Powering
your ideasTM
2017 ANNUAL REPORT 2017 Annual Report AT A GLANCE
integrated
to
National Bank of Canada provides
consumers, small and medium-sized enterprises
large
corporations in its domestic market while also offering specialized services
internationally.
in four business segments—Personal and
Commercial, Wealth Management, Financial Markets, and U.S. Specialty
Finance and International—with total assets of $246 billion as at October 31,
2017.
financial services
(SMEs) and
It operates
Through more than 21,000 employees, National Bank offers a complete
range of financial services that include: banking and investment solutions for
individuals and businesses as well as securities brokerage, insurance and
wealth management services.
National Bank is the leading bank in Quebec and the partner of choice for
SMEs. It is one of the six systemically important banks in Canada and has
branches
in almost every province. Through representative offices,
subsidiaries, and partnerships, it also operates in the United States, Europe
and other parts of the world.
Its head office is located in Montreal and its securities are listed on the
Toronto Stock Exchange.
3 Message From the President and Chief Executive Officer
5 Office of the President Members
6 Message From the Chairman of the Board
7 Board of Directors Members
8 Risk Disclosures
9 Management’s Discussion and Analysis
107 Audited Consolidated Financial Statements
202 Statistical Review
204 Glossary of Financial Terms
206
Information for Shareholders
Head Office
National Bank of Canada
National Bank Tower
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
Annual Meeting
The Annual Meeting of Holders of Common Shares of the Bank will be held on
Friday, April 20, 2018, at the Drummondville Centrexpo, in Drummondville,
Quebec, Canada.
Public Accountability Statement
The 2017 Social Responsibility Report will be available in March 2018 on the
Bank’s website at nbc.ca.
Communication with Shareholders
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the Transfer Agent at the following address:
Computershare Trust Company of Canada
Share Ownership Management
1500 Robert-Bourassa Boulevard, 7th Floor
Montreal, Quebec H3A 3S8 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
Shareholders whose shares are held by a market intermediary are asked to
contact the market intermediary concerned.
Other shareholder inquiries can be addressed to:
Investor Relations
National Bank of Canada
National Bank Tower
600 De La Gauchetière Street West, 7th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 1-866-517-5455
Fax:
E-mail:
Website:
514-394-6196
investorrelations@nbc.ca
nbc.ca/investorrelations
Caution Regarding Forward-Looking Statements
From time to time, National Bank of Canada makes written and oral forward-
looking statements, including in this Annual Report, in other filings with
Canadian regulators, in reports to shareholders, in press releases and in
other communications. All such statements are made pursuant to the
Canadian and American securities legislation and the provisions of the
United States Private Securities Litigation Reform Act of 1995.
Additional information about these statements can be found on page 9 of
this Annual Report.
Trademarks
The trademarks used in this report include National Bank of Canada, Private
Wealth 1859, one client, one bank, CashPerformer, NBC CapS, NBC CapS II,
NBC Asset Trust, NBC Capital Trust and National Bank All-in-One and their
respective logos, which are trademarks of National Bank of Canada used
under licence by National Bank of Canada or its subsidiaries. All other
trademarks mentioned in this report that are not the property of National
Bank of Canada are owned by their respective holders.
Pour obtenir une version française du Rapport annuel,
veuillez vous adresser à :
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Télécopieur :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
514 394-6196
Legal Deposit
ISBN 978-2-921835-55-8
Legal deposit – Bibliothèque et Archives nationales du Québec, 2017
Legal deposit – Library and Archives Canada, 2017
Printing
L’Empreinte
National Bank of Canada is proud to help save the environment by using
EcoLogo and Forest Stewardship Council® (FSC®) certified paper.
National
Bank
by the
numbers
2.6
MILLION
CLIENTS
477
BILLION $
ASSETS UNDER
MANAGEMENT
AND ADMINISTRATION
246
BILLION $
TOTAL ASSETS
6,609
MILLION $
TOTAL REVENUES
2,024
MILLION $
NET INCOME
21.3
BILLION $
MARKET
CAPITALIZATION
21,635
EMPLOYEES
429
BRANCHES
931
BANKING
MACHINES
FINANCIAL OVERVIEW
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Net income
Diluted earnings per share
Return on common shareholders’ equity
Operating results on a taxable equivalent basis and excluding specified items (1)
Total revenues on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Diluted earnings per share excluding specified items
Return on common shareholders’ equity excluding specified items
Efficiency ratio on a taxable equivalent basis and excluding specified items
Dividends declared
Total assets
Regulatory ratios under Basel III
Common Equity Tier 1 (CET1) capital ratio
Leverage ratio
Liquidity coverage ratio (LCR)
(1) See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
2017
2016
% change
6,609
2,024
5.38
18.1 %
6,864
2,049
5.45
18.3 %
55.9 %
2.28
245,827
11.2 %
4.0 %
132 %
5,840
1,256
$ 3.29
11.7 %
6,279
1,613
$ 4.35
15.5 %
58.2 %
$ 2.18
232,206
10.1 %
3.7 %
134 %
13
61
64
9
27
25
6
National Bank of Canada
2017 Annual Report
1
HELPING OUR CLIENTS POWER THEIR IDEAS
PROMOTING DIVERSITY
– Leading-edge digital and mobile banking services
– New branch concepts where advice and
technology converge
– Active participation in developing
the entrepreneurial ecosystem
SUPPORTING THE COMMUNITY
– Millions of dollars paid to the community
in the form of donations, sponsorships
and through fundraising initiatives
– Hundreds of organizations supported Canada-wide
– Committed to enhancing the impact of our social
investments
FUELLING ECONOMIC DEVELOPMENT
– $88 million invested in our facilities
– $1 billion spent on goods and services
– $2 billion paid in salaries and employee benefits
2
National Bank of Canada
2017 Annual Report
– Ongoing support of women, cultural communities
and the LGBT community
– Industry-leading representation of women among
management and directors
HELPING PROTECT THE ENVIRONMENT
– Award-winning energy efficiency program
– Received several LEED® certifications
To learn more:
nbc.ca
Our social responsibility 2017To learn more: nbc.ca MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
Through strong execution in fiscal 2017, we achieved solid operating
performance and record profitability. National Bank’s share price reached
new highs, and the Bank delivered
its
shareholders. While delivering these excellent results, we continued to
position the Bank for long-term success by focusing our investments and
efforts on our organizational transformation and business growth. I am
pleased not only with our financial results, but also with the momentum we
are building for the future.
industry-leading returns for
Excellent Performance Across the Board
In 2017, the Bank generated record net income of $2 billion, driven by strong
performance across all business lines, effective cost management and a
prudent approach to risk. Reflecting the acceleration of our transformation,
our efficiency ratio improved significantly and operating leverage was
positive. Our return on equity of over 18% is among the highest in the
industry.
During the year, we raised our dividend twice for a combined increase of
5% and returned additional capital to shareholders by resuming share
repurchases. The Bank delivered industry-leading total shareholder returns
of 36.2% and 13.6% over the one- and 10-year periods ended October 31,
2017.
Our vision is to be a simple, fast and efficient
bank. To achieve this, we are focusing on two
enablers—our digital transformation and our
cultural evolution.
important milestone
Disciplined Capital Deployment
An
the
strengthening of our Basel III Common Equity Tier 1 (CET1) ratio that reached
11.2%, a result of disciplined capital management.
fiscal 2017 performance was
in our
Our capital deployment priorities are very clear: maintain a strong CET1
ratio; invest to stimulate business growth in our core markets; invest to
capture significant efficiency gains and generate operating leverage above
1%; and return capital to our shareholders through predictable dividend
growth and disciplined share buybacks.
These priorities will continue to guide our capital deployment decisions
in fiscal 2018.
A Simple, Fast and Efficient Bank
Our one client, one bank transformation is in full stride. In a rapidly changing
environment, we want to remain the financial partner of choice to power our
customers’ ideas.
Our vision is to be a simple, fast and efficient bank. To achieve this, we
are focusing on two enablers—our digital transformation and our cultural
evolution. Successful execution will drive superior customer experience,
revenue growth and higher operating efficiency, allowing the Bank to sustain
long-term value creation for all stakeholders.
Digital Transformation
Through digital transformation, we are becoming more customer-centric and
more efficient. Following significant cost reductions in fiscal 2017, we are
now focused on a structural cost transformation through digitization,
automation, and product and process simplification. Our objective is to
improve operating efficiency every year.
Our digital infrastructure and capabilities are designed to give
customers full control of their financial life through a single point of access.
They will do their banking when they want and using the channel of their
choice—whether they want to open an account, apply for home financing or
pay bills. Emerging technologies are also offering new ways of engaging with
our customers to build and strengthen relationships. In adopting new tools,
we are aiming to strike the right balance between technology and a human
touch.
Cultural Evolution
While investing in digital technologies, we are mindful that an empowered
and engaged workforce is the cornerstone of our long-term success. The
Bank is sparing no effort in building a high-performing and change-capable
organization that values agility, innovation and collaboration.
The quality of people is the main differentiating factor in our industry.
Our employees can be assured that, of all the changes taking place at the
Bank, the cultural evolution of our organization is senior management’s top
priority.
Positioned for Growth
In fiscal 2017, we demonstrated our ability to achieve business growth while
deploying major changes in the delivery of our services. Growth remains our
priority as we go forward.
Our Personal and Commercial Banking segment
is focused on
leveraging our leadership in Quebec and increasing market penetration
across Canada. In the retail market, we are expanding existing relationships
by offering convenience and the best advice while attracting new customers
from targeted segments, in particular by using digital tools. In commercial
banking, we are growing by providing expert advice and timely response to
the needs of Quebec entrepreneurs. We are leveraging our digital platforms
and working closely with other National Bank business units to provide the
best solutions.
Outside Quebec, we are growing our retail presence through a cluster
strategy by focusing on urban areas where National Bank is already well
represented by its various business units. We are also seeing opportunities
to leverage our digital platforms in the retail market through compelling
value propositions. In the commercial market, we are continuing to grow in
specialized markets where we have recognized expertise, such as
healthcare, agriculture, technology, cinema and real estate.
3
National Bank of Canada2017 Annual Report
MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER (cont.)
Our Wealth Management segment enters the new fiscal year with strong
growth momentum. All business lines are well positioned for organic growth,
both in Quebec and across Canada. This segment is differentiated through its
unique business model—unbiased advice through open architecture as
Canada’s largest manager of managers. This allows for the development of
investment solutions using some of the world’s leading money managers in
various asset classes and investment styles. Another growth vector is
National Bank Independent Network, which is a leader in providing mission-
critical administrative services to over 400 independent wealth management
firms across Canada. Our Private Wealth 1859 division is growing beyond the
Province of Quebec through its offices in Calgary and Vancouver and will
continue to expand across the country.
The success of our Financial Markets business is built on our leadership
in Quebec and strong client relationships across Canada. Over the past 20
years, we have built a truly national platform, with more than 60% of our
revenues derived outside Quebec. Our Canadian leadership in government
debt finance and recognized expertise in risk management solutions provide
strong platforms for growth. On the corporate side, we continue to enhance
our focus on larger clients across the country while strengthening our
leadership position with mid-market clients.
In fiscal 2017, we created a new business segment comprised of
Credigy, our Atlanta-based specialty consumer finance subsidiary, and our
emerging markets portfolio, notably ABA Bank in Cambodia. I am pleased
with the performance of these subsidiaries, which delivered a combined 25%
increase in net income in fiscal 2017 and a strong return on equity. This
segment currently represents more than 8% of consolidated net income, and
we see that figure increasing to about 10% over the next few years. During
the year, we extended the moratorium on major investments in emerging
markets as we operationalize and consolidate our existing activities.
[…] we see growth opportunities for National
Bank across Canada in all lines of business.
Favourable Macroeconomic Environment
Our track record over the past decade demonstrates clearly that we benefit
from our positioning as a super-regional bank based in Quebec.
The Province of Quebec has a well-diversified economy, supported by
abundant green energy, an educated workforce and a thriving, world-class
technology eco-system. Job creation has been strong for several consecutive
years, and the unemployment rate has dipped below 6%, the lowest level in
over 40 years. Small business and consumer confidence is among the
highest in Canada, a development fostered not only by a favourable cyclical
backdrop but also by healthy public
the
implementation of sound fiscal policies aimed at improving Quebec’s long-
term economic growth. Economic activity remains particularly brisk in
Greater Montreal, where immigration is booming and where housing
affordability is still very reasonable compared to major urban centres in
Ontario and British Columbia.
finances, which allow
Looking ahead, we see growth opportunities for National Bank across
Canada in all lines of business. As we continue to expand our Canadian
footprint, Quebec will remain an
financial
performance, and our overweight position in our core market will remain a
significant competitive advantage.
important driver of our
Acknowledgements
I take this opportunity to extend my sincere thanks to all our employees for
their contribution to our excellent results. My colleagues in the Office of the
President deserve credit for their leadership and for being effective stewards
of the Bank’s transformation.
Our customers are responding positively to our initiatives and I thank
them for doing business with us. I also wish to acknowledge the support and
counsel of our Board of Directors and to thank our shareholders for their
confidence in the Bank.
Together, we are building the National Bank of the future.
Louis Vachon
President and Chief Executive Officer
4
National Bank of Canada2017 Annual Report
OFFICE OF THE PRESIDENT MEMBERS
Louis Vachon
President and Chief Executive Officer
William Bonnell
Executive Vice-President,
Risk Management
Dominique Fagnoule
Executive Vice-President,
Information Technology
Martin Gagnon
Executive Vice-President,
Wealth Management;
Co-President and Co-Chief Executive Officer,
National Bank Financial
Brigitte Hébert
Executive Vice-President,
Operations
Ricardo Pascoe
Chief Transformation Officer and
Executive Vice-President,
Strategic Initiatives Office
Diane Giard
Executive Vice-President,
Personal-Commercial Banking and Marketing
Denis Girouard
Executive Vice-President,
Financial Markets
Lynn Jeanniot
Executive Vice-President,
Human Resources and Corporate Affairs
Ghislain Parent
Chief Financial Officer and
Executive Vice-President,
Finance and Treasury
5
National Bank of Canada2017 Annual Report
MESSAGE FROM THE CHAIRMAN OF THE BOARD
At a time of rapid change in the banking industry, the Board of Directors
continues to work closely with senior management to position the Bank for
sustainable growth and value creation for the benefit of all stakeholders.
In fiscal 2017, financial performance attained record levels and the
Bank delivered industry-leading returns for shareholders. The Board was
pleased to note that all business segments are performing well and that the
Bank’s transformation—a key area of focus for the Board—is generating
tangible results.
Building the Future
In response to the ever-evolving needs of customers, the Bank is significantly
transforming the way it operates. It is investing in digital technologies,
implementing new
internal processes and driving a culture change
throughout the Bank. Both the Board and senior management believe that
transitioning to a workplace based on innovation, agility and empowerment
is key to the Bank’s future success. Fiscal year 2017 saw tangible progress
made in every aspect of the transformation, and the Board will continue to
closely oversee the progress of plan deployment in the months and years
ahead.
[…] transitioning to a workplace based on
innovation, agility and empowerment is key to
the Bank’s future success.
Investing in Talent
During fiscal 2017, the Board conducted a thorough review of the succession
plans at the top three levels of the Bank. We are satisfied that the Bank has
strong leadership and employees with the requisite skills.
The Board sees a rich talent pipeline for leadership positions at all
levels of the organization. In recent years, the Bank has adapted to industry
changes by hiring large numbers of people with new skills and capabilities. It
also invests continuously in training, certification, development and new
tools.
Board Composition and Renewal
Recent years have witnessed an orderly renewal of the Board with the arrival
of many new directors who bring a diverse range of professional
backgrounds and expertise. Most of them are current and former CEOs of
successful businesses in a number of industry sectors, both traditional and
emerging, and the Board is younger in age and tenure.
The Board has an appropriate mix of experience and diversity to
exercise effective oversight and to help carry out the Bank’s strategic
priorities for the benefit of all stakeholders. I would like to take this
opportunity to thank the members of the Board for their judicious counsel
and exemplary dedication to the Bank.
We are pleased to welcome Rebecca McKillican as a director and
member of the Human Resources Committee. Ms. McKillican contributes
valuable technology insights to our deliberations as President and CEO of
Well.ca, one of the largest online retailers in Canada. Ms. McKillican
previously worked for the operating group of investment firm KKR (Kohlberg,
Kravis and Roberts) and for McKinsey & Company.
We extend our sincere thanks to André Caillé for his contributions to the
Bank’s success during his tenure as a director, as well as to Julie Payette,
who stepped down following her appointment to the position of Governor
General of Canada.
Corporate Governance
Our governance continues to evolve in line with best practices, including the
adoption of a 12-year term limit for directors and, very recently, proxy access
for director nominations.
Numerous initiatives in recent years have raised our governance
practices to the highest standards. A rigorous internal governance audit
completed
in fiscal 2017 returned positive conclusions as well as
recommendations for improvement, which we are in the process of
implementing. We are determined to maintain a high-performing and
effective Board whose members are collectively responsible for the Bank’s
enduring success.
Acknowledgements
The Bank’s excellent fiscal 2017 results were achieved through a focus on
customers and disciplined execution. The Bank has good momentum and
strong leadership to drive long-term performance.
On behalf of the Board, I wish to thank Louis Vachon and the members
of the Office of the President for their leadership and all employees for their
contribution to the Bank’s success. We also thank the Bank’s 2.6 million
customers for their patronage and shareholders large and small for their
support.
Jean Houde
Chairman of the Board of Directors
For more information regarding the Bank’s governance, please refer to the Statement of
Corporate Practices available on the Bank’s website at nbc.ca.
6
National Bank of Canada2017 Annual Report
BOARD OF DIRECTORS MEMBERS
Jean Houde
Montreal, Quebec, Canada
Chairman of the Board of Directors,
National Bank of Canada
and Corporate Director
Director since March 2011
Raymond Bachand
Montreal, Quebec, Canada
Strategic Advisor,
Norton Rose Fulbright Canada LLP
and Corporate Director
Director since October 2014
Maryse Bertrand
Montreal, Quebec, Canada
Corporate Director
Director since April 2012
Pierre Blouin
Île-Bizard, Quebec, Canada
Corporate Director
Director since September 2016
Pierre Boivin
Montreal, Quebec, Canada
President and Chief Executive Officer,
Claridge inc.
Director since April 2013
Gillian H. Denham
Toronto, Ontario, Canada
Corporate Director
Director since October 2010
Richard Fortin
Boucherville, Quebec, Canada
Corporate Director
Director since August 2013
Karen Kinsley
Ottawa, Ontario, Canada
Corporate Director
Director since December 2014
Rebecca McKillican
Oakville, Ontario, Canada
President and Chief Executive Officer,
Well.ca
Director since October 2017
Lino A. Saputo Jr.
Montreal, Quebec, Canada
Chief Executive Officer and
Chairman of the Board of Directors,
Saputo Inc.
Director since April 2012
Andrée Savoie
Dieppe, New Brunswick, Canada
President and Chair of the
Board of Directors,
Acadian Properties Ltd.
Director since April 2015
Pierre Thabet
St-Georges, Quebec, Canada
President, Boa-Franc inc.
Director since March 2011
Louis Vachon
Beaconsfield, Quebec, Canada
President and Chief Executive Officer,
National Bank of Canada
Director since August 2006
Board Committees
Audit Committee
Karen Kinsley (Chair)
Pierre Blouin
Richard Fortin
Andrée Savoie
Risk Management Committee
Richard Fortin (Chair)
Raymond Bachand
Pierre Boivin
Karen Kinsley
Lino A. Saputo Jr.
Pierre Thabet
Human Resources Committee
Pierre Boivin (Chair)
Maryse Bertrand
Pierre Blouin
Gillian H. Denham
Rebecca McKillican
Conduct Review and Corporate
Governance Committee
Maryse Bertrand (Chair)
Raymond Bachand
Jean Houde
Andrée Savoie
7
National Bank of Canada2017 Annual Report
RISK DISCLOSURES
In May 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles
for enhancing the risk disclosures of major banks, to recommend improvements to current risk disclosures, and to identify risk disclosure best practices used
by major financial institutions. On October 29, 2012, the EDTF published a report entitled Enhancing the Risk Disclosures of Banks, which contains
32 recommendations. The Bank makes every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures
to meet the best practices on an ongoing basis. The risk disclosures required by the EDTF are provided in this Annual Report and in the document entitled
Supplementary Regulatory Capital Disclosure available on the Bank’s website at nbc.ca.
Annual
Report
Pages
Supplementary
Regulatory Capital
Disclosure(1)
General
1
2
3
4
Location of risk disclosures
Management’s Discussion and Analysis
Consolidated Financial Statements
Supplementary Regulatory Capital Disclosure
Risk terminology and risk measures
Top and emerging risks
New key regulatory ratios
Risk governance and risk management
5
6
7
8
Risk management organization, processes and key functions
Risk management culture
Key risks by business segment, risk management
and risk appetite
Stress testing
9
10
11
12
13
Capital adequacy and risk-weighted assets (RWA)
Minimum Pillar 1 capital requirements
Reconciliation of the accounting balance sheet to
the regulatory balance sheet
Movements in regulatory capital
Capital planning
RWA by business segment
and by risk type
Capital requirements by risk and RWA calculation method
Banking book credit risk
Movements in RWA by risk type
Assessment of credit risk model performance
14
15
16
17
Liquidity
18
Liquidity management and components of the liquidity buffer
Funding
19
20
21
Summary of encumbered and unencumbered assets
Residual contractual maturities of balance sheet items and
off-balance-sheet commitments
Funding strategy and funding sources
Market risk
22
23
24
25
Linkage of market risk measures to balance sheet
Market risk factors
VaR: assumptions, limitations and validation procedures
Stress tests, stressed VaR and backtesting
Credit risk
26
27
28
29
30
Credit risk exposures
Policies for identifying impaired loans
Movements in impaired loans and allowances for credit losses
Counterparty credit risk relating to derivatives transactions
Credit risk mitigation
Other risks
31
32
Other risks: governance, measurement and management
Publicly known risk events
8
42 to 87, 100 and 104
Notes 1, 7, 17, 24 and 30
51 to 87
51 to 53
43 to 46, 73, 75 and 80
55 to 69, 75 to 77
55 and 56
50, 55 and 56
42, 56, 64 and 73 to 77
43 to 46
47
42 to 50
48 and 50
48 and 60 to 64
48
49
59, 62 and 71
75 to 81
78 and 79
191 to 195
81 to 83
69 and 70
68, 71 to 74, 178 to 180
71 to 73
71 to 74
63, 67 and 149 to 152
65, 120 and 121
100, 104 and 149 to 152
65, 66 and 161 to 164
64 to 66
53 and 54 and 84 to 87
84
4 to 29
4 to 7
8
8
8 and 11 to 16
9
11 to 17
10 to 24 and 19 to 25(2)
20
25 and 26
22 and 24
(1)
(2)
For the fourth quarter ended October 31, 2017.
These pages are included in the document entitled Supplementary Financial Information for the Fourth Quarter Ended October 31, 2017.
8
National Bank of Canada2017 Annual Report
MANAGEMENT ’S DISCUSSION
AND ANA LYSIS
The following Management’s Discussion and Analysis (MD&A) presents the financial condition and operating results of National Bank of Canada (the Bank).
This analysis was prepared in accordance with the requirements set out in National Instrument 51-102, Continuous Disclosure Obligations, released by the
Canadian Securities Administrators (CSA). It is based on the audited consolidated financial statements for the year ended October 31, 2017 (the consolidated
financial statements) and prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards
Board (IASB), unless otherwise indicated. IFRS represent Canadian generally accepted accounting principles (GAAP). This MD&A should be read in conjunction
with the consolidated financial statements and accompanying notes for the year ended October 31, 2017. All amounts are presented in Canadian dollars.
Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank’s website at nbc.ca and SEDAR’s website at
sedar.com.
November 30, 2017
Financial Reporting Method
Financial Disclosure
Overview
Financial Analysis
Business Segment Analysis
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance and International
Other
Caution Regarding Forward-Looking Statements
10
12
13
18
21
24
27
30
33
Quarterly Financial Information
Analysis of the Consolidated Balance Sheet
Securitization and Off-Balance-Sheet Arrangements
Additional Financial Disclosure
Capital Management
Risk Management
Critical Accounting Estimates
Future Accounting Policy Changes
Additional Financial Information
34
35
39
41
42
51
88
92
96
From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Outlook for National Bank and the Major Economic Trends sections of
this Annual Report, in other filings with Canadian securities regulators, and in other communications, for the purpose of describing the economic environment in which the Bank will
operate during fiscal 2018 and the objectives it hopes to achieve for that period. These forward-looking statements are made in accordance with current securities legislation in
Canada and the United States. They include, among others, statements with respect to the economy—particularly the Canadian and U.S. economies—market changes, observations
regarding the Bank’s objectives and its strategies for achieving them, Bank-projected financial returns and certain risks faced by the Bank. These forward-looking statements are
typically identified by future or conditional verbs or words such as “outlook,” “believe,” “anticipate,” “estimate,” “project,” “expect,” “intend,” “plan,” and similar terms and
expressions.
By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions
about the performance of the Canadian and U.S. economies in 2018 and how that will affect the Bank’s business are among the main factors considered in setting the Bank’s
strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly
and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies.
There is a strong possibility that express or implied projections contained in these forward-looking statements will not materialize or will not be accurate. The Bank
recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank’s control, could cause actual future results,
conditions, actions or events to differ significantly from the targets, expectations, estimates or intentions expressed in the forward-looking statements. These factors include credit
risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk and environmental risk, all of which are described in more
detail in the Risk Management section beginning on page 51 of this Annual Report; general economic environment and financial market conditions in Canada, the United States and
certain other countries in which the Bank conducts business, including regulatory changes affecting the Bank’s business, capital and liquidity; changes in the accounting policies the
Bank uses to report its financial condition, including uncertainties associated with assumptions and critical accounting estimates; tax laws in the countries in which the Bank
operates, primarily Canada and the United States (including the U.S. Foreign Account Tax Compliance Act (FATCA)); changes to capital and liquidity guidelines and to the manner in
which they are to be presented and interpreted; changes to the credit ratings assigned to the Bank; and potential disruptions to the Bank’s information technology systems,
including evolving cyber attack risk.
The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of this Annual Report. Investors and
others who rely on the Bank’s forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as
required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.
The forward-looking information contained in this document is presented for the purpose of interpreting the information contained herein and may not be appropriate for other
purposes.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL REPORTING METHOD
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2016. This
presentation reflects the fact that the activities of subsidiary Credigy Ltd. (Credigy), which had previously been presented in the Financial Markets segment,
and that the activities of subsidiary Advanced Bank of Asia Limited (ABA Bank) and of other international investments, which had previously been presented in
the Other heading, are now presented in the U.S. Specialty Finance and International (USSF&I) segment. The Bank made this change to better align the
monitoring of its activities with its management structure.
The Bank has adjusted certain specified items to make the data from fiscal years 2017 and 2016 comparable. These adjustments are presented in the table
below.
Reconciliation of Non-GAAP Financial Measures
Year ended October 31
(millions of Canadian dollars)
Net interest income(1)
Taxable equivalent(2)
Financing cost related to holding restructured notes(3)
Net interest income on a taxable equivalent basis and
excluding specified items
Non-interest income(1)
Taxable equivalent(2)
Acquisition-related revenues(4)
Write-off of an equity interest in an associate(5)
Non-interest income on a taxable equivalent basis and
excluding specified items
Total revenues on a taxable equivalent basis and
excluding specified items
Non-interest expenses
Charges related to acquisitions(6)
Restructuring charge(7)
Impairment losses on intangible assets(8)
Litigation charges(9)
Non-interest expenses excluding specified items
Contribution on a taxable equivalent basis and excluding specified items
Provisions for credit losses
Income before income taxes on a taxable equivalent basis and
excluding specified items
Income taxes
Taxable equivalent(2)
Income taxes on the revenues related to holding restructured notes(3)
Income taxes on acquisition-related items(4)(6)
Income taxes on the write-off of an equity interest
in an associate(5)
Income taxes on the restructuring charge(7)
Income taxes on intangible asset impairment losses(8)
Income taxes on litigation charges(9)
Income taxes on the impact of changes to tax measures(10)
Income taxes on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Specified items after income taxes(11)
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders
Personal and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Other
2017
2016
2,071
−
−
2,071
990
−
−
−
990
3,061
1,646
−
−
−
−
1,646
1,415
153
1,262
337
−
−
−
−
−
−
−
−
337
925
−
925
−
925
431
−
−
431
1,173
−
9
−
1,182
1,613
1,036
(19)
−
−
−
1,017
596
3
593
149
−
−
5
−
−
−
−
−
154
439
(23)
416
−
416
575
207
−
782
813
35
−
−
848
1,630
658
−
−
−
−
658
972
−
972
18
242
−
−
−
−
−
−
−
260
712
−
712
−
712
262
−
−
262
279
−
−
−
279
541
225
−
−
−
−
225
316
48
268
84
−
−
−
−
−
−
−
−
84
184
−
184
29
155
(107)
2
−
3,232
209
−
(105)
3,441
122
−
2
−
3,377
35
11
−
2,992
231
9
3,232
2,848
4
31
164
124
3,423
3,047
19
292
−
−
−
−
292
(273)
40
(313)
(104)
2
−
−
−
−
−
−
−
(102)
(211)
(2)
(213)
55
(268)
6,864
6,279
3,857
(19)
−
−
−
3,838
3,026
244
3,875
(22)
(131)
(44)
(25)
3,653
2,626
484
2,782
2,142
484
244
−
5
−
−
−
−
−
733
2,049
(25)
2,024
84
1,940
225
235
3
11
19
35
12
7
(18)
529
1,613
(357)
1,256
75
1,181
On November 1, 2016, the Bank reclassified certain amounts in the Consolidated Statement of Income to better reflect the nature of the income presented in the Personal and Commercial
segment. As a result, for the year ended October 31, 2016, an amount of $36 million reported in Non-interest income was reclassified to Net interest income. This reclassification had no
impact on Net income.
The Bank uses the taxable equivalent basis to calculate net interest income, non-interest income and income taxes. This calculation method consists of grossing up certain tax-exempt
income (particularly dividends) by the income tax that would have been otherwise payable. An equivalent amount is added to income taxes. This adjustment is necessary in order to perform
a uniform comparison of the return on different assets regardless of their tax treatment.
During the year ended October 31, 2016, the Bank had recorded $9 million in financing costs ($6 million net of income taxes) related to holding restructured notes.
(1)
(2)
(3)
10
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL REPORTING METHOD
(4)
(5)
(6)
(7)
(8)
(9)
During the year ended October 31, 2017, the Bank recorded an amount of $9 million ($7 million net of income taxes) for its share in the integration costs incurred by Fiera Capital
Corporation (Fiera Capital) and an amount of $2 million ($2 million net of income taxes) for its share in the integration costs arising from its equity interest in TMX Group Limited (TMX). For
the year ended October 31, 2016, the total amount of these costs had been $31 million ($24 million net of income taxes) and notably included the Bank’s share in goodwill and intangible
asset impairment losses related to its equity interest in TMX for an amount of $18 million ($13 million net of income taxes).
During the year ended October 31, 2016, the Bank had written off its equity interest in associate Maple Financial Group Inc. (Maple) in an amount of $164 million ($145 million net of income
taxes) following the February 6, 2016 event described in the Analysis of the Consolidated Balance Sheet section on page 38 of this MD&A.
During the year ended October 31, 2017, the Bank recorded $19 million in charges ($16 million net of income taxes) related to the Wealth Management acquisitions (2016: $22 million,
$18 million net of income taxes). These charges consisted mostly of retention bonuses and the amortization of intangible assets.
During the year ended October 31, 2016, the Bank had recorded a restructuring charge of $131 million ($96 million net of income taxes). This charge consisted mostly of severance pay.
During the year ended October 31, 2016, the Bank had recorded $44 million ($32 million net of income taxes) in intangible asset impairment losses on internally developed software.
During the year ended October 31, 2016, the Bank had recorded $25 million in litigation charges ($18 million net of income taxes) related to resolving litigation and other disputes arising
from claims, both ongoing and potential, made against the Bank.
(10) During the year ended October 31, 2016, an $18 million tax provision had been recorded to reflect the impact of substantively enacted changes to tax measures.
(11) For the year ended October 31, 2016, the specified items had included a premium of $3 million, or $0.01 per share, on the redemption of the Series 20 preferred shares for cancellation.
Like many other financial institutions, the Bank uses the taxable
equivalent basis to calculate net interest income, non-interest income and
income taxes. This calculation method consists of grossing up certain tax-
exempt income (particularly dividends) by the income tax that would have
been otherwise payable. An equivalent amount is added to income taxes.
This adjustment is necessary in order to perform a uniform comparison of the
return on different assets regardless of their tax treatment.
Non-GAAP Financial Measures
The Bank uses a number of financial measures when assessing its results
and measuring its overall performance. Some of these financial measures
are not calculated in accordance with GAAP, which are based on IFRS.
Presenting non-GAAP financial measures helps readers to better understand
how management analyzes results, shows the impacts of specified items on
the results of the reported periods, and allows readers to assess results
without the specified items if they consider such items not to be reflective of
the underlying performance of the Bank’s operations. Securities regulators
require companies to caution readers that non-GAAP measures do not have a
standardized meaning under GAAP and therefore may not be comparable to
similar measures used by other companies.
In addition to the specified items, in fiscal 2016 the Bank had recorded
a sectoral provision of $250 million ($183 million net of income taxes) on
non-impaired loans in the oil and gas producer and service company
portfolio, reporting it in the Personal and Commercial segment. During fiscal
2017, the Bank reversed this sectoral provision by $40 million ($29 million
net of income taxes). Given the materiality of the sectoral provision
recognized and presented in accordance with GAAP, it has been excluded
from certain analyses in this MD&A.
11
11
National Bank of Canada2017 Annual Report
Changes to Internal Controls
Over Financial Reporting
The CEO and CFO also undertook work whereby they were able to conclude
that, during the year ended October 31, 2017, no changes were made to the
ICFR that have materially affected, or are reasonably likely to materially
affect, the design or operation of the ICFR.
Disclosure Committee
The Disclosure Committee assists the CEO and CFO by ensuring that
disclosure controls and procedures and internal control procedures for
financial reporting are implemented and operational. In so doing, the
Committee ensures that the Bank is meeting its disclosure obligations under
current regulations and that the CEO and CFO are producing the requisite
certifications.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL DISCLOSURE
Disclosure Controls
and Procedures
The Bank’s financial information is prepared with the support of a set of
disclosure controls and procedures (DC&P) that are implemented by the
President and Chief Executive Officer (CEO) and by the Chief Financial Officer
(CFO) and Executive Vice-President of Finance and Treasury. During the year
ended October 31, 2017, in accordance with Regulation 52-109 Respecting
Certification of Disclosure in Issuers’ Annual and Interim Filings
(Regulation 52-109), released by the CSA, the design and operation of these
controls and procedures were evaluated to determine their effectiveness.
As at October 31, 2017, the CEO and the CFO confirmed the
effectiveness of the DC&P. These controls are designed to provide
reasonable assurance that the information disclosed in annual and interim
filings and in other reports filed or submitted under securities legislation is
recorded, processed, summarized and reported within the time periods
specified by that legislation. These controls and procedures are also
designed to ensure that such information is accumulated and communicated
to the Bank’s management, including its signing officers, as appropriate, to
allow for timely decisions regarding disclosure.
This Annual Report was reviewed by the Disclosure Committee, the
Audit Committee, and the Bank’s Board of Directors (the Board), which
approved it prior to publication.
Internal Controls Over
Financial Reporting
The internal controls over financial reporting (ICFR) are designed to provide
reasonable assurance that the financial information presented is reliable and
that the consolidated financial statements were prepared in accordance with
GAAP, which are based on IFRS, unless indicated otherwise as explained on
page 10 of this MD&A. Due to inherent limitations, ICFR may not prevent or
detect all misstatements in a timely manner.
The CEO and the CFO oversaw the evaluation work performed on the
design and operation of
in accordance with
the Bank’s
Regulation 52-109. These controls were evaluated in accordance with the
control framework of the Committee of Sponsoring Organizations of the
Treadway Commission (COSO — 2013) for financial controls and in
accordance with the control framework of the Control Objectives for
Information and Related Technologies (COBIT) for general information
technology controls.
ICFR
Based on the evaluation results, the CEO and CFO concluded, as at
October 31, 2017, that there are no material weaknesses, that the ICFR are
effective and provide reasonable assurance that the financial reporting is
reliable, and that the Bank’s consolidated financial statements were
prepared in accordance with GAAP.
12
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
Highlights
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Net income
Net income attributable to the Bank’s shareholders
Return on common shareholders’ equity
Dividend payout ratio(1)
Earnings per share
Basic
Diluted
Operating results on a taxable equivalent basis
and excluding specified items(2)
Total revenues on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Return on common shareholders’ equity excluding specified items
Dividend payout ratio excluding specified items(1)
Efficiency ratio on a taxable equivalent basis and excluding specified items
Earnings per share excluding specified items(2)
Basic
Diluted
Common share information
Dividends declared
Book value
Share price
High
Low
Close
Number of common shares (thousands)
Market capitalization
Balance sheet and off-balance-sheet
Total assets
Loans and acceptances, net of allowances
Impaired loans, net of total allowances
As a % of average loans and acceptances
Deposits(3)
Equity attributable to common shareholders
Assets under administration and under management
Earnings coverage
Regulatory ratios under Basel III
Capital ratios(4)
Common Equity Tier 1 (CET1)
Tier 1(5)
Total(5)(6)
Leverage ratio(4)
Liquidity coverage ratio (LCR)
Other Information
Number of employees - Worldwide
Number of branches in Canada
Number of banking machines in Canada
2017
2016
2015
2017-16
% change
6,609
2,024
1,940
18.1 %
42 %
5,840
1,256
1,181
11.7 %
66 %
5,746
1,619
1,549
16.9 %
45 %
$
5.44
5.38
$
3.31
3.29
$
4.56
4.51
6,864
2,049
18.3 %
41 %
55.9 %
$
$
5.52
5.45
2.28
31.51
$
$
62.74
46.83
62.61
339,592
21,262
245,827
134,443
(339)
(0.3) %
156,671
10,700
477,358
13.61
11.2 %
14.9 %
15.1 %
4.0 %
132 %
21,635
429
931
6,279
1,613
15.5 %
50 %
58.2 %
4.38
4.35
$
2.18
28.52
$
47.88
35.83
47.88
338,053
16,186
232,206
126,178
(289)
(0.2) %
142,066
9,642
397,342
7.84
5,982
1,682
17.6 %
43 %
58.6 %
4.75
4.70
2.04
28.26
55.06
40.75
43.31
337,236
14,606
216,090
115,238
(112)
(0.1) %
130,458
9,531
357,793
10.49
10.1 %
13.5 %
15.3 %
3.7 %
134 %
9.9 %
12.5 %
14.0 %
3.7 %
131 %
21,770
450
938
20,189
452
930
13
61
64
64
64
9
27
26
25
6
7
10
11
20
(1)
(5)
(1)
(1)
(2)
(3)
(4)
(5)
(6)
Last four quarters.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
The amounts of $2.2 billion and $1.6 billion classified in Due to clients, dealers and brokers on the Consolidated Balance Sheets as at October 31, 2016 and 2015, respectively, are now
reported in Deposits.
The ratios are calculated using the “all-in” methodology.
Ratios as at October 31, 2017 include the redemption of the Series 28 preferred shares on November 15, 2017, and the ratios as at October 31, 2015 include the redemption of the
Series 20 preferred shares on November 15, 2015.
The ratio as at October 31, 2015 includes the $500 million redemption of medium-term notes on November 2, 2015.
13
13
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
About National Bank
Annual Dividend(1)
The Bank carries out its activities in four business segments, Personal and
Commercial, Wealth Management, Financial Markets, and U.S. Specialty
Finance and International. For presentation purposes, other activities are
reported in the Other heading of the business segment results. Each
reportable segment is distinguished by services offered, type of clientele and
marketing strategy. Additional information is provided in the Business
Segment Analysis section of this MD&A.
17
2017
2016
2015
2014
2013
$2.28
$2.18
$2.04
$1.88
$1.70
2017 Objectives and Results
When the Bank sets its medium-term objectives, it does not take specified
items(1) into consideration, as they are inherently unpredictable or non-
recurring. Management therefore excludes specified items when assessing
the Bank’s performance against its objectives.
In fiscal 2017, the Bank recorded $2,024 million in net income
compared to $1,256 million in fiscal 2016. Its 2017 diluted earnings per
share stood at $5.38 versus $3.29 in 2016, and its 2017 return on common
shareholders’ equity (ROE) was 18.1% in 2017 versus 11.7% in 2016. Net
income excluding specified items totalled $2,049 million in fiscal 2017, up
27%, and diluted earnings per share excluding specified items stood at
$5.45, up 25% from $4.35. Furthermore, ROE excluding specified items was
18.3% in 2017 versus 15.5% in 2016.
In 2017, the Bank met all of its medium-term objectives, even largely
exceeding its growth target for diluted earnings per share excluding
specified items. It did so thanks to steady net income growth across all its
business segments and also due to the fact that, in 2016, a sectoral
provision for credit losses had been recorded for oil and gas producers and
service companies.
2017 Medium-Term Objectives and Results
Medium-term
objectives
(%)
2017
results
(%)
Growth in diluted earnings per share
excluding specified items(1)
ROE excluding specified items(1)
Dividend payout ratio excluding specified items(1)
CET1 capital ratio
Leverage ratio
5-10
15-20
40-50
> 10.0
> 3.5
25
18.3
41
11.2
4.0
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
(1) The figures for fiscal years 2014 and 2013 have been adjusted to reflect the stock
dividend paid in 2014.
i.e., above
Regulatory Ratios
As at October 31, 2017, the Bank’s CET1, Tier 1 and Total capital ratios were,
respectively, 11.2%, 14.9% and 15.1%,
the regulatory
requirements, compared to ratios of, respectively, 10.1%, 13.5% and 15.3%
a year earlier. The increase in the CET1 capital ratio stems essentially from
net income, net of dividends, common share issuances under the Stock
Option Plan, remeasurements of pension plans and other post-employment
benefit plans, and low growth in risk-weighted assets, partly offset by the
common share repurchases during the year ended October 31, 2017. The
increase in the Tier 1 capital ratio stems essentially from the same items as
well as from the June 13, 2017 issuance of preferred shares for $400 million,
partly offset by the $200 million redemption of preferred shares on
November 15, 2017, which is already excluded from capital ratio calculations
as at October 31, 2017. The decrease in the Total capital ratio is a result of
the April 11, 2017 redemption of $1.0 billion in medium-term notes maturing
on April 11, 2022. The leverage ratio as at October 31, 2017 was 4.0%
compared to 3.7% as at October 31, 2016.
Evolution of Regulatory Ratios Under Basel III(1)
Q4 2017(2)
Q3 2017
Q2 2017
Q1 2017
Q4 2016
%
1
.
5
1
%
9
.
4
1
%
5
.
5
1
%
2
.
5
1
%
5
.
4
1
%
2
.
4
1
%
9
.
5
1
%
1
.
4
1
%
2
.
1
1
%
2
.
1
1
%
8
.
0
1
%
6
.
0
1
%
3
.
5
1
%
5
.
3
1
%
1
.
0
1
Dividends
For fiscal 2017, the Bank declared $778 million in dividends to common
shareholders
income
attributable
(2016: 66%). These dividends
represented 41% of net income attributable to common shareholders
excluding specified items (2016: 50%).
representing 42% of net
to common shareholders
(2016: $736 million),
%
0
.
4
%
0
.
4
%
8
.
3
%
8
.
3
%
7
.
3
CET1
Tier 1
Total
Leverage ratio
(1) The ratios are calculated using the “all-in” methodology.
(2) The Tier 1 capital ratio and the Total capital ratio include the redemption of the Series 28
preferred shares on November 15, 2017.
14
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
High Quality Loan Portfolio
For fiscal 2017, the Bank recorded $244 million in provisions for credit
losses, $240 million less than the provisions recorded for fiscal 2016.
Essentially, the lower credit loss provisions are related to the sectoral
provision on non-impaired loans recorded for the oil and gas producer and
service company loan portfolio, which was reversed by $40 million in fiscal
2017 compared to the $250 million recording of this provision in fiscal 2016.
Also, at $43 million, the provisions for credit losses on Commercial Banking
loans were down $30 million in fiscal 2017. Both of these decreases were
partly offset by a $40 million increase in the collective allowance for credit
risk on non-impaired loans recorded to reflect growth in the Bank’s overall
credit portfolio and by a $44 million increase in the provisions for credit
losses recorded for loans in the U.S. Specialty Finance and International
segment and that is essentially attributable to the Credigy subsidiary. The
2017 provisions for credit losses on impaired loans represented 0.19% of
average loans and acceptances, unchanged from fiscal 2016. In addition,
impaired loans, net of total allowances, were down $50 million compared to
last year given a decline in net impaired loans in the personal and
commercial loan portfolios and a $40 million increase in the collective
allowance on non-impaired loans, offset by a lower sectoral allowance on
non-impaired loans.
Risk Profile
(millions of Canadian dollars)
Provisions for credit losses(1)
Provisions for credit losses on impaired loans
as a % of average loans and acceptances
Net impaired loans
Gross impaired loans as a %
of tangible capital adjusted for allowances
Individual and collective allowances
as a % of impaired loans
Sectoral allowance on
non-impaired loans – Oil and gas(1)
Collective allowance on
non-impaired loans(1)
Impaired loans, net of total allowances
2017
244
2016
484
0.19 %
206
0.19 %
281
4.3 %
6.3 %
45.8 %
42.9 %
139
406
(339)
204
366
(289)
(1)
During fiscal 2017, the Bank reversed, by $40 million, the sectoral provision on non-
impaired loans for the oil and gas producer and service company loan portfolio. In
addition, the 2017 provisions for credit losses include a $40 million increase in the
collective allowance for credit risk on non-impaired loans. For the year ended
October 31, 2016, the provisions for credit losses had included the $250 million
recording of the sectoral provision.
Breakdown of the Average Loan and Acceptance Portfolio(1)
As at October 31, 2017
25%
8%
10%
5%
52%
Personal (2016: 52%)
Commercial (2016: 26%)
Wealth Management (2016: 8%)
Corporate (2016: 11%)
U.S. Specialty Finance and International (2016: 3%)
(1)
Excluding loans and acceptances in the Other heading.
Business Loans and Acceptances by Borrower Category
As at October 31
Agriculture
Oil and gas
Mining
Construction and real estate
Manufacturing
Wholesale and retail
Transportation
Telecommunications, media and technology
Financial institutions
Services
Governments and other related services
2017
%
2016
%
9.6
4.2
0.9
23.2
8.5
10.7
5.1
3.3
9.6
12.1
12.8
9.8
4.5
1.2
23.0
7.7
10.6
6.5
3.4
8.3
12.9
12.1
15
15
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
Outlook for National Bank
An essential component of the Bank’s strategy is to ensure business
diversification by supporting growth in its four business segments—Personal
and Commercial, Wealth Management, Financial Markets, and U.S. Specialty
Finance and International. Through acquisitions, strategic partnerships and
organic growth, the Wealth Management and Financial Markets segments
have expanded through the years and now generate close to half of the
Bank’s total revenues and more than half of its net income. Personal and
Commercial Banking, the Bank’s largest segment, continues to deliver steady
revenue and earnings growth. As for the U.S. Specialty Finance and
International segment, it is experiencing substantial revenue and net income
growth.
While prioritizing growth in its four main business segments, the Bank
also focuses on expanding its presence across Canada while continuing to
maintain its leadership position in Quebec. The Financial Markets segment is
well-positioned nationally and derives most of its revenues outside Quebec.
The Wealth Management segment has established a national presence
through its investment advisor channel, its business relationships with
independent advisors, and its partnerships and now enjoys a wide
distribution reach and consistent revenue growth outside Quebec. The
Personal and Commercial segment is largely based in central Canada and
has a strong presence in other select markets in Canada as well as a large-
scale digital presence nationally.
To complement its Canadian operations, the Bank continues to develop
international business in specialty consumer finance through its Credigy
subsidiary, and its ABA Bank subsidiary continues to achieve growth through
a diversified client base in Cambodia. During fiscal 2017, the Bank extended
its moratorium on major investments in emerging markets in order to
consolidate its existing operations. The Bank’s objective is to derive
approximately 10% of its net income from international operations in the
coming years.
Geographic Distribution of Total Revenues
Year ended October 31, 2017
(taxable equivalent basis)(1)
11%
30%
59%
Quebec (2016: 60%)
Other provinces (2016: 34%)
International (2016: 6%)
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
Business Mix(1)
Year ended October 31, 2017
(taxable equivalent basis)(2)
Personal and
Commercial
Wealth
Management
Financial
Markets
U.S. Specialty
Finance and
International
%
9
.
3
4
%
8
.
1
3
%
8
.
3
2
%
9
.
7
%
2
.
8
%
2
.
9
%
8
.
4
4
%
4
.
1
4
%
7
.
4
3
Total revenues
Net income
Economic capital
%
5
.
3
2
%
6
.
8
1
%
2
.
2
1
(1)
(2)
Excluding the Other heading.
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
16
National Bank of Canada2017 Annual Report
Quebec’s economy should expand by 2.0% in 2018, following 2.5% this
year. This significantly exceeds its potential growth rate estimated at 1.0%.
The province is at full employment, and in the third quarter posted its lowest
unemployment rate on record (1976), at 6.0%, and a record participation rate
of 75% for people aged 15 to 64. Small business and consumer confidence is
among the highest in Canada, a development fostered not only by a
favourable cyclical backdrop but also by healthy public finances, which
allows for the implementation of sound fiscal policies aimed at improving
Quebec’s long-term economic growth. Domestic demand continues to drive
the province’s growth, with Montreal accounting for most of the job creation
due to immigration.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OVERVIEW
Major Economic Trends
Global Economy
The world economy is sending comforting signals with the major regions
contributing synchronously to growth. Global consumer confidence is at a
cyclical high, stimulated by continuously improving labour markets, a
generalized wealth effect (real estate, financial markets) and low energy
prices. Inflation remains weak, which is allowing central banks to gradually
reduce their accommodative monetary policy. Very good financial conditions
lend well to a global rebound in business investment.
Global GDP should grow at its fastest pace since 2011 at an expected
rate of 3.7% in 2018 (3.6% in 2017). However, many unknowns loom over
the geopolitical situation, notably developments in North Korea and Iran. The
rise in commercial protectionism is also a preoccupying phenomenon on the
horizon for 2018.
United States
The U.S. economy remains on track to grow roughly 2.2% in 2017 thanks in
part to strong performances in the second and third quarters. Reconstruction
efforts to address hurricane-related damage will help drive growth in the
fourth quarter. The solid labour market is fueling consumer confidence and
hence spending. And assuming the debt-ceiling is raised come December
and fiscal stimulus is deployed ahead of mid-term congressional elections,
another year of above-potential growth can be expected in 2018 (2.4%).
As such, the Bank believes the U.S. Federal Reserve will tighten
monetary policy by raising rates in December and twice in 2018.
Canada
Canada’s economy remains on track to grow about 3.0% in 2017, well above
the consensus expectations among economists at the beginning of the year.
Consumption spending has been the major driver of growth this year,
benefiting from a confluence of favourable developments, including the best
labour market in years, family benefits, low interest rates, and the wealth
effects associated with surging home prices. If the Bank is correctly gauging
upcoming fiscal stimulus in a pre-electoral context in Quebec, Ontario and
possibly British Columbia, 2018 growth will also be strong at 2.5%. So, while
the Bank of Canada does not seem inclined to raise rates soon, strong data
may eventually force its hand early next year. A less accommodative
monetary policy combined with tighter mortgage requirements should cool
the residential real estate market, especially in Vancouver and Toronto. The
Montreal market is less vulnerable in this respect since housing affordability
remains reasonable.
17
17
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL ANALYSIS
Consolidated Results
Year ended October 31
(millions of Canadian dollars)
Operating results
Net interest income(1)
Non-interest income(1)
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses(2)
Income before income taxes
Income taxes
Net income
Diluted earnings per share (dollars)
Taxable equivalent(3)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
Specified items(3)
Items related to holding restructured notes
Acquisition-related items
Restructuring charge
Impairment losses on intangible assets
Litigation charges
Write-off of an equity interest in an associate
Gain on disposal of Fiera Capital shares
Share of current tax asset write-down of an associate
Specified items before income taxes
Income taxes on specified items(4)
Specified items after income taxes
Operating results on a taxable equivalent basis and
excluding specified items(3)
Net interest income on a taxable equivalent basis
and excluding specified items(1)
Non-interest income on a taxable equivalent basis
and excluding specified items(1)
Total revenues on a taxable equivalent basis and excluding specified items
Non-interest expenses excluding specified items
Contribution on a taxable equivalent basis and excluding specified items
Provisions for credit losses(2)
Income before income taxes on a taxable equivalent basis and excluding specified items
Income taxes on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Diluted earnings per share excluding specified items (dollars) (5)
2017
2016
2015
3,232
3,377
6,609
3,857
2,752
244
2,508
484
2,024
5.38
209
35
244
−
−
(30)
−
−
−
−
−
−
(30)
(5)
(25)
3,441
3,423
6,864
3,838
3,026
244
2,782
733
2,049
5.45
2,992
2,848
5,840
3,875
1,965
484
1,481
225
1,256
3.29
231
4
235
−
(9)
(53)
(131)
(44)
(25)
(164)
−
−
(426)
(69)
(357)
3,232
3,047
6,279
3,653
2,626
484
2,142
529
1,613
4.35
2,717
3,029
5,746
3,665
2,081
228
1,853
234
1,619
4.51
311
−
311
−
70
(34)
(86)
(46)
−
−
29
(18)
(85)
(22)
(63)
3,048
2,934
5,982
3,505
2,477
228
2,249
567
1,682
4.70
Average assets
Average loans and acceptances
Impaired loans, net of total allowances
Average deposits(6)
Efficiency ratio on a taxable equivalent basis and excluding specified items(3)
248,351
129,150
(339)
154,254
235,913
121,013
(289)
142,852
222,929
108,740
(112)
129,468
55.9 %
58.2 %
58.6 %
2017-16
% change
8
19
13
−
40
(50)
69
115
61
64
6
12
9
5
15
(50)
30
39
27
25
5
7
8
(1)
The Bank reclassified certain amounts in the Consolidated Statement of Income to better reflect the nature of the income reported in the Personal and Commercial segment. As a result, for
the years ended October 31, 2016 and 2015, certain Non-interest income items were reclassified to Net interest income. This reclassification had no impact on Net income.
18
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL ANALYSIS
(2)
(3)
(4)
(5)
(6)
During the year ended October 31, 2017, the Bank reversed, by $40 million, the sectoral provision on non-impaired loans recorded in 2016 for the oil and gas producer and service company
loan portfolio. The 2017 provisions for credit losses also included an amount of $40 million to reflect an increase in the collective allowance for credit risk on non-impaired loans. For 2016,
the provisions for credit losses had included a $250 million sectoral provision on non-impaired loans recorded for the oil and gas producer and service company loan portfolio.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
For the year ended October 31, 2016, the income taxes on specified items had included an $18 million tax provision recorded to reflect the impact of substantively enacted changes to tax
measures.
For the year ended October 31, 2016, the specified items had included a premium of $3 million, or $0.01 per share, on the redemption of the Series 20 preferred shares for cancellation.
On November 1, 2016, the Bank had changed the presentation of certain items on the Consolidated Balance Sheet, and prior year figures were adjusted to reflect those modifications.
Analysis of Consolidated Results
Financial Results
For fiscal 2017, the Bank’s net income totalled $2,024 million compared to
$1,256 million in fiscal 2016, a substantial increase owing to net income
growth across all the business segments as well as to the fact that, in 2016,
a sectoral provision of $183 million, net of income taxes, had been recorded
for oil and gas producers and service companies. In addition, a greater
amount of unfavourable specified items had been recorded in fiscal 2016. In
2017, the specified items, net of income taxes, reduced net income by
$25 million, whereas, in 2016, the specified items had reduced net income
by $357 million. In 2016, these items, net of income taxes, had included a
$145 million write-off of the Bank’s equity interest in associate Maple, a
$96 million restructuring charge, $32 million in intangible asset impairment
losses, and $18 million in litigation charges. For fiscal 2017, the Bank’s net
income excluding specified items totalled $2,049 million, up 27% from
$1,613 million in fiscal 2016.
Total Revenues
The Bank’s total revenues on a taxable equivalent basis(1) amounted to
$6,853 million in fiscal 2017, a $778 million year-over-year increase
(Table 2, page 98) driven by revenue growth across all of the Bank’s business
segments. The 2017 total revenues on a taxable equivalent basis and
excluding specified items were up $585 million or 9% year over year. For
both 2017 and 2016, the specified items included acquisition-related items,
in particular the Bank’s share in the goodwill and intangible asset
impairment losses arising from its equity interest in TMX in 2016. In 2016,
the specified items had also included the Bank’s write-off of its equity
interest in associate Maple as well as items related to holding restructured
notes.
Net Interest Income
For fiscal 2017, the Bank’s net interest income on a taxable equivalent basis
totalled $3,441 million, rising $218 million from $3,223 million in fiscal
2016 (Table 3, page 98). In the Personal and Commercial segment, the 2017
net interest income totalled $2,071 million, a $116 million or 6% year-over-
year increase driven by growth in average loan and deposit volumes, which
rose 4% and 12%, respectively. The loan growth came mainly from
residential mortgages and home equity lines of credit. Another factor
contributing to the segment’s increase in net interest income was a higher
net interest margin, which was 2.26% in 2017 compared to 2.24% in 2016.
In the Wealth Management segment, the 2017 net interest income totalled
$431 million, a $59 million year-over-year increase owing to deposit growth
and improved margins. In the U.S. Speciality Finance and International
segment, net interest income was up $191 million year over year given
growth in the loan volumes of the Credigy subsidiary and the performance of
the ABA Bank subsidiary, whose results have been consolidated into the
Bank’s results since the third quarter of 2016 and that has experienced
sustained loan and deposit growth in 2017. As for the Financial Markets
segment, the 2017 net interest income was down $156 million year over
year, mainly due to trading activities, and should be examined together with
the other items of trading activity revenues. For the Other heading of
segment results, the 2017 net interest income posted a year-over-year
increase.
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
19
19
National Bank of Canada2017 Annual Report
Non-Interest Expenses
Non-interest expenses stood at $3,857 million in 2017 (Table 7, page 101),
an $18 million year-over-year decrease resulting in part from a $131 million
restructuring charge, consisting mainly of severance pay, that had been
recorded in fiscal 2016. Technology costs, including amortization, were down
in 2017, as $44 million in intangible asset impairment losses had been
recorded in 2016, partly offset by higher technology investment expenses in
2017. Professional fees stood at $254 million in 2017, a $22 million year-
over-year decrease related to servicing fees associated with the business
activities of the Credigy subsidiary. Security and theft expense was down
year over year, as $25 million in litigation charges had been recorded in
2016 upon resolution of litigation and other disputes arising from claims
made against the Bank. Other expenses were also down when compared to
2016. Compensation and employee benefits stood at $2,358 million, a 9%
year-over-year increase resulting from the higher variable compensation
associated with revenue growth and from the cost of pension plans. In
addition, the results of the ABA Bank subsidiary, which have been
consolidated into the Bank’s results since the third quarter of 2016, led to an
overall increase in non-interest expenses. For 2017, non-interest expenses
excluding specified items rose $185 million or 5% year over year.
Income Taxes
Detailed information about the Bank’s income taxes is provided in Note 25 to
the consolidated financial statements. For fiscal 2017, income taxes stood at
$484 million, for an effective tax rate of 19%, compared to $225 million and
an effective tax rate of 15% in 2016. This change in the effective tax rate
stems mainly from the tax impact of several items that had been recorded in
2016, particularly the sectoral provision on non-impaired loans recorded for
the oil and gas producer and service company
loan portfolio, the
restructuring charge, the gain realized following the revaluation of the
previously held equity interest in ABA Bank, and the write-off of the Bank’s
equity interest in associate Maple. Also during fiscal 2016, a tax provision
had been recorded to reflect the impact of changes to tax measures.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL ANALYSIS
Non-Interest Income
Non-interest income on a taxable equivalent basis totalled $3,412 million in
fiscal 2017 versus $2,852 million in fiscal 2016 (Table 4, page 99). The
trading revenues recorded in non-interest income amounted to $409 million
compared to $154 million in 2016. Including the portion recorded in net
interest income, trading activity revenues amounted to $1,006 million in
2017, a $109 million year-over-year increase (Table 5, page 99) attributable
to revenues from equity securities, fixed-income securities, and the other
segments, whereas revenues from commodities and foreign exchange
activities were down year over year.
As shown in Table 4 on page 99, the 2017 underwriting and advisory
fees were down $27 million year over year, with the 2017 securities
brokerage commissions decreasing 8% year over year given a migration of
assets from transactional accounts to fee-based accounts in recent years.
Mutual fund revenues and trust service revenues totalled $930 million, a
$113 million year-over-year increase resulting from growth in fee-based
revenues and in assets under administration.
Revenues from credit fees and card revenues rose 18% and 11%,
respectively, compared to 2016, whereas revenues from acceptances and
letters of credit and guarantee were down $5 million year over year, partly
due to a decline in lending activity with oil and gas companies. The net gains
on available-for-sale securities item rose $70 million year over year.
The 2017 deposit and payment service charges rose $21 million or 8%
year over year, essentially as a result of the ABA Bank subsidiary, whose
results have been consolidated into the Bank’s results since the third quarter
of 2016. Insurance revenues were up $3 million and other-than-trading
foreign exchange revenues remained stable compared to 2016. The share in
the net income of associates and joint ventures was up, as the Bank’s share
in its equity interest in TMX recorded in 2016 had included $18 million in
goodwill and intangible asset impairment losses. Other revenues amounted
to $363 million, a $96 million year-over-year increase that was mainly due to
the Bank’s $164 million write-off of its equity interest in associate Maple in
2016, partly offset by a $41 million non-taxable gain recorded in 2016 upon
the revaluation of the previously held equity interest in ABA Bank and by a
decrease in the Credigy revenues recorded as non-interest income in 2017.
Provisions for Credit Losses
For fiscal 2017, the Bank recorded $244 million in provisions for credit
losses, $240 million less than the provisions recorded for fiscal 2016
(Table 6, page 100). Essentially, the lower credit loss provisions are related
to the sectoral provision on non-impaired loans recorded for the oil and gas
producer and service company loan portfolio, which was reversed by
$40 million in fiscal 2017 compared to the $250 million recording of this
sectoral provision in fiscal 2016. Also, at $43 million, the provisions for
credit losses on Commercial Banking loans were down $30 million in fiscal
2017. Both of these decreases were partly offset by a $40 million increase in
the collective allowance for credit risk on non-impaired loans, which was
recorded to reflect growth in the Bank’s overall credit portfolio, and by a
$44 million increase in the provisions for credit losses recorded for loans in
the U.S. Specialty Finance and International segment that is essentially
attributable to the Credigy subsidiary. The 2017 provisions for credit losses
on impaired loans represented 0.19% of average loans and acceptances,
unchanged from fiscal 2016.
20
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | Personal and Commercial
OVERVIEW
The Personal and Commercial segment meets the financial needs of some 2.5 million individuals and more than 135,000 businesses across Canada. These
clients entrust the Bank to manage, invest and safeguard their assets and finance their projects. Personal Banking offers everyday transaction solutions,
mortgage loans, home equity lines of credit, consumer loans, payment solutions, savings options, and tailored investment solutions as well as a diverse range
of insurance products through specialized subsidiaries. Commercial Banking offers financial advice and a full line of services, including credit, deposit and
investment solutions, international trade, foreign exchange transactions, payroll, cash management, insurance, electronic transactions and complementary
services. Clients turn to the Bank’s experienced advisors who take the time to understand their specific needs and help them reach their financial goals. And
thanks to the Bank’s convenient self-banking channels, 429 branches and 931 banking machines across Canada, clients can do their daily banking whenever
and wherever they wish.
Economic and Market Review
In 2017, the Canadian economy grew steadily. Consumer spending was the main engine of growth, thanks to a convergence of several favourable factors such
as the best labour market performance in years, low interest rates, and the wealth effects associated with rising residential real estate prices. For 2018, growth
is expected to be equally steady, although it is important to remember the increased sensitivity of homeowners in certain major urban centres to potential
interest rate increases.
2017 Achievements and Highlights
Priorities and Outlook for 2018
—
—
—
To support business growth, raise efficiency and improve customer
experience, in fiscal 2017 the Bank invested selectively in its digital
strategy and deployed several initiatives. In fact, more than 25
enhancements and added features to its digital applications were
deployed for retail customers. In addition, the Bank launched its first
mobile application for businesses and rolled out a new fleet of ATMs
with enhanced functionality.
The Bank built strong momentum in the digital engagement of
customers, which translated into a 40% increase in active retail mobile
users in fiscal 2017.
Process automation and streamlining combined with a simplification of
product lines and investment solutions resulted in higher efficiency
compared to the previous year.
— Our client relationship management platform was enhanced to provide
employees with a richer client profile, thereby helping them offer
personalized and timely advice based on a client’s goals, current assets
and liabilities, and spending patterns.
— Over 90% of our client-facing employees and their supervisors
completed a skills certification initiative under our training program by
year-end. The goal of this distinctive program is to ensure that our
people can meet the changing expectations of our clients.
—
—
—
—
—
—
—
—
—
—
—
—
Continue investing in training and coaching to develop an elite and
agile workforce that will be a source of competitive advantage in the
age of digital banking.
Continue deploying initiatives that differentiate the Bank as a simple,
easy and fast partner for retail clients.
Focus on digital origination and straight-through processing for certain
key products.
Launch a new online portal to support our digital strategy.
Provide clients with a single point of access for all their data and allow
them to choose how they receive advice: digital self-service, remote
interaction through voice or chat, or in person at a branch or at their
chosen location.
Continue to simplify our product lines and automate processes.
Position the Bank as the simplest and fastest in terms of origination
and service in three major retail banking tripseveryday bank account
opening, home financing and payments.
Increase the use of client information and analytics to anticipate client
needs and reach out proactively with relevant solutions.
Continue transforming the branch network and self-banking channels in
line with the digital strategy while achieving an appropriate balance
between technology and a human touch.
Simplify the commercial banking offering and reduce processing time.
Increase the amount of time Commercial Banking account managers
spend with clients by reducing manual paperwork through automation.
Increase collaboration with other business units—Wealth Management,
Private Banking,
Insurance—to serve
entrepreneurs.
Financial Markets and
21
21
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | PERSONAL AND COMMERCIAL
Segment Results – Personal and Commercial
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses(2)
Income before income taxes
Income taxes
Net income
Net income excluding the impact of the sectoral provision(2)
Net interest margin(3)
Average interest-bearing assets
Average assets
Average loans and acceptances
Net impaired loans
Net impaired loans as a % of average loans and acceptances
Average deposits
Efficiency ratio
2017
2016(1)
2015(1)
2017-16
% change
2,071
990
3,061
1,646
1,415
153
1,262
337
925
896
2.26 %
91,461
96,261
95,888
199
0.2 %
54,302
53.8 %
1,955
945
2,900
1,662
1,238
475
763
206
557
740
2.24 %
87,153
92,234
91,882
275
0.3 %
48,436
57.3 %
1,860
967
2,827
1,630
1,197
225
972
261
711
711
2.28 %
81,430
86,977
86,583
249
0.3 %
44,585
57.7 %
6
5
6
(1)
14
(68)
65
64
66
21
5
4
4
(28)
12
(1)
(2)
(3)
For the years ended October 31, 2016 and 2015, certain amounts have been revised from those previously reported, including a reclassification between Non-interest income and Net
interest income to better reflect the nature of the income. In addition, the restructuring charge recognized in fiscal 2015, which had been allocated among all the Bank’s business segments,
has been combined into the Other heading to reflect the presentation adopted in fiscal 2016.
During the year ended October 31, 2017, the Bank recorded a $40 million reversal ($29 million net of income taxes) of the sectoral provision on non-impaired loans taken for the oil and gas
producer and service company loan portfolio in 2016. For the year ended October 31, 2016, the provisions for credit losses had included this sectoral provision of $250 million ($183 million
net of income taxes) on non-impaired loans recorded for the oil and gas producer and service company loan portfolio. Given the materiality of this sectoral provision, recorded in accordance
with GAAP, net income excluding the impact of the sectoral provision has been presented to provide a better assessment of the segment’s results. See the Financial Reporting Method
section on page 10 for additional information on non-GAAP financial measures.
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
Loan and Acceptance Volumes
(millions of Canadian dollars)
(% of year-over-year growth)
Deposit Volumes
(millions of Canadian dollars)
(% of year-over-year growth)
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
%
1
.
6
+
%
4
.
4
+
%
7
.
6
+
%
9
.
4
+
%
1
.
5
+
%
8
.
2
+
60,000
50,000
40,000
30,000
20,000
10,000
0
%
6
.
8
+
%
4
.
6
+
%
4
.
1
1
+
%
1
.
2
1
+
%
4
.
1
2
+
%
2
.
4
+
2015
2016
2017
2015
2016
2017
Total Personal and Commercial
Personal
Commercial
Total Personal and Commercial
Personal
Commercial
22
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | PERSONAL AND COMMERCIAL
Financial Results
Total Revenues by Category
Year ended October 31, 2017
In the Personal and Commercial segment, net income totalled $925 million in
fiscal 2017, up 66% from $557 million in 2016. This change is mainly related
to the sectoral provision on non-impaired loans for the oil and gas producer
and service company loan portfolio, which was reversed by $29 million, net
of income taxes, in 2017 compared to the $183 million, net of income taxes,
recording of this provision in 2016. Net income excluding the impact of the
sectoral provision totalled $896 million in 2017, up 21% year over year. The
segment’s total revenues rose $161 million or 6% year over year, as net
interest income grew $116 million while non-interest income was up
$45 million. The higher net interest income came primarily from growth in
personal and commercial loan and deposit volumes and from a higher net
interest margin, which was 2.26% in 2017 versus 2.24% in 2016.
The segment’s 2017 non-interest expenses stood at $1,646 million, a
1% year-over-year decrease resulting mainly from lower compensation and
employee benefits (related to the transformation plan adopted by the Bank to
improve operational efficiency) as well as from lower communications costs
and operations support charges. These decreases were partly offset by
higher technology expenses related to business development. Given these
results, the segment’s 2017 contribution increased 14% year over year.
Furthermore, at 53.8%, the 2017 efficiency ratio improved by 3.5 percentage
points from 57.3% in 2016 and from 57.7% in 2015.
For 2017, the segment recorded $153 million in provisions for credit
losses, $322 million less than the $475 million recorded in 2016. This
decrease is essentially related to the impact of the sectoral provision, which
was reversed by $40 million in 2017 compared to the $250 million recording
of this provision in 2016. Also contributing to this decrease were lower
provisions for credit losses recorded for commercial loans.
Personal Banking
For fiscal 2017, Personal Banking’s revenues amounted to $1,942 million
compared to $1,840 million in fiscal 2016, a 6% year-over-year increase
driven mainly by a 5% increase in loan volume (primarily mortgage credit and
the credit card balance outstanding) and a 4% increase in deposit volume.
The 2017 non-interest income was up $47 million year over year, essentially
due to increases in revenues from deposit and payment services charges,
card revenues, internal commission revenues generated by the distribution
of Wealth Management products as well as from higher insurance revenues,
which in 2017 included a gain realized following a change to the distribution
model for property and casualty insurance. At the same time, the 2017 non-
interest expenses were down $10 million year over year, mainly due to lower
compensation and employee benefits and to lower communications costs
and operations support charges, partly offset by higher technology
expenses.
