ANNUAL REPORT
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® The NATIONAL BANK logo is a registered trademark of National Bank of Canada.
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be held on
April 24, 2020, at National Bank of Canada’s head Office in Montreal, Quebec,
Canada.
PPuubblliicc AAccccoouunnttaabbiilliittyy SSttaatteemmeenntt
The 2019 Social Responsibility Report will be available in March 2020 on the
Bank’s website at nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
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:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
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 13 of this
Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this report
include National Bank of Canada, Private Wealth 1859, CashPerformer, NBC
CapS II, NBC Asset Trust, NBC Capital Trust, and National Bank All-in-One and
their respective logos. Certain trademarks owned by third parties are also
mentioned in this report.
PPoouurr oobbtteenniirr uunnee vveerrssiioonn ffrraannççaaiissee dduu RRaappppoorrtt aannnnuueell,,
vveeuuiilllleezz vvoouuss aaddrreesssseerr àà ::
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
LLeeggaall DDeeppoossiitt
ISBN 978-2-921835-63-3
Legal deposit – Bibliothèque et Archives nationales du Québec, 2019
Legal deposit – Library and Archives Canada, 2019
Shareholders whose shares are held by a market intermediary are asked to
contact the market intermediary concerned.
PPrriinnttiinngg
L’Empreinte
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:
Website:
investorrelations@nbc.ca
nbc.ca/investorrelations
NNoorrmmaall CCoouurrssee IIssssuueerr BBiidd
The Bank began a normal course issuer bid (NCIB) to repurchase for
cancellation up to 6,000,000 common shares for the period starting June 10,
2019 and ending June 9, 2020. 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.
National Bank of Canada is proud to help save the environment by using
EcoLogo and Forest Stewardship Council® (FSC®) certified paper.
At a Glance
Founded in 1859, National Bank of Canada offers
financial services to individuals, businesses, institutional
clients and governments across Canada. We are one
of Canada’s six systemically important banks and
among the most profitable banks on a global basis by
return on equity.
We operate through three business segments in
Canada—Personal and Commercial Banking, Wealth
Management and Financial Markets—which represent
our main sources of revenue. A fourth segment—U.S.
Specialty Finance and International—complements the
growth of our domestic operations.
We are a leading bank in our core Quebec market and
also hold leadership positions across the country in
selected activities.
We strive to meet the highest standards of social
responsibility while creating value for our shareholders.
We are proud to be recognized as an employer of
choice and for promoting diversity and inclusion.
We are headquartered in Montreal, and our securities
are listed on the Toronto Stock Exchange (TSX: NA).
Table of Contents
3 Message From the President
and Chief Executive Officer
5 Members of the Office of the President
6 Message From the Chairman of the Board
7 Members of the Board of Directors
8 Our One Mission
9 Environmental, Social and Governance (ESG)
12 Risk Disclosures
13 Management’s Discussion and Analysis
111 Audited Consolidated Financial Statements
212 Statistical Review
214 Glossary of Financial Terms
216 Information for Shareholders
2.7 million Clients(1)
25,487 Employees(2)
495 Branches(3)
1,480 Banking Machines(4)
$565 B Assets Under Administration
$281 B Total Assets
$7,432 M Total Revenues
$2,322 M Net Income
$22.7 B Market Capitalization
and Under Management
9%
23%
45%
23%
19%
26%
55%
2019 Total Revenues by
Business Segment(5)
2019 Total Revenues by
Geographic Distribution(5)
Personal and Commercial
Province of Quebec
Wealth Management
Financial Markets
Other Canadian provinces
Outside of Canada
U.S. Specialty Finance and International
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) 422 in Canada, 70 in Cambodia and 3 in the United States (Florida)
(4) 939 in Canada and 541 in Cambodia
(5) Excluding the Other heading
Investing in
National Bank
Strong Earnings Growth(1)
2015–2019 / CAGR (2)
> Canadian super-regional bank with leading franchise in core
Quebec market
+ 8.9%
– Favourable economic conditions in both Quebec and Canada
> Targeted growth strategy across Canada and focused international
strategy delivering high returns
> Transformation driving efficiencies and enhanced customer experience
> Strong credit quality supported by sound geographic and
product diversification
Consistent Dividend Growth (3)
2015–2019 / CAGR (2)
> Industry-leading ROE (5)
> Strong capital position providing flexibility
+ 6.9%
> Attractive dividend yield and consistent annual dividend growth
> Track record of delivering superior total shareholder returns
2019 RETURN
ON EQUITY 18.0%
Solid Capital Position (4)
As at October 31, 2019
Industry-Leading Total Shareholder Returns (CAGR(2))
(for the periods ended October 31, 2019)
11.7%
National Bank
Canadian Peers(6)
TSX
Ranking(7)
1 year
3 years
10 years
18.9%
17.1%
13.9%
8.4%
9.4%
11.4%
13.1%
7.1%
7.4%
# 1
# 1
# 1
(1 ) Based on diluted earnings per share
(2) Compound annual growth rate
(3) Based on annual dividends per common share
(4) Common Equity Tier 1 (CET1) capital ratio
(5) Based on adjusted ROE as reported by Canadian peers, including Bank of Montreal, Canadian Imperial
Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia and Toronto-Dominion Bank
(6) Includes Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada,
Bank of Nova Scotia and Toronto-Dominion Bank
(7) Among Canadian peers, as defined above
National Bank of Canada
2019 Annual Report
1
Financial
Overview
Medium-Term Objectives and 2019 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
Financial Highlights
Medium-term
objectives
5–10%
15–20%
40–50%
> 10.75%
> 3.75%
2019 results
7.1 %
18.0 %
41.6 %
11.7 %
4.0 %
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Net income
Diluted earnings per share
Return on common shareholdersʼ equity
Operating results on a taxable equivalent basis and excluding specified items(1)
Total revenues on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Diluted earnings per share excluding specified items
Return on common shareholders’ equity excluding specified items
Dividend payout ratio excluding specified items
Efficiency ratio on a taxable equivalent basis and excluding specified items
Dividends declared
Total assets
Regulatory ratios under Basel III
Common Equity Tier 1 (CET1) capital ratio
Leverage ratio
Liquidity coverage ratio (LCR)
2019
2018
% change
7,432
2,322
$ 6.34
7,166
2,232
$ 5.94
18.0 %
18.4 %
7,666
2,328
$ 6.36
18.0 %
42 %
54.5 %
7,411
2,232
$ 5.94
18.4 %
41 %
54.8 %
$ 2.66
281,458
$ 2.44
262,471
11.7 %
4.0 %
146 %
11.7 %
4.0 %
147 %
4
4
7
3
4
7
9
7
(1 )
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
2
National Bank of Canada
2019 Annual Report
MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr
AAnnootthheerr SSttrroonngg YYeeaarr ffoorr NNaattiioonnaall BBaannkk
Fiscal 2019 was another strong year for National Bank. Across the Bank,
we achieved solid business growth and record profitability. Our
performance reflects our commitment to delivering consistent value to all
stakeholders: our clients, our employees, our shareholders and our
communities.
In 2019, we generated diluted earnings per share of $6.34, up 7% from
last year, and we met all of our medium-term objectives. Our credit quality
is excellent,
lending. Our
transformation translated into further improvements in our efficiency ratio.
Again this year, we delivered an industry-leading return on equity of
18.0%.
reflecting our prudent approach
to
National Bank’s share price reached new highs in 2019, and the Bank is in
the unique position of having delivered industry-leading compound annual
total shareholder returns of 18.9%, 17.1%, 13.9% and 15.1% over the
one, three, ten and twenty-year periods, respectively.
National Bank’s share price reached new
highs in 2019, and the Bank is in the
unique position of having delivered
industry-leading compound annual total
shareholders returns, […]
Our capital deployment strategy is clear and remains unchanged. Our top
priority is to maintain strong capital levels, providing us with the flexibility
to invest in growth initiatives in our core markets and to return capital to
shareholders. In 2019, we raised our dividend by 9% and returned
$281 million of additional capital through share repurchases.
WWeellll--PPoossiittiioonneedd ffoorr GGrroowwtthh
As a Canadian super-regional bank with a leading franchise in Quebec, we
continue to benefit from favourable economic conditions both in our home
province and across Canada. The Quebec economy remains strong, with
historically low unemployment rates, sound public finances and housing
affordability well above the national average.
At this point of the economic cycle, we remain very comfortable with our
business positioning and our prudent approach to risk. As we are entering
a new year, we will maintain our overweight positions in the province of
Quebec as well as in secured lending, which we view as favourable in the
current environment. We will also continue to strive to achieve the right
balance between volume growth, healthy margins, and strong credit
quality. Our overall objective is to position the Bank to perform well
through the cycle.
At this point of the economic cycle, we
remain very comfortable with our
business positioning and our prudent
approach to risk. […] Our overall objective
is to position the Bank to perform well
through the cycle.
Our Personal and Commercial Banking segment is benefitting from our
strong market position in Quebec. In the retail market, we are deepening
relationships with clients, focusing on advice and leveraging our digital
platforms to create a compelling and secure client experience, which
drives customer loyalty and acquisition. In Commercial Banking, we are
pursuing a focused growth strategy across Canada in specialized markets,
harnessing our
in healthcare, agriculture,
technology, creative industries and real estate.
recognized strengths
As a leading franchise in Quebec and firmly established in Canada, we are
pleased with the differentiated positioning of our Wealth Management
segment. With a focus on distribution, our open-architecture model
responds to client needs for choice and unbiased advice. We are proud to
be the Canadian leader in providing administrative services to independent
asset managers.
Our Financial Markets segment is a strong pillar for the Bank. Our
established leadership in selected niches across Canada is underpinned
by our entrepreneurial culture, our differentiated business mix and our
flexible approach to capital allocation. We continue to invest in our
franchise to further our presence domestically and capitalize on targeted
opportunities abroad.
We are very satisfied with the overall performance of our international
strategy, which generates strong growth and superior returns. Both
Credigy in the U.S. and ABA Bank in Cambodia have greatly exceeded our
expectations, and we continue to see attractive growth potential for each
platform. Looking ahead, our efforts and capital dedicated to international
markets will be concentrated on these two successful subsidiaries.
National Bank of Canada
3
National Bank of Canada2019 Annual Report MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr ((ccoonntt..))
PPeeooppllee aanndd CCuullttuurree::
AA CCoommppeettiittiivvee AAddvvaannttaaggee
At a time of profound change, we believe that people and culture are the
cornerstone of our long-term success. Our entrepreneurial culture, deeply
rooted within the organization, is a key differentiator in the way we
transform the Bank, serve our clients, and attract people with the right
skills and values. Our evolution as an agile organization goes hand-in-hand
with our digital transformation—all essential components to delivering
superior customer experience, sustainable revenue growth and higher
operating efficiency.
At National Bank, we are putting
People First.
In 2019, we adjusted our mission statement to respond to the rapid
evolution of our operating environment. At National Bank, we are putting
People First. We believe that building long-term relationships with our
clients, our employees and our communities is key to creating sustainable
long-term value for all stakeholders.
EEnnssuurriinngg LLoonngg--TTeerrmm SSuussttaaiinnaabbiilliittyy
The long-term sustainability of an institution like ours depends on the
ability to maintain a healthy balance between the interests of all
stakeholders. As a proud founding signatory of the UN Principles for
Responsible Banking and joining the UN Principle for Responsible
Investment in 2019, we are putting the full strength of our organization
behind our environmental, social and governance guiding principles with
the aim to develop a green economy, enrich our communities, and uphold
the highest standards in corporate governance. How we achieve success
is crucial and our principles must translate into tangible action. As we look
forward, we are more committed than ever to maximizing the positive
impact of our actions to the benefit of our clients, employees, communities
and shareholders.
MMoovviinngg FFoorrwwaarrdd WWiitthh CCoonnffiiddeennccee
As we embark on a new year, I look to the future with cautious optimism.
The outlook in Quebec remains favourable and we continue to take
advantage of Canada’s broader economic soundness. Our credit quality is
excellent, our capital ratios are strong, and disciplined cost management
remains a priority throughout the organization. In an environment of
macroeconomic and geopolitical uncertainties, we are comfortable with
our current positioning and we remain vigilant in balancing our objectives
of sustainable growth with prudent risk management.
As we mark our 160th anniversary, I am proud of the Bank’s influential role
in the economic and social development of Quebec and Canada. I wish to
sincerely thank my colleagues of the Office of the President for their
leadership and our more than 25,000 employees for their contribution in
achieving our mission each day. I thank the Board of Directors for its
judicious counsel and support. I also thank our 2.7 million clients and our
shareholders for their trust and continued support. We have the right team
in place to ensure the Bank’s long-term success and truly live our mission
of putting People First.
LLoouuiiss VVaacchhoonn
President and Chief Executive Officer
4
National Bank of Canada2019 Annual Report Members of the
Office of the President
Louis Vachon
President and Chief Executive Officer
Stéphane Achard
Executive Vice-President,
Commercial Banking and Insurance
Lucie Blanchet
Executive Vice-President,
Personal Banking and Client Experience
William Bonnell
Executive Vice-President,
Risk Management
Dominique Fagnoule
Executive Vice-President,
Information Technology
Laurent Ferreira
Executive Vice-President and
Co-Head, Financial Markets
Martin Gagnon
Executive Vice-President,
Wealth Management;
Co-President and Co-Chief Executive
Officer, National Bank Financial
Nathalie Généreux
Executive Vice-President,
Operations
Denis Girouard
Executive Vice-President and
Co-Head, Financial Markets
Brigitte Hébert
Executive Vice-President,
Employee Experience
Ghislain Parent
Chief Financial Officer and Executive
Vice-President, Finance
National Bank of Canada
2019 Annual Report
5
MMeessssaaggee FFrroomm tthhee CChhaaiirrmmaann ooff tthhee BBooaarrdd
National Bank celebrated its 160th anniversary in 2019, and the Board is
truly proud of its heritage and rich history. Over the last century and a half,
the Bank has successfully evolved and made positive contributions to the
economic and social development of its communities.
Against this backdrop, the Board is very pleased with the Bank’s strong
performance in 2019 and with the continued execution of its strategy. The
Bank has demonstrated, once again, its capacity to create tangible value
for all stakeholders:
its clients, employees, communities and
shareholders.
SSttrraatteeggiicc OOvveerrssiigghhtt
As stewards of the Bank, the Board plays a critical and active role in
overseeing the sound execution of the Bank’s strategy to ensure its long-
term success. The Board participates in annual strategic reviews with the
senior leadership team and in monitoring the progress of the Bank’s
initiatives and key performance indicators.
In order to provide sound guidance to management, the Board remains at
the forefront of new realities facing the financial services industry and stays
abreast of emerging technologies and other innovations. The Board also
continues
including
to engage meaningfully with stakeholders,
shareholders, to always keep its finger on the pulse of its industry.
FFooccuusseedd oonn TTaalleenntt aanndd CCuullttuurree
The Board works closely with management to ensure talent development.
Succession planning is also a key Board responsibility, and we have great
confidence in the strength of the leadership team and a solid pipeline of
talent across the Bank.
People and culture are the cornerstone of the Bank’s long-term success.
As the banking industry evolves in an ever-changing environment, a
strong entrepreneurial culture with the ability to adapt rapidly have
become competitive advantages in the pursuit of our transformation.
SSttrroonngg RRiisskk MMaannaaggeemmeenntt CCuullttuurree
The Board champions a strong risk management culture, strengthened
through active compliance, controls, and audits across all business lines.
The Board assesses the soundness of business opportunities against the
Bank’s risk management framework, which considers both financial and
non-financial risks.
In 2019, cybersecurity remained a key priority for the Board, and the Bank
continued its significant investments in this critical aspect of our industry.
Protecting client information is of the utmost importance, and risk-
reduction strategies are continually being assessed by the Board.
BBeesstt--iinn--CCllaassss BBooaarrdd GGoovveerrnnaannccee
Leadership in the area of governance is fundamental. We have a strong
Board, thanks to the active engagement of its dedicated members who put
forth diverse perspectives, backgrounds, and expertise, all critical to
strong oversight.
To ensure that the Board’s composition is both aligned with and can
anticipate the Bank’s ever-evolving needs, we remain proactive in
promoting the highest standards of board renewal and committee chair
rotations. In 2019, we welcomed Patricia Curadeau-Grou to the Board, a
National Bank alumna who brings deep knowledge of the banking industry
and solid expertise in finance and risk management.
EEmmbbeeddddiinngg EESSGG PPrriinncciipplleess IInnttoo oouurr
DDeecciissiioonn--MMaakkiinngg
The Bank recognizes that its long-term success is directly tied to its ability
to create sustainable value for all stakeholders.
Corporate responsibility and ethical standards have always been
embedded into the Bank’s culture. The Board understands the increasing
importance of environmental, social, and governance (ESG) factors to all
stakeholders. In 2019, we made significant progress in this regard, with
the development and formal adoption of the Bank’s ESG principles by the
Board.
RReeaaddyy ffoorr tthhee FFuuttuurree
On behalf of the Board, I would like to thank Louis Vachon and our
executive team for their leadership and lasting contributions. I would also
like to thank the Bank’s more than 25,000 employees for their unwavering
commitment and for being dedicated Bank ambassadors
in their
communities. Our passion for people has allowed us to successfully build
lasting relationships for the past 160 years, and we look forward to
continuing to do so in the future.
I wish to conclude by thanking our customers for their loyalty, our
shareholders for their support, and all our stakeholders for the confidence
they continue to manifest in National Bank.
JJeeaann HHoouuddee
Chairman of the Board of Directors
For more information regarding the Bank’s governance, please refer to the Statement of
Corporate Practices available on the Bank’s website at nbc.ca.
6
National Bank of Canada2019 Annual Report MMeemmbbeerrss ooff tthhee BBooaarrdd ooff DDiirreeccttoorrss
JJeeaann HHoouuddee
Montreal, Quebec, Canada
Chairman of the Board of Directors,
National Bank of Canada
and Corporate Director
Director since March 2011
RRaayymmoonndd BBaacchhaanndd
Montreal, Quebec, Canada
Strategic Advisor,
Norton Rose Fulbright Canada LLP
and Corporate Director
Director since October 2014
MMaarryyssee BBeerrttrraanndd
Westmount, Quebec, Canada
Corporate Director
Director since April 2012
PPiieerrrree BBlloouuiinn
Town of Mount-Royal, Quebec, Canada
Corporate Director
Director since September 2016
PPiieerrrree BBooiivviinn
Montreal, Quebec, Canada
President and Chief Executive Officer,
Claridge inc.
Director since April 2013
PPaattrriicciiaa CCuurraaddeeaauu--GGrroouu
Montreal, Quebec, Canada
Corporate Director
Director since April 2019
GGiilllliiaann HH.. DDeennhhaamm
Toronto, Ontario, Canada
Corporate Director
Director since October 2010
KKaarreenn KKiinnsslleeyy
Ottawa, Ontario, Canada
Corporate Director
Director since December 2014
RReebbeeccccaa MMccKKiilllliiccaann
Oakville, Ontario, Canada
Chief Retail Officer,
McKesson Canada
Director since October 2017
PPiieerrrree TThhaabbeett
St-Georges, Quebec, Canada
President, Boa-Franc inc.
Director since March 2011
RRoobbeerrtt PPaarréé
Westmount, Quebec, Canada
Strategic Advisor,
Fasken Martineau DuMoulin LLP
and Corporate Director
Director since April 2018
LLoouuiiss VVaacchhoonn
Beaconsfield, Quebec, Canada
President and Chief Executive Officer,
National Bank of Canada
Director since August 2006
LLiinnoo AA.. SSaappuuttoo JJrr..
Montreal, Quebec, Canada
Chief Executive Officer and
Chairman of the Board of Directors,
Saputo Inc.
Director since April 2012
AAnnddrrééee SSaavvooiiee
Dieppe, New Brunswick, Canada
President and Chair of the
Board of Directors,
Acadian Properties Ltd.
Director since April 2015
BBooaarrdd CCoommmmiitttteeeess
AAuuddiitt CCoommmmiitttteeee
Karen Kinsley (Chair)
Maryse Bertrand
Pierre Blouin
Andrée Savoie
Pierre Thabet
RRiisskk MMaannaaggeemmeenntt CCoommmmiitttteeee
Pierre Thabet (Chair)
Raymond Bachand
Patricia Curadeau-Grou
Karen Kinsley
Lino A. Saputo Jr.
HHuummaann RReessoouurrcceess CCoommmmiitttteeee
Pierre Boivin (Chair)
Maryse Bertrand
Pierre Blouin
Gillian H. Denham
Rebecca McKillican
CCoonndduucctt RReevviieeww aanndd CCoorrppoorraattee
GGoovveerrnnaannccee CCoommmmiitttteeee
Lino A. Saputo Jr. (Chair)
Raymond Bachand
Jean Houde
Robert Paré
Andrée Savoie
National Bank of Canada
7
National Bank of Canada2019 Annual Report
OUR ONE MISSION
We exist to have a
POSITIVE IMPACT in
people’s lives.
By building long-term
relationships with our
clients, employees
and communities.
People first.
Integral to our one mission
is support for sustainable
development.
We incorporate environmental,
social, and governance
matters into our business
and operating decisions.
The Board of Directors has approved
a sustainable development framework and
principles that inspire our thoughts and actions.
The Bank’s
Commitments
This past year, National Bank signed some major agreements:
> One of the first North American signatories to the United Nations’ Principles for Responsible Banking
> United Nations’ Global Standards of Conduct for Business: Tackling Discrimination Against Lesbian,
Gay, Bi, Trans and Intersex People (LGBTI)
> United Nations Environment Programme Finance Initiative (UNEP FI)
> National Bank Investments: Signatory to the United Nations’ Principles for Responsible Investment (PRI)
National Bank supports the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).
The Bank has therefore agreed to include, as part of its disclosure activities, information on the various questions
addressed by this group. In addition, in collaboration with banking industry partners, the Bank is working to develop
a relevant disclosure methodology.
The Bank is committed to having a positive impact on people’s lives.
Our principles reflect the importance of striking a balance among society’s stakeholders.
We are working to
develop a green
economy
We enrich
communities
We govern according
to the highest standards
1. We consider the fight against
4. We maximize the potential
climate change in our economic
and community actions
of individuals and the community
5. We promote inclusion
2. We guide and advise our clients
and diversity
in their energy transition
3. We manage and reduce our
environmental footprint in all
of our business segments
6. We foster entrepreneurship,
financial literacy, philanthropy,
and support for health
and education
7. We promote a strong ethics
culture, sound governance
practices, and rigorous risk
management
8. We manage according to
responsible business practices
9. We ensure the long-term
viability of the institution
Key United Nations sustainable development goals covered by our principles
10
National Bank of Canada
2019 Annual Report
Our Accomplishments
Environmental
We are working to develop a green economy
> Renewable energy loan portfolio growing faster
than the non-renewable energy portfolio in support
of the energy transition
> Equal investment allocated to the renewable
and non-renewable energy sectors
> Multi-award winning energy efficiency program
> Several LEED® certifications
> New head office designed to meet the highest
standards of sustainable construction and occupant
health and well-being (LEED v4 Gold certification)
> External disclosure of a framework for issuing NBC
Sustainability Bonds, an environmental policy,
and a code of supplier conduct
> Completion of four sustainability bond issuances,
including the first international issuance of USD
Sustainability Bonds by a North American bank
> Assets under management governed by
National Bank Investments’ OP4+ process: 95% (↑)
of our fund managers meet the Principles
for Responsible Investment
> Several initiatives put in place by the Positive
Environmental Impact Committee (end of purchase
of disposable water bottles, eco-friendly lunches, etc.)
Social
We enrich communities
Helping our clients power their ideas
> Leading-edge digital and mobile banking
solutions and many specialized services
> New branch concepts where advice
and technology converge
> Active participation in developing the
entrepreneurial ecosystem
Supporting the community
> Many millions of dollars paid to the community
in the form of donations and sponsorships
and through fundraisers
> Hundreds of organizations supported Canada-wide
> Committed to enhancing the impact of our social
investments
Stimulating economic development
> $121 million invested in our facilities
> $1.1 billion spent on goods and services
Promoting diversity and inclusion
> Listed in the 2019 Bloomberg Gender-Equality Index
> Active support of women, cultural communities,
and the LGBTQ+ community
> Listed as one of Canada’s Best Diversity Employers
for many years
Governance
We govern according to the highest standards
> Mandates of the Conduct Review and Corporate
Governance Committee, the Audit Committee,
and the Risk Management Committee include
ESG-related responsibilities
> Policy regarding diversity on the Board of Directors
(diversity of gender, age, designated groups, sexual orientation,
ethnocultural groups, and geographic origins)
> Listed in the 2019 FTSE4 Good Index of ethical
companies recognized for social responsibility
For more information: nbc.ca
National Bank of Canada
2019 Annual Report
11
RRiisskk DDiisscclloossuurreess
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.
AAnnnnuuaall
RReeppoorrtt
PPaaggeess
SSuupppplleemmeennttaarryy
RReegguullaattoorryy CCaappiittaall
aanndd PPiillllaarr 33 DDiisscclloossuurree(1)
GGeenneerraall
1
2
3
4
Location of risk disclosures
Management’s Discussion and Analysis
Consolidated Financial Statements
Supplementary Financial Information
Supplementary Regulatory Capital and Pillar 3 Disclosure
Risk terminology and risk measures
Top and emerging risks
New key regulatory ratios
RRiisskk ggoovveerrnnaannccee aanndd rriisskk mmaannaaggeemmeenntt
5
6
7
8
Risk management organization, processes and key functions
Risk management culture
Key risks by business segment, risk management
and risk appetite
Stress testing
9
10
11
12
13
CCaappiittaall aaddeeqquuaaccyy aanndd rriisskk--wweeiigghhtteedd aasssseettss ((RRWWAA))
Minimum Pillar 1 capital requirements
Reconciliation of the accounting balance sheet to
the regulatory balance sheet
Movements in regulatory capital
Capital planning
RWA by business segment
and by risk type
Capital requirements by risk and RWA calculation method
Banking book credit risk
Movements in RWA by risk type
Assessment of credit risk model performance
14
15
16
17
LLiiqquuiiddiittyy
18
Liquidity management and components of the liquidity buffer
FFuunnddiinngg
19
20
21
Summary of encumbered and unencumbered assets
Residual contractual maturities of balance sheet items and
off-balance-sheet commitments
Funding strategy and funding sources
MMaarrkkeett rriisskk
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
CCrreeddiitt rriisskk
26
27
28
29
30
Credit risk exposures
Policies for identifying impaired loans
Movements in impaired loans and allowances for credit losses
Counterparty credit risk relating to derivatives transactions
Credit risk mitigation
OOtthheerr rriisskkss
31
32
Other risks: Governance, measurement and management
Publicly known risk events
(1)
(2)
Fourth quarter 2019.
These pages are included in the document entitled Supplementary Financial Information Fourth Quarter 2019.
12
19 to 29(2)
5 to 52
7 to 13, 16 and 17
6
6
6
6
35
12
50 to 94, 107, 109 and 110
Notes 1, 7, 16, 23 and 29
58 to 94
63 to 67
51 to 53, 80, 82 and 86
58 to 76, 82 and 83
58 and 59
57 to 59 and 63
50, 59, 71, 80, 81 and 83
51 to 53
55
50 to 57
57
67 to 71
56
62, 68 to 70 and 75
82 to 87
84 and 85
203 to 207
87 to 89
77 and 78
75 to 81, 191 and 192
78 and 79
75 to 81
74 and 151 to 163
72, 126 and 127
107, 109, 110 and 151 to 163
72, 73 and 171 to 174
70 to 72 and 148
18 to 44 and 19 to 27(2)
24 to 26(2)
37 to 44 and 28(2) and 29(2)
20, 24 and 42 to 52
66, 67 and 90 to 94
90
National Bank of Canada2019 Annual Report
Management’s Discussion
and Analysis
DDeecceemmbbeerr 33,, 22001199
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, 2019 (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, 2019. 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.
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
1144
1166
1177
2211
2244
2255
2299
3333
3388
4422
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
4433
4444
4488
5500
5588
9955
110011
110022
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
From time to time, the Bank makes written and oral forward-looking statements, such as those contained in the Economic Review and Outlook 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 2020
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 2020 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 58 of this Annual Report, and more specifically, 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; 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 cyberattack risk.
The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found in the Risk Management section of this Annual Report. Investors and others
who rely on the Bank’s forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as required
by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.
The forward-looking information contained in this document is presented for the purpose of interpreting the information contained herein and may not be appropriate for other
purposes.
Management’s Discussion and Analysis
FFiinnaanncciiaall RReeppoorrttiinngg MMeetthhoodd
As stated in Note 1 to the consolidated financial statements, the Bank adopted IFRS 15 on November 1, 2018. As permitted by IFRS 15, the Bank did not restate
comparative consolidated financial statements, and Note 1 to the consolidated financial statements presents the impact of IFRS 15 adoption on the Bank’s
Consolidated Balance Sheet as at November 1, 2018.
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation
reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the
Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.
NNoonn--GGAAAAPP FFiinnaanncciiaall MMeeaassuurreess
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.
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.
The specified items related to the acquisitions of recent years (mainly those of the Wealth Management segment) are no longer presented as specified items as
of November 1, 2018, since the amounts are not considered significant. The figures for the year ended October 31, 2018 reflect this change.
14
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Financial Reporting Method
RReeccoonncciilliiaattiioonn ooff NNoonn--GGAAAAPP FFiinnaanncciiaall MMeeaassuurreess
Year ended October 31
(millions of Canadian dollars)
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss
UUSSSSFF&&II
Net interest income
Taxable equivalent
NNeett iinntteerreesstt iinnccoommee oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
Non-interest income
Taxable equivalent
Gain on disposal of Fiera Capital shares(2)
Gain on disposal of premises and equipment(3)
Remeasurement at fair value of an investment(4)
NNoonn--iinntteerreesstt iinnccoommee oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
TToottaall rreevveennuueess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Non-interest expenses
Impairment losses on premises and equipment and on intangible assets(5)
Provisions for onerous contracts(6)
Charge related to Maple(7)
Severance pay(8)
NNoonn--iinntteerreesstt eexxppeennsseess eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
CCoonnttrriibbuuttiioonn oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Provisions for credit losses
IInnccoommee bbeeffoorree iinnccoommee ttaaxxeess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Income taxes
Taxable equivalent
Income taxes on the gain on disposal of Fiera Capital shares(2)
Income taxes on the gain on disposal of premises and equipment(3)
Income taxes on the remeasurement at fair value of an investment(4)
Income taxes related to impairment losses on premises and equipment
and on intangible assets(5)
Income taxes on provisions for onerous contracts(6)
Income taxes on the charge related to Maple(7)
Income taxes on severance pay(8)
IInnccoommee ttaaxxeess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
NNeett iinnccoommee eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
SSppeecciiffiieedd iitteemmss aafftteerr iinnccoommee ttaaxxeess
NNeett iinnccoommee
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’ss sshhaarreehhoollddeerrss
22,,338833
−−
22,,338833
11,,006699
−−
−−
−−
−−
11,,006699
33,,445522
11,,881166
−−
−−
−−
−−
11,,881166
11,,663366
223377
11,,339999
337722
−−
−−
−−
−−
−−
−−
−−
−−
337722
11,,002277
−−
11,,002277
−−
11,,002277
446699
11
447700
11,,227733
−−
−−
−−
−−
228833
119911
447744
11,,114411
113355
−−
−−
−−
11,,227733
11,,227766
11,,774433
11,,006677
−−
−−
−−
−−
11,,006677
667766
−−
667766
117766
11
−−
−−
−−
−−
−−
−−
−−
117777
449999
−−
449999
−−
449999
11,,775500
774433
−−
−−
−−
−−
774433
11,,000077
3300
997777
((6666))
332266
−−
−−
−−
−−
−−
−−
−−
226600
771177
−−
771177
−−
771177
665566
−−
665566
5599
−−
−−
−−
−−
5599
771155
228855
−−
−−
−−
−−
228855
443300
8800
335500
7711
−−
−−
−−
−−
−−
−−
−−
−−
7711
227799
−−
227799
4400
223399
22001199
2018(1)
33,,559966
119955
33,,779911
33,,883366
113355
((7799))
((5500))
3333
3,382
144
3,526
3,784
101
−
−
−
33,,887755
3,885
77,,666666
44,,330011
((5577))
((4455))
((1111))
((1100))
44,,117788
33,,448888
334477
7,411
4,063
−
−
−
−
4,063
3,348
327
OOtthheerr
((119955))
33
((119922))
229944
−−
((7799))
((5500))
3333
119988
66
339900
((5577))
((4455))
((1111))
((1100))
226677
((226611))
−−
((226611))
33,,114411
3,021
((9911))
33
((1111))
((77))
66
1155
1122
33
33
((6677))
((119944))
((66))
((220000))
2266
((222266))
446622
333300
((1111))
((77))
66
1155
1122
33
33
881133
22,,332288
((66))
22,,332222
6666
22,,225566
544
245
−
−
−
−
−
−
−
789
2,232
−
2,232
87
2,145
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth
Management segment to the Personal and Commercial segment.
During the year ended October 31, 2019, following the Bank’s disposal of a portion of its investment in Fiera Capital Corporation (Fiera Capital) the Bank recorded a gain on disposal of
$79 million ($68 million net of income taxes), including a gain of $31 million ($27 million net of income taxes) upon remeasurement at fair value of the retained interest.
During the year ended October 31, 2019, the Bank completed the sale of its head office land and building located at 600 De La Gauchetière Street West, Montreal, Quebec, Canada, for gross
proceeds of $187 million, and a gain on disposal of premises and equipment of $50 million ($43 million net of income taxes) was recorded.
During the year ended October 31, 2019, the Bank remeasured at fair value its investment in NSIA Participations (NSIA) and recorded a loss of $33 million ($27 million net of income taxes).
During the year ended October 31, 2019, the Bank recorded $57 million ($42 million net of income taxes) in impairment losses on premises and equipment and on intangible assets related
to computer equipment and technology developments.
During the year ended October 31, 2019, the Bank reviewed all of its corporate building leases and recorded provisions for onerous contracts of $45 million ($33 million net of income taxes).
During the year ended October 31, 2019, the Bank recorded a charge of $11 million ($8 million net of income taxes) related to the company Maple Financial Group Inc. (Maple) following the
event of November 19, 2019, as described in the section entitled Event After the Consolidated Balance Sheet on page 47.
During the year ended October 31, 2019, following an optimization of certain organizational structures, the Bank recorded $10 million ($7 million net of income taxes) in severance pay.
National Bank of Canada
15
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
FFiinnaanncciiaall DDiisscclloossuurree
DDiisscclloossuurree CCoonnttrroollss aanndd PPrroocceedduurreess
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 October 31, 2019, in
accordance with Regulation 52-109 Respecting Certification of Disclosure in Issuers’ Annual and Interim Filings (Regulation 52-109), released by the CSA, the
design and operation of these controls and procedures were evaluated to determine their effectiveness.
As at October 31, 2019, 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.
IInntteerrnnaall CCoonnttrroollss OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
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 pages 14
and 15 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 the Bank’s ICFR in accordance with 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.
Based on the evaluation results, the CEO and CFO concluded, as at October 31, 2019, 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.
CChhaannggeess ttoo IInntteerrnnaall CCoonnttrroollss OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
The CEO and CFO also undertook work whereby they were able to conclude that, during the year ended October 31, 2019, 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.
DDiisscclloossuurree CCoommmmiitttteeee
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.
16
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
OOvveerrvviieeww
HHiigghhlliigghhttss
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
OOppeerraattiinngg rreessuullttss
Total revenues
Net income
Net income attributable to the Bank’s shareholders
Return on common shareholders’ equity
Dividend payout ratio
EEaarrnniinnggss ppeerr sshhaarree
Basic
Diluted
OOppeerraattiinngg rreessuullttss oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
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
Efficiency ratio on a taxable equivalent basis and excluding specified items
EEaarrnniinnggss ppeerr sshhaarree eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
Basic
Diluted
CCoommmmoonn sshhaarree iinnffoorrmmaattiioonn
Dividends declared
Book value
Share price
High
Low
Close
Number of common shares (thousands)
Market capitalization
BBaallaannccee sshheeeett aanndd ooffff--bbaallaannccee--sshheeeett
Total assets
Loans and acceptances, net of allowances
Deposits
Equity attributable to common shareholders
Assets under administration and under management
RReegguullaattoorryy rraattiiooss uunnddeerr BBaasseell IIIIII
Capital ratios
Common Equity Tier 1 (CET1)
Tier 1
Total
Leverage ratio
Liquidity coverage ratio (LCR)
OOtthheerr IInnffoorrmmaattiioonn
Number of employees – worldwide
Number of branches in Canada
Number of banking machines in Canada
22001199
2018
%% cchhaannggee
$$
$$
$$
77,,443322
22,,332222
22,,225566
1188..00 %%
4422 %%
66..3399
66..3344
$
77,,666666
22,,332288
1188..00 %%
4422 %%
5544..55 %%
$
$
66..4400
66..3366
22..6666
3366..8899
6688..0022
5544..9977
6688..0022
333344,,117722
2222,,773300
228811,,445588
115533,,225511
118899,,556666
1122,,332288
556655,,339966
7,166
2,232
2,145
18.4 %
41 %
6.01
5.94
7,411
2,232
18.4 %
41 %
54.8 %
6.01
5.94
2.44
34.40
65.63
58.69
59.76
335,071
20,024
262,471
146,082
170,830
11,526
485,080
1111..77 %%
1155..00 %%
1166..11 %%
44..00 %%
114466 %%
2255,,448877
442222
993399
11.7 %
15.5 %
16.8 %
4.0 %
147 %
23,450
428
937
44
44
55
66
77
33
44
66
77
99
77
55
1111
77
1177
99
((11))
––
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
National Bank of Canada
17
National Bank of Canada2019 Annual Report 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 operating activities, certain non-recurring items, and treasury activities are grouped
in the Other heading of 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.
%
1
.
1
1
%
7
.
9
%
3
.
9
Objectives and 2019 Results
When setting its objectives, the Bank aims for a realistic challenge in the current business
environment and factors in the predictable evolution in banking industry financial results as well as
the Bank’s business development plan. 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 2019, the Bank recorded $2,322 million in net income compared to $2,232 million in fiscal
2018. Its 2019 diluted earnings per share stood at $6.34 versus $5.94 in fiscal 2018, and its 2019
return on common shareholders’ equity (ROE) was 18.0% versus 18.4% in 2018. Net income
excluding specified items totalled $2,328 million in fiscal 2019, up 4% year over year, and diluted
earnings per share excluding specified items stood at $6.36, up 7% from $5.94 in 2018. Furthermore,
ROE excluding specified items was 18.0% in 2019 versus 18.4% in 2018.
The following table compares the Bank’s medium-term objectives with its 2019 results.
MMeeddiiuumm--TTeerrmm OObbjjeeccttiivveess aanndd 22001199 RReessuullttss
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
MMeeddiiuumm--
tteerrmm
oobbjjeeccttiivveess
((%%))
55--1100
1155--2200
4400--5500
>> 1100..7755
>> 33..7755
22001199
rreessuullttss ((%%))
77
1188..00
4422
1111..77
44..00
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial
measures.
In 2019, the Bank’s financial results met all of the medium-term objectives. The 7% growth in diluted
earnings per share excluding specified items was driven by solid net income growth in all business
segments, except in the Financial Markets segment, where net income was affected by a slowdown
during the first six months of fiscal 2019. And, even though the dividend per share was raised twice,
for a 9% increase in fiscal 2019, 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.
Management’s Discussion and Analysis
Overview
BBuussiinneessss MMiixx(1)
Year ended October 31, 2019
(taxable equivalent basis)(2)
%
1
.
5
4
%
7
.
0
4
%
1
.
4
3
%
0
.
5
4
%
4
.
8
2
%
8
.
2
2
%
8
.
2
2
%
8
.
9
1
%
2
.
1
1
Personal
and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Total revenue
Net income
Economic capital
NNeett iinnccoommee
Year ended October 31
(millions of Canadian dollars)
2
3
2
,
2
2
3
2
,
2
2
2
3
,
2
8
2
3
,
2
2018
22001199
Including specified items
Excluding specified items(2)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
Year ended October 31
(Canadian dollars)
4
9
.
5
4
9
.
5
4
3
.
6
6
3
.
6
2018
22001199
Including specified items
Excluding specified items(2)
(1) Excluding the Other heading.
(2) See the Financial Reporting Method section on pages
14 and 15 for additional information on non-GAAP
financial measures.
18
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Overview
For fiscal 2019, the Bank declared $892 million in dividends to common shareholders (2018:
$829 million), representing 42% of net income attributable to common shareholders (2018: 41%).
Year ended October 31
(Canadian dollars)
As at October 31, 2019, the Bank’s CET1, Tier 1 and Total capital ratios were, respectively, 11.7%,
15.0% and 16.1%, i.e., above the regulatory requirements, compared to ratios of, respectively,
11.7%, 15.5% and 16.8% as at October 31, 2018. The CET1 capital ratio remained stable. Net income
net of dividends, and common share issuances under the Stock Option Plan offset the application of
the Standardized Approach for measuring Counterparty Credit Risk (SA-CCR) rules for measuring
counterparty credit risk, growth in risk-weighted assets, the common share repurchases during the
year ended October 31, 2019, and remeasurements of pension plans and other post-employment
benefit plans. The decreases in the Tier 1 capital ratio and the Total capital ratio were essentially due
to growth in risk-weighted assets. As at October 31, 2019, the leverage ratio was 4.0%, stable
compared to October 31, 2018. The growth in Tier 1 capital was offset by growth in total leverage
exposure.
High-Quality Loan Portfolio
For fiscal 2019, the Bank recorded $347 million in provisions for credit losses, $20 million more than
those recorded in fiscal 2018. The higher year-over-year provisions stem mainly from provisions for
credit losses on credit card receivables and on loans in the Financial Markets segment. However, the
provisions for credit losses on loans of the USSF&I segment were down, essentially related to the
Credigy Ltd. (Credigy) subsidiary. The 2019 provisions for credit losses represented 0.23% of average
loans and acceptances, unchanged from fiscal 2018.
As at October 31 or for the year ended October 31
(millions of Canadian dollars)
Provisions for credit losses
Provisions for credit losses as a % of average loans and acceptances
Provisions for credit losses on impaired loans
as a % of average loans and acceptances
Net write-offs as a % of average loans and acceptances
Gross impaired loans(1)
Net impaired loans(2)
2018
327
0.23 %
0.23 %
0.23 %
630
404
(1)
(2)
All loans classified in Stage 3 of the expected credit loss model are impaired loans. The impaired loans presented in
this table exclude purchased or originated credit-impaired (POCI) loans.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn. The net impaired
loans presented in this table exclude POCI loans.
2015
2016
2017
2018
%
1
.
6
1
%
0
.
5
1
%
7
.
1
1
%
0
.
4
%
0
.
4
As at October 31
%
8
.
6
1
%
5
.
5
1
%
7
.
1
1
2018
CET1
Tier 1
Total
Leverage ratio
As at October 31, 2019
(1)
6 %
12 %
4 %
25 %
53 %
Personal Banking (2018: 54%)
Commercial Banking (2018: 25%)
Wealth Management (2018: 4%)
Financial Markets – Corporate Banking (2018: 11%)
U.S. Specialty Finance and International
(2018: 6%)
(1)
Excluding loans and acceptances in the Other heading
National Bank of Canada
2019 Annual Report
19
Management’s Discussion and Analysis
Overview
EEccoonnoommiicc RReevviieeww aanndd OOuuttllooookk
GGlloobbaall EEccoonnoommyy
While talks between China and the Unites States in the trade war opposing the two countries seem to be making headway, the damage to the global economy
has already been considerable. Worldwide, the manufacturing sector has been contracting for the past six months, but the services sector has kept the economy
afloat. Washington, like Beijing, stands to benefit from a truce. The trade war has hurt the Middle Kingdom, where slower growth is in large part due to a downturn
not only in exports but also in investment. To address the situation, Chinese authorities have had to implement stimulus measures via monetary and budgetary
policy in order to achieve their growth target of 6-6.5%. Owing to its relatively intense participation in the global value chain, the eurozone has been hardest hit
by the turmoil of the trade war. Germany, for instance, may already be in the midst of a technical recession after its economy contracted again in the second
quarter. Given the growing uncertainty, a majority of central banks have opted to ease their monetary policy in the third quarter, a record high since the global
recession of 2008-2009. This should be enough for the global economy to keep expanding. We expect global economic growth to reach 3.2% in 2020(1), up
slightly from 2019 (3.0%)(1).
In the U.S., the longest growth streak in history is showing signs of losing steam, thus reviving fears of recession in the present context of strained international
trade relations. In our opinion, the probability of a recession in the next twelve months does not exceed 30%, as a truce remains the most likely scenario in light
of the coming U.S. presidential election. Moreover, the resilience of consumption and of the labour market is largely compensating for the weakness in foreign
trade, which is putting the brakes on business investment. By lowering interest rates in October after twice doing so this summer, the U.S. Federal Reserve has
contributed to setting the yield curve back on an upward slope after its inversion in 2019 had raised alarm bells. We believe that this rate adjustment will suffice
for now. With the 2020 election in the offing, we can expect both monetary and budgetary policy to remain accommodative. We expect U.S. GDP to grow 2.3%
and 1.9% in 2019 and 2020(1), respectively.
CCaannaaddiiaann EEccoonnoommyy
The Canadian economy has once again proven the skeptics wrong after weakness in the energy and real estate sectors early in the year was seen as a bad omen.
