109191_BNC_rapport
2018 Annual ReportTM POWERING YOUR IDEAS is a trademark of National Bank of Canada.2018 Annual ReportPowering your ideasTMCOUV-ANG.indd 12018-12-13 12:50 PM At a glance 23,450 Employees2.7 million Clients428 Branches$485 BAssets under Administration and under Management 937 Banking Machines$262 B Total Assets$7,166 M Total Revenues$2,232 M Net Income$20.0 B Market CapitalizationNational Bank of Canada serves the financial needs of individuals, businesses, institutional clients and governments across Canada. Founded in 1859, the Bank is one of Canada’s six systemically important banks and among the most profitable banks on a global basis by return on equity.The Bank is a client-centric integrated financial services group operating in three Canadian business segments—Personal & Commercial Banking, Wealth Management and Financial Markets—that represent nearly 90% of its revenues. A fourth segment—U.S. Specialty Finance and International—complements the growth of our domestic operations.National Bank was established by entrepreneurs for entrepreneurs. Today it is a full-service bank with leading shares across a broad spectrum of financial products in its core Quebec market, and leadership positions across the country in selected activities. Headquartered in Montreal, the Bank has more than 23,000 employees and is proud to be recognized for being an employer of choice and for promoting diversity and inclusion. National Bank strives to meet the highest standards of social responsibility while creating value for its shareholders. The Bank’s securities are listed on the Toronto Stock Exchange (TSX: NA).Table of Contents 3 Message From the President and Chief Executive Officer 4 Office of the President Members 5 Message From the Chairman of the Board 6 Board of Directors Members 7 Social Responsibility 8 Risk Disclosures 9 Management’s Discussion and Analysis 103 Audited Consolidated Financial Statements 210 Statistical Review 212 Glossary of Financial Terms 214 Information for Shareholders(1) Excluding the Other heading2018 Total Revenues by Business Segment(1)44% 23% 9% 24% Personal and CommercialWealth ManagementFinancial MarketsU.S. Specialty Finance and International2018 Total Revenues by Geographic Distribution(1)58% 29% 13% QuebecOther provincesOutside of Canada 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 24, 2019, at Fairmont Le Château Frontenac, in Quebec City, Quebec, Canada. Public Accountability Statement The 2018 Social Responsibility Report will be available in March 2019 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 Fax: 1-888-453-0330 E-mail: service@computershare.com Website: computershare.com 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 E-mail: investorrelations@nbc.ca Website: nbc.ca/investorrelations Normal Course Issuer Bid The Bank began a normal course issuer bid (NCIB) to repurchase for cancellation up to 8,000,000 common shares for the period starting June 6, 2018 and ending June 5, 2019. Shareholders may obtain, free of charge, a copy of the notice of intent regarding this NCIB, which was approved by the Toronto Stock Exchange, by writing to the Corporate Secretary, National Bank of Canada, 600 De La Gauchetière Street West, 4th floor, Montreal, Quebec, Canada H3B 4L2. 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 : 1 866 517-5455 Adresse électronique : relationsinvestisseurs@bnc.ca Legal Deposit ISBN 978-2-921835-59-6 Legal deposit – Bibliothèque et Archives nationales du Québec, 2018 Legal deposit – Library and Archives Canada, 2018 Printing Deschamps Impression National Bank of Canada is proud to help save the environment by using EcoLogo and Forest Stewardship Council® (FSC®) certified paper.COUV-ANG.indd 22018-12-13 12:50 PM l
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National Bank of Canada2018 Annual Report 1Industry-Leading Total Shareholder Returns (CAGR(2)) (for the periods ended October 31, 2018)National BankCanadian Peers(5)3 years16.2%11.9%10 years15.1%12.5%2018 RETURN ON EQUITY18.4%(5) Includes Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia and Toronto-Dominion BankInvesting inNational Bank> Canadian super-regional bank with leading franchise in Quebec> Diversified business mix driving consistent performance– Undisputed leadership in Quebec market– Targeted growth strategy across Canada, with headroom for continued expansion– Disciplined international strategy delivering high returns> Balance between prudent risk management and sustainable growth> Transformation driving efficiencies and enhanced customer experience> Industry-leading ROE on a global basis> Strong capital level providing flexibility> Attractive dividend yield and consistent annual dividend growth> Superior total shareholder returnsSolid Capital Position(4)As at October 31, 2018Strong Earnings Growth(1)2014-2018 / CAGR(2)(4) Common Equity Tier 1 (CET1) capital ratio(1) Based on diluted earnings per share(2) Compound annual growth rate(3) Based on annual dividends per common share+8.3%Consistent Dividend Growth(3)2014-2018 / CAGR(2)6.7%11.7%
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As at October 31 or for the year ended October 31 (millions of Canadian dollars, except per share amounts) 20182017% changeOperating results Total revenues 7,166 6,609 8 Net income 2,232 2,024 10 Diluted earnings per share$ 5.94 $ 5.38 10Return on common shareholdersʼ equity 18.4 % 18.1 % Operating results on a taxable equivalent basis and excluding specified items(1)Total revenues on a taxable equivalent basis and excluding specified items 7,420 6,864 8 Net income excluding specified items 2,249 2,049 10 Diluted earnings per share excluding specified items$ 5.99 $ 5.45 10 Return on common shareholders’ equity excluding specified items 18.5 % 18.3 % Efficiency ratio on a taxable equivalent basis and excluding specified items 54.6 % 55.9 % Dividends declared$ 2.44 $ 2.28 7Total assets 262,471 245,827 7Regulatory ratios under Basel III Common Equity Tier 1 (CET1) capital ratio11.7% 11.2 %Leverage ratio4.0% 4.0 % Liquidity coverage ratio (LCR)147% 132 % (1) See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.National Bank of Canada2018 Annual Report 2Financial OverviewExcluding specified items(1)Growth rate 2018-17+10%Net Income (millions of Canadian dollars) 2014-2018 / CAGRTotal Assets (billions of Canadian dollars) 2014-2018 / CAGRGrowth rate 2018-17+8%Growth rate 2018-17+7%Total Revenues (millions of Canadian dollars) 2014-2018 / CAGR+7%+10%+6%205.4216.1232.2245.8262.5total assetnet incomerevenue5,4645,7465,8406,60920142015201620172018201420152016201720187,1661,5931,5381,6821,6191,6131,2562,0492,024201420152016201720182,2492,232total assetnet incomerevenuetotal assetnet incomerevenue
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National Bank of Canada2018 Annual Report 3 National Bank of Canada 2018 Annual Report 3 Message From the President and Chief Executive Officer As I look back on this past year, I am very pleased with the Bank’s overall performance. Year after year, the Bank delivers solid business growth and strong returns for our shareholders while helping our clients, employees and communities thrive. I am also very satisfied with the progress made in positioning the Bank for long-term success through our ongoing transformation and cultural evolution. In 2018, the Bank generated record net income of $2.2 billion, up 10% from last year. Across the Bank, we achieved solid growth while managing costs effectively and maintaining strong credit quality. This translated into a return on equity of 18.4%, among the highest in our industry globally. Our overall performance demonstrates the strength of our franchise and our ability to execute our strategic priorities. Year after year, the Bank delivers solid business growth and strong returns for our shareholders while helping our clients, employees and communities thrive. Our shareholders were rewarded with two dividend increases, and we returned additional capital through higher share repurchases. The Bank has delivered industry-leading total shareholder returns of 16% and 15% over the three- and ten-year periods ended October 31, 2018. We have a clear capital deployment strategy. Our first priority is to maintain strong capital levels. Our Common Equity Tier 1 capital ratio now stands at 11.7% – the highest level in our history – providing us with flexibility to invest in growth initiatives and return capital to shareholders. Organic growth remains our primary focus with the objective of enhancing customer experience and generating an operating leverage between 1% and 2%. An Agile, Collaborative and Adaptable Organization Over the years, the Bank’s franchise was built through our strong entrepreneurial culture and passion for people. We strongly believe that the cornerstone of our transformation is the evolution of our culture into an agile, collaborative and adaptable organization. In an environment of constant change, our culture will be a sustainable advantage and a key differentiator that is visible to our clients, employees and communities. In line with our strategic priorities, we are making significant investments in technology and digital initiatives to be a simple and efficient bank and meet our clients’ expectations. In 2018, sustained investments focused on deploying new digital services and advancing the automation of operations. We are seeing tangible results from our initiatives, with improved client satisfaction and strong efficiency gains. We have also continued to make major investments in data and the protection of client information. To keep pace with the development of new digital services and the increased use of artificial intelligence to elevate client experience, technology investments will remain significant for the next several years. Driving Business Growth As a super-regional Canadian bank with a leading franchise in Quebec, we continue to benefit from strong economic conditions in our home province, highlighted by historically low unemployment rates. Public finances are sound, as Quebec has declared budget surpluses for the past three years, and consumer and business confidence is high. We have good visibility on large infrastructure investments that will fuel economic growth over the next three to five years, with foreign investment and immigration adding further stimulus. Furthermore, the indebtedness of Quebec households is below the Canadian average, largely due to greater housing affordability, full employment of the prime-age population and a large proportion of women in the workforce. With about 58% of our revenues derived from our Quebec operations, we enter 2019 with prudent optimism as we balance volume growth, margins and credit quality. In Personal and Commercial Banking, we are the leading bank in Quebec with very strong brand recognition. In the retail market, our objective is to help our clients meet their financial objectives in a simple, relevant and efficient way. Our strategic priorities are focused on advice, relationships, a team approach and convenience. In Commercial Banking, we enter 2019 with double-digit volume growth. We have increased our presence on the ground and improved our digital offering, driving growth in both loans and deposits. We are also winning our share of business transfer opportunities, helping entrepreneurs pass on control of their businesses to the next generation. Outside Quebec, we are gaining market share by focusing on specialty verticals where we have recognized expertise. Our Wealth Management segment has grown significantly in recent years and, for 2018, accounted for 24% of our revenue. This has been achieved through a differentiated offering that responds to client needs for choice and unbiased advice. In the process, we have become the largest manager of managers in the country, Canada’s leading business focused on serving independent asset managers and a leading provider of white label banking solutions to financial institutions. Our Financial Markets segment delivered strong and consistent performance again in 2018, reflecting our diversified business mix, focus on client-driven activities, leadership in selected niches, and flexible approach to capital allocation. In 2019, we will build on our base as the number one investment bank in Quebec and the leader in government debt underwriting, ETF structuring and trading, structured products and equity derivatives across the country.
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Message From the President and Chief Executive Officer (cont.)
While Canada remains our core market, we are complementing domestic
growth by applying a disciplined international strategy that delivers higher
returns. In 2018, Credigy achieved strong earnings and solid returns despite
tighter market conditions. Looking forward, our strategy is for disciplined
growth at Credigy that falls within our return objectives and risk parameters.
In Cambodia, our ABA Bank subsidiary maintained its rapid growth in 2018
while delivering an ROE of over 30%. Since we acquired majority control in
2016, ABA Bank has nearly doubled in size to become the fourth largest bank
in the country. With our support, the future of ABA Bank’s simple banking
model is promising in a significantly unbanked market and a rapidly growing
economy.
Looking Ahead
After an excellent 2018, all our business segments are well-positioned for
growth. The strength and resilience of the Quebec economy gives us comfort
at the current stage of the business cycle, and we remain vigilant in
balancing our objectives of sustainable growth and prudent
risk
management. Heading into a new year, we have clear strategic priorities to
guide us and a highly engaged team to drive execution.
in a ground-breaking ceremony to
With the Bank’s greatest asset being its 23,000 employees, we
continuously invest to maintain the best team and our standing as an
employer of choice. In this regard, over 1,000 proud and excited employees
recently participated
launch the
construction of our new Montreal head office. The new building is designed
with occupant health and well-being in mind, and our employees were
involved in planning their work spaces. As a Bank that puts people first, we
aim to meet the highest global standards in sustainable construction, with
an objective to attain LEED v4 Gold and WELL certification for our new
headquarters. We are also investing in modern work spaces in other parts of
Canada, including our principal offices in Toronto and Vancouver.
With the Bank’s greatest asset being
its
23,000 employees, we continuously invest to
maintain the best team and our standing as an
employer of choice.
In these times of profound change, I thank my colleagues in the Office
of the President for their leadership and dedication to building the National
Bank of the future. Three new members joined the senior management team
in the past year – Lucie Blanchet and Stéphane Achard as co-heads of
Personal and Commercial Banking and Laurent Ferreira as co-head of
Financial Markets – while Brigitte Hébert added Human Resources and
Corporate Affairs to her responsibilities. All of them bring solid leadership,
vast experience and much passion to their new roles. On behalf of the Office
of the President, I also wish to acknowledge the tremendous efforts,
professionalism and commitment of our employees.
As always, I appreciate the judicious counsel of our Board of Directors
and thank our directors for their support. Finally, I would like to thank our
clients for their business and their trust as well as our shareholders for their
continued support.
Louis Vachon
President and Chief Executive Officer
Office of the President Members
Louis Vachon
President and Chief Executive Officer
William Bonnell
Executive Vice-President,
Risk Management
Martin Gagnon
Executive Vice-President,
Wealth Management;
Co-President and Co-Chief Executive Officer,
National Bank Financial
Ghislain Parent
Chief Financial Officer and
Executive Vice-President,
Finance
Stéphane Achard
Executive Vice-President,
Commercial Banking and Insurance
Dominique Fagnoule
Executive Vice-President,
Information Technology
Denis Girouard
Executive Vice-President and Co-Head,
Financial Markets
Ricardo Pascoe
Chief Transformation Officer and
Executive Vice-President
Lucie Blanchet
Executive Vice-President,
Personal Banking and Marketing
Laurent Ferreira
Executive Vice-President and Co-Head,
Financial Markets
Brigitte Hébert
Executive Vice-President,
Human Resources, Corporate Affairs
and Operations
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Message From the Chairman of the Board
Our 2018 financial results are a source of great satisfaction for the Board of
Directors. All of our business segments achieved growth while net income
exceeded last year’s record level. The Bank also generated industry-leading
return on equity while improving efficiency and maintaining excellent credit
quality. Significant progress in the Bank’s transformation further supports
our positive assessment of the year and optimism for the future.
The Board sees the overall performance in 2018 as validation not only
of the Bank’s strategy but also of our strong confidence in the senior
leadership team and our system of governance. We will continue to work
constructively with management and focus on the key drivers of the Bank’s
long-term success.
Building the Future
The Bank’s sustainability and ability to create value for all stakeholders are
fundamental Board responsibilities that we exercise through a number of
levers, notably our oversight of strategy. Together with the Office of the
President, we conduct annual strategic reviews and periodic assessments of
specific initiatives, during which we have an opportunity to challenge
management and offer our perspectives. The Board also approves the annual
business plans of each business segment and closely monitors their results.
Over the past two years, we have focused particular attention on
monitoring the Bank’s digital transformation and considerable technology
investments. The Board is pleased with the tangible progress made to date.
We look forward to reaching new milestones and gaining additional benefits
as the digital journey continues.
Investing in People
In 2018, as part of an orderly renewal of the Office of the President, the
Board approved the appointment of new heads of Personal and Commercial,
and Human Resources and Corporate Affairs segments as well as a new co-
head of Financial Markets. The current members of the Office of the President
have the depth and breadth of experience to provide strong and effective
leadership. They form a highly capable team and have the full confidence of
the Board.
At a time of rapid change in our industry, people and culture are at the
heart of the Bank’s transformation. Talent is our most important asset and
the cornerstone of building an adaptable organization. This philosophy is
fully endorsed by the Board and the senior management team.
Strong Risk Management Culture
In the normal course of business, the Bank is supported by a strong risk
management culture that is constantly reinforced by active compliance,
control, and audit activities. While being assured of rigorous attention to risk
in day-to-day operations, the Board has overseen a major effort to bolster the
Bank’s cyber defences through major capital investment over the past two
years. The Bank’s ability to safeguard the personal information of its
customers and offer uninterrupted service has been enhanced, and we will
continue to invest as technologies evolve.
At the Forefront of Governance
The aforementioned activities and actions of the Board are all part of good
governance. As a Board, we are committed to the highest standards in
exercising our responsibilities and to adopting the best practices that further
advance our ability to meet our duty to shareholders. Initiatives such as
committee chair rotations, Board performance self-assessments, information
sessions on
industry trends and the Bank’s business, constructive
shareholder engagement as well as many other activities help our Board
remain alert and capable of fully assuming its role.
The composition of the Board is a key factor in our effectiveness. We
have a highly capable Board, diverse in terms of gender, geographic
representation, perspective, and experience. Board renewal is supported by
an ongoing process of identifying potential directors whose profiles are
aligned with the Bank’s business. In this regard, we were pleased to
welcome Robert Paré to our Board following his election by shareholders in
April 2018. A lawyer and strategic advisor at Fasken Martineau DuMoulin,
Mr. Paré is recognized for his corporate governance and best practices
expertise acquired during a distinguished career
in corporate and
commercial law.
Our colleague Richard Fortin has informed us of his intention to retire at
the end of December 2018 after five years of dedicated service, in particular
as Chair of the Risk Management Committee. We thank him sincerely for his
commitment to the Bank’s success.
In my capacity as Chair, I take this opportunity to express my deep
appreciation to my Board colleagues for sharing their experience and wisdom
for the benefit of the Bank and all its stakeholders.
Recognizing Success
The Bank’s excellent results in 2018 reflect strong execution of a winning
strategy. On behalf of the Board, I would like to acknowledge the dedication
of Louis Vachon and his team in the Office of the President and thank them
for their leadership.
The Board is well aware that massive change places high demands on
the Bank’s team of more than 23,000 employees. We salute their willingness
to assimilate new business processes and adopt new ways of serving clients
while continuing to be the Bank’s most effective ambassadors in their
communities.
We also thank our clients for their loyalty and our shareholders, both
large and small, for placing their confidence in us.
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.
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2018 Annual Report
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National Bank of Canada2018 Annual Report 6 National Bank of Canada 2018 Annual Report 6 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 Pierre Boivin Montreal, Quebec, Canada President and Chief Executive Officer, Claridge inc. Director since April 2013 Rebecca McKillican Oakville, Ontario, Canada President and Chief Executive Officer, Well.ca Director since October 2017 Pierre Thabet St-Georges, Quebec, Canada President, Boa-Franc inc. Director since March 2011 Raymond Bachand Montreal, Quebec, Canada Strategic Advisor, Norton Rose Fulbright Canada LLP and Corporate Director Director since October 2014 Gillian H. Denham Toronto, Ontario, Canada Corporate Director Director since October 2010 Robert Paré Westmount, Quebec, Canada Strategic Advisor, Fasken Martineau DuMoulin LLP and Corporate Director Director since April 2018 Louis Vachon Beaconsfield, Quebec, Canada President and Chief Executive Officer, National Bank of Canada Director since August 2006 Maryse Bertrand Westmount, Quebec, Canada Corporate Director Director since April 2012 Richard Fortin Boucherville, Quebec, Canada Corporate Director Director since August 2013 Lino A. Saputo Jr. Montreal, Quebec, Canada Chief Executive Officer and Chairman of the Board of Directors, Saputo Inc. Director since April 2012 Pierre Blouin Île-Bizard, Quebec, Canada Corporate Director Director since September 2016 Karen Kinsley Ottawa, Ontario, Canada Corporate Director Director since December 2014 Andrée Savoie Dieppe, New Brunswick, Canada President and Chair of the Board of Directors, Acadian Properties Ltd. Director since April 2015 Board Committees Audit Committee Karen Kinsley (Chair) Pierre Blouin Richard Fortin Andrée Savoie Human Resources Committee Pierre Boivin (Chair) Maryse Bertrand Pierre Blouin Gillian H. Denham Rebecca McKillican Risk Management Committee Richard Fortin (Chair) Raymond Bachand Pierre Boivin Karen Kinsley Lino A. Saputo Jr. Pierre Thabet Conduct Review and Corporate Governance Committee Maryse Bertrand (Chair) Raymond Bachand Jean Houde Robert Paré Lino A. Saputo Jr. Andrée Savoie
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Helping our clients power their ideas> Leading-edge digital and mobile banking services and many specialized services> Partnerships with fintechs to improve personal and commercial services > New branch concepts where advice and technology converge> Active participation in developing the entrepreneurial ecosystemSupporting 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 investmentsFuelling economic development> $161 million invested in our facilities> $1.1 billion spent on goods and servicesPromoting diversity and inclusion> Ongoing support of women, cultural communities and the LGBT community> Listed as one of Canada’s Best Diversity Employers for many years> Awarded gold certification by Women in GovernanceHelping protect the environment> Award-winning energy efficiency program> Received several LEED® certifications> Design of new head office in accordance with the strictest standards in terms of sustainable construction and occupants’ health and well-beingTo learn more: nbc.caAt its most recent annual meeting, National Bank announced its support for the Financial Stability Board’s Task Force on Climate-related Financial Disclosure. The Bank has therefore committed to ensuring that its disclosures include relevant information on various topics addressed by the task force. In collaboration with industry partners, the Bank is working on developing a relevant disclosure approach.Financial information related to climate changeOur 2018 socialresponsibilityinitiativesNational Bank of Canada2018 Annual Report 7
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Risk Disclosures
In 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. 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
and Pillar 3 Disclosure available on the Bank’s website at nbc.ca.
General
1
2
3
4
Location of risk disclosures
Management’s Discussion and Analysis
Consolidated Financial Statements
Supplementary Regulatory Capital and Pillar 3 Disclosure
Risk terminology and risk measures
Top and emerging risks
New key regulatory ratios
Risk governance and risk management
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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
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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
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17
Liquidity
18
Liquidity management and components of the liquidity buffer
Funding
19
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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
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27
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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
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Other risks: governance, measurement and management
Publicly known risk events
Annual
Report
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43 to 87, 98, 101 and 102
Notes 1, 8, 17, 24 and 30
52 to 87
52 and 53
44 to 47, 74, 75 and 80
56 to 69, 75 to 77
56 and 57
51, 56 and 57
43, 57, 64 and 73 to 77
44 to 47
49
43 to 51
51
61 to 64
50
60, 63, 64 and 71
75 to 81
78 and 79
202 to 206
81 to 83
69 and 70
68, 71 to 74, 190 to 192
71 to 73
71 to 74
67 and 152 to 163
65 and 120 to 123
98, 101, 102 and 152 to 163
65, 66 and 171 to 174
64 to 66, 149
54, 55 and 84 to 87
84
(1)
(2)
Fourth quarter 2018.
These pages are included in the document entitled Supplementary Financial Information − Fourth Quarter 2018.
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National Bank of Canada
2018 Annual Report
Pages
Supplementary
Regulatory Capital
and Pillar 3
Disclosure (1)
4 to 37
4 to 7, 15 and 16
14
14
14
14
8 to 10, 17 to 26, 29 and 30, and 19 to 25(2)
24 and 25(2)
11, 12 and 27 to 33
18, 19, 33 and 35 to 37
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Management’s Discussion
and Analysis
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 annual consolidated financial statements for the year ended October 31, 2018 (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, 2018. 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.
December 4, 2018
Financial Reporting Method
Financial Disclosure
Overview
Financial Analysis
Business Segment Analysis
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance and International (USSF&I)
Other
Caution Regarding Forward-Looking Statements
10
11
12
16
19
24
28
32
36
Quarterly Financial Information
Analysis of the Consolidated Balance Sheet
Securitization and Off-Balance-Sheet Arrangements
Capital Management
Risk Management
Critical Accounting Estimates
Future Accounting Policy Changes
Additional Financial Information
37
38
41
43
52
88
93
94
From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Major Economic Trends section 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 2019 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 2019 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 52 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.
National Bank of Canada
2018 Annual Report
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Management’s Discussion and Analysis
Financial Reporting Method
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 2017 the Bank had recorded a $40 million reversal ($29 million net of income taxes) to the sectoral provision
on non-impaired loans taken for the oil and gas producer and service company portfolio and reported in the Personal and Commercial segment. In fiscal 2016,
the provisions for credit losses had included an amount of $250 million related to that sectoral provision. Given the materiality of the sectoral provision
recorded and presented in accordance with GAAP, it has been excluded from certain analyses in this MD&A.
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.
Reconciliation of Non-GAAP Financial Measures
Year ended October 31
(millions of Canadian dollars)
Net interest income(1)
Taxable equivalent(2)
Net interest income on a taxable equivalent basis
Non-interest income(1)
Taxable equivalent(2)
Acquisition-related revenues(3)
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(4)
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 acquisition-related items(3)(4)
Income taxes on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Specified items after income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders
Personal and
Commercial
Wealth
Management
Financial
Markets
USSF&I
2,212
−
2,212
1,027
−
−
1,027
3,239
1,720
−
1,720
1,519
226
1,293
345
−
−
345
948
−
948
−
948
510
−
510
1,249
−
9
268
141
409
1,233
101
−
1,258
1,334
1,768
1,092
(11)
1,081
687
3
684
175
−
3
178
506
(17)
489
−
489
1,743
697
−
697
1,046
4
1,042
36
242
−
278
764
−
764
−
764
584
−
584
55
−
−
55
639
251
−
251
388
94
294
72
−
−
72
222
−
222
38
184
2018
2017
3,382
144
3,526
3,784
101
9
3,436
209
3,645
3,173
35
11
3,894
3,219
7,420
4,063
(11)
4,052
3,368
327
3,041
544
245
3
792
2,249
(17)
2,232
87
2,145
6,864
3,857
(19)
3,838
3,026
244
2,782
484
244
5
733
2,049
(25)
2,024
84
1,940
Other
(192)
3
(189)
220
−
−
220
31
303
−
303
(272)
−
(272)
(84)
3
−
(81)
(191)
−
(191)
49
(240)
(2)
(1) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, for the year ended October 31, 2017, a $204 million amount 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, 2018, the Bank recorded an amount of $9 million ($9 million net of income taxes) for its share in the integration costs incurred by Fiera Capital
Corporation (Fiera Capital). For the year ended October 31, 2017, the total amount of these costs had been $11 million ($9 million net of income taxes) and had also included the Bank’s
share in the integration costs arising from its equity interest in TMX Group Limited.
During the year ended October 31, 2018, the Bank recorded $11 million in charges ($8 million net of income taxes) related to the Wealth Management acquisitions (2017: $19 million,
$16 million net of income taxes). These charges consisted mostly of retention bonuses and the amortization of intangible assets.
(3)
(4)
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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, 2018, 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
and Executive Vice-President, Finance (CFO). During the year ended
in accordance with Regulation 52-109 Respecting
October 31, 2018,
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, 2018, 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, the 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, 2018, 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.
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2018 Annual Report
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2018 Annual Report
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2018
2017
2016
2018-17
% change
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
7,166
2,232
2,145
18.4 %
41 %
6,609
2,024
1,940
18.1 %
42 %
5,840
1,256
1,181
11.7 %
66 %
$
6.01
5.94
$
5.44
5.38
$
3.31
3.29
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(3)
Net impaired loans(4) as a % of average loans and acceptances
Deposits
Equity attributable to common shareholders
Assets under administration and under management
$
$
Regulatory ratios under Basel III
Capital ratios(5)
Common Equity Tier 1 (CET1)
Tier 1(6)
Total(6)
Leverage ratio(5)
Liquidity coverage ratio (LCR)
Other Information
Number of employees — worldwide
Number of branches in Canada
Number of banking machines in Canada
$
$
7,420
2,249
18.5 %
40 %
54.6 %
6.06
5.99
2.44
34.40
65.63
58.69
59.76
335,071
20,024
262,471
146,082
0.3 %
170,830
11,526
485,080
11.7 %
15.5 %
16.8 %
4.0 %
147 %
23,450
428
937
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
136,457
0.2 %
156,671
10,700
477,358
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
128,036
0.2 %
142,066
9,642
397,342
10.1 %
13.5 %
15.3 %
3.7 %
134 %
21,770
450
938
8
10
11
10
10
8
10
10
10
7
7
9
8
2
8
–
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 Purchased receivables amount of $2,014 million, which was presented separately on the Consolidated Balance Sheet as at October 31, 2017, is now reported in Loans and
acceptances, net of allowances (2016: $1,858 million).
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include purchased or originated credit-impaired loans.
The ratios are calculated using the “all-in” methodology.
Ratios as at October 31, 2017 included the redemption of the Series 28 preferred shares on November 15, 2017.
12
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2018 Annual Report
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2018 Annual Report
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In 2018, the Bank met all of its medium-term objectives, even reaching
the upper end of its target range for growth in diluted earnings per share
excluding specified items. This result was driven by solid net income growth
across all the business segments. And, even though the dividend per share
was raised twice, for a 7% increase in fiscal 2018, the dividend payout ratio
excluding specified items was at the lower end of the target range, mainly
due to rapid growth in diluted earnings per share excluding specified items.
Medium-Term Objectives and 2018 Results
Medium-term
objectives
(%)
2018
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
> 10.75
> 3.75
10
18.5
40
11.7
4.0
(1) See the Financial Reporting Method section on page 10 for additional information on non-
GAAP financial measures.
Dividends
For fiscal 2018, the Bank declared $829 million in dividends to common
shareholders (2017: $778 million), representing 41% of net income
attributable to common shareholders (2017: 42%) and representing 40% of
net income attributable to common shareholders excluding specified items
(2017: 41%).
Annual Dividend(1)
2018
2018
2017
2016
2015
2014
$2.44
$2.28
$2.18
$2.04
$1.88
(1) The figures for fiscal 2014 have been adjusted to reflect the stock dividend paid in 2014.
Management’s Discussion and Analysis
Overview
About National Bank
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.
Business Mix(1)
Year ended October 31, 2018
(taxable equivalent basis)(2)
Personal and
Commercial
Wealth
Management
Financial
Markets
.
U.S. Specialty
Finance and
International
%
5
.
2
4
%
5
.
1
3
%
6
.
3
2
%
3
.
0
1
%
7
.
8
%
2
.
9
%
9
.
3
4
%
1
.
9
3
%
2
.
4
3
%
8
.
3
2
%
2
.
0
2
%
0
.
3
1
Total revenues
Net income
Economic capital
(1)
(2)
Excluding the Other heading.
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
Objectives and 2018 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 2018, the Bank recorded $2,232 million in net income
compared to $2,024 million in fiscal 2017. Its 2018 diluted earnings per
share stood at $5.94 versus $5.38 in 2017, and its 2018 return on common
shareholders’ equity (ROE) was 18.4% versus 18.1% in 2017. Net income
excluding specified items totalled $2,249 million in fiscal 2018, up 10%, and
diluted earnings per share excluding specified items stood at $5.99, up 10%
from $5.45. Furthermore, ROE excluding specified items was 18.5% in 2018
versus 18.3% in 2017.
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
1
National Bank of Canada
2018 Annual Report
National Bank of Canada
2018 Annual Report
13
13
i.e., above
i.e., above
Ratios des fonds propres réglementaires
Le ratio des fonds propres CET1, le ratio des fonds propres de catégorie 1 et
le ratio du total des fonds propres s’établissent, respectivement, à 11,7 %, à
Management’s Discussion and Analysis
Overview
15,5 % et à 16,8 % au 31 octobre 2018, soit au-delà des exigences
Management’s Discussion and Analysis
réglementaires, comparativement à des ratios de 11,2 %, de 14,9 % et de
Overview
15,1 %, respectivement, au 31 octobre 2017. L’augmentation du ratio des
Regulatory Capital Ratios
fonds propres CET1 est essentiellement attribuable au résultat net,
As at October 31, 2018, the Bank’s CET1, Tier 1 and Total capital ratios were,
Regulatory Capital Ratios
déduction faite des dividendes, aux émissions d’actions ordinaires liées au
respectively, 11.7%, 15.5% and 16.8%,
the regulatory
As at October 31, 2018, the Bank’s CET1, Tier 1 and Total capital ratios were,
régime d’options d’achat d’actions et aux réévaluations des régimes de
requirements, compared to ratios of, respectively, 11.2%, 14.9% and 15.1%
the regulatory
respectively, 11.7%, 15.5% and 16.8%,
retraite et d’autres avantages postérieurs à l’emploi, facteurs qui ont été
as at October 31, 2017. The increase in the CET1 capital ratio stems
requirements, compared to ratios of, respectively, 11.2%, 14.9% and 15.1%
atténués par la croissance de l’actif pondéré en fonction des risques, par les
essentially from net income net of dividends, common share issuances under
as at October 31, 2017. The increase in the CET1 capital ratio stems
rachats d’actions ordinaires effectués au cours de l’exercice terminé le
the Stock Option Plan, and remeasurements of pension plans and other post-
essentially from net income net of dividends, common share issuances under
31 octobre 2018 ainsi que par l’incidence de l’adoption de l’IFRS 9 le
employment benefit plans, factors that were tempered by growth in risk-
the Stock Option Plan, and remeasurements of pension plans and other post-
1er novembre 2017. L’augmentation du
fonds propres de
weighted assets, by the common share repurchases made during the year
employment benefit plans, factors that were tempered by growth in risk-
catégorie 1 et du ratio du total des fonds propres est essentiellement
ended October 31, 2018, and by the impact of adopting of IFRS 9 on
weighted assets, by the common share repurchases made during the year
attribuable aux mêmes éléments. De plus, l’augmentation du ratio des fonds
November 1, 2017. The increases in the Tier 1 and Total capital ratios were
ended October 31, 2018, and by the impact of adopting of IFRS 9 on
propres de catégorie 1 est attribuable aux émissions d’actions privilégiées
essentially driven by the same items. However, the increase in the Tier 1
November 1, 2017. The increases in the Tier 1 and Total capital ratios were
séries 40 et 42 pour un montant de 600 M$, compensées par le rachat des
capital ratio was also due to the $600 million issuances of Series 40 and 42
essentially driven by the same items. However, the increase in the Tier 1
parts de Fiducie d’actifs BNC pour un montant de 400 M$, alors que
preferred shares, partly offset by the $400 million redemption of NBC Asset
capital ratio was also due to the $600 million issuances of Series 40 and 42
l’émission des billets à moyen terme le 1er février 2018, pour un montant de
Trust units, while the $750 million issuance of medium-term notes on
preferred shares, partly offset by the $400 million redemption of NBC Asset
750 M$, a contribué à l’augmentation du ratio du total des fonds propres.
February 1, 2018 contributed to the higher Total capital ratio. As at
Trust units, while the $750 million issuance of medium-term notes on
Enfin, le ratio de levier en date du 31 octobre 2018 s’établit à 4,0 %,
October 31, 2018 the leverage ratio was 4.0%, unchanged from October 31,
February 1, 2018 contributed to the higher Total capital ratio. As at
inchangé par rapport au 31 octobre 2017.
2017.
October 31, 2018 the leverage ratio was 4.0%, unchanged from October 31,
2017.
Évolution des ratios réglementaires selon Bâle III (1)
Evolution of Regulatory Ratios Under Basel III(1)
ratio des
Evolution of Regulatory Ratios Under Basel III(1)
T4 2018
T3 2018
Q3 2018
T2 2018
Q2 2018
Q4 2018
T1 2018
Q1 2018
T4 2017 (2)
Q4 2017(2)
l
u
o
c
4
-
1
F
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017(2)
%
8
6
1
.
%
5
5
1
.
%
7
6
1
.
%
4
5
1
.
%
6
6
1
.
%
3
5
1
.
%
3
5
1
.
%
5
5
1
.
%
1
5
1
.
%
9
4
1
.
%
7
1
1
.
%
6
1
1
.
%
3
1
1
.
%
2
1
1
.
%
2
1
1
.
(1)
%
0
4
.
%
0
4
.
%
0
4
.
%
0
4
.
%
0
4
.
CET1
Tier 1
CET1
CET1
Total
Catégorie 1
Tier 1
Leverage ratio
Total
Total
The ratios are calculated using the “all-in” methodology.
Ratio de levier
Leverage ratio
The Tier 1 capital ratio and the Total capital ratio included the redemption of the Series 28
Les ratios sont calculés selon la méthode « tout compris ».
The ratios are calculated using the “all-in” methodology.
preferred shares on November 15, 2017.
Le ratio des fonds propres de catégorie 1 et le ratio du total des fonds propres tenaient
The Tier 1 capital ratio and the Total capital ratio included the redemption of the Series 28
compte du rachat d’actions privilégiées série 28 effectué le 15 novembre 2017.
preferred shares on November 15, 2017.
(1)
(2)
(1)
(1)
(2)
(2)
Un portefeuille de prêts de qualité
Les dotations aux pertes de crédit de l’exercice 2018 sont en hausse de
83 M$ par rapport à l’exercice 2017 et se chiffrent à 327 M$. Cette
augmentation s’explique principalement par les dotations aux pertes de
crédit sur les prêts non dépréciés du secteur des Particuliers et Entreprises et
High Quality Loan Portfolio
par les dotations aux pertes de crédit sur les prêts du secteur FSEU&I,
High Quality Loan Portfolio
essentiellement attribuables à la filiale Credigy Ltd. (Credigy). Les dotations
For fiscal 2018, the Bank recorded $327 million in provisions for credit
aux pertes de crédit ont représenté 0,23 % des prêts et acceptations
losses, $83 million more than those recorded in fiscal 2017. The higher year-
For fiscal 2018, the Bank recorded $327 million in provisions for credit
moyens, comparativement à 0,19 % à l’exercice précédent.
over-year provisions stem mainly from provisions for credit losses on non-
losses, $83 million more than those recorded in fiscal 2017. The higher year-
impaired loans of the Personal and Commercial segment and from the credit
over-year provisions stem mainly from provisions for credit losses on non-
Répartition du portefeuille de prêts et acceptations moyens (1)
loss provisions taken for USSF&I segment loans, which were essentially
impaired loans of the Personal and Commercial segment and from the credit
Au 31 octobre 2018
attributable to the Credigy Ltd. (Credigy) subsidiary. The 2018 provisions for
loss provisions taken for USSF&I segment loans, which were essentially
credit
loans and acceptances
6 %
attributable to the Credigy Ltd. (Credigy) subsidiary. The 2018 provisions for
compared to 0.19% in fiscal 2017.
losses represented 0.23% of average loans and acceptances
credit
compared to 0.19% in fiscal 2017.
11 %
Breakdown of the Average Loan and Acceptance Portfolio(1)
As at October 31, 2018
Breakdown of the Average Loan and Acceptance Portfolio(1)
6%
As at October 31, 2018
losses represented 0.23% of average
8 %
11%
11%
6%
8%
8%
25 %
50 %
50%
50%
25%
Particuliers (2017 : 52 %)
Entreprises (2017 : 25 %)
Gestion de patrimoine (2017 : 8 %)
Marchés financiers – Grandes entreprises (2017 : 10 %)
Financement spécialisé aux États-Unis et International (2017 : 5 %)
25%
Profil de risque
Excluant les prêts et acceptations de la rubrique Autres.
Personal (2017: 52%)
Commercial (2017: 25%)
Personal (2017: 52%)
Wealth Management (2017: 8%)
Commercial (2017: 25%)
Financial Markets – Corporate (2017: 10%)
Wealth Management (2017: 8%)
U.S. Specialty Finance and International (2017: 5%)
Financial Markets – Corporate (2017: 10%)
Excluding loans and acceptances in the Other heading.
U.S. Specialty Finance and International (2017: 5%)
(en millions de dollars canadiens)
2018
2017
327
244
2017
2018
0,19 %
0,23 %
0,19 %
244
2017
0,23 %
327
2018
Excluding loans and acceptances in the Other heading.
(1)
Dotations aux pertes de crédit
(1)
Dotations aux pertes de crédit en %
Risk Profile
des prêts et acceptations moyens
Dotations aux pertes de crédit sur
Risk Profile
(millions of Canadian dollars)
prêts dépréciés (1) en % des prêts et
acceptations moyens
Provisions for credit losses
(millions of Canadian dollars)
Radiations nettes en % des prêts
Provisions for credit losses as a %
Provisions for credit losses
et acceptations moyens
of average loans and acceptances
Provisions for credit losses as a %
Prêts dépréciés bruts (1)
Provisions for credit losses on impaired loans(1)
of average loans and acceptances
Prêts dépréciés nets (2)
as a % of average loans and acceptances
Provisions for credit losses on impaired loans(1)
Net charge-offs as a % of average loans and
(1)
Suite à l’adoption de l’IFRS 9, tous les prêts classés en phase 3 selon le modèle de
0.19 %
as a % of average loans and acceptances
acceptances
0.23 %
détermination des pertes de crédit attendues représentent des prêts dépréciés. Selon
Net charge-offs as a % of average loans and
Gross impaired loans(1)
380
l’IAS 39, les prêts étaient considérés comme dépréciés selon des critères différents. Ces
0.23 %
acceptances
Net impaired loans(2)
206
prêts dépréciés ne tiennent pas compte des prêts dépréciés dès leur acquisition ou leur
Gross impaired loans(1)
380
création (DAC).
Net impaired loans(2)
206
(1)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss
Les prêts dépréciés nets sont présentés déduction faite des provisions pour pertes de
(2)
model are impaired loans. Under IAS 39, loans were considered impaired according to
crédit sur les montants utilisés de la phase 3, et ne tiennent pas compte des prêts DAC.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss
different criteria. These impaired loans do not include purchased or originated credit-
model are impaired loans. Under IAS 39, loans were considered impaired according to
impaired (POCI) loans.
different criteria. These impaired loans do not include purchased or originated credit-
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan
impaired (POCI) loans.
amounts drawn and do not include POCI loans.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan
amounts drawn and do not include POCI loans.
0.23 %
0.23 %
630
0.23 %
404
630
404
244
0,23 %
0.19 %
380
0.19 %
206
0.19 %
327
0,23 %
0.23 %
630
0.23 %
404
0.23 %
(2)
(1)
(2)
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2018 Annual Report
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Rapport annuel 2018
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2018 Annual Report
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Quebec’s economy is experiencing an exceptional period. After growing
by 2.8% in 2017 and almost 2.5% in 2018, GDP will decline to 1.7% in 2019.
Although more moderate, this rate is still higher than the GDP potential
growth, estimated at less than 1.5%. Economic growth has reduced the
unemployment rate to less than 6% for the first time in over 40 years,
boosting household confidence, which is currently at a peak. The savings
rate is high, and households are less indebted than elsewhere in the country,
which is a good sign for consumption in the coming quarters. Residential real
estate, which is more affordable in Quebec, did not undergo the slowdown
observed in Ontario and British Columbia. Home resales reached a record
level in 2018 and prices are growing faster. Despite the labour shortage,
business confidence is solid, which should mean increased investments to
compensate for the scarcity of workers.