Commercial Banking
For fiscal 2017, Commercial Banking’s revenues amounted to $1,119 million,
rising 6% from $1,060 million in fiscal 2016. Net interest income was up,
driven essentially by growth in loan and deposit volumes of 3% and 21%,
respectively, and by a higher net interest margin. Non-interest income was
down $2 million as a result of lower revenues from bankers’ acceptances due
to a decline in lending activity with oil and gas companies, partly offset by
higher credit fee revenues and revenues from foreign exchange activities.
Non-interest expenses were down $6 million, mainly due to
lower
compensation and employee benefits and lower technology costs.
13%
4%
36%
47%
Personal Banking (2016: 47%)
Commercial Banking (2016: 37%)
Payment Solutions (2016: 12%)
Insurance (2016: 4%)
Quarterly Results
(millions of Canadian dollars)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
7
8
7
5
8
7
4
3
7
5
5
7
1
1
4
3
1
4
0
1
4
2
1
4
9
3
2
0
4
2
3
3
2
3
1
2
Total revenues
Non-interest expenses
Net income
23
23
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | Wealth Management
OVERVIEW
The Wealth Management segment believes that the strength of client relationships is—and will remain—the key factor in its success. Therefore, this segment
focuses on hiring and retaining advisors and support staff with a passion for providing outstanding client experience and on providing category-leading
products and services.
Wealth Management leverages internal and third-party distribution channels as well as its product manufacturers to maintain leadership in Quebec and to
continue growing its market share across Canada. The segment is differentiated by its unique business model and a culture that features a high degree of
professionalism.
Economic and Market Review
Global economic expansion continued to advance during the year, as industrial production grew rapidly. The rise in various indicators bolstered investor
confidence, which partly explains why the market index calculated by Morgan Stanley Capital International (MSCI World) peaked. The S&P/TSX Index also
staged a strong comeback at the end of the year. In this context, there was strong growth in revenues, particularly from fee-based services, in accordance with
the business strategies put in place. For 2018, the role of advisory services will make it possible to anticipate continued business growth based on various
scenarios for potential market changes.
2017 Achievements and Highlights
—
—
—
The Bank launched the myWEALTH unified solution for clients seeking a
complete discretionary platform tailored to their precise needs.
Assets under management on the myWEALTH platform increased to
$32.6 billion, driven by an ongoing migration of clients to fee-based
services. The Bank’s
investment advisors provide personalized
investment management advice for negotiated annual fees adapted to
client needs.
Through a commercial agreement with Nest Wealth, a Canadian
financial technology company, the Bank has added complementary
digital tools to help its investment advisors improve service and further
deepen client relationships.
—
— Ottawa and Halifax became the latest Wealth Management offices to
offer clients retail banking services, including credit and transactional
services. Personal banking personnel are now embedded in eight
Wealth Management offices across Canada, providing greater
convenience for clients and increasing internal efficiency.
The Private Wealth 1859 division continued to expand its affluent client
base across the country. During the year, the division deployed state-of-
the-art productivity and client relationship management tools to sustain
its growth and reputation for stellar service.
investment management subsidiary, National Bank
The Bank’s
Investments Inc. (NBI), simplified and optimized its mutual fund offering
through fund mergers, closings, and modifications while delivering
benefits to both investors and the financial advisors offering the funds.
As the only major Canadian bank to delegate all portfolio management
of its investment funds to external firms, the Bank continued to
introduce innovative investment solutions on our open architecture
platform, including the new NBI Unconstrained Fixed Income Fund,
managed by Bill Gross, a portfolio manager at Janus Capital Group, Inc.
—
—
—
National Bank Independent Network (NBIN), previously named National
Bank Correspondent Network, which provides state-of-the-art trade
execution and custody services to independent investment advisors and
portfolio management firms, onboarded one of its largest clients to
date, adding some $23.0 billion in assets under administration. NBIN’s
assets under administration stood at $168.7 billion at fiscal year-end.
Priorities and Outlook for 2018
—
—
—
—
Through a coordinated strategy with other Bank units, grow the Bank’s
share of savings in Quebec to become the market leader.
Support business growth outside Quebec by offering credit and other
banking services in additional Wealth Management offices as well as in
the offices of financial partners who already offer the Bank’s retail
banking services to their clients on a white-label basis.
Leverage the Bank’s open architecture model to launch new investment
solutions that are relevant to individual investors by partnering with the
world’s best-performing investment management firms.
Expand NBIN’s market share with independent investment advisors and
portfolio management firms by providing efficient clearing and back-
office services through our unique Web platform, thereby helping them
increase efficiency while maintaining compliance with mounting
regulatory requirements.
— Maintain full compliance with new regulatory requirements for point-of-
forms of
regarding commissions, other
sale client disclosure
compensation, and investment performance.
24
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | WEALTH MANAGEMENT
Segment Results – Wealth Management
Year ended October 31
(millions of Canadian dollars)
Net interest income
Fee-based revenues
Transaction and other revenues
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Specified items after income taxes(2)
Net income excluding specified items(2)
Average assets
Average loans and acceptances
Net impaired loans
Average deposits
Efficiency ratio excluding specified items(2)
2017
2016(1)
2015(1)
2017-16
% change
431
906
267
1,604
1,036
568
3
565
149
416
23
439
11,652
9,924
4
31,192
372
803
266
1,441
999
442
5
437
116
321
26
347
11,006
9,379
5
28,344
323
761
335
1,419
983
436
3
433
110
323
(1)
322
10,388
8,772
5
24,895
63.1 %
67.3 %
68.6 %
16
13
−
11
4
29
(40)
29
28
30
27
6
6
10
(1)
(2)
For the years ended October 31, 2016 and 2015, certain amounts have been revised from those previously reported. In addition, the restructuring charge recognized in fiscal 2015, which
had been allocated among all the Bank’s business segments, has been combined into the Other heading to reflect the presentation adopted in fiscal 2016.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
Assets Under Administration or Under Management – Wealth Management
As at October 31
(millions of Canadian dollars)
Assets under administration
Assets under management
Individual
Mutual funds
Assets under administration and under management
2017
2016(1)
2015(1)
411,817
341,047
308,396
33,349
32,192
65,541
477,358
27,589
28,706
56,295
397,342
23,614
25,783
49,397
357,793
2017-16
% change
21
21
12
16
20
(1)
For the years ended October 31, 2016 and 2015, certain amounts have been revised from those previously reported.
25
25
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | WEALTH MANAGEMENT
Financial Results
Total Revenues by Category
Year ended October 31, 2017
In the Wealth Management segment, net income totalled $416 million in
fiscal 2017, up $95 million or 30% from $321 million in fiscal 2016. Net
income excluding specified items (with the specified items including the
acquisition-related charges of recent years) totalled $439 million for fiscal
2017, up $92 million or 27% from $347 million in 2016.
The segment’s total revenues amounted to $1,604 million in fiscal 2017
compared to $1,441 million in fiscal 2016, a $163 million year-over-year
increase driven mainly by 16% growth in net interest income, attributable to
deposit growth and improved margins, as well as by 13% growth in fee-
based revenues given net inflows across all solutions and a steady rise in
stock market performance during fiscal 2017. Transaction-based and other
revenues, particularly brokerage commissions on share and bond
transactions, remained essentially unchanged from 2016.
The segment’s non-interest expenses stood at $1,036 million in fiscal
2017 compared to $999 million in fiscal 2016, a 4% year-over-year increase
mainly attributable to the higher variable compensation and external
management fees associated with the revenue growth arising from the
segment’s greater business volume. In addition, there were year-over-year
increases in both operations support charges and in the costs incurred to
develop affluent client services in Western Canada. The 2017 efficiency ratio
excluding specified items was 63.1% compared to 67.3% in 2016 and 68.6%
in 2015.
The segment recorded $3 million in provisions for credit losses in 2017,
$2 million less than in 2016.
Assets Under Administration and Under Management
As at October 31, 2017, total assets under administration and under
management amounted to $477.4 billion, rising $80.0 billion or 20% since
October 31, 2016 and 33% since October 31, 2015.
Assets under administration amounted to $411.8 billion as at
October 31, 2017, a $70.8 billion or 21% increase since October 31, 2016
that came from net inflows to various solutions and from a stock market
recovery.
In the individuals category, assets under management amounted to
$33.3 billion as at October 31, 2017 compared to $27.6 billion as at
October 31, 2016. Mutual funds totalled $32.2 billion as at October 31,
2017, rising 12% since October 31, 2016 given excellent net inflows to the
various distribution networks.
17%
27%
56%
Net interest income (2016: 26%)
Fee-based services (2016: 56%)
Transaction-based and other revenues (2016: 18%)
Quarterly Results
(millions of Canadian dollars)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
1
1
4
3
0
4
3
9
3
7
9
3
0
6
2
9
5
2
8
5
2
9
5
2
0
1
1
6
0
1
9
9
1
0
1
Total revenues
Non-interest expenses
Net income
26
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | Financial Markets
OVERVIEW
The Financial Markets segment offers a full suite of financial solutions, from debt and equity underwriting to bank credit and risk management products. This
segment also delivers comprehensive advisory services in the areas of mergers and acquisitions and financing. Access to the Canadian capital markets is
provided through its fixed-income, equities and derivatives business lines. The segment’s clients consist of large and mid-sized corporations, public sector
clients and institutions across Canada.
Financial Markets is an investment banking leader across Canada and the overall top-ranked franchise in Quebec. In fixed-income and equities, it is a market
leader, providing origination, underwriting, distribution, and liquidity through secondary market activities as well as macroeconomic and issuer-focused
research.
Through offices in New York, London (UK), and Hong Kong, this segment markets Canadian debt and equity securities to institutional investors in the United
States, Europe and Asia. Through its Dublin subsidiary, it engages in trading activities with large European-based institutions in local equity and equity-linked
securities exchanges.
Economic and Market Review
The fiscal 2017 environment was conducive to strong capital markets results, with trading revenue supported by volatility and the rising markets in the U.S.
following the presidential election. As volatility decreased in the second half, there was a pick-up in underwriting and advisory revenues and strong M&A
volumes.
2017 Achievements and Highlights
The Financial Markets segment has prioritized servicing Canadian corporate
clients through capital raising, advisory services and risk management
solutions. Among its key transactions in 2017, the segment:
—
—
—
—
—
Advised Alimentation Couche-Tard Inc. on a US$4.4 billion acquisition
of CST Brands, Inc., including acting as joint bookrunner on the related
bank financing and co-bookrunner on a $700 million Canadian tranche
of a $3.8 billion multi-tranche cross-border bond financing.
Advised an investor group led by J.C. Flowers & Co. and Värde Partners
on a $2.5 billion acquisition of Fairstone Financial Inc. (previously
CitiFinancial Canada) and led the structuring, hedging and financing of
securitization transactions to close the acquisition.
Acted as financial advisor to Parkland Fuel Corporation on a $1.6 billion
acquisition of Chevron Canada’s downstream fuel business, including
serving as joint bookrunner on a $660 million bought deal private
placement of Parkland shares, on a $500 million senior unsecured note
offering, and on $1 billion in new credit facilities. In addition, it
provided risk management solutions to Parkland.
Served as one of the advisors to Osisko Gold Royalties on a $1.1 billion
acquisition of a royalty portfolio from Orion Mine Finance, providing risk
management solutions
in conjunction with the transaction. The
segment subsequently acted as joint bookrunner on a $300 million
lead arranger and
convertible debenture offering and as sole
bookrunner on a $350 million credit facility.
Acted as joint bookrunner on two preferred share issuances raising
$300 million and on a $425 million issuance of senior unsecured notes
for Intact Financial Corporation, as part of the acquisition of OneBeacon
Insurance Group, Ltd; acted as co-manager on a $414 million bought
deal equity
joint
bookrunner on a $750 million bank financing.
issuance and acted as co-lead arranger and
—
—
Acted as financial advisor to The Jean Coutu Group (PJC) Inc. on its
announced $4.5 billion sale to METRO INC. In addition, it supported
METRO INC. in its financing of the acquisition by acting as co-lead
arranger and as joint bookrunner on a $3.4 billion bank commitment at
announcement for the cash portion of the transaction consideration and
as joint bookrunner on the subsequent $650 million secondary equity
bought deal offering of a portion of METRO INC.’s holding
in
Alimentation Couche-Tard Inc.
Continued to leverage its derivatives trading and structuring expertise
to reach a broader group of clients. Its innovative risk management
solutions, which help clients manage risks across all asset classes,
have expanded to cover an additional 32% of clients over the last five
years, with most of them using multiple risk management products.
Financial Markets has long been a leader in fixed income:
—
—
The segment ranked first in Canada for debt underwriting, excluding
self-funded deals, in the first nine months of 2017. It raised a total of
$16.5 billion during this period, leading the market in all debt raised.
This included acting as joint bookrunner for Bell Canada on $3 billion of
senior unsecured notes through two transactions.
It has maintained its leadership position in government debt financing,
leading two five-year fixed-rate Canada Mortgage Bond issuances
aggregating $10.25 billion and winning inaugural lead mandates for
the City of Ottawa and the City of Toronto.
27
27
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | FINANCIAL MARKETS
Financial Markets is one of the leading infrastructure finance firms:
Priorities and Outlook for 2018
—
—
It acted as financial advisor to the Rideau Transit Group consortium with
respect to certain elements of the $3.0 billion Ottawa Light Rail Transit
Stage 2 expansion, involving 40 km of new rail line and 23 new
stations.
It acted as financial advisor and sole underwriter for the Link 427
consortium,
in connection with the $480 million Highway 427
Expansion project in Ontario, involving the design, construction,
financing and maintenance of an expansion to an existing highway in
the Toronto area.
Focus on corporate clients by providing a complete suite of capital
raising, advisory and risk management services.
Continue to expand corporate client coverage, benefiting from the
expansion of investment banking and M&A advisory teams.
Expand the range of products and services offered to Canadian and
international clients through the segment’s activities in New York,
London, Dublin and Hong Kong.
Realize the benefits of ongoing investments in technologies that
support the segment’s client-facing businesses.
Other notable highlights included:
—
—
In fiscal 2017, the Bank raised $1.9 billion through equity, equity-
linked, and preferred share issuances for corporate and institutional
clients. Corporate transactions included NBF’s role as co-lead in CIBC’s
$800 million issuance of preferred shares. In the managed retail
product space, the Bank also raised approximately $500 million for
funds managed by Quadravest Capital Management Inc.
Investment in our research team was rewarded, notably by our 3rd
overall ranking and 11 top analysts in the latest Thomson Reuters
Analyst Awards.
Segment Results – Financial Markets
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Trading activity revenues
Equities
Fixed-income
Commodities and foreign exchange
Financial market fees
Gains on available-for-sale securities, net
Banking services
Other
Total revenues on a taxable equivalent basis
Non-interest expenses
Contribution on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
Net income
Specified items after income taxes(1)
Net income excluding specified items(1)
Average assets
Average loans and acceptances (Corporate Banking only)
Average deposits
Efficiency ratio on a taxable equivalent basis and excluding specified items(1)
2017
2016(2)
2015(2)
2017-16
% change
496
304
103
903
305
60
338
24
1,630
658
972
−
972
260
712
−
712
95,004
13,118
20,926
438
263
116
817
288
16
322
(130)
1,313
615
698
−
698
213
485
145
630
87,504
12,552
15,201
450
237
147
834
286
1
286
79
1,486
599
887
−
887
236
651
16
667
86,466
10,057
13,550
40.4 %
41.6 %
39.8 %
13
16
(11)
11
6
5
24
7
39
39
22
47
13
9
5
38
(1)
(2)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
For the years ended October 31, 2016 and 2015, certain amounts have been revised from those previously reported, notably amounts related to the Credigy subsidiary, which are now
reported in the USSF&I segment. In addition, the restructuring charge recognized in fiscal 2015, which had been allocated among all the Bank’s business segments, has been combined into
the Other heading to reflect the presentation adopted in fiscal 2016.
28
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | FINANCIAL MARKETS
Financial Results
In the Financial Markets segment, net income totalled $712 million in fiscal
2017, up $227 million or 47% from fiscal 2016. The segment’s total
revenues on a taxable equivalent basis amounted to $1,630 million
compared to $1,313 million in fiscal 2016, a $317 million year-over-year
increase that was driven by all of the segment’s revenue categories, in
particular the Other revenue category, which in 2016 had included the
$164 million write-off of the Bank’s equity interest in associate Maple. Given
favourable market conditions, the 2017 trading activity revenues increased
11% year over year owing to growth in revenues from equity securities and
from fixed-income securities, which were up 13% and 16%, respectively. As
for revenues from financial market fees and revenues from banking services,
they increased by 6% and 5%, respectively. Furthermore, the 2017 gains on
available-for-sale securities were higher than those recorded in 2016.
For the year ended October 31, 2017, the segment’s non-interest
expenses increased 7% year over year, mainly due to the higher variable
compensation associated with revenue growth as well as to higher
operations support charges. At 40.4%, the 2017 efficiency ratio on a taxable
equivalent basis and excluding specified items improved by 1.2 percentage
points when compared to 41.6% in 2016 and compares to 39.8% in 2015.
The segment did not record any provisions for credit losses for fiscal
years 2017, 2016 and 2015.
Excluding the write-off of the Bank’s equity interest in associate Maple
recorded in 2016, the segment’s 2017 net income excluding specified items
rose 13% when compared to 2016.
Total Revenues by Category(1)
Year ended October 31, 2017
(taxable equivalent basis)(2)
19%
21%
4%
56%
Trading activity revenues (2016: 57%)
Financial market fees (2016: 20%)
Banking services (2016: 22%)
Gains on available-for-sale securities (2016: 1%)
(1)
(2)
Excluding revenues from other activities.
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
Quarterly Results
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
5
1
4
2
9
3
4
0
4
9
1
4
6
8
1
1
6
1
8
6
1
2
6
1
5
7
1
5
6
1
3
8
0 1
7
1
Total revenues
Non-interest expenses
Net income
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
29
29
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | U.S. Specialty Finance and International
OVERVIEW
The Bank has an 80% ownership interest in Credigy, a subsidiary specialized in consumer finance investment. Credigy acquires portfolios of consumer
receivables from different categories of lenders and seeks to realize the assets through collections to achieve expected returns. The company also provides
financing to the consumer receivables market. Purchase and financing decisions are assessed by experienced personnel using proprietary models and
analytics expertise. Based in Atlanta, U.S.A., Credigy is primarily active in performing assets covering a broad range of asset classes, mostly in the U.S. market.
The Bank has a 90% ownership interest in ABA Bank, a rapidly growing commercial bank with a diversified client base in Cambodia. ABA Bank was founded in
1996. The Bank also has minority positions in financial groups active in francophone Africa and in Africa-Asia trade. At the end of fiscal 2017, the Bank’s
investments in emerging markets totalled $433 million.
Economic and Market Review
The U.S. consumer finance industry sustained a strong growth trajectory in 2017, fueled by a rebounding U.S. economy. Increases in consumer and investment
spending resulted in real GDP growth. In response to the strengthening economy, the U.S. Federal Reserve gradually raised interest rates during the year.
Cambodia’s GDP continued to grow rapidly in 2017. The country continues to benefit from its membership in the dynamic Association of Southeast Asian
Nations (ASEAN) trade association, low oil prices, growth of the tourism industry and expansionary fiscal policy.
CREDIGY
ABA BANK
2017 Achievements and Highlights
2017 Achievements and Highlights
— Opened seven new branches, bringing the total to 49.
—
Increased the number of clients to more than 35,000 borrowers and
214,000 depositors.
Achieved a 29% return on equity.
—
— Maintained credit quality with non-performing loans at 0.5%.
—
Named Best Bank in Cambodia by Global Finance and Euromoney
magazines in 2017 for the third straight year.
Priorities and Outlook for 2018
—
—
—
Continue to target micro-businesses and SMEs by opening six new
branches in rural areas.
Drive deposit growth by increasing digital banking and self-banking
penetration through innovation: best-in-class mobile banking, remote
account opening, quick-response code-based (QR Code) payments, and
other functionalities.
Continue to strengthen the risk management, internal audit and
compliance functions.
—
—
—
—
—
Invested US$3.4 billion during 2017, a 70% increase from 2016.
Performing consumer receivables represent more than 96% of Credigy’s
income-producing assets.
Achieved a 3.6% return on assets, exceeding the minimum target of
2.5%.
Selected as one of the 2017 Top Workplaces by the Atlanta Journal-
Constitution.
Developed several initiatives to promote employee development.
Priorities and Outlook for 2018
—
Continue to build the Credigy brand as the go-to business partner in the
U.S. consumer receivables market to access the best opportunities.
Focus on creative structures within consumer finance.
—
— Maintain a diversified business book and continue to search for new
investments at the best risk-adjusted returns.
Continue the trajectory of disciplined growth.
—
30
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | U.S. SPECIALTY FINANCE AND INTERNATIONAL
Segment Results – U.S. Specialty Finance and International
Year ended October 31
(millions of Canadian dollars)
Operating results
Net interest income
Non-interest income
Total revenues
Credigy
ABA Bank and International
Non-interest expenses
Credigy
ABA Bank and International
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank's shareholders
Average assets
Average loans and receivables
Average other revenue-bearing assets
Average deposits
Efficiency ratio
2017
2016(1)
2015(1)
2017-16
% change
262
279
541
409
132
225
163
62
316
48
268
84
184
29
155
7,519
6,062
449
1,265
41.6 %
71
340
411
324
87
207
182
25
204
4
200
53
147
20
127
5,319
3,499
1,162
487
50.4 %
(7)
233
226
216
10
147
144
3
79
−
79
25
54
13
41
2,275
1,302
646
−
65.0 %
269
(18)
32
26
52
9
(10)
148
55
34
58
25
45
22
41
73
(61)
(1)
The amounts presented for the years ended October 31, 2016 and 2015 are consistent with the segment disclosure presentation adopted by the Bank for the fiscal year that began on
November 1, 2016.
31
31
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | U.S. SPECIALTY FINANCE AND INTERNATIONAL
Financial Results
Total Revenues by Category
Year ended October 31, 2017
In the U.S. Speciality Finance and International segment, net income totalled
$184 million for the year ended October 31, 2017 compared to $147 million
in fiscal 2016. The segment’s 2017 total revenues amounted to $541 million
versus $411 million in fiscal 2016; this revenue growth was driven partly by
a 26% increase in Credigy’s revenues, particularly due to growth in loan
volumes, and partly by the revenues from the ABA Bank subsidiary,
consolidated into the Bank’s results since the third quarter of 2016, which
increased steadily due to growth in loan and deposit volumes. These
increases more than made up for the fiscal 2016 recognition of a $41 million
non-taxable gain realized on the revaluation of the previously held equity
interest in ABA Bank.
For the year ended October 31, 2017, the segment’s non-interest
expenses stood at $225 million, an $18 million year-over-year increase
attributable essentially to all of the non-interest expenses of the ABA Bank
subsidiary, which have been consolidated into the Bank’s results since the
third quarter of 2016. As for the non-interest expenses of the Credigy
subsidiary, they were down 10% year over year, primarily as a result of lower
servicing fees.
For fiscal 2017, the segment’s provisions for credit losses stood at
$48 million and were essentially attributable to the provisions recorded for
the Credigy subsidiary as a result of its business growth.
23%
1%
76%
Credigy (2016: 79%)
ABA Bank (2016: 10%)
International (2016: 11%)
Quarterly Results
(millions of Canadian dollars)
Q4 2017
Q3 2017
Q2 2017
Q1 2017
4
5
1
7
4
1
2
2
1
8
1
1
6
5
5
5
8
5
1
5
5
5
6
5
0
4
8
3
Total revenues
Non-interest expenses
Net income
32
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
BUSINESS SEGMENT ANALYSIS | Other
OVERVIEW
The Other heading reports on Treasury operations, including the Bank’s asset and liability management, liquidity management and funding operations; certain
non-recurring items; and the unallocated portion of corporate units. Corporate units include Information Technology, Transformation and Strategic Initiatives
Office, Risk Management, Operations, Human Resources and Corporate Affairs, and Finance and Treasury. These units provide advice and guidance throughout
the Bank and to its business segments in addition to expertise and support in their respective fields.
Segment Results – Other
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues on a taxable equivalent basis
Non-interest expenses
Contribution on a taxable equivalent basis
Provisions for credit losses(3)
Income before income taxes on a taxable equivalent basis
Income taxes (recovery) on a taxable equivalent basis
Net loss
Non-controlling interests
Net loss attributable to the Bank’s shareholders
Specified items after income taxes(1)
Net loss excluding specified items(1)
Average assets
2017
(105)
122
17
292
(275)
40
(315)
(102)
(213)
55
(268)
2016(2)
2015(2)
(113)
123
10
392
(382)
−
(382)
(128)
(254)
55
(309)
(149)
248
99
306
(207)
−
(207)
(87)
(120)
57
(177)
2
(211)
37,915
186
(68)
39,850
48
(72)
36,823
(1)
(2)
(3)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
For the years ended October 31, 2016 and 2015, certain amounts have been revised from those previously reported, notably amounts related to the ABA Bank subsidiary and the other
international investments that are now reported in the USSF&I segment. In addition, the restructuring charge recognized in fiscal 2015, which had been allocated among all the Bank’s
business segments, has been combined into the Other heading to reflect the presentation adopted in fiscal 2016.
The $40 million in provisions for credit losses in fiscal 2017 reflects an increase in the collective allowance for credit risk on non-impaired loans.
Financial Results
For the Other heading of segment results, there was a net loss of
$213 million in fiscal 2017 compared to a net loss of $254 million in fiscal
2016. The 2016 results had been affected by the following specified items,
net of income taxes: $6 million in financing costs related to holding
restructured notes; a $96 million restructuring charge; $18 million in
litigation charges; $32 million in intangible asset impairment losses; and the
Bank’s $16 million share in the charges related to its equity interest in TMX.
Also in fiscal 2016, an $18 million tax provision had been recorded to reflect
the impact of changes in tax measures. For fiscal 2017, the Other heading’s
net loss was affected by specified items of $2 million, net of income taxes,
related to the Bank’s share in TMX.
For the year ended October 31, 2017, net loss excluding specified items
stood at $211 million compared to a net loss of $68 million in fiscal 2016.
The higher net loss excluding specified items was mainly a result of several
factors: the increase of $40 million ($29 million net of income taxes) in the
collective allowance for credit risk on non-impaired loans to reflect growth in
the Bank’s overall credit portfolio; an increase in non-interest expenses
arising from compensation and employee benefits, in particular the cost of
pension plans and variable compensation; and technology costs resulting
from the digital transformation.
33
33
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY FINANCIAL INFORMATION
Several trends and factors have an impact on the Bank’s quarterly net income, revenues, non-interest expenses and provisions for credit losses. The following
table presents a summary of results for the past eight quarters. Furthermore, a summary of results for the past 12 quarters is provided in Table 1 on pages 96
and 97.
Quarterly Results Summary(1)
(millions of Canadian dollars)
Statement of income data
Net interest income
Non-interest income
Total revenues
Provisions for credit losses
Non-interest expenses
Income taxes
Net income
Q4
Q3
Q2
841
863
1,704
70
976
133
525
831
844
1,675
58
971
128
518
762
835
1,597
56
941
116
484
2017
Q1
798
835
1,633
60
969
107
497
Q4
Q3
Q2
778
791
1,569
59
1,159
44
307
783
774
1,557
45
937
97
478
715
710
1,425
317
876
22
210
2016
Q1
716
573
1,289
63
903
62
261
(1)
For additional information about the 2017 fourth quarter results, visit the Bank’s website at nbc.ca or the SEDAR website at sedar.com to consult the Bank’s Press Release for the Fourth Quarter of 2017,
published on December 1, 2017.
The analysis below of the past eight quarters reflects the sustained
performance of all the business segments and helps readers identify the
items that have favourably or unfavourably affected results. Given the net
income growth across all of the Bank’s main business segments, and due to
certain specified items recorded in fiscal 2016, the net income for each
quarter of 2017 was up year over year. Conversely, for fiscal 2016, the net
income for each quarter but the third quarter was down year over year,
mainly due to the specified items recorded in fiscal 2016, as described in the
Financial Reporting Method section on page 10 and that provides additional
information on non-GAAP financial measures.
For the first quarter of 2017, the year-over-year increase in net income
was partly due to a write-off of $145 million, net of income taxes, of the
Bank’s equity interest in associate Maple in the first quarter of 2016.
For the second quarter of 2017, the year-over-year increase in net
income was substantial given that, in the second quarter of 2016, the Bank
had recorded a sectoral provision for credit losses for oil and gas producers
and service companies of $183 million, net of income taxes.
For the third quarter of 2017, the year-over-year increase in net income
was driven by solid performance in the main business segments, which more
than made up for the $41 million non-taxable gain recorded in 2016
following a revaluation of the previously held equity interest in ABA Bank.
For the fourth quarter of 2017, the year-over-year increase in net
income was substantial, as there was net income growth across all the
business segments combined with the fact that, in the fourth quarter of
2016, the following items, net of income taxes, had been recorded: a
$96 million restructuring charge, $32 million in intangible asset impairment
losses, and $18 million in litigation charges.
As for net interest income, this item posted year-over-year growth in
every quarter of 2017 and 2016. These increases were driven by growth in
personal and commercial loan and deposit volumes, the net interest income
growth at Wealth Management (notably due to deposit growth and improved
margins), the net interest income growth at Credigy, and the contributions
made by the ABA Bank subsidiary since the third quarter of 2016. These
increases more than offset the decrease in net interest income within the
Financial Markets segment.
The non-interest income results for every quarter of 2017 and for the
fourth quarter of 2016 were up year over year owing to sustained growth by
the business segments. For three of the four quarters of 2016, non-interest
income was down year over year, particularly because the equity interest in
associate Maple was written off in the first quarter of 2016 and, in 2015,
revenues related to holding restructured notes and a gain on the disposal of
Fiera Capital shares had been recorded.
Over the past eight quarters, the Bank’s provisions for credit losses
were affected by several items. In the second quarter of 2017, the Bank
reversed, by $40 million, the sectoral provision on non-impaired loans
recorded for the oil and gas producer and service company loan portfolio,
whereas this sectoral provision had initially been recorded, in an amount of
$250 million, in the second quarter of 2016. The 2017 second-quarter
provisions for credit losses also included a $40 million increase in the
collective allowance for credit risk on non-impaired loans. For the fourth
quarter of 2017, the year-over-year increase in the provisions for credit
losses came essentially from the Credigy subsidiary.
Over most of the past eight quarters, non-interest expenses posted
year-over-year increases, mainly as a result of compensation and employee
benefits (including the variable compensation associated with revenue
growth in the business segments), technology investments, business
development expenses, and the acquisition of the ABA Bank subsidiary. For
the fourth quarter of 2017, non-interest expenses were down year over year,
essentially because a restructuring charge, intangible asset impairment
losses, and litigation charges had been recorded in the fourth quarter of
2016.
The effective tax rate was up for three of the four quarters in 2017,
whereas the second and fourth quarters of 2016 had posted lower rates. The
change in the effective tax rate between the second quarters of 2017 and
2016 came mainly from the tax impact of recording the sectoral provision in
the second quarter of 2016 as well as from lower tax-exempt dividend
income in the second quarter of 2017. Lastly, during the second quarter of
2016, a tax provision had been recorded to reflect the impact of changes to
tax measures.
34
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF THE CONSOLIDATED BALANCE SHEET
Consolidated Balance Sheet Summary
As at October 31
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances (net of allowances for credit losses)
Other
Liabilities and equity
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders
Non-controlling interests
2017
2016(1)
% change
8,802
65,343
20,789
134,443
16,450
245,827
156,671
75,589
9
12,750
808
245,827
8,183
64,541
13,948
126,178
19,356
232,206
142,066
77,026
1,012
11,292
810
232,206
8
1
49
7
(15)
6
10
(2)
(99)
13
−
6
(1)
On November 1, 2016, the Bank changed the presentation of certain items on the Consolidated Balance Sheet, and the October 31, 2016 figures were adjusted to reflect these
modifications.
As at October 31, 2017, the Bank’s total assets amounted to $245.8 billion
compared to $232.2 billion at year-end 2016, a 6% increase owing mainly to
a $6.9 billion increase in securities purchased under reverse repurchase
agreements and securities borrowed and an $8.2 billion increase in loans
and acceptances.
Cash and Deposits With Financial Institutions
At $8.8 billion as at October 31, 2017, cash and deposits with financial
institutions rose $0.6 billion since the same date last year, mainly due to
deposits with financial institutions. The Bank’s liquidity and funding risk
management practices are described on pages 75 to 83 of this MD&A.
Securities
As at October 31, 2017, securities totalled $65.3 billion (27% of total
assets), rising $0.8 billion during the year from $64.5 billion as at
October 31, 2016. Available-for-sale securities decreased by $6.0 billion,
essentially due to a decrease in securities issued or guaranteed by the
Canadian government and Canadian provincial and municipal governments.
This decrease was offset by held-to-maturity securities and securities at fair
value through profit or loss, which rose $5.3 billion and $1.5 billion,
respectively, mainly due to securities issued or guaranteed by the Canadian
government and equity securities. Securities purchased under reverse
repurchase agreements and securities borrowed totalled $20.8 billion as at
October 31, 2017, a $6.9 billion increase since year-end 2016 that is mainly
related to the business activities of the Financial Markets segment. The
Bank’s market risk management policies are described on pages 68 to 75 of
this MD&A.
Master Asset Vehicles (MAV)
As at October 31, 2017, the carrying value of the restructured notes of the
MAV conduits and of the other restructured notes held by the Bank was nil
($619 million as at October 31, 2016). The change in the carrying value of
the restructured notes of the MAV conduits during the year ended
October 31, 2017 was mainly attributable to capital repayments.
Loans and Acceptances
As at October 31, 2017, loans and acceptances, net of allowances for credit
losses, totalled $134.4 billion, up $8.2 billion or 7%, and accounted for 55%
of total assets.
Residential mortgage loans outstanding totalled $50.5 billion as at
October 31, 2017, rising $1.6 billion or 3% since year-end 2016. This growth
was driven by sustained demand for mortgage credit.
Personal loans and credit card receivables totalled $37.0 billion at year-
end 2017, a $3.0 billion or 9% increase from $34.0 billion at year-end 2016.
This increase came from growth in Credigy and ABA Bank lending activities
and from Personal Banking’s operations.
At $47.7 billion as at October 31, 2017, loans and acceptances to
businesses and government increased $3.6 billion or 8% since October 31,
2016. This increase came mainly from the activities of the Credigy subsidiary
and from Commercial Banking. The customers’ liability under acceptances
decreased by $0.4 billion since last year due to a decline in lending activity
with oil and gas companies.
35
35
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF THE CONSOLIDATED BALANCE SHEET
Table 9 (page 103) shows gross loans and acceptances by borrower
category as at October 31, 2017. At $66.4 billion, residential mortgages
(including home equity lines of credit) have posted strong growth since 2013
and account for 49% of total loans and acceptances. This growth was driven
by sustained demand for mortgage credit. Retail loans also increased,
totalling $16.4 billion as at October 31, 2017. With respect to commercial
loans, there was growth mainly in the financial institutions category,
manufacturing category, construction and real estate category, and
wholesale and retail category, whereas there were decreases in the
transportation category and mining category.
Impaired Loans
As at October 31, 2017, gross impaired loans stood at $380 million,
declining $112 million since October 31, 2016, mainly due to decreases in
the personal and commercial loan portfolios (Table 10, page 104). Impaired
loans represented 4.3% of the tangible capital adjusted for allowances
compared to 6.3% as at October 31, 2016. Gross impaired loans, net of
individual and collective allowances, decreased $75 million from a year ago,
as a result of the decreases in impaired personal and commercial loans.
A detailed description of the Bank’s credit risk management practices is
provided on pages 60 to 67 of this MD&A as well as in Note 7 to the
consolidated financial statements.
Other Assets
As at October 31, 2017, other assets totalled $16.5 billion compared to
$19.4 billion as at October 31, 2016. This $2.9 billion decrease in other
assets can essentially be traced to a $2.0 billion decrease in derivative
financial
in premises and
equipment. Purchased receivables, investments in associates and joint
ventures, goodwill, intangible assets, and the other item of Other assets
remained relatively stable compared to last year.
instruments and a $0.7 billion decrease
Deposit Liability
At $156.7 billion as at October 31, 2017, deposits increased by $14.6 billion
or 10% since year-end 2016. At $53.7 billion, personal deposits, as
presented in Table 11 (page 105), increased $1.2 billion since October 31,
2016, accounting for 34.3% of all deposits. This increase was driven by Bank
initiatives to grow this type of deposit. A summary of total personal savings
is provided in the following table.
As shown in Table 11, business and government deposits totalled
$97.6 billion, up $13.7 billion or 16% from $83.9 billion at year-end 2016.
This increase came from banking and governmental activities and term
deposits. Deposits from deposit-taking institutions were down $0.2 billion
from the same date last year.
As at October 31, 2017, total personal savings amounted to
$210.5 billion, rising 6% from $199.0 billion since October 31, 2016.
Overall, off-balance-sheet personal savings stood at $156.8 billion, rising
$10.3 billion or 7% since year-end 2016 and driven by excellent net inflows
to mutual funds and by a stock market recovery.
Total Personal Savings
As at October 31
(millions of Canadian dollars)
Balance sheet
Deposits
Off-balance-sheet
Brokerage
Mutual funds
Other
Total
2017
2016(1)
% change
53,719
52,521
2
124,212
32,192
408
156,812
210,531
117,298
28,706
463
146,467
198,988
6
12
(12)
7
6
(1)
Certain amounts have been revised from those previously reported.
Other Liabilities
Other liabilities stood at $75.6 billion as at October 31, 2017 and consisted
of the following items: acceptances, obligations related to securities sold
short, obligations related to securities sold under repurchase agreements
and securities loaned, derivative financial instruments, liabilities related to
transferred receivables, and other liability items. Other liabilities were down
$1.4 billion since October 31, 2016, mainly due to a $0.8 billion decrease in
obligations related to securities sold under repurchase agreements and
securities
in derivative financial
instruments, partly offset by a $1.2 billion increase in obligations related to
securities sold short.
loaned and a $1.1 billion decrease
Subordinated Debt and Other Contractual Obligations
Subordinated debt decreased by $1.0 billion since October 31, 2016 as the
result of an early redemption, in April 2017, of medium-term notes maturing
on April 11, 2022.
Contractual obligations are presented in detail in Note 30 to the
consolidated financial statements.
Equity
As at October 31, 2017, equity attributable to the Bank’s shareholders was
$12.8 billion, up $1.5 billion from $11.3 billion as at October 31, 2016. This
increase was essentially driven by an increase in retained earnings,
attributable to net income net of dividends, and by common share issuances
under the stock option plan, partly offset by common share repurchases for
cancellation and by the $400 million issuance of Series 38 preferred shares.
The Consolidated Statements of Changes in Equity on page 113 of this
Annual Report present the items of equity.
36
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF THE CONSOLIDATED BALANCE SHEET
As at October 31, 2017, the Bank had 339.6 million common shares
issued and outstanding compared to 338.1 million a year earlier. This
increase was mainly due to the issuance of shares under the Stock Option
Plan. The Bank repurchased 2 million common shares and issued 16 million
Series 38 First Preferred Shares. See Note 19 to the consolidated financial
statements. An analysis of the Bank’s regulatory capital is presented in the
Capital Management section of this MD&A.
Shares and Stock Options
First preferred shares
Series 28(1)
Series 30
Series 32
Series 34
Series 36
Series 38
Common shares(2)
Stock options(2)
As at October 31, 2017
Number of shares
$ million
8,000,000
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
82,000,000
339,591,965
14,575,894
200
350
300
400
400
400
2,050
2,768
(1) On November 15, 2017, the Bank redeemed all the issued and outstanding Non-
Cumulative 5-Year Rate-Reset Series 28 First Preferred Shares. Pursuant to the share
conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 8,000,000 Series 28 preferred shares for a
total amount of $200 million.
As at November 24, 2017, there were 340,190,181 common shares and 14,526,844
stock options outstanding.
(2)
Related Party Transactions
In the normal course of business, the Bank provides various banking services
and enters
into contractual agreements and other transactions with
associates, joint ventures, directors, key officers and other related parties.
These agreements and transactions are entered into under conditions similar
to those offered to non-related third parties.
Loans to eligible key officers are granted under the same conditions as
those granted to any other employee of the Bank. The main conditions are as
follows:
For personal lines of credit, employees may not borrow more than 50%
of their annual gross base salary at the reduced rate. The Canadian prime
rate is applied to the remainder.
In accordance with the Bank Act (Canada), the aggregate of loans
granted to key officers of the Bank, excluding mortgage loans granted on
their principal residence, cannot exceed twice the officer’s annual salary.
Furthermore, the Bank offers a deferred stock unit plan to directors who
are not Bank employees. For additional information, see Note 23 to the
consolidated financial statements. Additional information on related parties
is presented in Notes 9, 28 and 29 to the consolidated financial statements.
Acquisition
Advanced Bank of Asia Limited
On May 16, 2016, the Bank completed the acquisition of Advanced Bank of
Asia Limited (ABA Bank), a major Cambodian financial institution that offers
financial products and services to
individuals and businesses. This
acquisition is part of the Bank’s international growth strategy and, upon
completion, brings the Bank’s common share equity interest in ABA Bank to
90%. The sum of the $119 million cash purchase price, of the fair value of
the previously held interest, and of the estimated value of the non-controlling
interest established at the acquisition date exceeded the fair value of the net
assets acquired by $129 million. This excess amount was recorded on the
Consolidated Balance Sheet as goodwill and mainly represents ABA Bank’s
expected business growth in Cambodia. The goodwill from this acquisition
was not deductible for tax purposes. The acquired receivables, consisting
mainly of personal and commercial loans, had an estimated acquisition-date
fair value of $754 million. This amount also represents the gross contractual
amounts receivable that the Bank expects to fully recover.
During the year ended October 31, 2016, the Bank also recognized a
$41 million non-taxable gain on the revaluation of its previously held equity
interest in ABA Bank in the Non-interest income – Other item of the
Consolidated Statement of
Income. For business segment disclosure
purposes, this gain and ABA Bank’s financial results have been included in
the USSF&I segment. ABA Bank’s results have been consolidated in the
Bank’s financial statements as of May 17, 2016.
the employee must meet the same credit requirements as a client;
—
— mortgage loans, to a maximum of $200,000, are granted for a three-
year term at the posted rate less 2% and, for a five-year term, at the
posted rate less 2.5% limited to half of the posted rate. Any amount
over the $200,000 maximum is financed at the preferential employee
rate;
home equity lines of credit bear interest at Canadian prime less 1%, but
never lower than Canadian prime divided by two;
personal loans bear interest at a risk-based regular client rate;
credit card advances bear interest at a prescribed fixed rate in
accordance with Bank policy;
personal lines of credit bear interest at Canadian prime less 1%, but
never lower than Canadian prime divided by two.
—
—
—
—
37
37
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF THE CONSOLIDATED BALANCE SHEET
Maple Financial Group Inc.
Event After the Consolidated Balance Sheet Date
Redemption of Preferred Shares
On November 15, 2017, the Bank redeemed all the issued and outstanding
Non-Cumulative 5-Year Rate-Reset Series 28 First Preferred Shares. Pursuant
to the share conditions, the redemption price was $25.00 per share plus the
periodic dividend declared and unpaid. The Bank redeemed 8,000,000
Series 28 preferred shares for a total amount of $200 million, which will
reduce Preferred share capital.
The Bank has a 24.9% equity interest in Maple Financial Group Inc. (Maple),
a privately owned Canadian company that operated through direct and
indirect wholly owned subsidiaries in Canada, Germany, the United Kingdom
and the United States. In August 2016, Maple filed for bankruptcy under
applicable Canadian laws, and a receiver was appointed to administer the
company. Similar proceedings were initiated for each of Maple’s other
material subsidiaries in their home jurisdictions.
Maple Bank GmbH, an indirect wholly owned subsidiary of Maple, has
been the subject of an investigation into alleged tax irregularities by German
prosecutors since September 2015 and, to the Bank’s knowledge, that
investigation is ongoing. The Bank understands that the investigation is
focusing on selected trading activities by Maple Bank GmbH and some of its
current and former employees during taxation years 2006 to 2010, although
the Bank has been advised that the investigation may also extend to
subsequent taxation years. The German authorities have alleged that these
trading activities violated German tax laws. Neither the Bank nor its
employees were involved in these trading activities and, to the Bank’s
knowledge, are not the subject of this investigation.
On February 6, 2016, the German Federal Financial Supervisory
Authority, BaFin, placed a moratorium on the business activities of Maple
Bank GmbH, preventing it from carrying out its normal business activities. In
light of the situation, the Bank wrote off the carrying value of its equity
interest in Maple in an amount of $164 million ($145 million net of income
taxes) during the first quarter of 2016. The $164 million write-off of the
equity interest in this associate was recognized in the Non-interest income –
Other item of the Consolidated Statement of Income for the year ended
October 31, 2016 and was reported in the Financial Markets segment.
The Bank has advised the German authorities that if it is determined
that portions of dividends received from Maple could be reasonably
attributable to tax fraud by Maple Bank GmbH, arrangements will be made to
repay those amounts to the relevant authority. If any repayments are
required, they are not expected to be material to the Bank’s financial
position.
Income Taxes
to which
the proposed reassessment and
In March 2017, the Canada Revenue Agency (CRA) issued a proposed
reassessment to the Bank for the 2011 and 2012 taxation years. In
May 2017, the CRA reassessed the Bank for the 2012 taxation year. The
transactions
the actual
reassessment relate are similar to those prospectively addressed by the
synthetic equity arrangement rules introduced in the 2015 Canadian federal
budget. The proposed reassessment and the actual reassessment (including
interest) total approximately
estimated provincial
$173 million. The CRA may issue reassessments to the Bank in respect of
similar activities for fiscal years subsequent to 2012. The Bank is confident
that its tax position was appropriate and intends to vigorously defend its
position. As a result, no amount has been recognized in the consolidated
financial statements as at October 31, 2017.
income taxes and
38
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECURITIZATION AND OFF-BALANCE-SHEET ARRANGEMENTS
In the normal course of business, the Bank is party to various financial
arrangements that, under IFRS, are not required to be recorded on the
Consolidated Balance Sheet or are recorded under amounts other than their
notional or contractual values. These arrangements include, among others,
transactions with structured entities, derivative financial instruments, the
issuance of guarantees, credit instruments, and financial assets received as
collateral.
Structured Entities
their
financial assets or provide
The Bank uses structured entities, among other means, to diversify its
funding sources and to offer services to clients, in particular to help them
investment
securitize
opportunities. Under IFRS, a structured entity must be consolidated if the
Bank controls the entity. Note 1 to the consolidated financial statements
describes the accounting policy and criteria used for consolidating structured
entities. Additional information on consolidated and non-consolidated
structured entities is provided in Note 28 to the consolidated financial
statements.
them with
Securitization of the Bank’s Financial Assets
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing Corporation
(CMHC) securitization programs: the Mortgage-Backed Securities Program
under the National Housing Act (Canada) (NHA) and the Canada Mortgage
Bond (CMB) Program. Under the first program, the Bank issues NHA
securities backed by insured residential mortgage loans and, under the
second, the Bank sells NHA securities to Canada Housing Trust (CHT), which
finances the purchase through the issuance of mortgage bonds insured by
CMHC. Moreover, these mortgage bonds feature an interest rate swap
agreement under which a CMHC-certified counterparty pays CHT the interest
due to investors and receives the interest on the NHA securities. As at
October 31, 2017, the outstanding amount of NHA securities issued by the
Bank and sold to CHT was $16.7 billion. The mortgage loans sold consist of
fixed- or variable-rate residential loans that are insured against potential
losses by a loan insurer. In accordance with the NHA-MBS Program, the Bank
advances the funds required to cover late payments and, if necessary,
obtains reimbursement from the insurer that insured the loan. The NHA-MBS
and CMB programs do not use liquidity guarantee arrangements. The Bank
uses these securitization programs mainly to diversify its funding sources. In
accordance with IFRS, because the Bank retains substantially all of the risks
and rewards of ownership of the mortgage loans transferred to CHT, the
derecognition criteria are not met. Therefore, the insured mortgage loans
securitized under the CMB program continue to be recognized in Loans on
the Bank’s Consolidated Balance Sheet and the
for the
considerations received from the transfer are recognized in Liabilities related
to transferred receivables on the Consolidated Balance Sheet. For additional
information, see Note 8 to the consolidated financial statements.
liabilities
Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to
continue its program of securitizing credit card receivables on a revolving
basis. The Bank uses this entity for capital management and funding
purposes. The Bank acts as the servicer of the receivables sold and
maintains a relationship with the clients. Furthermore, it administers the
securitization program and ensures that all related procedures are
stringently followed and that investors are paid according to the provisions
of the program.
As at October 31, 2017, the credit card receivables portfolio held by
CCCT II (net of the Bank Certificate held by the Bank) represented an amount
outstanding of $1.4 billion. CCCT II issued investors’ certificates, $0.9 billion
of which is held by third parties and $0.5 billion is held by the Bank. New
receivables are periodically sold to the structure on a revolving basis to
replace the receivables reimbursed by clients.
The different series of certificates are rated by Fitch Ratings Inc. (Fitch)
and DBRS Limited (DBRS). From this portfolio of sold receivables, the Bank
retains the excess spread, i.e., the residual net interest income after all the
expenses related to this structure have been paid, and thus provides first-
loss protection. Furthermore, second-loss protection for issued series is
provided by certificates subordinated to the senior notes (Series 2015-1 and
2016-1), representing 6.4% of the total amount of the series issued. The
Bank controls CCCT II and thus consolidates it.
Securitization of Third-Party Financial Assets
The Bank administers multi-seller conduits that purchase financial assets
from clients and finance those purchases by issuing commercial paper
backed by the acquired assets. Clients use these multi-seller conduits to
diversify their funding sources and reduce borrowing costs while continuing
to service the financial assets and providing some amount of first-loss
protection. Notes issued by the conduits and held by third parties provide
additional credit loss protection. The Bank acts as a financial agent and
provides administrative and transaction structuring services to these
conduits. The Bank provides backstop liquidity and credit enhancement
facilities under the commercial paper program. These facilities are presented
and described in Notes 27 and 28 to the consolidated financial statements.
The Bank has concluded derivative financial instrument contracts with these
conduits, the fair value of which is presented on the Bank’s Consolidated
Balance Sheet. The Bank is not required to consolidate these conduits, as it
does not control them.
39
39
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECURITIZATION AND OFF-BALANCE-SHEET ARRANGEMENTS
Derivative Financial Instruments
The Bank uses various types of derivative financial instruments to meet its
clients’ needs, generate trading activity revenues and manage its exposure
to foreign exchange, interest, and credit rate risk as well as other market
risks. All derivative financial instruments are accounted for at fair value on
in derivative financial
the Consolidated Balance Sheet. Transactions
instruments are expressed as notional amounts. These amounts are not
presented as assets or liabilities on the Consolidated Balance Sheet. They
represent the face amount of the contract to which a rate or price is applied
to determine the amount of cash flows to be exchanged. Notes 1 and 17 to
the consolidated financial statements provide additional information on the
types of derivative financial instruments used by the Bank and their
accounting basis.
Guarantees
In the normal course of business, the Bank enters into various guarantee
contracts. The principal types of guarantees are letters of guarantee,
backstop liquidity and credit enhancement facilities, certain securities
lending activities, and certain indemnification agreements. Note 27 to the
consolidated financial statements provides detailed information on these
guarantees.
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-
sheet credit commitments. The credit instruments used to meet the financing
needs of its clients represent the maximum amount of additional credit that
the Bank could be required to extend if the commitments were fully drawn.
For additional information on these off-balance-sheet credit instruments and
other items, see Note 27 to the consolidated financial statements.
Financial Assets Received as Collateral
In the normal course of business, the Bank receives financial assets as
collateral as a result of transactions involving securities purchased under
reverse
lending
repurchase agreements, securities borrowing and
agreements, and derivative financial instrument transactions. For additional
information regarding financial assets received as collateral, see Note 27 to
the consolidated financial statements.
40
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL DISCLOSURE
The Financial Stability Board (FSB) is an international financial group
established at the London G20 Summit in April 2009 as a successor to the
Financial Stability Forum (FSF) founded in 1999 at the initiative of the G7. It
brings together several national financial authorities (central banks, finance
ministries, etc.) as well as several international organizations and groups
working to develop financial stability standards. Its objective is to promote
cooperation in the oversight and monitoring of financial institutions.
In April 2008, the FSF published a report at the request of the
G7 Finance Ministers and Central Bank Governors. OSFI then asked Canadian
banks to apply certain recommendations set out in the report.
the
The
to enhance
recommendations seek
transparency and
measurement of certain exposures,
in particular structured entities,
subprime and Alt-A exposures, collateralized debt obligations, residential
and commercial mortgage-backed securities, and
leveraged financing
structures. The Bank does not market any specific mortgage financing
program to subprime or Alt-A clients. Subprime loans are generally defined
as loans granted to borrowers with a higher credit risk profile than prime
borrowers, and the Bank does not grant this type of loan. Alt-A loans are
granted to borrowers who cannot provide standard proof of income. The
Bank’s Alt-A loan volume was $408 million as at October 31, 2017
($483 million as at October 31, 2016).
The Bank does not have any significant direct position in residential and
commercial mortgage-backed securities that are not insured by the CMHC.
Credit derivative positions are presented in the Supplementary Regulatory
Capital Disclosure report, which is available on the Bank’s website at nbc.ca.
Leveraged financing structures are defined by the Bank as loans
granted to large corporate and financial sponsor-backed companies that are
typically non-investment grade with much higher levels of debt relative to
other companies in the same industry. Leveraged finance is commonly
employed to achieve a specific objective, for example, to make an
acquisition, complete a buy-out or repurchase shares. Leveraged finance risk
exposure takes the form of both funded and unfunded commitments. As at
October 31, 2017, total commitments for this type of loan stood at
$3,269 million ($2,694 million as at October 31, 2016). Details about other
exposures are provided in the table concerning structured entities in Note 28
to the consolidated financial statements.
In May 2012, the FSB formed a working group, the Enhanced Disclosure
Task Force (EDTF), that was mandated to develop principles for enhancing the
risk disclosures of major banks, to recommend improvements to current risk
disclosures, and to identify risk disclosure best practices used by major
financial institutions. On October 29, 2012, the EDTF published a report
entitled Enhancing the Risk Disclosures of Banks, which contains
32 recommendations. The Bank continues to make every effort to ensure
overall compliance with those recommendations and is continuing to
enhance its risk disclosures to meet the best practices on an ongoing basis.
The risk disclosures required by the EDTF are provided in this Annual Report
and in the documents entitled Supplementary Regulatory Capital Disclosure
and Supplementary Financial Information, which are available on the Bank’s
website at nbc.ca. In addition, on page 8 of this Annual Report is a table of
contents that readers can use to locate information relative to the 32
recommendations.
41
41
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Capital management has a dual role of ensuring a competitive return to the
Bank’s shareholders while maintaining a solid capital foundation that covers
risks inherent to the Bank’s business, supports its business segments and
protects its clients.
Structure and Governance
Along with its partners from Risk Management and from Treasury and
Finance, the Capital Management team is responsible for maintaining
integrated control methods and processes so that an overall assessment of
capital adequacy may be performed.
The Board oversees the structure and development of the Bank’s capital
management policy and ensures that the Bank maintains sufficient capital in
accordance with regulatory requirements and in consideration of market
conditions. The Board delegates certain responsibilities to the Risk
Management Committee
recommends capital
management policies and oversees their application. However, the Board, on
the recommendation of the RMC, assumes the following responsibilities:
(RMC), which
turn
in
—
—
—
—
—
—
reviewing and approving the capital management policy;
reviewing and approving the Bank’s risk appetite, including the main
capital and risk targets and the corresponding limits;
reviewing and approving the capital plan and strategy on an annual
basis, including the Bank’s internal capital adequacy assessment
process;
reviewing and approving the implementation of significant measures
respecting capital, including contingency measures;
reviewing significant capital disclosures,
adequacy ratios;
ensuring the appropriateness of the regulatory capital adequacy
assessment.
including Basel capital
The Office of the President is responsible for defining the Bank’s
strategy and plays a key role in guiding measures and decisions regarding
capital. The Asset/Liability Management Committee oversees capital
management, which consists of reviewing the capital plan and strategy and
implementing significant measures respecting capital, including contingency
measures, and making recommendations with respect to these measures.
Capital Management Framework
The Bank’s capital management policy defines guiding principles as well as
the roles and responsibilities of its internal capital adequacy assessment
process. This process aims to determine the capital that the Bank needs to
pursue and accommodate unexpected losses arising from extremely adverse
economic and operational conditions. The Bank has implemented a rigorous
internal capital adequacy assessment process that comprises the following
procedures:
—
conducting an overall risk assessment;
—
— measuring significant risks and the capital requirements on the Bank’s
financial budget for the next fiscal year and current and prospective risk
profiles;
integrating stress tests across the organization and executing
sensitivity analyses to determine the capital buffer above minimum
regulatory levels (for additional information on enterprise-wide stress
testing, see the Risk Management section of this MD&A);
aggregating capital and monitoring the reasonableness of internal
capital compared with regulatory capital;
comparing projected internal capital with regulatory capital levels,
internal operating targets, and competing banks;
attesting to the adequacy of the levels of capital at the Bank.
—
—
—
Assessing capital adequacy is an integral part of capital planning and
strategy. The Bank sets internal capital ratio targets that include a
discretionary cushion in excess of the regulatory requirements, which
provides a solid
financial structure and sufficient capital to meet
management’s business needs in accordance with its risk appetite, along
with competitive returns to shareholders, under both normal market
conditions and a range of severe but plausible stress testing scenarios. The
internal capital adequacy assessment process is a key tool in establishing
the Bank’s capital strategy and is subject to quarterly reviews and periodic
amendments.
Risk-adjusted return on capital (RAROC) and shareholder value added
(SVA), which are obtained from an assessment of required economic capital,
are calculated quarterly for each of the Bank’s business segments. The
results are then used to guide management in allocating capital among the
different business segments.
42
National Bank of Canada2017 Annual Report
OSFI is responsible for applying the Basel Accord in Canada. As
required under the Basel Accord, OSFI requires that regulatory capital
instruments other than common equity have a non-viability contingent
capital (NVCC) clause to ensure that investors bear losses before taxpayers
should the government determine that it is in the public interest to rescue a
non-viable financial institution. Instruments issued before January 1, 2013
that would be Basel III compliant if it were not for the absence of the NVCC
clause are grandfathered and will be phased out over a period of ten years.
The Bank expects to phase out all of its non-NVCC instruments without
resorting to any regulatory event redemption.
The Basel III regulatory framework sets out transitional arrangements
for the period of 2013 to 2019. OSFI has introduced two methodologies for
determining capital. The “all-in” methodology includes all of the regulatory
adjustments that will be required by 2019 while retaining the phase-out
rules for non-qualifying capital instruments. The “transitional” methodology,
which is in line with the BCBS guidelines, in addition to applying the phase-
out rules for non-qualifying capital instruments, also applies a more flexible
and steady phasing in of the required regulatory adjustments. The Bank will
disclose its capital ratios calculated according to both methodologies for
each quarter until the start of 2019. However, OSFI requires Canadian banks
to meet the minimum “all-in” thresholds rather than the minimum thresholds
calculated using the “transitional” method.
Consequently, the Bank and all other major Canadian banks have had
to maintain, on an “all-in” basis, a CET1 capital ratio of at least 8.0%, a Tier 1
capital ratio of at least 9.5%, and a Total capital ratio of at least 11.5%. All of
these ratios are to include a capital conservation buffer of 2.5% and a 1%
surcharge applicable to Domestic Systemically Important Banks (D-SIBs).
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Basel Accord and Regulatory Environment
Basel Accord
The Basel Accord proposes a range of approaches of varying complexity, the
choice of which determines the sensitivity of capital to risks. A less complex
approach, such as the Standardized Approach, uses regulatory weightings,
while a more complex approach uses the Bank’s internal estimates of risk
components to establish risk-weighted assets and calculate regulatory
capital.
As required under Basel, risk-weighted assets (RWA) are calculated for
each credit risk, market risk, and operational risk. The Bank uses the
Advanced Internal Rating-Based (AIRB) Approach for credit risk to determine
minimum regulatory capital requirements for a majority of its portfolios. The
credit risk of certain portfolios considered to be less significant is weighted
according to the Basel Standardized Approach. The simple risk-weighted
method is used to calculate the charge related to available-for-sale securities
in the form of equity securities. This method requires proactive management
of the capital allocated to portfolios with equity securities since, beyond a
certain investment threshold, the cost of regulatory capital becomes
prohibitive. As for operational risk, the Bank uses the Standardized
Approach. Market risk-weighted assets are primarily determined using the
Internal Model-Based Approach, but the Standardized Approach is used to
assess interest-rate specific risk. Lastly, for externally rated securitization
exposures, the Bank uses the Rating-Based Approach (RBA). This approach
assigns risk weights to exposures using external ratings. The Bank uses the
ratings assigned by Moody’s, Standard & Poor’s (S&P), Fitch, DBRS or a
combination of these ratings.
Capital ratios are calculated by dividing capital by risk-weighted assets.
Credit, market and operational risks are factored into the risk-weighted
assets calculation for regulatory purposes. Basel rules apply at the
consolidated level of the Bank. Assets of non-consolidated entities for
regulatory purposes are therefore excluded from the risk-weighted assets
calculation.
The definition adopted by the Basel Committee on Banking Supervision
(BCBS) distinguishes between three types of capital. Common Equity Tier 1
(CET1) capital consists of common shareholders’ equity less goodwill,
intangible assets and other capital deductions. The Additional Tier 1
instruments comprise eligible non-cumulative preferred shares and the
eligible amount of innovative instruments. The sum of CET1 and Additional
Tier 1 capital forms what is known as Tier 1 capital. Tier 2 capital consists of
the eligible portion of subordinated debt and certain loan loss allowances.
Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
43
43
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
The table below provides a comparison of the transitional ratios established
by the BCBS and those required by OSFI’s “all-in” methodology. All ratios
include the capital conservation buffer and the D-SIB surcharge, when
applicable.
The Bank ensures that its capital levels are always above the minimum
capital requirements for OSFI’s “all-in” ratios. By maintaining a strong capital
structure, the Bank can cover the risks inherent to its business activities,
support its business segments and protect its clients.
To ensure an implementation similar to that in other countries, OSFI has
decided to phase in the Credit Valuation Adjustment (CVA) charge over a five-
year period beginning in 2014. For fiscal 2017, only 72%, 77% and 81% of
total CVA were applied, respectively, to the calculation of the CET1, Tier 1 and
Total capital ratios. These percentages will increase to 80%, 83% and 86%,
respectively, in 2018, and reach 100% in 2019.
Since January 1, 2015, OSFI has been requiring Canadian banks to meet
a Basel III leverage ratio of at least 3.0%. The leverage ratio is a measure
independent of risk that is calculated by dividing the amount of Tier 1 capital
by total exposure. Total exposure is defined as the sum of on-balance-sheet
assets (including derivative exposures and securities financing transaction
exposures) and off-balance-sheet items. The assets deducted from Tier 1
capital are also deducted from total exposure.
Other disclosure requirements pursuant to Pillar 3 of the Basel Accord
and a set of recommendations defined by the EDTF are presented in the
Supplementary Regulatory Capital Disclosure report published quarterly and
available on the Bank’s website at nbc.ca. Furthermore, a complete list of
capital instruments and their main features is also available on the Bank’s
website.
Requirements – Regulatory Ratios
BCBS transitional ratios
Capital conservation buffer
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
Phase-in of regulatory capital adjustments
Phase-out of non-qualifying capital instruments
OSFI's “all-in” ratios
Capital conservation buffer
D-SIB surcharge
CET1 capital ratio
Tier 1 capital ratio
Total capital ratio
Phase-out of non-qualifying capital instruments
2017
2018
2019
2020
2021
2022
1.25 %
5.75 %
7.25 %
9.25 %
80 %
50 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
50 %
1.875 %
6.375 %
7.875 %
9.875 %
100 %
40 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
40 %
2.5 %
7.0 %
8.5 %
10.5 %
100 %
30 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
30 %
2.5 %
7.0 %
8.5 %
10.5 %
100 %
20 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
20 %
2.5 %
7.0 %
8.5 %
10.5 %
100 %
10 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
10 %
2.5 %
7.0 %
8.5 %
10.5 %
100 %
− %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
− %
Leverage ratio
3.0 %
3.0 %
3.0 %
3.0 %
3.0 %
3.0 %
44
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Regulatory Context
The Bank closely monitors regulatory developments and participates actively
in the various consultative processes. Presented below are brief descriptions
of ongoing regulatory projects.
In March 2014, the BCBS issued the final rules on the standardized
approach for measuring counterparty credit risk (SA-CCR), which will replace
the Current Exposure Method (CEM). On August 21, 2017, OSFI announced its
intention to bring these rules into force as of the first quarter of 2019.
However, it will require institutions to start reporting amounts as of the first
quarter of 2018.
In December 2014, the BCBS issued two consultative papers, Capital
Floors: The Design of a Framework Based on Standardised Approaches and
Revisions to the Standardised Approach for Credit Risk, the latter having
been reviewed a second time in December 2015. The capital floor is meant to
mitigate risk related to internal credit risk calculation models and enhance
the comparability of risk across banks. The new floor will replace the current
one, which is still based on Basel I. The new standardized approach for credit
risk aims to reduce reliance on credit rating agencies and improve sensitivity
to certain risks.
In July 2015, the BCBS issued a consultative paper, Review of the Credit
Valuation Adjustment Risk Framework, with the aim of ensuring that all
important drivers of CVA are considered in calculating capital, aligning the
various accounting frameworks and ensuring consistency with the market
risk framework. No date has been set for the implementation of these new
rules, which will increase the level of capital the Bank is required to
maintain.
On November 9, 2015, the FSB issued a standard entitled Total Loss-
Absorbing Capacity (TLAC) Standard for Global Systemically Important Banks
(G-SIBs), which aims to implement a resolution strategy to determine
whether global systemically important banks (G-SIBs) have sufficient loss-
absorbing capacity to minimize impacts on financial stability and maintain
the continuity of critical economic functions. On October 12, 2016, the BCBS
issued the final version of the document, TLAC Holdings, which provides a
framework for the standard. It sets out the regulatory capital treatment
applicable to loss-absorbing instruments held by internationally active
banks. This prudential treatment is intended to reduce contagion in the
financial system should a G-SIB go into resolution. On June 16, 2017, OSFI
released for comment a draft guideline entitled Total Loss-Absorbing
Capacity (TLAC). The draft guideline requires D-SIBS to maintain a minimum
capacity to absorb losses as required under the Bank Act (Canada) and is
part of the bank recapitalization (bail-in) regime. D-SIBs will have until
November 1, 2021 to comply. Also on June 16, 2017, the Government of
Canada released for comment bank bail-in regulations that set out the main
features of the regime, including the types of debt instruments that will be
subject to the regulations. Eligible shares and liabilities issued before the
bail-in regulations come into force would not be subject to conversion. In
addition, the regulations officially designate the Canada Deposit Insurance
Corporation (CDIC) as the resolution authority for Canada’s largest banks and
requires D-SIBs to submit resolution plans to the CDIC.
On January 14, 2016, the BCBS issued the final rules for calculating
market risk in Minimum Capital Requirements for Market Risk, a document
that aims to remedy structural weaknesses in the trading portfolio that had
not been addressed in previous market risk revisions. On June 29, 2017, the
BCBS proposed a simplified alternative to the standardized approach rules
in the consultative document, Simplified Alternative to the
set out
Standardised Approach to Market Risk Capital Requirements. On July 20,
2017, OSFI issued a letter indicating its intention to extend, by at least one
year, the implementation timeline for the rules on minimum capital
requirements for market risk. Consequently, the first regulatory declaration
period will not be before the first quarter of 2021.
On March 4, 2016, the BCBS issued Standardised Measurement
Approach for Operational Risk, a consultative document that proposes a new
standardized method for calculating operational risk.
On March 24, 2016, the BCBS issued Reducing Variation in Credit Risk-
Weighted Assets – Constraints on the Use of Internal Model Approaches, a
consultative document that aims to limit the use of advanced credit risk
calculation models. On April 6, 2016, the BCBS also issued Revisions to the
Basel III Leverage Ratio Framework, a consultative document that proposes,
in particular, revisions to the treatment of derivative exposures.
On April 21, 2016, the BCBS issued the final version of Interest Rate
Risk in the Banking Book, a document that addresses risk management,
capital treatment, and the supervision of interest rate risk in the banking
book. These rules, which have to be implemented by 2018, are intended to
ensure that banks have adequate capital to cover potential banking book
losses arising from interest rate movements and to limit capital arbitrage
between the trading book and the banking book. However, in April 2017,
OSFI informed Canadian banks of its intention to postpone application until
2019.
On July 11, 2016, the BCBS revised the final securitization framework
rules issued on December 11, 2014 in the document entitled Revisions to the
Securitisation Framework. This document was amended to include Criteria for
Identifying Simple, Transparent and Comparable Securitisations, a document
issued in July 2015, as well as Capital Treatment for ‘Simple, Transparent and
Comparable’ Securitisations, a consultative paper issued in November 2015.
The aim of this new document is to address some shortcomings in the
current securitization framework while allowing a more favourable capital
treatment
requirements of simplicity,
transparency and comparability. On July 6, 2017, the BCBS issued a
consultative paper, Capital Treatment for ‘Simple, Transparent and
Comparable’ Short-Term Securitisations, which defines short-term
July 2016 document. On
securitization
rules
August 21, 2017, OSFI announced
implement a new
securitization framework in the first quarter of 2019.
the
intention to
transactions meeting
to supplement
the
for
its
In December 2016, OSFI released an update to the Capital Adequacy
Requirements Guideline. The guideline notably clarifies the rules for
recognizing equity investments in funds and for calculating countercyclical
buffers. In the Bank’s opinion, countercyclical buffers will have a minimal
impact on its capital ratios given that it does not have significant exposures
in countries affected by the buffer.
45
45
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
On March 29, 2017, the BCBS issued Pillar 3 Disclosure Requirements –
Consolidated and Enhanced Framework, which sets out the final disclosure
rules under Pillar 3. This document incorporates the document issued on
January 28, 2015 for phase 1 and the one issued on March 11, 2016 for
phase 2. A third phase will be defined later. The new requirements are
intended to improve transparency, consistency and comparability of results
across banks. On April 20, 2017, OSFI issued the final version of the
guideline entitled Pillar 3 Disclosure Requirements, specifying therein that
D-SIBs will have to meet the BCBS’s requirements for the two first phases as
of October 31, 2018. This guideline will replace OSFI’s November 2007
advisory, Pillar 3 Disclosure Requirements.
Also on March 29, 2017, the BCBS issued the final version of Regulatory
Treatment of Accounting Provisions – Interim Approach and Transitional
Arrangements. This document results from the November 1, 2017 adoption
of IFRS 9, which requires provisions to be recognized according to expected
credit losses rather than incurred losses, as required by the current
standard. The BCBS will retain the current Basel Accord regulatory treatment
for provisions during a transition period. Jurisdictions may adopt transitional
measures to phase in any potential significant negative impacts on regulatory
capital arising from the new expected credit loss impairment model under
IFRS 9. On August 21, 2017, OSFI released for comment a new, revised version
of the Capital Adequacy Requirements Guideline. This new version, which
applies the same principles set forth by the BCBS, addresses the treatment of
allowances following the adoption of IFRS 9. However, on November 29, 2017,
OSFI has announced that no transitional measure will be allowed following
IFRS 9 adoption.