As it happens, the economy bounced back spectacularly in the second quarter, growing at an annualized rate of 3.7%. Job creation in the first ten months of the
year has been the strongest ever since 2002 and wage growth has picked up relentlessly. The vitality of the labour market and lower interest rates have energized
the housing market, which has managed to rebound in both Ontario and British Columbia. There is no denying that household debt levels are high and the
savings rate very low at present. This should translate into moderate consumption growth. However, other sectors should step up in 2020 and push the economy
to grow near potential (1.6%)(1). Canadian exports should benefit from persistently strong U.S. demand and a weak currency. Furthermore, given the federal
election results, a fiscal stimulus is in the cards for 2020. Given the economy’s resilience and an annual core inflation rate essentially on target, the Bank of
Canada should not have to follow the Fed’s lead in easing monetary policy, unless hostilities flare up again between China and the United States.
QQuueebbeecc EEccoonnoommyy
The Quebec economy continues to forge ahead at a sustained pace. GDP has grown for ten months in a row, the longest such streak since statistics began to be
calculated in 1997. The economy and the labour market are being spurred on by an accommodative monetary policy and budgetary stimulus. Over 87,000 net
new jobs have been created in the province since the beginning of 2019, the best showing in this regard since 2012. The unemployment rate could hit a record
low for a fourth straight year in 2019. Labour shortages are no doubt having an impact on the hourly wages of permanent employees, which in the past year have
registered their steepest increase by far since 1998 (6.1% in 2019 third quarter). In this context, the real estate market, which remains more affordable in Quebec
than elsewhere in Canada, is headed for a record year in terms of home sales. Economic growth is expected to slow down but should remain solid at 1.5% in
2020 (2.5% in 2019)(1). The household savings rate is high and household debt is lower than in the rest of the country, which bodes well for consumption in the
coming quarters.
(1) GDP growth expectations, Economy and Strategy Group
20
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
FFiinnaanncciiaall AAnnaallyyssiiss
CCoonnssoolliiddaatteedd RReessuullttss
Year ended October 31
(millions of Canadian dollars)
OOppeerraattiinngg rreessuullttss
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Diluted earnings per share (dollars)
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(1)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
SSppeecciiffiieedd iitteemmss(1)
Gain on disposal of Fiera Capital shares
Gain on disposal of premises and equipment
Remeasurement at fair value of an investment
Impairment losses on premises and equipment and on intangible assets
Provisions for onerous contracts
Charge related to Maple
Severance pay
Specified items before income taxes
Income taxes on specified items
Specified items after income taxes
OOppeerraattiinngg rreessuullttss oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
Net interest income on a taxable equivalent basis
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 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 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
Average deposits
Efficiency ratio on a taxable equivalent basis and excluding specified items(1)
22001199
2018
%% cchhaannggee
33,,559966
33,,883366
77,,443322
44,,330011
33,,113311
334477
22,,778844
446622
22,,332222
66..3344
119955
113355
333300
−−
7799
5500
((3333))
((5577))
((4455))
((1111))
((1100))
((2277))
((2211))
((66))
33,,779911
33,,887755
77,,666666
44,,117788
33,,448888
334477
33,,114411
881133
22,,332288
66..3366
228866,,116622
114488,,776655
118844,,446600
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
5.94
144
101
245
−
−
−
−
−
−
−
−
−
−
−
3,526
3,885
7,411
4,063
3,348
327
3,021
789
2,232
5.94
265,940
139,603
167,176
5544..55 %%
54.8 %
66
11
44
66
11
66
−−
((1155))
44
77
88
−−
33
33
44
66
44
33
44
77
88
77
1100
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
National Bank of Canada
21
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Financial Analysis
AAnnaallyyssiiss ooff CCoonnssoolliiddaatteedd RReessuullttss
FFiinnaanncciiaall RReessuullttss
For fiscal 2019, the Bank’s net income totalled $2,322 million compared to $2,232 million in fiscal 2018, a year-over-year increase owing essentially to net
income growth across most of the business segments, tempered by a slowdown in the Financial Markets segment during the first six months of fiscal 2019.
Specified items, net of income taxes, had a $6 million unfavourable impact on net income in fiscal 2019. The fiscal 2019 specified items, net of income taxes,
include a $68 million gain on disposal of Fiera Capital shares, a $43 million gain on disposal of premises and equipment, a $27 million loss on the remeasurement
at fair value of the Bank’s investment in NSIA, $42 million in impairment losses on premises and equipment and on intangible assets, $33 million in provisions
for onerous contracts, an $8 million charge related to Maple, and $7 million in severance pay. For fiscal 2019, the Bank’s net income excluding specified items(1)
totalled $2,328 million, up 4% from $2,232 million in fiscal 2018.
TToottaall RReevveennuueess
For fiscal 2019, the Bank’s total revenues amounted to $7,432 million, up $266 million or 4% from $7,166 million in fiscal 2018. The fiscal 2019 total revenues
include a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the
remeasurement at fair value of the Bank’s investment in NSIA. The increase in total revenues was driven by revenue growth across all of the Bank’s business
segments. The 2019 total revenues on a taxable equivalent basis and excluding specified items(1) were up $255 million or 3% year over year. For additional
information about total revenues on a taxable equivalent basis(1), see Table 2 on page 104.
Net Interest Income
For fiscal 2019, the Bank’s net interest income totalled $3,596 million, rising $214 million from $3,382 million in fiscal 2018. The 2019 net interest income on
a taxable equivalent basis(1) was $3,791 million compared to $3,526 million in fiscal 2018 (Table 3, page 104).
In the Personal and Commercial (P&C) segment, the fiscal 2019 net interest income totalled $2,383 million, a $107 million or 5% year-over-year increase driven
mainly by growth in loan volumes (primarily from mortgage and commercial lending activity) and in deposit volumes, which rose 5% and 7%, respectively. This
increase in P&C’s net interest income was tempered by a narrowing of the net interest margin, which was 2.23% in fiscal 2019 versus 2.24% in fiscal 2018, that
was largely due to a decrease in loan margins. In the Wealth Management segment, the fiscal 2019 net interest income on a taxable equivalent basis(1) totalled
$470 million, a $24 million year-over-year increase owing to growth in loan and deposit volumes.
As for the Financial Markets segment, its 2019 net interest income on a taxable equivalent basis(1) was up $65 million or 16% year over year, mainly due to
trading activities, and should be examined together with the other items of trading activity revenues. In the USSF&I segment, the fiscal 2019 net interest income
was up $72 million year over year owing to growth in loan and deposit volumes at the Advanced Bank of Asia Limited (ABA Bank) subsidiary, tempered by a
decrease in net interest income at the Credigy subsidiary.
Non-Interest Income
For fiscal 2019, non-interest income totalled $3,836 million versus $3,784 million in fiscal 2018. The 2019 non-interest income includes a $79 million gain on
disposal of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the remeasurement at fair value
of the Bank’s investment in NSIA. Non-interest income on a taxable equivalent basis and excluding specified items(1) amounted to $3,875 million in fiscal 2019
compared to $3,885 million in fiscal 2018. For additional information on non-interest income on a taxable equivalent basis(1), see Table 4 on page 105.
The fiscal 2019 revenues from underwriting and advisory fees were down 19% when compared to fiscal 2018, in particular due to merger and acquisition
activities in the Financial Markets segment. Revenues from securities brokerage commissions were also down, declining $17 million as a result of lower
transaction volume during fiscal 2019. Together, mutual fund revenues and trust service revenues totalled $1,058 million in fiscal 2019, a $33 million year-over-
year increase resulting from growth in fee-based revenues and from an increase in assets under administration and under management arising from stronger
stock market performance in 2019.
The trading revenues recorded in non-interest income amounted to $829 million in fiscal 2019 compared to $840 million in fiscal 2018. Trading revenues on a
taxable equivalent basis(1) recorded in non-interest income totalled $964 million, an increase from $941 million in 2018. Including the portion recorded in net
interest income, trading activity revenues on a taxable equivalent basis(1) amounted to $1,199 million in 2019, a $50 million year-over-year increase (Table 5,
page 105) attributable to revenues from equity securities and from fixed-income securities, whereas revenues from commodities and foreign exchange activities
and revenues from other segments decreased year over year.
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
22
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Financial Analysis
In fiscal 2019, revenues from credit fees and revenues from acceptances and letters of credit and guarantee were up $14 million year over year, as there was
increased credit activity in Commercial Banking, the Financial Markets segment, and the Credigy subsidiary. Card revenues posted 10% year-over-year growth
during fiscal 2019, whereas revenues from deposit and payment service charges were down $9 million given a revision to rates. The Bank’s fiscal 2019 insurance
revenues were up $15 million year over year, partly due to a revision to actuarial reserves. As for other-than-trading foreign exchange revenues and gains on
non-trading securities, they remained stable when compared to fiscal 2018. The Bank’s share in the net income of associates and joint ventures was also up,
rising $6 million year over year. Other revenues amounted to $251 million in fiscal 2019, a $78 million year-over-year increase owing mainly to the 2019 specified
items, which include a gain on disposal of Fiera Capital shares and a gain on disposal of premises and equipment, tempered by a loss arising from a fair value
remeasurement of the Bank’s investment in NSIA.
NNoonn--IInntteerreesstt EExxppeennsseess
Non-interest expenses stood at $4,301 million in fiscal 2019, up $238 million from fiscal 2018 (Table 6, page 106). The 2019 non-interest expenses include
$57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts, an $11 million charge
related to Maple, and $10 million in severance pay. Non-interest expenses excluding specified items(1) stood at $4,178 million, up $115 million or 3% year over
year.
Compensation and employee benefits stood at $2,532 million in fiscal 2019, a 3% year-over-year increase resulting from an increase in the number of employees,
which essentially stems from the expansion of ABA Bank’s banking network, and an annual increase in salaries, tempered somewhat by a lower pension expense.
Occupancy expenses were also up, rising year over year due to provisions for onerous contracts recorded during the year in addition to business growth at ABA
Bank. 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, in addition to impairment losses on premises and equipment and intangible assets recorded in fiscal 2019. Other expenses
were also up, mainly due to expenses related to the activities of the Financial Markets segment and to the charge related to Maple.
PPrroovviissiioonnss ffoorr CCrreeddiitt LLoosssseess
For fiscal 2019, the Bank recorded $347 million in provisions for credit losses, $20 million more than the provisions recorded in fiscal 2018 (Table 7, page 107).
This increase came mainly from higher credit loss provisions on credit card receivables, which rose $7 million year over year, and from higher credit loss
provisions on loans in the Financial Markets segment, which rose $26 million year over year. These higher provisions relate mainly to provisions on impaired
loans. In the USSF&I segment, provisions for credit losses on loans were down $14 million, essentially attributable to the Credigy subsidiary. At $313 million,
the fiscal 2019 provisions for credit losses on impaired loans represent 0.21% of average loans and acceptances, less than last year’s 0.23%, notably due to a
decrease in the credit losses on impaired loans of the Credigy subsidiary, tempered by an increase in credit losses on impaired loans in the Financial Markets
segment.
IInnccoommee TTaaxxeess
Detailed information about the Bank’s income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2019, income taxes stood at
$462 million, representing an effective tax rate of 17% compared to $544 million and an effective tax rate of 20% in 2018. This change in effective tax rate was
created mainly by a realization of capital gains taxed at a lower rate, by higher income from lower tax rate jurisdictions, and by a year-over-year increase in the
2019 tax-exempt dividend income.
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
National Bank of Canada
23
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation
reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the
Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.
National Bank of Canada
Business
Segments
Personal and
Commercial
Wealth
Management
Financial
Markets
U.S. Specialty
Finance and
International
Banking services
Credit services
Financing
Investment solutions
Insurance
Major
Activities
Full-service brokerage
Private banking
Direct brokerage
Investment solutions
Administrative and trade
execution services
Transaction products for
advisors
Trust and estate services
Equities, fixed-income,
U.S. Specialty Finance
commodities and
foreign exchange
Corporate banking
Investment banking
Credigy
International
ABA Bank (Cambodia)
Minority interests in
emerging markets
Other: Treasury activities, liquidity management, Bank funding, asset/liability management, corporate units
RReessuullttss bbyy BBuussiinneessss SSeeggmmeenntt
Year ended October 31(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
(recovery)
Income taxes (recovery)(2)
Net income
Non-controlling interests
Net income attributable to the
Bank’s shareholders
Average assets
Personal and
Commercial
2018
22001199
Wealth
Management
2018
22001199
22,,338833
11,,006699
33,,445522
11,,881166
11,,663366
223377
11,,339999
337722
11,,002277
−−
2,276
1,033
3,309
1,782
1,527
228
1,299
347
952
−
447700
11,,227733
11,,774433
11,,006677
667766
−−
667766
117777
449999
−−
446
1,243
1,689
1,058
631
1
630
166
464
−
22001199
447744
11,,227766
11,,775500
774433
11,,000077
3300
997777
226600
771177
−−
Financial
Markets
2018
22001199
USSF&I
2018
409
1,334
1,743
697
1,046
4
1,042
278
764
−
665566
5599
771155
228855
443300
8800
335500
7711
227799
4400
584
55
639
251
388
94
294
72
222
38
22001199
((338877))
115599
((222288))
339900
((661188))
−−
((661188))
((441188))
((220000))
2266
Other
2018
(333)
119
(214)
275
(489)
−
(489)
(319)
(170)
49
22001199
Total
2018
33,,559966
33,,883366
77,,443322
44,,330011
33,,113311
334477
22,,778844
446622
22,,332222
6666
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
87
11,,002277
952
111122,,779988 106,857
449999
66,,221199
464
6,167
771177
111122,,449933
764
100,721
223399
1100,,998855
184
9,270
((222266))
4433,,666677
(219)
42,925
22,,225566
228866,,116622
2,145
265,940
(1)
(2)
For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth
Management segment to the Personal and Commercial segment.
The Net interest income, Non-interest income and Income taxes (recovery) items of the business segments are presented on a taxable equivalent basis. See the Financial Reporting Method
section on pages 14 and 15 for additional information on non-GAAP financial measures.
24
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and approximately 137,000 businesses across Canada.
These clients entrust the Bank to manage, invest, and safeguard their assets and to finance their projects. 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,
422 branches and 939 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.
PPeerrssoonnaall BBaannkkiinngg
Personal Banking provides a complete range of financing and investment products and services, mainly in Quebec, to help clients 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.
CCoommmmeerrcciiaall BBaannkkiinngg
Commercial Banking serves the financial needs of 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 160 years, Commercial Banking is
Quebec’s leading provider of the core banking products for businesses and is also known across Canada for its expertise in targeted specialized industries such
as health, agriculture and agri-food, technology, creative industries, real estate, and energy.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
The economic environment is resilient in Quebec and in the rest of the country, driven by accommodative monetary policy and fiscal stimulus. Consumers are
benefitting from strong employment gains and accelerating wages. The unemployment rate is on track to hit a record low for a fourth straight year in 2019 in
Quebec. Wages are rising at the fastest pace among provinces, and the savings rate stands at a multi-year high, providing a cushion that can support
consumption. Furthermore, both consumer and business confidence are high in Quebec. The province’s household debt level is below the Canadian average,
and housing affordability is better. Business investment is being supported by accelerated depreciation measures implemented by the federal and some
provincial governments. The financial sector is quickly transforming toward digital and mobile services, and there is vigorous competition between established
entities and new market participants that are distinguishing themselves through new technologies.
The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.
KKeeyy SSuucccceessss FFaaccttoorrss
Strong penetration in our core Quebec market thanks to a full range of personal and commercial services.
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.
National Bank of Canada
25
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.
Strategic Priorities
2019 Achievements and Highlights
Maintain volume growth and
accelerate net client acquisition
Improve the client experience
Accelerate the digital
transformation
Improve efficiency
Raised our presence through greater geographic coverage, a larger sales force, and an enhanced advisory
offering, including a partnership with M3 Mortgage Group whereby mortgage brokers can offer Bank products
to their clients.
Personalized our advisory services to target strategic clients such as newcomers, millennials, professionals,
people aged 50 to 64 and SMEs.
Assisted Canadian SMEs with their export activities through a partnership with Export Development Canada
(EDC).
Maintained a high credit quality, with credit loss provisions on impaired loans at 22 basis points for Personal
Banking and at 10 basis points for Commercial Banking.
Enhanced the capabilities of the transactional platform and mobile app to deliver a simpler, safer, and more
intuitive digital experience.
Placed emphasis on a team approach, one that combines generalists and specialists, to give customers the
best possible advice and solutions.
Transformed 35 branches to assist clients in their switch to self-service, by removing physical barriers, and
by being proactive with the advisory offering.
Strengthened business relations with companies and improved the advisory offering to entrepreneurs
through strategic partnerships, such as the partnership with Operio whereby SMEs can benefit from
integrated accounting and advisory services.
Enhanced online origination processes (account opening and mortgage preapproval).
Launched NATgo, an entirely digital investment experience based on client goals.
Won three major Boomerang Awards, which recognize outstanding digital branding performance, for the
experience provided on our transactional sites, mobile apps and website.
Simplified our product offering, particularly for savings accounts.
Unified client processes, both for retail clients (account openings, payments, residential financing and
investing) and for business clients (account openings, financing, and cash management).
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002200
MMaaiinnttaaiinn vvoolluummee ggrroowwtthh aanndd aacccceelleerraattee nneett cclliieenntt aaccqquuiissiittiioonn
Grow our client base, particularly among newcomers, millennials, professionals, peopled aged 50 to 64 and SMEs, with our online origination capabilities,
while enhancing the Bank’s presence with clients who have strong growth potential.
Continue to tailor our offering to market particularities, competition, geographic location and micromarkets.
OOppttiimmiizzee tthhee cclliieenntt eexxppeerriieennccee
Provide clients with a simple, unified experience characterized by an integrated approach across all products and distribution channels.
Expand self-service options on our digital channels.
Continue to deploy an innovative experience within 100-some branches in the network.
Enhance the user experience by providing a consolidated view of all investments and a fully automated savings service.
Help business clients to grow by giving them access to the Bank’s network of entrepreneurs.
FFooccuuss oonn eeffffiicciieennccyy
Continue simplification and automation of certain targeted processes (transactional solutions, payments, and commercial financing).
26
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
SSeeggmmeenntt RReessuullttss –– PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Contribution
Provisions for credit losses
Income before income taxes
Income taxes
NNeett iinnccoommee
Net interest margin(2)
Average interest-bearing assets
Average assets
Average loans and acceptances
Net impaired loans(3)
Net impaired loans(3) as a % of average loans and acceptances
Average deposits
Efficiency ratio
22001199
2018(1)
%% cchhaannggee
22,,338833
11,,006699
33,,445522
11,,881166
11,,663366
223377
11,,339999
337722
11,,002277
22..2233 %%
110066,,999955
111122,,779988
111122,,229900
440099
00..44 %%
6622,,448877
5522..66 %%
2,276
1,033
3,309
1,782
1,527
228
1,299
347
952
2.24 %
101,446
106,857
106,513
386
0.4 %
58,383
53.9 %
55
33
44
22
77
44
88
77
88
55
66
55
66
77
(1)
(2)
(3)
For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth
Management segment to the Personal and Commercial segment.
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.
AAvveerraaggee LLooaannss aanndd AAcccceeppttaanncceess aanndd DDeeppoossiittss
Year ended October 31
(millions of Canadian dollars)
106,513
111122,,229900
58,383
6622,,448877
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2019
21%
79%
Loans and
acceptances
Deposits
Loans and
acceptances
Deposits
2018
22001199
Personal Banking
Commercial Banking
Province of Quebec (2018: 79%)
Other provinces (2018: 21%)
National Bank of Canada
27
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
FFiinnaanncciiaall RReessuullttss
In the Personal and Commercial segment, net income totalled $1,027 million in fiscal 2019, up 8%
from $952 million in fiscal 2018. The segment’s total revenues rose $143 million or 4% year over
year, primarily owing to growth in net interest income, which was up $107 million, as well as to a $36
million increase in non-interest income. The growth in net interest income was driven mostly by higher
personal and commercial loan and deposit volumes but was tempered by a narrowing of the net
interest margin, which was 2.23% in fiscal 2019 versus 2.24% in fiscal 2018, a decrease resulting
mainly from loan margins.
The segment’s non-interest expenses stood at $1,816 million in fiscal 2019, a 2% year-over-year
increase attributable mainly to increases in operations support charges and in amortization expense
arising from the segment's activities as well as in compensation and employee benefits. Given these
results, the segment’s fiscal 2019 contribution was up 7% year over year. And, at 52.6% for fiscal
2019, the segment’s efficiency ratio improved by 1.3 percentage points from 53.9% in 2018.
For fiscal 2019, the segment recorded $237 million in provisions for credit losses, $9 million more
than the $228 million recorded in fiscal 2018. This increase came mainly from higher credit loss
provisions on credit card receivables.
PPeerrssoonnaall BBaannkkiinngg
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2019
37%
46%
4%
13%
Retail (2018: 46%)
Payment Solutions (2018: 13%)
Insurance (2018: 4%)
Commercial Banking (2018: 37%)
For fiscal 2019, Personal Banking’s total revenues amounted to $2,164 million, up 4% from
$2,085 million in fiscal 2018. This growth came mainly from a 4% increase in loan volumes, mainly
mortgage loans, and a 6% increase in deposit volumes. Non-interest income was up $21 million,
essentially due to card revenues and to insurance revenues, reflecting revisions made to actuarial
reserves. Personal Banking’s non-interest expenses rose by $19 million in 2019, resulting mainly
from higher technology investment expenses as well as higher operations support charges related to
the segment's activities.
OOppeerraattiinngg RReessuullttss
Year ended October 31
(millions of Canadian dollars)
3,309
33,,445522
CCoommmmeerrcciiaall BBaannkkiinngg
For fiscal 2019, Commercial Banking’s total revenues amounted to $1,288 million, rising 5% from
$1,224 million in fiscal 2018. Its net interest income was up, essentially due to growth in loan
volumes and deposit volumes, both of which rose 8%, tempered by a narrowing of the net interest
margin on loan and deposit volumes. Non-interest income grew $15 million year over year owing to
increases in revenues from bankers’ acceptances and in revenues from derivative financial
instruments. Commercial Banking’s non-interest expenses rose $15 million in fiscal 2019, mainly due
to higher compensation and employee benefits as well as to higher operations support charges
related to the segment's activities.
1,782
11,,881166
952
11,,002277
Total
revenues
Non-
interest
expenses
Net
income
Total
revenues
Non-
interest
expenses
Net
income
2018
22001199
Personal Banking
Commercial Banking
28
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || WWeeaalltthh MMaannaaggeemmeenntt
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 proposes investment solutions to independent advisors as well as solutions to
institutional clients.
BBuussiinneessss UUnniittss
FFuullll--SSeerrvviiccee BBrrookkeerraaggee
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 services, and insurance services while working in close collaboration with other segments of the Bank.
PPrriivvaattee BBaannkkiinngg
Private Banking 1859 (PB1859) 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, PB1859 continues to expand its operations across Canada
with its extensive range of financial solutions and strategies covering the protection, growth, and transition of wealth.
DDiirreecctt BBrrookkeerraaggee
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 and an optimized mobile trading
platform or by speaking directly to a representative on the phone.
IInnvveessttmmeenntt SSoolluuttiioonnss
National Bank Investments Inc. (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.
AAddmmiinniissttrraattiivvee aanndd TTrraaddee EExxeeccuuttiioonn SSeerrvviicceess
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.
TTrraannssaaccttiioonn PPrroodduuccttss
The Wealth Management segment provides independent advisors across Canada with an extensive range of investment products, including guaranteed
investment certificates (GICs), mutual funds, notes, structured products, and monetization, helping to support their own business needs and client relationships.
TTrruusstt aanndd EEssttaattee SSeerrvviicceess
Through National Bank Trust Inc. (NBT), 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. NBT
also offers integrated trustee and depository services as well as securities custody services.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Policymakers acted pre-emptively as a fear of the global economy sliding into a recession increased as a result of the trade conflict between the United States
and China. The U.S. Federal Reserve applied a rate-cut, realizing a 75-basis point decline in its policy rate. Given the resilience of the Canadian economy and
inflation, the Bank of Canada did not deem stimulus as necessary as the Canadian economy is benefitting from lower long-term rates and improving global
financial conditions. Those welcomed developments, combined with resilience in the labour market and housing market, suggest steady growth in the coming
quarters.
The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.
National Bank of Canada
29
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
KKeeyy SSuucccceessss FFaaccttoorrss
Leadership position in Quebec in terms of market share and brand recognition.
Largest manager of managers in Canada (open architecture); clients benefit from objective advice.
Leadership position in Canada in securities custody and brokerage services for independent wealth management firms.
Firmly rooted across Canada in full-service brokerage and private management services.
Ability to forge solid, lasting client relationships built on personalized advice and solutions provided at every life stage.
High level of client satisfaction with direct brokerage services.
Proven track record and excellent reputation as a business partner among non-bank financial institutions.
Ability to work closely with the Personal and Commercial segment and to leverage its distribution platform.
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
The Wealth Management segment will capitalize on the strength of the Bank's brand, distribution capacity, and differentiated business model to grow market
shares in the mass and mass affluent markets. The segment seeks to increase market penetration across Canada through organic growth as well as targeted
actions and partnerships.
Strategic Priorities
2019 Achievements and Highlights
Transform the partnership with clients
Launched National Bank exchange-traded funds (ETFs).
Launched NATgo, an entirely digital investment experience based on client goals.
Deployed a strategy that centres on goals and life stages.
Deployed a new online brokerage platform.
Invest in high-growth markets
Gradually deploying a new MFDA (Mutual Fund Dealers Association of Canada) platform for B2B clients.
Developed a new cross-selling strategy in partnership with other Bank segments.
Developed a strategy for women investors.
Continue transforming Wealth
Management’s culture
Promoted a joint mission and an integrated client approach within Wealth Management.
Implemented concrete measures to promote innovation and accelerate transformation.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002200
TTrraannssffoorrmm tthhee wwaayy wwee sseerrvvee cclliieennttss
Deploy a customer relationship management (CRM) system for employees of NBFWM.
Enhance the online brokerage and account opening platform.
Increase the usability of the new MFDA platform, which is designed to replace certain existing asset management platforms.
CCoonncceennttrraattee oonn ffaasstt--ggrroowwiinngg mmaarrkkeettss
Launch new types of investment products.
Develop markets outside Quebec, including the Ontario strategy to grow PB1859’s market presence, and its acquisition of high net worth customers and
increase synergies with the Personal and Commercial segment.
Implement the multi-family office strategy.
CCoonnttiinnuuee ttrraannssffoorrmmiinngg WWeeaalltthh MMaannaaggeemmeenntt’’ss ccuullttuurree
Invest in client satisfaction measures in various Wealth Management subsidiaries.
Fine-tune the leadership skills of managers using best management practices.
30
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
SSeeggmmeenntt RReessuullttss –– WWeeaalltthh MMaannaaggeemmeenntt
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income on a taxable equivalent basis
Fee-based revenues
Transaction and other revenues
Total revenues on a taxable equivalent basis
Non-interest expenses
Contribution on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
NNeett iinnccoommee
Average assets
Average loans and acceptances
Net impaired loans(3)
Average deposits
Efficiency ratio on a taxable equivalent basis(1)
22001199
2018(2)
%% cchhaannggee
447700
11,,001133
226600
11,,774433
11,,006677
667766
−−
667766
117777
449999
66,,221199
44,,885555
33
3322,,332211
446
983
260
1,689
1,058
631
1
630
166
464
6,167
4,720
3
31,261
6611..22 %%
62.6 %
55
33
−−
33
11
77
77
77
88
11
33
−−
33
(1)
(2)
(3)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth
Management segment to the Personal and Commercial segment.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd UUnnddeerr MMaannaaggeemmeenntt –– WWeeaalltthh MMaannaaggeemmeenntt
As at October 31
(millions of Canadian dollars)
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn
AAsssseettss uunnddeerr mmaannaaggeemmeenntt
Individual
Mutual funds
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn aanndd uunnddeerr mmaannaaggeemmeenntt
22001199
448844,,663366
4433,,994411
3366,,881199
8800,,776600
556655,,339966
2018
%% cchhaannggee
416,199
37,007
31,874
68,881
485,080
1166
1199
1166
1177
1177
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd UUnnddeerr
MMaannaaggeemmeenntt
Year ended October 31
(millions of Canadian dollars)
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2019
(on a taxable equivalent basis)(1)
9
9
1
,
6
1
4
1
8
8
,
8
6
66
33
66
,,
44
88
44
00
66
77
,,
00
88
36%
64%
2018
22001199
Assets under administration
Assets under management
Province of Quebec (2018: 62%)
Other provinces (2018: 38%)
(1) See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
National Bank of Canada
31
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
FFiinnaanncciiaall RReessuullttss
In the Wealth Management segment, net income totalled $499 million in fiscal 2019, up $35 million
or 8% from $464 million in fiscal 2018. The segment’s total revenues on a taxable equivalent basis(1)
amounted to $1,743 million in fiscal 2019, up $54 million from $1,689 million in fiscal 2018. This
increase stems mainly from a 5% increase in net interest income on a taxable equivalent basis(1)
owing to growth in the segment’s loan and deposit volumes. The fiscal 2019 fee-based revenues were
up 3% year over year given growth in assets under administration and under management generated
by net inflows into various solutions and due to stronger stock market performance in fiscal 2019. As
for the transaction-based and other revenues category, it remained stable when compared to fiscal
2018.
The segment’s non-interest expenses stood at $1,067 million in fiscal 2019, a $9 million year-over-
year increase attributable mainly to higher compensation and employee benefits as well as to higher
operations support charges related to the segment's initiatives. The 2019 efficiency ratio on a taxable
equivalent basis(1) was 61.2% in fiscal 2019, an improvement of 1.4 percentage points from 62.6%
in 2018.
The segment’s provisions for credit losses were negligible in fiscal years 2019 and 2018.
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd UUnnddeerr MMaannaaggeemmeenntt
As at October 31, 2019, assets under administration and under management totalled $565.4 billion,
rising $80.3 billion or 17% from October 31, 2018 due to net inflows into various solutions and to
stronger stock market performance in fiscal 2019.
Assets under administration totalled $484.6 billion as at October 31, 2019, up $68.4 billion
compared to October 31, 2018. This increase came from net inflows into various solutions and to
stronger stock market performance in fiscal 2019.
In the individuals category, assets under management amounted to $43.9 billion as at October 31,
2019 compared to $37.0 billion as at October 31, 2018. The mutual funds category totalled
$36.8 billion as at October 31, 2019, rising 16% from October 31, 2018.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2019
(on a taxable equivalent basis)(1)
15%
27%
58%
Net interest income (2018: 27%)
Fee-based services (2018: 58%)
Transaction-based and other revenues (2018: 15%)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(on a taxable equivalent basis)(1)
(millions of Canadian dollars)
1,689
11,,774433
1,058
11,,006677
464
449999
2018
22001199
Total revenues
Non-interest expenses
Net income
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial
measures.
32
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || FFiinnaanncciiaall MMaarrkkeettss
The Financial Markets segment offers a complete suite of products and services to corporations, institutional clients, and public-sector entities. Whether
providing comprehensive advisory services and research or capital markets products and services, its focus is on client relationships and their growth. Over 800
professionals serve client needs through offices in North America, Europe, the U.K. and Asia.
BBuussiinneessss UUnniittss
The Financial Markets segment operates two main business lines: Global Markets and Corporate and Investment Banking.
GGlloobbaall MMaarrkkeettss
Financial Markets is a Canadian leader in risk management solutions and structured products and is the largest market-maker in exchange-traded funds (ETFs)
in Canada by volume. The segment offers solutions covering fixed income securities, currencies, equities and commodities in order to mitigate the financial and
business risks of clients. It also provides new product development expertise to asset managers and fund companies and supports their success by providing
liquidity, research, and counterparty services. Financial Markets also provides tailored investment products across all asset classes to institutional and retail
distribution channels.
CCoorrppoorraattee aanndd IInnvveessttmmeenntt BBaannkkiinngg
Financial Markets provides services in corporate banking, advisory and capital markets. It offers loan origination and syndication to corporations for project
financing, merger and acquisition transactions, and corporate financing solutions. The segment is also an investment banking leader in Quebec and across
Canada. Its comprehensive services include strategic advisory for financing and mergers and acquisitions as well as for 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.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
In 2019, global uncertainties dominated financial headlines. Trade negotiations between the United States and China oscillated between detente and escalation
before taking a turn for the better at the end of October with the announcement of significant progress for a truce between the two countries. Given the growing
uncertainty and the slowing global economy, a majority of central banks have opted to ease their monetary policy in the third quarter, a record high since the
global recession of 2008-2009. The Bank of Canada did not deem it necessary to add stimulus as labour market strength contributed to a housing market
rebound. Steady growth is expected in the coming quarters, as financial conditions have improved and some fiscal stimulus is expected next year.
The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.
KKeeyy SSuucccceessss FFaaccttoorrss
Pan-Canadian franchise with established leadership in government debt underwriting, ETF market-making, and securities lending and recognized
capabilities in risk management solutions, structured products and equity derivatives.
Integrated approach, teamwork, and alignment among all groups.
Focused on client relationships and diversified client activity and revenue mix.
Sound risk management.
Flexible approach to capital allocation and proven ability to adapt to evolving capital market conditions and deliver consistent financial performance.
National Bank of Canada
33
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
Strategic Priorities
2019 Achievements and Highlights
Ranked first in government debt underwriting:
Lead and joint lead on Canada Mortgage Bond issuances aggregating $30.25 billion.
Lead on multiple deals for the Province of Quebec aggregating $9.5 billion.
Inaugural joint lead for the Government of Canada on a US$3.0 billion 3-year offering.
Inaugural lead for the Province of Newfoundland and Labrador on a $300 million 10-year offering.
Lead on the First Nations Finance Authority’s $163 million 9-year offering.
Joint lead for South Coast British Columbia Transportation Authority’s (TransLink) $200 million 31-year Green
Bond offering.
Joint lead for the City of Toronto’s $200 million 20-year Green Bond offering.
Maintain leadership in Canadian debt
underwriting
Lead in corporate debt underwriting:
Joint bookrunner on a $300 million senior unsecured note offering for Parkland Fuel Corporation.
Joint bookrunner on a $350 million 2.25-year senior unsecured debenture offering for SmartCentres REIT.
Joint bookrunner on an inaugural $125 million senior unsecured note offering for Kruger Packaging Holdings
L.P.
Joint bookrunner on a $200 million 5-year senior unsecured note offering for Cominar REIT.
Sole lead placement agent on a $325 million private placement transaction for Capital Power Corporation.
Joint bookrunner on two U.S.-dollar high-yield transactions for Fairstone Financial Inc., raising US$425 million
for the company.
Joint bookrunner on a $450 million dual tranche offering for EPCOR Utilities.
Joint bookrunner on a $350 million senior unsecured debenture offering for CI Financial Corporation.
Joint bookrunner on a $700 million dual-tranche offering for Enbridge Gas Inc.
Joint bookrunner on a US$750 million inaugural U.S.-dollar bail-in and first sustainable note offering for
National Bank of Canada.
Maintain leadership in investment
products
Strengthened our relationships with international networks by issuing more than $1 billion of notes outside of
Canada, which contributed to the diversification of the Bank’s deposit base.
Ranked first in ETF market-making in Canada:
Increased our market share relative to last year, capturing 42% of total buy and sell volume, despite market
conditions.
Selected as designated broker 64 times, which represents a 48% increase year over year.
Pioneer in overnight offerings, which continue to be a successful means for asset managers to raise capital:
Led another $500 million of overnight offerings as a combination of split-share and single-trust unit funds.
Launched the first ever Canadian at-the-market (ATM) issuance programs for two listed investment funds.
Awarded Deal of the Year in rate structures by mtn-i, a global news, data and analytics platform covering the
private debt market.
Awarded Most Impressive Financial Institutional Structured MTN Issuer by GlobalCapital, a global service
provider of capital markets information whose methodology relies on the views of market participants.
34
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Strategic Priorities
2019 Achievements and Highlights
Awarded the Greenwich Quality Leader in Canadian FX Service by Greenwich Associates, a leading global provider
of data, analytics and insights to the financial services industry. Overall, National Bank Financial leads in the ability
to understand client needs and deliver intensive sales coverage.
Involved in significant mandates including:
Acted as financial advisor to the Special Committee of Dream Global REIT in relation to its acquisition by
Blackstone Group Inc.
Advisor to Pipestone Oil Corp. in their $650 million reverse takeover of Blackbird Energy Inc. to form Pipestone
Energy Corp. (TSX-V: PIPE) as well as underwriting and currently acting as administrative agent, lead arranger
and sole bookrunner with respect to Pipestone’s $198.5 million senior secured credit facilities.
Financial advisor to Atlantic Gold Corp. on its sale to Australian-based St Barbara Limited, for a total
consideration of $802 million. Also acted as sole lead arranger and bookrunner for Atlantic Gold Corporation’s
$150 million revolving credit facility and underwrote the change of control provision for St Barbara in
conjunction with the transaction.
Exclusive financial advisor to Osisko Gold Royalties Ltd. on: (i) its acquisition of Barkervillle Gold Mines Ltd. in
a transaction valued at $338 million and (ii) its $175 million asset swap transaction with Orion Resource
Partners. Also acted as sole lead arranger and bookrunner for Osisko’s $400 million revolving credit facility.
Sole financial advisor to Bombardier Inc. on a US$300 million disposal of the Q Series program and the
underlying aftermarket business to Longview Aviation Capital Corp.
Sole financial advisor to Bombardier Inc. on a US$800 million disposal of its Business Aircraft Training
activities, including a US$155 million monetization of royalties that were payable by CAE Inc.
Sole financial advisor to Transat A.T. Inc. in its review of strategic alternatives and $720 million disposal to Air
Canada.
Joint bookrunner on Lightspeed POS Inc.’s $276 million initial public offering and $217 million follow-on
offering.
Co-bookrunner on $144 million equity offering for Park Lawn Corporation.
Co-lead on Northland Power Inc.’s $347 million subscription receipt equity financing.
Co-financial advisor for Crescent Point Energy Corp. on the sale of certain oil & gas assets in southeast
Saskatchewan and Manitoba for $219 million.
Co-bookrunner and co-lead on an equity financing and administrative agent for Allied Energy Corp. as well co-
lead arranger and joint bookrunner on a $75 million senior secured credit facility to finance the acquisition of
certain assets from Crescent Point Energy Corp.
Expand our client coverage to increase
our presence in advisory services
Leverage leadership in equity
distribution to increase lead and co-
lead positions
Priorities and Outlook for 2020
Continue to expand our activities in areas of expertise with a constant focus on Canadian clients.
Continue to be a strategic partner for our clients.
Increase market share among corporations for all fee-based products.
Continue to automate processes, use artificial intelligence, and increase data-sharing across the Financial Markets segment.
Maintain tight cost control and an industry-leading efficiency ratio.
National Bank of Canada
35
National Bank of Canada2019 Annual Report 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
Corporate and investment 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
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
NNeett iinnccoommee
Average assets
Average loans and acceptances
Net impaired loans(3)
Average deposits
Efficiency ratio on a taxable equivalent basis(1)
22001199
2018(2)
%% cchhaannggee
662244
228899
112266
11,,003399
771199
((88))
11,,775500
774433
11,,000077
3300
997777
226600
771177
111122,,449933
1166,,557755
2233
3300,,331111
576
267
130
973
750
20
1,743
697
1,046
4
1,042
278
764
100,721
15,116
−
23,510
4422..55 %%
40.0 %
88
88
((33))
77
((44))
−−
77
((44))
((66))
((66))
((66))
1122
1100
2299
(1)
(2)
(3)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For the year ended October 31, 2018, certain amounts have been reclassified.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
973
11,,003399
750
771199
20
2018
22001199
((88))
Global markets - Equities
Global markets - Fixed-income
Global markets - Commodities and foreign exchange
Corporate and investment banking
Gains on investments and other
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2019
(taxable equivalent basis)(1)
41 %
22 %
37 %
Province of Quebec (2018: 31%)
Other provinces (2018: 42%)
Outside of Canada (2018: 27%)
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
36
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Financial Results
In the Financial Markets segment, net income totalled $717 million in fiscal 2019, down 6% year over
year. The segment’s fiscal 2019 total revenues on a taxable equivalent basis(1) amounted to $1,750
million, up $7 million from $1,743 million in fiscal 2018. Revenues from the Global Markets category
posted year-over-year growth of 7%, with revenues from equity securities and from fixed-income
securities each rising 8%, tempered by a 3% decrease in revenues from commodities and foreign
exchange activities. As for corporate and investment banking revenues, they were down 4% year over
year, mainly due to a slowdown in capital markets activity as well as to a decrease in merger and
acquisition activities in fiscal 2019. This decrease was partly offset by higher banking services
revenues in fiscal 2019. Lastly, higher gains on investments and other revenues were recorded in
fiscal 2018.
For the year ended October 31, 2019, the segment’s non-interest expenses rose 7% year over year,
mainly due to increases in compensation and employee benefits, in expenses related to technological
investments, in business development expenses, and in operations support charges. The segment’s
fiscal 2019 efficiency ratio on a taxable equivalent basis(1) was 42.5% in fiscal 2019 versus 40.0% in
2018.
Financial Markets recorded $30 million in provisions for credit losses during fiscal 2019 compared to
$4 million in fiscal 2018, an increase that stems mainly from credit loss provisions on impaired loans.
(1)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial
measures.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2019
(taxable equivalent basis)(1)
41 %
59 %
Global markets (2018: 56%)
Corporate and investment banking (2018: 43%)
Gains on investments and other (2018: 1%)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
1,743
11,,775500
764
697
774433
771177
2018
22001199
Total revenues
Non-interest expenses
Net income
National Bank of Canada
37
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted, disciplined international strategy that aims for superior returns. 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. The Bank also holds minority positions
in financial groups operating in French-speaking Africa and Africa-Asia. The Bank has a moratorium in effect on any new significant investments in emerging
markets. During fiscal 2019, the U.S. Specialty Finance and International (USSF&I) segment generated 10% of the Bank’s consolidated total revenue and 12%
of its net income.
UU..SS.. SSppeecciiaallttyy FFiinnaannccee –– CCrreeddiiggyy
Founded in 2001, Credigy is a specialty finance company with flexibility across its capital structure to acquire or finance a diverse range of assets. Based in
Atlanta, Georgia, Credigy is primarily active in performing assets covering a broad range of asset classes, mostly consumer receivables in the U.S. market. The
Bank holds an 80% ownership interest in Credigy.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Despite global uncertainty negatively affecting exports and business investment, the U.S. economy posted steady growth in 2019 thanks to resilience in
consumption. Consumer confidence in the U.S. is flying high given a still-hot labour market that is fuelling household income. Lower interest rates and low
leverage suggest upside potential for household credit in the U.S.
The economic environment in 2019 and the outlook for 2020 are discussed in more detail in the Economic Review and Outlook section on page 20.
KKeeyy SSuucccceessss FFaaccttoorrss
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 300 transactions life-to-date, representing over US$13 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.
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
Credigy aims to 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
2019 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 average assets of approximately $7 billion.
Maintain a diversified mix of
performing assets
Performing assets accounted for 96% of assets.
Continued diversification in asset classes focusing on both secured and unsecured consumer assets.
Achieve best risk-adjusted returns
Credit model monitoring and refinement helped Credigy focus on the best risk/reward investments.
Maintained a disciplined approach to ensure a risk-return balance and an ROA of at least 2.5%.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002200
Deliver growth by leveraging relationships with current and prospective partners.
Leverage committed funding agreements to support asset growth.
Capitalize on changing market conditions that have potential for large investment opportunities.
Maintain focus on asset diversification and a balanced risk/return investment profile.
38
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
IInntteerrnnaattiioonnaall –– AABBAA BBaannkk
Established in 1996, ABA Bank provides financial services to individuals and businesses in Cambodia. It is the third largest and fastest-growing commercial
bank in the country with an ROE of approximately 30%. It offers a full spectrum of financial services to micro, small and medium enterprises (MSMEs) as well as
to individuals through 70 branches, 541 ATM and cash deposit machines, and advanced online banking and mobile banking platforms. For the fifth and sixth
straight years respectively, ABA Bank has been selected as the Best Bank in Cambodia by Global Finance and Euromoney magazines. In fiscal 2019, the Bank
became 100% shareholder of ABA Bank after acquiring the remaining 10% ownership interest.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
The Cambodian economy is rapidly growing, with GDP growth nearing 7% in the past decade. It is a well-diversified economy, largely based on the U.S. dollar.
The strong GDP growth is supported by its membership in the Association of Southeast Asian Nations (ASEAN) trade association and an expansionary fiscal
policy. The Cambodian market is highly underbanked, with approximately 8% of the population having a credit account and 40% having a deposit account.
Mobile technology and social media are widely adopted and used in the country, and over 70% of the population of 16.5 million is under 35 years of age.
KKeeyy SSuucccceessss FFaaccttoorrss
Loan strategy targeting MSMEs with simple products.
Strong risk management driving high credit quality.
Ability to fund loan growth through the deposit strategy.
Deposit strategy leveraging state-of-the art technology, leading to an expanding transactional banking ecosystem.
Experienced leadership team, and educated workforce supported by robust training programs.
Governance structure based on high Canadian standards while providing local management with the autonomy to pursue strategic priorities and business
objectives.
Leveraging National Bank’s reputation as a world-class financial institution.
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
ABA Bank wishes to pursue omnichannel banking strategy 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
2019 Achievements and Highlights
Grow market share in MSME lending
while contributing to the economy
and maintaining credit quality
Achieved 52% growth in loan volumes, with 100% of loans collateralized.
At 0.7% in 2019, non-performing loans below market average.
Increased market penetration with the opening of 7 new branches for a total of 70 branches country-wide.
Improved from fourth to third largest bank in Cambodia by assets.
Sustain growth in deposits and
transactional services
Deposits increased 82% compared to 2018.
Continued to make enhancements to self-banking capabilities, including the first full-scale mobile banking
application in Cambodia.
ABA’s online payment gateway (PayWay) was optimized, adding new functions that facilitate merchant
operations and that transform the Cambodian eCommerce landscape.
Self-banking transactions made up 94% of all transactions, compared to 90% in 2018.
