series 8, which are non-cumulative,
(7)
floating rate preferred shares.
If converted, holders of the First Preferred Shares Series 6 and Series 8 will be entitled to receive quarterly floating rate dividends, as and when declared by the Board of Directors of CWB, which reset quarterly at a rate equal to the
90-day Government of Canada Treasury Bill rate plus 276 and 547 basis points, respectively.
Upon the occurrence of a non-viability trigger event (as defined by OSFI),
each preferred share will be automatically converted, without the consent
of the holders, into CWB common shares. Conversion to common shares
will be determined by dividing the preferred share conversion value
($25.00 per preferred share plus any declared but unpaid dividends) by the
common share value (the greater of (i) the floor price of $ 5.00 and (ii) the
current market price calculated as the volume-weighted average trading
price for the ten consecutive trading days ending on the day immediately
prior to the date of the conversion).
c) Dividends
The following dividends were declared by CWB’s Board of Directors and paid by CWB during the year:
$1.00 per common share (2017 - $0.93)
$1.10 per preferred share - Series 5 (2017 - $1.10)
$1.56 per preferred share - Series 7 (2017 - $1.56)
Total
2018
2017
$ 88,819
$ 82,107
5,500
5,500
8,750
8,750
$ 103,069
$ 96,357
Subsequent to October 31, 2018, the Board of Directors of CWB declared
a dividend of $0.26 per common share payable on January 3, 2019 to
shareholders of record on December 14, 2018, a dividend of $0.275 per
Series 5 preferred share payable on January 31, 2019 to shareholders of
record on January 22, 2019, and a dividend of $0.390625 per Series 7
preferred share payable on January 31, 2019 to shareholders of record on
January 22, 2018. With respect to these dividend declarations, no liability
was recorded on the consolidated balance sheet at October 31, 2018.
d) Dividend Reinvestment Plan
Under the dividend reinvestment plan (plan), CWB provides holders of
CWB’s common shares and holders of any other class of shares deemed
eligible by CWB’s Board of Directors with the opportunity to direct cash
dividends paid on any class of their eligible shares towards the purchase of
additional common shares. Currently, the Board of Directors has deemed
that the holders of CWB’s Series 5 and Series 7 Preferred Shares are also
eligible to participate in the plan. The plan is only open to shareholders
residing in Canada.
At the option of CWB, the common shares may be issued from CWB’s
treasury at an average market price based on the closing prices of a board
lot of common shares on the Toronto Stock Exchange (TSX) for the five
trading days immediately preceding the dividend payment date, with a
discount of between 0% to 5%. CWB also has the option to fund the
plan through the open market at market prices. During the year, 119,174
(2017 – 177,731) common shares were issued under the plan from CWB’s
treasury with no discount (2017 – no discount).
100
CWB Financial Group 2018 Annual Report
18. SHARE-BASED PAYMENTS
a) Stock Options
Stock options are accounted for using the fair value method. The estimated
value is recognized over the applicable vesting period as an increase to
both salary expense and share-based payment reserve. When options are
exercised, the proceeds received and the applicable amount in share-based
payment reserve are credited to common shares.
CWB has authorized 6,398,728 common shares (2017 – 6,577,007)
for issuance under the share incentive plan. Of the amount authorized,
The details of, and changes in, the issued and outstanding options follow:
Options
Balance at beginning of year
Granted
Exercised or exchanged
Expired
Forfeited
Balance at End of Year
Exercisable at End of Year
Further details relating to stock options outstanding and exercisable follow:
Range of Exercise Prices
$23.70 to $26.13
$29.99 to $35.15
$37.50 to $39.42
Total
All exercised options are settled via cashless settlement, which provides
the option holder the number of shares equivalent to the excess of the
market value of the shares under option, determined at the exercise date,
over the exercise price. During fiscal 2018, option holders exchanged the
rights to 782,769 (2017 – 1,850,575) options and received 178,279 (2017
– 213,502) shares in return by way of cashless settlement.
Salary expense of $1,776 (2017 – $1,931) was recognized relating to the
estimated fair value of options granted. The fair value of options granted
during the year was estimated using a binomial option pricing model
with the following variables and assumptions: (i) risk-free interest rate of
2.0% (2017 – 1.3%), (ii) expected option life of 5.0 (2017 – 5.0) years, (iii)
expected annual volatility of 28% (2017 – 26%), and (iv) expected
options exercisable into 2,833,461 shares (2017 – 3,390,759) are issued
and outstanding. The outstanding options vest within three years and are
exercisable at a fixed price equal to the average of the market price on the
day of and the four days preceding the grant date. Options granted after
2015 expire within seven years of date of grant. Previously granted options
expire within five years of date of grant. Outstanding options expire from
December 2018 to March 2025.
2018
2017
Number
of Options
Weighted
Average
Exercise Price
Number
of Options
Weighted
Average
Exercise Price
3,390,759
$
262,563
(782,769)
(37,092)
-
2,833,461
1,628,324
$
$
31.02
35.15
28.95
36.94
-
31.90
34.64
5,205,794
$
339,630
(1,850,575)
(271,055)
(33,035)
3,390,759
1,787,718
$
$
29.63
30.84
27.17
29.67
35.91
31.02
35.34
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life (years)
3.0 $
5.8
0.4
2.6 $
Weighted
Average
Exercise
Price
24.83
32.72
38.66
31.90
Weighted
Average
Exercise
Price
26.13
-
38.66
34.64
Number of
Options
522,671 $
-
1,105,653
1,628,324 $
Number of
Options
1,125,615
602,193
1,105,653
2,833,461
annual dividends of 2.9% (2017 – 3.1%). Expected volatility is estimated
by evaluating historical volatility of the share price over multi-year periods.
The weighted average fair value of options granted was estimated at
$6.48 (2017 – $4.77) per share.
During the year, $2,818 (2017 – $8,228) was transferred from the share-
based payment reserve to share capital, representing the estimated fair
value recognized for 782,769 (2017 – 1,850,575) options exercised during
the year.
101
CWB Financial Group 2018 Annual Report b) Restricted Share Units
Under the Restricted Share Unit (RSU) plan, certain employees are eligible
to receive an award in the form of RSUs. Each RSU entitles the employee to
receive the cash equivalent of the market value of CWB’s common shares at
the vesting date. Throughout the vesting period, common share dividend
equivalents accrue to the employee in the form of additional units. RSUs
vest on each anniversary of the grant in equal one-third instalments over a
period of three years. Salary expense is recognized over the vesting period
except where the employee is eligible to retire prior to the vesting date, in
which case the expense is recognized between the grant date and the date
the employee is eligible to retire.
During the year, salary expense of $9,160 (2017 – $9,677) was recognized
related to RSUs. As at October 31, 2018, the liability for the RSUs held
under this plan was $10,821 (October 31, 2017 – $14,510). At the end of
each period, the liability and salary expense are adjusted to reflect changes
in the fair value of the RSUs.