On October 25, 2017, the BCBS issued the final version of Identification
and Measurement of Step-In Risk, which measures the risk of the Bank
providing support to an unconsolidated entity, should that entity experience
financial stress, and do so beyond or in the absence of any contractual
obligation, in order to mitigate the impact of the shadow banking system.
This rule will come into effect between now and 2020.
Capital Management in 2017
Management Activities
On April 11, 2017, the Bank redeemed $1.0 billion of medium-term notes
maturing on April 11, 2022 at a price equal to their nominal value plus
accrued interest.
On June 5, 2017, the Bank began a normal course issuer bid to
repurchase for cancellation up to 6,000,000 common shares over the 12-
month period ending no later than June 4, 2018. During the fiscal year ended
October 31, 2017, the Bank repurchased 2,000,000 common shares for
$115 million, which reduced Common share capital by $16 million and
Retained earnings by $99 million.
On June 13, 2017, the Bank issued 16,000,000 Non-Cumulative 5-Year
Rate-Reset Series 38 First Preferred Shares at a per-share price of $25.00 for
gross proceeds of $400 million. Given that the Series 38 preferred shares
satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On November 15, 2017, after year-end, the Bank redeemed all the
issued and outstanding Non-Cumulative 5-Year Rate-Reset Series 28 First
Preferred Shares. Pursuant to the share conditions, the redemption price was
$25.00 per share plus the periodic dividend declared and unpaid. The Bank
redeemed 8,000,000 Series 28 First Preferred Shares for a total amount of
$200 million. These instruments were excluded from the capital ratio
calculations as at October 31, 2017.
Regulatory Capital Ratios
As at October 31, 2017, the Bank’s CET1, Tier 1 and Total capital ratios were,
respectively, 11.2%, 14.9% and 15.1%,
i.e., above the regulatory
requirements, compared to ratios of, respectively, 10.1%, 13.5% and 15.3%
a year earlier. The increase in the CET1 capital ratio stems essentially from
net income, net of dividends, common share issuances under the Stock
Option Plan, remeasurements of pension plans and other post-employment
benefit plans, and low growth in risk-weighted assets, partly offset by
common share repurchases during the year ended October 31, 2017. The
increase in the Tier 1 capital ratio stems essentially from the same items as
well as from the June 13, 2017 issuance of preferred shares for $400 million,
partly offset by the $200 million redemption of preferred shares on
November 15, 2017, which is already excluded from the capital ratio
calculations as at October 31, 2017. The decrease in the Total capital ratio is
a result of the April 11, 2017 redemption of $1.0 billion in medium-term
notes maturing on April 11, 2022. The leverage ratio as at October 31, 2017
was 4.0%, compared to 3.7% as at October 31, 2016.
Regulatory Capital and Ratios Under Basel III(1)
As at October 31
(millions of Canadian dollars)
Capital
CET1
Tier 1(2)
Total(2)
Risk-weighted assets
CET1 capital
Tier 1 capital
Total capital
Total exposure
Capital ratios
CET1
Tier 1(2)
Total(2)
Leverage ratio
2017
2016
7,856
10,457
10,661
6,865
9,265
10,506
70,173
70,327
70,451
68,205
68,430
68,623
262,539
253,097
11.2 %
14.9 %
15.1 %
10.1 %
13.5 %
15.3 %
4.0 %
3.7 %
(1)
(2)
Figures are presented on an “all-in” basis.
Figures as at October 31, 2017 include the redemption of the Series 28 preferred shares
on November 15, 2017.
For additional information on capital instruments, see Notes 16, 19 and 20 to
the consolidated financial statements.
Dividends
The Bank’s strategy for common share dividends is to aim for a dividend
payout ratio of between 40% and 50% of net income excluding specified
items, taking into account such factors as financial position, cash needs,
regulatory requirements and any other factor deemed relevant by the Board.
For fiscal 2017, the Bank declared $778 million in dividends to common
shareholders, which represents 42% of net income attributable to common
shareholders (2016: 66%). These dividends represented 41% of net income
attributable to common shareholders excluding specified items (2016: 50%).
The declared dividends are within the target payout range. The Bank has
taken a prudent approach to managing regulatory capital and remains
confident in its ability to increase earnings going forward.
46
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Movement in Regulatory Capital(1)
Year ended October 31
(millions of Canadian dollars)
Common Equity Tier 1 (CET1) capital
Balance at beginning
Issuance of common shares (including Stock Option Plan)
Impact of shares purchased or sold for trading
Repurchase of common shares
Common share capital issued by subsidiaries and held by third parties
Contributed surplus
Dividends on preferred and common shares
Net income attributable to the Bank’s shareholders
Removal of own credit spread net of income taxes
Other
Movements in accumulated other comprehensive income
Translation adjustments
Available-for-sale securities
Other
Change in goodwill and intangible assets (net of related tax liability)
Other, including regulatory adjustments and transitional arrangements
Change in defined benefit pension plan asset (net of related tax liability)
Change in amount exceeding 15% threshold
Deferred tax assets
Significant investment in common shares of financial institutions
Change in other regulatory adjustments(2)
Balance at end
Additional Tier 1 capital
Balance at beginning
New Tier 1 eligible capital issuances
Redeemed capital(3)
Change in non-qualifying Additional Tier 1 subject to phase-out
Other, including regulatory adjustments and transitional arrangements
Balance at end
Total Tier 1 capital
Tier 2 capital
Balance at beginning
New Tier 2 eligible capital issuances
Redeemed capital(4)
Change in non-qualifying Tier 2 subject to phase-out
Tier 2 instruments issued by subsidiaries and held by third parties
Change in certain loan loss allowances
Other, including regulatory adjustments and transitional arrangements
Balance at end
2017
2016
6,865
179
(37)
(115)
1
(15)
(863)
1,940
25
19
(39)
(12)
(10)
(81)
3
−
−
(4)
7,856
2,400
400
(200)
−
1
2,601
10,457
1,241
−
(1,000)
−
−
(37)
−
204
6,801
43
(12)
−
7
6
(797)
1,181
19
(380)
22
39
1
(210)
147
−
−
(2)
6,865
1,825
800
−
(225)
−
2,400
9,265
1,052
−
−
−
2
186
1
1,241
Total regulatory capital
10,661
10,506
(1)
(2)
(3)
(4)
Figures are presented on an “all-in” basis.
Represents the change in investments in the Bank’s own CET1.
Figures for the year ended October 31, 2017 include the redemption of the Series 28 preferred shares on November 15, 2017. Figures for the year ended October 31, 2016 do not include the
November 15, 2015 redemption of Series 20 preferred shares that had been excluded from the calculation of capital as at October 31, 2015.
Figures for the year ended October 31, 2016 do not include the $500 million redemption of notes on November 2, 2015 that had been excluded from the calculation of capital as at
October 31, 2015.
47
47
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
RWA by Key Risk Drivers
CET1 RWA amounted to $70.2 billion as at October 31, 2017, rising $2.0 billion from $68.2 billion as at October 31, 2016. This organic growth in RWA was
partly offset by the 2017 first-quarter repayment of the restructured notes of the master asset vehicle (MAV) conduits and by foreign exchange movements. The
Bank’s CET1 risk-weighted assets are presented in the following table.
Capital Adequacy Under Basel III(1)
As at October 31
(millions of Canadian dollars)
Credit risk
Retail
Residential mortgages
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Banking book equities(3)
Securitization
Other assets
Counterparty credit risk
Corporate
Sovereign
Financial institutions
Trading portfolio
Credit valuation adjustment charge(4)
Regulatory scaling factor
Total – Credit risk
Market risk
VaR
Stressed VaR
Interest-rate-specific risk
Total – Market risk
Operational risk
Total
Exposure
at default
49,028
6,196
16,635
63,492
28,493
5,339
910
4,740
24,376
16,567
35,603
53,169
8,309
312,857
Standardized
Approach
AIRB
Approach
Other
Approach
Total
Risk-weighted
assets
2017
Capital
requirement(2)
2016
Risk-weighted
assets
Total
911
−
2,357
1,700
282
408
−
−
−
47
−
−
161
2,227
−
8,093
−
−
906
906
10,039
4,644
1,275
5,254
25,844
703
1,123
910
390
−
150
43
366
2,017
−
2,580
45,299
867
1,324
−
2,191
−
−
−
−
−
−
−
−
−
3,645
−
−
−
−
−
−
3,645
−
−
−
−
−
5,555
1,275
7,611
27,544
985
1,531
910
390
3,645
197
43
366
2,178
2,227
2,580
57,037
867
1,324
906
3,097
10,039
444
102
609
2,204
79
123
73
31
292
16
3
29
174
178
206
4,563
69
106
73
248
803
5,455
1,178
6,823
27,393
875
1,574
875
831
3,176
347
34
402
2,345
2,055
2,540
55,903
1,014
1,067
726
2,807
9,495
312,857
19,038
47,490
3,645
70,173
5,614
68,205
(1)
(2)
(3)
(4)
Figures are presented on an “all-in” basis.
The capital requirement is equal to 8% of risk-weighted assets.
Calculated using the simple risk-weighted method.
Calculated based on CET1 RWA.
48
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Risk-Weighted Assets Movement by Key Drivers(1)
Quarter ended
(millions of Canadian dollars)
Credit risk – Risk-weighted assets at beginning
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Credit risk – Risk-weighted assets at end
Market risk – Risk-weighted assets at beginning
Movement in risk levels(2)
Model updates
Methodology and policy
Acquisitions and disposals
Market risk – Risk-weighted assets at end
Operational risk – Risk-weighted assets at beginning
Movement in risk levels
Acquisitions and disposals
Operational risk – Risk-weighted assets at end
October 31, 2017
July 31, 2017
April 30, 2017
January 31, 2017
October 31, 2016
Total
Total
Total
Total
Total
56,066
833
141
(426)
−
−
423
57,037
3,263
(166)
−
−
−
3,097
9,827
212
−
10,039
56,855
453
(143)
−
−
−
(1,099)
56,066
2,768
353
142
−
−
3,263
9,760
67
−
9,827
55,148
889
176
−
−
−
642
56,855
3,815
(1,047)
−
−
−
2,768
9,611
149
−
9,760
55,903
455
(832)
−
−
−
(378)
55,148
2,807
1,008
−
−
−
3,815
9,495
116
−
9,611
55,848
640
68
(954)
−
−
301
55,903
3,291
(484)
−
−
−
2,807
9,391
104
−
9,495
Risk-weighted assets at end
70,173
69,156
69,383
68,574
68,205
(1)
(2)
Figures are presented on an “all-in” basis and have been calculated based on CET1 risk-weighted assets.
Also includes foreign exchange rate movements that are not considered material.
The table above provides the risk-weighted assets movements by key drivers
underlying the different risk categories.
The “Book size” item reflects organic changes in exposure size and
composition (including new loans and maturing loans). RWA movements
attributable to book size include increases or decreases in exposures,
measured by exposure at default, assuming a stable risk profile.
The “Book quality” item is the Bank’s best estimate of changes in book
quality related to experience, such as underlying customer behaviour or
demographics, including changes resulting from model recalibrations or
realignments.
The “Model updates” item is used to reflect implementations of new
models, changes in model scope, and any other change applied to address
model malfunctions.
The “Methodology and policy” item presents the impact of changes in
calculation methods resulting from changes in regulatory policies.
49
49
National Bank of Canada2017 Annual Report
The Risk Management section of this MD&A provides comprehensive
information about the main types of risk. The “Other risks” presented below
include risks such as business risk and structural interest rate risk in
risk.
addition
the benefit of diversification among
types of
to
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL MANAGEMENT
Allocation of Economic Capital and Regulatory RWA
Economic capital is an internal measure that the Bank uses to determine the
capital it needs to remain solvent and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed as well as the risk
diversification effect among them and among the business segments.
Economic capital thus helps the Bank to determine the capital required to
protect itself against such risks and ensure its long-term viability. The by-
segment allocation of economic capital and regulatory RWA was done on a
stand-alone basis before attribution of goodwill and intangible assets. The
method used to assess economic capital is reviewed regularly in order to
accurately quantify these risks.
Allocation of Risks by Business Segment
As at October 31, 2017
(millions of Canadian dollars)
NATIONAL BANK OF CANADA
Business
segments
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance
and International
Other
Investment solutions
Credit services
Investment solutions
Banking services
Credigy
Trust services
Banking services
Wealth management
solutions
Investment banking services
ABA Bank
Financing solutions to
institutional clients
Trading and investment
solutions
International investment
activties
Treasury operations
Liquidity management
Bank funding
Asset and liability
management
Corporate units
(72)
(36)
(26)
293
159
2,221
50
(323)
1,948
1,562
357
188
2,107
Credit
Market
Operational
Other risks
Total
154
212
379
745
Credit
Market
Operational
Other risks
Total
1,947
199
239
281
2,666
Credit
Market
Operational
Other risks
Total
432
49
45
33
Credit
Market
Operational
Other risks
559
Total
Risk-weighted
assets
Credit
Market
Operational
Total
28,287
4,304
32,591
Credit
Market
Operational
Total
2,548
2,580
5,128
Credit
Market
Operational
Total
18,988
3,047
2,932
24,967
Credit
Market
Operational
Total
4,993
546
Credit
Market
Operational
5,539
Total
50
Banking services
Credit services
Financing
Major activities
Insurance
Credit
Market
Operational
Other risks
Total
Economic capital
by type of risk
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
In this section of the MD&A, grey-shaded text and tables marked with an asterisk (*) are integral parts of the consolidated financial statements. They
represent the Bank’s objectives, the risk management policies and procedures, and the methods applied to measure credit risk, market risk as well as
liquidity and funding risk, as required by IFRS 7 – Financial Instruments: Disclosures.
The Bank views risk as an integral part of its development and the diversification of its activities and advocates a risk management approach consistent with
its business expansion strategy. The purpose of sound risk management is to provide reasonable assurance that incurred risks do not exceed acceptable
thresholds and that risk-taking contributes to the creation of shareholder value. For the Bank, this means striking a healthy balance between return and risk.
The Bank is exposed to risk in two ways. First, it voluntarily exposes itself to certain risk categories, particularly credit and market risk, in order to
generate revenue. Second, it assumes risks that are inherent to its activities—to which it does not choose to expose itself—and that do not generate revenue,
i.e., mainly operational risk. These risks may result in losses that could adversely affect future earnings.
Top and Emerging Risks
Top and emerging risks are risks that could have a material adverse effect on the Bank’s financial results, reputation or long-term business model and strategy.
The Bank’s processes are designed to detect and assess these risks as early as possible so that appropriate mitigating strategies can be applied. The Bank’s
top and emerging risks are as follows.
Risk
Trend
Description
Global
economic
risks
Economic
risks in
Canada
Currently, the main global risks consist of slowing economic growth in certain emerging countries, geopolitical tensions—
in particular the rapid militarization of North Korea—and the adoption of protectionist measures that are undermining
international trade. The coming into power of the new U.S. administration brings its share of concerns about future
policies that might affect the Canadian and Quebec economies. Excessive protectionism could adversely affect certain
industries and slow international trade, negatively affecting our export clients in turn. Furthermore, the rise of
nationalism, the waves of migration to western Europe, and geopolitical tensions have also intensified uncertainty in the
economic system.
In addition, given exceptional monetary measures taken by central banks combined with mild economic growth and low
inflation, long-term interest rates continue to be historically low in the major advanced economies. Such a situation may
have prompted market participants to adopt excessive risk-taking strategies in search of higher returns, the negative
effects of which may be felt if interest rates return to normal faster than expected, particularly in the United States.
Therefore, the Bank is remaining vigilant and continuing to rely on its strong risk management framework to identify,
assess and mitigate risk so that it remains within the risk appetite limits.
The domestic energy sector struggled in the wake of the global oil supply shock but is gradually adapting to the new
environment. The fossil fuel-producing provinces are back on track to growth but their unemployment rates remain high.
Fortunately, stable economic and financial conditions in the three largest provinces (Ontario, Quebec, British Columbia)
continue to support a credit environment that is favourable for the Bank’s loan portfolio. Still, Canada remains vulnerable
to a deteriorating economic backdrop, which threatens to erode job creation and disposable household income—even
more so given the high household debt levels. Economic growth, and more specifically the housing market, has been
stimulated in recent years by very low interest rates. A housing price correction is therefore representing an added source
of risk for the Canadian economy should the central banks continue to reduce monetary stimulus. The Bank maintains
sound credit practices, but tighter mortgage rules remain an issue for Canadian households.
The Bank also closely monitors international developments that may affect the Canadian economy. The renegotiation
of agreements such as NAFTA has cast substantial uncertainty over the trade relationship between Canada and the United
States and other economic partners. These uncertainties have significantly destabilized the industry, and the Bank has
responded by continuing to monitor market developments and remaining vigilant in line with its risk tolerance policy.
51
51
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Risk
Trend
Description
Low oil and
gas prices
Low oil and gas prices have had a direct impact on the energy sector, challenging many energy companies to implement
a broad range of measures to address the situation. Should oil and gas prices continue to fall or remain depressed for
an extended period of time, the obstacles to be overcome by these companies will only become more daunting and will
affect their repayment capacity and credit quality. The potential impact of a prolonged decrease on the Bank’s operating
results depends on how long oil prices remain low and how businesses deploy measures to increase efficiency, reduce
outflows of funds, and sell assets in order to raise capital to cover operating costs. The Bank is actively managing this
portfolio, and several measures have already been taken with our clients to limit the risk of loss.
Information
system
disruptions
and security
breaches
Technology has become a major part of the banking industry’s operations, in particular the ever-increasing use of
information technologies such as mobile, wireless and web-enabled devices. Despite the Bank’s efforts to ensure the
integrity of its systems and information, it is exposed to the risks associated with data breaches, malicious software,
unauthorized access, hacking, phishing, identity theft, intellectual property theft, asset theft, industrial espionage and
possible denial of service due to activities causing network failures and service interruptions. It is also possible for the
Bank to be unable to prevent or implement effective preventive measures against every potential cyber-threat, as the
tactics used are multiplying, change frequently, come from a wide range of sources and are increasingly sophisticated.
Disruptions to or malfunctions in the physical infrastructure or operating systems that support the Bank and its
clients, or cyber-threats and security breaches affecting the networks, systems or tools that clients use to access
products and services, could cause client attrition; financial loss; inability of clients to do their banking; non-
compliance with privacy legislation or any other laws in effect; legal disputes; fines; penalties or regulatory action;
reputational damage; compliance, corrective measure, investigative, or restoration costs; cost hikes to maintain and
upgrade technological infrastructures and systems, all of which could affect the Bank’s operating results or financial
position.
To protect its clients, the Bank closely monitors and actively manages its control environment. It also monitors the
changing global environment and continues to improve the processes and practices used to prevent, identify and
manage cybersecurity threats to ensure continuous effectiveness and protection. The Bank continually assesses the
effectiveness of key controls through testing, measuring its own practices against best practices, and via external
benchmarking. The Bank also invests in projects designed to constantly update and improve its information technology
infrastructure, controls, internal resources and technological capabilities. The Board’s Risk Management Committee is
regularly informed of cybersecurity trends and developments to gain a better understanding of potential cybersecurity
risks.
52
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Risk
Trend
Description
Reliance on
technology
and third
parties
The Bank is reliant on technology, as clients are seeking greater access to products and services on a variety of
platforms and because many of the products and services require substantial data processing. As such, the Bank’s
technology platform must be able to manage all such data. The fast pace of technological change combined with both
client and competitive pressures require significant and sustained investment in technology. Unsuccessful
implementation of technological improvements or new products or services could significantly affect the Bank’s
ability to serve and retain clients.
Third parties provide essential components of the Bank’s commercial infrastructure such as Internet connections
and access to network and other communications services. The Bank is also party to outsourcing agreements for IT
support and for cash management and processing. Interruptions in these services could adversely affect the Bank’s
ability to provide products and services to its clients and conduct its business. To mitigate this risk, the Bank has an
outsourcing risk management framework that includes business continuity plans that are tested periodically to
ensure their effectiveness in times of crisis. Despite these preventative measures, it is possible that these third
parties may not anticipate or implement effective measures against all of the risks related to technology and
information security.
Third-party cloud computing solutions could raise the risks related to data security and breaches if security
control protocols involving these third parties are overridden. As such, the Bank’s practices for managing
procurement processes and suppliers must also continue to evolve so it can appropriately manage the related risks.
Technological
innovation
The Bank’s financial performance depends on its ability to develop and market new and innovative products and
services, adopt and develop new technologies that help differentiate its products and services and generate cost
savings, and market these new products and services at the right time and at competitive prices. Failure to properly
review critical changes within the business before and during the implementation and deployment of key
technological systems or failure to align client expectations with the Bank’s client commitments and operating
capabilities could adversely affect the Bank’s operating results or financial position.
Other Factors That Can Affect Future Results
International Risks
Through the operations of some of its units (mainly its New York and London
offices) and subsidiaries in Canada and abroad (in particular, Credigy Ltd.
and Advanced Bank of Asia Limited), the Bank is exposed to risks arising
from its presence in international markets and foreign jurisdictions. While
these risks do not affect a significant proportion of the Bank’s portfolios,
their impact must not be overlooked, especially those that are of a legal or
regulatory nature. Such risk can be particularly high when the exposure is in
a territory where the enforceability of agreements signed by the Bank is
uncertain, in countries and regions facing political or socio-economic
disturbances, or in countries that may be subject to international sanctions.
Generally speaking, there are many ways in which the Bank may be exposed
to the risks posed by other countries, not the least of which being foreign
laws and regulations. In all such situations, it is important to consider what
is referred to as “country risk,” which affects not only the activities that the
Bank carries out abroad but also the business that it conducts with non-
resident clients as well as the services it provides to clients doing business
abroad, such as electronic funds transfers, international products and
transactions from Canada in foreign currencies.
As part of its activities related to managing international sanctions and
to combat money laundering and terrorist financing (MLTF), the Bank
performs audits of country risk. This control may have restrictions, the scope
of which can vary based on current sanctions and on the MLTF risk
classification of the country in question. MLTF risk is a financial, regulatory
and reputation risk. The Bank complies with requirements in Canada and
those in the countries where it does business. It has implemented internal
policies, standards and controls for sound management of prevention,
detection, reporting and information exchange. The Bank maintains an
infrastructure through which it can respond effectively to this risk and ensure
that its employees, officers and directors take part in training. The Bank is
committed to complying with regulatory requirements and addressing this
risk by taking steps to discourage MLTF through its products and services.
53
53
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
The Bank is exposed to financial risks outside Canada and the United
States primarily through its interbank transactions on international financial
markets or through international trade finance activities. This geographic
exposure represents a moderate proportion of the Bank’s total risk. The
geographic exposure of loans is disclosed in the quarterly Supplementary
Financial Information report available on the Bank’s website at nbc.ca. To
control country risk, the Bank sets credit concentration limits by country and
reviews and submits them to the Board for approval upon renewal of the
Credit Risk Management Policy. These limits, which are based on a
percentage of the Bank’s regulatory capital, are proportionate to the level of
risk represented by each country, particularly emerging countries. The risk is
rated using a classification mechanism similar to the one used for credit
default risk. In addition to the country limits per se, authorization caps and
limits are established, as a percentage of capital, for the world’s high-risk
regions, i.e., essentially all regions except for North America, Western
European countries and the developed countries of Asia.
Level of Competition
The level of competition in the Bank’s markets has an impact on its
performance. Retaining clients hinges on several factors, including the prices
of products and services, quality of service, and changes to the products and
services offered.
Acquisitions
The Bank’s ability to successfully complete an acquisition
is often
conditional on regulatory approval, and the Bank cannot be certain when or
under what conditions, if any, approval will be granted. Acquisitions could
affect future results should the Bank experience difficulty integrating the
acquired business. If the Bank does encounter difficulty integrating an
acquired business, maintaining an appropriate governance level over the
acquired business, or retaining key officers within the acquired business,
these factors could prevent the Bank from realizing expected revenue
growth, cost savings, market share gains and other projected benefits of the
acquisition.
Ability to Attract and Retain Key Officers
The Bank’s future performance depends largely on its ability to attract and
retain key officers. There is intense competition for the best people in the
financial services industry, and there is no assurance that the Bank, or any
entity it acquires, will be able to continue to attract and retain key officers.
Judicial and Regulatory Proceedings
The Bank takes reasonable measures to comply with the laws and
regulations in effect in the jurisdictions where it operates. Should these
measures prove ineffective, the Bank could be subject to judicial or
regulatory decisions resulting in fines, damages, or other costs or to
restrictions likely to adversely affect its net income and damage its
reputation. The Bank may also be subject to litigation in the normal course of
business. Although the Bank establishes provisions for the measures it is
subject to under accounting requirements, actual losses resulting from such
litigation could differ significantly from the recognized amounts, and
unfavourable outcomes in such cases could have a significant adverse effect
on the Bank’s financial results. The resulting reputational damage could also
affect the Bank’s future business prospects. For additional information on
this topic, see Note 27 to the consolidated financial statements.
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine how the
Bank reports its financial position and operating results and may require
management to make estimates or rely on assumptions about matters that
are inherently uncertain. Any changes to these estimates and assumptions
may have a significant impact on the Bank’s operating results and financial
position.
Other Factors
Other factors that could affect the Bank’s future results include amendments
to tax legislation, unexpected changes in consumer spending and saving
habits, the timely development and launch of new products and services, the
ability to successfully align its organizational structure, resources and
processes, the ability to activate a business continuity plan within a
reasonable time, the potential impact of international conflicts or natural
catastrophes on the Bank’s activities, and the Bank’s ability to foresee and
effectively manage the risks associated with these factors through rigorous
risk management.
54
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Risk Management Framework
Risk is rigorously managed. That means it is identified, measured and controlled to ensure that the Bank’s operations yield an adequate return for the level of
risk assumed. Managing risk requires a solid understanding of every type of risk found across the Bank. In addition to providing assurance that risk levels do
not exceed acceptable thresholds, effective risk management can be used to control the volatility of the Bank's results.
Despite the exercise of stringent risk management and the mitigation measures in place, risk cannot be suppressed entirely, and the residual risks may
occasionally cause significant losses. In the normal course of business, the Bank is primarily exposed to the risks presented below.
Credit
risk
Market
risk
Funding and liquidity
risk
Operational
risk
Regulatory compliance
risk
Reputation
risk
Strategic
risk
Environmental
risk
To achieve its risk management objectives, the Bank relies on a risk
management framework that combines the following components:
—
—
—
—
—
—
—
—
incorporation of risk management into the corporate culture;
risk appetite and reporting;
enterprise-wide stress testing;
governance structure;
risk management policies;
risk models governance and vetting framework;
independent oversight by the Compliance Service;
independent assessment by Internal Audit.
Incorporation of Risk Management Into the Corporate Culture
The Bank’s management continually promotes risk management through
internal communications. A balanced approach is advocated, whereby
business development initiatives are combined with a constant focus on
sound risk management. In particular, risk is taken into consideration when
preparing the segments’ business plans, when analyzing strategic initiatives
and when launching new products. The Bank’s risk management is also
strengthened by incentive compensation programs that are structured to
reflect the Bank’s risk appetite. In addition, all employees must complete
mandatory annual regulatory compliance training focused on the Bank’s
Code of Conduct and Ethics and anti-money laundering and anti-terrorism
financing efforts. Risk management training is also offered across all
segments of the Bank.
Furthermore,
the existing risk
management
roles and
responsibilities by reinforcing the concept of the three lines of defence. The
Governance Structure section presented on the following pages defines this
concept as well as the roles and responsibilities at all levels of the
organization.
the Bank has defined clear
the effectiveness of
framework,
to ensure
First Line of Defence
Business Units
Second Line of Defence
Risk Management
and Oversight Functions
Third Line of Defence
Internal Audit
– Identify, manage, assess and
in day-to-day
risks
mitigate
activities.
– Establish the enterprise-wide risk
and
framework
management
policies.
– Ensure activities are in alignment
with the Bank’s risk appetite and
risk management policies.
– Provide independent oversight of
management practices and an
independent challenge of the first
line of defence.
– Provide independent assurance to
management and the Board on the
overall effectiveness of the risk
management policies, processes
and
the
in which the first and
manner
second lines of defence reach their
control and
risk management
objectives.
practices,
including
– Promote
an
risk
management culture throughout
the Bank.
effective
– Monitor and report on risk.
55
55
National Bank of Canada2017 Annual Report
Enterprise-Wide Stress Testing
As part of a more extensive process aimed at ensuring that the Bank
maintains adequate capital levels commensurate with its business strategy
and risk appetite, an enterprise-wide stress testing program is in place at the
Bank. Stress testing can be defined as a risk management method that
assesses the potential effects—on the Bank’s financial position, capital and
liquidity—of a series of specified changes in risk factors, corresponding to
exceptional but plausible events. The program supports management’s
decision-making process by identifying potential vulnerabilities for the Bank
as a whole that are considered in setting limits as well as in longer term
business planning. The scenarios and stress test results are reviewed by a
group of stress testing experts, a stress testing oversight group and the
Global Risk Committee and are approved by the Board. For additional
information, see the Stress Testing and Crisis Scenarios headings of the
credit, market and liquidity risk sections.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
The following guiding principles support strong risk management:
—
—
—
—
—
risk is everyone’s business: business units, risk management and
oversight functions as well as Internal Audit play an important role in
ensuring an effective and robust risk management framework is in
place;
client-centric: having quality information is key to understanding our
clients, effectively managing risk, and delivering excellent client
service;
enterprise-wide: an integrated view of risk is the basis for sound risk
management and decision-making by management;
human capital: the Bank’s employees are engaged, experienced and
have a high level of expertise; their curiosity supports continuous
development and their rigour promotes a sound risk culture across the
organization;
fact-based: good risk management relies heavily on common sense and
judgment and on advanced systems and models.
Risk Appetite and Reporting
Risk-taking is intrinsic to a financial institution’s business. Business unit
strategies have always—implicitly or explicitly—incorporated decisions about
the amount of risk they are willing to assume. Risk appetite represents how
much risk an organization is willing to assume to achieve its business
strategy. The Bank cultivates a risk management culture that is aligned with
its risk appetite, doing so by setting risk tolerance thresholds that determine
its risk-taking capacity.
The Bank’s risk appetite framework consists of principles, statements,
metrics as well as targets and is reinforced by policies and limits. It is
defined both quantitatively and qualitatively and requires:
—
—
—
—
—
—
—
—
—
a target risk rating of at least A+ or the equivalent;
a risk-reward balance;
a stable risk profile;
a strategic level of concentration aligned with approved targets;
a strong capital position;
a strong liquidity position;
a low tolerance to operational and reputation risk;
a rigorous management of regulatory compliance risk;
operational and
circumstances and crisis.
information systems stability
in both normal
The Bank’s management and business units are involved in the process
for setting the risk appetite and are responsible for adequately monitoring
the chosen key risk indicators. These needs are assessed by means of the
enterprise strategic planning process. The risk indicators are reported on a
regular basis to ensure an effective alignment of the Bank’s risk profile to its
risk appetite; otherwise, appropriate actions could be taken.
56
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Governance Structure *
The following diagram shows the Bank’s overall governance architecture and the governance relationships established for risk management. As the second
line of defence, the Risk Management Group sets the risk management rules, policies and guidelines to which the business units must adhere and also
ensures compliance therewith.
SHAREHOLDERS
Elect
Appoint
BOARD OF
DIRECTORS
Appoints and mandates
Independent
Auditor
Reports to
Audit
Committee
Risk Management
Committee
Human Resources
Committee
Conduct Review
and Corporate Governance
Committee
Report to
Report to
Advises
Internal Audit
Oversight
Function
Finance
Oversight
Function
Risk
Management
Oversight
Function
Reports to
Global Risk Committee
Compliance
Oversight
Function
Risk Oversight
Working Group
Report to
Market Risk
Management
Committee
Operational
Risk
Management
Committee
Enterprise-
Wide Risk
Management
Committee
Appoints
President
and CEO
Appoints
Office of the
President
Report to
Business Units
The Human Resources Committee(1)
The Human Resources Committee examines and approves the Bank’s total
compensation policies and programs, taking into consideration the risk
management framework, and recommends their approval to the Board. It
sets annual objectives and key performance indicators for the President and
Chief Executive Officer, recommends that they be approved by the Board, and
evaluates the performance and achievements against these objectives and
indicators. It recommends to the Board that it approve the compensation of
the President and Chief Executive Officer, of the members of the Office of the
President, and of the heads of the oversight functions. It also periodically
reviews and examines the management succession plan.
The Conduct Review and Corporate Governance Committee(1)
The Conduct Review and Corporate Governance Committee is in charge of
implementing and ensuring compliance with rules, procedures, and
governance. It oversees the processes for managing and monitoring related
party transactions and evaluates the performance and effectiveness of the
Board and its members.
The Board of Directors (Board)(1)
The Board examines and approves the Bank’s overall risk philosophy and
risk appetite, acknowledges and understands the main risks faced by the
Bank, and makes sure appropriate systems are in place to effectively manage
and control those risks. It performs its mandate in this regard both directly
and through its committees, particularly the Audit Committee, the Risk
Management Committee, the Human Resources Committee and the Conduct
Review and Corporate Governance Committee.
The Audit Committee(1)
The Audit Committee oversees the work of the internal auditor and the
independent auditor, the financial reporting and analysis process, the Bank’s
internal controls, and the application of the policy for reporting irregularities
related to accounting, internal accounting controls and other auditing
matters.
The Risk Management Committee (RMC)(1)
The Risk Management Committee reviews the risk appetite framework, the
main risk management policies as well as risk tolerance limits and
recommends their approval by the Board. It ensures that appropriate
resources, processes and procedures are in place to properly and effectively
manage risk on an ongoing basis. Finally, it monitors the risk profile and risk
trends of the Bank’s activities and ensures alignment with the risk appetite.
(1)
Additional information about the Bank’s governance architecture can be found in the
Management Proxy Circular for the 2018 Annual Meeting of Holders of Common Shares,
which will soon be available on the Bank’s website at nbc.ca and on SEDAR’s website at
sedar.com. The mandates of the Board and its committees are available in their entirety at
nbc.ca.
57
57
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
The Office of the President and the Bank’s Management
Composed of the President and Chief Executive Officer and the officers
responsible for the Bank’s main functions and business units, the Office of
the President ensures that risk management is effective and aligned with the
Bank’s pursuit of its objectives and strategies. The Bank’s management
promotes the integration of risk management into its corporate culture and
manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk
management framework. It is responsible for providing the Bank’s Board and
management with objective, independent assurance as well as advice on the
effectiveness of the main governance, risk management, and internal control
processes and systems and for making recommendations to promote the
Bank’s long-term strength.
The Global Risk Committee (GRC)
The Global Risk Committee defines the parameters of the policies that
determine risk tolerance and the overall risk strategy, for the Bank and its
subsidiaries as a whole, and sets limits as well as tolerance and intervention
thresholds enabling the Bank to properly manage the main risks to which it
is exposed. The committee approves and monitors all large credit facilities. It
also recommends for Board approval the Bank’s risk philosophy, risk
appetite and risk profile management. The Operational Risk Management
Committee, the Market Risk Management Committee, and the Enterprise-
Wide Risk Management Committee presented in the governance structure
diagram above are the primary committees reporting to the Global Risk
Committee. The Global Risk Committee also carries out its mandate through
the Senior Complex Valuation Committee, the Committee on Banks, the
Models Oversight Committee and the Product and Activity Review
Committees.
The Business Units
As the first line of defence, the business units manage risks related to their
operations within established
risk
management policies by identifying, analyzing and understanding the risks
to which they are exposed and implementing risk mitigation mechanisms.
The management of these units must ensure that employees are adhering to
current policies and limits.
in accordance with
limits and
The Finance Oversight Function
The Finance Oversight Function is responsible for optimizing management of
financial resources and ensuring sound governance of financial information.
It helps the business segments and support functions with their financial
performance, ensures compliance with regulatory requirements, and carries
out the Bank’s reporting to shareholders and the external reporting of the
various units, entities and subsidiaries of the Bank.
The Risk Management Oversight Function
The Risk Management Oversight Function is responsible for identifying,
integrated
assessing and monitoring—independently and using an
approach—the various risks to which the Bank is exposed and for promoting
a risk management culture within the Bank. The Risk Management team
helps the Board and management understand and monitor the main risks.
The unit also develops, maintains and communicates the risk appetite
framework while overseeing the integrity and reliability of risk measures.
The Compliance Oversight Function
The Compliance Oversight Function is responsible for implementing a Bank-
wide regulatory compliance risk management framework by relying on an
organizational structure that includes functional links to the main business
segments. It also exercises independent oversight of the compliance of the
Bank and its subsidiaries with policies and procedures on regulatory
compliance risk.
The Risk Oversight Working Group
The working group that monitors compensation-related risks supports the
Human Resources Committee in its compensation risk oversight role. It’s a
three-member group consisting of the Executive Vice-President of Risk
Management, the Chief Financial Officer and Executive Vice-President of
Finance and Treasury, and the Executive Vice-President of Human Resources
and Corporate Affairs. The working group helps to ensure that compensation
policies and programs do not unduly encourage senior management
members, officers, material risk takers or bank employees to take risks
beyond the Bank’s risk tolerance thresholds. As part of that role, it ensures
that the Bank is adhering to the Corporate Governance Guidelines issued by
OSFI and to the Principles for Sound Compensation Practices issued by the
Financial Stability Board, for which the Canadian implementation and
monitoring is conducted by OSFI. The Board’s Risk Management Committee
also reviews the reports presented by the working group to the Human
Resources Committee.
58
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Risk Management Policies
Risk management policies and the related standards and procedures are the
essential elements of the risk management framework. They set out
responsibilities, define and describe the main activity-related risks, specify
the requirements that the business units must meet in assessing and
managing risk, stipulate the authorization process for risk-taking and set the
risk limits to be adhered to. These policies cover all the main risks in the
Bank, are reviewed regularly to ensure they are still relevant given changes in
the markets and in the business plans of the Bank’s business units, and
apply to the entire Bank and its subsidiaries. Other policies, standards, and
procedures complement the main policies and cover more specific aspects of
risk management such as business continuity, the launch of new products,
initiatives or activities, or financial instrument measurement.
Risk Models Governance and Vetting Framework
In most cases, the Bank’s exposure to the main risks, such as credit risk and
market risk, is assessed through the use of models. The key components of
the Bank’s model vetting governance framework are as follows: the model
risk management policies, the Models Oversight Committee, and the model
vetting group. The policies set the rules and guidelines applicable to both the
model development and the model vetting groups. The scope of models
covered is wide, ranging from the market risk pricing models and automated
credit decision-making models to the business risk capital model, including
models used for regulatory capital and stressed capital purposes.
The Bank makes increasing use of models to guide enterprise-wide risk
management, financial markets strategy, economic and regulatory capital
allocation, global credit risk management, wealth management and
profitability measures. Models have in fact become a standard in risk
management. This stresses the growing importance of model risk for banks,
hence the implementation of a rigorous policy and sound model vetting
processes to ensure models can be used appropriately and efficiently to
manage risks.
One of the cornerstones of the Bank’s policies is the general principle
that all models that are deemed important for the Bank or that are used for
regulatory capital purposes require independent vetting. To that effect, all
models used by the Bank are classified in terms of their risk level (low,
medium or high). Based on that assessment, the Bank applies strict
guidelines with respect to model review requirements and the minimum
frequency of such reviews. The Bank believes that the best defence against
“model risk” is the implementation of a robust development and validation
framework.
Independent Oversight by the Compliance Service
Compliance is an independent oversight function within the Bank. Its Senior
Vice-President and Chief Compliance Officer has direct access to the RMC
and to the President and Chief Executive Officer and can communicate
directly with officers and directors of the Bank and of its subsidiaries and
foreign centres. The Senior Vice-President and Chief Compliance Officer
meets regularly with the Chair of the RMC (with whom she has a direct
reporting relationship) in the absence of management, to review matters on
the Bank’s
the
management and on access to the information required.
the Compliance Service and
relationship between
the
Business unit managers must oversee
implementation of
mechanisms for the daily control of regulatory compliance risks arising from
the operations under their responsibility. Compliance exercises independent
oversight in order to assist managers in effectively managing these risks and
to obtain reasonable assurance that the Bank is compliant with the
regulatory requirements in effect where it does business, both in Canada and
internationally.
The control framework covers the following:
—
—
—
—
—
—
—
—
—
identification, evaluation, communication, maintenance and updating
of regulatory requirements;
information gathering and monitoring of regulatory changes;
identification of the business units affected by these requirements;
documentation of compliance and regulatory requirement controls
applicable to daily operations,
including monitoring procedures,
remedial action plans and periodic reports produced by the business
units;
continuous training for all employees;
information exchange between the business segments, business units
and Compliance;
independent oversight to assess the effectiveness of regulatory
compliance risk management by the business units and to detect
shortcomings or non-compliance in the application of existing policies
and procedures;
quarterly and annual reports to the RMC on the main results of
compliance oversight and on any change to the regulatory compliance
risk framework or its effectiveness;
annual certification process.
Independent Assessment by Internal Audit
Internal Audit is an independent, objective function within the Bank. Through
the Audit Committee, it provides assurance to management and the Board as
to the Bank’s level of command over its activities, advises on how to improve
those activities, and contributes to the creation of added value. It helps the
Bank to achieve its objectives by applying a systematic, methodical approach
for assessing and improving the effectiveness of the design and operation of
its main governance, risk management and internal control processes and
systems and formulates recommendations to promote the Bank’s long-term
strength.
Whenever recommendations are issued, Internal Audit is mandated to
independently evaluate the appropriateness of the measures taken by
managers to resolve issues and then to ensure rigorous follow-up.
The Senior Vice-President of Internal Audit reports to the Chair of the
Audit Committee. Her independence is ensured through an administrative
relationship with the President and Chief Executive Officer, and she may, at
any time, call an unscheduled Audit Committee meeting. Internal Audit has
unrestricted access to all business segments, corporate units and
subsidiaries of the Bank.
59
59
National Bank of Canada2017 Annual Report
Credit Risk Rating and Assessment
Before a sound and prudent credit decision can be taken, the obligor’s or
counterparty’s credit risk must be accurately assessed. This is the first step
in processing credit applications. Each application is analyzed and assigned
one of 19 grades on a scale of 1 to 10 using a credit rating system developed
by the Bank for all portfolios exposed to credit risk. As each grade
corresponds to a debtor’s, counterparty’s or third party’s probability of
default, the Bank can determine the credit risk. The credit risk assessment
method varies according to portfolio type. There are two main methods for
assessing credit risk, i.e., the Advanced Internal Rating-Based (AIRB)
Approach or the Standardized Approach, as defined by the Basel Accord to
its
determine minimum regulatory capital requirements for most of
portfolios.
The main parameters used to measure the credit risk of loans
outstanding and undrawn amounts under the AIRB Approach are as follows:
—
—
—
probability of default (PD), which is the probability of through-the-cycle
12-month default by the obligor, calibrated on a long-run average PD
throughout a full economic cycle;
loss given default (LGD), which represents the magnitude of the loss
from the obligor’s default that would be expected in an economic
downturn and subject to certain regulatory floors, expressed as a
percentage of exposure at default (EAD);
EAD, which is an estimate of the amount drawn and of the expected use
of any undrawn portion prior to default, and cannot be lower than the
current balance.
The methodology as well as the data and the downturn periods used to
estimate LGD are described on the next page.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Credit Risk Management
Credit risk is the risk of incurring a financial loss if an obligor does not fully
honour its contractual commitments to the Bank. Obligors may be debtors,
issuers, counterparties or guarantors. Credit risk is the most significant risk
facing the Bank in the normal course of business. The Bank is exposed to
credit risk not only through its direct lending activities and transactions but
also through commitments to extend credit, letters of guarantee, letters of
credit, over-the-counter derivatives
trading, available-for-sale debt
securities, securities purchased under reverse repurchase agreements,
deposits with financial institutions, brokerage activities, and transactions
carrying a settlement risk for the Bank such as irrevocable fund transfers to
third parties via electronic payment systems.
Governance
A policy framework centralizes the governance of activities that generate
credit risk for the Bank and is supplemented by a series of subordinate
internal or sectoral policies and guidelines on specific management issues
such as credit limits, collateral requirements and risk quantification or issues
that provide more thorough guidance for given business segments.
For example, the institutional activities of the Bank and its subsidiaries
on financial markets and international commercial transactions are governed
by business unit directives that set out standards adapted to the specific
environment of these activities. This also applies to retail brokerage
subsidiaries. In isolated cases, a business unit or subsidiary may have its
own credit policy, and that policy must always fall within the spirit of the
Bank’s policy framework and be reviewed and approved by the management
of the Risk Management Group. The Risk Management Group defines the
scope of the universe of subsidiaries carrying significant credit risks and the
magnitude of the risks incurred.
Credit risk is controlled through a rigorous process that comprises the
following elements:
—
—
—
—
—
—
—
—
—
credit application;
credit risk rating and assessment;
economic capital assessment;
stress testing and crisis scenarios;
credit granting process;
risk mitigation;
follow-up of monitored accounts and recovery;
counterparty risk assessment;
settlement risk assessment.
60
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
AIRB APPROACH
DATA
DOWNTURN PERIOD
METHODOLOGY FOR CALCULATING LGD
Retail
The Bank’s internal historical data from 1996 to 2014
1996-1998, 2000-2002
October 2008 – December 2009
LGD based on the Bank’s historical
recoveries and losses
Corporate
The Bank’s internal historical data from 2000 to 2014
2000-2003 and 2008-2009
LGD based on the Bank’s historical
recoveries and losses
Sovereign
Moody’s observed default price of bonds, from
1983 to 2010
S&P rating history from 1975 to 2011
No specific period
Based on implied market LGD using
observed bond price decreases following
the issuer’s default
Financial institutions
Global Credit Data Consortium loss and
recovery database from 1998 to 2014
1991-1992, 1994, 1998, 2001-2002 and
2008-2009
Model for predicting LGD based on
different issue- and issuer-related risk
drivers
Personal Credit Portfolios
This category comprises portfolios of residential mortgage loans, consumer
loans and loans to certain small businesses. The Bank uses AIRB tools and
models to assess credit risk. Models are in place for the main portfolios,
particularly mortgage loans, home equity lines of credit, credit cards, budget
loans and lines of credit. A risk analysis based on loan grouping in pools of
homogeneous obligor and product profiles is used for overall management of
personal credit portfolios. This personal credit assessment approach, which
has proven particularly effective for estimating loan defaults and losses,
takes a number of factors into account, namely:
behaviour scoring;
loan product characteristics;
collateral provided;
the length of time on the Bank’s balance sheet;
loan status (active, delinquent or defaulted).
This mechanism provides adequate risk measurement inasmuch as it
effectively differentiates risk levels by pool. Therefore, the results are
periodically reviewed and, if necessary, adjustments are made to the models.
Obligor migrations between pools are among the factors considered in the
credit risk assessment.
Loan pools are also established based on probability of default, loss
given default and exposure at default, which are measured based on the
characteristics of the obligor and the transaction itself. The credit risk of
these portfolios is estimated using credit scoring models that determine the
obligor’s probability of default. Loss given default is estimated based on
transaction-specific factors such as
loan product characteristics (for
example, a line of credit versus a term loan), loan-to-value ratio and types of
collateral.
Under the Bank’s standards applicable to default-risk rating and
facility-risk rating and according to its risk review, renewal and quantification
standards, default risk ratings must be reviewed annually. Personal credit
risk assessments are based on a group of debtors with similar credit
histories and behaviour profiles.
The credit scoring models are also used to grant new credit. These
models use proven statistical methods
that measure applicants’
characteristics and history based on internal and external historical
information to estimate the applicant’s future credit behaviour and assign a
probability of default. The underlying data include client information such as
current and past employment, historical loan data in the Bank’s management
systems and information from external sources such as credit rating
agencies.
The Bank also uses behaviour scoring models to manage and monitor
current commitments. The risk assessment is based on statistical analyses of
the past behaviour of obligors with which the Bank has a long-term
relationship in an effort to predict their future behaviour. The underlying
information includes the obligor’s cash flows and borrowing trends.
Information on characteristics that determine behaviour in these models also
comes from both internal sources on current commitments and external
sources.
Business and Government Credit Portfolios
This category comprises business (other than some small businesses that
are classified in personal credit portfolios), government and financial
institution credit portfolios.
These credit portfolios are assigned a risk rating based on a detailed
individual analysis of the financial and non-financial aspects of the obligor,
including the obligor’s financial strength, sector of economic activity,
competitive ability, access to capital and management quality. The Bank has
risk-rating tools and models enabling it to specifically assess the risk
represented by an obligor in relation to its industry and peers. The models
used are adapted to the obligor’s broad sector of activity. Models are in place
for nine sectors: business/commercial, large business, banks-brokerage,
sovereigns, investment funds, energy, real estate, agriculture and insurance.
61
61
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
This risk assessment method assigns a default risk rating to an obligor
that reflects its credit quality. To each default credit risk rating corresponds a
probability of default (see the following table). Using this classification of
obligor credit risk, the Bank can differentiate appropriately between the
various assessments of an obligor’s capacity to meet its contractual
obligations. Default risk ratings are assigned according to an assessment of
an obligor’s commercial and financial risks based on a solvency review.
Various risk quantification models, described below, are used to perform this
assessment.
The business and government default risk rating scale used by the Bank
is similar to the systems used by major external rating agencies. The
complete default risk-rating scale comprised of 19 grades is presented in the
Supplementary Regulatory Capital Disclosure report, which is available on
the Bank’s website at nbc.ca. The following table presents a grouping of the
grades by major risk category and compares them with the ratings of two
major rating agencies.
Internal Default Risk Ratings – Business and government*
The credit risk of obligors and of their facilities are assessed with the
PD and LGD parameters at least once a year or more often if significant
changes (triggers) are observed when updating financial information or if
another qualitative indicator of a deterioration in the obligor’s solvency or in
the collateral associated with the obligor’s facilities is noted.
A watchlist also exists that enables the Bank to more actively monitor
the financial position of obligors whose default-risk rating is greater than or
equal to 7.0. This process seeks to minimize an obligor’s default risk and
allows for proactive credit risk management.
Validation
The Risk Management Group monitors the effectiveness of the risk-rating
systems and associated parameters, which are also reviewed regularly in
accordance with the Bank’s policies.
Backtesting
is performed at regular
the
effectiveness of the models used to estimate probability of default, loss
given default and exposure at default. For probability of default in particular,
this backtesting takes the form of sequentially applied statistical tests
designed to assess the following criteria:
to validate
intervals
the model’s discriminatory power;
overrides;
—
—
— model calibration;
—
the stability of the model’s output.
The credit risk quantification models are developed and tested by a
team of specialists and their performance is monitored by the applicable
business units and related credit risk management services. New models are
validated by a unit that is independent of both the specialists who developed
the model and the concerned business units, and approved through an
escalation process established by the model risk management policy.
Furthermore, new models or changes to existing models that markedly
impact regulatory capital must be approved by the Board before being
submitted to the regulatory agencies, and a summary report of all changes to
the models is submitted to the RMC once a year.
The default risk-rating systems, methods and models are also subject to
periodic independent validation as often as required given the inherent risk
of the activity. Models that have a significant impact on regulatory capital
must be reviewed regularly, thereby further raising the certainty that these
quantification mechanisms are working as expected. The key aspects to be
validated are factors allowing accurate risk classification by level, adequate
quantification of exposure, use of assessment techniques that include
external factors such as economic conditions and credit status and, lastly,
compliance with internal policies and regulatory provisions. Each year, the
Risk Management Group presents a summary report on the validations to the
RMC.
The Bank’s credit risk assessment and rating systems are overseen by
the Models Oversight Committee, the GRC and the RMC, and are an integral
part of a comprehensive Bank-wide credit risk oversight framework. Along
with the above-mentioned elements, the Bank documents and periodically
reviews the policies, definitions of responsibilities, resource allocation and
existing processes.
PD (%) –
Corporate
and financial
institutions
Ratings
1–2.5
3–4
4.5–6.5
0.000–0.102
0.103–0.461
0.462–5.624
7–7.5
8–8.5
9–10
5.625–15.283
15.284–99.999
100
PD (%) –
Sovereign
Standard
& Poor's
Moody's Description(1)
AAA to A-
0.000–0.059
Aaa to A3
0.060–0.341 BBB+ to BBB- Baa1 to Baa3
0.342–6.275
Excellent
Good
Ba1 to B2 Satisfactory
BB+ to B
Special
6.276–20.098
mention
20.099–99.999 CCC & CCC- Caa2 & Caa3 Substandard
Default
B3 to Caa1
B- to CCC+
CC, C & D
Ca, C & D
100
(1)
Additional information is provided in the table on page 63.
The Bank also uses individual assessment models by industry to assign a
risk rating to the credit facility based on the collateral and guarantees the
obligor is able to provide and, in some cases, based on other factors.
The Bank consequently has a bi-dimensional risk-rating system that,
using models and based on internal and external historical data, establishes
a default risk rating for each obligor. In addition, the models assign, to each
credit facility, a loss-given-default risk rating that is independent of the risk
rating assigned to the obligor.
The Bank’s default, and in some cases credit facility, risk-rating
systems and the related risk parameters contribute directly to informed
credit-granting, renewal and monitoring decisions. They are also used to
determine and analyze risk-based pricing. In addition, from a credit portfolio
management perspective, they are used to establish counterparty credit
concentration limits and segment concentration limits and to determine the
credit risk appetite of these portfolios. Moreover, they represent an
important component in estimating expected and unexpected losses,
measuring minimum required economic capital, and measuring the minimum
level of capital required, as prescribed by the regulatory authorities.
62
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Personal Credit Portfolio Subject to the AIRB Approach *
The following table presents the credit quality of the personal credit portfolio subject to the AIRB Approach, according to the internal risk-rating categories
assigned to debtors.
As at October 31
(millions of Canadian dollars)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
Probability of
default (%)
0.000-0.144
0.145-0.506
0.507-2.681
2.682-9.348
9.349-99.999
100
Residential
mortgage(1)
25,477
14,136
5,753
804
297
136
46,603
Qualifying
revolving
retail(2)
3,200
1,160
1,305
422
88
21
6,196
Other
retail(3)
2,390
2,896
4,250
846
225
103
10,710
Exposure at default
2016
2017
Total
31,067
18,192
11,308
2,072
610
260
63,509
Total
26,743
19,784
10,939
2,090
593
260
60,409
(1)
(2)
(3)
Includes home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans, credit card receivables, certain SME loans, and other personal loans.
Business and Government Credit Portfolio Subject to the AIRB Approach *
The following table presents the credit quality of the business and government credit portfolio subject to the AIRB Approach, according to the internal risk-
rating categories assigned to debtors, as defined in the table on page 62.
As at October 31
(millions of Canadian dollars)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
Drawn(1)
26,759
21,590
20,778
1,065
85
282
70,559
Undrawn
commitments(2)
Other
exposures(3)
5,820
10,036
3,973
174
6
1
20,010
65,399
26,391
12,750
43
2
−
104,585
2017
Total
97,978
58,017
37,501
1,282
93
283
195,154
Exposure at default
2016
Total
81,105
52,838
30,535
1,307
101
345
166,231
(1)
(2)
Amounts drawn represent certain deposits with financial institutions, available-for-sale debt securities, gross loans, customers’ liability under acceptances and certain other assets.
Undrawn commitments represent unused portions of authorized credit facilities in the form of loans, acceptances, letters of guarantee and documentary letters of credit, excluding
investment banking activities.
(3) Other exposures represent securities purchased under reverse repurchase agreements and securities borrowed as well as securities sold under repurchase agreements and securities
loaned, forwards, futures, swaps and options and also include letters of guarantee, documentary letters of credit, and securitized assets that represent the Bank’s commitment to make
payments in the event a client cannot meet its financial obligations to third parties.
63
63
National Bank of Canada2017 Annual Report
influenced by
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the
risk assessment. Aside from a client’s solvency, credit-granting decisions are
also
factors such as available collateral, transaction
compliance with policies, standards and procedures, and the Bank’s overall
risk-adjusted return objective. Each credit-granting decision is made by
authorities within the risk management teams and management who are
independent of the business units and are at a reporting level commensurate
with the size of the proposed credit transaction and the associated risk.
Decision-making authority is determined in compliance with the
delegation of authority set out in the Credit Risk Management Policy. A
person in a senior position in the organization approves credit facilities that
are substantial or carry a higher risk for the Bank. The GRC approves and
monitors all substantial credit facilities. Credit applications that exceed
management’s latitudes are submitted to the Board for approval. The credit-
granting process demands a high level of accountability from managers, who
must proactively manage the credit portfolio.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques. In
addition to the standard practice of requiring collateral to guarantee
repayment of the credit it grants, the Bank also uses protection mechanisms
such as credit derivative financial instruments, syndication and loan
assignments as well as an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is to obtain
quality collateral from obligors. Obtaining collateral cannot replace a
rigorous assessment of an obligor’s ability to meet its financial obligations,
but, beyond a certain risk threshold, it is an essential complement. Collateral
is not required in all cases. It depends upon the level of risk presented by the
obligor and the type of loan granted. However, if the level of risk to the Bank
is considered high, collateral will likely be required. The legal validity and
enforceability of any collateral obtained and the Bank’s ability to correctly
and regularly measure the collateral’s value are critical for this mechanism to
play its proper role in risk mitigation. The Bank has established specific
requirements in its internal policies with respect to the appropriate legal
documentation and assessment for the kinds of collateral that business units
may require to guarantee the loans granted. The categories of eligible
collateral and the lending value of the collateralized assets have also been
defined by the Bank. For the most part, they include the following asset
categories as well as guarantees (whether secured by collateral or
unsecured) and government and bank guarantees:
accounts receivable;
inventories;
—
—
— machinery and equipment and rolling stock;
—
residential and commercial real estate, office buildings and industrial
facilities;
cash and marketable securities.
—
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Assessment of Economic Capital
The assessment of the Bank’s minimum required economic capital is based
on the credit risk assessments of debtors. These two activities are therefore
interlinked. The different models used to assess the credit risk of a given
portfolio type also enable the Bank to determine the default correlation
among debtors. This information is a critical component in the evaluation of
potential losses for all portfolios carrying credit risk. Estimates of potential
losses, whether expected or not, are based on historical loss experience,
portfolio monitoring, market data and statistical modelling. Expected and
unexpected losses are factors used in assessing the minimum required
economic capital for all of the Bank’s credit portfolios. The assessment of
economic capital also considers the anticipated potential migrations of
obligors’ default risk during the remaining term of their credit commitments.
The main risk factors that have an impact on economic capital are as follows:
—
—
—
—
—
—
the obligor’s probability of default;
estimated amount potentially drawn at the time of the obligor’s default;
loss in the event of default;
the default probability correlation among obligors;
the residual term of credit commitments;
impact of economic and sector-based cycles on asset quality.
Stress Testing and Crisis Scenarios
The Bank carries out stress tests to evaluate its sensitivity to crisis situations
in certain activity sectors and key portfolios. A global stress test
methodology covers most business, government, and personal credit
portfolios to provide the Bank with an overview of the situation. By
simulating specific scenarios, these tests enable the Bank to measure the
level of regulatory capital needed to absorb potential losses and to
determine the impact on its solvency. In addition, these tests contribute to
portfolio management as they influence the determination of concentration
limits by obligor, product or business sector.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the long-term
quality of its portfolio, the Bank uses sound risk management when granting
residential mortgages to confirm: (i) the obligor’s intention to meet its
financial obligations, (ii) the obligor’s ability to repay its debts and (iii) the
quality of the collateral. In addition, the Bank takes a prudent approach to
client qualification by using, for example, a higher interest rate for terms less
than five years to mitigate the risk of short- or medium-term rate increases.
Nonetheless, the risk of economic slowdown could adversely affect the
profitability of the mortgage portfolio. In stress test analyses, the Bank
considers a variety of scenarios to measure the impact of adverse market
conditions. In such circumstances, our analyses show significantly higher
loan losses, which would decrease profitability and reduce the Bank’s capital
ratios.
64
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding loans and
undrawn amounts of commitments to a particular obligor but also through
the sectoral distribution of the outstanding loans and undrawn amounts and
through the exposure of its various credit portfolios to geographical,
concentration and settlement risks.
The Bank’s approach to controlling these diverse risks begins with a
diversification of exposures. Measures designed to maintain a healthy
degree of diversification of credit risk in its portfolios are set out in the
Bank’s internal policies and procedures. These instructions are mainly
reflected in the application of various exposure limits: credit concentration
limits by counterparty and credit concentration limits by business sector,
country, region, product, and type of financial instrument. These limits are
determined based on the Bank’s credit risk appetite framework and are
reviewed periodically
limits,
particularly exceptions, is monitored through periodic reports submitted by
the Risk Management Group’s officers to the Board.
in that respect. Compliance with these
Continuous analyses are performed in order to anticipate problems with
a sector or obligor before they materialize as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative financial
instruments, which are regularly used by the Bank, are described in detail in
the Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee Contracts
The Bank also reduces credit risk by using the protection provided by credit
derivative financial instruments such as credit default swaps. When the Bank
acquires credit protection, it pays a premium on the swap to the counterparty
in exchange for the counterparty’s commitment to pay if the underlying entity
defaults or another event involving the underlying entity and covered by the
legal agreement occurs. Since, like obligors, providers of credit protection
must receive a default risk rating, the Bank’s standards set out all the criteria
under which a counterparty may be judged eligible to mitigate the Bank’s
credit risk. The Bank may also reduce its credit risk by entering into financial
guarantee contracts whereby a guarantor indemnifies the Bank for a loss
resulting from an obligor failing to make a payment when due in accordance
with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate objectives,
responsibilities and documentation requirements for loan syndication.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis and in a
manner commensurate with the related risk. Loan portfolio managers use an
array of intervention methods to conduct a particularly rigorous follow-up on
files that show risk of default. When loans continue to deteriorate and there
is an increase in risk to the point where monitoring has to be increased, a
group specialized in managing problem accounts steps in to maximize
collection of the disbursed amounts and tailor strategies to these accounts.
In these cases, loan portfolio managers prepare and submit, to the
credit department, a detailed monitoring report each month to track the
status of at-risk obligors and the corrective measures undertaken. The
management of each department concerned performs follow-ups on the
reports, and each quarter a credit monitoring committee meets to review the
action plans and monitoring reports of obligors that have commitments of
$3 million or more. The authority to approve allowances for credit losses is
attributed using limits delegated on the basis of hierarchical level under the
Credit Risk Management Policy.
Information on the recognition of impaired loans and allowances for
credit losses are presented in Note 1 to the consolidated financial
statements.
Forbearance and Restructuring
Situations where a business or retail obligor begin showing clear signs of
potential insolvency are managed on a case-by-case basis and require the
use of judgment. The Loan Work Out Policy sets the principles applicable in
such situations to guide loan restructuring decisions and identify situations
where distressed restructuring applies. A distressed restructuring situation
occurs when the Bank, for economic or legal reasons related to the obligor’s
financial difficulties, grants the obligor a special concession that is contrary
to the Bank's policies. Such concessions could include a lower interest rate,
waiver of principal and extension of the maturity date.
The Bank has established a management framework for commercial and
corporate obligors that represent higher-than-normal risk of default. It
outlines the roles and responsibilities of loan portfolio managers with
respect to managing high-risk accounts and the responsibilities of the Work
Out units and other participants in the process. Lastly, the Credit Risk
Management Policy and a management framework are used to determine the
authorization limits for distressed restructuring situations. During fiscal
years 2017 and 2016, the amount of distressed loan restructurings was not
significant.
it faces when
it trades derivative financial
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of
transactions involving financial instruments. The most significant risks are
those
instruments with
counterparties on the over-the-counter market or when it purchases
securities under reverse repurchase agreements or sells securities under
repurchase agreements. Securities lending transactions and securities
brokerage activities involving derivative financial instruments are also
sources of counterparty risk. Note 17 to the consolidated financial
statements provides a complete description of the credit risk for derivative
financial instruments by type of traded product. The Risk Management Group
has developed models by broad category of financial instrument through
which it applies an advanced methodology for calculating the Bank’s credit
risk exposure and economic capital. The exposures are subject to limits.
These two elements are established based on the potential volatility of the
underlying assets until maturity of the contract.
65
65
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Counterparty obligations related to the trading of contracts on
derivative financial instruments, securities lending transactions and reverse
repurchase agreements are frequently subject to credit risk mitigation
measures. The mitigation techniques are somewhat different from those
used for loans and advances and depend on the nature of the instrument or
the type of contract traded. The most widely used measure is the signing of
master agreements: the International Swaps & Derivatives Association, Inc.
(ISDA) master agreement, the Global Master Repurchase Agreement (GMRA)
and the Global Master Securities Lending Agreement (GMSLA). These
agreements make it possible, in the event of default, insolvency or
bankruptcy of one of the contracting parties, to apply full netting of the gross
amounts of the market values for each of the transactions covered by the
agreement and in force at the time of default. The amount of the final
settlement is therefore the net balance of gains and losses on each
transaction, which reduces exposure when a counterparty defaults. The
Bank’s policies require that an ISDA, GMRA, or GMSLA agreement be signed
with most trading counterparties to derivatives, foreign exchange forward
contracts, lending transactions and reverse repurchase agreements.
Another mechanism for reducing credit risk on derivatives and foreign
exchange forward contracts complements the ISDA master agreement in
many cases and provides the Bank and its counterparty (or either of the
parties, if need be) with the right to request collateral from the counterparty
when the net balance of gains and losses on each transaction exceeds a
threshold defined in the agreement. These agreements, also known as Credit
Support Annexes (CSAs), are common between financial institutions active in
international financial markets since they limit credit risk while providing
traders with additional flexibility to continue trading with the counterparty.
The Bank often uses this type of legal documentation in transactions with
financial institutions and governments. For business transactions, the Bank
prefers to use internal mechanisms set out in the credit agreements. The
Bank’s internal policies set the conditions governing the implementation of
such mitigation methods.
Requiring collateral as part of a securities lending transaction or reverse
repurchase agreement is not solely the result of an internal credit decision.
In fact, it is a mandatory market practice imposed by self-regulating
organizations in the financial services sector such as the Investment Industry
Regulatory Organization of Canada.
The Bank also has policies and guidelines governing its own collateral
pledged to counterparties, given the potential impact of such asset transfers
on its liquidity. In accordance with its Liquidity, Funding & Pledging Policy,
the Bank conducts simulations of potential counterparty collateral claims
under CSAs in effect, in the event of a Bank downgrade or other unlikely
occurrences. The simulations are based on various Bank downgrading
scenarios or market value fluctuations of transactions covered by CSAs.
The Bank has identified circumstances in which it is likely to be
exposed to wrong-way risk, which is generally associated with exposure to
counterparty risk and characterized by higher risk for the Bank if a
counterparty’s probability of default
increases (unfavourable positive
correlation). A common wrong-way risk arises from the trading of derivatives
contracts with counterparties where the underlying assets may include
equity securities issued by those counterparties.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal
delivery of cash or securities between the Bank and a counterparty. Foreign
exchange contracts are an example of transactions that can generate
significant levels of settlement risk. However, the implementation of
multilateral settlement systems that allow settlement netting among
participating institutions has contributed greatly to reducing the risks
associated with the settlement of foreign exchange transactions among
banks. The Bank also uses financial intermediaries to gain access to
established clearing houses in order to minimize settlement risk for certain
financial derivative transactions. In some cases, the Bank may have direct
access to established clearing houses for settling financial transactions such
as repurchase agreements or reverse repurchase agreements. In addition,
certain derivative financial instruments traded over the counter are settled
directly or indirectly by central counterparties. For additional information,
see the table that presents notional amounts in Note 17 to the consolidated
financial statements.
There are several other types of transactions that may generate
settlement risk, in particular the use of certain electronic fund transfer
services. This risk refers to the possibility that the Bank may make a payment
or settlement on a transaction without receiving the amount owed from the
counterparty, and with no opportunity to recover the funds delivered
(irrevocable settlement).
The ultimate means for completely eliminating such a risk is for the
Bank to complete no payments or settlements before receiving the funds due
from the counterparty. Such an approach cannot, however, be used
systematically. For several electronic payment services, the Bank is able to
implement mechanisms that allow it to make its transfers revocable or to
debit the counterparty in the amount of the settlements before it makes its
own transfer. On the other hand, the nature of transactions in financial
instruments makes it impossible for such practices to be widely used. For
example, on foreign exchange transactions involving a currency other than
the U.S. dollar, time zone differentials impose strict payment schedules on
the parties. The Bank cannot unduly postpone a settlement without facing
significant penalties, due to the large size of amounts involved.
The most effective way for the Bank to control settlement risks, both for
financial market transactions and irrevocable transfers, is to impose internal
risk limits based on the counterparty’s ability to pay.
66
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
The amounts shown in the following tables represent the Bank’s maximum exposure to credit risk as at the financial reporting date without taking into account
any collateral held or any other credit enhancements. These amounts do not take into account allowances for credit losses nor amounts pledged as collateral.
The tables also exclude equity securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories *
(millions of Canadian dollars)
As at October 31, 2017
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach
AIRB Approach
Total – Gross credit risk
(millions of Canadian dollars)
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach
AIRB Approach
Total – Gross credit risk
Drawn
Undrawn
commitments
Repo-style
transactions(1)
OTC
derivatives
Other
off-balance-
sheet items(2)
41,308
2,834
15,169
59,311
44,554
24,325
4,505
73,384
−
−
132,695
11,154
121,541
132,695
7,720
3,362
1,452
12,534
16,002
4,024
193
20,219
−
−
32,753
230
32,523
32,753
−
−
−
−
16,553
35,289
52,811
104,653
−
−
104,653
4,101
100,552
104,653
−
−
−
−
14
314
358
686
8,309
−
8,995
189
8,806
8,995
−
−
14
14
2,936
144
641
3,721
−
4,740
8,475
366
8,109
8,475
Total
49,028
6,196
16,635
71,859
80,059
64,096
58,508
202,663
8,309
4,740
287,571
16,040
271,531
287,571
As at October 31, 2016
Drawn
Undrawn
commitments
Repo-style
transactions(1)
OTC
derivatives
Other
off-balance-
sheet items(2)
40,600
2,795
13,980
57,375
40,956
23,068
4,074
68,098
−
616
126,089
10,458
115,631
126,089
5,978
2,921
1,301
10,200
14,416
3,623
252
18,291
−
−
28,491
277
28,214
28,491
−
−
−
−
14,418
30,559
36,835
81,812
−
−
81,812
2,294
79,518
81,812
−
−
−
−
27
328
324
679
9,623
−
10,302
282
10,020
10,302
−
−
93
93
2,890
135
609
3,634
−
3,452
7,179
491
6,688
7,179
Total
46,578
5,716
15,374
67,668
72,707
57,713
42,094
172,514
9,623
4,068
253,873
13,802
240,071
253,873
(1)
(2)
Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.
Letters of guarantee, documentary letters of credit and securitized assets that represent the Bank’s commitment to make payments in the event that a client cannot meet its financial
obligations to third parties.
67
67
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Market Risk Management
Market risk is the risk of losses in on- and off-balance-sheet positions arising
from movements in market parameters.
The Bank is exposed to market risk through its participation in market
making, trading, investing and asset/liability management activities. Trading
and market making activities involve taking positions, particularly on various
instruments such as bonds, shares, currencies, commodities or derivative
financial instruments. The Bank is exposed to non-trading market risk
through its asset/liability management portfolios and its short-term funding
and investment portfolios.