Retain international recognition of
ABA Bank’s progress
Global Finance magazine named ABA Bank as the “Best Bank in Cambodia” for the fifth consecutive year.
Euromoney magazine named ABA Bank as the “Best Bank in Cambodia” for the sixth consecutive year.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002200
LLeevveerraaggee ppoossiittiivvee eeccoonnoommiicc oouuttllooookk bbyy ssttaayyiinngg ffooccuusseedd oonn ccoorree ttaarrggeett mmaarrkkeettss
Continue to offer simple and efficient banking solutions aligned with domestic needs in the underbanked Cambodian market.
Focus on MSME clients to achieve loan growth.
Increase deposit base by offering convenience to retail customers through an advanced digital and self-banking infrastructure and an expanding branch
network.
EEnnssuurree ssoolliidd ffoouunnddaattiioonn ffoorr ssuussttaaiinnaabbllee lloonngg--tteerrmm ggrroowwtthh
Open 10 to 12 additional branches in 2020 to extend its reach in Cambodia and gain direct access to a larger pool of MSME customers and retail deposits.
Focus on sound business processes as well as on strong governance and risk management.
National Bank of Canada
39
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
SSeeggmmeenntt RReessuullttss –– UUSSSSFF&&II
Year ended October 31
(millions of Canadian dollars)
TToottaall rreevveennuueess
Credigy
ABA Bank
International
NNoonn--iinntteerreesstt eexxppeennsseess
Credigy
ABA Bank
International
Contribution
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
Credigy
ABA Bank
Income before income taxes
Income taxes
NNeett iinnccoommee
Non-controlling interests
Net income attributable to the Bank's shareholders
Average assets
Average loans and receivables
Net impaired loans – Stage 3(1)
Purchased or originated credit-impaired (POCI) loans
Average deposits
Efficiency ratio
22001199
2018
%% cchhaannggee
440022
330033
1100
771155
115522
113311
22
228855
443300
6688
1122
8800
335500
7711
227799
4400
223399
1100,,998855
88,,990077
1155
11,,116666
33,,447744
446
192
1
639
156
93
2
251
388
81
13
94
294
72
222
38
184
9,270
7,853
15
1,576
1,907
3399..99 %%
39.3 %
((1100))
5588
1122
((33))
4411
1144
1111
((1166))
((88))
((1155))
1199
((11))
2266
55
3300
1199
1133
−−
((2266))
8822
(1)
Net impaired loans – Stage 3 exclude POCI loans and are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
AAvveerraaggee LLooaannss –– CCrreeddiiggyy
Year ended October 31
(millions of Canadian dollars)
6,058
66,,117799
AAvveerraaggee LLooaannss aanndd DDeeppoossiittss –– AABBAA BBaannkk
Year ended October 31
(millions of Canadian dollars)
33,,447744
22,,772288
1,907
1,790
2018
22001199
2018
22001199
Loans
POCI loans
Loans
Deposits
40
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
FFiinnaanncciiaall RReessuullttss
In the USSF&I segment, the fiscal 2019 net income totalled $279 million compared to $222 million in
fiscal 2018. The segment’s fiscal 2019 total revenues amounted to $715 million versus $639 million
in fiscal 2018, representing year-over-year growth of 12% that came mainly from a $111 million
increase in the revenues of the ABA Bank subsidiary owing to sustained growth in loan and deposit
volumes. At the Credigy subsidiary, revenues were down $44 million as a result of changes in the loan
portfolio mix.
The segment’s non-interest expenses stood at $285 million in fiscal 2019, a $34 million year-over-
year increase essentially attributable to all of ABA Bank’s non-interest expenses and related to its
growing banking network. At the Credigy subsidiary, non-interest expenses were down slightly year
over year.
In fiscal 2019, the segment recorded $80 million in provisions for credit losses, consisting essentially
of Credigy’s credit loss provisions.
CCrreeddiiggyy
For fiscal 2019, Credigy's net income totalled $144 million, down $10 million from fiscal 2018. The
subsidiary’s total revenues amounted to $402 million compared to $446 million in fiscal 2018, a
$44 million or 10% decrease attributable mainly to lower net interest income arising from changes in
the loan portfolio mix. Credigy’s fiscal 2019 non-interest expenses stood at $152 million versus $156
million in fiscal 2018, with the decrease being attributable to the variable compensation associated
with the subsidiary’s revenues. Credigy recorded $68 million in provisions for credit losses for fiscal
2019 versus $81 million in fiscal 2018, a decrease that is attributable to credit loss provisions on
impaired and non-impaired loans following repayments and maturities of certain loan portfolios,
whereas credit loss provisions on POCI loans were up compared to fiscal 2018.
AABBAA BBaannkk
For fiscal 2019, ABA Bank’s net income totalled $128 million, up $59 million or 86% from fiscal 2018.
The subsidiary’s total revenues amounted to $303 million compared to $192 million in fiscal 2018, a
$111 million or 58% increase driven mainly by higher net interest income owing to sustained growth
in loan volumes and deposit volumes, which rose 52% and 82%, respectively. The subsidiary’s fiscal
2019 non-interest expenses stood at $131 million compared to $93 million in fiscal 2018. This
increase was attributable to the expansion of the subsidiary’s banking network, including
compensation and employee benefits as well as occupancy expenses. For fiscal 2019, ABA Bank
recorded $12 million in provisions for credit losses, stable when compared to $13 million in fiscal
2018.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2019
1%
43%
56%
Credigy (2018: 70%)
ABA Bank (2018: 30%)
International (2018: negligible)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(millions of Canadian dollars)
639
771155
251
222
228855
227799
Total
revenues
Non-
interest
expenses
Net
income
Total
revenues
Non-
interest
expenses
Net
income
2018
22001199
Credigy
ABA Bank and International
National Bank of Canada
41
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || OOtthheerr
The Other heading reports on Treasury operations, liquidity management, Bank funding, asset and liability management, certain non-recurring items, and the
unallocated portion of corporate units. Corporate units include Information Technology, Risk Management, Employee Experience, 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.
SSeeggmmeenntt RReessuullttss –– OOtthheerr
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income on a taxable equivalent basis
Non-interest income on a taxable equivalent basis
Total revenues on a taxable equivalent basis
Non-interest expenses
Contribution on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes (recovery) on a taxable equivalent basis
NNeett lloossss
Non-controlling interests
Net loss attributable to the Bank’s shareholders
Specified items after income taxes(1)
NNeett lloossss eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
Average assets
22001199
2018(2)
((119922))
229944
110022
339900
((228888))
−−
((228888))
((8888))
((220000))
2266
((222266))
66
((119944))
4433,,666677
(189)
220
31
275
(244)
−
(244)
(74)
(170)
49
(219)
−
(170)
42,925
(1)
(2)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For the year ended October 31, 2018, certain amounts have been reclassified.
FFiinnaanncciiaall RReessuullttss
For the Other heading of segment results, there was a net loss of $200 million in fiscal 2019 compared to a net loss of $170 million in fiscal 2018. This change
in net loss was essentially due to a lower contribution from treasury activities during fiscal 2019 arising in part from the impact of market volatility on the Bank’s
asset/liability management portfolio during the first quarter of 2019. The specified items recorded for fiscal 2019 had a $6 million unfavourable impact on the
net income recorded in the Other heading. Net loss excluding specified items stood at $194 million for fiscal 2019 compared to a $170 million net loss in fiscal
2018.
Total revenues on a taxable equivalent basis were up, mainly due to the specified items recorded for fiscal 2019, which include a $79 million gain on disposal
of Fiera Capital shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss arising from the fair value remeasurement of the Bank’s
investment in NSIA. The fiscal 2019 non-interest expenses were also up as a result of the following specified items: $57 million in impairment losses on premises
and equipment and on intangible assets, $45 million in provisions for onerous contracts, an $11 million charge related to Maple, and $10 million in severance
pay.
42
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
QQuuaarrtteerrllyy FFiinnaanncciiaall IInnffoorrmmaattiioonn
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 102 and 103.
QQuuaarrtteerrllyy RReessuullttss SSuummmmaarryy(1)
(millions of Canadian dollars)
SSttaatteemmeenntt ooff iinnccoommee ddaattaa
Net interest income
Non-interest income
Total revenues
Provisions for credit losses
Non-interest expenses
Income taxes
NNeett iinnccoommee
QQ44
QQ33
QQ22
993366
997799
11,,991155
8899
11,,009955
112277
660044
885555
11,,009933
11,,994488
8866
11,,115544
110000
660088
994422
882288
11,,777700
8844
11,,002266
110022
555588
22001199
QQ11
886633
993366
11,,779999
8888
11,,002266
113333
555522
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
(1)
For additional information about the 2019 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 2019, published on December 4, 2019.
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 net income growth across most of the Bank’s main business segments, the net income for each quarter of
2019 was up year over year. However, the year-over-year growth in net income for the first and second quarters of 2019 was tempered somewhat by a slowdown
in the activities of the Financial Markets segment.
Net interest income posted year-over-year growth in every quarter of 2019. These increases were mainly driven by growth in personal and commercial loan and
deposit volumes, net interest income growth at Wealth Management (notably due to loan and deposit growth) and to growth in the net interest income of the
ABA Bank subsidiary. The year-over-year increases in net interest income for the first and third quarters of 2019 were tempered somewhat by lower net interest
income in the Financial Markets segment. Furthermore, the Credigy subsidiary posted less net interest income in the first, second, and third quarters of 2019 as
a result of changes in the loan portfolio mix.
The non-interest income results for the first, second and fourth quarters of 2019 were down year over year. Non-interest income in the first and second quarters
of 2019 was down year over year given a slowdown in the activities of the Financial Markets segment. The 2019 third-quarter non-interest income included a
revision to actuarial reserves and the following specified items: a $79 million gain on disposal of Fiera Capital shares, a $50 million gain on disposal of premises
and equipment, and a $33 million loss arising from the remeasurement at fair value of the Bank’s investment in NSIA.
The provisions for credit losses posted year-over-year increases in almost every quarter of 2019. Higher credit loss provisions were recorded in the third and
fourth quarters of 2019 as a result of provisions on personal loans, credit card receivables, and Financial Markets loans. For the second quarter of 2019,
provisions for credit losses saw a year-over-year decrease, mainly due to provisions recorded on loans at the Credigy subsidiary.
The non-interest expense results for every quarter of 2019 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 investment expenses made as part of the Bank’s
transformation plan and for business development activities, and expenses related to the expansion of ABA Bank’s banking network. In addition, non-interest
expenses for the third quarter of 2019 included $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions
for onerous contracts, and $10 million in severance pay. For the fourth quarter of 2019, non-interest expenses included an $11 million charge related to Maple.
The effective income tax rate for every quarter of 2019 was down year over year. These changes in effective tax rate between the quarters of 2019 and 2018 were
created mainly by a realization of capital gains taxed at a lower rate, by higher income from lower tax rate jurisdictions, and by lower tax-exempt dividend income.
In addition, the U.S. tax reform had an impact on the effective tax rate of the first quarter of 2019 compared to the first quarter of 2018.
National Bank of Canada
43
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
AAnnaallyyssiiss ooff tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett SSuummmmaarryy
As at October 31
(millions of Canadian dollars)
AAsssseettss
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances, net of allowances
Other
LLiiaabbiilliittiieess aanndd eeqquuiittyy
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders
Non-controlling interests
22001199
2018
%% cchhaannggee
1133,,669988
8822,,222266
1177,,772233
115533,,225511
1144,,556600
228811,,445588
118899,,556666
7755,,998833
777733
1144,,777788
335588
228811,,445588
12,756
69,783
18,159
146,082
15,691
262,471
170,830
76,539
747
13,976
379
262,471
77
1188
((22))
55
((77))
77
1111
((11))
33
66
((66))
77
As at October 31, 2019, the Bank’s total assets amounted to $281.5 billion compared to $262.5 billion at year-end 2018, a $19.0 billion or 7% increase owing
mainly to a $12.4 billion increase in securities and a $7.2 billion increase in loans and acceptances, net of allowances.
CCaasshh aanndd DDeeppoossiittss WWiitthh FFiinnaanncciiaall IInnssttiittuuttiioonnss
At $13.7 billion as at October 31, 2019, cash and deposits with financial institutions rose $0.9 billion or 7% since the same date last year, mainly due to deposits
with financial institutions made by the ABA Bank subsidiary. The Bank’s liquidity and funding risk management practices are described on pages 82 to 89 of this
MD&A.
SSeeccuurriittiieess
As at October 31, 2019, securities totalled $82.2 billion (29% of total assets). During fiscal 2019, they grew $12.4 billion from $69.8 billion as at October 31,
2018. This growth was partly due to a $6.0 billion increase in securities at fair value through profit or loss attributable to a $13.5 billion increase in equity
securities and to a $1.3 billion increase in securities issued or guaranteed by U.S. Treasury, other U.S. agencies and other foreign governments. These increases
were tempered by a $4.2 billion decrease in securities issued or guaranteed by the Canadian government and a $3.9 billion decrease in securities issued or
guaranteed by Canadian provincial and municipal governments. Securities other than those measured at fair value through profit or loss were up $6.4 billion,
essentially due to a $2.1 billion increase in securities issued or guaranteed by the Canadian government, to a $3.5 billion increase in securities issued or
guaranteed by U.S. Treasury, other U.S. agencies, and other foreign governments, and to a $0.8 billion increase in other debt securities. Securities purchased
under reverse repurchase agreements and securities borrowed totalled $17.7 billion as at October 31, 2019, a 2% decrease since year-end 2018 that is mainly
related to activities in the Financial Markets segment. The Bank’s market risk management policies are described on pages 75 to 81 of this MD&A.
LLooaannss aanndd AAcccceeppttaanncceess
As at October 31, 2019, loans and acceptances, net of allowances for credit losses, totalled $153.3 billion, up $7.2 billion or 5% from October 31, 2018, and
accounted for 54% of total assets.
Residential mortgage loans outstanding totalled $57.2 billion as at October 31, 2019, rising $3.5 billion or 7% since year-end 2018. This growth was driven by
sustained demand for mortgage credit as well as by business growth at the ABA Bank subsidiary. Personal loans totalled $36.9 billion at year-end 2019, declining
$0.5 billion from $37.4 billion at year-end 2018 due in part to changes in the loan portfolio mix of the Credigy subsidiary. As for credit card receivables, they
totalled $2.3 billion, remaining stable when compared to October 31, 2018.
At $57.5 billion as at October 31, 2019, loans and acceptances to businesses and government increased $4.1 billion or 8% since October 31, 2018. This increase
was driven mainly by Commercial Banking and Credigy subsidiary activities.
Table 9 (page 109) shows gross loans and acceptances by borrower category as at October 31, 2019. At $74.4 billion, residential mortgages (including home
equity lines of credit) have posted strong growth since 2015 and account for 48% of total loans and acceptances. This growth in residential mortgages was
driven by sustained demand for mortgage credit as well as by growth in business activity at the ABA Bank subsidiary. As for retail loans, they totalled $15.7 billion
as at October 31, 2019. With respect to commercial loans, there was year-over-year growth in the agriculture category, utilities category, and manufacturing
category. As at October 31, 2019, certain categories posted year-over-year decreases, notably the mining category, the finance and insurance category, and the
government category. Furthermore, the Credigy subsidiary’s POCI loans were down from October 31, 2018 due to maturities and repayments in certain portfolios.
44
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
IImmppaaiirreedd LLooaannss
Impaired loans include loans classified in Stage 3 of the expected credit loss model and the purchased or originated credit-impaired (POCI) loans of the Credigy
subsidiary.
As at October 31, 2019, gross impaired loans excluding POCI loans stood at $684 million compared to $630 million as at October 31, 2018 (Table 10, page 109).
Net impaired loans excluding POCI loans totalled $450 million as at October 31, 2019 compared to $404 million as at October 31, 2018, a $46 million increase
related to net impaired loans in the Commercial Banking portfolio and the Financial Markets segment. Gross POCI loans stood at $1,166 million as at October
31, 2019, down from $1,576 million as at October 31, 2018 as a result of maturities and repayments of certain portfolios.
A detailed description of the Bank’s credit risk management practices is provided on pages 67 to 74 of this MD&A as well as in Note 7 to the consolidated
financial statements.
OOtthheerr AAsssseettss
As at October 31, 2019, other assets totalled $14.6 billion compared to $15.7 billion as at October 31, 2018. This $1.1 billion decrease in other assets can
essentially be traced to a $0.5 billion decrease in derivative financial instruments and to a $0.4 billion decrease in other assets. Investments in associates and
joint ventures declined due to the disposal of a portion of the Bank’s interest in Fiera Capital as well as to a conclusion to stop recognizing the equity stake in
NSIA as an investment in an associate following a loss of significant influence. Premises and equipment also decreased due to the sale of the land and head
office building occupied by the Bank.
DDeeppoossiitt LLiiaabbiilliittyy
At $189.6 billion as at October 31, 2019, deposits increased by $18.8 billion or 11% since year-end 2018. At $60.1 billion, personal deposits, as presented in
Table 12 (page 110), increased $4.4 billion since October 31, 2018 and accounted for 32% of all deposits. This increase was driven by Bank initiatives designed
to grow this type of deposit as well as by business growth at the ABA Bank subsidiary. A summary of total personal savings is provided in the table below.
As shown in Table 12, business and government deposits totalled $125.3 billion, up $15.0 billion from $110.3 billion at year-end 2018. This increase came from
business growth at Commercial Banking and from treasury funding activities, including $3.5 billion in deposits subject to bank recapitalization (bail-in)
conversion regulations, from corporate financing activities and from issuances of structured notes. Deposits from deposit-taking institutions were down
$0.6 billion from the same date last year.
As at October 31, 2019, total personal savings amounted to $233.0 billion, up from $211.5 billion as at October 31, 2018. Overall, off-balance-sheet personal
savings stood at $172.9 billion as at October 31, 2019 compared to $155.8 billion a year ago given net inflows in brokerage operations and stronger stock
market performance.
TToottaall PPeerrssoonnaall SSaavviinnggss
As at October 31
(millions of Canadian dollars)
BBaallaannccee sshheeeett
Deposits
OOffff--bbaallaannccee--sshheeeett
Brokerage
Mutual funds
Other
TToottaall
22001199
2018
%% cchhaannggee
6600,,006655
55,688
113355,,776688
3366,,881199
331199
117722,,990066
223322,,997711
123,458
31,874
440
155,772
211,460
88
1100
1166
((2288))
1111
1100
OOtthheerr LLiiaabbiilliittiieess
As at October 31, 2019, other liabilities stood at $76.0 billion, declining $0.5 billion since October 31, 2018, essentially due to a $5.0 billion decrease in
obligations related to securities sold short, partly offset by a $1.9 billion increase in obligations related to securities sold under repurchase agreements and
securities loaned, a $0.9 billion increase in derivative financial instruments, and a $1.2 billion increase in liabilities related to transferred receivables.
SSuubboorrddiinnaatteedd DDeebbtt aanndd OOtthheerr CCoonnttrraaccttuuaall OObblliiggaattiioonnss
Subordinated debt has remained relatively stable since October 31, 2018. The contractual obligations are presented in detail in Note 29 to the consolidated
financial statements.
National Bank of Canada
45
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
EEqquuiittyy
As at October 31, 2019, equity attributable to the Bank’s shareholders was $14.8 billion, rising $0.8 billion from $14.0 billion since October 31, 2018. This
increase came from net income net of dividends, tempered by remeasurements of pension plans and other post-employment benefit plans, by a net change in
gains (losses) on cash flow hedges, and by repurchases of common shares for cancellation, factors which themselves were partly offset by issuances of common
shares under the Stock Option Plan and the impact of shares purchased or sold for trading. The Consolidated Statements of Changes in Equity on page 118 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.
AAccqquuiissiittiioonn
On September 27, 2019, the Bank acquired the entire remaining non-controlling interest in the Cambodian subsidiary Advanced Bank of Asia Limited (ABA Bank)
for $84 million. Following this transaction, ABA Bank became a wholly owned subsidiary of the Bank.
EExxppoossuurreess ttoo CCeerrttaaiinn AAccttiivviittiieess
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 12 of this Annual Report is a table of contents that readers can use to locate information
relative to the 32 recommendations.
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 $402 million as at October 31, 2019 ($425 million as at October 31, 2018). 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, 2019, total commitments for this type of loan
stood at $3,559 million ($2,967 million as at October 31, 2018). Details about other exposures are provided in the table concerning structured entities in Note 27
to the consolidated financial statements.
46
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
RReellaatteedd PPaarrttyy TTrraannssaaccttiioonnss
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.
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 22 to the consolidated financial
statements. Additional information on related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.
IInnccoommee TTaaxxeess
In June 2019, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2014.
In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $220 million (including provincial tax and interest) in
respect of certain Canadian dividends received by the Bank during the 2013 and 2012 taxation years.
The transactions to which the above-mentioned reassessments relate are similar to those prospectively addressed by income tax legislation enacted as a result
of the 2015 Canadian federal budget.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2014 in regard to activities similar to those that were the subject of the
above-mentioned 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, 2019.
EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
On November 19, 2019, the Bank paid 7.7 million euros to the German tax authorities in relation to the Maple case. This payment was made upon a final tax
claim of the tax authorities against the insolvency administrator that was approved by the Maple GmbH creditor assembly. As at October 31, 2019, a provision
of $11 million was recorded to reflect this adjusting event after the Consolidated Balance Sheet date. For additional information, see Note 26 to the consolidated
financial statements.
National Bank of Canada
47
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
SSeeccuurriittiizzaattiioonn aanndd OOffff--BBaallaannccee--SShheeeett AArrrraannggeemmeennttss
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.
SSttrruuccttuurreedd EEnnttiittiieess
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 their
financial assets or provide them with 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 27 to the consolidated financial statements.
SSeeccuurriittiizzaattiioonn ooff tthhee BBaannkk’’ss FFiinnaanncciiaall AAsssseettss
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, 2019, the outstanding amount of NHA
securities issued by the Bank and sold to CHT was $19.2 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 8 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 client relationship.
Furthermore, it administers the securitization program and ensures that all related procedures are stringently followed and that investors are paid according to
the provisions of the program.
As at October 31, 2019, the credit card receivables portfolio held by CCCT II (net of the Bank Certificate held by the Bank) represented an amount outstanding of
$1.6 billion. CCCT II issued investors’ certificates, $0.9 billion of which is held by third parties and $0.7 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 the Fitch and DBRS rating agencies. 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 5.8% of the total amount of the series issued. The
Bank controls CCCT II and thus consolidates it.
SSeeccuurriittiizzaattiioonn ooff TThhiirrdd--PPaarrttyy FFiinnaanncciiaall AAsssseettss
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 26 and 27 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.
48
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Securitization and Off-Balance-Sheet Arrangements
DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
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 the Consolidated Balance
Sheet. Transactions in derivative financial 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 16 to the consolidated financial statements provide additional information on the types of derivative financial instruments used by the
Bank and their accounting basis.
GGuuaarraanntteeeess
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 26 to the consolidated financial statements
provides detailed information on these guarantees.
CCrreeddiitt IInnssttrruummeennttss
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 26 to the consolidated financial statements.
FFiinnaanncciiaall AAsssseettss RReecceeiivveedd aass CCoollllaatteerraall
In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse
repurchase agreements, securities borrowing and lending agreements, and derivative financial instrument transactions. For additional information regarding
financial assets received as collateral, see Note 26 to the consolidated financial statements.
National Bank of Canada
49
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
CCaappiittaall MMaannaaggeemmeenntt
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.
CCaappiittaall MMaannaaggeemmeenntt FFrraammeewwoorrkk
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 related to 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 Bank’s capital levels.
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.
SSttrruuccttuurree aanndd GGoovveerrnnaannccee
Along with its partners from Risk Management, Global Funding and Treasury Group, 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 (RMC),
which in turn recommends capital management policies and oversees their application. However, the Board, on the recommendation of the RMC, assumes the
following responsibilities:
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, including Basel capital adequacy ratios;
ensuring the appropriateness of the regulatory capital adequacy assessment.
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.
50
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Capital Management
BBaasseell AAccccoorrdd aanndd RReegguullaattoorryy EEnnvviirroonnmmeenntt
BBaasseell AAccccoorrdd
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.
With respect to the risk related to securitization operations, the capital treatment depends on the type of underlying exposures and on the information available
about the exposures. The Bank must use the Securitization Internal Rating-Based Approach (SEC-IRBA) if it is able to apply an approved internal ratings-based
model and has sufficient information to calculate the capital requirements for all underlying exposures in the securitization pool. Under this approach, the RWA
is derived from a combination of supervisory inputs and inputs specific to the securitization exposure such as the implicit capital charge related to the underlying
exposures, the credit enhancement level, the effective maturity, the number of exposures, and the weighted average loss given default (LGD).
If the Bank cannot use the SEC-IRBA, it must use the Securitization External Rating-Based Approach (SEC-ERBA) for the securitization exposures that are externally
rated. 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. If the Bank cannot apply the SEC-ERBA or the IAA, it must use the supervisory formula under the Securitization
Standardized Approach (SEC-SA). Under this approach, RWA is derived from inputs specific to the securitization exposure such as the implicit capital charge
related to the underlying exposures calculated under the standardized credit risk approach as well as credit enhancement and delinquency levels.
If none of the above approaches can be used, the securitization exposure must be assigned a risk weight of 1,250%. The Bank can apply a reduced capital charge
for securitization exposures that meet the criteria of the Simple, Transparent and Comparable (STC) framework. To mitigate the impact of the revised
securitization framework, which took effect on November 1, 2018, OSFI has permitted grandfathering of the current capital treatment for one year through a
negative adjustment to RWA that eliminates the initial increase in risk weights. OSFI has also provided transitional arrangements for all securitization
transactions completed by December 31, 2018 for a maximum of two years.
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 eligible subordinated debt and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
National Bank of Canada
51
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Capital Management
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. Furthermore, in the regulations of the Canadian Deposit Insurance Corporation (CDIC) Act and
the Bank Act (Canada), the Government of Canada has provided detailed information on conversion, issuance, and compensation regimes for bail-in instruments
issued by D-SIBs. 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 conversion and issuance of bail-in instruments came into force on 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 that the Bail-In Regulations come into force are not
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 did not have
a material impact on the Bank’s funding plan.
The Bank and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 10.0%, a Tier 1 capital
ratio of at least 11.5%, and a Total capital ratio of at least 13.5%. All of these ratios are to include a capital conservation buffer of 2.5%, a 1% surcharge applicable
solely to D-SIBs, and a 2.0% domestic stability buffer. The domestic stability buffer, which can vary from 0% to 2.5% of risk-weighted assets, consists exclusively
of CET1 capital. A D-SIB that fails to meet this buffer requirement will not be subject to automatic constraints to reduce capital distributions but will have to
provide a remediation plan to OSFI. The banks also have to meet the 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. OSFI requires 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.
OSFI’s Total Loss Absorbing Capacity (TLAC) guideline, which applies to all D-SIBs under the federal government’s bail-in regulations, came into effect on
September 23, 2018. The purpose of the TLAC guideline is to ensure that a D-SIB has sufficient loss-absorbing capacity to support its recapitalization in the
unlikely event it becomes non-viable. OSFI is requiring D-SIBs to maintain a minimum risk-based TLAC ratio of 23.50% (including the domestic stability buffer)
of risk-weighted assets and a minimum TLAC leverage ratio of 6.75% by November 1, 2021. During the quarter ended April 30, 2019, the Bank started to issue
qualifying bail-in debt and expects its TLAC ratios to improve through the normal refinancing of its maturing unsecured term debt. The Bank does not anticipate
any challenges in meeting these TLAC requirements.
RReeqquuiirreemmeennttss –– RReegguullaattoorryy RRaattiiooss UUnnddeerr BBaasseell IIIIII
CCaappiittaall
ccoonnsseerrvvaattiioonn
bbuuffffeerr
MMiinniimmuumm
sseett bbyy
BBCCBBSS
DD--SSIIBB
ssuurrcchhaarrggee
MMiinniimmuumm
sseett bbyy
OOSSFFII((11))
MMiinniimmuumm
DDoommeessttiicc
ssttaabbiilliittyy
bbuuffffeerr(2)
AAss aatt OOccttoobbeerr 3311,, 22001199
MMiinniimmuumm sseett bbyy
OOSSFFII((11)),, iinncclluuddiinngg
tthhee bbuuffffeerr
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
44..55 %%
66..00 %%
88..00 %%
33..00 %%
22..55 %%
22..55 %%
22..55 %%
nn..aa..
77..00 %%
88..55 %%
1100..55 %%
nn..aa..
11..00 %%
11..00 %%
11..00 %%
nn..aa..
88..00 %%
99..55 %%
1111..55 %%
33..00 %%
22..00 %%
22..00 %%
22..00 %%
nn..aa..
1100..00 %%
1111..55 %%
1133..55 %%
33..00 %%
n.a. Not applicable
(1)
(2)
The capital ratios include the capital conservation buffer and the D-SIB surcharge.
For D-SIBs, the buffer level varies between 0% and 2.5% of risk-weighted assets and is set by OSFI.
The Bank ensures that its capital levels are always above the minimum capital requirements set by OSFI, including the buffer. 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.
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.
52
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Capital Management
RReegguullaattoorryy CCoonntteexxtt
The Bank closely monitors regulatory developments and participates actively in various consultative processes. Presented below are brief descriptions of
ongoing regulatory projects. As had been planned, the Bank applied several new regulatory requirements in 2019, in particular the SA-CCR (Standardized
Approach for Measuring Counterparty Credit Risk) rules and the revised securitization framework (described above).
Basel III Reform
In December 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 in risk-
weighted assets and 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 capital floor. In February 2018, the BCBS 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, and these requirements will form a single Pillar 3 disclosure framework. In January 2019, the
BCBS also issued a newly revised version of the document entitled Revisions to the Minimum Capital Requirements for Market Risk (initially issued in
March 2018), which will have to be applied as of 2022.
In July 2018, OSFI issued a 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.
Other Projects
On April 10, 2019, OSFI released the final version of its B-2 guideline, Large Exposure Limits for Domestic Systemically Important Banks. Large exposure limits
help to restrict the maximum loss that an institution could face in the event of a sudden failure of a counterparty. This new version of the B-2 guideline tightens
the exposure limits applicable to Global Systemically Important Banks (G-SIBs) and to other Canadian D-SIBs. It recognizes eligible credit risk mitigation
techniques by measuring exposures on a net basis rather than a gross basis, and it reduces the eligible capital base by replacing Total capital with Tier 1 capital.
All D-SIBs are expected to comply with the B-2 guideline for the period beginning November 1, 2019.
On May 30, 2019, OSFI released a revised version of its B-12 guideline, Interest Rate Risk Management. This guideline outlines OSFI’s expectations regarding
the management of Interest Rate Risk in the Banking Book (IRRBB) in areas such as governance processes, risk measurement, development of stress test
scenarios as well as key behavioural and modelling assumptions. D-SIBs will have to apply this revised guideline as of January 1, 2020.
On June 26, 2019, the BCBS finalized revisions to the leverage ratio’s treatment of client-cleared derivatives and to disclosure requirements in order to address
concerns about balance sheet window-dressing. The treatment of client-cleared derivatives was revised to align the leverage ratio measurement with the
measurement determined by the SA-CCR rules as used for risk-based capital requirements. The revision to Revisions to Leverage Ratio Disclosure Requirements
aims to alleviate leverage ratio balance sheet window-dressing concerns. Internationally active banks will be required to disclose their leverage ratios based on
quarter-end values and on an average of daily values for securities financing transactions. These revisions will come into effect on January 1, 2022.
CCaappiittaall MMaannaaggeemmeenntt iinn 22001199
MMaannaaggeemmeenntt AAccttiivviittiieess
During the fiscal year ended October 31, 2019, the Bank repurchased 4,547,200 common shares for $281 million, which reduced Common share capital by
$40 million and Retained earnings by $241 million. The repurchase of 2,347,200 common shares was part of the normal course issuer bid to repurchase for
cancellation program that the Bank had launched on June 6, 2018 and that ended on June 5, 2019; under this program, the Bank repurchased a total of 6,847,200
common shares. On June 10, 2019, the Bank began a new normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares over the 12-
month period ending no later than June 9, 2020. During the year ended October 31, 2019, the Bank repurchased 2,200,000 common shares under the new
program.
As at October 31, 2019, the Bank had 334,172,411 issued and outstanding common shares compared to 335,070,642 a year earlier as well as 98,000,000
issued and outstanding preferred shares, unchanged from October 31, 2018. For additional information on capital instruments, see Notes 15, 18 and 19 to the
consolidated financial statements.
DDiivviiddeennddss
The Bank’s strategy for common share dividends is to aim for a dividend payout ratio of between 40% and 50% of net income attributable to common
shareholders excluding specified items, taking into account such factors as financial position, cash needs, regulatory requirements and any other factor deemed
relevant by the Board.
National Bank of Canada
53
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Capital Management
For fiscal 2019, the Bank declared $892 million in dividends to common shareholders, which represents 42% of net income attributable to common shareholders
(2018: 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.
SShhaarreess aanndd SSttoocckk OOppttiioonnss
First preferred shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Common shares
Stock options
NNuummbbeerr ooff sshhaarreess
$$ mmiilllliioonn
AAss aatt OOccttoobbeerr 3311,, 22001199
1144,,000000,,000000
1122,,000000,,000000
1166,,000000,,000000
1166,,000000,,000000
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
9988,,000000,,000000
333344,,117722,,441111
1122,,110033,,662266
335500
330000
440000
440000
440000
330000
330000
22,,445500
22,,994499
As at November 29, 2019, there were 334,201,015 common shares and 12,076,868 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 723 million Bank common shares, which would have a 68.4% dilutive effect based on the
number of Bank common shares outstanding as at October 31, 2019.
RReegguullaattoorryy CCaappiittaall RRaattiiooss
As at October 31, 2019, the Bank’s CET1, Tier 1 and Total capital ratios were, respectively, 11.7%, 15.0% and 16.1%, i.e., above the regulatory requirements,
compared to ratios of, respectively, 11.7%, 15.5% and 16.8% as at October 31, 2018. The CET1 capital ratio remained stable. Net income net of dividends, and
common share issuances under the Stock Option Plan offset the application of the SA-CCR rules for measuring counterparty credit risk, growth in risk-weighted
assets, the common share repurchases during the year ended October 31, 2019, and remeasurements of pension plans and other post-employment benefit
plans. The decreases in the Tier 1 capital ratio and the Total capital ratio were essentially due to growth in risk-weighted assets. As at October 31, 2019, the
leverage ratio was 4.0%, stable compared to October 31, 2018. The growth in Tier 1 capital was offset by growth in total leverage exposure.
RReegguullaattoorryy CCaappiittaall aanndd RRaattiiooss UUnnddeerr BBaasseell IIIIII
As at October 31
(millions of Canadian dollars)
CCaappiittaall
CET1
Tier 1
Total
RRiisskk--wweeiigghhtteedd aasssseettss
CET1 capital
Tier 1 capital
Total capital
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
54
22001199
2018
99,,669922
1122,,449922
1133,,336666
8833,,003399
8833,,003399
8833,,003399
330088,,990022
1111..77 %%
1155..00 %%
1166..11 %%
44..00 %%
8,608
11,410
12,352
73,654
73,670
73,685
284,337
11.7 %
15.5 %
16.8 %
4.0 %
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Capital Management
MMoovveemmeenntt iinn RReegguullaattoorryy CCaappiittaall
Year ended October 31
(millions of Canadian dollars)
CCoommmmoonn EEqquuiittyy TTiieerr 11 ((CCEETT11)) ccaappiittaall
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 15 on November 1, 2018 (IFRS 9 on November 1, 2017)
Other
Movements in accumulated other comprehensive income
Translation adjustments
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(1)
Balance at end
AAddddiittiioonnaall TTiieerr 11 ccaappiittaall
Balance at beginning
New Tier 1 eligible capital issuances
Redeemed capital
Change in non-qualifying Additional Tier 1 subject to phase-out
Other, including regulatory adjustments and transitional arrangements
Balance at end
TToottaall TTiieerr 11 ccaappiittaall
TTiieerr 22 ccaappiittaall
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
TToottaall rreegguullaattoorryy ccaappiittaall
(1)
Represents the change in investments in the Bank’s own CET1.
22001199
2018
88,,660088
110077
4455
((228811))
99
((11,,000088))
22,,225566
((1133))
((88))
((44))
((116633))
((66))
11
33
113344
33
−−
−−
99
99,,669922
22,,880022
−−
−−
−−
((22))
22,,880000
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
1122,,449922
11,410
994422
−−
−−
−−
((44))
1100
((7744))
887744
204
750
−
−
2
(14)
−
942
1133,,336666
12,352
National Bank of Canada
55
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Capital Management
RRWWAA bbyy KKeeyy RRiisskk DDrriivveerrss
CET1 RWA amounted to $83.0 billion as at October 31, 2019, rising $9.4 billion from $73.7 billion as at October 31, 2018. This increase resulted mainly from
organic growth in RWA and from a change in the method used to measure counterparty credit risk (SA-CCR). The changes in the Bank’s risk-weighted assets by
risk type are presented in the following table.
RRiisskk--WWeeiigghhtteedd AAsssseettss MMoovveemmeenntt bbyy KKeeyy DDrriivveerrss
Quarter ended
(millions of Canadian dollars)
CCrreeddiitt rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
CCrreeddiitt rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
MMaarrkkeett rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Movement in risk levels(1)
Model updates
Methodology and policy
Acquisitions and disposals
MMaarrkkeett rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
OOppeerraattiioonnaall rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Movement in risk levels
Acquisitions and disposals
OOppeerraattiioonnaall rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
OOccttoobbeerr 3311,, 22001199
JJuullyy 3311,, 22001199
AApprriill 3300,, 22001199
JJaannuuaarryy 3311,, 22001199 October 31, 2018
TToottaall
TToottaall
TToottaall
TToottaall
Total
6655,,669933
11,,997799
1111
((4466))
((336622))
−−
((2211))
6677,,225544
33,,997722
330044
−−
−−
−−
44,,227766
1111,,331199
119900
−−
1111,,550099
8833,,003399
6644,,112244
11,,558888
((115555))
441166
−−
−−
((228800))
6655,,669933
33,,778888
118844
−−
−−
−−
33,,997722
1111,,009966
222233
−−
1111,,331199
8800,,998844
6622,,116622
11,,558899
5566
3333
−−
−−
228844
6644,,112244
33,,996644
((117766))
−−
−−
−−
33,,778888
1100,,991100
118866
−−
1111,,009966
7799,,000088
5599,,447766
11,,227733
((119988))
−−
11,,663344
−−
((2233))
6622,,116622
33,,443355
552299
−−
−−
−−
33,,996644
1100,,774433
116677
−−
1100,,991100
7777,,003366
57,974
1,629
(203)
(72)
−
−
148
59,476
4,755
(406)
(914)
−
−
3,435
10,539
204
−
10,743
73,654
(1)
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 book 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. During the quarter ended July 31, 2019, the Bank updated its models for credit card portfolios and energy sector loans.
The “Methodology and policy” item presents the impact of changes in calculation methods resulting from changes in regulatory policies as a result, for example,
of new regulations. During the quarter ended January 31, 2019, the Bank implemented the SA-CCR rules for measuring counterparty credit risk under the
standardized approach, as required by the BCBS. During the quarter ended October 31, 2019, the Bank refined the risk-weight calculation method for derivative
financial instruments.
56
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Capital Management
AAllllooccaattiioonn ooff EEccoonnoommiicc CCaappiittaall aanndd RReegguullaattoorryy RRWWAA
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.
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 addition to the benefit of diversification among types of risk.
AAllllooccaattiioonn ooff RRiisskkss bbyy BBuussiinneessss SSeeggmmeenntt
As at October 31, 2019
(millions of Canadian dollars)
NNAATTIIOONNAALL BBAANNKK OOFF CCAANNAADDAA
BBuussiinneessss
sseeggmmeennttss
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
WWeeaalltthh MMaannaaggeemmeenntt
FFiinnaanncciiaall MMaarrkkeettss
Banking services
Credit services
Financing
Full-service brokerage
Private banking
Direct brokerage
MMaajjoorr aaccttiivviittiieess
Investment solutions
Investment solutions
Insurance
Administrative and trade
execution services
Transaction products for
advisors
Trust and estate services
Equities, Fixed-income,
commodities and foreign
exchange
Corporate banking
Investment banking
UU..SS.. SSppeecciiaallttyy FFiinnaannccee aanndd
IInntteerrnnaattiioonnaall
OOtthheerr
U.S. Specialty Finance
• Credigy
International
• ABA Bank (Cambodia)
• Minority interests in
emerging markets
Treasury activities
Liquidity management
Bank funding
Asset and liability
management
Corporate units
EEccoonnoommiicc ccaappiittaall
bbyy ttyyppee ooff rriisskk
RRiisskk--wweeiigghhtteedd
aasssseettss
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
1,708
–
390
217
22,,331155
31,851
–
4,692
3366,,554433
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
105
–
242
414
776611
1,811
–
2,917
44,,772288
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
2,199
201
308
340
33,,004488
22,783
4,147
3,764
3300,,669944
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
521
10
82
42
665555
6,588
–
1,024
77,,661122
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
63
(16)
(73)
(84)
((111100))
4,221
129
(888)
33,,446622
National Bank of Canada
57
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
RRiisskk MMaannaaggeemmeenntt
IInn tthhiiss sseeccttiioonn ooff tthhee MMDD&&AA,, ggrreeyy--sshhaaddeedd tteexxtt aanndd ttaabblleess mmaarrkkeedd wwiitthh aann aasstteerriisskk ((**)) aarree iinntteeggrraall ppaarrttss ooff tthhee ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss.. TThheeyy
rreepprreesseenntt tthhee BBaannkk’’ss oobbjjeeccttiivveess,, tthhee rriisskk mmaannaaggeemmeenntt ppoolliicciieess aanndd pprroocceedduurreess,, aanndd tthhee mmeetthhooddss aapppplliieedd ttoo mmeeaassuurree ccrreeddiitt rriisskk,, mmaarrkkeett rriisskk aass wweellll aass
lliiqquuiiddiittyy aanndd ffuunnddiinngg rriisskk,, aass rreeqquuiirreedd bbyy IIFFRRSS 77 –– FFiinnaanncciiaall IInnssttrruummeennttss:: DDiisscclloossuurreess..
Risk-taking is intrinsic to a financial institution’s business. 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 strategy. The Bank voluntarily exposes itself to certain risk categories, particularly credit
and market risk, in order to generate revenue. It assumes certain 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 risks. The purpose of sound and effective risk management is to provide reasonable assurance that incurred
risks do not exceed acceptable thresholds, to control the volatility in the Bank's results, and to ensure that risk-taking contributes to the creation of shareholder
value.
RRiisskk MMaannaaggeemmeenntt FFrraammeewwoorrkk
Risk is rigorously managed. Risks are identified, measured and controlled to achieve an appropriate balance between the returns obtained and the risks
assumed. Consequently, decision-making is supported by risk assessments and management processes that are consistent with the Bank’s risk appetite and
by prudent levels of capital and liquidity. Despite the exercise of stringent risk management and the mitigation measures in place, risk cannot be suppressed
entirely, and residual risks may occasionally cause significant losses.
The Bank has developed guidelines that support sound and effective 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 a 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 and effective 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 ensures that risk management is built into the corporate culture;
fact-based: good risk management relies heavily on common sense and good judgment and on advanced systems and models.
RRiisskk AAppppeettiittee
Risk appetite represents how much risk an organization is willing to assume to achieve its business strategy. The Bank defines its risk appetite by setting
tolerance thresholds, by aligning those thresholds with its business strategy, and by integrating risk management throughout its corporate culture. Risk appetite
is built into decision-making processes as well as into strategic, financial and capital planning.
The Bank’s risk appetite framework consists of principles, statements, metrics as well as targets and is reinforced by policies and limits. When setting its risk
appetite targets, the Bank considers regulatory constraints and the expectations of stakeholders, in particular customers, employees, the community,
shareholders, regulatory agencies, governments, and rating agencies.
The risk appetite framework is defined by the following principles and statements:
The Bank’s brand, reputation and long-term viability are at the centre of our decisions, which demand:
•
•
•
•
a strong credit rating to be maintained;
a strong capital and cash position;
rigorous management of regulatory compliance risk, including sales practices;
zero tolerance for negligence in information security.
The Bank understands the risks taken; they are aligned with our business strategy and translate into:
•
•
•
a risk-reward balance;
a stable risk profile;
a strategic level of concentration aligned with approved targets.
The Bank’s transformation and simplification plan is being carried out without compromising rigorous risk management, which is reflected in:
•
•
a low tolerance to operational and reputation risk;
operational and information systems stability, both under normal circumstances and in times of crisis.
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National Bank of Canada2019 Annual Report
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Risk Management
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
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.
EEnntteerrpprriissee--WWiiddee SSttrreessss TTeessttiinngg
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 (GRC) 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.
IInnccoorrppoorraattiioonn ooff RRiisskk MMaannaaggeemmeenntt IInnttoo tthhee CCoorrppoorraattee CCuullttuurree
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 and effective 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 on anti-money laundering and anti-terrorist financing (AML/ATF) efforts. Risk management training is also offered across all segments of the
Bank.
Furthermore, to ensure the effectiveness of the existing risk management framework, the Bank has defined clear 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.
FFiirrsstt LLiinnee ooff DDeeffeennccee
Risk Owner
Business Units
SSeeccoonndd LLiinnee ooff DDeeffeennccee
Independent Oversight
Risk Management
and Oversight Functions
TThhiirrdd LLiinnee ooff DDeeffeennccee
Independent Assurance
Internal Audit
•
Identify, manage, assess and mitigate risks
in day-to-day activities.
policies and standards.
• Oversee risk management by setting
• Provide the Board and management with
• Ensure activities are in alignment with the
Bank’s risk appetite and risk management
policies.
• Provide independent oversight of
management practices and an independent
challenge of the first line of defence.