Management’s Discussion and Analysis
Overview
Major Economic Trends
Global Economy
After posting its strongest growth in six years, the global economy is
showing signs of slowing down. The U.S. economy definitely has wind in its
sails but this is not the case for several other major economies, including
China’s economy, which appears to be losing steam. The strength of the U.S.
dollar and oil prices means that energy bills have increased considerably
over the past year in many emerging nations, which is equivalent to a tax for
consumers. In addition, rising interest rates are an obstacle to several
countries that have experienced strong increases in U.S.-dollar denominated
debt in recent years. To limit the depreciation of their currencies and the
resulting inflation, some emerging nations will have to raise their interest
rates, thereby curbing their domestic economies even more. Fortunately,
inflation is still under control in the United States, the Eurozone and Japan,
enabling the major central banks to gradually reduce their monetary
accommodation. Global economic growth is expected to slow down to around
3.5% next year, assuming that trade tensions between China and the United
States do not worsen.
United States
The U.S. economy should grow at a rate of approximately 2.5% in 2019
thanks to massive budget stimulus and a monetary policy that is still
accommodating. Business confidence is at a record level, which bodes well
for employment and investment. Consumers are also very optimistic, due to
the lowest unemployment rate in close to 50 years and wage growth that
should support consumption in the coming quarters.
Nevertheless, it would be surprising if the U.S. Federal Reserve raised
interest rates more than twice in 2019 given that its actions have
consequences for emerging nations, which account for almost 60% of trade
with the United States. Furthermore, the U.S. real estate sector is already
shaken by the increase in mortgage rates.
Canada
The Canadian economy continued to do well in 2018 despite concerns
related to real estate and household debt in a context of rising interest rates.
The tighter conditions on granting credit for uninsured mortgages had the
expected effect, cooling down residential real estate in the hottest, most
expensive markets (Vancouver and Toronto). Nationally, mortgage credit is
growing at its slowest rate in 17 years. However, we are far from the
catastrophe some people fear, as house sales have stabilized at their
average rate over the last 10 years, which suggests that housing prices
should not decline significantly. The job market is tight nationwide, which
should be reflected in good wage growth, enabling households to cope with
future interest rate increases. The weak Canadian dollar remains favourable
for exports, as the new United States–Mexico–Canada Agreement (USMCA)
has reassured exporters, who may in turn increase their investments. With a
federal election coming in 2019, budget stimulus cannot be ruled out, which
could enable the economy to grow by approximately 2.0% in 2019, still
above potential. In this context, the Bank of Canada is likely to continue
normalizing its monetary policy. The Bank is anticipating a policy rate of
2.5% by the end of 2019.
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2018 Annual Report
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2018 Annual Report
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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)
Acquisition-related items
Specified items before income taxes
Income taxes on specified items
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)
Average assets
Average loans and acceptances
Net impaired loans(4) as a % of average loans and acceptances
Average deposits
Efficiency ratio on a taxable equivalent basis and excluding specified items(3)
2018
2017
% change
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
5.94
144
101
245
−
(20)
(20)
(3)
(17)
3,526
3,894
7,420
4,052
3,368
327
3,041
792
2,249
5.99
3,436
3,173
6,609
3,857
2,752
244
2,508
484
2,024
5.38
209
35
244
−
(30)
(30)
(5)
(25)
3,645
3,219
6,864
3,838
3,026
244
2,782
733
2,049
5.45
265,762
139,887
0.3 %
167,176
54.6 %
248,351
130,882
0.2 %
154,254
55.9 %
(2)
19
8
5
13
34
11
12
10
10
(3)
21
8
6
11
34
9
8
10
10
7
7
8
(1) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, a $204 million amount reported in Non-interest income was reclassified to Net interest income for the year ended October 31, 2017. This reclassification had no impact on Net
income.
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, and the provisions for credit losses included an amount of $40 million to reflect an increase in the collective allowance for credit risk on non-impaired loans.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include purchased or originated credit-impaired loans.
(2)
(3)
(4)
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Management’s Discussion and Analysis
Financial Analysis
Analysis of Consolidated Results
Financial Results
For fiscal 2018, the Bank’s net income totalled $2,232 million compared to
$2,024 million in fiscal 2017, an increase that was driven by net income
growth across all the business segments. In 2018, the specified items net of
income taxes reduced net income by $17 million, whereas, in 2017, they had
reduced net income by $25 million. The Bank’s 2018 net income excluding
specified items totalled $2,249 million, up 10% from $2,049 million in 2017.
Total Revenues
For fiscal 2018, the Bank’s total revenues on a taxable equivalent basis(1)
amounted to $7,411 million, a $558 million year-over-year increase (Table 2,
page 96) driven by revenue growth across all of the Bank’s business
segments. As for the 2018 total revenues on a taxable equivalent basis and
excluding specified items, they were up $556 million or 8% year over year.
Both the 2018 and 2017 specified items consisted of acquisition-related
items.
Net Interest Income
For fiscal 2018, the Bank’s net interest income on a taxable equivalent basis
totalled $3,526 million, down $119 million from $3,645 million in fiscal
2017 (Table 3, page 96).
In the Personal and Commercial segment, the 2018 net interest income
totalled $2,212 million, a $143 million or 7% year-over-year increase driven
by growth in loan and deposit volumes, which rose 5% and 7%, respectively.
The loan growth came mainly from mortgage and commercial lending
activity. Another factor contributing to the Personal and Commercial
segment’s increase in net interest income was a higher net interest margin,
which reached 2.32% in 2018 versus 2.26% in 2017, largely due to higher
deposit margins. In the Wealth Management segment, the 2018 net interest
income totalled $510 million, a $79 million year-over-year increase owing to
improved margins. These increases also reflect a favourable impact from the
Bank of Canada’s interest rate hikes.
In the U.S. Speciality Finance and International segment, the 2018 net
interest income was up $118 million year over year given growth in the
Credigy subsidiary’s loan volumes as well as growth in the Advanced Bank of
Asia Limited (ABA Bank) subsidiary’s loan and deposit volumes. As for the
Financial Markets segment, the 2018 net interest income was down
$363 million year over year, mainly due to trading activities, and should be
examined together with the other items of trading activity revenues.
(1)
See the Financial Reporting Method section on page 10 for additional information on
non-GAAP financial measures.
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Non-Interest Income
For fiscal 2018, non-interest income on a taxable equivalent basis totalled
$3,885 million versus $3,208 million in fiscal 2017 (Table 4, page 97). The
trading revenues recorded in non-interest income amounted to $941 million
compared to $409 million in 2017. Including the portion recorded in net
interest income, trading activity revenues amounted to $1,131 million in
2018 (Table 5, page 97), a $141 million year-over-year increase attributable
to revenues from equity securities, revenues from commodities and foreign
exchange activities, and revenues from the other segments, whereas
revenues from fixed-income securities were down year over year.
As shown in Table 4 on page 97, the 2018 revenues from underwriting
and advisory fees were up $39 million year over year, in particular due to
merger and acquisition activities in the Financial Markets segment. Revenues
from securities brokerage commissions were down 10% year over year given
a migration of assets from transactional accounts to fee-based accounts in
recent years. Together, mutual fund revenues and trust service revenues
totalled $1,025 million in 2018, a $95 million year-over-year increase
resulting
in assets under
administration and under management.
fee-based revenues and
from growth
in
The 2018 revenues from credit fees and revenues from acceptances and
letters of credit and guarantee increased $42 million year over year, partly
due to stronger lending activity in both Commercial Banking and the
Financial Markets segment. Card revenues advanced during fiscal 2018,
posting 20% year-over-year growth. The 2018 revenues from deposit and
payment service charges remained stable, while insurance revenues and
other-than-trading foreign exchange revenues rose by $4 million and
$14 million, respectively. Gains on securities decreased $63 million, as
many securities were sold in fiscal 2017, while the Bank’s share in the net
income of associates and joint ventures declined $7 million. Other revenues
amounted to $173 million in 2018, up $14 million from 2017 primarily due to
securities lending revenues.
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Management’s Discussion and Analysis
Financial Analysis
Provisions for Credit Losses
For fiscal 2018, the Bank recorded $327 million in provisions for credit
losses (Table 6, page 98), $83 million more than the provisions recorded for
fiscal 2017. This increase stems mainly from credit loss provisions taken for
Personal Banking loans and Commercial Banking loans, which increased
$15 million and $58 million, respectively, in fiscal 2018. These two increases
stem from the provisions recorded on non-impaired loans, as a $40 million
reversal to the sectoral provision for the oil and gas producer and service
company loan portfolio had been recorded in fiscal 2017. In addition, the
credit loss provisions recorded for U.S. Specialty Finance and International
loans were up $46 million, essentially attributable to the Credigy subsidiary.
During fiscal 2017, a $40 million increase in the collective allowance for
credit risk on non-impaired loans had been recorded to reflect growth in the
Bank’s overall credit portfolio. Provisions for credit losses on impaired loans
in 2018 represent 0.23% of average loans and acceptances, up from 0.19%
in 2017, mainly due to higher credit losses on impaired loans at the Credigy
subsidiary.
Non-Interest Expenses
In fiscal 2018, non-interest expenses stood at $4,063 million (Table 7,
page 99), a $206 million increase when compared to fiscal 2017, while non-
interest expenses excluding specified items rose $214 million or 6%.
Compensation and employee benefits stood at $2,466 million in 2018,
a 5% year-over-year increase resulting from a greater number of employees
and the higher variable compensation associated with revenue growth. The
increase in technology expenses, including amortization, came from the
technology investments made to execute the Bank’s transformation plan and
for business development activities. The 2018 professional fees stood at
$244 million, a $10 million year-over-year decrease related to the servicing
fees associated with Credigy’s business activities, whereas advertising and
external relations expenses and other expenses were up year over year.
Furthermore, the expansion of ABA Bank's banking network led to an overall
increase in non-interest expenses.
Income Taxes
Detailed information about the Bank’s income taxes is provided in Note 25 to
the consolidated financial statements. For fiscal 2018, income taxes stood at
$544 million, for an effective tax rate of 20%, compared to $484 million and
an effective tax rate of 19% in 2017. Credigy’s lower effective income tax rate
arising from the U.S. tax reform was partly offset by a decrease in the value of
deferred tax assets and by income taxes on the deemed repatriation of
foreign profits.
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Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and close to 137,000 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, 428 branches and 937 banking machines across Canada, clients can do their daily banking whenever
and wherever they wish.
Personal Banking
Personal Banking offers a complete range of financing and investment products and services to over 2.6 million individuals, mainly in Quebec, helping them
reach their financial goals throughout every stage in their lives. It offers everyday transaction solutions, mortgage loans and home equity lines of credit,
consumer loans, payment solutions, savings and investment solutions as well as a diverse range of insurance products.
Commercial Banking
Commercial Banking serves the financial needs of over 137,000 small and medium-sized enterprises and large corporations, helping them to achieve growth.
It offers a full line of financial products and services, including credit, deposit and investment solutions, international trade, foreign exchange transactions,
payroll, cash management, insurance, electronic transactions and complementary services. With deep roots in the business community for over 150 years,
Commercial Banking is Quebec’s leading provider of the core banking products for businesses. It is also known across Canada for its expertise in targeted
specialized industries such as health, agriculture and agri-food, technology, motion pictures, real estate and oil and gas.
Economic and Market Review
Favourable economic environment in Quebec and the rest of the country, primarily driven by over 2% GDP growth and continuously low interest rates,
despite the hikes in the policy interest rate since 2017.
Historically low unemployment rate in Quebec over the last two years and a prime working age population (25 to 54 years) that is fully employed.
High levels of consumer and business confidence in Quebec.
Increased investment by Quebec and Canadian companies.
Lower household debt level in Quebec compared to the Canadian average and the highest savings rate among provinces.
Rapid transformation of the financial sector toward digital and mobile services and vigorous competition between established entities and new market
participants that are distinguishing themselves through new technologies.
Key Success Factors
Largest bank in Quebec in terms of market share and strong brand recognition.
Well-established and enduring client relationships grounded in an ability to provide both advice and a full range of solutions tailored to specific client
needs.
The largest sales force in Quebec, consisting of both generalists and specialists, positioning us to offer the best advice to clients.
Unmatched closeness to Quebec entrepreneurs, with leading expertise in business lending and risk management solutions.
Recognized expertise across Canada in specialized industries.
Ability to meet all of the needs facing businesses and entrepreneurs in collaboration with other Bank segments.
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Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Objectives and Strategies
The Personal and Commercial segment is targeting growth by becoming a simple and effective bank focused on constantly improving the client experience.
Strategic Priorities
2018 Achievements and Highlights
Maintain volume growth and credit
quality
Improve the client experience
Accelerate the digital transformation
Improve efficiency
Addition of 230 home financing specialists to help clients develop their mortgage strategies.
Increased geographic coverage of mobile sales force, investment specialists and business account
managers to foster volume growth.
Strong volume growth across the main Personal Banking products.
Higher mortgage growth in the second half of 2018 following a repositioning of the distribution model.
Acceleration of commercial loan and deposit volume growth during the year.
High credit quality, with credit loss provisions on impaired loans of 23 basis points in Personal Banking
and 12 basis points in Commercial Banking.
Launch of a new financing platform for SMEs so that they can borrow online and obtain a decision
within minutes.
An enhanced mobile payment offering for individuals and third-place ranking maintained for the best
mobile applications in Canada.
Launch of the Bank’s first virtual assistant for making appointments online through digital channels and
Facebook Messenger.
Several 2018 Ipsos Financial Service Excellence Awards won for client service excellence.
Better approach to measuring client satisfaction through an improved survey experience.
Launch of a new transactional site providing clients with a 360-degree view of their bank accounts,
including accounts held with other banking institutions, to facilitate budget planning.
Deployment of several origination tools, including instantaneous credit card approvals, online
mortgage preapprovals, and the ability to start the personal and business account opening process
online.
Enhanced digital experience through the addition of features such as Interac transfers, confirmations
that recipients have received automatic deposits, cancellations of transfers, and recipient management.
First in Canada to launch Easy Pay, a mobile point-of-sale solution that allows SMEs to accept
contactless payments.
Simplification and digital aligning of the banking solutions offered to retail and business clients.
Automation and digitization of administrative processes and reducing the footprint of branches.
Efficiency ratio reduced to 53%, meeting the target set in 2015.
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Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Priorities and Outlook for 2019
The Bank expects the strong economic fundamentals in its core Quebec market to support growth in 2019. With the business cycle in the mature phase in the
U.S., which is a large export market for commercial clients, the Bank is comforted by the strong diversification of the Quebec economy, sound governance of
public finances that has led to three consecutive years of provincial budget surpluses, and good visibility on major government infrastructure projects over the
next several years. Residential housing remains affordable in Montreal and across Quebec while household debt is manageable, reflecting a historically low
unemployment rate and the world’s second highest proportion of women in the labour force. These and other factors provide a favourable context as the Bank
enters a new fiscal year.
The Personal and Commercial segment’s 2019 performance will be driven by its execution against its priorities and its ability to balance volume growth,
margins and credit quality.
Maintain the Pace of Growth
Develop a retail offering that is tailored to market particularities, competition, geographic location and micromarkets.
Enhance marketing and capitalize on online origination features to attract new arrivals, millennials, professionals and SMEs.
Provide a digital savings experience that combines the strength of advisors and modern technologies to help clients reach their life goals.
Update the range of cash management products, adapting them to the needs of clients and helping them to manage their business’s cash cycle.
Achieve greater presence with specialized industries and increase market coverage to grow the Bank’s market share among small businesses in Quebec.
Emphasize a team approach that offers the best advice and solutions by combining generalists and specialists.
Provide a simple, unified client experience by applying an integrated approach across all products and distribution channels.
Develop the marketing capabilities needed to conduct effective campaigns, anticipate client preferences, and personalize client interactions.
Focus on Client Experience
Modernize the client feedback process.
Transform the in-branch experience by supporting clients through the shift to self-service, removing physical barriers and being proactive through the
advisory offering.
Help business clients to grow by giving them access to the Bank’s network of entrepreneurs.
Deepen relationships with business clients with the help of data analysis and digital client relationship management tools.
Expand client self-service options by deploying new digital features such as international transfers and online credit card activation.
Improve the Interac payment offering by enabling business clients to send payment requests to customers and to receive direct deposits from them.
Continue the Digital Transformation
Make continuous improvements to the mobile application, for both retail and business clients.
Modernize and simplify the digital user experience for both large corporations and SMEs by deploying single sign-on features, Enterprise Resource
Planning (ERP) integration, and roles and access management.
Focus on Efficiency
Simplify the product offering, digitize and automate key processes.
Automate our click-to-chat/chatbot dialogue mechanisms in order to personalize certain client interactions on a mass scale and make the Customer
Contact Centres more accessible.
Continue simplification and unification of the core client lifecycle activities, whether they be retail clients (account opening, payments, home purchase
and saving) or business clients (account opening, financing and cash management).
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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(3)
Net interest margin(4)
Average interest-bearing assets
Average assets
Average gross loans and acceptances
Net impaired loans(5) under IFRS 9
Net impaired loans under IAS 39
Net impaired loans(5) as a % of average loans and acceptances
Average deposits
Efficiency ratio
2018
2017(1)
2016(1)
2018-17
% change
2,212
1,027
3,239
1,720
1,519
226
1,293
345
948
948
2.32 %
95,344
100,619
100,572
372
0.4 %
58,051
53.1 %
2,069
988
3,057
1,672
1,385
153
1,232
329
903
874
2.26 %
91,633
96,433
96,060
199
0.2 %
54,302
54.7 %
1,955
945
2,900
1,662
1,238
475
763
206
557
740
2.24 %
87,266
92,347
91,995
275
0.3 %
48,436
57.3 %
7
4
6
3
10
48
5
5
5
8
4
4
5
7
(1)
(2)
(3)
(4)
(5)
For the years ended October 31, 2017 and 2016, certain amounts have been reclassified.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the years ended October 31, 2017 and 2016, only
provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the Other
heading. During the year ended October 31, 2017, the Bank had 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. 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).
Given the materiality of the 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.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Loan and Acceptance Volumes
(millions of Canadian dollars)
(% of year-over-year growth)
Deposit Volumes
(millions of Canadian dollars)
(% of year-over-year growth)
120,000
100,000
80,000
60,000
40,000
20,000
0
%
4
.
4
+
%
1
.
5
+
%
7
.
4
+
%
4
.
3
+
%
0
.
3
+
%
3
.
7
+
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
%
1
.
2
1
+
%
9
.
6
+
%
2
.
4
+
%
4
.
1
2
+
%
3
.
4
+
%
6
.
9
+
2016
2017
2018
2018
2016
2017
2018
2018
Total Personal and Commercial
Personal
Commercial
Total Personal and Commercial
Personal
Commercial
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Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Financial Results
In the Personal and Commercial segment, net income totalled $948 million in
fiscal 2018, up 5% from $903 million in fiscal 2017. The fiscal 2018 net
income was up 8% when compared to the net income excluding the impact of
the sectoral provision on non-impaired loans for the oil and gas producer and
service company loan portfolio, which had been reversed by $29 million, net
of income taxes, in fiscal 2017. The segment’s total revenues rose
$182 million or 6% year over year, as net interest income grew $143 million
while non-interest income grew $39 million. The increase in net interest
income was driven primarily by higher personal and commercial loan and
deposit volumes as well as by a wider net interest margin, which rose to
2.32% in 2018 from 2.26% in 2017 owing mainly to growth in deposit
margins.
The segment’s 2018 non-interest expenses stood at $1,720 million, a
3% year-over-year increase resulting mainly from higher compensation and
employee benefits, operations support charges, and technology investment
expenses. Given these results, the segment’s 2018 contribution increased
10% year over year. Furthermore, at 53.1%, the segment’s 2018 efficiency
ratio improved by 1.6 percentage points from 54.7% in 2017 (57.3% in
2016).
For 2018, the segment recorded $226 million in provisions for credit
losses, $73 million more than the $153 million recorded in 2017. This
increase was mainly due to the $40 million reversal of the sectoral provision
in fiscal 2017 as well as to higher credit loss provisions on personal and
commercial loans, in particular provisions recorded for non-impaired loans
and for credit card receivables.
Total Revenues by Category
Year ended October 31, 2018
4%
13%
38%
Personal Banking (2017: 46%)
Commercial Banking (2017: 37%)
Payment Solutions (2017: 13%)
Insurance (2017: 4%)
Personal Banking
Quarterly Results
(millions of Canadian dollars)
45%
Personal Banking’s total revenues amounted to $2,015 million in fiscal
2018, up 4% from $1,941 million in 2017. This growth came mainly from
3.4% growth in loan volumes, mainly mortgage loans, and a 4.3% increase in
deposit volumes. Personal Banking’s 2018 non-interest income was up
$13 million year over year, essentially due to higher card revenues, higher
internal commission revenues generated by the distribution of Wealth
Management products, and an increase in insurance revenues despite the
gain realized in 2017 upon a change to the distribution model for property
and casualty insurance. Personal Banking’s non-interest expenses rose by
$37 million in 2018, resulting mainly from higher compensation and
employee benefits, technology investment expenses, and operations support
charges.
Commercial Banking
For fiscal 2018, Commercial Banking’s revenues amounted to $1,224 million,
rising 10% from $1,116 million in fiscal 2017. Its net interest income was up,
essentially due to 7.3% and 9.6% growth in loan and deposit volumes,
respectively, and to a wider net interest margin resulting mainly from deposit
margins. Commercial Banking’s 2018 non-interest income grew $26 million
year over year owing to increases in revenues from credit fees, revenues from
bankers’ acceptances, and revenues from foreign exchange activities. Its
2018 non-interest expenses rose $11 million, mainly due to higher
compensation and employee benefits and higher operations support
charges.
Q4 2018
Q3 2018
Q2 2018
Q1 2018
1
3
8
2
3
8
7
7
7
9
9
7
1
3
4
2
3
4
9
2
4
8
2
4
7
5
2
8
4
2
3
1
2
0
3
2
-
-
-
Total revenues
Non-interest expenses
Net income
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Business Segment Analysis | Wealth Management
As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory services
and close client relationships. It delivers a full range of wealth management products and solutions through a multi-channel distribution network and a
differentiated business model. The Wealth Management segment also offers investment solutions to independent advisors as well as solutions to institutional
clients.
Business Lines
Investment Solutions
National Bank Investments (NBI) manufactures and offers mutual funds, investment solutions, and services to consumers and institutional investors through
the Bank’s extended network. With its open architecture model, NBI is Canada’s largest investment fund manager to entrust the management of its
investments exclusively to external portfolio managers.
Full-Service Brokerage
Drawing on the largest network of investment advisors in Quebec, National Bank Financial - Wealth Management (NBFWM) provides wealth management
advisory services through close to 1,000 advisors at over 100 service points across Canada. Its advisors serve over 400,000 retail clients, proposing portfolio
management services, financial and succession planning, and insurance and pension services while working in close collaboration with other segments of the
Bank.
Private Banking
Private Banking 1859 offers highly personalized wealth management services and advice across Canada, helping affluent clients to benefit from
comprehensive management of their personal and family fortunes. As a true market leader in Quebec, Private Banking 1859 continues to expand its operations
across Canada with its extensive range of financial solutions covering the protection, growth and transition of wealth.
Direct Brokerage
National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online
investment solution. NBDB helps customers who want to manage their own investments to do so through a trading platform, through an optimized mobile
trading platform, or by speaking directly to a representative on the phone.
Administrative and Trade Execution Services
National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services, such as trade execution, custodial services, and
brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund
managers.
Transaction and Credit Products
The Wealth Management segment provides independent advisors across Canada with an extensive range of investment products, including GICs, mutual
funds, notes, structured products and monetization, helping to support their own business needs and client relationships. It also offers banking services such
as investment loans, mortgages and other financial products, in partnership with non-bank financial institutions seeking to expand their service offering to
their own clients.
Trust and Estate Services
Through National Bank Trust, the Wealth Management segment provides retail and institutional clients with turnkey services and solutions. Its team of experts
offers a full range of high value-added services designed to consolidate, protect and transfer its customers’ wealth and give them peace of mind. It also offers
integrated trustee and depository services as well as securities custody services.
Economic and Market Review
The tightening of monetary policy continued in 2018, and additional rate hikes by the Bank of Canada are expected in 2019. Barring any unexpected economic
shocks, economic growth will probably continue despite the rising cost of money. The markets reached the maturity phase of their cycle in 2018, but this could
last into the foreseeable future.
The financial services industry is still experiencing rapid change, and demographic transition will play a decisive role in its evolution. Several factors are
reshaping the industry’s demand curve, including the transfer of wealth from the children of the Great Depression, baby-boomers transitioning into retirement,
a resurgence of Generation X into accumulation mode, and the arrival of millennial households.
In the coming years, technological excellence capable of providing clients with the most relevant, personalized experience will be needed to win the client
retention battle. With the multitude of solutions being offered by new industry players (FinTechs), the development of artificial intelligence applications is
becoming a major differentiating factor in the industry. On the regulatory front, many consultations are under way and could require even more adjustments in
the future.
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Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
Key Success Factors
Leadership position in Quebec in terms of market share and brand recognition.
Strong market penetration across Canada in full-service brokerage and private management services.
Ability to build strong ties with clients through the advice provided and the solutions offered at every stage of their lives.
Largest manager of managers in Canada (open architecture); our clients benefit from objective advice.
Leader in the Canadian market for distribution to independent advisors.
High level of client satisfaction with our direct brokerage services.
Proven track record and excellent reputation as a business partner among non-bank financial institutions.
Objectives and Strategies
Capitalizing on the strength of the Bank's brand, its distribution capacity, and Wealth Management's differentiated business model to grow market shares in
the mass and mass affluent markets. Increase market penetration across Canada through organic growth as well as targeted actions and partnerships.
Strategic Priorities
2018 Achievements and Highlights
Execute the plan related to our Savings Bank
approach and integrated into the NBI business
plan
Achieve the growth potential of NBIN
Development of the NatGo experience, currently in the pilot project stage, to be
deployed for customers in 2019.
NBIN’s integration of Hollis Wealth was the largest transaction of its kind completed by
the Bank and was a resounding success.
Major investments to strengthen NBIN’s presence in the custodial services market and
in the Mutual Fund Dealers Association of Canada (MFDA) environment.
Optimize the open architecture
Continue to optimize the business model of
NBFWM
Develop a strategy for capturing market share in
Ontario for NBFWM and Private Banking 1859
Priorities and Outlook for 2019
On the strength of its open architecture, NBI offers Meritage portfolios, all of which rank
in the first quartile, even when considering the fees.
NBFWM recruited a large number of advisors who are aligned with the Bank's values and
corporate culture.
A business plan has been developed and will be implemented in fiscal 2019.
Transform Client Service:
Offer sound, independent advice that emphasizes the client’s constantly evolving goals.
Invest in cutting-edge platforms and tools to stay at the forefront of the digital evolution.
Promote data-based solutions to ensure a comprehensive approach.
Concentrate on Fast-Growing Markets:
Grow the market share of the retail client portfolio by maximizing integration across all distribution channels.
Accelerate the acquisition of mass and mass affluent customers in Quebec.
Continue market penetration efforts outside Quebec.
Leverage the solutions developed across all distribution channels for B2B clients.
Continue Transforming Wealth Management’s Culture:
Leverage Wealth Management's unified team to provide clients with an integrated and transparent approach.
Rely on agility and empower employees to accelerate the transformation.
Encourage an innovation mindset.
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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(2)
Income before income taxes
Income taxes
Net income
Specified items after income taxes(3)
Net income excluding specified items(3)
Average assets
Average loans and acceptances
Net impaired loans(4) under IFRS 9
Net impaired loans under IAS 39
Average deposits
Efficiency ratio excluding specified items(3)
2018
2017(1)
2016(1)
2018-17
% change
510
987
262
1,759
1,092
667
3
664
175
489
17
506
12,551
11,104
17
31,592
61.1 %
431
906
267
1,604
1,046
558
3
555
147
408
23
431
11,652
9,924
4
31,192
63.7 %
372
803
266
1,441
999
442
5
437
116
321
26
347
11,006
9,379
5
28,344
67.3 %
18
9
(2)
10
4
20
−
20
19
20
17
8
12
1
(1)
(2)
(3)
(4)
For the years ended October 31, 2017 and 2016, certain amounts have been reclassified.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the years ended October 31, 2017 and 2016, only
provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the Other
heading.
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures. For fiscal 2016, the specified items included the acquisition-related items
of recent years.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
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
2018
2017
2016
416,199
411,817
341,047
37,007
31,874
68,881
485,080
33,349
32,192
65,541
477,358
27,589
28,706
56,295
397,342
2018-17
% change
1
11
(1)
5
2
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Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
Financial Results
In the Wealth Management segment, net income totalled $489 million in
fiscal 2018, up $81 million or 20% from $408 million in fiscal 2017. For
2018, the segment’s net income excluding specified items (with the specified
items including the acquisition-related items of recent years) totalled
$506 million, up $75 million or 17% from $431 million in 2017.
Total revenues amounted to $1,759 million in 2018 compared to
$1,604 million in 2017, a $155 million year-over-year increase driven mainly
by 18% growth in net interest income, attributable to improved margins, and
by 9% growth in fee-based revenues given net inflows across all solutions
and a steady rise in stock market performance during 2018. As for the 2018
transaction-based and other revenues, they were down when compared to
2017.
The segment’s non-interest expenses stood at $1,092 million in 2018
compared to $1,046 million in 2017, a 4% year-over-year increase
attributable primarily to the higher variable compensation and external
management fees associated with the revenue growth arising from greater
business volume as well as to higher operations support charges. The 2018
efficiency ratio excluding specified items was 61.1%, an improvement of
2.6 percentage points from 63.7% in 2017 (67.3% in 2016).
The segment recorded $3 million in provisions for credit losses in 2018,
stable when compared to 2017.
Assets Under Administration and Under Management
As at October 31, 2018, assets under administration and under management
totalled $485.1 billion, a $7.7 billion or 2% increase from one year earlier,
with net inflows into various solutions tempered by a drop in stock prices at
the end of fiscal 2018. When compared to October 31, 2016, assets under
administration and under management grew 22%.
Assets under administration amounted to $416.2 billion as at
October 31, 2018, a $4.4 billion increase since October 31, 2017 that came
from net inflows to various solutions.
In the individuals category, assets under management amounted to
$37.0 billion as at October 31, 2018 compared to $33.3 billion as at
October 31, 2017. Mutual funds totalled $31.9 billion as at October 31,
2018, down when compared to October 31, 2017.
Total Revenues by Category
Year ended October 31, 2018
15%
29%
56%
Net interest income (2017: 27%)
Fee-based services (2017: 56%)
Transaction-based and other revenues (2017: 17%)
Quarterly Results
(millions of Canadian dollars)
Q4 2018
Q3 2018
Q2 2018
Q1 2018
5
4
4
2
4
4
1
3
4
1
4
4
6
7
2
0
7
2
9
6
2
7
7
2
4
2
1
6
2
1
9
1
1
0
2
1
-
-
-
Total revenues
Non-interest expenses
Net income
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Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
The Financial Markets segment offers a full range of products and services to corporate, government and institutional clients. Whether providing
comprehensive advisory services, macroeconomic and issuer-focused research, or capital markets services, its focus is on client relationships and their
growth. Over 700 professionals serve client needs through offices in North America, Europe, the U.K. and Asia.
Lines of Business
The Financial Markets segment operates two main business lines: Global Markets and Corporate and Investment Banking.
Global Markets
Financial Markets is a Canadian leader in risk management solutions and structured products and is the largest market-maker in exchange-traded funds in
Canada by volume. The financial and business risks of its clients are mitigated through solutions covering interest rates, foreign exchange rates, equities and
commodities. The segment offers structuring advice to asset managers and fund companies for new product development and supports their success by
providing liquidity, research and counterparty services. It also issues tailored investment products in all asset classes to institutional and retail investors.
Corporate and Investment Banking
Financial Markets offers loan origination and syndication to corporations for project financing, merger and acquisition transactions, and general corporate
purposes. The segment is also an investment banking leader across Canada and the overall top-ranked franchise in Quebec. Its comprehensive services
include strategic advisory for financing and mergers and acquisitions as well as debt and equity underwriting. It is the Canadian leader in government and
corporate high yield debt underwriting. Dominant in Quebec, it leads deals for provincial and municipal governments across Canada while growing its national
position in infrastructure and project financing. Financial Markets is active in securitization financing, mainly Government-of-Canada-insured mortgages and
mortgage-backed securities.
Economic and Market Review
Financial Markets started fiscal 2018 very strong as our flexible approach to capital allocation provided us with the ability to seize opportunities in the
securities finance business. Plagued by periods of volatility, domestic equity offerings fell drastically. However, the segment achieved strong progress building
its M&A franchise through several landmark transactions. Results for the second half of 2018 were influenced by global trade tensions and strong economic
fundamentals in Canada.
Key Success Factors
Integrated approach, teamwork, alignment and communication among all groups.
Focused on client relationships and their growth.
Diversified client activity and revenue mix.
Recognized track record of innovation in derivatives and structuring.
Proven ability to adapt to evolving capital markets conditions and deliver consistent financial performance.
Objectives and Strategies
Strategic Priorities
2018 Achievements and Highlights
Maintain leadership in Canadian debt
underwriting
Lead and joint-lead on Canada Mortgage Bond issuances aggregating $29.25 billion.
Lead on deals for the Province of Quebec aggregating $9.5 billion.
Joint lead on the Province of Alberta’s US$2.25 billion five-year offering.
Inaugural lead for the Province of Saskatchewan.
Lead on a 10-year transaction for the First Nations Finance Authority.
Lead on the City of Toronto’s largest 20-year transaction.
Ranked first in government debt underwriting:
Leader in corporate debt underwriting:
Joint bookrunner on a $1.4 billion multi-tranche offering for Hydro-One Inc.
Joint bookrunner on a $1.2 billion multi-tranche offering for METRO INC.
Joint bookrunner on a US$900 million offering for Alimentation Couche-Tard Inc.
Joint bookrunner on a $500 million dual tranche offering for Union Gas Limited.
Joint bookrunner on a $500 million dual tranche offering for SmartCentres REIT.
Joint bookrunner on a $220 million offering for Superior Plus LP.
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Business Segment Analysis | Financial Markets
Strategic Priorities
2018 Achievements and Highlights
Expand our client coverage to increase
our presence in advisory services
Leverage leadership in equity
distribution to increase lead and
co-lead positions
Maintain leadership in investment
products
Financial advisor to Enercare Inc. on its $4.3 billion sale to Brookfield Infrastructure.
Advisor to the special committee of the board of directors of Raging River Exploration Inc. on its
strategic repositioning process and its resulting $1.9 billion merger with Baytex Energy Corp.
Additionally, provided a fairness opinion about the merger to the special committee and board.
Financial advisor to Stingray Group Inc. on its acquisition of Newfoundland Capital Corporation Limited
for $506 million. Also acted as joint bookrunner on the related $83 million public equity financing and
as sole lead arranger and bookrunner on the $450 million in credit facilities to finance the transaction.
Exclusive financial advisor to Whitecap Resources Inc. on its $940 million acquisition of Cenovus Energy
Inc.’s Weyburn light oil assets and on a $92.5 million private placement. Also acted as exclusive
financial advisor, co-lead underwriter, and joint bookrunner on a concurrent $332.5 million bought deal
offering of Whitecap common shares.
On February 26, 2018, in conjunction with Industrial Alliance Insurance and Financial Services Inc.
entering into an arrangement agreement to create a new holding company, National Bank Financial Inc.
provided an opinion to Industrial Alliance’s board of directors that the proposed arrangement was fair,
from a financial point of view, to the company's common shareholders. On the same day, and
concurrent with the announcement of the acquisition of PPI Management Inc., National Bank
Financial Inc. acted as co-lead underwriter for the issuance of $149 million of common shares and
$150 million preferred shares.
Exclusive financial advisor to Hydro-Québec on the sale of a majority interest (55%) in TM4 Inc. to
Dana Incorporated for a cash consideration of $165 million.
Co-lead on the Morneau Shepell Inc. offering and lead on the associated foreign exchange and interest
rate hedging.
Lead underwriter on Shopify Inc.’s US$658 million equity financing.
Co-bookrunner on Nevada Copper’s $128 million and $108 million equity financings.
U.S. initiative for structured notes:
Since March 2018, the top tier U.S. wealth management networks approved the Bank as an issuer. This
approval resulted in the issuance of a number of structured notes on different underlying assets and
indices for nearly $1.0 billion. The notes are classified as retail deposits and contribute to the
diversification of the Bank’s deposit base. This 2018 issuance amount represents an increase of almost
$900 million from 2017.
Exchange-traded funds (ETF) initiative:
Given reduced ETF market volume in 2018, the ETF market-making team captured almost 40% market
share, effectively becoming the number one ETF market-maker in Canada. For fixed-income ETFs, a key
area of focus, market share grew by over 50%, moving the Bank into the number one position in
Canada. The ETF team was selected to act as designated broker 43 times this year, up from 33 times last
year.
Managed retail products:
In the managed retail product space, the Bank was able to lead another $500 million of overnight split
share re-openings in 2018. The Bank pioneered the overnight approach, which continues to be a
successful means for asset managers to raise capital.
Priorities and Outlook for 2019
Strategic pillar: Continue to automate processes, use artificial intelligence, and increase data-sharing across the Financial Markets segment.
Develop advisory relationships with investor clients.
Increase market share with corporations for all fee-based products.
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Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Segment Results – Financial Markets
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Global markets
Equities
Fixed-income
Commodities and foreign exchange
Financial market fees
Corporate banking
Gains on investments and other
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 on a taxable equivalent basis
Net income
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Specified items after income taxes(1)
Net income excluding specified items(1)
Average assets
Average loans and acceptances
Net impaired loans(4)
Average deposits
Efficiency ratio on a taxable equivalent basis and excluding specified items(1)
2018
2017(2)
2016(2)
2018-17
% change
564
265
126
955
349
377
62
1,743
697
1,046
4
1,042
278
764
−
764
100,721
15,116
−
23,510
496
294
103
893
304
327
94
1,618
665
953
−
953
255
698
−
698
94,991
13,118
−
20,926
438
263
116
817
285
322
(114)
1,310
614
696
−
696
213
483
145
628
87,491
12,552
−
15,201
40.0 %
41.1 %
41.7 %
14
(10)
22
7
15
15
(34)
8
5
10
9
9
9
9
6
15
12
(1)
(2)
(3)
(4)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures. For fiscal 2016, the specified items included a $164 million write-off of
the equity interest in associate Maple ($145 million net of income taxes).
For the years ended October 31, 2017 and 2016, certain amounts have been reclassified.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the years ended October 31, 2017 and 2016, only
provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the Other
heading.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
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Business Segment Analysis | Financial Markets
Financial Results
In the Financial Markets segment, net income totalled $764 million in fiscal
2018, up $66 million or 9% from fiscal 2017. Total revenues on a taxable
equivalent basis amounted to $1,743 million compared to $1,618 million in
fiscal 2017, a $125 million increase driven by all revenue types except for
gains on investments and other revenues. Due to favourable market
conditions in fiscal 2018, global markets revenues increased 7% year over
year. Specifically, revenues from equity securities and from commodity and
foreign exchange activities grew 14% and 22%, respectively, while fixed-
income revenues declined 10%. Revenues from financial market fees were up
15%, particularly due to solid performance in merger and acquisition
business. Furthermore, corporate banking revenues grew 15% year over year
owing to more robust lending activity. Lastly, higher gains on investments
and other revenues had been recorded in fiscal 2017, whereas the
$164 million write-off ($145 million net of income taxes) of the equity
interest in associate Maple recorded in fiscal 2016 had a significant impact
on the segment’s result.
For the year ended October 31, 2018, the segment’s non-interest
expenses increased 5% year over year, mainly due to the higher variable
compensation associated with revenue growth as well as to higher
operations support charges. At 40.0%, the 2018 efficiency ratio on a taxable
equivalent basis and excluding specified items improved by 1.1 percentage
points when compared to 41.1% in 2017 and also improved compared to
41.7% in 2016.
For 2018, the segment recorded $4 million in provisions for credit
losses on non-impaired loans, whereas no provisions had been recorded in
2017 and 2016.
Total Revenues by Category
Year ended October 31, 2018
(taxable equivalent basis)(1)
3%
22%
20%
55%
Global markets (2017: 55%)
Financial market fees (2017: 19%)
Corporate Banking (2017: 20%)
Gains on investments and other (2017: 6%)
(1)
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 2018
Q3 2018
Q2 2018
Q1 2018
6
3
4
6
1
4
7
3
4
4
5
4
2
9
1
4
7
1
8
7
1
1
7
1
0
9
1
6
7
1
4
0
2
6
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.
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Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted and disciplined international strategy that aims for higher returns and offers additional strategic
options for capital deployment. The Bank is currently focused on specialty finance in the U.S. through Credigy and on personal and commercial banking in
Cambodia through ABA Bank. During fiscal 2018, the U.S. Specialty Finance and International segment generated 9% of consolidated total revenue and 10% of
net income.
U.S. Specialty Finance – Credigy
Credigy is a specialty finance company with flexibility across its capital structure to acquire or finance all segments of the consumer receivables market. Based
in Atlanta, the company is primarily active in performing assets covering a broad range of asset classes, mostly in the U.S. market. The Bank holds an 80%
ownership interest in Credigy.
Economic and Market Review
U.S. consumer credit is expected to reach record levels in 2018, fueled by strong economic growth and low unemployment, despite four interest rate hikes by
the Federal Reserve during the year. Significant increases in overall market liquidity in the U.S. are creating short-term pressure on net spreads in specialty
finance.
Key Success Factors
Ability to seize opportunities in rapidly changing market conditions through a disciplined yet adaptable investment strategy.
Diversification across several classes of performing assets.
Market credibility achieved through over 250 transactions life-to-date, representing over US$11 billion in total investments supported by the Bank.
Rigorous pricing approach strengthened by continuous refinement of modelling and analytics capabilities and deep expertise in specific asset classes.
Proven expertise in the successful management and servicing of consumer assets.
Objectives and Strategies
Provide customized solutions for the consumer receivables market in pursuit of the best risk-adjusted returns and a return on assets (ROA) of at least 2.5%.
Strategic Priorities
2018 Achievements and Highlights
Sustain deal flow by being a partner of
choice for bank and non-bank
institutions facing complex challenges
and strategic changes.
Maintained strong average assets of $6.4 billion.
Maintain a diversified mix of
performing assets
Performing assets accounted for 97% of assets compared to 96% at the end of 2017.
Continued diversification in asset classes focusing on both secured and unsecured consumer assets.
Proactively mitigate risks
Monitoring and refinement of credit models allow Credigy to focus on the best risk/reward investments.
Continue disciplined approach to ensure a balance between risk and return and an ROA of at least 2.5%.
Priorities and Outlook for 2019
Credigy continues to position itself as a transaction partner of choice that has the willingness and financial capacity to negotiate mutually beneficial deals with
both bank and non-bank financial institutions. While building its deal pipeline, the company continuously refines and enhances its modelling and analytics
tools to optimize pricing and servicing of the consumer receivables portfolios. Market conditions are expected to remain neutral in 2019 in an environment of
strong credit expansion. Credigy’s diversification will permit continued growth, albeit at slower rates in the current market conditions and until spreads widen.