Number of RSUs
Balance at beginning of year
Granted
Vested and paid out
Forfeited
Balance at End of Year
2018
2017
731,930
741,244
283,083
(367,752)
(20,447)
626,814
360,929
(336,159)
(34,084)
731,930
c) Performance Share Units
Under the Performance Share Unit (PSU) plan, certain employees are
eligible to receive an award in the form of PSUs on an annual basis. At
the time of a grant, each PSU represents a unit with an underlying value
equivalent to the value of a CWB common share. Throughout the vesting
period, common share dividend equivalents accrue to the employee in the
form of additional units. Under the PSU Plan, each PSU vests at the end of
a three-year period and is settled in cash.
At the end of each specified performance period, a multiplier based on
performance targets is applied to a portion of the PSUs originally granted
and any accrued notional dividends such that the total value of the PSUs
may vary from 0% to 200% of the value of an equal number of CWB
common shares.
During the year, salary expense of $2,951 (2017 – $1,878) was recognized
related to PSUs. As at October 31, 2018, the liability for the PSUs held
under this plan was $5,225 (October 31, 2017 – $3,603). At the end of
each period, the liability and salary expense are adjusted to reflect changes
in the fair value of the PSUs.
Number of PSUs
Balance at beginning of year
Granted
Vested and paid out
Balance at End of Year
d) Deferred Share Units
2018
209,263
54,929
(69,959)
194,233
2017
177,579
58,807
(27,123)
209,263
Under the Deferred Share Unit (DSU) plan, non-employee directors receive
at least 50% of their retainer in DSUs. The DSUs are not redeemable until
the individual is no longer a director and must be redeemed for cash.
Common share dividend equivalents accrue to the directors in the form of
additional units. The expense related to the DSUs is recorded in the period
the award is earned by the director.
During the year, other non-interest expenses included $858 (2017 – $804)
related to the DSUs. As at October 31, 2018, the liability for DSUs held
under this plan was $5,238 (October 31, 2017 – $6,281). At the end of
each period, the liability and expense are adjusted to reflect changes in the
market value of the DSUs.
2018
172,833
28,888
2017
142,969
29,864
(30,652)
-
171,069
172,833
Number of DSUs
Balance at beginning of year
Granted
Paid out
Balance at End of Year
102
CWB Financial Group 2018 Annual Report 19. NON-CONTROLLING INTERESTS
Non-controlling interests relate to the following:
CWB Wealth Management Ltd.
McLean & Partners Wealth Management Ltd.
Total
20. CONTINGENT LIABILITIES AND COMMITMENTS
a) Credit Instruments
As at
October 31
2018
As at
October 31
2017
$
$
$
2,056
695
2,751
$
1,987
810
2,797
In the normal course of business, CWB enters into various commitments
and has contingent liabilities, which are not reflected in the consolidated
balance sheets. These items are reported below and are expressed in terms
of the contractual amount of the related commitment.
Credit Instruments
Commitments to extend credit
Guarantees and standby letters of credit
Total
October 31
2018
October 31
2017
$
4,708,313
$
4,063,709
520,775
451,486
$
5,229,088
$
4,515,195
Commitments to extend credit to customers also arise in the normal
course of business and include undrawn availability under lines of credit
and commercial operating loans of $2,334,078 (October 31, 2017
– $2,010,830) and authorized but unfunded loan commitments of
$2,374,235 (October 31, 2017 – $2,052,879). In the majority of instances,
availability of undrawn commercial commitments is subject to the borrower
meeting specified financial tests or other covenants regarding completion
or satisfaction of certain conditions precedent. It is also usual practice to
include the right to review and withhold funding in the event of a material
adverse change in the financial condition of the borrower. The allowance
for credit losses related to committed but undrawn credit exposures
and letters of credit is included in other liabilities on the consolidated
balance sheets (see Note 15). From a liquidity perspective, undrawn
credit authorizations will be funded over time, with draws in many cases
extending over a period of months. In some instances, authorizations are
never advanced or may be reduced because of changing requirements.
Revolving credit authorizations are subject to repayment which, on a
pooled basis, also decreases liquidity risk.
Guarantees and standby letters of credit represent CWB’s obligation to
make payments to third parties when a customer is unable to make required
payments or meet other contractual obligations. These instruments carry
the same credit risk, recourse and collateral security requirements as loans
extended to customers and generally have a term that does not exceed
one year. Losses, if any, resulting from these transactions are not expected
to be material.
b) Lease Commitments
CWB has obligations under long-term, non-cancellable operating leases
for the rental of premises. The leases typically run 10 to 15 years, with an
option to renew the lease for an additional five years. Operating leases
primarily comprise branch and office premises and are not capitalized. Total
costs, including free rent periods and step-rent increases, are expensed on
a straight-line basis over the lease term.
Minimum future lease commitments for each of the five succeeding years and thereafter are as follows:
2019
2020
2021
2022
2023
2024 and thereafter
Total
$
$
13,912
13,483
12,070
9,667
8,971
24,338
82,441
103
CWB Financial Group 2018 Annual Report c) Purchase Obligations
CWB has contractual obligations related to operating and capital expenditures which typically run one to five years.
Purchase obligations for each of the succeeding years are as follows:
2019
2020
2021
Total
d) Guarantees
$
$
1,856
1,429
1,064
4,349
A guarantee is defined as a contract that contingently requires the
guarantor to make payments to a third party based on (i) changes in an
underlying economic characteristic that is related to an asset, liability or
equity security of the guaranteed party, (ii) failure of another party to
perform under an obligating agreement, or (iii) failure of another third
party to pay indebtedness when due.
Significant guarantees provided to third parties include guarantees and
standby letters of credit as discussed above.
In the ordinary course of business, CWB enters into contractual
arrangements under which CWB may agree to indemnify the other
party. Under these agreements, CWB may be required to compensate
counterparties for costs incurred as a result of various contingencies, such
as changes in laws and regulations and litigation claims. A maximum
potential liability cannot be identified as the terms of these arrangements
vary and generally no predetermined amounts or limits are identified. The
likelihood of occurrence of contingent events that would trigger payment
under these arrangements is either remote or difficult to predict and, in the
past, payments under these arrangements have been insignificant.
No amounts are reflected in the consolidated financial statements related
to these guarantees and indemnifications.
e) Legal and Regulatory Proceedings
In the ordinary course of business, CWB and its subsidiaries are party to
legal and regulatory proceedings. Based on current knowledge, CWB does
not expect the outcome of any of these proceedings to have a material
effect on the consolidated financial position or results of operations.
21. EMPLOYEE FUTURE BENEFITS
All employee future benefits related to CWB’s group retirement savings
and employee share purchase plans are recognized in the periods during
which services are rendered by employees. CWB’s contributions to the
group retirement savings plan and employee share purchase plan totaled
$15,038 (2017 – $13,727).