• Promote sound risk management at the
Bank.
• Monitor and report on risk.
independent assurance as to the
effectiveness and efficiency of the main
governance, risk management, and
internal control processes and systems.
• Provide recommendations and advice to
promote the Bank’s long-term financial
strength.
National Bank of Canada
59
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
GGoovveerrnnaannccee SSttrruuccttuurree**
The following diagram shows the Bank’s overall governance architecture and the governance relationships established for risk management.
SSHHAARREEHHOOLLDDEERRSS
EElleecctt
AAppppooiinntt
BBOOAARRDD OOFF
DDIIRREECCTTOORRSS
AAppppooiinnttss aanndd mmaannddaatteess
IInnddeeppeennddeenntt
AAuuddiittoorr
RReeppoorrttss ttoo
AAuuddiitt
CCoommmmiitttteeee
RRiisskk MMaannaaggeemmeenntt
CCoommmmiitttteeee
HHuummaann RReessoouurrcceess
CCoommmmiitttteeee
CCoonndduucctt RReevviieeww
aanndd CCoorrppoorraattee GGoovveerrnnaannccee
CCoommmmiitttteeee
RReeppoorrtt ttoo
RReeppoorrtt ttoo
AAddvviisseess
Internal Audit
Oversight
Function
Finance
Oversight
Function
Risk
Management
Oversight
Function
RReeppoorrttss ttoo
Global Risk Committee
Compliance
Oversight
Function
Compensation
Risk Oversight
Working Group
RReeppoorrtt ttoo
Financial
Markets Risk
Committee
Operational
Risk
Management
Committee
Enterprise-
Wide Risk
Management
Committee
AAppppooiinnttss
PPrreessiiddeenntt
aanndd CCEEOO
AAppppooiinnttss
OOffffiiccee ooff tthhee
PPrreessiiddeenntt
RReeppoorrtt ttoo
BBuussiinneessss UUnniittss
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. In addition, the Board ensures that the Bank operates in accordance
with environmental, social and governance (ESG) practices and strategies. It performs its mandate 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 Bank’s internal auditor and independent auditor; ensures the Bank's financial strength; establishes the Bank’s
financial reporting framework, analysis processes and internal controls; and reviews any reports of irregularities in accounting, internal controls, and audit.
The Risk Management Committee (RMC)(1)
The Risk Management Committee examines the risk appetite framework and recommends it to the Board for approval. It approves the main risk management
policies and risk tolerance limits. 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.
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 approves 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 ensures that the Bank maintains sound practices that comply with legislation and best practices,
particularly in the area of ESG responsibilities. It must ensure that the directors are qualified by evaluating the performance and effectiveness of the Board and
its members and by planning director succession and the composition of the Board. The Committee ensures that mechanisms are in place to prevent prohibited
financial transactions between the Bank and related parties.
(1)
Additional information about the Bank’s governance architecture can be found in the Management Proxy Circular for the 2020 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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National Bank of Canada2019 Annual Report
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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 and efficiency of the main governance, risk management, and internal
control processes and systems and for making recommendations and providing advice 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. It is responsible for capital management and
actively participates in the activities of the Asset/Liability Management Committee.
The Risk Management Oversight Function
The Risk Management Oversight Function is responsible for identifying, assessing and monitoring—independently and using an integrated 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 is 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, Employee Experience. The working group helps to ensure that compensation policies and programs do not unduly encourage senior management
members, officers, material risk takers or bank employees to take risks beyond the Bank’s risk tolerance thresholds. As part of that role, it ensures that the Bank
is adhering to the Corporate Governance Guidelines issued by OSFI and to the Principles for Sound Compensation Practices issued by the Financial Stability
Board, for which the Canadian implementation and monitoring is conducted by OSFI. The Board’s Risk Management Committee also reviews the reports
presented by the working group to the Human Resources Committee.
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 Financial Markets Risk 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 limits and in accordance with 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.
National Bank of Canada
61
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Risk Management
RRiisskk MMaannaaggeemmeenntt PPoolliicciieess
The risk management policies and related standards and procedures 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 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.
GGoovveerrnnaannccee ooff MMooddeell RRiisskk MMaannaaggeemmeenntt
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 model risk management process to ensure models can be used appropriately
and efficiently to manage risks.
The key components of the Bank’s model risk management 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 developing and vetting models. The
scope of models covered is wide, ranging from 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 framework also includes more
advanced artificial intelligence models.
One of the cornerstones of the Bank’s policies is the general principle that all models deemed important for the Bank or used for regulatory capital purposes
require heightened lifecycle monitoring and independent vetting. All models used by the Bank are therefore classified in terms of risk level (low, medium, or
high). Based on this classification, the Bank applies strict guidelines regarding the requirements for model development and documentation, independent review
thereof, performance monitoring thereof, and minimum review frequency. The Bank believes that the best defence against “model risk” is the implementation
of a robust development and validation framework.
IInnddeeppeennddeenntt OOvveerrssiigghhtt bbyy tthhee CCoommpplliiaannccee SSeerrvviiccee
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.
Business unit managers must oversee the 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.
IInnddeeppeennddeenntt AAsssseessssmmeenntt bbyy IInntteerrnnaall AAuuddiitt
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, 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.
62
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
TToopp aanndd EEmmeerrggiinngg RRiisskkss
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.
Managing risk requires a solid understanding of every type of risk found across the Bank. The Bank therefore maintains an inventory of the main risks and the
emerging risks to which it is exposed. Doing so makes it easier to identify and effectively manage risks. In the normal course of business, the Bank is primarily
exposed to the following risks.
Credit
risk
Market
risk
Funding and
liquidity risk
Operational
risk
Regulatory
compliance risk
Reputation
risk
Strategic
risk
Environmental
risk
The Bank is also exposed to other significant and emerging risks, as defined below.
RRiisskk
TTrreenndd
DDeessccrriippttiioonn
IInnffoorrmmaattiioonn
sseeccuurriittyy aanndd
ccyybbeerrsseeccuurriittyy
Technology, which is now omnipresent in our daily lives, is at the heart of banking services and has become the main
driver of innovation in the financial sector. While this digital transformation meets the growing needs of customers while
enhancing the operational efficiency of institutions, it nevertheless comes with information security and cybersecurity
risks. The personal information and financial data of financial institution customers are prime targets for criminals. These
criminals, who are increasingly well organized and employing ever more sophisticated schemes, try to use technology to
steal information.
Faced with a resurgence of cyberthreats and the sophistication of cybercriminals, the Bank 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.
Cyberattacks, as with system breaches or interruptions that support the Bank and its customers, 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 costs, 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.
It is also possible for the Bank to be unable to prevent or implement effective preventive measures against every potential
cyberthreat, as the tactics used are multiplying, change frequently, come from a wide range of sources and are
increasingly sophisticated.
Within this context, the Bank works to ensure the integrity and protection of its systems and information. The Bank
reaffirms its commitment to continuous improvement in the area of information security, the ultimate goal being to protect
its customers and maintain their trust. Along with its partners in the financial sector and with the regulatory authorities,
the Bank is committed to making a sustained effort to mitigate technology risks. Measures specifically directed at
anticipating this type of threat include the formation of multidisciplinary teams comprising cybersecurity and fraud
prevention specialists. The Bank is also pursuing initiatives under its own cybersecurity program aimed at adapting its
protection, surveillance, detection and response capabilities in response to changing threats. A governance and
accountability structure has also been established to support decision-making based on sound risk management. The
RMC is regularly informed of cybersecurity trends and developments and of lessons learned from operational incidents
that have occurred in other large organizations in order to gain a better understanding of potential risks, particularly risks
related to cybersecurity and the protection of personal information.
National Bank of Canada
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National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Risk Management
RRiisskk
TTrreenndd
DDeessccrriippttiioonn
The current economic expansion in the United States has become the longest since World War II, and this has many
observers wondering whether a recession is imminent. Clearly the power struggle between China and the United States
over trade has given cause for concern. The longer that this climate of uncertainty persists, the greater the likelihood
that business leaders will delay investment and hiring plans as they wait for more clarity on the new rules of the game.
Activity in the global manufacturing sector slowed significantly in 2019 but, fortunately, the service sector continued to
perform well. Some emerging countries are particularly vulnerable to rising protectionism, given the important role
played by the manufacturing sector in their economies. In addition, 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. In Europe, geopolitical risks are abound, including the possibility that the United Kingdom will leave the
European Union without an agreement, political uncertainty in Italy, and a potential resurgence of the yellow vest
movement in France.
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 the advanced economies. Such a situation may have
prompted market participants to adopt excessive risk-taking strategies in search of higher returns, which may have
adverse effects should the economy falter or interest rates rise. Therefore, the Bank is remaining vigilant and continuing
to rely on its strong risk management framework to identify, assess, and mitigate risk and to remain within the risk
appetite limits.
The Canadian economy is showing encouraging signs in a gloomy global economic environment. The labour market has
been resilient despite disappointing economic growth in the fourth quarter of 2018 and in the first quarter of 2019. A
strong rebound in the second quarter confirmed that this weakness was only temporary, particularly in the energy sector.
In the wake of the sharp drop in oil prices in 2014-2015, producers have adapted to the new environment, but if oil and
gas prices were to fall even further, producers would face obstacles that would affect their repayment capacity and credit
quality. The fossil fuel-producing provinces continue to idle and their unemployment rates remain high. Sound economic
and financial conditions in the three largest provinces (Ontario, Quebec and British Columbia) continue, however, to
support a credit environment favourable to the loan portfolios. Still, Canada remains vulnerable to a deteriorating global
economic backdrop, which threatens to erode job creation and disposable household income—even more so given high
debt levels. While the Vancouver and Toronto real estate markets are showing some stability after a slowdown, they
remain vulnerable to a less favourable economic environment due to high prices. An unexpected jump in inflation also
represents a risk to the Canadian economy to the extent that it could prompt the U.S. Federal Reserve or the Bank of
Canada to scale back its monetary accommodation. Should this occur, real estate assets, among others, would be
vulnerable to a price correction.
The Bank monitors international developments that may affect the Canadian economy. Even though Canada has reached
a trade agreement with its North American partners, American protectionism continues to pose a risk to Canada. For
example, the U.S. administration did not hesitate to threaten Mexico with tariffs during the migrant dispute, even though
a trade agreement had just been reached. In addition, the current Chinese-American conflict may gradually lead to the
development of two quite separate supply chains. Should this occur, Canadian companies that choose to focus on the
U.S. market may be denied access to the Chinese market, while those that choose the Chinese market may have more
difficulty gaining market share in the United States. These uncertainties may significantly destabilize certain sectors,
and the Bank has responded by continuing to monitor market developments and remaining vigilant in line with its risk
tolerance policy.
EEccoonnoommiicc
aanndd
ggeeooppoolliittiiccaall
rriisskk
64
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk
TTrreenndd
DDeessccrriippttiioonn
RReelliiaannccee oonn
tteecchhnnoollooggyy
aanndd tthhiirrdd
ppaarrttiieess
EEnnvviirroonnmmeennttaall,,
ssoocciiaall aanndd
ggoovveerrnnaannccee
((EESSGG))
aapppprrooaacchh aanndd
cclliimmaattee
cchhaannggee
TTeecchhnnoollooggiiccaall
iinnnnoovvaattiioonn aanndd
ccoommppeettiittiioonn
The Bank is reliant on technology, as clients are seeking greater access to products and services on a variety of platforms
that must support substantial data volumes. The fast pace of technological change combined with both client and
competitive pressures require significant and sustained investment in technology. Inadequate 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 to support
business processes and to handle certain IT activities. In some cases, these business relationships require the sharing
of 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 risk management
framework wherein information security, financial health, and performance are validated before any agreements are
reached and throughout the life of the agreements. It also includes business continuity plans, which are tested
periodically to ensure their effectiveness in times of crisis. 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.
In recent years, the environmental, social and governance (ESG) approach has not been a major concern for customers
and investors. Today, perceptions have changed, and many stakeholders now agree that these issues have become a
current concern and could affect corporate profitability in the near future. The Bank has therefore adopted ESG principles
and supported a variety of sustainable development initiatives.
The increased focus on ESG issues has not been prompted by any specific laws or regulations requiring greater
disclosure but rather by a desire for transparency and a broader understanding of their impact on corporate reputation
and finances. Pressures from customers, investors, environmental groups and, more recently, non-financial bodies have
also prompted financial institutions to consider the ways in which the ESG approach could affect their operations in
terms of reputation risk, strategy, and portfolio management and what they can do to apply principles of responsible
citizenship.
In recent years there has been a growing emphasis on environmental and climate issues. A financial disclosure
framework has been published, as well as various climate change guides for banks, insurers and portfolio managers.
Considerable change is occurring in terms of commitment to and implementation of such frameworks and guides.
In addition, the Bank of Canada’s annual Financial System Review addressed issues such as the interrelationships
between the environment, the economy, and the financial system. This is particularly true in Canada, where resources
play a vital role in our economy and where the natural environment is a defining feature of our identity. Although no
specific requirements have been published, we will continue to closely monitor developments in this area and all their
implications for the Bank.
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.
In addition, 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.
National Bank of Canada
65
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Risk Management
OOtthheerr FFaaccttoorrss TThhaatt CCaann AAffffeecctt FFuuttuurree RReessuullttss
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.” Country risk 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 anti-money laundering and anti-terrorist financing (AML/ATF) regulatory requirements 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.
Money laundering and terrorist financing is a financial, regulatory and reputation risk. For additional information, see the Regulatory Compliance Risk
Management section.
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.
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.
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 26 to the consolidated financial statements.
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National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
CCrreeddiitt RRiisskk
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.
GGoovveerrnnaannccee
A policy framework centralizes the governance of activities that generate credit risk for the Bank and is supplemented by a series of subordinate internal policies
and standards. These policies and standards address 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.
National Bank of Canada
67
National Bank of Canada2019 Annual Report Management’s Discussion and Analysis
Risk Management
CCrreeddiitt RRiisskk RRaattiinngg aanndd AAsssseessssmmeenntt
Before a sound and prudent credit decision can be made, 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 estimate
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 and the Standardized Approach, as defined by the Basel Accord to determine minimum regulatory capital requirements
for most of its 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;
• exposure at default (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 below.
AAIIRRBB AAPPPPRROOAACCHH
DDAATTAA
DDOOWWNNTTUURRNN PPEERRIIOODD
MMEETTHHOODDOOLLOOGGYY FFOORR CCAALLCCUULLAATTIINNGG LLGGDD
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 2018
2000-2003, 2008-2009 and
2014-2018
LGD based on the Bank’s historical
internal data on recoveries and losses
Sovereign
Moody’s observed default price of bonds, from
1983 to 2015
S&P rating history from 1975 to 2016
1999-2001 and 2008-2012
Based on implied market LGD using
observed bond price decreases
following the issuer’s default
Financial institutions
Global Credit Data Consortium historical loss and
recovery database from 1998 to 2014
1991-1992, 1994, 1998,
2001-2002 and 2008-2009
Model for predicting LGD based on
different issue- and issuer-related risk
drivers
Personal Credit Portfolios
This category comprises portfolios of residential mortgage loans, consumer loans and loans to certain small businesses. 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 credit 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.
68
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Loan pools are also established based on PD, LGD, and EAD, 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 PD. LGD is estimated based on transaction-specific factors such as
loan product characteristics (for example, a line of credit versus a term loan), loan-to-value ratio and types of collateral.
Under the Bank’s standards applicable to default-risk rating and facility-risk rating and according to its risk review, renewal and quantification standards, default
risk ratings must be reviewed annually.
Credit scoring models are also used to grant credit. These models use proven statistical methods that measure applicants’ demand 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.
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 PD (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 ratings by major risk category and compares them with the ratings of two major rating agencies.
IInntteerrnnaall DDeeffaauulltt RRiisskk RRaattiinnggss**
Description(1)
Personal credit
portfolios
Excellent
Good
Satisfactory
Special mention
Substandard
Default
PD (%) – Retail
Ratings
0.000–0.144
0.145–0.506
0.507–2.681
2.682–9.348
9.349–99.999
100
1–2.5
3–4
4.5–6.5
7–7.5
8–8.5
9–10
PD (%) –
Corporate and
financial institutions
0.000–0.125
0.125–0.451
0.451–4.743
4.743–11.161
11.161–99.999
100
Business and government
credit portfolios
PD (%) –
Sovereign
Standard
& Poor's
0.000–0.094
0.094–0.454
0.454–6.607
6.607–19.120
19.120–99.999
100
AAA to A-
BBB+ to BBB-
BB+ to B
B- to CCC+
CCC & CCC-
CC, C & D
Moody's
Aaa to A3
Baa1 to Baa3
Ba1 to B2
B3 to Caa1
Caa2 & Caa3
Ca, C & D
(1)
Additional information is provided in Note 7 – Loans and Allowances for Credit Losses to the audited annual consolidated financial statements for the year ended October 31, 2019.
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, an LGD risk rating
that is independent of the default risk rating assigned to the obligor.
National Bank of Canada
69
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
The Bank’s default risk ratings and LGD risk ratings as well as 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 intervals to validate the effectiveness of the models used to estimate PD, LGD, and EAD. For PD in particular, this backtesting
takes the form of sequentially applied statistical tests designed to assess the following criteria:
the model’s discriminatory power;
•
• overrides;
• model calibration;
•
the stability of the model’s output.
The credit risk quantification models are developed and tested by a team of specialists and their performance is monitored by the applicable business units and
related credit risk management services. Models are validated by a unit that is independent of both the specialists who developed the model and the concerned
business units. Approvals of new models or changes to existing models are subject to 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.
The key aspects to be validated are factors allowing accurate risk classification by level, adequate quantification of exposure, use of assessment techniques that
include external factors such as economic conditions and credit status and, lastly, compliance with internal policies and regulatory provisions. Each year, the
Risk Management Group presents a summary report on the validations to the RMC.
The Bank’s credit risk assessment and rating systems are overseen by the Models Oversight Committee, the GRC and the RMC, and are an integral part of a
comprehensive Bank-wide credit risk oversight framework. Along with the above-mentioned elements, the Bank documents and periodically reviews the policies,
definitions of responsibilities, resource allocation and existing processes.
AAsssseessssmmeenntt ooff EEccoonnoommiicc CCaappiittaall
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 PD;
EAD;
LGD;
the PD correlation among obligors;
the residual term of credit commitments;
the impact of economic and sector-based cycles on asset quality.
70
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
SSttrreessss TTeessttiinngg aanndd CCrriissiiss SScceennaarriiooss
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.
CCrreeddiitt--GGrraannttiinngg PPrroocceessss
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
influenced by 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.
RReevviieeww aanndd RReenneewwaall PPrroocceesssseess
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.
RRiisskk MMiittiiggaattiioonn
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment of
the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication and loan assignments as well as an
orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is to obtain quality collateral from obligors. Obtaining collateral cannot replace a rigorous assessment of
an obligor’s ability to meet its financial obligations, but, beyond a certain risk threshold, it is an essential complement. Collateral is not required in all cases. It
depends upon the level of risk presented by the obligor and the type of loan granted. However, if the level of risk to the Bank is considered high, collateral will
likely be required. The legal validity and enforceability of any collateral obtained and the Bank’s ability to correctly and regularly measure the collateral’s value
are critical for this mechanism to play its proper role in risk mitigation.
The Bank has established specific requirements in its internal policies with respect to the appropriate legal documentation and assessment for the kinds of
collateral that business units may require to guarantee the loans granted. The categories of eligible collateral and the lending value of the collateralized assets
have also been defined by the Bank. For the most part, they include the following asset categories as well as guarantees (whether secured by collateral or
unsecured) and government and bank guarantees:
inventories;
• accounts receivable;
•
• machinery and equipment and rolling stock;
•
•
residential and commercial real estate, office buildings and industrial facilities;
cash and marketable securities.
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.
National Bank of Canada
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National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
FFoollllooww--UUpp ooff MMoonniittoorreedd AAccccoouunnttss aanndd RReeccoovveerryy
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 7 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 out 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 2019 and 2018, the amount of distressed loan restructurings was not significant.
CCoouunntteerrppaarrttyy RRiisskk AAsssseessssmmeenntt
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those it faces
when it trades derivative financial 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 16 to the consolidated financial statements provides a complete description of the credit risk for derivative
financial instruments by type of traded product.
72
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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 expiration 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 the 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 PD 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.
AAsssseessssmmeenntt ooff SSeettttlleemmeenntt RRiisskk
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 16 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 by 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.
National Bank of Canada
73
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
The amounts shown in the following tables represent the Bank’s maximum exposure to credit risk as at the financial reporting date without taking into account
any collateral held or any other credit enhancements. These amounts do not take into account allowances for credit losses nor amounts pledged as collateral.
The tables also exclude equity securities.
MMaaxxiimmuumm CCrreeddiitt RRiisskk EExxppoossuurree UUnnddeerr tthhee BBaasseell AAsssseett CCaatteeggoorriieess**
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22001199
RReettaaiill
Residential mortgage
Qualifying revolving retail
Other retail
NNoonn--rreettaaiill
Corporate
Sovereign
Financial institutions
TTrraaddiinngg ppoorrttffoolliioo
SSeeccuurriittiizzaattiioonn
TToottaall –– GGrroossss ccrreeddiitt rriisskk
SSttaannddaarrddiizzeedd AApppprrooaacchh
AAIIRRBB AApppprrooaacchh
TToottaall –– GGrroossss ccrreeddiitt rriisskk
(millions of Canadian dollars)
RReettaaiill
Residential mortgage
Qualifying revolving retail
Other retail
NNoonn--rreettaaiill
Corporate
Sovereign
Financial institutions
TTrraaddiinngg ppoorrttffoolliioo
SSeeccuurriittiizzaattiioonn
TToottaall –– GGrroossss ccrreeddiitt rriisskk
SSttaannddaarrddiizzeedd AApppprrooaacchh
AAIIRRBB AApppprrooaacchh
TToottaall –– GGrroossss ccrreeddiitt rriisskk
DDrraawwnn
UUnnddrraawwnn
ccoommmmiittmmeennttss
RReeppoo--ssttyyllee
ttrraannssaaccttiioonnss(1)
DDeerriivvaattiivvee
ffiinnaanncciiaall
iinnssttrruummeennttss(2)
OOtthheerr
ooffff--bbaallaannccee--
sshheeeett iitteemmss(3)
5500,,332288
22,,554400
1144,,225588
6677,,112266
5566,,000022
3311,,330088
55,,220000
9922,,551100
−−
11,,116666
116600,,880022
1177,,116666
114433,,663366
116600,,880022
88,,881122
33,,004466
11,,991111
1133,,776699
2200,,552277
55,,222222
442255
2266,,117744
−−
−−
3399,,994433
660011
3399,,334422
3399,,994433
−−
−−
−−
−−
2211,,552244
3366,,220088
9977,,442233
115555,,115555
−−
−−
115555,,115555
2288,,557711
112266,,558844
115555,,115555
−−
−−
−−
−−
11
119900
11,,996666
22,,115577
1122,,001155
−−
1144,,117722
11,,995511
1122,,222211
1144,,117722
−−
−−
2200
2200
44,,110033
114488
662299
44,,888800
−−
33,,559988
88,,449988
111199
88,,337799
88,,449988
TToottaall
5599,,114400
55,,558866
1166,,118899
8800,,991155
110022,,115577
7733,,007766
110055,,664433
228800,,887766
1122,,001155
44,,776644
337788,,557700
4488,,440088
333300,,116622
337788,,557700
As at October 31, 2018
Drawn
Undrawn
commitments
Repo-style
transactions(1)
Derivative
financial
instruments(2)
Other
off-balance-
sheet items(3)
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
(1)
(2)
(3)
Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.
Exposure presented using the SA-CCR method since the first quarter of 2019.
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.
74
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
MMaarrkkeett RRiisskk
Market risk is the risk of losses arising from movements in market prices. Market risk comes from a number of factors, particularly changes to market variables
such as interest rates, exchange rates, equity prices, commodity prices and implied volatilities. The Bank is exposed to market risk through its participation in
trading, investment and asset/liability management activities. Trading 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.
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, 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.
GGoovveerrnnaannccee
A market risk management policy governs global market risk management across the Bank’s units and subsidiaries that are exposed to this type of risk. It is
approved by the GRC. The policy sets out the framework and principles for managing market risk; defines risk measures, control and monitoring activities; sets
limits; and reports on breaches.
The Financial Markets Risk Committee oversees all Financial Markets segment risks that could adversely affect the Bank's results, liquidity, or capital. This
committee also oversees the Financial Markets segment’s risk framework to ensure that controls are in place to contain risk in accordance with the Bank's risk
appetite framework.
Market risk limits ensure the link and coherence between the Bank’s market risk appetite targets and the day-to-day market risk management by all parties
involved, notably senior management, business lines and market risk sector in its independent control function. The Bank's monitoring and reporting process
consists of comparing market risk exposure to alert levels and market risk limits determined for all limit authorization and approval levels.
AAsssseessssiinngg MMaarrkkeett RRiisskk
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 Value-at-Risk (VaR), Stressed 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
in the Financial Markets segment and the Bank's Global Funding and Treasury Group.
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.
National Bank of Canada
75
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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 of 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.
CCoonnttrroolllliinngg MMaarrkkeett RRiisskk
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.
76
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
RReeccoonncciilliiaattiioonn ooff MMaarrkkeett RRiisskk WWiitthh CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett IItteemmss
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22001199
BBaallaannccee
sshheeeett
TTrraaddiinngg(1)
NNoonn--TTrraaddiinngg(2)
NNoott ssuubbjjeecctt ttoo
mmaarrkkeett rriisskk
NNoonn--ttrraaddeedd rriisskk
pprriimmaarryy rriisskk sseennssiittiivviittyy
MMaarrkkeett rriisskk mmeeaassuurreess
AAsssseettss
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
LLiiaabbiilliittiieess
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
1133,,669988
6611,,882233
1100,,664488
99,,775555
1177,,772233
115533,,225511
88,,112299
3388
66,,339933
228811,,445588
118899,,556666
66,,889933
1122,,884499
2211,,990000
66,,885522
2211,,331122
337744
55,,880033
777733
226666,,332222
557799
1122,,660099
551100
IInntteerreesstt rraattee(3)
5588,,117700
−−
−−
−−
66,,006600
77,,113344
−−
−−
7711,,994433
99,,886699
−−
1122,,884499
−−
66,,112233
55,,116655
−−
2244
−−
3344,,003300
33,,665533
1100,,664488
99,,775555
1177,,772233
114477,,119911
999955
3388
−−
220022,,661122
117799,,669977
66,,889933
−−
2211,,990000
772299
1166,,114477
337744
991111
777733
222277,,442244
IInntteerreesstt rraattee(3) aanndd eeqquuiittyy(4)
IInntteerreesstt rraattee(3) aanndd eeqquuiittyy(5)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)(6)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(7) aanndd eexxcchhaannggee rraattee(7)
OOtthheerr(8)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)(6)
IInntteerreesstt rraattee(7) aanndd eexxcchhaannggee rraattee(7)
IInntteerreesstt rraattee(3)
OOtthheerr(8)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)
−−
−−
−−
−−
−−
−−
−−
66,,339933
66,,990033
−−
−−
−−
−−
−−
−−
−−
44,,886688
−−
44,,886688
(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 6 to the consolidated financial statements.
The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 3 and 6 to the consolidated financial statements.
These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day, interest
rate risk is included in the VaR and SVaR measures.
For additional information, see Notes 16 and 17 to the consolidated financial statements.
For additional information, see Note 23 to the consolidated financial statements.
National Bank of Canada
77
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
(millions of Canadian dollars)
AAsssseettss
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
LLiiaabbiilliittiieess
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, 2018
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 Notes 6 to the consolidated financial statements.
The fair value of equity securities designated at fair value through other comprehensive income is presented in Notes 3 and 6 to the consolidated financial statements.
These instruments are recorded at amortized cost and are subject to credit risk for capital management purposes. For trading-related transactions with maturities of more than one day,
interest rate risk is included in the VaR and SVaR measures.
For additional information, see Notes 16 and 17 to the consolidated financial statements.
For additional information, see Note 23 to the consolidated financial statements.
TTrraaddiinngg AAccttiivviittiieess
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.
VVaaRR ooff TTrraaddiinngg PPoorrttffoolliiooss bbyy RRiisskk CCaatteeggoorryy(1)**
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
TToottaall ttrraaddiinngg VVaaRR
LLooww
((44..00))
((00..44))
((22..88))
((00..55))
nn..mm..
((33..88))
HHiigghh
AAvveerraaggee
22001199
PPeerriioodd eenndd
((77..11))
((11..88))
((66..00))
((11..55))
nn..mm..
((88..99))
((55..33))
((00..88))
((33..88))
((11..00))
44..88
((66..11))
((44..44))
((11..33))
((33..88))
((11..22))
44..44
((66..33))
Low
(3.0)
(0.5)
(1.6)
(0.5)
n.m.
(3.1)
High
(5.9)
(2.7)
(5.8)
(1.7)
n.m.
(7.4)
Average
2018
Period end
(4.1)
(1.2)
(3.5)
(1.0)
4.6
(5.2)
(5.9)
(1.4)
(4.7)
(0.9)
7.0
(5.9)
n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and lows may occur on different days and be attributable to different types of risk.
(1)
(2)
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.
78
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
SSVVaaRR ooff TTrraaddiinngg PPoorrttffoolliiooss bbyy RRiisskk CCaatteeggoorryy(1)**
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
TToottaall ttrraaddiinngg SSVVaaRR
LLooww
((1111..88))
((00..66))
((44..55))
((11..11))
nn..mm..
((99..00))
HHiigghh
AAvveerraaggee
22001199
PPeerriioodd eenndd
((2266..66))
((44..11))
((1144..44))
((44..00))
nn..mm..
((1177..88))
((1166..44))
((11..44))
((77..33))
((22..11))
1144..22
((1133..00))
((1155..11))
((22..00))
((88..99))
((22..77))
1133..44
((1155..33))
Low
(7.5)
(0.5)
(1.2)
(0.4)
n.m.
(4.0)
High
Average
2018
Period end
(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)
n.m. Computation of a correlation effect for the high and low is not meaningful, as highs and lows may occur on different days and be attributable to different types of risk.
(1)
(2)
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.
The average total trading VaR stood at $6.1 million for fiscal 2019, up from $5.2 million in fiscal 2018. The average total trading SVaR was also up, rising from
$9.7 million in fiscal 2018 to $13.0 million in fiscal 2019. These increases were essentially due to higher interest rate risk and higher equity risk.
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 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, 2019. Daily trading and underwriting losses in excess of $1 million were recorded on 4 days. None of these losses exceeded the VaR.
DDaaiillyy TTrraaddiinngg aanndd UUnnddeerrwwrriittiinngg RReevveennuueess
(millions of Canadian dollars)
25
20
15
10
5
0
(5)
(10)
(15)
8
1
.
v
o
N
8
1
.
c
e
D
9
1
.
n
a
J
9
1
.
b
e
F
9
1
.
r
a
M
9
1
.
r
p
A
9
1
y
a
M
9
1
e
n
u
J
9
1
y
l
u
J
9
1
.
g
u
A
9
1
.
t
p
e
S
9
1
.
t
c
O
Daily trading and underwriting revenues
VaR
National Bank of Canada
79
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
CCrriissiiss SScceennaarriiooss
A crisis scenario is a risk management technique that consists of estimating potential losses under abnormal market conditions and risk factor movements. This
technique enhances transparency by exploring a range of serious but plausible events.
These crises scenarios simulate the results that the portfolios would generate if the extreme scenarios in question were to occur. The Bank’s stress testing
framework, which is to all positions generating market risk currently comprises the following range of different stress test scenarios:
sharp parallel increases/decreases in interest rates; non-parallel movements (flattening and steepening) and increases/decreases in credit spreads;
sharp stock market crash coupled with a significant increase in volatility; increase in stock prices associated with less volatility; increase in the volatility of
the term structure coupled with a decrease in stock prices;
significant increases/decreases in commodity prices coupled with increases/decreases in volatility; short-term and long-term increases/decreases in
commodity prices;
depreciation/appreciation of the U.S. dollar and of other currencies relative to the Canadian dollar.
SSttrruuccttuurraall IInntteerreesstt RRaattee RRiisskk
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 of 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 loan prepayment 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.
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 the Global Funding and Treasury Group.
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, reporting procedures, delegation of responsibilities and segregation of duties. The Bank also prepares an annual funding
plan that incorporates the expected growth of assets and liabilities.
Regulatory Context
On May 30, 2019, OSFI released a revised version of its B-12 guideline, Interest Rate Risk Management. The guideline outlines OSFI’s expectations regarding
the management of Interest Rate Risk in the Banking Book (IRRBB) in areas such as governance processes, risk measurement, development of stress test
scenarios as well as key behavioural and modelling assumptions. D-SIBs will have to apply this revised guideline as of January 1, 2020.
Governance
Management of the Bank’s structural interest rate risk is mandated to the Global Funding and Treasury Group. In this role, the executives and personnel of this
group are responsible for the 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 of these activities. The Office of the President approves and endorses the structural interest
rate exposure and strategies on the recommendation of the Global Funding and Treasury Group. The Risk Management Group is responsible for assessing
structural interest rate risk, monitoring activities, and ensuring compliance with the structural interest rate risk policy. The Risk Management Group ensures that
an appropriate risk management framework is in place and ensures compliance with the risk appetite framework and policy. Structural interest rate risk
supervision is mainly provided by the Financial Markets Risk Committee. This committee reviews exposure to structural interest rate risk, the use of limits, and
changes made to assumptions.
80
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
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 the 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.
IInntteerreesstt RRaattee SSeennssiittiivviittyy –– NNoonn--TTrraaddiinngg AAccttiivviittiieess ((BBeeffoorree TTaaxx))**
As at October 31
(millions of Canadian dollars)
IImmppaacctt oonn eeqquuiittyy
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
IImmppaacctt oonn nneett iinntteerreesstt iinnccoommee
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
CCaannaaddiiaann
ddoollllaarr
OOtthheerr
ccuurrrreenncciieess
((117788))
119999
((2266))
7733
4400
((44))
4422
((44))
22001199
TToottaall
((113388))
119955
1166
6699
Canadian
dollar
Other
currencies
(140)
154
10
34
9
17
19
8
2018
Total
(131)
171
29
42
IInnvveessttmmeenntt GGoovveerrnnaannccee
The Bank has created securities portfolios in liquid and less liquid securities for strategic, long-term investment and liquidity management purposes. These
investments carry market risk, credit risk, liquidity risk and concentration risk.
The investment governance sets out the guiding principles and general management standards that must be followed by all those who manage portfolios of
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 private equity funds, for investment banking services, are also subject to 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.
SSttrruuccttuurraall FFoorreeiiggnn EExxcchhaannggee RRiisskk
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 related hedges, are reported 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.
National Bank of Canada
81
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
LLiiqquuiiddiittyy aanndd FFuunnddiinngg RRiisskk
Liquidity and funding risk is the risk that the Bank will be unable to honour daily cash and financial obligations without resorting to costly and untimely measures.
Liquidity and funding risk arises when sources of funds become insufficient to meet scheduled payments under the Bank’s commitments. Liquidity risk stems
from mismatched cash flows related to assets and liabilities as well as the characteristics of certain products such as credit commitments and non-fixed-term
deposits.
The Bank’s primary objective as a financial institution is to manage liquidity such that it supports the Bank’s business strategy and allows it to honour its
commitments when they come due, even in extreme conditions. This is done primarily by implementing a policy framework approved by the Board, which
establishes a risk appetite, monitoring structures controlled by various committees, risk indicators, reporting procedures, delegation of responsibilities and
segregation of duties. The Bank also prepares an annual funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to implement regulatory liquidity standards. The Bank adapts its processes and policies to
reflect the Bank’s liquidity risk appetite towards these new requirements.
The Liquidity Adequacy Requirements are reviewed annually to reflect domestic and international regulatory changes. They constitute OSFI's proposed liquidity
framework and include six chapters:
overview;
liquidity coverage ratio (LCR);
net stable funding ratio (NSFR);
net cumulative cash flow (NCCF);
liquidity monitoring tools;
intraday liquidity monitoring tools.
The LCR is used to ensure that banks can overcome 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 a 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 Bank publishes the LCR on a quarterly basis. It is currently monitoring the NSFR ratio and will be compliant therewith as of the effective date of January 1,
2021, with OSFI having published the final version of the Net Stable Funding Ratio Disclosure Requirements guideline on April 11, 2019, which sets out NSFR
ratio disclosure requirements for D-SIBs. These requirements will be applicable as of January 1, 2020, but since OSFI has introduced an additional year to
implement the disclosure framework, they will take effect on January 1, 2021. On April 11, 2019, OSFI also issued a new version of its Liquidity Adequacy
Requirements guideline, which will come into effect on January 1, 2020. This version differs from the previous one and seeks to ensure that liquidity risk
measuring and monitoring standards reflect current sound practices.
On May 23, 2019, OSFI updated the covered bond limit calculation. Effective August 1, 2019, total assets pledged by a deposit-taking institution for covered
bonds must not, at any time, represent more than 5.5% of the issuer’s on-balance-sheet assets.
On July 18, 2019, OSFI published proposed changes to guideline B-6 – Liquidity Principles for public consultation. The current version was last updated in 2012,
and the proposed changes aim to ensure that the guideline remains current, relevant, and appropriate to the scale and complexity of institutions. OSFI is targeting
an implementation date of January 1, 2020.
GGoovveerrnnaannccee
The Global Funding and Treasury Group is responsible for managing liquidity and funding risk. Although the day-to-day and strategic management of risks
associated with liquidity, funding and pledging activities is assumed by the Global Funding and Treasury Group, the Risk Management Group is responsible for
assessing liquidity risk and overseeing compliance with the resulting policy. The Risk Management Group ensures that an appropriate risk management
framework is in place and ensures compliance with the risk appetite framework. This structure provides an independent oversight and effective challenge for
the liquidity, funding and pledging decisions, strategy, and exposure.
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 the Global Funding and Treasury Group, 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.
Oversight of liquidity risk is entrusted mainly to the Financial Markets Risk Committee, whose members include representatives of the Financial Markets segment,
the Global Funding and Treasury Group, the Risk Management Group, and Internal Audit.
82
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Through the Financial Markets Risk Committee, the Risk Management Group 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, the Global Funding and Treasury Group takes remedial action. According to the escalation process, problematic situations are reported to
management and to the GRC and 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.
LLiiqquuiiddiittyy MMaannaaggeemmeenntt
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 management, funding and pledging activities within the Global Funding and Treasury Group, the Bank can better coordinate
enterprise-wide funding and risk monitoring activities. All internal funding transactions between Bank entities are controlled by the Global Funding and Treasury
Group.
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.
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. Appropriate scenarios and limits are included in the Bank's liquidity,
funding and pledging governance policy.
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.
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:
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. 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.
National Bank of Canada
83
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
LLiiqquuiidd AAsssseett PPoorrttffoolliioo
As at October 31
(millions of Canadian dollars)
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
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
LLooaannss
Securities backed by insured residential mortgages
AAss aatt OOccttoobbeerr 3311,, 22001199
As at October 31, 2018
As at October 31
(millions of Canadian dollars)
UUnneennccuummbbeerreedd lliiqquuiidd aasssseettss bbyy eennttiittyy
National Bank (parent)
Domestic subsidiaries
Foreign subsidiaries and branches
As at October 31
(millions of Canadian dollars)
UUnneennccuummbbeerreedd lliiqquuiidd aasssseettss bbyy ccuurrrreennccyy
Canadian dollar
U.S. dollar
Other currencies
LLiiqquuiidd AAsssseett PPoorrttffoolliioo –– AAvveerraaggee(4)
Year ended October 31
(millions of Canadian dollars)
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
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
LLooaannss
Securities backed by insured residential mortgages
AAss aatt OOccttoobbeerr 3311,, 22001199
As at October 31, 2018
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(1)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(2)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(3)
22001199
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2018
Unencumbered
liquid assets
1133,,669988
−−
1133,,669988
44,,110022
99,,559966
10,287
2255,,664488
1188,,776600
4444,,440088
1100,,222244
55,,664477
4400,,770077
77,,442222
110033,,334466
91,640
55,,440044
22,,221122
2288,,993344
−−
5555,,331100
57,483
1155,,662288
77,,885599
6699,,664411
77,,442222
115588,,665566
149,123
2200,,995533
99,,448833
22,,227788
4422,,667733
44,,449966
8833,,998855
86,176
2233,,445555
20,825
66,,114455
55,,558811
2266,,996688
22,,992266
7744,,667711
6,540
5,398
16,611
3,286
62,947
22001199
2018
3300,,338800
1144,,881155
2299,,447766
7744,,667711
30,205
11,543
21,199
62,947
22001199
2018
3399,,117722
1199,,335566
1166,,114433
7744,,667711
35,838
22,663
4,446
62,947
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(1)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(2)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(3)
22001199
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2018
Unencumbered
liquid assets
1111,,883300
−−
1111,,883300
33,,333399
88,,449911
9,098
2288,,115522
2233,,334499
5511,,550011
1111,,332200
55,,441100
3388,,441166
77,,668888
110022,,881166
96,513
66,,776611
22,,447744
2299,,885500
−−
6622,,443344
63,347
1188,,008811
77,,888844
6688,,226666
77,,668888
116655,,225500
159,860
2288,,550066
1133,,663399
22,,999999
4411,,990066
44,,553388
9944,,992277
96,591
2222,,999955
19,180
44,,444422
44,,888855
2266,,336600
33,,115500
7700,,332233
4,652
4,041
22,001
4,297
63,269
Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.
Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.
In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered liquid assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative financial
instrument transactions, asset-backed securities and liquid assets legally restricted from transfers.
The average is based on the sum of the end-of-period balances of the 12 months of the year divided by 12.
(1)
(2)
(3)
(4)
84
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
SSuummmmaarryy ooff EEnnccuummbbeerreedd aanndd UUnneennccuummbbeerreedd AAsssseettss
(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
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
EEnnccuummbbeerreedd
aasssseettss(1)
UUnneennccuummbbeerreedd
aasssseettss
AAss aatt OOccttoobbeerr 3311,, 22001199
EEnnccuummbbeerreedd
aasssseettss aass %%
ooff ttoottaall aasssseettss
TToottaall
OOtthheerr(2)
33,,995599
−−
1122,,885500
−−
−−
−−
−−
−−
−−
−−
1166,,880099
AAvvaaiillaabbllee aass
ccoollllaatteerraall
99,,559966
5577,,227766
44,,887733
22,,992266
−−
−−
−−
−−
−−
−−
7744,,667711
OOtthheerr(3)
−−
−−
−−
111188,,449900
88,,112299
338855
449900
11,,441122
11,,440066
22,,773388
113333,,005500
1133,,669988
8822,,222266
1177,,772233
115533,,225511
88,,112299
338855
449900
11,,441122
11,,440066
22,,773388
228811,,445588
11..44
88..99
44..66
1111..33
−−
−−
−−
−−
−−
−−
2266..22
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
PPlleeddggeedd aass
ccoollllaatteerraall
114433
2244,,995500
−−
3311,,883355
−−
−−
−−
−−
−−
−−
5566,,992288
Pledged as
collateral
87
20,787
−
28,670
−
−
−
−
−
−
49,544
(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 (e.g., Canada Mortgage and Housing Corporation insured mortgages that can be securitized into mortgage-backed securities under the National Housing Act (Canada)).
National Bank of Canada
85
National Bank of Canada2019 Annual Report
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, 2019, the Bank’s average LCR
was 146%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
LLCCRR DDiisscclloossuurree RReeqquuiirreemmeennttss(1)
(millions of Canadian dollars)
HHiigghh--qquuaalliittyy lliiqquuiidd aasssseettss ((HHQQLLAA))
1 Total HQLA
CCaasshh oouuttfflloowwss
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
CCaasshh iinnfflloowwss
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)
TToottaall uunnwweeiigghhtteedd
vvaalluuee(2) ((aavveerraaggee))
OOccttoobbeerr 3311,, 22001199
TToottaall wweeiigghhtteedd
vvaalluuee(3) ((aavveerraaggee))
For the quarter ended
July 31, 2019
Total weighted
value(3) (average)
nn..aa..
4455,,889911
4433,,993333
1199,,335500
2244,,558833
7766,,557799
1133,,006655
5544,,114433
99,,337711
nn..aa..
3366,,009933
99,,223333
883399
2266,,002211
11,,997700
9922,,665500
nn..aa..
111166,,229999
1100,,449966
1166,,007700
114422,,886655
33,,003399
558811
22,,445588
4422,,447799
33,,114433
2299,,996655
99,,337711
1155,,995522
1100,,119999
55,,229911
883399
44,,006699
557766
11,,444477
7733,,669922
1199,,550000
66,,445555
1166,,007700
4422,,002255
46,194
2,893
588
2,305
39,240
2,780
28,888
7,572
16,440
9,031
4,113
858
4,060
415
1,442
69,461
19,765
6,094
13,531
39,390
TToottaall aaddjjuusstteedd
vvaalluuee(4)
Total adjusted
value(4)
nn..aa..
nn..aa..
nn..aa..
4455,,889911
3311,,666677
114466 %%
46,194
30,071
154 %
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.
As at October 31, 2019, Level 1 liquid assets represented 79% 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, 2019
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.
86
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Intraday Liquidity
The Bank manages its intraday liquidity in such a way that the amount of available liquidity exceeds its maximum intraday liquidity requirements. The Bank
monitors its intraday liquidity on an hourly basis and the evolution is presented monthly to the Financial Markets Risk Committee.
FFuunnddiinngg RRiisskk
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.
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 29 to the consolidated financial statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment of the Bank’s credit quality based on qualitative and quantitative information provided
to them. Credit ratings may be revised at any time based on 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.