Market risk comes from a number of factors, the most important of
which are:
—
—
—
—
—
—
financial
interest rate risk: relates to changes in the term structure of interest
rates of
instruments such as bonds, money market
instruments and derivative financial instruments;
foreign exchange risk: relates to changes in foreign exchange rates of
financial instruments such as investments in foreign subsidiaries,
foreign currency denominated loans and securities, future cash flows in
foreign currencies and derivative financial instruments;
equity risk: relates to changes in overall equity prices (general equity
risk) or in individual characteristics that are specific to an entity
(equity-specific risk) for financial instruments such as common shares
and options;
commodity risk: relates to changes in commodity prices for financial
instruments used in exchange trading or over-the-counter trading,
involving either physical trading or derivatives trading of commodities;
traded credit risk: relates to changes in the creditworthiness of all
issuers (general traded credit risk) or in the characteristics of an issuer
(issuer-specific traded credit risk) relating mainly to the Bank’s
portfolios of debt securities and credit derivatives, whose value could
be adversely affected by changes in credit spreads, by credit migration
or by defaults;
implied correlation risk: relates to changes in the implied correlations
between two or more risk factors found primarily in complex derivative
financial instruments with several correlated risk factors;
— market liquidity risk: relates to a significant decrease or, at worst, a
halt in the level of expected market activity for a specific market or for a
variety of instruments, thereby making the instruments concerned less
liquid or illiquid. This exposes the Bank to losses due to the inability to
execute its transactions at the prevailing prices, which may not
represent the true price at which the position can be fully unwound.
Almost all traded instruments are exposed to this type of risk
depending mainly on frequency and volume of transactions;
—
portfolio diversification and hedging risk (basis risk): relates to
changes in correlations realized between two or more risk factors.
Adverse changes in realized correlations can reduce the portfolio
diversification benefit in the sense that several of the positions could
have a higher correlation than expected, giving rise to simultaneous
losses. In addition, adverse changes in realized correlations can make
hedging strategies less effective if the underlying position and the
hedge position have a weaker correlation than expected.
The trading portfolios include positions in financial instruments and
commodities held either with trading intent or to hedge other elements of the
trading book. Positions held with trading intent are those held for short-term
resale and/or with the intent of taking advantage of actual or expected short-
term price movements or to lock in arbitrage profits. These portfolios target
one of the following objectives: market making, trading, proprietary trading,
liquidating positions for clients or selling financial products to clients.
Non-trading portfolios include all financial instruments held to maturity
or until conditions are more advantageous to invest in other investments or
held strictly for liquidity management, short-term funding and asset/liability
management purposes.
Governance
The Board is responsible for approving the market risk management policy
framework and the Bank’s market risk appetite measures and targets. The
Bank’s President and Chief Executive Officer, who has ultimate responsibility
for market risk limits, manages the Bank’s market risk based on the risk
appetite targets set and approved by the Board to generate acceptable return
on market risk capital. The President and Chief Executive Officer delegates
risk-taking responsibilities to business unit managers reporting to him. The
business units are responsible for the market risks inherent to their
particular activities and must therefore actively manage such risks. The
Market Risk Management Committee monitors market risk across the Bank
and ensures that the magnitude and mix of risks remain within the Bank’s
market risk appetite targets and risk limits. This committee also ensures that
the risk management environment is transparent, disciplined and controlled.
68
National Bank of Canada2017 Annual Report
The following tables provide a breakdown of the Bank’s Consolidated
Balance Sheet into assets and liabilities by those that carry market risk and
those that do not carry market risk, distinguishing between trading positions
whose main risk measures are VaR and SVaR and non-trading positions that
use other risk measures.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
An integrated control framework is used to manage market risk, which
is overseen by the Market Risk Management Committee. The Bank is
continually adapting its market risk management and oversight framework.
A comprehensive policy governs global market risk management across
the Bank’s units and subsidiaries that are exposed to this type of risk. The
policy presents the main mechanisms used for identifying and measuring the
types of market risk to which the Bank is exposed, most of which are
described on the previous page. It also defines the link between the Bank’s
market risk appetite approved by the Board and the framework implemented
for setting market risk limits across all the Bank’s business units that are
allowed to undertake market risk. The purpose of the market risk limits is to
set out tolerance thresholds for these business units or portfolios to comply
with the Bank’s market risk appetite targets. These are cascaded down to
business units using a hierarchy of different types of limits (e.g., Value at
Risk (VaR), stop loss limit) allocated by portfolio, trading unit, unit manager
and officer, as well as an appropriate breach escalation process.
Reconciliation of Market Risk with Consolidated Balance Sheet Items
(millions of Canadian dollars)
As at October 31, 2017
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans, net of allowances
Customers’ liability under acceptances
Derivative financial instruments
Purchased receivables
Defined benefit asset
Other
Liabilities
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
Balance
sheet
Trading(1)
Non-Trading(2)
Not subject to
market risk
Non-traded risk
primary risk sensitivity
Market risk measures
8,802
154
8,385
263
Interest rate(3)
47,536
8,552
9,255
20,789
128,452
5,991
8,423
2,014
56
5,957
245,827
156,671
5,991
15,363
21,767
6,612
20,098
252
5,506
9
232,269
46,825
−
−
−
5,638
−
7,508
−
−
−
60,125
5,692
−
15,363
−
6,045
4,452
−
15
−
31,567
711
8,552
9,255
20,789
122,814
5,991
915
2,014
56
−
179,482
150,979
5,991
−
21,767
567
15,646
252
945
9
196,156
−
−
−
−
−
−
−
−
−
5,957
6,220
−
−
−
−
−
−
−
4,546
−
4,546
Interest rate(3)
Interest rate(3) and equity(4)
Interest rate(3)
Interest rate(3)(5)
Interest rate(3)
Interest rate(3)
Interest rate(6) and exchange rate
Interest rate
Other(7)
Interest rate(3)
Interest rate(3)
Interest rate(3)(5)
Interest rate(6) and exchange rate
Interest rate(3)
Other(7)
Interest rate(3)
Interest rate(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Trading positions whose risk measures are VaR and SVaR. See the tables on the following pages that show the VaR and SVaR distributions of the trading portfolios by risk category as well as
their correlation effect.
Non-trading positions that use other risk measures.
See the tables on the following pages that show the VaR and SVaR distributions of the trading portfolios by risk category and their correlation effect as well as the interest rate sensitivity
tables.
The fair value of equity securities classified as available-for-sale is presented in Notes 3 and 6 to the consolidated financial statements.
These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For transactions with maturities of more than one day, interest rate risk is
included in the VaR and SVaR measures when they relate to trading activities.
See Notes 17 and 18 to the consolidated financial statements.
See Note 24 to the consolidated financial statements.
69
69
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans, net of allowances
Customers’ liability under acceptances,
net of allowances
Derivative financial instruments
Purchased receivables
Defined benefit asset
Other
Liabilities
Deposits(9)
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other(9)
Subordinated debt
Balance
sheet
Trading(1)
Non-trading(2)
Not subject to
market risk
Non-traded risk primary
risk sensitivity
Market risk measures
As at October 31, 2016
8,183
181
7,580
422
Interest rate(3)
45,964
14,608
3,969
13,948
119,747
6,431
10,416
1,858
48
7,034
232,206
142,066
6,441
14,207
22,636
7,725
20,131
314
5,572
1,012
220,104
44,545
−
−
−
6,454
−
9,195
−
−
−
60,375
4,826
−
14,207
−
6,818
4,378
−
43
−
30,272
1,419
14,608
3,969
13,948
113,293
6,431
1,221
1,858
48
−
164,375
137,240
6,441
−
22,636
907
15,753
314
1,346
1,012
185,649
−
−
−
−
−
−
−
−
−
7,034
7,456
−
−
−
−
−
−
−
4,183
−
4,183
Interest rate(3) and other(4)
Interest rate(3) and equity(5)
Interest rate(3)
Interest rate(3)(6)
Interest rate(3)
Interest rate(3)
Interest rate(7) and exchange rate
Interest rate
Other(8)
Interest rate(3)
Interest rate(3)
Interest rate(3)(6)
Interest rate(7) and exchange rate
Interest rate(3)
Other(8)
Interest rate(3)
Interest rate(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Trading positions whose risk measures are VaR and SVaR. See the tables on the following pages that show the VaR and SVaR distributions of the trading portfolios by risk category as well
as their correlation effect.
Non-trading positions that use other risk measures.
See the tables on the following pages that show the VaR and SVaR distributions of the trading portfolios by risk category and their correlation effect as well as the interest rate sensitivity
tables.
See the Master Asset Vehicles section in Note 6 to the consolidated financial statements.
The fair value of equity securities classified as available-for-sale is presented in Notes 3 and 6 to the consolidated financial statements.
These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For transactions with maturities of more than one day, interest rate risk is
included in the VaR and SVaR measures when they relate to trading activities.
See Notes 17 and 18 to the consolidated financial statements.
See Note 24 to the consolidated financial statements.
An amount of $2,159 million representing amounts due to clients, dealers and brokers, classified in Liabilities – Other in this table as at October 31, 2016, is now reported in Deposits.
70
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Assessing Market Risk
The Risk Management Group uses a variety of risk measures to estimate the
size of potential losses under more or less severe scenarios, and using both
short-term and long-term time horizons. For short-term horizons, the Bank’s
risk measures include VaR, SVaR, and sensitivity metrics. For long-term
horizons or sudden significant market moves, including those due to a lack
of market liquidity, the risk measures include stress testing across an
extensive range of scenarios. VaR is a statistical measure of risk that is used
to quantify market risks by product and by risk type as well as aggregate risk
by portfolio, on a scale ranging from one trading unit to another, for the Bank
as a whole. VaR is defined as the maximum loss at a specific confidence level
over a certain horizon under normal market conditions. The VaR method has
the advantage of providing a uniform measurement of financial instrument-
related market risks based on a single statistical confidence level and time
horizon. The Bank uses a historical price distribution to compute the
probable loss levels at the 99% confidence level, using a two-year daily time
series of risk factor changes. VaR is the maximum daily loss the Bank could
incur, in 99 cases out of 100, in a given portfolio. In other words, the loss
could exceed that amount in only one out of 100 cases.
The trading VaR is measured by assuming a holding period of one day
for ongoing market risk management and a 10-day horizon for regulatory
capital purposes. This assumption is used to combine the VaR of various
portfolios and provides an estimate of the daily market risk incurred by the
Bank. VaR is calculated on a daily basis both for major classes of financial
instruments (including derivative financial instruments) and all trading
portfolios of the Financial Markets segment and Corporate Treasury of the
Bank.
In addition to the one-day trading VaR, the Bank calculates a trading
SVaR, which is a statistical measure of risk that replicates the VaR
calculation method (one-day holding period for risk management purposes
and 10-day horizon for regulatory capital purposes) but uses, instead of the
variable two-year history of market risk data input, 12-month historical data
corresponding to a continuous period of significant financial stress that is
relevant in terms of the Bank’s portfolios.
VaR methodology techniques are well suited to measure risks under
normal market conditions. VaR metrics are most appropriate as a risk
measure for trading positions in liquid financial markets. However, there are
limitations in measuring risks with this method when extreme and sudden
market risk events occur, since they are likely to underestimate the Bank’s
market risk. VaR methodology limitations include the following:
—
—
—
—
past changes in market risk factors may not always produce accurate
predictions of the distribution and correlations of future market
movements;
a VaR with a daily time horizon does not fully capture the market risk of
positions that cannot be liquidated or hedged within one day;
the market risk factor historical database used for VaR calculation may
not reflect potential losses that could occur under unusual market
conditions (e.g., periods of extreme illiquidity) relative to the historical
period used for VaR estimates;
the use of a 99% VaR confidence level does not reflect the extent of
potential losses beyond that percentile.
Given the limitations to VaR, for the Bank it represents only one
component in its risk management oversight, which also incorporates,
among other measures, stress testing, sensitivity analysis, concentration
and liquidity limits and analysis.
The Bank also conducts backtesting of the VaR model. It consists of
comparing the profits and losses to the statistical VaR measure. Backtesting
is essential to verifying the VaR model’s capacity to adequately forecast the
maximum risk of market losses and thus validate, retroactively, the quality
and accuracy of the results obtained using the model. If the backtesting
results present material discrepancies, the VaR model could be revised in
accordance with the Bank’s model risk management framework.
Trading Activities
The revenues generated by trading activities are compared with VaR as a
backtesting assessment of the appropriateness of this risk measure as well
as the financial performance of trading activities relative to the risk
undertaken.
The first table below shows the VaR distribution of trading portfolios by
risk category as well as their correlation effect. The second table on the next
page shows the SVaR distribution, i.e., the VaR of the Bank’s current
portfolios obtained following the calibration of risk factors over a 12-month
stress period.
VaR of Trading Portfolios by Risk Category(1) *
(millions of Canadian dollars)
Low
High
Year ended October 31, 2017
Period end
Average
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading VaR
(2.1)
(0.8)
(2.2)
(0.4)
n.m.
(3.6)
(7.8)
(3.7)
(14.2)
(2.0)
n.m.
(11.1)
(4.1)
(2.2)
(3.4)
(0.8)
5.3
(5.2)
(4.1)
(1.0)
(2.5)
(0.7)
4.4
(3.9)
(millions of Canadian dollars)
Low
High
Year ended October 31, 2016
Period end
Average
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading VaR
(2.2)
(2.0)
(2.3)
(0.6)
n.m.
(4.1)
(6.0)
(5.3)
(5.6)
(2.6)
n.m.
(8.4)
(3.9)
(3.1)
(3.7)
(1.1)
5.8
(6.0)
(3.6)
(2.8)
(3.0)
(0.9)
5.3
(5.0)
n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and
(1)
(2)
lows may occur on different days and be attributable to different types of risk.
Amounts are presented on a pre-tax basis and represent one-day VaR using a 99%
confidence level.
The total trading VaR is less than the sum of the individual risk factor VaR results due to
the correlation effect.
71
71
National Bank of Canada2017 Annual Report
The average total trading VaR was $5.2 million for fiscal 2017, down slightly
from $6.0 million in fiscal 2016, as higher interest rate VaR was more than
offset by lower foreign exchange VaR and lower commodity VaR. The average
total trading SVaR stood at $7.1 million for fiscal 2017 compared to
$7.9 million the previous fiscal year. This decrease was essentially caused by
lower foreign exchange SVaR.
The table below shows daily trading and underwriting revenues and
VaR. Daily trading and underwriting revenues were positive on 96% of the
days for the year ended October 31, 2017. Daily trading and underwriting
losses in excess of $1 million were recorded on 4 days. None of these losses
exceeded the VaR.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
SVaR of Trading Portfolios by Risk Category(1) *
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading SVaR
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading SVaR
Low
(4.1)
(1.0)
(2.5)
(0.5)
n.m.
(3.9)
Low
(4.2)
(1.9)
(2.2)
(0.6)
n.m.
(4.5)
Year ended October 31, 2017
Period end
Average
High
(13.4)
(8.6)
(16.3)
(2.7)
n.m.
(13.7)
(8.1)
(2.6)
(4.6)
(1.0)
9.2
(7.1)
(10.6)
(1.7)
(5.3)
(0.7)
10.2
(8.1)
Year ended October 31, 2016
High
Average
Period end
(10.1)
(9.6)
(7.2)
(4.0)
n.m.
(11.8)
(7.1)
(3.9)
(4.5)
(1.4)
9.0
(7.9)
(6.0)
(3.7)
(3.3)
(1.0)
8.2
(5.8)
n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and
(1)
(2)
lows may occur on different days and be attributable to different types of risk.
Amounts are presented on a pre-tax basis and represent one-day SVaR using a 99%
confidence level.
The total trading SVaR is less than the sum of the individual risk factor SVaR results due
to the correlation effect.
Daily Trading and Underwriting Revenues
(millions of Canadian dollars)
25
20
15
10
5
0
(5)
(10)
(15)
72
6
1
.
v
o
N
6
1
.
c
e
D
7
1
.
n
a
J
7
1
.
b
e
F
7
1
.
r
a
M
7
1
.
r
p
A
7
1
y
a
M
7
1
e
n
u
J
7
1
y
l
u
J
7
1
.
g
u
A
7
1
.
t
p
e
S
7
1
.
t
c
O
Daily trading and underwriting revenues
VaR (CAN)
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Stress Testing and Crisis Scenarios
Stress testing is a risk management technique that consists of estimating
potential
losses under abnormal market conditions and risk factor
movements. Stress testing enhances transparency by exploring a range of
potential low-probability events. Comprehensive stress testing scenarios
include the following:
changes in all relevant market rates;
potential political shifts;
—
—
— market illiquidity;
—
the interplay between market and credit risk.
These stress tests and sensitivity analyses simulate the results that the
portfolios would generate if the extreme scenarios in question were to occur.
The Bank’s stress testing framework applied to all positions generating
market risk currently comprises the following range of different stress test
scenarios:
—
—
—
—
and
movements
steepening)
interest rate: sharp parallel increases/decreases in interest rates; non-
parallel
and
(flattening
increases/decreases in credit spreads;
equity: sharp stock market crash coupled with a significant increase in
volatility; increase in stock prices associated with a lesser volatility;
increase in volatility of term structure coupled with a decrease in stock
prices;
commodity: significant
in commodity prices
increases/decreases
coupled with increases/decreases in volatility; short-term and long-
term increases/decreases in commodity prices;
foreign exchange: depreciation/appreciation of the U.S. dollar and of
other currencies relative to the Canadian dollar.
Controlling Risk
Outstanding VaR exposure is monitored daily in relation to established limits
for each type of market risk, portfolio and business unit. The RMC reviews
VaR results and other risk measure results each quarter, including any
breaches of the limits set out in the policy.
The Bank also uses economic capital for market risk as an indicator for
risk appetite and limits setting. This indicator measures the amount of
capital that is required to absorb unexpected losses due to market risk
events over a one-year horizon and with a determined confidence level. For
additional information on economic capital, see page 50 in the Capital
Management section of this MD&A.
Separate policies govern the pricing and valuation adjustments on
financial instruments measured at fair value.
Structural Interest Rate Risk
As part of its core banking activities, such as lending and deposit taking, the
Bank is exposed to interest rate risk. Interest rate risk is the potential
negative impact of interest rate fluctuations on the Bank’s annual net interest
income and economic value of equity. Activities related to hedging,
investments and term funding are also exposed to structural interest rate
risk. The Bank’s main exposure to interest rate risk stems from a variety of
sources:
—
—
—
—
yield curve risk, which refers to changes in the level, slope and shape of
the yield curve;
repricing risk, which arises from timing differences in the maturity and
repricing of on- and off-balance-sheet items;
options risk, either implicit (e.g., prepayment in mortgage loans) or
explicit (e.g., capped mortgages and rate guarantees) in balance sheet
products;
basis risk that is caused by imperfect correlation between different
yield curves.
Funds transfer pricing is a process by which the Bank’s business units
are charged or paid according to their use or supply of funding. Through this
mechanism, all funding activities as well as the interest rate risk and liquidity
risk associated with those activities are centralized in Corporate Treasury.
Active management of structural interest rate risk can significantly
enhance the Bank’s profitability and add to shareholder value. The Bank’s
goal is to maximize its economic value of equity and annual net interest
income considering the Bank’s risk appetite. This has to be accomplished
within prescribed risk limits and is done primarily by implementing a policy
framework approved by the Board, which establishes a risk tolerance
threshold, monitoring structures controlled by the various committees, risk
indicators,
responsibilities and
segregation of duties. The Bank also prepares an annual funding plan that
incorporates the expected growth of assets and liabilities.
reporting procedures, delegation of
Regulatory Environment
In April 2016, the BCBS issued the final version of Interest Rate Risk in the
Banking Book, a document that addresses risk management, capital
treatment, and supervision of interest rate risk in the banking book. This
document replaces Principles for the Management and Supervision of
Interest Rate Risk published by the BCBS in 2004. Two objectives are behind
the document:
—
—
ensure that banks have enough capital to cover potential banking book
losses stemming from changes in interest rates;
limit capital arbitrage between the trading book and the banking book.
Presently, the Bank is fully compliant with the 2004 principles and is
progressing towards compliance with the final BCBS rules, the application of
which will be mandatory starting in 2018. However, in April 2017, OSFI
informed Canadian banks of its intention to postpone application until 2019.
73
73
National Bank of Canada2017 Annual Report
(millions of Canadian dollars)
As at October 31, 2016
Canadian
dollar
Other
currencies
Total
Impact on equity
100-basis-point increase
in the interest rate
100-basis-point decrease
in the interest rate
Impact on net interest income
100-basis-point increase
in the interest rate
100-basis-point decrease
in the interest rate
(210)
26
(184)
169
(33)
136
(10)
18
33
(37)
23
(19)
Investment Governance
The Bank has created available-for-sale securities and held-to-maturity
securities portfolios in liquid and less liquid securities for strategic, long-
term investment and liquidity management purposes. These investments
carry market risk, credit risk, liquidity risk and concentration risk.
The investment governance sets out the guiding principles and general
management standards that must be followed by all those who manage
portfolios of available-for-sale and held-to-maturity securities included in the
portfolios of the Bank and
investment
governance, business units that are active in managing these types of
portfolios must adopt internal investment policies that set, among other
things, targets and limits for the allocation of assets in the portfolios
concerned and internal approval mechanisms. The primary objective is to
reduce concentration risk by industry, issuer, country, type of financial
instrument and credit quality.
its subsidiaries. Under this
Overall limits in value and in proportion to the Bank’s equity are set on
the outstanding amount of liquid preferred shares, liquid equity securities
excluding preferred shares, and instruments classified as illiquid securities
in the available-for-sale securities portfolios. The overall exposure to
common shares with respect to an individual issuer and the total outstanding
amount invested in hedge funds and private equity funds, for investment
banking services, are also subject to these limits. Restrictions are also set on
investments defined as special. Lastly, the Bank has a specific strategic
investment policy, approved by the Board, which defines strategic
investments as purchases of business assets or acquisitions of significant
interests in an entity for purposes of acquiring control or creating a long-term
relationship.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Governance
Management of the Bank’s structural interest rate risk is mandated to
Corporate Treasury. In this role, the Corporate Treasury executives and
personnel are responsible for the identification and day-to-day management
of the risks inherent to structural interest rate risk hedging decisions and
operations. They act as the primary effective challenge function with respect
to the execution and monitoring of these activities. Moreover, they must
ensure compliance with the structural interest rate risk policy. The Office of
the President approves and endorses the structural interest rate exposure
and strategies on the recommendation of Corporate Treasury. Operational
supervision is ensured by two committees: the Management Forecast
Committee and the Intersector Funding Committee. The former analyzes the
various structural interest rate risk metrics. The latter ensures that the funds
transfer pricing mechanism is adequate and captures all new products
offered. Both committees report to the Office of the President –
Asset/Liability Management Committee.
Stress Testing and Crisis Scenarios
Stress tests are performed on a regular basis to assess the impact of various
scenarios on annual net interest income and on the economic value of equity
in order to guide the management of structural interest rate risk. Crisis
scenarios are performed where the yield curve level, slope and shape are
shocked. Yield curve basis and volatility scenarios are also performed. All
risk factors mentioned above are covered by specific scenarios and have
Board-approved or GRC-approved risk limits.
Dynamic simulation is also used to project the Bank’s future net interest
income, future economic value and future structural interest rate risk
exposure. These simulations project cash flows of assets, liabilities and off-
balance-sheet products over a given investment horizon. Given their dynamic
nature, they encompass assumptions pertaining to changes in volume, client
term preference, prepayments of deposits and loans, and yield curve.
The following tables present the potential before-tax impact of an
immediate and sustained 100-basis-point increase or decrease in interest
rates on the economic value of equity and on the net interest income of the
non-trading portfolios for the next 12 months, assuming no further hedging
is undertaken.
Interest Rate Sensitivity –
Non-Trading Activities (Before Tax) *
(millions of Canadian dollars)
As at October 31, 2017
Impact on equity
100-basis-point increase
in the interest rate
100-basis-point decrease
in the interest rate
Impact on net interest income
100-basis-point increase
in the interest rate
100-basis-point decrease
in the interest rate
Canadian
dollar
Other
currencies
(191)
159
3
(7)
36
(6)
44
(11)
Total
(155)
153
47
(18)
74
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Structural Foreign Exchange Risk
The Bank’s structural foreign exchange risk arises from investments in
foreign operations denominated in currencies other than the Canadian
dollar. This risk, predominantly in U.S. dollars, is measured by assessing the
impact of currency fluctuations on net interest income and shareholders’
equity. The Bank uses financial instruments (derivative and non-derivative) to
hedge some of this risk. An adverse change in foreign exchange rates can
also impact the Bank’s capital ratios due to the amount of RWA denominated
in a foreign currency. When the Canadian dollar depreciates relative to other
currencies, unrealized translation gains on the Bank’s net investments in
foreign operations, net of
in other
comprehensive income in shareholders’ equity. In addition, the Canadian-
dollar equivalent of U.S.-dollar-denominated RWA and regulatory capital
deductions increases. The reverse is true when the Canadian dollar
appreciates relative to the U.S. dollar. The structural foreign exchange risk
exposure is managed to ensure that the potential impacts on the capital
ratios and net income are within tolerable limits set by risk policies.
related hedges, are
reported
Liquidity and Funding Risk Management
Liquidity and funding risk is the risk that the Bank will be unable to honour
daily cash and financial obligations without resorting to costly and untimely
measures. Liquidity and funding risk arises when sources of funds become
insufficient to meet scheduled payments under the Bank’s commitments.
Liquidity risk stems from mismatched cash flows related to assets and
liabilities as well as the characteristics of certain products such as credit
commitments and non-fixed-term deposits.
The Bank’s primary objective as a financial institution is to manage
liquidity such that it supports the Bank’s business strategy and allows it to
honour its commitments when they come due, even in extreme conditions.
This is done primarily by implementing a policy framework approved by the
Board, which establishes a risk appetite, monitoring structures controlled by
various committees, risk indicators, reporting procedures, delegation of
responsibilities and segregation of duties. The Bank also prepares an annual
funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to
implement regulatory liquidity standards while adapting its processes and
policies to reflect the Bank’s liquidity risk appetite towards these new
requirements.
In May 2014, OSFI issued its final Liquidity Adequacy Requirements
(LAR) guideline and this LAR guideline is reviewed annually to reflect national
and international regulatory changes. The LAR guideline is the new liquidity
framework proposed by OSFI. It contains the following six chapters:
overview;
liquidity coverage ratio (LCR);
net stable funding ratio (NSFR);
net cumulative cash flow (NCCF);
liquidity monitoring tools;
intraday liquidity monitoring tools.
The LCR is intended to oversee banks through severe short-term stress
while the NSFR is a structural ratio over a one-year horizon. The NCCF metric
is defined as a monitoring tool that calculates survival period. It is based on
the assumptions of a stress scenario prescribed by OSFI that aims to
represent a combined systemic and bank-specific crisis.
The OSFI guideline entitled Public Disclosure Requirements for
Domestic Systemically Important Banks on Liquidity Coverage Ratio is based
on the BCBS’s final LCR rules and prescribes a standardized format across
the banking industry. The Canadian D-SIBs implemented the LCR disclosure
requirements in January 2015.
The Bank is currently monitoring the NSFR ratio and will be compliant in
time for the implementation. In June 2015, BCBS issued its final Net Stable
Funding Ratio Disclosure Standards document. Designed to improve the
transparency of NSFR disclosure, this document sets out a common
framework for public disclosure of this ratio. On March 6, 2017, OSFI notified
Canadian deposit-taking
the
implementation timeline of the NSFR to January 1, 2019.
institutions of
to extend
intention
its
Furthermore, on April 20, 2016, the federal government introduced a
bill to implement bank recapitalization measures, and, on June 22, 2016, a
law was adopted. The law amends the Canada Deposit Insurance Corporation
Act (CDICA) to, among other things, permit the Canada Deposit Insurance
Corporation (CDIC) to be appointed receiver of a D-SIB and to convert certain
shares and certain eligible liabilities of a D-SIB into common shares of the
concerned bank if OSFI considers that the bank has ceased, or is about to
cease, to be viable. On June 16, 2017, OSFI released for comment a draft
guideline entitled Total Loss-Absorbing Capacity (TLAC). The draft guideline
requires D-SIBs to maintain a minimum capacity to absorb losses as required
under the Bank Act (Canada) and is part of the bank recapitalization (bail-in)
regime. D-SIBs will have until November 1, 2021 to comply. On June 16,
2017, the Government of Canada released for comment bank bail-in
regulations. In addition, the regulations officially designate CDIC as the
resolution authority for Canada’s largest banks and requires D-SIBs to
submit resolution plans to the CDIC. The Bank continues to monitor bail-in
regime developments, as additional details on implementation, scope and
timing are expected to follow through regulations.
The Bank also produces Quantitative Impact Study (QIS) reports that are
submitted to the Bank for International Settlements (BIS). Using the QIS
results, the BIS can follow the progress of Basel III implementation.
75
75
National Bank of Canada2017 Annual Report
Liquidity Management
The Bank performs liquidity management, funding and pledging operations
not only from its head office and regional offices in Canada, but also through
certain foreign centres. Although the volume of such operations abroad
represents a sizable portion of global liquidity management, the Bank’s
liquidity management is centralized. By organizing liquidity, funding and
pledging activities within Corporate Treasury, the Bank can better coordinate
enterprise-wide funding and risk monitoring activities. All internal funding
transactions between Bank entities are controlled by Corporate Treasury.
This centralized structure streamlines the allocation and control of
liquidity management, funding and pledging limits. Nonetheless, the
Liquidity, Funding and Pledging Governance policy contains special
provisions for the financial centres that are most active in terms of
institutional funding and sets limits and monitoring thresholds for secured
and unsecured short-term funding, both in absolute value and materiality.
The Bank’s funds transfer pricing system prices liquidity by allocating
the cost or income to the various business segments. Liquidity costs are
allocated to liquidity-intensive activities, mainly long-term loans, and
commitments to extend credit and less liquid securities as well as strategic
investments. The liquidity compensation is credited to the suppliers of funds,
primarily funding in the form of stable deposits from the Bank’s distribution
network.
Short-term day-to-day funding decisions are based on a daily
cumulative net cash position, which is controlled using liquidity ratio limits.
Among these ratios and metrics, the Bank pays particular attention to the
funds obtained on the wholesale market and to cumulative cash flows over
various time horizons.
Moreover, the Bank’s collateral pledging activities are monitored in
relation to the different limits set by the Bank and are subject to monthly
stress tests using simulations. In particular, the Bank uses various scenarios
to estimate the potential amounts of additional collateral that would be
required in the event of a downgrade to the Bank’s credit rating.
Liquidity risk can be assessed in many different ways using different
liquidity indicators. One of the key monitoring tools of liquidity risk is the
Bank’s survival period based on contractual maturity and behavioural
assumptions applied to balance sheet items as well as off-balance-sheet
commitments.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Governance
Corporate Treasury manages liquidity and funding needs Bank-wide. Its
activities comprise:
— managing day-to-day cash flow, collateral and short-term funding;
—
planning and issuing long-term funding and determining liquidity cost
transfer pricing;
participating in the development and implementation of the liquidity
the Liquidity, Funding and Pledging
management
Governance policy, the annual
liquidity
contingency plan;
developing and implementing the LAR guidelines and the national and
international regulations to which the Bank must adhere;
funding plan and the
—
—
framework,
— monitoring, measuring and reporting on the Bank’s exposure to
—
liquidity risk, both overall and by currency;
establishing and maintaining an adequate risk assessment process and
effective controls.
The Bank’s Liquidity, Funding and Pledging Governance policy requires
review and approval by the RMC, based on recommendations from the GRC.
The Bank has established two levels of limits. The first level of limits
encompasses the Bank’s overall liquidity position and is Board approved,
while the second level of limits is more focused on specific elements of
liquidity risk and is approved by the GRC. The Board not only approves the
supervision of day-to-day risk management and governance but also backup
plans in anticipation of emergency and liquidity crisis situations. If a limit
has to be revised, the Risk Management Group with the support of Corporate
Treasury, submits the proposed revision to the GRC. If the latter approves the
request, it is presented to the Board for approval only if a level-one limit is
concerned.
Liquidity risk supervision at the Bank is mainly assigned to the Liquidity
and Funding Committee, composed of representatives from Corporate
Treasury, the Risk Management Group, and Internal Audit. In accordance with
the roles and responsibilities under their respective mandates, the members
of this committee are also asked for input in developing risk management
and control mechanisms and implementing policies.
Through the Liquidity and Funding Committee, Corporate Treasury
regularly reports changes in liquidity, funding and pledging indicators and
compliance with regulatory, Board and GRC approved limits. If control reports
indicate non-compliance with the limits and, generally, deterioration of
liquidity indicators, Corporate Treasury takes remedial action. According to
the escalation process, problematic situations are reported to the
management of the Finance and Treasury unit and of the Risk Management
Group, as well as to the GRC and to the RMC. An executive report on the
Bank’s liquidity and funding risk management, which describes the Bank’s
liquidity position and informs the Board of non-compliance with the limits
and other rules observed during the reference period as well as remedial
action taken, is submitted quarterly to the RMC.
Although the day-to-day and strategic management of risks associated
with liquidity, funding and pledging activities and the monitoring of
compliance with the resulting policy is assumed by Corporate Treasury, the
Risk Management Group is responsible for ensuring that an appropriate risk
management framework is in place and that risk appetite and policy are
adhered to. This provides an independent oversight and effective challenge
for the liquidity, funding and pledging decisions, strategy and exposure.
76
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Stress Testing and Crisis Scenarios
Using various simulations, survival period measures the number of months it
would take to completely utilize the Bank’s liquid assets if the Bank were to
lose deposits prematurely or if funds from wholesale markets were not
renewed at maturity. It is measured monthly using three scenarios. These
scenarios were developed to assess sensitivity to a Bank-specific or systemic
crisis. Deposit loss simulations are carried out based on their degree of
stability, while the value of certain assets is encumbered by an amount
reflecting their readiness for liquidation in a crisis. These scenarios are
reviewed and submitted to the Board once a year for approval.
The results of these stress tests are reviewed on a monthly basis by the
Liquidity and Funding Committee while the Board reviews the results each
quarter.
Lastly, the Bank maintains an up-to-date, comprehensive financial
contingency and crisis recovery plan that describes the measures to be taken
in the event of a critical liquidity situation. This plan is reviewed and
approved annually by the Board as part of business continuity and recovery
planning. See the Regulatory Compliance Risk Management section for
additional information.
The Bank considers, among its simulations, a severe liquidity crisis
scenario, where the Bank experiences difficulties in a turbulent financial
market. This scenario combines a significant limitation in the access to its
funding channels and a significant decrease of its assets’ marketability.
Liquidity Risk Appetite
The Bank monitors and manages its risk appetite through liquidity limits,
ratios and stress tests. The Bank’s liquidity risk appetite is based on the
following principles:
The stress test results provide the Bank with its potential liquidity
requirements under each scenario and, given the liquidity risk appetite
adopted, allow the Bank to manage unwanted risk. Each scenario has its own
set of underlying assumptions that cover a wide range of aspects, including
haircuts, encumbrance on liquid assets, loss of deposits, collateral usage
and assets pledged. It also includes an estimate of the funding needs of
contingent liabilities. Contingent liquidity risk refers to the possibility that
the Bank needs a significant amount of funding due to events such as an
unexpected increase in drawdowns on committed lines, withdrawal of
deposits, increase in collateral requirements or other triggers embedded in
legal documentation.
The following assumptions underlie the scenarios:
—
—
—
—
—
—
—
partial non-renewal at maturity for most of the Bank’s unsecured
wholesale funding;
non-renewal of a portion of the retail and commercial deposits;
run-offs on demand deposits;
partial renewal of loans;
drawdowns on committed lines;
additional collateral required for the Bank in the event of a credit rating
downgrade;
limited access to the foreign exchange market.
—
—
—
ensure the Bank has a sufficient amount of unencumbered liquid assets
to cover its financial requirements, in both normal and stressed
conditions;
ensure the Bank keeps a liquidity buffer above the minimum regulatory
requirement;
ensure the Bank maintains diversified and stable sources of funding.
Liquid Assets
To protect depositors and creditors from unexpected crisis situations, the
Bank holds a portfolio of unencumbered liquid assets that can be readily
liquidated to meet financial obligations. This portfolio consists of highly
liquid securities, most of which are issued or guaranteed by governments,
and of cash loans maturing in less than 30 days. The majority of
unencumbered liquid assets are held in Canadian or U.S. dollars. Moreover,
all assets that can be quickly monetized are considered liquid assets. The
Bank’s liquidity reserves do not factor in the availability of the central bank’s
emergency liquidity facilities. The following tables provide information on the
Bank’s encumbered and unencumbered assets.
77
77
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Liquid Asset Portfolio
As at October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2017
As at October 31, 2016
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by entity
National Bank (parent)
Domestic subsidiaries
Foreign subsidiaries and branches
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by currency
Canadian dollar
U.S. dollar
Other currencies
Liquid Asset Portfolio – Average(4)
Year ended October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2017
As at October 31, 2016
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2017
Unencumbered
liquid assets
2016
Unencumbered
liquid assets
8,802
−
8,802
1,957
6,845
6,201
21,003
30,422
51,425
32,104
19,321
15,356
12,446
4,845
27,049
9,505
83,650
80,541
13,056
1,816
46,915
−
92,209
71,292
25,502
6,661
73,964
9,505
175,859
151,833
20,797
3,176
54,301
4,113
116,448
105,650
4,705
3,485
19,663
5,392
59,411
7,553
3,488
9,349
4,236
46,183
2017
2016
27,769
9,871
21,771
59,411
25,951
8,185
12,047
46,183
2017
2016
31,146
21,260
7,005
59,411
28,629
13,829
3,725
46,183
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2017
Unencumbered
liquid assets
2016
Unencumbered
liquid assets
10,838
−
10,838
1,955
8,883
6,057
21,184
22,335
43,519
28,244
15,275
12,842
14,583
4,778
25,259
10,315
86,957
72,709
13,558
1,386
48,728
−
86,007
68,216
28,141
6,164
73,987
10,315
172,964
140,925
22,264
2,478
59,082
3,511
117,534
96,663
5,877
3,686
14,905
6,804
55,430
7,462
3,065
11,711
3,125
44,262
Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.
Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.
In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered liquid assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative
financial instrument transactions, asset-backed securities and liquid assets legally restricted from transfers.
The average is based on the sum of the end-of-period balances of the 12 months of the year divided by 12.
(1)
(2)
(3)
(4)
78
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Summary of Encumbered and Unencumbered Assets
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans, net of allowances
Customers’ liability under acceptances
Derivative financial instruments
Purchased receivables
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans, net of allowances
Customers’ liability under acceptances, net of allowances
Derivative financial instruments
Purchased receivables
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(4)
Encumbered
assets(1)
Unencumbered
assets
As at October 31, 2017
Encumbered
assets as %
of total assets
Total
Other(2)
1,881
−
15,363
−
−
−
−
−
−
−
−
−
17,244
Available as
collateral
6,845
41,748
5,426
5,392
−
−
−
−
−
−
−
−
59,411
Other(3)
−
−
−
82,645
5,991
8,423
2,014
631
558
1,409
1,239
2,176
105,086
8,802
65,343
20,789
128,452
5,991
8,423
2,014
631
558
1,409
1,239
2,176
245,827
0.8
9.6
6.2
16.5
−
−
−
−
−
−
−
−
33.1
Encumbered
assets(1)
Unencumbered
assets
As at October 31, 2016
Encumbered
assets as %
of total assets
Total
Other(2)
1,888
−
13,948
−
−
−
−
−
−
−
−
−
15,836
Available as
collateral
6,201
35,746
−
4,236
−
−
−
−
−
−
−
−
46,183
Other(3)
−
619
−
79,360
6,431
10,416
1,858
645
1,338
1,412
1,140
2,547
105,766
8,183
64,541
13,948
119,747
6,431
10,416
1,858
645
1,338
1,412
1,140
2,547
232,206
0.9
12.1
6.0
15.6
−
−
−
−
−
−
−
−
34.6
Pledged as
collateral
76
23,595
−
40,415
−
−
−
−
−
−
−
−
64,086
Pledged as
collateral
94
28,176
−
36,151
−
−
−
−
−
−
−
−
64,421
(1)
(2)
(3)
(4)
In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative
financial instrument transactions, asset-backed securities, residential mortgage loans securitized and transferred under the Canada Mortgage Bond program, assets held in consolidated
trusts supporting the Bank’s funding activities and mortgage loans transferred under covered bond programs.
Other encumbered assets include assets for which there are restrictions and therefore cannot be used for collateral or funding purposes as well as assets used to cover short sales.
Other unencumbered assets are assets that cannot be used for collateral or funding purposes in their current form. This category includes assets that are potentially eligible as funding
program collateral (for example, Canada Mortgage and Housing Corporation insured mortgages that can be securitized into mortgage-backed securities under the National Housing Act
(Canada)).
The Due from clients, dealers and brokers amount of $843 million presented separately on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Other assets.
79
79
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Liquidity Coverage Ratio (LCR)
The LCR was introduced to ensure banks maintain sufficient liquidity to withstand periods of severe short-term stress. OSFI has been requiring Canadian banks
to maintain a minimum LCR of 100%. An LCR above 100% ensures that banks are holding sufficient high-quality liquid assets (HQLA) to cover net cash outflows
given a severe, 30-day liquidity crisis. The assumptions underlying the LCR scenario were established by the BCBS and OSFI.
The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended October 31, 2017, the Bank’s
average LCR was 132%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
LCR Disclosure Requirements(1)
(millions of Canadian dollars)
High-quality liquid assets (HQLA)
1 Total HQLA
Cash outflows
2 Retail deposits and deposits from small business customers, of which:
3 Stable deposits
4 Less stable deposits
5 Unsecured wholesale funding, of which:
6 Operational deposits (all counterparties)
7 Non-operational deposits (all counterparties)
8 Unsecured debt
9 Secured wholesale funding
10 Additional requirements, of which:
11 Outflows related to derivative exposures and other collateral requirements
12 Outflows related to loss of funding on secured debt securities
13 Backstop liquidity and credit enhancement facilities and commitments to extend credit
14 Other contractual commitments to extend credit
15 Other contingent commitments to extend credit
16 Total cash outflows
Cash inflows
17 Secured lending (e.g., reverse repos)
18 Inflows from fully performing exposures
19 Other cash inflows
20 Total cash inflows
21 Total HQLA
22 Total net cash outflows
23 Liquidity coverage ratio (%)(5)
Total unweighted
value(2) (average)
October 31, 2017
Total weighted
value(3) (average)
For the quarter ended
July 31, 2017
Total weighted
value(3) (average)
n.a.
44,413
44,293
38,431
18,691
19,740
58,086
12,111
38,695
7,280
n.a.
32,958
7,030
1,139
24,789
1,486
79,015
n.a.
67,687
7,749
5,635
81,071
2,535
561
1,974
30,193
2,913
20,000
7,280
15,442
8,406
3,747
1,139
3,520
406
1,081
58,063
14,446
4,414
5,635
24,495
2,529
552
1,977
30,791
2,674
21,171
6,946
13,708
8,837
4,203
932
3,702
272
963
57,100
13,552
4,416
6,142
24,110
Total adjusted
value(4)
Total adjusted
value(4)
n.a.
n.a.
n.a.
44,413
33,568
132 %
44,293
32,990
134 %
Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
n.a. Not applicable
(1) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(2)
(3) Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.
(4)
(5)
Total adjusted values are calculated after the application of both haircuts and inflow and outflow rates and any applicable caps.
The data in this table has been calculated using averages of the daily figures in the quarter.
Level 1 liquid assets represent 89% of the Bank’s HQLA, which includes cash, central bank deposits, and bonds issued or guaranteed by the Canadian
government and Canadian provincial governments.
Cash outflows arise from the application of OSFI-prescribed assumptions on deposits, debt, secured funding, commitments and additional collateral
requirements. The cash outflows are partly offset by cash inflows, which come mainly from secured loans and performing loans. The Bank expects some
quarter-over-quarter variation between reported LCRs, and such variation may not be indicative of a trend. The variation between the quarter ended
October 31, 2017 and the previous quarter was a result of normal business activities. The Bank’s liquid asset buffer is well in excess of its total net cash
outflows.
The LCR assumptions differ from the assumptions used for the liquidity disclosures presented in the tables on the previous pages or those used for
internal liquidity management rules. While the liquidity disclosure framework was prescribed by the EDTF, the Bank’s internal liquidity metrics use
assumptions that are calibrated according to its business model and experience.
80
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Intraday Liquidity
The Bank manages its intraday liquidity in such a way that the amount of
available liquidity exceeds its maximum intraday liquidity requirements. The
Bank monitors its intraday liquidity on an hourly basis and the evolution is
presented monthly to the Liquidity and Funding Committee.
Funding Risk
Funding risk is defined as the risk to the Bank’s ongoing ability to raise
sufficient funds to finance actual or proposed business activities on an
unsecured or secured basis at an acceptable price. The Bank maintains a
good balance of its funding through appropriate diversification of its
unsecured funding vehicles, securitization programs and secured funding.
The Bank also diversifies its funding by currency, geography and maturity.
The funding management priority is to achieve the optimal balance between
the deposit-liability of the Bank’s retail network, secured funding and
unsecured funding. This brings optimal stability to the funding and reduces
vulnerability to unpredictable events.
The Bank’s retail network deposits are its primary and most stable
source of funding. Stable funds are used to fund Bank activities, whereas
funds from the wholesale markets are used to fund securities. In order to
maintain the ideal funding profile, the Bank seeks to limit short-term
wholesale funding and is careful to diversify its funding sources. The Bank
seeks to diversify its funding sources by geographic location, currency,
instrument, maturity and depositor. In addition, the Bank is actively involved
in securitization programs
(residential mortgages and credit card
receivables) that diversify its access to long-term funding.
Funding and liquidity levels remained sound and robust over the year
and the Bank does not foresee any event, commitment or demand that might
have a significant impact on its funding and liquidity risk position. For
additional information, see the table entitled Residual Contractual Maturities
of Balance Sheet Items and Off-Balance-Sheet Commitments in Note 30 to
the consolidated financial statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment
of the Bank’s credit quality based on qualitative and quantitative information
provided to them. Credit ratings may be revised at any time based on macro-
economic factors or on the current and projected financial condition of the
Bank. Credit ratings are one of the main factors that influence the Bank’s
ability to access financial markets at a reasonable cost. A downgrade in the
Bank’s credit ratings could adversely affect the cost, size and term of future
funding. The following table presents the Bank’s credit ratings according to
four rating agencies as at October 31, 2017. Funding and liquidity levels
remained sound and robust, and the Bank continues to enjoy excellent
access to the market for its funding needs.
Short-term senior debt
Canadian commercial
paper
Long-term deposits
Long-term senior debt
Subordinated debt
Preferred shares
NVCC preferred shares
Rating outlook
Moody’s(1)
S&P
DBRS
Fitch
P-1
A-1
R-1(mid)
F1
A-1(mid)
A
BBB+
P-2(low)
P-3(high)
Stable
A1
Baa2
Ba1(hyb)
Ba1(hyb)
Negative(2)
AA(low)
AA(low)
A(high)
Pfd-2
Pfd-2(low)
Negative(3)
A+
A
BBB-
Stable
(2)
(1) On May 10, 2017, Moody’s credit rating agency lowered the credit ratings for long-term
debt of all Canadian D-SIBs by one notch. The credit ratings for the Bank’s long-term
senior debt therefore moved to A1 from Aa3. The credit rating for short-term senior debt
remained stable at P-1.
Credit rating agency Moody’s maintained the “negative” outlook for all Canadian D-SIBs
due to the pending Regulations to Implement the Bank Recapitalization (Bail-in) Regime.
Credit rating agency DBRS maintained the “negative” outlook for many Canadian D-SIBs
due to the pending Regulations to Implement the Bank Recapitalization (Bail-in) Regime.
The “negative” outlook applies to long-term deposits, long-term senior debt and non-
NVCC subordinated debt.
(3)
81
81
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Guarantees
As part of a comprehensive liquidity management framework, the Bank
regularly reviews its contracts that stipulate that additional collateral could
be required in the event of a downgrade of the Bank’s credit rating. The
Bank’s liquidity position management already incorporates additional
collateral requirements
in the event of a one-notch to three-notch
downgrade. The table below presents the additional collateral requirements
in the event of a one-notch or three-notch credit rating downgrade.
The Bank actively monitors and controls liquidity risk exposures and
funding needs within and across entities, business segments and currencies.
The process involves evaluating the liquidity position of individual business
segments in addition to that of the Bank as a whole as well as the liquidity
risk from raising unsecured and secured funding in foreign currencies. The
funding strategy is executed through the funding plan.
The Bank’s funding framework consists of the following:
(millions of Canadian dollars)
One-notch
downgrade
As at October 31, 2017
Three-notch
downgrade
— maintaining a diversified deposit strategy;
— maintaining active access to wholesale funding markets and ensuring
diversification by depositor, funding vehicle type, geographic location,
currency, and tenor of funding in the secured and unsecured markets;
Derivatives(1)
1
15
(1)
Contractual requirements related to agreements known as Credit Support Annexes.
Funding Strategy
The key objectives of the funding strategy are to:
—
—
—
support the organic growth of the Bank through prudent liquidity and
funding management to withstand severe stresses;
fund core banking activities with deposits and securitizations;
limit short-term wholesale funding.
—
— monitoring and controlling liquidity risk exposure and funding needs
across all the Bank’s entities, business segments and currencies using
a well-developed funds transfer pricing system that includes a liquidity
premium and using effective liquidity monitoring tools;
having funding centres in the Montreal, Toronto, New York and London
offices;
investing in infrastructure to ensure quality and timeliness in data
transmission;
integrating
management and the long-term funding plan.
in day-to-day
framework
regulatory
liquidity
the
—
—
The Bank’s balance sheet is diversified and is supported by a funding
strategy. The core banking activities are funded entirely through personal
and commercial deposits and through securitization programs. In addition to
core deposits, the Bank also receives non-marketable deposits from
governments and corporations. Wholesale funding is invested in cash and
securities. The chart below shows the Bank’s funding structure as at
October 31, 2017.
Funding Structure
As at October 31, 2017
(billions of Canadian dollars)
Securities: 65.3
Cash and other(2): 29.6
Business and government loans: 47.0
Personal and credit card loans: 36.9
Residential mortgages: 50.5
Other assets: 16.5
Assets: 245.8
This category comprises term funding products, marketable or non-marketable.
This category comprises securities purchased under reverse repurchase agreements and securities borrowed.
This category comprises subordinated debt and equity.
(1)
(2)
(3)
82
Unsecured funding(1): 33.0
Secured funding: 37.1
Securitization and covered bonds: 28.0
Business and government deposits: 68.9
Personal deposits: 53.7
Capital(3): 13.6
Other liabilities: 11.5
Liabilities and equity: 245.8
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Diversified Funding Sources
The purpose of diversification by source, geographic location, currency,
instrument, maturity and depositor is to mitigate liquidity and funding risk by
ensuring that the Bank has in place alternative sources of funds that
strengthen its capacity to withstand a variety of severe yet plausible
institution-specific and market-wide shocks. To meet this objective, the
Bank:
—
takes funding diversification into account in the business planning
process;
sets limits on funding concentration;
— maintains a variety of funding programs to access different markets;
—
— maintains strong relationships with fund providers;
is active in various funding markets of all tenors;
—
identifies and monitors the main factors that affect the ability to raise
—
funds.
The Bank is active in the following funding programs:
—
—
—
—
—
—
—
—
—
Canadian dollar Senior Unsecured Debt;
U.S. dollar Senior Unsecured Debt;
Canadian Medium Term Note Shelf;
U.S. dollar Commercial Paper programs;
U.S. dollar Certificates of Deposit;
Euro Medium Term Note program;
Canada Mortgage and Housing Corporation securitization programs;
Canadian Credit Card Trust II;
Legislative Covered Bond program.
The table below presents the residual contractual maturities of the Bank’s
wholesale funding. The information has been presented in accordance with
the categories recommended by the EDTF for comparison purposes with
other banks.
Residual Contractual Maturities of Wholesale Funding(1)
(millions of Canadian dollars)
As at October 31, 2017
Deposits from banks(2)
Certificates of deposit and commercial paper(3)
Asset-backed commercial paper
Senior unsecured medium-term notes(4)
Senior unsecured structured notes
Covered bonds and asset-backed securities
Mortgage securitization
Covered bonds
Securitization of credit card receivables
Subordinated liabilities(5)
Other(6)
Secured funding
Unsecured funding
As at October 31, 2016
1 month or
less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
12 months
Subtotal
1 year
or less
706
1,242
−
250
−
−
−
−
−
6,296
8,494
−
8,494
8,494
6,207
6
2,499
−
928
−
1,873
−
−
−
3
5,309
1,873
3,436
5,309
3,880
10
3,685
−
26
−
448
967
−
−
10
5,146
1,415
3,731
5,146
4,854
−
1,571
−
1,667
13
1,081
−
−
−
−
4,332
1,081
3,251
4,332
5,850
722
8,997
−
2,871
13
3,402
967
−
−
6,309
23,281
4,369
18,912
23,281
20,791
Over 1
year to
2 years
−
626
−
2,998
330
3,486
1,492
36
−
−
8,968
5,014
3,954
8,968
7,250
Over 2
years
−
−
−
5,718
4,428
13,210
4,551
873
9
−
28,789
18,634
10,155
28,789
29,549
Total
722
9,623
−
11,587
4,771
20,098
7,010
909
9
6,309
61,038
28,017
33,021
61,038
57,590
(1)
(2)
(3)
(4)
(5)
(6)
Bankers’ acceptances are not included in this table.
Deposits from banks include all non-negotiable term deposits from banks.
Includes bearer deposit notes.
Certificates of deposit denominated in euros are included in senior unsecured medium-term notes.
Subordinated debt is presented in this table but the Bank does not consider it as part of its wholesale funding.
The Other item includes non-negotiable term deposits from non-bank financial institutions such as broker-dealers, pension funds and trust companies.
83
83
National Bank of Canada2017 Annual Report
Key Risk Indicators
The business units and corporate units define key indicators associated with
their main operational risks. The key indicators are used to monitor
operational risk profiles and are related to critical thresholds that, once
reached, result in action by management. Using key risk indicators, the
business units and corporate units can track risks and proactively detect any
adverse change in risk exposure.
Specialized Risk Assessment Programs
Certain specialized groups have implemented programs with their own risk-
specific policies and procedures as well as oversight mechanisms to ensure
they are respected. Such specialized programs exist for:
— management of financial reporting risk;
— management of technological and information security risks;
— management of business continuity;
— management of risks related to third parties;
fraud risk management;
—
— model risk management;
—
—
review and approval of new products and activities;
information confidentiality.
Operational Risk Reports and Disclosures
The Operational Risk Unit regularly reports to the Operational Risk
Management Committee, to the GRC, and to the RMC on the status of
operational risk across the Bank, on the measures taken with respect to the
risks, and on the significant exposures to losses and emerging risks in order
to ensure management accountability and attention is maintained over
current and emerging issues. This reporting enhances the transparency and
proactive management of major operational risk factors.
Insurance Program
In order to protect itself against any material losses related to its exposure to
unforeseeable operational risks, the Bank also has adequate insurance, the
nature and amount of which meet its coverage requirements.
Regulatory Compliance Risk Management
Regulatory compliance risk is the risk of the Bank or its employees failing to
comply with the regulatory requirements in effect where the Bank does
business, both in Canada and internationally. Regulatory risk is present in all
of the daily operations of each Bank segment. A situation of regulatory non-
compliance can adversely affect the Bank’s reputation and result in
penalties, fines and sanctions or increased oversight by regulators.
The Bank operates in a highly regulated industry. The diversity of its
activities and its geographical reach in Canada and abroad add to this
complexity, since its operations are overseen by various regulatory bodies
and self-regulatory organizations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Operational Risk Management
Operational risk is the risk of loss resulting from an inadequacy or a failure
ascribable to people, processes, technology or external events. Operational
risk exists for every Bank activity. Theft, fraud, cyber attacks, unauthorized
transactions,
to or
misinterpretation of laws and regulations, litigation or disputes with clients
or property damage are just a few examples of events likely to cause financial
loss, harm the Bank’s reputation or lead to punitive damages or regulatory
penalties or sanctions.
errors, human
amendments
system
error,
Although operational risk cannot be eliminated entirely, it can be
managed in a thorough and transparent manner to keep it at an acceptable
level. The Bank’s operational risk management framework is built on the
concept of three lines of defence and provides a clear allocation of
responsibilities to all levels of the organization, as mentioned below.
Operational Risk Management Framework
By identifying, assessing and monitoring operational risk, business units and
corporate units can:
—
recognize and understand the inherent and residual risks to which their
activities and operations are exposed;
identify measures for keeping such risks at an acceptable level;
—
— manage the risks proactively and continuously.
The main tools developed for the purposes of this framework are
described below.
Collection and Analysis of Data on Operational Losses Incurred by the Bank
The Operational Risk Unit applies a process, across the Bank and its
subsidiaries, for collecting and compiling data on internal operational
losses. This data is entered into a centralized database and includes the
amount of each loss, the type of risk involved, a description of the event that
caused the loss, and the date of the loss, making it possible to better
understand the fundamental causes of this type of loss and develop
mitigation strategies. During fiscal years 2017 and 2016, there were no
material losses resulting from an operational risk event.
Collection and Analysis of Data on External Operational Events Observed in
the Financial Industry
The Bank collects and analyzes information reported in the media on
significant operational events experienced by other financial institutions in
order to assess the effectiveness of its own operational risk management
practices and reinforce them, if necessary.
Operational Risk Self-Assessment
The operational risk self-assessment program gives each business unit and
corporate unit the means to proactively identify and assess new or major
operational risks to which they are exposed, evaluate the effectiveness of
mitigating controls, and develop action plans to keep such risks at
acceptable levels.
84
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Organizational Structure of Compliance
The Senior Vice-President and Chief Compliance Officer acts as the Chief
Anti-Money Laundering Officer and oversees the compliance program and the
anti-money laundering and anti-terrorism financing (AML/ATF) program for all
the Bank’s segments.
Regulatory Compliance Framework
To ensure sound management of regulatory compliance, the Bank favours
proactive approaches, incorporates regulatory requirements into its day-to-
day operations, and communicates regularly with its employees to remind
them of the importance of complying with regulations.
Regulatory risk management ensures that events stemming from
regulatory non-compliance that could have an impact on the Bank’s activities
and reputation are proactively identified and understood and that mitigating
strategies are implemented. It also provides reasonable assurance that the
Bank is in compliance, in all material respects, with the regulatory
requirements in effect where it does business, both in Canada and
internationally.
The implementation of a regulatory compliance risk management
framework across the Bank is entrusted to the Compliance Service, which
has the following mandate:
—
including
regulations
— make sure that policies and procedures that ensure compliance with
the regulations in effect in all territories where the Bank and its
subsidiaries operate,
to AML/ATF
activities, are in place and operational;
develop compliance training and information programs for employees
of the Bank and of its subsidiaries and foreign centres;
exercise independent oversight of the compliance of the Bank, its
subsidiaries, and its foreign centres with policies and procedures;
report relevant compliance and AML/ATF matters to the Bank’s Board
and inform it of any changes in the effectiveness of the Bank’s risk
management framework.
related
—
—
The Bank holds itself to high regulatory compliance risk management
standards in order to earn the trust of its clients, its shareholders, the market
and the general public.
Described below are the main regulatory developments that have been
monitored over the past year.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic risks, D-SIBs
are required to have in place recovery and resolution plans. A recovery plan
is essentially a road map that guides the recovery of a Bank in the event of
severe financial stress; conversely, a resolution plan guides its orderly wind-
down in the event of failure when recovery is no longer an option. The Bank
develops and periodically updates its recovery and resolution plans to
prepare for these high-risk, but low-probability events. These plans are
presented to its domestic regulatory authorities. The Bank also works on
documenting a resolution plan with Canada Deposit Insurance Corporation
(CDIC) that would ensure orderly winding down of the Bank’s operations.
Liquidity Reforms
To promote a more resilient banking sector, more stringent international
rules on liquidity were introduced by the BCBS through Basel III and
implemented at a national level. In Canada, the liquidity rules began phasing
in during 2015. For additional information, see the Liquidity and Funding
Risk Management section of this MD&A.
Increased Regulatory Oversight for D-SIBs
Since six major Canadian banks were designated as D-SIBs in March 2013,
regulatory oversight has increased. The regulatory agencies are paying close
attention to capital ratio determination approaches, guaranteed mortgage
lending, risk data aggregation and risk reporting (RDARR), stress test
scenarios, the implementation of AML/ATF programs, recovery and resolution
planning (living will) and the implementation of effective anti-cyberterrorism
measures. The Bank is making every effort to meet the regulatory
requirements and is incorporating these initiatives into its day-to-day
business management.
Over-The-Counter (OTC) Derivative Financial Instrument Reforms
The Canadian Securities Administrators (CSA) and OSFI are piloting the
implementation of the regulatory framework stemming from the G20
commitments related to over-the-counter derivatives markets. The main
components of the regulatory reform are:
—
—
—
—
reporting of derivatives data;
clearing of certain transactions through central counterparties;
capital and margin requirements for transactions that are exempted
from mandatory clearing;
trading of derivatives on electronic platforms, registration of market
participants and protection of customer positions and collateral.
This reform is being implemented gradually, and the Bank is closely
monitoring the implementation of these regulatory initiatives in Canada, the
United States and Europe in order to ensure that the necessary measures are
adopted to achieve compliance with the new requirements applicable to its
activities on over-the-counter markets.
Anti-Money Laundering and Anti-Terrorism Financing (AML/ATF)
In June 2017, amendments to the Proceeds of Crime (Money Laundering) and
Terrorist Financing Regulations came into force. They provide a regulatory
framework for governing the treatment of politically exposed domestic
persons and provide additional components to be considered in risk
assessments. The transition period for implementing the new client identity
verification methods has been extended until January 23, 2018.
85
85
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Common Reporting Standard (CRS)
The Standard for Automatic Exchange of Financial Account Information,
known as the Common Reporting Standard (CRS), was developed by the
Organization for Economic Co-operation and Development (OECD) at the
request of the G8 and G20 in order to fight tax evasion. About 100
jurisdictions, including Canada, have confirmed their membership.
The CRS came into effect in Canada on July 1, 2017. It requires financial
institutions, including the Bank, to collect and disclose, to the Canada
Revenue Agency (CRA), certain information about mandatorily reportable
accounts whose holders are tax residents of a jurisdiction other than Canada.
The information is sent to the CRA via an annual reporting process and, as of
2018, the information will be exchanged with the tax authorities of other
jurisdictions participating in the CRS. Information is exchanged reciprocally,
so similar information about accounts held outside Canada by tax residents
of Canada will be provided to the CRA.
Qualified Intermediary Agreement
The Qualified Intermediary Agreement (QIA) is an agreement concerning
withholdings on certain U.S.-source income (such as dividends and interest)
and the reporting of such income. Through a contractual agreement with the
U.S. tax authorities, qualified intermediary entities can benefit from a
reduced administrative burden to enable their clients to receive the
advantageous taxation rates allowed under the tax treaties. In January 2017,
the terms of the QIA were amended by the U.S. tax authorities. These new
measures are currently being implemented.
Taxation of U.S. dividend-equivalent income
Subsection 871(m) of the US Internal Revenue Code is intended to guarantee
that investors who are not U.S. residents pay tax on dividends paid on
instruments related to U.S. equities. Transactions entered into as of
January 1, 2017 and related to derivative instruments whose underlying
securities are U.S. shares or “ineligible indexes” are subject to withholding
and reporting requirements. Following the implementation of these new
measures, other requirements set out in this legislation and that were to
apply in January 2018 have, however, been postponed by one year.
Good practice in the foreign exchange market
The FX Global Code of Conduct is a voluntary code of good practice that
applies to all participants in the wholesale foreign exchange market in all of
the world’s financial centres. Published in May 2017, the code is the result of
nearly two years of collaborative effort among central banks, including the
Bank of Canada, and market participants from the world’s leading financial
centres. The code defines the good practices that should be followed by
market participants to guarantee a robust, fair and transparent foreign
exchange market. It covers such areas as ethics, governance, execution of
information sharing, and risk
orders
management. The Bank has launched a project to implement this new
framework, which should be put in place gradually between November 2017
and May 2018.
(confirmation and settlement)
Investigation into sales practices
During fiscal 2017, the Financial Consumer Agency of Canada and the Office
of the Superintendent of Financial Institutions launched an industry-wide
review, which is ongoing, into the sales practices of financial institutions in
Canada. The Bank is participating and will continue to monitor the related
developments.
Reputation Risk Management
Reputation risk is the risk that the Bank’s operations or practices will be
judged negatively by the public, whether that judgment is with or without
basis, thereby adversely affecting the perception, image or trademarks of the
Bank, potentially resulting in costly litigation or loss of income. Reputation
risk generally arises from a deficiency in managing another risk. The Bank’s
reputation may, for example, be adversely affected by non-compliance with
laws and regulations or by process failures. All risks must therefore be
managed effectively in order to protect the Bank’s reputation.
The Bank seeks to ensure that its employees are constantly aware of
the potential repercussions of their actions on the Bank’s reputation and
image. In addition to the previously discussed operational risk management
initiatives, a variety of mechanisms are in place to support sound reputation
risk management, including codes of professional conduct applicable to all
employees, policies regarding ethics and corporate governance and
appropriate training programs.
The Bank also has a policy, approved by the Board, that covers
reputation risk stemming from complex structured financing transactions
and other transactions that may give rise to reputation issues. The policy
sets the reputation risk management rules and practices applicable to these
transactions. The policy is complemented by the special provisions of the
new products and activities policy, which determines the approvals required
by the various committees that assess risk whenever new products or
activities are introduced within the business units. These provisions are
intended, among other things, to provide oversight for the management of
reputation risk, which may be material for such products or activities. The
new products and activities policy requires that any new product or activity
for which reputation risk is determined to be high be submitted to the GRC
for approval.
The activities of the Compliance Service, Legal Affairs Department,
Public Relations Department and Investor Relations Department complete the
reputation risk management framework.
Strategic Risk Management
Strategic risk is the risk of a loss arising from inappropriate strategic
orientations, improper execution or ineffective response to economic or
financial changes. The corporate strategic plan is developed by the Office of
the President, in alignment with the Bank’s overall risk appetite, and
approved by the Board. Once approved, the initiatives of the strategic plan
are monitored regularly to ensure that they are progressing according to
plan. If not, strategies could be reviewed or adjusted if deemed appropriate.
In addition, the Bank has a specific Board-approved policy for strategic
investments, which are defined as purchases of business assets or
acquisitions of significant interests in an entity for the purposes of acquiring
control or creating a long-term relationship. As such, acquisition projects and
other strategic investments are analyzed through a due diligence process to
ensure that these investments are aligned with the corporate strategic plan
and the Bank’s risk appetite.
86
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK MANAGEMENT
Environmental Risk Management
Environmental risk is the risk of a loss or damage to the Bank’s reputation
arising from environmental concerns related to the Bank or its clients.
Environmental risk is often associated with credit risk and operational risk.
Environmental risk is defined as any impact arising from environmental
issues (such as climate change, pollution and waste management) that
causes a loss of financial value or operating value or that damages the
Bank’s reputation. This risk arises from commercial and operating activities.
For example, environmental issues related to the purchase or sale of
contaminated properties by clients of the Bank or the deployment of large-
scale projects could expose the Bank to credit and reputation risk. The Bank
has implemented a process that examines supplier practices in order to
assess their impact on the environment and consider this aspect more
thoroughly in its decision-making. The Bank has set up a series of eco-
responsible measures that allow for better management of greenhouse gas
emissions arising from its activities and for a cleaner environment. It is also
the first Canadian company to obtain Carbon Care Certification from Enviro-
access for its greenhouse gas reduction efforts over the last five years. It is
working with firms of experts to create an environmental strategy that will
allow it to contribute more to sustainable development. The Bank is a
signatory to the Carbon Disclosure Project, which collects and publishes
information disclosed by companies worldwide regarding their management
of climate change and their greenhouse gas emissions.
The Bank would also be forced to deal with operational risk and the risk
related to the legal environment when environmental issues arise in its
branches or administrative offices.
In this context, the Risk Management Group develops requirements that
are prescribed in its internal policies in order to reveal, assess, control and
monitor environmental risk. For their part, the business segments and
corporate units must integrate requirements and controls related to the
management of environmental risk in their activities. The Risk Management
Group monitors its application and regularly reviews the standards. Each
year, the Bank publishes its performance objectives and results in its Social
Responsibility Report, which is available on its website at nbc.ca. This year
again, it is one of the 20 greenest banks in the world and it continues to work
to improve its environmental strategies.
87
87
National Bank of Canada2017 Annual Report
Allowances for Credit Losses
A loan, except credit card receivables, is considered impaired if there is
objective evidence of impairment and, in management’s best estimate, the
timely collection of principal and interest is no longer reasonably assured, or
when a payment is contractually 90 days past due, unless the loan is fully
secured and collection efforts are reasonably expected to result in repayment
of the debt within 180 days. For credit card receivables, they are written off
when payment is 180 days in arrears. Loans that are insured or fully
guaranteed by a Canadian government (federal or provincial) or by a
Canadian government agency are considered impaired when they are more
than 365 days in arrears.
Allowances for credit losses are management’s best estimate of losses
in its credit portfolio as at the balance sheet date. They relate primarily to
loans but may also cover the credit risk associated with deposits with
financial institutions, loan substitute securities, credit instruments such as
acceptances, and off-balance-sheet items such as commitments to extend
credit, letters of guarantee and letters of credit. Management reviews
portfolio credit quality on an ongoing basis to ensure that the amount of the
allowance for credit losses is adequate.
The allowances for credit losses on impaired loans are calculated on a
loan-by-loan basis and assessed either individually or collectively based on
the portfolio’s historical net loss experience. The allowance for credit losses
on non-impaired loans is assessed collectively taking into account the Bank’s
overall credit portfolio.
When assessing allowances for credit losses, management must use its
judgment in establishing reasonable assumptions and subjective and critical
estimates concerning the probability of default, probable losses in the event
of default, the amount at risk in the event of default, the amount and dates of
future cash flows, the value of the underlying collateral and realization costs.
Any changes in these estimates and assumptions, as well as the use of
different, but equally reasonable, estimates and assumptions, could have an
impact on the allowances for credit losses and, consequently, on the
provisions for credit losses for the year. A description of the methods used to
calculate the allowances for credit losses can be found in Note 1 to the
consolidated financial statements. All business segments are affected by this
accounting estimate.
Fair Value of Financial Instruments
When they are initially recognized, all financial assets and liabilities,
including derivative financial instruments, are recorded at fair value on the
Consolidated Balance Sheet. In subsequent periods, they are measured at
fair value, except for items classified in the following categories, which are
measured at amortized cost using the effective interest rate method:
financial assets held to maturity, loans and receivables, and financial
liabilities at amortized cost. The fair value of a financial instrument is the
price that would be received to sell a financial asset or paid to transfer a
financial liability in an orderly transaction in the principal market at the
measurement date under current market conditions (i.e., an exit price).
MANAGEMENT’S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING ESTIMATES
A summary of the significant accounting policies used by the Bank is
presented in Note 1 to the consolidated financial statements of this Annual
Report. Some of these accounting policies are considered critical given their
importance to the presentation of the Bank’s financial position and operating
results and require subjective and complex judgments and estimates on
matters that are inherently uncertain. Any change in these judgments and
estimates could have a significant impact on the Bank’s consolidated
financial statements. The critical accounting estimates are as follows.