104
CWB Financial Group 2018 Annual Report 22. INCOME TAXES
CWB follows the deferred method of accounting for income taxes whereby
current income taxes are recognized for the estimated income taxes
payable for the current period. Deferred tax assets and liabilities represent
the cumulative amount of tax applicable to temporary differences between
the carrying amount of the assets and liabilities, and their values for tax
purposes. Deferred tax assets and liabilities are measured using enacted
or substantively enacted tax rates anticipated to apply to taxable income
in the years in which those temporary differences are anticipated to be
recovered or settled. Changes in deferred taxes related to a change in tax
rates are recognized in income in the period of the tax rate change. All
deferred tax assets and liabilities are expected to be realized in the normal
course of operations.
The provision for income taxes consists of the following:
Consolidated statements of income
Current
Deferred
Other comprehensive income
Tax expense (recovery) related to:
Available-for-sale securities
Derivatives designated as cash flow hedges
2018
2017
$
105,381
$
(8,504)
96,877
(7,410)
(10,297)
(17,707)
85,941
(3,708)
82,233
1,642
(9,350)
(7,708)
Total
$
79,170
$
74,525
A reconciliation of the statutory tax rates and income tax that would be payable at these rates to the effective income tax rates and provision for income
taxes reported in the consolidated statements of income follows:
2018
2017
$
97,324
26.9 % $
83,623
(1,708)
479
782
(0.4)
0.1
0.2
26.8 % $
(2,645)
519
736
82,233
26.8 %
(0.8)
0.2
0.2
26.4 %
Combined Canadian federal and provincial income taxes and
statutory tax rate
Increase (decrease) arising from:
Tax-exempt income
Stock-based compensation
Other
Provision for Income Taxes and Effective Tax Rate
$
96,877
Deferred tax balances are comprised of the following:
Deferred Tax Assets
Allowance for credit losses
Leasing income
Deferred loan fees
Deferred deposit broker commission
Other temporary differences
Deferred Tax Liabilities
Intangible assets
Other temporary differences
2018
2017
$
25,847
$
18,608
12,068
(8,219)
(2,427)
45,877
$
4,373
1,372
$
5,745
$
$
$
$
26,988
14,915
10,875
(6,625)
(6,452)
39,701
5,547
1,705
7,252
105
CWB Financial Group 2018 Annual Report 23. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings
per share is calculated based on the treasury stock method, which assumes that any proceeds from in-the-money stock options are used to purchase CWB’s
common shares at the average market price during the period.
The calculation of earnings per common share follows:
Numerator
Common shareholders’ net income
Denominator
Weighted average of common shares outstanding - basic
Dilutive instruments:
Stock options(1)
Weighted Average Number of Common Shares Outstanding - Diluted
Earnings Per Common Share
Basic
Diluted
2018
2017
$
249,256
$
214,277
88,806,458
88,296,592
478,441
295,586
89,284,899
88,592,178
$
$
2.81
2.79
2.43
2.42
(1) At October 31, 2018, the denominator excludes 1,368,216 (2017 – 1,556,237) of employee stock options with an average exercise price of $38.76 (2017 - $37.49), adjusted for unrecognized stock-based compensation, that is greater
than the average market price.
24. RELATED PARTY TRANSACTIONS
Transactions with and between subsidiary entities are made at normal
market prices and eliminated on consolidation.
Preferred Rates and Terms
officers and employees and their immediate family at preferred rates. The
total amount outstanding for these deposits is $313,004 (October 31,
2017 – $311,194).
CWB makes loans, primarily residential mortgages, to its officers and
employees at various preferred rates and terms. The total amount
outstanding for these types of loans is $147,886 (October 31, 2017 –
$116,199). CWB offers deposits, primarily fixed term deposits, to its
Key Management Personnel
Key management personnel of CWB are those that have authority and
responsibility for planning, directing and controlling the activities of CWB
and include independent directors of CWB.
Compensation of key management personnel is as follows:
Salaries, benefits and directors' compensation
Share-based payments (stock options, RSUs, PSUs and DSUs)(1)
Total
(1) Share-based payments are based on the estimated fair value on grant date.
Loans outstanding with key management personnel totaled $190 as at
October 31, 2018 (October 31, 2017 – $326). CWB’s policies preclude
lending to CWB’s independent directors.
2018
5,326
3,132
$
8,458
$
2017
5,106
2,936
8,042
$
$
106
CWB Financial Group 2018 Annual Report
25. INTEREST RATE SENSITIVITY
CWB is exposed to interest rate risk as a result of a difference, or gap,
between the maturity or repricing behaviour of interest sensitive assets
and liabilities. The interest rate gap is managed by adjusting the repricing
behaviour of interest sensitive assets or liabilities to ensure the gap falls
within the risk appetite of CWB. The repricing profile of these assets and
liabilities has been incorporated in the table following, which contains the
gap position at October 31 for select time intervals. Figures in brackets
represent an excess of liabilities over assets or a negative gap position.
Asset Liability Gap Positions
($ millions)
October 31, 2018
Assets
Floating
Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Total
Within
1 Year
1 Year to
5 Years
More than
5 Years
Non-
interest
Sensitive
Total
Cash resources and securities
$
93
$
105
$
329
$
527
$
1,711
$
-
$
-
$
2,238
11,751
-
15
11,859
1,539
-
325
1,969
4,079
17,369
8,817
200
(181)
26,205
-
760
5,168
-
1,100
18,996
-
3,847
14,375
-
-
200
579
189
587
579
5,136
34,158
Loans(1)
Other assets(2)
Derivative financial instruments(3)
Total
Liabilities and Equity
Deposits
Securities sold under
repurchase agreements
Other liabilities(2)
Debt(1)
Equity
Derivative financial instruments(3)
Total
Interest Rate Sensitive Gap
Cumulative Gap
Cumulative Gap as a
7,384
1,564
4,019
12,967
10,763
95
-
52
-
4,947
12,478
$
$
(619)
(619)
-
-
104
-
-
-
-
419
125
-
1,668
301
(318)
$
$
4,563
605
287
$
$
95
-
575
125
4,947
18,709
-
-
1,433
140
-
12,336
$
$
287
287
$
$
2,039
2,326
$
$
Percentage of Total Assets
(1.8)%
(0.9)%
0.8 %
0.8 %
6.8 %
7.4 %
October 31, 2017
Cumulative Gap
Cumulative Gap as a
$
351
$
717
$
752
$
752
$
1,960
$
2,358
$
-
$
Percentage of Total Assets
1.2 %
2.4 %
2.5 %
2.5 %
6.5 %
7.8 %
-
(1) Potential prepayments of fixed rate loans and early redemption of redeemable fixed term deposits have not been estimated. Redemptions of fixed term deposits where depositors have this option are not expected to be material.
The majority of fixed rate loans, mortgages and leases are either closed or carry prepayment penalties.
(2) Accrued interest is excluded in calculating interest sensitive assets and liabilities.
(3) Derivative financial instruments are included in this table at the notional amount.