Funding and liquidity levels remained sound and robust, and the Bank continues to enjoy excellent access to the market for its funding needs. The Bank received
favourable credit ratings from all the agencies, reflecting the high quality of its debt instruments, and the Bank's objective is to maintain these high ratings. On
July 29, 2019, DBRS Limited (DBRS) changed the trend on all the Bank’s ratings and its related entities from "Stable" to "Positive" to reflect improvements in its
assessment of the Bank's funding and liquidity levels. For Moody's, S&P, and Fitch, the outlook remains unchanged at "Stable." The following table presents
the Bank’s credit ratings according to four rating agencies as at October 31, 2019.
TThhee BBaannkk’’ss CCrreeddiitt RRaattiinnggss
Short-term senior debt
Canadian commercial paper
Long-term deposits
Long-term non-bail-inable senior debt(1)
Senior debt(2)
NVCC subordinated debt
NVCC preferred shares
Counterparty risk(3)
Covered bonds program
Rating outlook
MMooooddyy’’ss
SS&&PP
AAss aatt OOccttoobbeerr 3311,, 22001199
FFiittcchh
DDBBRRSS
P-1
Aa3
Aa3
A3
Baa2 (hyb)
Ba1 (hyb)
Aa3/P-1
Aaa
Stable
A-1
A-1 (mid)
A
BBB+
BBB
P-3 (high)
Stable
R-1 (mid)
AA (low)
AA (low)
A (high)
BBB (high)
Pfd-2 (low)
AAA
Positive
F1
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 uses the term Counterparty Risk Rating while Fitch uses the term Derivative Counterparty Rating.
National Bank of Canada
87
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Guarantees
As part of a comprehensive liquidity management framework, the Bank regularly reviews its contracts that stipulate that additional collateral could be required
in the event of a downgrade of the Bank’s credit rating. The Bank’s liquidity position management already incorporates additional collateral requirements in the
event of a one-notch to three-notch downgrade. The table below presents the additional collateral requirements in the event of a one-notch or three-notch credit
rating downgrade.
(millions of Canadian dollars)
Derivatives(1)
OOnnee--nnoottcchh
ddoowwnnggrraaddee
AAss aatt OOccttoobbeerr 3311,, 22001199
TThhrreeee--nnoottcchh
ddoowwnnggrraaddee
2266
3355
(1)
Contractual requirements related to agreements known as Credit Support Annexes.
Funding Strategy
The main objective of the funding strategy is to support the Bank's organic growth while also enabling it to survive potentially severe and prolonged crises and
to meet its regulatory obligations and financial targets.
The Bank’s funding framework is summarized as follows:
pursue a diversified deposit strategy to fund core banking activities through stable deposits coming from the networks of each of the Bank’s major business
segments;
incorporate the regulatory framework into day-to-day liquidity management and into the long-term funding plan by leveraging a strong risk management
culture and centralized expertise;
maintain active access to various markets to ensure a diversification of institutional funding in terms of source, geographic location, currency, instrument
and maturity, whether or not funding is secured.
The funding strategy is implemented in accordance with the overall objectives of strengthening the Bank's franchise among market participants and
consolidating its excellent reputation. The Bank continuously monitors and analyzes the possibilities for accessing less expensive and more flexible funding.
The deposit strategy remains a priority for the Bank, which continues to prefer deposits to institutional funding.
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 implemented through the funding plan and deposit strategy, which are monitored,
updated to reflect actual results and regularly evaluated.
88
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Diversified Funding Sources
The primary purpose of diversification by source, geographic location, currency, instrument, maturity and depositor is to mitigate liquidity and funding risk by
ensuring that the Bank maintains 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:
sets limits on funding concentration;
takes funding diversification into account in the business planning process;
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 and for various instruments;
identifies and monitors the main factors that affect the ability to raise funds.
The Bank is active in the following funding and securitization platforms:
Canadian dollar Senior Unsecured Debt;
U.S. dollar Senior Unsecured Debt programs;
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.
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff WWhhoolleessaallee FFuunnddiinngg(1)
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22001199
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, 2018
11 mmoonntthh oorr
lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
1122 mmoonntthhss
660055
11,,991144
1144
665544
−−
−−
−−
−−
33,,118877
−−
33,,118877
33,,118877
1,944
1133
44,,119999
339955
−−
11,,449911
−−
−−
−−
66,,009988
11,,449911
44,,660077
66,,009988
7,261
77
33,,223388
22,,110033
−−
999955
−−
887744
−−
77,,221177
11,,886699
55,,334488
77,,221177
4,339
−−
22,,664444
22,,777711
225544
11,,225566
−−
−−
−−
66,,992255
11,,225566
55,,666699
66,,992255
5,143
SSuubbttoottaall
11 yyeeaarr
oorr lleessss
662255
1111,,999955
55,,228833
990088
33,,774422
−−
887744
−−
2233,,442277
44,,661166
1188,,881111
2233,,442277
18,687
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
−−
−−
33,,443322
−−
33,,664400
22,,229900
−−
−−
99,,336622
55,,993300
33,,443322
99,,336622
9,856
OOvveerr 22
yyeeaarrss
−−
−−
44,,773300
44,,110088
1133,,993300
77,,116688
3377
777733
3300,,774466
2211,,113355
99,,661111
3300,,774466
28,950
TToottaall
662255
1111,,999955
1133,,444455
55,,001166
2211,,331122
99,,445588
991111
777733
6633,,553355
3311,,668811
3311,,885544
6633,,553355
57,493
(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.
National Bank of Canada
89
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
OOppeerraattiioonnaall RRiisskk
Operational risk is the risk of loss resulting from an inadequacy or a failure ascribable to human resources, equipment, processes, technology or external events.
Operational risk exists for every Bank activity. Theft, fraud, cyberattacks, unauthorized transactions, system errors, human error, amendments 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.
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.
OOppeerraattiioonnaall RRiisskk MMaannaaggeemmeenntt FFrraammeewwoorrkk
The operational risk management framework is described in the Operational Risk Management Policy, which is derived from the Risk Management Policy. The
operational risk management framework is aligned with the Bank's risk appetite and is made up of policies, standards, and procedures specific to each
operational risk, which fall under the responsibility of specialized groups.
The segments use several operational risk management tools and methods to identify, assess, and monitor their operational risks and control measures. With
these tools and methods, the segments can:
recognize and understand the inherent and residual risks to which their activities and operations are exposed;
identify how to mitigate the identified risks and monitor them to keep them at an acceptable level;
proactively and continuously manage risks.
OOppeerraattiioonnaall RRiisskk MMaannaaggeemmeenntt TToooollss aanndd MMeetthhooddss
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 2019 and
2018, there were no material losses resulting from an operational risk event.
Analysis and Lessons Learned From Operational Events Observed in Other Large Businesses
By collecting and analyzing media-reported information about significant operational events, in particular events related to information security and theft of
personal information experienced by other financial institutions, the Bank can assess the effectiveness of its own operational risk management practices and
reinforce them, if necessary.
Operational Risk Self-Assessment Program
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 can track risks
and proactively detect any adverse change in risk exposure.
Scenario Analysis
Scenario analysis, which is part of a Bank-wide stress testing program, is an important and useful tool for assessing the potential impacts arising from major
operational events. It helps the Bank define its risk appetite, set its exposure limits, and engage in strategic planning. More specifically, it helps senior
management to better understand the risks facing the Bank and to make appropriate management decisions to mitigate potential operational risks.
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.
OOppeerraattiioonnaall RRiisskk RReeppoorrttss aanndd DDiisscclloossuurreess
Operational events for which the financial impact exceeds the tolerance thresholds or that have a significant regulatory or reputation impact are submitted to
the decision-making levels concerned. Management is obligated to report on its management process and to remain alert to current and future issues. Reports
on the Bank’s risk profile, highlights, and emerging risks are periodically submitted, on a timely basis, to the Operational Risk Management Committee, the GRC
and the RMC. This reporting enhances the transparency and proactive management of the main operational risk factors.
90
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
RReegguullaattoorryy CCoommpplliiaannccee RRiisskk
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 compliance 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.
OOrrggaanniizzaattiioonnaall SSttrruuccttuurree ooff CCoommpplliiaannccee
Compliance is an independent oversight function within the Bank. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer
serves as both chief compliance officer (CCO) and chief anti-money laundering and anti-terrorist financing officer (CAMLATFO). She is responsible for
implementing and updating the Bank’s compliance program and the AML/ATF program across all Bank segments. Having a reporting relationship with the Chair
of the RMC, the CCO and CAMLATFO meets with him on at least once every quarter. With him, she goes over matters on the relationship between the Compliance
Service and the Bank’s management and on access to the information required. The CCO and CAMLATFO can also communicate directly with officers and directors
of the Bank and of its subsidiaries and foreign centres.
RReegguullaattoorryy CCoommpplliiaannccee FFrraammeewwoorrkk
The Bank operates in a highly regulated industry. To ensure sound management of regulatory compliance, the Bank favours proactive approaches and
incorporates regulatory requirements into its day-to-day operations.
Regulatory compliance risk management ensures that events stemming from regulatory non-compliance are proactively identified and understood and that
mitigating strategies are implemented. Such proactive management 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 are in effect, including regulations related to AML/ATF, to international
sanctions, and to corruption;
develop compliance and AML/ATF training programs for Bank employees, officers, and directors;
exercise independent oversight and monitor the programs, policies, and procedures implemented by the Bank, its subsidiaries, and foreign centres to ensure
that the control mechanisms are sufficient, respected, and effective;
report relevant compliance and AML/ATF matters to the Bank’s Board and inform it of any changes in the effectiveness of the Bank’s risk management
framework.
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.
Consumer Protection
Last year saw several regulatory changes. Notably, several amendments to the Quebec Consumer Protection Act came into force, and the industry adopted a
voluntary code of conduct to protect seniors. In addition, Bill C-86 was adopted by the Government of Canada and will substantially amend the Bank Act (Canada).
The purpose of these regulatory changes is to ensure consumer protection by fostering transparency and informed decision-making. Furthermore, the Bank
constantly monitors the consumer protection landscape such that it can change its business practices if necessary. The Bank also makes sure its practices are
aligned with industry practices by taking part in a variety of events that bring together players from the financial services ecosystem.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
On July 10, 2019, the Government of Canada published amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing
Act (2019), which will come into force in three stages. Amendments regarding identification methods may be applied once the Financial Transactions and Reports
Analysis Centre of Canada (FINTRAC) publishes its guideline on the topic, and the other amendments will come into force in June 2020 and June 2021. Regarding
the five-year review of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, Canadian banks are still awaiting the introduction of the bill.
Privacy and Data Protection
Due to changes in technologies and in society at large, privacy and data protection is a topical issue in Canada. In Europe, the new General Data Protection
Regulation (GDPR) has been in force since May 2018, and several companies have received substantial penalties for contravening this regulation. In the United
States, California has also adopted a stringent privacy protection act, which will come into force in January 2020. Changes in legislation related to the protection
of personal information could accelerate in several jurisdictions, including Canada. This acceleration could be reflected in the granting of greater powers to the
regulators responsible for privacy protection, such as the power to impose penalties. We are monitoring the relevant legislative developments.
National Bank of Canada
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National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
Canada Deposit Insurance Corporation (CDIC)
Changes in the Government of Canada’s deposit insurance framework have been announced concerning information on co-owned accounts and accounts held
in trust as well as on the insurability of certain deposits. As of April 30, 2020, coverage will be extended to insurable deposits in foreign currencies and to term
deposits with maturities exceeding five years. In addition, as of April 30, 2021, separate coverage will be granted for Registered Education Savings Plans and
Registered Disability Savings Plans. New requirements will also be established for the coverage of deposits in trust, particularly nominee-brokered deposits.
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 improves 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. In addition, the Bank and other D-SIBs continue to work with
the CDIC to develop a comprehensive settlement plan that would ensure orderly winding down of the Bank’s operations.
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. Some of the obligations of a qualified derivatives dealer, established under subsection 871(m) of the IRC and
the qualified intermediary agreement have also been deferred 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. 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.
Reform of Benchmark Interest Rates
The reform of benchmark interest rates is a global initiative coordinated and led by central banks and public authorities around the world, including in Canada.
The objective is to improve benchmarks by ensuring that they satisfy robust international standards. The initiative will introduce other benchmarks as potential
successors to benchmark interest rates such as the Interbank Offered Rates (IBOR), which are the benchmark rates used by the major international banks for
short-term loans on the interbank market. These rates, particularly LIBOR (London Interbank Offered Rate), are widely used as benchmark rates around the world
for derivative financial instruments, bonds and other floating-rate instruments. The gradual elimination of the IBOR rates will have an impact on over-the-counter
derivative transactions, and the Bank expects that a standardized solution for the industry will be adopted, probably in the form of an ISDA protocol. For some
other types of contracts, contractual amendments are anticipated by the end of 2021, when some of the current rates are expected to be eliminated.
RReeppuuttaattiioonn RRiisskk
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.
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National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Risk Management
SSttrraatteeggiicc RRiisskk
Strategic risk is the risk of a loss arising from inappropriate strategic orientations, improper execution or ineffective response to economic, financial, or regulatory
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. 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.
EEnnvviirroonnmmeennttaall RRiisskk
Environmental risk is the risk of an environmental issue leading to a loss in financial or operating value or harming the Bank’s reputation or having an impact on
its stakeholders. Consequently, physical risks resulting from the impacts of increases in the number and intensity of extreme weather events, as well as transition
risks resulting from a shift to a low-carbon economy, require particular attention to reduce the Bank’s exposure to these negative externalities and, at the same
time, seize new growth opportunities.
The Bank, aware that it has a mobilizing role to play in environmental matters, announced its support for the Financial Stability Board’s Task Force on Climate-
Related Financial Disclosures (TCFD) and will disclose, in addition to its performance reports, the information recommended by the task force.
The TCFD has structured its recommendations around four pillars that represent an organization’s operating fundamentals: governance, strategy, risk
management, and metrics and targets. These four major classes of recommendations are intended to provide a framework for the publication of climate-related
financial information such that institutional investors can make informed choices about their exposure to climate-related risks and opportunities.
GGoovveerrnnaannccee
Oversight by the Board of Directors (Board)
The Board identifies environmental, social, and governance (ESG) issues, including the impacts that climate change could have on the organization as a whole,
and monitors the evolution of those issues.
The Risk Management Committee, Audit Committee, and Conduct Review and Corporate Governance Committee are responsible for periodically examining the
efforts made by the Bank to ensure that it is operating in accordance with high standards of corporate responsibility, including in environmental issues. This
year, their respective mandates were expanded in this regard. Each year, the Board also reviews the Bank’s Social Responsibility Report, which notably provides
details about its contribution to environmental protection.
To further clarify the Bank’s commitment to exercising effective governance with regard to mechanisms to oversee risks and opportunities related specifically to
the climate, the Risk Management Committee has a specific responsibility to ensure that the risk management framework takes ESG risks into account such that
they are appropriately identified and monitored and integrated into the existing risk management processes.
Management’s Role
The Bank oversees climate-related risks through the risk management framework and various executive committees. The Enterprise-Wide Risk Management
Committee (co-chaired by the Executive Vice-President, Risk Management and the Chief Financial Officer and Executive Vice-President, Finance) is regularly
informed of developments and issues to facilitate monitoring and discussion such that issues can be effectively resolved when necessary.
SSttrraatteeggyy
The Bank has committed, through its mission, to make a positive impact on its stakeholders. It works to ensure that its commitments are reflected throughout
its practices, including the transition to a low-carbon economy.
An identification of environment-related risks and opportunities has helped the Bank to evolve and incorporate climate matters into its internal decision-making.
There are many opportunities to limit environmental risks—including climate-related risks—and their impacts on the community. With this in mind, the Bank
plans on offering more solutions whereby clients can increase their presence in low-carbon activities such as renewable energies and responsible investment.
For example, a program that allows for the issuance of sustainability bonds will enable various organizations, including the Bank itself, to issue debt securities
to finance projects that meet certain environmental and social criteria. The Bank also provides financial support to environmental organizations whose mission
is to promote sustainable development and protect biodiversity and natural environments.
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Risk Management
Over the past year, the Bank has completed a classification of the physical risks and transition-related risks based on each of the industries that make up its
credit portfolios. In addition, in response to the TCFD’s recommendations, the Bank assessed the proportion of its carbon-related exposures to better understand
the impacts of climate-related risks and opportunities on its credit portfolios. The results of these assessments will allow the Bank to start by examining its
investment and asset growth strategy in more detail. They will also help guide the Bank’s climate scenario analyses of these industries in the years to come. The
Bank will communicate the results of these analyses in an open and transparent manner. The Bank continues to work with its peers to find solutions for more
accurate and consistent analyses and assessments of climate-related risks and opportunities. It is also a member of several strategic working groups, helping it
to stay abreast of developments related to ESG risks, particularly climate risks.
RRiisskk MMaannaaggeemmeenntt
Risk Identification, Assessment and Management
The Bank recognizes the importance of identifying, assessing, and managing climate-related risks. To this end, it proactively monitors all risks as well as its
segments’ risk exposures in relation to its risk appetite and established limits. 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. These risks include credit, market, liquidity, operational, and ESG risks as well
as climate-related risks. In addition, rapidly changing economic, regulatory, technological and business environments may have an impact on certain activities
or on the Bank as a whole.
Based on the TCFD's recommendations, the Bank has identified two types of relevant climate-related risks to include in its monitoring activities: physical risks
and transition-related risks. It defines physical risks as the potential impacts on its physical assets and financial assets arising from more frequent and more
intense extreme weather events, food insecurity, and energy and resource supply problems related to climate change. The Bank defines transition-related risks
as the impacts arising from the move toward a low-emission economy. Such impacts include technological changes or public policy directions that could lead to
a revaluation of the company's assets and result in new costs or new opportunities. The Bank’s definition of transition-related risk also includes market risk and
reputational risk.
The Bank ensures that it has processes in place to proactively identify and measure these risks so that it can implement appropriate mitigation strategies. To
this end, the Bank has implemented an environmental policy that applies to activities and decisions across the Bank as well as in all its business segments. This
policy clearly sets out the established principles for identifying and limiting environmental risk as well as the impacts on the community and its business
segments.
Incorporation of Risk
Given that environmental risk is associated with credit risk and operational risk, the Bank recognizes the importance of incorporating several additional control
measures into its existing risk management processes. To this end, risks are regularly reported to the Enterprise-Wide Risk Management Committee.
The Bank's current approach to controlling risks includes regularly identifying and prioritizing the impacts of physical risks and transitional risks. This applies
to all industries affected by the Bank's assets. In the interests of proactively ensuring the strategic positioning of its entire portfolio, the Bank has expressed its
desire to support the energy transition toward a lower-carbon economy. Through its credit adjudication process, it seeks to develop and implement a process
for assessing and quantifying the impacts of climate change on its strategy and results.
IInnddiiccaattoorrss aanndd OObbjjeeccttiivveess
Measures Used to Assess Climate-Related Risks and Opportunities
To date, the Bank has implemented several measures to manage climate-related risks and opportunities related to its investment, funding, and operational
strategies. Among other things, the Bank calculates its own annual greenhouse gas (GHG) emissions, and it performs a calculation and analysis of the proportion
of its carbon-related investments that serves as a guide to discussions about strategic alignment and risk appetite.
GHG Emissions
The Bank has carried out a voluntary annual inventory of its GHG emissions since 2008. It reports the information to the Carbon Disclosure Project, which
compiles several types of climate data.
Objectives for Managing Climate-Related Risks and Opportunities
The Bank is committed to reducing its environmental footprint by implementing, on a voluntary basis, various eco-responsible measures aimed at calculating
and reducing its GHG emissions. This includes significant improvements made to the energy efficiency of its facilities over the past 15 years. The Bank has
implemented an innovative system for managing the energy consumption of 300 branches that uses a web-based interface. As a result, the Bank can monitor its
facilities in real time with a view to managing its energy consumption more effectively.
OOuuttllooookk aanndd NNeexxtt SStteeppss
For the coming year, the Bank will focus its efforts on:
growing the proportion of its renewable-energy-related funding assets at a faster pace than those related to fossil fuels;
offering to support customers in their energy transitions;
developing indicators for effectively monitoring its sustainable development performance;
strengthening its partnerships with the industry's main change agents in order to meet its commitments.
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CCrriittiiccaall AAccccoouunnttiinngg EEssttiimmaatteess
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.
CCllaassssiiffiiccaattiioonn ooff FFiinnaanncciiaall IInnssttrruummeennttss
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. Consequently, 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.
FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss
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 consider when 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.
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In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to determine fair
value but that are not included in the measurement technique due to system limitations or uncertainty surrounding the measure. These factors include, but are
not limited to, the unobservable nature of inputs used in the valuation model, assumptions about risk such as market risk, credit risk, or risk related to the
valuation model and future administration costs. The Bank may also consider market liquidity risk when determining the fair value of financial instruments when
it believes these instruments could be disposed of for a consideration below the fair value otherwise determined due to a lack of market liquidity or an insufficient
volume of transactions in a given market. The measurement adjustments also include the funding valuation adjustment applied to derivative financial
instruments to reflect the market implied cost or benefits of funding collateral for uncollateralized or partly collateralized transactions.
IFRS establishes a fair value hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to three levels. The
fair value hierarchy has the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the measurement date.
These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain highly liquid debt securities
actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the market for the
asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or
corroborated by observable market inputs by correlation or other means. These instruments consist primarily of certain 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 as well as 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 investments in hedge funds, certain
derivative financial instruments, equity and debt securities of private companies, certain loans, and certain deposits (structured deposit notes).
Establishing fair value is an accounting estimate and has an impact on Securities at fair value through profit or loss, certain Loans, 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 other 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 3 and 6 to the consolidated financial statements.
IImmppaaiirrmmeenntt ooff FFiinnaanncciiaall AAsssseettss
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 7 to the consolidated financial statements.
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DDeetteerrmmiinniinngg tthhee SSttaaggee
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, in 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, in 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. 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.
AAsssseessssmmeenntt ooff SSiiggnniiffiiccaanntt IInnccrreeaassee iinn CCrreeddiitt RRiisskk
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.
MMeeaassuurreemmeenntt ooff EExxppeecctteedd CCrreeddiitt LLoosssseess
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.
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PPuurrcchhaasseedd oorr OOrriiggiinnaatteedd CCrreeddiitt--IImmppaaiirreedd FFiinnaanncciiaall AAsssseettss
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.
DDeeffiinniittiioonn ooff DDeeffaauulltt
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.
WWrriittee--OOffffss
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.
IImmppaaiirrmmeenntt ooff NNoonn--FFiinnaanncciiaall AAsssseettss
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not yet available for use or that have indefinite useful lives are
tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the individual
asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which the
asset belongs will be determined. Goodwill is always tested for impairment at the level of a CGU or a group of CGUs. A CGU is the smallest identifiable group of
assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Bank uses judgment to identify
CGUs.
An asset’s recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value of expected
future cash flows from the asset or CGU. The recoverable amount of the CGU is determined using valuation models that consider various factors such as projected
future cash flows, discount rates and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a significant
impact on income. If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and
an impairment loss is recognized in Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is objective evidence that premises and equipment or intangible assets with finite useful lives
may be impaired. It also uses judgment in determining to which CGU or group of CGUs an asset or goodwill is to be allocated. Moreover, for impairment
assessment purposes, management must make estimates and assumptions regarding the recoverable amount of non-financial assets, CGUs or a group of CGUs.
For additional information on the estimates and assumptions used to calculate the recoverable amount of an asset or CGU, see Note 11 to the consolidated
financial statements.
Any changes to these estimates and assumptions may have an impact on the recoverable amount of a non-financial asset and, consequently, on impairment
testing results. These accounting estimates have an impact on Premises and equipment, Intangible assets and Goodwill reported on the Consolidated Balance
Sheet. The aggregate impairment loss, if any, is recognized as a non-interest expense for the corresponding segment and presented in the Other item.
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
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.
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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-employment benefit plan expenses presented in Compensation and 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 23 to the
consolidated financial statements.
IInnccoommee TTaaxxeess
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 24 to the consolidated financial statements.
CCoonnttiinnggeenntt LLiiaabbiilliittiieess
MMaappllee FFiinnaanncciiaall GGrroouupp IInncc..
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.
Maple Bank GmbH (Maple 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 GmbH and some of its former employees, primarily during taxation years 2006 to 2010. The German authorities have alleged
that these trading activities, often referred to as “cum/ex trading,” 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. At that time, the Bank announced that if it were determined that portions of the
dividends it received from Maple could be reasonably attributed to tax fraud by Maple GmbH, arrangements would be made to repay those amounts to the
relevant authority.
On February 6, 2016, the German Federal Financial Supervisory Authority, BaFin, placed a moratorium on the business activities of Maple GmbH preventing it
from carrying out its normal business activities. 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. 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.
While there has not yet been a determination of tax fraud on the part of Maple GmbH or its employees, in the insolvency proceedings of Maple GmbH the German
finance office issued a declaration about the result of the tax audit at Maple GmbH and about the relevant tax consequences of the cum/ex trading and concluded
a final tax claim of the tax authorities against the insolvency administrator. This claim was approved by the Maple GmbH creditor assembly.
The Bank has been in contact with the German prosecutors, who have confirmed that, in their view based upon the evidence they have considered since the
occurrence of the insolvency, the Bank was not involved in any respect with the alleged tax fraud undertaken by Maple GmbH nor was it negligent in failing to
identify that alleged fraud. Further to discussions between the Bank and the German prosecutors concerning the amounts deemed attributable to the alleged
tax fraud, the Bank paid 7.7 million euros to the German tax authorities on November 19, 2019.
The Bank has been engaging in discussions with the bankruptcy and insolvency administrators of relevant Maple entities regarding potential claims they may
assert against Maple’s former shareholders in relation to the insolvency of Maple and its subsidiaries. The Bank does not see a legal basis for any such liability
but is nevertheless continuing discussions at this time. If any payments are required, they are not expected to be material to the Bank’s financial position.
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LLiittiiggaattiioonn
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 proceedings involving the Bank are as
follows:
WWaattssoonn
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 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.
DDeeffrraannccee
On January 21, 2019, the Quebec Superior Court authorized a class action against the Bank and several other Canadian financial institutions. The originating
application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The plaintiffs allege that non-
sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer
Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.
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 results of operation for a particular period, it would not have a material adverse impact on the Bank’s consolidated
financial position.
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant risks
and uncertainties, and, when it is significant, the effect of the time value of money.
The recognition of a litigation provision requires 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.
SSttrruuccttuurreedd EEnnttiittiieess
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 27 to the consolidated financial statements.
100
100
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
FFuuttuurree AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
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.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22001199
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 – Leases. The new standard replaces the previous lease accounting standard, IAS 17 – Leases, and related
interpretations. Under IAS 17, lessees and lessors were required to classify their leases as either finance leases or operating leases and to account for these two
types of leases differently. IFRS 16 provides a single accounting model for lessees, requiring lessees to recognize a right-of-use asset as well as a liability that
reflects the present value of future lease payments. Lessees will also recognize depreciation expense on the right-of-use asset and interest expense on the lease
liability in the Consolidated Statement of Income. As for lessors, IFRS 16 substantially carries forward the lessor accounting in IAS 17, with the distinction
between finance and operating leases being retained.
The Bank has elected to apply IFRS 16 using the modified retrospective basis by adjusting the Consolidated Balance Sheet as at November 1, 2019, the date of
initial application, with no restatement of comparative periods. The most significant impact to the Bank will be related to real estate leases, which are currently
classified as operating leases.
On transition, the Bank will apply, on a lease-by-lease basis, certain practical expedients. More specifically, it will measure the right-of-use assets at an amount
equal to the lease liability, it will rely on the Bank’s assessment about whether leases are onerous as at October 31, 2019 as an alternative to performing an
impairment test as at November 1, 2019, and it will exclude initial direct costs from the measurement of the right-of-use assets as at November 1, 2019.
Furthermore, on transition and thereafter, the Bank will exclude leases for which the underlying asset is of low value, will exclude short-term leases and, for real
estate leases, will elect not to separate non-lease components from lease components.
As at October 31, 2019, the Bank’s best estimate of the impact of adopting IFRS 16 is an increase in total assets of approximately $653 million representing
leased premises, an increase in total liabilities of approximately $653 million primarily representing lease liabilities, and a decrease of approximately 9 basis
points in the Common Equity Tier 1 (CET 1) capital ratio as at November 1, 2019.
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. This interpretation
will not have an impact on the Bank’s Consolidated Balance Sheet as at November 1, 2019.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002200
Conceptual Framework for Financial Reporting
On March 29, 2018, the IASB published 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.
Reform to Benchmark Interest Rates (Amendments to IFRS 9, IAS 39 and IFRS 7)
In September 2019, in response to uncertainty arising from the phasing-out of benchmark interest rates such as interbank offered rates (IBORs), the IASB issued
amendments to its new and former financial instrument standards, IFRS 9 – Financial Instruments and IAS 39 – Financial Instruments: Recognition and
Measurement as well as to the related standard on disclosures, IFRS 7 – Financial Instruments: Disclosures.
The amendments modify certain hedge accounting requirements in IFRS 9 and IAS 39 to provide relief from the potential effects of the uncertainty caused by the
IBOR reform. In addition, the amendments to IFRS 7 require additional disclosure about hedging relationships directly affected by this uncertainty. When the
Bank adopted IFRS 9 on November 1, 2017, it made an accounting policy choice to continue applying the IAS 39 hedge accounting requirements.
For the Bank, the effective date of these amendments is November 1, 2020. However, early adoption is permitted.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002211
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
101
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Table 1 – Quarterly Results
(millions of Canadian dollars, except per share amounts)
SSttaatteemmeenntt ooff iinnccoommee ddaattaa
Net interest income
Non-interest income(1)
TToottaall rreevveennuueess
Provisions for credit losses
Non-interest expenses(2)
Income taxes
NNeett iinnccoommee
Non-controlling interests
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss
EEaarrnniinnggss ppeerr ccoommmmoonn sshhaarree
Basic
Diluted
DDiivviiddeennddss (per share)
Common
Preferred
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
TToottaall
QQ44
QQ33
QQ22
33,,559966
33,,883366
77,,443322
334477
44,,330011
446622
22,,332222
6666
22,,225566
993366
997799
11,,991155
8899
11,,009955
112277
660044
1144
559900
885555
11,,009933
11,,994488
8866
11,,115544
110000
660088
1177
559911
994422
882288
11,,777700
8844
11,,002266
110022
555588
1199
553399
22001199
QQ11
886633
993366
11,,779999
8888
11,,002266
113333
555522
1166
553366
$$
$$
66..3399
66..3344
$$
11..6688
11..6677
11..6688 $$
11..6666
$$
11..5522
11..5511
11..5511
11..5500
$$
22..6666
$$
00..6688
$$
00..6688 $$
00..6655
$$
00..6655
−−
11..00115566
00..99775500
11..44000000
11..33550000
11..11112255
11..11550000
11..22337755
−−
00..22551155
00..22443377
00..33550000
00..33337755
00..22778811
00..22887755
00..33009944
−−
00..22551166
00..22443388
00..33550000
00..33337755
00..22778811
00..22887755
00..33009933
−−
00..22556622
00..22443377
00..33550000
00..33337755
00..22778822
00..22887755
00..33009944
−−
00..22556633
00..22443388
00..33550000
00..33337755
00..22778811
00..22887755
00..33009944
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy
1188..00 %%
1188..22 %%
1188..77 %%
1177..88 %%
1177..22 %%
TToottaall aasssseettss
LLoonngg--tteerrmm ffiinnaanncciiaall lliiaabbiilliittiieess(3)
NNeett iimmppaaiirreedd llooaannss(4) uunnddeerr IIFFRRSS 99
NNeett iimmppaaiirreedd llooaannss uunnddeerr IIAASS 3399
NNuummbbeerr ooff ccoommmmoonn sshhaarreess oouuttssttaannddiinngg (thousands)
Average – Basic
Average – Diluted
End of period
PPeerr ccoommmmoonn sshhaarree
Book value
Share price
High
Low
NNuummbbeerr ooff eemmppllooyyeeeess – WWoorrllddwwiiddee
NNuummbbeerr ooff bbrraanncchheess iinn CCaannaaddaa
228811,,445588
227766,,331122
226699,,110066
226633,,335555
777733
445500
777733
442200
777722
337799
776644
337733
333355,,110044
333377,,663300
333344,,339933
333366,,990000
333344,,117722
333344,,884433
333377,,776688
333344,,221100
333355,,447788
333388,,551155
333355,,111166
333355,,771166
333388,,558855
333355,,550000
$$
3366..8899
$$
3366..1122 $$
3355..4499
$$
3344..8855
$$
6688..0022
5544..9977
6688..0022
6600..3388
2255,,448877
442222
6644..1166
6600..7711
2244,,888811
442299
6633..8822
6600..3311
2244,,113377
442288
6611..8800
5544..9977
2233,,996600
442288
(1)
(2)
(3)
(4)
For fiscal 2019, the Non-interest income item includes a $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a $33
million loss resulting from the fair value measurement of an investment.
For fiscal 2019, the Non-interest expenses item includes $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts,
an $11 million charge related to Maple, and $10 million in severance pay.
Subordinated debt.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans; the net impaired loans presented in this table exclude 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.
102
102
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
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
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
$
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
–
–
$
$
$
5.44
5.38
$
1.40
1.39
1.39 $
1.37
$
1.30
1.28
1.35
1.34
2.28
$
0.58
$
0.58 $
0.56
$
0.56
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
–
–
0.2375
0.2562
0.2437
0.3500
0.3375
0.4724
–
–
0.2375
0.2563
0.2438
0.3500
0.3375
–
–
–
0.2375
0.2562
0.2437
0.3500
0.3375
–
–
–
0.2375
0.2563
0.2438
0.3500
0.3375
–
–
–
18.4 %
17.8 %
18.4 %
18.6 %
18.7 %
18.1 %
17.8 %
18.2 %
17.9 %
18.4 %
262,471
257,637
256,259
251,065
245,827
240,072
239,020
234,119
747
404
753
413
755
382
8
371
9
9
10
1,009
206
240
213
226
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
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
$
34.40 $
33.91 $
32.64
$
31.75
$
31.51
$
30.84 $
29.97
$
29.51
$
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
$
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
National Bank of Canada
103
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 22 –– OOvveerrvviieeww ooff RReessuullttss
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income on a taxable equivalent basis
Non-interest income on a taxable equivalent basis(2)
Total revenues on a taxable equivalent basis
Non-interest expenses(3)
Contribution on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders
Average assets
22001199
2018
2017
2016
2015
33,,779911
33,,997711
77,,776622
44,,330011
33,,446611
334477
33,,111144
779922
22,,332222
6666
3,526
3,885
7,411
4,063
3,348
327
3,021
789
2,232
87
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
3,240
2,817
6,057
3,665
2,392
228
2,164
545
1,619
70
22,,225566
228866,,116622
2,145
265,940
1,940
248,351
1,181
235,913
1,549
222,929
(1)
(2)
(3)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For fiscal 2019, the Non-interest income item includes a $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a $33
million loss resulting from the fair value measurement of an investment.
For fiscal 2019, the Non-interest expenses item includes $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts,
an $11 million charge related to Maple, and $10 million in severance pay.
TTaabbllee 33 –– CChhaannggeess iinn NNeett IInntteerreesstt IInnccoommee(1)
Year ended October 31
(taxable equivalent basis)(2)
(millions of Canadian dollars)
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall(1)
Net interest income
Average assets
Average interest-bearing assets
Net interest margin(3)
WWeeaalltthh MMaannaaggeemmeenntt(1)
Net interest income on a taxable equivalent basis
Average assets
FFiinnaanncciiaall MMaarrkkeettss
Net interest income on a taxable equivalent basis
Average assets
UUSSSSFF&&II
Net interest income
Average assets
OOtthheerr
Net interest income on a taxable equivalent basis
Average assets
TToottaall
Net interest income on a taxable equivalent basis
Average assets
22001199
2018
2017
2016
2015
22,,338833
111122,,779988
110066,,999955
2,276
106,857
101,446
2,127
102,139
97,339
2,011
97,741
92,660
1,917
92,090
86,543
22..2233 %%
2.24 %
2.19 %
2.17 %
2.22 %
447700
66,,221199
446
6,167
447744
111122,,449933
409
100,721
665566
1100,,998855
((119922))
4433,,666677
584
9,270
(189)
42,925
373
5,947
772
94,991
466
7,519
(93)
37,755
316
5,612
266
5,275
938
87,491
1,001
86,466
284
5,319
205
2,275
(113)
39,750
(149)
36,823
33,,779911
228866,,116622
3,526
265,940
3,645
248,351
3,436
235,913
3,240
222,929
(1)
(2)
(3)
For fiscal years prior to 2019, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth Management
segment to the Personal and Commercial segment.
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
104
104
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 44 –– NNoonn--IInntteerreesstt IInnccoommee
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) on a taxable equivalent basis
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
United States
Other countries
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)
22001199
331144
117788
444499
660099
113344
228833
117755
227711
996644
7777
113366
9966
3344
225511
33,,997711
33,,663377
8844
225500
2018
388
195
438
587
126
277
159
280
941
77
121
95
28
173
3,885
3,589
108
188
2017
2016
349
216
412
518
130
231
132
279
409
140
117
81
35
159
3,208
3,027
136
45
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
5511..22 %%
52.4 %
46.8 %
43.4 %
46.5 %
5500..55 %%
52.4 %
46.8 %
45.0 %
45.4 %
(1)
(2)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For fiscal 2019, other revenues includes a $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a $33 million loss
resulting from the fair value measurement of an investment.
TTaabbllee 55 –– TTrraaddiinngg AAccttiivviittyy RReevveennuueess(1)
Year ended October 31
(taxable equivalent basis)(2)
(millions of Canadian dollars)
FFiinnaanncciiaall mmaarrkkeettss
Equities
Fixed-income
Commodities and foreign exchange
OOtthheerr sseeggmmeennttss
22001199
2018
2017
2016
2015
662244
228899
112266
11,,003399
116600
11,,119999
576
267
130
973
176
506
294
107
907
97
1,149
1,004
438
263
116
817
80
897
450
237
147
834
151
985
(1)
(2)
Includes net interest income on a taxable equivalent basis and non-interest income on a taxable equivalent basis.
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
National Bank of Canada
105
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 66 –– NNoonn--IInntteerreesstt EExxppeennsseess
Year ended October 31
(millions of Canadian dollars)
Compensation and employee benefits(1)
Occupancy(2)
Technology
Amortization – Premises and equipment
Amortization – Technology(3)
Communications
Professional fees
Restructuring charge(4)
Travel and business development
Capital and payroll taxes
Other(5)
Total
Canada
United States
Other countries
Non-interest expenses as a % of total
revenues on a taxable equivalent basis(6)
Non-interest expenses as a % of total
revenues on a taxable equivalent basis
and excluding specified items(6)
22001199
22,,553322
225544
337722
4444
333322
6622
224499
−−
112288
7700
225588
44,,330011
33,,993311
221100
116600
2018
2,466
193
375
43
245
63
244
−
128
79
227
4,063
3,750
205
108
2017
2,358
195
364
41
204
61
254
−
122
73
185
3,857
3,571
209
77
2016
2,161
195
367
38
220
67
276
131
120
71
229
3,875
3,601
235
39
2015
2,160
185
352
38
182
69
233
86
113
69
178
3,665
3,457
192
16
5555..44 %%
54.8 %
56.3 %
63.8 %
60.5 %
5544..55 %%
54.8 %
56.3 %
58.6 %
59.1 %
(1)
(2)
(3)
(4)
(5)
(6)
For fiscal 2019, compensation and employee benefits include $10 million in severance pay.
For fiscal 2019, occupancy expense includes $45 million in provisions for onerous contracts.
For fiscal 2019, the Amortization – Technology expense includes $57 million in impairment losses on premises and equipment and on intangible assets.
The fiscal 2016 restructuring charge had included $129 million in compensation and employee benefits and $2 million in occupancy expenses, and the fiscal 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.
For fiscal 2019, other expenses include an $11 million charge related to Maple; the fiscal 2016 other expenses had included $25 million in litigation charges.
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
106
106
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 77 –– PPrroovviissiioonnss ffoorr CCrreeddiitt LLoosssseess(1)
Year ended October 31
(millions of Canadian dollars)
PPeerrssoonnaall BBaannkkiinngg(3)(4)
Stage 3
Stages 1 and 2
CCoommmmeerrcciiaall BBaannkkiinngg
Stage 3
Stages 1 and 2(5)
WWeeaalltthh MMaannaaggeemmeenntt(4)
Stage 3
Stages 1 and 2
FFiinnaanncciiaall MMaarrkkeettss
Stage 3
Stages 1 and 2
UUSSSSFF&&II
Stage 3
Stages 1 and 2
POCI loans
OOtthheerr
Stage 3
Stages 1 and 2(6)
TToottaall pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
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
22001199
2018
2017(2)
2016(2)
2015(2)
116666
88
117744
3355
2288
6633
−−
−−
−−
1188
1122
3300
9944
((2244))
1100
8800
−−
−−
−−
334477
158
9
167
40
21
61
−
1
1
−
4
4
126
(3)
(29)
94
−
−
−
327
153
−
153
43
(40)
3
−
−
−
−
−
−
48
−
−
48
−
40
40
156
−
156
73
250
323
1
−
1
−
−
−
4
−
−
4
−
−
−
165
−
165
63
−
63
−
−
−
−
−
−
−
−
−
−
−
−
−
244
484
228
114488,,776655
139,603
130,882
122,559
108,740
00..2211 %%
0.23 %
0.19 %
0.19 %
0.21 %
00..2233 %%
0.23 %
0.19 %
0.39 %
0.21 %
(1)
(2)
(3)
(4)
(5)
(6)
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.
Provisions for credit losses on impaired loans presented in this table exclude provisions for credit losses on POCI loans.
These figures are presented in accordance with IAS 39.
Includes credit card receivables.
For fiscal years prior to 2019, certain amounts have been reclassified, as amounts related to advisor banking service activities were transferred from the Wealth Management segment to the
Personal and Commercial segment.
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.
National Bank of Canada
107
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 88 –– CChhaannggee iinn AAvveerraaggee VVoolluummeess
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
AAsssseettss
Deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Residential mortgage loans
Personal loans
Credit card receivables
Business and government loans
POCI loans
Interest-bearing assets
Other assets
Total assets
LLiiaabbiilliittiieess aanndd eeqquuiittyy
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
AAvveerraaggee
vvoolluummee
$$
22001199
RRaattee
%%
Average
volume
$
2018(2)
Rate
%
Average
volume
$
2017(2)
Rate
%
Average
volume
$
2016(2)
Rate
%
Average
volume
$
2015(2)
Rate
%
1133,,114499
8855,,777722
11..6644
11..9977
16,282
75,923
1.27
1.64
15,802
66,591
0.72
1.75
14,079
60,784
0.46
1.98
11,771
57,494
0.26
2.25
2222,,447722
5533,,447744
3333,,007777
22,,221199
5511,,774466
11,,338866
226633,,229955
2222,,886677
228866,,116622
5544,,775566
55,,995500
112233,,775544
118844,,446600
775588
4477,,440044
223322,,662222
3388,,882277
1144,,771133
228866,,116622
11..6600
22..8855
33..9977
1133..7711
55..1100
1122..7788
33..1122
22..8877
11..2277
11..8811
22..0022
11..7799
33..2255
11..3355
11..9900
11..5555
11..3322
20,090
51,497
32,208
2,164
45,649
1,486
245,299
20,641
265,940
50,499
5,980
110,697
167,176
564
47,762
215,502
36,492
13,946
265,940
1.09
2.75
3.69
13.35
4.71
12.76
2.81
2.60
1.12
1.45
1.62
1.47
3.20
1.20
1.57
1.27
1.33
19,878
50,844
30,890
2,206
39,579
1,238
227,028
21,323
248,351
48,408
7,567
98,279
154,254
423
44,204
198,881
36,722
12,748
248,351
1.03
2.61
3.34
12.07
3.95
15.18
2.58
2.36
1.01
0.69
1.20
1.11
3.81
0.74
1.11
0.89
1.47
19,038
46,310
30,409
2,107
34,197
1,545
208,469
27,444
235,913
44,510
12,468
85,874
142,852
1,047
38,804
182,703
41,627
11,583
235,913
0.75
2.69
3.27
11.98
3.22
14.01
2.50
25,610
41,798
28,840
2,023
26,883
1,204
195,623
27,306
0.79
2.85
3.38
11.85
3.22
17.87
2.56
2.12
222,929
2.15
42,480
10,925
76,063
129,468
1,571
40,374
171,413
40,792
10,724
222,929
1.13
0.39
1.10
1.04
3.16
0.31
0.98
0.76
1.36
1.20
0.24
1.12
1.07
3.80
0.41
1.03
0.79
1.36
(1)
(2)
See the Financial Reporting Method section on pages 14 and 15 for additional information on non-GAAP financial measures.
For fiscal years prior to 2019, certain amounts have been reclassified.