Impairment of Financial Assets
At the end of each reporting period, the Bank determines whether there is
objective evidence of impairment of a financial asset or group of financial
assets. There is objective evidence of impairment when one or more loss
events occur after the initial recognition of the asset and prior to or on the
balance sheet date and these events adversely affect the estimated future
cash flows of the financial assets in question. Management must exercise
judgment to determine whether certain events or circumstances constitute
objective evidence of impairment and to estimate the timing of future cash
flows.
reviewed
Available-for-Sale Securities
for objective evidence of
Available-for-sale securities are
impairment at the end of each reporting period, which is an exercise that
requires the use of judgment and estimates. The Bank considers all available
objective evidence of impairment, including observable data about loss
events such as: a significant financial difficulty of the issuer, a breach of
contract such as a default, and situations involving bankruptcy or other
financial reorganization. In addition to these loss events, objective evidence
of impairment for an equity security also includes information about
significant changes with an adverse effect that have taken place in the
technological, market, economic, or legal environment in which the issuer
operates, and indicates that the cost of the investment in the equity security
may not be recovered. For equity securities, a significant or prolonged
decline in fair value below cost is also objective evidence of impairment.
If there is objective evidence of impairment, any amount previously
recognized in Accumulated other comprehensive income is reclassified to
Non-interest income in the Consolidated Statement of Income. This amount is
determined as the difference between the acquisition cost (net of any capital
repayments and amortization) and the current fair value of the asset less any
impairment
the
loss on
Consolidated Statement of Income.
investment previously
recognized
that
in
This accounting estimate has an impact, across all business segments,
on Available-for-sale securities on the Consolidated Balance Sheet, on Other
comprehensive income in the Consolidated Statement of Comprehensive
Income, and on Non-interest income in the Consolidated Statement of
Income.
88
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING ESTIMATES
Unadjusted quoted prices in active markets, based on bid prices for
financial assets and offered prices for financial liabilities, provide the best
evidence of fair value. A financial instrument is considered quoted in an
active market when prices
or
in
principal-to-principal markets are accessible at the measurement date. An
active market is one where transactions occur with sufficient frequency and
volume to provide quoted prices on an ongoing basis.
exchange, dealer, broker
When there is no quoted price in an active market, the Bank uses
another valuation technique that maximizes the use of relevant observable
inputs and minimizes the use of unobservable inputs. The chosen valuation
technique incorporates all the factors that market participants would take
into account in pricing a transaction. Judgment is required in applying a large
number of acceptable valuation techniques and estimates to determine fair
value. The estimated fair value reflects market conditions on the valuation
date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial
recognition is the transaction price, i.e., the fair value of the consideration
received or paid. If there’s a difference between the fair value at initial
recognition and the transaction price, and the fair value is determined using
a valuation technique based on observable market inputs or, in the case of a
derivative, if the risks are fully offset by other contracts entered into with
third parties, this difference is recognized in the Consolidated Statement of
Income. In other cases, the difference between the fair value at initial
recognition and the transaction price is deferred on the Consolidated
Balance Sheet. The amount of the deferred gain or loss is recognized over the
term of the financial instrument. The unamortized balance is immediately
recognized in net income when (i) observable market inputs can be obtained
and support the fair value of the transaction, (ii) the risks associated with the
initial contract are substantially offset by other contracts entered into with
third parties, (iii) the gain or loss is realized through a cash receipt or
payment, or (iv) the transaction matures or is cancelled before maturity.
In certain cases, measurement adjustments are recognized to address
factors that market participants would use at the measurement date to
determine fair value but that are not included in the measurement technique
due to system limitations or uncertainty surrounding the measure. These
factors include, but are not limited to, the unobservable nature of inputs
used in the valuation model, assumptions about risk such as market risk,
credit risk, or risk related to the valuation model and future administration
costs. The Bank may also consider market liquidity risk when determining
the fair value of financial instruments when it believes these instruments
could be disposed of for a consideration below the fair value otherwise
determined due to a lack of market liquidity or an insufficient volume of
transactions in a given market. The measurement adjustments also include
the funding valuation adjustment applied to derivative financial instruments
to reflect the market implied cost or benefits of funding collateral for
uncollateralized or partly collateralized transactions.
IFRS establishes a fair value hierarchy that classifies the inputs used in
financial instrument fair value measurement techniques according to three
levels. The fair value hierarchy has the following levels:
—
—
—
Level 1:
Inputs corresponding to unadjusted quoted prices in active
markets for identical assets and liabilities and accessible to
the Bank at the measurement date. These instruments consist
primarily of equity securities, derivative financial instruments
traded in active markets, and certain highly liquid debt
securities actively traded in over-the-counter markets.
Level 2: Valuation techniques based on inputs, other than the quoted
prices included in Level 1 inputs, that are directly or indirectly
observable in the market for the asset or liability. These
inputs are quoted prices of similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; inputs other than quoted prices
used in a valuation model that are observable for that
instrument; and inputs that are derived principally from or
corroborated by observable market inputs by correlation or
other means. These instruments consist primarily of certain
instruments
loans, certain deposits, derivative financial
traded in over-the-counter markets, certain debt securities,
is not directly
certain equity securities whose value
observable
to
liabilities related
transferred receivables as well as certain other liabilities.
in an active market,
Level 3: Valuation techniques based on one or more significant inputs
that are not observable in the market for the asset or liability.
The Bank classifies financial instruments in Level 3 when the
valuation technique is based on at least one significant input
that is not observable in the markets. The valuation technique
may also be partly based on observable market inputs.
Financial instruments whose fair values are classified in
Level 3 consist of investments in hedge funds, certain
derivative financial instruments, equity and debt securities of
private companies, certain restructured notes, and certain
deposits (structured deposit notes).
Establishing fair value is an accounting estimate and has an impact on
Securities at fair value through profit or loss, certain Loans, Available-for-sale
securities, Obligations related to securities sold short, Derivative financial
instruments, and financial instruments designated at fair value through profit
or loss on the Consolidated Balance Sheet. This estimate also has an impact
on Non-interest income in the Consolidated Statement of Income of the
Financial Markets segment and of the Other heading. Lastly, this estimate
has an impact on Other comprehensive income in the Consolidated
Statement of Comprehensive Income. For additional information on the fair
value determination of financial instruments, see Notes 3 and 6 to the
consolidated financial statements.
89
89
National Bank of Canada2017 Annual Report
Employee Benefits – Pension Plans and
Other Post-Employment Benefits
Pension plan and other post-employment plan expenses and obligations are
actuarially determined using the projected benefit method prorated on
service. The calculations incorporate management’s best estimates of
various actuarial assumptions such as discount rates, rates of compensation
increase, health care cost trend rates, mortality rates and retirement age.
Remeasurements of these plans result in actuarial gains and losses
related to the defined benefit obligation and the actual return on plan assets,
excluding the net interest determined by applying a discount rate to the net
asset or liability of the plans. Remeasurements are immediately recognized
in Other comprehensive income and will not be subsequently reclassified to
net income; these cumulative gains and losses are reclassified to Retained
earnings.
The use of different assumptions could have a significant impact on the
defined benefit asset (liability) presented in Other assets (Other liabilities) on
the Consolidated Balance Sheet, on the pension plan and other post-
in Compensation and
employment benefit plan expenses presented
employee benefits in the Consolidated Statement of Income, as well as on
Remeasurements of pension plans and other post-employment benefit plans
presented in Other comprehensive income. All business segments are
affected by this accounting estimate. For additional information, including
the significant assumptions used to determine the Bank’s pension plan and
other post-employment benefit plan expenses and the sensitivity analysis for
significant plan assumptions, see Note 24 to the consolidated financial
statements.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING ESTIMATES
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are
tested for impairment when events or changes in circumstances indicate that
their carrying value may not be recoverable. At the end of each reporting
period, the Bank determines whether there is an indication that premises
and equipment or intangible assets with finite useful lives may be impaired.
Goodwill and intangible assets that are not yet available for use or that have
indefinite useful lives are tested for impairment annually or more frequently
if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with
its recoverable amount. The recoverable amount must be estimated for the
individual asset. Where it is not possible to estimate the recoverable amount
of an individual asset, the recoverable amount of the cash-generating unit
(CGU) to which the asset belongs will be determined. Goodwill is always
tested for impairment at the level of a CGU or a group of CGUs. A CGU is the
smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of
assets. The Bank uses judgment to identify CGUs.
An asset’s recoverable amount is the higher of fair value less costs to
sell and the value in use of the asset or CGU. Value in use is the present value
of expected future cash flows from the asset or CGU. The recoverable amount
of the CGU is determined using valuation models that consider various
factors such as projected future cash flows, discount rates and growth rates.
The use of different estimates and assumptions in applying the impairment
tests could have a significant impact on income. If the recoverable amount of
an asset or a CGU is less than its carrying amount, the carrying amount is
reduced to its recoverable amount and an impairment loss is recognized in
Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is
objective evidence that premises and equipment or intangible assets with
finite useful lives may be impaired. It also uses judgment in determining to
which CGU or group of CGUs an asset or goodwill is to be allocated.
Moreover, for impairment assessment purposes, management must make
estimates and assumptions regarding the recoverable amount of non-
financial assets, CGUs or a group of CGUs. For additional information on the
estimates and assumptions used to calculate the recoverable amount of an
asset or CGU, see Note 11 to the consolidated financial statements.
Any changes to these estimates and assumptions may have an impact
on the recoverable amount of a non-financial asset and, consequently, on
impairment testing results. These accounting estimates have an impact on
Premises and equipment, Intangible assets and Goodwill reported on the
Consolidated Balance Sheet. The aggregate impairment loss, if any, is
recognized as a non-interest expense for the corresponding segment and
presented in the Other item.
90
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
CRITICAL ACCOUNTING ESTIMATES
Income Taxes
The Bank makes assumptions to estimate income taxes as well as deferred
tax assets and liabilities. This process includes estimating the actual amount
of income taxes payable and evaluating tax loss carryforwards and temporary
differences arising from differences between the values of the items reported
for accounting and for income tax purposes. Deferred tax assets and
liabilities, presented in Other assets and Other liabilities on the Consolidated
Balance Sheet, are calculated according to the tax rates to be applied in
future periods. Previously recorded deferred tax assets and liabilities must
be adjusted when the date of the future event is revised based on current
information. The Bank periodically evaluates deferred tax assets to assess
recoverability. In the Bank’s opinion, based on the information at its
disposal, it is probable that all deferred tax assets will be realized prior to
their expiration.
This accounting estimate affects Income taxes in the Consolidated
Statement of Income for all business segments. For additional information on
income taxes, see Notes 1 and 25 to the consolidated financial statements.
Litigation
In the normal course of business, the Bank and its subsidiaries are involved
in various claims relating, among other matters, to loan portfolios,
investment portfolios and supplier agreements, including court proceedings,
investigations or claims of a regulatory nature, class actions or other legal
remedies of varied natures. The recent developments in the main legal
proceeding involving the Bank are as follows:
(Visa), MasterCard
Watson
In 2011, a class action was filed in the Supreme Court of British Columbia
International
against Visa Corporation Canada
Incorporated (MasterCard) as well as National Bank and a number of other
financial institutions. The plaintiff is alleging that the credit card networks
and financial institutions engaged in a price-fixing system to increase or
maintain the fees paid by merchants on Visa and MasterCard transactions. In
so doing, they would have been in breach of the Competition Act. An
unspecified amount of compensatory and punitive damages is being
claimed. During the year ended October 31, 2017, the Bank entered into an
agreement-in-principle with the plaintiffs in order to settle this dispute in the
five jurisdictions where the class action was filed. This agreement is subject
to the approval of the Court in each of those jurisdictions.
It is impossible to determine the outcome of the claims instituted or
which may be instituted against the Bank and its subsidiaries. The Bank
estimates, based on the information at its disposal, that while the amount of
contingent liabilities pertaining to these claims, taken individually or in the
aggregate, could have a material impact on the Bank’s consolidated
operating income for a particular period, it would not have a material adverse
impact on the Bank’s consolidated financial position.
Provisions are liabilities of uncertain timing and amount. A provision is
recognized when the Bank has a present obligation (legal or constructive)
arising from a past event, when it is probable that an outflow of economic
resources will be required to settle the obligation and when the amount of
the obligation can be reliably estimated. Provisions are based on the Bank’s
best estimates of the economic resources required to settle the present
obligation, given all relevant risks and uncertainties, and, when it is
significant, the effect of the time value of money.
The
requires
recognition of a
litigation provision
the Bank’s
management to assess the probability of loss and estimate any potential
monetary impact. The Bank examines each litigation provision individually by
considering the development of each case, its past experience in similar
transactions and the opinion of its legal counsel. Each new piece of
information can alter the Bank’s assessment as to the probability and
estimated amount of the loss and the extent to which it adjusts the recorded
provision. Moreover, the actual settlement cost of these litigations can be
significantly higher or lower than the amounts recognized.
Structured Entities
In the normal course of business, the Bank enters into arrangements and
transactions with structured entities. Structured entities are entities
designed so that voting or similar rights are not the dominant factor in
deciding who controls the entity, such as when voting rights relate solely to
administrative tasks and the relevant activities are directed by means of
contractual arrangements. A structured entity is consolidated when the Bank
concludes, after evaluating the substance of the relationship and its right or
exposure to variable returns, that it controls that entity. Management must
exercise judgment in determining whether the Bank controls an entity.
Additional information is provided in the Securitization and Off-Balance-
Sheet Arrangements section of this MD&A (pages 39 and 40) and in Note 28
to the consolidated financial statements.
91
91
National Bank of Canada2017 Annual Report
IFRS 9 requires that all debt instrument financial assets, including
loans, that do not meet a “solely payment of principal and interest” (SPPI)
condition, including those that contain embedded derivatives, be classified
as at fair value through profit or loss. For those that meet the SPPI condition,
classification at initial recognition will be determined based on the business
model under which these assets are managed. Upon transition, the business
model test will be based on the facts and circumstances as at November 1,
2017. Debt instruments that are being managed on a “held for trading” or
fair value basis will be classified as at fair value through profit or loss. Debt
instruments that are managed on a “hold to collect and for sale” basis will be
classified as at fair value through other comprehensive income. Finally, debt
instruments that are managed on a “hold to collect” basis will be classified
as at amortized cost. In addition, IFRS 9 also includes an option to
irrevocably designate, at initial recognition, a debt instrument as measured
at fair value through profit or loss if doing so eliminates or significantly
reduces an accounting mismatch and if OSFI requirements are also met. This
designation is also available for existing financial assets and liabilities at the
date of IFRS 9 adoption.
Under IFRS 9, all equity instrument financial assets must be classified
as at fair value through profit or loss. However, the Bank may, at initial
recognition of a non-trading equity instrument, irrevocably elect to designate
the instrument as at fair value through other comprehensive income with no
subsequent reclassification of gains and losses to net income. Dividends will
continue to be recognized in net income. This designation is also available
for existing non-trading equity instruments at the date of IFRS 9 adoption.
Derivative financial instruments will continue to be measured at fair value
through profit or loss.
The classification and measurement of financial liabilities remain
essentially unchanged under
liabilities
IFRS 9, except
designated as measured at fair value through profit or loss under the fair
value option. Once the fair value election is made, changes in fair value
attributable to changes in an entity’s own credit risk must be recognized in
Other comprehensive income rather than in net income. On February 1, 2016,
the Bank early adopted, on a prospective basis, the own credit risk
provisions of IFRS 9.
financial
for
MANAGEMENT’S DISCUSSION AND ANALYSIS
FUTURE ACCOUNTING POLICY CHANGES
The IASB issues revisions and amendments to a number of standards, some
of which have already had an impact on the Bank and others that could have
an impact in the future. The Bank is currently assessing the impact that
adoption of the following standards will have on its consolidated financial
statements. A summary of these amendments and the effective dates
applicable to the Bank are presented below.
Effective Date – Early Adoption on November 1, 2017
IFRS 9 – Financial Instruments
In July 2014, the IASB issued a complete and final version of IFRS 9, which
replaces the guidance in IAS 39 – Financial Instruments: Recognition and
Measurement. IFRS 9 sets out requirements for the classification and
measurement of financial assets and financial liabilities, for the impairment
of financial assets, and for general hedge accounting. Macro hedge
accounting has been decoupled from IFRS 9 and will be considered and
issued as a separate standard. As a result of IFRS 9, consequential
amendments have been made to IFRS 7 – Financial Instruments: Disclosures,
requiring additional qualitative and quantitative disclosures that must be
adopted at the same time as IFRS 9. In December 2015, the Basel Committee
on Banking Supervision issued Guidance on Credit Risk and Accounting for
Expected Credit Losses. In June 2016, OSFI issued the final guideline on
IFRS 9 Financial Instruments and Disclosures, setting out its expectations
regarding IFRS 9 application.
For the Bank, the IFRS 9 effective date is November 1, 2018 with early
adoption permitted. However, on January 9, 2015, OSFI issued a final version
of Early Adoption of IFRS 9 Financial Instruments for Domestic Systemically
Important Banks and stated therein that it expects Domestic Systemically
Important Banks (D-SIBs), a group that includes the Bank, to adopt IFRS 9 as
of November 1, 2017. The Bank will
IFRS 9 as of
November 1, 2017. Its first financial statements presented in accordance
with IFRS 9 will be its unaudited interim condensed consolidated financial
statements for the quarter ending January 31, 2018. In general, IFRS 9 is to
be applied retrospectively. As permitted by IFRS 9, the Bank will not restate
the comparative period financial statements. The retrospective impact of
applying IFRS 9 will be accounted for through adjustments to the opening
balances of Retained earnings, Accumulated other comprehensive income
and Non-controlling interests as at November 1, 2017.
therefore adopt
Classification and Measurement
IFRS 9 provides a single model for financial asset classification and
measurement that is based on both the business model for managing
financial assets and the contractual cash flow characteristics of the financial
assets. These factors determine whether the financial assets are measured at
amortized cost, fair value through other comprehensive income, or fair value
through profit or loss.
92
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
FUTURE ACCOUNTING POLICY CHANGES
Impairment
Overall Comparison of the New Impairment Model and the Current Model
IFRS 9 introduces a new, single impairment model for financial assets that
requires the recognition of expected credit losses (ECL) rather than incurred
losses as applied under the current standard. Currently, impairment losses
are recognized if, and only if, there is objective evidence of impairment as a
result of one or more loss events that occurred after initial recognition of the
asset and that loss event has a detrimental impact on the estimated future
cash flows of the asset that can be reliably estimated. If there is no objective
evidence of impairment for an individual financial asset, that financial asset
is included in a group of assets with similar credit risk characteristics and
collectively assessed for impairment losses incurred but not yet identified.
Under IFRS 9, ECLs will be recognized in profit or loss before a loss event has
occurred, which could result in earlier recognition of credit losses compared
to the current model.
incurred
Under the current standard,
losses are measured by
incorporating reasonable and supportable information about past events and
current conditions. Under IFRS 9, the ECL model, which is forward-looking, in
addition requires that forecasts of future events and economic conditions be
used when determining significant increases in credit risk and when
measuring expected losses. Forward-looking macroeconomic factors such as
unemployment rates, housing price indices, interest rates, and gross
domestic product will be incorporated into the risk parameters. Estimating
forward-looking information will require significant judgment and must be
consistent with the forward-looking information used by the Bank for other
purposes, such as forecasting and budgeting.
Scope
The impairment model applies to all financial assets not measured at fair
value through profit or loss. The ECL model also applies to loan commitments
and financial guarantees that are not measured at fair value through profit or
loss.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of expected
cash shortfalls over the remaining expected life of the financial instrument.
The measurement of ECLs will be based primarily on the product of the
instrument’s probability of default (PD), loss given default (LGD), and
exposure at default (EAD). IFRS 9 requires the estimate of expected credit
losses to reflect an unbiased and probability-weighted amount that is
determined by evaluating a range of possible outcomes. The Bank will
incorporate three forward-looking macroeconomic scenarios in its ECL
calculation process: a base scenario, an upside scenario, and a downside
scenario. Probability-weights will be attributed to each scenario. The
scenarios and probability weights will be reassessed quarterly and subject to
management review.
The ECL model contains a three-stage approach that is based on the
change in the credit quality of assets since initial recognition. If, at the
reporting date, the credit risk of non-impaired financial instruments has not
increased significantly since initial recognition, these financial instruments
are classified in Stage 1, and a loss allowance that is measured, at each
reporting date, at an amount equal to 12-month expected credit losses is
recorded. When there is a significant increase in credit risk since initial
recognition, these non-impaired financial instruments are migrated to
Stage 2, and a loss allowance that is measured, at each reporting date, at an
amount equal to lifetime expected credit losses is recorded. In subsequent
reporting periods, if the credit risk of the financial instrument improves such
that there is no longer a significant increase in credit risk since initial
recognition, the ECL model requires reverting to recognition of 12-month
expected credit losses. When one or more events that have a detrimental
impact on the estimated future cash flows of a financial asset have occurred,
the financial asset is considered credit-impaired and is migrated to Stage 3,
and an allowance equal to lifetime expected losses continues to be recorded
or the financial asset is written off.
Interest income is calculated on the gross carrying amount of the
financial assets in Stages 1 and 2 and on the net carrying amount of the
financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
To assess whether the credit risk of a financial instrument has increased
significantly, the PD occurring over its expected life as at the reporting date
is compared with the PD occurring over its expected life on the date of initial
recognition, and reasonable and supportable information indicative of
significant increases in credit risk since initial recognition is considered. The
Bank has included relative and absolute thresholds in the definition of
significant increase in credit risk and a backstop of 30 days past due. All
financial instruments that are 30 days past due are migrated to Stage 2 even
if other metrics do not indicate that a significant increase in credit risk has
occurred.
Definition of Default
IFRS 9 does not define default but requires the definition to be consistent with
the definition used for internal credit risk management purposes. However,
IFRS 9 contains a rebuttable presumption that default does not occur later
than when a financial asset is 90 days past due. Under IFRS 9, the Bank will
consider a financial asset, other than a credit card receivable, as credit-
impaired when one or more events that have a detrimental impact on the
estimated future cash flows of a financial asset have occurred or when
contractual payments are 90 days past due. The backstop for credit card
receivables will be 180 days past due. The Bank’s write-off policy under IAS 39
is not expected to be materially different under IFRS 9.
93
93
National Bank of Canada2017 Annual Report
Transition Impact
As at October 31, 2017, the Bank’s best estimate of the impact of
transitioning to IFRS 9 is a decrease of approximately $165 million, net of
income taxes, in equity as at November 1, 2017, and a decrease of
approximately 16 basis points in the Common Equity Tier 1 (CET1) capital
ratio. The estimate of the impact for the Bank relates primarily to the
classification and measurement requirements, in particular the election to
irrevocably designate certain financial assets and financial liabilities at fair
value through profit or loss under the fair value option, as permitted by the
IFRS 9 transitional provisions.
The estimate of the impact of applying the new impairment model for
financial assets is not significant. The Bank continues to refine and validate
the new impairment models leading up to the disclosure of its 2018 first
quarter results.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FUTURE ACCOUNTING POLICY CHANGES
Comparison of Regulatory Expected Credit Loss Model and IFRS 9
Expected Credit Loss Model
The IFRS 9 ECL calculation has leveraged, where appropriate, the expected
credit loss model parameters used by the Bank for regulatory purposes,
namely: PD, LGD and EAD. Adjustments to these parameters were made to
comply with IFRS 9 requirements. After the adoption of IFRS 9, an ECL model
will be used for both regulatory and accounting purposes. However, there are
key differences, which are summarized below.
Regulatory Capital
On March 29, 2017, the Basel Committee on Banking Supervision (BCBS)
interim regulatory treatment for accounting
released details on the
provisions as well as standards for transitional arrangements. Given the
coming into effect of IFRS 9, the BCBS will retain the current Basel Accord
regulatory treatment for provisions during a transition period.
Jurisdictions may adopt transitional measures to phase in any potential
significant negative impacts on regulatory capital arising from the new
expected credit loss impairment model under IFRS 9. On August 21, 2017,
OSFI released for comment a new, revised version of the Capital Adequacy
Requirements (CAR) Guideline to be implemented in the first quarter of 2018.
Consistent with the BCBS position, the proposed CAR Guideline retains the
current regulatory treatment of accounting provisions. As for transitional
measures to phase-in any potential negative impacts on regulatory capital,
on November 29, 2017, OSFI has announced that no mitigation measure will
be allowed for banks whose capital position could be significantly affected
by IFRS 9 adoption.
Hedge Accounting
IFRS 9 introduces a new general hedge accounting model that better aligns
hedge accounting with risk management activities. However, the current
hedge accounting requirements under IAS 39 may continue to be applied
until the IASB finalizes its macro hedge accounting project. As permitted, the
Bank elected not to adopt the IFRS 9 hedge accounting requirements and
instead will continue applying the IAS 39 hedge accounting requirements.
The Bank will, however, comply with the revised hedge accounting
disclosures required by the consequential amendments made to IFRS 7.
Regulatory Capital
Through-the-cycle 12-month PD calibrated on a long run average
PD throughout a full economic cycle. The default backstop is
generally 90 days past due.
IFRS 9
Point-in-time 12-month or lifetime PD based on past experience, current
conditions and relevant forward-looking information. The default backstop is
generally 90 days past due.
Downturn LGD based on losses that would be expected in an
economic downturn and subject to certain regulatory floors. All
collection costs are included.
Expected LGD based on past experience, current conditions and relevant forward-
looking information. The value of collateral and other credit risk mitigants are
incorporated as appropriate and undue conservatism and floors are excluded.
Based on the drawn balance plus expected utilization of any
undrawn portion prior to default, and cannot be lower than the
current balance.
Represents the expected balance at default across the lifetime horizon on
forward-looking expectations.
ECLs are discounted from the default date to the reporting date.
PD
LGD
EAD
Other
94
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
FUTURE ACCOUNTING POLICY CHANGES
Effective Date – November 1, 2018
IFRS 15 – Revenue From Contracts With Customers
In May 2014, the IASB issued a new standard, IFRS 15, which replaces the
current revenue recognition standards and interpretations. IFRS 15 provides
a single comprehensive model to use when accounting for revenue arising
from contracts with customers. The new model applies to all contracts with
customers except those that are within the scope of other IFRS standards
such as leases, insurance contracts and financial instruments. As a result,
the majority of the Bank’s revenue, including net interest income, will not be
impacted.
At its meeting on July 22, 2015, the IASB unanimously confirmed its
proposal to defer the effective date of IFRS 15 to fiscal years beginning on or
after January 1, 2018, which will be November 1, 2018 for the Bank. In
April 2016, the IASB issued amendments to IFRS 15, clarifying some
requirements and providing additional transitional relief at the date of initial
application.
On transition, IFRS 15 permits to either restate prior periods or to apply
the standard on a modified retrospective basis. The Bank plans to use the
modified retrospective basis, recognizing the cumulative effect of initially
applying the standard as an adjustment to the opening balance of Retained
earnings as at November 1, 2018, without restating comparative periods.
While the impact assessment is not complete, the Bank does not
currently expect the adoption of IFRS 15 to have a significant impact on its
consolidated financial statements. The Bank is continuing to review its
revenue contracts that fall within the scope of IFRS 15 and to assess the
impact of the new standard on its consolidated financial statements,
including the additional disclosure requirements.
Effective Date – November 1, 2019
IFRS 16 – Leases
In January 2016, the IASB issued a new standard, IFRS 16 – Leases. The new
standard requires lessees to recognize most leases on the balance sheet
using a single model, thereby eliminating the distinction between operating
and finance leases. Lessor accounting, however, remains similar to current
accounting practice, and the distinction between operating and finance
leases is retained. Early application is permitted if IFRS 15 – Revenue From
Contracts With Customers is also applied.
IFRIC Interpretation 23 – Uncertainty Over Income Tax Treatments
In June 2017, the IASB issued IFRIC Interpretation 23, which addresses how
to reflect tax treatment uncertainty in accounting for income taxes.
Effective Date – November 1, 2021
IFRS 17 – Insurance Contracts
In May 2017, the IASB issued IFRS 17 – Insurance Contracts, a new standard
that replaces IFRS 4, the current insurance contract accounting standard.
IFRS 17 introduces a new accounting framework that will improve the
comparability and quality of financial information.
95
95
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 1 – QUARTERLY RESULTS
(millions of Canadian dollars, except per share amounts)
Statement of income data
Net interest income(1)
Non-interest income(1)
Total revenues
Provisions for credit losses
Non-interest expenses
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders
Earnings per common share
Basic
Diluted
Dividends (per share)
Common
Preferred
Series 20
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Total
Q4
Q3
Q2
3,232
3,377
6,609
244
3,857
484
2,024
84
1,940
841
863
1,704
70
976
133
525
19
506
831
844
1,675
58
971
128
518
24
494
762
835
1,597
56
941
116
484
22
462
2017
Q1
798
835
1,633
60
969
107
497
19
478
$
5.44 $
5.38
1.40 $
1.39
1.39 $
1.37
1.30 $
1.28
1.35
1.34
$
2.28 $
0.58 $
0.58 $
0.56 $
0.56
−
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
−
0.2375
0.2562
0.2437
0.3500
0.3375
0.4724
−
0.2375
0.2563
0.2438
0.3500
0.3375
−
−
0.2375
0.2562
0.2437
0.3500
0.3375
−
−
0.2375
0.2563
0.2438
0.3500
0.3375
−
Return on common shareholders’ equity
18.1 %
17.8 %
18.2 %
17.9 %
18.4 %
Total assets
Long-term financial liabilities(2)
Net impaired loans
Number of common shares outstanding (thousands)
Average – Basic
Average – Diluted
End of period
Per common share
Book value
Share price
High
Low
Number of employees
Number of branches in Canada
245,827
240,072
239,020
234,119
9
9
10
1,009
206
240
213
226
340,809
344,771
341,108
345,507
339,592
341,555
345,353
341,580
341,107
345,416
341,524
339,476
343,270
340,810
$
31.51 $
30.84 $
29.97 $
29.51
$
62.74
46.83
62.74
55.29
21,635
429
56.44
51.77
21,526
443
58.75
52.94
21,290
445
56.60
46.83
21,295
448
(1)
(2)
The prior year figures have been adjusted to reflect a reclassification of certain amounts between the Non-interest income – Credit fees item and the Net interest income item in order to
better reflect the nature of the income reported in the Personal and Commercial segment.
Subordinated debt.
96
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
Total
Q4
Q3
Q2
2,992
2,848
5,840
484
3,875
225
1,256
75
1,181
778
791
1,569
59
1,159
44
307
18
289
783
774
1,557
45
937
97
478
18
460
715
710
1,425
317
876
22
210
17
193
2016
Q1
716
573
1,289
63
903
62
261
22
239
Total
Q4
Q3
Q2
2,717
3,029
5,746
228
3,665
234
1,619
70
1,549
703
702
1,405
61
960
37
347
19
328
686
824
1,510
56
906
95
453
17
436
657
764
1,421
57
936
24
404
16
388
2015
Q1
671
739
1,410
54
863
78
415
18
397
$
3.31 $
3.29
0.79 $
0.78
1.32 $
1.31
0.52 $
0.52
0.68
0.67
$
4.56 $
4.51
0.96 $
0.95
1.29 $
1.28
1.14 $
1.13
1.17
1.16
$
2.18 $
0.55 $
0.55 $
0.54 $
0.54
$
2.04 $
0.52 $
0.52 $
0.50 $
0.50
–
0.9500
1.0250
0.9750
1.1373
0.5733
–
–
0.2375
0.2562
0.2437
0.3500
0.5733
–
–
0.2375
0.2563
0.2437
0.3500
–
–
–
0.2375
0.2562
0.2438
0.4373
–
–
–
0.2375
0.2563
0.2438
–
–
–
1.5000
0.9500
1.0250
1.0760
–
–
–
0.3750
0.2375
0.2562
0.2438
–
–
–
0.3750
0.2375
0.2563
0.2438
–
–
–
0.3750
0.2375
0.2562
0.2438
–
–
–
0.3750
0.2375
0.2563
0.3446
–
–
–
11.7 %
11.0 %
18.7 %
7.7 %
9.5 %
16.9 %
13.6 %
18.8 %
17.6 %
17.8
%
232,206
229,896
220,734
219,301
216,090
215,560
207,123
214,474
1,012
1,014
1,015
1,021
1,522
1,530
1,529
1,539
281
251
300
234
254
254
249
194
337,460
339,895
337,882
341,018
338,053
337,553
340,196
336,826
337,329
339,530
337,418
337,074
339,265
337,535
329,790
333,139
331,459
334,138
337,236
329,527
333,127
330,001
329,275
332,849
330,141
328,880
332,925
329,860
$
28.52 $
28.39 $
27.75 $
27.77
$
28.26 $
27.60 $
27.01 $
26.33
$
47.88
35.83
47.88
44.14
21,770
450
46.65
40.98
21,731
453
45.56
35.95
20,105
453
44.11
35.83
20,114
453
$
55.06
40.75
46.33
40.75
20,189
452
50.01
43.78
20,502
452
49.15
45.02
20,659
452
55.06
44.21
20,691
452
97
97
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 2 – OVERVIEW OF RESULTS
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income(3)
Non-interest income(3)
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders
Average assets
2017
3,441
3,412
6,853
3,857
2,996
244
2,752
728
2,024
84
2016
2015
3,223
2,852
6,075
3,875
2,200
484
1,716
460
1,256
75
3,028
3,029
6,057
3,665
2,392
228
2,164
545
1,619
70
2014
2,834
2,849
5,683
3,423
2,260
208
2,052
514
1,538
69
2013(2)
2,721
2,639
5,360
3,206
2,154
181
1,973
461
1,512
63
1,940
248,351
1,181
235,913
1,549
222,929
1,469
206,680
1,449
193,509
(1)
(2)
(3)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
Certain amounts have been adjusted to reflect accounting standard changes in 2014.
The prior year figures have been adjusted to reflect a reclassification of certain amounts between the Non-interest income item and the Net interest income item in order to better reflect the
nature of the income reported in the Personal and Commercial segment.
TABLE 3 – CHANGES IN NET INTEREST INCOME
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Personal and Commercial
Net interest income(3)
Average assets
Average interest-bearing assets
Net interest margin(3)(4)
Wealth Management
Net interest income
Average assets
Financial Markets
Net interest income
Average assets
U.S. Specialty Finance and International
Net interest income
Average assets
Other
Net interest income
Average assets
Total
Net interest income(3)
Average assets
2017
2016
2015
2014
2013(2)
2,071
96,261
91,461
1,955
92,234
87,153
1,860
86,977
81,430
1,770
81,516
75,963
1,690
76,696
70,718
2.26 %
2.24 %
2.28 %
2.33 %
2.39 %
431
11,652
782
95,004
262
7,519
(105)
37,915
372
11,006
938
87,504
71
5,319
(113)
39,850
323
10,388
1,001
86,466
(7)
2,275
(149)
36,823
312
10,400
825
85,427
(1)
771
272
9,080
781
86,573
3
490
(72)
28,566
(25)
20,670
3,441
248,351
3,223
235,913
3,028
222,929
2,834
206,680
2,721
193,509
(1)
(2)
(3)
(4)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
Certain amounts have been adjusted to reflect accounting standard changes in 2014.
The prior year figures have been adjusted to reflect a reclassification of certain amounts between the Non-interest income item and the Net interest income item in order to better reflect the
nature of the income reported in the Personal and Commercial segment.
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
98
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 4 – NON-INTEREST INCOME
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Trust service revenues
Credit fees(2)
Revenues from acceptances, letters of
credit and guarantee
Card revenues
Deposit and payment service charges
Trading revenues (losses)
Gains (losses) on available-for-sale
securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and
joint ventures
Other
Domestic
International
United States
Other
Non-interest income as a % of total revenues
on a taxable equivalent basis(1)
Non-interest income as a % of total revenues
on a taxable equivalent basis and
excluding specified items(1)
2017
2016
349
216
412
518
130
231
132
279
409
140
117
81
35
363
3,412
3,027
340
45
376
235
364
453
110
236
119
258
154
70
114
81
15
267
2,852
2,434
337
81
2015
387
273
320
446
112
223
128
238
209
82
107
88
26
390
3,029
2,737
284
8
2014
388
333
251
388
98
217
134
234
106
103
108
89
44
356
2,849
2,545
303
1
2013
301
335
219
314
90
226
121
235
186
82
118
90
26
296
2,639
2,358
227
54
49.8 %
46.9 %
50.0 %
50.1 %
49.2 %
49.9 %
48.5 %
49.0 %
49.4 %
47.9 %
(1)
(2)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
The prior year figures have been adjusted to reflect a reclassification of certain amounts between the Non-interest income – Credit fees item and the Net interest income item in order to
better reflect the nature of the income reported in the Personal and Commercial segment.
TABLE 5 – TRADING ACTIVITY REVENUES(1)
Year ended October 31
(taxable equivalent basis)(2)
(millions of Canadian dollars)
Financial markets
Equities
Fixed-income
Commodities and foreign exchange
Other segments
2017
2016
2015
2014
2013
496
304
103
903
103
1,006
438
263
116
817
80
897
450
237
147
834
151
985
332
207
82
621
122
743
288
237
88
613
212
825
(1)
(2)
Includes net interest income and non-interest income.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
99
99
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 6 – PROVISIONS FOR CREDIT LOSSES
Year ended October 31
(millions of Canadian dollars)
Provisions for credit losses on impaired loans
Personal
Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance and International
Total
Sectoral allowance on non-impaired loans – Oil and gas(1)
Collective allowance on non-impaired loans(2)
Total provisions for credit losses
Average loans and acceptances
Provisions for credit losses on impaired loans as
a % of average loans and acceptances
Provisions for credit losses on impaired and non-impaired
loans as a % of average loans and acceptances
Allowances for credit losses
Balance at beginning
Provisions for credit losses
Write-offs
Write-offs on credit cards
Recoveries and other(3)
Balance at end
Composition of allowances:
Individual and collective allowances on impaired loans
Sectoral allowance on non-impaired loans – Oil and gas(1)
Collective allowance on non-impaired loans(2)
2017
2016
2015
2014
2013
150
43
3
−
48
244
(40)
40
244
152
73
5
−
4
234
250
−
484
162
63
3
−
−
228
−
−
228
155
50
3
−
−
208
−
−
208
148
44
3
(14)
−
181
−
−
181
129,150
121,013
108,740
99,548
92,398
0.19 %
0.19 %
0.21 %
0.21 %
0.20 %
0.19 %
0.40 %
0.21 %
0.21 %
0.20 %
781
244
(238)
(82)
14
719
174
139
406
569
484
(201)
(81)
10
781
211
204
366
604
228
(197)
(81)
15
569
203
−
366
578
208
(118)
(79)
15
604
238
−
366
577
181
(112)
(78)
10
578
212
−
366
(1)
(2)
(3)
The sectoral allowance on non-impaired loans – oil and gas was established collectively for the portfolio of loans to producers and service companies in the oil and gas sector.
The collective allowance for credit risk on non-impaired loans was established taking into account the Bank’s overall credit portfolio, except for loans covered by the sectoral allowance.
Includes foreign exchange and other movements.
100
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 7 – NON-INTEREST EXPENSES
Year ended October 31
(millions of Canadian dollars)
Compensation and employee benefits(2)
Occupancy
Technology
Amortization – Premises and equipment
Amortization – Technology
Communications
Professional fees
Restructuring charge(3)
Advertising and external relations
Stationery
Travel and business development
Security and theft
Capital and payroll taxes
Other
Total
Domestic
International
United States
Other
Non-interest expenses as a % of total
revenues on a taxable equivalent basis(4)
Non-interest expenses as a % of total
revenues on a taxable equivalent basis
and excluding specified items(4)
2017
2,358
195
364
41
204
61
254
−
87
24
35
26
73
135
3,857
3,571
209
77
2016
2,161
195
367
38
220
67
276
131
83
25
37
45
71
159
3,875
3,601
235
39
2015
2,160
185
352
38
182
69
233
86
77
24
36
15
69
139
3,665
3,457
192
16
2014
2,049
183
335
39
178
68
227
−
80
25
34
43
44
118
3,423
3,223
186
14
2013(1)
1,899
194
319
43
139
68
221
−
71
22
30
26
46
128
3,206
3,006
183
17
56.3 %
63.8 %
60.5 %
60.2 %
59.8 %
55.9 %
58.2 %
58.6 %
58.6 %
60.2 %
(1)
(2)
(3)
(4)
Certain amounts have been adjusted to reflect accounting standard changes in 2014.
Compensation and employee benefits included an amount of $12 million in severance pay in 2013.
The 2016 restructuring charge had included $129 million in compensation and employee benefits and $2 million in occupancy expenses, and the 2015 restructuring charge had included
$51 million in compensation and employee benefits and $35 million in other charges such as occupancy expenses and professional fees.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
01
101
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 8 – CHANGE IN AVERAGE VOLUMES
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Assets
Deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Residential mortgage loans
Personal loans and credit card
receivables
Business and government loans
Impaired loans, net of total allowances
Interest-bearing assets
Other assets
Total assets
Liabilities and equity
Personal deposits
Deposit-taking institutions
Other deposits
Subordinated debt
Obligations other than deposits
Interest-bearing liabilities
Other liabilities
Equity
Liabilities and equity
Net interest margin
Average
volume
$
2017
Rate
%
Average
volume
$
2016
Rate
%
Average
volume
$
2015
Rate
%
Average
volume
$
2014
Rate
%
Average
volume
$
2013(2)
Rate
%
15,802
66,591
0.72
1.75
14,079
60,784
0.46
1.98
11,771
57,494
0.26
2.25
10,313
57,559
0.28
2.42
7,051
58,094
0.27
2.33
19,878
49,264
1.03
2.62
19,038
46,213
0.75
2.69
25,610
41,719
0.79
2.85
24,789
38,517
0.68
3.02
21,271
35,590
0.79
3.13
34,044
39,993
(276)
225,296
23,055
248,351
3.86
3.91
(0.61)
2.51
32,480
34,510
(177)
206,927
28,986
3.84
3.20
(0.97)
2.42
2.28
235,913
2.12
30,817
27,096
(88)
194,419
28,510
222,929
3.94
3.20
(1.78)
2.47
2.15
28,714
23,498
(119)
183,271
23,409
206,680
4.18
3.42
(1.89)
2.60
2.31
26,917
21,126
(161)
169,888
23,621
193,509
4.21
3.60
(0.78)
2.68
2.35
49,435
7,567
97,252
154,254
423
44,204
198,881
36,599
12,871
248,351
44,510
12,468
85,874
142,852
1,047
38,804
182,703
41,561
11,649
235,913
0.99
0.69
1.21
1.11
3.81
0.74
1.11
0.89
1.39
42,480
10,925
76,063
129,468
1,571
40,374
171,413
40,792
10,724
222,929
1.13
0.39
1.10
1.04
3.16
0.31
0.98
0.76
1.36
43,000
8,685
63,919
115,604
1,906
44,230
161,740
35,288
9,652
206,680
1.20
0.24
1.12
1.07
3.80
0.41
1.03
0.79
1.36
40,156
7,237
54,636
102,029
2,381
45,156
149,566
35,180
8,763
193,509
1.31
0.24
1.22
1.18
3.96
0.91
1.19
0.93
1.38
1.45
0.32
1.12
1.19
4.30
1.07
1.22
0.95
1.40
(1)
(2)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
Certain amounts have been adjusted to reflect accounting standard changes in 2014.
102
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 9 – DISTRIBUTION OF GROSS LOANS AND ACCEPTANCES BY BORROWER CATEGORY UNDER
BASEL ASSET CLASSES
As at October 31
(millions of Canadian dollars)
Residential mortgage(1)(2)
Qualifying revolving retail
Other retail
Agriculture
Financial institutions
Manufacturing
Construction and real estate
Transportation
Telecommunications, media and technology
Oil and gas
Mining
Wholesale and retail
Services
Other(2)
2017
%
$
2016
%
$
2015
%
$
2014
%
$
2013
%
$
66,398
4,217
12,150
4,923
4,932
4,341
11,891
2,593
1,662
2,129
470
5,497
12,726
1,233
135,162
49.1
3.1
9.0
3.6
3.7
3.2
8.8
1.9
1.2
1.6
0.4
4.1
9.4
0.9
100.0
58,265
4,178
10,316
4,599
3,872
3,597
10,729
3,013
1,578
2,102
582
4,932
11,659
7,537
126,959
45.9
3.3
8.1
3.6
3.0
2.8
8.5
2.4
1.2
1.7
0.5
3.9
9.2
5.9
100.0
54,004
4,093
9,512
4,433
2,679
3,765
10,439
1,956
1,254
3,220
392
4,873
9,861
5,326
115,807
46.6
3.6
8.2
3.8
2.3
3.3
9.0
1.7
1.1
2.8
0.3
4.2
8.5
4.6
100.0
50,011
4,033
9,027
3,857
1,482
3,689
9,088
1,223
1,540
3,621
247
5,281
9,308
4,366
106,773
46.8
3.8
8.5
3.6
1.4
3.5
8.5
1.1
1.4
3.4
0.2
5.0
8.7
4.1
100.0
46,836
3,962
8,801
3,553
1,693
3,286
7,562
1,202
1,471
3,552
211
4,587
8,512
2,688
97,916
47.8
4.1
9.0
3.6
1.7
3.4
7.7
1.2
1.5
3.6
0.2
4.7
8.7
2.8
100.0
(1)
(2)
Includes residential mortgage loans on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Since November 1, 2016, the loans acquired by the Financial Markets segment for securitization purposes, and reported in the Other category, are now being reported in the Residential
mortgage category. Figures as at October 31, 2016 and from previous years were not adjusted to reflect those modifications.
03
103
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 10 – IMPAIRED LOANS
As at October 31
(millions of Canadian dollars)
Net impaired loans
Personal(1)
Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance and International
Other
Total net impaired loans
Gross impaired loans
Individual and collective allowances
on impaired loans
Net impaired loans
2017
2016
2015
2014
2013
78
121
4
−
3
−
206
380
174
206
85
190
5
−
1
−
281
492
211
281
92
157
5
−
−
−
254
457
203
254
88
158
2
−
−
−
248
486
238
248
70
111
2
−
−
−
183
395
212
183
Provisioning rate
As a % of average loans and acceptances
As a % of common shareholders’ equity
As a % of tangible capital adjusted for allowances
45.8 %
0.2 %
1.9 %
4.3 %
42.9 %
0.2 %
2.9 %
6.3 %
44.4 %
0.2 %
2.7 %
5.9 %
49.0 %
0.2 %
2.9 %
7.1 %
53.7 %
0.2 %
2.4 %
6.5 %
(1)
Includes $39 million in net consumer loans in 2017 (2016: $40 million; 2015: $42 million; 2014: $46 million; 2013: $37 million).
104
National Bank of Canada2017 Annual Report
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADDITIONAL FINANCIAL INFORMATION
TABLE 11 – DEPOSITS
As at October 31
(millions of Canadian dollars)
2017
%
$
$
Personal
Business and government
Deposit-taking institutions
Total
Domestic
International
United States
Other
Total
Personal deposits as a %
of total assets
53,719
97,571
5,381
156,671
145,288
5,825
5,558
156,671
2016(1)
%
37.0
59.0
4.0
100.0
92.8
$
47,394
76,845
6,219
130,458
116,315
2015(1)
%
36.3
58.9
4.8
100.0
89.2
$
44,963
67,364
7,556
119,883
105,621
2014(1)
%
37.5
56.2
6.3
100.0
88.1
42,652
57,103
2,356
102,111
94,647
2013(1)(2)
%
$
34.3
62.3
3.4
100.0
92.8
52,521
83,905
5,640
142,066
131,869
3.7
3.5
100.0
4,442
5,755
142,066
3.1
4.1
100.0
9,655
4,488
130,458
7.4
3.4
100.0
12,152
2,110
119,883
10.1
1.8
100.0
6,893
571
102,111
21.9
22.6
21.9
21.9
41.8
55.9
2.3
100.0
92.6
6.8
0.6
100.0
22.7
(1)
(2)
Certain amounts have been revised from those previously reported, particularly an amount of $2,159 million classified in Due to clients, dealers and brokers on the Consolidated Balance
Sheet as at October 31, 2016 that is now reported in Deposits ($1,628 million as at October 31, 2015). Figures as at October 31, 2014 and 2013 were not adjusted to reflect those changes.
Certain amounts have been adjusted to reflect accounting standard changes in 2014.
05
105
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Management’s Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Audited Consolidated Financial Statements
108
109
110
111
112
113
114
115
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements of National Bank of Canada (the Bank) have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS
represent Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems needed to discharge its responsibility, which is to provide reasonable assurance that the
financial accounts are accurate and complete and that the Bank’s assets are adequately safeguarded. Controls that are currently in place include quality
standards on staff hiring and training; the implementation of organizational structures with clear divisions of responsibility and accountability for
performance; the Code of Professional Conduct; and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen the evaluation of the design and operation of the Bank’s internal controls over
financial reporting in accordance with Regulation 52-109 Respecting Certification of Disclosures in Issuers’ Annual and Interim Filings released by the
Canadian Securities Administrators. Based on the evaluation work performed, we have concluded that the internal controls over financial reporting were
effective as at October 31, 2017 and that they provide reasonable assurance that the financial information is reliable and that the Bank’s consolidated
financial statements have been prepared in accordance with IFRS.
The Board of Directors (the Board) is responsible for reviewing and approving the financial information contained in the Annual Report. Acting through the
Audit Committee, the Board also oversees the presentation of the consolidated financial statements and ensures that accounting and control systems are
maintained. Composed of directors who are neither officers nor employees of the Bank, the Audit Committee is responsible, through Internal Audit, for
performing an independent and objective review of the Bank’s internal control effectiveness, i.e., governance processes, risk management processes and
control measures. Furthermore, the Audit Committee reviews the consolidated financial statements and recommends their approval to the Board.
The control systems are supported by the presence of the Compliance Service, which exercises independent oversight in order to assist managers in effectively
managing regulatory compliance risk and to obtain reasonable assurance that the Bank is compliant with regulatory requirements.
The Senior Vice-President of Internal Audit has direct access to the Chair of the Audit Committee and to the President and Chief Executive Officer. In addition,
the Senior Vice-President and Chief Compliance Officer has a direct functional link to the Chair of the Risk Management Committee and direct access to the
President and Chief Executive Officer.
In accordance with the Bank Act (Canada), OSFI is mandated to protect the rights and interests of the depositors. Accordingly, OSFI examines and enquires into
the business and affairs of the Bank, as deemed necessary, to ensure that the provisions of the Bank Act (Canada) are being satisfied and that the Bank is in
sound financial condition.
The independent auditor, Deloitte LLP, whose report follows, was appointed by the shareholders on the recommendation of the Board. The auditor has full and
unrestricted access to the Audit Committee to discuss audit and financial reporting matters.
Louis Vachon
President and Chief Executive Officer
Ghislain Parent
Chief Financial Officer and Executive Vice-President
Finance and Treasury
Montreal, Canada, November 30, 2017
108
National Bank of Canada2017 Annual Report
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of National Bank of Canada
We have audited the accompanying consolidated financial statements of National Bank of Canada (the Bank), which comprise the consolidated balance sheets
as at October 31, 2017 and 2016, the consolidated statements of income, the consolidated statements of comprehensive income, the consolidated statements
of changes in equity and the consolidated statements of cash flows for the years ended October 31, 2017 and 2016, and 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 as issued by the International Accounting Standards Board, 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.
The Auditor’s 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 the auditor’s 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, the auditor considers 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 financial position of the Bank as at October 31, 2017 and 2016
and its financial performance and its cash flows for the years ended October 31, 2017 and 2016 in accordance with the International Financial Reporting
Standards issued by the International Accounting Standards Board.
Deloitte LLP1
Montreal, Canada, November 30, 2017
1 CPA auditor, CA, public accountancy permit No. A121501
09
109
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
CONSOLIDATED BALANCE SHEETS
As at October 31
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under reverse repurchase agreements
and securities borrowed
Loans
Residential mortgage
Personal and credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
Other
Derivative financial instruments
Purchased receivables
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Liabilities and equity
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Equity
Equity attributable to the Bank’s shareholders
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Notes 4 and 6
Note 7
Note 17
Note 9
Note 10
Note 11
Note 11
Note 12
2017
2016
8,802
8,183
47,536
8,552
9,255
65,343
45,964
14,608
3,969
64,541
20,789
13,948
50,518
36,963
41,690
129,171
5,991
(719)
134,443
8,423
2,014
631
558
1,409
1,239
2,176
16,450
245,827
48,868
33,964
37,686
120,518
6,441
(781)
126,178
10,416
1,858
645
1,338
1,412
1,140
2,547
19,356
232,206
Notes 4 and 13
156,671
142,066
Note 17
Notes 4 and 8
Note 14
Note 16
Notes 19 and 23
5,991
15,363
21,767
6,612
20,098
5,758
75,589
9
2,050
2,768
58
7,706
168
12,750
808
13,558
245,827
6,441
14,207
22,636
7,725
20,131
5,886
77,026
1,012
1,650
2,645
73
6,706
218
11,292
810
12,102
232,206
Non-controlling interests
Note 20
The accompanying notes are an integral part of these audited consolidated financial statements.
Louis Vachon
President and Chief Executive Officer
Karen Kinsley
Director
110
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
CONSOLIDATED STATEMENTS OF INCOME
Year ended October 31
2017
2016
Interest income
Loans
Securities at fair value through profit or loss
Available-for-sale securities
Held-to-maturity securities
Deposits with financial institutions
Interest expense
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
Net interest income
Non-interest income
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Trust service revenues
Credit fees
Card revenues
Deposit and payment service charges
Trading revenues (losses)
Gains (losses) on available-for-sale securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and joint ventures
Other
Total revenues
Provisions for credit losses
Non-interest expenses
Compensation and employee benefits
Occupancy
Technology
Communications
Professional fees
Restructuring charge
Other
Income before income taxes
Income taxes
Net income
Net income attributable to
Preferred shareholders
Common shareholders
Bank shareholders
Non-controlling interests
Earnings per share (dollars)
Basic
Diluted
Dividends per common share (dollars)
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 22
Note 9
Note 9
Note 7
Note 15
Note 25
Note 26
Note 19
4,511
598
227
130
114
5,580
1,780
403
16
149
2,348
3,232
349
216
412
518
361
132
279
374
140
117
81
35
363
3,377
6,609
244
6,365
2,358
236
568
61
254
−
380
3,857
2,508
484
2,024
85
1,855
1,940
84
2,024
5.44
5.38
2.28
3,872
620
330
24
65
4,911
1,435
404
33
47
1,919
2,992
376
235
364
453
346
119
258
150
70
114
81
15
267
2,848
5,840
484
5,356
2,161
233
587
67
276
131
420
3,875
1,481
225
1,256
64
1,117
1,181
75
1,256
3.31
3.29
2.18
11
111
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended October 31
Net income
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
Net change in available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Net (gains) losses on available-for-sale securities reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
Total other comprehensive income (loss), net of income taxes
Comprehensive income
Comprehensive income attributable to
Bank shareholders
Non-controlling interests
2017
2,024
2016
1,256
(64)
−
25
−
(39)
119
(131)
(12)
33
(26)
7
(10)
97
(21)
76
22
62
(12)
(33)
5
22
113
(74)
39
34
(18)
16
1
(257)
(66)
(323)
(245)
2,046
1,011
1,966
80
2,046
931
80
1,011
INCOME TAXES – OTHER COMPREHENSIVE INCOME
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
2017
2016
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
Net change in available-for-sale securities
Net unrealized gains (losses) on available-for-sale securities
Net (gains) losses on available-for-sale securities reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Remeasurements of pension plans and other post-employment benefit plans
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
The accompanying notes are an integral part of these audited consolidated financial statements.
(2)
−
1
−
(1)
46
(48)
(2)
12
(9)
3
(3)
36
(8)
25
(1)
(2)
(9)
2
(10)
42
(27)
15
13
(7)
6
−
(94)
(24)
(107)
112
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Note 19
Note 19
Note 23
Note 19
Note 19
Note 19
Note 20
Year ended October 31
Preferred shares at beginning
Issuances of Series 34, 36 and 38 preferred shares
Redemption of Series 20 preferred shares for cancellation
Preferred shares at end
Common shares at beginning
Issuances of common shares
Stock Option Plan
Repurchases of common shares for cancellation
Impact of shares purchased or sold for trading
Other
Common shares at end
Contributed surplus at beginning
Stock option expense
Stock options exercised
Contributed surplus at end
Retained earnings at beginning
Net income attributable to the Bank’s shareholders
Dividends
Preferred shares
Common shares
Premium paid on preferred shares redeemed for cancellation
Premium paid on common shares repurchased for cancellation
Share issuance expenses, net of income taxes
Remeasurements of pension plans and other post-employment benefit plans
Net fair value change attributable to the credit risk on financial liabilities designated at fair value
through profit or loss
Impact of a financial liability resulting from put options written to non-controlling interests
Other
Retained earnings at end
Accumulated other comprehensive income at beginning
Net foreign currency translation adjustments
Net change in unrealized gains (losses) on available-for-sale securities
Net change in gains (losses) on cash flow hedges
Share in the other comprehensive income of associates and joint ventures
Accumulated other comprehensive income at end
Equity attributable to the Bank’s shareholders
Non-controlling interests at beginning
Net income attributable to non-controlling interests
Other comprehensive income attributable to non-controlling interests
Distributions to non-controlling interests
Non-controlling interests at end
Equity
ACCUMULATED OTHER COMPREHENSIVE INCOME
As at October 31
Accumulated other comprehensive income
Net foreign currency translation adjustments
Net unrealized gains (losses) on available-for-sale securities
Net gains (losses) on instruments designated as cash flow hedges
Share in the other comprehensive income of associates and joint ventures
The accompanying notes are an integral part of these audited consolidated financial statements.
2017
1,650
400
−
2,050
2,645
179
(16)
(37)
(3)
2,768
73
11
(26)
58
6,706
1,940
(85)
(778)
−
(99)
(8)
97
(21)
(34)
(12)
7,706
218
(39)
(12)
11
(10)
168
2016
1,023
800
(173)
1,650
2,614
43
−
(12)
−
2,645
67
12
(6)
73
6,705
1,181
(61)
(736)
(3)
−
(11)
(257)
(66)
(46)
−
6,706
145
22
39
11
1
218
12,750
11,292
810
84
(4)
(82)
808
801
75
5
(71)
810
13,558
12,102
2017
2016
(13)
39
146
(4)
168
26
51
135
6
218
13
113
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended October 31
Cash flows from operating activities
Net income
Adjustments for
Provisions for credit losses
Amortization of premises and equipment and intangible assets
Impairment losses on intangible assets
Write-off of an equity interest in an associate
Gain on the revaluation of the previously held equity interest in Advanced Bank of Asia Limited
Gain on the disposal of an equity interest in a joint venture
Deferred taxes
Losses (gains) on sales of available-for-sale securities, net
Impairment losses on available-for-sale securities
Share in the net income of associates and joint ventures
Stock option expense
Change in operating assets and liabilities
Securities at fair value through profit or loss
Securities purchased under reverse repurchase agreements and securities borrowed
Loans, net of securitization
Deposits
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements and securities loaned
Derivative financial instruments, net
Purchased receivables
Interest and dividends receivable and interest payable
Current tax assets and liabilities
Other items
Cash flows from financing activities
Issuances of preferred shares
Redemption of preferred shares for cancellation
Issuances of common shares, net of the impact of shares purchased for trading
Repurchases of common shares for cancellation
Redemption of subordinated debt
Share issuance expenses
Dividends paid
Distributions to non-controlling interests
Cash flows from investing activities
Acquisition of Advanced Bank of Asia Limited
Net change in investments in associates and joint ventures
Purchases of available-for-sale securities
Maturities of available-for-sale securities
Sales of available-for-sale securities
Purchases of held-to-maturity securities
Net change in tangible assets leased under operating leases
Net change in premises and equipment
Net change in intangible assets
Impact of currency rate movements on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents at beginning
Cash and cash equivalents at end(1)
Supplementary information about cash flows from operating activities
Interest paid
Interest and dividends received
Income taxes paid
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 11
Note 9
Note 33
Note 33
2017
2016
2,024
1,256
244
351
−
−
−
(17)
(13)
(140)
−
(35)
11
(1,572)
(6,841)
(8,982)
14,605
1,156
(869)
880
(156)
19
(73)
929
1,521
400
−
116
(115)
(1,000)
(8)
(846)
(82)
(1,535)
−
35
(4,277)
516
9,523
(5,269)
674
(94)
(268)
840
(207)
619
8,183
8,802
2,315
5,565
612
484
417
45
164
(41)
−
(136)
(79)
9
(15)
12
(3,967)
3,754
(13,278)
10,639
(3,126)
8,857
395
(420)
6
245
217
5,438
800
(176)
25
−
(500)
(11)
(600)
(71)
(533)
(119)
−
(6,284)
786
5,355
(3,962)
372
(140)
(268)
(4,260)
(29)
616
7,567
8,183
1,898
4,860
235
(1)
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $2.0 billion as at October 31, 2017 ($2.0 billion as at
October 31, 2016) for which there are restrictions. In addition, a negligible amount was held in escrow as at October 31, 2017 ($3 million as at October 31, 2016).
114
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Note 18
Basis of Presentation and Summary of Significant Accounting Policies
Future Accounting Policy Changes
Fair Value of Financial Instruments
Financial Instruments Designated at Fair Value Through Profit or Loss
Offsetting Financial Assets and Financial Liabilities
Securities
Loans
Financial Assets Transferred But Not Derecognized
Investments in Associates and Joint Ventures
Premises and Equipment
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Restructuring
Subordinated Debt
Derivative Financial Instruments
Hedging Activities
115
129
133
145
146
147
149
153
154
156
157
158
159
160
160
161
161
165
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Note 32
Note 33
Note 34
Share Capital
Non-Controlling Interests
Capital Disclosure
Trading Activity Revenues
Share-Based Payments
Employee Benefits – Pension Plans and Other
Post-Employment Benefits
Income Taxes
Earnings Per Share
Guarantees, Commitments and Contingent Liabilities
Structured Entities
Related Party Disclosures
Management of the Risks Associated With Financial Instruments
Interest Rate Sensitivity
Segment Disclosures
Acquisition
Event After the Consolidated Balance Sheet Date
167
170
171
172
173
176
181
183
184
187
190
191
196
197
199
199
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
National Bank of Canada (the Bank) is a financial institution incorporated and domiciled in Canada and whose shares are listed on the Toronto Stock Exchange.
Its head office is located at 600 De La Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a chartered bank under Schedule 1 of the Bank Act
(Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI).
The Bank provides integrated financial services to consumers, small- and medium-sized enterprises, and large corporations and operates four business
segments, namely, the Personal and Commercial segment, the Wealth Management segment, the Financial Markets segment, and the U.S. Specialty Finance
and International (USSF&I) segment. Its full line of services includes banking and investing solutions for individuals and businesses, securities brokerage,
insurance and wealth management.
On November 30, 2017, the Board of Directors (the Board) authorized the publication of the Bank’s audited annual consolidated financial statements
(the consolidated financial statements) for the year ended October 31, 2017.
Basis of Presentation
The consolidated financial statements of the Bank have been prepared in accordance with section 308(4) of the Bank Act (Canada), which states that, except as
otherwise specified by OSFI, the financial statements are to be prepared in accordance with the International Financial Reporting Standards (IFRS), as issued
by the International Accounting Standards Board (IASB). IFRS represent Canadian generally accepted accounting principles (GAAP). None of the OSFI
accounting requirements are exceptions to IFRS.
On November 1, 2016, the Bank reclassified certain Personal and Commercial segment revenues in the Consolidated Statement of Income to better reflect the
nature of the income reported. As a result, for the year ended October 31, 2016, an amount of $36 million reported in Non-interest income – Credit fees was
reclassified to Interest income – Loans.
Also on November 1, 2016, the Bank changed the presentation of certain items on the Consolidated Balance Sheet, and certain amounts were revised from
those previously reported. The Due from clients, dealers and brokers item as at October 31, 2016 is now presented in Other assets on the Consolidated
Balance Sheet. All deposits have been grouped into a single Deposits item. To better reflect the nature of certain liabilities on the Consolidated Balance Sheet,
an amount of $2.2 billion reported in the Due to clients, dealers and brokers item was reclassified to the Deposits item as at October 31, 2016. The Due to
clients, dealers and brokers item is now presented in Other liabilities on the Consolidated Balance Sheet.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
15
115
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make estimates and assumptions that affect
the reporting date carrying amounts of assets and liabilities, net income and related information. Furthermore, certain accounting policies require complex
judgments and estimates because they apply to matters that are inherently uncertain, in particular accounting policies applicable to allowances for credit
losses, the fair value determination of financial instruments, the impairment of available-for-sale securities, the impairment of non-financial assets, pension
plans and other post-employment benefits, income taxes, provisions, and the consolidation of structured entities. Descriptions of these judgments and
estimates are provided in each of the related notes to the consolidated financial statements. Actual results could differ from these estimates, in which case the
impact is recognized in the consolidated financial statements of future fiscal periods. The accounting policies described in this note provide greater detail
about the use of estimates and assumptions and reliance on judgment.
Basis of Consolidation
Subsidiaries
The consolidated financial statements include all of the assets, liabilities, operating results and cash flows of the Bank and its subsidiaries, after elimination of
intercompany transactions and balances. The subsidiaries are entities, including structured entities, controlled by the Bank. A structured entity is an entity
created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls
the entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements.
Management must exercise judgment in determining whether the Bank must consolidate an entity. The Bank controls an entity only if the following three
conditions are met:
—
—
—
it has decision-making authority regarding the entity’s relevant activities;
it has exposure or rights to variable returns from its involvement with the entity; and
it has the ability to use its power to affect the amount of the returns.
When determining decision-making authority, many factors are taken into account, including the existence and effect of actual and potential voting rights held
by the Bank that can be exercised as well as the holding of instruments that are convertible into voting shares. In addition, the Bank must determine whether,
as an investor with decision-making rights, it acts as a principal or agent.
Based on these principles, an assessment of control is performed at the inception of a relationship between any entity and the Bank. When performing this
assessment, the Bank considers all facts and circumstances, and it must reassess whether it still controls an investee if facts and circumstances indicate that
there are changes to one or more of the three conditions of control.
The Bank consolidates the entities it controls from the date on which control is obtained and ceases to consolidate them from the date control ceases. The
Bank uses the acquisition method to account for the acquisition of a subsidiary from a third party on the date control is obtained.
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity interests of third parties in the Bank’s subsidiaries and are presented in total Equity, separately
from Equity attributable to the Bank’s shareholders. The non-controlling interests’ proportionate share in the net income and other comprehensive income of
the Bank’s subsidiaries are presented in total net income and total comprehensive income, respectively.
With respect to units issued to third parties by mutual funds and certain other funds that are consolidated, they are presented at fair value in Other liabilities
on the Consolidated Balance Sheet. Lastly, changes in ownership interests in subsidiaries that do not result in a loss of control are recognized as equity
transactions. The difference between the adjustment in the carrying value of the non-controlling interest and the fair value of the consideration paid or received
is recognized directly in Equity attributable to the Bank’s shareholders.
Investments in Associates and Joint Ventures
The Bank exercises significant influence over an entity when it has the power to participate in the financial and operating policy decisions of the investee. The
Bank has joint control over an entity when there’s a contractually agreed sharing of control of an entity that exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
Investments in associates, i.e., entities over which the Bank exercises significant influence, and investments in joint ventures, i.e., entities over which the Bank
has rights to the net assets and exercises joint control, are accounted for using the equity method. Under the equity method, the investment is initially
recorded at cost and, following acquisition, the Bank’s shares in the net income and in the other comprehensive income are recognized, respectively, in Non-
interest income in the Consolidated Statement of Income and in Other comprehensive income in the Consolidated Statement of Comprehensive Income. The
carrying value of the investment is adjusted by an equivalent amount on the Consolidated Balance Sheet and reduced by distributions received.
116
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Foreign Currencies
The consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional and presentation currency. Each entity in the group
determines its own functional currency, and the items reported in the financial statements of each entity are measured using that currency.
Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using the rates in effect on the date of the
Consolidated Balance Sheet. Translation gains and losses are recognized in Non-interest income in the Consolidated Statement of Income. Revenues and
expenses denominated in foreign currencies are translated at the average exchange rates for the period. Non-monetary assets and liabilities are translated
into the functional currency at historical rates. Non-monetary items denominated in foreign currencies measured at fair value are translated using the
exchange rates in effect on the date fair value is determined, and the translation gains or losses are recognized in the Consolidated Statement of Income.
Translation gains or losses on non-monetary items classified as available for sale are recognized in Other comprehensive income. Upon disposal or due to
impairment of a non-monetary item classified as available for sale, the deferred translation gains or losses are reclassified, in whole or in part, from
Accumulated other comprehensive income to Non-interest income of the Consolidated Statement of Income.
In the consolidated financial statements, the assets and liabilities of all foreign operations are translated into the Bank’s functional currency using the rates in
effect on the Consolidated Balance Sheet date, whereas the revenues and expenses of such foreign operations are translated into the Bank’s functional
currency at the average exchange rates for the period. Any goodwill resulting from the acquisition of a foreign operation that does not have the same functional
currency as the parent company, and any fair value adjustments to the carrying amounts of assets and liabilities resulting from the acquisition, are treated as
assets and liabilities of the foreign operation and translated using the rates in effect on the Consolidated Balance Sheet date. Gains and losses on translating
the financial statements of foreign operations, along with related hedge and tax effects, are presented in Other comprehensive income. Upon disposal of a
foreign operation, the deferred cumulative amount recognized in Accumulated other comprehensive income relating to that particular operation is reclassified
to Non-interest income of the Consolidated Statement of Income.
Classification and Measurement of Financial Instruments
In accordance with the accounting framework for financial instruments, all financial assets and liabilities must be classified based on their characteristics,
management’s intention, or choice of category in certain circumstances. When initially recognized, all financial assets are classified as at fair value through
profit or loss, held to maturity, available for sale, or loans and receivables, while financial liabilities are classified as at fair value through profit or loss or as
financial liabilities at amortized cost. Certain debt securities that are not quoted in an active market may be classified as loans and receivables, and
impairment is determined using the same model as for loans. Loans and receivables that the Bank intends to sell immediately or in the near term must be
classified as at fair value through profit or loss, whereas loans and receivables for which the Bank may not recover substantially all of its initial investment, for
reasons other than credit deterioration, must be classified as available for sale.
When initially recognized, all financial assets and liabilities, including derivative financial instruments, are recorded at fair value on the Consolidated Balance
Sheet. In subsequent periods, they are measured at fair value, except for items classified in the following categories, which are measured at amortized cost
using the effective interest rate method: financial assets held to maturity, loans and receivables, and financial liabilities at amortized cost.
Under the fair value option, a financial asset or liability may be irrevocably designated at fair value through profit or loss when it is initially recognized.
Financial assets thus designated are recognized at fair value, and any change in fair value is recorded in Non-interest income in the Consolidated Statement of
Income. Financial liabilities thus designated are recognized at fair value, and any changes in fair value attributable to changes in the Bank's own credit risk are
recognized in Other comprehensive income unless these changes offset the amounts recognized in Net income. Fair value changes not attributable to the
Bank's own credit risk are recognized in Non-interest income in the Consolidated Statement of Income. The amounts recognized in Other comprehensive
income will not be subsequently reclassified to Net income. Interest income and expenses arising from these financial instruments designated at fair value
through profit or loss are recorded in the Net interest income item of the Consolidated Statement of Income. The Bank may use this option in the following
cases.