The effective, weighted average interest rates for each class of financial asset and liability are shown below:
Weighted Average Effective Interest Rates
(%)
October 31, 2018
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
October 31, 2017
Total Assets
Total Liabilities
Interest Rate Sensitive Gap
Floating Rate
and Within
1 Month
1 to 3
Months
3 Months
to 1 Year
Total
Within
1 Year
1 Year to
5 Years
More than
5 Years
4.4 %
1.7
2.7 %
3.6 %
0.7
2.9 %
3.5 %
2.3
1.2 %
3.5 %
1.7
1.8 %
4.1 %
2.2
1.9 %
3.4 %
1.8
1.6 %
4.3 %
1.9
2.4 %
3.5 %
1.1
2.4 %
3.6 %
2.5
1.1 %
3.5 %
2.2
1.3 %
6.0 %
-
6.0 %
4.8 %
-
4.8 %
Total
4.0 %
2.1
1.9 %
3.5 %
2.0
1.5 %
Based on the current interest rate gap position, it is estimated that a one
percentage point increase in all interest rates would increase net interest
income by approximately $6,234 (October 31, 2017 – $8,324) and decrease
other comprehensive income $104,554 (October 31, 2017 – $77,293) net
of tax, respectively, over the following twelve months. A one-percentage
point decrease in all interest rates would decrease net interest income by
approximately $7,467 (October 31, 2017 – $13,226) and increase other
comprehensive income $107,162 (October 31, 2017 – $76,173), net of
tax.
107
-
-
-
-
-
-
-
(30)
23,700
-
630
-
2,324
189
3,113
95
630
2,008
2,589
5,136
34,158
200
$ (2,526)
2,526
$
$
$
-
-
-
-
-
-
-
CWB Financial Group 2018 Annual Report
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
a) Financial Assets and Liabilities by Measurement Basis
The fair value of a financial instrument on initial recognition is normally
the transaction price (i.e. the value of the consideration given or received).
Subsequent to initial recognition, financial instruments measured at fair
value that are quoted in active markets are based on bid prices for financial
assets and offer prices for financial liabilities. For certain securities and
derivative financial instruments where an active market does not exist, fair
values are determined using valuation techniques that refer to observable
market data, including discounted cash flow analysis, option pricing models
and other valuation techniques commonly used by market participants,
and non-market observable inputs.
Several of CWB’s significant financial instruments, such as loans and
deposits, lack an available trading market as they are not typically
exchanged. Therefore, these instruments have been valued assuming they
will not be sold, using present value or other suitable techniques and are
not necessarily representative of the amounts realizable in an immediate
settlement of the instrument.
Changes in interest rates are the main cause of changes in the fair value
of CWB’s financial instruments. The carrying value of loans, deposits,
subordinated debentures and debt securities are not adjusted to reflect
increases or decreases in fair value due to interest rate changes as CWB’s
intention is to realize their value over time by holding them to maturity.
The table below provides the carrying amount of financial instruments by
category as defined in IAS 39 and by balance sheet heading. The table
sets out the fair values of financial instruments (including derivatives)
using the valuation methods and assumptions referred to below the table.
The table does not include assets and liabilities that are not considered
financial instruments. The table also excludes assets and liabilities which
are considered financial instruments, but are not recorded at fair value and
for which the carrying amount approximates fair value.
October 31, 2018(1)
Financial Assets
Cash resources
Securities
Loans(2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(2)
Securities sold under
repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
October 31, 2017
Financial Assets
Cash resources
Securities
Loans(2)
Derivative related
Total Financial Assets
Financial Liabilities
Deposits(2)
Securities sold under
repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
Loans and
Receivables, and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
Fair Value
Over (Under)
Carrying
Amount
(Note 4)
$
(Note 5)
$
-
-
-
2,496
-
-
26,390,375
-
$
153,221
$
153,221
$
153,221
$
2,084,752
2,084,752
2,084,752
-
-
-
-
26,390,375
26,551,146
160,771
2,496
2,496
-
$
$
2,496
$
26,390,375
$ 2,237,973
$ 28,630,844
$ 28,791,615
$
160,771
-
$
23,743,618
$
-
$ 23,743,618
$ 23,502,200
$
(241,418)
-
-
-
69,581
-
95,126
95,126
95,126
-
2,007,854
29,814
-
-
-
-
2,007,854
1,942,472
(65,382)
29,814
69,581
29,814
69,581
-
-
$
69,581
$
25,781,286
$
95,126
$ 25,945,993
$ 25,639,193
$
(306,800)
Loans and
Receivables, and
Non-trading
Liabilities
Derivatives
Available-
for-sale
Total
Carrying
Amount
Fair Value
Fair Value
Over (Under)
Carrying
Amount
(Note 4)
$
(Note 5)
$
-
-
-
12,393
-
-
23,365,410
-
$
521,796
$
521,796
$
521,796
$
2,186,987
2,186,987
2,186,987
-
-
-
-
23,365,410
23,649,806
284,396
12,393
12,393
-
$
12,393
$
23,365,410
$
2,708,783
$ 26,086,586
$ 26,370,982
$
284,396
$
-
$
21,916,584
$
-
$ 21,916,584
$ 21,874,990
$
(41,594)
-
-
-
35,381
-
58,358
58,358
58,358
-
1,476,336
32,920
-
-
-
-
1,476,336
1,437,516
(38,820)
32,920
35,381
32,920
35,381
-
-
$
35,381
$
23,425,840
$
58,358
$ 23,519,579
$ 23,439,165
$
(80,414)
(1) For further information on interest rates associated with financial assets and liabilities, including derivative instruments, refer to Note 25.
(2) Loans and deposits exclude deferred premiums, deferred revenue and allowances for credit losses, which are not financial instruments.
108
CWB Financial Group 2018 Annual Report The methods and assumptions used to estimate the fair values of financial
instruments are as follows:
• Cash resources and securities are reported on the consolidated balance
sheets at the fair value disclosed in Notes 4 and 5. Securities purchased
under resale agreements are reported at the fair value as disclosed on
the consolidated balance sheets. These values are based on quoted
market prices, if available. Where a quoted market price is not readily
available, other valuation techniques are based on observable market
rates used to estimate fair value.
• Fair value of loans reflects changes in the general level of interest
rates that have occurred since the loans were originated and exclude
the allowance for credit losses. For floating rate loans, fair value
is assumed to be equal to book value as the interest rates on these
loans automatically reprice to market. For all other loans, fair value is
estimated by discounting the expected future cash flows of these loans
at current market rates for loans with similar terms and risks.
• With the exception of derivative financial instruments and contingent
consideration, other assets and other liabilities reported on the
consolidated balance sheets are either not considered financial
instruments, or are assumed to approximate their carrying value due
to their short-term nature. Other assets and other liabilities which are
not considered financial instruments include property and equipment,
goodwill and other intangible assets, deferred tax asset, prepaid and
deferred expenses, financing costs, deferred tax liability, deferred
revenue and leasehold inducements.