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Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
International – ABA Bank
ABA Bank is a profitable, rapidly growing bank that offers financial services to individuals and businesses in Cambodia with an ROE of 31%. It offers a full
spectrum of financial services to micro, small and medium-size enterprises (MSMEs) as well as to individuals through 63 branches and 259 banking machines
across the country. It has been selected as Best Bank in Cambodia by Euromoney Magazine for five consecutive years since 2014. Since 2016, the Bank is the
majority shareholder, holding a 90% ownership interest, and has invested US$81 million in ABA Bank subordinated debt.
Economic and Market Review
GDP growth in Cambodia averaging near 7% for the past decade.
A diversified economy based largely on the U.S. dollar. Strong GDP growth is supported by membership in the Association of Southeast Asian Nations
(ASEAN) trade association and an expansionary fiscal policy.
Highly underbanked market. Approximately 7% of the population have a credit account and 33% have a deposit account.
High adoption and use of mobile technology and social media. Over 70% of the population of 16.5 million is under 35 years of age.
Key Success Factors
Strong risk management driving high credit quality.
Ability to fund loan growth through deposits by leveraging the Bank’s reputation as a world-class financial institution.
Experienced leadership team and well-trained employees.
Governance structure based on high Canadian standards while providing local management with the autonomy to pursue strategic priorities and
business objectives.
Objectives and Strategies
Pursue omnichannel banking focused on being the lending partner of choice to MSMEs, while increasing market penetration in deposits and transactional
services for retail and business clients.
Strategic Priorities
2018 Achievements and Highlights
Grow market share in MSME lending
while maintaining credit quality
Sustain growth in deposits and
transactional services
Achieved 53% growth in loan volumes, with 100% of all loans collateralized.
Non-performing loans were 0.8% compared to 0.5% in 2017.
Greater market penetration with the opening of 14 new branches for a total of 63 branches country-wide.
Ranked fourth largest bank in Cambodia by assets.
Deposits increased 51% compared to 2017.
Continued enhancements to self-banking capabilities, including the first full-scale mobile banking
application in Cambodia.
Self-banking transactions made up 91% of all transactions compared to 81% in 2017.
Priorities and Outlook for 2019
ABA Bank enters 2019 with strong growth momentum and a positive outlook. It will continue to offer simple and efficient banking solutions in the underbanked
Cambodian market, focusing on MSME clients to achieve loan growth while increasing its stable deposit base by leveraging the Bank’s reputation and offering
convenience to retail customers through its advanced digital and self-banking infrastructure and expanding branch network. It plans to open an additional six
to eight branches in 2019 to extend its reach into new regions of the country and gain direct access to a larger pool of MSME customers and retail deposits.
International – Other Investments
In addition to its controlling interest in ABA Bank, the Bank also holds minority positions in financial groups active in trade with French-speaking Africa and
Africa-Asia. As at October 31, 2018, the total amount invested in emerging markets was $544 million. Of this amount, the investment in ABA Bank represents
$322 million or 59%.
The Bank is currently focused on supporting ABA Bank’s rapid growth and on operationalizing its governance framework. The Bank has consequently extended
its moratorium on making significant new investments in emerging markets until 2020.
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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)
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(2)
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank's shareholders
Average assets
Average loans and acceptances
Net impaired loans(3) under IFRS 9
Net impaired loans under IAS 39
Purchased or originated credit-impaired (POCI) loans
Average other revenue-bearing assets
Average deposits
Efficiency ratio
2018
2017(1)
2016(1)
2018-17
% change
584
55
639
446
193
251
156
95
388
94
294
72
222
38
184
9,270
7,853
15
1,576
15
1,907
39.3 %
466
75
541
409
132
225
163
62
316
48
268
84
184
29
155
7,519
6,062
3
1,990
449
1,265
41.6 %
284
127
411
324
87
207
182
25
204
4
200
53
147
20
127
5,319
3,499
1
1,846
1,162
487
50.4 %
25
(27)
18
9
46
12
(4)
53
23
96
10
(14)
21
31
19
23
30
(21)
(97)
51
(1)
(2)
(3)
For the years ended October 31, 2017 and 2016, certain amounts have been reclassified.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the years ended October 31, 2017 and 2016,
only provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the
Other heading.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and do not include POCI loans.
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Business Segment Analysis | U.S. Specialty Finance and International
Financial Results
Total Revenues by Category
Year ended October 31, 2018
For the year ended October 31, 2018, the USSF&I segment generated
$222 million in net income compared to $184 million in fiscal 2017. Its 2018
total revenues amounted to $639 million versus $541 million in 2017; this
18% revenue growth was driven by an increase in Credigy’s revenues,
particularly due to growth in loan volumes, and by growth in ABA Bank’s
revenues, which increased steadily due to higher loan and deposit volumes.
The segment’s 2018 non-interest expenses stood at $251 million, a
$26 million year-over-year increase attributable essentially to the ABA Bank
non-interest expenses incurred to expand its banking network. As for
Credigy’s non-interest expenses, they were down 4% year over year,
primarily as a result of lower servicing fees.
For 2018, the segment recorded $94 million in provisions for credit
losses, consisting essentially of Credigy’s credit loss provisions.
30%
70%
Credigy (2017: 76%)
ABA Bank (2017: 23%)
International (2017: 1%)
Quarterly Results
(millions of Canadian dollars)
Q4 2018
Q3 2018
Q2 2018
Q1 2018
8
5
1
6
4
1
4
7
1
1
6
1
5
6
5
5
4
6
4
5
2
6
3
6
0
6
0
5
-
-
-
Total revenues
Non-interest expenses
Net income
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Management’s Discussion and Analysis
Business Segment Analysis | Other
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, Risk Management,
Human Resources, Corporate Affairs and Operations, and Finance. 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
2018
(189)
220
31
303
(272)
−
(272)
(81)
(191)
49
(240)
2017(2)
2016(2)
(93)
126
33
249
(216)
40
(256)
(87)
(169)
55
(224)
(113)
126
13
393
(380)
−
(380)
(128)
(252)
55
(307)
−
(191)
42,601
2
(167)
37,756
186
(66)
39,750
(1)
(2)
(3)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures. In fiscal 2016, the specified items consisted mainly of the following
items, net of income taxes: a restructuring charge of $96 million, impairment losses on intangible assets of $32 million, and litigation charges of $18 million.
For the years ended October 31, 2017 and 2016, certain amounts have been reclassified.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the years ended October 31, 2017 and 2016, only
provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the Other
heading. For fiscal 2017, the $40 million in provisions for credit losses consisted of 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
$191 million in fiscal 2018 compared to a net loss of $169 million in fiscal
2017. This change was mainly due to an increase in non-interest expenses,
particularly technology investment expenses made as part of the Bank’s
transformation plan and for business development activities, and to a higher
contribution from Treasury activities in 2017. These items more than offset
the expected favourable impact on fiscal 2018 of the $40 million increase
($29 million net of income taxes) recorded for the collective allowance for
credit risk on non-impaired loans in fiscal 2017 to reflect growth in the
Bank’s overall credit portfolio.
3
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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. For example,
the second quarter of the fiscal year has fewer days than the other quarters, which can result in reductions to total revenues and certain non-interest expense
items. 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 94 and 95.
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
826
988
1,814
73
1,036
139
566
837
955
1,792
76
1,011
136
569
885
869
1,754
91
992
124
547
2018
Q1
834
972
1,806
87
1,024
145
550
Q4
Q3
Q2
881
823
1,704
70
976
133
525
887
788
1,675
58
971
128
518
815
782
1,597
56
941
116
484
2017(2)
Q1
853
780
1,633
60
969
107
497
(1)
(2)
For additional information about the 2018 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 2018, published on December 5, 2018.
For the fiscal 2017 quarterly periods, certain amounts have been reclassified. These reclassifications had no impact on net income.
The non-interest expense results for every quarter of 2018 were up year
over year. Explaining these increases were compensation and employee
benefits (including the variable compensation associated with revenue
growth in the business segments), technology investments expenses made
as part of the Bank’s transformation plan and for business development
activities, and expenses related to the expansion of ABA Bank banking
network.
The effective tax rate was relatively stable over the four quarters of
2018, whereas it was lower in the first quarter of 2017. The change in the
effective tax rate between the first quarters of 2018 and 2017 came from
lower tax-exempt dividend income in the first quarter of 2018. In addition,
the U.S. tax reform had an impact on the effective tax rates of the second,
third and fourth quarters of fiscal 2018.
The above analysis 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. Thanks to the
net income growth across all of the Bank’s main business segments, the net
income for each quarter of 2018 was up year over year.
Net interest income posted year-over-year decreases in each quarter of
2018 except for the second quarter, which posted a year-over-year increase.
These decreases came mainly from a decline in the net interest income
results of the Financial Markets segment that were partly offset by the
increase in non-interest income. These decreases were tempered, however,
by growth in personal and commercial loan and deposit volumes, net interest
income growth at Wealth Management (notably due to deposit growth and
improved margins) and the net interest income growth at the Credigy and
ABA Bank subsidiaries. The year-over-year increase in net interest income for
the second quarter of 2018 was a result of higher net interest income in the
Financial Markets segment, notably due to equity securities revenues
recorded during the quarter.
Non-interest income posted year-over-year increases in every quarter of
fiscal 2018 owing to sustained growth across all the business segments.
The provisions for credit losses in every quarter of fiscal 2018 were
affected by the application of IFRS 9 on November 1, 2017. They posted year-
over-year increases in every quarter of 2018, partly due to provisions
recorded on non-impaired personal and commercial loans and to provisions
recorded for the U.S. Specialty Finance and International segment and
related essentially to the Credigy subsidiary. Furthermore, during the second
quarter of 2017, the Bank had recorded a $40 million reversal to the sectoral
provision on non-impaired loans taken for the oil and gas producer and
service company loan portfolio. The 2017 second-quarter provisions for
credit losses had also included a $40 million increase in the collective
allowance for credit risk on non-impaired loans.
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Analysis of the Consolidated Balance Sheet
The Consolidated Balance Sheet as at October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9 adoption,
refer to Notes 1 and 3 to the consolidated financial statements. Comparative information has not been restated.
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
Other
Liabilities and equity
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders
Non-controlling interests
2018
2017(1)
% change
12,756
69,783
18,159
146,082
15,691
262,471
170,830
76,539
747
13,976
379
262,471
8,802
65,343
20,789
136,457
14,436
245,827
156,671
75,589
9
12,750
808
245,827
45
7
(13)
7
9
7
9
1
10
(53)
7
(1) On November 1, 2017, the Bank changed the presentation of certain items on the Consolidated Balance Sheet, and the October 31, 2017 figures were reclassified to reflect those changes.
As at October 31, 2018, the Bank’s total assets amounted to $262.5 billion
compared to $245.8 billion at year-end 2017, a 7% increase owing mainly to
a $4.0 billion increase in cash and deposits with financial institutions, a
$4.5 billion increase in securities, and a $9.6 billion increase in loans and
acceptances net of allowances.
Cash and Deposits With Financial Institutions
At $12.8 billion as at October 31, 2018, cash and deposits with financial
institutions have risen $4.0 billion since October 31, 2017, mainly due to
growth in deposits with the U.S. Federal Reserve. 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, 2018, securities totalled $69.8 billion (27% of total
assets). During fiscal 2018, they grew $4.5 billion from $65.3 billion as at
October 31, 2017. This growth was essentially due to an $8.3 billion increase
in securities at fair value through profit or loss, as securities issued or
guaranteed by the Canadian government were up $5.9 billion and securities
issued or guaranteed by Canadian provincial and municipal governments
were up $2.9 billion. As at October 31, 2018, securities purchased under
reverse
totalled
repurchase agreements and securities borrowed
$18.2 billion, a 13% decrease from the same date last year that stems
mainly from Treasury activities. The Bank’s market risk management policies
are described on pages 68 to 75 of this MD&A.
Loans and Acceptances
As at October 31, 2018, loans and acceptances, net of allowances for credit
losses, totalled $146.1 billion, up $9.6 billion or 7% from October 31, 2017,
and accounted for 56% of total assets.
Residential mortgage loans outstanding totalled $53.7 billion as at
October 31, 2018, rising $2.1 billion or 4% since year-end 2017. This growth
was driven by demand for mortgage credit and business growth at ABA Bank.
Personal loans totalled $37.4 billion at year-end 2018, a $1.8 billion or
5% increase from $35.6 billion at year-end 2017. This increase came from
growth in Personal Banking’s business activities, mainly due to home equity
lines of credit. As for credit card receivables, they increased 3% to total
$2.3 billion as at October 31, 2018.
At $53.4 billion as at October 31, 2018, loans and acceptances to
businesses and government increased $5.7 billion or 12% since October 31,
2017, mainly due to business growth at Commercial Banking and in the
Financial Markets segment.
Table 9 (page 101) shows gross loans and acceptances by borrower
category as at October 31, 2018. At $70.6 billion, residential mortgage loans
(including home equity lines of credit) have posted strong growth since 2014
and account for 48% of total loans and acceptances as at October 31, 2018;
this growth was driven by sustained demand for mortgage credit. As for retail
loans, they totalled $16.5 billion as at October 31, 2018. With respect to
commercial loans, there was year-over-year growth mainly in the agriculture
category, mining category, manufacturing category and real estate category,
whereas certain categories posted year-over-year decreases, notably the
retail trade category and the finance and insurance category. Purchased or
originated credit-impaired loans were down when compared to October 31,
2017.
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Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Impaired Loans
Following IFRS 9 adoption on November 1, 2017, all loans classified in
Stage 3 of the expected credit loss model are impaired loans. Under IAS 39,
loans were considered impaired according to different criteria. These
impaired loans do not include POCI loans.
As at October 31, 2018, gross impaired loans stood at $630 million
compared to $599 million as at November 1, 2017 and $380 million as at
October 31, 2017 (Table 10, page 101). As at October 31, 2018, net impaired
loans stood at $404 million compared to $360 million as at November 1,
2017, a $44 million increase arising mainly from commercial loan portfolios.
As at October 31, 2017, net impaired loans stood at $206 million.
A detailed description of the Bank’s credit risk management practices is
provided on pages 61 to 67 of this MD&A as well as in Note 8 to the
consolidated financial statements.
Other Assets
As at October 31, 2018, other assets totalled $15.7 billion compared to
$14.4 billion as at October 31, 2017, a $1.3 billion increase arising mainly
from a $0.9 billion increase in the other item of other assets, notably the
Due from clients, dealers and brokers item. As for derivative financial
instruments,
joint ventures, goodwill,
in associates and
premises and equipment, and intangible assets, they remained relatively
stable year over year.
investments
Deposit Liability
At $170.8 billion as at October 31, 2018, deposits increased by $14.1 billion
or 9% since year-end 2017. At $55.7 billion, personal deposits, as presented
in Table 12 (page 102), increased $3.5 billion since October 31, 2017 and
accounted for 33% of all deposits. This increase was driven by Bank
initiatives designed to grow this type of deposit as well as by growth at the
ABA Bank subsidiary. A summary of total personal savings is provided in the
following table below.
As shown in Table 12, business and government deposits totalled
$110.3 billion, up $11.2 billion from $99.1 billion at year-end 2017. This
increase came mainly from government and banking business as well as
Treasury funding activities. Deposits from deposit-taking institutions were
down $0.6 billion from the same date last year.
As at October 31, 2018, total personal savings amounted to
$211.5 billion, up from $209.0 billion as at October 31, 2017. Overall, off-
balance-sheet personal savings stood at $155.8 billion as at October 31,
2018 compared to $156.8 billion one year earlier, a decrease that is
essentially attributable to a decline in stock market prices at the end of
2018.
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2018
2017
% change
55,688
52,175
123,458
31,874
440
155,772
211,460
124,212
32,192
408
156,812
208,987
7
(1)
(1)
8
(1)
1
Total Personal Savings
As at October 31
(millions of Canadian dollars)
Balance sheet
Deposits(1)
Off-balance-sheet
Brokerage
Mutual funds
Other
Total
(1)
The Bank reclassified certain amounts presented in the Deposits item of the
Consolidated Balance Sheet. As at October 31, 2017, a $1,544 million amount was
reclassified from Deposits – Personal into Deposits – Business and government.
Other Liabilities
Other liabilities stood at $76.5 billion as at October 31, 2018, rising
$0.9 billion since October 31, 2017, essentially due to a $2.4 billion increase
in obligations related to securities sold short, partly offset by a $1.8 billion
decrease
in obligations related to securities sold under repurchase
agreements and securities loaned and a $0.6 billion decrease in derivative
financial instruments.
Subordinated Debt and Other Contractual Obligations
Since October 31, 2017, subordinated debt increased due to a $750 million
issuance of medium-term notes on February 1, 2018.
The contractual obligations are presented in detail in Note 30 to the
consolidated financial statements.
Equity
As at October 31, 2018, equity attributable to the Bank’s shareholders was
$14.0 billion, up $1.2 billion from $12.8 billion as at October 31, 2017. This
increase came from net income net of dividends, from remeasurements of
pension plans and other post-employment benefit plans, and from the
issuances of Series 40 and Series 42 preferred shares for $600 million,
tempered by a $200 million redemption of Series 28 preferred shares for
cancellation. The issuances of common shares under the stock option plan
were more than offset by common shares repurchased for cancellation and
the impact of shares purchased or sold for trading. As for non-controlling
interests, they were down $429 million, essentially due to the $400 million
redemption of trust units issued by NBC Asset Trust. The Consolidated
Statements of Changes in Equity on page 110 of this Annual Report present
the items of equity. In addition, an analysis of the Bank’s regulatory capital is
presented in the Capital Management section of this MD&A.
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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:
the employee must meet the same credit requirements as a client;
—
— mortgage loans are offered at the preferential employee rate;
—
home equity lines of credit bear interest at Canadian prime less 0.5%,
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 0.5%, but
never lower than Canadian prime divided by two.
—
—
—
The Bank also 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 10, 28 and 29 to the consolidated financial statements.
Income Taxes
In September 2018, the Bank was reassessed by the Canada Revenue
Agency (CRA) for additional income tax and interest of approximately
$130 million (including estimated provincial tax and interest) in respect of
certain Canadian dividends received by the Bank during 2013.
In May 2017, the Bank had been reassessed for additional income tax
and interest of approximately $77 million (including provincial tax and
interest) in respect of certain Canadian dividends received by the Bank
during 2012.
The transactions to which these reassessments relate are similar to
those prospectively addressed by the synthetic equity arrangement rules
introduced in the 2015 Canadian federal budget.
Also in July 2018, the CRA confirmed in writing that, except for the
above-mentioned reassessment for 2012, it would not pursue the proposed
reassessment in respect of 2011 and 2012 that had been communicated to
the Bank in March 2017.
The CRA may issue reassessments to the Bank for taxation years
subsequent to 2013 in regard to activities similar to those that were the
subject of the 2013 and 2012 reassessments. The Bank remains 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, 2018.
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Exposures to Certain Activities
In 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. The EDTF
published a report containing 32 recommendations. The risk disclosures
required by the EDTF are provided in this Annual Report and in the documents
entitled Supplementary Regulatory Capital and Pillar 3 Disclosure and
Supplementary Financial Information, which are available on the Bank’s
website at nbc.ca. In addition, on page 8 of this MD&A is a table of contents
that
the 32
recommendations.
readers can use
information
relative
locate
to
to
The FSB recommendations seek to enhance the 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. Alt-A loans are granted to borrowers
who cannot provide standard proof of income. The Bank’s Alt-A loan volume
was $425 million as at October 31, 2018 ($408 million as at October 31,
2017).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 and Pillar 3 Disclosure report, which is available on the
Bank’s website at nbc.ca.
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, 2018,
total
commitments for this type of loan stood at $2,967 million ($3,269 million as
at October 31, 2017). Details about other exposures are provided in the table
concerning structured entities in Note 28 to the consolidated financial
statements.
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.
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.
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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
securitize
investment
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, 2018, the outstanding amount of NHA securities issued by the
Bank and sold to CHT was $16.5 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
liabilities 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 9 to the consolidated financial statements.
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
the
relationship. Furthermore,
securitization program and ensures that all related procedures are
stringently followed and that investors are paid according to the provisions
of the program.
it administers
the client
As at October 31, 2018, 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, 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.
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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 interest rate, foreign exchange and credit 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.
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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 Enterprise-Wide Risk 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.
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2018 Annual Report
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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.
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 its business activities 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.
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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 banking book equity
securities. This method requires proactive management of the capital
allocated to portfolios with banking book 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. The Bank uses the Internal Assessment Approach (IAA) for unrated
securitization exposures relating to the asset-backed commercial paper
conduits it sponsors. Under the IAA, the Bank considers all relevant risk
factors in assessing the credit quality of the exposures in the same manner
as would an external credit assessment institution. The Bank uses loss
coverage models and policies to quantify and monitor the level of risk. Under
the IAA, the Bank assesses the extent to which the available credit
enhancement for loss protection provides coverage for expected losses and
stressed levels of projected losses. All exposures are assigned an internal
risk rating, which is reviewed annually. The internal ratings are scaled to
correspond to the long-term ratings used by the rating agencies. The Bank’s
IAA process is subject to all of the key elements and principles of the Bank’s
risk management governance structure. The securitization exposures are
multiplied by the OSFI’s prescribed risk weights to calculate RWA for capital
purposes. The Bank uses OSFI’s supervisory formula (SF) for all other unrated
securitization exposures. Under the SF, RWA is derived from different inputs
specific to the securitization exposure such as the implicit capital charge
related to the underlying exposures, the credit enhancement level and
thickness of the tranche exposure, the number of exposures and the
weighted average loss given default (LGD).
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 allowances for credit
losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
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. Given that the
phasing in of the capital-related adjustments ended in the first quarter of
2018, it is no longer necessary to determine capital according to the
“transitional” methodology. OSFI requires Canadian banks to meet or exceed
the “all-in” minimum ratios rather than the transitional minimum ratios.
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).
Since the introduction of the Basel II framework, OSFI has prescribed a
capital floor requirement for banks that apply the advanced internal ratings-
based (AIRB) approach for credit risk. The revised capital floor sets the
regulatory capital level according to the Basel II standardized approach. If
the capital requirement under Basel III is less than 75% of the capital
requirements as calculated under Basel II, the difference is added to risk-
weighted assets.
In addition, during fiscal 2018, OSFI introduced a Domestic Stability
Buffer (the buffer) that D-SIBs will have to maintain to protect against risks
associated with systemic vulnerabilities. A D-SIB that fails to meet the buffer
requirement will not be subject to automatic constraints to reduce capital
distributions but will have to provide a remediation plan to OSFI.
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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 2018, 80%, 83% and 86% of total
CVA were applied, respectively, to the calculation of the CET1, Tier 1 and
Total capital ratios. These percentages will increase to 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 and Pillar 3 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-out of non-qualifying capital instruments
OSFI's “all-in” ratios
Capital conservation buffer
D-SIB surcharge
CET1 capital ratio(1)
Tier 1 capital ratio(1)
Total capital ratio(1)
Phase-out of non-qualifying capital instruments
Leverage ratio
2018
2019
2020
2021
2022
1.875 %
6.375 %
7.875 %
9.875 %
40 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
40 %
3.0 %
2.5 %
7.0 %
8.5 %
10.5 %
30 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
30 %
3.0 %
2.5 %
7.0 %
8.5 %
10.5 %
20 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
20 %
3.0 %
2.5 %
7.0 %
8.5 %
10.5 %
10 %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
10 %
3.0 %
2.5 %
7.0 %
8.5 %
10.5 %
− %
2.5 %
1.0 %
8.0 %
9.5 %
11.5 %
− %
3.0 %
(1) On June 25, 2018, OSFI introduced a domestic stability buffer (the buffer) to be held by D-SIBs. The buffer level varies between 0% and 2.5% of risk-weighted assets and was set 1.5% as at
October 31, 2018. For additional information, refer to the Regulatory Context section hereafter.
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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). Application of SA-CCR will be mandatory
as of the first quarter of 2019.
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 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. On October 5, 2018, OSFI published, for public consultation purposes,
a new guideline on interest rate risk in the banking book (IRRBB) to replace
the current guideline. The Bank is currently working to comply with this new
OSFI-proposed guideline that is planned to take effect on January 1, 2020.
in
risk-weighted assets and
On December 7, 2017, the Group of Central Bank Governors and Heads
of Supervision (GHOS), which oversees the BCBS, endorsed the outstanding
Basel III post-crisis regulatory reforms. The purpose of the approved reforms,
set out in Basel III: Finalising Post-Crisis Reforms, is to reduce excessive
variability
improve comparability and
transparency among bank capital ratios. The reforms must be implemented
starting in 2022 and include the following: revisions to the standardized
approaches for calculating credit risk and operational risk; a constraint on
using the internal ratings-based approach for calculating credit risk; and
revisions to the leverage ratio, the CVA, and the calculation of the output
floor. The BCBS has also set 2022 as the implementation date and the first
regulatory reporting date for the market risk framework published in
January 2016. On
issued discussion paper
Implementation of the Final Basel III Reforms in Canada, which sets out
OSFI’s preliminary views on the scope and timelines for implementing the
final Basel III reforms in Canada.
July 16, 2018, OSFI
On January 12, 2018, OSFI issued a document that sets out revisions to
capital floor calculations. The purpose of the capital floor is to reduce the risk
related to internal credit risk calculation models and to improve the
comparability of risk among banks. The new floor will replace the one
currently being used, which is based on Basel I requirements. The revised
capital floor will set the regulatory capital level that will have to be met by
banks that use the internal models based on the Basel II standardized
approach. As of the second quarter of 2018, the new floor has been
progressively coming into effect, starting with a 70% floor factor that rose to
72.5% in the third quarter of 2018 and reached 75% in the fourth quarter of
2018.
the BCBS
On February 27, 2018,
issued Pillar 3 Disclosure
Requirements – Updated Framework, a consultative document that presents
the additional disclosure requirements that will apply when the outstanding
Basel III regulatory reforms take effect as of 2022. The revisions to the
Pillar 3 disclosure requirements made during Phase 1 and Phase 2 (issued on
January 28, 2015 and March 11, 2016, respectively) combined with these
new disclosure requirements will form a single Pillar 3 disclosure framework.
On March 22, 2018, the BCBS issued a consultative document entitled
Pillar 3 Disclosure Requirements: Regulatory Treatment of Accounting
Provisions. This document is a technical amendment on the Pillar 3
disclosure requirements addressing provisions for expected credit losses
and the related transitional arrangements. The proposed implementation
date is January 1, 2019.
On March 22, 2018, the BCBS also issued Revisions to the Minimum
Capital Requirements for Market Risk, a consultative document prepared to
resolve shortcomings in the Minimum Capital Requirements for Market Risk
standard, which will have to be applied as of 2022.
On April 18, 2018, the Government of Canada issued the final
regulations under the Canadian Deposit Insurance Corporation (CDIC) Act and
the Bank Act providing the details of conversion, issuance and compensation
regimes for bail-in instruments issued by D-SIBs, including the Bank,
(collectively, the “Bail-In Regulations”). Pursuant to the CDIC Act, in
circumstances where OSFI has determined that the Bank has ceased, or is
about to cease, to be viable, the Governor in Council may, upon a Minister of
Finance recommendation indicating that he or she believes that it is in the
public interest to do so, grant an order directing CDIC to convert all or a
portion of certain shares and liabilities of the Bank into common shares of
the Bank (a “Bail-In Conversion”). The Bail-in Regulations governing the
into force on
conversion and
September 23, 2018, and those governing compensation for holders of
converted instruments came into force on March 27, 2018. Any shares and
liabilities issued before the date the Bail-In Regulations come into force will
not be subject to a Bail-In Conversion, unless, in the case of a liability, the
terms of such liability are, on or after that day, amended to increase its
principal amount or to extend its term to maturity, and the liability, as
amended, meets the requirements to be subject to a Bail-In Conversion. The
Bail-in Regulations are not expected to have a material impact on the Bank’s
funding plan.
issuance of bail-in
instruments came
In conjunction with the issuance of the Bail-In Regulations, OSFI issued
its final Total Loss Absorbing Capacity (TLAC) Guideline, which came into
effect on September 23, 2018 as well as revisions to its Capital Adequacy
Requirements (CAR) Guideline. The TLAC Guideline requires D-SIBs to
maintain sufficient loss absorbing capacity to support their recapitalization
in the unlikely event of a failure so that they can remain open and operating
without requiring public funds or threatening financial stability. On
August 21, 2018, as set out in the Bank Act, OSFI issued orders to each
D-SIB, setting the minimum risk-based TLAC ratio at 23% (including the
domestic stability buffer) of risk-weighted assets and the minimum TLAC
leverage ratio at 6.75%. D-SIBs must fully meet these minimum TLAC
requirements by November 1, 2021 and public disclosure and regulatory
reporting relating to the TLAC Guideline will commence as of the first quarter
of 2019. The Bank does not anticipate any challenges in meeting these TLAC
requirements. The revisions of the CAR Guideline implement the prudential
treatment for holdings of other TLAC instruments (as defined in the TLAC
Guideline) and apply to all D-SIBs effective the first quarter of 2019.
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On January 22, 2018, the Bank issued 12,000,000 Non-Cumulative
5-Year Rate-Reset Series 40 First Preferred Shares at a price equal to $25.00
per share for gross proceeds of $300 million. Given that the Series 40
preferred shares satisfy the NVCC requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On February 1, 2018, the Bank issued medium-term notes for a total
amount of $750 million, bearing interest at a rate of 3.183% and maturing on
February 1, 2028. As
the NVCC
requirements, they qualify for the purposes of calculating regulatory capital
under Basel III.
these medium-term notes satisfy
On June 11, 2018, the Bank issued 12,000,000 Non-Cumulative 5-Year
Rate-Reset Series 42 First Preferred Shares at a per-share price of $25.00 for
gross proceeds of $300 million. Given that the Series 42 preferred shares
satisfy the NVCC requirements, they qualify for the purposes of calculating
regulatory capital under Basel III.
Lastly, on June 30, 2018, NBC Asset Trust (the Trust), a closed-end trust
established by the Bank, redeemed all of the outstanding 400,000 trust units
(NBC CapS II – Series 1) at a per-unit price of $1,000 for gross proceeds of
$400 million.
As at October 31, 2018, the Bank had 335,070,642 issued and
outstanding common shares compared to 339,591,965 a year earlier as well
as 98,000,000 issued and outstanding preferred shares compared to
82,000,000 as at October 31, 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 2018, the Bank declared $829 million in dividends to common
shareholders, which represents 41% of net income attributable to common
shareholders (2017: 42%). These dividends represented 40% of net income
attributable to common shareholders excluding specified items (2017: 41%).
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.
Management’s Discussion and Analysis
Capital Management
On May 14, 2018, the BCBS and the board of directors of the
International Organization of Securities Commissions issued a document
entitled Criteria for Identifying ‘Simple, Transparent and Comparable’ (STC)
Short-Term Securitisations. The BCBS also issued the final document entitled
Capital Treatment for ‘Simple, Transparent and Comparable’ Short-Term
Securitisations. Short-term securitizations that meet the STC criteria will be
eligible for lower minimum capital requirements. The guidelines and
principles set out in these two documents are similar to those applicable to
STC term securitizations issued in July 2016. These documents complete the
Revisions to the Securitisation Framework document issued in July 2016.
Application of the revised securitization framework will be mandatory as of
first quarter 2019.
On June 25, 2018, OSFI issued a letter on the domestic stability buffer
(the buffer) held by D-SIBs to protect against risks associated with systemic
vulnerabilities. A vulnerability is considered if it is measurable, material, and
cyclical and has a system-wide impact that could materialize in the
foreseeable future. The vulnerabilities identified at this time are Canadian
consumer indebtedness, asset imbalances in the Canadian market, and
Canadian institutional indebtedness. The capital buffer level will be based on
OSFI’s assessment of these vulnerabilities combined with its supervisory
judgment. The buffer level, to vary between 0% and 2.5% of risk-weighted
assets, is identical for all D-SIBs and has been set at 1.5%. This buffer
consists exclusively of CET1 capital. OSFI may increase the buffer if it
perceives increased risks or reduce the buffer if it considers that the risks
have decreased. A D-SIB that fails to meet the buffer requirement will not be
subject to automatic constraints to reduce capital distributions but will have
to provide a remediation plan to OSFI. This new buffer took effect in the third
quarter of 2018.
On October 30, 2018, OSFI released the final version of the Capital
Adequacy Requirements (CAR) Guideline that will take effect in the first
quarter of 2019. The main changes
implementation of the
standardized approach for measuring counterparty credit risk, the capital
requirements for bank exposures to central counterparties, and the new
provisions of the securitization framework.
involve
Capital Management in 2018
Management Activities
During the fiscal year ended October 31, 2018, the Bank repurchased
7,500,000 common shares for $467 million, which reduced Common share
capital by $64 million and Retained earnings by $403 million. The
repurchase of 3,000,000 common shares was part of the normal course
issuer bid to repurchase for cancellation program that the Bank launched on
June 5, 2017 and that ended on June 4, 2018, under which the Bank
repurchased a total of 5,000,000 common shares under the program. On
June 6, 2018, the Bank began a new normal course issuer bid to repurchase
for cancellation up to 8,000,000 common shares over the 12-month period
ending no later than June 5, 2019. During the year ended October 31, 2018,
the Bank repurchased 4,500,000 common shares under the new program.
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. These instruments had already been excluded from the capital
ratio calculations as at October 31, 2017.
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47
Management’s Discussion and Analysis
Capital Management
Shares and Stock Options
First preferred shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Common shares
Stock options
As at October 31, 2018
Number of shares
$ million
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
335,070,642
13,064,746
350
300
400
400
400
300
300
2,450
2,822
As at November 30, 2018, there were 335,782,996 common shares and
13,055,458 stock options outstanding. NVCC provisions require the
conversion of capital instruments into a variable number of common shares
should OSFI deem a bank to be non-viable or should the government publicly
announce that a bank has accepted or agreed to accept an injection of
capital. If an NVCC trigger event were to occur, all of the Bank’s preferred
shares and medium-term notes maturing on February 1, 2028, which are
NVCC capital instruments, would be converted into common shares of the
Bank according to an automatic conversion formula at a conversion price
corresponding to the greater of the following amounts: (i) a $5.00 contractual
floor price; or (ii) the market price of the Bank’s common shares on the date
of the trigger event (10-day weighted average price). Based on a $5.00 floor
price and including an estimate for accrued dividends and interest, these
NVCC capital instruments would be converted into a maximum of 99,125,000
Bank common shares, which would have a 22.4% dilutive effect based on the
number of Bank common shares outstanding as at October 31, 2018.
i.e., above
Regulatory Capital Ratios
As at October 31, 2018, the Bank’s CET1, Tier 1 and Total capital ratios were,
respectively, 11.7%, 15.5% and 16.8%,
the regulatory
requirements, compared to ratios of, respectively, 11.2%, 14.9% and 15.1%
as at October 31, 2017. The increase in the CET1 capital ratio stems
essentially from net income net of dividends, common share issuances under
the Stock Option Plan, and remeasurements of pension plans and other post-
employment benefit plans, factors that were tempered by growth in risk-
weighted assets, by the common share repurchases made during the year
ended October 31, 2018, and by the impact of adopting IFRS 9 on
November 1, 2017. The increases in the Tier 1 and Total capital ratios were
essentially driven by the same items. However, the increase in the Tier 1
capital ratio was also due to the $600 million issuances of Series 40 and 42
preferred shares, partly offset by the $400 million redemption of NBC Asset
Trust units, while the $750 million issuance of medium-term notes on
February 1, 2018 contributed to the higher Total capital ratio. As at
October 31, 2018 the leverage ratio was 4.0%, unchanged from October 31,
2017.
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
2018
2017
8,608
11,410
12,352
73,654
73,670
73,685
7,856
10,457
10,661
70,173
70,327
70,451
284,337
262,539
11.7 %
15.5 %
16.8 %
11.2 %
14.9 %
15.1 %
4.0 %
4.0 %
(1)
(2)
Figures are presented on an “all-in” basis.
Figures as at October 31, 2017 included the redemption of the Series 28 preferred
shares on November 15, 2017.
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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
Other contributed surplus
Dividends on preferred and common shares
Net income attributable to the Bank’s shareholders
Common share capital issued by subsidiaries and held by third parties
Removal of own credit spread net of income taxes
Impact of adopting IFRS 9 on November 1, 2017
Other
Movements in accumulated other comprehensive income
Translation adjustments
Available-for-sale securities
Debt securities at fair value through other comprehensive income
Impact of adopting IFRS 9 on November 1, 2017
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
2018
2017
7,856
113
(10)
(467)
14
(934)
2,145
5
(24)
(122)
97
27
(16)
(10)
1
(57)
(7)
−
−
(3)
8,608
2,601
600
(400)
−
1
2,802
6,865
179
(37)
(115)
(15)
(863)
1,940
1
25
19
(39)
(12)
(10)
(81)
3
−
−
(4)
7,856
2,400
400
(200)
−
1
2,601
Total Tier 1 capital
11,410
10,457
Tier 2 capital
Balance at beginning
New Tier 2 eligible capital issuances
Redeemed capital
Change in non-qualifying Tier 2 subject to phase-out
Tier 2 instruments issued by subsidiaries and held by third parties
Change in certain allowances for credit losses
Other, including regulatory adjustments and transitional arrangements
Balance at end
204
750
−
−
2
(14)
−
942
1,241
−
(1,000)
−
−
(37)
−
204
Total regulatory capital
12,352
10,661
(1)
(2)
(3)
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 included the redemption of the Series 28 preferred shares on November 15, 2017.
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Capital Management
RWA by Key Risk Drivers
CET1 RWA amounted to $73.7 billion as at October 31, 2018, rising $3.5 billion from $70.2 billion as at October 31, 2017. This organic growth in RWA was
partly offset by an improved portfolio quality and an updating of the models. The changes in the Bank’s risk-weighted assets by risk type are presented in the
following table.
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
Risk-weighted assets at end
October 31, 2018
July 31, 2018
April 30, 2018
January 31, 2018 October 31, 2017
Total
Total
Total
Total
Total
57,974
1,629
(203)
(72)
−
−
148
59,476
4,755
(406)
(914)
−
−
3,435
10,539
204
−
10,743
73,654
58,377
(486)
(70)
−
−
−
153
57,974
4,055
700
−
−
−
4,755
10,402
137
−
10,539
73,268
57,625
1,974
(1,681)
(74)
−
−
533
58,377
3,336
719
−
−
−
4,055
10,218
184
−
10,402
72,834
57,037
1,289
(143)
−
−
−
(558)
57,625
3,097
239
−
−
−
3,336
10,039
179
−
10,218
71,179
56,066
833
141
(426)
−
−
423
57,037
3,263
(166)
−
−
−
3,097
9,827
212
−
10,039
70,173
(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 and also including risk mitigation factors.
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.
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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, 2018
(millions of Canadian dollars)
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Business
segments
Personal and Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance
and International
Other
Banking services
Credit services
Financing
Major activities
Insurance
Credit
Market
Operational
Other risks
Total
Economic capital
by type of risk
Investment solutions
Credit services
Investment solutions
Corporate banking
Trust services
Banking services
Wealth management
solutions
Investment banking
Financing solutions to
institutional clients
Global markets
Credigy
ABA Bank
International investment
activties
Treasury operations
Liquidity management
Bank funding
Asset and liability
management
Corporate units
1,579
–
355
186
2,120
Credit
Market
Operational
Other risks
Total
160
–
223
423
806
Credit
Market
Operational
Other risks
Total
1,851
209
267
308
2,635
Credit
Market
Operational
Other risks
Total
483
52
64
40
Credit 27
Market
(39)
Operational
(50)
193
Other risks
639
Total
131
Risk-weighted
assets
Credit
Market
Operational
Total
30,122
–
4,432
34,554
Credit
Market
Operational
Total
2,901
–
2,792
5,693
Credit
Market
Operational
Total
18,007
3,533
3,342
24,882
Credit
Market
Operational
Total
5,680
–
802
6,482
Credit
Market
Operational
Total
2,766
(98)
(625)
2,043
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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. It 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. In recent years,
U.S.-dollar debt levels in certain countries have risen sharply, and an appreciation of the U.S. dollar could compromise
the creditworthiness of certain borrowers. Similarly, a variety of geopolitical tensions remain a source of concern. The
adoption of protectionist measures could also undermine international trade. Among other things, the U.S.
administration brings its share of concerns about future policies that might affect the Canadian and Quebec economies.
Protectionism directed at Canada could adversely affect certain industries and slow trade, negatively affecting export
clients in turn. Escalating trade tensions between China and the U.S. could compromise global economic expansion and
cause collateral damage, in particular to the Canadian economy. In addition, the rising nationalism and waves of
displacement toward Western Europe continue to stoke fears.
Given the exceptional monetary measures taken by central banks combined with mild economic growth and low
inflation, long-term interest rates have remained low for a long time in advanced economies. Such a situation could
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 U.S. 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. In the event that oil and gas prices fall again, producers may face obstacles that will negatively affect
their ability to repay debt and that will erode the quality of their credit. While provinces that produce fossil energy
resources saw positive economic growth in the first half of 2018, their unemployment rates remained high, and the
recent drop in oil prices pose additional challenges. Sound economic and financial conditions in the three largest
provinces (Ontario, Quebec and British Columbia) continue to support a credit environment favourable to the loan
portfolios. 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. An unexpected
jump in inflation represents a risk to the Canadian economy to the extent that it could prompt the Bank of Canada to
quickly cut back its monetary stimulus. Should this occur, real estate assets, among others, would be vulnerable to a
price correction, and tighter mortgage rules remain an issue for Canadian households.
The Bank also monitors international developments that may affect the Canadian economy. As mentioned, U.S.
protectionism has cast substantial uncertainty over the trade relationship between Canada and the United States and
other economic partners. These uncertainties have significantly destabilized certain sectors, and the Bank has
responded by continuing to monitor market developments and remaining vigilant in line with its risk tolerance policy.
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Management’s Discussion and Analysis
Risk Management
Risk
Trend
Description
Information
system
disruptions
and security
breaches
Reliance on
technology
and third
parties
Technology has become a major part of the banking industry’s operations, in particular the ever-increasing use of
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 attacks 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 measures, 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 customers, the Bank actively monitors and manages its control environment as well as evolving
cyber threats around the world. It continues to improve its existing processes and practices to identify risks, protect
information assets, and detect and respond to potential threats. The Bank continually assesses the effectiveness of its
key controls through testing and through internal and external assessments of its current practices. The Bank is also
investing in multiple projects designed to better protect itself against cyber attacks, comply with industry standards,
and continually improve security controls. The Board’s Risk Management Committee is regularly informed of
cybersecurity trends and developments to gain a better understanding of potential cybersecurity risks.