—
—
—
If, consistent with a documented risk management strategy, using this option allows the Bank to eliminate or significantly reduce the measurement or
recognition mismatch of measuring financial assets or liabilities on a different basis, and if the fair values are reliable.
If a group of financial assets and financial liabilities to which an instrument belongs is managed and its performance is evaluated on a fair value basis, in
accordance with the Bank’s documented risk management or investment strategy, and information is provided on that basis to senior management.
Consequently, the Bank may use the fair value option if it has implemented a documented risk management strategy to manage a group of financial
instruments together on the fair value basis, if it can demonstrate that significant financial risks are eliminated or significantly reduced, and if the fair
values are reliable.
For hybrid financial instruments with one or more embedded derivatives that would significantly modify the cash flows of the financial instruments and
that would otherwise be bifurcated and accounted for separately.
17
117
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Reclassification of Financial Instruments
A financial asset, other than a derivative financial instrument or a financial asset that, upon initial recognition, was designated as measured at fair value
through profit or loss, may be reclassified out of the fair value through profit or loss category in rare circumstances if the financial asset is no longer held for
the purpose of selling it in the near term. The financial asset must be reclassified at its fair value on the date of reclassification, and this fair value becomes its
new amortized cost, as applicable. No gain or loss previously recognized in the Consolidated Statement of Income may be reversed.
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in
pricing a transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The
estimated fair value reflects market conditions on the valuation date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration received or
paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a valuation technique
based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with third parties, this difference is
recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial recognition and the transaction price is
deferred on the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the term of the financial instrument. The unamortized
balance is immediately recognized in net income when (i) observable market inputs can be obtained and support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by other contracts entered into with third parties, (iii) the gain or loss is realized through a cash
receipt or payment, or (iv) the transaction matures or is cancelled before maturity.
In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to determine fair
value but that are not included in the measurement technique due to system limitations or uncertainty surrounding the measure. These factors include, but are
not limited to, the unobservable nature of inputs used in the valuation model, assumptions about risk such as market risk, credit risk, or risk related to the
valuation model, and future administration costs. The Bank may also consider market liquidity risk when determining the fair value of financial instruments
when it believes these instruments could be disposed of for a consideration below the fair value otherwise determined due to a lack of market liquidity or an
insufficient volume of transactions in a given market.
As permitted when certain criteria are met, the Bank has elected to determine fair value based on net exposure to credit risk or market risk for certain portfolios
of financial instruments, mainly derivatives.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash and cash equivalents, amounts pledged as collateral as well as amounts placed in escrow. Cash
comprises cash and bank notes. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions, including net receivables
related to cheques and other items in the clearing process, as well as the net amount of cheques and other items in transit.
Securities at Fair Value Through Profit or Loss
Securities at fair value through profit or loss are generally purchased for sale in the near term or are part of portfolios of identified financial instruments that
are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. The Bank accounts for securities transactions at fair
value through profit or loss on the settlement date on the Consolidated Balance Sheet. Changes in fair value between the trade date and the settlement date
are included in Non-interest income in the Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized at fair value, and transaction fees are recognized directly in the Consolidated Statement of Income.
Interest income as well as realized and unrealized gains and losses on such securities are recorded in Non-interest income in the Consolidated Statement of
Income. Dividend income is recorded in Interest income in the Consolidated Statement of Income.
118
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Available-for-Sale Securities
Securities that are neither classified as at fair value through profit or loss nor as held to maturity nor in the loans and receivables category are classified as
available-for-sale securities. The Bank accounts for available-for-sale securities transactions on the trade date, and the related transaction costs are
capitalized.
Available-for-sale securities are recognized at fair value. Unrealized gains and losses are recognized, net of impairment losses and income taxes, provided
they are not hedged by derivative financial instruments in a fair value hedging relationship, in Other comprehensive income. When the securities are sold, the
realized gains or losses, determined on an average cost basis, are reclassified to Non-interest income in the Consolidated Statement of Income on the
transaction date.
The amortization of premiums and discounts, calculated using the effective interest rate method, as well as dividend and interest income, are recognized in
Interest income in the Consolidated Statement of Income.
Held-to-Maturity Securities
Held-to-maturity securities are financial assets with fixed or determinable payments and a fixed maturity that the Bank intends and is able to hold until
maturity. The Bank accounts for held-to-maturity securities transactions on the trade date, and the related transaction costs are capitalized. These securities
are initially recognized at fair value. In subsequent periods, they are recognized at amortized cost using the effective interest rate method, less any impairment
loss measured using the same impairment model used for loans. Interest income and the amortization of premiums and discounts on these securities are
recognized in Net interest income in the Consolidated Statement of Income.
Securities Purchased Under Reverse Repurchase Agreements, Obligations Related to Securities Sold
Under Repurchase Agreements and Securities Borrowed and Loaned
The Bank recognizes these transactions at amortized cost using the effective interest rate method. Securities sold under repurchase agreements remain on the
Consolidated Balance Sheet, whereas securities purchased under reverse repurchase agreements are not recognized. Reverse repurchase agreements and
repurchase agreements are treated as collateralized lending and borrowing transactions.
The Bank also borrows and lends securities. Securities loaned remain on the Consolidated Balance Sheet while securities borrowed are not recognized. As part
of these transactions, the Bank pledges or receives collateral in the form of cash or securities. Collateral pledged in the form of securities remains on the
Consolidated Balance Sheet. Collateral received in the form of securities is not recognized on the Consolidated Balance Sheet. Collateral pledged or received in
the form of cash is recognized in financial assets or liabilities on the Consolidated Balance Sheet.
When the collateral is pledged or received in the form of cash, the interest income and expense are recorded in Net interest income in the Consolidated
Statement of Income.
Loans
Loans, including transaction costs directly attributable to the granting of the loans, other than loans classified or designated as measured at fair value through
profit or loss, are presented on the Consolidated Balance Sheet at amortized cost using the effective interest rate method. Loans classified or designated as
measured at fair value through profit or loss are recognized at fair value.
Impairment of Financial Assets
At the end of each reporting period, the Bank determines whether there is objective evidence of impairment of a financial asset or group of financial assets.
There is objective evidence of impairment when one or more loss events occur after the initial recognition of the asset and prior to or on the balance sheet date
and these events adversely affect the estimated future cash flows of the financial assets in question. Management must exercise judgment to determine
whether certain events or circumstances constitute objective evidence of impairment and to estimate the timing of future cash flows.
Available-for-Sale Securities
Available-for-sale securities are reviewed for objective evidence of impairment at the end of each reporting period. The Bank considers all available objective
evidence of impairment, including observable data about loss events such as: a significant financial difficulty of the issuer, a breach of contract such as a
default, and situations involving bankruptcy or other financial reorganization. In addition to these loss events, objective evidence of impairment for an equity
security also includes information about significant changes with an adverse effect that have taken place in the technological, market, economic, or legal
environment in which the issuer operates, and indicates that the cost of the investment in the equity security may not be recovered. For equity securities, a
significant or prolonged decline in fair value below cost is also considered objective evidence of impairment.
19
119
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
If there is objective evidence of impairment, any amount previously recognized in Accumulated other comprehensive income is reclassified to Non-
interest income in the Consolidated Statement of Income. This amount is determined as the difference between the acquisition cost (net of any capital
repayments and amortization) and the current fair value of the asset less any impairment loss on that investment previously recognized in the Consolidated
Statement of Income.
Once an impairment loss has been recognized for an available-for-sale security, the subsequent accounting treatment depends on whether the instrument is a
debt or equity security.
—
—
For an available-for-sale debt security, a subsequent decline in fair value will be accounted for in Non-interest income in the Consolidated Statement of
Income when there is further objective evidence of impairment as a result of further decreases in the estimated future cash flows of the debt security.
Impairment losses recognized in income relating to an available-for-sale debt security must be reversed in the Consolidated Statement of Income when,
in a subsequent period, the fair value of the security increases and the increase can be objectively associated with an event occurring after the loss was
recognized.
For an available-for-sale equity security, subsequent decreases in fair value are accounted for in the Consolidated Statement of Income. Impairment
losses recognized are not reversed through the Consolidated Statement of Income. All subsequent increases in fair value will be accounted for in Other
comprehensive income in the Consolidated Statement of Comprehensive Income.
Impaired Loans
A loan, except credit card receivables, is considered impaired if there is objective evidence of impairment and, in management’s best estimate, the timely
collection of principal and interest is no longer reasonably assured, or when a payment is contractually 90 days past due, unless the loan is fully secured and
collection efforts are reasonably expected to result in repayment of the debt within 180 days. For credit card receivables, they are written off when payment is
180 days in arrears. Loans that are insured or fully guaranteed by a Canadian government (federal or provincial) or by a Canadian government agency are
considered impaired when more than 365 days in arrears.
When a counterparty to a loan fails to make the payment when contractually due, that loan is considered past due but not impaired.
When a loan is deemed impaired, interest recognition ceases and the carrying amount of the loan is reduced to its estimated realizable amount by writing off
all or part of the loan or by taking an allowance for credit losses. The impairment loss is calculated by comparing the present value of expected future cash
flows, discounted at the initial effective interest rate of the loan, to its current carrying amount including accrued interest. The losses are recorded in Provisions
for credit losses in the Consolidated Statement of Income.
A loan is returned to performing status when the timely collection of future interest and principal is reasonably assured and when all principal and interest
payments in arrears have been collected.
A loan and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of recovery to be non-
existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or winding up and balances
owing are not likely to be recovered.
Situations where a retail, commercial or government borrower begin showing clear signs of potential insolvency are managed on a case-by-case basis and
require the use of judgment. In these situations, the Bank may grant a concession to the borrower regarding the original terms and conditions of the loan, for
example by reducing the rate, granting a forgiveness of principal or extending the term despite the Bank’s credit policies. Once the terms of the loan have been
renegotiated and agreed upon with the borrower, the loan is considered a restructured loan. As of the restructuring date, the current carrying amount of the
loan, including accrued interest, is reduced to the present value of expected cash flows under the modified terms, discounted at the original effective interest
rate of the loan. The reduction in the carrying value is recorded in Provisions for credit losses in the Consolidated Statement of Income.
Allowances for Credit Losses
Allowances for credit losses are management’s best estimate of losses in its credit portfolio as at the balance sheet date. They relate primarily to loans but may
also cover the credit risk associated with deposits with financial institutions, loan substitute securities, credit instruments such as acceptances, and off-
balance-sheet items such as commitments to extend credit, letters of guarantee and letters of credit.
Changes in allowances for credit losses attributable to the passage of time are recorded in Interest income in the Consolidated Statement of Income, whereas
changes attributable to a revision of expected payments are recorded in Provisions for credit losses in the Consolidated Statement of Income.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the allowances
were recognized, the previously recognized impairment loss is reversed directly in Provisions for credit losses in the Consolidated Statement of Income.
120
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
The allowances for credit losses on impaired loans are calculated on a loan-by-loan basis and assessed either individually or collectively based on the
portfolio’s historical net loss experience. The allowance for credit losses on non-impaired loans is assessed collectively.
Allowances on Impaired Loans
Impairment allowances are recorded for all individually identified impaired loans to reduce their carrying amount to the estimated realizable amount. For each
impaired loan, the Bank records an individual allowance, when the credit loss assessment is based on a detailed analysis of the borrower’s file, or a collective
allowance, when the credit loss assessment is based on the portfolio’s historical net loss experience.
For all individually significant impaired loans, namely business and government loans, and for certain impaired loans that are not individually significant,
namely residential mortgages, the Bank records an individual allowance since the credit loss assessment is based on a detailed analysis of the borrower’s file.
For all other impaired loans that are not individually significant but have been individually identified as impaired, the Bank records for each such loan a
collective allowance based on historical net loss experience.
Allowances on Non-Impaired Loans
When the credit risk of a portfolio of loans that have similar credit risk characteristics increases significantly, such as a group of loans of a specific industry,
but the loans have yet to be individually identified as impaired, a sectoral allowance is established collectively for the entire loan portfolio. The sectoral
allowance is determined using an approach similar to the collective allowance measurement on non-impaired loans, i.e., an approach based on expected
default and loss factors determined by statistical analysis of historical loss data by loan type, and on an analysis of the industry-specific market factors such
as market liquidity, credit spreads, and risk factor levels.
All loans that have not been individually identified as impaired, and that are not covered by a sectoral allowance, are grouped according to their credit risk
characteristics for the purpose of calculating a collective allowance on non-impaired loans. The collective allowance on non-impaired loans includes two
components for credit risk: the allocated collective allowance and the unallocated collective allowance.
The allocated collective allowance for the business and government loan portfolio is based on expected default and loss factors determined by statistical
analysis of historical loss data, delineated by loan type, to which is added an amount that takes into account the discovery period and migration risk. For
personal loans, the allocated collective allowance is calculated based on specific parameters by product, and no discovery period is calculated. Losses are
determined by the application of loss ratios established through statistical analysis of historical loss data.
The unallocated collective allowance reflects management’s assessment of probable portfolio losses that have not been captured by the allocated collective
allowance. This assessment takes into account general economic and business conditions, recent credit loss data, and credit quality and concentration trends
when the collective allowance is determined at the Consolidated Balance Sheet date. This allowance also reflects model and estimation risks. The unallocated
collective allowance does not represent future losses or serve as a substitute for the allocated collective allowance.
The sectoral allowance and collective allowance on non-impaired loans are collectively established and reflect the impairment losses that the Bank has
incurred as a result of events that have occurred but where the individual loss has not been identified.
Purchased Receivables
On the acquisition date, purchased receivables are measured at fair value, which incorporates incurred and expected credit losses estimated on the
acquisition date and the interest rate differential between the receivable’s contractual interest rate and the current market rates for the remaining term. As a
result, no allowances for credit losses are recorded on the Consolidated Balance Sheet on the acquisition date. Discounts related to incurred credit losses are
not amortized.
Purchased performing receivables are subsequently accounted for at amortized cost based on their contractual cash flows, and any discount or premium is
considered an adjustment to the loan yield and is amortized over the expected life of the receivable using the effective interest rate method and recorded in the
Consolidated Statement of Income.
When receivables are acquired with objective evidence of incurred credit loss, where the timely collection of contractual principal and interest is not
reasonably assured, these receivables are subsequently accounted for at amortized cost based on the present value of expected future cash flows discounted
at the initial effective interest rate. At the end of each reporting period, the Bank re-evaluates the expected future cash flows and adjusts the carrying amount
of the receivables to reflect the revised expected future cash flows discounted at the initial effective interest rate. This adjustment is immediately recorded in
the Consolidated Statement of Income.
21
121
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank has transferred contractual rights to receive the cash flows or assumed an obligation to
transfer these cash flows to a third party. The Bank derecognizes a financial asset when it considers that substantially all of the risks and rewards of the asset
have been transferred or when the contractual rights to the cash flows of the financial asset expire. When the Bank considers that it has retained substantially
all of the risks and rewards of the transferred asset, it continues to recognize the financial asset and, if applicable, recognizes a financial liability on the
Consolidated Balance Sheet. If, due to a derivative financial instrument, the transfer of a financial asset does not result in derecognition, the derivative
financial instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially all the risks and rewards related to a financial asset, it derecognizes the financial asset it no
longer controls. Any rights and obligations retained following the asset transfer are recognized separately as an asset or liability. If the Bank retains control of
the financial asset, it continues to recognize the asset to the extent of its continuing involvement in that asset, i.e., to the extent to which it is exposed to
changes in the value of the transferred asset.
In order to diversify its funding sources, the Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the
Mortgage-Backed Securities Program under the National Housing Act (Canada) (NHA) and Canada Mortgage Bond (CMB) program. Under the first program, the
Bank issues NHA securities backed by insured residential mortgages and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT). As
part of these transactions, the Bank retains substantially all of the risks and rewards related to ownership of the mortgage loans sold. Therefore, the insured
mortgage loans securitized under the CMB program continue to be recognized in the Loans item on the Bank’s Consolidated Balance Sheet and the liabilities
for the considerations received from the transfer are recognized in Liabilities related to transferred receivables on the Consolidated Balance Sheet. Moreover,
insured mortgage loans securitized and retained by the Bank continue to be recognized in Loans on the Consolidated Balance Sheet.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is discharged, cancelled or expires. The difference between the carrying value of the financial liability
transferred and the consideration paid is recognized in the Consolidated Statement of Income.
Acceptances and Customers’ Liability Under Acceptances
The potential liability of the Bank under acceptances is recorded as a customer commitment liability on the Consolidated Balance Sheet. The Bank’s potential
recourse vis à vis clients is recorded as an equivalent offsetting asset. Fees are recorded in Non-interest income in the Consolidated Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank’s obligation to deliver the securities it sold but did not own at the time of sale. Obligations related to securities sold
short are recorded at fair value and presented as liabilities on the Consolidated Balance Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues, and to
manage its exposure to interest rate risk, foreign exchange risk, credit risk and other market risks.
All derivative financial instruments are recorded at fair value on the Consolidated Balance Sheet. Derivative financial instruments with a positive fair value are
included in assets, and derivative financial instruments with a negative fair value are included in liabilities on the Consolidated Balance Sheet.
Embedded Derivative Financial Instruments
An embedded derivative financial instrument is a component of a financial instrument or another contract, the characteristics of which are similar to those of a
derivative product. Taken together, the financial instrument or contract is considered to be a hybrid instrument comprising a host contract and an embedded
derivative financial instrument.
Embedded derivatives are bifurcated and accounted for separately if, and only if, the following three conditions are met: the economic characteristics and risks
of the embedded derivative are not closely related to those of the host contract, the embedded derivative is a separate instrument that meets the definition of
a derivative financial instrument, and the hybrid contract is not recorded at fair value.
Embedded derivatives that must be bifurcated and separately accounted for are recorded at fair value on the Consolidated Balance Sheet. Realized and
unrealized gains and losses are recognized in Non-interest income in the Consolidated Statement of Income. In general, all embedded derivatives are
presented on a combined basis with the host contract. However, certain embedded derivatives that are bifurcated from the host contract are presented in
Derivative financial instruments on the Consolidated Balance Sheet.
122
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value, and the realized and unrealized gains and losses (including interest income and expense) are
recorded in Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments Designated as Hedging Instruments
Policy
The purpose of a hedging transaction is to modify the Bank’s exposure to one or more risks by creating an offset between changes in the fair value of, or the
cash flows attributable to, the hedged item and the hedging instrument. Hedge accounting ensures that offsetting gains, losses, revenues and expenses are
recognized in the Consolidated Statement of Income in the same period or periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging relationship, at its inception, by detailing the risk management objective and the hedging strategy.
The documentation identifies the specific asset, liability or cash flows being hedged, the related hedging instrument, the nature of the specific risk exposure or
exposures being hedged, the intended term of the hedging relationship and the method for assessing the effectiveness or ineffectiveness of the hedging
relationship. At the inception of the hedging relationship, and for every financial reporting period for which the hedge has been designated, the Bank ensures
that the hedging relationship is highly effective and consistent with its originally documented risk management objective and strategy. When a hedging
relationship meets the hedge accounting requirements, it is designated as either a fair value hedge, a cash flow hedge or a foreign exchange hedge of a net
investment in a foreign operation.
Fair Value Hedge
In a fair value hedge, the Bank mainly uses interest rate swaps to hedge changes in the fair value of a hedged item. The carrying amount of the hedged item is
adjusted based on the effective portion of the gains or losses attributable to the hedged risk, which are recognized in the Consolidated Statement of Income,
as well as the change in the fair value of the hedging instrument. The resulting ineffective portion is recognized in Non-interest income in the Consolidated
Statement of Income.
The Bank prospectively discontinues hedge accounting if the hedging instrument is sold or expires or if the hedging relationship no longer qualifies for hedge
accounting or if the Bank revokes the designation. When the designation is revoked, the hedged item is no longer adjusted to reflect changes in fair value, and
the amounts previously recorded as cumulative adjustments with respect to the effective portion of gains and losses attributable to the hedged risk are
amortized using the effective interest rate method and recognized in the Consolidated Statement of Income over the remaining useful life of the hedged item. If
the hedged item is sold or terminated before maturity, the cumulative adjustments to the effective portion of gains and losses attributable to the hedged risk
are immediately recorded in the Consolidated Statement of Income.
Cash Flow Hedge
In a cash flow hedge, the Bank mainly uses interest rate swaps and total return swaps to hedge variable cash flows attributable to the hedged risk related to a
financial asset or liability (or to a group of financial assets or liabilities). The effective portion of changes in fair value of the hedging instrument is recognized
in Other comprehensive income and the ineffective portion in Non-interest income in the Consolidated Statement of Income.
The amounts previously recorded in Accumulated other comprehensive income are reclassified to the Consolidated Statement of Income of the period or
periods during which the cash flows of the hedged item affect the Consolidated Statement of Income. If the hedging instrument is sold or expires or if the
hedging relationship no longer qualifies for hedge accounting or if the Bank cancels that designation, then the amounts previously recognized in Accumulated
other comprehensive income are reclassified to the Consolidated Statement of Income in the period or periods during which the cash flows of the hedged item
affect the Consolidated Statement of Income.
Hedge of a Net Investment in a Foreign Operation
Derivative and non-derivative financial instruments are used to hedge foreign exchange risk related to investments made in foreign operations whose
functional currency is not the Canadian dollar. The effective portion of the gains and losses on the hedging instrument is recognized in Other comprehensive
income and the ineffective portion in Non-interest income in the Consolidated Statement of Income. Upon the total or partial sale of a net investment in a
foreign operation, amounts reported in Accumulated other comprehensive income are reclassified, in whole or in part, to Non-interest income in the
Consolidated Statement of Income.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
23
123
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Premises and Equipment
Premises and equipment, except for land, are recognized at cost less accumulated amortization and accumulated impairment losses. Land is recorded at cost
net of any impairment losses.
Premises and equipment and the significant components of a building that have different useful lives or that provide economic benefits at a different pace are
systematically amortized over their useful lives. Amortization methods and useful lives are reviewed on an annual basis. The amortization expense is recorded
in Non-interest expenses in the Consolidated Statement of Income.
Significant components of a building
Exterior design
Interior design, roofing and electromechanical system
Structure
Other buildings
Computer equipment
Other equipment and furniture
Leasehold improvements
Methods
Useful life
Straight-line
Straight-line
Straight-line
5% declining balance
Straight-line
Straight-line
Straight-line
20 years
30 years
75 years
3-4 years
1-8 years
(1)
(1)
The average amortization period is 15 years, determined using the lesser of the useful life or the lease term plus the first renewal option.
Goodwill
The Bank uses the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at the
acquisition-date fair value and the transaction costs related to the acquisition are expensed as incurred. When the Bank acquires control of a business, all of
the identifiable assets and liabilities of the acquiree, including intangible assets, are recorded at fair value. The interests previously held in the acquiree are
also measured at fair value. Goodwill represents the excess of the purchase consideration and all previously held interests over the fair value of identifiable
net assets of the acquiree. If the fair value of identifiable net assets exceeds the purchase consideration and all previously held interests, the difference is
immediately recognized as a gain on a bargain purchase.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Bank’s ownership interest and can be initially
measured at either fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The measurement basis is
selected on a case-by-case basis. Following the acquisition, non-controlling interests consist of the value assigned to those interests at initial recognition plus
the non-controlling interests’ share of changes in equity since the date of the combination.
Intangible Assets
Intangible Assets With Finite Useful Lives
Software and certain other intangible assets are recognized at cost net of accumulated amortization and accumulated impairment losses. These intangible
assets are systematically amortized on a straight-line basis over their useful lives, which vary between four and ten years. The amortization expense is
recorded in Non-interest expenses in the Consolidated Statement of Income.
Intangible Assets With Indefinite Useful Lives
The Bank’s intangible assets with indefinite useful lives come from the acquisition of subsidiaries or groups of assets and consist of management contracts
and a trademark. They are recognized at the acquisition-date fair value. The management contracts are for the management of open-ended funds. At the end of
each reporting period, the Bank reviews the useful lives to determine whether events and circumstances continue to support an indefinite useful life
assessment. Intangible assets are deemed to have an indefinite useful life following an examination of all relevant factors, in particular: a) the contracts do not
have contractual maturities; b) the stability of the business segment to which the intangible assets belong; c) the Bank’s capacity to control the future
economic benefits of the intangible assets; and d) the continued economic benefits generated by the intangible assets.
124
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not yet available for use or that have indefinite useful lives
are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the individual
asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which
the asset belongs will be determined. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. The Bank uses judgment to identify CGUs.
An asset’s recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value of
expected future cash flows from the asset or CGU. The recoverable amount of the CGU is determined using valuation models that consider various factors such
as projected future cash flows, discount rates and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a
significant impact on income.
Corporate assets, such as the head office building and computer equipment, do not generate cash inflows that are largely independent of the cash inflows
from other assets or groups of assets. Therefore, the recoverable amount of an individual corporate asset cannot be determined unless management has
decided to dispose of the asset. However, if there is an indication that a corporate asset may be impaired, the recoverable amount is determined for the CGU or
group of CGUs to which the corporate asset belongs, and is compared with the carrying amount of this CGU or group of CGUs.
Goodwill is always tested for impairment at the level of a CGU or groups of CGUs. For impairment testing purposes, from the acquisition date, goodwill
resulting from a business combination must be allocated to the CGU or group of CGUs expected to benefit from the synergies of the business combination.
Each CGU or group of CGUs to which goodwill is allocated must represent the lowest level for which the goodwill is monitored internally at the Bank and must
not be larger than an operating segment. The allocation of goodwill to a CGU or group of CGUs involves management’s judgment. If an impairment loss is to be
recognized, the Bank does so by first reducing the carrying amount of goodwill allocated to the CGU or group of CGUs and then reducing the carrying amounts
of the other assets of the CGU or group of CGUs in proportion to the carrying amount of each asset in the CGU or group of CGUs.
If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment
loss is recognized in Non-interest expenses in the Consolidated Statement of Income. An impairment loss recognized in prior periods for an asset other than
goodwill must be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment
was recognized. If this is the case, the carrying amount of the asset is increased, as the impairment loss was reversed, but shall not exceed the carrying
amount that would have been determined, net of amortization, had no impairment loss been recognized for this asset in previous years.
Leases
A lease is an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed period of time in return for a payment or series of
payments. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. Title may or
may not eventually be transferred. An operating lease is a lease other than a finance lease. The Bank primarily enters into operating leases.
When the Bank is the lessee under an operating lease, the rental expense is recognized on a straight-line basis over the lease term in Non-interest expenses in
the Consolidated Statement of Income. When the Bank is the lessor, the lease assets remain on the Consolidated Balance Sheet and are reported in premises
and equipment, and the rental income is recognized net of related expenses in Non-interest income in the Consolidated Statement of Income.
Provisions
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money. The provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated Balance Sheet.
25
125
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Revenue Recognition
The Bank’s revenues are recognized in the Consolidated Statement of Income as they are earned.
Interest Income and Expense
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest rate method. The effective interest rate is the rate that discounts estimated future cash inflows and outflows through
the expected life of the financial instrument (or, when appropriate, a shorter period) to the net carrying amount of the instrument. When calculating the
effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but without considering future credit losses
and also includes all fees paid or received related to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums
or discounts.
Commission Revenues
Loan origination fees, including commitment, restructuring and renegotiation fees, are considered an integral part of the yield earned on the loan. They are
deferred and amortized using the effective interest rate method, and the amortization is recognized in Interest income over the term of the loan. Direct costs for
originating a loan are netted against the loan origination fees. If it is likely that a commitment will result in a loan, commitment fees receive the same
accounting treatment, i.e., they are deferred and amortized using the effective interest rate method and the amortization is recognized in Interest income over
the term of the loan. Otherwise, they are recorded in Non-interest income over the term of the commitment.
Loan syndication fees are recorded in Non-interest income unless the yield on the loan retained by the Bank is less than that of other comparable lenders
involved in the financing. In such cases, an appropriate portion of the fees is deferred and amortized using the effective interest rate method, and the
amortization is recognized in Interest income over the term of the loan. Certain mortgage loan prepayment fees are recognized in Interest income in the
Consolidated Statement of Income when earned.
Dividend Income
Dividends from an equity instrument are recognized in the Consolidated Statement of Income when the Bank’s right to receive payment is established.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are arrangements under which one party accepts significant insurance risk by agreeing to compensate
the policyholder if a specified uncertain future event were to occur. Gross premiums, net of premiums transferred under reinsurance contracts, are recognized
when they become due. Royalties received from reinsurers are recognized when earned. Claims are recognized when received and an amount is estimated as
they are being processed. All of these amounts are recognized on a net basis in Non-interest income in the Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance liability are recognized, respectively, in Other assets and in Other liabilities on the
Consolidated Balance Sheet. Subsequent changes in the carrying value of the reinsurance asset and insurance liability are recognized on a net basis in
Non-interest income in the Consolidated Statement of Income.
Income Taxes
Income taxes include current taxes and deferred taxes and are recorded in net income except for income taxes generated by items recognized in Other
comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a period. It is calculated using the enacted or substantively enacted tax rates
prevailing on the reporting date, and any adjustments recognized in the period for current tax of prior periods. Current tax assets and liabilities are offset and
the net balance is presented in either Other assets or Other liabilities on the Consolidated Balance Sheet when the Bank has a legally enforceable right to set
off the recognized amounts and intends to settle on a net basis or to simultaneously realize the asset and settle the liability.
Deferred tax is established based on temporary differences between the carrying values and the tax bases of assets and liabilities, in accordance with enacted
or substantively enacted income tax laws and rates that will apply on the date the differences will reverse. Deferred tax is not recognized for temporary
differences related to the following:
—
—
—
—
the initial accounting of goodwill;
the initial accounting of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither
accounting income nor taxable income;
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable future and
that the Bank controls the timing of the reversal of the temporary difference;
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable future and
that there will not be taxable income to which the temporary difference can be recognized.
126
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Deferred tax assets are tax benefits in the form of deductions the Bank may claim to reduce its taxable income in future years. At the end of each reporting
period, the carrying amount of deferred tax assets is revised and reduced to the extent that it is no longer probable that sufficient taxable income will be
available to allow the benefit of the deferred tax asset to be utilized.
Deferred tax assets and liabilities are offset and the net balance is presented in either Other assets or Other liabilities on the Consolidated Balance Sheet when
the Bank has a legally enforceable right to set off the current tax assets and liabilities, and if the deferred tax assets and liabilities relate to taxes levied by the
same taxation authority on the same taxable entity, or on different taxable entities that intend to settle current tax assets and liabilities based on their net
amount.
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process includes estimating the actual amount of
current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of the items reported for accounting
and for income tax purposes. Deferred tax assets and liabilities presented on the Consolidated Balance Sheet are calculated according to the tax rates to be
applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date of the future event is revised based on current
information.
Moreover, the Bank is subject to the jurisdiction of various tax authorities. In the normal course of its business, the Bank is involved in a number of
transactions for which the tax impacts are uncertain. As a result, the Bank accounts for provisions for uncertain tax positions that adequately represent the tax
risk stemming from tax matters under discussion or being audited by tax authorities or from other matters involving uncertainty. The amounts of these
provisions reflect the best possible estimates of the amounts that may have to be paid based on qualitative assessments of all relevant factors. The provisions
are estimated at the end of each reporting period. However, it is possible that an adjustment to the provision needs to be recognized at a future date following
an audit by the tax authorities. When the final assessment differs from the initially provisioned amounts, the difference will impact the income taxes of the
period in which the assessment was made.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification agreement that could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to reimburse the beneficiary in the event of a loss resulting from a debtor defaulting on the
original or amended terms of a debt instrument.
To reflect the fair value of the obligation assumed at the inception of a financial guarantee, a liability is recorded in Other liabilities on the Consolidated
Balance Sheet. After initial recognition, the Bank must measure financial guarantee contracts at the higher of the estimated amount needed to settle the
financial obligation under the guarantee or the amount initially recognized less, where applicable, the accumulated amortization that corresponds to revenue
earned during the period. This revenue is recognized in Credit fees in the Consolidated Statement of Income.
Employee Benefits – Pension Plans and Other Post-Employment Benefits
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. The other post-employment benefit plans
include post-retirement medical, dental and life insurance coverage. While pension plans are funded, the other plans are not.
Plan expenses and obligations are actuarially determined based on the projected benefit method prorated on service. The calculations use management’s best
estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates, mortality rates and retirement
age.
The net asset or net liability of pension plans and other post-employment benefit plans are calculated separately for each plan as the difference between the
present value of the future benefits earned by employees in respect of current- and prior-period service and the fair value of plan assets. The net asset or net
liability is included in either the Other assets or Other liabilities item of the Consolidated Balance Sheet.
The expense related to pension plans and other post-employment benefit plans consists of the following items: current service cost, net interest on the net
plan asset or liability, administration costs and past service cost, if any, recognized when a plan is amended. This expense is recognized in Compensation and
employee benefits in the Consolidated Statement of Income. The net amount of interest income and expense is determined by applying a discount rate to the
net plan asset or liability amount.
Remeasurements resulting from pension plans and other post-employment benefit plans represent actuarial gains and losses related to the defined benefit
obligation and the actual return on plan assets, excluding net interest determined by applying a discount rate to the net asset or liability of the plans.
Remeasurements are immediately recognized in Other comprehensive income and will not be subsequently reclassified to net income; these cumulative gains
and losses are reclassified to Retained earnings.
27
127
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
Share-Based Payments
The Bank has several share-based compensation plans: the Stock Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan,
the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan (DCP) of National Bank Financial and the
Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for employees to become fully entitled to the award. This period is generally the same as
the vesting period, except where the required service period begins before the award date. Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on the award date. Compensation expense related to awards granted to employees who will
become eligible to retire during the vesting period is recognized over the period from the award date to the date the employee becomes eligible to retire. For all
of these plans, as of the first year of recognition, the expense includes cancellation and forfeiture estimates. These estimates are subsequently revised as
necessary. The Bank uses derivative financial instruments to hedge the risks associated with some of these plans. The compensation expense for these plans,
net of related hedges, is recognized in the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account for stock options awarded. The options vest at 25% per year, and each tranche is
treated as though it was a separate award. The fair value of each of the tranches is measured on the award date using the Black-Scholes model, and this fair
value is recognized in Compensation and employee benefits and Contributed surplus. When the options are exercised, the Contributed surplus amount is
credited to Equity – Common shares on the Consolidated Balance Sheet. The proceeds received from the employees when these options are exercised are also
credited to Equity – Common shares on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded and their fair value is remeasured at the end of each reporting period until they are exercised. The cost is
recognized in Compensation and employee benefits in the Consolidated Statement of Income and in Other liabilities on the Consolidated Balance Sheet. The
obligation that results from the change in fair value at each period is recognized in net income gradually over the vesting period, and periodically thereafter,
until the SARs are exercised. When a SAR is exercised, the Bank makes a cash payment equal to the increase in the stock price since the date of the award.
The obligation that results from the award of a DSU, RSU, PSU and DCP unit is recognized in net income, and the corresponding amount is included in Other
liabilities on the Consolidated Balance Sheet. For the DSU, RSU and DCP plans, the change in the obligation attributable to variations in the share price and
dividends paid on common shares for these plans is recognized in Compensation and employee benefits in the Consolidated Statement of Income for the
period in which the variations occur. On the redemption date, the Bank makes a cash payment equal to the value of the common shares on that date. For the
PSU Plan, the change in the obligation attributable to changes in the stock price, adjusted upward or downward depending on the relative result of the
performance criteria, and the change in the obligation attributable to dividends paid on the shares awarded under the plan, are recognized in Compensation
and employee benefits in the Consolidated Statement of Income for the period in which the changes occur. On the redemption date, the Bank makes a cash
payment equal to the value of the common shares on that date, adjusted upward or downward according to the performance criteria. This is based on the total
shareholder return (TSR) achieved by the Bank compared to that of the S&P/TSX Banks adjusted sub-index.
The Bank’s contributions to the employee share ownership plan are expensed as incurred.
128
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 2 – FUTURE ACCOUNTING POLICY CHANGES
The IASB issues revisions and amendments to a number of standards, some of which have already had an impact on the Bank and others that could have an
impact in the future. The Bank is currently assessing the impact that adoption of the following standards will have on its consolidated financial statements. A
summary of these amendments and the effective dates applicable to the Bank are presented below.
Effective Date – Early Adoption on November 1, 2017
IFRS 9 – Financial Instruments
In July 2014, the IASB issued a complete and final version of IFRS 9, which replaces the guidance in IAS 39 – Financial Instruments: Recognition and
Measurement. IFRS 9 sets out requirements for the classification and measurement of financial assets and financial liabilities, for the impairment of financial
assets, and for general hedge accounting. Macro hedge accounting has been decoupled from IFRS 9 and will be considered and issued as a separate standard.
As a result of IFRS 9, consequential amendments have been made to IFRS 7 – Financial Instruments: Disclosures, requiring additional qualitative and
quantitative disclosures that must be adopted at the same time as IFRS 9. In December 2015, the Basel Committee on Banking Supervision issued Guidance on
Credit Risk and Accounting for Expected Credit Losses. In June 2016, OSFI issued the final guideline on IFRS 9 Financial Instruments and Disclosures, setting
out its expectations regarding IFRS 9 application.
For the Bank, the IFRS 9 effective date is November 1, 2018 with early adoption permitted. However, on January 9, 2015, OSFI issued a final version of Early
Adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks and stated therein that it expects Domestic Systemically Important Banks
(D-SIBs), a group that includes the Bank, to adopt IFRS 9 as of November 1, 2017. The Bank will therefore adopt IFRS 9 as of November 1, 2017. Its first
financial statements presented in accordance with IFRS 9 will be its unaudited interim condensed consolidated financial statements for the quarter ending
January 31, 2018. In general, IFRS 9 is to be applied retrospectively. As permitted by IFRS 9, the Bank will not restate the comparative period financial
statements. The retrospective impact of applying IFRS 9 will be accounted for through adjustments to the opening balances of Retained earnings, Accumulated
other comprehensive income and Non-controlling interests as at November 1, 2017.
Classification and Measurement
IFRS 9 provides a single model for financial asset classification and measurement that is based on both the business model for managing financial assets and
the contractual cash flow characteristics of the financial assets. These factors determine whether the financial assets are measured at amortized cost, fair
value through other comprehensive income, or fair value through profit or loss.
IFRS 9 requires that all debt instrument financial assets, including loans, that do not meet a “solely payment of principal and interest” (SPPI) condition,
including those that contain embedded derivatives, be classified as at fair value through profit or loss. For those that meet the SPPI condition, classification at
initial recognition will be determined based on the business model under which these assets are managed. Upon transition, the business model test will be
based on the facts and circumstances as at November 1, 2017. Debt instruments that are being managed on a “held for trading” or fair value basis will be
classified as at fair value through profit or loss. Debt instruments that are managed on a “hold to collect and for sale” basis will be classified as at fair value
through other comprehensive income. Finally, debt instruments that are managed on a “hold to collect” basis will be classified as at amortized cost. In
addition, IFRS 9 also includes an option to irrevocably designate, at initial recognition, a debt instrument as measured at fair value through profit or loss if
doing so eliminates or significantly reduces an accounting mismatch and if OSFI requirements are also met. This designation is also available for existing
financial assets and liabilities at the date of IFRS 9 adoption.
Under IFRS 9, all equity instrument financial assets must be classified as at fair value through profit or loss. However, the Bank may, at initial recognition of a
non-trading equity instrument, irrevocably elect to designate the instrument as at fair value through other comprehensive income with no subsequent
reclassification of gains and losses to net income. Dividends will continue to be recognized in net income. This designation is also available for existing non-
trading equity instruments at the date of IFRS 9 adoption. Derivative financial instruments will continue to be measured at fair value through profit or loss.
The classification and measurement of financial liabilities remain essentially unchanged under IFRS 9, except for financial liabilities designated as measured
at fair value through profit or loss under the fair value option. Once the fair value election is made, changes in fair value attributable to changes in an entity’s
own credit risk must be recognized in Other comprehensive income rather than in net income. On February 1, 2016, the Bank early adopted, on a prospective
basis, the own credit risk provisions of IFRS 9.
29
129
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 2 – FUTURE ACCOUNTING POLICY CHANGES (cont.)
Impairment
Overall Comparison of the New Impairment Model and the Current Model
IFRS 9 introduces a new, single impairment model for financial assets that requires the recognition of expected credit losses (ECL) rather than incurred losses
as applied under the current standard. Currently, impairment losses are recognized if, and only if, there is objective evidence of impairment as a result of one
or more loss events that occurred after initial recognition of the asset and that loss event has a detrimental impact on the estimated future cash flows of the
asset that can be reliably estimated. If there is no objective evidence of impairment for an individual financial asset, that financial asset is included in a group
of assets with similar credit risk characteristics and collectively assessed for impairment losses incurred but not yet identified. Under IFRS 9, ECLs will be
recognized in profit or loss before a loss event has occurred, which could result in earlier recognition of credit losses compared to the current model.
Under the current standard, incurred losses are measured by incorporating reasonable and supportable information about past events and current conditions.
Under IFRS 9, the ECL model, which is forward-looking, in addition requires that forecasts of future events and economic conditions be used when determining
significant increases in credit risk and when measuring expected losses. Forward-looking macroeconomic factors such as unemployment rates, housing price
indices, interest rates, and gross domestic product will be incorporated into the risk parameters. Estimating forward-looking information will require
significant judgment and must be consistent with the forward-looking information used by the Bank for other purposes, such as forecasting and budgeting.
Scope
The impairment model applies to all financial assets not measured at fair value through profit or loss. The ECL model also applies to loan commitments and
financial guarantees that are not measured at fair value through profit or loss.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the financial instrument. The
measurement of ECLs will be based primarily on the product of the instrument’s probability of default (PD), loss given default (LGD), and exposure at default
(EAD). IFRS 9 requires the estimate of expected credit losses to reflect an unbiased and probability-weighted amount that is determined by evaluating a range
of possible outcomes. The Bank will incorporate three forward-looking macroeconomic scenarios in its ECL calculation process: a base scenario, an upside
scenario, and a downside scenario. Probability-weights will be attributed to each scenario. The scenarios and probability weights will be reassessed quarterly
and subject to management review.
The ECL model contains a three-stage approach that is based on the change in the credit quality of assets since initial recognition. If, at the reporting date, the
credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1,
and a loss allowance that is measured, at each reporting date, at an amount equal to 12-month expected credit losses is recorded. When there is a significant
increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and a loss allowance that is measured, at
each reporting date, at an amount equal to lifetime expected credit losses is recorded. In subsequent reporting periods, if the credit risk of the financial
instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the ECL model requires reverting to recognition of
12-month expected credit losses. When one or more events that have a detrimental impact on the estimated future cash flows of a financial asset have
occurred, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance equal to lifetime expected losses continues to be
recorded or the financial asset is written off.
Interest income is calculated on the gross carrying amount of the financial assets in Stages 1 and 2 and on the net carrying amount of the financial assets in
Stage 3.
130
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Assessment of Significant Increase in Credit Risk
To assess whether the credit risk of a financial instrument has increased significantly, the PD occurring over its expected life as at the reporting date is
compared with the PD occurring over its expected life on the date of initial recognition, and reasonable and supportable information indicative of significant
increases in credit risk since initial recognition is considered. The Bank has included relative and absolute thresholds in the definition of significant increase in
credit risk and a backstop of 30 days past due. All financial instruments that are 30 days past due are migrated to Stage 2 even if other metrics do not indicate
that a significant increase in credit risk has occurred.
Definition of Default
IFRS 9 does not define default but requires the definition to be consistent with the definition used for internal credit risk management purposes. However, IFRS 9
contains a rebuttable presumption that default does not occur later than when a financial asset is 90 days past due. Under IFRS 9, the Bank will consider a
financial asset, other than a credit card receivable, as credit-impaired when one or more events that have a detrimental impact on the estimated future cash
flows of a financial asset have occurred or when contractual payments are 90 days past due. The backstop for credit card receivables will be 180 days past due.
The Bank’s write-off policy under IAS 39 is not expected to be materially different under IFRS 9.
Comparison of Regulatory Expected Credit Loss Model and IFRS 9 Expected Credit Loss Model
The IFRS 9 ECL calculation has leveraged, where appropriate, the expected credit loss model parameters used by the Bank for regulatory purposes, namely: PD,
LGD and EAD. Adjustments to these parameters were made to comply with IFRS 9 requirements. After the adoption of IFRS 9, an ECL model will be used for both
regulatory and accounting purposes. However, there are key differences, which are summarized below.
Regulatory Capital
Through-the-cycle 12-month PD calibrated on a long run average
PD throughout a full economic cycle. The default backstop is
generally 90 days past due.
IFRS 9
Point-in-time 12-month or lifetime PD based on past experience, current
conditions and relevant forward-looking information. The default backstop is
generally 90 days past due.
Downturn LGD based on losses that would be expected in an
economic downturn and subject to certain regulatory floors. All
collection costs are included.
Expected LGD based on past experience, current conditions and relevant forward-
looking information. The value of collateral and other credit risk mitigants are
incorporated as appropriate and undue conservatism and floors are excluded.
Based on the drawn balance plus expected utilization of any
undrawn portion prior to default, and cannot be lower than the
current balance.
Represents the expected balance at default across the lifetime horizon on
forward-looking expectations.
ECLs are discounted from the default date to the reporting date.
PD
LGD
EAD
Other
Regulatory Capital
On March 29, 2017, the Basel Committee on Banking Supervision (BCBS) released details on the interim regulatory treatment for accounting provisions as well
as standards for transitional arrangements. Given the coming into effect of IFRS 9, the BCBS will retain the current Basel Accord regulatory treatment for
provisions during a transition period. Jurisdictions may adopt transitional measures to phase in any potential significant negative impacts on regulatory capital
arising from the new expected credit loss impairment model under IFRS 9. On August 21, 2017, OSFI released for comment a new, revised version of the
Capital Adequacy Requirements (CAR) Guideline to be implemented in the first quarter of 2018. Consistent with the BCBS position, the proposed CAR Guideline
retains the current regulatory treatment of accounting provisions. As for transitional measures to phase-in any potential negative impacts on regulatory capital,
on November 29, 2017, OSFI has announced that no mitigation measures will be allowed for banks whose capital position could be significantly affected by
IFRS 9 adoption.
Hedge Accounting
IFRS 9 introduces a new general hedge accounting model that better aligns hedge accounting with risk management activities. However, the current hedge
accounting requirements under IAS 39 may continue to be applied until the IASB finalizes its macro hedge accounting project. As permitted, the Bank elected
not to adopt the IFRS 9 hedge accounting requirements and instead will continue applying the IAS 39 hedge accounting requirements. The Bank will, however,
comply with the revised hedge accounting disclosures required by the consequential amendments made to IFRS 7.
31
131
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 2 – FUTURE ACCOUNTING POLICY CHANGES (cont.)
Transition Impact
As at October 31, 2017, the Bank’s best estimate of the impact of transitioning to IFRS 9 is a decrease of approximately $165 million, net of income taxes, in
equity as at November 1, 2017, and a decrease of approximately 16 basis points in the Common Equity Tier 1 (CET1) capital ratio. The estimate of the impact
for the Bank relates primarily to the classification and measurement requirements, in particular the election to irrevocably designate certain financial assets
and financial liabilities at fair value through profit or loss under the fair value option, as permitted by the IFRS 9 transitional provisions.
The estimate of the impact of applying the new impairment model for financial assets is not significant. The Bank continues to refine and validate the new
impairment models leading up to the disclosure of its 2018 first quarter results.
Effective Date – November 1, 2018
IFRS 15 – Revenue From Contracts With Customers
In May 2014, the IASB issued a new standard, IFRS 15, which replaces the current revenue recognition standards and interpretations. IFRS 15 provides a single
comprehensive model to use when accounting for revenue arising from contracts with customers. The new model applies to all contracts with customers except
those that are within the scope of other IFRS standards such as leases, insurance contracts and financial instruments. As a result, the majority of the Bank’s
revenue, including net interest income, will not be impacted.
At its meeting on July 22, 2015, the IASB unanimously confirmed its proposal to defer the effective date of IFRS 15 to fiscal years beginning on or after
January 1, 2018, which will be November 1, 2018 for the Bank. In April 2016, the IASB issued amendments to IFRS 15, clarifying some requirements and
providing additional transitional relief at the date of initial application.
On transition, IFRS 15 permits to either restate prior periods or to apply the standard on a modified retrospective basis. The Bank plans to use the modified
retrospective basis, recognizing the cumulative effect of initially applying the standard as an adjustment to the opening balance of Retained earnings as at
November 1, 2018, without restating comparative periods.
While the impact assessment is not complete, the Bank does not currently expect the adoption of IFRS 15 to have a significant impact on the consolidated
financial statements. The Bank is continuing to review its revenue contracts that fall within the scope of IFRS 15 and to assess the impact of the new standard
on its consolidated financial statements, including the additional disclosure requirements.
Effective Date – November 1, 2019
IFRS 16 – Leases
In January 2016, the IASB issued a new standard, IFRS 16 – Leases. The new standard requires lessees to recognize most leases on the balance sheet using a
single model, thereby eliminating the distinction between operating and finance leases. Lessor accounting, however, remains similar to current accounting
practice, and the distinction between operating and finance leases is retained. Early application is permitted if IFRS 15 – Revenue From Contracts With
Customers is also applied.
IFRIC Interpretation 23 – Uncertainty Over Income Tax Treatments
In June 2017, the IASB issued IFRIC Interpretation 23, which addresses how to reflect tax treatment uncertainty in accounting for income taxes.
Effective Date – November 1, 2021
IFRS 17 – Insurance Contracts
In May 2017, the IASB issued IFRS 17 – Insurance Contracts, a new standard that replaces IFRS 4, the current insurance contract accounting standard. IFRS 17
introduces a new accounting framework that will improve the comparability and quality of financial information.
132
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories
set out in the accounting framework for financial instruments.
Financial
instruments
classified
as at fair
value through
profit or loss
Carrying value and fair value
Available-
for-sale
financial
instruments
measured
at fair value
Financial
instruments
designated
at fair value
through profit
or loss
Carrying
value
Fair value
As at October 31, 2017
Financial
instruments
at amortized
cost
Financial
instruments
at amortized
cost
Total
carrying
value
Total
fair
value
Financial assets
Cash and deposits with financial
institutions
−
−
−
8,802
8,802
8,802
8,802
Securities
46,780
756
8,552
9,255
9,229
65,343
65,317
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Purchased receivables
Other assets
Financial liabilities
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
(1)
Includes embedded derivative financial instruments.
−
5,523
8,423
−
−
657
115
−
−
−
−
−
−
−
−
20,132
20,132
20,789
20,789
128,805
128,944
134,443
134,582
−
2,014
994
−
2,014
994
8,423
2,014
994
8,423
2,014
994
−
5,501
151,170
(1)
151,571
156,671
157,072
−
15,363
−
−
5,991
−
5,991
−
5,991
15,363
5,991
15,363
−
6,612
−
15
534
−
6,209
−
−
−
21,233
−
13,889
2,902
9
21,233
−
13,940
2,904
21,767
6,612
20,098
2,917
21,767
6,612
20,149
2,919
6
9
6
33
133
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Financial
instruments
classified
as at fair
value through
profit or loss
Carrying value and fair value
Available-
for-sale
financial
instruments
measured
at fair value
Financial
instruments
designated
at fair value
through profit
or loss
Carrying
value
Fair value
As at October 31, 2016
Financial
instruments
at amortized
cost
Financial
instruments
at amortized
cost
Total
carrying
value
Total
fair
value
Financial assets
Cash and deposits with financial
institutions
−
−
−
8,183
8,183
8,183
8,183
Securities
44,499
1,465
14,608
3,969
3,993
64,541
64,565
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Purchased receivables
Other assets(1)
Financial liabilities
Deposits(2)
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities(2)
Subordinated debt
−
6,290
10,416
−
−
158
164
−
−
−
−
−
−
−
−
13,790
13,790
13,948
13,948
119,724
120,641
126,178
127,095
−
1,858
1,317
−
1,858
1,317
10,416
1,858
1,317
10,416
1,858
1,317
−
4,655
137,411
(3)
138,267
142,066
142,922
−
14,207
−
−
6,441
−
6,441
−
6,441
14,207
6,441
14,207
−
7,725
−
43
−
−
6,206
−
−
−
22,636
−
13,925
3,158
1,012
22,636
−
13,974
3,173
22,636
7,725
20,131
3,201
22,636
7,725
20,180
3,216
1,013
1,012
1,013
(1)
(2)
(3)
The Due from clients, dealers and brokers amount of $843 million presented separately on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Other assets.
An amount of $2,699 million reported in Due to clients, dealers and brokers on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Deposits ($2,159 million) and in
Other liabilities ($540 million).
Includes embedded derivative financial instruments.
134
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets provide the best evidence of fair value. When there is no quoted price in an active market, the Bank applies other
valuation techniques that maximize the use of relevant observable inputs and that minimize the use of unobservable inputs. Such valuation techniques include
the following: using information available from recent market transactions, referring to the current fair value of a comparable financial instrument, applying
discounted cash flow analysis, applying option pricing models, or relying on any other valuation technique that is commonly used by market participants and
has proven to yield reliable estimates. Judgment is required when applying many of the valuation techniques. The Bank’s valuation was based on its
assessment of the conditions prevailing as at October 31, 2017 and may change in the future. Furthermore, there may be valuation uncertainty resulting from
the choice of valuation model used.
Valuation Governance
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the classification policies to determine the hierarchy, and
there are controls in place to ensure that fair value is measured appropriately, reliably and consistently. Valuation methods and the underlying assumptions
are reviewed on a regular basis.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable approximation of fair value:
—
—
—
—
—
—
—
cash and deposits with financial institutions;
securities purchased under reverse repurchase agreements and securities borrowed;
obligations related to securities sold under repurchase agreements and securities loaned;
customers’ liability under acceptances;
acceptances;
purchased receivables;
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments are recognized at fair value on the Consolidated Balance Sheet. Their fair value is based on quoted prices in active markets, i.e.,
bid prices for financial assets and offered prices for financial liabilities. If there are no quoted prices in an active market, fair value is estimated based on prices
for securities that, in substance, are identical. If such prices are not available, fair value is determined using valuation techniques that incorporate
assumptions based primarily on observable market inputs such as current market prices, the contractual prices of the underlying instruments, the time value
of money, credit risk, interest rate yield curves and currency rates.
When one or more significant inputs are not observable in the markets, fair value is established primarily on the basis of internal estimates and data that
consider the valuation policies in effect at the Bank, economic conditions, the specific characteristics of the financial asset or liability and other relevant
factors.
Securities Issued or Guaranteed by Governments
Securities issued or guaranteed include government debt securities of the governments of Canada (federal, provincial and municipal) as well as debt securities
of the U.S. government (U.S. Treasury), of other U.S. agencies and of other foreign governments. The fair value of these securities is based on unadjusted
quoted prices in active markets. For those classified in Level 2, quoted prices for identical or similar instruments in active markets are used to determine fair
value. In the absence of an observable market, valuation techniques such as the discounted cash flow method could be used, incorporating assumptions on
benchmark yields (CDOR, LIBOR and other) and the risk spreads of similar securities.
35
135
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Equity Securities and Other Debt Securities
The fair value of equity securities is determined primarily by using quoted prices in active markets. For equity securities and other debt securities classified in
Level 2, a valuation technique based on quoted prices of identical and similar instruments in an active market is used to determine fair value. In the absence of
observable inputs, valuation techniques such as the discounted cash flow method could be used, incorporating assumptions on benchmark yields (CDOR,
LIBOR and other) and the risk spreads of similar securities. For those classified in Level 3, fair value can be determined based on the net asset value, which
represents the estimated value of a security based on valuations received from investment or fund managers or the general partners of the limited
partnerships. Fair value can also be determined using internal valuation techniques adjusted for risk factors related to the financial instruments and for
economic conditions.
Restructured Notes of the Master Asset Vehicle (MAV) Conduits
In establishing the fair value of the restructured notes of the MAV conduits classified as Level 2, the Bank considered the quality of the underlying assets. The
Bank determined fair value using a valuation technique that incorporates discounted cash flows. For the restructured notes of the MAV I and MAV II conduits,
the discount rate is based 80% on the CDX.IG index tranches and 20% on a basket of securities backed by assets such as credit card receivables, Residential
Mortgage-Backed Securities (RMBS), Commercial Mortgage-Backed Securities (CMBS) and automobile loans.
In establishing the fair value of the restructured notes, the Bank adjusts, as required, its liquidity assumption to reflect market conditions. The Bank
determines the fair value of the restructured notes of the MAV conduits it is holding by comparing the value obtained using the above-described methodology
against a range of values. The values situated in this range were obtained by adjusting various liquidity scenarios.
Other Restructured Notes of MAV I and MAV II Conduits
The fair value of these financial instruments, which are classified in Level 3, is determined based on the net asset value, which represents the estimated value
of a security based on valuations received from the administrator of the conduits.
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheet. For exchange-traded derivative financial instruments, fair value
is based on the quoted price in an active market, i.e., bid prices for financial assets or offered prices for financial liabilities.
For over-the-counter (OTC) derivative financial instruments, fair value is determined using well established valuation techniques that incorporate assumptions
based primarily on observable market inputs such as current market prices and the contractual prices of the underlying instruments, the time value of money,
interest rate yield curves, credit curves, currency rates as well as price and rate volatility factors. In establishing the fair value of OTC derivative financial
instruments, the Bank also incorporates the following factors:
Credit Valuation Adjustment (CVA)
The CVA is a valuation adjustment applied to derivative financial instruments to reflect the credit risk of the counterparty. For each counterparty, the CVA is
based on the expected positive exposure and probabilities of default through time. The exposures are determined by incorporating relevant factors such as
current and potential future market values, master netting arrangements, collateral agreements and expected recovery rates. The default probabilities are
inferred using credit default swap (CDS) spreads. When unavailable, relevant proxies are used. While the general methodology currently assumes
independence between expected positive exposures and probabilities of default, adjustments are applied to certain types of transactions where there is a
direct link between the exposure at default and the default probabilities.
Debit Valuation Adjustment (DVA)
The DVA reflects the Bank’s own credit risk in the valuation of derivative financial instruments. The DVA is based on the expected negative exposure and
probabilities of default of the Bank over time. The exposures are determined by incorporating relevant factors such as current and potential future market
values, master netting arrangements, collateral agreements and expected recovery rates. The market implied spreads of the Bank are used in the calculation of
the DVA.
136
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Funding Valuation Adjustment (FVA)
The FVA is a valuation adjustment applied to derivative financial instruments to reflect the market implied cost or benefits of funding collateral for
uncollateralized or partly collateralized transactions. The expected exposures are determined using methodologies consistent with the CVA and DVA
framework. The funding level used to determine the FVA is based on the average funding level of relevant market participants.
When the valuation techniques incorporate one or more significant inputs that are not observable in the markets, the fair value of OTC derivative financial
instruments is established primarily on the basis of internal estimates and data that consider the valuation policies in effect at the Bank, economic conditions,
the specific characteristics of the financial asset or financial liability and other relevant factors.
Loans
The fair value of fixed-rate mortgage loans is determined by discounting expected future contractual cash flows, adjusted for several factors, including
prepayment options, current market interest rates for similar loans, and other relevant variables where applicable. The fair value of variable-rate mortgage
loans is deemed to equal carrying value.
The fair value of other fixed-rate loans is determined by discounting expected future contractual cash flows using current market interest rates charged for
similar new loans. The fair value of variable-rate loans is deemed to equal carrying value.
Deposits
The fair value of fixed-term deposits is determined primarily by discounting expected future contractual cash flows and considering several factors such as
redemption options and market interest rates currently offered for financial instruments with similar conditions. For certain term funding instruments, fair
value is determined using market prices for similar instruments. The fair value of demand deposits and notice deposits is deemed to equal carrying value.
The fair value of structured deposit notes is established using valuation models that maximize the use of observable inputs when available, such as
benchmark indices, and also incorporates the DVA, which reflects the Bank’s own credit risk. In calculating DVA, the market implied spreads of the Bank are
used to infer its probabilities of default. Lastly, when fair value is determined using option pricing models, the valuation techniques are similar to those
described for derivative financial instruments.
Liabilities Related to Transferred Receivables
These liabilities arise from sale transactions to Canada Housing Trust (CHT) of securities backed by insured residential mortgages and other securities under
the Canada Mortgage Bond (CMB) program. These transactions do not qualify for derecognition. They are recorded as guaranteed borrowings, which results in
the recording of liabilities on the Consolidated Balance Sheet. The fair value of these liabilities is established using valuation techniques based on observable
market inputs such as Canada Mortgage Bond prices.
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates offered for similar financial instruments that have the same term to maturity.
37
137
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Hierarchy of Fair Value Measurements
IFRS establishes a fair value hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to three levels. This
fair value hierarchy requires observable market inputs to be used whenever such inputs exist. According to the hierarchy, the highest level of inputs are
unadjusted quoted prices in active markets for identical instruments and the lowest level of inputs are unobservable inputs. If inputs from different levels of
the hierarchy are used, the financial instrument is classified in the same level as the lowest level input that is significant to the fair value measurement. The
fair value hierarchy has the following levels.
— Level 1: Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the
measurement date. These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain
highly liquid debt securities actively traded in over-the-counter markets.
— Level 2: Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the
market for the asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and
inputs that are derived principally from or corroborated by observable market inputs by correlation or other means. These instruments consist
primarily of certain loans, certain deposits, derivative financial instruments traded in over-the-counter markets, certain debt securities, certain
equity securities whose value is not directly observable in an active market, liabilities related to transferred receivables and certain other
liabilities.
—
Level 3: Valuation techniques based on one or more significant inputs that are not observable in the market for the asset or liability. The Bank classifies
financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The
valuation technique may also be partly based on observable market inputs.
Financial instruments whose fair values are classified in Level 3 consist of the following:
—
—
—
financial instruments measured at fair value through profit or loss: investments in hedge funds for which there are certain restrictions on unit or security
redemptions, as well as certain derivative financial instruments whose fair value is established using internal valuation models that are based on
significant unobservable market inputs.
available-for-sale securities: certain restructured notes as well as equity and debt securities of private companies.
certain deposits (structured deposit notes) whose fair value is established using internal valuation models that are based on significant unobservable
market inputs.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the quarter in
which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2017, $358 million in securities classified as at fair value through profit or loss and $17 million in obligations related to securities sold short
were transferred from Level 2 to Level 1 resulting from changing market conditions ($214 million in securities classified as at fair value through profit or loss
and $71 million in obligations related to securities sold short in fiscal 2016). In addition, during fiscal 2017, $103 million in securities classified as at fair
value through profit or loss and $53 million in obligations related to securities sold short were transferred from Level 1 to Level 2 (for fiscal 2016, $56 million
in securities classified as at fair value through profit or loss and no obligations related to securities sold short).
During fiscal years 2017 and 2016, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs
resulting from changing market conditions.
138
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Financial Instruments Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Available-for-sale
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities purchased under reverse repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Financial liabilities
Deposits
Other
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Level 1
Level 2
Level 3
Total financial
assets/liabilities
at fair value
As at October 31, 2017
2,506
−
1,916
−
25,751
30,173
66
−
519
−
109
694
−
−
6,156
7,770
212
2,599
610
17,347
4,215
2,584
2
494
237
7,532
657
5,638
68
30,935
8,284
39,458
−
5,708
10,515
−
118
−
−
10,633
4,848
534
6,443
6,209
15
23,757
−
−
−
−
16
16
−
−
−
−
326
326
−
−
71
413
1
−
−
51
−
−
52
8,662
7,770
2,128
2,599
26,377
47,536
4,281
2,584
521
494
672
8,552
657
5,638
8,423
70,806
5,709
15,363
534
6,612
6,209
15
34,442
39
139
National Bank of Canada2017 Annual Report
Level 1
Level 2
As at October 31, 2016
Total financial
assets/liabilities
at fair value
Level 3
2,284
−
3,968
−
20,410
26,662
241
−
1,614
−
201
2,056
−
−
87
28,805
4,904
10,547
206
2,934
693
19,284
6,040
4,996
95
948
168
12,247
158
6,454
10,196
48,339
−
4,788
8,732
117
−
−
8,849
5,475
7,490
6,206
43
24,002
−
−
−
−
18
18
−
−
−
30
275
305
−
−
133
456
7
−
118
−
−
125
7,188
10,547
4,174
2,934
21,121
45,964
6,281
4,996
1,709
978
644
14,608
158
6,454
10,416
77,600
4,795
14,207
7,725
6,206
43
32,976
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Available-for-sale
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities purchased under reverse repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Financial liabilities
Deposits
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
140
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the
markets. The valuation technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable inputs
used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
Financial assets
Securities
Equity securities and other debt securities
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Financial liabilities
Deposits
Structured deposit notes
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Financial assets
Securities
Other restructured notes of the
MAV I and MAV II conduits
Equity securities and other debt securities
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Financial liabilities
Deposits
Structured deposit notes
Other
Derivative financial instruments
Equity contracts
Primary
valuation techniques
Significant
unobservable inputs
As at October 31, 2017
Range of input values
Low
High
Net asset value
Market comparable
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
100 %
11 x
100 %
14 x
455 Bps(2)
705 Bps(2)
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
2.20 %
7 %
(42) %
2.20 %
23 %
(42) %
Fair
value
342
1
70
413
1
Option pricing model
Long-term volatility
Market correlation
8 %
(37) %
39 %
83 %
1
50
52
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
2.20 %
8 %
(42) %
2.20 %
41 %
83 %
Fair
value
Primary
valuation techniques
Significant
unobservable inputs
As at October 31, 2016
Range of input values
Low
High
6
317
2
131
456
Net asset value
Net asset value
Market comparable
Price-based model
Net asset value
Net asset value
EV/EBITDA(1) multiple
Price equivalent
100 %
100 %
11 x
71 %
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
2.20 %
10 %
(56) %
7
Option pricing model
Long-term volatility
Market correlation
10 %
(33) %
118
125
Option pricing model
Long-term volatility
Market correlation
10 %
(56) %
100 %
100 %
14 x
121 %
2.20 %
25 %
(56) %
55 %
87 %
54 %
87 %
(1)
(2)
EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.
Bps or basis point is a unit of measure equal to 0.01%.
41
141
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits or
the general partners of the limited partnerships. The net asset value of a fund is the total fair value of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples, which are determined based on comparable companies, and a higher multiple will translate into a
higher fair value. Price equivalent is a percentage of the market price based on the liquidity of the security.
Discount Rate
When discounted cash flow methods are used, the discount rate is the input used to bring future cash flows to their present value. A higher discount rate will
translate into a lower fair value.
Long-Term Volatility
Volatility is a measure of the expected future variability of market prices. Volatility is generally observable in the market through options prices. However, the
long-term volatility of options with a longer maturity might not be observable. An increase (decrease) in long-term volatility is generally associated with an
increase (decrease) in long-term correlation. Higher long-term volatility may increase or decrease an instrument’s fair value depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two different variables. A positive correlation means that the variables tend to move in the same
direction; a negative correlation means that the variables tend to move in opposite directions. Correlation is used to measure financial instruments whose
future returns depend on several variables. Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of
its contractual payout.
Sensitivity Analysis of Financial Instruments Classified in Level 3
The Bank performs sensitivity analyses for the fair value measurements of financial instruments classified in Level 3, substituting unobservable inputs with
one or more reasonably possible alternative assumptions.
For equity securities and other debt securities, the Bank varies significant unobservable inputs such as net asset values, EV/EBITDA multiples, or price
equivalents and establishes a reasonable fair value range that could result in a $40 million increase or decrease in the fair value recorded as at
October 31, 2017 (a $40 million increase or decrease as at October 31, 2016).
For derivative financial instruments and embedded derivatives related to structured deposit notes, the Bank varies long-term volatility and market correlation
inputs and establishes a reasonable fair value range. As at October 31, 2017, for derivative financial instruments, the net fair value could result in a $3 million
increase or decrease ($7 million increase or decrease as at October 31, 2016), whereas for structured deposit notes, the fair value could result in a $1 million
increase or decrease ($1 million increase or decrease as at October 31, 2016).
142
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial
instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.
Year ended October 31, 2017
Securities
at fair value
through profit
or loss
Available-
for-sale
securities
Derivative
financial
instruments(1)
Deposits
18
2
−
4
(10)
−
−
2
−
16
1
305
24
(28)
85
(57)
−
(3)
−
−
326
−
15
(9)
−
−
−
−
18
−
(4)
20
(9)
(7)
−
−
−
−
(10)
1
(1)
16
(1)
−
Year ended October 31, 2016
Securities
at fair value
through profit
or loss
Available-
for-sale
securities
Derivative
financial
instruments(1)
Deposits
21
(1)
−
18
(26)
−
−
6
−
18
(1)
261
8
14
42
(13)
−
(8)
1
−
305
−
(38)
(31)
−
−
−
−
20
67
(3)
15
(31)
(20)
9
−
−
−
(13)
3
(32)
46
(7)
9
Fair value as at October 31, 2016
Total realized and unrealized gains (losses) included in Net income(2)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2017
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2017(3)
Fair value as at October 31, 2015
Total realized and unrealized gains (losses) included in Net income(4)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2016
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2016(5)
(1)
(2)
(3)
(4)
(5)
The derivative financial instruments include assets and liabilities presented on a net basis.
Total net gains included in Non-interest income was $17 million.
Total unrealized losses included in Non-interest income was $8 million.
Total net losses included in Non-interest income was $15 million.
Total unrealized losses included in Non-interest income was $23 million.
43
143
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 3 – FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
Financial Instruments Not Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair value
hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
Level 1
Level 2
Level 3
Total
As at October 31, 2017
−
−
−
−
−
−
−
−
−
−
−
5,368
2,086
20
1,755
9,229
−
−
−
−
−
5,368
2,086
20
1,755
9,229
50,665
72,288
122,953
151,571
13,940
947
6
166,464
−
−
−
−
−
151,571
13,940
947
6
166,464
Level 1
Level 2
Level 3
Total
As at October 31, 2016
−
−
−
−
−
−
−
−
−
−
2,652
548
793
3,993
−
−
−
−
2,652
548
793
3,993
44,895
69,305
114,200
136,108
13,974
1,359
1,013
152,454
−
−
−
−
−
136,108
13,974
1,359
1,013
152,454
Financial assets
Held-to-maturity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Financial assets
Held-to-maturity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
144
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 4 – FINANCIAL INSTRUMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
The Bank chose to designate certain financial instruments at fair value through profit or loss according to the criteria presented in Note 1. Consistent with its
risk management strategy and as permitted by the fair value option, when the designation eliminates or significantly reduces the measurement or recognition
mismatch resulting from measuring financial assets and liabilities on different bases, the Bank designated at fair value through profit or loss certain securities,
certain securities purchased under reverse repurchase agreements, certain obligations related to securities sold under repurchase agreements, and certain
liabilities related to transferred receivables. The fair value of liabilities related to transferred receivables does not include credit risk, as the holders of these
liabilities are not exposed to the Bank’s credit risk.
The Bank also designated certain deposits that include embedded derivative financial instruments and certain loans at fair value through profit or loss. There
is no exposure to credit risk on the loans to the extent that they are fully collateralized.
To determine a change in fair value arising from a change in the credit risk of deposits designated at fair value through profit or loss, the Bank calculates, at
the beginning of the period, the present value of the instrument’s contractual cash flows using the following rates: first, using an observed discount rate for
similar securities that reflects the Bank’s credit spread and, then, using a rate that excludes the Bank’s credit spread. The difference obtained between the two
values is then compared to the difference obtained using the same rates at the end of the period.