• For derivative financial instruments where an active market does not
exist, fair values are determined using valuation techniques that refer
to observable market data, including discounted cash flow analysis,
option pricing models and other valuation techniques commonly used
by market participants.
• For contingent consideration, included in other liabilities, where an
active market does not exist, fair value is determined by estimating the
expected value of the contingent consideration, taking into consideration
the potential financial outcomes and their associated probabilities.
• Deposits with no stated maturity are assumed to be equal to their
carrying values. The estimated fair values of fixed rate deposits are
determined by discounting the contractual cash flows at current market
rates for deposits of similar terms.
• The fair values of debt are determined by reference to current market
prices for debt with similar terms and risks.
Fair values are based on management’s best estimates based on market
conditions and pricing policies at a certain point in time. The estimates
are subjective and involve particular assumptions and matters of judgment
and, as such, may not be reflective of future fair values.
109
CWB Financial Group 2018 Annual Report Fair Value Hierarchy
CWB categorizes its fair value measurements of financial instruments
according to a three-level hierarchy. Level 1 fair value measurements
reflect unadjusted quoted prices in active markets for identical assets and
liabilities that CWB can access at the measurement date. Level 2 fair value
measurements were estimated using observable inputs, including quoted
market prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets or liabilities in inactive markets, and model
inputs that are either observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. Level
3 fair value measurements were determined using one or more inputs that
are unobservable and significant to the fair value of the asset or liability.
Unobservable inputs are used to measure fair value to the extent that
observable inputs are not available at the measurement date.
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
153,221
$
144,019
$
9,202
$
2,084,752
26,551,146
2,496
219,570
1,865,182
-
-
-
2,496
26,551,146
-
$
28,791,615
$
363,589
$
1,876,880
$
26,551,146
$
23,502,200
$
95,126
1,942,472
29,814
69,581
$
25,639,193
$
-
-
-
-
-
-
$
23,502,200
$
95,126
1,942,472
-
69,581
-
-
-
29,814
-
$
25,609,379
$
29,814
Fair Value
Level 1
Level 2
Level 3
Valuation Technique
$
521,796
$
27,440
$
494,356
$
2,186,987
23,649,806
12,393
285,998
1,900,989
-
-
-
23,649,806
12,393
-
$
26,370,982
$
313,438
$
2,407,738
$
23,649,806
$
21,874,990
$
58,358
1,437,516
32,920
35,381
$
23,439,165
$
-
-
-
-
-
-
$
21,874,990
$
58,358
1,437,516
-
35,381
-
-
-
32,920
-
$
23,406,245
$
32,920
-
-
-
-
As at October 31, 2018
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Securities sold under repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
As at October 31, 2017
Financial Assets
Cash resources
Securities
Loans
Derivative related
Total Financial Assets
Financial Liabilities
Deposits
Securities sold under repurchase agreements
Debt
Contingent consideration
Derivative related
Total Financial Liabilities
110
CWB Financial Group 2018 Annual Report b) Level 3 Financial Instruments Measured at Fair Value
The Level 3 financial liabilities measured at fair value on the consolidated
balance sheet as at October 31, 2018 are related to the acquisition of CWB
Maxium Financial Inc. and the divestiture related to the CWT strategic
transactions (see Note 3). Fair value is determined by estimating the
expected value of the contingent consideration, taking into consideration
the potential financial outcomes and their associated probabilities.
The following table shows a reconciliation of the fair value measurements related to the Level 3 financial instruments:
Acquisitions
Balance at beginning of year
Acquisition-related fair value changes
Contingent consideration instalment payment(1)
Divestitures
Balance at beginning of year
Divestiture-related fair value changes
CWT strategic transactions
2018
2017
$
32,420
$
24,257
20,094
(23,000)
18,295
(10,132)
29,514
32,420
500
-
(200)
-
-
500
300
500
Balance at End of Year
$
29,814
$
32,920
(1) Under the terms of the March 2016 purchase agreement relating to the acquisition of CWB Maxium Financial Inc., contingent consideration payment instalments will be made annually with determination of the total amount
payable based on CWB Maxium Financial Inc.’s cumulative business performance over a 36-month period. Up to 50% of each contingent consideration payment may be settled with CWB common shares at the vendor’s option,
provided the average share price over the preceding 20 days exceeds $30.00, with the remainder to be paid in cash. CWB completed the second contingent consideration instalment payment in 2018 with cash totaling
$17,250 and the issuance of 160,293 CWB common shares with a fair value of $5,750. The 2017 instalment was paid in cash.
27. FINANCIAL INSTRUMENTS - OFFSETTING
The following table provides a summary of financial assets and liabilities
which are subject to enforceable master netting agreements and similar
arrangements, as well as financial collateral received to mitigate credit
exposures related to these financial instruments. The agreements do
not meet the netting criteria required by IAS 32 Financial Instruments:
Presentation as the right to set-off is only enforceable in the event of
default or occurrence of other predetermined events.
As at October 31, 2018
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
As at October 31, 2017
Financial Assets
Derivative instruments
Financial Liabilities
Derivative instruments
Amounts not offset on the consolidated balance sheet
Gross amounts
reported on the
consolidated
balance sheets
Impact of
master netting
agreements
Cash
collateral(1)
Securities
received as
collateral(1)(2)
Net amount
$
2,496
$
2,496
$
-
$
-
$
-
$
69,581
$
2,496
$
55,550
$
-
$
11,535
Amounts not offset on the consolidated balance sheet
Gross amounts
reported on the
consolidated
balance sheet
Impact of
master netting
agreements
Cash
collateral(1)
Securities
received as
collateral(1)(2)
Net amount
$
12,393
$
3,106
$
6,670
$
-
$
2,617
$
35,381
$
3,106
$
30,914
$
-
$
1,361
(1) Financial collateral is reflected at fair value. The amount of financial instruments and cash collateral disclosed is limited to the net balance sheet exposure, and any over-collateralization is excluded from the table.
(2) Collateral received in the form of securities is not recognized on the consolidated balance sheets.
111
CWB Financial Group 2018 Annual Report
28. RISK MANAGEMENT
As part of CWB’s risk management practices, the risks that are significant to
the business are identified, monitored and controlled. The most significant
risks include credit risk, market risk, capital risk and operational risk. The
nature of these risks and how they are managed is provided in the Risk
Management section of the MD&A.
As permitted by the IASB, certain of the risk management disclosure related
to risks inherent with financial instruments is included in the MD&A. The
relevant MD&A sections are identified by shading within boxes and the
content forms an integral part of these audited consolidated financial
statements.
Information on specific measures of risk, including the allowance for credit
losses, derivative financial instruments, interest rate sensitivity, fair value of
financial instruments and liability for unpaid claims are included elsewhere
in these notes to the consolidated financial statements.
29. CAPITAL MANAGEMENT
Capital funds are managed in accordance with policies and plans that are
regularly reviewed and approved by the Board of Directors or Board Risk
Committee and take into account forecasted capital needs and markets.