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 its products and services require substantial processing of data, much of which is
confidential. 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 technological infrastructure such as Internet
connections and access to network and other communications services. The Bank also relies on the services of third
parties for support in its IT activities and in the handling of certain business processes that involve sharing confidential
information. An interruption of these services or a breach of security could have an unfavourable impact on the Bank’s
ability to provide products and services to its customers and to conduct business, not to mention the impact it would
have on the Bank’s reputation. To mitigate this risk, the Bank has a third-party-related risk management framework
that includes business continuity plans, which are tested periodically to ensure their effectiveness in times of crisis. A
multitude of checks on information security and on financial health and performance are conducted before any
agreement is reached and for the duration thereof. Despite these preventive measures and the efforts deployed by the
Bank’s teams to manage third parties, there remains a possibility that certain risks will materialize. In such cases, the
Bank would then rely on the contingency and mitigation measures established in collaboration with the third parties.
The Bank is aware of the significance of third-party-related risks and continues to develop its practices in this regard.
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.
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Management’s Discussion and Analysis
Risk Management
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.,
NBC Global Finance Limited, 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, the Bank must adhere to the regulatory
requirements to combat money laundering and terrorist financing activities
(MLTFA) in effect in each jurisdiction where it conducts business. It must also
comply with the requirements pertaining to current international sanctions in
these various jurisdictions. MLTFA risk is a financial, regulatory and
reputation risk. In order to meet these regulatory requirements, the Bank has
implemented a program to combat MLTFA in addition to a program on
international sanctions. This program is the principal means used by the
Bank to introduce and maintain effective control over Bank-wide risks of
exposure to MLTFA and activities that could violate the international
sanctions. Implementing controls that take these risks into consideration, as
well as direct involvement on the part of directors, officers and employees of
the Bank, are essential for the program to be effective. By systematically
applying the appropriate standards and procedures in their day-to-day work,
employees play a role in preserving the Bank’s reputation and integrity.
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 are based on a percentage of
the Bank’s regulatory capital, in line with 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, 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 of the
timing or conditions of regulatory decisions. 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.
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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 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.
Management’s Discussion and Analysis
Risk Management
Intellectual Property
The Bank protects the intellectual property developed by its employees in
connection with their duties. However, in some cases, it may have a more
limited ability to acquire
intellectual property rights. Moreover, the
intellectual property rights acquired by the Bank provide no guarantees that
they will be effective in deterring or preventing a third party from
misappropriating intellectual property or providing a defense against the
misappropriation of intellectual property. Moreover, the goods and services
developed by the Bank are provided in a competitive market where third
parties could hold intellectual property rights prior to those held by the Bank.
In such circumstances, there is no guarantee that the Bank will successfully
provide a defense against an infringement claim, that it will be able to modify
its goods and services to avoid infringing upon third party rights or that it will
obtain a licence with commercially acceptable conditions.
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 operating results or 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
operating results. The resulting reputational damage could also affect the
Bank’s future business prospects. For additional information, see Note 27 to
the consolidated financial statements.
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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 and evaluation 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, Internal Audit carries out an
evaluation of the culture through its mandates. Finally, all employees must
complete mandatory annual regulatory compliance training focused on the
Bank’s Code of Conduct and Ethics and its fight against MLTFA. Risk
management training is also offered across all segments of the Bank.
to ensure
framework,
Furthermore,
the effectiveness of
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
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
mitigate risks in day-to-day
activities.
– Ensure
are
activities
in
alignment with the Bank’s risk
appetite and risk management
policies.
– Establish the enterprise-wide risk
and
framework
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
practices,
and
including the manner in which
the first and second lines of
defence reach their control and
risk management objectives.
– Promote
an
risk
management culture throughout
the Bank.
effective
– Monitor and report on risk.
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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 sections of this
MD&A applicable to credit risk, market risk, and liquidity risk.
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
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 strong credit rating to be maintained;
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, including sales
practices;
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. Additional
information on the key credit, market and liquidity risk indicators monitored
by the Bank’s management is presented on the following pages.
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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
Compensation
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 2019 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.
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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 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
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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 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 and evaluation of the
compliance of the Bank and its subsidiaries with standards and policies on
regulatory compliance risk.
The Compensation 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, Risk
Management; the Chief Financial Officer and Executive Vice-President,
Finance; and the Executive Vice-President, Human Resources, Corporate
Affairs and Operations. The working group helps
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 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.
the Financial Stability Board,
to ensure
for which
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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 and standards, the model vetting group, and the
Models Oversight Committee. The policies and standards set the rules and
principles 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, IFRS 9 models, and financial-crime models.
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, Chief Compliance Officer and
Chief Anti-Money Laundering Officer regularly meets with the Chair of the
RMC (with whom she has a direct reporting relationship) in the absence of
management, to review matters on the relationship between the Compliance
Service and the Bank’s management and on access to the information
required.
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 and evaluation 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, standards 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.
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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, 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 standards 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 risk rating and assessment;
economic capital assessment;
stress testing and crisis scenarios;
credit granting process;
revision and renewal process;
risk mitigation;
follow-up of monitored accounts and recovery;
counterparty risk assessment;
settlement risk assessment.
Reporting
Every quarter, an integrated risk management report is presented to senior
management and the RMC. It presents changes in the credit portfolio
and highlights on the following matters:
—
—
—
—
—
credit portfolio volume growth by business segment;
a breakdown of the credit portfolio according to various criteria for
which concentration limits have been set;
changes in allowances for credit losses;
changes in impaired loans;
follow-up of monitored accounts.
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AIRB APPROACH
DATA
DOWNTURN PERIOD
METHODOLOGY FOR CALCULATING LGD
Retail
The Bank’s internal historical data from 1996 to 2016
1996-1998, 2000-2002
October 2008 – December 2009
LGD based on the Bank’s historical
internal data on recoveries and losses
Corporate
The Bank’s internal historical data from 2000 to 2016
2000-2003 and 2008-2009
Sovereign
Moody’s observed default price of bonds, from
1983 to 2000
S&P rating history from 1975 to 2011
No specific period
Financial institutions
Global Credit Data Consortium loss and recovery
database from 1998 to 2014
1991-1992, 1994, 1998,
2001-2002 and 2008-2009
LGD based on the Bank’s historical
internal data on recoveries and losses
Based on implied market LGD using
observed bond price decreases
following the issuer’s default
Model for predicting LGD based on
different issue- and issuer-related risk
drivers
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This category comprises portfolios of residential mortgage loans, consumer
loans and loans to certain small businesses. To assess credit risk, AIRB
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
loan product characteristics (for
transaction-specific factors such as
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.
Credit scoring models are also used to grant 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. The table below shows the PD categories along with the associated
credit qualities of the personal credit portfolio.
Internal Default Risk Rating – Personal Credit Portfolio *
PD (%)
0.000-0.144
0.145-0.506
0.507-2.681
2.682-9.348
9.349-99.999
100
Description(1)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
(1)
Additional information is provided in Note 8 – Loans and Allowances for Credit Losses to
the audited annual consolidated financial statements for the year ended October 31,
2018.
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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 ten sectors: business/commercial, large business, financial institutions,
sovereigns, investment funds, energy, real estate, agriculture, insurance,
and public-private partnership project financing.
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
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 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.
The credit risk of obligors and of their facilities is 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
PD (%) –
Sovereign
Standard
& Poor's
Moody's Description(1)
the model’s discriminatory power;
overrides;
—
—
— model calibration;
—
the stability of the model’s output.
PD (%) –
Corporate
and financial
institutions
Ratings
1–2.5
3–4
0.000–0.102
0.103–0.461
4.5–6.5
0.462–5.624
AAA to A-
0.000–0.059
Aaa to A3
0.060–0.341 BBB+ to BBB- Baa1 to Baa3
0.342–6.275
BB+ to B
Excellent
Good
Ba1 to B2 Satisfactory
Special
mention
5.625–15.283
6.276–20.098
15.284–99.999 20.099–99.999
100
100
B- to CCC+
B3 to Caa1
CCC & CCC- Caa2 & Caa3 Substandard
Default
CC, C & D
Ca, C & D
Additional information is provided in Note 8 – Loans and Allowances for Credit Losses to
the audited annual consolidated financial statements for the year ended October 31,
2018.
7–7.5
8–8.5
9–10
(1)
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 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. Models are
validated by a unit that is independent of both the specialists who developed
the model and the concerned business units. Approvals to new models or
changes to existing models are 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 facility and 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.
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Risk Management
The key aspects to be validated are factors allowing accurate risk
level, adequate quantification of exposure, use of
classification by
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.
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;
exposure at default;
loss in the event of default;
the default probability correlation among obligors;
the residual term of credit commitments;
the 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, in accordance with the applicable rules,
the Bank takes a prudent approach to client qualification by using, for
example, a higher interest rate 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
credit losses, which would decrease profitability and reduce the Bank’s
capital ratios.
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.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the
Bank to update information on the quality of the facilities and covers, among
other things, risk ratings, compliance with credit conditions, and obligor
behaviour. The credit risk of all obligors is reviewed at least once per year.
After this periodic review, for on-demand or unused credit, the Bank decides
whether to pursue its business relationship with the obligor and, if so,
revises the credit conditions.
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.
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Risk Management
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.
—
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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 policies, standards 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. Compliance with these limits, particularly exceptions,
is monitored through periodic reports submitted by the Risk Management
Group’s officers to the Board.
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.
5
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 a high 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 (watchlist) 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 is presented in Notes 1 and 8 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 2018 and 2017, 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.
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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.
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 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, securities
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.
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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, 2018
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)
45,926
2,829
15,461
64,216
50,750
27,131
4,107
81,988
−
1,474
147,678
13,152
134,526
147,678
8,287
3,447
1,589
13,323
17,588
5,234
303
23,125
−
−
36,448
253
36,195
36,448
−
−
−
−
16,657
41,364
75,839
133,860
−
−
133,860
14,577
119,283
133,860
−
−
−
−
29
47
4,122
4,198
9,620
−
13,818
3,965
9,853
13,818
−
−
14
14
3,503
139
738
4,380
−
3,272
7,666
356
7,310
7,666
Total
54,213
6,276
17,064
77,553
88,527
73,915
85,109
247,551
9,620
4,746
339,470
32,303
307,167
339,470
As at October 31, 2017
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
−
1,324
134,019
11,154
122,865
134,019
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
77,902
129,744
−
−
129,744
29,192
100,552
129,744
−
−
−
−
14
314
3,279
3,607
8,309
−
11,916
3,110
8,806
11,916
−
−
14
14
2,936
144
641
3,721
−
3,416
7,151
366
6,785
7,151
Total
49,028
6,196
16,635
71,859
80,059
64,096
86,520
230,675
8,309
4,740
315,583
44,052
271,531
315,583
(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.
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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, investment 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 and investment portfolios.
Market risk comes from a number of factors, the most important of
which are:
—
—
—
—
—
—
foreign currency denominated
interest rate risk: relates to changes in the term structure (and/or the
implied volatility) of the interest rates on financial instruments such as
bonds, money market instruments and derivative financial instruments;
foreign exchange risk: relates to changes (and/or the implied volatility)
of the exchange rates on financial instruments such as investments in
foreign subsidiaries,
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), and/or their implied volatility, for financial
instruments such as common shares and options;
commodity risk: relates to changes (and/or the implied volatility) in the
commodity prices for financial instruments used in exchange trading or
over-the-counter
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), and/or their implied volatility,
relating mainly to the Bank’s portfolios of debt securities and credit
derivatives, whose value could be adversely affected by changes in
credit spreads, credit migration or 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;
involving either physical
trading,
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, proprietary trading,
liquidating positions for clients or selling financial products to clients.
Non-trading portfolios include financial instruments intended to be held
to maturity as well as those held for daily cash management or for the
purpose of maintaining targeted returns or ensuring asset and liability
management.
Governance
The RMC 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 reviews market risk across the Bank,
with an emphasis on trading activities, 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.
— 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;
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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), Stressed VaR (SVaR), stress testing), 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, 2018
Balance
sheet
Trading(1)
Non-Trading(2)
Not subject to
market risk
Non-traded risk
primary risk sensitivity
Market risk measures
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
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
12,756
55,817
5,668
8,298
18,159
146,082
8,608
64
7,019
262,471
170,830
6,801
17,780
19,998
6,036
20,100
186
5,638
747
248,116
226
12,269
261
Interest rate(3)
51,575
−
−
−
5,417
7,625
−
−
64,843
7,187
−
17,780
−
4,807
3,733
−
21
−
33,528
4,242
5,668
8,298
18,159
140,665
983
64
−
190,348
163,643
6,801
−
19,998
1,229
16,367
186
910
747
209,881
Interest rate(3) and equity(4)
Interest rate(3) and equity(5)
Interest rate(3)
Interest rate(3)(6)
Interest rate(3)
Interest rate(7) and exchange rate(7)
Other(8)
Interest rate(3)
Interest rate(3)
Interest rate(3)(6)
Interest rate(7) and exchange rate(7)
Interest rate(3)
Other(8)
Interest rate(3)
Interest rate(3)
−
−
−
−
−
−
−
7,019
7,280
−
−
−
−
−
−
−
4,707
−
4,707
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Trading positions whose risk measures are VaR and SVaR. For additional information, 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.
For additional information, 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.
For additional information, see Note 7 to the consolidated financial statements.
The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 4 and 7 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.
For additional information, see Notes 17 and 18 to the consolidated financial statements.
For additional information, see Note 24 to the consolidated financial statements.
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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 and acceptances, net of allowances(6)
Derivative financial instruments
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
As at October 31, 2017
8,802
47,536
8,552
9,255
20,789
136,457
8,423
56
5,957
245,827
156,671
5,991
15,363
21,767
6,612
20,098
252
5,506
9
232,269
154
46,825
−
−
−
5,638
7,508
−
−
60,125
5,692
−
15,363
−
6,045
4,452
−
15
−
31,567
8,385
711
8,552
9,255
20,789
130,819
915
56
−
179,482
150,979
5,991
−
21,767
567
15,646
252
945
9
196,156
Interest rate(3)
Interest rate(3)
Interest rate(3) and equity(4)
Interest rate(3)
Interest rate(3)(5)
Interest rate(3)
Interest rate(7) and exchange rate(7)
Other(8)
Interest rate(3)
Interest rate(3)
Interest rate(3)(5)
Interest rate(7) and exchange rate(7)
Interest rate(3)
Other(8)
Interest rate(3)
Interest rate(3)
263
−
−
−
−
−
−
−
5,957
6,220
−
−
−
−
−
−
−
4,546
−
4,546
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Trading positions whose risk measures are VaR and SVaR. For additional information, 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.
For additional information, 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 4 and 7 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.
An amount of $2,014 million classified in Purchased receivables and an amount of $5,991 million classified in Customers’ liability under acceptances as at October 31, 2017 are now
reported in Loans and acceptances, net of allowances.
For additional information, see Notes 17 and 18 to the consolidated financial statements.
For additional information, see Note 24 to the consolidated financial statements.
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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 and SVaR Models
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, 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.
For VaR, the Bank uses a historical price distribution to compute the
probable loss levels at the 99% confidence level, using a two-year history of
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 holding period for
regulatory capital purposes. 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 but uses, instead of a two-year history of risk factor
changes, a 12-month data period 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, 2018
Period end
Average
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading VaR
(3.0)
(0.5)
(1.6)
(0.5)
n.m.
(3.1)
(5.9)
(2.7)
(5.8)
(1.7)
n.m.
(7.4)
(4.1)
(1.2)
(3.5)
(1.0)
4.6
(5.2)
(5.9)
(1.4)
(4.7)
(0.9)
7.0
(5.9)
(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)
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.
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The average total trading VaR stood at $5.2 million for fiscal 2018,
stable when compared to fiscal 2017. Average total trading SVaR was
$9.7 million in fiscal 2018, an increase from $7.1 million in fiscal 2017 that
was essentially due to higher interest rate risk.
The table below shows daily trading and underwriting revenues and
VaR. Daily trading and underwriting revenues were positive on 97% of the
days for the year ended October 31, 2018. Daily trading and underwriting
losses in excess of $1 million were recorded on 4 days. Only one 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
(7.5)
(0.5)
(1.2)
(0.4)
n.m.
(4.0)
Low
(4.1)
(1.0)
(2.5)
(0.5)
n.m.
(3.9)
Year ended October 31, 2018
Period end
Average
High
(15.7)
(4.1)
(9.3)
(2.9)
n.m.
(17.8)
(11.8)
(1.5)
(3.5)
(1.8)
8.9
(9.7)
(13.6)
(2.4)
(9.3)
(2.2)
17.7
(9.8)
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)
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)
7
1
.
v
o
N
7
1
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c
e
D
8
1
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n
a
J
8
1
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b
e
F
8
1
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r
a
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8
1
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r
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Trading and underwriting revenues
VaR (CAN)
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Management’s Discussion and Analysis
Risk Management
losses under abnormal market conditions and risk
Stress Testing and Crisis Scenarios
Stress testing is a risk management technique that consists of estimating
potential
factor
movements. Stress testing enhances transparency by exploring a range of
potential low-probability events. Stress tests cover a complete and wide
range of risk factors (considering interrelations among them) in order to
identify key potential risks and vulnerabilities to the Bank’s exposures under
several plausible events. Stress tests are performed on single risk factors or
multiple risk factors or are based on historical events.
These stress tests 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 lesser volatility;
increase in volatility of term structure coupled with a decrease in stock
prices;
in commodity prices
increases/decreases
commodity: significant
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 the Capital Management
section of this MD&A.
A separate policy governs the pricing and valuation adjustments on
financial instruments measured at fair value.
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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.
The Bank’s exposure to structural interest rate risk is assessed and
controlled mostly through the impact of stress scenarios and market shocks
on the economic value of the Bank’s equity and on 12-month net interest
income projections. These metrics are based on cash flow projections
prepared using a number of assumptions. Specifically, the Bank has
developed key assumptions on
levels, deposit
redemptions, and the behaviour of customers that were granted rate
guarantees. These specific assumptions were developed based on historical
analyses and are reviewed frequently.
loan prepayment
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
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Management’s Discussion and Analysis
Risk Management
Regulatory Context
On October 5, 2018, OSFI issued, for public consultation, a new guideline on
managing interest rate risk in the banking book (IRRBB) to replace the
current guideline. OSFI’s proposed guideline incorporates most of the
guidance in the April 2016 BCBS document that sets standards for IRRBB
management. OSFI’s objective with this public consultation is to ensure that
the methods used by financial institutions to measure, manage and monitor
IRRBB
(and OSFI’s related oversight practices) remain current and
comprehensive with respect to defining a risk control framework for
managing IRRBB to a prudent level. The Bank is currently working to comply
with this new OSFI-proposed guideline that is expected to take effect on
January 1, 2020.
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, 2018
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
(140)
154
10
34
9
17
19
8
Total
(131)
171
29
42
(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)
Investment Governance
The Bank has created securities portfolios in liquid and less liquid securities
for strategic, long-term investment and liquidity management purposes.
These
liquidity risk and
concentration risk.
investments carry market risk, credit risk,
The investment governance sets out the guiding principles and general
management standards that must be followed by all those who manage
portfolios of these securities included in the portfolios of the Bank and its
subsidiaries. Under this 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.
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 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.
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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.
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.
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 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 February 6, 2018, OSFI
notified Canadian deposit-taking institutions of its intention to extend the
NSFR implementation date to January 1, 2020, one year later than planned.
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.
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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
to the
the escalation process, problematic situations are reported
management of the Finance 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.
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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, which
were developed to assess sensitivity to a Bank-specific and/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. For additional information, see the Regulatory Compliance Risk
Management section of this MD&A.
The Bank considers, among its simulations, a severe liquidity crisis
scenario, where the Bank experiences difficulties in a turbulent financial
market. This scenario significantly reduces access to its funding sources and
the marketability of its assets.
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 scenarios are based on the following underlying assumptions:
—
—
—
—
—
—
—
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.
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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, 2018
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(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, 2018
As at October 31, 2017
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2018
Unencumbered
liquid assets
2017
Unencumbered
liquid assets
12,756
−
12,756
2,469
10,287
6,845
22,843
21,202
44,045
14,492
5,486
26,962
9,101
91,640
83,650
7,916
2,800
25,565
−
57,483
58,254
22,408
8,286
52,527
9,101
149,123
141,904
23,220
15,868
2,888
35,916
5,815
86,176
82,493
20,825
19,321
6,540
5,398
16,611
3,286
62,947
4,705
3,485
19,663
5,392
59,411
2018
2017
30,205
11,543
21,199
62,947
27,769
9,871
21,771
59,411
2018
2017
35,838
22,663
4,446
62,947
31,146
21,260
7,005
59,411
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2018
Unencumbered
liquid assets
2017
Unencumbered
liquid assets
11,356
−
11,356
2,258
9,098
8,883
24,636
25,642
50,278
12,946
5,090
33,137
9,348
96,513
86,957
8,405
1,966
27,334
−
63,347
51,234
21,351
7,056
60,471
9,348
159,860
138,191
31,098
16,699
3,015
38,470
5,051
96,591
82,761
19,180
15,275
4,652
4,041
22,001
4,297
63,269
5,877
3,686
14,905
6,804
55,430
(1)
(2)
(3)
(4)
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.
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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 and acceptances, net of allowances
Derivative financial instruments
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 and acceptances, net of allowances(4)
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Encumbered
assets(1)
Unencumbered
assets
As at October 31, 2018
Encumbered
assets as %
of total assets
Total
Other(2)
2,382
−
17,781
−
−
−
−
−
−
−
20,163
Available as
collateral
10,287
48,996
378
3,286
−
−
−
−
−
−
62,947
Other(3)
−
−
−
114,126
8,608
645
601
1,412
1,314
3,111
129,817
12,756
69,783
18,159
146,082
8,608
645
601
1,412
1,314
3,111
262,471
0.9
7.9
6.8
10.9
−
−
−
−
−
−
26.5
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)
−
−
−
100,290
8,423
631
558
1,409
1,239
2,176
114,726
8,802
65,343
20,789
136,457
8,423
631
558
1,409
1,239
2,176
245,827
0.8
9.6
6.2
12.5
−
−
−
−
−
−
29.1
Pledged as
collateral
87
20,787
−
28,670
−
−
−
−
−
−
49,544
Pledged as
collateral
76
23,595
−
30,775
−
−
−
−
−
−
54,446
(1)
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.
(2) 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.
(3) 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)).
An amount of $2,014 million classified in Purchased receivables and an amount of $5,991 million classified in Customers’ liability under acceptances as at October 31, 2017 are now
reported in Loans and acceptances, net of allowances.
(4)
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Management’s Discussion and Analysis
Risk Management
Liquidity Coverage Ratio (LCR)
The LCR was introduced primarily 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, 2018, the Bank’s
average LCR was 147%, 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, 2018
Total weighted
value(3) (average)
For the quarter ended
July 31, 2018
Total weighted
value(3) (average)
n.a.
44,699
41,263
19,176
22,087
61,553
12,096
42,599
6,858
n.a.
32,530
7,454
1,169
23,907
1,634
87,865
n.a.
88,260
8,644
8,286
105,190
2,784
575
2,209
32,021
2,908
22,255
6,858
17,048
9,169
4,273
1,169
3,727
534
1,325
62,881
19,175
5,040
8,286
32,501
44,580
2,741
568
2,173
32,428
2,728
22,262
7,438
18,935
8,492
3,593
1,076
3,823
265
1,306
64,167
18,210
5,153
10,564
33,927
Total adjusted
value(4)
Total adjusted
value(4)
n.a.
n.a.
n.a.
44,699
30,380
147 %
44,580
30,240
147 %
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 87% 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, 2018 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.
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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 an optimal balance between
deposits, securitization, secured funding and unsecured funding. This brings
optimal stability to the funding and reduces vulnerability to unpredictable
events.
The Bank’s branch 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.
The Bank’s Credit Ratings
Short-term senior debt
Canadian commercial paper
Long-term deposits
Long-term non-bail-inable senior debt(1)
Senior debt(2)
Subordinated debt
NVCC subordinated debt
NVCC preferred shares
Counterparty risk(3)
Covered bonds program
Rating outlook
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 various
factors, including macro-economic factors, methodologies used by ratings
agencies, or 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 and
could also result in increased requirement to pledge collateral or decreased
capacity to engage
in certain collateralized business activities at a
reasonable cost, including hedging and derivatives transactions. The
following table presents the Bank’s credit ratings according to four rating
agencies as at October 31, 2018. Funding and liquidity levels remained
sound and robust, and the Bank continues to enjoy excellent access to the
market for its funding needs.
Moody’s
S&P
As at October 31, 2018
Fitch
DBRS
P-1
Aa3
Aa3
A3
Baa2
Baa2(hyb)
Ba1(hyb)
Aa3/P-1
Aaa
Stable
A-1
A-1(mid)
A
BBB+
BBB+
BBB
P-3(high)
Stable
R-1(mid)
AA(low)
AA(low)
A(high)
A
BBB(high)
Pfd-2(low)
AAA
Stable
F1
A+
A+
A+
A
A+
AAA
Stable
Includes senior debt issued prior to September 23, 2018 and senior debt issued on or after September 23, 2018 which is excluded from the Bank Recapitalization (Bail-in) Regime.
Subject to conversion under the Bank Recapitalization (Bail-in) Regime.
(1)
(2)
(3) Moody’s terminology is Counterparty Risk Rating while Fitch’s terminology is Derivative Counterparty Rating,
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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.
(millions of Canadian dollars)
One-notch
downgrade
As at October 31, 2018
Three-notch
downgrade
Derivatives(1)
1
12
(1)
Contractual requirements related to agreements known as Credit Support Annexes.
Funding Strategy
The key objectives of the funding strategy are to:
—
support the Bank’s organic growth through prudent liquidity and
funding management;
— withstand severe stresses;
—
—
fund core banking activities with stable deposits and securitization;
fund the securities portfolio with secured and unsecured wholesale
funding;
limit short
—
— maintain active access to wholesale funding markets and ensure
term wholesale funding; and
diversification.
‐
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:
—
implementing a diversified deposit strategy, including new initiatives,
on a regular basis, that will further grow the deposits balance;
— monitoring and controlling exposure to liquidity risk and the funding
needs across all the Bank’s entities, business segments and currencies,
using a well-developed funds transfer pricing system;
integrating the regulatory framework (OSFI liquidity guidelines and
principles, Basel III liquidity framework) in the day
day liquidity
management and the long
term funding plan.
—
to
‐
‐
‐
The Bank’s balance sheet is well diversified and is supported by a
funding strategy. The Bank continuously monitors and analyzes the
possibilities for accessing less expensive funding. The Bank is aiming to fund
its core banking activities through personal, commercial and government
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, 2018.
Funding Structure
As at October 31, 2018
(billions of Canadian dollars)
Cash and other(2): 30.9
Securities: 69.8
Unsecured funding(1): 31.5
Secured funding: 37.8
Securitization and covered bonds: 29.3
Residential mortgages: 53.7
Personal deposits : 55.7
Personal loans and credit card
receivables: 39.3
Business and government loans(3): 53.1
Other assets: 15.7
Assets: 262.5
Business and government deposits: 82.1
Capital(4): 15.1
Other liabilities: 11.0
Liabilities and equity: 262.5
(1)
(2)
(3)
(4)
This category comprises term funding products, marketable or non-marketable.
This category comprises securities purchased under reverse repurchase agreements and securities borrowed.
Includes customers’ liability under acceptances.
This category comprises subordinated debt and equity.
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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.
Residual Contractual Maturities of Wholesale Funding(1)
The Bank is active in the following funding platforms:
—
—
—
—
—
—
—
—
—
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.
(millions of Canadian dollars)
As at October 31, 2018
Deposits from banks(2)
Certificates of deposit and commercial paper(3)
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)
Secured funding
Unsecured funding
As at October 31, 2017
1 month or
less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
12 months
705
641
562
−
−
−
36
−
1,944
36
1,908
1,944
2,198
7
1,719
1,797
−
2,244
1,494
−
−
7,261
3,738
3,523
7,261
5,306
8
4,088
17
−
226
−
−
−
4,339
226
4,113
4,339
5,136
−
1,377
2,033
329
1,404
−
−
−
5,143
1,404
3,739
5,143
4,332
Subtotal
1 year
or less
720
7,825
4,409
329
3,874
1,494
36
−
18,687
5,404
13,283
18,687
16,972
Over 1
year to
2 years
−
197
4,789
908
3,088
−
874
−
9,856
3,962
5,894
9,856
8,968
Over 2
years
50
−
4,633
3,591
13,138
6,791
−
747
28,950
19,929
9,021
28,950
28,789
Total
770
8,022
13,831
4,828
20,100
8,285
910
747
57,493
29,295
28,198
57,493
54,729
(1)
(2)
(3)
(4)
(5)
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.
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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,
inappropriate sales practice behaviour 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
operational risk, business units and corporate units can:
identifying, assessing, monitoring, mitigating and
reporting on
—
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;
—
report significant operating issues and risks to senior management and
the Board.
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 2018 and 2017, 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.
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 standards 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;
—
—
—
—
sales practice risk management;
data 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.
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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 MLTFA 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.
Fighting Money Laundering and Terrorist Financing Activities (MLTFA)
In July 2018, amendments to the Proceeds of Crime (Money Laundering) and
Terrorist Financing Regulations were issued and should take effect in late
2019. They will have a significant impact on clients, particularly with respect
to the additional information to be obtained and maintained, and will require
major changes to the related systems and processes. The Government of
Canada has also launched a consultation process in anticipation of the five-
year review of the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act. Canadian banks, including the Bank, have provided their
comments and are awaiting the introduction of the bill.
Cannabis Act
The impacts of the act and regulations surrounding cannabis distribution and
possession both on the Bank’s employees and on its business relationships
with clients were analyzed during the year. Measures reflecting the Bank’s
position on this topic were put in place during fiscal 2018.
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Management’s Discussion and Analysis
Risk Management
Organizational Structure of Compliance
The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money
Laundering Officer oversees the compliance program and the programs
aimed at fighting money laundering and terrorist financing activities (MLTFA)
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:
—
— make sure that policies and standards that ensure compliance with the
regulations in effect in all jurisdictions where the Bank and its
subsidiaries operate, including regulations related to MLTFA, are in
place and operational;
develop training programs regarding compliance and the fight against
MLTFA for employees of the Bank and of its subsidiaries and foreign
centres;
exercise independent evaluation of the compliance of the Bank, its
subsidiaries, and its foreign centres with policies and standards;
report relevant compliance and MLTFA matters to the Bank’s Board and
inform it of any changes in the effectiveness of the Bank’s risk
management framework.
—
—
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.
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Risk Management
Common Reporting Standard (CRS)
The Common Reporting Standard (CRS), developed by the Organization for
Economic Co-operation and Development (OECD), requires participating
countries to obtain certain information from their financial institutions and
automatically exchange that information with other participating countries
on an annual basis. The CRS is used to fight tax evasion and to promote
voluntary compliance with tax laws. Over one hundred countries, including
Canada, have agreed to exchange information under the CRS.
CRS legislation came into effect in Canada on July 1, 2017. The CRS
requires that Canadian financial institutions, including the Bank, collect and
disclose to the Canada Revenue Agency (CRA) certain information on financial
accounts held by tax residents of countries other than Canada and the United
States. The Bank transmits this information through an annual reporting
process, and the first return was filed with the CRA on May 1, 2018.
Qualified Intermediary Agreement
The Qualified Intermediary (QI) Agreement is an agreement regarding
withholdings on certain U.S.-source income (such as dividends and interest)
and the reporting of such income. Through a contractual agreement with the
Internal Revenue Service, QI 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 QI Agreement were amended. These new measures were implemented
during fiscal 2018.
Section 871(m) – Dividend Equivalent Payments
Section 871(m) of the U.S. Internal Revenue Code aims to ensure that non-
U.S. persons pay tax on payments that can be considered dividends on U.S.
shares, when these payments are made on certain derivative instruments.
The derivative instruments for which the underlyings are U.S. shares or “non-
qualified indices” concluded as of January 1, 2017 are subject to the
withholding and reporting requirements. The effective date for certain
components of this regulation has been deferred from January 1, 2019 to
January 1, 2021.
Good Practice in the Foreign Exchange Market
The FX Global Code 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 to be followed by market participants to
guarantee a robust, fair and transparent foreign exchange market. It covers
such areas as ethics, governance, execution of orders (confirmation and
settlement), information sharing, and risk management. The Bank completed
implementation of the code of good practice and published a declaration of
compliance with the FX Global Code on its website.
Investigation Into Sales Practices
During fiscal 2017, the Financial Consumer Agency of Canada and OSFI
launched an industry-wide review of the sales practices of financial
institutions in Canada. The reports resulting from the reviews carried out by
these two regulatory bodies did not show any systemic risk related to sales
practices. With the interests of clients as its priority, the Bank is taking these
reports seriously and has quickly addressed the recommendations made by
both organizations.
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 reputation risk policy, approved by the RMC of the
Board, that covers all of the Bank’s practices and transactions, including
those of the third parties with which it establishes business relationships.
The policy sets the reputation risk management principles and rules. 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.
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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 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. 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 (GHG) 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 Social Responsibility Report, which is available
on its website at nbc.ca.
The Bank believes that it has a role to play in the fight against climate
change. It supports the global community’s efforts to move towards an
economy that is more respectful of the environment and towards a
sustainable economic development model that is low in GHG emissions.
Having given its support to the Financial Stability Board’s Task Force on
Climate-related Financial Disclosures (TCDF), the Bank has committed to
ensuring that its disclosures include relevant information on the various
topics addressed by this group. In addition, in collaboration with industry
partners, the Bank is working to develop a coherent and useful framework for
disclosing climate-change-related financial data.
The Bank continues to identify and measure climate-related risks. It
leads by example by focusing on energy efficiency, reducing the intensity of
its GHG emissions, and incorporating sustainable building principles into the
design and operation of its establishments. The Bank also monitors the
leading thinking, coming from provincial and national authorities, on climate
issues.
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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.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on
the Consolidated Balance Sheet. At initial recognition, financial assets must
be classified as subsequently measured at fair value through other
comprehensive income, at amortized cost, or at fair value through profit or
loss. The Bank determines the classification based on the contractual cash
flow characteristics of the financial assets and on the business model it uses
to manage these financial assets.
For the purpose of classifying a financial asset, the Bank must
determine whether the contractual cash flows associated with the financial
asset are solely payments of principal and interest on the principal amount
outstanding. The principal is generally the fair value of the financial asset at
initial recognition. The interest consists of consideration for the time value of
money, for the credit risk associated with the principal amount outstanding
during a particular period, and for other basic lending risks and costs as well
as of a profit margin. If the Bank determines that the contractual cash flows
associated with a financial asset are not solely payments of principal and
interest, the financial assets must be classified as measured at fair value
through profit or loss.
When classifying financial assets, the Bank determines the business
model used for each portfolio of financial assets that are managed together
to achieve a same business objective. The business model reflects how the
Bank manages its financial assets and the extent to which the financial asset
cash flows are generated by the collection of the contractual cash flows, the
sale of the financial assets, or both. The Bank determines the business
model using scenarios that it reasonably expects to occur. The business
model determination is a matter of fact and requires the use of judgment and
consideration of all the relevant evidence available at the date of
determination.
A financial asset portfolio falls within a “hold to collect” business model
when the Bank’s primary objective is to hold these financial assets in order
to collect contractual cash flows from them and not to sell them. When the
Bank’s objective is achieved both by collecting contractual cash flows and by
selling the financial assets, the financial asset portfolio falls within a “hold to
collect and sell” business model. In this type of business model, collecting
contractual cash flows and selling financial assets are both integral
components to achieving the Bank’s objective for this financial asset
portfolio. Financial assets are mandatorily measured at fair value through
profit or loss if they do not fall within either a “hold to collect” business
model or a “hold to collect and sell” business model.
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
the fair value of financial assets and liabilities measured at amortized cost
using the effective interest rate method. 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
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.
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Critical Accounting Estimates
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
liabilities and accessible to the Bank at the
identical assets and
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
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 as well as certain other liabilities.
instruments
financial
traded
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 loans, and certain deposits
(structured deposit notes).
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Establishing fair value is an accounting estimate and has an impact on
Securities at fair value through profit or loss, certain Loans, Securities at fair
value through other comprehensive income, Obligations related to securities
sold short, Derivative financial instruments, financial instruments designated
at fair value through profit or loss, and financial instruments designated at
fair value through comprehensive income 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 4 and 7 to the consolidated financial
statements.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage
impairment approach to measure the expected credit losses (ECL) on all debt
instruments measured at amortized cost or at fair value through other
comprehensive income and on loan commitments and financial guarantees
that are not measured at fair value. ECLs are a probability-weighted estimate
of credit losses over the remaining expected life of the financial instrument.
The ECL model is forward looking. Measurement of ECLs at each reporting
period reflects reasonable and supportable information about past events,
current conditions, and forecasts of future events and economic conditions.
Judgment is required in making assumptions and estimates, determining
movements between the three stages, and applying forward-looking
information. Any changes in assumptions and estimates, as well as the use
of different, but equally reasonable, estimates and assumptions, could have
an impact on the allowances for credit losses and the provisions for credit
losses for the year. All business segments are affected by this accounting
estimate. For additional information, see Note 8 to the consolidated financial
statements.
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Critical Accounting Estimates
Determining the Stage
The ECL three-stage impairment approach is based on the change in the
credit quality of financial assets since initial recognition. If, at the reporting
date, the credit risk of non-impaired financial instruments has not increased
significantly since
instruments are
initial recognition, these financial
classified in Stage 1, and an allowance for credit losses 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 an allowance for credit losses 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
Stage 1, i.e., 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 for credit
losses equal to lifetime expected losses continues to be recorded or the
financial asset is written off. The interest income is calculated on the gross
carrying amount for financial assets in Stages 1 and 2 and on the net carrying
amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses
an internal credit risk grading system, external risk ratings, and forward-
looking information to assess deterioration in credit quality of a financial
instrument. To assess whether or not the credit risk of a financial instrument
has increased significantly, the Bank compares the probability of default (PD)
occurring over its expected life as at the reporting date with the PD occurring
over its expected life on the date of initial recognition and considers
reasonable and supportable information indicative of a significant increase
in credit risk since initial recognition. The Bank includes 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. The assessment of a
significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected
cash shortfalls over the remaining expected life of the financial instrument,
and reasonable and supportable information about past events, current
conditions and forecasts of future events and economic conditions is
considered. The estimation and application of forward-looking information
requires significant judgment. The cash shortfall is the difference between all
contractual cash flows owed to the Bank and all the cash flows that the Bank
expects to receive.
The measurement of ECLs is primarily based on the product of the
financial instrument’s probability of default (PD), loss given default (LGD) and
exposure at default (EAD). Forward-looking macroeconomic factors such as
unemployment rates, housing price indices, interest rates, and gross
domestic product (GDP) are incorporated into the risk parameters. The
estimate of expected credit losses reflects an unbiased and probability-
weighted amount that is determined by evaluating a range of possible
outcomes. The Bank incorporates three forward-looking macroeconomic
scenarios in its ECL calculation process: a base scenario, an upside scenario
and a downside scenario. Probability weights are attributed to each scenario.
The scenarios and probability weights are reassessed quarterly and are
subject to management review. The Bank applies experienced credit
judgment to adjust the modelled ECL results when it becomes evident that
known or expected risk factors and information were not considered in the
credit risk rating and modelling process.
ECLs for all financial instruments are recognized in Provisions for credit
losses in the Consolidated Statement of Income. In the case of debt
instruments measured at fair value through other comprehensive income,
ECLs are recognized in Provisions for credit losses in the Consolidated
Statement of Income, and a corresponding amount is recognized in Other
comprehensive income with no reduction in the carrying amount of the asset
on the Consolidated Balance Sheet. As for debt instruments measured at
amortized cost, they are presented net of the related allowance for credit
losses on the Consolidated Balance Sheet. Allowances for credit losses for
off-balance-sheet credit exposures that are not measured at fair value are
included in Other liabilities on the Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the
asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in
the initial fair value. In subsequent reporting periods, the Bank recognizes
only the cumulative changes in these lifetime ECLs since initial recognition as
an allowance for credit losses. The Bank recognizes changes in ECLs in
Provisions for credit losses in the Consolidated Statement of Income, even if
the lifetime ECLs are less than ECLs that were included in the estimated cash
flows on initial recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer
financial instruments between stages is consistent with the definition of
default used for internal credit risk management purposes. The Bank
considers a financial asset, other than a credit card receivable, to be credit-
impaired when one or more events that have a detrimental impact on the
estimated future cash flows of the financial asset have occurred or when
contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following: when a notice of bankruptcy is received, a settlement proposal is
made, or contractual payments are 180 days past due.
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Write-offs
A financial asset 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.
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 12 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.
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.
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.
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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 and in Note 28 to the consolidated
financial statements.
Management’s Discussion and Analysis
Critical Accounting Estimates
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.
More specifically, the Bank is involved as a defendant in class actions
instituted by consumers contesting, inter alia, certain transaction fees or
who wish to avail themselves of certain legislative provisions relating to
consumer protection. 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) and MasterCard International
Incorporated (MasterCard) (the Networks) as well as National Bank and a
number of other Canadian financial institutions. A similar action was also
initiated in Quebec, Ontario, Alberta and Saskatchewan. In each of the
actions, the Networks and financial institutions are alleged to have been
involved in a price-fixing system to maintain and increase the fees paid by
merchants on transactions executed using the credit cards of the Networks.
In so doing, they would notably be in breach of the Competition Act. An
unspecified amount of compensatory and punitive damages is being
claimed. In 2017, a settlement was reached with the plaintiffs; in 2018 it was
then approved by the trial courts in each of the five jurisdictions where the
action was initiated. The rulings approving the settlement are now the
subject of appeal proceedings in multiple 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.
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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 – November 1, 2018
IFRS 15 – Revenue From Contracts With Customers
In May 2014, the IASB issued IFRS 15, which replaces the current revenue
recognition standards and
IASB
interpretations.
unanimously confirmed its proposal to defer the IFRS 15 effective date to
fiscal years beginning on or after January 1, 2018, which is November 1,
2018 for the Bank. In April 2016, the IASB issued amendments to IFRS 15,
providing clarifications on, among other topics, the elements to be
considered when determining whether an entity is a principal or agent.
July 2015,
the
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IFRS 15 provides a single comprehensive model to use when accounting
for revenue from contracts with customers. The new model applies to all
contracts with customers except those that fall within the scope of other IFRS
standards such as leases, insurance contracts, and financial instruments. As
a result, the majority of the Bank’s revenues, including net interest income,
will not be affected. According to the core principle of IFRS 15, the method
used to recognize revenue from contracts with customers should reflect the
moment when the promised goods or services are transferred and reflect the
amount of consideration the entity expects to receive in exchange for those
goods or services. Consequently, the entity recognizes revenue for a
performance obligation as it is satisfied, that is, when control of the goods or
services underlying the performance obligation is transferred to the
customer.