108
108
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 99 –– DDiissttrriibbuuttiioonn ooff GGrroossss LLooaannss aanndd AAcccceeppttaanncceess bbyy BBoorrrroowweerr CCaatteeggoorryy UUnnddeerr
BBaasseell AAsssseett CCllaasssseess
As at October 31
(millions of Canadian dollars)
Residential mortgage(1)(2)
Qualifying revolving retail
Other retail
Agriculture
Oil and gas, and pipelines(3)
Mining
Utilities
Non-real-estate construction(3)(4)
Manufacturing(3)
Wholesale
Retail
Transportation(3)
Communications
Finance and insurance
Real estate and real-estate-construction(3)(5)
Professional services
Education and health care(3)
Other services
Government
Other(2)
POCI loans
22001199
%%
$$
2018
%
$
2017
%
$
2016
%
$
2015
%
$
7744,,444488
44,,009999
1111,,660066
66,,330088
44,,332299
775588
33,,337722
11,,116688
66,,330033
22,,222211
33,,228899
11,,668822
11,,661144
44,,333355
1111,,663355
11,,884466
33,,552200
44,,993377
11,,007711
44,,222222
11,,116666
115533,,992299
4488..44
22..77
77..55
44..11
22..88
00..55
22..22
00..88
44..11
11..44
22..11
11..11
11..00
22..88
77..66
11..22
22..33
33..22
00..77
22..77
00..88
110000..00
70,591
4,211
12,246
5,759
4,056
1,032
2,715
1,049
5,303
2,163
3,069
1,452
1,597
4,732
11,629
1,582
3,284
4,715
1,445
2,534
1,576
146,740
48.1
2.9
8.3
3.9
2.8
0.7
1.9
0.7
3.6
1.5
2.1
1.0
1.1
3.2
7.9
1.1
2.2
3.2
1.0
1.7
1.1
100.0
66,398
4,217
12,150
4,923
3,364
470
2,347
1,336
4,274
2,066
3,431
1,425
1,662
4,932
10,418
1,416
2,886
4,762
1,452
1,233
1,990
137,152
48.4
3.1
8.9
3.6
2.5
0.3
1.7
1.0
3.1
1.5
2.5
1.0
1.2
3.6
7.6
1.0
2.1
3.5
1.1
0.9
1.4
100.0
58,265
4,178
10,316
4,599
3,595
582
1,814
1,147
3,561
2,021
2,911
1,565
1,578
3,872
9,458
1,374
2,738
4,647
1,201
7,537
1,846
128,805
45.2
3.2
8.0
3.6
2.8
0.5
1.4
0.9
2.8
1.6
2.3
1.2
1.2
3.0
7.3
1.1
2.1
3.6
0.9
5.9
1.4
100.0
54,004
4,093
9,512
4,433
3,978
429
1,385
1,240
3,738
1,908
2,965
1,189
1,254
2,679
8,639
1,214
2,730
4,200
891
5,326
1,424
117,231
46.1
3.6
8.1
3.8
3.4
0.4
1.2
1.0
3.2
1.6
2.5
1.0
1.1
2.3
7.4
1.0
2.3
3.6
0.7
4.5
1.2
100.0
(1)
(2)
(3)
(4)
(5)
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.
The presentation of certain borrower categories was changed during fiscal 2019. Comparative figures have been revised.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
TTaabbllee 1100 –– IImmppaaiirreedd LLooaannss(1)
As at October 31
(millions of Canadian dollars)
Net impaired loans(3)
Personal Banking(4)
Commercial Banking
Wealth Management(4)
Financial Markets
USSF&I
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(3)
Provisioning rate
As a % of loans and acceptances
22001199
2018
2017(2)
2016(2)
2015(2)
118877
222222
33
2233
1155
−−
445500
668844
223344
445500
3344..22 %%
00..33 %%
199
187
3
−
15
−
404
630
226
404
35.9 %
0.3 %
81
121
1
−
3
−
206
380
174
206
89
190
1
−
1
−
281
492
211
281
95
157
2
−
−
−
254
457
203
254
45.8 %
0.2 %
42.9 %
0.2 %
44.4 %
0.2 %
(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.
The impaired loans presented in this table exclude POCI loans.
These figures are presented in accordance with IAS 39.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
For fiscal years prior to 2019, certain amounts have been reclassified, as amounts related to advisor banking service activities were transferred from the Wealth Management segment to the
Personal and Commercial segment.
National Bank of Canada
109
National Bank of Canada2019 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 1111 –– AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
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(2)
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(3)
Collective allowance on non-impaired loans(4)
22001199
771144
334477
((335511))
((11))
5522
((66))
775555
223344
550011
7777
((5577))
2018
735
327
(367)
(24)
45
(2)
714
226
498
56
(66)
2017(1)
2016(1)
2015(1)
769
244
(320)
−
13
(11)
695
174
(24)
139
406
555
484
(282)
−
13
(1)
769
211
(12)
204
366
605
228
(278)
−
13
(13)
555
203
(14)
−
366
(1)
(2)
(3)
(4)
These figures are presented in accordance with IAS 39.
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.
Allowances for credit losses on impaired loans presented in this table exclude allowances for credit losses on 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.
TTaabbllee 1122 –– DDeeppoossiittss
As at October 31
(millions of Canadian dollars)
22001199
%%
$$
2018
%
$
2017
%
$
2016
%
$
$
Personal
Business and government
Deposit-taking institutions
Total
Canada
United States
Other countries
Total
Personal deposits as a %
of total assets
6600,,006655
112255,,226666
44,,223355
118899,,556666
117722,,776644
66,,990077
99,,889955
118899,,556666
3311..77
55,688
6666..11 110,321
4,821
22..22
110000..00 170,830
9911..11 156,054
6,048
33..77
8,728
55..22
110000..00 170,830
2211..33
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
36.0
60.0
4.0
47,394
76,845
6,219
100.0 130,458
92.8 116,315
9,655
3.1
4,488
4.1
100.0 130,458
22.0
2015
%
36.3
58.9
4.8
100.0
89.2
7.4
3.4
100.0
21.9
110
National Bank of Canada2019 Annual Report
Audited Consolidated
Financial Statements
Management’s Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Audited Consolidated Financial Statements
111122
111133
111155
111166
111177
111188
111199
112200
MMaannaaggeemmeenntt’’ss RReessppoonnssiibbiilliittyy ffoorr FFiinnaanncciiaall RReeppoorrttiinngg
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,
2019 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 further 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.
LLoouuiiss VVaacchhoonn
President and Chief Executive Officer
GGhhiissllaaiinn PPaarreenntt
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, December 3, 2019
112
National Bank of Canada2019 Annual Report
IInnddeeppeennddeenntt AAuuddiittoorr’’ss RReeppoorrtt
To the Shareholders of National Bank of Canada,
OOppiinniioonn
We have audited the consolidated financial statements of National Bank of Canada (the Bank), which comprise the consolidated balance sheets as at October 31,
2019 and 2018, and 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 then ended, and notes to the consolidated financial statements, including a summary of
significant accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at October 31, 2019 and 2018,
and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS).
BBaassiiss ffoorr OOppiinniioonn
We conducted our audit in accordance with Canadian generally accepted auditing standards (Canadian GAAS). Our responsibilities under those standards are
further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance
with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
OOtthheerr IInnffoorrmmaattiioonn
Management is responsible for the other information. The other information comprises:
Management’s Discussion and Analysis;
The information, other than the financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In
connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have performed on
this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We
have nothing to report in this regard.
RReessppoonnssiibbiilliittiieess ooff MMaannaaggeemmeenntt aanndd TThhoossee CChhaarrggeedd WWiitthh GGoovveerrnnaannccee ffoorr tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable,
matters related to a going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Bank’s financial reporting process.
AAuuddiittoorr’’ss RReessppoonnssiibbiilliittiieess ffoorr tthhee AAuuddiitt ooff tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud
or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these financial statements.
National Bank of Canada
113
National Bank of Canada2019 Annual Report
Independent Auditor’s Report (cont.)
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Bank’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a
material uncertainty exists related to events or conditions that may cast significant doubt on the Bank’s ability to continue as a going concern. If we conclude
that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such
disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Bank to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements, including the note disclosures, and whether the financial statements
represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Bank to express an opinion
on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit
opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings,
including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to
communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Chantal Leclerc.
//ss// DDeellooiittttee LLLLPP11
December 3, 2019
Montreal, Quebec
1 CPA auditor, CA, public accountancy permit No. A121444
114
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeettss
As at October 31
AAsssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss
aanndd sseeccuurriittiieess bboorrrroowweedd
LLooaannss
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
OOtthheerr
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss
OOtthheerr
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
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
EEqquuiittyy aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss
Preferred shares
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss
Note 19
The accompanying notes are an integral part of these audited consolidated financial statements.
Notes 3, 4 and 6
Note 7
Note 16
Note 9
Note 10
Note 11
Note 11
Note 12
22001199
2018
1133,,669988
12,756
6611,,882233
1100,,664488
99,,775555
8822,,222266
55,817
5,668
8,298
69,783
1177,,772233
18,159
5577,,117711
3366,,994444
22,,332222
5500,,559999
114477,,003366
66,,889933
((667788))
115533,,225511
88,,112299
338855
449900
11,,441122
11,,440066
22,,773388
1144,,556600
228811,,445588
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
Notes 4 and 13
118899,,556666
170,830
Note 16
Notes 4 and 8
Note 14
Note 15
Notes 18 and 22
66,,889933
1122,,884499
2211,,990000
66,,885522
2211,,331122
66,,117777
7755,,998833
777733
22,,445500
22,,994499
5511
99,,331122
1166
1144,,777788
335588
1155,,113366
228811,,445588
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
LLoouuiiss VVaacchhoonn
President and Chief Executive Officer
KKaarreenn KKiinnsslleeyy
Director
National Bank of Canada
115
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff IInnccoommee
Year ended October 31
22001199
2018
IInntteerreesstt iinnccoommee
Loans
Securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Securities at amortized cost
Deposits with financial institutions
IInntteerreesstt eexxppeennssee
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
NNeett iinntteerreesstt iinnccoommee(1)
NNoonn--iinntteerreesstt iinnccoommee
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 non-trading securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and joint ventures
Other
TToottaall rreevveennuueess
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
NNoonn--iinntteerreesstt eexxppeennsseess
Compensation and employee benefits
Occupancy
Technology
Communications
Professional fees
Other
IInnccoommee bbeeffoorree iinnccoommee ttaaxxeess
Income taxes
NNeett iinnccoommee
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo
Preferred shareholders
Common shareholders
Bank shareholders
Non-controlling interests
EEaarrnniinnggss ppeerr sshhaarree (dollars)
Basic
Diluted
DDiivviiddeennddss ppeerr ccoommmmoonn sshhaarree (dollars)
The accompanying notes are an integral part of these audited consolidated financial statements.
66,,446688
11,,008866
119955
221100
221155
88,,117744
33,,446688
444444
2255
664411
44,,557788
33,,559966
331144
117788
444499
660099
441177
117755
227711
882299
7777
113366
9966
3344
225511
33,,883366
77,,443322
334477
77,,008855
22,,553322
229988
770044
6622
224499
445566
44,,330011
22,,778844
446622
22,,332222
111166
22,,114400
22,,225566
6666
22,,332222
66..3399
66..3344
22..6666
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
Note 21
Note 9
Notes 9 and 10
Note 7
Note 14
Notes 10 and 11
Note 24
Note 25
Note 18
(1) Net interest income includes dividend income. For additional information, see Note 1 to these audited consolidated financial statements.
116
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CCoommpprreehheennssiivvee IInnccoommee
Year ended October 31
NNeett iinnccoommee
OOtthheerr ccoommpprreehheennssiivvee iinnccoommee,, nneett ooff iinnccoommee ttaaxxeess
IItteemmss tthhaatt mmaayy bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
NNeett ffoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn aaddjjuussttmmeennttss
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
NNeett cchhaannggee iinn ddeebbtt sseeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
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
NNeett cchhaannggee iinn ccaasshh ffllooww hheeddggeess
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
SShhaarree iinn tthhee ootthheerr ccoommpprreehheennssiivvee iinnccoommee ooff aassssoocciiaatteess aanndd jjooiinntt vveennttuurreess
IItteemmss tthhaatt wwiillll nnoott bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
RReemmeeaassuurreemmeennttss ooff ppeennssiioonn ppllaannss aanndd ootthheerr ppoosstt--eemmppllooyymmeenntt bbeenneeffiitt ppllaannss
NNeett ggaaiinnss ((lloosssseess)) oonn eeqquuiittyy sseeccuurriittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
NNeett ffaaiirr vvaalluuee cchhaannggee aattttrriibbuuttaabbllee ttoo ccrreeddiitt rriisskk oonn ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee ((lloossss)),, nneett ooff iinnccoommee ttaaxxeess
CCoommpprreehheennssiivvee iinnccoommee
CCoommpprreehheennssiivvee iinnccoommee aattttrriibbuuttaabbllee ttoo
Bank shareholders
Non-controlling interests
22001199
22,,332222
2018
2,232
((99))
((22))
44
−−
((77))
5544
((5533))
11
((113377))
((2200))
((115577))
33
((113355))
((2211))
55
((115511))
((331111))
22,,001111
11,,994466
6655
22,,001111
41
−
(13)
−
28
(11)
(5)
(16)
51
(46)
5
1
103
(2)
21
122
140
2,372
2,284
88
2,372
IInnccoommee TTaaxxeess –– OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
22001199
2018
NNeett ffoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn aaddjjuussttmmeennttss
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
NNeett cchhaannggee iinn ddeebbtt sseeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
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
NNeett cchhaannggee iinn ccaasshh ffllooww hheeddggeess
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
SShhaarree iinn tthhee ootthheerr ccoommpprreehheennssiivvee iinnccoommee ooff aassssoocciiaatteess aanndd jjooiinntt vveennttuurreess
RReemmeeaassuurreemmeennttss ooff ppeennssiioonn ppllaannss aanndd ootthheerr ppoosstt--eemmppllooyymmeenntt bbeenneeffiitt ppllaannss
NNeett ggaaiinnss ((lloosssseess)) oonn eeqquuiittyy sseeccuurriittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee iinnccoommee
NNeett ffaaiirr vvaalluuee cchhaannggee aattttrriibbuuttaabbllee ttoo ccrreeddiitt rriisskk oonn ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
The accompanying notes are an integral part of these audited consolidated financial statements.
33
((11))
22
22
66
1199
((1199))
−−
((5500))
((77))
((5577))
−−
((4488))
((66))
22
((110033))
National Bank of Canada
1
−
−
−
1
(4)
(1)
(5)
19
(17)
2
−
37
(1)
7
41
117
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Changes in Equity
Note 18
Note 18
Note 22
Note 18
Note 18
Note 18
Year ended October 31
PPrreeffeerrrreedd sshhaarreess aatt bbeeggiinnnniinngg
Issuances of Series 40 and 42 preferred shares
Redemption of Series 28 preferred shares for cancellation
PPrreeffeerrrreedd sshhaarreess aatt eenndd
CCoommmmoonn sshhaarreess aatt bbeeggiinnnniinngg
Issuances of common shares pursuant to the Stock Option Plan
Repurchases of common shares for cancellation
Impact of shares purchased or sold for trading
CCoommmmoonn sshhaarreess aatt eenndd
CCoonnttrriibbuutteedd ssuurrpplluuss aatt bbeeggiinnnniinngg
Stock option expense
Stock options exercised
Other
CCoonnttrriibbuutteedd ssuurrpplluuss aatt eenndd
RReettaaiinneedd eeaarrnniinnggss aatt bbeeggiinnnniinngg
Impact of adopting IFRS 15 on November 1, 2018 (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
RReettaaiinneedd eeaarrnniinnggss aatt eenndd
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee aatt bbeeggiinnnniinngg
Impact of adopting IFRS 9 on November 1, 2017
Net foreign currency translation adjustments
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
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee aatt eenndd
22001199
22,,445500
−−
−−
22,,445500
22,,882222
112222
((4400))
4455
22,,994499
5577
1111
((1155))
((22))
5511
88,,447722
((44))
22,,225566
((111166))
((889922))
((224411))
−−
((113355))
((2211))
55
((1122))
−−
99,,331122
117755
((66))
11
((115577))
33
1166
2018
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
EEqquuiittyy aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss
1144,,777788
13,976
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss aatt bbeeggiinnnniinngg
Impact of adopting IFRS 9 on November 1, 2017
Purchase of the non-controlling interest of the Advanced Bank of Asia Limited subsidiary
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
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss aatt eenndd
Note 19
Note 31
337799
((3300))
−−
6666
((11))
((5566))
335588
808
(16)
−
(400)
87
1
(101)
379
EEqquuiittyy
1155,,113366
14,355
Accumulated Other Comprehensive Income
As at October 31
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Net foreign currency translation adjustments
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.
22001199
2018
88
1144
((66))
−−
1166
14
13
151
(3)
175
118
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CCaasshh FFlloowwss
Year ended October 31
CCaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess
Net income
Adjustments for
Provisions for credit losses
Amortization of premises and equipment and intangible assets
Gains on disposals of investments in associates and joint ventures
Remeasurement at fair value of an investment
Provisions for onerous contracts
Gain on disposal of premises and equipment
Impairment losses on premises and equipment and on intangible assets
Deferred taxes
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
CCaasshh fflloowwss ffrroomm ffiinnaanncciinngg aaccttiivviittiieess
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
Purchase of the non-controlling interest of the Advanced Bank of Asia Limited subsidiary
Redemption of trust units issued by NBC Asset Trust
Share issuance expenses
Dividends paid
Distributions to non-controlling interests
CCaasshh fflloowwss ffrroomm iinnvveessttiinngg aaccttiivviittiieess
Disposal of shares of an investment in an associate
Disposal of premises and equipment
Net change in investments in associates and joint ventures
Purchases of non-trading securities
Maturities of non-trading securities
Sales of non-trading securities
Net change in tangible assets leased under operating leases
Net change in premises and equipment
Net change in intangible assets
IImmppaacctt ooff ccuurrrreennccyy rraattee mmoovveemmeennttss oonn ccaasshh aanndd ccaasshh eeqquuiivvaalleennttss
IInnccrreeaassee ((ddeeccrreeaassee)) iinn ccaasshh aanndd ccaasshh eeqquuiivvaalleennttss
Cash and cash equivalents at beginning
CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt eenndd(1)
SSuupppplleemmeennttaarryy iinnffoorrmmaattiioonn aabboouutt ccaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess
Interest paid
Interest and dividends received
Income taxes paid
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 9
Note 9
Note 14
Note 10
Notes 10 and 11
Note 31
Note 9
Note 10
22001199
2018
22,,332222
2,232
334477
332288
((7799))
3333
4455
((5500))
5577
((220077))
((7777))
((3344))
1111
((66,,000066))
443366
((66,,222211))
1188,,773366
((44,,993311))
11,,990022
11,,229955
((4411))
((77))
442211
88,,228800
−−
−−
115522
((228811))
−−
((8844))
−−
−−
((999922))
((5566))
((11,,226611))
112288
118877
((1166))
((1166,,335555))
11,,889933
88,,441133
−−
((114444))
((335599))
((66,,225533))
117766
994422
1122,,775566
1133,,669988
44,,554455
88,,110000
552200
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)
(7,790)
509
6,173
69
(233)
(256)
(1,531)
266
3,954
8,802
12,756
3,440
6,875
596
(1)
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $4.1 billion as at October 31, 2019 ($2.5 billion as at
October 31, 2018) for which there are restrictions.
National Bank of Canada
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Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNootteess ttoo tthhee AAuuddiitteedd CCoonnssoolliiddaatteedd FFiinnaanncciiaall SSttaatteemmeennttss
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Basis of Presentation and Summary of Significant Accounting Policies
Future Accounting Policy Changes
Fair Value of Financial Instruments
Financial Instruments Designated at Fair Value Through Profit or Loss
Offsetting Financial Assets and Financial Liabilities
Securities
Loans 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
Derivative Financial Instruments
Hedging Activities
112200
113355
113366
114477
114488
114499
115511
116644
116655
116677
116688
116699
117700
117700
117711
117711
117744
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Note 32
Share Capital
Non-Controlling Interests
Capital Disclosure
Trading Activity Revenues
Share-Based Payments
Employee Benefits – Pension Plans and Other
Post-Employment Benefits
Income Taxes
Earnings Per Share
Guarantees, Commitments and Contingent Liabilities
Structured Entities
Related Party Disclosures
Management of the Risks Associated With Financial Instruments
Segment Disclosures
Acquisition
Event After the Consolidated Balance Sheet Date
118800
118833
118844
118855
118866
118899
119933
119955
119955
119999
220022
220033
220088
220099
220099
NNoottee 11 –– BBaassiiss ooff PPrreesseennttaattiioonn aanndd SSuummmmaarryy ooff SSiiggnniiffiiccaanntt AAccccoouunnttiinngg PPoolliicciieess
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).
National Bank of Canada offers financial services to individuals, businesses, institutional clients and governments throughout Canada as well as specialized
services at the international level. 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 includes banking and investing solutions
for individuals and businesses, corporate banking and investment banking services, securities brokerage, insurance, and wealth management.
On December 3, 2019, 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, 2019.
BBaassiiss ooff PPrreesseennttaattiioonn
The Bank’s consolidated financial statements 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 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.
The accounting policies covered in the Summary of Significant Accounting Policies section have been applied consistently to all periods presented and include
the changes described hereafter in the Accounting Policy Changes section, which have been applied since November 1, 2018 following adoption of IFRS 15 –
Revenue From Contracts With Customers (IFRS 15). As permitted by IFRS 15, the Bank did not restate comparative consolidated financial statements.
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)
AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
Effective November 1, 2018, the Bank adopted IFRS 15, which replaces the previous revenue recognition standards and interpretations. Excluded from the scope
of IFRS 15 are revenues related to lease contracts, insurance contracts, and financial instruments. Fees earned, which are an integral component of the effective
interest rate of financial assets and liabilities measured at amortized cost, are within the scope of IFRS 9 – Financial Instruments and are therefore outside the
scope of IFRS 15. Most of the Bank’s revenues, including net interest income, are not impacted by the adoption of this standard.
IFRS 15 provides a single comprehensive model to use in accounting for revenue arising from contracts with customers. The new revenue recognition model is
based on a control approach that differs from the risks and rewards approach applied under previous IFRS. The revenue streams that fall within the scope of IFRS
15 are fee and commission income, and the applicable significant accounting policies are described in the Summary of Significant Accounting Policies section.
However, the adoption of IFRS 15 did not have a significant impact on the Bank’s revenue recognition accounting policies.
The core principle of IFRS 15 is to recognize revenue when, or as, a performance obligation is satisfied, i.e., when control of a promised service is transferred to
a customer and in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for the service. Revenue may therefore be
recognized at a point in time, upon completion of the service, or over time as services are provided.
The Bank has elected to apply IFRS 15 using the modified retrospective basis, recognizing the cumulative effect of initially applying the standard as an adjustment
to the opening balance of Retained earnings without restating comparative figures. Adoption of IFRS 15 resulted in a $4 million decrease to opening Retained
earnings as at November 1, 2018.
SSuummmmaarryy ooff SSiiggnniiffiiccaanntt AAccccoouunnttiinngg PPoolliicciieess
JJuuddggmmeennttss,, EEssttiimmaatteess aanndd AAssssuummppttiioonnss
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 following: 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, the consolidation of structured entities, and the classification of debt instruments. Descriptions of these judgments and
estimates are provided in each of the notes related thereto in the consolidated financial statements. Actual results could therefore differ from these estimates,
in which case the impacts are 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.
BBaassiiss ooff CCoonnssoolliiddaattiioonn
Subsidiaries
These consolidated financial statements include all the assets, liabilities, operating results and cash flows of the Bank and its subsidiaries, after elimination of
intercompany transactions and balances. Subsidiaries are entities, including structured entities, controlled by the Bank. A structured entity is an entity created
to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls the entity,
such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements.
Management must exercise judgment in determining whether the Bank must consolidate an entity. The Bank controls an entity only if the following three
conditions are met:
it has decision-making authority regarding the entity’s relevant activities;
it has exposure or rights to variable returns from its involvement with the entity; and
it has the ability to use its power to affect the amount of the returns.
When determining decision-making authority, the Bank considers many factors, 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.
National Bank of Canada
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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.)
Non-Controlling Interests
Non-controlling interests in subsidiaries represent the equity interests held by 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 shares of the net income and other comprehensive
income of the Bank’s subsidiaries are presented separately in the Consolidated Statement of Income and in the Consolidated Statement of 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 when there’s a contractually agreed sharing of control of an arrangement, and joint control 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.
TTrraannssllaattiioonn ooff FFoorreeiiggnn CCuurrrreenncciieess
The consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional and presentation currency. Each foreign operation of
the Bank determines its own functional currency, and the items reported in the financial statements of each foreign operation are measured using that currency.
Monetary items and non-monetary items measured at fair value and denominated in foreign currencies are translated into the functional currency at exchange
rates prevailing at the Consolidated Balance Sheet date. Non-monetary items not measured at fair value are translated into the functional currency at historical
rates. Revenues and expenses denominated in foreign currencies are translated at the average exchange rates for the period. Translation gains and losses are
recognized in Non-interest income in the Consolidated Statement of Income, except for equity instruments designated at fair value through other comprehensive
income, for which unrealized gains and losses are recorded in Other comprehensive income and will not be subsequently 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 at the exchange
rates prevailing at 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 at the exchange rates prevailing at the Consolidated Balance Sheet date. Unrealized translation
gains and losses relating to foreign operations, along with the impact of hedges and income taxes on the related results, are presented in Other comprehensive
income. On disposal of a foreign operation, any accumulated translation gains and losses, along with the related hedges, recorded in the Accumulated other
comprehensive income item of this foreign operation, are reclassified to Non-interest income in the Consolidated Statement of Income.
CCllaassssiiffiiccaattiioonn aanndd MMeeaassuurreemmeenntt ooff FFiinnaanncciiaall IInnssttrruummeennttss
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 as 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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. Consequently, 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.
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:
If, consistent with a documented risk management strategy, using this option allows the Bank to eliminate or significantly reduce a measurement or
recognition inconsistency that would otherwise arise from measuring financial assets or liabilities on different bases, 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
At initial recognition, an investment in an equity instrument that is neither held for trading nor a contingent consideration recognized in a business combination
may be irrevocably designated 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.
National Bank of Canada
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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.)
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.
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. Interest income, any transaction costs, 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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 the cash consideration is paid by the Bank.
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.
EEssttaabblliisshhiinngg FFaaiirr VVaalluuee
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 consider when 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.
National Bank of Canada
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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.)
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 derivative financial instruments.
IImmppaaiirrmmeenntt ooff FFiinnaanncciiaall AAsssseettss
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.
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, in 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, in 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. 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 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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.
DDeerreeccooggnniittiioonn ooff FFiinnaanncciiaall AAsssseettss aanndd SSeeccuurriittiizzaattiioonn
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 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 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 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 of 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.
DDeerreeccooggnniittiioonn ooff FFiinnaanncciiaall LLiiaabbiilliittiieess
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.
CCaasshh aanndd DDeeppoossiittss WWiitthh FFiinnaanncciiaall IInnssttiittuuttiioonnss
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.
AAcccceeppttaanncceess aanndd CCuussttoommeerrss’’ LLiiaabbiilliittyy UUnnddeerr AAcccceeppttaanncceess
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.
National Bank of Canada
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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.)
OObblliiggaattiioonnss RReellaatteedd ttoo SSeeccuurriittiieess SSoolldd SShhoorrtt
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.
DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues, and to
manage its exposure to interest rate risk, foreign exchange risk, credit risk and other market risks.
All derivative financial instruments are measured 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, the effect being that some of the cash flows of the combined
instrument vary in a way similar to a stand-alone derivative. An 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 in the case of a non-financial variable that the variable is not specific to one of the parties to the contract.
A derivative embedded in a financial liability is separated from the host contract and treated as a separate derivative if, and only if, the following three conditions
are met: the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, the embedded derivative is a
separate instrument that meets the definition of a derivative financial instrument, and the hybrid contract is not measured at fair value through profit or loss.
Embedded derivatives that are separately accounted for are measured at fair value on the Consolidated Balance Sheet, and subsequent changes in fair value 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 separated 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
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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 with respect to the effective portion of gains and losses attributable to the hedged risk
are immediately recorded in the Consolidated Statement of Income.
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.
OOffffsseettttiinngg ooff FFiinnaanncciiaall AAsssseettss aanndd LLiiaabbiilliittiieess
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.
PPrreemmiisseess aanndd EEqquuiippmmeenntt
Premises and equipment, except for land and the head office building under construction, are recognized at cost less accumulated amortization and accumulated
impairment losses. Land and the head office building under construction are recorded at cost less 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
Equipment and furniture
Leasehold improvements
Method
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.
GGooooddwwiillll
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 the identifiable net
assets of the acquiree. If the fair value of the identifiable net assets exceeds the purchase consideration and all previously held interests, the difference is
immediately recognized as a gain on a bargain purchase.
National Bank of Canada
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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.)
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 an 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 acquisition.
IInnttaannggiibbllee AAsssseettss
Intangible Assets With Finite Useful Lives
Software and certain other intangible assets are recognized at cost less 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.
IImmppaaiirrmmeenntt ooff NNoonn--FFiinnaanncciiaall AAsssseettss
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
generated by 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 that recoverable amount 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, given that 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
LLeeaasseess
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.
PPrroovviissiioonnss
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. Provisions are reviewed at the end of each reporting period. Provisions are
presented in Other liabilities on the Consolidated Balance Sheet.
IInntteerreesstt IInnccoommee aanndd EExxppeennssee
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest rate method.
The effective interest rate is the rate that 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 expected cash flows by considering all the contractual terms of the financial instrument but does not consider 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 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.
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.
DDiivviiddeenndd IInnccoommee
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.
FFeeee aanndd CCoommmmiissssiioonn IInnccoommee
Fee and commission income is recognized when, or as, a performance obligation is satisfied, i.e., when control of a promised service is transferred to a customer
and in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for the service. The revenue may therefore be
recognized at a point in time, upon completion of the service, or over time as services are provided.
The Bank must also determine whether its performance obligation is to provide the service itself or to arrange for another party to provide the service (in other
words, whether the Bank is acting as a principal or agent). A principal may itself satisfy its performance obligation to provide the specified good or service or it
may engage another party to satisfy some or all of the performance obligation on its behalf. A principal also has the primary responsibility for fulfilling the
promise to provide the good or service to the customer and has discretion in establishing the price for the service. If the Bank is acting as a principal, revenue is
recognized on a gross basis in an amount corresponding to the consideration to which the Bank expects to be entitled. If the Bank is acting as an agent, then
revenue is recognized net of the service fees and other costs incurred in relation to the commission and fees earned.
National Bank of Canada
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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.)
Underwriting and Advisory Fees
Underwriting and advisory fees include underwriting fees, financial advisory fees, and loan syndication fees. These fees are mainly earned in the Financial
Markets segment and are recognized at a point in time as revenue upon successful completion of the engagement. Financial advisory fees are fees earned for
assisting customers with transactions related to mergers and acquisitions and financial restructurings. Loan syndication fees represent fees earned as the agent
or lead lender responsible for structuring, arranging, and administering a loan syndication and 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.
Securities Brokerage Commissions
Securities brokerage commissions are earned in the Wealth Management segment and are recognized at a point in time when the transaction is executed.
Mutual Fund and Trust Service Revenues
Mutual fund and trust service revenues include management and administration fees. These fees are earned in the Wealth Management segment. Management
fees are primarily calculated on assets under management and are recorded over the period the services are performed. Administration fees are generally based
on assets under administration or management and are recorded over the period the services are performed.
Card Revenues
Card revenues are earned in the Personal and Commercial segment and include card fees such as annual and transactional fees as well as interchange fees.
Interchange fees are recognized when a card transaction is settled. Card fees are recognized on the transaction date except for annual fees, which are recorded
evenly throughout the year. Reward costs are recorded as a reduction to interchange fees.
Credit Fees and Deposit and Payment Service Charges
Credit fees and deposit and payment service charges are earned in the Personal and Commercial, Financial Markets, and U.S. Specialty Finance and International
segments. Credit fees are generally recognized in income over the period the services are provided. Deposit and payment service charges include fees related to
account maintenance activities and transaction-based service charges. Fees related to account maintenance activities are recognized over the period the services
are provided, whereas transaction-based service charges are recognized at a point in time when the transaction is completed.
IInnssuurraannccee RReevveennuueess
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 was 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 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.
IInnccoommee TTaaxxeess
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 the 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 that 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 it is 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 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.
The Bank is subject to the jurisdictions 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, at a future date, a provision might need to be adjusted 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.
FFiinnaanncciiaall GGuuaarraanntteeee CCoonnttrraaccttss
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 a beneficiary in the event of a loss resulting from a debtor defaulting on the original or amended
terms of a debt instrument.
To reflect the fair value of the obligation assumed at the inception of a financial guarantee, a liability is recorded in Other liabilities on the Consolidated Balance
Sheet. After initial recognition, the Bank must measure financial guarantee contracts at the higher of the allowance for credit losses determined using the ECL
model and of the initially recognized amount less, where applicable, the cumulative amount of income recognized. This revenue is recognized in Credit fees in
the Consolidated Statement of Income.
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. Other post-employment benefit plans include
post-employment medical, dental, and life insurance coverage. While pension plans are funded, the other plans are not.
Plan expenses and obligations are actuarially determined based on the projected benefit method prorated on service. The calculations use management’s best
estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates, mortality rates, and retirement
age.
The net asset or net liability of pension plans and other post-employment benefit plans are calculated separately for each plan as the difference between the
present value of the future benefits earned by employees in respect of current- and prior-period service and the fair value of plan assets. The net asset or net
liability is included in either the Other assets or Other liabilities item of the Consolidated Balance Sheet.
National Bank of Canada
133
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
SShhaarree--BBaasseedd PPaayymmeennttss
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.
The Bank’s contributions to the employee share ownership plan are expensed as incurred.
134
134
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 22 –– FFuuttuurree AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
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.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22001199
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16 – Leases. The new standard replaces the previous lease accounting standard, IAS 17 – Leases, and related
interpretations. Under IAS 17, lessees and lessors were required to classify their leases as either finance leases or operating leases and to account for these two
types of leases differently. IFRS 16 provides a single accounting model for lessees, requiring lessees to recognize a right-of-use asset as well as a liability that
reflects the present value of future lease payments. Lessees will also recognize depreciation expense on the right-of-use asset and interest expense on the lease
liability in the Consolidated Statement of Income. As for lessors, IFRS 16 substantially carries forward the lessor accounting in IAS 17, with the distinction
between finance and operating leases being retained.
The Bank has elected to apply IFRS 16 using the modified retrospective basis by adjusting the Consolidated Balance Sheet as at November 1, 2019, the date of
initial application, with no restatement of comparative periods. The most significant impact to the Bank will be related to real estate leases, which are currently
classified as operating leases.
On transition, the Bank will apply, on a lease-by-lease basis, certain practical expedients. More specifically, it will measure the right-of-use assets at an amount
equal to the lease liability, it will rely on the Bank’s assessment about whether leases are onerous as at October 31, 2019 as an alternative to performing an
impairment test as at November 1, 2019, and it will exclude initial direct costs from the measurement of the right-of-use assets as at November 1, 2019.
Furthermore, on transition and thereafter, the Bank will exclude leases for which the underlying asset is of low value, will exclude short-term leases and, for real
estate leases, will elect not to separate non-lease components from lease components.
As at October 31, 2019, the Bank’s best estimate of the impact of adopting IFRS 16 is an increase in total assets of approximately $653 million representing
leased premises, an increase in total liabilities of approximately $653 million primarily representing lease liabilities, and a decrease of approximately 9 basis
points in the Common Equity Tier 1 (CET 1) capital ratio as at November 1, 2019.
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. This interpretation
will not have an impact on the Bank’s Consolidated Balance Sheet as at November 1, 2019.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002200
Conceptual Framework for Financial Reporting
On March 29, 2018, the IASB published 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.
Reform to Benchmark Interest Rates (Amendments to IFRS 9, IAS 39 and IFRS 7)
In September 2019, in response to uncertainty arising from the phasing-out of benchmark interest rates such as interbank offered rates (IBORs), the IASB issued
amendments to its new and former financial instrument standards, IFRS 9 – Financial Instruments and IAS 39 – Financial Instruments: Recognition and
Measurement as well as to the related standard on disclosures, IFRS 7 – Financial Instruments: Disclosures.
The amendments modify certain hedge accounting requirements in IFRS 9 and IAS 39 to provide relief from the potential effects of the uncertainty caused by the
IBOR reform. In addition, the amendments to IFRS 7 require additional disclosure about hedging relationships directly affected by this uncertainty. When the
Bank adopted IFRS 9 on November 1, 2017, it made an accounting policy choice to continue applying the IAS 39 hedge accounting requirements.
For the Bank, the effective date of these amendments is November 1, 2020. However, early adoption is permitted.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002211
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
135
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories
set out in the accounting framework for financial instruments.
FFiinnaanncciiaall
iinnssttrruummeennttss
ccllaassssiiffiieedd aass
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
FFiinnaanncciiaall
iinnssttrruummeennttss
ddeessiiggnnaatteedd
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
DDeebbtt sseeccuurriittiieess
ccllaassssiiffiieedd aass aatt
ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
CCaarrrryyiinngg vvaalluuee
aanndd ffaaiirr vvaalluuee
EEqquuiittyy sseeccuurriittiieess
ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
AAss aatt OOccttoobbeerr 3311,, 22001199
CCaarrrryyiinngg
vvaalluuee
FFaaiirr
vvaalluuee
FFiinnaanncciiaall
iinnssttrruummeennttss
aatt aammoorrttiizzeedd
ccoosstt,, nneett
FFiinnaanncciiaall
iinnssttrruummeennttss
aatt aammoorrttiizzeedd
ccoosstt,, nneett
TToottaall
ccaarrrryyiinngg
vvaalluuee
TToottaall
ffaaiirr
vvaalluuee
FFiinnaanncciiaall aasssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall
iinnssttiittuuttiioonnss
SSeeccuurriittiieess
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee
rreeppuurrcchhaassee aaggrreeeemmeennttss
aanndd sseeccuurriittiieess bboorrrroowweedd
LLooaannss aanndd aacccceeppttaanncceess,, nneett ooff aalllloowwaanncceess
OOtthheerr
Derivative financial instruments
Other assets
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
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
SSuubboorrddiinnaatteedd ddeebbtt
(1)
Includes embedded derivative financial instruments.
−−
5588,,555566
−−
33,,226677
−−
1100,,002266
−−
662222
1133,,669988
99,,775555
1133,,669988
1133,,669988
1133,,669988
99,,882244
8822,,222266
8822,,229955
−−
66,,779988
88,,112299
−−
8877
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
1177,,663366
114466,,445533
−−
11,,119933
1177,,663366
1177,,772233
1177,,772233
114477,,005511
115533,,225511
115533,,884499
−−
11,,119933
88,,112299
11,,119933
88,,112299
11,,119933
−−
1111,,220033
117788,,336633 (1)
117788,,886611
118899,,556666
119900,,006644
−−
1122,,884499
−−
66,,885522
−−
2244
−−
−−
−−
−−
−−
88,,221155
−−
−−
66,,889933
−−
66,,889933
−−
66,,889933
1122,,884499
66,,889933
1122,,884499
2211,,990000
−−
1133,,009977
33,,001188
777733
2211,,990000
−−
1133,,118866
33,,001199
2211,,990000
66,,885522
2211,,331122
33,,004422
2211,,990000
66,,885522
2211,,440011
33,,004433
776655
777733
776655
136
6
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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
FFiinnaanncciiaall aasssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall
iinnssttiittuuttiioonnss
SSeeccuurriittiieess
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee
rreeppuurrcchhaassee aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss aanndd aacccceeppttaanncceess,, nneett ooff aalllloowwaanncceess
OOtthheerr
Derivative financial instruments
Other assets
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
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
SSuubboorrddiinnaatteedd ddeebbtt
(1)
Includes embedded derivative financial instruments.
Establishing Fair Value
−
−
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
17,680
18,159
18,159
139,974
139,551 146,082
145,659
−
1,804
−
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
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, 2019 and may change in the future. Furthermore, there may be valuation uncertainty resulting from the choice of
valuation model used.
National Bank of Canada
137
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
VVaalluuaattiioonn GGoovveerrnnaannccee
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.
VVaalluuaattiioonn MMeetthhooddss aanndd AAssssuummppttiioonnss
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 using 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 by governments 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.
138
138
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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.
National Bank of Canada
139
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
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.
HHiieerraarrcchhyy ooff FFaaiirr VVaalluuee MMeeaassuurreemmeennttss
DDeetteerrmmiinniinngg tthhee LLeevveellss ooff tthhee FFaaiirr VVaalluuee MMeeaassuurreemmeenntt HHiieerraarrcchhyy
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, equity securities and debt securities of private companies, 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.
TTrraannssffeerrss BBeettwweeeenn tthhee FFaaiirr VVaalluuee HHiieerraarrcchhyy LLeevveellss
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 2019, $50 million in securities classified as at fair value through profit or loss and $1 million in obligations related to securities sold short were
transferred from Level 2 to Level 1 resulting from changing market conditions ($324 million in securities classified as at fair value through profit or loss and $33
million in obligations related to securities sold short in fiscal 2018). In addition, during fiscal 2019, $20 million in securities classified as at fair value through
profit or loss and $2 million in obligations related to securities sold short were transferred from Level 1 to Level 2 (for 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).
During fiscal years 2019 and 2018, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs
resulting from changing market conditions.
140
140
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall IInnssttrruummeennttss RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
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
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
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
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss
OOtthheerr
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
LLeevveell 11
LLeevveell 22
AAss aatt OOccttoobbeerr 3311,, 22001199
TToottaall ffiinnaanncciiaall
aasssseettss//lliiaabbiilliittiieess
aatt ffaaiirr vvaalluuee
LLeevveell 33
22,,110022
−−
11,,777700
−−
3388,,883366
4422,,770088
119966
−−
33,,447711
−−
5533
33,,772200
−−
−−
88,,332211
66,,776622
9900
22,,666666
881188
1188,,665577
44,,223366
11,,667744
7755
337744
220077
66,,556666
8877
66,,443388
−−
−−
−−
2277
443311
445588
−−
−−
−−
−−
336622
336622
−−
336600
117799
4466,,660077
77,,992244
3399,,667722
2266
11,,220066
−−
1111,,338833
88,,335522
115566
−−
−−
88,,550088
44,,449977
66,,667744
88,,221155
2244
3300,,779933
−−
−−
2222
−−
−−
2222
1100,,442233
66,,776622
11,,886600
22,,669933
4400,,008855
6611,,882233
44,,443322
11,,667744
33,,554466
337744
662222
1100,,664488
8877
66,,779988
88,,112299
8877,,448855
1111,,338833
1122,,884499
66,,885522
88,,221155
2244
3399,,332233
National Bank of Canada
141
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
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
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
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
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss
OOtthheerr
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
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
142
142
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
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.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
Equity securities and other debt securities
LLooaannss
Loans at fair value through profit or loss
OOtthheerr
Derivative financial instruments
Interest rate contracts
Equity contracts
FFiinnaanncciiaall lliiaabbiilliittiieess
OOtthheerr
Derivative financial instruments
Equity contracts
FFaaiirr
vvaalluuee
882200
336600
66
2200
11,,220066
2222
2222
Primary
valuation techniques
Significant
unobservable inputs
LLooww
AAss aatt OOccttoobbeerr 3311,, 22001199
RRaannggee ooff iinnppuutt vvaalluueess
HHiigghh
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
Discounted cash flows
Discounted cash flows
Option pricing model
Net asset value
EV/EBITDA(1) multiple
Credit spread
Discount Rate
110000 %%
1133 xx
446600 BBppss(2)
44..5500 %%
110000 %%
1166 xx
770055 BBppss(2)
1144..3388 %%
Discount rate
Liquidity premium
55..2266 %%
33..5566 %%
88..8899 %%
77..3344 %%
Discount rate
Long-term volatility
Market correlation
22..2200 %%
44 %%
2211 %%
22..2200 %%
3355 %%
3311 %%
Option pricing model
Long-term volatility
Market correlation
55 %%
((2299)) %%
4499 %%
8899 %%
Fair
value
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2018
Range of input values
High
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
Equity securities and other debt securities
LLooaannss
Loans at fair value through profit or loss
OOtthheerr
Derivative financial instruments
Equity contracts
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
Structured deposit notes
OOtthheerr
Derivative financial instruments
Interest rate contracts
Equity contracts
546
386
20
952
11
2
25
38
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
100 %
11 x
100 %
16 x
460 Bps(2)
690 Bps(2)
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 %
(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%.
National Bank of Canada
143
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
SSiiggnniiffiiccaanntt UUnnoobbsseerrvvaabbllee IInnppuuttss UUsseedd ffoorr FFaaiirr VVaalluuee MMeeaassuurreemmeennttss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
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.
SSeennssiittiivviittyy AAnnaallyyssiiss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
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 $121 million increase or decrease in the fair value recorded as at
October 31, 2019 (a $70 million increase or decrease as at October 31, 2018).
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 $54 million
increase or decrease in the fair value recorded as at October 31, 2019 ($43 million increase or decrease as at October 31, 2018).
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, 2019, for derivative financial instruments, the net fair value could result in a $1 million
increase or decrease ($5 million increase or decrease as at October 31, 2018), whereas for structured deposit notes, the fair value could have resulted in a
$1 million increase or decrease as at October 31, 2018.
For all Level 3 financial instruments, the reasonable fair value ranges could result in an 8% increase or decrease in net income as at October 31, 2019 (a 5 %
increase or decrease in net income as at October 31, 2018).
144
144
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
CChhaannggee iinn tthhee FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
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 October 31, 2018
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
FFaaiirr vvaalluuee aass aatt OOccttoobbeerr 3311,, 22001199
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2019(3)
Fair value as at November 1, 2017
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
FFaaiirr vvaalluuee aass aatt OOccttoobbeerr 3311,, 22001188
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2018(5)
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
331133
((6699))
−−
225533
((3399))
−−
−−
−−
−−
445588
((7766))
223333
−−
((44))
113333
−−
−−
−−
−−
−−
336622
−−
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
−
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
DDeerriivvaattiivvee
ffiinnaanncciiaall
iinnssttrruummeennttss(1)
DDeeppoossiittss
((77))
1166
−−
−−
−−
−−
33
((1100))
22
44
1166
((1111))
−−
−−
−−
−−
−−
−−
−−
1111
−−
−−
Year ended October 31, 2018
Derivative
financial
instruments(1)
Deposits
20
−
−
−
−
−
(8)
(1)
(18)
(7)
−
(1)
−
−
−
−
(8)
−
(3)
1
(11)
−
LLooaannss
338866
1122
−−
−−
−−
66
((4444))
−−
−−
336600
1122
Loans
428
16
−
−
−
8
(66)
−
−
386
16
(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 loss of $41 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized loss of $48 million.