The goal is to maintain adequate regulatory capital to be considered well-
capitalized, protect customer deposits and provide capacity for internally
generated growth and strategic opportunities that do not otherwise require
accessing the public capital markets, all while providing a satisfactory
return for shareholders.
CWB has a share incentive plan that is provided to officers and employees
who are in a position to impact the longer term financial success of CWB
as measured by share price appreciation and dividend yield. Note 18 to
the consolidated financial statements details the number of shares under
options outstanding, the weighted average exercise price and the amounts
exercisable at year end.
Regulatory capital and capital ratios are calculated in accordance with
the requirements of OSFI. Capital is managed and reported in accordance
with the requirements of the Basel III Capital Adequacy Accord (Basel III)
using the Standardized approach. OSFI requires banks to measure capital
adequacy in accordance with instructions for determining risk-adjusted
capital and risk-weighted assets, including off-balance sheet commitments.
Based on the deemed credit risk of each type of asset, a standardized
weighting of 0% to 150% is assigned. As an example, a loan that is fully
insured by CMHC is applied a risk weighting of 0% as CWB’s risk of loss
is nil, while uninsured commercial loans are assigned a risk weighting of
100% to reflect the higher level of risk associated with this type of asset.
The ratio of regulatory capital to risk-weighted assets is calculated and
compared to OSFI’s standards for Canadian financial institutions. Off-
balance sheet assets, such as the notional amount of derivatives and some
credit commitments, are included in the calculation of risk-weighted assets
and both the credit risk equivalent and the risk-weighted calculations are
prescribed by OSFI.
Capital Structure And Regulatory Ratios
Regulatory Capital, Net of Deductions
Common equity Tier 1
Tier 1
Total
Capital Ratios
Common equity Tier 1
Tier 1
Total
Leverage Ratio
112
The required minimum regulatory capital ratios for a bank using the
Standardized approach for credit risk, including a 250 basis point capital
conservation buffer, are 7.0% common equity Tier 1 (CET1), 8.5% Tier 1
and 10.5% Total capital. In addition, OSFI requires banks to maintain a
minimum leverage ratio of 3%. The leverage ratio provides the ratio of Tier
1 capital to on-balance sheet and off-balance sheet exposures.
Basel III rules, effective January 1, 2013, provide for transitional adjustments
with certain aspects of the new rules phased in between 2013 and 2019.
The only available transition allowance in the Basel III capital standards
permitted by OSFI for Canadian banks relates to the multi-year phase
out of non-qualifying capital instruments. The 2018 inclusion of non-
qualifying capital instruments in regulatory capital under Basel III is capped
at 40% (2017 – 50%) of the balance of non-common equity instruments
outstanding at January 1, 2013. At October 31, 2018 and 2017, there were
no exclusions from regulatory capital related to outstanding subordinated
debentures.
During the year, CWB complied with all internal and external capital
requirements.
2018
2017
$ 2,153,019
$ 2,009,530
2,418,231
2,274,727
2,788,048
2,644,071
9.2 %
9.5 %
10.3
10.8
11.9
8.0
12.5
8.3
CWB Financial Group 2018 Annual Report 30. SUBSIDIARIES
As at October 31, 2018, CWB, either directly or indirectly through its
subsidiaries, controls the following significant subsidiaries.
Canadian Western Bank Subsidiaries(1)
(annexed in accordance with subsection 308 (3) of the Bank Act)
CWB National Leasing Inc.
CWB Maxium Financial Inc.
CWB Wealth Management Ltd.(2)
McLean & Partners Wealth Management Ltd.
Canadian Western Financial Ltd.
CWB Insurance Solutions Ltd.
Canadian Western Trust Company
Valiant Trust Company
Canadian Western Bank Leasing Inc.
Address of
Head Office
1525 Buffalo Place
Winnipeg, Manitoba
30 Vogell Road, Suite 1
Richmond Hill, Ontario
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
801 10th Ave SW
Calgary, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
Suite 3000, 10303 Jasper Avenue
Edmonton, Alberta
(1) Unless otherwise noted, CWB, either directly or through its subsidiaries, owns 100% of the voting shares of
each entity.
(2) CWB owns 89.14% of the voting shares of CWB Wealth Management Ltd.
(3) The carrying value of voting shares is stated at the cost of CWB’s equity in the subsidiaries in thousands of
dollars.
Carrying Value of
Voting Shares Owned
by the Bank(3)
$ 134,458
30,812
29,346
19,136
8,080
1
113
CWB Financial Group 2018 Annual Report SHAREHOLDER INFORMATION
CWB Financial Group
Corporate Headquarters
Suite 3000, 10303 Jasper Avenue NW
CWB Place
Edmonton, AB T5J 3X6
Telephone: (780) 423-8888
Fax: (780) 423-8897
Website: cwb.com
Transfer Agent and Registrar
Computershare
100 University Avenue, 8th Floor
Toronto, ON M5J 2Y1
Telephone: (416) 263-9200
Toll-free: 1-800-564-6253
Fax: (888) 453-0330
Website: computershare.com
Stock Exchange Listings
The Toronto Stock Exchange (TSX)
Common Shares: CWB
Series 5 Preferred Shares: CWB.PR.B
Series 7 Preferred Shares: CWB.PR.C
Shareholder Administration
Computershare serves as Transfer
Agent and Registrar for the common
shares and preferred shares of CWB.
For dividend information, change
in share registration or address, lost
share certificates, tax forms or estate
transfers, please write or call the
Transfer Agent and Registrar, or inquire
online at computershare.com.
Duplicated Communications
If you receive, but do not require,
more than one mailing for the same
ownership, please contact the Transfer
Agent and Registrar to combine the
accounts.
Direct Deposit Services
Shareholders may choose to have cash
dividends paid on CWB common and
preferred shares deposited directly
into accounts held at their financial
institution. To arrange direct deposit
service, please contact the Transfer
Agent and Registrar.
Eligible Dividend Designation
CWB designates all common and
preferred share dividends paid to
Canadian residents as “eligible
dividends”, as defined in the Income
Tax Act (Canada), unless otherwise
noted.
Dividend Reinvestment Plan
CWB’s dividend reinvestment plan
allows common and preferred
shareholders to purchase additional
common shares by reinvesting their
cash dividend without incurring
brokerage and commission fees. For
information about participation in the
plan, please contact the Transfer Agent
and Registrar.
Investor Relations
Shareholders, institutional investors
or research analysts who would like
additional financial information are
asked to contact:
Investor Relations Department
CWB Financial Group
Suite 3000, 10303 Jasper Avenue NW
CWB Place
Edmonton, AB T5J 3X6
Telephone: (800) 836-1886
Fax: (780) 969-8326
Email: investorrelations@cwbank.com
More comprehensive investor
information - including supplemental
financial reports, quarterly financial
releases, corporate presentations,
corporate fact sheets and frequently
asked questions - is available in the
Investor Relations section at cwb.com.