Transition Impact
For the Bank, the transition to IFRS 15 will not have a significant impact on
when revenue from contracts with customers is recognized. However, the
presentation of certain revenues and certain non-interest expenses in the
Consolidated Statement of Income will change, as gross amounts will have to
be presented. At this time, certain revenues are presented net of certain non-
interest expenses. This presentation change will not have a significant
impact on the Bank. Upon transition, IFRS 15 permits entities to either
restate prior periods or to apply the standard on a modified retrospective
basis. The Bank has chosen to apply the standard using 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. This adjustment
to the opening balance of Retained earnings as at November 1, 2018 will not
be significant.
Effective Date – November 1, 2019
IFRS 16 – Leases
In January 2016, the IASB issued 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, 2020
On March 29, 2018, the IASB issued the revised Conceptual Framework for
Financial Reporting to replace its 2010 conceptual framework. For the IASB,
the revised conceptual framework has been in effect since its publication
date. Early application is permitted.
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. At its meeting on
November 14, 2018, the IASB tentatively decided to defer the IFRS 17
effective date to fiscal years beginning on or after January, 1, 2022.
National Bank of Canada
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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
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Earnings per common share
Basic
Diluted
Dividends (per share)
Common
Preferred
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Total
Q4
Q3
Q2
3,382
3,784
7,166
327
4,063
544
2,232
87
2,145
826
988
1,814
73
1,036
139
566
16
550
837
955
1,792
76
1,011
136
569
23
546
885
869
1,754
91
992
124
547
25
522
2018
Q1
834
972
1,806
87
1,024
145
550
23
527
$
$
6.01
5.94
$
1.53
1.52
1.54 $
1.52
$
1.46
1.44
1.48
1.46
$
2.44
$
0.62
$
0.62 $
0.60
$
0.60
−
1.0250
0.9750
1.4000
1.3500
1.1125
0.9310
0.5323
−
0.2562
0.2437
0.3500
0.3375
0.2781
0.2875
0.5323
−
0.2563
0.2438
0.3500
0.3375
0.2781
0.2875
−
−
0.2562
0.2437
0.3500
0.3375
0.2782
0.3560
−
−
0.2563
0.2438
0.3500
0.3375
0.2781
−
−
Return on common shareholders’ equity
18.4 %
17.8 %
18.4 %
18.6 %
18.7 %
Total assets
Long-term financial liabilities(2)
Net impaired loans(3) under IFRS 9
Net impaired loans under IAS 39
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
262,471
257,637
256,259
251,065
747
404
753
413
755
382
8
371
339,372
343,240
337,508
341,395
335,071
339,160
343,280
337,441
339,885
343,900
339,348
340,950
345,458
340,390
$
34.40
$
33.91 $
32.64
$
31.75
$
65.63
58.69
65.63
58.93
23,450
428
64.29
61.26
23,029
428
64.08
58.69
22,359
428
65.35
62.33
21,868
429
(1) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, a $204 million amount (2016: $213 million) reported in Non-interest income was reclassified to Net interest income for the year ended October 31, 2017. This reclassification
had no impact on Net income.
Subordinated debt.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans and do not include POCI loans. Under IAS 39, loans were considered
impaired according to different criteria. Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
(2)
(3)
94
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Additional Financial Information
Total
Q4
Q3
Q2
3,436
3,173
6,609
244
3,857
484
2,024
84
1,940
881
823
1,704
70
976
133
525
19
506
887
788
1,675
58
971
128
518
24
494
815
782
1,597
56
941
116
484
22
462
2017
Q1
853
780
1,633
60
969
107
497
19
478
Total
Q4
Q3
Q2
3,205
2,635
5,840
484
3,875
225
1,256
75
1,181
827
742
1,569
59
1,159
44
307
18
289
823
734
1,557
45
937
97
478
18
460
763
662
1,425
317
876
22
210
17
193
2016
Q1
792
497
1,289
63
903
62
261
22
239
$
5.44 $
5.38
1.40 $
1.39
1.39 $
1.37
$
1.30
1.28
1.35
1.34
$
$
3.31
3.29
$
0.79
0.78
1.32 $
1.31
$
0.52
0.52
0.68
0.67
$
2.28 $
0.58 $
0.58 $
0.56
$
0.56
$
2.18
$
0.55
$
0.55 $
0.54
$
0.54
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
–
–
–
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
–
–
–
–
–
18.1 %
17.8 %
18.2 %
17.9 %
18.4 %
11.7 %
11.0 %
18.7 %
7.7 %
9.5 %
245,827
240,072
239,020
234,119
232,206
229,896
220,734
219,301
9
9
10
1,009
1,012
1,014
1,015
1,021
206
240
213
226
281
251
300
234
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
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
$
31.51 $
30.84 $
29.97
$
29.51
$
28.52
$
28.39 $
27.75
$
27.77
$
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
$
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
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2018 Annual Report
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2018 Annual Report
95
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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(2)
Non-interest income(2)
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
2018
3,526
3,885
7,411
4,063
3,348
327
3,021
789
2,232
87
2017
2016
3,645
3,208
6,853
3,857
2,996
244
2,752
728
2,024
84
3,436
2,639
6,075
3,875
2,200
484
1,716
460
1,256
75
2015
3,240
2,817
6,057
3,665
2,392
228
2,164
545
1,619
70
2014
3,011
2,672
5,683
3,423
2,260
208
2,052
514
1,538
69
2,145
265,762
1,940
248,351
1,181
235,913
1,549
222,929
1,469
206,680
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(1)
(2) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, a $204 million amount (2016: $213 million; 2015: $212 million and 2014: $177 million) reported in Non-interest income was reclassified to Net interest income for the year
ended October 31, 2017. This reclassification had no impact on Net income.
Table 3 – Changes in Net Interest Income(1)
Year ended October 31
(taxable equivalent basis)(2)
(millions of Canadian dollars)
Personal and Commercial
Net interest income
Average assets
Average interest-bearing assets
Net interest margin(3)
Wealth Management
Net interest income
Average assets
Financial Markets
Net interest income
Average assets
U.S. Specialty Finance and International
Net interest income(4)
Average assets
Other
Net interest income
Average assets
Total
Net interest income(4)
Average assets
2018
2017
2016
2015
2014
2,212
100,619
95,344
2.32 %
2,069
96,433
91,633
2.26 %
1,955
92,347
87,266
2.24 %
1,860
86,977
81,430
2.28 %
1,770
81,516
75,963
2.33 %
510
12,551
409
100,721
584
9,270
(189)
42,601
431
11,652
772
94,991
466
7,519
(93)
37,756
372
11,006
938
87,491
284
5,319
(113)
39,750
323
10,388
1,001
86,466
205
2,275
(149)
36,823
312
10,400
825
85,427
176
771
(72)
28,566
3,526
265,762
3,645
248,351
3,436
235,913
3,240
222,929
3,011
206,680
For years prior to 2018, certain amounts have been reclassified.
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.
(1)
(2)
(3)
(4) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, a $204 million amount (2016: $213 million; 2015: $212 million and 2014: $177 million) reported in Non-interest income was reclassified to Net interest income for the year
ended October 31, 2017. This reclassification had no impact on Net income.
6
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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
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
Gains (losses) on non-trading
securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and
joint ventures
Other(2)
Canada
International
United States
Other
Non-interest income on a taxable equivalent
basis as a % of total revenues on a
taxable equivalent basis(1)
Non-interest income on a taxable equivalent basis
and excluding specified items as a % of total
revenues on a taxable equivalent basis and
excluding specified items(1)
2018
388
195
438
587
126
277
159
280
941
77
121
95
28
173
3,885
3,589
108
188
2017
349
216
412
518
130
231
132
279
409
140
117
81
35
159
3,208
3,027
136
45
2016
376
235
364
453
110
236
119
258
154
70
114
81
15
54
2,639
2,434
124
81
2015
387
273
320
446
112
223
128
238
209
82
107
88
26
178
2,817
2,737
72
8
2014
388
333
251
388
98
217
134
234
106
103
108
89
44
179
2,672
2,545
126
1
52.4 %
46.8 %
43.4 %
46.5 %
47.0 %
52.5 %
46.9 %
45.1 %
45.5 %
46.3 %
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
(1)
(2) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item is now reported in Loans. As a result of
this change, a $204 million amount (2016: $213 million; 2015: $212 million and 2014: $177 million) reported in Non-interest income was reclassified to Net interest income for the year
ended October 31, 2017. This reclassification had no impact on Net income.
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
2018
2017
2016
2015
2014
564
265
126
955
176
1,131
496
294
103
893
97
990
438
263
116
817
80
897
450
237
147
834
151
985
332
207
82
621
122
743
(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.
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Management’s Discussion and Analysis
Additional Financial Information
Table 6 – Provisions for Credit Losses(1)
Year ended October 31
(millions of Canadian dollars)
Personal Banking(2)
Stage 3
Stages 1 and 2
Commercial Banking
Stage 3
Stages 1 and 2(3)
Wealth Management
Stage 3
Stages 1 and 2
Financial Markets
Stage 3
Stages 1 and 2
U.S. Specialty Finance and International
Stage 3
Stages 1 and 2
POCI loans
Other
Stage 3
Stages 1 and 2(4)
Total provisions for credit losses
Average loans and acceptances
Provisions for credit losses on impaired loans(1) as
a % of average loans and acceptances
Provisions for credit losses
as a % of average loans and acceptances
2018
2017
2016
2015
2014
156
9
165
40
21
61
2
1
3
−
4
4
126
(3)
(29)
94
−
−
−
327
150
−
150
43
(40)
3
3
−
3
−
−
−
48
−
−
48
−
40
40
152
−
152
73
250
323
5
−
5
−
−
−
4
−
−
4
−
−
−
162
−
162
63
−
63
3
−
3
−
−
−
−
−
−
−
−
−
−
155
−
155
50
−
50
3
−
3
−
−
−
−
−
−
−
−
−
−
244
484
228
208
139,887
130,882
122,559
108,740
99,548
0.23 %
0.19 %
0.19 %
0.21 %
0.21 %
0.23 %
0.19 %
0.39 %
0.21 %
0.21 %
(1)
(2)
(3)
(4)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. These impaired loans do not include POCI loans.
Including credit card receivables.
During fiscal 2017, the Bank recorded a $40 million reversal of the sectoral provision on non-impaired loans that had been taken collectively for the oil and gas producer and service
company loan portfolio. In addition, the fiscal 2016 provisions for credit losses had included a $250 million amount related to the initial recording of this sectoral provision.
During fiscal 2017, the provisions for credit losses had included a $40 million increase in the collective allowance for credit risk on non-impaired loans, which was established taking into
account the Bank’s overall credit portfolio, except for loans covered by the sectoral allowance and POCI loans.
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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
Occupancy
Technology
Amortization – Premises and equipment
Amortization – Technology
Communications
Professional fees
Restructuring charge(1)
Advertising and external relations
Stationery
Travel and business development
Security and theft
Capital and payroll taxes
Other
Total
Canada
International
United States
Other
Non-interest expenses as a % of total
revenues on a taxable equivalent basis(2)
Non-interest expenses as a % of total
revenues on a taxable equivalent basis
and excluding specified items(2)
2018
2,466
193
375
43
245
63
244
−
91
23
37
26
79
178
4,063
3,750
205
108
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
54.8 %
56.3 %
63.8 %
60.5 %
60.2 %
54.6 %
55.9 %
58.2 %
58.6 %
58.6 %
(1)
(2)
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.
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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
Business and government loans
Impaired loans, net of 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
$
2018
Rate
%
Average
volume
$
2017(2)
Rate
%
Average
volume
$
2016(2)
Rate
%
Average
volume
$
2015(2)
Rate
%
Average
volume
$
2014(2)
Rate
%
16,282
78,640
1.27
1.58
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
17,372
51,452
34,664
45,657
1,515
245,582
20,180
265,762
50,499
5,980
110,697
167,176
564
47,762
215,502
36,314
13,946
265,762
1.26
2.75
4.27
4.71
12.65
2.81
19,878
50,754
33,048
39,994
962
227,029
1.03
2.61
3.93
3.91
19.72
2.58
19,038
46,213
32,477
34,510
1,368
208,469
0.75
2.69
3.84
3.20
15.70
2.50
21,322
27,444
2.60
248,351
2.36
235,913
2.12
48,408
7,567
98,279
154,254
423
44,204
198,881
36,722
12,748
248,351
1.12
1.45
1.62
1.47
3.20
1.20
1.57
1.27
1.33
44,510
12,468
85,874
142,852
1,047
38,804
182,703
41,627
11,583
235,913
1.01
0.69
1.20
1.11
3.81
0.74
1.11
0.89
1.47
1.13
0.39
1.10
1.04
3.16
0.31
0.98
0.76
1.36
25,610
41,719
30,817
27,096
1,116
195,623
27,306
222,929
42,480
10,925
76,063
129,468
1,571
40,374
171,413
40,792
10,724
222,929
0.79
2.85
3.94
3.20
19.14
2.56
24,789
38,517
28,714
23,498
620
184,010
22,670
0.68
3.02
4.18
3.42
28.91
2.68
2.15
206,680
2.31
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
1.31
0.24
1.22
1.18
3.96
0.91
1.19
0.93
1.38
(1)
(2)
See the Financial Reporting Method section on page 10 for additional information on non-GAAP financial measures.
For the years prior to 2018, certain amounts have been reclassified, particularly amounts in Loans; Impaired loans, net of allowances; and Deposits.
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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
Oil and gas
Mining
Utilities
Construction
Manufacturing
Wholesale trade
Retail trade
Transportation
Communications
Finance and insurance
Real estate
Professional services
Education and health care
Other services
Government
Other(2)
POCI loans
2018
%
$
2017
%
$
2016
%
$
2015
%
$
2014
%
$
70,591
4,211
12,246
5,759
2,506
1,032
2,715
2,976
5,536
2,163
3,069
2,770
1,597
4,732
9,997
1,582
2,988
4,715
1,445
2,534
1,576
146,740
48.1
2.9
8.3
3.9
1.7
0.7
1.9
2.0
3.8
1.5
2.1
1.9
1.1
3.2
6.8
1.1
2.0
3.2
1.0
1.7
1.1
100.0
66,398
4,217
12,150
4,923
2,129
470
2,347
2,787
4,341
2,066
3,431
2,593
1,662
4,932
9,104
1,416
2,749
4,762
1,452
1,233
1,990
137,152
48.4
3.1
8.9
3.6
1.6
0.3
1.7
2.0
3.2
1.5
2.5
1.9
1.2
3.6
6.6
1.0
2.0
3.5
1.1
0.9
1.4
100.0
58,265
4,178
10,316
4,599
2,102
582
1,814
2,419
3,597
2,021
2,911
3,013
1,578
3,872
8,310
1,374
2,623
4,647
1,201
7,537
1,846
128,805
45.2
3.2
8.0
3.6
1.6
0.5
1.4
1.9
2.8
1.6
2.3
2.3
1.2
3.0
6.5
1.1
2.0
3.6
0.9
5.9
1.4
100.0
54,004
4,093
9,512
4,433
3,220
392
1,385
2,308
3,765
1,908
2,965
1,956
1,254
2,679
8,131
1,214
2,612
4,200
450
5,326
1,424
117,231
46.1
3.6
8.1
3.8
2.7
0.3
1.2
2.0
3.2
1.6
2.5
1.7
1.1
2.3
6.9
1.0
2.2
3.6
0.4
4.5
1.2
100.0
50,011
4,033
9,027
3,857
3,621
247
813
1,898
3,689
2,006
3,275
1,223
1,540
1,482
7,190
1,659
2,730
3,567
539
4,366
791
107,564
46.5
3.7
8.4
3.6
3.4
0.2
0.8
1.8
3.4
1.9
3.0
1.1
1.4
1.4
6.7
1.5
2.5
3.3
0.5
4.1
0.8
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.
Table 10 – Impaired Loans(1)
As at October 31
(millions of Canadian dollars)
Net impaired loans(2)
Personal
Commercial
Wealth Management
Financial Markets
U.S. Specialty Finance and International
Other
Total net impaired loans
Gross impaired loans
Allowances for credit losses on impaired loans
Individual and collective allowances
on impaired loans
Net impaired loans(2)
2018
2017
2016
2015
2014
185
187
17
−
15
−
404
630
226
404
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
Provisioning rate
As a % of loans and acceptances
35.9 %
0.3 %
45.8 %
0.2 %
42.9 %
0.2 %
44.4 %
0.2 %
49.0 %
0.2 %
(1)
(2)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. These impaired loans do not include POCI loans.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
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1
Management’s Discussion and Analysis
Additional Financial Information
Table 11 – Allowances for Credit Losses(1)
Year ended October 31
(millions of Canadian dollars)
Balance at beginning
Provisions for credit losses
Write-offs
Disposals
Recoveries
Exchange and other movements
Balance at end
Composition of allowances:
Allowances for credit losses on impaired loans
Allowances for credit losses on non-impaired loans
Allowances for credit losses on off-balance-sheet
commitments and other assets
Allowances for credit losses on POCI loans
Sectoral allowance on non-impaired loans – Oil and gas(2)
Collective allowance on non-impaired loans(3)
2018
735
327
(367)
(24)
45
(2)
714
226
498
56
(66)
2017
769
244
(320)
−
13
(11)
695
174
(24)
139
406
2016
555
484
(282)
−
13
(1)
769
211
(12)
204
366
2015
605
228
(278)
−
13
(13)
555
203
(14)
−
366
2014
578
208
(197)
−
15
1
605
238
1
−
366
(1)
(2)
(3)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. These impaired loans do not include POCI loans.
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 and
POCI loans.
Table 12 – Deposits
As at October 31
(millions of Canadian dollars)
2018
%
$
2017(1)
%
$
2016(1)
%
$
2015(1)
%
$
2014(1)
%
$
Personal
Business and government
Deposit-taking institutions
Total
Canada
International
United States
Other
Total
Personal deposits as a %
of total assets
55,688
110,321
4,821
170,830
156,054
6,048
8,728
170,830
52,175
99,115
5,381
156,671
145,288
5,825
5,558
156,671
32.6
64.6
2.8
100.0
91.4
3.5
5.1
100.0
21.2
51,163
85,263
5,640
142,066
131,869
4,442
5,755
142,066
33.3
63.3
3.4
100.0
92.8
3.7
3.5
100.0
21.2
47,394
76,845
6,219
130,458
116,315
9,655
4,488
130,458
36.0
60.0
4.0
100.0
92.8
3.1
4.1
100.0
22.0
44,963
67,364
7,556
119,883
105,621
12,152
2,110
119,883
36.3
58.9
4.8
100.0
89.2
7.4
3.4
100.0
21.9
37.5
56.2
6.3
100.0
88.1
10.1
1.8
100.0
21.9
(1)
The Bank changed the classification of certain amounts presented in the Deposits item of the Consolidated Balance Sheet. As at October 31, 2017, an amount of $1,544 million
($1,358 million as at October 31, 2016) was reclassified from Deposits – Personal to Deposits – Business and government. The figures as at October 31, 2015 and 2014 have not been
reclassified.
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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
104
105
106
107
108
110
111
112
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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, 2018 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 and evaluation in order to assist
managers in effectively managing regulatory compliance risk and to obtain reasonable assurance that the Bank is compliant with regulatory requirements.
Both the Senior Vice-President, Internal Audit and the Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer have a direct
functional link to the Chair of the Audit Committee and to the Chair of the Risk Management Committee. They both also have 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
Montreal, Canada, December 4, 2018
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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, 2018 and 2017 and as at November 1, 2017, 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, 2018 and 2017, 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.
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, 2018 and 2017
and as at November 1, 2017, and its financial performance and its cash flows for the years ended October 31, 2018 and 2017 in accordance with International
Financial Reporting Standards issued by the International Accounting Standards Board.
/s/ Deloitte LLP1
Montreal, Canada, December 4, 2018
1 CPA auditor, CA, public accountancy permit No. A121444
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Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Balance Sheets
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
Available-for-sale
At fair value through other comprehensive income
Held-to-maturity
At amortized cost
Securities purchased under reverse repurchase agreements
and securities borrowed
Loans
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Notes 4, 5 and 7
Notes 5 and 8
Note 17
Note 10
Note 11
Note 12
Note 12
Note 13
Liabilities and equity
Deposits
Notes 5 and 14
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
Note 17
Notes 5 and 9
Note 15
Subordinated debt
Equity
Equity attributable to the Bank’s shareholders
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Note 16
Notes 19 and 23
Non-controlling interests
Note 20
As at October 31, 2018(1) As at November 1, 2017(1) As at October 31, 2017
12,756
55,817
5,668
8,298
69,783
18,159
53,651
37,357
2,325
46,606
139,939
6,801
(658)
146,082
8,608
645
601
1,412
1,314
3,111
15,691
262,471
170,830
6,801
17,780
19,998
6,036
20,100
5,824
76,539
747
2,450
2,822
57
8,472
175
13,976
379
14,355
262,471
8,801
8,802
52,228
6,424
6,653
65,305
47,536
8,552
9,255
65,343
20,789
20,789
51,609
35,590
2,247
41,690
131,136
5,991
(673)
136,454
8,423
631
558
1,409
1,239
2,226
14,486
245,835
51,634
35,590
2,247
41,690
131,161
5,991
(695)
136,457
8,423
631
558
1,409
1,239
2,176
14,436
245,827
156,787
156,671
5,991
15,363
21,767
6,612
20,122
5,791
75,646
9
2,050
2,768
58
7,567
158
12,601
792
13,393
245,835
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
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
The Consolidated Balance Sheets as at October 31, 2018 and as at November 1, 2017 reflect the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9 adoption,
refer to Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
Louis Vachon
President and Chief Executive Officer
Karen Kinsley
Director
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Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Income
Year ended October 31
2018(1)
2017
Interest income
Loans
Securities at fair value through profit or loss
Available-for-sale securities
Securities at fair value through other comprehensive income
Held-to-maturity securities
Securities at amortized cost
Deposits with financial institutions
Interest expense
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
Net interest income(2)
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
Gains (losses) on non-trading 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
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 10
Note 8
Note 25
Note 26
Note 19
5,632
771
152
174
206
6,935
2,562
414
18
559
3,553
3,382
388
195
438
587
403
159
280
840
77
121
95
28
173
3,784
7,166
327
6,839
2,466
236
620
63
244
434
4,063
2,776
544
2,232
105
2,040
2,145
87
2,232
6.01
5.94
2.44
4,715
598
227
130
114
5,784
1,780
403
16
149
2,348
3,436
349
216
412
518
361
132
279
374
140
117
81
35
159
3,173
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
(1)
The Consolidated Statement of Income for the year ended October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9 adoption, refer to
Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
(2) Net interest income includes dividend income. For additional information, see Note 1 to these audited consolidated financial statements.
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(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
Impact of hedging net foreign currency translation gains (losses)
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 debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
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 gains (losses) on equity securities designated at fair value through other
comprehensive income
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
Total other comprehensive income, net of income taxes
Comprehensive income
Comprehensive income attributable to
Bank shareholders
Non-controlling interests
2018(1)
2,232
2017
2,024
41
(13)
28
(11)
(5)
(16)
51
(46)
5
1
103
(2)
21
122
140
2,372
2,284
88
2,372
(64)
25
(39)
119
(131)
(12)
33
(26)
7
(10)
97
(21)
76
22
2,046
1,966
80
2,046
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
The Consolidated Statement of Comprehensive Income for the year ended October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9
adoption, refer to Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
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(millions of Canadian dollars)
Consolidated Statements of Comprehensive Income (cont.)
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
2018(1)
2017
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Impact of hedging net foreign currency translation gains (losses)
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 debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
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 gains (losses) on equity securities designated at fair value through other
comprehensive income
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.
1
−
1
(4)
(1)
(5)
19
(17)
2
−
37
(1)
7
41
(2)
1
(1)
46
(48)
(2)
12
(9)
3
(3)
36
(8)
25
(1)
The Consolidated Statement of Comprehensive Income for the year ended October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9
adoption, refer to Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
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Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Changes in Equity
Year ended October 31
Preferred shares at beginning
Issuances of Series 38, 40 and 42 preferred shares
Redemption of Series 28 preferred shares for cancellation
Preferred shares at end
Common shares at beginning
Issuances of common shares pursuant to the 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
Other
Contributed surplus at end
Retained earnings at beginning
Impact of adopting IFRS 9 on November 1, 2017
Net income attributable to the Bank’s shareholders
Dividends on preferred shares
Dividends on common shares
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 gains (losses) on equity securities designated at fair value through other comprehensive income
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
Impact of adopting IFRS 9 on November 1, 2017
Net foreign currency translation adjustments
Net change in unrealized gains (losses) on available-for-sale securities
Net change in unrealized gains (losses) on debt securities at fair value through other comprehensive income
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
Impact of adopting IFRS 9 on November 1, 2017
Redemption of trust units issued by NBC Asset Trust
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 unrealized gains (losses) on debt securities at fair value through other comprehensive income
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.
Note 19
Note 19
Note 23
Note 19
Note 19
Note 19
Note 20
2018(1)
2,050
600
(200)
2,450
2,768
128
(64)
(10)
−
2,822
58
12
(15)
2
57
7,706
(139)
2,145
(105)
(829)
(403)
(12)
103
(2)
21
−
(13)
8,472
168
(10)
27
(16)
5
1
175
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
13,976
12,750
808
(16)
(400)
87
1
(101)
379
810
−
84
(4)
(82)
808
14,355
13,558
2018
14
13
151
(3)
175
2017
(13)
39
146
(4)
168
(1)
The Consolidated Statement of Changes in Equity for the year ended October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9 adoption,
refer to Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
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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
Gains on disposals of equity interests in joint ventures
Deferred taxes
Losses (gains) on sales of available-for-sale securities, net
Losses (gains) on sales of non-trading securities, net
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 and acceptances, 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
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 (including the impact of shares purchased for trading)
Repurchases of common shares for cancellation
Issuance of subordinated debt
Redemption of subordinated debt
Redemption of trust units issued by NBC Asset Trust
Share issuance expenses
Dividends paid
Distributions to non-controlling interests
Cash flows from investing activities
Net change in investments in associates and joint ventures
Purchases of securities measured at fair value through other comprehensive income
Maturities of securities measured at fair value through other comprehensive income
Sales of securities measured at fair value through other comprehensive income
Purchases of securities measured at amortized cost
Maturities of securities measured at amortized cost
Sales of securities measured at amortized cost
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 (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning
Cash and cash equivalents at end(2)
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.
2018(1)
2017
2,232
2,024
327
302
(4)
24
(77)
(28)
12
(3,589)
2,630
(9,160)
14,159
2,417
(1,769)
(761)
53
(127)
(777)
5,864
600
(200)
103
(467)
750
−
(400)
(12)
(918)
(101)
(645)
(3)
(5,415)
25
6,039
(2,375)
484
134
69
(233)
(256)
(1,531)
266
3,954
8,802
12,756
3,440
6,875
596
244
351
(17)
(13)
(140)
(35)
11
(1,572)
(6,841)
(9,138)
14,605
1,156
(869)
880
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
(1)
(2)
The Consolidated Statement of Cash Flows for the year ended October 31, 2018 reflects the adoption of IFRS 9 on November 1, 2017. For additional information on IFRS 9 adoption, refer to
Notes 1 and 3 to these audited consolidated financial statements. Comparative information has not been restated.
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $2.5 billion as at October 31, 2018 ($2.0 billion as at
October 31, 2017) for which there are restrictions.
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(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
Basis of Presentation and Summary of Significant Accounting Policies
Future Accounting Policy Changes
Impacts of IFRS 9 Adoption
Fair Value of Financial Instruments
Financial Instruments Designated at Fair Value Through Profit or Loss
Offsetting Financial Assets and Financial Liabilities
Securities
Loans and Allowances for Credit Losses
Financial Assets Transferred But Not Derecognized
Investments in Associates and Joint Ventures
Premises and Equipment
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Subordinated Debt
112
131
131
137
148
149
150
152
164
165
167
168
169
170
170
171
Note 17 Derivative Financial Instruments
Hedging Activities
Note 18
Share Capital
Note 19
Non-Controlling Interests
Note 20
Capital Disclosure
Note 21
Trading Activity Revenues
Note 22
Share-Based Payments
Note 23
Employee Benefits – Pension Plans and Other
Note 24
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
Segment Disclosures
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
171
175
179
182
183
184
185
188
193
195
195
198
201
202
207
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 is an integrated financial group that provides comprehensive financial services to consumers, small- and medium-sized enterprises (SMEs) and large
corporations in its national market while also offering specialized services internationally. It 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 include banking and investing solutions for individuals and businesses, corporate banking and investment banking services, securities
brokerage, insurance and wealth management.
On December 4, 2018, 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, 2018.
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.
Unless stated otherwise, the accounting policies described in the Summary of Significant Accounting Policies section have been applied consistently to all
periods presented. On November 1, 2017, the Bank adopted IFRS 9 – Financial Instruments (IFRS 9). Subsequent to IFRS 9 application, the Bank changed the
policies of two key accounting areas, as described in the Accounting Policy Changes section. As permitted by the IFRS 9 transitional provisions, the Bank has
elected to not restate the prior period figures, which have been reported using the previous accounting policies.
On November 1, 2017, the Bank changed the presentation of certain items on the Consolidated Balance Sheet and reclassified certain amounts. The former
Personal and credit card loans item is now presented in two separate items. The Purchased receivables item, which had been presented net of allowances for
credit losses in an amount of $2,014 million as at October 31, 2017 is now reported in Residential mortgage loans ($1,116 million) and in Personal loans
($874 million), and the Allowances for credit losses item was reduced by $24 million. As a result of this presentation change, for the year ended
October 31, 2017, a $204 million amount reported in Non-interest income – Other was reclassified to Interest income – Loans.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Accounting Policy Changes
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 expected Domestic Systemically Important Banks (D-SIBs), a group that includes the Bank, to early adopt IFRS 9 as of November 1, 2017. As
permitted by the IASB, the Bank early adopted IFRS 9 on November 1, 2017. IFRS 9 replaces the guidance in IAS 39 – Financial Instruments: Recognition and
Measurement (IAS 39). It 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. As a result of IFRS 9, consequential amendments were made to IFRS 7 – Financial Instruments: Disclosures,
requiring additional qualitative and quantitative disclosures that were adopted at the same time as IFRS 9.
As permitted by IFRS 9, the Bank did not restate comparative period financial statements. The Bank applied IFRS 9 on a retrospective basis. Adjustments to the
carrying amounts of financial assets and liabilities at the date of initial application have been accounted for in the opening balances of Retained earnings,
Accumulated other comprehensive income and Non-controlling interests as at November 1, 2017. Note 3 to these consolidated financial statements presents
the impacts of IFRS 9 adoption on the Bank’s Consolidated Balance Sheet as at November 1, 2017.
The adoption of IFRS 9 on November 1, 2017 gave rise to accounting policy changes in two key areas: classification and measurement as well as impairment.
These new policies have been applied since November 1, 2017. As permitted by IFRS 9, the Bank had adopted the own credit risk provisions of IFRS 9 effective
February 1, 2016. The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. The accounting policy
changes arising from IFRS 9 adoption on November 1, 2017 are described hereafter.
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.
The following summarizes the key changes resulting from IFRS 9 adoption:
The “held-to-maturity” and “available-for-sale” financial asset categories were removed.
A new “measured at amortized cost” financial asset category was introduced. It applies to debt instruments whose contractual cash flow characteristics
are solely payments of principal and interest and that are held in a business model whose objective is to hold assets to collect contractual cash flows.
A new “measured at fair value through other comprehensive income” financial asset category was introduced. It applies to debt instruments whose
contractual cash flow characteristics are solely payments of principal and interest and that are held in a business model whose objective is achieved both
by collecting contractual cash flows and selling financial assets.
A new financial asset category for non-trading equity investments measured at fair value through other comprehensive income was introduced.
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. 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.
Impairment
IFRS 9 introduces a new, single impairment model for financial assets that requires the recognition of expected credit losses (ECL) rather than the incurred
credit losses applied under IAS 39. Under IAS 39, impairment losses were recognized if, and only if, there was objective evidence of impairment as a result of
one or more loss events that had occurred after initial recognition of the asset and that loss event had a detrimental impact on the estimated future cash flows
of the asset that could be reliably estimated. If there was no objective evidence of impairment for an individual financial asset, that financial asset was
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 are recognized in profit or loss before a loss event has occurred.
Under IAS 39, incurred credit losses were measured by incorporating reasonable and supportable information about past events and current conditions. Under
IFRS 9, the ECL model, which is forward-looking, also 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 (GDP) are incorporated into the risk parameters. Estimating forward-looking information requires significant
judgment.
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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 the fair value
determination of financial instruments, the impairment of financial assets, the impairment of non-financial assets, pension plans and other post-employment
benefits, income taxes, provisions, consolidation of structured entities and classification of debt instruments under IFRS 9. 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;
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.
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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.
Under IAS 39, translation gains or losses on non-monetary items classified as available for sale are recognized in Other comprehensive income. Under IFRS 9,
translation gains or losses on equity securities designated at fair value through other comprehensive income are also recognized in Other comprehensive
income. Under IAS 39, 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. Under
IFRS 9, deferred translation gains or losses on equity securities designated at fair value through other comprehensive income are not reclassified to net
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 for the Year Ended October 31, 2018
The Bank applied the IFRS 9 classification and measurement requirements applicable to financial instruments for the year ended October 31, 2018. The 2017
comparative period has not been restated, and the IAS 39 requirements have been applied.
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely
payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period,
and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset
are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to achieve a
same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset cash flows are
generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business model using scenarios
that it reasonably expects to occur. The business model determination is a matter of fact and requires the use of judgment and consideration of all the relevant
evidence available at the date of determination.
A financial asset portfolio falls within a “hold to collect” business model when the Bank’s primary objective is to hold these financial assets in order to collect
contractual cash flows from them and not to sell them. When the Bank’s objective is achieved both by collecting contractual cash flows and by selling the
financial assets, the financial asset portfolio falls within a “hold to collect and sell” business model. In this type of business model, collecting contractual cash
flows and selling financial assets are both integral components to achieving the Bank’s objective for this financial asset portfolio. Financial assets are
mandatorily measured at fair value through profit or loss if they do not fall within either a “hold to collect” business model or a “hold to collect and sell”
business model.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Financial Instruments Designated at Fair Value Through Profit or Loss
A financial asset may be irrevocably designated at fair value through profit or loss at initial recognition if certain conditions are met. The Bank may apply this
option if, consistent with a documented risk management strategy, doing so eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring financial assets or liabilities or recognizing gains and losses on them on different bases and if the fair values are
reliable. 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. Interest income arising from these financial instruments designated at fair value through profit or loss is recorded in Net interest income
in the Consolidated Statement of Income.
A financial liability may be irrevocably designated at fair value through profit or loss when it is initially recognized. 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 expense arising from these financial liabilities designated at fair value through profit or loss is recorded in the Net interest income item of the
Consolidated Statement of Income. The Bank may use this option in the following cases:
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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 this 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.
Financial Instruments Designated at Fair Value Through Other Comprehensive Income
It is permitted to irrevocably designate, at initial recognition, an investment in an equity instrument that is neither held for trading nor a contingent
consideration recognized in a business combination as being at fair value through other comprehensive income. In accordance with this designation, any
change in fair value is recognized in Other comprehensive income with no subsequent reclassification to net income. Dividend income is recorded in Interest
income in the Consolidated Statement of Income.
Securities Measured at Fair Value Through Other Comprehensive Income
Securities measured at fair value through other comprehensive income include: (i) debt securities for which the contractual terms of the financial asset give
rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding and that fall within a “hold to
collect and sell” business model and (ii) equity securities designated at fair value through other comprehensive income with no subsequent reclassification of
gains and losses to net income.
The Bank recognizes securities transactions at fair value through other comprehensive income on the trade date, and the transaction costs are capitalized.
Interest income and dividend income are recognized in Interest income in the Consolidated Statement of Income.
Debt Securities Measured at Fair Value Through Other Comprehensive Income
Debt securities measured at fair value through other comprehensive income are recognized at fair value. Unrealized gains and losses are recognized, net of
expected credit losses and income taxes, and provided that they are not hedged by derivative financial instruments in a fair value hedging relationship, in
Other comprehensive income. When the securities are sold, realized gains or losses, determined on an average cost basis, are reclassified to Non-interest
income – Gains (losses) on non-trading securities, net in the Consolidated Statement of Income. Premiums, discounts and related transaction costs are
amortized over the expected life of the instrument to interest income using the effective interest rate method.
Equity Securities Designated at Fair Value Through Other Comprehensive Income
Equity securities designated at fair value through other comprehensive income are recognized at fair value. Unrealized gains and losses are presented, net of
income taxes, in Other comprehensive income with no subsequent reclassification of realized gains and losses to net income. Transaction costs incurred upon
the purchase of such equity securities are not reclassified to net income upon the sale of the securities.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities for which the contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal amount outstanding and that fall within a “hold to collect” business model.
The Bank recognizes these securities transactions at fair value on the trade date, and the transaction costs are capitalized. After initial recognition, debt
securities in this category are recorded at amortized cost. Interest income is recognized in Interest income in the Consolidated Statement of Income.
Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to interest income using the effective interest rate
method. Securities measured at amortized cost are presented net of allowances for credit losses on the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair value through other comprehensive income or at amortized cost are classified as measured at fair
value through profit or loss.
Securities measured at fair value through profit or loss include (i) securities held for trading, (ii) securities designated at fair value through profit or loss, (iii) all
equity securities other than those designated as measured at fair value through other comprehensive income with no subsequent reclassifications of gains
and losses to net income, and (iv) debt securities for which the contractual cash flows are not solely payments of principal and any interest on the principal
amount outstanding.
The Bank recognizes 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 recognized in Non-interest income in the Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized at fair value, and any transaction costs are recognized directly in the Consolidated Statement of
Income. Interest income as well as realized and unrealized gains or losses on securities held for trading are recognized in Non-interest income – Trading
revenues (losses) in the Consolidated Statement of Income. Dividend income is recorded in Interest income in the Consolidated Statement of Income. Interest
income on securities designated at fair value through profit or loss is recorded in Interest income in the Consolidated Statement of Income. Realized and
unrealized gains or losses on these securities are recognized in Non-interest income – Trading revenues (losses) in the Consolidated Statement of Income.
Realized and unrealized gains or losses on equity securities at fair value through profit or loss, other than those held for trading, as well as debt securities for
which the contractual cash flows are not solely payments of principal and interest on the principal amount outstanding, are recognized in Non-interest income
– Gains (losses) on non-trading securities, net in the Consolidated Statement of Income. The dividend and interest income on these financial assets are
recognized in 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, except when they are designated at fair value through profit
or loss and are recorded at fair value. These transactions are held within a business model whose objective is to collect contractual cash flows, i.e., cash flows
that are solely payments of principal and interest on the principal amount outstanding. 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 Measured at Amortized Cost
Loans classified as measured at amortized cost include loans originated or purchased by the Bank that are not classified as measured at fair value through
profit or loss or designated at fair value through profit or loss. These loans are held within a business model whose objective is to collect contractual cash
flows, i.e., cash flows that are solely payments of principal and interest on the principal amount outstanding. All loans originated by the Bank are recognized
when cash is advanced to a borrower. Purchased loans are recognized when cash consideration is paid by the Bank.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
All loans are initially recognized at fair value plus directly attributable costs and are subsequently measured at amortized cost using the effective interest rate
method, net of an allowance for expected credit losses. For purchased performing loans, the acquisition date fair value adjustment on each loan is amortized
to interest income over the expected remaining life of the loan using the effective interest rate method. For purchased credit-impaired loans, the acquisition
date fair value adjustment on each loan consists of management’s estimate of the shortfall of principal and interest cash flows that the Bank expects to collect
and of the time value of money. The time value of money component of the fair value adjustment is amortized to interest income over the remaining life of the
loan using the effective interest rate method. Loans are presented net of allowances for credit losses on the Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or loss, loans designated at fair value through profit or loss, and loans for which the contractual cash
flows are not solely payments of principal and interest on the principal amount outstanding are recognized at fair value on the Consolidated Balance Sheet.
The interest income on loans at fair value through profit or loss is recorded in Interest income in the Consolidated Statement of Income.
Changes in the fair value of loans classified as at fair value through profit or loss and loans designated at fair value through profit or loss are recognized in
Non-interest income – Trading revenues (losses) in the Consolidated Statement of Income. With respect to loans whose contractual cash flows are not solely
payments of principal and interest on the principal amount outstanding, changes in fair value are recognized in Non-interest income – Other in the
Consolidated Statement of Income.
Reclassification of Financial Assets
A financial asset other than a derivative financial instrument or a financial asset that, at initial recognition, was designated as measured at fair value through
profit or loss, is reclassified only in rare situations, i.e., when there is a change in the business model used to manage the financial asset. The reclassification
is applied prospectively from the reclassification date.
Classification and Measurement of Financial Instruments for the Year Ended October 31, 2017
The Bank applied the IFRS 9 classification and measurement requirements applicable to financial instruments for the year ended October 31, 2018. The 2017
comparative period has not been restated, and the IAS 39 requirements have been applied.
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 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.
Financial Instruments Designated at Fair Value Through Profit or Loss
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 this 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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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, except when they are designated at fair value through profit
or loss and are recorded at fair value. 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.
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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 contractual interest rate of the receivable 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
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.
Impairment of Financial Assets for the Year Ended October 31, 2018
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events,
current conditions, and forecasts of future events and economic conditions.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial 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 an allowance for credit losses 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 an allowance for credit
losses 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 Stage 1, i.e., 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 for credit losses
equal to lifetime expected losses continues to be recorded or the financial asset is written off. The interest income is calculated on the gross carrying amount
for financial assets in Stages 1 and 2 and on the net carrying amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and forward-looking
information to assess deterioration in credit quality of a financial instrument. To assess whether or not the credit risk of a financial instrument has increased
significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting date with the PD occurring over its expected
life on the date of initial recognition and considers reasonable and supportable information indicative of a significant increase in credit risk since initial
recognition. The Bank includes 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. The assessment of a significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial instrument, and
reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions is considered. The
estimation and application of forward-looking information requires significant judgment. The cash shortfall is the difference between all contractual cash flows
owed to the Bank and all the cash flows that the Bank expects to receive.