Total gains (losses) included in Non-interest income was a gain of $45 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized gain of $23 million.
National Bank of Canada
145
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall IInnssttrruummeennttss NNoott RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
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.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
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
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
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
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
LLeevveell 11
LLeevveell 22
LLeevveell 33
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22001199
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
55,,229922
11,,880055
113388
22,,558899
99,,882244
5599,,885577
117788,,886611
1133,,118866
991122
776655
119933,,772244
−−
−−
−−
−−
−−
55,,229922
11,,880055
113388
22,,558899
99,,882244
8800,,330011
114400,,115588
−−
−−
−−
−−
−−
117788,,886611
1133,,118866
991122
776655
119933,,772244
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
146
146
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 44 –– FFiinnaanncciiaall IInnssttrruummeennttss DDeessiiggnnaatteedd aatt FFaaiirr VVaalluuee TThhrroouugghh PPrrooffiitt oorr LLoossss
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, and certain liabilities related to transferred receivables. The fair value of liabilities related to transferred receivables does not
include credit risk, as the holders of these liabilities are not exposed to the Bank’s credit risk. The Bank also designated certain deposits that include embedded
derivative financial instruments 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.
FFiinnaanncciiaall aasssseettss ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities
Securities purchased under reverse repurchase agreements
FFiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Deposits(1)(2)
Liabilities related to transferred receivables
FFiinnaanncciiaall aasssseettss ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities
Securities purchased under reverse repurchase agreements
FFiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Deposits(1)(2)
Liabilities related to transferred receivables
CCaarrrryyiinngg
vvaalluuee aass aatt
OOccttoobbeerr 3311,, 22001199
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ffoorr tthhee yyeeaarr eennddeedd
OOccttoobbeerr 3311,, 22001199
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ssiinnccee tthhee iinniittiiaall
rreeccooggnniittiioonn ooff
tthhee iinnssttrruummeenntt
33,,226677
8877
33,,335544
1111,,220033
88,,221155
1199,,441188
8866
−−
8866
((778899))
((116633))
((995522))
2266
−−
2266
((220044))
((7755))
((227799))
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
(1)
(2)
For the year ended October 31, 2019, 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 gain of $7 million ($28 million gain for the year ended October 31, 2018).
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.
National Bank of Canada
147
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 55 –– OOffffsseettttiinngg FFiinnaanncciiaall AAsssseettss aanndd FFiinnaanncciiaall LLiiaabbiilliittiieess
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.
FFiinnaanncciiaall aasssseettss
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
FFiinnaanncciiaall aasssseettss
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
AAss aatt OOccttoobbeerr 3311,, 22001199
AAmmoouunnttss
sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
NNeett aammoouunnttss
rreeppoorrtteedd
oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
AAssssoocciiaatteedd aammoouunnttss
nnoott sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
FFiinnaanncciiaall aasssseettss
rreecceeiivveedd//pplleeddggeedd
aass ccoollllaatteerraall(2)
FFiinnaanncciiaall
iinnssttrruummeennttss(1)
GGrroossss aammoouunnttss
rreeccooggnniizzeedd
2200,,888899
1100,,994477
3311,,883366
2255,,006666
99,,667700
3344,,773366
33,,116666
22,,881188
55,,998844
33,,116666
22,,881188
55,,998844
1177,,772233
88,,112299
2255,,885522
2211,,990000
66,,885522
2288,,775522
44,,449933
33,,441155
77,,990088
44,,449933
33,,441155
77,,990088
1133,,119922
22,,552299
1155,,772211
1177,,332277
22,,005511
1199,,337788
NNeett
aammoouunnttss
3388
22,,118855
22,,222233
8800
11,,338866
11,,446666
As at October 31, 2018
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
148
(1)
(2)
Carrying amount of financial instruments that are subject to an enforceable master netting agreement or similar agreement but that do not satisfy offsetting criteria.
Excludes non-financial instruments collateral.
148
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 66 –– SSeeccuurriittiieess
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff SSeeccuurriittiieess
As at October 31
SSeeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
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
SSeeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
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
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt(1)
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
11 yyeeaarr
oorr lleessss
OOvveerr 11
yyeeaarr ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
22001199
2018
TToottaall
Total
660000
660077
11,,667799
331144
−−
33,,220000
4455
3366
−−
11
−−
8822
550066
112222
111188
6699
881155
77,,667722
22,,558855
8822
11,,332277
−−
1111,,666666
33,,662277
990099
33,,334411
8855
−−
77,,996622
44,,774422
11,,442288
2200
11,,336677
77,,555577
22,,115511
33,,557700
9999
11,,005522
−−
66,,887722
776600
772299
220055
228888
−−
11,,998822
−−
223388
11
11,,114444
11,,338833
−−
−−
−−
−−
4400,,008855
4400,,008855
−−
−−
−−
−−
662222
662222
−−
−−
−−
−−
−−
1100,,442233
66,,776622
11,,886600
22,,669933
4400,,008855
6611,,882233
44,,443322
11,,667744
33,,554466
337744
662222
1100,,664488
55,,224488
11,,778888
113399
22,,558800
99,,775555
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
(1)
As at October 31, 2019, securities at amortized cost are presented net of $1 million in allowances for credit losses ($1 million as at October 31, 2018).
CCrreeddiitt QQuuaalliittyy
As at October 31, 2019 and 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 7 to these consolidated financial statements.
National Bank of Canada
149
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities (cont.)
GGrroossss GGaaiinnss ((LLoosssseess)) oonn SSeeccuurriittiieess aatt FFaaiirr VVaalluuee TThhrroouugghh OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAmmoorrttiizzeedd
ccoosstt
GGrroossss uunnrreeaalliizzeedd
ggaaiinnss
GGrroossss uunnrreeaalliizzeedd
lloosssseess
AAss aatt OOccttoobbeerr 3311,, 22001199
CCaarrrryyiinngg
vvaalluuee(1)
44,,441111
11,,661144
33,,552211
336644
664499
1100,,555599
2266
6600
2255
1111
22
112244
((55))
−−
−−
((11))
((2299))
((3355))
44,,443322
11,,667744
33,,554466
337744
662222
1100,,664488
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2018
Carrying
value(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, 2019 and 2018, are reported in Other
comprehensive income. For additional information, see Note 7 to these consolidated financial statements.
EEqquuiittyy SSeeccuurriittiieess DDeessiiggnnaatteedd aatt FFaaiirr VVaalluuee TThhrroouugghh OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
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, 2019, an amount of $25 million in dividend income was recognized for these investments ($17 million for the year ended
October 31, 2018), including $1 million for investments that were sold during the year ended October 31, 2019 (negligible amounts for the year ended
October 31, 2018).
Fair value at beginning
Change in fair value
Designated at fair value through other
comprehensive income(1)(2)
Sales(3)
FFaaiirr vvaalluuee aatt eenndd
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
Year ended October 31, 2018
EEqquuiittyy sseeccuurriittiieess
ooff pprriivvaattee ccoommppaanniieess
EEqquuiittyy sseeccuurriittiieess
ooff ppuubblliicc ccoommppaanniieess
223333
(( 44))
113333
−−
336622
111188
((2233))
225533
((8888))
226600
TToottaall
335511
((2277))
338866
((8888))
662222
Equity securities
of private companies
Equity securities
of public companies
158
−
75
−
233
122
(2)
34
(36)
118
Total
280
(2)
109
(36)
351
(1) On June 30, 2019, the Bank concluded that it had lost significant influence over NSIA Participations (NSIA) and therefore ceased using the equity method to account for this investment. The
Bank designated its investment in NSIA as a financial asset measured at fair value through other comprehensive income. For additional information, see Note 9 to these consolidated financial
statements.
(2) On May 9, 2019, after disposing of a portion of its investment in Fiera Capital Corporation, the Bank designated the retained interest as a financial asset measured at fair value through other
comprehensive income. For additional information, see Note 9 to these consolidated financial statements.
The Bank disposed of public company equity securities for economic reasons.
(3)
GGaaiinnss ((LLoosssseess)) oonn DDiissppoossaallss ooff SSeeccuurriittiieess aatt AAmmoorrttiizzeedd CCoosstt
During the years ended October 31, 2019 and 2018, the Bank sold certain debt securities measured at amortized cost. The carrying value of these securities
upon disposal was $461 million for the year ended October 31, 2019 ($134 million for the year ended October 31, 2018), and the Bank recognized gains of
$9 million for the year ended October 31, 2019 (negligible amounts for the year ended October 31, 2018) in Non-interest income – Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income.
150
150
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 77 –– LLooaannss aanndd AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
Loans are recognized either at fair value through profit or loss or at amortized cost using the financial asset classification criteria defined in IFRS 9.
DDeetteerrmmiinniinngg aanndd MMeeaassuurriinngg EExxppeecctteedd CCrreeddiitt LLoosssseess ((EECCLL))
DDeetteerrmmiinniinngg EExxppeecctteedd CCrreeddiitt LLoosssseess
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.
POCI
Financial assets that are credit-impaired when purchased or originated (POCI) are classified in the POCI category.
IImmppaaiirrmmeenntt GGoovveerrnnaannccee
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.
MMeeaassuurreemmeenntt ooff EExxppeecctteedd CCrreeddiitt LLoosssseess ((EECCLL))
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 such as type of instrument, geographic location, comparable risk level, and business sector or
industry.
IInnppuuttss,, AAssssuummppttiioonnss aanndd EEssttiimmaattiioonn TTeecchhnniiqquueess
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.
National Bank of Canada
151
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
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 LGD 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 are a series of relative and absolute
thresholds, and a backstop is also applied. All financial instruments that are over 30 days past due 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.
CCrreeddiitt QQuuaalliittyy ooff LLooaannss
The following tables present the gross carrying amounts of loans as at October 31, 2019 and 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 Internal Default Risk Ratings table on page 69 in the Credit Risk Management section of the
MD&A for the year ended October 31, 2019.
152
152
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22001199
NNoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
SSttaaggee 33
IImmppaaiirreedd llooaannss
PPOOCCII
LLooaannss aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt oorr lloossss(1)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
2211,,884400
1144,,337755
88,,117788
441133
110011
−−
4444,,990077
33,,668866
4488,,559933
3377
4488,,555566
1144,,333311
1100,,111199
44,,997733
441166
110099
−−
2299,,994488
33,,554455
3333,,449933
6644
3333,,442299
337700
331166
778866
442211
2222
−−
11,,991155
3344
11,,994499
2266
11,,992233
44,,778833
2222,,995511
2222,,336677
8877
4455
−−
5500,,223333
33,,777799
5544,,001122
5588
5533,,995544
113388,,004477
118855
113377,,886622
−−
1111
667744
449977
224488
−−
11,,443300
1199
11,,444499
1122
11,,443377
−−
220066
11,,447777
771111
119999
−−
22,,559933
8833
22,,667766
110033
22,,557733
−−
−−
2200
224411
111122
−−
337733
−−
337733
110022
227711
−−
44
11,,334466
11,,113311
225555
−−
22,,773366
−−
22,,773366
9999
22,,663377
77,,223344
331166
66,,991188
−−
−−
−−
−−
−−
111177
111177
2277
114444
2255
111199
−−
−−
−−
−−
−−
113399
113399
2233
116622
6699
9933
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
330066
330066
7722
337788
114400
223388
668844
223344
445500
−−
−−
−−
−−
−−
−−
−−
555533
555533
((5533))
660066
−−
−−
−−
−−
−−
−−
−−
661133
661133
((44))
661177
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
66,,443322
66,,443322
−−
66,,443322
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
111122
5533
7722
−−
−−
−−
223377
112299
336666
−−
336666
TToottaall
2211,,884400
1144,,338866
88,,885522
991100
334499
111177
4466,,445544
1100,,771177
5577,,117711
2211
5577,,115500
1144,,333311
1100,,332255
66,,445500
11,,112277
330088
113399
3322,,668800
44,,226644
3366,,994444
223322
3366,,771122
337700
331166
880066
666622
113344
−−
22,,228888
3344
22,,332222
112288
22,,119944
44,,889955
2233,,000088
2233,,778855
11,,221188
330000
330066
5533,,551122
33,,998800
5577,,449922
229977
5577,,119955
11,,116666
((5577))
11,,222233
66,,779988
−−
66,,779988
115533,,992299
667788
115533,,225511
(1)
(2)
(3)
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.
National Bank of Canada
153
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
As at October 31, 2018
Non-impaired loans
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(1)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
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)
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.
154
154
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
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, 2019 and 2018 according to credit quality and ECL
impairment stage.
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(1)
RReettaaiill
Excellent
Good
Satisfactory
Special mention
Substandard
Default
NNoonn--rreettaaiill
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Total exposure
Allowances for credit losses
TToottaall eexxppoossuurree,, nneett ooff aalllloowwaanncceess
SSttaaggee 11
SSttaaggee 22
SSttaaggee 33
TToottaall
Stage 1
Stage 2
Stage 3
Total
AAss aatt OOccttoobbeerr 3311,, 22001199
As at October 31, 2018
1122,,008888
33,,558855
11,,332288
111144
55
−−
1100,,005500
1144,,664400
66,,116655
1177
116677
−−
4488,,115599
66,,115544
5544,,331133
5533
5544,,226600
22
5511
118800
8822
1199
−−
−−
11
551133
116611
2299
−−
11,,003388
−−
11,,003388
2200
11,,001188
−−
−−
−−
−−
−−
44
−−
−−
−−
−−
−−
1166
2200
11
2211
11
2200
1122,,009900
33,,663366
11,,550088
119966
2244
44
1100,,005500
1144,,664411
66,,667788
117788
119966
1166
4499,,221177
66,,115555
5555,,337722
7744
5555,,229988
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.
National Bank of Canada
155
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
LLooaannss PPaasstt DDuuee BBuutt NNoott IImmppaaiirreedd(1)
RReessiiddeennttiiaall
mmoorrttggaaggee
PPeerrssoonnaall
CCrreeddiitt ccaarrdd
BBuussiinneessss aanndd
ggoovveerrnnmmeenntt(2)
Residential
mortgage
Personal
AAss aatt OOccttoobbeerr 3311,, 22001199
As at October 31, 2018
Business and
government(2)
Credit card
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(3)
9922
3344
−−
112266
8822
3344
−−
111166
2277
1133
2288
6688
3311
2211
−−
5522
105
41
−
146
102
59
−
161
27
13
27
67
36
41
−
77
(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.
All loans more than 90 days past due, except for credit card receivables, are considered impaired (Stage 3).
IImmppaaiirreedd LLooaannss
LLooaannss – SSttaaggee 33
Residential mortgage
Personal
Credit card(1)
Business and government(2)
LLooaannss – PPOOCCII
AAss aatt OOccttoobbeerr 3311,, 22001199
As at October 31, 2018
GGrroossss
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess
NNeett
Gross
Allowances for
credit losses
114444
116622
−−
337788
668844
11,,116666
11,,885500
2255
6699
−−
114400
223344
((5577))
117777
111199
9933
−−
223388
445500
11,,222233
11,,667733
151
164
−
315
630
1,576
2,206
21
71
−
134
226
(66)
160
Net
130
93
−
181
404
1,642
2,046
(1)
(2)
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.
MMaaxxiimmuumm EExxppoossuurree ttoo CCrreeddiitt RRiisskk oonn IImmppaaiirreedd LLooaannss
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.
As at October 31
22001199
GGrroossss
iimmppaaiirreedd llooaannss
PPeerrcceennttaaggee ccoovveerreedd
bbyy gguuaarraanntteeeess(1)
Gross
impaired loans
2018
Percentage covered
by guarantees(1)
Types of collateral
and guarantees
LLooaannss – SSttaaggee 33
Residential mortgage
Personal
Business and government(2)
LLooaannss – PPOOCCII
114444
116622
337788
11,,116666
110000 %%
4466 %%
5533 %%
2288 %%
151
164
315
1,576
100 %
44 %
54 %
14 %
Residential buildings
Buildings and automobiles
Buildings, equipment,
government and bank guarantees
Buildings and automobiles
(1)
(2)
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.
156
156
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
The tables below present a reconciliation of the allowances for credit losses by Consolidated Balance Sheet item and by type of off-balance-sheet commitment.
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess aass aatt
OOccttoobbeerr 3311,, 22001188
PPrroovviissiioonnss ffoorr
ccrreeddiitt lloosssseess
WWrriittee--ooffffss(1)
DDiissppoossaallss
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess aass
aatt OOccttoobbeerr 3311,, 22001199
RReeccoovveerriieess
aanndd ootthheerr
BBaallaannccee sshheeeett
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss(2)(3)
SSeeccuurriittiieess(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd sseeccuurriittiieess bboorrrroowweedd(2)(3)
LLooaannss(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
OOtthheerr aasssseettss(2)(3)
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
BBaallaannccee sshheeeett
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss(2)(3)
SSeeccuurriittiieess(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd sseeccuurriittiieess bboorrrroowweedd(2)(3)
LLooaannss(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
OOtthheerr aasssseettss(2)(3)
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
11
−−
11
−−
11
225599
112299
224499
2200
665588
−−
33
4499
22
5544
771144
11
−−
−−
−−
2266
113377
8888
6666
99
332266
−−
33
1177
−−
2200
334477
−−
−−
−−
−−
((77))
((118888))
((110044))
((5522))
−−
((335511))
−−
−−
−−
−−
−−
((335511))
−−
−−
−−
−−
−−
−−
−−
((11))
−−
((11))
−−
−−
−−
−−
−−
((11))
−−
−−
−−
−−
11
2244
1155
66
−−
4466
−−
−−
−−
−−
−−
4466
22
−−
11
−−
2211
223322
112288
226688
2299
667788
−−
66
6666
22
7744
775555
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
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)
(2)
(3)
(4)
(5)
(6)
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2019 and that are still subject to enforcement activity was $166 million
($152 million for the year ended October 31, 2018).
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
As at October 31, 2019 and 2018, these financial assets were mainly classified in Stage 1 and their credit quality fell within the Excellent category.
The allowances for credit losses are reported in the Accumulated other comprehensive income item of the Consolidated Balance Sheet.
The allowances for credit losses are reported in the Allowances for credit losses item of the Consolidated Balance Sheet.
The allowances for credit losses are reported in the Other liabilities item of the Consolidated Balance Sheet.
National Bank of Canada
157
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances for credit losses for each loan category at amortized cost according to ECL impairment stage.
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
Year ended October 31, 2018
RReessiiddeennttiiaall mmoorrttggaaggee
Balance at beginning
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
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
PPeerrssoonnaall
Balance at beginning
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
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
nnoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
iimmppaaiirreedd llooaannss
PPOOCCII(1)
SSttaaggee 33
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
TToottaall
3311
1177
1133
((11))
−−
((2222))
((11))
−−
66
−−
−−
−−
−−
3377
3377
−−
7722
4488
7722
((1199))
((77))
((9911))
((1111))
−−
((88))
−−
−−
−−
11
6655
6644
11
1133
−−
((1100))
22
((44))
1122
((11))
−−
((11))
−−
−−
−−
−−
1122
1122
−−
112211
−−
((6644))
2233
((9911))
112277
((1111))
−−
((1166))
−−
−−
−−
((11))
110044
110033
11
2211
−−
((33))
((11))
44
1100
−−
−−
1100
((77))
−−
22
((11))
2255
2255
−−
7711
−−
((88))
((44))
9988
8811
((55))
−−
116622
((118888))
−−
2277
((33))
6699
6699
−−
((6644))
−−
−−
−−
−−
1111
−−
−−
1111
−−
−−
−−
−−
((5533))
((5533))
−−
((33))
−−
−−
−−
−−
((11))
−−
−−
((11))
−−
−−
−−
−−
((44))
((44))
−−
11
1177
−−
−−
−−
1111
((22))
−−
2266
((77))
−−
22
((11))
2211
2211
−−
226611
4488
−−
−−
−−
111166
((2277))
−−
113377
((118888))
−−
2277
((33))
223344
223322
22
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 for the year ended October 31, 2019 was $92 million ($258 million for the year ended October 31,
2018). 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
158
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
Year ended October 31, 2018
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
nnoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
iimmppaaiirreedd llooaannss
PPOOCCII(1)
SSttaaggee 33
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
CCrreeddiitt ccaarrdd
Balance at beginning
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
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(6)
Balance at beginning
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
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
TToottaall aalllloowwaanncceess ffoorr ccrreeddiitt lloosssseess aatt eenndd(7)
Includes:
Amounts drawn
Undrawn commitments(5)
4400
88
9977
((1155))
((22))
((8899))
((44))
1122
77
−−
−−
−−
−−
4477
2266
2211
6655
2299
2277
((88))
((11))
((1199))
((1100))
−−
1188
−−
−−
−−
−−
8833
5588
2255
223322
118855
4477
111155
−−
((9977))
1155
((3399))
112288
((22))
((77))
((22))
−−
−−
−−
−−
111133
110022
1111
8899
−−
((1199))
1188
((44))
2266
((55))
−−
1166
−−
−−
−−
−−
110055
9999
66
333344
331166
1188
−−
−−
−−
−−
4411
4488
−−
−−
8899
((110044))
−−
1155
−−
−−
−−
−−
113355
−−
((88))
((1100))
55
7755
((1100))
−−
5522
((5522))
−−
88
((22))
114411
114400
11
223355
223344
11
TToottaall
115555
88
−−
−−
−−
8877
((66))
55
9944
((110044))
−−
1155
−−
116600
112288
3322
229900
2299
−−
−−
−−
8822
((2255))
−−
8866
((5522))
((11))
88
((22))
332299
229977
3322
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
11
−−
−−
−−
−−
−−
−−
−−
−−
−−
((11))
−−
−−
−−
−−
−−
((5577))
774444
((5577))
−−
667788
6666
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
Total
153
8
−
−
−
114
(36)
−
86
(98)
−
14
−
155
129
26
292
32
−
−
−
60
(25)
−
67
(64)
(13)
7
1
290
269
21
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
1
−
−
1
−
−
−
−
1
1
−
(66)
707
(66)
−
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, 2019 was $92 million ($258 million for the year ended
October 31, 2018). 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.
National Bank of Canada
159
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Distribution of Gross and Impaired Loans by Borrower Category Under the Basel Asset Classes
RReettaaiill
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
NNoonn--rreettaaiill
Agriculture
Oil and gas and pipelines
Mining
Utilities
Non-real-estate construction(6)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate services and real estate construction(7)
Professional services
Education and health care
Other services
Government
Other
SSttaaggeess 11 aanndd 22(8)
PPOOCCII
GGrroossss
llooaannss(1)
IImmppaaiirreedd
llooaannss(1)
AAss aatt OOccttoobbeerr 3311
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
iimmppaaiirreedd llooaannss(1)(2)
22001199
YYeeaarr eennddeedd OOccttoobbeerr 3311
PPrroovviissiioonnss ffoorr
ccrreeddiitt lloosssseess
WWrriittee--ooffffss
7744,,444488
44,,009999
1111,,660066
9900,,115533
66,,330088
44,,332299
775588
33,,337722
11,,116688
66,,330033
22,,222211
33,,228899
11,,668822
11,,661144
44,,333355
1111,,663355
11,,884466
33,,552200
44,,993377
11,,007711
44,,222222
6622,,661100
118833
2244
8844
229911
7777
6633
−−
−−
−−
5500
2288
44
99
2277
1122
3322
88
6622
2200
−−
11
339933
11,,116666
115533,,992299
11,,116666
11,,885500
2288
1155
4499
9922
44
3322
−−
−−
−−
2288
1100
22
11
1111
11
1144
55
2211
1122
−−
11
114422
557788
((5577))
775555
1100
111122
113399
226611
((33))
44
−−
−−
−−
77
77
((11))
77
55
−−
1100
11
1144
((11))
−−
11
5511
2255
1100
334477
88
112277
116644
229999
−−
2211
−−
−−
−−
33
33
11
66
77
−−
33
33
−−
55
−−
−−
5522
335511
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Includes customers’ liability under acceptances.
Allowances for credit losses on drawn amounts.
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 civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
Includes other financial assets at amortized cost and off-balance-sheet commitments; the allowances for credit losses on off-balance-sheet commitments include an amount of $1 million for
undrawn Stage 3 commitments related to business and government loans.
160
160
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReettaaiill
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
NNoonn--rreettaaiill
Agriculture
Oil and gas and pipelines(6)
Mining
Utilities
Non-real-estate construction(6)(7)
Manufacturing(6)
Wholesale
Retail
Transportation(6)
Communications
Finance and insurance
Real estate services and real estate construction(6)(8)
Professional services
Education and health care(6)
Other services
Government
Other
SSttaaggeess 11 aanndd 22(9)
PPOOCCII
Gross
loans(1)
Impaired
loans(1)
As at October 31
Allowances for
credit losses on
impaired loans(1)(2)
2018
Year ended October 31
Provisions for
credit losses
Write-offs
70,591
4,211
12,246
87,048
5,759
4,056
1,032
2,715
1,049
5,303
2,163
3,069
1,452
1,597
4,732
11,629
1,582
3,284
4,715
1,445
2,534
58,116
190
23
91
304
63
97
−
−
1
48
13
11
2
19
19
18
6
4
24
−
1
326
1,576
146,740
1,576
2,206
22
14
53
89
7
53
−
−
1
22
6
4
1
12
1
5
3
4
17
−
1
137
554
(66)
714
10
108
165
283
1
12
−
−
−
11
−
11
1
3
−
(3)
1
3
5
−
(4)
41
32
(29)
327
9
123
171
303
−
12
−
3
−
2
1
22
2
−
−
16
1
−
3
−
2
64
367
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes customers’ liability under acceptances.
Allowances for credit losses on drawn amounts.
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 certain borrower categories was changed during fiscal 2019. Comparative figures have been reclassified.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
Includes other financial assets at amortized cost and off-balance-sheet commitments; the allowances for credit losses on off-balance-sheet commitments include an amount of $1 million for
undrawn Stage 3 commitments related to business and government loans.
National Bank of Canada
161
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
MMaaiinn MMaaccrrooeeccoonnoommiicc FFaaccttoorrss
The following tables show the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the base case,
upside scenario and downside scenario, the average values of the factors over the next 12 months (used for Stage 1 credit loss calculations) and over the
remaining forecast period (used for Stage 2 credit loss calculations) are presented.
MMaaccrrooeeccoonnoommiicc ffaaccttoorrss(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
MMaaccrrooeeccoonnoommiicc ffaaccttoorrss(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)
NNeexxtt
1122 mmoonntthhss
BBaassee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
NNeexxtt
1122 mmoonntthhss
UUppssiiddee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
NNeexxtt
1122 mmoonntthhss
AAss aatt OOccttoobbeerr 3311,, 22001199
DDoowwnnssiiddee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
11..55 %%
55..88 %%
33..11 %%
11..66 %%
44..99 %%
6611
11..66 %%
55..77 %%
33..11 %%
11..66 %%
22..44 %%
6600
22..00 %%
55..66 %%
66..11 %%
11..55 %%
88..55 %%
7711
22..11 %%
55..33 %%
22..33 %%
11..44 %%
22..99 %%
6699
((22..00)) %%
66..88 %%
((1100..99)) %%
22..77 %%
((1144..11)) %%
3399
11..66 %%
77..55 %%
((00..33)) %%
22..66 %%
66..66 %%
3399
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2018
Downside scenario
Remaining
forecast period
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 price index is commonly used as a benchmark.
The main macroeconomic factors used for the personal credit portfolio are unemployment rate and housing price index growth, based on the economy of Canada
or Quebec. The main macroeconomic factors used for the business and government credit portfolio are unemployment rate, 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 growth, and WTI oil price) will generally correlate with lower allowances for credit
losses.
162
162
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
SSeennssiittiivviittyy AAnnaallyyssiiss ooff AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess oonn NNoonn--IImmppaaiirreedd LLooaannss
SScceennaarriiooss
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2019 based on the
probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22001199
SSiimmuullaattiioonnss
100% upside scenario
100% base scenario
100% downside scenario
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
556666
446677
449944
777744
MMiiggrraattiioonn
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2019 with the
estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22001199
SSiimmuullaattiioonnss
Non-impaired loans if they were all in Stage 1
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
556666
443399
National Bank of Canada
163
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 88 –– FFiinnaanncciiaall AAsssseettss TTrraannssffeerrrreedd BBuutt NNoott DDeerreeccooggnniizzeedd
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.
SSeeccuurriittiieess SSoolldd UUnnddeerr RReeppuurrcchhaassee AAggrreeeemmeennttss aanndd SSeeccuurriittiieess LLooaanneedd
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.
FFiinnaanncciiaall AAsssseettss TTrraannssffeerrrreedd ttoo SSttrruuccttuurreedd EEnnttiittiieess
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing
Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the transferred
assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities related to
transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated
liabilities.
As at October 31
22001199
2018
CCaarrrryyiinngg vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities(1)
Residential mortgages
CCaarrrryyiinngg vvaalluuee ooff aassssoocciiaatteedd lliiaabbiilliittiieess(2)
FFaaiirr vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities(1)
Residential mortgages
FFaaiirr vvaalluuee ooff aassssoocciiaatteedd lliiaabbiilliittiieess(2)
4477,,229977
2200,,114422
6677,,443399
3366,,662255
4477,,229977
2200,,330088
6677,,660055
3366,,771144
44,125
20,064
64,189
32,834
44,125
19,993
64,118
32,809
(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 $3,166 million as at October 31, 2019 ($287 million as at
October 31, 2018) 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 $9,753 million as at October 31, 2019 ($7,550 million as at October 31, 2018).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
CCaarrrryyiinngg vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities backed by insured residential mortgages and other securities sold to CHT
Securities sold under repurchase agreements
Securities loaned
22001199
2018
2211,,003355
1166,,229944
3300,,111100
6677,,443399
20,576
12,927
30,686
64,189
164
164
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 99 –– IInnvveessttmmeennttss iinn AAssssoocciiaatteess aanndd JJooiinntt VVeennttuurreess
As at October 31
LLiisstteedd aassssoocciiaatteess(2)
TMX Group Limited(3)
Fiera Capital Corporation(4)
UUnnlliisstteedd aassssoocciiaatteess
NSIA Participations(5)
Other
Business
segment
Other
Wealth Management
USSF&I
22001199
CCaarrrryyiinngg
vvaalluuee
2018 (1)
Carrying
value
227733
−−
227733
−−
111122
111122
338855
264
140
404
140
101
241
645
(1)
(2)
(3)
During fiscal 2018, the Bank had disposed of its entire interest in an unlisted joint venture.
The fair value of investments in associates based on quoted prices in active markets was $544 million as at October 31, 2019 ($611 million as at October 31, 2018).
The Bank exercises significant influence over TMX Group Limited mainly through its equity interest, debt financing, and presence on TMX Group Limited’s board of directors. As at October 31,
2019, the Bank’s ownership interest in TMX Group Limited was 8.5%.
(4) On May 9, 2019, through one of its subsidiaries, the Bank disposed of 10,680,000 Class A subordinate voting shares of Fiera Capital Corporation (Fiera Capital) at a per-share price of
$12.00 for gross proceeds of $128 million. Before the transaction, the Bank’s investment in Fiera Capital stood at 18% and was accounted for using the equity method. After the transaction,
the Bank’s ownership percentage was 7%. A gain on disposal of Fiera Capital shares of $79 million, including a $31 million gain on remeasurement at fair value of the retained interest was
recognized in the Non-interest income – Other item of the Consolidated Statement of Income for the year ended October 31, 2019 and reported in the Other heading of segment results. After
the transaction, the Bank designated the 7% retained interest as a financial asset measured at fair value through other comprehensive income. As at October 31, 2019, the Bank’s ownership
interest in Fiera Capital was 5.0%.
(5) On June 30, 2019, the Bank concluded that it had lost significant influence over NSIA Participations (NSIA), an associate entity in the Ivory Coast, and therefore ceased using the equity method
to account for this investment. The Bank designated its investment in NSIA as a financial asset measured at fair value through other comprehensive income in an amount of $128 million.
Following the fair value measurement, a $33 million loss was recorded in the Non-interest income – Other item of the Consolidated Statement of Income and reported in the Other heading of
segment results. As at October 31, 2019, the Bank’s ownership interest in NSIA was 22.1%.
As at October 31, 2019 and 2018, 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, 2019, TMX Group Limited paid $12 million in dividends to the Bank ($10 million for
the year ended October 31, 2018).
Fiera Capital Corporation (Fiera Capital)
Fiera Capital is an independent Canadian investment management firm. During the year ended October 31, 2019, Fiera Capital paid $10 million in dividends to
the Bank, of which $7 million as dividends from an investment in an associate ($13 million for the year ended October 31, 2018).
NSIA Participations
NSIA Participations is a financial group headquartered in Abidjan, Ivory Coast. During the fiscal years ended October 31, 2019 and 2018, NSIA Participations did
not pay any dividends to the Bank.
National Bank of Canada
165
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 9 – Investments in Associates and Joint Ventures (cont.)
The following table provides summarized financial information on the Bank’s listed associates.
As at October 31
BBaallaannccee sshheeeett
Current assets
Non-current assets
Current liabilities
Non-current liabilities
IInnccoommee ssttaatteemmeenntt
Total revenues
Net income
Other comprehensive income (loss)
Comprehensive income
22001199(1)
TTMMXX GGrroouupp
LLiimmiitteedd
3311,,009999
55,,221155
3311,,116644
11,,771111
881122
227700
((3388))
223322
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
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2019 and 2018, 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, 2019 and 2018.
The table below provides summarized financial information related to the Bank’s proportionate share in unlisted associates that are not individually significant.
Year ended October 31
Net income
Other comprehensive income
Comprehensive income
(1)
The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2019 and 2018.
22001199(1)
2018(1)
1122
11
1133
6
−
6
166
6
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1100 –– PPrreemmiisseess aanndd EEqquuiippmmeenntt
HHeeaadd ooffffiiccee
bbuuiillddiinngg uunnddeerr
ccoonnssttrruuccttiioonn(1)
LLaanndd
BBuuiillddiinnggss
CCoommppuutteerr
eeqquuiippmmeenntt
EEqquuiippmmeenntt
aanndd ffuurrnniittuurree
LLeeaasseehhoolldd
iimmpprroovveemmeennttss
17
66
(4)
79
11
((1100))
−−
7700
−
4488
−−
−−
4488
CCoosstt
As at October 31, 2017
Acquisitions
Disposals
Fully amortized assets
As at October 31, 2018
Acquisitions
Disposals(2)
Impairment losses(3)
AAss aatt OOccttoobbeerr 3311,, 22001199
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2017
Amortization for the year
Disposals
Fully amortized assets
As at October 31, 2018
Amortization for the year
Disposals(2)
Impairment losses(3)
AAss aatt OOccttoobbeerr 3311,, 22001199
Carrying value as at October 31, 2018
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22001199
79
7700
−
4488
255
6
(2)
(3)
256
44
((118855))
−−
7755
154
5
(1)
(3)
155
66
((110033))
−−
5588
101
1177
235
90
(4)
(1)
320
3399
−−
((3366))
332233
92
74
(5)
(1)
160
5577
−−
((2233))
119944
160
112299
278
18
(170)
(8)
118
1188
((2266))
−−
111100
146
16
(99)
(8)
55
1155
((1133))
−−
5577
63
5533
292
59
(1)
(10)
340
3344
((5522))
−−
332222
127
26
(1)
(10)
142
2277
((2200))
−−
114499
198
117733
TToottaall
1,077
239
(181)
(22)
1,113
114444
((227733))
((3366))
994488
519
121
(106)
(22)
512
110055
((113366))
((2233))
445588
601
449900
As at October 31, 2019, contractual commitments related to the head office building under construction stood at $312 million and cover a period up to 2023.
(1)
(2) On July 30, 2019, the Bank completed the sale of its head office land and building located at 600 De La Gauchetière Street West, Montreal, Quebec, Canada, for gross proceeds of $187 million.
At the same time, the Bank entered into a four-year operating lease with the purchaser. This sale-leaseback transaction resulted in a gain of $50 million, which was recognized in the Non-
Interest Income – Other item of the Consolidated Statement of Income and reported in the Other heading of segment results.
During the year ended October 31, 2019, the Bank decided to stop using certain computer equipment. Consequently, an amount of $13 million in impairment losses related to this equipment
was recognized in the Non-interest expenses – Technology item of the Consolidated Statement of Income and reported in the Other heading of segment results.
(3)
AAsssseettss LLeeaasseedd UUnnddeerr OOppeerraattiinngg LLeeaasseess
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
AAss aatt OOccttoobbeerr 3311,, 22001199
22
66
11
99
National Bank of Canada
167
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1111 –– GGooooddwwiillll aanndd IInnttaannggiibbllee AAsssseettss
GGooooddwwiillll
The following table presents changes in the carrying amounts of goodwill by cash-generating unit (CGU) and by business segment for the years ended October 31,
2019 and 2018.
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall(1)
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss(1)
TThhiirrdd--PPaarrttyy
SSoolluuttiioonnss(1)
SSeeccuurriittiieess
BBrrookkeerraaggee(1)
MMaannaaggeedd
SSoolluuttiioonnss(1)
Balance as at October 31, 2017
Impact of foreign currency translation
Balance as at October 31, 2018
Impact of foreign currency translation
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22001199
54
−−
54
−−
5544
256
−−
256
−−
225566
434
−−
434
−−
443344
269
−−
269
−−
226699
(1)
Constitutes a CGU.
CCrreeddiiggyy
LLttdd..(1)
AAddvvaanncceedd
BBaannkk ooff AAssiiaa
LLiimmiitteedd(1)
235
−
235
−−
223355
32
1
33
−−
3333
129
2
131
−−
113311
TToottaall
959
−−
959
−−
995599
UUSSSSFF&&II
TToottaall
TToottaall
161
3
164
−−
116644
1,409
3
1,412
−−
11,,441122
GGooooddwwiillll IImmppaaiirrmmeenntt TTeessttiinngg aanndd SSiiggnniiffiiccaanntt AAssssuummppttiioonnss
For impairment testing purposes, goodwill resulting from a business combination must be allocated, as of the acquisition date, 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, 2019 and 2018, 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, 2019, for each CGU or CGU group, the discount rate used was 12.9% (12.8% as at October 31, 2018) and the long-term
growth rate was between 2% and 5%, depending on the CGU, as at October 31, 2019 and 2018.
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.
168
168
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
IInnttaannggiibbllee AAsssseettss
IInnddeeffiinniittee uusseeffuull lliiffee
FFiinniittee uusseeffuull lliiffee
TToottaall
MMaannaaggeemmeenntt
ccoonnttrraaccttss(1)
TTrraaddeemmaarrkk
TToottaall
IInntteerrnnaallllyy--
ggeenneerraatteedd
ssooffttwwaarree(2)
OOtthheerr
ssooffttwwaarree
OOtthheerr
iinnttaannggiibbllee
aasssseettss
CCoosstt
As at October 31, 2017
Acquisitions
Fully amortized intangible assets
As at October 31, 2018
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
AAss aatt OOccttoobbeerr 3311,, 22001199
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2017
Amortization for the year
Fully amortized intangible assets
As at October 31, 2018
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
AAss aatt OOccttoobbeerr 3311,, 22001199
161
−
161
−−
−−
116611
11
−
11
−−
−−
1111
172
−
172
−−
−−
117722
1,267
242
−
1,509
332299
((8855))
((5500))
11,,770033
295
149
−
444
119944
((4411))
((5500))
554477
Carrying value as at October 31, 2018
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22001199
161
116611
11
1111
172
117722
1,065
11,,115566
115
13
(2)
126
3300
−−
−−
115566
61
23
(2)
82
2233
−−
−−
110055
44
5511
108
1
(6)
103
−−
−−
−−
110033
67
9
(6)
70
66
−−
−−
7766
33
2277
TToottaall
1,490
256
(8)
1,738
335599
((8855))
((5500))
11,,996622
423
181
(8)
596
222233
((4411))
((5500))
772288
1,662
256
(8)
1,910
335599
((8855))
((5500))
22,,113344
423
181
(8)
596
222233
((4411))
((5500))
772288
1,142
11,,223344
1,314
11,,440066
(1)
(2)
(3)
For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
The remaining amortization period for significant internally-generated software is four years.
The Bank wrote off certain technology developments due to obsolescence and decided to discontinue them. The recoverable amount of those technology developments was estimated to be
nil. During the year ended October 31, 2019, an amount of $44 million in impairment losses was recognized in the Non-interest expenses – Technology item of the Consolidated Statement of
Income and reported in the Other heading of segment results.
NNoottee 1122 –– OOtthheerr AAsssseettss
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers
Defined benefit asset (Note 23)
Deferred tax assets (Note 24)
Current tax assets
Reinsurance assets
22001199
2018
669966
662233
557700
3388
556622
221166
3333
22,,773388
775
549
1,255
64
324
113
31
3,111
National Bank of Canada
169
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1133 –– DDeeppoossiittss
As at October 31
Personal
Business and government
Deposit-taking institutions
OOnn ddeemmaanndd(1)
AAfftteerr nnoottiiccee(2)
FFiixxeedd tteerrmm(3)
44,,332255
3388,,668800
11,,770077
4444,,771122
2277,,227711
2211,,882233
11,,331144
5500,,440088
2288,,446699
6644,,776633
11,,221144
9944,,444466
22001199
TToottaall
6600,,006655
112255,,226666
44,,223355
118899,,556666
2018
Total
55,688
110,321
4,821
170,830
(1)
(2)
(3)
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 a 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, covered bonds, as described below and includes a $3.5 billion amount of deposits
as at October 31, 2019 that are subject to the bank bail-in conversion regulations issued by the Government of Canada. These regulations provide certain powers
to the Canada Deposit Insurance Corporation (CDIC), notably the power to convert certain eligible Bank shares and liabilities into common shares should the
Bank become non-viable.
CCoovveerreedd BBoonnddss
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, 2019, an amount of
1.0 billion euros in covered bonds matured, and the Bank issued covered bonds in amounts of US$1.3 billion and 750 million euros (US$750 million in covered
bonds matured, and the Bank issued covered bonds in an amount of 1.5 billion euros during the year ended October 31, 2018). The covered bonds
totalled $9.5 billion as at October 31, 2019 ($8.3 billion as at October 31, 2018). For additional information, see Note 27 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 $16.5 billion as at October 31, 2019 ($13.2 billion as at October 31, 2018), of which $16.2 billion ($12.9 billion as at
October 31, 2018) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
NNoottee 1144 –– OOtthheerr LLiiaabbiilliittiieess
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 23)
Allowances for credit losses — Off-balance-sheet commitments (Note 7)
Deferred tax liabilities (Note 24)
Current tax liabilities
Insurance liabilities
Other items(1)(2)(3)
22001199
11,,888833
11,,222255
11,,006611
554488
337744
7744
55
114444
2244
883399
66,,117777
2018
1,790
1,033
1,012
796
186
54
25
48
50
830
5,824
(1)
(2)
(3)
As at October 31, 2019, Other items included $6 million in restructuring provisions ($14 million as at October 31, 2018).
As at October 31, 2019, Other items included $19 million in litigation provisions ($9 million as at October 31, 2018).
During the year ended October 31, 2019, the Bank reviewed all of the leases for its corporate buildings and recorded $45 million in provisions for onerous contracts in the Non-interest
expenses – Occupancy item of the Consolidated Statement of Income and reported in the Other heading of segment results. As at October 31, 2019, other items included $48 million in
provisions for onerous contracts ($3 million as at October 31, 2018).
170
0
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1155 –– SSuubboorrddiinnaatteedd DDeebbtt
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 had 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
22001199
2018
MMaattuurriittyy ddaattee
IInntteerreesstt rraattee CChhaarraacctteerriissttiiccss
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)
TToottaall
775500
99
775599
1155
((11))
777733
750
9
759
(10)
(2)
747
(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, 2019 (2018: 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)
NNoottee 1166 –– DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price,
credit spread or index.
The main types of derivative financial instruments used are presented below.
FFoorrwwaarrddss aanndd FFuuttuurreess
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.
SSwwaappss
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.
OOppttiioonnss
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.
National Bank of Canada
171
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 –– Derivative Financial Instruments (cont.)