This 2018 Annual Report, along with
our Annual Information Form, Notice
of Annual Meeting of Shareholders
and Proxy Circular, is available on our
website, or will be available in due
course. For additional printed copies
of these reports, please contact the
Investor Relations Department.
Filings are available on the Canadian
Securities Administrators' website at
sedar.com.
2019 Annual Meeting
The annual meeting of the common
shareholders of Canadian Western
Bank will be held in Edmonton, AB, on
April 4, 2019 at The Fairmont Hotel
Macdonald (Empire Ballroom) at 1:00
p.m. MT (3:00 p.m. ET).
Corporate Secretary
Bindu Cudjoe
Senior Vice President,
General Counsel and
Corporate Secretary
CWB Financial Group
Complaints or Concerns
regarding Accounting, Internal
Accounting Controls or
Auditing Matters
Please contact either:
Carolyn J. Graham
Executive Vice President and Chief
Financial Officer
CWB Financial Group
Telephone: (780) 423-8854
Fax: (780) 969-8326
Email: carolyn.graham@cwbank.com
or
Robert A. Manning
Chairman of the Audit Committee
c/o 210 – 5324 Calgary Trail
Edmonton, AB T6H 4J8
Telephone: (780) 438-2626
Fax: (780) 438-2632
Email: rmanning2626@gmail.com
SENIOR OFFICERS
Executive Officers
Chris H. Fowler
President and Chief Executive Officer
Commercial and
Retail Banking
Jeff Bowling
Senior Vice President and
Regional General Manager, Prairies
Blaine Forer
Senior Vice President and
Regional General Manager,
British Columbia
Lester Shore
Senior Vice President and Regional
General Manager, Northern Alberta
Mario Furlan
Senior Vice President,
Real Estate and Specialized Lending
Jeff Wright
Senior Vice President,
Client Solutions
CWB National Leasing
Michael Dubowec
President and Chief Executive Officer
CWB Optimum Mortgage
Rejean Roberge
Carolyn J. Graham, FCPA, FCA
Vice President
Canadian Western Trust
Scott Scobie
Vice President and General Manager
CWB Wealth Management
David Schaffner
President and
Chief Executive Officer
McLean & Partners
Wealth Management
Kevin Dehod
President and
Chief Executive Officer
CWB Maxium Financial
Paul McLean
Chief Executive Officer
Daryl MacLellan
President
Ombudsman
Michael Novak
Executive Vice President and
Chief Financial Officer
Kelly S. Blackett
Executive Vice President, Human
Resources and Corporate
Communications
Glen Eastwood
Executive Vice President, Business
Transformation
Darrell Jones
Executive Vice President, and
Chief Information Officer
Stephen Murphy
Executive Vice President, Banking
H. Bogac (Bogie) Ozdemir
Executive Vice President and
Chief Risk Officer
Senior Corporate Officers
Niall Boles
Senior Vice President and Treasurer
David L. Thompson
Senior Vice President,
Credit Risk Management
Bindu Cudjoe
Senior Vice President,
General Counsel and
Corporate Secretary
Vlad Ahmad
Senior Vice President,
Operations and Transformation
Allen D. Stephen, CPA, CA
Vice President and
Chief Accountant
114
CWB Financial Group 2018 Annual Report Manitoba
Winnipeg
Winnipeg Downtown
230 Portage Avenue
(204) 956-4669
Mike McAulay
Winnipeg Kenaston
125 Nature Park Way
(204) 452-0939
Chris Voogt
CWB National
Leasing Group
Winnipeg
1525 Buffalo Place
(204) 954-9000
Toll-free: 1-800-882-0560
cwbnationalleasing.com
(Representation across all
provinces and territories in
Canada)
Motive Financial
Edmonton
3000, 10303 Jasper Avenue NW
(780) 441-2249
Toll-free: 1-877-441-2249
motivefinancial.com
Canadian Western Trust
Toll-free: 1-800-663-1124
cwt.ca
Vancouver
300, 750 Cambie Street
(604) 685-2081
Calgary Northeast
2810 - 32 Avenue NE
(403) 250-8838
Terri Lawrence
Coquitlam
Yorkton
310, 101 Schoolhouse Street
(604) 540-8829
Dave McGregor
5, 259 Hamilton Road
(306) 782-1002
Kelly Denis
Calgary South Trail Crossing
Courtenay
300, 5222 - 130 Avenue SE
(403) 257-8235
Nancy Matheos
200, 470 Puntledge Road
(250) 334-8888
Jean-Marc Jaquier
Broker Buying Centre
Kamloops
285, 4000 Glenmore Court SE
(403) 720-8960
David Miller
101, 1211 Summit Drive
(250) 828-1070
Romi Arora
LOCATIONS
Canadian Western Bank
Regional Offices
British Columbia
2200, 666 Burrard Street
Vancouver
(604) 669-0081
Blaine Forer
Northern Alberta
3000, 10303 Jasper Avenue NW
Edmonton
(780) 423-8888
Lester Shore
Prairies
606 - 4 Street SW
Calgary
(403) 262-8700
Jeff Bowling
Real Estate and
Specialized Lending
2200, 666 Burrard Street
Vancouver
(604) 443-5118
Mario Furlan
Equipment Financing
3000, 10303 Jasper Avenue NW
Edmonton
(780) 441-3770
Kirby Hill
BRANCHES
Alberta
Edmonton
Edmonton Main
100, 12230 Jasper Avenue NW
(780) 424-4846
Andy McPherson
103 Street
10303 Jasper Avenue NW
(780) 423-8801
Bruce Young
Old Strathcona
7933 - 104 Street NW
(780) 433-4286
Donna Austin
Grande Prairie
11226 - 100 Avenue
(780) 831-1888
Kyle Small
Leduc
5407 Discovery Way
(780) 986-9858
Surinder Gakhal
Lethbridge
744 - 4 Avenue S
(403) 328-9199
Daryn Wenaas
Medicine Hat
101, 2810 - 13 Avenue SE
(403) 527-7321
Daniel Kitching
Red Deer
4822 - 51 Avenue
(403) 341-4000
Rama Alluri
Sherwood Park
251 Palisades Way
(780) 449-6699
Paul de Haan
St. Albert
300 - 700 St. Albert Trail
(780) 458-4001
Blair Zahara
British Columbia
Vancouver
South Edmonton Common
Kitsilano
2142 - 99 Street NW
(780) 988-8607
Robert Ovics
West Point
17603 - 100 Avenue NW
(780) 484-7407
David Hardy
Calgary
Calgary Main
606 - 4 Street SW
(403) 262-8700
Dean Proctor
Calgary Chinook
6606 Macleod Trail SW
(403) 252-2299
Rick Vandergraaf
Calgary Foothills
6127 Barlow Trail SE
(403) 269-9882
Dustin Jones
3190 West Broadway
(604) 732-4262