Information about the financial assets and financial liabilities designated at fair value through profit or loss is provided in the following tables.
Financial assets designated at fair value through profit or loss
Securities
Securities purchased under reverse repurchase agreements
Loans
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Securites sold under repurchase agreements
Liabilities related to transferred receivables
Financial assets designated at fair value through profit or loss
Securities
Securities purchased under reverse repurchase agreements
Loans
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Liabilities related to transferred receivables
Change in the total
fair value (including
the change in the
fair value attributable
to credit risk) for
the year ended
October 31, 2017
Carrying
value as at
October 31, 2017
Change in
fair value
since the initial
recognition of
the instrument
756
657
115
1,528
5,501
534
6,209
12,244
(4)
−
(11)
(15)
(113)
−
158
45
16
−
(32)
(16)
34
−
(52)
(18)
Change in the total
fair value (including
the change in the
fair value attributable
to credit risk) for
the year ended
October 31, 2016
Carrying
value as at
October 31, 2016
Change in
fair value
since the initial
recognition of
the instrument
1,465
158
164
1,787
4,655
6,206
10,861
10
−
(14)
(4)
(132)
41
(91)
326
−
(27)
299
(81)
(207)
(288)
(1)
(2)
For the year ended October 31, 2017, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk, and recorded in Other comprehensive
income, resulted in a $29 million loss (for the year ended October 31, 2016, a net loss of $75 million consisting of a $90 million loss recognized in Other comprehensive income upon early
prospective adoption of the credit risk provisions set out in IFRS 9 – Financial Instruments on February 1, 2016 and a $15 million gain recognized in Net income).
The amount at maturity that the Bank will be contractually required to pay to the holders of these deposits varies and will differ from the reporting date fair value.
45
145
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 5 – OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Financial assets and liabilities are offset and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter financial derivatives subject to master netting arrangements of the International Swaps & Derivatives Association, Inc. or other
similar agreements do not meet the netting criteria on the Consolidated Balance Sheet because the right of set-off is legally enforceable only in the event of
default, insolvency or bankruptcy.
Generally, securities purchased under reverse repurchase agreements and securities borrowed as well as obligations related to securities sold under
repurchase agreements and securities loaned, subject to master agreements, do not meet the netting criteria since they confer a right of set-off that is
enforceable only in the event of default, insolvency or bankruptcy.
However, the above-mentioned transactions may be subject to contractual netting agreements concluded with clearing houses. If the netting criteria are met,
these transactions are netted on the Consolidated Balance Sheet. In addition, as part of these transactions, the Bank may give or receive cash or other
financial instruments used as collateral.
The following tables present information on financial assets and financial liabilities that are netted on the Consolidated Balance Sheet because they meet the
netting criteria and on those that are not netted and are subject to an enforceable master netting arrangement or similar agreement.
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
As at October 31, 2017
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial assets
received/pledged
as collateral(2)
Financial
instruments(1)
Gross amounts
recognized
24,939
9,848
34,787
4,150
1,425
5,575
20,789
8,423
29,212
25,917
8,037
33,954
4,150
1,425
5,575
21,767
6,612
28,379
3,304
3,931
7,235
3,304
3,931
7,235
17,403
2,688
20,091
18,385
1,187
19,572
Net
amounts
82
1,804
1,886
78
1,494
1,572
As at October 31, 2016
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial assets
received/pledged
as collateral(2)
Financial
instruments(1)
Gross amounts
recognized
25,115
12,521
37,636
11,167
2,105
13,272
13,948
10,416
24,364
33,803
9,830
43,633
11,167
2,105
13,272
22,636
7,725
30,361
1,843
4,743
6,586
1,843
4,743
6,586
12,035
3,390
15,425
20,633
1,740
22,373
Net
amounts
70
2,283
2,353
160
1,242
1,402
(1)
(2)
Carrying amount of financial instruments that are subject to a master netting agreement or similar agreement but that do not satisfy offsetting criteria.
Excluding non-financial instruments collateral.
146
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 6 – SECURITIES
Residual Contractual Maturities of Securities
As at October 31
Securities at fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Available-for-sale securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Held-to-maturity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
1 year
or less
Over 1
year to
5 years
Over
5 years
No
specified
maturity
2017
2016
Total
Total
1,976
412
1,856
862
6
5,112
56
2
1
11
75
145
60
30
−
538
628
5,528
4,734
205
1,084
28
11,579
3,569
353
116
275
79
4,392
5,331
1,161
20
1,057
7,569
1,158
2,624
67
653
−
4,502
656
2,229
404
203
4
3,496
−
901
−
157
1,058
−
−
−
−
26,343
26,343
−
−
−
5
514
519
−
−
−
−
−
8,662
7,770
2,128
2,599
26,377
47,536
4,281
2,584
521
494
672
8,552
5,391
2,092
20
1,752
9,255
7,188
10,547
4,174
2,934
21,121
45,964
6,281
4,996
1,709
978
644
14,608
2,606
544
−
819
3,969
47
147
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 6 – SECURITIES (cont.)
Gross Gains (Losses) on Available-for-Sale Securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
As at October 31, 2017
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
4,308
2,502
536
487
633
8,466
6
87
−
9
64
166
(33)
(5)
(15)
(2)
(25)
(80)
Carrying
value
4,281
2,584
521
494
672
8,552
As at October 31, 2016
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
6,201
4,704
1,702
951
588
14,146
83
312
11
29
94
529
(3)
(20)
(4)
(2)
(38)
(67)
Carrying
value
6,281
4,996
1,709
978
644
14,608
Impairment Losses Recognized
At the end of each financial reporting period, the Bank determines whether there is objective evidence of impairment for each available-for-sale security.
During the year ended October 31, 2017, a negligible amount ($9 million for the year ended October 31, 2016) for impairment charges was recognized in Gains
(losses) on available-for-sale securities, net in the Consolidated Statement of Income. In addition, during the years ended October 31, 2017 and 2016, no
amounts were reversed in the Consolidated Statement of Income to recognize subsequent increases in the fair value of previously impaired debt securities.
Gross Unrealized Losses
As at October 31, 2017 and 2016, the Bank concluded that the gross unrealized losses on available-for-sale securities were mainly due to market price
fluctuations and to changes in foreign exchange rates and that there is no objective evidence of impairment requiring an impairment charge to be recognized
in the Consolidated Statement of Income.
Held-to-Maturity Securities
At the end of each financial reporting period, the Bank determines whether there is objective evidence of impairment for each held-to-maturity security. As at
October 31, 2017 and 2016, there was no objective evidence of impairment on held-to-maturity securities.
Master Asset Vehicles (MAV)
As at October 31, 2017, the carrying value of the restructured notes of the MAV conduits and of the other restructured notes held by the Bank was nil
($619 million as at October 31, 2016). The change in the carrying value of the restructured notes of the MAV conduits during the year ended October 31, 2017
was mainly attributable to capital repayments.
148
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 7 – LOANS
Credit Quality
Neither past due(3) nor impaired
Past due(3) but not impaired
Impaired
Gross loans
Less: Allowances on impaired loans
Individual allowances
Collective allowances
Allowances on impaired loans
Less:
Sectoral allowance on non-impaired loans – Oil and gas(4)
Collective allowance on non-impaired loans(5)
Loans and acceptances, net of allowances
Neither past due(3) nor impaired
Past due(3) but not impaired
Impaired
Gross loans
Less: Allowances on impaired loans
Individual allowances
Collective allowances
Allowances on impaired loans
Less:
Sectoral allowance on non-impaired loans – Oil and gas(4)
Collective allowance on non-impaired loans(5)
Loans and acceptances, net of allowances
As at October 31, 2017
Residential
mortgage
Personal and
credit card
Business and
government(1)(2)
50,232
220
66
50,518
13
−
13
50,505
36,498
385
80
36,963
22
18
40
36,923
47,369
78
234
47,681
119
2
121
47,560
Total
134,099
683
380
135,162
154
20
174
134,988
139
406
545
134,443
As at October 31, 2016
Residential
mortgage
Personal and
credit card
Business and
government(1)(2)
48,552
245
71
48,868
13
−
13
48,855
33,591
294
79
33,964
20
19
39
33,925
43,673
112
342
44,127
156
3
159
43,968
Total
125,816
651
492
126,959
189
22
211
126,748
204
366
570
126,178
(1)
(2)
(3)
(4)
(5)
Business credit portfolios are closely monitored and a monthly watchlist of problem commitments is produced. The watchlist is analyzed by the loan portfolio managers concerned, who
must then submit a report to Credit Risk Management.
Includes customers’ liability under acceptances.
A loan is past due when the counterparty has not made a payment by the contractual due date.
The sectoral allowance on non-impaired loans was established collectively for the portfolio of loans to producers and service companies in the oil and gas sector.
The collective allowance for credit risk on non-impaired loans was established taking into account the Bank’s overall credit portfolio, except for loans covered by the sectoral allowance.
49
149
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 7 – LOANS (cont.)
Loans Past Due But Not Impaired(1)
As at October 31
2017
Residential
mortgage
Personal and
credit card
Business and
government
Residential
mortgage
Personal and
credit card
2016
Business and
government
Past due but not impaired
31 to 60 days
61 to 90 days
90 days and greater
111
40
69
220
110
50
225
385
30
15
33
78
115
48
82
245
112
36
146
294
51
9
52
112
(1)
Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.
Impaired Loans
Loans
Residential mortgage
Personal and credit card
Business and government(1)
Loans
Residential mortgage
Personal and credit card
Business and government(1)
(1)
Includes customers’ liability under acceptances.
As at October 31, 2017
Individual
allowances
Collective
allowances
13
22
119
154
−
18
2
20
Net
53
40
113
206
As at October 31, 2016
Individual
allowances
Collective
allowances
13
20
156
189
−
19
3
22
Net
58
40
183
281
Gross
66
80
234
380
Gross
71
79
342
492
150
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Allowances for Credit Losses
Allowances on impaired loans
Residential mortgage
Individual allowances
Collective allowances
Personal and credit card
Individual allowances
Collective allowances
Business and government(3)
Individual allowances
Collective allowances
Individual allowances
Collective allowances
Sectoral allowance on non-impaired
loans – Oil and gas(4)
Collective allowance on non-impaired loans(5)
Allowances on impaired loans
Residential mortgage
Individual allowances
Collective allowances
Personal and credit card
Individual allowances
Collective allowances
Business and government(3)
Individual allowances
Collective allowances
Individual allowances
Collective allowances
Sectoral allowance on non-impaired
loans – Oil and gas(4)
Collective allowance on non-impaired loans(5)
Balance at
beginning
Provisions for
credit losses
Write-offs
Write-offs on
credit cards
Recoveries
and other(1)
Transfers(2)
Balance at
end
Year ended October 31, 2017
13
−
20
19
156
3
189
22
211
204
366
570
781
13
−
163
27
39
2
215
29
244
(40)
40
−
244
(14)
−
(80)
(37)
(104)
(3)
(198)
(40)
(238)
−
−
−
(238)
−
−
(82)
−
−
−
(82)
−
(82)
−
−
−
(82)
1
−
1
9
3
−
5
9
14
−
−
−
14
−
−
−
−
25
−
25
−
25
(25)
−
(25)
−
13
−
22
18
119
2
154
20
174
139
406
545
719
Balance at
beginning
Provisions for
credit losses
Write-offs
Write-offs on
credit cards
Recoveries
and other(1)
Transfers(2)
Balance
at end
Year ended October 31, 2016
10
−
18
22
151
2
179
24
203
−
366
366
569
12
−
123
28
67
4
202
32
234
250
−
250
484
(11)
−
(41)
(39)
(107)
(3)
(159)
(42)
(201)
−
−
−
(201)
−
−
(81)
−
−
−
(81)
−
(81)
−
−
−
(81)
2
−
1
8
(1)
−
2
8
10
−
−
−
10
−
−
−
−
46
−
46
−
46
(46)
−
(46)
−
13
−
20
19
156
3
189
22
211
204
366
570
781
Includes foreign exchange movements.
(1)
(2) When a loan covered by the Sectoral allowance on non-impaired loans – Oil and gas becomes impaired, the sectoral allowance related to that loan is transferred to the individual allowances
on impaired loans.
Includes customers’ liability under acceptances.
The sectoral allowance on non-impaired loans was established collectively for the portfolio of loans to producers and service companies in the oil and gas sector.
The collective allowance for credit risk on non-impaired loans was established taking into account the Bank’s overall credit portfolio, except for loans covered by the sectoral allowance.
(3)
(4)
(5)
51
151
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 7 – LOANS (cont.)
Distribution of Gross and Impaired Loans by Borrower Category Under the Basel Asset Classes
Retail
Residential mortgage(2)(3)
Qualifying revolving retail(4)
Other retail(5)
Non-retail
Agriculture
Oil and gas
Mining
Construction and real estate(6)
Manufacturing
Wholesale and retail
Transportation
Telecommunications, media and technology
Financial institutions
Services
Governments and other related services
Other(3)
Retail
Residential mortgage(2)
Qualifying revolving retail(4)
Other retail(5)
Non-retail
Agriculture
Oil and gas
Mining
Construction and real estate(6)
Manufacturing
Wholesale and retail
Transportation
Telecommunications, media and technology
Financial institutions
Services
Governments and other related services
Other
As at October 31
Year ended October 31
2017
Gross
loans(1)
Impaired
loans(1)
Allowances on
impaired loans(1)
Provisions
for credit
losses
Write-offs
66,398
4,217
12,150
82,765
4,923
2,129
470
11,891
4,341
5,497
2,593
1,662
4,932
6,178
6,548
1,233
52,397
135,162
68
17
53
138
7
93
−
41
16
44
3
13
−
18
5
2
242
380
13
10
29
52
3
34
−
20
14
22
2
8
−
12
5
2
122
174
13
104
86
203
(1)
(40)
−
16
−
10
−
3
−
7
5
41
41
244
14
109
90
213
3
56
−
4
12
8
6
2
−
4
12
−
107
320
2016
As at October 31
Year ended October 31
Gross
loans(1)
Impaired
loans(1)
Allowances on
impaired loans(1)
Provisions
for credit
losses
Write-offs
58,265
4,178
10,316
72,759
4,599
2,102
582
10,729
3,597
4,932
3,013
1,578
3,872
6,021
5,638
7,537
54,200
126,959
76
18
49
143
16
178
−
19
25
34
6
23
−
22
18
8
349
492
13
10
28
51
6
66
−
9
21
17
4
9
−
8
12
8
160
211
11
105
45
161
−
284
−
5
8
12
3
4
−
4
−
3
323
484
11
108
53
172
3
66
−
2
6
23
5
−
−
4
−
1
110
282
(1)
(2)
(3)
(4)
(5)
(6)
Includes customers’ liability under acceptances.
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Since November 1, 2016, the loans acquired by the Financial Markets segment for securitization purposes, and reported in the Other category, are now being reported in the Residential
mortgage category. Figures as at October 31, 2016 were not adjusted to reflect those modifications.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
Includes non-residential mortgages.
152
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 8 – FINANCIAL ASSETS TRANSFERRED BUT NOT DERECOGNIZED
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties,
in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and rewards related to
those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk and other price risks, whereas the rewards
include income streams associated with the financial assets. As such, those financial assets are not derecognized and the transactions are treated as
collateralized or secured borrowings. The nature of those transactions is described below.
Securities Sold Under Repurchase Agreements and Securities Loaned
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial assets to third
parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or repledge the financial assets
received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is included in Obligations related to
securities sold under repurchase agreements and securities loaned on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank
does not record the collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing
Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the
transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities
related to transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated
liabilities.
As at October 31
2017
2016
Carrying value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Carrying value of associated liabilities(2)
Fair value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Fair value of associated liabilities(2)
42,014
19,080
61,094
33,330
42,014
19,169
61,183
33,356
39,989
19,093
59,082
34,992
39,989
19,403
59,392
35,041
(1)
(2)
The amount related to the securities loaned is the maximum amount of Bank securities that can be lent. For the obligations related to securities sold under repurchase agreements, the
amount includes the Bank’s own financial assets as well as those of third parties.
Associated liabilities include obligations related to securities sold under repurchase agreements before the offsetting impact of $1,621 million as at October 31, 2017 ($3,521 million as at
October 31, 2016) and liabilities related to transferred receivables. Liabilities related to securities loaned are not included, as the Bank can lend its own financial assets and those of third
parties. The carrying value and fair value of liabilities related to securities loaned were $10,156 million as at October 31, 2017 ($11,296 million as at October 31, 2016).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
Carrying value of financial assets transferred but not derecognized
Securities backed by insured residential mortgages and other securities sold to CHT
Securities sold under repurchase agreements
Securities loaned
2017
2016
20,012
13,544
27,538
61,094
20,030
14,615
24,437
59,082
53
153
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 9 – INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
As at October 31
Listed associates(1)
TMX Group Limited(2)
Fiera Capital Corporation
Unlisted associates
Maple Financial Group Inc.(3)
Other
Unlisted joint ventures
Business
segment
Ownership
percentage
2017
Carrying
value
2016
Carrying
value
Other
Wealth Management
8.6 %
20.6 %
Financial Markets
24.9 %
241
152
393
−
229
229
9
631
231
154
385
−
230
230
30
645
(1)
(2)
(3)
The fair value of investments in associates based on quoted prices in an active market was $581 million as at October 31, 2017 ($497 million as at October 31, 2016).
The Bank exercises significant influence over TMX Group Limited mainly because of its equity interest, debt financing, and presence on TMX Group’s board of directors.
During fiscal 2016, the Bank had written off the carrying value of its equity interest in Maple Financial Group Inc. in an amount of $164 million. For additional information, see the text below.
As at October 31, 2017 and 2016, there were no significant restrictions limiting the ability of associates and joint ventures to transfer funds to the Bank in the
form of dividends or to repay any loans or advances. Furthermore, the Bank has not made any specific commitment or contracted any contingent liability with
respect to associates or joint ventures.
TMX Group Limited
TMX Group Limited is a Canadian corporation that directly or indirectly controls a number of entities that operate stock exchanges and clearing houses and
provide clearing and settlement services. During the year ended October 31, 2017, TMX Group Limited paid $9 million in dividends to the Bank ($8 million for
the year ended October 31, 2016).
Fiera Capital Corporation
Fiera Capital Corporation is an independent Canadian investment management firm. During the year ended October 31, 2017, Fiera Capital Corporation paid
$12 million in dividends to the Bank ($10 million for the year ended October 31, 2016).
Maple Financial Group Inc.
The Bank has a 24.9% equity interest in Maple Financial Group Inc. (Maple), a privately owned Canadian company that operated through direct and indirect
wholly owned subsidiaries in Canada, Germany, the United Kingdom and the United States. In August 2016, Maple filed for bankruptcy under applicable
Canadian laws, and a receiver was appointed to administer the company. Similar proceedings were initiated for each of Maple’s other material subsidiaries in
their home jurisdictions.
Maple Bank GmbH, an indirect wholly owned subsidiary of Maple, has been the subject of an investigation into alleged tax irregularities by German
prosecutors since September 2015 and, to the Bank’s knowledge, that investigation is ongoing. The Bank understands that the investigation is focusing on
selected trading activities by Maple Bank GmbH and some of its current and former employees during taxation years 2006 to 2010, although the Bank has
been advised that the investigation may also extend to subsequent taxation years. The German authorities have alleged that these trading activities violated
German tax laws. Neither the Bank nor its employees were involved in these trading activities and, to the Bank’s knowledge, are not the subject of this
investigation.
On February 6, 2016, the German Federal Financial Supervisory Authority, BaFin, placed a moratorium on the business activities of Maple Bank GmbH,
preventing it from carrying out its normal business activities. In light of the situation, the Bank wrote off the carrying value of its equity interest in Maple in an
amount of $164 million ($145 million net of income taxes) during the first quarter of 2016. The $164 million write-off of the equity interest in this associate
was recognized in the Non-interest income – Other item of the Consolidated Statement of Income for the year ended October 31, 2016 and was reported in the
Financial Markets segment.
The Bank has advised the German authorities that if it is determined that portions of dividends received from Maple could be reasonably attributable to tax
fraud by Maple Bank GmbH, arrangements will be made to repay those amounts to the relevant authority. If any repayments are required, they are not
expected to be material to the Bank’s financial position.
154
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
The following table provides summarized financial information on the Bank’s listed associates.
As at October 31
Balance sheet
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Income statement
Total revenues
Net income
Other comprehensive income (loss)
Comprehensive income (loss)
TMX Group
Limited
Fiera Capital
Corporation
14,743
4,469
14,641
1,549
732
218
(2)
216
164
941
84
482
438
15
(12)
3
2017(1)
Total
14,907
5,410
14,725
2,031
1,170
233
(14)
219
2016(1)
Total
18,934
5,452
18,986
1,975
1,027
(10)
1
(9)
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2017 and 2016, which are the most recent available, and the income
statement amounts are based on the cumulative balances for the 12-month periods ended September 30, 2017 and 2016.
The table below provides summarized financial information related to the Bank’s share of associates and joint ventures that are not individually significant.
Year ended October 31
Net income
Other comprehensive income
Comprehensive income
Unlisted
associates
Unlisted
joint ventures
11
(10)
1
1
−
1
2017(1)
2016(1)
Total
12
(10)
2
Total
11
−
11
(1)
The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2017 and 2016.
55
155
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 10 – PREMISES AND EQUIPMENT
Land
Buildings
Computer
equipment
Equipment
and furniture
Leasehold
improvements
14
−
−
14
3
−
17
Cost
As at October 31, 2015
Acquisitions
Disposals
Fully amortized assets
As at October 31, 2016
Acquisitions
Disposals
Fully amortized assets
As at October 31, 2017
Accumulated amortization
As at October 31, 2015
Amortization for the year
Disposals
Fully amortized assets
As at October 31, 2016
Amortization for the year
Disposals
Fully amortized assets
As at October 31, 2017
Carrying value as at October 31, 2016
Carrying value as at October 31, 2017
14
17
Assets Leased Under Operating Leases
252
4
(1)
(2)
253
7
(4)
(1)
255
151
5
(1)
(2)
153
5
(3)
(1)
154
100
101
244
115
(21)
(114)
224
38
−
(27)
235
158
42
(13)
(114)
73
46
−
(27)
92
151
143
1,633
24
(566)
(4)
1,087
16
(818)
(7)
278
164
203
(191)
(4)
172
106
(125)
(7)
146
915
132
281
37
(6)
(16)
296
32
(6)
(30)
292
134
23
(3)
(16)
138
25
(6)
(30)
127
158
165
Total
2,424
180
(594)
(136)
1,874
96
(828)
(65)
1,077
607
273
(208)
(136)
536
182
(134)
(65)
519
1,338
558
The Bank is a lessor under operating lease agreements for certain buildings. Through one of its subsidiaries, the Bank is also a lessor for equipment leased
under operating leases. Upon expiry of a lease, the Bank disposes of the equipment. These leases have terms varying from one year to five years and do not
contain any bargain purchase options or contingent rent.
The following table breaks down the future minimum payments receivable under these operating leases.
As at October 31,
2017
84
42
8
134
1 year or less
Over 1 year to 5 years
Over 5 years
156
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 11 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table presents the change in the carrying amount of goodwill by cash-generating unit (CGU) and by business segment for the years ended
October 31, 2017 and 2016.
Personal and
Commercial(1)
Wealth
Management
Financial
Markets(1)
Balance as at October 31, 2015
Acquisition of Advanced Bank of
Asia Limited (Note 33)
Impact of foreign currency translation
Balance as at October 31, 2016
Acquisition of Groupe Financier
Abi-Témi inc.(2)
Impact of foreign currency translation
Balance as at October 31, 2017
Third-Party
Solutions(1)
Securities
Brokerage(1)
Managed
Solutions(1)
51
−
−
51
3
−
54
256
−
−
256
−
−
256
434
−
−
434
−
−
434
269
−
−
269
−
−
269
Total
959
−
−
959
−
−
959
USSF&I
Total
Credigy
Ltd.(1)
Advanced
Bank of
Asia Limited(1)
Total
234
−
1
235
−
−
235
33
−
−
33
−
(1)
32
−
33
1,277
129
5
134
−
(5)
129
129
5
167
129
6
1,412
−
(6)
3
(6)
161
1,409
(1)
(2)
Constitutes a CGU.
During the year ended October 31, 2017, the Bank, through one of its wholly owned subsidiaries, acquired Groupe Financier Abi-Témi inc. located in Rouyn-Noranda, Canada.
Goodwill Impairment Testing and Significant Assumptions
For impairment testing purposes, from the acquisition date, goodwill resulting from a business combination must be allocated to a CGU or a group of CGUs
expected to benefit from the synergies of the business combination. Goodwill is tested for impairment annually or more frequently if events or circumstances
indicate that the recoverable value of the CGU or group of CGUs may have fallen below its carrying amount.
Goodwill was tested for impairment during the years ended October 31, 2017 and 2016, and no impairment loss was recognized.
The recoverable value of a CGU or group of CGUs is based on the value in use that is calculated based on discounted pre-tax cash flows. Future pre-tax cash
flows are estimated based on a five-year period, which is the reference period used for the most recent financial forecasts approved by management. Cash
flows beyond that period are extrapolated using a long-term growth rate.
The discount rate used for each CGU or group of CGUs is calculated using the cost of debt financing and the cost related to the Bank’s equity. This rate
corresponds to the Bank’s weighted average cost of capital and reflects the risk specific to the CGU. The long-term growth rate used in calculating discounted
cash flow estimates is based on the forecasted growth rate plus a risk premium. The rate is constant over the entire five-year period for which the cash flows
were determined. Growth rates are determined, among other factors, based on past growth rates, economic trends, inflation, competition and the impact of the
Bank’s strategic initiatives. As at October 31, 2017, for each CGU or CGU group, the discount rate used was 13.2% (12.3% as at October 31, 2016) and the
long-term growth rate was between 2.0% and 5.0% depending on the CGU as at October 31, 2017 and 2016.
Estimating a CGU’s value in use requires significant judgment regarding the inputs used in applying the discounted cash flow method. The Bank conducts
sensitivity analyses by varying the after-tax discount rate and the terminal growth rates upward by 1%; such sensitivity analyses would not increase a CGU’s
carrying value above its value in use.
57
157
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 11 – GOODWILL AND INTANGIBLE ASSETS (cont.)
Intangible Assets
Indefinite useful life
Finite useful life
Total
Management
contracts(1)
Trademark
Total
Internally-
generated
software(2)
Other
software
Other
intangible
assets
161
−
−
161
−
161
11
−
−
11
−
11
172
−
−
172
−
172
Cost
As at October 31, 2015
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2016
Acquisitions
Fully amortized intangible assets
As at October 31, 2017
Accumulated amortization
As at October 31, 2015
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2016
Amortization for the year
Fully amortized intangible assets
As at October 31, 2017
Carrying value as at October 31, 2016
Carrying value as at October 31, 2017
161
161
11
11
172
172
913
234
(69)
(40)
1,038
245
(16)
1,267
133
108
(25)
(40)
176
135
(16)
295
862
972
107
36
−
(17)
126
21
(32)
115
58
27
−
(17)
68
25
(32)
61
58
54
107
−
(1)
−
106
2
−
108
49
9
−
−
58
9
−
67
48
41
Total
1,127
270
(70)
(57)
1,270
268
(48)
1,490
240
144
(25)
(57)
302
169
(48)
423
1,299
270
(70)
(57)
1,442
268
(48)
1,662
240
144
(25)
(57)
302
169
(48)
423
968
1,067
1,140
1,239
(1)
(2)
(3)
For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
The remaining amortization period for significant internally-generated software is five years.
The Bank wrote off certain internally generated software applications due to obsolescence and decided to discontinue them. The recoverable amount of those applications was estimated to
be nil. During the year ended October 31, 2016, $44 million in impairment losses had been recognized and charged to the Other heading of segment disclosures.
NOTE 12 – OTHER ASSETS
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers(1)
Defined benefit asset (Note 24)
Deferred tax assets (Note 25)
Current tax assets
Reinsurance assets
2017
2016
690
489
505
56
374
31
31
2,176
668
474
843
48
402
80
32
2,547
(1) The Due from clients, dealers and brokers amount of $843 million presented separately on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Other assets.
158
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 13 – DEPOSITS
As at October 31
Personal
Business and government
Deposit-taking institutions
On demand
or after notice(2)
Fixed term(3)
28,516
46,938
2,447
77,901
25,203
50,633
2,934
78,770
2017
Total
53,719
97,571
5,381
156,671
2016(1)
Total
52,521
83,905
5,640
142,066
(1)
(2)
(3)
Certain amounts have been revised from those previously reported, particularly an amount of $2,159 million classified in Due to clients, dealers and brokers on the Consolidated Balance
Sheet as at October 31, 2016 that is now reported in Deposits.
Demand deposits are deposits for which the Bank does not have the right to require notice of withdrawal and consist essentially of deposits in chequing accounts. Notice deposits are
deposits for which the Bank may legally require notice of withdrawal and consist mainly of deposits in savings accounts.
Fixed-term deposits are deposits that can be withdrawn by the holder on a specified date and include term deposits, guaranteed investment certificates, savings accounts and plans,
covered bonds and similar instruments.
The Deposits – Business and government item includes, among other items, the covered bonds, as described below.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold
uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During the year ended October 31, 2017,
the Bank issued covered bonds under this program in an amount of 150 million pounds sterling (covered bonds in amounts of 750 million euros and
100 million pounds sterling issued during the year ended October 31, 2016). The covered bonds totalled $7.0 billion as at October 31, 2017 ($6.7 billion as at
October 31, 2016). See Note 28 for additional information.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that apply to this transaction. The assets
owned by this entity totalled $15.9 billion as at October 31, 2017 ($14.2 billion as at October 31, 2016), of which $15.6 billion ($13.9 billion as at
October 31, 2016) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
59
159
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 14 – OTHER LIABILITIES
As at October 31
Accounts payable and accrued expenses
Subsidiaries’ debts to third parties
Interest and dividends payable
Due to clients, dealers and brokers(1)
Defined benefit liability (Note 24)
Deferred tax liabilities (Note 25)
Current tax liabilities
Insurance liabilities
Other items(2)(3)
2017
1,797
1,075
883
647
252
35
93
60
916
5,758
2016
1,510
1,447
832
540
314
57
215
71
900
5,886
(1)
(2)
(3)
An amount of $540 million reported in the Due to clients, dealers and brokers item on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Other liabilities.
As at October 31, 2017, Other items included a $46 million restructuring provision ($152 million as at October 31, 2016). See Note 15 for additional information.
As at October 31, 2017, Other items included a $12 million litigation provision ($18 million as at October 31, 2016).
NOTE 15 – RESTRUCTURING
During fiscal years 2016 and 2015, the Board approved certain restructuring initiatives to accelerate its transformation plan, satisfy the changing needs of its
clients and enhance operational efficiency. This transformation will allow the Bank to maintain the pace of its client-centric shift, pursue the transition to
digital banking, maintain a compelling workplace and focus on operational excellence.
During fiscal 2016, the Bank recorded a charge of $131 million in the Restructuring charge item of the Consolidated Statement of Income, consisting of
severance pay and onerous contracts. This restructuring charge was reported in the Other heading of the segment disclosures.
The table below presents the changes in the restructuring provision on the Consolidated Balance Sheet.
As at October 31, 2015
Restructuring charge
Payments during the year
As at October 31, 2016
Payments during the year
As at October 31, 2017
Severance pay
51
129
(34)
146
(104)
42
Other
16
2
(12)
6
(2)
4
Total
67
131
(46)
152
(106)
46
160
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 16 – SUBORDINATED DEBT
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the Bank’s note
and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its
subordinated notes and debentures in whole or in part.
On April 11, 2017, the Bank redeemed $1.0 billion of medium-term notes maturing on April 11, 2022 at a price equal to their nominal value plus accrued
interest.
As at October 31
2017
2016
Maturity date
Interest rate
Characteristics
April
February
2022
2087
Fair value hedge adjustment
Unamortized issuance costs(2)
Total
3.261% Redeemable
Variable(1) Redeemable at the Bank’s option since February 28, 1993
−
9
9
−
−
9
1,000
9
1,009
5
(2)
1,012
(1)
(2)
Debentures denominated in foreign currency totalling US$7 million as at October 31, 2017 (2016: US$7 million) and bearing interest at a rate of 1/8% above six-month LIBOR.
The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization calculated using the effective interest rate method.
NOTE 17 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, or equity, commodity or credit
instrument or index.
The main types of derivative financial instruments used are presented below.
Forwards and Futures
Forwards and futures are contractual obligations to buy or deliver a specified amount of currency, interest rate, commodity or financial instrument on a
specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on organized
exchanges and are subject to cash margining calculated daily by clearing houses.
Swaps
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
—
—
—
—
—
Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.
Interest rate swaps are transactions in which counterparties exchange fixed and floating rate interest payments, based on the notional principal value in
the same currency.
Commodity swaps are transactions in which counterparties exchange fixed and floating rate payments, based on the notional principal value of a
commodity.
Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on a
benchmark interest rate.
Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if a credit
event occurs.
Options
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a
specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity or financial instrument at an agreed-upon
price upon the sale of the option. The writer receives a premium for the sale of this instrument.
61
161
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 17 – DERIVATIVE FINANCIAL INSTRUMENTS (cont.)
Notional Amounts
Notional amounts are not presented in assets or liabilities on the Consolidated Balance Sheet. They represent the reference amount of the contract to which a
rate or price is applied to determine the amount of cash flows to be exchanged.
As at October 31
2017
2016
3 months
or less
Over 3
months to
12 months
Over 1
year to
5 years
Over
5 years
Total
contracts
Contracts
held for
trading
purposes
Contracts
designated
as hedges
Total
contracts
Term to maturity
Interest rate contracts
OTC contracts
Forward rate agreements
Not settled by central counterparties
Settled by central counterparties
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
Foreign exchange contracts
OTC contracts
Forwards
Swaps
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
Equity, commodity and
credit derivative contracts(1)
OTC contracts
Forwards
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
(1)
Includes precious metal contracts.
162
691
−
104
819
−
129
−
−
795
948
795
948
6,064
111,227
10
23
118,015
9,143
82,338
1,082
628
94,114
68,050
116,566
1,084
567
186,396
41,694
48,890
630
606
91,820
124,951
359,021
2,806
1,824
490,345
19,817
13,793
11,708
65
45,383
16,043
65,571
4,798
4,815
91,227
45
424
−
−
469
15,887
26,881
−
−
42,768
6,570
26,867
4,138
3,526
41,101
−
−
−
−
−
7,369
5,257
6,392
2,516
21,534
7,365
57,930
747
619
66,661
−
−
−
−
−
−
−
−
−
−
43,073
45,931
18,100
2,581
109,685
1,635
29,493
−
−
31,128
31,613
179,861
9,683
8,960
230,117
−
−
−
−
−
45
424
−
−
469
119,531
327,496
2,647
1,546
452,963
43,073
45,931
18,100
2,581
109,685
31,613
168,479
9,683
8,960
218,735
45
424
−
−
469
4
56
1,895
287
2,242
2,242
6,622
143
602
206
7,577
9,520
238
90
316
10,220
8,507
7,291
1,287
846
19,826
457
1,210
230
208
2,392
25,106
8,882
2,209
1,576
40,015
4,588
7,976
1,505
746
14,815
277,486
192
1,747
357
943
3,239
191,442
261
1,081
131
1,032
2,505
296,922
70
43
−
109
222
125,562
5,111
10,847
1,993
2,830
20,781
891,412
24,989
8,882
2,209
1,576
39,898
5,111
10,847
1,993
2,830
20,781
842,531
−
−
5,420
31,525
159
278
37,382
−
−
−
−
−
−
11,382
−
−
11,382
−
−
−
−
−
−
117
−
−
−
117
−
−
−
−
−
48,881
2,249
8,015
132,364
289,597
4,862
2,874
439,961
32,275
50,275
19,248
20,119
121,917
45,221
175,742
7,822
7,005
235,790
41
756
10
4
811
3,209
20,194
1,969
2,160
2,562
30,094
3,574
9,798
2,311
2,929
18,612
847,185
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Credit Risk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual
obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit and monitoring standards as those applied
to the Bank’s other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and monitors the size of the portfolios as well
as the diversification and maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for the
exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also negotiates master
netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty in the event of default, insolvency or
bankruptcy. However, overall exposure to credit risk, reduced through master netting agreements, may change substantially after the balance sheet date
because it is affected by all transactions subject to a contract as well as by changes in the market rates of the underlying instruments.
The Bank also uses financial intermediaries to have access to established clearing houses in order to minimize the settlement risk for certain financial
derivative transactions. In some cases, the Bank has direct access to clearing houses for settling derivative financial instruments. In addition, certain
derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties.
In the case of exchange-traded contracts, exposure to credit risk is limited because these transactions are standardized contracts executed on established
exchanges, each of which is associated with a well-capitalized clearing house that assumes the obligations of both counterparties and guarantees their
performance obligations. All exchange-traded contracts are subject to initial margins and daily settlement.
Terms Used
Replacement Cost
Replacement cost is the Bank’s maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount
is the positive fair value of all over-the-counter derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI’s
Capital Adequacy Requirements Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio
As at October 31
Interest rate contracts
Foreign exchange contracts
Equity, commodity and credit derivative contracts
Impact of master netting agreements
Replacement
cost(1)
Credit risk
equivalent
2,214
4,465
1,677
8,356
(3,931)
4,425
8,598
11,373
4,816
24,787
(10,445)
14,342
2017
Risk-
weighted
amount
821
1,901
305
3,027
(756)
2,271
Replacement
cost(1)
Credit risk
equivalent
3,812
4,295
2,222
10,329
(4,743)
5,586
9,213
10,784
4,702
24,699
(11,721)
12,978
(1)
As at October 31, 2017, the total positive fair value of exchange-traded contracts, which amounted to $67 million ($87 million as at October 31, 2016), was excluded.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio by Counterparty
As at October 31
OECD(1) governments
Banks of OECD member countries
Other
(1)
Organization for Economic Co-operation and Development.
Replacement
cost
956
969
2,500
4,425
2017
Credit risk
equivalent
1,761
3,809
8,772
14,342
Replacement
cost
1,084
1,025
3,477
5,586
2016
Risk-
weighted
amount
909
1,715
487
3,111
(629)
2,482
2016
Credit risk
equivalent
1,859
3,809
7,310
12,978
63
163
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 17 – DERIVATIVE FINANCIAL INSTRUMENTS (cont.)
Fair Value of Derivative Financial Instruments
As at October 31
Contracts held for trading purposes
Interest rate contracts
Forwards
Swaps
Options
Foreign exchange contracts
Forwards
Swaps
Options
Equity, commodity and credit derivative contracts
Forwards
Swaps
Options
Total – Contracts held for trading purposes
Contracts designated as hedges
Interest rate contracts
Forwards
Swaps
Options
Foreign exchange contracts
Forwards
Swaps
Options
Equity, commodity and credit derivative contracts
Forwards
Swaps
Options
Total – Contracts designated as hedges
Designated as fair value hedges
Designated as cash flow hedges
Designated as a hedge of a net investment in a
foreign operation
Total fair value
Impact of master netting agreements
Positive
Negative
5
1,713
36
1,754
573
3,531
141
4,245
773
626
336
1,735
7,734
−
468
1
469
−
220
−
220
−
−
−
−
689
246
442
1
1,362
7
1,370
423
2,498
146
3,067
159
1,163
416
1,738
6,175
−
342
6
348
−
89
−
89
−
−
−
−
437
217
220
2017
Net
4
351
29
384
150
1,033
(5)
1,178
614
(537)
(80)
(3)
1,559
−
126
(5)
121
−
131
−
131
−
−
−
−
252
29
222
Positive
Negative
7
2,843
43
2,893
1,140
2,987
160
4,287
1,407
490
410
2,307
9,487
−
917
2
919
−
8
−
8
−
2
−
2
929
580
341
3
2,147
10
2,160
873
2,782
138
3,793
152
521
407
1,080
7,033
−
679
12
691
1
−
−
1
−
−
−
−
692
436
255
2016
Net
4
696
33
733
267
205
22
494
1,255
(31)
3
1,227
2,454
−
238
(10)
228
(1)
8
−
7
−
2
−
2
237
144
86
1
8,423
(3,931)
4,492
−
6,612
(3,931)
2,681
1
1,811
−
1,811
8
10,416
(4,743)
5,673
1
7,725
(4,743)
2,982
7
2,691
−
2,691
164
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 18 – HEDGING ACTIVITIES
Derivative and Non-Derivative Financial Instruments Designated as Hedging Instruments
As at October 31
Assets
Derivative financial instruments
Liabilities
Derivative financial instruments
Carrying value of non-derivative
financial instruments
Notional amounts of designated derivative
financial instruments
Fair value
hedge
Cash flow
hedge
2017
Net investment
hedge
Fair value
hedge
Cash flow
hedge
2016
Net investment
hedge
246
442
217
−
220
−
1
−
841
580
341
436
−
255
−
8
1
1,024
18,878
29,955
48
18,965
24,714
492
Fair Value Hedges
Fair value hedge transactions consist of using interest rate swaps to hedge changes in the fair value of a financial asset or financial liability caused by interest
rate fluctuations. Changes in the fair value of the derivative financial instruments used as hedging instruments offset changes in the fair value of the hedged
item. The Bank applies this strategy mainly to portfolios of available-for-sale securities, fixed-rate deposits, liabilities related to transferred receivables and
subordinated debt.
Results of the Fair Value Hedges
Year ended October 31
Gains (losses) on hedging instruments
Gains (losses) on hedged items attributable to the hedged risk
Ineffectiveness of fair value hedging relationships
2017
(150)
147
4
2016
(13)
12
−
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities.
The Bank applies this strategy mainly to loan, personal credit line, acceptance and deposit portfolios. The Bank also uses total return swaps to hedge the risk
of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these swaps are designated as part of a cash flow hedge against a
portion of the unrecognized obligation of the RSU Plan. In a cash flow hedge, the derivative financial instruments used as hedging instruments reduce the
variability of future cash flows related to the hedged item.
Results of the Cash Flow Hedges
Year ended October 31
Unrealized gains (losses) included in Other comprehensive income
as the effective portion of the hedging instrument
Losses (gains) reclassified to Net interest income in the Consolidated Statement of Income
Ineffectiveness of cash flow hedging relationships
2017
2016
45
(35)
1
47
(25)
(1)
65
165
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 18 – HEDGING ACTIVITIES (cont.)
The following table shows the periods during which the Bank expects the hedged cash flows to occur and have an impact on net income.
Expected cash flows from hedged assets
Expected cash flows from hedged liabilities
Net exposure
Expected cash flows from hedged assets
Expected cash flows from hedged liabilities
Net exposure
1 year
or less
41
147
(106)
1 year
or less
24
55
(31)
Over
1 year to
2 years
41
119
(78)
Over
1 year to
2 years
27
54
(27)
As at October 31, 2017
Over
2 years to
5 years
127
208
(81)
Over
5 years
51
80
(29)
As at October 31, 2016
Over
2 years to
5 years
74
120
(46)
Over
5 years
52
36
16
Hedges of Net Investments in Foreign Operations
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank
measures this risk by assessing the impact of foreign currency fluctuations and hedges it using financial instruments (derivative or non-derivative). In a hedge
of a net investment in a foreign operation, the financial instruments used offset foreign exchange gains and losses on the investments. When non-derivative
financial instruments are designated as foreign exchange risk hedges, only the changes in fair value that are attributable to foreign exchange risk are taken
into account in assessing and calculating the effectiveness of the hedge.
For the years ended October 31, 2017 and 2016, a negligible amount representing the ineffective portion was recognized in Non-interest income in the
Consolidated Statement of Income.
166
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 19 – SHARE CAPITAL
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
First Preferred Shares
Redemption and
conversion date
in effect as of (1)(2)
Redemption
price per
share ($)(1)
Convertible into
preferred shares(2)
Dividend per
share ($)(3)
Reset premium
As at October 31, 2017
November 15, 2017 (4)(5)
May 15, 2019 (4)(5)
February 15, 2020 (4)(5)
May 15, 2021 (4)(5)
August 15, 2021 (4)(5)
November 15, 2022 (4)(5)
June 30, 2013
July 31, 2013
November 15, 2017 (4)
May 15, 2019 (4)
February 15, 2020 (4)
May 15, 2021 (4)
August 15, 2021 (4)
November 15, 2022 (4)
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.00
25.50 (9)
25.50 (9)
25.50 (9)
25.50 (9)
25.50 (9)
25.50 (9)
Series 29
Series 31
Series 33
Series 35
Series 37
Series 39
0.23750 (6)
0.25625 (6)
0.24375 (6)
0.35000 (6)
0.33750 (6)
0.27813 (6)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0.68750
0.75000
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
2.43 %
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
n.a.
n.a.
2.43 %
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
First preferred shares
issued and outstanding
Series 28
Series 30(7)
Series 32(7)
Series 34(7)
Series 36(7)
Series 38(7)
First preferred shares
authorized but not issued
Series 19(8)
Series 23(8)
Series 29
Series 31(7)
Series 33(7)
Series 35(7)
Series 37(7)
Series 39(7)
n.a.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Not applicable
Redeemable in cash at the Bank’s option, in whole or in part, subject to the provisions of the Bank Act (Canada) and to OSFI approval. Redemption prices are increased by all the declared
and unpaid dividends on the preferred shares to the date fixed for redemption.
Convertible at the option of the holders of first preferred shares, subject to certain conditions.
The dividends are non-cumulative and payable quarterly, except for Series 19 and 23, for which the dividends are payable semi-annually.
Redeemable as of the date fixed for redemption and on the same date every five years thereafter.
Convertible as of the date fixed for conversion and on the same date every five years thereafter, subject to certain conditions.
The dividend amount is set for the initial period ending on the date fixed for redemption. Thereafter, these shares carry a non-cumulative quarterly fixed dividend in an amount per share
determined by multiplying the rate of interest equal to the sum of the 5-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset
premium.
Upon the occurrence of a trigger event as defined by OSFI, each outstanding preferred share will be automatically and immediately converted, on a full and permanent basis, without the
consent of the holder, into a number of common shares of the Bank determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the
preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of the common shares will
be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten
consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the
price will be the fair value reasonably determined by the Bank’s Board.
For additional information, see Note 20.
As of the date fixed for redemption, the redemption price will be $25.50 per share. Thereafter, on the same date every five years, the redemption price will be $25.00 per share.
The dividend period begins as of the date fixed for redemption. The amount of the floating quarterly non-cumulative dividend is determined by multiplying the rate of interest equal to the
sum of the 90-day Government of Canada treasury bill yield on the floating rate calculation date by $25.00, plus the reset premium.
Second Preferred Shares
15 million shares without par value, issuable for a total maximum consideration of $300 million. As at October 31, 2017, no shares had been issued or traded.
67
167
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 19 – SHARE CAPITAL (cont.)
Shares Outstanding
As at October 31
First Preferred Shares
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Common shares at beginning of the fiscal year
Issued pursuant to the Stock Option Plan
Repurchase of common shares for cancellation
Impact of shares purchased or sold for trading(1)
Other
Common shares at end of year
Number
of shares
8,000,000
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
82,000,000
338,053,054
4,239,095
(2,000,000)
(591,843)
(108,341)
339,591,965
2017
Shares
$
200
350
300
400
400
400
2,050
2,645
179
(16)
(37)
(3)
2,768
Number
of shares
8,000,000
14,000,000
12,000,000
16,000,000
16,000,000
−
66,000,000
337,236,322
1,122,756
−
(306,024)
−
338,053,054
2016
Shares
$
200
350
300
400
400
−
1,650
2,614
43
−
(12)
−
2,645
(1)
As at October 31, 2017, 553,980 shares were held for trading, representing a total amount of $35 million (37,863 shares sold short for trading representing $2 million as at
October 31, 2016).
Dividends Declared
Year ended October 31
First Preferred Shares
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Common shares
Dividends
$
8
14
12
22
22
7
85
778
863
2017
Dividends
per share
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
2.2800
Dividends
$
8
14
12
18
9
−
61
736
797
2016
Dividends
per share
0.9500
1.0250
0.9750
1.1373
0.5733
−
2.1800
Issuances of Preferred Shares
On June 13, 2017, the Bank issued 16,000,000 Non-Cumulative 5-Year Rate-Reset Series 38 First Preferred Shares at a price equal to $25.00 per share for
gross proceeds of $400 million. Given that the Series 38 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On June 13, 2016, the Bank had issued 16,000,000 Non-Cumulative 5-Year Rate-Reset Series 36 First Preferred Shares at a price equal to $25.00 per share for
gross proceeds of $400 million. Given that the Series 36 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On January 22, 2016, the Bank had issued 16,000,000 Non-Cumulative 5-Year Rate-Reset Series 34 First Preferred Shares at a price equal to $25.00 per share
for gross proceeds of $400 million. Given that the Series 34 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
Redemption of Preferred Shares
On August 29, 2017, the Board approved the redemption, on November 15, 2017, of all the issued and outstanding Non-Cumulative 5-Year Rate-Reset
Series 28 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.00 per share plus the periodic dividend declared and unpaid.
The Bank redeemed 8,000,000 Series 28 preferred shares for a total amount of $200 million on November 15, 2017.
168
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Repurchases of Common Shares
On June 5, 2017, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares over the 12-month period ending
no later than June 4, 2018. Any repurchase through the Toronto Stock Exchange will be done at market prices. The amounts that will be paid above the average
book value of the common shares will be charged to Retained earnings. During the year ended October 31, 2017, the Bank repurchased 2,000,000 common
shares for $115 million, which reduced Common share capital by $16 million and Retained earnings by $99 million.
Reserved Common Shares
As at October 31, 2017 and 2016, 15,507,568 common shares were reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2017, 25,764,866 common shares (21,003,961 as at October 31, 2016) were reserved under the Stock Option Plan.
Common Shares Held in Escrow
As part of the acquisition of Wellington West Holdings Inc. in 2011, the Bank had issued common shares held in escrow. In December 2016, 799,563 of these
shares were released to shareholders. In addition, 108,341 shares were cancelled, mainly upon the settlement of certain indemnifications guaranteed by
those shares. As at October 31, 2017, the number of common shares held in escrow was 28,881 (936,785 as at October 31, 2016). The Bank expects that the
remaining shares in escrow will be settled by the end of calendar year 2018.
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so
doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI’s capital adequacy and liquidity guidelines. In addition, the ability to pay
common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common
shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside
for payment. Moreover, if NBC Asset Trust were unable to pay the full amount of distributions on the trust units, the Bank would withhold from declaring
dividends on any of its preferred and common shares during a determined period. For additional information, see Notes 20 and 28.
Dividend Reinvestment Plan
The Bank has a dividend reinvestment plan for common and preferred shareholders. Participation in the plan is optional. Under the terms and conditions of the
plan, participants acquire shares through the reinvestment of cash dividends paid on the shares they hold or through optional cash payments. Common shares
subscribed by participants are purchased on their behalf in the secondary market through the Bank’s transfer agent, Computershare Trust Company of Canada,
at a price equal to the average purchase price of the common shares during the ten business days immediately following the dividend payment date.
69
169
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 20 – NON-CONTROLLING INTERESTS
As at October 31
Trust units issued by NBC Asset Trust (NBC CapS II)
Series 1(1)
Series 2(2)
Other
(1)
(2)
Includes $10 million in accrued interest ($10 million as at October 31, 2016).
Includes $9 million in accrued interest ($9 million as at October 31, 2016).
2017
2016
410
359
39
808
410
359
41
810
Trust Units Issued by NBC Asset Trust
Through structured entity NBC Asset Trust (the Trust), a closed-end trust established under the laws of the Province of Ontario, the Bank issued transferable
non-voting trust units called “Trust Capital Securities” or “NBC CapS II.” These securities are not redeemable or exchangeable for Bank preferred shares at the
option of the holder. The gross proceeds from the issuance were used by the Trust to finance the acquisition of mortgage loans from the Bank. For additional
information, see Note 28.
The main terms and characteristics of the NBC CapS II trust units are presented below.
Number
Issuance date
Annual yield
Distribution dates
Series 1
Series 2
400,000
January 22, 2008
350,000
June 30, 2008
7.235 %
7.447 %
June 30,
December 31
June 30,
December 31
Semi-annual
distribution
by NBC CapS II(1)
$36.175(2)
$37.235(3)
(1)
(2)
(3)
For each unit with a face value of $1,000.
For each distribution date after June 30, 2018, the distribution will be paid at a rate equal to one-half the sum of the 180-day bankers’ acceptance rate in effect plus 3.79%.
For each distribution date after June 30, 2020, the distribution will be paid at a rate equal to one-half the sum of the 180-day bankers’ acceptance rate in effect plus 4.09%.
Distribution
No cash distributions will be payable by the Trust on NBC CapS II if the Bank fails to declare regular dividends on its preferred shares or, if no preferred shares
are then outstanding, on its outstanding common shares. In this case, the net distributable funds of the Trust will be paid to the Bank as the sole holder of the
special trust securities, representing the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions in full on the NBC CapS II, the
Bank will withhold from declaring dividends on any of its preferred and common shares during a determined period.
Automatic Exchange
Each NBC CapS II – Series 1 can be exchanged automatically, without the consent of the holders, for 40 Series 19 First Preferred Shares of the Bank, and each
NBC CapS II – Series 2 can be exchanged automatically, without the consent of the holders, for 40 Series 23 First Preferred Shares of the Bank upon the
occurrence of one of the following events: (i) proceedings are commenced for the winding-up of the Bank; (ii) OSFI takes control of the Bank; (iii) the Bank posts
a Tier 1 capital ratio of less than 5% or a Total capital ratio of less than 8%; or (iv) OSFI has directed the Bank to increase its capital or to provide additional
liquidity and the Bank elects such automatic exchange or the Bank fails to comply with such direction to the satisfaction of OSFI. On an automatic exchange,
the Bank will hold all outstanding trust capital securities of the Trust.
Redemption at the Option of the Trust
On any distribution date, the Trust may, subject to prior written notice and OSFI approval, redeem, at its option, the NBC CapS II – Series 1 and Series 2, in
whole but not in part, without the consent of the holders.
Purchase for Cancellation
The Trust may, with OSFI approval, purchase NBC CapS II – Series 1 and Series 2, in whole or in part, on the open market or by tender or private contract at any
price. The NBC CapS II purchased by the Trust, if any, will be cancelled and will not be reissued.
Regulatory Capital
The NBC CapS II – Series 1 and Series 2 qualify as innovative capital instruments and are eligible as additional Tier 1 capital, but because these instruments do
not satisfy the non-viability contingent capital requirements, they are to be phased out at a rate of 10% per year between 2013 and 2022.
170
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 21 – CAPITAL DISCLOSURE
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers the
risks inherent to the Bank’s business, supports its business segments and protects its clients.
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy
assessment process. This process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and periodic amendments.
Capital Management
Capital ratios are obtained by dividing regulatory capital by risk-weighted assets and are expressed as a percentage. Risk-weighted assets are calculated in
accordance with the rules established by OSFI for on- and off-balance-sheet risks. Credit, market and operational risks are factored into the risk-weighted
assets calculation for regulatory purposes. The definition adopted by the Basel Committee on Banking Supervision (BCBS) distinguishes between three types
of capital. Common Equity Tier 1 (CET1) capital consists of common shareholders’ equity less goodwill, intangible assets and other capital deductions. The
Additional Tier 1 instruments comprise eligible non-cumulative preferred shares and the eligible amount of innovative instruments. The sum of CET1 and
Additional Tier 1 capital form what is known as Tier 1 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain loan loss
allowances. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
The Basel III regulatory framework sets out transitional arrangements for the period of 2013 to 2019. However, OSFI is requiring Canadian banks to meet the
2019 minimum “all-in” requirements rather than the minimum ratios calculated using the transitional methodology. The “all-in” methodology includes all of
the regulatory adjustments that will be required by 2019 while retaining the phase-out rules for non-qualifying capital instruments. Consequently, the Bank
and all other major Canadian banks have had to maintain, on an "all-in" basis, a CET1 capital ratio of at least 8.0%, a Tier 1 capital ratio of at least 9.5%, and a
Total capital ratio of at least 11.5%. All of these ratios are to include a capital conservation buffer of 2.5% and a 1% surcharge applicable to Domestic
Systemically Important Banks.
OSFI has been requiring Canadian banks to meet a Basel III leverage ratio of at least 3.0%. The leverage ratio is a measure independent of risk that is
calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including derivative
exposures and securities financing transaction exposures) and off-balance-sheet items. The assets deducted from Tier 1 capital are also deducted from total
exposure.
During the years ended October 31, 2017 and 2016, the Bank was in compliance with all of OSFI’s regulatory capital requirements.
71
171
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 21 – CAPITAL DISCLOSURE (cont.)
Regulatory Capital and Ratios Under Basel III(1)
As at October 31
Capital
CET1
Tier 1(2)
Total(2)
Risk-weighted assets
CET1 capital
Tier 1 capital
Total capital
Total exposure
Capital ratios
CET1
Tier 1(2)
Total(2)
Leverage ratio
2017
2016
7,856
10,457
10,661
70,173
70,327
70,451
6,865
9,265
10,506
68,205
68,430
68,623
262,539
253,097
11.2 %
14.9 %
15.1 %
10.1 %
13.5 %
15.3 %
4.0 %
3.7 %
(1)
(2)
Figures are presented on an “all-in” basis.
Figures as at October 31, 2017 include the redemption of the Series 28 preferred shares on November 15, 2017.
NOTE 22 – TRADING ACTIVITY REVENUES
Trading activity revenues consist of the net interest income from trading activities and trading revenues recognized in Non-interest income in the Consolidated
Statement of Income.
Net interest income comprises dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest
income related to the financing of these financial assets and liabilities.
Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss,
income from held-for-trading derivative financial instruments, and the change in fair value of financial instruments designated at fair value through profit or
loss.
Year ended October 31
Net interest income
Non-interest income
2017
392
374
766
2016
515
150
665
172
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 23 – SHARE-BASED PAYMENTS
The compensation expense information provided below excludes the impact of hedging.
Stock Option Plan
The Bank’s Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and
provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank’s common share on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain
circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant’s
rights to continue vesting in accordance with the stated terms of the grant agreement. The maximum number of common shares that may be issued under the
Stock Option Plan was 25,764,866 as at October 31, 2017 (21,003,961 as at October 31, 2016). The number of common shares reserved for a participant may
not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31
Stock Option Plan
Outstanding at beginning
Awarded
Exercised
Cancelled(1)
Outstanding at end
Exercisable at end
Number of
options
17,302,322
1,804,016
(4,239,095)
(291,349)
14,575,894
9,250,560
2017
Weighted
average
exercise price
$
$
$
$
$
$
38.05
54.69
36.31
45.90
40.46
36.03
Number of
options
16,652,313
2,140,420
(1,122,756)
(367,655)
17,302,322
10,850,976
(1)
Includes 10,728 expired options during the year ended October 31, 2017 (900 expired options during the year ended October 31, 2016).
Exercise price
$26.93
$17.44
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
Options
outstanding
546,861
881,360
909,483
1,086,075
1,297,570
1,615,570
2,051,898
2,494,194
1,927,107
1,765,776
14,575,894
Options
exercisable
546,861
881,360
909,483
1,086,075
1,297,570
1,615,570
1,409,054
1,104,420
400,167
−
9,250,560
2016
Weighted
average
exercise price
$
$
$
$
$
$
37.33
42.17
33.06
44.30
38.05
34.32
Expiry date
December 2017
December 2018
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
During the year ended October 31, 2017, the Bank awarded 1,804,016 stock options (2,140,420 during the year ended October 31, 2016) with an average fair
value of $5.75 per option ($3.70 for the year ended October 31, 2016).
The average fair value of options awarded was estimated on the award date using the Black-Scholes model as well as the following assumptions.
As at October 31
Risk-free interest rate
Expected life of options
Expected volatility
Expected dividend yield
2017
2016
1.59%
7 years
20.53%
4.41%
1.43%
7 years
21.12%
5.33%
73
173
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 23 – SHARE-BASED PAYMENTS (cont.)
The expected life of the options is based on historical data and is not necessarily representative of how options will be exercised in the future. Expected
volatility is extrapolated from the implied volatility of the Bank’s share price and observable market inputs, which are not necessarily representative of actual
results. The expected dividend yield represents the annualized dividend divided by the Bank’s share price at the award date. The risk-free interest rate is based
on the Canadian dollar swap curve at the award date. The exercise price is equal to the Bank’s share price at the award date. No other market parameter has
been included in the fair value measurement of the options.
The compensation expense recorded for this plan for the year ended October 31, 2017 was $11 million ($12 million for the year ended October 31, 2016).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a
cash amount equal to the difference between the closing price of the Bank’s common share on the Toronto Stock Exchange on the day preceding the exercise
date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire 10 years after the award date or, in certain
circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring employees that allow the participant’s rights to
continue vesting in accordance with the stated terms of the grant agreement. A compensation expense of $4 million was recognized for the year ended
October 31, 2017 with respect to this plan ($1 million for the year ended October 31, 2016).
As at October 31
SAR Plan(1)
Outstanding at beginning
Awarded
Exercised
Outstanding at end
Exercisable at end
(1)
No SARs cancelled or expired during the years ended October 31, 2017 and 2016.
Exercise price
$26.93
$17.44
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
Number
of SARs
349,856
63,356
(17,878)
395,334
225,637
2017
Weighted
average
exercise price
$
$
$
$
$
39.59
54.69
33.34
42.29
37.69
Number
of SARs
319,920
74,180
(44,244)
349,856
185,143
SARs
outstanding
SARs
exercisable
−
10,780
34,430
29,340
31,616
33,020
35,360
83,252
74,180
63,356
395,334
−
10,780
34,430
29,340
31,616
33,020
26,280
41,626
18,545
−
225,637
2016
Weighted
average
exercise price
$
$
$
$
$
37.42
42.17
28.24
39.59
35.28
Expiry date
December 2017
December 2018
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
Deferred Stock Unit (DSU) Plans
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as directors. These plans allow the Bank to tie a portion of
the value of the compensation of participants to the future value of the Bank’s common shares. A DSU is a right that has a value equal to the closing price of a
common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four years. Additional DSUs are
credited to the participant’s account equal in amount to the dividends paid on common shares of the Bank and vest evenly over the same period as the
reference DSUs. DSUs may only be cashed when participants retire or leave the Bank, or for directors, when their term ends. The DSU Plan contains provisions
for retiring employees that allow the participant’s units to continue vesting in accordance with the stated terms of the grant agreement.
During the year ended October 31, 2017, the Bank awarded 74,436 DSUs at a weighted average price of $54.69 (79,098 DSUs at a weighted average price of
$42.17 for the year ended October 31, 2016). A total of 637,989 DSUs were outstanding as at October 31, 2017 (688,035 DSUs as at October 31, 2016). A
compensation expense of $14 million was recognized for the year ended October 31, 2017 with respect to these plans ($9 million for the year ended
October 31, 2016).
174
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation
of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December. RSUs
generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the date of the award, the
date on which all RSUs expire. Additional RSUs are credited to the participant’s account equal in amount to the dividends declared on the common shares of
the Bank and vest evenly over the same period as the reference RSUs. The RSU Plan contains provisions for retiring employees that allow the participant’s units
to continue vesting in accordance with the stated terms of the award agreement.
During the year ended October 31, 2017, the Bank awarded 2,411,016 RSUs at a weighted average price of $51.21 (2,631,545 RSUs at a weighted average
price of $43.43 for the year ended October 31, 2016). As at October 31, 2017, a total of 5,156,316 RSUs were outstanding (5,205,269 RSUs as at October 31,
2016). A compensation expense of $174 million was recognized for the year ended October 31, 2017 with respect to the Plan ($122 million for the year ended
October 31, 2016).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of these
officers and other designated persons to the future value of the Bank’s common shares. A PSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December,
adjusted upward or downward according to performance criteria, which is based on the total shareholder return (TSR) over three years achieved by the Bank
compared to that of the S&P/TSX Banks adjusted sub-index. PSUs vest on the sixth business day of December of the third year following the date of the award,
the date on which all PSUs expire. Additional PSUs are credited to the participant’s account in an amount equal to the dividends declared on the Bank’s
common shares and vest evenly over the same period as the reference PSUs. The PSU Plan contains provisions for retiring employees that allow the
participant’s units to continue vesting in accordance with the stated terms of the award agreement.
During the year ended October 31, 2017, the Bank awarded 345,237 PSUs at a weighted average price of $51.21 (364,163 PSUs at a weighted average price of
$43.43 for the year ended October 31, 2016). As at October 31, 2017, a total of 881,701 PSUs were outstanding (781,846 PSUs as at October 31, 2016). A
compensation expense of $24 million was recognized for the year ended October 31, 2017 with respect to the Plan ($15 million for the year ended
October 31, 2016).
Deferred Compensation Plan of National Bank Financial (NBF)
This plan is exclusively for key employees of NBF Wealth Management. The purpose of this plan is to foster the retention of key employees and promote the
growth in income and the continuous improvement in profitability at Wealth Management. Under this plan, participants can defer a portion of their annual
compensation and NBF may pay a contribution to key employees when certain financial objectives are met. Amounts awarded by NBF and the compensation
deferred by participants are invested in, among others, Bank common share units. These share units represent a right, the value of which corresponds to the
closing price of the Bank’s common share on the Toronto Stock Exchange on the award date. Additional units are paid to the participant’s account equal in
amount to the dividends declared on the Bank’s common shares. Share units representing the amounts awarded by NBF vest evenly over four years. When a
participant retires, or in certain cases when the participant’s employment is terminated, the participant receives a cash amount representing the value of the
vested share units.
During the year ended October 31, 2017, NBF awarded 132,226 share units at a weighted average price of $55.36 (163,845 share units at a weighted average
price of $42.05 for the year ended October 31, 2016). As at October 31, 2017, 1,598,966 share units were outstanding (1,569,501 share units as at
October 31, 2016). During the year ended October 31, 2017, a $24 million compensation expense was recognized for this Plan ($13 million for the year ended
October 31, 2016).
Employee Share Ownership Plan
Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of
payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after
one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to $10 million for the
year ended October 31, 2017 ($10 million for the year ended October 31, 2016), were charged to Compensation and employee benefits when paid. As at
October 31, 2017, a total of 5,961,203 common shares were held for this plan (6,359,681 common shares as at October 31, 2016).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank’s
common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank’s share-based compensation plans amounted to $511 million as at October 31, 2017 ($391 million as at
October 31, 2016). The intrinsic value of these liabilities that had vested as at October 31, 2017 was $223 million ($186 million as at October 31, 2016).
75
175
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 24 – EMPLOYEE BENEFITS – PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. The pension plans provide benefits based on
years of plan participation and average earnings at retirement. The other post-employment benefit plans include post-retirement medical, dental and life
insurance coverage. The pension plans are funded whereas the other plans are not funded. The fair value of plan assets and the present value of the defined
benefit obligation are measured as at October 31.
The Bank’s most significant pension plan is the Employee Pension Plan of the National Bank of Canada; it is registered with OSFI and the Canada Revenue
Agency and subject to the Pension Benefits Standards Act, 1985 and the Income Tax Act.
The defined benefit plans expose the Bank to specific risks such as investment performance, changes to the discount rate used to calculate the obligation, the
longevity of plan members and future inflation. While management believes that the assumptions used in the actuarial valuation process are reasonable, there
remains a degree of risk and uncertainty that may cause future results to differ significantly from these assumptions, which could give rise to gains or losses.
According to the Bank’s governance rules, the policies and risk management related to the defined benefit plans are overseen at different levels by the pension
committees, the Bank’s management and the Board’s Human Resources Committee. The defined benefit plans are examined on an ongoing basis in order to
monitor the funding and investment policies, the plans’ financial status and the Bank’s funding requirements.
The Bank’s funding policy for the defined benefit pension plans is to make at least the minimum annual contributions required by pension regulators.
For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of refunds
from the plan surplus, where permitted by applicable regulations and plan provisions.
Defined Benefit Obligation, Plan Assets and Funded Status
As at October 31
Defined benefit obligation
Balance at beginning
Current service cost
Interest cost
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions
Actuarial (gains) losses arising from changes in financial assumptions
Actuarial (gains) losses arising from experience adjustments
Employee contributions
Benefits paid
Balance at end
Plan assets
Fair value at beginning
Interest income
Administration cost
Remeasurements
Return on plan assets (excluding interest income)
Bank contributions(1)
Employee contributions
Benefits paid
Fair value at end
Defined benefit asset (liability) at end
2017
3,843
114
142
−
(77)
92
49
(179)
3,984
3,776
135
(3)
138
63
49
(179)
3,979
(5)
Pension plans
2016
Other post-employment benefit plans
2016
2017
3,263
71
145
−
492
2
48
(178)
3,843
3,521
154
(3)
167
67
48
(178)
3,776
(67)
199
5
7
−
(3)
(7)
(10)
191
173
4
7
−
23
1
(9)
199
(191)
(199)
(1)
For fiscal 2018, the Bank expects to pay an employer contribution of $60 million to the defined benefit pension plans.
176
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Defined Benefit Asset (Liability)
As at October 31
Defined benefit asset included in Other assets
Defined benefit liability included in Other liabilities
Cost for Pension Plans and Other Post-Employment Benefits
Year ended October 31
Current service cost
Interest expense (income), net
Administration costs
Expense recognized in Net income
Remeasurements(1)
Actuarial (gains) losses on defined benefit obligation
Return on plan assets(2)
Remeasurements recognized in Other comprehensive income
2017
56
(61)
(5)
2017
114
7
3
124
15
(138)
(123)
1
Pension plans
2016
Other post-employment benefit plans
2016
2017
48
(115)
(67)
(191)
(191)
(199)
(199)
Pension plans
2016
Other post-employment benefit plans
2016
2017
71
(9)
3
65
494
(167)
327
392
5
7
12
(10)
(10)
2
(1)
(2)
Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
Excluding interest income.
Allocation of the Fair Value of Pension Plan Assets
As at October 31
Asset classes
Cash and cash equivalents
Equity securities
Debt securities
Canadian government
Canadian provincial and municipal governments
Restructured notes of the MAV III conduits
Other issuers
Other
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,693
244
−
−
−
−
1,937
108
390
−
1,038
39
395
72
2,042
2017
Total
108
2,083
244
1,038
39
395
72
3,979
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,489
297
−
−
−
−
1,786
54
391
−
1,052
44
376
73
1,990
4
7
11
24
24
35
2016
Total
54
1,880
297
1,052
44
376
73
3,776
(1)
Unadjusted quoted prices in active markets for identical assets that the Bank can access at the measurement date.
The Bank’s investment strategy for plan assets considers several factors, including the time horizon of pension plan obligations and investment risk. For each
plan, an allocation range per asset class is defined using a mix of equity and debt securities to optimize the risk-return profile of plan assets and minimize
asset/liability mismatching.
The pension plan assets may include investment securities issued by the Bank. As at October 31, 2017 and 2016, the pension plan assets do not include any
securities issued by the Bank.
For fiscal 2017, the Bank and its related entities received $6 million ($6 million in fiscal 2016) in fees from the pension plans for related management,
administration and custodial services.
77
177
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 24 – EMPLOYEE BENEFITS – PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (cont.)
Allocation of the Defined Benefit Obligation by the Status of Defined Benefit Plan Participants
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
Weighted average duration of the
defined benefit obligation (in years)
2017
46 %
50 %
4 %
100 %
17
Pension plans
2016
Other post-employment benefit plans
2016
2017
48 %
48 %
4 %
100 %
17
31 %
69 %
38 %
62 %
100 %
100 %
15
16
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a
curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on observed data and extrapolated data.