The measurement of ECLs is primarily based on the product of the financial instrument’s PD, loss given default (LGD) and exposure at default (EAD). Forward-
looking macroeconomic factors such as unemployment rates, housing price indices, interest rates, and GDP are incorporated into the risk parameters. The
estimate of expected credit losses reflects an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes. The
Bank incorporates three forward-looking macroeconomic scenarios in its ECL calculation process: a base scenario, an upside scenario and a downside
scenario. Probability weights are attributed to each scenario. The scenarios and probability weights are reassessed quarterly and are subject to management
review. The Bank applies experienced credit judgment to adjust the modelled ECL results when it becomes evident that known or expected risk factors and
information were not considered in the credit risk rating and modelling process.
ECLs for all financial instruments are recognized in Provisions for credit losses in the Consolidated Statement of Income. In the case of debt instruments
measured at fair value through other comprehensive income, ECLs are recognized in Provisions for credit losses in the Consolidated Statement of Income, and
a corresponding amount is recognized in Other comprehensive income with no reduction in the carrying amount of the asset on the Consolidated Balance
Sheet. As for debt instruments measured at amortized cost, they are presented net of the related allowance for credit losses on the Consolidated Balance
Sheet. Allowances for credit losses for off-balance-sheet credit exposures that are not measured at fair value are included in Other liabilities on the
Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs in Provisions for
credit losses in the Consolidated Statement of Income, even if the lifetime ECLs are less than ECLs that were included in the estimated cash flows on initial
recognition.
Definition of Default
The definition of default used by the Bank to measure ECLs and transfer financial instruments between stages is consistent with the definition of default used
for internal credit risk management purposes. The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more
events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past
due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following: when a notice of bankruptcy is received, a
settlement proposal is made, or contractual payments are 180 days past due.
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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.)
Write-offs
A financial asset 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.
Impairment of Financial Assets for the Year Ended October 31, 2017
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.
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 differs depending on whether the
instrument is a debt or equity security.
−
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For an available-for-sale debt security, a subsequent decrease in fair value is 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 related 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. Recognized
impairment losses are not reversed through the Consolidated Statement of Income. All subsequent increases in fair value are 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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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.
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(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
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 ownership
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 ownership 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 of ownership of the 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.
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.
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.
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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. Where there are
offsetting financial assets and financial liabilities, the net fair value of certain derivative financial instruments is reported either as an asset or as a liability.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host contract, which causes some of the cash flows of the
combined instrument to vary in a way similar to a standalone derivative. The embedded derivative causes some or all of the cash flows that otherwise would be
required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable, provided that, in the case of a non-financial variable, the variable is not specific to one of the
parties to the contract.
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, and the hybrid contract is not measured at fair value through profit or loss. For the year ended October 31, 2018, these conditions continue to
apply to hybrid contracts that contain a host contract that is not a financial asset within the scope of IFRS 9. Where a hybrid contract contains a host contract
that is a financial asset within the scope of IFRS 9, the entire hybrid contract, including all embedded features, is measured for classification under IFRS 9.
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.
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
As permitted by IFRS 9, the Bank elected to continue applying the hedge accounting requirements of IAS 39, which are described hereafter.
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 Hedges
For fair value hedges, 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.
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Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Cash Flow Hedges
For cash flow hedges, 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.
Hedges of Net Investments in Foreign Operations
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.
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.
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(millions of Canadian dollars)
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.
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 group 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
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.
Under IFRS 9, the effective interest rate is the rate that exactly discounts estimated future cash inflows and outflows through the expected life of the financial
asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. When calculating the effective interest
rate, the Bank estimates the expected cash flows by considering all the contractual terms of the financial instrument but does not consider the expected credit
losses. The calculation includes all fees and points paid or received between the parties to the contract that are an integral part of the effective interest rate,
transaction costs, and all other premiums or discounts. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a
financial asset except for purchased or originated credit-impaired financial assets and financial assets that were not impaired upon their purchase or
origination but became impaired thereafter. For the purchased or originated credit-impaired financial assets, the Bank applies the credit-adjusted effective
interest rate to the amortized cost of the financial asset from initial recognition. The credit-adjusted effective interest rate reflects expected credit losses. As for
loans that have subsequently become credit-impaired, interest income is calculated by applying the effective interest rate to the net carrying amount (net of
allowances for credit losses) rather than to the carrying amount.
Under IAS 39, 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 Net interest income 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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, under IFRS 9, the Bank must measure financial guarantee contracts at the higher of the allowance for credit losses
determined using the ECL model and of the initially recognized amount less, where applicable, the cumulative amount of income recognized. Under IAS 39, the
Bank must measure financial guarantee contracts at the higher of the amount needed to settle the financial obligation under the guarantee and the amount
initially recognized less, where applicable, the cumulative amount of income recognized. 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-employment medical, dental and life insurance coverage. While pension plans are funded, the other plans are not.
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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.)
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.
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.
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1
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0
1
0
1
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 – November 1, 2018
IFRS 15 – Revenue From Contracts With Customers
In May 2014, the IASB issued IFRS 15, which replaces the current revenue recognition standards and interpretations. In July 2015, the IASB unanimously
confirmed its proposal to defer the IFRS 15 effective date to fiscal years beginning on or after January 1, 2018, which is November 1, 2018 for the Bank. In April
2016, the IASB issued amendments to IFRS 15, providing clarifications on, among other topics, the elements to be considered when determining whether an
entity is a principal or agent.
IFRS 15 provides a single comprehensive model to use when accounting for revenue from contracts with customers. The new model applies to all contracts with
customers except those that fall within the scope of other IFRS standards such as leases, insurance contracts, and financial instruments. As a result, the
majority of the Bank’s revenues, including net interest income, will not be affected. According to the core principle of IFRS 15, the method used to recognize
revenue from contracts with customers should reflect the moment when the promised goods or services are transferred and reflect the amount of consideration
the entity expects to receive in exchange for those goods or services. Consequently, the entity recognizes revenue for a performance obligation as it is
satisfied, that is, when control of the goods or services underlying the performance obligation is transferred to the customer.
Transition Impact
For the Bank, the transition to IFRS 15 will not have a significant impact on when revenue from contracts with customers is recognized. However, the
presentation of certain revenues and certain non-interest expenses in the Consolidated Statement of Income will change, as gross amounts will have to be
presented. At this time, certain revenues are presented net of certain non-interest expenses. This presentation change will not have a significant impact on the
Bank. Upon transition, IFRS 15 permits entities to either restate prior periods or to apply the standard on a modified retrospective basis. The Bank has chosen
to apply the standard using 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. This adjustment to the opening balance of Retained
earnings as at November 1, 2018 will not be significant.
Effective Date – November 1, 2019
IFRS 16 – Leases
In January 2016, the IASB issued 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, 2020
On March 29, 2018, the IASB issued the revised Conceptual Framework for Financial Reporting to replace its 2010 conceptual framework. For the IASB, the
revised conceptual framework has been in effect since its publication date. Early application is permitted.
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. At its meeting on November 14, 2018, the
IASB tentatively decided to defer the IFRS 17 effective date to fiscal years beginning on or after January, 1, 2022.
Note 3 – Impacts of IFRS 9 Adoption
The IFRS 9 classification and measurement requirements as well as the impairment requirements have been applied retrospectively through adjustments to
Consolidated Balance Sheet amounts on the date of initial application, i.e., November 1, 2017, with no restatement of comparative periods. The impacts of
IFRS 9 adoption were recognized through adjustments to Retained earnings, Accumulated other comprehensive income, and Non-controlling interests on
November 1, 2017.
The following information presents the Consolidated Balance Sheet impacts as at November 1, 2017.
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131
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Impacts of IFRS 9 Adoption (cont.)
Classifications and Measurements of Financial Instruments at the Date of Initial Application of IFRS 9
The following table presents the classifications and carrying amounts of the Bank’s financial assets and financial liabilities, as previously established in
accordance with IAS 39 as at October 31, 2017, as well as the new classifications and new carrying amounts established in accordance with IFRS 9 as at
November 1, 2017, where applicable. With respect to financial instruments for which the measurement method has changed, additional information is
provided hereafter. Refer to the letter indicated in the reference column.
As at October 31,
2017
Carrying value
under IAS 39
As at November 1,
2017
Carrying value
under IFRS 9
Classification under IAS 39
Classification under IFRS 9 Reference
Financial assets
Cash and deposits with
financial institutions
Securities
Debt and equity securities
Debt securities
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Equity securities
Debt securities
Equity securities
Debt securities
Securities purchased under
reverse repurchase agreements
and securities borrowed
Loans
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under
acceptances
Derivative financial instruments
Other assets
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8,802
8,801
Loans and receivables
At amortized cost
46,780
56
45
655
5,489
32
2,359
280
392
6,628
2,627
46,780
56
45
655
5,489
At fair value through profit or loss
Designated at fair value through
profit or loss under fair value option
Designated at fair value through
profit or loss under fair value option
Designated at fair value through
profit or loss under fair value option
Available-for-sale
25
2,359
Available-for-sale
Available-for-sale
280
Available-for-sale
392
6,628
2,596
Available-for-sale
Held-to-maturity
Held-to-maturity
At fair value through profit or loss
Designated at fair value through
profit or loss under fair value option
At fair value through profit or loss
At fair value through other
comprehensive income
At fair value through other
comprehensive income
At amortized cost
Designated at fair value through
profit or loss under fair value option
Designated at fair value through other
comprehensive income with no
subsequent reclassification of gains
and losses to net income
At fair value through profit or loss
At amortized cost
Designated at fair value through
profit or loss under fair value option
65,343
65,305
20,132
657
20,789
45,658
5,523
453
35,590
2,247
41,269
306
115
5,991
137,152
8,423
994
20,132
657
20,789
45,658
5,523
428
35,590
2,247
41,269
306
115
5,991
137,127
Loans and receivables
Designated at fair value through
profit or loss under fair value option
At amortized cost
Designated at fair value through
profit or loss under fair value option
Loans and receivables
At fair value through profit or loss
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Loans and receivables
Designated at fair value through
profit or loss under fair value option
At amortized cost
At fair value through profit or loss
At fair value through profit or loss
At amortized cost
At amortized cost
At amortized cost
At fair value through profit or loss
At fair value through profit or loss
Loans and receivables
At amortized cost
8,423
At fair value through profit or loss
At fair value through profit or loss
994
Loans and receivables
At amortized cost
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(h)
(i)
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Financial 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
Other liabilities
Subordinated debt
148,169
3,001
148,169
3,117
At amortized cost
At amortized cost
5,501
5,501
Designated at fair value through
profit or loss under fair value option
At amortized cost
Designated at fair value through
profit or loss under fair value option
Designated at fair value through
profit or loss under fair value option
156,671
5,991
156,787
5,991
At amortized cost
At amortized cost
15,363
15,363
At fair value through profit or loss
At fair value through profit or loss
21,233
534
21,767
6,612
11,568
2,321
6,209
20,098
2,902
15
9
21,233
534
21,767
At amortized cost
Designated at fair value through
profit or loss under fair value option
At amortized cost
Designated at fair value through
profit or loss under fair value option
6,612
At fair value through profit or loss
At fair value through profit or loss
11,568
2,345
At amortized cost
At amortized cost
Designated at fair value through
profit or loss under fair value option
At amortized cost
Designated at fair value through
profit or loss under fair value option
Designated at fair value through
profit or loss under fair value option
At amortized cost
At fair value through profit or loss
At amortized cost
At fair value through profit or loss
9
At amortized cost
At amortized cost
6,209
20,122
2,902
15
(j)
(j)
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
As at October 31,
2017
Carrying value
under IAS 39
As at November 1,
2017
Carrying value
under IFRS 9
Classification under IAS 39
Classification under IFRS 9 Reference
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
As at October 31, 2017, these equity securities were designated at fair value through profit or loss under the fair value option. On November 1, 2017, these equity securities were classified as at fair value
through profit or loss since, under IFRS 9, all investments in equity instruments, other than those designated at fair value through other comprehensive income with no subsequent reclassification of gains
and losses to net income, must be classified as at fair value through profit or loss.
As at October 31, 2017, these debt securities were designated at fair value through profit or loss under the fair value option. On November 1, 2017, as permitted by the IFRS 9 transitional provisions, the
Bank decided to revoke this designation and classified these securities as at fair value through other comprehensive income since (1) the financial assets are held within a business model whose objective
is achieved by both collecting contractual cash flows and selling financial assets and (2) the contractual terms of these debt securities give rise to cash flows that are solely payments of principal and
interest on the principal amount outstanding.
As at October 31, 2017, these debt securities were classified as available for sale. They were being recognized at fair value with changes in fair value being recorded in Other comprehensive income. On
November 1, 2017, under IFRS 9, the Bank reclassified these debt securities as at amortized cost, since (1) the financial assets are held within a business model whose objective is achieved by collecting
contractual cash flows and (2) the contractual terms of these debt securities give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.
As at October 31, 2017, these debt securities were classified as available for sale. They were being recognized at fair value with changes in fair value being recorded in Other comprehensive income. On
November 1, 2017, and as permitted by the IFRS 9 transitional provisions, the Bank made an irrevocable election to designate these debt securities at fair value through profit or loss under the fair value
option.
As at October 31, 2017, these equity securities were classified as available for sale. They were being recognized at fair value with changes in fair value being recorded in Other comprehensive income. On
November 1, 2017, and as permitted by the IFRS 9 transitional provisions, the Bank made an irrevocable election to designate these equity securities held in non-trading portfolios at fair value through
other comprehensive income with no subsequent reclassification of gains and losses to net income.
As at October 31, 2017, these equity securities were classified as available for sale. They were being recognized at fair value with changes in fair value being recorded in Other comprehensive income. On
November 1, 2017, these equity securities were classified as at fair value through profit or loss, since, under IFRS 9, all investments in equity instruments, other than those designated at fair value through
other comprehensive income with no subsequent reclassification of gains and losses to net income, must be classified as at fair value through profit or loss.
As at October 31, 2017, these debt securities were classified as held to maturity and accounted for at amortized cost. On November 1, 2017, and as permitted by the IFRS 9 transitional provisions, the Bank
made an irrevocable election to designate certain debt securities at fair value through profit or loss under the fair value option.
As at October 31, 2017, these loans were classified as loans and receivables and accounted for at amortized cost. On November 1, 2017, under IFRS 9, these loans had to be classified as at fair value
through profit or loss, since the contractual terms of these financial assets give rise to cash flows that are not solely payments of principal and interest on the principal amount outstanding.
As at October 31, 2017, these loans were designated at fair value through profit or loss, since IAS 39 had allowed for the full amount of a hybrid financial instrument containing one or more embedded
derivatives that would be bifurcated and accounted for separately to be irrevocably designated at fair value through profit or loss under the fair value option. On November 1, 2017, the Bank revoked this
designation. Under IFRS 9, the full amount of such hybrid financial instruments is classified as at fair value through profit or loss, since the contractual terms of these financial assets give rise to cash flows
that are not solely payments of principal and interest on the principal amount outstanding.
As at October 31, 2017, these financial liabilities were accounted for at amortized cost. On November 1, 2017, and as permitted by the IFRS 9 transitional provisions, the Bank made an irrevocable election
to designate certain deposits and certain liabilities related to transferred receivables at fair value through profit or loss under the fair value option.
National Bank of Canada
2018 Annual Report
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2018 Annual Report
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133
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Impacts of IFRS 9 Adoption (cont.)
The following table presents a reconciliation of the financial asset and liability carrying values established in accordance with IAS 39 as at October 31, 2017
with the new carrying values established in accordance with IFRS 9 as at November 1, 2017 (where applicable) as well as the impact of IFRS 9 adoption on
income tax assets and liabilities.
Reconciliation of New Carrying Values Under IFRS 9 as at November 1, 2017
Classification
Measurement
Impairment
IFRS 9 adjustments
Reconciliation of
new carrying values
under IFRS 9
Cash and deposits with financial institutions
Under IAS 39 as at October 31, 2017
Allowances for credit losses
Under IFRS 9 as at November 1, 2017
Securities at fair value through profit or loss
Under IAS 39 as at October 31, 2017
Reclassification into:
Debt securities at fair value through other comprehensive income
Reclassification from:
Available-for-sale debt securities
Available-for-sale equity securities
Held-to-maturity debt securities
Under IFRS 9 as at November 1, 2017
Available-for-sale securities
Under IAS 39 as at October 31, 2017
Reclassification into:
Equity securities designated at fair value through other
comprehensive income with no subsequent reclassification
of gains and losses to net income
Equity securities at fair value through profit or loss
Debt securities designated at fair value through profit or
loss under fair value option
Debt securities at amortized cost
Debt securities at fair value through other comprehensive income
Under IFRS 9 as at November 1, 2017
Securities at fair value through other comprehensive
income
Under IAS 39 as at October 31, 2017
Reclassification from:
Available-for-sale debt securities
Available-for-sale equity securities
Debt securities designated at fair value through profit or
loss under fair value option
Under IFRS 9 as at November 1, 2017
Held-to-maturity securities
Under IAS 39 as at October 31, 2017
Reclassification into:
Debt securities designated at fair value through profit or
loss under fair value option
Debt securities at amortized cost
Under IFRS 9 as at November 1, 2017
Securities at amortized cost
Under IAS 39 as at October 31, 2017
Reclassification from:
Available-for-sale debt securities
Held-to-maturity debt securities
Under IFRS 9 as at November 1, 2017
l
u
o
c
2
-
0
1
F
t
r
o
p
p
a
r
_
C
N
B
_
1
9
1
9
0
1
−
−
(655)
2,359
392
2,627
4,723
(280)
(392)
(2,359)
(32)
(5,489)
(8,552)
5,489
280
655
6,424
(2,627)
(6,628)
(9,255)
32
6,628
6,660
−
−
−
−
−
(31)
(31)
−
−
−
−
−
−
−
−
−
−
−
−
−
(4)
−
(4)
(1)
(1)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
(3)
−
(3)
8,802
(1)
8,801
47,536
(655)
2,359
392
2,596
52,228
8,552
(280)
(392)
(2,359)
(32)
(5,489)
−
−
5,489
280
655
6,424
9,255
(2,627)
(6,628)
−
−
25
6,628
6,653
0
1
134
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l
u
o
c
2
-
1
1
F
t
r
o
p
p
a
r
_
C
N
B
_
1
9
1
9
0
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Reconciliation of New Carrying Values Under IFRS 9 as at November 1, 2017 (cont.)
Residential mortgage loans
Under IAS 39 as at October 31, 2017
Adjustments related to classification and measurement
Under IFRS 9 as at November 1, 2017
Allowances for credit losses
Under IAS 39 as at October 31, 2017
Impairment adjustments related to loans at amortized cost
Under IFRS 9 as at November 1, 2017
Other assets
As at October 31, 2017
Tax assets — Adjustments related to measurement and impairment
As at November 1, 2017
Deposits
Under IAS 39 as at October 31, 2017
Designated at fair value through profit or loss under fair value option
Under IFRS 9 as at November 1, 2017
Liabilities related to transferred receivables
Under IAS 39 as at October 31, 2017
Designated at fair value through profit or loss under fair value option
Under IFRS 9 as at November 1, 2017
Other liabilities
As at October 31, 2017
Allowances for credit losses — Off-balance-sheet commitments
Tax liabilities — Adjustments related to impairment
As at November 1, 2017
Impact of IFRS 9 adjustments on equity as at November 1, 2017
Classification
Measurement
Impairment
IFRS 9 adjustments
Reconciliation of
new carrying values
under IFRS 9
−
−
−
−
−
−
−
−
−
−
−
−
−
−
(25)
(25)
−
−
56
56
116
116
24
24
−
−
−
(144)
−
−
22
22
(6)
(6)
−
−
−
−
58
(25)
33
(21)
51,634
(25)
51,609
(695)
22
(673)
2,176
50
2,226
156,671
116
156,787
20,098
24
20,122
5,758
58
(25)
5,791
The following table presents a reconciliation of the Retained earnings, Accumulated other comprehensive income and Non-controlling interests amounts
established in accordance with IAS 39 as at October 31, 2017 with those established in accordance with IFRS 9 as at November 1, 2017.
Under IAS 39 as at October 31, 2017
Adjustments related to measurement, net of income taxes
Adjustments related to impairment, net of income taxes
Impact of IFRS 9 adjustments
Under IFRS 9 as at November 1, 2017
1
1
Retained
earnings
Accumulated other
comprehensive
income
Non-controlling
interests
Impact on equity as at
November 1, 2017
7,706
(131)
(8)
(139)
7,567
168
(10)
−
(10)
158
808
(3)
(13)
(16)
792
(144)
(21)
(165)
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2018 Annual Report
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135
l
u
o
c
2
-
1
1
F
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Impacts of IFRS 9 Adoption (cont.)
On November 1, 2017, the Bank classified certain debt securities that were being recognized at fair value through other comprehensive income as at
October 31, 2017 as measured at amortized cost. As at October 31, 2018, the fair value of these debt securities was $7 million, and the change in fair value
that would have been recognized in Other comprehensive income for the year ended October 31, 2018 would have been negligible.
On November 1, 2017, the Bank classified certain debt securities that were being recognized at fair value through profit or loss under the fair value option as at
October 31, 2017 as measured at fair value through other comprehensive income. During the year ended October 31, 2018, the Bank sold all of those debt
securities.
The following table presents a reconciliation of the Allowances for credit losses amounts established in accordance with IAS 39 as at October 31, 2017 with
those established in accordance with IFRS 9 as at November 1, 2017.
Allowances for credit losses
under IAS 39 as at
October 31, 2017(1)
Classification
adjustments
Impairment
remeasurement
adjustments
Allowances for credit losses
under IFRS 9 as at
November 1, 2017
Cash and deposits with financial institutions
Securities
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets
Other liabilities(2)
−
−
−
−
11
142
92
439
11
695
−
−
695
−
−
3
−
−
−
−
−
−
−
−
−
3
1
−
−
−
7
119
36
(189)
5
(22)
−
58
37
1
−
3
−
18
261
128
250
16
673
−
58
735
(1) On November 1, 2017, the Bank changed the presentation of certain Consolidated Balance Sheet items and reclassified certain amounts. As at October 31, 2017, the Purchased receivables
item had been presented net of allowances for credit losses. This item is now reported in Loans and in Allowances for credit losses on the Consolidated Balance Sheet. As a result, the
Allowances for credit losses item as at October 31, 2017 was reduced by $24 million.
Impairment remeasurement adjustments include an amount of $58 million in allowances for credit losses recorded for off-balance-sheet commitments such as letters of guarantee and
documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities. As at October 31, 2017, these allowances had been reported in Allowances
for credit losses.
(2)
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u
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c
2
-
1
1
F
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – 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
Financial
instruments
designated at
fair value
through profit
or loss
Debt securities
classified as at
fair value
through other
comprehensive
income
Carrying value
and fair value
Equity securities
designated at
fair value
through other
comprehensive
income
As at October 31, 2018
Carrying
value
Fair
value
Financial
instruments
at amortized
cost, net
Financial
instruments
at amortized
cost, net
Total
carrying
value
Total
fair
value
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements
and securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
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.
−
51,927
−
3,890
−
5,317
−
351
12,756
8,298
12,756
12,756
12,756
8,237
69,783
69,722
−
6,108
8,608
−
479
−
−
−
−
−
−
−
−
−
−
−
17,680
139,974
−
1,804
17,680
18,159
18,159
139,551
146,082
145,659
−
1,804
8,608
1,804
8,608
1,804
−
10,126
160,704 (1)
160,938
170,830
171,064
−
17,780
−
−
−
6,036
−
21
−
−
−
7,714
−
−
6,801
−
6,801
−
6,801
17,780
6,801
17,780
19,998
−
12,386
3,163
747
19,998
−
12,361
3,152
19,998
6,036
20,100
3,184
19,998
6,036
20,075
3,173
734
747
734
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l
u
o
c
2
-
1
1
F
t
r
o
p
p
a
r
_
C
N
B
_
1
9
1
9
0
1
1
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Fair Value of Financial Instruments (cont.)
Financial
instruments
classified as
at fair value
through profit
or loss
Financial
instruments
designated
at fair value
through profit
or loss
Carrying value
and fair value
Available-
for-sale
financial
instruments
measured
at fair value
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
−
46,780
−
5,523
8,423
−
−
756
657
115
−
−
−
8,552
8,802
9,255
8,802
9,229
8,802
8,802
65,343
65,317
−
−
−
−
20,132
130,819
20,132
20,789
20,789
130,958
136,457
136,596
−
994
−
994
8,423
994
8,423
994
−
5,501
151,170 (2)
151,571
156,671
157,072
−
15,363
−
6,612
−
15
−
−
−
534
−
6,209
−
−
5,991
−
5,991
−
5,991
15,363
5,991
15,363
21,233
−
13,889
2,902
9
21,233
−
13,940
2,904
21,767
6,612
20,098
2,917
6
9
21,767
6,612
20,149
2,919
6
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances(1)
Other
Derivative financial instruments
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)
(2)
The Purchased receivables amount of $2,014 million, which was presented separately on the Consolidated Balance Sheet as at October 31, 2017, is now reported in Loans and acceptances,
net of allowances.
Includes embedded derivative financial instruments.
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, 2018 and may change in the future. Furthermore, there may be valuation uncertainty resulting from
the choice of valuation model used.
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1
1
1
0
9
1
9
1
_
B
N
C
_
r
a
p
p
o
r
t
F
1
1
-
2
c
o
u
l
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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;
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, 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.
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.
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F
1
1
-
2
c
o
u
l
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Fair Value of Financial Instruments (cont.)
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.
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 other 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.
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1
1
-
2
c
o
u
l
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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;
securities at fair value through other comprehensive income: equity and debt securities of private companies;
certain loans and 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 2018, $324 million in securities classified as at fair value through profit or loss and $33 million in obligations related to securities sold short
were transferred from Level 2 to Level 1 resulting from changing market conditions ($358 million in securities classified as at fair value through profit or loss
and $17 million in obligations related to securities sold short in fiscal 2017). In addition, during fiscal 2018, $37 million in securities classified as at fair value
through profit or loss and $3 million in obligations related to securities sold short were transferred from Level 1 to Level 2 (for 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).
During fiscal years 2018 and 2017, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs
resulting from changing market conditions.
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1
1
1
0
9
1
9
1
_
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1
1
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2
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o
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Fair Value of Financial Instruments (cont.)
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
At fair value through other comprehensive income
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
Other
Derivative financial instruments
Financial liabilities
Deposits
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Level 1
Level 2
As at October 31, 2018
Total financial
assets/liabilities
at fair value
Level 3
5,469
−
314
−
25,928
31,711
265
−
123
−
−
388
−
−
9,130
10,628
249
3,391
395
23,793
2,320
2,184
−
425
118
5,047
479
5,722
97
32,196
8,491
43,532
−
10,210
12,524
211
−
−
12,735
5,256
5,798
7,714
21
28,999
−
−
−
25
288
313
−
−
−
−
233
233
−
386
20
952
11
−
27
−
−
38
14,599
10,628
563
3,416
26,611
55,817
2,585
2,184
123
425
351
5,668
479
6,108
8,608
76,680
10,221
17,780
6,036
7,714
21
41,772
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1
9
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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
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
As at October 31, 2017
Total financial
assets/liabilities
at fair value
Level 3
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
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1
1
-
2
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o
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Fair Value of Financial Instruments (cont.)
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
Loans
Loans at fair value through profit or loss
Other
Derivative financial instruments
Equity contracts
Financial liabilities
Deposits
Structured deposit notes
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
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
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2018
Range of input values
High
Net asset value
Market comparable
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
100 %
11 x
100 %
16 x
460 Bps(2)
690 Bps(2)
Discounted cash flows
Discounted cash flows
Discount rate
Liquidity premium
5.81 %
2.68 %
8.92 %
5.80 %
Option pricing model
Long-term volatility
7 %
21 %
Option pricing model
Long-term volatility
Market correlation
3 %
(36) %
52 %
82 %
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
2.20 %
7 %
(34) %
2.20 %
70 %
83 %
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2017
Range of input values
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
546
386
20
952
11
2
25
38
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 %
(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%.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 $70 million increase or decrease in the fair value recorded as at
October 31, 2018 (a $40 million increase or decrease as at October 31, 2017).
For the loans, the Bank varies unobservable inputs such as a liquidity premium and establishes a reasonable fair value range that could result in a $43 million
increase or decrease in the fair value recorded as at October 31, 2018. As at October 31, 2017, there were no sensitivity analyses as no loans had been
classified in Level 3.
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, 2018, for derivative financial instruments, the net fair value could result in a $5 million
increase or decrease ($3 million increase or decrease as at October 31, 2017), 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, 2017).
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1
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Fair Value of Financial Instruments (cont.)
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.
Fair value as at November 1, 2017
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, 2018
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2018(3)
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
184
29
−
117
(21)
−
−
4
−
313
7
158
−
−
75
−
−
−
−
−
233
−
Year ended October 31, 2018
Derivative
financial
instruments(1)
Deposits
20
−
−
−
−
−
(8)
(1)
(18)
(7)
−
(1)
−
−
−
−
(8)
−
(3)
1
(11)
−
Loans
428
16
−
−
−
8
(66)
−
−
386
16
Securities
at fair value
through profit
or loss
Available-
for-sale
securities
Derivative
financial
instruments(1)
Deposits
Year ended October 31, 2017
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)
−
Fair value as at October 31, 2016
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, 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(5)
(1)
(2)
(3)
(4)
(5)
The derivative financial instruments include assets and liabilities presented on a net basis.
Total gains (losses) included in Non-interest income was a gain of $45 million.
Total unrealized gains (losses) included in Non-interest income was a gain of $23 million.
Total gains (losses) included in Non-interest income was a gain of $17 million.
Total unrealized gains (losses) included in Non-interest income was a loss of $8 million.
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9
1
9
0
1
1
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
Financial assets
Securities at amortized cost
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
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
Level 1
Level 2
Level 3
Total
As at October 31, 2018
−
−
−
−
−
−
−
−
−
−
−
4,914
1,667
21
1,635
8,237
−
−
−
−
−
4,914
1,667
21
1,635
8,237
56,938
75,812
132,750
160,938
12,361
899
734
174,932
−
−
−
−
−
160,938
12,361
899
734
174,932
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
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2018 Annual Report
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147
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 5 – 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 to these consolidated
financial statements. Consistent with its risk management strategy and in accordance with the fair value option, which permits the designation if it eliminates
or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets and liabilities or recognizing
the gains and losses thereon 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. There is no exposure to credit risk on the loans to the extent that they are fully collateralized. The Bank also designated certain deposits that
include embedded derivative financial instruments at fair value through profit or loss.
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.
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Financial assets designated at fair value through profit or loss
Securities
Securities purchased under reverse repurchase agreements
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
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)
Securities sold under repurchase agreements
Liabilities related to transferred receivables
Carrying
value as at
October 31, 2018
Unrealized
gains (losses)
for the year ended
October 31, 2018
Unrealized
gains (losses)
since the initial
recognition of
the instrument
3,890
479
4,369
10,126
7,714
17,840
(55)
−
(55)
518
172
690
(92)
−
(92)
551
87
638
Carrying
value as at
October 31, 2017
Unrealized
gains (losses)
for the year ended
October 31, 2017
Unrealized
gains (losses)
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)
(1)
(2)
For the year ended October 31, 2018, 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 $28 million gain (net loss of $29 million for the year ended October 31, 2017).
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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – 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.
As at October 31, 2018
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
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
18,446
10,923
29,369
20,285
8,351
28,636
287
2,315
2,602
287
2,315
2,602
18,159
8,608
26,767
19,998
6,036
26,034
3,156
3,151
6,307
3,156
3,151
6,307
14,943
3,748
18,691
16,752
1,381
18,133
Net
amounts
60
1,709
1,769
90
1,504
1,594
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
25,917
8,037
33,954
4,150
1,425
5,575
4,150
1,425
5,575
20,789
8,423
29,212
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
(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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – 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
Securities at fair value through other comprehensive income
(Available-for-sale securities as at October 31, 2017)
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 at amortized cost(1)
(Held-to-maturity securities as at October 31, 2017)
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
2018
2017
Total
Total
3,781
2,571
278
973
22
7,625
88
−
119
86
34
327
83
5
−
661
749
9,172
5,220
200
1,543
30
16,165
1,916
466
−
140
84
2,606
4,863
1,239
20
854
6,976
1,646
2,837
85
875
1
5,444
581
1,718
4
199
−
2,502
6
436
1
130
573
−
−
−
25
26,558
26,583
−
−
−
−
233
233
−
−
−
−
−
14,599
10,628
563
3,416
26,611
55,817
2,585
2,184
123
425
351
5,668
4,952
1,680
21
1,645
8,298
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
(1)
Securities at amortized cost are presented net of $1 million in allowances for credit losses.
Credit Quality
As at October 31, 2018, securities at fair value through other comprehensive income and securities at amortized cost are classified in Stage 1, with their credit
quality falling mainly in the “Excellent” category according to the Bank’s internal risk-rating categories. For additional information on the reconciliation of
allowances for credit losses, see Note 8 to these consolidated financial statements.
Gross Gains (Losses) on Securities at Fair Value Through Other Comprehensive Income
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
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2018
Carrying
value(1)
1
1
2,624
2,196
123
434
356
5,733
1
22
−
1
−
24
(40)
(34)
−
(10)
(5)
(89)
2,585
2,184
123
425
351
5,668
(1)
The allowances for credit losses on securities at fair value through other comprehensive income, representing a negligible amount as at October 31, 2018, are reported in Other
comprehensive income. For additional information, see Note 8 to these consolidated financial statements.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Equity Securities Designated at Fair Value Through Other Comprehensive Income
The Bank designated certain equity securities, the main business objective of which is to generate dividend income, at fair value through other comprehensive
income without subsequent reclassification of gains and losses to net income.
During the year ended October 31, 2018, an amount of $17 million in dividend income was recognized for these investments, including a negligible amount for
investments that were sold during the year ended October 31, 2018.
Fair value as at November 1, 2017
Change in fair value
Designated at fair value through other comprehensive income
Sales(1)
Fair value as at October 31, 2018
(1)
The Bank disposed of public company equity securities for economic reasons.
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
Year ended October 31, 2018
Equity securities of
private companies
Equity securities of
public companies
158
−
75
−
233
122
(2)
34
(36)
118
Total
280
(2)
109
(36)
351
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
Impairment Losses Recognized
During the year ended October 31, 2017, a negligible amount of impairment charges had been recognized in Gains (losses) on available-for-sale securities, net
in the Consolidated Statement of Income, and 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, the Bank had 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 was no objective evidence of impairment requiring an impairment charge to be recognized in the
Consolidated Statement of Income.
Gains (Losses) on Disposals of Securities at Amortized Cost
2
1
During the year ended October 31, 2018, the Bank sold certain debt securities measured at amortized cost given an increase in their credit risk. The carrying
value of these securities upon disposal was $134 million, and the Bank recognized a negligible gain in Non-interest income – Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income.
Held-to-Maturity Securities
As at October 31, 2017, the Bank had concluded that there was no objective evidence of impairment on held-to-maturity securities.
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Note 8 – Loans and Allowances for Credit Losses
As at October 31, 2018, loans are recognized on the Consolidated Balance Sheet either at fair value through profit or loss or at amortized cost using the
financial asset classification criteria defined in IFRS 9.
The information provided in the tables on the following pages is presented in accordance with IFRS 9 as at October 31, 2018 and in accordance with IAS 39 as
at October 31, 2017 and reflects the presentation changes applied to certain Consolidated Balance Sheet items. For additional information, see Note 1 to these
consolidated financial statements.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage impairment approach that is based on the change in the credit quality of financial assets since initial
recognition.
— Stage 1: Financial assets that have experienced no significant increase in credit risk between initial recognition and the reporting date and for which
12-month expected credit losses are recorded at the reporting date are classified in Stage 1.
— Stage 2: Financial assets that have experienced a significant increase in credit risk between initial recognition and the reporting date, and for which
lifetime expected credit losses are recorded at the reporting date, are classified in Stage 2.
— Stage 3: Financial assets for which there is objective evidence of impairment, for which one or more events have had a detrimental impact on the
estimated future cash flows of these financial assets at the reporting date, and for which lifetime expected credit losses are recorded, are
classified in Stage 3.
Financial assets that are credit-impaired when purchased or originated (POCI) are classified in the POCI category.
POCI:
—
Impairment Governance
A rigorous control framework is applied to the determination of expected credit losses. The Bank has policies and procedures that govern impairments arising
from credit risk. These policies are documented and periodically reviewed by the Risk Management group. All models used to calculate expected credit losses
are validated, and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the team that prepares the calculations. Complex questions on measurement methodologies
and assumptions are reviewed by a group of experts from various functions. Furthermore, the inputs and assumptions used to determine expected credit
losses are reviewed on a regular basis.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables: (1) probability of default (PD), (2) loss given default (LGD) and (3) exposure at default (EAD).
For accounting purposes, 12-month PD and lifetime PD are the probabilities of a default occurring over the next 12 months or over the life of a financial
instrument, respectively, based on conditions existing at the balance sheet date and on future economic conditions that have, or will have, an impact on credit
risk. LGD reflects the losses expected should default occur and considers such factors as the mitigating effects of collateral, the realizable value thereof, and
the time value of money. EAD is the expected balance owing at default and considers such factors as repayments of principal and interest between the balance
sheet date and the time of default as well as any amounts expected to be drawn on a committed facility. Twelve-month expected credit losses are estimated by
multiplying 12-month PD by LGD and by EAD. Lifetime expected credit losses are estimated using the lifetime PD.
For most financial instruments, expected credit losses are measured on an individual basis. Financial instruments that have credit losses measured on a
collective basis are grouped according to similar credit risk characteristics.
Inputs, Assumptions and Estimation Techniques
The Bank’s approach to calculating expected credit losses consists essentially of leveraging existing regulatory models and then adjusting their parameters for
IFRS 9 purposes. These models have the advantage of having been thoroughly tested and validated. In addition, using the same base models, regardless of the
purpose, provides consistency across risk assessments. These models use inputs, assumptions and estimation techniques that require a high degree of
management judgment. The main factors that contribute to changes in ECL that are subject to significant judgment include the following:
—
—
—
calibration of regulatory parameters in order to obtain point-in-time and forward-looking parameters;
forecasts of macroeconomic variables for multiple scenarios and the probability weighting of the scenarios;
determination of the significant increases in credit risk (SICR) of a loan.
These elements are explained on the following page.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Main parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical data to the long-run default rate, adjustments are required to obtain a point-in-time,
forward-looking PD, as required by IFRS 9. The Bank performs the following: (1) A point-in-time calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally equals the prior-year default rate. The prior-year default rate is selected for the calibration
performed at this stage, as it often reflects one of the most accurate and appropriate estimates of the current-year default rate; (2) Forward-looking
adjustments are incorporated through, among other measures, a calibration factor based on forecasts produced by the stress testing team's analyses. The
team considers three macroeconomic scenarios, and, for each scenario, produces a forward-looking assessment covering the three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three macroeconomic scenarios, expected LGD based on the LDG values observed using
backtesting, the economic LGD estimated and used to calculate economic capital, and lastly, the estimated downturn LGD used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance anticipated at each point in time. Expected EAD decreases over time according
to contractual repayments and to prepayments. For revolving loans, the EAD percentage is based on the percentage estimated by the corresponding regulatory
model and, thereafter, is converted to dollars according to the authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or lines of credit, the expected life is based on the behavioural life of clients who have
defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank’s Economy and Strategy group is responsible for developing three macroeconomic scenarios and for recommending probability weights for each
scenario. Macroeconomic scenarios are not developed for specific portfolios, as the Economy and Strategy group provides a set of variables for each of the
defined scenarios for the next three years. The PDs are also adjusted to incorporate economic assumptions (interest rates, unemployment rates, GDP forecasts,
oil prices, housing price indices, etc.) that can be statistically tied to PD changes that will have an impact beyond the next 12 months. These statistical
relationships are determined using the processes developed for stress testing. In addition, the group considers other relevant factors that may not be
adequately reflected in the information used to calculate the PDs (including late payments and whether the financial asset is subject to additional monitoring
within the watchlist process for business and government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial Instrument
At each reporting period, the Bank determines whether credit risk has increased significantly since initial recognition by examining the change in the risk of
default occurring over the remaining life of the financial instrument. First, the Bank compares the point-in-time forward-looking remaining lifetime PD at the
reporting date with the expected point-in-time forward-looking remaining lifetime PD established at initial recognition. Based on this comparison, the Bank
determines whether the loan has deteriorated when compared to the initial conditions. Because the comparison includes an adjustment based on origination-
date forward-looking information and reporting-date forward-looking information, the deterioration may be caused by the following factors: (i) deterioration of
the economic outlook used in the forward-looking assessment; (ii) deterioration of the borrower’s conditions (payment defaults, worsening financial ratios,
etc.); or (iii) a combination of both factors. The quantitative criteria used to determine a significant increase in credit risk is a series of relative and absolute
thresholds, and a backstop is also applied. All financial instruments that are 30 days past but below 90 days past due are migrated to Stage 2, even if the
other criteria do not indicate a significant increase in credit risk.
Credit Quality of Loans
The following table presents the gross carrying amounts of loans as at October 31, 2018, according to credit quality and ECL impairment stage of each loan
category at amortized cost, and according to credit quality for loans at fair value through profit or loss. For additional information on credit quality according to
the Advanced Internal Rating-Based (AIRB) categories, see the “Credit Risk Management” section of the MD&A for the year ended October 31, 2018.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Loans and Allowances for Credit Losses (cont.)
As at October 31, 2018
Non-impaired loans
Stage 2
Stage 1
Stage 3(1)
Impaired loans
POCI
Loans at fair value
through profit or loss(2)
Residential mortgage
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Personal
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Credit card
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Business and government(4)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Total loans
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
19,035
14,928
8,838
421
81
−
43,303
2,546
45,849
31
45,818
13,625
10,089
5,430
456
91
−
29,691
4,421
34,112
71
34,041
416
306
888
294
12
−
1,916
27
1,943
24
1,919
4,736
24,005
18,986
493
55
−
48,275
2,611
50,886
48
50,838
132,790
174
132,616
−
10
348
621
300
−
1,279
27
1,306
13
1,293
2
52
902
694
204
−
1,854
140
1,994
120
1,874
−
−
37
249
96
−
382
−
382
105
277
−
6
1,068
758
121
−
1,953
1
1,954
86
1,868
5,636
324
5,312
−
−
−
−
−
128
128
23
151
21
130
−
−
−
−
−
137
137
27
164
71
93
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
276
276
39
315
134
181
630
226
404
−
−
−
−
−
−
−
487
487
(64)
551
−
−
−
−
−
−
−
1,087
1,087
(3)
1,090
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
2
2
1
1
−
−
−
−
−
−
−
5,858
5,858
−
5,858
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
111
55
84
−
−
−
250
−
250
−
250
Total
19,035
14,938
9,186
1,042
381
128
44,710
8,941
53,651
1
53,650
13,627
10,141
6,332
1,150
295
137
31,682
5,675
37,357
259
37,098
416
306
925
543
108
−
2,298
27
2,325
129
2,196
4,847
24,066
20,138
1,251
176
276
50,754
2,653
53,407
269
53,138
1,576
(66)
1,642
6,108
−
6,108
146,740
658
146,082
(1)
(2)
(3)
(4)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria.