Demetra Papaspyros
Park Place
100, 666 Burrard Street
(604) 688-8711
Brian Korpan
Vancouver Real Estate
2200, 666 Burrard Street
(604) 669-0081
Jennifer Drury
West Broadway
110, 1333 West Broadway
(604) 730-8818
Lawrence Robinson
Abbotsford
100, 2548 Clearbrook Road
(604) 855-4941
Hugh Ellis
Kelowna
1674 Bertram Street
(250) 862-8008
Bob Brown
Langley
100, 19915 - 64 Avenue
(604) 539-5088
Craig Martin
Nanaimo
101, 6475 Metral Drive
(250) 390-0088
Kevin Wilson
Prince George
300 Victoria Street
(250) 612-0123
Antonio Stancati
Richmond
4991 No. 3 Road
(604) 238-2800
Dean Chan
Surrey
Panorama Ridge
103, 15230 Highway 10
(604) 575-3783
Scott Bearss
Strawberry Hill
1, 7548 - 120 Street
(604) 591-1898
Dylan Watson
Victoria
1201 Douglas Street
(250) 383-1206
Mary Ellen Echle
Saskatchewan
Lloydminster
2909 - 50 Avenue
(306) 825-8410
Alan Wells
Regina
1866 Hamilton Street
Hill Tower III
(306) 757-8888
Kelly Dennis
Saskatoon
Saskatoon City Centre
244 - 2 Avenue South
(306) 477-8888
Kelly Walker
Saskatoon North Landing
101, 2803 Faithfull Avenue
(306) 244-8008
Kelly Walker
CWB Optimum Mortgage
Edmonton
#1010, 10303 Jasper Avenue NW
(780) 423-9748
Toll-free: 1-866-441-3775
optimummortgage.ca
(Representation across Western
Canada, Ontario, and Atlantic
Canada)
CWB Maxium Financial
Richmond Hill
30 Vogell Road #1
(905) 780-6150
cwbmaxium.com
CWB Franchise Finance
Mississauga
Suite E200 6860 Century
Avenue
(289) 998-0284
cwbfranchise.com
CWB Wealth
Management
Edmonton
3000, 10303 Jasper Avenue NW
(855) 292-9655
cwbwealth.com
McLean & Partners
Wealth Management
Calgary
801 - 10 Avenue SW
(403) 234-0005
Toll-free: 1-888-665-0005
mcleanpartners.com
Canadian Western
Financial
Edmonton
3000, 10303 Jasper Avenue NW
(780) 423-8888
canadianwesternfinancial.com
115
CWB Financial Group 2018 Annual Report FIVE YEAR FINANCIAL SUMMARY
($ thousands, except per share amounts)
Results from Continuing Operations(1)
Net interest income per financial statements
Non-interest income
Pre-tax, pre-provision income(2)
Total revenue
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(2)
Return on common shareholders' equity(2)
Adjusted return on common shareholders' equity(2)
Return on assets(2)
Efficiency ratio(2)
Net interest margin(2)
Number of full-time equivalent staff
Results from Combined Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(3)
Return on common shareholders' equity(2)
Adjusted return on common shareholders' equity(2)
Return on assets(2)
Results from Discontinued Operations(1)
Common shareholders' net income
Earnings per share
Basic
Diluted
Adjusted cash(2)
Per Common Share
Average common shares outstanding (thousands)
Cash dividends
Book value
Market price
High
Low
Close
2018
2017
2016
2015
2014
$
724,990
78,368
436,188
803,358
249,256
$
642,390
84,245
388,729
726,635
214,277
$
585,224
72,672
350,603
657,896
177,761
$
543,472
67,948
322,479
611,420
208,064
$
499,565
84,305
318,977
583,600
205,288
2.81
2.79
3.01
11.0 %
11.9
0.89
45.7
2.60
2,178
2.43
2.42
2.63
10.1 %
11.0
0.85
46.5
2.56
2,058
2.13
2.13
2.26
9.3 %
9.9
0.73
46.7
2.41
1,966
2.59
2.59
2.63
12.4 %
12.6
0.97
47.3
2.53
1,928
2.57
2.54
2.59
13.9 %
14.2
1.05
45.4
2.56
1,788
$
249,256
$
214,277
$
177,761
$
319,701
$
218,549
2.81
2.79
3.01
11.0 %
11.9
0.89
-
-
-
-
88,806
1.00
26.09
40.83
29.81
30.62
$
$
2.43
2.42
2.63
10.1 %
11.0
0.85
-
-
-
-
88,297
0.93
24.82
37.36
23.68
36.34
$
$
$
$
2.13
2.13
2.26
9.3 %
9.9
0.73
-
-
-
-
$
83,411
0.92
23.58
29.30
19.26
25.45
3.97
3.97
4.01
19.1 %
19.3
1.48
2.73
2.70
2.76
14.8 %
15.1
1.10
$
111,637
$
13,261
1.38
1.38
1.38
80,442
0.86
22.18
38.16
21.04
25.13
$
0.16
0.16
0.17
80,034
0.78
19.52
43.30
32.61
37.75
Balance Sheet and Off-Balance Sheet Summary
Assets
Cash resources, securities and repurchase agreements
Loans
Deposits
Debt
Shareholders' equity
Assets under administration
Assets under management
Capital Adequacy
Common equity Tier 1 ratio
Tier 1 ratio
Total ratio
Other Information
Provision for credit losses as a percentage of average loans
Net impaired loans as a percentage of total loans
$ 29,021,463
2,237,973
26,204,599
23,699,957
2,007,854
2,585,752
8,368,716
2,100,802
$ 26,447,453
2,708,783
23,229,239
21,902,982
1,476,336
2,461,045
10,408,012
2,114,861
$ 25,222,549
2,791,968
21,961,348
21,194,553
1,268,198
2,342,040
10,689,398
1,924,181
$ 22,838,527
2,994,534
19,475,383
19,365,407
1,187,623
1,910,907
9,293,683
1,882,736
$ 20,635,046
2,697,185
17,536,489
17,373,014
1,036,990
1,693,527
10,101,698
1,795,975
9.2 %
10.3
11.9
0.20 %
(0.03)
9.5 %
10.8
12.5
0.23 %
0.14
9.2 %
11.0
13.1
0.38 %
-
8.5 %
9.7
12.7
0.17 %
(0.11)
8.0 %
9.3
12.8
0.15 %
(0.19)
(1) On May 1, 2015, CWB sold its property and casualty insurance subsidiary and CWB’s stock transfer business. Revenue, expenses and gains on sale associated with the businesses sold are defined and classified on the consolidated
statements of income for prior periods as “Discontinued Operations”. The remaining operations are defined as “Continuing Operations”, and the total Continuing Operations and Discontinued Operations are defined as “Combined
Operations”. Total revenue from Combined Operations include $107.8 million of divestiture gains in 2015. Return on shareholders’ equity reflects equity from Combined Operations. All other measures reflect either Continuing or
Combined Operations as indicated.
(2) See page 20 for non-IFRS definitions.
116
CWB Financial Group 2018 Annual Report
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