In order to measure the pension plan and other post-employment plan obligation, the vested benefits that the Bank expects to pay in each future period are
discounted to the measurement date using the spot rate associated with each of the respective periods based on the yield curve derived using the above
methodology. The sum of discounted benefit amounts represents the defined benefit obligation. An average discount rate that replicates this obligation is then
computed.
To better reflect current service cost, a separate discount rate was determined to account for the timing of future benefit payments associated with the
additional year of service to be earned by the plan’s active participants. Since these benefits are, on average, being paid at a later date than the benefits
already earned by participants as a whole (i.e., longer duration), this method results in the use of a generally higher discount rate for calculating current
service cost than that used to measure obligations where the yield curve is positively sloped. The methodology used to determine this discount rate is the
same as the one used to establish the discount rate for measuring the obligation.
178
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Other Assumptions
For measurement purposes, the estimated annual growth rate for health care costs was 5.28% for 2017 (5.77% for 2016). Based on the assumption retained,
this rate is expected to decrease gradually to 2.97% in 2034 and remain steady thereafter.
The mortality assumption is a determining factor when measuring the defined benefit obligation. Determining the expected benefit payout period is based on
best estimate assumptions regarding mortality. Mortality tables are reviewed at least once a year, and the assumptions made are in accordance with accepted
actuarial practice. New results regarding the plans are reviewed and used in calculating best estimates of future mortality.
As at October 31
Defined benefit obligation
Discount rate
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
Year ended October 31
Pension plan expense
Discount rate – Current service
Discount rate – Interest expense (income), net
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
2017
3.65 %
3.00 %
21.2
23.5
22.2
24.5
Pension plans
2016
Other post-employment benefit plans
2016
2017
3.60 %
3.00 %
21.1
23.5
22.2
24.5
3.65 %
3.00 %
5.28 %
21.2
23.5
22.2
24.5
3.60 %
3.00 %
5.77 %
21.1
23.5
22.2
24.5
2017
Pension plans
2016
Other post-employment benefit plans
2016
2017
3.75 %
3.60 %
3.00 %
4.75 %
4.40 %
3.00 %
21.1
23.5
22.2
24.5
21.1
23.4
22.1
24.4
3.75 %
3.60 %
3.00 %
5.77 %
21.1
23.5
22.2
24.5
4.75 %
4.40 %
3.00 %
5.77 %
21.1
23.4
22.1
24.4
79
179
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 24 – EMPLOYEE BENEFITS – PENSION PLANS AND OTHER POST-EMPLOYMENT BENEFITS (cont.)
Sensitivity of Significant Assumptions for 2017
The following table shows the potential impacts of changes to key assumptions on the defined benefit obligation of the pension plans and other post-
employment benefit plans as at October 31, 2017. These impacts are hypothetical and should be interpreted with caution as changes in each significant
assumption may not be linear.
Impact of a 0.25% increase in the discount rate
Impact of a 0.25% decrease in the discount rate
Impact of a 0.25% increase in the rate of compensation increase
Impact of a 0.25% decrease in the rate of compensation increase
Impact of a 1.00% increase in the health care cost trend rate
Impact of a 1.00% decrease in the health care cost trend rate
Impact of an increase in the age of participants by one year
Impact of a decrease in the age of participants by one year
Projected Benefit Payments
Year ended October 31
2018
2019
2020
2021
2022
2023 to 2027
Pension plans
Change in the obligation
Other post-employment benefit
plans
Change in the obligation
(165)
180
38
(34)
(96)
97
(7)
8
1
(1)
9
(8)
(2)
2
Pension plans
Other post-employment
benefit plans
139
138
139
144
150
840
10
9
9
9
9
43
180
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 25 – INCOME TAXES
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
Consolidated Statement of Income
Current taxes
Current year
Prior period adjustments
Deferred taxes
Origination and reversal of temporary differences
Prior period adjustments
Consolidated Statement of Changes in Equity
Share issuance expense and other
Consolidated Statement of Comprehensive Income
Remeasurements of pension plans and other post-employment benefit plans
Other
Income taxes
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
2017
2016
508
(11)
497
(8)
(5)
(13)
484
8
36
(11)
25
517
2017
505
12
517
378
(17)
361
(150)
14
(136)
225
(4)
(94)
(13)
(107)
114
2016
352
(238)
114
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
Deferred tax assets
Allowances for credit losses
Deferred charges
Defined benefit liability – Pension plans
Defined benefit liability – Other post-employment
benefit plans
Deferred revenue
Tax loss carryforwards
Other items(1)(2)
Deferred tax liabilities
Premises and equipment and intangible assets
Defined benefit asset – Pension plans
Investments in associates
Other items
Net deferred tax assets (liabilities)
As at October 31
Consolidated
Balance Sheet
2016
Year ended October 31
Consolidated Statement
of Income
2016
2017
Year ended October 31
Consolidated Statement
of Comprehensive Income
2016
2017
159
241
102
58
33
18
48
659
(177)
(70)
(43)
(24)
(314)
345
(8)
5
−
−
5
6
(4)
4
(22)
16
18
(3)
9
13
54
53
−
10
(3)
14
(10)
118
(22)
(7)
22
25
18
136
−
−
(33)
(2)
−
−
8
(27)
−
(1)
−
−
(1)
(28)
−
−
88
(2)
−
−
−
86
−
8
−
4
12
98
2017
151
246
69
56
38
24
61
645
(199)
(55)
(25)
(27)
(306)
339
(1)
(2)
As at October 31, 2017, the Consolidated Balance Sheet amount includes $3 million in deferred tax assets related to share issuance costs ($4 million as at October 31, 2016) reported in
Retained earnings on the Consolidated Statement of Changes in Equity.
As at October 31, 2017, the Consolidated Balance Sheet amount includes $6 million in deferred tax assets related to the impact of a foreign subsidiary’s transition to IFRS reported in
Retained earnings.
81
181
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 25 – INCOME TAXES (cont.)
Net deferred tax assets are included in Other assets and net deferred tax liabilities are included in Other liabilities.
As at October 31
Deferred tax assets
Deferred tax liabilities
2017
374
(35)
339
2016
402
(57)
345
According to forecasts, which are based on information available on October 31, 2017, the Bank believes that it is probable that the results of future
operations will generate sufficient taxable income to utilize all the deferred tax assets before they expire.
As at October 31, 2017, the total amount of temporary differences, unused tax loss carryforwards and unused tax credits for which no deferred tax asset has
been recognized was $383 million ($290 million as at October 31, 2016).
As at October 31, 2017, the total amount of temporary differences related to investments in subsidiaries, associates, and joint ventures for which no deferred
tax liability has been recognized was $1,057 million ($834 million as at October 31, 2016).
The following table provides a reconciliation of the Bank’s income tax rate.
Year ended October 31
Income before income taxes
Income taxes at Canadian statutory income tax rate
Reduction in income tax rate due to
Tax-exempt income from securities
Non-taxable portion of capital gains
Tax rates of subsidiaries, foreign entities and associates
Other items
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
Notice of Assessment
$
2,508
670
(178)
(2)
1
(7)
(186)
484
2017
%
100.0
26.7
(7.1)
(0.1)
0.1
(0.3)
(7.4)
19.3
$
1,481
400
(168)
−
3
(10)
(175)
225
2016
%
100.0
27.0
(11.3)
−
0.2
(0.7)
(11.8)
15.2
In March 2017, the Canada Revenue Agency (CRA) issued a proposed reassessment to the Bank for the 2011 and 2012 taxation years. In May 2017, the CRA
reassessed the Bank for the 2012 taxation year. The transactions to which the proposed reassessment and the actual reassessment relate are similar to those
prospectively addressed by the synthetic equity arrangement rules introduced in the 2015 Canadian federal budget. The proposed reassessment and the
actual reassessment (including estimated provincial income taxes and interest) total approximately $173 million. The CRA may issue reassessments to the
Bank in respect of similar activities for fiscal years subsequent to 2012. The Bank is confident that its tax position was appropriate and intends to vigorously
defend its position. As a result, no amount has been recognized in the consolidated financial statements as at October 31, 2017.
182
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 26 – EARNINGS PER SHARE
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred
shares.
Year ended October 31
2017
2016
Basic earnings per share
Net income attributable to the Bank’s shareholders
Dividends on preferred shares
Premium paid on preferred shares redeemed for cancellation
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Basic earnings per share (dollars)
Diluted earnings per share
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Adjustment to average number of common shares (thousands)
Stock options(1)
Weighted average diluted number of common shares outstanding (thousands)
Diluted earnings per share (dollars)
1,940
85
−
1,855
340,809
5.44
1,855
340,809
3,962
344,771
5.38
1,181
61
3
1,117
337,460
3.31
1,117
337,460
2,435
339,895
3.29
(1)
For the year ended October 31, 2017, as the exercise price of the options was lower than the average price of the Bank’s common shares, no option was excluded from the diluted earnings
per share calculation. For the year ended October 31, 2016, the calculation of the diluted earnings per share had excluded an average number of 5,730,365 options outstanding with a
weighted average exercise price of $46.55, as the exercise price of these options was greater than the average price of the Bank’s common shares.
183
183
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 27 – GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES
Guarantees
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties, without
consideration of recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum potential amount of future
payments for significant guarantees issued by the Bank is presented in the following table.
As at October 31
Letters of guarantee
Backstop liquidity, credit enhancement facilities and other
Securities lending
2017
3,847
5,049
1,293
2016
3,125
5,969
982
Letters of Guarantee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make
payments in the event that a client cannot meet its financial obligations to third parties. The Bank’s policy for requiring collateral security with respect to
letters of guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years. The collective allowance on
non-impaired loans covers all credit risks, including those relating to letters of guarantee. As at October 31, 2017 and 2016, no amount has been recorded on
the Consolidated Balance Sheet with respect to these letters of guarantee.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed commercial paper.
The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2017, the notional amount of the global-style backstop liquidity
facilities totalled $2.7 billion ($2.9 billion as at October 31, 2016), representing the total amount of the commercial paper outstanding.
These backstop liquidity facilities can be drawn if the conduits are unable to access the commercial paper market, even if there is no general market
disruption. These facilities have terms of less than one year and can be periodically renewed. The terms and conditions of these backstop liquidity facilities do
not require the Bank to advance money to the conduits if the conduits are insolvent or involved in bankruptcy proceedings or to fund non-performing assets
beyond the amount of the available credit enhancements. The backstop liquidity facilities provided by the Bank have not been drawn to date.
The Bank also provides credit enhancement facilities to these multi-seller conduits. These facilities have terms of less than one year and are automatically
renewable unless the Bank sends a non-renewal notice. As at October 31, 2017 and 2016, the committed notional value for these facilities was $30 million. To
date, the credit enhancement facilities provided by the Bank have not been drawn.
The maximum risk of loss for the Bank cannot exceed the total amount of commercial paper outstanding, i.e., $2.7 billion as at October 31, 2017 ($2.9 billion
as at October 31, 2016). As at October 31, 2017, the Bank held $6 million ($4 million as at October 31, 2016) of this commercial paper and, consequently, the
maximum potential amount of future payments was $2.7 billion ($2.9 billion as at October 31, 2016).
CDCC Overnight Liquidity Facility
Canadian Derivatives Clearing Corporation (CDCC) acts as a central clearing counterparty for multiple financial instrument transactions in Canada. Certain
fixed-income clearing members of CDCC have provided an equally shared committed and uncommitted global overnight liquidity facility for the purpose of
supporting CDCC in its clearing activities of securities purchased under reverse repurchase agreements or sold under repurchase agreements. The objective of
this facility is to maintain sufficient liquidity in the event of a clearing member’s default. As a fixed-income clearing member providing support to CDCC, the
Bank provides a liquidity facility. As at October 31, 2017, the notional amount of the overnight uncommitted liquidity facility amounted to $2.3 billion
($2.3 billion as at October 31, 2016). As at October 31, 2017 and 2016, no amount had been drawn.
184
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Securities Lending
Under securities lending agreements the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities, the Bank
lends the securities to third parties and indemnifies its clients in the event of loss. In order to protect itself against any contingent loss, the Bank obtains, as
security from the borrower, a cash amount or extremely liquid marketable securities with a fair value greater than that of the securities loaned. No amount has
been recognized on the Consolidated Balance Sheet with respect to potential indemnities resulting from securities lending agreements.
Other Indemnification Agreements
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into numerous
contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations
(including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. The Bank
also undertakes to indemnify any person acting as a director or officer or performing a similar function within the Bank or one of its subsidiaries or another
entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations to which he or she is party in that capacity.
Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the
network, the Bank granted a movable hypothec to the network that can be used in the event another member fails to meet its contractual obligations. The
durations of the indemnification agreements vary according to circumstance; as at October 31, 2017 and 2016, given the nature of the agreements, the Bank is
unable to make a reasonable estimate of the maximum potential liability it could be required to pay to counterparties. No amount has been recorded on the
Consolidated Balance Sheet with respect to these agreements.
Master Asset Vehicles (MAV)
Margin Funding Facility
During fiscal 2017, given the repayment of the restructured notes, the Bank ceased its commitment to contribute to the margin funding facility of the MAV
conduits. As at October 31, 2016, the Bank had committed to contribute $800 million to a margin funding facility related to the MAV conduits in order to
finance potential collateral calls, and no amount had been advanced.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing needs of its
clients represent the maximum amount of additional credit the Bank could be obligated to extend if the commitments were fully drawn.
As at October 31
Letters of guarantee(1)
Documentary letters of credit(2)
Credit card receivables(3)
Commitments to extend credit(3)
2017
3,847
137
7,688
52,391
2016
3,125
136
7,187
47,815
(1)
(2)
(3)
See the Letters of Guarantee heading on page 184.
Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to draw drafts on the Bank up to an amount established under specific
terms and conditions; these instruments are collateralized by the delivery of the goods to which they are related.
Credit card receivables and commitments to extend credit represent the undrawn portions of credit authorizations granted in the form of loans, acceptances, letters of guarantee and
documentary letters of credit. The Bank is required at all times to make the undrawn portion of the credit authorization available, subject to certain conditions.
Financial Assets Received as Collateral
As at October 31, 2017, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $92.2 billion ($71.3 billion
as at October 31, 2016). These financial assets received as collateral consist of securities related to securities financing and derivative transactions as well as
securities purchased under reverse repurchase agreements and securities borrowed.
Other Commitments
The Bank acts as an investor in investment banking activities where it enters into agreements to finance external private equity funds and investments in
equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank has commitments to invest up to
$77 million as at October 31, 2017 ($37 million as at October 31, 2016).
85
185
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 27 – GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
Pledged Assets
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as collateral is
provided in the following table. These transactions are concluded in accordance with standard terms and conditions for such transactions.
As at October 31
2017
2016
Assets pledged to
Bank of Canada
Direct clearing organizations(1)
Assets pledged in relation to
Derivative financial instrument transactions
Borrowing, securities lending and securities sold under reverse repurchase agreements
Securitization transactions
Covered bonds(2)
Other
Total
(1)
(2)
Includes assets pledged as collateral for Large Value Transfer System (LVTS) activities.
The Bank has a covered bond program. For additional information, see Notes 13 and 28.
Contingent Liabilities
502
1,358
1,330
40,693
23,151
7,668
126
74,828
−
563
2,419
43,390
23,457
7,296
125
77,250
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of varied
natures. The recent developments in the main legal proceeding involving the Bank are as follows:
Watson
In 2011, a class action was filed in the Supreme Court of British Columbia against Visa Corporation Canada (Visa), MasterCard International Incorporated
(MasterCard) as well as National Bank and a number of other financial institutions. The plaintiff is alleging that the credit card networks and financial
institutions engaged in a price-fixing system to increase or maintain the fees paid by merchants on Visa and MasterCard transactions. In so doing, they would
have been in breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. During the year ended
October 31, 2017, the Bank entered into an agreement-in-principle with the plaintiffs in order to settle this dispute in the five jurisdictions where the class
action was filed. This agreement is subject to the approval of the Court in each of those jurisdictions.
It is impossible to determine the outcome of the claims instituted or which may be instituted against the Bank and its subsidiaries. The Bank estimates, based
on the information at its disposal, that while the amount of contingent liabilities pertaining to these claims, taken individually or in the aggregate, could have a
material impact on the Bank’s consolidated operating income for a particular period, it would not have a material adverse impact on the Bank’s consolidated
financial position.
186
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 28 – STRUCTURED ENTITIES
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means
of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note 1. The Bank’s
maximum exposure to loss resulting from its interests in these structured entities consists primarily of the investments in these entities, the fair value of
derivative financial instrument contracts entered into with them, and the backstop liquidity and credit enhancement facilities granted to certain structured
entities.
In the normal course of business, the Bank may enter into financing transactions with third-party structured entities, including commercial loans, reverse
repurchase agreements, prime brokerage margin lending, and similar collateralized lending transactions. While such transactions expose the Bank to the
counterparty credit risk of the structured entities, this exposure is mitigated by the collateral related to these transactions. The Bank typically has neither
power nor significant variable returns resulting from financing transactions with structured entities and does not consolidate such entities. Financing
transactions with third-party-sponsored structured entities are included in the Bank's consolidated financial statements and are not included in the table
accompanying this note.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit
enhancement facilities under the commercial paper program. These facilities are presented and described in Note 27. The Bank has concluded derivative
financial instrument contracts with these conduits, the fair value of which is presented on the Bank’s Consolidated Balance Sheet. Although the Bank has the
ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of the returns it obtains, as it acts as an agent.
Consequently, the Bank does not control these conduits and does not consolidate them.
Master Asset Vehicles (MAV)
The MAVs are structured entities created for the purpose of grouping the restructured notes stemming from asset-backed commercial paper held by Canadian
corporate investors. The Bank held economic interests in MAVs in the form of restructured notes and the margin funding facility. The Bank did not have the
ability to direct the relevant activities of the MAVs. Consequently, it did not control these MAVs and did not consolidate them. During fiscal 2017, the
restructured notes were repaid and the Bank ceased its commitment to contribute to the margin funding facility of the MAV conduits.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds.
The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. The Bank does not control the funds where its holdings are not significant as in these circumstances,
the Bank either acts only as an agent or does not have any power over the relevant activities. In both cases, it does not have significant exposure to the
variable returns of the funds. Therefore, the Bank does not consolidate these funds.
Private Investments
As part of its investment banking operations, the Bank invests in several limited liability partnerships and other incorporated entities. These investment
companies in turn invest in operating companies with a view to reselling these investments at a profit over the medium or long term. The Bank does not
intervene in the operations of these entities; its only role is that of an investor. Consequently, it does not control these companies and does not consolidate
them.
Asset-Backed Structured Entities
The Bank invested in certain asset-backed structured entities. The underlying assets consist of residential mortgages, consumer loans, equipment loans and
leases. The Bank does not have the ability to direct the relevant activities of these structured entities and has no exposure to their variable returns, other than
the right to receive interest income and dividend income from its investments. Consequently, the Bank does not control these structured entities and does not
consolidate them.
87
187
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 28 – STRUCTURED ENTITIES (cont.)
The following table presents the carrying amounts of the assets and liabilities relating to the Bank’s interests in non-consolidated structured entities, the
Bank’s maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada Housing Trust is
not presented. For additional information, see Note 8.
Assets on the Consolidated Balance Sheet
Securities at fair value through profit or loss
Available-for-sale securities
Held-to-maturity securities
As at October 31, 2016
Liabilities on the Consolidated Balance Sheet
Derivative financial instruments
As at October 31, 2016
Maximum exposure to loss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2016
Total assets of the structured entities
As at October 31, 2016
Multi-seller
conduits(1)
Master asset
vehicles(2)
Investment
funds(3)
Private
investments(4)
Asset-backed
structured entities(5)
As at October 31, 2017
6
−
−
6
10
13
13
−
6
2,721
2,727
2,883
2,768
2,912
−
−
−
−
619
−
−
−
−
−
−
1,419
−
−
29
29
−
58
86
−
−
−
58
−
58
86
277
303
−
70
−
70
97
−
−
−
70
−
70
97
437
2,650
−
−
1,306
1,306
503
−
−
−
1,306
216
1,522
503
3,201
813
(1)
(2)
(3)
(4)
(5)
The main underlying assets, located in Canada, are residential mortgages, automobile loans, automobile inventory financings, and other receivables. As at October 31, 2017, the notional
committed amount of the global-style liquidity facilities totalled $2.7 billion ($2.9 billion as at October 31, 2016), representing the total amount of commercial paper outstanding. The Bank
also provides series-wide credit enhancement facilities for a notional committed amount of $30 million ($30 million as at October 31, 2016). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2017, the Bank held $6 million in commercial paper ($4 million as at October 31, 2016) and, consequently, the maximum
potential amount of future payments as at October 31, 2017 is limited to $2.7 billion ($2.9 billion as at October 31, 2016), which represents the undrawn liquidity and credit enhancement
facilities.
As at October 31, 2017, the carrying value of the restructured notes of the master asset vehicle (MAV) conduits and of the other restructured notes held by the Bank was nil ($619 million as
at October 31, 2016). The change in the carrying value of the restructured notes of the MAV conduits during the year ended October 31, 2017 was mainly attributable to capital repayments.
During fiscal 2017, given the repayment of the restructured notes, the Bank ceased its commitment to contribute to the margin funding facility of the MAV conduits. The undrawn margin
funding facility stood at $800 million as at October 31, 2016.
The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
The underlying assets are private investments. The amount of total assets of the structured entities corresponds to the amount for the most recent available period.
The underlying assets are residential mortgages, consumer loans, equipment loans and leases.
Consolidated Structured Entities
Securitization Entity for the Bank’s Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use the entity
for capital management and funding purposes.
The Bank provides first-loss protection against the losses since it retains the excess spread from the portfolio of sold receivables. The excess spread
represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss protection as it
holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is responsible for the daily
administration and management of CCCT II’s credit card receivables. The Bank therefore has the ability to direct the relevant activities of CCCT II and can
exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds.
The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. The Bank controls the relevant activities of these funds through its involvement as an investor and
its significant exposure to their variable returns. Therefore, the Bank consolidates these funds.
188
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold
uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. The Bank acts as manager of the partnership
and has decision-making authority over its relevant activities in accordance with the contractual terms governing the covered bond legislative program. In
addition, the Bank is able, in accordance with the contractual terms governing the covered bond legislative program, to affect the variable returns of the
partnership, which are directly related to the return on the mortgage loan portfolio and the interest on the loans from the Bank. Consequently, the Bank
controls the partnership and consolidates it.
NBC Asset Trust
The Bank created NBC Asset Trust for its funding and capital management needs. The securities issued by this trust constitute innovative capital instruments
and are eligible as additional Tier 1 capital, but because these instruments do not satisfy the non-viability contingent capital requirements, they are to be
phased out at a rate of 10% per year between 2013 and 2022. For additional information, see Note 20. The issuance proceeds were used to acquire, from the
Bank, residential mortgage loans. The Bank continues to administer these loans and is committed to repurchase from NBC Asset Trust the capital balance and
unpaid accrued interest on any loan that is more than 90 days past due. The Bank also manages day-to-day operations and holds the special voting securities
of the trust. After the distribution has been paid to the holders of the trust capital securities, the Bank, as the sole holder of the special trust securities, is
entitled to receive the balance of net residual funds. Therefore, the Bank has the ability to direct the relevant activities of NBC Asset Trust and can use its power
to affect the amount of returns it obtains. Consequently, the Bank controls this trust and consolidates it.
Third-Party Structured Entities
In 2015, the Bank, through one of its subsidiaries, acquired interests in portions of a third-party structured entity. Each portion of the structured entity is a
deemed separate entity since all of the following criteria are met: 1) specified assets of the entity are the only source of payment for specified liabilities of (or
specified other interests in) the entity; 2) parties other than those with the specified liabilities do not have rights or obligations related to the specified assets
or to residual cash flows from those assets. The Bank controls and therefore consolidates the deemed separate entities, as it has the ability to direct their
relevant activities through its kick-out rights over the servicer of their assets and because it is also exposed to the variability of their returns.
The following table presents the Bank’s investments and other assets in the consolidated structured entities as well as the total assets of these entities.
As at October 31
Consolidated structured entities
Securitization entity for the Bank’s credit card receivables(2)(3)
Investment funds(4)
Covered bonds(5)
Building(6)
NBC Asset Trust(7)
Third-party structured entities(8)
Investments
and other assets
863
205
15,605
61
1,350
74
18,158
2017
Total
assets(1)
1,784
217
15,891
54
2,122
74
20,142
Investments
and other assets
343
156
13,908
66
1,350
867
16,690
2016
Total
assets(1)
1,882
199
14,176
59
2,121
867
19,304
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
There are restrictions that stem mainly from regulatory requirements, corporate or securities laws and contractual arrangements that limit the ability of certain consolidated structured
entities to transfer funds to the Bank.
The underlying assets are credit card receivables.
The Bank’s investment is presented net of third-party holdings.
The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
The underlying assets are uninsured residential mortgage loans of the Bank. The average maturity of these underlying assets is three years. As at October 31, 2017, the total amount of
transferred mortgage loans was $15.6 billion ($13.9 billion as at October 31, 2016), and the total amount of covered bonds of $7.0 billion was recognized in Deposits on the Consolidated
Balance Sheet ($6.7 billion as at October 31, 2016). For additional information, see Note 13.
The underlying asset is a building located in Canada.
The underlying assets are insured and uninsured residential mortgage loans of the Bank. As at October 31, 2017, insured loans amounted to $82 million ($148 million as at
October 31, 2016). The average maturity of the underlying assets is two years. For additional information, see Note 20.
The underlying assets consist of equipment leased under operating leases.
89
189
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 29 – RELATED PARTY DISCLOSURES
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other operations
with related parties. The Bank considers the following to be related parties.
—
—
—
—
Its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household.
Entities over which its key officers and directors and their immediate family have control and/or significant influence through their significant voting
power.
The Bank’s associates and joint ventures.
The Bank’s pension plans (for additional information, see Note 24).
According to the established definition, the Bank’s key officers are those persons having authority and responsibility for planning, directing and controlling the
Bank’s activities, directly or indirectly.
Related Party Transactions
As at October 31
Assets
Mortgage loans and other loans(3)
Other
Liabilities
Deposits
Other
Key officers
and directors(1)
2016(2)
34
−
38
−
2017
30
−
43
−
2017
(4)
364
21
(5)
789
23
Related entities
2016
(4)
789
43
(5)
628
19
(1)
(2)
(3)
(4)
(5)
As at October 31, 2017, key officers, directors and their immediate family members were holding $46 million of the Bank’s common and preferred shares ($29 million as at
October 31, 2016).
For the year ended October 31, 2016, certain amounts have been revised from those previously reported.
The Bank did not record any allowance or provisions for credit losses in fiscal years 2017 and 2016.
As at October 31, 2017, mortgage loans and other loans consisted of: (i) $28 million in loans to the Bank’s associates and joint ventures ($190 million as at October 31, 2016), and
(ii) $336 million in loans to entities whose key officers, directors and their immediate family members exercise control or significant influence through significant voting power ($599 million
as at October 31, 2016).
As at October 31, 2017, deposits consisted of: (i) $285 million in deposits from the Bank’s associates and joint ventures ($321 million as at October 31, 2016) and (ii) $504 million in
deposits from entities whose key officers, directors and their immediate family members exercise control or significant influence through significant voting power ($307 million as at
October 31, 2016).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions similar to
those offered to non-related third parties. These agreements did not have a significant impact on the Bank’s results. The Bank also offers a deferred stock unit
plan to directors who are not Bank employees. For additional information, see Notes 9, 23 and 28.
Compensation of Key Officers and Directors
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
2017
24
21
2016
19
19
190
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Principal Subsidiaries of the Bank(1)
Name
Business activity
Principal office address
As at October 31, 2017
Investment
at cost
Voting
shares(2)
Canada and United States
National Bank Acquisition Holding Inc.
National Bank Group Inc.
National Bank Financial Inc.
NBCN Inc.
National Bank Financial Ltd.
NBF International Holdings Inc.
Credigy International Holdings Inc.
National Bank of Canada Financial Group Inc.
Credigy Ltd.
National Bank of Canada Financial Inc.
National Bank Life Insurance Company
Natcan Trust Company
National Bank Trust Inc.
National Bank Realty Inc.
National Bank Investments Inc.
National Bank Direct Brokerage Inc.
NatBC Holding Corporation
Natbank, National Association
Other countries
Natcan Global Holdings Ltd.
NBC Global Finance Limited
NBC Financial Markets Asia Limited
Advanced Bank of Asia Limited
ATA IT Ltd.
(1)
(2)
Excluding consolidated structured entities. See Note 28.
The Bank’s percentage of voting rights in these subsidiaries.
Holding company
Holding company
Investment dealer
Investment dealer
Investment dealer
Holding company
Holding company
Holding company
Holding company
Investment dealer
Insurance
Trustee
Trustee
Real estate
Mutual funds dealer
Investment dealer
Holding company
Banking
Montreal, Canada
Montreal, Canada
Montreal, Canada
Toronto, Canada
Montreal, Canada
Montreal, Canada
Montreal, Canada
New York, NY, United States
Atlanta, GA, United States
New York, NY, United States
Montreal, Canada
Montreal, Canada
Montreal, Canada
Montreal, Canada
Montreal, Canada
Montreal, Canada
Hollywood, FL, United States
Hollywood, FL, United States
Holding company
Investment services
Investment dealer
Commercial bank
Information technology
Sliema, Malta
Dublin, Ireland
Hong Kong, China
Phnom Penh, Cambodia
Bangkok, Thailand
100%
100%
100%
100%
100%
100%
80%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90%
100%
772
238
195
13
585
38
31
22
5
283
3
NOTE 30 – MANAGEMENT OF THE RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Bank is exposed to credit risk, market risk, liquidity risk and financing risk. The Bank’s objectives, policies and procedures for managing risk and the risk
measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2017. Text in grey shading and tables
identified with an asterisk (*) in the Risk Management section of the MD&A are an integral part of these consolidated financial statements.
Residual Contractual Maturities of Balance Sheet Items and Off-Balance-Sheet Commitments
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2017 and 2016. The
information gathered from this maturity analysis is a component of liquidity and funding management. However, this maturity profile does not represent how
the Bank manages its interest rate risk nor its liquidity risk and funding needs. The Bank considers factors other than contractual maturity in the assessment of
liquid assets or in determining expected future cash flows.
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the funding needs of its
clients represent the maximum amount of additional credit the Bank could be obligated to extend if the commitments were fully drawn.
The Bank also has future minimum commitments under leases for premises as well for other contracts, mainly contracts for outsourced information technology
services. Most of the lease commitments are related to operating leases.
91
191
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 30 – MANAGEMENT OF THE RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (cont.)
Assets
Cash and deposits
with financial institutions
Securities
At fair value through
profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans and acceptances(1)
Residential mortgage
Personal and credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
Purchased receivables
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2017
6,181
534
23
1
1
4
−
−
2,058
8,802
467
−
25
492
1,182
67
−
1,249
931
19
−
950
1,623
29
−
1,652
909
30
603
1,542
3,413
419
388
4,220
8,166
3,973
7,181
19,320
4,502
3,496
1,058
9,056
26,343
519
−
26,862
47,536
8,552
9,255
65,343
8,235
2,717
1,534
129
19
3,677
770
−
3,708
20,789
758
227
7,576
1,039
343
2,493
1,428
550
2,014
2,735
873
2,192
2,046
680
1,840
7,944
2,893
4,636
33,029
9,557
9,946
1,525
2,779
2,718
14
19,061
8,275
50,518
36,963
41,690
5,030
865
96
−
−
−
−
−
13,591
4,740
4,088
5,800
4,566
15,473
52,532
7,022
546
861
402
255
180
903
2,070
3,177
381
927
29,426
109
970
10,210
71
473
7,068
85
340
7,922
36
216
6,344
83
986
24,360
79
2,149
74,771
109
3,286
19,364
−
(719)
26,631
5,991
(719)
134,443
29
2,014
8,423
2,014
631
558
1,409
1,239
1,223
7,103
66,362
631
558
1,409
1,239
2,176
16,450
245,827
(1)
Amounts collectible on demand are considered to have no specified maturity.
192
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Liabilities, Equity and Off-Balance-Sheet Commitments
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2017
Deposits(1)(2)
Personal
Business and government
Deposit-taking institutions
Other
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Other liabilities – Other items(1)(5)
944
10,689
2,252
13,885
5,030
1,243
5,652
408
−
−
327
12,660
1,829
5,744
495
8,068
865
472
932
919
1,873
−
85
5,146
2,410
6,423
134
8,967
2,083
2,539
−
4,622
2,578
2,032
−
4,610
4,641
7,762
−
12,403
8,463
10,601
−
19,064
2,255
4,843
53
7,151
28,516
46,938
2,447
77,901
53,719
97,571
5,381
156,671
96
−
259
118
3,049
448
448
−
231
4,531
3,315
303
1,081
−
55
4,872
−
99
−
255
−
−
51
405
−
−
−
−
−
5,991
578
6,147
4,553
1,894
15,363
−
826
3,486
36
75
5,001
−
1,541
−
1,906
8,819
6
21,767
6,612
9,272
873
130
17,963
3,938
−
163
10,560
−
−
3,732
14,451
20,098
909
4,849
75,589
−
−
9
−
9
Subordinated debt
−
−
−
−
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Lease commitments and
other contracts
26,545
13,214
13,498
9,494
5,015
17,404
37,027
17,720
240
848
648
906
408
892
40
2
−
3,841
2,736
3,532
2,298
3,214
15
4,100
−
3,303
−
3,584
−
6,730
79
147
199
195
190
676
1,431
−
124
425
13,558
105,910
13,558
245,827
−
7,688
3,984
7,688
−
23,963
5,049
52,391
−
3,342
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts payable upon demand or notice are considered to have no specified maturity.
The Deposits item is presented in greater detail than it is on the Consolidated Balance Sheet.
Amounts are disclosed according to the remaining contractual maturity of the underlying security.
These amounts mainly include liabilities related to the securitization of mortgage loans.
The Other liabilities item is presented in greater detail than it is on the Consolidated Balance Sheet.
These amounts are unconditionally revocable at the Bank’s discretion at any time.
In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $2.3 billion.
These amounts include $39.6 billion that is unconditionally revocable at the Bank’s discretion at any time.
93
193
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 30 – MANAGEMENT OF THE RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS (cont.)
Assets
Cash and deposits
with financial institutions
Securities
At fair value through
profit or loss
Available-for-sale
Held-to-maturity
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans and acceptances(1)
Residential mortgage
Personal and credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
Purchased receivables
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)(2)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2016
5,487
199
21
22
7
−
−
−
2,447
8,183
1,066
108
−
1,174
1,207
177
−
1,384
2,646
134
−
2,780
702
76
−
778
935
63
472
1,470
4,800
365
30
5,195
7,864
7,553
3,263
18,680
5,641
5,580
204
11,425
21,103
552
−
21,655
45,964
14,608
3,969
64,541
4,842
2,320
2,846
1,532
10
456
−
−
1,942
13,948
874
873
6,266
1,155
413
2,116
1,607
592
1,937
2,389
724
2,321
1,839
570
1,731
7,764
2,235
4,684
32,034
8,797
8,578
1,193
2,041
2,275
13
17,719
7,778
48,868
33,964
37,686
5,633
718
90
−
−
−
−
−
13,646
4,402
4,226
5,434
4,140
14,683
49,409
5,509
569
730
457
293
219
838
2,628
4,682
294
863
26,012
122
852
9,157
71
528
10,401
77
370
8,136
92
311
5,938
123
961
21,295
90
2,718
70,807
125
4,807
21,741
−
(781)
24,729
6,441
(781)
126,178
−
1,858
10,416
1,858
645
1,338
1,412
1,140
1,553
7,946
58,719
645
1,338
1,412
1,140
2,547
19,356
232,206
(1)
(2)
Amounts collectible on demand are considered to have no specified maturity.
The Due from clients, dealers and brokers amount of $843 million presented separately on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Other assets.
194
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
Liabilities, Equity and Off-Balance-Sheet Commitments
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2016
Deposits(1)(2)
Personal(3)
Business and government(3)(4)
Deposit-taking institutions(3)
Other
Acceptances
Obligations related
to securities sold short(5)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(6)
Securitization – Credit card(7)
Other liabilities – Other items(1)(4)(7)
978
9,493
3,466
13,937
5,631
84
11,992
661
−
424
470
19,262
1,905
4,210
222
6,337
719
201
1,505
693
1,341
−
296
4,755
2,827
4,591
310
7,728
91
50
3,555
486
324
−
127
4,633
1,824
1,981
31
3,836
−
41
4,260
303
1,107
−
19
5,730
Subordinated debt
−
−
1,003
−
1,499
3,419
7
4,925
4,448
5,880
−
10,328
9,208
9,012
−
18,220
1,776
6,343
61
8,180
28,056
38,976
1,543
68,575
52,521
83,905
5,640
142,066
−
53
−
182
548
−
77
860
−
−
−
−
−
6,441
586
4,652
5,629
2,911
14,207
−
740
2,465
−
43
3,834
−
1,608
−
3,052
9,795
873
88
17,016
4,551
−
197
13,429
1,324
−
−
−
3,272
7,507
22,636
7,725
20,131
1,297
4,589
77,026
−
−
9
−
1,012
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(8)
Backstop liquidity and credit
enhancement facilities(9)
Commitments to extend credit(10)
Lease commitments and
other contracts
33,199
11,092
13,364
9,566
5,785
14,162
35,236
21,618
145
614
288
286
282
693
741
212
−
1,149
2,056
1,293
3,898
1,012
15
1,927
−
1,685
−
8,525
−
10,565
87
169
243
236
221
718
1,526
−
550
520
12,102
88,184
12,102
232,206
−
7,187
3,261
7,187
−
21,109
5,969
47,815
−
3,720
(1)
(2)
(3)
(4)
Amounts payable upon demand or notice are considered to have no specified maturity.
The Deposits item is presented in greater detail than it is on the Consolidated Balance Sheet.
Certain amounts have been revised from those previously reported.
An amount of $2,699 million reported in Due to clients, dealers and brokers on the Consolidated Balance Sheet as at October 31, 2016 is now reported in Deposits – Business and
government ($2,159 million) and in Other liabilities – Other items ($540 million).
Amounts have been disclosed according to the remaining contractual maturity of the underlying security.
These amounts mainly include liabilities related to the securitization of mortgage loans.
The Other liabilities item is presented in greater detail than it is on the Consolidated Balance Sheet.
These amounts are unconditionally revocable at the Bank’s discretion at any time.
In the event of payment on one of the backstop liquidity facilities, the Bank will receive as collateral government bonds in an amount up to $2.3 billion.
(5)
(6)
(7)
(8)
(9)
(10) These amounts include $21.1 billion that is unconditionally revocable at the Bank’s discretion at any time.
95
195
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 31 – INTEREST RATE SENSITIVITY
The Bank offers a range of financial products whose cash flows are sensitive to interest rate fluctuations. Interest rate risk arises from on- and off-balance-
sheet cash flow mismatches. The degree of exposure is based on the magnitude and direction of interest rate movements and on the extent of the mismatch of
the maturities. Analyzing interest rate sensitivity gaps is one of the techniques used by the Bank to manage interest rate risk.
The following table presents the sensitivity of the Bank’s Consolidated Balance Sheet items to interest rate fluctuations.
As at October 31
Floating
rate
3 months
or less
Over 3
months to
12 months
Over 1
year to
5 years
Over
5 years
Non-
interest
sensitive
2017
2016
Total
Total
Assets
Cash and deposits with financial institutions
Effective yield
Securities
Effective yield
Loans and acceptances, net of allowances(1)
Effective yield
Other
Liabilities and equity
Deposits(2)
Effective yield
Obligations related to securities sold short and
related to securities sold under repurchase
agreements and securities loaned
Effective yield
Subordinated debt
Effective yield
Acceptances and other liabilities(2)
Equity
1,149
6,797
0.9 %
1,706
2,782
0.9 %
54,831
36,357
8,620
66,306
1.7 %
−
45,936
−
− %
3,992
1.5 %
16,391
2.9 %
−
20,383
−
− %
21,170
1.6 %
41,636
2.8 %
−
62,806
−
− %
856
8,802
8,183
8,838
26,855
65,343
64,541
2.6 %
2,303
7.1 %
−
11,141
3,714
155,232
140,126
7,830
39,255
16,450
245,827
19,356
232,206
61,201
28,773
16,659
28,313
3,374
18,351
156,671
142,066
1.2 %
1.5 %
1.7 %
0.5 %
7,562
8,279
5,870
6,719
4,504
4,196
37,130
36,843
−
11,675
−
80,438
1.3 %
−
− %
1.5 %
−
− %
1.5 %
−
− %
2.4 %
9
1.5 %
−
9
1,012
6,478
200
43,730
695
−
23,224
8,585
1,450
45,067
3,801
400
12,088
7,225
11,508
41,280
38,459
13,558
245,827
40,183
12,102
232,206
On-balance-sheet gap
(14,132)
2,206
(2,841)
17,739
(947)
(2,025)
−
−
Position in Canadian dollars
Position in foreign currency
(4,972)
(9,160)
6,415
(4,209)
4,034
(6,875)
21,618
(3,879)
(1,832)
885
(11,843)
9,818
13,420
(13,420)
7,505
(7,505)
On-balance-sheet gap
(14,132)
2,206
(2,841)
17,739
(947)
(2,025)
−
−
(1)
(2)
Includes securities purchased under reverse repurchase agreements and securities borrowed.
Certain amounts have been revised from those previously reported, particularly an amount of $2,159 million, representing amounts due to clients, dealers and brokers, classified in the
Other liabilities item of this table as at October 31, 2016 that is now reported in Deposits.
The effective yield represents the weighted average effective yield based on the earlier of contractual repricing and maturity dates.
196
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 32 – SEGMENT DISCLOSURES
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2016. This
presentation reflects the fact that the activities of subsidiary Credigy Ltd., which had previously been presented in the Financial Markets segment, and that the
activities of subsidiary Advanced Bank of Asia Limited (ABA Bank) and of other international investments, which had previously been presented in the Other
heading, are now presented in the U.S. Specialty Finance and International (USSF&I) segment. The Bank made this change to better align the monitoring of its
activities with its management structure.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals and businesses as well as insurance
operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions
offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses banking services, investment banking services and financial solutions for large and mid-size corporations, public
sector organizations, and institutional investors. The segment is also active in proprietary trading and investment activities for the Bank.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by subsidiary Credigy Ltd.; the activities of subsidiary ABA Bank, which offers
financial products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging markets.
Other
This heading encompasses Treasury activities, including the Bank’s asset and liability management, liquidity management and funding operations, certain
non-recurring items and the unallocated portion of corporate services.
The segment disclosures have been prepared in accordance with the accounting policies described in Note 1, except for the net interest income, non-interest
income and income taxes (recovery) of the operating segments, which are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation
method that consists in grossing up certain tax-exempt income by the amount of income tax that would have otherwise been payable. The effect of these
adjustments is reversed under the Other heading. Head office expenses are allocated to each operating segment presented in the business segment results.
The Bank assesses performance based on the net income attributable to the Bank’s shareholders. Intersegment revenues are recognized at the exchange
amount. Segment assets correspond to average assets used in segment operations.
97
197
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 32 – SEGMENT DISCLOSURES (cont.)
Results by Business Segment
Year ended October 31(1)
Net interest income(2)
Non-interest income(2)
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses(3)
Income before income taxes
(recovery)
Income taxes (recovery)(2)
Net income
Non-controlling interests
Net income attributable to the
Bank’s shareholders
Average assets
Personal and
Commercial
2016
2017
Wealth
Management
2016
2017
Financial
Markets
2016
2017
2017
USSF&I
2016
2,071
990
3,061
1,646
1,415
153
1,262
337
925
−
1,955
945
2,900
1,662
1,238
475
431
1,173
1,604
1,036
568
3
372
1,069
1,441
999
442
5
782
848
1,630
658
972
−
938
375
1,313
615
698
−
763
206
557
−
565
149
416
−
437
116
321
−
972
260
712
−
698
213
485
−
262
279
541
225
316
48
268
84
184
29
71
340
411
207
204
4
200
53
147
20
2017
(314)
87
(227)
292
(519)
40
(559)
(346)
(213)
55
Other
2016
(344)
119
(225)
392
(617)
−
(617)
(363)
(254)
55
2017
Total
2016
3,232
3,377
6,609
3,857
2,752
244
2,508
484
2,024
84
2,992
2,848
5,840
3,875
1,965
484
1,481
225
1,256
75
925
96,261
557
92,234
416
11,652
321
11,006
712
95,004
485
87,504
155
7,519
127
5,319
(268)
37,915
(309)
39,850
1,940
248,351
1,181
235,913
(1)
(2)
(3)
For the year ended October 31, 2016, certain amounts have been revised from those previously reported, particularly in the Personal and Commercial segment, where an amount of
$36 million reported in Non-interest income was reclassified to Net interest income.
For the year ended October 31, 2017, Net interest income was grossed up by $209 million ($231 million in 2016), Non-interest income was grossed up by $35 million ($4 million in 2016),
and an equivalent amount was recognized in Income taxes (recovery). The effect of these adjustments is reversed under the Other heading.
During the year ended October 31, 2017, the Bank reversed, by $40 million, the sectoral provision on non-impaired loans recorded for the oil and gas producer and service company loan
portfolio presented in the Personal and Commercial segment, and the $40 million in provisions for credit losses in the Other heading reflects an increase in the collective allowance for credit
risk on non-impaired loans. For the year ended October 31, 2016, the Provisions for credit losses item had included a $250 million sectoral provision on non-impaired loans recorded for the
oil and gas producer and service company loan portfolio, reported in the Personal and Commercial segment.
Results by Geographic Segment
Year ended October 31
Net interest income(1)
Non-interest income(1)
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders
Average assets
2017
Canada
2016
United States
2016
2017
2,748
2,992
5,740
3,571
2,169
196
1,973
354
1,619
61
1,558
212,946
2,839
2,430
5,269
3,601
1,668
480
1,188
162
1,026
57
969
209,414
255
340
595
209
386
44
342
107
235
23
212
18,479
110
337
447
235
212
4
208
56
152
18
134
18,325
2017
229
45
274
77
197
4
193
23
170
−
170
16,926
Other
2016
2017
Total
2016
43
81
124
39
85
−
85
7
78
−
78
8,174
3,232
3,377
6,609
3,857
2,752
244
2,508
484
2,024
84
1,940
248,351
2,992
2,848
5,840
3,875
1,965
484
1,481
225
1,256
75
1,181
235,913
(1)
For the year ended October 31, 2016, certain amounts have been revised from those previously reported, particularly an amount of $36 million reported in Non-interest income was
reclassified to Net interest income to better reflect the nature of the income.
198
National Bank of Canada2017 Annual Report
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS
(millions of Canadian dollars)
NOTE 33 – ACQUISITION
Acquisition of Advanced Bank of Asia Limited
On May 16, 2016, the Bank completed the acquisition of Advanced Bank of Asia Limited (ABA Bank), a major Cambodian financial institution that offers
financial products and services to individuals and businesses. This acquisition is part of the Bank’s international growth strategy and, upon completion,
brought the Bank’s common share equity interest in ABA Bank to 90%. The sum of the $119 million cash purchase price, of the fair value of the previously held
interest, and of the estimated value of the non-controlling interest established at the acquisition date exceeded the fair value of the net assets acquired by
$129 million. This excess amount was recorded on the Consolidated Balance Sheet as goodwill and mainly represents ABA Bank’s expected business growth
in Cambodia. The goodwill from this acquisition was not deductible for tax purposes. The acquired receivables, consisting mainly of personal and commercial
loans, had an estimated acquisition-date fair value of $754 million. This amount also represents the gross contractual amounts receivable that the Bank
expects to fully recover.
During the year ended October 31, 2016, the Bank also recognized a $41 million non-taxable gain on the revaluation of its previously held equity interest in
ABA Bank in the Non-interest income – Other item of the Consolidated Statement of Income. For business segment disclosure purposes, this gain and
ABA Bank’s financial results have been included in the USSF&I segment. ABA Bank’s results have been consolidated in the Bank’s financial statements since
May 17, 2016.
NOTE 34 – EVENT AFTER THE CONSOLIDATED BALANCE SHEET DATE
Redemption of Preferred Shares
On November 15, 2017, the Bank redeemed all the issued and outstanding Non-Cumulative 5-Year Rate-Reset Series 28 First Preferred Shares. Pursuant to the
share conditions, the redemption price was $25.00 per share plus the periodic dividend declared and unpaid. The Bank redeemed 8,000,000 Series 28
preferred shares for a total amount of $200 million, which will reduce Preferred share capital.
99
199
National Bank of Canada2017 Annual Report
SUPPLEMENTARY
INFORMATION
Statistical Review
Glossary of Financial Terms
Information for Shareholders
202
204
206
SUPPLEMENTARY INFORMATION
STATISTICAL REVIEW
As at October 31(1)
(millions of Canadian dollars)
Consolidated Balance Sheet data
Cash and deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances
Other assets
Total assets
Deposits(2)
Other liabilities(2)
Other liabilities and non-controlling interests
Subordinated debt
Share capital
Preferred
Common
Contributed surplus
Retained earnings
Accumulated other comprehensive
income (loss)
Non-controlling interests
Total liabilities and equity
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
8,802
65,343
8,183
64,541
7,567
56,040
8,086
52,953
3,596
53,744
3,249
54,898
2,851
56,592
2,274
54,268
2,228
50,233
3,660
46,185
20,789
134,443
16,450
245,827
156,671
75,589
13,948
126,178
19,356
232,206
142,066
77,026
17,702
115,238
19,543
216,090
130,458
72,755
24,525
106,169
13,696
205,429
119,883
73,163
21,449
97,338
12,092
188,219
102,111
74,729
15,529
90,922
13,305
177,903
93,474
73,948
12,507
80,758
14,146
166,854
85,787
71,791
10,878
63,134
14,748
145,302
81,785
7,637
58,370
13,670
132,138
75,170
7,868
56,015
15,604
129,332
76,022
9
1,012
1,522
1,881
2,426
2,470
2,000
2,050
2,768
58
7,706
1,650
2,645
73
6,706
1,023
2,614
67
6,705
1,223
2,293
52
5,850
677
2,160
58
5,055
762
2,054
58
4,091
168
808
245,827
218
810
232,206
145
801
216,090
289
795
205,429
214
789
188,219
255
791
177,903
762
1,970
46
3,366
337
795
54,276
2,033
48,474
2,017
45,546
2,255
1,089
1,804
66
4,081
1,089
1,729
48
3,515
774
1,656
31
3,110
168
96
(62)
166,854
145,302
132,138
129,332
Average assets
Net impaired loans(3)
248,351
206
235,913
281
222,929
254
206,680
248
193,509
183
181,344
179
165,942
175
140,360
162
140,978
223
128,319
169
Consolidated Statement of Income data
Net interest income(4)
Non-interest income(4)
Total revenues
Provisions for credit losses
Non-interest expenses
Income taxes
Non-controlling interests
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders
3,232
3,377
6,609
244
3,857
484
2,992
2,848
5,840
484
3,875
225
2,717
3,029
5,746
228
3,665
234
2,584
2,880
5,464
208
3,423
295
2,478
2,673
5,151
181
3,206
252
2,365
2,936
5,301
180
3,207
317
2,318
2,336
4,654
184
2,952
264
2,024
84
1,256
75
1,619
70
1,538
69
1,512
63
1,597
61
1,254
60
1,940
1,181
1,549
1,469
1,449
1,536
1,194
1,933
2,351
4,284
144
2,822
221
63
1,034
1,961
2,172
4,133
305
2,662
252
60
854
1,772
2,062
3,834
144
2,695
167
52
776
(1)
(2)
(3)
(4)
The figures for 2010 and prior years are presented in accordance with previous Canadian GAAP, and certain amounts from fiscal years 2013, 2012 and 2011 have been adjusted to reflect
changes to the accounting standards in 2014.
Certain amounts have been revised from those previously reported, particularly an amount of $2,159 million representing amounts due to clients, dealers and brokers, classified in Other
liabilities in this table as at October 31, 2016, that is now reported in Deposits ($1,628 million as at October 31, 2015). Figures as at October 31, 2014 and preceding years were not
adjusted to reflect those modifications.
Includes customers’ liability under acceptances.
The figures for fiscal years 2012 to 2016 have been adjusted to reflect the reclassification of certain amounts between the Non-interest income – Credit fees and the Net interest income
items and thereby better reflect the nature of the income reported in the Personal and Commercial segment.
202
National Bank of Canada2017 Annual Report
SUPPLEMENTARY INFORMATION
STATISTICAL REVIEW
As at October 31(1)
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
Number of common shares(2)
(thousands)
Number of common
339,592
338,053
337,236
329,297
325,983
322,617
320,948
325,544
322,402
318,894
shareholders on record
21,542
21,966
22,152
22,394
22,737
23,180
23,588
23,598
23,970
24,354
Basic earnings
per share(2)
Diluted earnings
per share(2)
Dividend per share(2)
Share price(2)
High
Low
Close
Book value(2)
Dividends on preferred
shares
Series 15
Series 16
Series 20
Series 21
Series 24
Series 26
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Financial ratios
Return on common
shareholders’ equity
Return on average assets
Regulatory ratios under
Basel III
Capital ratios(3)
CET1(4)
Tier 1(4)(5)
Total(4)(5)
Leverage ratio(4)
$
5.44
$
$
$
$
$
$
$
$
$
$
$
$
5.38
2.28
62.74
46.83
62.61
31.51
–
–
–
–
–
–
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
$
$
$
$
$
$
$
3.31 $
4.56
3.29 $
2.18 $
4.51
2.04
47.88 $
35.83 $
47.88 $
28.52 $
55.06
40.75
43.31
28.26
–
–
–
–
– $ 1.5000
–
–
–
–
–
–
$ 0.9500 $ 0.9500
$ 1.0250 $ 1.0250
$ 0.9750 $ 1.0760
–
$ 1.1373
–
$ 0.5733
–
–
$
$
$
$
$
$
$
4.36
4.32
1.88
53.88
41.60
52.68
25.76
–
$ 1.2125
$ 1.5000
–
$ 0.4125
$ 0.4125
$ 0.9500
$ 0.7849
–
–
–
–
$
$
$
$
$
$
$
4.34 $
4.63 $
3.41 $
3.00 $
2.48 $
2.35
4.31 $
1.70 $
4.58 $
1.54 $
3.37 $
1.37 $
2.97 $
1.24 $
2.47 $
1.24 $
2.34
1.24
45.24 $
36.18 $
45.24 $
22.97 $
40.64 $
31.64 $
38.59 $
20.02 $
40.72 $
32.43 $
35.57 $
17.82 $
33.94 $
27.23 $
33.57 $
18.80 $
31.04 $
12.81 $
28.20 $
16.72 $
27.32
21.13
22.61
14.85
$ 0.2444 $ 1.4625 $ 1.4625 $ 1.4625 $ 1.4625 $ 1.4625
$ 1.2125 $ 1.2125 $ 1.2125 $ 1.2125 $ 1.2125 $ 1.2125
$ 1.5000 $ 1.5000 $ 1.5000 $ 1.5000 $ 1.5000 $ 0.8692
$ 1.0078 $ 1.3438 $ 1.3438 $ 1.3438 $ 1.3438 $ 0.5596
–
$ 1.6500 $ 1.6500 $ 1.6500 $ 1.6500 $ 1.3765
–
$ 1.6500 $ 1.6500 $ 1.6500 $ 1.6500 $ 1.3042
–
–
$ 0.9728
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
18.1 %
0.81 %
11.7 %
0.53 %
16.9 %
0.73 %
17.9 %
0.74 %
20.1 %
0.78 %
24.1 %
0.88 %
19.8 %
0.76 %
17.0 %
0.74 %
15.6 %
0.61 %
16.4 %
0.60 %
11.2 %
14.9 %(6)
15.1 %(6)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(7)
14.0 %(9)
3.7 %
9.2 %
12.3 %(8)
15.1 %(8)
8.7 %
11.4 %
15.0 %
7.3 %
10.1 %
14.1 %
7.6 %
10.8 %
14.3 %
14.0 %
17.5 %
10.7 %
14.3 %
9.4 %
13.2 %
Other information
Number of employees(10)(11)
Branches in Canada
Banking machines in Canada
20,584
429
931
20,600
450
938
19,026
452
930
18,725
452
935
16,675
453
937
16,636
451
923
16,217
448
893
15,298
442
869
14,851
445
866
14,420
446
858
(1)
(2)
(3)
(4)
(5)
The figures for 2010 and prior years are presented in accordance with previous Canadian GAAP, and certain amounts from fiscal years 2013, 2012 and 2011 have been adjusted to reflect
changes to the accounting standards in 2014.
The figures for 2014 and prior years have been adjusted to reflect the stock dividend paid in 2014.
The October 31, 2013, 2012 and 2011 ratios have not been adjusted to reflect changes in accounting standards.
Since October 31, 2013, the capital ratios were calculated using the “all-in” methodology and the October 31, 2012 and 2011 ratios are presented on a pro forma basis.
In 2008, the Bank adopted the rules of the Basel II Accord and, since November 1, 2009, it has been applying the AIRB Approach for credit risk, whereas prior to that date, it had been using
the Standardized Approach.
Taking into account the redemption of the Series 28 preferred shares on November 15, 2017.
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015.
Taking into account the redemption of the Series 16 preferred shares on November 15, 2014.
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015 and the $500 million redemption of notes on November 2, 2015.
(6)
(7)
(8)
(9)
(10) Full-time equivalent.
(11) Number of employees includes employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2017.
203
203
National Bank of Canada2017 Annual Report
SUPPLEMENTARY INFORMATION
GLOSSARY OF FINANCIAL TERMS
Acceptances
Acceptances constitute a guarantee of payment by a bank and can be traded
in the money market. The Bank earns a “stamping fee” for providing this
guarantee.
Allowances for credit losses
Allowances for credit losses are management’s best estimate of losses in its
credit portfolio as at the balance sheet date. These allowances are primarily
related to loans but may also cover the credit risk associated with deposits
with financial institutions, loan substitute securities, credit instruments such
as acceptances, and off-balance-sheet items such as commitments to extend
credit, letters of guarantee and letters of credit. The allowances are increased
by the provisions for credit losses, which are charged to income and
decreased by the amount of write-offs, net of recoveries in the period.
Assets under administration
Assets in respect of which a financial institution provides administrative
services such as custodial services, collection of investment income,
settlement of purchase and sale transactions and record-keeping. Assets
under administration, which are beneficially owned by clients, are not
reported on the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution that are beneficially owned by
clients. Management services are more comprehensive than administrative
services, and include selecting investments or offering investment advice.
Assets under management, which may also be administered by the financial
institution, are not reported on the financial institution’s balance sheet.
Average interest-bearing assets
Average interest-bearing assets include deposits with financial institutions,
certain interest-bearing cash items, securities, securities purchased under
reverse repurchase agreements and securities borrowed, and loans but
excludes other assets. The average is calculated based on the daily averages
for the year.
Basis point
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Common Equity Tier 1 (CET1) capital ratio
Common Equity Tier 1 capital consists of common shareholders’ equity less
goodwill, intangible assets and other capital deductions. Common Equity
Tier 1 capital ratio is calculated by dividing Common Equity Tier 1 capital by
the corresponding risk-weighted assets.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, exchange rate or equity, commodity
or credit instrument or index. Examples of derivatives include swaps,
options, forward rate agreements and futures. The notional amount of the
derivative is the contract amount used as a reference point to calculate the
payments to be exchanged between the two parties, and the notional amount
itself is generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net income after preferred share
dividends.
204
Economic capital
Economic capital is the internal measure used by the Bank to determine the
capital required for its solvency and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed, as well as the risk
diversification effect among them and among the business segments.
Economic capital thus helps the Bank to determine the capital required to
protect itself against such risks and ensure its long-term viability.
Efficiency ratio
Non-interest expenses as a percentage of total revenue, the efficiency ratio
measures the efficiency of the Bank’s operations.
Fair value
The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction in the
principal market at the measurement date under current market conditions
(i.e., an exit price).
Hedging
The purpose of a hedging transaction is to modify the Bank’s exposure to one
or more risks by creating an offset between changes in the fair value of, or
the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loan
A loan, except credit card receivables, is considered impaired if there is
objective evidence of impairment and, in management’s best estimate, the
timely collection of principal and interest is no longer reasonably assured, or
when a payment is contractually 90 days past due, unless the loan is fully
secured and collection efforts are reasonably expected to result in repayment
of the debt within 180 days. Loans that are insured or fully guaranteed by a
Canadian government (federal or provincial) or by a Canadian government
agency are considered impaired when they are more than 365 days in
arrears.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure.
Total exposure is defined as the sum of on-balance-sheet assets (including
derivative exposures and securities financing transaction exposures) and off-
balance-sheet items.
Liquidity coverage ratio
The liquidity coverage ratio is a measure designed to ensure that the Bank
has sufficient high-quality liquid assets to cover net cash outflows given a
severe, 30-day liquidity crisis.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts
with each other that provides for the net settlement of all contracts through a
single payment, in the event of default, insolvency or bankruptcy.
Net interest margin
Net interest income as a percentage of average interest-bearing assets.
National Bank of Canada2017 Annual Report
SUPPLEMENTARY INFORMATION
GLOSSARY OF FINANCIAL TERMS
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
The mandate of the Office of the Superintendent of Financial Institutions
(OSFI) is to regulate and supervise financial institutions and private pension
plans subject to federal oversight, to help minimize undue losses to
depositors and policyholders and, thereby, to contribute to public confidence
in the Canadian financial system.
Structured entity
A structured entity is an entity created to accomplish a narrow and well-
defined objective and is designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when voting
rights relate solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
Operating leverage
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses.
Taxable equivalent basis
Taxable equivalent basis is a calculation method that consists in grossing up
certain tax-exempt income by the amount of income tax that would have
otherwise been payable.
Provisions for credit losses
The amount charged to income necessary to bring the allowances for credit
losses to a level determined appropriate by management. This includes
provisions for impaired loans and non-impaired loans.
Return on common shareholders’ equity (ROE)
Net income, less dividends on preferred shares, expressed as a percentage
of the average value of common shareholders’ equity.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In
the Standardized calculation approach, factors are applied to the face value
of certain assets in order to reflect comparable risk levels. In the Advanced
Internal Rating-Based (AIRB) approach, risk-weighted assets are derived from
the Bank's internal models, which represent the Bank's own assessment of
the risks it incurs. Off-balance-sheet instruments are converted to balance
sheet (or credit) equivalents by adjusting the notional values before applying
the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement
under which the securities will be resold to the same client on a specified
date and at a specified price. Such an agreement is a form of short-term
collateralized lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional
Tier 1 instruments, namely, eligible non-cumulative preferred shares and the
eligible amount of innovative instruments. Tier 1 capital ratio is calculated by
dividing Tier 1 capital, less regulatory adjustments, by the corresponding
risk-weighted assets.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of
the eligible portion of subordinated debt and certain loan loss allowances.
Total capital ratio is calculated by dividing total capital, less regulatory
adjustments, by the corresponding risk-weighted assets.
Total shareholder return
The total shareholder return (TSR) represents the average total return on an
investment in the Bank’s common shares. The return includes changes in
share price and assumes that the dividends received were reinvested in
additional common shares of the Bank.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks
across products, per types of risks and aggregate risk on a portfolio basis.
VaR is defined as the maximum loss at a specific confidence level over a
certain horizon under normal market conditions. The VaR method has the
advantage of providing a uniform measurement of financial instrument-
related market risks based on a single statistical confidence level and time
horizon.
05
205
National Bank of Canada2017 Annual Report
SUPPLEMENTARY INFORMATION
INFORMATION FOR SHAREHOLDERS
Description of Share Capital
Dividends Declared on Common Shares During Fiscal 2017
The authorized share capital of the Bank consists of an unlimited number of
common shares, without par value, an unlimited number of first preferred
shares, without par value, issuable for a maximum aggregate consideration
of $5 billion, and 15 million second preferred shares, without par value,
issuable for a maximum aggregate consideration of $300 million. As at
October 31, 2017, the Bank had a total of 339,591,965 common shares and
82,000,000 first preferred shares issued and outstanding.
Ex-dividend date
Record date
Payment date
December 22, 2016
December 28, 2016
February 1, 2017
March 23, 2017
June 22, 2017
September 21, 2017
September 25, 2017
March 27, 2017
May 1, 2017
June 26, 2017
August 1, 2017
November 1, 2017
Dividend per
share ($)
0.56
0.56
0.58
0.58
Stock Exchange Listings
The Bank’s common shares and Series 28, 30, 32, 34, 36 and 38 First
Preferred Shares are listed on the Toronto Stock Exchange in Canada.
Ex-dividend
date
Record
date
Payment
date
Series
28
Series
30
Series
32
Dividend per share ($)
Series
38
Series
36
Series
34
Issue or class
Ticker symbol
Newspaper abbreviation
Apr. 6, 17
Apr. 10, 17 May 15, 17
0.2375
0.2562
0.2437
0.3500
0.3375
Jul. 6, 17
Jul. 10, 17 Aug. 15, 17
0.2375
0.2563
0.2438
0.3500
0.3375
Dec. 30, 16
Jan. 4, 17
Feb. 15, 17
0.2375
0.2563
0.2438
0.3500
0.3375
−
−
−
Dividends Declared on Preferred Shares During Fiscal 2017
NA
Nat Bk or Natl Bk
Oct. 5, 17
Oct. 10, 17 Nov. 15, 17
0.2375
0.2562
0.2437
0.3500
0.3375
0.4724
Dividends paid are “eligible dividends” in accordance with the Income Tax
Act (Canada).
Dividend Reinvestment and Share Purchase Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for
Canadian holders of its common and preferred shares under which they can
acquire common shares of the Bank without paying commissions or
administration fees. Canadian participants acquire common shares through
the reinvestment of cash dividends paid on the shares they hold or through
optional cash payments of at least $500 per payment, up to a maximum of
$5,000 per quarter.
For additional information, shareholders may contact National Bank’s
registrar and transfer agent, Computershare Trust Company of Canada, at
1-888-838-1407. To participate in the plan, National Bank’s beneficial or
non-registered common shareholders must contact their financial institution
or broker.
Direct Deposit
Shareholders may elect to have their dividend payments deposited directly
via electronic funds transfer to their bank account at any financial institution
that is a member of the Canadian Payments Association. To do so, they must
send a written request to the Transfer Agent, Computershare Trust Company
of Canada.
Common shares
First Preferred Shares
Series 28(1)
Series 30
Series 32
Series 34
Series 36
Series 38
NA.PR.Q Nat Bk s28 or Natl Bk s28
NA.PR.S Nat Bk s30 or Natl Bk s30
NA.PR.W Nat Bk s32 or Natl Bk s32
NA.PR.X Nat Bk s34 or Natl Bk s34
NA.PR.A Nat Bk s36 or Natl Bk s36
NA.PR.C Nat Bk s38 or Natl Bk s38
(1)
On November 15, 2017, the Bank redeemed all the issued and outstanding Non-
Cumulative 5-Year Rate-Reset Series 28 First Preferred Shares. Pursuant to the share
conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 8,000,000 Series 28 preferred shares for a
total amount of $200 million.
Number of Registered Shareholders
As at October 31, 2017, there were 21,542 common shareholders recorded
in the Bank’s common share register.
Dividends
Dividend Dates in Fiscal 2018
(subject to approval by the Board of Directors of the Bank)
Ex-dividend date
Record date
Payment date
Common shares
December 22, 2017
March 22, 2018
June 22, 2018
September 20, 2018
Preferred shares,
Series 30, 32, 34, 36 and 38
January 3, 2018
April 6, 2018
July 5, 2018
October 4, 2018
December 27, 2017
February 1, 2018
March 26, 2018
June 26, 2018
May 1, 2018
August 1, 2018
September 24, 2018
November 1, 2018
January 5, 2018
April 9, 2018
July 9, 2018
October 9, 2018
February 15, 2018
May 15, 2018
August 15, 2018
November 15, 2018
206
National Bank of Canada2017 Annual Report
AT A GLANCE
integrated
to
National Bank of Canada provides
consumers, small and medium-sized enterprises
large
corporations in its domestic market while also offering specialized services
internationally.
in four business segments—Personal and
Commercial, Wealth Management, Financial Markets, and U.S. Specialty
Finance and International—with total assets of $246 billion as at October 31,
2017.
financial services
(SMEs) and
It operates
Through more than 21,000 employees, National Bank offers a complete
range of financial services that include: banking and investment solutions for
individuals and businesses as well as securities brokerage, insurance and
wealth management services.
National Bank is the leading bank in Quebec and the partner of choice for
SMEs. It is one of the six systemically important banks in Canada and has
branches
in almost every province. Through representative offices,
subsidiaries, and partnerships, it also operates in the United States, Europe
and other parts of the world.
Its head office is located in Montreal and its securities are listed on the
Toronto Stock Exchange.
3 Message From the President and Chief Executive Officer
5 Office of the President Members
6 Message From the Chairman of the Board
7 Board of Directors Members
8 Risk Disclosures
9 Management’s Discussion and Analysis
107 Audited Consolidated Financial Statements
202 Statistical Review
204 Glossary of Financial Terms
206
Information for Shareholders
Head Office
National Bank of Canada
National Bank Tower
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
Annual Meeting
The Annual Meeting of Holders of Common Shares of the Bank will be held on
Friday, April 20, 2018, at the Drummondville Centrexpo, in Drummondville,
Quebec, Canada.
Public Accountability Statement
The 2017 Social Responsibility Report will be available in March 2018 on the
Bank’s website at nbc.ca.
Communication with Shareholders
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the Transfer Agent at the following address:
Computershare Trust Company of Canada
Share Ownership Management
1500 Robert-Bourassa Boulevard, 7th Floor
Montreal, Quebec H3A 3S8 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
Shareholders whose shares are held by a market intermediary are asked to
contact the market intermediary concerned.
Other shareholder inquiries can be addressed to:
Investor Relations
National Bank of Canada
National Bank Tower
600 De La Gauchetière Street West, 7th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 1-866-517-5455
Fax:
E-mail:
Website:
514-394-6196
investorrelations@nbc.ca
nbc.ca/investorrelations
Caution Regarding Forward-Looking Statements
From time to time, National Bank of Canada makes written and oral forward-
looking statements, including in this Annual Report, in other filings with
Canadian regulators, in reports to shareholders, in press releases and in
other communications. All such statements are made pursuant to the
Canadian and American securities legislation and the provisions of the
United States Private Securities Litigation Reform Act of 1995.
Additional information about these statements can be found on page 9 of
this Annual Report.
Trademarks
The trademarks used in this report include National Bank of Canada, Private
Wealth 1859, one client, one bank, CashPerformer, NBC CapS, NBC CapS II,
NBC Asset Trust, NBC Capital Trust and National Bank All-in-One and their
respective logos, which are trademarks of National Bank of Canada used
under licence by National Bank of Canada or its subsidiaries. All other
trademarks mentioned in this report that are not the property of National
Bank of Canada are owned by their respective holders.
Pour obtenir une version française du Rapport annuel,
veuillez vous adresser à :
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Télécopieur :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
514 394-6196
Legal Deposit
ISBN 978-2-921835-55-8
Legal deposit – Bibliothèque et Archives nationales du Québec, 2017
Legal deposit – Library and Archives Canada, 2017
Printing
L’Empreinte
National Bank of Canada is proud to help save the environment by using
EcoLogo and Forest Stewardship Council® (FSC®) certified paper.
Powering
your ideasTM
2017 ANNUAL REPORT 2017 Annual Report