Not subject to expected credit losses.
The allowances for credit losses do not include the amounts related to undrawn commitments reported in the Other liabilities item of the Consolidated Balance Sheet.
Includes customers’ liability under acceptances.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
The following table presents the credit risk exposures of off-balance-sheet commitments as at October 31, 2018 according to credit quality and ECL
impairment stage.
Stage 1
Stage 2
Stage 3
Total
As at October 31, 2018
Off-balance-sheet commitments(1)
Retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
Non-retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Total exposure
Allowances for credit losses
Total exposure, net of allowances
11,440
2,450
969
79
2
−
5,881
13,570
4,302
133
3
−
38,829
6,434
45,263
38
45,225
9
13
117
77
13
−
−
−
353
142
6
−
730
−
730
15
715
−
−
−
−
−
2
−
−
−
−
−
4
6
5
11
1
10
11,449
2,463
1,086
156
15
2
5,881
13,570
4,655
275
9
4
39,565
6,439
46,004
54
45,950
(1)
Represent letters of guarantee and documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities.
The following table presents comparative figures showing the credit quality of loans as at October 31, 2017 in accordance with IAS 39.
As at October 31, 2017
Neither past due(3) nor impaired
Past due(3) but not impaired
Impaired
POCI(4)
Gross loans
Less: Allowances on impaired loans
Individual allowances
Collective allowances
Allowances on POCI loans(4)
Allowances on impaired loans
Less:
Sectoral allowance on non-impaired loans – Oil and gas(5)
Collective allowance on non-impaired loans(6)
Loans and acceptances, net of allowances
Residential
mortgage
Personal
Credit card
Business and
government(1)(2)
50,232
220
66
1,116
51,634
13
−
(31)
(18)
51,652
34,305
331
80
874
35,590
22
18
7
47
35,543
2,193
54
−
−
2,247
−
−
−
−
2,247
47,369
78
234
−
47,681
119
2
−
121
47,560
Total
134,099
683
380
1,990
137,152
154
20
(24)
150
137,002
139
406
545
136,457
(1)
(2)
(3)
(4)
(5)
(6)
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 Purchased receivables line item, which was presented net of allowances for credit losses in an amount of $2,014 million as at October 31, 2017, is now presented in the Loans item for
an amount of $1,990 million, and the Allowances for credit losses item was reduced by $24 million.
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 and
POCI loans.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Loans and Allowances for Credit Losses (cont.)
Loans Past Due But Not Impaired(1)
Residential
mortgage
Personal
As at October 31, 2018
Business and
government(2)
Credit card
Residential
mortgage
Personal
As at October 31, 2017
Business and
government(2)
Credit card
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(3)
105
41
−
146
102
59
−
161
27
13
27
67
36
41
−
77
111
40
69
220
88
39
204
331
22
11
21
54
30
15
33
78
(1)
(2)
(3)
Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.
Includes customers’ liability under acceptances.
Given the adoption of IFRS 9, loans more than 90 days past due, except for credit card receivables, are considered impaired (Stage 3).
Impaired Loans(1)
Loans
Residential mortgage
Personal
Credit card(2)
Business and government(3)
As at October 31, 2018
As at October 31, 2017
Gross
Allowances for
credit losses
Net
Gross
Allowances for
credit losses
151
164
−
315
630
21
71
−
134
226
130
93
−
181
404
66
80
−
234
380
13
40
−
121
174
Net
53
40
−
113
206
(1)
(2)
(3)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. These loans do not include POCI loans.
Credit card receivables are considered impaired, at the latest, when payment is 180 days past due, and they are written off at that time.
Includes customers’ liability under acceptances.
Maximum Exposure to Credit Risk on Impaired Loans
The following table presents the maximum exposure to credit risk of impaired loans, the percentage of exposure covered by guarantees, and the main types of
collateral and guarantees held for each loan category.
Loans
Residential mortgage
Personal
Business and government(3)
Gross
impaired loans(1)
Percentage covered by
guarantees(2)
As at October 31, 2018
Types of collateral
and guarantees
151
164
315
100 %
44 %
54 %
Residential buildings
Buildings and automobiles
Buildings, equipment, government
guarantees and bank guarantees
(1)
(2)
(3)
As a result of IFRS 9 adoption, all loans classified in Stage 3 of the expected credit loss model are impaired loans. These loans do not include POCI loans.
For gross impaired loans, the ratio is calculated on a weighted average basis using the estimated value of the collateral and guarantees held for each loan category presented. The value of
the collateral and guarantees held for a specific loan may exceed the balance of the loan; when this is the case, the ratio is capped at 100%.
Includes customers’ liability under acceptances.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Allowances for Credit Losses
The table below presents a reconciliation of the allowances for credit losses by Consolidated Balance Sheet item and by type of off-balance-sheet commitment.
Allowances for
credit losses as at
November 1, 2017
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2018
Allowances for
credit losses as
at October 31, 2018
Recoveries
and other
Balance sheet
Cash and deposits with financial institutions(2)(3)
Securities(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
Securities purchased under reverse repurchase
agreements and securities borrowed(2)(3)
Loans(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets(2)(3)
Off-balance-sheet commitments(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
1
−
3
−
18
261
128
250
16
673
−
3
54
1
58
735
−
−
(2)
−
(3)
179
91
68
4
339
−
−
(11)
1
(10)
327
−
−
−
−
(9)
(196)
(98)
(64)
−
(367)
−
−
−
−
−
−
−
−
−
(6)
(5)
−
(13)
−
(24)
−
−
−
−
−
(367)
(24)
−
−
−
−
1
20
8
8
−
37
−
−
6
−
6
43
1
−
1
−
1
259
129
249
20
658
−
3
49
2
54
714
(1) The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2018 and that are still subject to enforcement activity was $152 million.
(2) These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
(3) As at October 31, 2018, these financial assets were mainly classified in Stage 1 and their credit quality fell within the Excellent category.
(4) The allowances for credit losses are reported in the Accumulated other comprehensive income item of the Consolidated Balance Sheet.
(5) The allowances for credit losses are reported in the Allowances for credit losses item of the Consolidated Balance Sheet.
(6) The allowances for credit losses are reported in the Other liabilities item of the Consolidated Balance Sheet.
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2018 Annual Report
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2018 Annual Report
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157
1
2
1
0
9
1
9
1
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1
2
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2
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Loans and Allowances for Credit Losses (cont.)
The following table presents the reconciliation of allowances for credit losses for each loan category at amortized cost according to ECL impairment stage.
Year ended October 31, 2018
Residential mortgage
Balance as at November 1, 2017
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance as at October 31, 2018
Includes:
Amounts drawn
Undrawn commitments(5)
Personal
Balance as at November 1, 2017
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance as at October 31, 2018
Includes:
Amounts drawn
Undrawn commitments(5)
Allowances for credit losses
on non-impaired loans
Stage 2
Stage 1
Allowances for credit losses
on impaired loans
POCI(1)
Stage 3
22
14
12
−
−
(15)
(1)
−
10
−
−
−
(1)
31
31
−
91
48
80
(29)
(8)
(100)
(15)
4
(20)
−
−
−
1
72
71
1
10
−
(10)
2
(4)
17
(2)
−
3
−
−
−
−
13
13
−
107
−
(76)
35
(123)
203
(14)
(13)
12
−
−
−
2
121
120
1
17
−
(2)
(2)
4
14
(4)
−
10
(9)
−
4
(1)
21
21
−
59
−
(4)
(6)
131
71
(2)
−
190
(196)
−
20
(2)
71
71
−
(31)
−
−
−
−
(26)
−
−
(26)
−
(6)
−
(1)
(64)
(64)
−
7
−
−
−
−
(4)
−
−
(4)
−
(5)
−
(1)
(3)
(3)
−
Total
18
14
−
−
−
(10)
(7)
−
(3)
(9)
(6)
4
(3)
1
1
−
264
48
−
−
−
170
(31)
(9)
178
(196)
(5)
20
−
261
259
2
(1)
(2)
(3)
(4)
(5)
The total amount of undiscounted initially expected credit losses on the POCI loans acquired during the year ended October 31, 2018 was $258 million. The expected credit losses reflected
in the purchase price were discounted.
Represent stage transfers deemed to have taken place at the beginning of the quarter in which the transfer occurred.
Includes the net remeasurement of loss allowances (after transfers) attributable mainly to changes in volumes and in the credit quality of existing loans as well as to changes in risk
parameters.
Represent reversals to loss allowances arising from full loan repayments (excluding write-offs and disposals).
The allowances for credit losses on undrawn commitments are reported in the Other liabilities item of the Consolidated Balance Sheet.
158
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2018 Annual Report
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2018 Annual Report
158
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2
1
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9
1
9
1
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1
2
-
2
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31, 2018
Credit card
Balance as at November 1, 2017
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance as at October 31, 2018
Includes:
Amounts drawn
Undrawn commitments(5)
Business and government(6)
Balance as at November 1, 2017
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
Balance as at October 31, 2018
Includes:
Amounts drawn
Undrawn commitments(5)
Total allowances for credit losses as at October 31, 2018(7)
Includes:
Amounts drawn
Undrawn commitments(5)
Allowances for credit losses
on non-impaired loans
Stage 2
Stage 1
Allowances for credit losses
on impaired loans
POCI(1)
Stage 3
41
8
95
(14)
−
(89)
(1)
−
(1)
−
−
−
−
40
24
16
53
32
21
(4)
−
(26)
(12)
−
11
−
−
−
1
65
48
17
208
174
34
112
−
(95)
14
(53)
172
(35)
−
3
−
−
−
−
115
105
10
74
−
(16)
7
(2)
30
(4)
−
15
−
−
−
−
89
86
3
338
324
14
−
−
−
−
53
31
−
−
84
(98)
−
14
−
−
−
−
165
−
(5)
(3)
2
55
(9)
−
40
(64)
(13)
7
−
135
134
1
227
226
1
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
1
−
−
1
−
−
−
−
1
1
−
(66)
(66)
−
Total
153
8
−
−
−
114
(36)
−
86
(98)
−
14
−
155
129
26
292
32
−
−
−
60
(25)
−
67
(64)
(13)
7
1
290
269
21
707
658
49
(1)
(2)
(3)
(4)
(5)
(6)
(7)
The total amount of undiscounted initially expected credit losses on the POCI loans acquired during the year ended October 31, 2018 was $258 million. The expected credit losses reflected
in the purchase price were discounted.
Represent stage transfers deemed to have taken place at the beginning of the quarter in which the transfer occurred.
Includes the net remeasurement of loss allowances (after transfers) attributable mainly to changes in volumes and in the credit quality of existing loans as well as to changes in risk
parameters.
Represent reversals to loss allowances arising from full loan repayments (excluding write-offs and disposals).
The allowances for credit losses on undrawn commitments are reported in the Other liabilities item of the Consolidated Balance Sheet.
Includes customers’ liability under acceptances.
Excludes allowances for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments other than undrawn commitments.
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2018 Annual Report
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2018 Annual Report
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159
F
1
2
-
2
c
o
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Loans and Allowances for Credit Losses (cont.)
The following table presents the reconciliation of allowances for credit losses for each loan category for the year ended October 31, 2017 according to IAS 39.
Allowances on impaired loans
Residential mortgage
Individual allowances
Collective allowances
Allowances on POCI loans
Personal
Individual allowances
Collective allowances
Allowances on POCI loans
Credit card
Individual allowances
Collective allowances
Business and government
Individual allowances
Collective allowances
Individual allowances
Collective allowances
Allowances on POCI loans
Sectoral allowance on non-impaired
loans – Oil and gas(3)
Collective allowance on non-impaired loans(4)
Balance at
beginning
Provisions for
credit losses
Write-offs
Recoveries
and other(1)
Transfers(2)
Balance
at end
Year ended October 31, 2017
13
−
(11)
20
19
(1)
−
−
156
3
189
22
(12)
199
204
366
570
769
13
−
−
81
27
−
82
−
39
2
215
29
−
244
(40)
40
−
244
(14)
−
−
(80)
(37)
−
(82)
−
(104)
(3)
(280)
(40)
−
(320)
−
−
−
(320)
1
−
(20)
1
9
8
−
−
3
−
5
9
(12)
2
−
−
−
2
−
−
−
−
−
−
−
−
25
−
25
−
−
25
(25)
−
(25)
−
13
−
(31)
22
18
7
−
−
119
2
154
20
(24)
150
139
406
545
695
Includes foreign exchange movements as well as changes in the allowances for credit losses on POCI loans that had been recorded in Non-interest income.
(1)
(2) When a loan covered by the Sectoral allowance on non-impaired loans – Oil and gas item became impaired, the sectoral allowance related to that loan was transferred to the individual
(3)
(4)
allowances on impaired loans.
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 that had been covered by the sectoral
allowance and POCI loans.
160
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2018 Annual Report
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2018 Annual Report
160
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1
2
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2
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Distribution of Gross and Impaired Loans by Borrower Category Under the Basel Asset Classes
Retail
Residential mortgage(4)
Qualifying revolving retail(5)
Other retail(6)
Non-retail
Agriculture
Oil and gas
Mining
Utilities
Construction(7)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate
Professional services
Education and health care
Other services
Government
Other
Stages 1 and 2(8)
POCI
Gross
loans(1)
Impaired
loans(1)(2)
As at October 31
Allowances for
credit losses on
impaired loans(1)(3)
2018
Year ended October 31
Provisions for
credit losses
Write-offs
70,591
4,211
12,246
87,048
5,759
2,506
1,032
2,715
2,976
5,536
2,163
3,069
2,770
1,597
4,732
9,997
1,582
2,988
4,715
1,445
2,534
58,116
1,576
146,740
190
23
91
304
63
97
−
−
8
48
13
11
2
19
19
11
6
4
24
−
1
326
630
22
14
53
89
7
53
−
−
4
22
6
4
1
12
1
2
3
4
17
−
1
137
554
(66)
714
10
108
165
283
1
12
−
−
(3)
11
−
11
1
3
−
−
1
3
5
−
(4)
41
32
(29)
327
9
123
171
303
−
12
−
3
15
2
1
22
2
−
−
1
1
−
3
−
2
64
367
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes customers’ liability under acceptances.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. These loans do not include POCI loans.
Does not include allowances for credit losses on POCI loans.
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
Includes non-residential mortgages.
Includes other financial assets at amortized cost and off-balance-sheet commitments.
National Bank of Canada
2018 Annual Report
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2018 Annual Report
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2
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9
1
9
1
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1
2
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2
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Loans and Allowances for Credit Losses (cont.)
Retail
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
Non-retail(6)
Agriculture
Oil and gas
Mining
Utilities
Construction(7)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate
Professional services
Education and health care
Other services
Governments
Other
POCI(8)
Gross
loans(1)
Impaired
loans(1)(2)
As at October 31
Allowances for
credit losses on
impaired loans(1)
2017
Year ended October 31
Provisions for
credit losses
Write-offs
66,398
4,217
12,150
82,765
4,923
2,129
470
2,347
2,787
4,341
2,066
3,431
2,593
1,662
4,932
9,104
1,416
2,749
4,762
1,452
1,233
52,397
1,990
137,152
68
17
53
138
7
93
−
4
29
16
12
32
3
13
−
12
3
1
15
−
2
242
380
13
10
29
52
3
34
−
4
17
14
7
15
2
8
−
3
1
1
11
−
2
122
(24)
150
13
104
86
203
(1)
(40)
−
−
15
−
−
10
−
3
−
1
1
−
6
5
41
41
244
14
109
90
213
3
56
−
−
4
12
1
7
6
2
−
−
−
12
4
−
−
107
320
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes customers’ liability under acceptances.
These loans do not include POCI loans.
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
The presentation of borrower categories is more detailed than that previously presented.
Includes non-residential mortgages.
Changes in allowances for credit losses on POCI loans were recorded in Non-interest income.
162
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2018 Annual Report
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2018 Annual Report
162
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2
1
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1
9
1
9
0
1
2
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Main Macroeconomic Factors
The following table shows the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the base
case, upside scenario and downside scenario, the average values of the factors over the next 12 months (used for Stage 1 credit loss calculations) and over the
remaining forecast period (used for Stage 2 credit loss calculations) are presented.
Next 12 months
forecast period Next 12 months
forecast period Next 12 months
Base scenario
Remaining
Upside scenario
Remaining
As at October 31, 2018
Downside scenario
Remaining
forecast period
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
1.9 %
5.7 %
2.8 %
1.6 %
3.5 %
71
1.5 %
5.5 %
0.8 %
1.5 %
2.4 %
68
2.5 %
5.6 %
3.4 %
1.4 %
6.4 %
75
2.0 %
5.3 %
2.1 %
1.2 %
3.8 %
81
(2.3) %
7.0 %
(10.6) %
2.6 %
(18.5) %
46
1.5 %
7.8 %
(0.3) %
2.6 %
6.9 %
36
All macroeconomic factors are based on the Canadian economy unless otherwise indicated.
Growth rate is annualized.
Yield on corporate BBB bonds less yield on Canadian federal government bonds with 10-year maturity.
(1)
(2)
(3)
(4) Main stock index in Canada.
(5)
The West Texas Intermediate (WTI) oil pricing index is commonly used as a benchmark.
The main macroeconomic factors used for the personal credit portfolio are unemployment rate and housing price index. The main macroeconomic factors used
for the business and government credit portfolio are GDP growth, BBB spread, S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally correlate with higher allowances for credit losses, whereas an increase in the other
macroeconomic factors (GDP growth, S&P/TSX growth, housing price index, and WTI oil price) will generally correlate with lower allowances for credit losses.
Sensitivity Analysis of Allowances for Credit Losses on Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) under IFRS 9 as at October 31, 2018
based on the probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
Under IFRS 9
Simulations
100% upside scenario
100% base scenario
100% downside scenario
Allowances for credit losses
on non-impaired loans
546
486
513
759
Migration
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) under IFRS 9 as at October 31, 2018
with the estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
Under IFRS 9
Simulations
Non-impaired loans if they were all in Stage 1
Allowances for credit losses
on non-impaired loans
546
423
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2018 Annual Report
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2018 Annual Report
163
163
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 9 – 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.
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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
2018
2017
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)
44,125
20,064
64,189
32,834
44,125
19,993
64,118
32,809
42,014
19,080
61,094
33,330
42,014
19,169
61,183
33,356
(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 $287 million as at October 31, 2018 ($1,621 million as at
October 31, 2017) 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 $7,550 million as at October 31, 2018 ($10,156 million as at October 31, 2017).
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
2018
2017
20,576
12,927
30,686
64,189
20,012
13,544
27,538
61,094
164
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2018 Annual Report
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2018 Annual Report
164
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – 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 venture(4)
Business
segment
Ownership
percentage
2018
Carrying
value
2017
Carrying
value
Other
Wealth Management
8.5 %
18.0 %
Financial Markets
24.9 %
264
140
404
−
241
241
−
645
241
152
393
−
229
229
9
631
(1)
(2)
(3)
(4)
The fair value of investments in associates based on quoted prices in an active market was $611 million as at October 31, 2018 ($581 million as at October 31, 2017).
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. For additional information, see the text below.
During fiscal 2018, the Bank disposed of its entire investment.
As at October 31, 2018 and 2017, 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, 2018, TMX Group Limited paid $10 million in dividends to the Bank ($9 million for
the year ended October 31, 2017).
Fiera Capital Corporation
Fiera Capital Corporation is an independent Canadian investment management firm. During the year ended October 31, 2018, Fiera Capital Corporation paid
$13 million in dividends to the Bank ($12 million for the year ended October 31, 2017).
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 trustee 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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Investments in Associates and Joint Ventures (cont.)
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
TMX Group
Limited
Fiera Capital
Corporation
20,433
5,160
20,653
1,624
780
419
(23)
396
210
1,201
138
634
524
(2)
21
19
2018(1)
Total
20,643
6,361
20,791
2,258
1,304
417
(2)
415
2017(1)
Total
14,907
5,410
14,725
2,031
1,170
233
(14)
219
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2018 and 2017, 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, 2018 and 2017.
The table below provides summarized financial information related to the Bank’s share of associates (and the joint venture for the year ended
October 31, 2017) that are not individually significant.
Year ended October 31
Net income
Other comprehensive income
Comprehensive income
Unlisted
associates
6
−
6
2018(1)
Total
6
−
6
2017(1)
Total
12
(10)
2
(1)
The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2018 and 2017.
2
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1
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1
9
1
9
0
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 11 – Premises and Equipment
Cost
As at October 31, 2016
Acquisitions
Disposals
Fully amortized assets
As at October 31, 2017
Acquisitions
Disposals
Fully amortized assets
As at October 31, 2018
Accumulated amortization
As at October 31, 2016
Amortization for the year
Disposals
Fully amortized assets
As at October 31, 2017
Amortization for the year
Disposals
Fully amortized assets
As at October 31, 2018
Carrying value as at October 31, 2017
Carrying value as at October 31, 2018
Land
Buildings
Computer
equipment
Equipment
and furniture
Leasehold
improvements
14
3
−
17
66
(4)
79
17
79
253
7
(4)
(1)
255
6
(2)
(3)
256
153
5
(3)
(1)
154
5
(1)
(3)
155
101
101
224
38
−
(27)
235
90
(4)
(1)
320
73
46
−
(27)
92
74
(5)
(1)
160
143
160
1,087
16
(818)
(7)
278
18
(170)
(8)
118
172
106
(125)
(7)
146
16
(99)
(8)
55
132
63
296
32
(6)
(30)
292
59
(1)
(10)
340
138
25
(6)
(30)
127
26
(1)
(10)
142
165
198
Total
1,874
96
(828)
(65)
1,077
239
(181)
(22)
1,113
536
182
(134)
(65)
519
121
(106)
(22)
512
558
601
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for certain buildings. 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.
1 year or less
Over 1 year to 5 years
Over 5 years
3
1
As at October 31,
2018
10
34
7
51
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 12 – 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, 2018 and 2017.
Personal and
Commercial(1)
Wealth
Management
Financial
Markets(1)
Third-Party
Solutions(1)
Securities
Brokerage(1)
Managed
Solutions(1)
Total
USSF&I
Total
Credigy
Ltd.(1)
Advanced
Bank of Asia
Limited(1)
Total
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
Impact of foreign currency translation
Balance as at October 31, 2018
51
3
−
54
−
54
256
−
−
256
−
256
434
−
−
434
−
434
269
959
235
−
−
269
−
269
−
−
959
−
959
−
−
235
−
235
33
−
(1)
32
1
33
134
167
1,412
−
(5)
129
2
131
−
(6)
161
3
164
3
(6)
1,409
3
1,412
(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, 2018 and 2017, 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, 2018, for each CGU or CGU group, the discount rate used was 12.8% (13.2% as at October 31, 2017) and the
long-term growth rate was between 2.0% and 5.0% depending on the CGU as at October 31, 2018 and 2017.
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 upward by 1% and the terminal growth rates down by 1%. Such sensitivity analyses demonstrate that
a reasonable change in assumptions would not result in a CGU’s carrying value exceeding its value in use.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Intangible Assets
Indefinite useful life
Finite useful life
Total
Management
contracts(1)
Trademark
Total
Internally-
generated
software(2)
Other
software
Other
intangible
assets
Cost
As at October 31, 2016
Acquisitions
Fully amortized intangible assets
As at October 31, 2017
Acquisitions
Fully amortized intangible assets
As at October 31, 2018
Accumulated amortization
As at October 31, 2016
Amortization for the year
Fully amortized intangible assets
As at October 31, 2017
Amortization for the year
Fully amortized intangible assets
As at October 31, 2018
161
−
161
−
161
11
−
11
−
11
172
−
172
−
172
1,038
245
(16)
1,267
242
−
1,509
176
135
(16)
295
149
−
444
Carrying value as at October 31, 2017
Carrying value as at October 31, 2018
161
161
11
11
172
172
972
1,065
(1)
(2)
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.
126
21
(32)
115
13
(2)
126
68
25
(32)
61
23
(2)
82
54
44
106
2
−
108
1
(6)
103
58
9
−
67
9
(6)
70
41
33
Note 13 – Other Assets
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers
Defined benefit asset (Note 24)
Deferred tax assets (Note 25)
Current tax assets
Reinsurance assets
Total
1,270
268
(48)
1,490
256
(8)
1,738
302
169
(48)
423
181
(8)
596
1,442
268
(48)
1,662
256
(8)
1,910
302
169
(48)
423
181
(8)
596
1,067
1,142
1,239
1,314
2018
2017
775
549
1,255
64
324
113
31
3,111
690
489
505
56
374
31
31
2,176
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1
9
0
1
3
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 14 – Deposits
As at October 31
Personal
Business and government
Deposit-taking institutions
On demand
or after notice(2)
Fixed term(3)
27,808
54,894
2,803
85,505
27,880
55,427
2,018
85,325
2018
Total
55,688
110,321
4,821
170,830
2017(1)
Total
52,175
99,115
5,381
156,671
(1)
(2)
(3)
The Bank reclassified certain amounts presented in the Deposits item of the Consolidated Balance Sheet. As at October 31, 2017, a $1,544 million amount was reclassified from Deposits –
Personal into Deposits – Business and government.
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, 2018, an
amount of US$750 million in covered bonds matured, and the Bank issued covered bonds in an amount of 1.5 billion euros (150 million pounds sterling issued
during the year ended October 31, 2017). The covered bonds totalled $8.3 billion as at October 31, 2018 ($7.0 billion as at October 31, 2017). For additional
information, see Note 28 to these consolidated financial statements.
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 $13.2 billion as at October 31, 2018 ($15.9 billion as at October 31, 2017), of which $12.9 billion ($15.6 billion as at
October 31, 2017) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
Note 15 – 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
Defined benefit liability (Note 24)
Allowances for credit losses — off-balance-sheet commitments(1) (Note 8)
Deferred tax liabilities (Note 25)
Current tax liabilities
Insurance liabilities
Other items(2)(3)
2018
1,790
1,033
1,012
796
186
54
25
48
50
830
5,824
2017
1,797
1,075
883
647
252
−
35
93
60
916
5,758
(1)
(2)
(3)
Upon IFRS 9 adoption on November 1, 2017, allowances for credit losses on off-balance-sheet commitments are now reported in the Other liabilities item of the Consolidated Balance Sheet.
As at October 31, 2018, Other items included a $14 million restructuring provision ($46 million as at October 31, 2017).
As at October 31, 2018, Other items included a $9 million litigation provision ($12 million as at October 31, 2017).
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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 February 1, 2018, the Bank issued medium-term notes for a total amount of $750 million, bearing interest at 3.183% and maturing on February 1, 2028.
As at October 31
2018
2017
Maturity date
Interest rate Characteristics
February
February
2028
2087
3.183%(1) Redeemable(2)
Variable(3) Redeemable at the Bank’s option since February 28, 1993
Fair value hedge adjustment
Unamortized issuance costs(4)
Total
750
9
759
(10)
(2)
747
−
9
9
−
−
9
(1)
Bearing interest at a rate of 3.183%, payable semi-annually until February 1, 2023, and thereafter bearing interest at a floating rate equal to the rate on three-month CDOR plus 0.72%,
payable quarterly.
(2) With the prior approval of OSFI, the Bank may, at its option, redeem these notes as of February 1, 2023, in whole or in part, at their nominal value plus accrued and unpaid interest. These
notes contain non-viability contingent capital (NVCC) provisions and qualify for the purposes of calculating regulatory capital under Basel III. In the case of a trigger event as defined by OSFI,
each note will be automatically and immediately converted, on a full and permanent basis, without the consent of the holder, into a specified number of common shares of the Bank as
determined using an automatic conversion formula with a multiplier of 1.5 and a conversion price based on the greater of: (i) a floor price of $5.00; (ii) the current market price of common
shares, which represents the volume weighted average price of common shares for the ten 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. The number of shares issued is
determined by dividing the par value of the note (plus accrued and unpaid interest on such note) by the conversion price and then applying the multiplier.
Debentures denominated in foreign currency totalling US$7 million as at October 31, 2018 (2017: 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.
(3)
(4)
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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Derivative Financial Instruments (cont.)
Notional Amounts(1)
As at October 31
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
Equity, commodity and
credit derivative contracts(2)
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
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
2018
2017
1,256
−
6,423
135,508
1,520
251
144,958
9,301
2,634
19,189
−
31,124
18,099
75,165
5,224
4,326
102,814
59
235
294
37
19,629
160
653
158
20,637
7,168
8,678
1,615
1,391
18,852
318,679
324
2,172
13,802
73,177
396
199
90,070
10,649
16,276
7,000
−
33,925
7,653
28,750
5,745
5,976
48,124
−
3
3
100
−
66,747
144,258
3,039
922
215,066
7,548
7,646
−
−
15,194
5,078
66,505
1,353
813
73,749
−
−
−
−
−
42,229
55,786
483
646
99,144
−
−
−
−
−
1,348
29,491
−
−
30,839
1,680
2,172
129,201
408,729
5,438
2,018
549,238
27,498
26,556
26,189
−
80,243
32,178
199,911
12,322
11,115
255,526
−
−
−
59
238
297
72
1,672
195
1,976
15,552
225
116
328
16,293
208
1,789
292
658
2,947
191,362
11,293
686
677
726
15,054
252
1,183
336
1,370
3,141
322,204
400
1,367
77
224
2,263
71
41
−
49
161
132,407
46,874
2,438
1,523
1,436
54,247
7,699
11,691
2,243
3,468
25,101
964,652
1,680
2,172
125,292
381,200
5,158
844
516,346
27,498
26,556
26,189
−
80,243
32,178
186,864
12,322
11,115
242,479
59
238
297
1,976
46,765
2,438
1,523
1,436
54,138
7,699
11,691
2,243
3,468
25,101
918,604
−
−
3,909
27,529
280
1,174
32,892
−
−
−
−
−
−
13,047
−
−
13,047
−
−
−
−
109
−
−
−
109
−
−
−
−
−
46,048
795
948
124,951
359,021
2,806
1,824
490,345
43,073
45,931
18,100
2,581
109,685
31,613
179,861
9,683
8,960
230,117
45
424
469
2,242
25,106
8,882
2,209
1,576
40,015
5,111
10,847
1,993
2,830
20,781
891,412
(1)
(2)
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.
Includes precious metal contracts.
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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
1,943
3,533
3,034
8,510
(3,151)
5,359
7,961
11,043
6,919
25,923
(8,300)
17,623
2018
Risk-
weighted
amount
649
1,853
673
3,175
(863)
2,312
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
(1)
As at October 31, 2018, the total positive fair value of exchange-traded contracts, which amounted to $98 million ($67 million as at October 31, 2017), 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
1,051
816
3,492
5,359
2018
Credit risk
equivalent
1,855
4,197
11,571
17,623
Replacement
cost
956
969
2,500
4,425
2017
Risk-
weighted
amount
821
1,901
305
3,027
(756)
2,271
2017
Credit risk
equivalent
1,761
3,809
8,772
14,342
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2018 Annual Report
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2018 Annual Report
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9
1
9
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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
16
1,392
61
1,469
428
2,892
157
3,477
854
1,929
336
3,119
8,065
−
487
−
487
−
56
−
56
−
−
−
−
543
197
346
10
1,486
41
1,537
243
1,956
139
2,338
62
997
431
1,490
5,365
−
403
81
484
−
187
−
187
−
−
−
−
671
476
195
−
8,608
(3,151)
5,457
−
6,036
(3,151)
2,885
2018
Net
6
(94)
20
(68)
185
936
18
1,139
792
932
(95)
1,629
2,700
−
84
(81)
3
−
(131)
−
(131)
−
−
−
−
(128)
(279)
151
−
2,572
−
2,572
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
1
8,423
(3,931)
4,492
−
6,612
(3,931)
2,681
1
1,811
−
1,811
174
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2018 Annual Report
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2018 Annual Report
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Hedging Activities
The Bank’s market risk exposure, risk management objectives, policies and procedures, and risk measurement methods are presented in the Risk
Management section of the MD&A for the year ended October 31, 2018.
The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. However, the information provided in the
following tables for the year ended October 31, 2018 reflects the new disclosure requirements of IFRS 7 – Financial Instruments: Disclosures. Some of the
tables present information on currencies, specifically, the Canadian dollar (CAD), the Chinese yuan renminbi (CNH), the Hong Kong dollar (HKD), the U.S. dollar
(USD), the euro (EUR), the pound sterling (GBP) and the Brazilian real (BRL). As for the tables for the year ended October 31, 2017, they have been prepared in
accordance with the previous disclosure requirements of IFRS 7. For additional information, see Note 1 to these consolidated financial statements.
The following table shows the notional amounts and the weighted average rates by term to maturity of the designated derivative instruments and their fair
value by type of hedging relationship.
1 year
or less
Over
1 year
to 2 years
Over 2
years to 5
years
Term to maturity
Over
5 years
As at October 31, 2018
Fair value
Total
Assets
Liabilities
Fair value hedges
Interest rate risk
Interest rate swaps
Notional amount
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount
Average CAD-CNH exchange rate
Average CAD-HKD exchange rate
Options
Notional amount
Average fixed interest rate – Purchased
Average fixed interest rate – Written
Cash flow hedges
Interest rate risk
Interest rate swaps
Notional amount
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-EUR exchange rate
Average USD-GBP exchange rate
Equity price risk
Equity swaps
Notional amount
Average price
Hedges of net investments
in foreign operations(1)
Foreign exchange risk
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-BRL exchange rate
Average USD-HKD exchange rate
474
0.5 %
2.3 %
1,305
0.5 %
1.3 %
5,834
1.9 %
2.0 %
6,406
2.3 %
2.7 %
14,019
193
357
1.8 %
2.2 %
−
−
−
773
$ 0.1955
−
115
−
$ 0.1621
−
−
−
888
$ 0.1955
$ 0.1621
88
(0.2) %
3.7 %
562
315
0.1 %
2.4 %
97
(0.6) %
2.6 %
954
− %
2.7 %
2,393
6,046
7,360
1,454
− %
2.7 %
16,361
4
−
38
81
197
476
−
−
−
−
−
−
−
3,052
2.1 %
1.9 %
11,155
2.0 %
0.2 %
3,212
2.5 %
1.4 %
17,419
2.1 %
0.8 %
294
46
3,094
$ 1.3072
$ 1.2278
−
6,730
$ 1.2970
$ 1.1378
$ 1.3012
$
$
2,320
1.2838
1.2295
−
12,144
$ 1.2976
$ 1.1742
$ 1.3012
52
149
$
109
62.42
109
−
−
6,146
−
−
17,885
−
−
5,532
$
109
62.42
29,672
−
346
−
195
15
$ 1.2929
$ 0.2508
$ 0.1281
15
686
−
−
−
−
−
8,539
−
−
−
−
−
23,931
−
−
−
−
−
12,892
15
$ 1.2929
$ 0.2508
$ 0.1281
15
46,048
−
−
−
543
−
671
(1)
As at October 31, 2018, the Bank also designated $1,035 million in foreign currency deposits denominated in U.S. dollars and euros as net investment hedging instruments.
National Bank of Canada
2018 Annual Report
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2018 Annual Report
175
175
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Hedging Activities (cont.)
Derivative and Non-Derivative Financial Instruments Designated as Hedges
F
1
3
-
2
c
o
u
l
Assets
Derivative financial instruments
Liabilities
Derivative financial instruments
Carrying value of non-derivative financial instruments
Fair value
hedges
246
217
−
Cash flow
hedges
As at October 31, 2017
Hedges of net investments
in foreign operations
442
220
−
1
−
841
48
Notional amounts of designated derivative financial instruments
18,878
29,955
Fair Value Hedges
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a
financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values 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 securities measured at fair value through
other comprehensive income, fixed-rate deposits, liabilities related to transferred receivables, and subordinated debt.
In addition, when a fixed-rate asset or liability is denominated in a foreign currency, the Bank sometimes uses cross-currency swaps to hedge the associated
foreign exchange risk. The Bank may designate a cross-currency swap to exchange the fixed-rate foreign currency for the functional currency at a floating rate
in a single hedging relationship addressing both interest rate risk and foreign exchange risk. In certain cases, given that interest rate risk and foreign
exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of
interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to foreign currency fixed-rate deposits.
Regression analysis is used to test hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show amounts related to hedged items as well as the results of the fair value hedges.
Carrying value
of hedged
items
3,315
6,367
4,482
737
As at October 31, 2018
Cumulative
adjustments
from
discontinued
hedges
Cumulative
hedge
adjustments
from active
hedges
Year ended October 31, 2018
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
(78)
(258)
(89)
(10)
(11)
20
50
−
(144)
264
123
10
253
144
(262)
(122)
(10)
(250)
−
2
1
−
3
Year ended October 31, 2017
(150)
147
4
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2018 Annual Report
176
Securities at fair value through other comprehensive income
Deposits
Liabilities related to transferred receivables
Subordinated debt
(1)
Amounts are presented on a pre-tax basis.
Gains (losses) on hedging instruments
Gains (losses) on hedged items attributable to the hedged risk
Hedge ineffectiveness
176
National Bank of Canada
2018 Annual Report
F
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-
2
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not
distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this
strategy mainly to its 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 cash flow hedges, the derivative financial
instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.
As at October 31, 2018
Year ended October 31, 2018
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
Net interest
income(1)
Interest rate risk
Loans
Deposits
Acceptances
Equity price risk
Other liabilities
(1)
Amounts are presented on a pre-tax basis.
(16)
138
54
176
(3)
173
(26)
19
37
30
7
37
54
(84)
(70)
(100)
23
(77)
(53)
86
68
101
(23)
78
−
−
1
1
−
1
(53)
78
68
93
(23)
70
(36)
(10)
(17)
(63)
−
(63)
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
Hedge ineffectiveness
Year ended October 31, 2017
45
(35)
1
The following table shows the periods during which the Bank expected 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
1 year or less
Over 1 year to 2
years
Over 2 years to 5
years
Over 5 years
As at October 31, 2017
41
147
(106)
41
119
(78)
127
208
(81)
51
80
(29)
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2018 Annual Report
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2018 Annual Report
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Hedging Activities (cont.)
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 derivative and non-derivative financial instruments (cross-
currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the 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 when assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative
attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the
notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following table presents the amounts related to hedged items as well as the results of the net investment hedges.
As at October 31, 2018
Year ended October 31, 2018
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
the Non-interest
income item(1)
Net investments in foreign
operations denominated in:
USD
EUR
BRL
Other currencies
(1)
Amounts are presented on a pre-tax basis.
(2)
1
(1)
−
(2)
(187)
(4)
37
−
(154)
17
(1)
(3)
−
13
(17)
1
3
−
(13)
−
−
−
−
−
(17)
1
3
−
(13)
−
−
−
−
−
For the year ended October 31, 2017, a negligible amount representing the ineffective portion was recognized in Non-interest income in the Consolidated
Statement of Income.
Reconciliation of Equity Components
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31, 2017
Hedges of net investments in foreign operations(1)
Gains (losses) included as the effective portion
Foreign currency translation gains (losses) on investments in foreign operations
Cash flow hedges(1)
Gains (losses) included as the effective portion
Interest rate risk
Equity price risk
Losses (gains) reclassified to the Consolidated Statement of Income
Interest rate risk
Equity price risk
Other comprehensive income attributable to non-controlling interests
Income taxes
As at October 31, 2018
(1)
Amounts are presented on a pre-tax basis.
178
National Bank of Canada
2018 Annual Report
Net gains (losses) on cash
flow hedges
Net foreign currency
translation adjustments
146
93
(23)
(63)
−
−
(2)
151
(13)
(13)
42
(1)
(1)
14
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2018 Annual Report
178
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9
0
1
3
1
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, 2018
May 15, 2019 (5)(6)
February 15, 2020 (5)(6)
May 15, 2021 (5)(6)
August 15, 2021 (5)(6)
November 15, 2022 (5)(6)
May 15, 2023 (5)(6)
November 15, 2023 (5)(6)
July 31, 2013
May 15, 2019 (5)
February 15, 2020 (5)
May 15, 2021 (5)
August 15, 2021 (5)
November 15, 2022 (5)
May 15, 2023 (5)
November 15, 2023 (5)
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)
25.50 (9)
Series 31
Series 33
Series 35
Series 37
Series 39
Series 41
Series 43
0.25625 (7)
0.24375 (7)
0.35000 (7)
0.33750 (7)
0.27813 (7)
0.28750 (7)
0.30938 (7)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0.75000
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
Floating rate (10)
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
2.58 %
2.77 %
n.a.
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
2.58 %
2.77 %
First preferred shares
issued and outstanding
Series 30(4)
Series 32(4)
Series 34(4)
Series 36(4)
Series 38(4)
Series 40(4)
Series 42(4)
First preferred shares
authorized but not issued
Series 23(8)
Series 31(4)
Series 33(4)
Series 35(4)
Series 37(4)
Series 39(4)
Series 41(4)
Series 43(4)
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 23, for which the dividends are payable semi-annually.
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.
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.
For additional information, see Note 20 to these consolidated financial statements.
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, 2018, no shares had been issued or traded.
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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
Series 40
Series 42
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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
−
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
339,591,965
3,129,313
(7,500,000)
(149,430)
(1,206)
335,070,642
2018
Shares
$
−
350
300
400
400
400
300
300
2,450
2,768
128
(64)
(10)
−
2,822
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
(1)
As at October 31, 2018, 703,410 shares were held for trading, representing a total amount of $45 million (553,980 shares held for trading representing $35 million as at October 31, 2017).
Dividends Declared
Year ended October 31
First Preferred Shares
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Common shares
2018
Dividends
per share
−
1.0250
0.9750
1.4000
1.3500
1.1125
0.9310
0.5323
2.4400
Dividends
$
−
14
12
22
22
18
11
6
105
829
934
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
Issuances of Preferred Shares
On June 11, 2018, the Bank issued 12,000,000 Non-Cumulative 5-Year Rate-Reset Series 42 First Preferred Shares at a price equal to $25.00 per share for
gross proceeds of $300 million. Given that the Series 42 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On January 22, 2018, the Bank issued 12,000,000 Non-Cumulative 5-Year Rate-Reset Series 40 First Preferred Shares at a price equal to $25.00 per share for
gross proceeds of $300 million. Given that the Series 40 preferred shares satisfy the non-viability contingent capital requirements, they qualify for the
purposes of calculating regulatory capital under Basel III.
On June 13, 2017, the Bank had 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.
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 reduced Preferred share capital.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Repurchases of Common Shares
On June 6, 2018, the Bank began a normal course issuer bid to repurchase for cancellation up to 8,000,000 common shares (representing approximately
2.36% of its outstanding common shares) over the 12-month period ending no later than June 5, 2019. On June 5, 2017, the Bank had begun a normal course
issuer bid to repurchase for cancellation up to 6,000,000 common shares (representing approximately 1.76% of its outstanding common shares) over the
12-month period ended June 4, 2018. Any repurchase through the Toronto Stock Exchange will be done at market prices. The common shares may also be
repurchased through other means authorized by the Toronto Stock Exchange and applicable regulations, including private agreements or share repurchase
programs under issuer bid exemption orders issued by the securities regulators. A private purchase made under an exemption order issued by a securities
regulator will be done at a discount to the prevailing 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, 2018, the Bank repurchased 7,500,000 common shares for $467 million, which reduced
Common share capital by $64 million and Retained earnings by $403 million.
Reserved Common Shares
As at October 31, 2018 and 2017, 15,507,568 common shares were reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2018, 22,894,802 common shares (25,764,866 as at October 31, 2017) 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, and 108,341 shares were cancelled, mainly upon the settlement of certain indemnifications guaranteed by those
shares. During the year ended October 31, 2018, 3,778 of these shares were released to shareholders and 1,206 shares were cancelled. As at
October 31, 2018, the number of common shares held in escrow was 23,897 (28,881 as at October 31, 2017). The Bank expects that the remaining shares in
escrow will be settled by the end of calendar year 2019.
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 to these consolidated
financial statements.
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.
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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
2018
2017
−
359
20
379
410
359
39
808
(1) On June 30, 2018, NBC Asset Trust redeemed all of the outstanding 400,000 NBC CapS II – Series 1 at a per-unit price of $1,000 for gross proceeds of $400 million. As at October 31, 2017,
the balance included $10 million in accrued interest.
Includes $9 million in accrued interest ($9 million as at October 31, 2017).
(2)
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 to these consolidated financial statements.
The main terms and characteristics of the NBC CapS II trust units outstanding as at October 31, 2018 are presented below.
Number
Issuance date
Annual yield
Distribution dates
Semi-annual
distribution
by NBC CapS II(1)
Series 2
350,000
June 30, 2008
7.447 %
June 30,
December 31
$37.235(2)
(1)
(2)
For each unit with a face value of $1,000.
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 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 2, in whole but not in
part, without the consent of the holders.
3
1
Purchase for Cancellation
The Trust may, with OSFI approval, purchase NBC CapS II – 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 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.
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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 forms what is known as Tier 1 capital. Tier 2 capital consists of the eligible portion of subordinated debt and certain allowances for
credit losses. 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 (DSIBs). The banks also have to meet the revised capital floor that sets the regulatory capital level according to the Basel II
standardized approach. If the capital requirement under Basel III is less than 75% of the capital requirements as calculated under Basel II, the difference is
added to risk-weighted assets. In addition, during the year ended October 31, 2018, OSFI introduced a domestic stability buffer of 1.5% that must be
maintained by the DSIBs. This buffer is exclusively made up of CET1 capital.
OSFI has also 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, 2018 and 2017, the Bank was in compliance with all of OSFI’s regulatory capital requirements.
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F14 - 2coul - W&T
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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
2018
2017
8,608
11,410
12,352
73,654
73,670
73,685
7,856
10,457
10,661
70,173
70,327
70,451
284,337
262,539
11.7 %
15.5 %
16.8 %
11.2 %
14.9 %
15.1 %
4.0 %
4.0 %
(1)
(2)
Figures are presented on an “all-in” basis.
Figures as at October 31, 2017 included 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 of 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, changes in the fair value of loans at fair value through profit or loss, and changes in the fair
value of financial instruments designated at fair value through profit or loss.
Year ended October 31
Net interest income
Non-interest income
2018
52
840
892
2017
376
374
750
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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 22,894,802 as at October 31, 2018 (25,764,866 as at October 31, 2017). 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
14,575,894
1,836,348
(3,129,313)
(218,183)
13,064,746
8,378,530
2018
Weighted
average
exercise price
$
$
$
$
$
$
40.46
64.14
35.75
48.85
44.78
39.17
Number of
options
17,302,322
1,804,016
(4,239,095)
(291,349)
14,575,894
9,250,560
(1)
Includes 13,784 expired options during the year ended October 31, 2018 (10,728 expired options during the year ended October 31, 2017).
Exercise price
$17.44
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
5
1
Options
outstanding
502,406
706,605
878,110
1,030,956
1,330,891
1,471,790
2,048,089
1,656,478
1,640,341
1,799,080
13,064,746
Options
exercisable
502,406
706,605
878,110
1,030,956
1,330,891
1,471,790
1,394,261
699,838
363,673
−
8,378,530
2017
Weighted
average
exercise price
$
$
$
$
$
$
38.05
54.69
36.31
45.90
40.46
36.03
Expiry date
December 2018
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
During the year ended October 31, 2018, the Bank awarded 1,836,348 stock options (1,804,016 during the year ended October 31, 2017) with an average fair
value of $7.42 per option ($5.75 for the year ended October 31, 2017).
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
2018
2017
2.11%
7 years
18.87%
3.80%
1.59%
7 years
20.53%
4.41%
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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, 2018 was $12 million ($11 million for the year ended October 31, 2017).
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 $1 million was recognized for the year ended
October 31, 2018 with respect to this plan ($4 million for the year ended October 31, 2017).
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, 2018 and 2017.
Exercise price
$17.44
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
Number
of SARs
395,334
62,820
(125,943)
332,211
163,971
2018
Weighted
average
exercise price
$
$
$
$
$
42.29
64.14
41.13
46.86
38.91
Number
of SARs
349,856
63,356
(17,878)
395,334
225,637
SARs
outstanding
SARs
exercisable
−
26,974
21,060
24,608
24,216
29,480
44,492
46,964
51,597
62,820
332,211
−
26,974
21,060
24,608
24,216
29,480
23,679
9,874
4,080
−
163,971
2017
Weighted
average
exercise price
$
$
$
$
$
39.59
54.69
33.34
42.29
37.69
Expiry date
December 2018
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
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, 2018, the Bank awarded 44,713 DSUs at a weighted average price of $63.68 (74,436 DSUs at a weighted average price of
$54.69 for the year ended October 31, 2017). A total of 591,360 DSUs were outstanding as at October 31, 2018 (637,989 DSUs as at October 31, 2017). A
compensation expense of $7 million was recognized for the year ended October 31, 2018 with respect to these plans ($14 million for the year ended
October 31, 2017).
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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, 2018, the Bank awarded 2,158,594 RSUs at a weighted average price of $63.57 (2,411,016 RSUs at a weighted average
price of $51.21 for the year ended October 31, 2017). As at October 31, 2018, a total of 5,072,615 RSUs were outstanding (5,156,316 RSUs as at October 31,
2017). A compensation expense of $140 million was recognized for the year ended October 31, 2018 with respect to this plan ($174 million for the year ended
October 31, 2017).
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, 2018, the Bank awarded 287,206 PSUs at a weighted average price of $63.57 (345,237 PSUs at a weighted average price of
$51.21 for the year ended October 31, 2017). As at October 31, 2018, a total of 969,322 PSUs were outstanding (881,701 PSUs as at October 31, 2017). A
compensation expense of $21 million was recognized for the year ended October 31, 2018 with respect to this plan ($24 million for the year ended
October 31, 2017).
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, 2018, NBF awarded 132,544 share units at a weighted average price of $63.63 (132,226 share units at a weighted average
price of $55.36 for the year ended October 31, 2017). As at October 31, 2018, 1,618,166 share units were outstanding (1,598,966 share units as at
October 31, 2017). During the year ended October 31, 2018, a $3 million compensation expense reversal related to a decline in share value was recognized for
this plan ($24 million compensation expense for the year ended October 31, 2017).
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 $9 million for the year
ended October 31, 2018 ($10 million for the year ended October 31, 2017), were charged to Compensation and employee benefits when paid. As at
October 31, 2018, a total of 5,718,242 common shares were held for this plan (5,961,203 common shares as at October 31, 2017).
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 $494 million as at October 31, 2018 ($511 million as at
October 31, 2017). The intrinsic value of these liabilities that had vested as at October 31, 2018 was $182 million ($223 million as at October 31, 2017).
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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
2018
3,984
114
148
37
(276)
−
47
(190)
3,864
3,979
144
(4)
(116)
58
47
(190)
3,918
54
Pension plans
2017
Other post-employment benefit plans
2017
2018
3,843
114
142
−
(77)
92
49
(179)
3,984
3,776
135
(3)
138
63
49
(179)
3,979
(5)
191
5
7
−
(16)
(1)
(10)
176
199
5
7
−
(3)
(7)
(10)
191
(176)
(191)
(1)
For fiscal 2019, the Bank expects to pay an employer contribution of $60 million to the defined benefit pension plans.
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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
2018
64
(10)
54
Pension plans
2017
Other post-employment benefit plans
2017
2018
56
(61)
(5)
(176)
(176)
(191)
(191)
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
2018
114
4
4
122
(239)
116
(123)
(1)
Pension plans
2017
Other post-employment benefit plans
2017
2018
114
7
3
124
15
(138)
(123)
1
5
7
12
(17)
(17)
(5)
(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
Other issuers
Other
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,482
223
−
−
−
1,705
91
482
−
1,115
383
142
2,213
2018
Total
91
1,964
223
1,115
383
142
3,918
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,693
244
−
−
−
1,937
108
390
−
1,038
395
111
2,042
5
7
12
(10)
(10)
2
2017
Total
108
2,083
244
1,038
395
111
3,979
(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, 2018 and 2017, the pension plan assets do not include any
securities issued by the Bank.
During the year ended October 31, 2018, the Bank sold $30 million in units of a private investment fund that it was holding to the pension plan. These units
are reported in the Equity securities not quoted in an active market category.
For fiscal 2018, the Bank and its related entities received $5 million ($6 million in fiscal 2017) in fees from the pension plans for related management,
administration and custodial services.
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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)
2018
45 %
51 %
4 %
100 %
16
Pension plans
2017
Other post-employment benefit plans
2017
2018
46 %
50 %
4 %
100 %
17
31 %
69 %
31 %
69 %
100 %
100 %
14
15
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.
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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 5.23% in 2018 (5.28% in 2017). Based on the assumption retained,
this rate is expected to decrease gradually to 3.50% in 2038 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
2018
4.05 %
3.00 %
21.2
23.6
22.3
24.5
Pension plans
2017
Other post-employment benefit plans
2017
2018
3.65 %
3.00 %
21.2
23.5
22.2
24.5
4.05 %
3.00 %
5.23 %
21.2
23.6
22.3
24.5
3.65 %
3.00 %
5.28 %
21.2
23.5
22.2
24.5
2018
Pension plans
2017
Other post-employment benefit plans
2017
2018
3.75 %
3.65 %
3.00 %
3.75 %
3.60 %
3.00 %
21.2
23.5
22.2
24.5
21.1
23.5
22.2
24.5
3.75 %
3.65 %
3.00 %
5.28 %
21.2
23.5
22.2
24.5
3.75 %
3.60 %
3.00 %
5.77 %
21.1
23.5
22.2
24.5
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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 2018
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, 2018. 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
2019
2020
2021
2022
2023
2024 to 2028
Pension plans
Change in the obligation
Other post-employment benefit
plans
Change in the obligation
(153)
163
37
(36)
(94)
92
(6)
7
1
(1)
8
(7)
(2)
2
Pension plans
Other post-employment
benefit plans
196
202
208
214
221
1,208
9
9
9
9
9
41
5
1
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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
2018
2017
504
16
520
15
9
24
544
(5)
37
4
41
580
2018
523
57
580
508
(11)
497
(8)
(5)
(13)
484
8
36
(11)
25
517
2017
505
12
517
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
6
1
Deferred tax assets
Allowances for credit losses(1)
Deferred charges
Defined benefit liability – Pension plans
Defined benefit liability – Other post-employment
benefit plans
Deferred revenue
Tax loss carryforwards
Other items(2)(3)
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
2017
2018
Year ended October 31
Consolidated Statement
of Income
2017
2018
Year ended October 31
Consolidated Statement
of Comprehensive Income
2017
2018
143
233
36
54
38
26
26
556
(207)
(41)
(31)
22
(257)
299
151
246
69
56
38
24
61
645
(199)
(55)
(25)
(27)
(306)
339
(16)
(13)
−
−
−
2
(49)
(76)
(8)
16
(6)
50
52
(24)
(8)
5
−
−
5
6
(4)
4
(22)
16
18
(3)
9
13
−
−
(33)
(2)
−
−
−
(35)
−
(2)
−
(1)
(3)
(38)
−
−
(33)
(2)
−
−
8
(27)
−
(1)
−
−
(1)
(28)
(1)
(2)
(3)
As at November 1, 2017, as a result of impairment remeasurement adjustments upon IFRS 9 adoption, the Deferred tax assets related to allowances for credit losses and Retained earnings
increased by $8 million.
As at November 1, 2017, as a result of classification adjustments upon IFRS 9 adoption, the Deferred tax assets related to certain loans and Retained earnings increased by $9 million.
As at October 31, 2018, the Consolidated Balance Sheet amount includes $5 million in deferred tax assets related to share issuance costs ($3 million as at October 31, 2017) reported in
Retained earnings on the Consolidated Statement of Changes in Equity.
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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
2018
324
(25)
299
2017
374
(35)
339
According to forecasts, which are based on information available on October 31, 2018, 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, 2018, the total amount of temporary differences, unused tax loss carryforwards and unused tax credits for which no deferred tax asset has
been recognized was $369 million ($383 million as at October 31, 2017).
As at October 31, 2018, 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 $1,972 million ($1,057 million as at October 31, 2017).
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
$
2,776
741
(161)
(6)
(36)
6
(197)
544
2018
%
100.0
26.7
(5.8)
(0.2)
(1.3)
0.2
(7.1)
19.6
$
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
In September 2018, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $130 million
(including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2013.
In May 2017, the Bank had been reassessed for additional income tax and interest of approximately $77 million (including provincial tax and interest) in
respect of certain Canadian dividends received by the Bank during 2012.
The transactions to which these reassessments relate are similar to those prospectively addressed by the synthetic equity arrangement rules introduced in the
2015 Canadian federal budget.
Also in July 2018, the CRA confirmed in writing that, except for the above-mentioned reassessment for 2012, it would not pursue the proposed reassessment in
respect of 2011 and 2012 that had been communicated to the Bank in March 2017.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2013 in regard to activities similar to those that were the subject of the 2013
and 2012 reassessments. The Bank remains 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, 2018.
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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
2018
2017
Basic earnings per share
Net income attributable to the Bank’s shareholders
Dividends on preferred shares
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)
2,145
105
2,040
339,372
6.01
2,040
339,372
3,868
343,240
5.94
1,940
85
1,855
340,809
5.44
1,855
340,809
3,962
344,771
5.38
(1)
For the year ended October 31, 2018, the calculation of the diluted earnings per share excluded an average number of 1,621,740 options outstanding with a weighted average exercise price
of $64.14, as the exercise price of these options was greater than the average price of the Bank’s common shares. 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.
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(1)
Backstop liquidity, credit enhancement facilities and other(1)
Securities lending
2018
4,353
4,878
227
2017
3,847
5,049
1,293
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, refer to Note 8 to these consolidated financial statements.
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.
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, 2018, the notional amount of the global-style backstop liquidity
facilities totalled $2.6 billion ($2.7 billion as at October 31, 2017), 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.
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1
9
0
1
6
1
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Guarantees, Commitments and Contingent Liabilities (cont.)
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, 2018 and 2017, 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., $2.6 billion as at October 31, 2018 ($2.7 billion
as at October 31, 2017). As at October 31, 2018, the Bank held $7 million ($6 million as at October 31, 2017) of this commercial paper and, consequently, the
maximum potential amount of future payments was $2.6 billion ($2.7 billion as at October 31, 2017).
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, 2018 and 2017, the notional amount of the overnight uncommitted liquidity facility amounted to
$2.3 billion. As at October 31, 2018 and 2017, no amount had been drawn.
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 collateral in favour of the Bank of Canada to guarantee any obligation of the Bank towards the Bank of Canada that could result from
the Bank’s participation in the securities transfer network. The durations of the indemnification agreements vary according to circumstance; as at October 31,
2018 and 2017, 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.
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)
2018
4,353
142
7,874
57,794
2017
3,847
137
7,688
52,391
(1)
(2)
(3)
See the Letters of Guarantee heading on page 195.
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, 2018, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $57.5 billion ($58.3 billion
as at October 31, 2017). 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.
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Notes to the Audited Consolidated Financial Statements
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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
$99 million as at October 31, 2018 ($77 million as at October 31, 2017).
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
2018
2017
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
502
1,130
1,652
41,378
22,083
8,995
125
75,865
502
1,358
1,330
40,693
23,151
7,668
126
74,828
(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 14 and 28 to these consolidated financial statements.
Contingent Liabilities
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.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. 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) and MasterCard International Incorporated
(MasterCard) (the Networks) as well as National Bank and a number of other Canadian financial institutions. A similar action was also initiated in Quebec,
Ontario, Alberta and Saskatchewan. In each of the actions, the Networks and financial institutions are alleged to have been involved in a price-fixing system to
maintain and increase the fees paid by merchants on transactions executed using the credit cards of the Networks. In so doing, they would notably be in
breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. In 2017, a settlement was reached with the
plaintiffs; in 2018 it was then approved by the trial courts in each of the five jurisdictions where the action was initiated. The rulings approving the settlement
are now the subject of appeal proceedings in multiple 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.
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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.
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. In addition, the Bank is sponsor and investment manager of mutual funds in which it has
insignificant or no interest. 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 9 to these consolidated financial statements.
Assets on the Consolidated Balance Sheet
Securities at fair value through profit or loss
Securities at amortized cost
As at October 31, 2017
Liabilities on the Consolidated Balance Sheet
Derivative financial instruments
As at October 31, 2017
Maximum exposure to loss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2017
Total assets of the structured entities
As at October 31, 2017
Multi-seller
conduits(1)
Investment
funds(2)
Private
investments(3)
As at October 31, 2018
Asset-backed
structured entities(4)
7
−
7
6
26
13
7
2,550
2,557
2,727
2,589
2,768
139
−
139
58
−
−
139
−
139
58
1,054
277
86
−
86
70
−
−
86
−
86
70
492
437
−
1,450
1,450
1,306
−
−
1,450
102
1,552
1,522
3,612
3,201
(1)
(2)
(3)
(4)
The main underlying assets, located in Canada, are residential mortgages, automobile loans, automobile inventory financings, and other receivables. As at October 31, 2018, the notional
committed amount of the global-style liquidity facilities totalled $2.6 billion ($2.7 billion as at October 31, 2017), 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, 2017). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2018, the Bank held $7 million in commercial paper ($6 million as at October 31, 2017) and, consequently, the maximum
potential amount of future payments as at October 31, 2018 is limited to $2.6 billion ($2.7 billion as at October 31, 2017), which represents the undrawn liquidity and credit enhancement
facilities.
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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 28 – Structured Entities (cont.)
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 to these consolidated financial statements. 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.
In 2018, the Bank, through one of its subsidiaries, provided financing to a third-party structured entity in exchange for a 100% interest in a loan portfolio, the
sole asset held by that entity. The Bank controls and therefore consolidates the structured entity, as it has the ability to direct the entity’s relevant activities
through its involvement in the decision-making process. The Bank is also exposed to the entity’s variable 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
898
289
12,886
61
700
305
15,139
2018
Total
assets(1)
2,053
310
13,153
54
1,060
305
16,935
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
(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 two years. As at October 31, 2018, the total amount of
transferred mortgage loans was $12.9 billion ($15.6 billion as at October 31, 2017), and the total amount of covered bonds of $8.3 billion was recognized in Deposits on the Consolidated
Balance Sheet ($7.0 billion as at October 31, 2017). For additional information, see Note 14 to these consolidated financial statements.
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, 2018, insured loans amounted to $18 million ($82 million as at
October 31, 2017). The average maturity of the underlying assets is two years. For additional information, see Note 20 to these consolidated financial statements.
The underlying assets consist of equipment leased under operating leases as well as a loan portfolio.
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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 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 to these consolidated financial statements).
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
Other
Liabilities
Deposits
Other
Key officers
and directors(1)
2017
30
−
43
−
2018
36
−
59
−
2018
298 (2)
8
246 (3)
16
Related entities
2017
(2)
364
21
(3)
789
23
(1)
(2)
(3)
As at October 31, 2018, key officers, directors and their immediate family members were holding $67 million of the Bank’s common and preferred shares ($46 million as at
October 31, 2017).
As at October 31, 2018, mortgage loans and other loans consisted of: (i) no loans to the Bank’s associates and joint ventures ($28 million as at October 31, 2017), and (ii) $298 million in
loans to entities over which the Bank’s key officers, directors and their immediate family members exercise control or significant influence through significant voting power ($336 million as
at October 31, 2017).
As at October 31, 2018, deposits consisted of: (i) $41 million in deposits from the Bank’s associates and joint ventures ($285 million as at October 31, 2017) and (ii) $205 million in
deposits from entities over which the Bank’s key officers, directors and their immediate family members exercise control or significant influence through significant voting power
($504 million as at October 31, 2017).
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 10, 23 and 28 to these consolidated financial statements.
Compensation of Key Officers and Directors
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
2018
22
25
2017
24
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 29 – Related Party Disclosures (cont.)
Principal Subsidiaries of the Bank(1)
Name
Business activity
Principal office address
Canada and United States
National Bank Acquisition Holding Inc.
National Bank Financial Inc.
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.
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.
Holding company
Investment dealer
Holding company
Holding company
Holding company
Holding company
Investment dealer
Insurance
Trustee
Trustee
Real estate
Mutual funds dealer
Holding company
Banking
Montreal, 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
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
As at October 31, 2018
Investment
at cost
Voting
shares(2)
100%
100%
100%
80%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90%
100%
1,429
238
195
80
585
31
22
5
280
3
(1)
(2)
Excluding consolidated structured entities. For additional information, see Note 28 to these consolidated financial statements.
The Bank’s percentage of voting rights in these subsidiaries.
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, 2018. Text in grey shading and tables
identified with an asterisk (*) in the Risk Management section of the MD&A for the year ended October 31, 2018 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, 2018 and 2017. 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.
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(millions of Canadian dollars)
Assets
Cash and deposits
with financial institutions
Securities
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
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, 2018
9,544
790
41
1
19
10
−
−
2,351
12,756
1,982
1,713
1,043
1,430
1,457
5,638
10,527
5,444
26,583
55,817
3
−
1,985
183
10
1,906
7
9
1,059
66
−
1,496
68
730
2,255
714
814
7,166
1,892
6,162
18,581
2,502
573
8,519
233
−
26,816
5,668
8,298
69,783
7,759
1,242
2,154
271
790
2,151
−
−
3,792
18,159
724
365
−
7,557
950
395
−
2,454
1,583
622
−
2,246
2,653
1,070
−
3,672
2,105
762
−
2,206
10,124
3,914
−
4,244
32,675
10,509
−
12,838
2,085
3,116
−
2,402
752
16,604
2,325
8,987
53,651
37,357
2,325
46,606
6,019
670
112
−
−
−
−
−
14,665
4,469
4,563
7,395
5,073
18,282
56,022
7,603
−
(658)
28,010
6,801
(658)
146,082
642
884
718
375
287
951
2,005
2,746
−
8,608
574
1,216
35,169
108
992
9,399
66
784
8,601
61
436
9,599
131
418
8,555
119
1,070
28,679
31
2,036
76,639
54
2,800
18,922
645
601
1,412
1,314
1,967
5,939
66,908
645
601
1,412
1,314
3,111
15,691
262,471
(1)
Amounts collectible on demand are considered to have no specified maturity.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Management of the Risks Associated With Financial Instruments (cont.)
Liabilities and equity
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)
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
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, 2018
1,630
12,082
949
14,661
6,019
1,061
6,912
427
−
36
548
15,003
−
2,324
9,725
541
12,590
670
362
1,981
668
2,244
−
241
6,166
−
2,631
5,587
200
8,418
112
201
3,826
288
226
−
56
4,709
−
2,033
2,953
15
5,001
−
33
1,607
245
867
−
20
2,772
−
2,785
1,988
263
5,036
5,156
7,017
−
12,173
8,994
11,050
−
20,044
2,327
5,025
50
7,402
27,808
54,894
2,803
85,505
55,688
110,321
4,821
170,830
−
−
−
−
−
6,801
311
1,753
3,729
5,946
4,384
17,780
−
181
537
−
59
1,088
−
−
856
3,088
874
66
6,637
−
−
1,485
10,072
−
63
15,349
−
1,886
3,066
−
207
11,105
5,672
−
19,998
6,036
−
−
3,654
13,710
20,100
910
4,914
76,539
−
747
−
747
29,664
18,756
13,127
7,773
6,124
18,810
35,393
19,254
78
1,269
540
1,296
688
566
58
−
−
2,394
15
4,161
2,298
3,886
15
4,988
−
4,737
−
3,839
31
38
58
55
71
247
−
6,777
470
−
304
412
14,355
113,570
14,355
262,471
−
7,874
4,495
7,874
2,550
26,708
4,878
57,794
−
1,382
(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 $42.9 billion that is unconditionally revocable at the Bank’s discretion at any time.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(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(1)(2)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
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
345
−
2,493
1,428
563
−
2,014
2,735
1,318
−
2,192
2,046
813
−
1,840
8,014
2,893
−
4,636
33,603
9,838
−
9,946
1,544
2,779
−
2,718
467
16,814
2,247
8,275
51,634
35,590
2,247
41,690
5,030
865
96
−
−
−
−
−
13,591
4,742
4,101
6,245
4,699
15,543
53,387
7,041
−
(695)
27,108
5,991
(695)
136,457
562
872
403
255
180
904
2,070
3,177
−
8,423
381
943
29,442
109
981
10,223
71
474
7,082
85
340
8,367
36
216
6,477
83
987
24,431
79
2,149
75,626
109
3,286
19,383
631
558
1,409
1,239
1,223
5,060
64,796
631
558
1,409
1,239
2,176
14,436
245,827
(1)
(2)
Amounts collectible on demand are considered to have no specified maturity.
The Purchased receivables amount of $2,014 million presented separately on the Consolidated Balance Sheet as at October 31, 2017 is now reported in Loans.
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2018 Annual Report
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2018 Annual Report
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Management of the Risks Associated With Financial Instruments (cont.)
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Liabilities and equity
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)
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(9)
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
944
10,689
2,252
13,885
5,030
1,243
5,652
410
−
−
327
12,662
1,829
5,744
495
8,068
865
472
932
922
1,873
−
85
5,149
2,410
6,423
134
8,967
96
259
3,049
449
448
−
231
4,532
2,083
2,539
−
4,622
−
118
3,315
303
1,081
−
55
4,872
−
−
−
−
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
26,972
48,482
2,447
77,901
52,175
99,115
5,381
156,671
−
99
−
255
−
−
51
405
−
−
−
−
−
5,991
578
6,147
4,553
1,894
15,363
−
826
3,486
36
75
5,001
−
1,542
9,272
873
130
17,964
−
1,905
3,938
−
163
10,559
8,819
−
21,767
6,612
−
−
3,732
14,445
20,098
909
4,849
75,589
−
−
9
−
9
26,547
13,217
13,499
9,494
5,015
17,404
37,028
17,719
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
34
33
50
50
50
201
−
6,730
471
−
124
466
13,558
105,904
13,558
245,827
−
7,688
3,984
7,688
−
23,963
5,049
52,391
−
1,355
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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 and the Bank reclassified certain amounts presented in the Deposits item of the Consolidated
Balance Sheet. As at October 31, 2017, a $1,544 million amount was reclassified from Deposits – Personal into Deposits – Business and government.
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.
These amounts include $39.6 billion that is unconditionally revocable at the Bank’s discretion at any time.
After refining the process used to identify lease commitments and other contracts, certain amounts have been modified from those previously reported as at October 31, 2017.
206
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2018 Annual Report
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 31 – 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.
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 corporate banking and investment banking 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; 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 to these consolidated financial statements,
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. Operations support charges 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.
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
2017
2018
Wealth
Management
2017
2018
Financial
Markets
2017
2018
2018
USSF&I
2017
2,212
1,027
3,239
1,720
1,519
226
2,069
988
3,057
1,672
1,385
153
1,293
345
948
−
1,232
329
903
−
510
1,249
1,759
1,092
667
3
664
175
489
−
431
1,173
1,604
1,046
558
3
555
147
408
−
409
1,334
1,743
697
1,046
4
1,042
278
764
−
772
846
1,618
665
953
−
953
255
698
−
584
55
639
251
388
94
294
72
222
38
466
75
541
225
316
48
268
84
184
29
2018
(333)
119
(214)
303
(517)
−
(517)
(326)
(191)
49
Other
2017
2018
(302)
91
(211)
249
(460)
40
(500)
(331)
(169)
55
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
87
Total
2017
3,436
3,173
6,609
3,857
2,752
244
2,508
484
2,024
84
948
100,619
903
96,433
489
12,551
408
11,652
764
100,721
698
94,991
184
9,270
155
7,519
(240)
42,601
(224)
37,756
2,145
265,762
1,940
248,351
(1)
(2)
(3)
For the year ended October 31, 2017, certain amounts have been reclassified, particularly in the USSF&I segment, where an amount of $204 million reported in Non-interest income was
reclassified to Net interest income.
For the year ended October 31, 2018, Net interest income was grossed up by $144 million ($209 million in 2017), Non-interest income was grossed up by $101 million ($35 million in 2017),
and an equivalent amount was recognized in Income taxes (recovery). The effect of these adjustments is reversed under the Other heading.
Given the adoption of IFRS 9 on November 1, 2017, the Bank accounts for all provisions for credit losses within the business segments. For the fiscal year ended October 31, 2017, only
provisions for credit losses on impaired loans had been recognized in the business segments, whereas provisions for credit losses on non-impaired loans had been recognized in the Other
heading. During the year ended October 31, 2017, the Bank had 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 had reflected an increase in the collective
allowance for credit risk on non-impaired loans.
National Bank of Canada
2018 Annual Report
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2018 Annual Report
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 31 – Segment Disclosures (cont.)
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
2018
2,531
3,488
6,019
3,750
2,269
233
2,036
412
1,624
54
1,570
218,469
Canada
2017
United States
2017
2018
2,748
2,992
5,740
3,571
2,169
196
1,973
354
1,619
61
1,558
212,946
469
108
577
205
372
81
291
85
206
33
173
20,503
459
136
595
209
386
44
342
107
235
23
212
18,479
2018
382
188
570
108
462
13
449
47
402
−
402
26,790
Other
2017
229
45
274
77
197
4
193
23
170
−
170
16,926
2018
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
87
2,145
265,762
Total
2017
3,436
3,173
6,609
3,857
2,752
244
2,508
484
2,024
84
1,940
248,351
(1)
For the year ended October 31, 2017, certain amounts have been reclassified; in particular, an amount of $204 million reported in Non-interest income was reclassified to Net interest
income.
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Supplementary
Information
Statistical Review
Glossary of Financial Terms
Information for Shareholders
210
212
214
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109191_BNC_rapport
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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(2)
Other assets(2)
Total assets
Deposits
Other liabilities
Non-controlling interests
Subordinated debt
Share capital
Preferred
Common
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interests
Total liabilities and equity
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
12,756
69,783
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
18,159
146,082
15,691
262,471
170,830
76,539
20,789
136,457
14,436
245,827
156,671
75,589
13,948
128,036
17,498
232,206
142,066
77,026
17,702
116,676
18,105
216,090
130,458
72,755
24,525
106,959
12,906
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
747
9
1,012
1,522
1,881
2,426
2,470
2,000
2,450
2,822
57
8,472
175
379
262,471
2,050
2,768
58
7,706
168
808
245,827
1,650
2,645
73
6,706
218
810
232,206
1,023
2,614
67
6,705
145
801
216,090
1,223
2,293
52
5,850
289
795
205,429
677
2,160
58
5,055
214
789
188,219
762
2,054
58
4,091
255
791
177,903
762
1,970
46
3,366
337
795
166,854
10,878
63,134
14,748
145,302
81,785
53,059
1,217
2,033
1,089
1,804
66
4,081
168
7,637
58,370
13,670
132,138
75,170
47,259
1,215
2,017
1,089
1,729
48
3,515
96
145,302
132,138
Average assets
265,762
248,351
235,913
222,929
206,680
193,509
181,344
165,942
140,360
140,978
Net impaired loans(3)(4) under IFRS 9
Net impaired loans(4) under IAS 39
Consolidated Statement of Income data
Net interest income(5)
Non-interest income(5)
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
404
3,382
3,784
7,166
327
4,063
544
2,232
87
206
281
254
248
183
179
175
162
223
3,436
3,173
6,609
244
3,857
484
2,024
84
3,205
2,635
5,840
484
3,875
225
1,256
75
2,929
2,817
5,746
228
3,665
234
1,619
70
2,761
2,703
5,464
208
3,423
295
1,538
69
2,478
2,673
5,151
181
3,206
252
1,512
63
2,365
2,936
5,301
180
3,207
317
1,597
61
2,318
2,336
4,654
184
2,952
264
1,254
60
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
2,145
1,940
1,181
1,549
1,469
1,449
1,536
1,194
(1)
(2)
(3)
(4)
(5)
The figures for 2010 and 2009 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 reclassified; in particular, a Purchased receivables amount of $2,014 million, which had been classified in Other assets in this table as at October 31, 2017, is
now reported in Loans and acceptances (2016: $1,858 million; 2015: $1,438 million; 2014: $790 million). Figures as at October 31, 2013 and previous years were not adjusted to reflect
those modifications.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. POCI loans have been excluded. Under IAS 39, loans were considered
impaired according to different criteria. Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Includes customers’ liability under acceptances.
The figures for fiscal years 2014 to 2017 have been adjusted to reflect the reclassification of certain amounts between the Non-interest income and the Net interest income items to reflect
the change in the presentation of certain Consolidated Balance Sheet items; in particular, the Purchased receivables item, which had been classified in Other assets as at October 31, 2017,
is now reported in Loans.
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2018 Annual Report
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Statistical Review
As at October 31(1)
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Number of common shares(2)
(thousands)
Number of common
335,071
339,592
338,053
337,236
329,297
325,983
322,617
320,948
325,544
322,402
shareholders on record
21,325
21,542
21,966
22,152
22,394
22,737
23,180
23,588
23,598
23,970
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
Series 40
Series 42
$
$
$
$
$
$
$
6.01
5.94
2.44
65.63
58.69
59.76
34.40
–
–
–
–
–
–
–
$ 1.0250
$ 0.9750
$ 1.4000
$ 1.3500
$ 1.1125
$ 0.9310
$ 0.5323
$
$
$
$
$
$
$
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
4.31 $
1.70 $
4.58 $
1.54 $
3.37 $
1.37 $
2.97 $
1.24 $
2.47
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
$ 0.2444 $ 1.4625 $ 1.4625 $ 1.4625 $ 1.4625
$ 1.2125 $ 1.2125 $ 1.2125 $ 1.2125 $ 1.2125
$ 1.5000 $ 1.5000 $ 1.5000 $ 1.5000 $ 1.5000
$ 1.0078 $ 1.3438 $ 1.3438 $ 1.3438 $ 1.3438
$ 1.6500 $ 1.6500 $ 1.6500 $ 1.6500 $ 1.3765
$ 1.6500 $ 1.6500 $ 1.6500 $ 1.6500 $ 1.3042
–
$ 0.9728
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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Financial ratios
Return on common
shareholders’ equity
Return on average assets
Regulatory ratios under
Basel III
Capital ratios(3)
CET1(4)
Tier 1(4)
Total(4)
Leverage ratio(4)
Other information
Number of employees(9)(10)
Branches in Canada
Banking machines in Canada
18.4 %
0.84 %
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 %
11.7 %
15.5 %
16.8 %
4.0 %
11.2 %
14.9 %(5)
15.1 %(5)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(6)
14.0 %(8)
3.7 %
9.2 %
12.3 %(7)
15.1 %(7)
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 %
22,426
428
937
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
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
The figures for 2010 and 2009 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.
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.
Full-time equivalent.
Including employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2018.
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2018 Annual Report
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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 represent management’s unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance-sheet items such as loan
commitments and financial guarantees.
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.
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 loans
The Bank considers a financial asset, other than a credit card receivable, to
be credit-impaired when one or more events that have a detrimental impact
on the estimated future cash flows of the financial asset have occurred or
when contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following: when a notice of bankruptcy is received, a settlement proposal is
made, or contractual payments are 180 days past due.
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.
Dividend payout ratio
Common dividends as a percentage of net income after preferred share
dividends.
Net interest margin
Net interest income as a percentage of average interest-bearing assets.
212
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2018 Annual Report
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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.
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 credit 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.
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2018 Annual Report
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2018 Annual Report
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Information for Shareholders
Description of Share Capital
Dividends Declared on Common Shares During Fiscal 2018
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 $300 million. As at
October 31, 2018, the Bank had a total of 335,070,642 common shares and
98,000,000 first preferred shares issued and outstanding.
Record date
Payment date
Dividend per share ($)
December 27, 2017
March 26, 2018
June 26, 2018
September 24, 2018
February 1, 2018
May 1, 2018
August 1, 2018
November 1, 2018
0.60
0.60
0.62
0.62
Stock Exchange Listings
Dividends Declared on Preferred Shares During Fiscal 2018
The Bank’s common shares and Series 30, 32, 34, 36, 38, 40 and 42 First
Preferred Shares are listed on the Toronto Stock Exchange in Canada.
Record
date
Payment
date
Series
30
Series
32
Series
34
Series
36
Dividend per share ($)
Series
42
Series
40
Series
38
Issue or class
Ticker symbol
Newspaper abbreviation
Jan. 5, 18
Feb. 15, 18
0.2563
NA
Nat Bk or Natl Bk
Jul. 9, 18
Aug. 15, 18
0.2563
Apr. 9, 18
May 15, 18
0.2562
Oct. 9, 18
Nov. 15, 18
0.2562
0.2438 0.3500 0.3375
0.2437 0.3500 0.3375
0.2438 0.3500 0.3375
0.2437 0.3500 0.3375
0.2781
0.2782
−
0.3560
0.2781
0.2875
−
−
−
0.2781
0.2875 0.5323
Common shares
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
NA.PR.S
NA.PR.W
NA.PR.X
NA.PR.A
NA.PR.C
NA.PR.E
NA.PR.G
Nat Bk s30 or Natl Bk s30
Nat Bk s32 or Natl Bk s32
Nat Bk s34 or Natl Bk s34
Nat Bk s36 or Natl Bk s36
Nat Bk s38 or Natl Bk s38
Nat Bk s40 or Natl Bk s40
Nat Bk s42 or Natl Bk s42
Number of Registered Shareholders
As at October 31, 2018, there were 21,325 common shareholders recorded
in the Bank’s common share register.
Dividends
Dividend Dates in Fiscal 2019
(subject to approval by the Board of Directors of the Bank)
Record date
Common shares
December 31, 2018
March 25, 2019
June 25, 2019
September 30, 2019
Preferred shares,
Series 30, 32, 34, 36, 38, 40 and 42
January 7, 2019
April 5, 2019
July 8, 2019
October 7, 2019
Payment date
February 1, 2019
May 1, 2019
August 1, 2019
November 1, 2019
February 15, 2019
May 15, 2019
August 15, 2019
November 15, 2019
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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.
8
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8
At a glance 23,450 Employees2.7 millionClients428 Branches$485BAssets under Administration and under Management 937 Banking Machines$262 B Total Assets$7,166 M Total Revenues$2,232 M Net Income$20.0 B Market CapitalizationNational Bank of Canada serves the financial needs of individuals, businesses, institutional clients andgovernments across Canada. Founded in 1859, the Bank is one of Canada’s six systemically important banks and among the most profitable banks on a global basis by return on equity.The Bank is a client-centric integrated financial services group operating in three Canadian business segments—Personal & Commercial Banking, Wealth Management and Financial Markets—that represent nearly 90% of its revenues. A fourth segment—U.S. Specialty Finance and International—complements the growth of our domestic operations.National Bank was established by entrepreneurs for entrepreneurs. Today it is a full-service bank with leading shares across a broad spectrum of financial products in its core Quebec market, and leadership positions across the country in selected activities. Headquartered in Montreal, the Bank has more than 23,000 employees and is proud to be recognized for being an employer of choice and for promoting diversityand inclusion. National Bank strives to meet the highest standards of social responsibility while creating value for its shareholders. The Bank’s securities are listed on the Toronto Stock Exchange (TSX: NA).Table of Contents3 Message From the President and Chief Executive Officer4 Office of the President Members5 Message From the Chairman of the Board6 Board of Directors Members7 Social Responsibility8 Risk Disclosures9 Management’s Discussion and Analysis103 Audited Consolidated Financial Statements210 Statistical Review212 Glossary of Financial Terms214 Information for Shareholders(1) Excluding the Other heading2018 Total Revenues by Business Segment(1)44% 23% 9% 24% Personal and CommercialWealth ManagementFinancial MarketsU.S. Specialty Finance and International2018 Total Revenues by Geographic Distribution(1)58% 29% 13% QuebecOther provincesOutside of CanadaHead 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 MeetingThe Annual Meeting of Holders of Common Shares of the Bank will be held on Wednesday, April 24, 2019, at Fairmont Le Château Frontenac, in Quebec City, Quebec, Canada. Public Accountability Statement The 2018 Social Responsibility Report will be available in March 2019 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 Fax: 1-888-453-0330 E-mail:service@computershare.com Website:computershare.com 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 E-mail:investorrelations@nbc.ca Website: nbc.ca/investorrelations Normal Course Issuer BidThe Bank began a normal course issuer bid (NCIB) to repurchase for cancellation up to 8,000,000 common shares for the period starting June 6, 2018 and ending June 5, 2019. Shareholders may obtain, free of charge, a copy of the notice of intent regarding this NCIB, which was approved by the Toronto Stock Exchange, by writing to the Corporate Secretary, National Bank of Canada, 600 De La Gauchetière Street West, 4th floor, Montreal, Quebec, Canada H3B 4L2. 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 : 1 866 517-5455 Adresse électronique : relationsinvestisseurs@bnc.ca Legal Deposit ISBN 978-2-921835-59-6 Legal deposit – Bibliothèque et Archives nationales du Québec, 2018 Legal deposit – Library and Archives Canada, 2018 Printing Deschamps Impression National Bank of Canada is proud to help save the environment by using EcoLogo and Forest Stewardship Council® (FSC®) certified paper.COUV-ANG.indd 22018-12-13 12:50 PM 109191_BNC_rapport
2018 Annual ReportTM POWERING YOUR IDEAS is a trademark of National Bank of Canada.2018 Annual ReportPowering your ideasTMCOUV-ANG.indd 12018-12-13 12:50 PM