NNoottiioonnaall AAmmoouunnttss(1)
As at October 31
IInntteerreesstt rraattee ccoonnttrraaccttss
OOTTCC ccoonnttrraaccttss
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
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
Options purchased
Options written
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
OOTTCC ccoonnttrraaccttss
Forwards
Swaps
Options purchased
Options written
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
EEqquuiittyy,, ccoommmmooddiittyy aanndd
ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss(2)
OOTTCC ccoonnttrraaccttss
Forwards
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
Options purchased
Options written
33 mmoonntthhss
oorr lleessss
OOvveerr 33
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
TToottaall
ccoonnttrraaccttss
CCoonnttrraaccttss hheelldd
ffoorr ttrraaddiinngg
ppuurrppoosseess
CCoonnttrraaccttss
ddeessiiggnnaatteedd
aass hheeddggeess
Total
contracts
TTeerrmm ttoo mmaattuurriittyy
22001199
2018
44,,224411
−−
88,,883311
115577,,775533
2288
111144
117700,,996677
2255,,557766
99,,002200
1155,,440000
116655
5500,,116611
1122,,996600
114499,,881111
66,,007755
66,,001188
117744,,886644
8800
3355
111155
2244
4455,,995555
222200
226699
8833
4466,,555511
55,,115533
1111,,886655
22,,990022
22,,222244
2222,,114444
446644,,880022
11,,002288
117744
1155,,331155
115577,,663388
11,,777777
220077
117766,,113399
88,,117799
77,,775500
22,,669988
11,,669988
2200,,332255
88,,773311
6611,,666600
66,,006655
66,,443344
8822,,889900
−−
−−
−−
−−
558800
6600,,776655
220077,,882244
33,,666688
11,,225533
227744,,009900
778855
44,,447799
−−
−−
55,,226644
66,,009900
7755,,779911
11,,551111
11,,111144
8844,,550066
−−
−−
−−
−−
−−
4422,,446622
6666,,661122
22,,998899
44,,002211
111166,,008844
−−
−−
−−
−−
−−
11,,116677
2255,,662222
−−
−−
2266,,778899
55,,226699
775544
112277,,337733
558899,,882277
88,,446622
55,,559955
773377,,228800
3344,,554400
2211,,224499
1188,,009988
11,,886633
7755,,775500
2288,,994488
331122,,888844
1133,,665511
1133,,556666
336699,,004499
−−
−−
−−
8800
3355
111155
6611
11,,555511
119977
11,,883333
334422
22,,002266
22
111177
22,,668844
7744,,440066
66,,445544
11,,110088
11,,335588
8855,,115599
2200,,885599
115544
4400
117744
2211,,228888
331144
11,,660055
330055
770033
22,,992277
330033,,556699
77,,225500
44,,005544
779977
998844
1144,,663366
339900
777777
222200
994422
22,,332299
338800,,882255
55,,226699
775544
112244,,883322
555522,,777744
88,,225522
44,,550066
669966,,338877
3344,,554400
2211,,224499
1188,,009988
11,,886633
7755,,775500
2288,,994488
229955,,111100
1133,,665511
1133,,556666
335511,,227755
8800
3355
111155
11,,883333
7744,,440066
66,,445544
11,,110088
11,,335588
8855,,115599
−−
−−
22,,554411
3377,,005533
221100
11,,008899
4400,,889933
−−
−−
−−
−−
−−
−−
1177,,777744
−−
−−
1177,,777744
−−
−−
−−
−−
−−
−−
−−
−−
−−
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
1,976
46,874
2,438
1,523
1,436
54,247
7,699
11,691
2,243
3,468
25,101
964,652
115588
−−
−−
44
116622
114455,,771199
66,,001155
1144,,224477
33,,442277
33,,887733
2277,,556622
11,,229944,,991155
66,,001155
1144,,224477
33,,442277
33,,887733
2277,,556622
11,,223366,,224488
−−
−−
−−
−−
−−
5588,,666677
(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.
172
2
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCrreeddiitt RRiisskk
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 credit monitoring standards as those
applied to the Bank’s other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and manages 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 arising from 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.
TTeerrmmss UUsseedd
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 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.
CCrreeddiitt RRiisskk EExxppoossuurree ooff tthhee DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeenntt PPoorrttffoolliioo
As at October 31
Interest rate contracts
Foreign exchange contracts
Equity, commodity and credit derivative contracts
Impact of master netting agreements
RReeppllaacceemmeenntt
ccoosstt
CCrreeddiitt rriisskk
eeqquuiivvaalleenntt(1)
22,,660033
33,,110033
22,,442233
88,,112299
((33,,441155))
44,,771144
66,,668855
44,,557700
22,,991177
1144,,117722
1144,,117722
22001199
RRiisskk--
wweeiigghhtteedd
aammoouunntt(1)
996688
11,,551155
11,,111199
33,,660022
33,,660022
Replacement
cost(2)
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
(1)
(2)
After application of the Standardized Approach for Measuring Counterparty Credit Risk on November 1, 2018, the amounts are presented net of the Impact of master netting agreements.
As at October 31, 2018, the total positive fair value of exchange-traded contracts amounting to $98 million was excluded.
CCrreeddiitt RRiisskk EExxppoossuurree ooff tthhee DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeenntt PPoorrttffoolliioo bbyy CCoouunntteerrppaarrttyy
As at October 31
OECD(1) governments
Banks of OECD member countries
Other
(1) Organisation for Economic Co-operation and Development.
RReeppllaacceemmeenntt
ccoosstt
11,,004488
667700
22,,999966
44,,771144
22001199
CCrreeddiitt rriisskk
eeqquuiivvaalleenntt
22,,007777
33,,772200
88,,337755
1144,,117722
Replacement
cost
1,051
816
3,492
5,359
2018
Credit risk
equivalent
1,855
4,197
11,571
17,623
National Bank of Canada
173
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 –– Derivative Financial Instruments (cont.)
FFaaiirr VVaalluuee ooff DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
As at October 31
CCoonnttrraaccttss hheelldd ffoorr ttrraaddiinngg ppuurrppoosseess
IInntteerreesstt rraattee ccoonnttrraaccttss
Forwards
Swaps
Options
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
Forwards
Swaps
Options
EEqquuiittyy,, ccoommmmooddiittyy aanndd ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss
Forwards
Swaps
Options
Total – Contracts held for trading purposes
CCoonnttrraaccttss ddeessiiggnnaatteedd aass hheeddggeess
IInntteerreesstt rraattee ccoonnttrraaccttss
Forwards
Swaps
Options
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
Forwards
Swaps
Options
EEqquuiittyy,, ccoommmmooddiittyy aanndd ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss
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
TToottaall ffaaiirr vvaalluuee
Impact of master netting agreements
NNoottee 1177 –– HHeeddggiinngg AAccttiivviittiieess
PPoossiittiivvee
NNeeggaattiivvee
3366
11,,880088
9977
11,,994411
229988
22,,661188
112277
33,,004433
11,,005500
11,,003300
334433
22,,442233
77,,440077
−−
666622
−−
666622
−−
6600
−−
6600
−−
−−
−−
−−
772222
446611
226611
5599
11,,774422
7700
11,,887711
118800
22,,226633
110099
22,,555522
7722
11,,443399
440055
11,,991166
66,,333399
−−
225522
220066
445588
−−
5555
−−
5555
−−
−−
−−
−−
551133
332200
119933
−−
88,,112299
((33,,441155))
44,,771144
−−
66,,885522
((33,,441155))
33,,443377
22001199
NNeett
((2233))
6666
2277
7700
111188
335555
1188
449911
997788
((440099))
((6622))
550077
11,,006688
−−
441100
((220066))
220044
−−
55
−−
55
−−
−−
−−
−−
220099
114411
6688
−−
11,,227777
−−
11,,227777
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
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, 2019.
The Bank has elected, as permitted under IFRS 9, to continue applying the hedge accounting requirements of IAS 39. 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).
174
4
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
As at October 31
OOvveerr
11 yyeeaarr
ttoo 22
yyeeaarrss
11 yyeeaarr
oorr lleessss
TTeerrmm ttoo mmaattuurriittyy
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
22001199
FFaaiirr vvaalluuee
2018
Fair value
TToottaall
AAsssseettss LLiiaabbiilliittiieess
Total
Assets Liabilities
FFaaiirr vvaalluuee hheeddggeess
IInntteerreesstt rraattee rriisskk
Interest rate swaps
Notional amount – LIBOR reform(1)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – Other
Average CAD-CNH exchange rate
Average CAD-HKD exchange rate
Options
Notional amount – LIBOR reform(1)
Notional amount – Other
Average fixed interest rate – Purchased
Average fixed interest rate – Written
CCaasshh ffllooww hheeddggeess
IInntteerreesstt rraattee rriisskk
Interest rate swaps
Notional amount – LIBOR reform(1)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – Other
Average CAD-USD exchange rate
Average USD-EUR exchange rate
Average USD-GBP exchange rate
EEqquuiittyy pprriiccee rriisskk
Equity swaps
Notional amount
Average price
HHeeddggeess ooff nneett iinnvveessttmmeennttss
iinn ffoorreeiiggnn ooppeerraattiioonnss(2)
FFoorreeiiggnn eexxcchhaannggee rriisskk
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-BRL exchange rate
Average USD-HKD exchange rate
11,,006611
33,,338811
555544
66,,554411
11,,776688
33,,660000
22,,332222
1144,,558833
−− %%
00..88 %%
11..77 %%
00..88 %%
22..00 %%
22..22 %%
11..99 %%
22..66 %%
11..99 %%
22..11 %%
111122
$$ 00..11886644
−−
331144
00..11 %%
22..44 %%
11,,448877
−−
111166
−−
$$ 00..11662211
−−
−−
−−
−−
−−
−−
−−
−−
222288
$$ 00..11886644
$$ 00..11662211
3355
00..11 %%
22..44 %%
4400
2222
((00..88)) %%
22..77 %%
339955
449933
−− %%
22..88 %%
443355
886644
00..11 %%
22..77 %%
445511
111144 14,019
193
357
1.8 %
2.2 %
1100
−−
888
4
38
$ 0.1955
$ 0.1621
−−
220066
1,454
−
81
− %
2.7 %
33,,441166
77,,227733
66,,225566
1188,,443322
446611
332200
16,361
197
476
22,,774400
22..11 %%
11..99 %%
771177
22..11 %%
−− %%
11,,118855
1144,,886600
−−
33,,118877
11,,118855
2211,,550044
22..00 %%
00..77 %%
22..22 %%
00..77 %%
22..00 %%
00..88 %%
221111
113388 17,419
294
46
2.1 %
0.8 %
5500
5555 12,144
52
149
11,,443355
33,,003344
22,,330022
−−
$$ 11..33007766 $$ 11..33224433 $$ 11..33110011 $$ 11..22883388
$$ 11..22227788 $$ 11..11113311 $$ 11..11335511 $$ 11..22229955
−−
1100,,776655
−−
$$ 11..22992211
−−
−−
1133,,006677
44,,446699
$$ 11..33007744
$$ 11..11662266
$$ 11..22992211
$ 1.2976
$ 1.1742
$ 1.3012
−−
−−
55,,777744
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
109
$ 62.42
−
−
22,,115522
2266,,881100
55,,448899
4400,,222255
226611
119933 29,672
346
195
1100
$$ 11..33228866
−−
$$ 00..11227777
1100
77,,227711
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
1100
$$ 11..33228866
−−
$$ 00..11227777
1100
55,,556688
3344,,008833
1111,,774455
5588,,666677
−−
−−
772222
−−
15
$ 1.2929
$ 0.2508
$ 0.1281
15
−−
551133 46,048
−
−
−
543
−
671
(1)
(2)
The benchmark interest rate reform is a global initiative led and coordinated by central banks and governments around the world, including those in Canada. In July 2017, the UK Financial
Conduct Committee (FCA) stated that, after 2021, it will no longer compel banks to submit rates used for the calculation of the London Interbank Offered Rate (LIBOR). The Bank has formed a
team that is conducting a Bank-wide impact analysis. It is currently inventorying all of the Bank’s contractual arrangements linked to LIBOR, assessing the Bank’s exposures to LIBOR
instruments and identifying impacts on the Bank’s products, systems and processes with the intention of minimizing the impacts through appropriate mitigating actions. The Bank is also
actively involved in industry working groups and will continue to monitor industry progress.
As at October 31, 2019, the Bank also designated $958 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,035 million in foreign
currency deposits denominated in U.S. dollars and euros as net investment hedging instruments as at October 31, 2018).
National Bank of Canada
175
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
FFaaiirr VVaalluuee HHeeddggeess
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 items. 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.
CCaarrrryyiinngg vvaalluuee
ooff hheeddggeedd
iitteemmss
88,,334444
44,,666677
33,,666633
775522
Carrying value
of hedged
items
3,315
6,367
4,482
737
AAss aatt OOccttoobbeerr 3311,, 22001199
CCuummuullaattiivvee
aaddjjuussttmmeennttss
ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
CCuummuullaattiivvee
hheeddggee
aaddjjuussttmmeennttss
ffrroomm aaccttiivvee
hheeddggeess
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggeedd
iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
7788
111122
5599
1155
99
4488
7799
−−
221100
((339966))
((119988))
((2255))
((440099))
((220088))
339955
119977
2266
441100
22
((11))
((11))
11
11
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
Securities at fair value through other comprehensive income
Deposits
Liabilities related to transferred receivables
Subordinated debt
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.
176
6
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCaasshh FFllooww HHeeddggeess
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.
AAss aatt OOccttoobbeerr 3311,, 22001199
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
aaccttiivvee hheeddggeess
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
GGaaiinnss ((lloosssseess)) oonn
hheeddggeedd iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess)) oonn
hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
UUnnrreeaalliizzeedd ggaaiinnss
((lloosssseess)) iinncclluuddeedd
iinn OOtthheerr
ccoommpprreehheennssiivvee
iinnccoommee aass tthhee
eeffffeeccttiivvee ppoorrttiioonn
ooff tthhee hheeddggiinngg
iinnssttrruummeenntt(1)
LLoosssseess ((ggaaiinnss))
rreeccllaassssiiffiieedd ttoo
NNeett iinntteerreesstt
iinnccoommee(1)
−−
3300
44
3344
−−
3344
((1144))
99
((4444))
((4499))
1100
((3399))
((4455))
115544
113333
224422
((66))
223366
4455
((115544))
((113355))
((224444))
66
((223388))
−−
−−
((22))
((22))
−−
((22))
4455
((110088))
((113333))
((119966))
99
((118877))
((1166))
((1100))
22
((2244))
((33))
((2277))
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)
(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)
IInntteerreesstt rraattee rriisskk
Loans
Deposits
Acceptances
EEqquuiittyy pprriiccee rriisskk
Other liabilities
IInntteerreesstt rraattee rriisskk
Loans
Deposits
Acceptances
EEqquuiittyy pprriiccee rriisskk
Other liabilities
(1)
Amounts are presented on a pre-tax basis.
National Bank of Canada
177
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
HHeeddggeess ooff NNeett IInnvveessttmmeennttss iinn FFoorreeiiggnn OOppeerraattiioonnss
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 tables present the amounts related to hedged items as well as the results of the net investment hedges.
NNeett iinnvveessttmmeennttss iinn ffoorreeiiggnn
ooppeerraattiioonnss ddeennoommiinnaatteedd iinn::
USD
EUR
BRL
Other currencies
AAss aatt OOccttoobbeerr 3311,, 22001199
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22001199
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
aaccttiivvee hheeddggeess
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
GGaaiinnss ((lloosssseess)) oonn
hheeddggeedd iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess)) oonn
hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
UUnnrreeaalliizzeedd ggaaiinnss
((lloosssseess)) iinncclluuddeedd
iinn OOtthheerr
ccoommpprreehheennssiivvee
iinnccoommee aass tthhee
eeffffeeccttiivvee ppoorrttiioonn
ooff tthhee hheeddggiinngg
iinnssttrruummeenntt(1)
LLoosssseess ((ggaaiinnss))
rreeccllaassssiiffiieedd ttoo
tthhee NNoonn--iinntteerreesstt
iinnccoommee iitteemm(1)
77
−−
−−
−−
77
((119911))
−−
3366
−−
((115555))
((55))
−−
−−
((11))
((66))
55
−−
−−
11
66
−−
−−
−−
−−
−−
55
−−
−−
11
66
−−
33
−−
((11))
22
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)
NNeett iinnvveessttmmeennttss iinn ffoorreeiiggnn
ooppeerraattiioonnss ddeennoommiinnaatteedd iinn::
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)
−
−
−
−
−
178
8
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReeccoonncciilliiaattiioonn ooff EEqquuiittyy CCoommppoonneennttss
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31
Balance at beginning
HHeeddggeess ooff nneett iinnvveessttmmeennttss iinn ffoorreeiiggnn ooppeerraattiioonnss(1)
Gains (losses) included as the effective portion
Losses (gains) reclassified to Non-interest income
Foreign currency translation gains (losses) on investments in foreign operations
CCaasshh ffllooww hheeddggeess(1)
Gains (losses) included as the effective portion
Interest rate risk
Equity price risk
Losses (gains) reclassified to Net interest income
Interest rate risk
Equity price risk
Other comprehensive income attributable to non-controlling interests
Income taxes
BBaallaannccee aatt eenndd
(1)
Amounts are presented on a pre-tax basis.
NNeett ggaaiinnss ((lloosssseess)) oonn
ccaasshh ffllooww hheeddggeess
115511
((119966))
99
((2244))
((33))
−−
5577
((66))
22001199
NNeett ffoorreeiiggnn ccuurrrreennccyy
ttrraannssllaattiioonn
aaddjjuussttmmeennttss
1144
66
22
((99))
11
((66))
88
Net gains (losses)
on cash flow hedges
146
93
(23)
(63)
−
−
(2)
151
2018
Net foreign currency
translation
adjustments
(13)
(13)
−
42
(1)
(1)
14
National Bank of Canada
179
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1188 –– SShhaarree CCaappiittaall
AAuutthhoorriizzeedd
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 $5 billion.
FFiirrsstt PPrreeffeerrrreedd SShhaarreess
Redemption and
conversion date(1)(2)
Redemption
price per
share ($)(1)
Convertible into
preferred shares(2)
Dividend per
share ($)(3)
Reset premium
As at October 31, 2019
May 15, 2024 (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, 2024 (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
25.00 (10)
25.50 (12)
25.50 (12)
25.50 (12)
25.50 (12)
25.50 (12)
25.50 (12)
Series 31
Series 33
Series 35
Series 37
Series 39
Series 41
Series 43
0.25156 (7)
0.24375 (8)
0.35000 (8)
0.33750 (8)
0.27813 (8)
0.28750 (8)
0.30938 (8)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
0.75000
Floating rate (11)
Floating rate (11)
Floating rate (11)
Floating rate (11)
Floating rate (11)
Floating rate (11)
Floating rate (11)
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 %
FFiirrsstt pprreeffeerrrreedd sshhaarreess
iissssuueedd aanndd oouuttssttaannddiinngg
Series 30(4)
Series 32(4)
Series 34(4)
Series 36(4)
Series 38(4)
Series 40(4)
Series 42(4)
FFiirrsstt pprreeffeerrrreedd sshhaarreess
aauutthhoorriizzeedd bbuutt nnoott iissssuueedd
Series 23(9)
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)
(11)
(12)
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 on the date fixed for redemption and on the same date every five years thereafter.
Convertible on 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 five-year period commencing on May 16, 2019 and 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.
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 19 to these consolidated financial statements.
As of the date fixed for redemption, and every five years thereafter, 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.
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.
Second Preferred Shares
15 million shares without par value, issuable for a total maximum consideration of $300 million. As at October 31, 2019, no shares had been issued or traded.
180
180
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
SShhaarreess OOuuttssttaannddiinngg
As at October 31
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Common shares at beginning of the fiscal year
Issued pursuant to the Stock Option Plan
Repurchase of common shares for cancellation
Impact of shares purchased or sold for trading(1)
Other
Common shares at end of year
NNuummbbeerr
ooff sshhaarreess
1144,,000000,,000000
1122,,000000,,000000
1166,,000000,,000000
1166,,000000,,000000
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
9988,,000000,,000000
333355,,007700,,664422
22,,995500,,992222
((44,,554477,,220000))
669999,,556644
((11,,551177))
333344,,117722,,441111
22001199
SShhaarreess
$$
335500
330000
440000
440000
440000
330000
330000
22,,445500
22,,882222
112222
((4400))
4455
−−
22,,994499
Number
of shares
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
339,591,965
3,129,313
(7,500,000)
(149,430)
(1,206)
335,070,642
2018
Shares
$
350
300
400
400
400
300
300
2,450
2,768
128
(64)
(10)
−
2,822
(1)
As at October 31, 2019, there were 3,846 shares held for trading, representing a negligible amount (703,410 shares held for trading representing $45 million as at October 31, 2018).
DDiivviiddeennddss DDeeccllaarreedd
Year ended October 31
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Common shares
DDiivviiddeennddss
$$
1144
1122
2222
2222
1188
1144
1144
111166
889922
11,,000088
22001199
DDiivviiddeennddss
ppeerr sshhaarree
11..00115566
00..99775500
11..44000000
11..33550000
11..11112255
11..11550000
11..22337755
22..66660000
Dividends
$
14
12
22
22
18
11
6
105
829
934
2018
Dividends
per share
1.0250
0.9750
1.4000
1.3500
1.1125
0.9310
0.5323
2.4400
IIssssuuaanncceess ooff PPrreeffeerrrreedd SShhaarreess
On June 11, 2018, the Bank had 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 had 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.
National Bank of Canada
181
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 –– Share Capital (cont.)
RReeppuurrcchhaasseess ooff CCoommmmoonn SShhaarreess
On June 10, 2019, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares (representing approximately 1.80%
of its outstanding common shares) over the 12-month period ending no later than June 9, 2020. On June 6, 2018, the Bank had begun 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 ended June 5, 2019. 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 price. The amounts that are paid above the average book value of the common shares are charged to Retained earnings.
During the year ended October 31, 2019, the Bank repurchased 4,547,200 common shares for $281 million, which reduced Common share capital by $40 million
and Retained earnings by $241 million. During the year ended October 31, 2018, the Bank had repurchased 7,500,000 common shares for $467 million, which
had reduced Common share capital by $64 million and Retained earnings by $403 million.
RReesseerrvveedd CCoommmmoonn SShhaarreess
As at October 31, 2019 and 2018, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2019, there were 20,377,278 common shares (22,894,802 as at October 31, 2018) reserved under the Stock Option Plan.
CCoommmmoonn SShhaarreess HHeelldd iinn EEssccrrooww
As part of the acquisition of Wellington West Holdings Inc. in 2011, the Bank had issued common shares held in escrow. In December 2016, a total of 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, 2019, a total of 870 of these shares were released to shareholders, and 1,517 shares were cancelled (during the year
ended October 31, 2018, a total of 3,778 of these shares were released, and 1,206 shares were cancelled). As at October 31, 2019, the number of common
shares held in escrow was 21,510 (23,897 as at October 31, 2018). The Bank expects that the remaining shares in escrow will be settled by the end of calendar
year 2020.
RReessttrriiccttiioonn oonn tthhee PPaayymmeenntt ooff DDiivviiddeennddss
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 19 and 27 to these consolidated financial statements.
DDiivviiddeenndd RReeiinnvveessttmmeenntt PPllaann
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.
182
182
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1199 –– NNoonn--CCoonnttrroolllliinngg IInntteerreessttss
As at October 31
Trust units issued by NBC Asset Trust (NBC CapS II) – Series 2(1)
Other(2)
22001199
335599
((11))
335588
2018
359
20
379
(1)
(2)
Includes $9 million in accrued interest as at October 31, 2019 ($9 million as at October 31, 2018).
During the year ended October 31, 2019, the Bank acquired the entire remaining non-controlling interest in the Cambodian subsidiary Advanced Bank of Asia Limited. For additional
information, see Note 31 to these consolidated financial statements.
TTrruusstt UUnniittss IIssssuueedd bbyy NNBBCC AAsssseett TTrruusstt
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 27 to these consolidated financial statements.
The main terms and characteristics of the NBC CapS II trust units outstanding as at October 31, 2019 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.
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.
National Bank of Canada
183
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2200 –– CCaappiittaall DDiisscclloossuurree
CCaappiittaall MMaannaaggeemmeenntt OObbjjeeccttiivveess,, PPoolliicciieess aanndd PPrroocceedduurreess
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.
CCaappiittaall MMaannaaggeemmeenntt
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 Bank and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 10.0%, a Tier 1 capital
ratio of at least 11.5%, and a Total capital ratio of at least 13.5%. All of these ratios are to include a capital conservation buffer of 2.5%, a 1% surcharge applicable
solely to D-SIBs, and a 2.0% domestic stability buffer. The domestic stability buffer, which can vary from 0% to 2.5% of risk-weighted assets, consists exclusively
of CET1 capital. A D-SIB that fails to meet this buffer requirement will not be subject to automatic constraints to reduce capital distributions but will have to
provide a remediation plan to OSFI. The banks also have to meet the 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. OSFI requires 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, 2019 and 2018, the Bank was in compliance with all of OSFI’s regulatory capital requirements.
184
184
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReegguullaattoorryy CCaappiittaall aanndd RRaattiiooss UUnnddeerr BBaasseell IIIIII
As at October 31
CCaappiittaall
CET1
Tier 1
Total
RRiisskk--wweeiigghhtteedd aasssseettss
CET1 capital
Tier 1 capital
Total capital
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
22001199
2018
99,,669922
1122,,449922
1133,,336666
8833,,003399
8833,,003399
8833,,003399
8,608
11,410
12,352
73,654
73,670
73,685
330088,,990022
284,337
1111..77 %%
1155..00 %%
1166..11 %%
44..00 %%
11.7 %
15.5 %
16.8 %
4.0 %
NNoottee 2211 –– TTrraaddiinngg AAccttiivviittyy RReevveennuueess
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, changes in the fair value of
financial instruments designated at fair value through profit or loss, and transaction costs if applicable.
Year ended October 31
Net interest income
Non-interest income
22001199
4477
882299
887766
2018
70
840
910
National Bank of Canada
185
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2222 –– SShhaarree--BBaasseedd PPaayymmeennttss
The compensation expense information provided below excludes the impact of hedging.
SSttoocckk OOppttiioonn PPllaann
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 20,377,278 as at October 31, 2019 (22,894,802 as at October 31, 2018). 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
SSttoocckk OOppttiioonn PPllaann
Outstanding at beginning
Awarded
Exercised
Cancelled(1)
Outstanding at end
Exercisable at end
NNuummbbeerr ooff
ooppttiioonnss
1133,,006644,,774466
22,,111166,,889922
((22,,995500,,992222))
((112277,,009900))
1122,,110033,,662266
77,,442211,,666622
22001199
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
$$
4444..7788
5588..7799
3366..4400
5566..8866
4499..1155
4433..5599
Number of
options
14,575,894
1,836,348
(3,129,313)
(218,183)
13,064,746
8,378,530
(1)
Includes 13,662 expired options during the year ended October 31, 2019 (13,784 expired options during the year ended October 31, 2018).
Exercise price
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
Options
outstanding
373,908
580,874
778,732
965,378
1,213,605
1,529,319
1,339,479
1,493,427
1,734,064
2,094,840
12,103,626
Options
exercisable
373,908
580,874
778,732
965,378
1,213,605
1,529,319
884,759
671,513
423,574
−
7,421,662
2018
Weighted
average
exercise price
$
$
$
$
$
$
40.46
64.14
35.75
48.85
44.78
39.17
Expiry date
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
During the year ended October 31, 2019, the Bank awarded 2,116,892 stock options (1,836,348 stock options during the year ended October 31, 2018) with an
average fair value of $6.14 per option ($7.42 for the year ended October 31, 2018).
The average fair value of options awarded was estimated on the award date using the Black-Scholes model as well as the following assumptions.
Year ended October 31
Risk-free interest rate
Expected life of options
Expected volatility
Expected dividend yield
186
22001199
2018
22..5500%%
77 yyeeaarrss
1188..4400%%
44..3377%%
2.11%
7 years
18.87%
3.80%
186
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, 2019 was $11 million ($12 million for the year ended October 31, 2018).
SSttoocckk AApppprreecciiaattiioonn RRiigghhttss ((SSAARR)) PPllaann
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 $2 million was recognized for the year ended
October 31, 2019 with respect to this plan ($1 million for the year ended October 31, 2018).
As at October 31
SSAARR PPllaann(1)
Outstanding at beginning
Awarded
Exercised
Outstanding at end
Exercisable at end
(1)
No SARs cancelled or expired during the years ended October 31, 2019 and 2018.
Exercise price
$29.25
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
NNuummbbeerr
ooff SSAARRss
333322,,221111
4466,,996688
((4444,,118822))
333344,,999977
119900,,669911
22001199
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
4466..8866
5588..7799
3388..6699
4499..6611
4433..6655
Number
of SARs
395,334
62,820
(125,943)
332,211
163,971
SARs
outstanding
SARs
exercisable
9,320
21,060
24,608
24,216
29,480
31,572
33,356
51,597
62,820
46,968
334,997
9,320
21,060
24,608
24,216
29,480
31,572
14,811
19,919
15,705
−
190,691
2018
Weighted
average
exercise price
$
$
$
$
$
42.29
64.14
41.13
46.86
38.91
Expiry date
December 2019
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
DDeeffeerrrreedd SSttoocckk UUnniitt ((DDSSUU)) PPllaannss
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 accounts of participants in an amount equal to the dividends declared on Bank common shares 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 Plans contain provisions
for retiring employees whereby participants may continue vesting units in accordance with the stated terms of the grant agreement.
During the year ended October 31, 2019, the Bank awarded 51,839 DSUs at a weighted average price of $60.33 (44,713 DSUs at a weighted average price of
$63.68 for the year ended October 31, 2018). A total of 569,402 DSUs were outstanding as at October 31, 2019 (591,360 DSUs as at October 31, 2018). A
compensation expense of $9 million was recognized for the year ended October 31, 2019 with respect to these plans ($7 million for the year ended
October 31, 2018).
National Bank of Canada
187
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 22 –– Share-Based Payments (cont.)
RReessttrriicctteedd SSttoocckk UUnniitt ((RRSSUU)) PPllaann
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 accounts of participants in an amount equal to the dividends declared on the Bank common
shares and vest evenly over the same period as the reference RSUs. The RSU Plan contains provisions for retiring employees whereby participants may continue
vesting units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2019, the Bank awarded 2,396,501 RSUs at a weighted average price of $60.07 (2,158,594 RSUs at a weighted average price
of $63.57 for the year ended October 31, 2018). As at October 31, 2019, a total of 4,977,984 RSUs were outstanding (5,072,615 RSUs as at October 31, 2018).
A compensation expense of $175 million was recognized for the year ended October 31, 2019 with respect to this plan ($140 million for the year ended
October 31, 2018).
PPeerrffoorrmmaannccee SSttoocckk UUnniitt ((PPSSUU)) PPllaann
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 Bank’s total shareholder return (TSR) growth index over three years compared to
the average TSR growth index of the comparator group composed of Canadian banks over three years. 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 accounts of participants 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 whereby participants may continue vesting units in accordance with the stated terms of the award agreement.
During the year ended October 31, 2019, the Bank awarded 351,956 PSUs at a weighted average price of $60.07 (287,206 PSUs at a weighted average price of
$63.57 for the year ended October 31, 2018). As at October 31, 2019, a total of 843,250 PSUs were outstanding (969,322 PSUs as at October 31, 2018). A
compensation expense of $29 million was recognized for the year ended October 31, 2019 with respect to this plan ($21 million for the year ended
October 31, 2018).
DDeeffeerrrreedd CCoommppeennssaattiioonn PPllaann ooff NNaattiioonnaall BBaannkk FFiinnaanncciiaall ((NNBBFF))
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 accounts of participants in an
amount equal to the dividends declared on Bank 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, 2019, NBF awarded 147,927 share units at a weighted average price of $59.94 (132,544 share units at a weighted average
price of $63.63 for the year ended October 31, 2018). As at October 31, 2019, a total of 1,764,789 share units were outstanding (1,618,166 share units as at
October 31, 2018). During the year ended October 31, 2019, a $22 million compensation expense was recognized for this plan (recovery of a $3 million
compensation expense related to a decline in share value for the year ended October 31, 2018).
EEmmppllooyyeeee SShhaarree OOwwnneerrsshhiipp PPllaann
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 $12 million for the year
ended October 31, 2019 ($9 million for the year ended October 31, 2018), were charged to Compensation and employee benefits when paid. As at October 31,
2019, a total of 5,813,172 common shares were held for this plan (5,718,242 common shares as at October 31, 2018).
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.
PPllaann LLiiaabbiilliittiieess aanndd IInnttrriinnssiicc VVaalluuee
Total liabilities arising from the Bank’s share-based compensation plans amounted to $549 million as at October 31, 2019 ($494 million as at October 31, 2018).
The intrinsic value of these liabilities that had vested as at October 31, 2019 was $217 million ($182 million as at October 31, 2018).
188
188
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2233 –– EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
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.
DDeeffiinneedd BBeenneeffiitt OObblliiggaattiioonn,, PPllaann AAsssseettss aanndd FFuunnddeedd SSttaattuuss
As at October 31
DDeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn
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
PPllaann aasssseettss
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
DDeeffiinneedd bbeenneeffiitt aasssseett ((lliiaabbiilliittyy)) aatt eenndd
22001199
33,,886644
9933
115588
((112211))
771122
114411
5533
((119977))
44,,770033
33,,991188
115577
((44))
557755
6677
5533
((119977))
44,,556699
((113344))
Pension plans
2018
Other post-employment benefit plans
2018
22001199
3,984
114
148
37
(276)
−
47
(190)
3,864
3,979
144
(4)
(116)
58
47
(190)
3,918
54
117766
33
66
88
1188
−−
((99))
220022
191
5
7
−
(16)
(1)
(10)
176
((220022))
(176)
(1)
For fiscal 2020, the Bank expects to pay an employer contribution of $62 million to the defined benefit pension plans.
National Bank of Canada
189
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 23 – Employee Benefits – Pension Plans and Other Post-Employment Benefits (cont.)
DDeeffiinneedd BBeenneeffiitt AAsssseett ((LLiiaabbiilliittyy))
As at October 31
Defined benefit asset included in Other assets
Defined benefit liability included in Other liabilities
22001199
3388
((117722))
((113344))
Pension plans
2018
Other post-employment benefit plans
2018
22001199
64
(10)
54
((220022))
((220022))
(176)
(176)
Pension plans
2018
Other post-employment benefit plans
2018
22001199
CCoosstt ffoorr PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
Year ended October 31
Current service cost
Interest expense (income), net
Administration costs
EExxppeennssee rreeccooggnniizzeedd iinn NNeett iinnccoommee
RReemmeeaassuurreemmeennttss(1)
Actuarial (gains) losses on defined benefit obligation
Return on plan assets(2)
RReemmeeaassuurreemmeennttss rreeccooggnniizzeedd iinn OOtthheerr ccoommpprreehheennssiivvee iinnccoommee
22001199
9933
11
44
9988
773322
((557755))
115577
225555
114
4
4
122
(239)
116
(123)
(1)
33
66
99
2266
2266
3355
(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.
AAllllooccaattiioonn ooff tthhee FFaaiirr VVaalluuee ooff PPeennssiioonn PPllaann AAsssseettss
As at October 31
Asset classes
Cash and cash equivalents
Equity securities
Debt securities
Canadian government
Canadian provincial and municipal governments
Other issuers
Other
QQuuootteedd
iinn aann aaccttiivvee
mmaarrkkeett(1)
NNoott qquuootteedd
iinn aann aaccttiivvee
mmaarrkkeett
−−
11,,445588
330066
−−
−−
−−
11,,776644
6633
447788
−−
11,,449911
557711
220022
22,,880055
22001199
TToottaall
6633
11,,993366
330066
11,,449911
557711
220022
44,,556699
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
5
7
12
(17)
(17)
(5)
2018
Total
91
1,964
223
1,115
383
142
3,918
(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, 2019 and 2018, the pension plan assets do not include any
securities issued by the Bank.
For fiscal 2019, the Bank and its related entities received $3 million ($5 million in fiscal 2018) in fees from the pension plans for related management,
administration and custodial services.
190
190
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
AAllllooccaattiioonn ooff tthhee DDeeffiinneedd BBeenneeffiitt OObblliiggaattiioonn bbyy tthhee SSttaattuuss ooff
DDeeffiinneedd BBeenneeffiitt PPllaann PPaarrttiicciippaannttss
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
WWeeiigghhtteedd aavveerraaggee dduurraattiioonn ooff tthhee
ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn (in years)
22001199
4422 %%
5522 %%
66 %%
110000 %%
1177
Pension plans
2018
Other post-employment benefit plans
2018
22001199
45 %
51 %
4 %
100 %
16
2222 %%
7788 %%
31 %
69 %
110000 %%
100 %
1133
14
SSiiggnniiffiiccaanntt AAccttuuaarriiaall AAssssuummppttiioonnss ((WWeeiigghhtteedd AAvveerraaggee))
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.
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.
Other Assumptions
For measurement purposes, the estimated annual growth rate for health care costs was 5.17% as at October 31, 2019 (5.23% as at October 31, 2018). Based
on the assumption retained, this rate is expected to decrease gradually to 3.50% in 2038 and remain steady thereafter.
Mortality assumptions are 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
DDeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn
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
22001199
33..1100 %%
33..0000 %%
2211..33
2233..66
2222..33
2244..66
Pension plans
2018
Other post-employment benefit plans
2018
22001199
4.05 %
3.00 %
21.2
23.6
22.3
24.5
33..1100 %%
33..0000 %%
55..1177 %%
2211..33
2233..66
2222..33
2244..66
4.05 %
3.00 %
5.23 %
21.2
23.6
22.3
24.5
National Bank of Canada
191
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 23 – Employee Benefits – Pension Plans and Other Post-Employment Benefits (cont.)
Year ended October 31
PPeennssiioonn ppllaann eexxppeennssee
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
22001199
Pension plans
2018
Other post-employment benefit plans
2018
22001199
44..1155 %%
44..0055 %%
33..0000 %%
3.75 %
3.65 %
3.00 %
2211..22
2233..66
2222..33
2244..55
21.2
23.5
22.2
24.5
44..1155 %%
44..0055 %%
33..0000 %%
55..2233 %%
2211..22
2233..66
2222..33
2244..55
3.75 %
3.65 %
3.00 %
5.28 %
21.2
23.5
22.2
24.5
SSeennssiittiivviittyy ooff SSiiggnniiffiiccaanntt AAssssuummppttiioonnss ffoorr 22001199
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, 2019. 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
PPrroojjeecctteedd BBeenneeffiitt PPaayymmeennttss
Year ended October 31
2020
2021
2022
2023
2024
2025 to 2029
192
Pension plans
Change in the obligation
Other post-employment
benefit plans
Change in the obligation
(191)
204
34
(35)
(123)
119
(5)
5
−
−
9
(7)
(3)
3
Pension plans
Other post-employment
benefit plans
203
209
215
221
228
1,247
9
9
9
9
9
38
192
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2244 –– IInnccoommee TTaaxxeess
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee
CCuurrrreenntt ttaaxxeess
Current year
Prior period adjustments
DDeeffeerrrreedd ttaaxxeess
Origination and reversal of temporary differences
Prior period adjustments
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff CChhaannggeess iinn EEqquuiittyy
Share issuance expense and other
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff CCoommpprreehheennssiivvee IInnccoommee
Remeasurements of pension plans and other post-employment benefit plans
Net change in cash flow hedges
Other
IInnccoommee ttaaxxeess
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
22001199
2018
664477
2222
666699
((118888))
((1199))
((220077))
446622
−−
((4488))
((5577))
22
((110033))
335599
22001199
661177
((225588))
335599
504
16
520
15
9
24
544
(5)
37
2
2
41
580
2018
523
57
580
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
DDeeffeerrrreedd ttaaxx aasssseettss
Allowances for credit losses
Deferred charges
Defined benefit liability – Pension plans
Defined benefit liability – Other post-employment
benefit plans
Investments in associates
Deferred revenue
Tax loss carryforwards
Other items(2)(3)
DDeeffeerrrreedd ttaaxx lliiaabbiilliittiieess
Premises and equipment and intangible assets
Defined benefit asset – Pension plans
Investments in associates
Other items
NNeett ddeeffeerrrreedd ttaaxx aasssseettss ((lliiaabbiilliittiieess))
As at October 31
Consolidated
Balance Sheet
2018(1)
22001199
Year ended October 31
Consolidated Statement
of Income
2018(1)
22001199
Year ended October 31
Consolidated Statement
of Comprehensive Income
2018
22001199
115500
226644
7788
5500
7755
4411
9955
4444
779977
((114400))
((3333))
((1166))
((5511))
((224400))
555577
143
233
36
54
54
38
26
26
610
(207)
(41)
(31)
(32)
(311)
299
77
3311
−−
((1100))
2211
33
6699
1177
113388
6677
88
1155
((2211))
6699
220077
(16)
(13)
−
−
14
−
2
(49)
(62)
(8)
16
(6)
36
38
(24)
−−
−−
4422
66
−−
−−
−−
−−
4488
−−
−−
−−
22
22
5500
−
−
(33)
(2)
−
−
−
−
(35)
−
(2)
−
(1)
(3)
(38)
(1)
(2)
(3)
For the year ended October 31, 2018, certain amounts have been reclassified.
As at October 31, 2019, the Consolidated Balance Sheet includes a negligible amount in deferred tax assets related to share issuance costs ($5 million as at October 31, 2018) reported in
Retained earnings on the Consolidated Statement of Changes in Equity.
As at November 1, 2018, as a result of adjustments upon IFRS 15 adoption, Deferred tax assets and Retained earnings increased by $1 million.
National Bank of Canada
193
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 24 – 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
22001199
556622
((55))
555577
2018
324
(25)
299
According to forecasts, which are based on information available on October 31, 2019, 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, 2019, the total amount of temporary differences, unused tax loss carryforwards and unused tax credits for which no deferred tax asset has
been recognized was $508 million ($369 million as at October 31, 2018).
As at October 31, 2019, 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 $3,184 million ($1,972 million as at October 31, 2018).
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
NNoottiiccee ooff AAsssseessssmmeenntt
$$
22,,778844
774411
((220088))
((1177))
((6677))
1133
((227799))
446622
22001199
%%
110000..00
2266..66
((77..55))
((00..66))
((22..44))
00..55
((1100..00))
1166..66
$
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
In June 2019, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2014.
In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $220 million (including provincial tax and interest) in
respect of certain Canadian dividends received by the Bank during the 2013 and 2012 taxation years.
The transactions to which the above-mentioned reassessments relate are similar to those prospectively addressed by income tax legislation enacted as a result
of the 2015 Canadian federal budget.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2014 in regard to activities similar to those that were the subject of the
above-mentioned 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, 2019.
194
194
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2255 –– EEaarrnniinnggss PPeerr SShhaarree
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
22001199
2018
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree
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)
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree (dollars)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
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)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree (dollars)
22,,225566
111166
22,,114400
333355,,110044
66..3399
22,,114400
333355,,110044
22,,552266
333377,,663300
66..3344
2,145
105
2,040
339,372
6.01
2,040
339,372
3,868
343,240
5.94
(1)
For the year ended October 31, 2019, the calculation of the diluted earnings per share excluded an average number of 1,775,598 options outstanding with a weighted average exercise price
of $64.14 (1,621,740 options outstanding with a weighted average exercise price of $64.14 for the year ended October 31, 2018), as the exercise price of these options was greater than the
average price of the Bank’s common shares.
NNoottee 2266 –– GGuuaarraanntteeeess,, CCoommmmiittmmeennttss aanndd CCoonnttiinnggeenntt LLiiaabbiilliittiieess
GGuuaarraanntteeeess
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
22001199
55,,223311
55,,665555
228800
2018
4,353
4,878
227
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, refer to Note 7 to these consolidated financial statements.
LLeetttteerrss ooff GGuuaarraanntteeee
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.
BBaacckkssttoopp LLiiqquuiiddiittyy aanndd CCrreeddiitt EEnnhhaanncceemmeenntt FFaacciilliittiieess
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, 2019, the notional amount of the global-style backstop liquidity
facilities totalled $2.6 billion ($2.6 billion as at October 31, 2018), 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.
National Bank of Canada
195
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 26 – 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, 2019 and 2018, 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, 2019 ($2.6 billion
as at October 31, 2018). As at October 31, 2019, the Bank held $13 million ($7 million as at October 31, 2018) of this commercial paper and, consequently, the
maximum potential amount of future payments was $2.6 billion ($2.6 billion as at October 31, 2018).
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, 2019, the notional amount of the overnight uncommitted liquidity facility amounted to $3.0 billion ($2.3 billion as at October
31, 2018). As at October 31, 2019 and 2018, no amount had been drawn.
SSeeccuurriittiieess LLeennddiinngg
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.
OOtthheerr IInnddeemmnniiffiiccaattiioonn AAggrreeeemmeennttss
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, 2019 and
2018, 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.
CCoommmmiittmmeennttss
CCrreeddiitt IInnssttrruummeennttss
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)
22001199
55,,223311
116633
77,,663300
6622,,112244
2018
4,353
142
7,874
57,794
(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.
FFiinnaanncciiaall AAsssseettss RReecceeiivveedd aass CCoollllaatteerraall
As at October 31, 2019, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $55.3 billion ($57.5 billion
as at October 31, 2018). 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.
196
6
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
OOtthheerr CCoommmmiittmmeennttss
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
$92 million as at October 31, 2019 ($99 million as at October 31, 2018). In addition, through one of its subsidiaries, the Bank purchases retail loans originated
by other financial institutions at market value at the time of purchase. As at October 31, 2019, the Bank had commitments to purchase loans of up to $1.6 billion.
PPlleeddggeedd AAsssseettss
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
22001199
2018
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
TToottaall
550022
11,,005522
22,,882222
4411,,994466
2233,,229999
1100,,330000
44
7799,,992255
502
1,130
1,652
41,378
22,083
8,995
125
75,865
(1)
(2)
Includes assets pledged as collateral for Large Value Transfer System (LVTS) activities.
The Bank has a covered bond program. For additional information, see Notes 13 and 27 to these consolidated financial statements.
CCoonnttiinnggeenntt LLiiaabbiilliittiieess
MMaappllee FFiinnaanncciiaall GGrroouupp IInncc..
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.
Maple Bank GmbH (Maple 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 GmbH and some of its former employees, primarily during taxation years 2006 to 2010. The German authorities have alleged
that these trading activities, often referred to as “cum/ex trading,” 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. At that time, the Bank announced that if it were determined that portions of the
dividends it received from Maple could be reasonably attributed to tax fraud by Maple GmbH, arrangements would be made to repay those amounts to the
relevant authority.
On February 6, 2016, the German Federal Financial Supervisory Authority, BaFin, placed a moratorium on the business activities of Maple GmbH preventing it
from carrying out its normal business activities. 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. 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.
While there has not yet been a determination of tax fraud on the part of Maple GmbH or its employees, in the insolvency proceedings of Maple GmbH the German
finance office issued a declaration about the result of the tax audit at Maple GmbH and about the relevant tax consequences of the cum/ex trading and concluded
a final tax claim of the tax authorities against the insolvency administrator. This claim was approved by the Maple GmbH creditor assembly.
The Bank has been in contact with the German prosecutors, who have confirmed that, in their view based upon the evidence they have considered since the
occurrence of the insolvency, the Bank was not involved in any respect with the alleged tax fraud undertaken by Maple GmbH nor was it negligent in failing to
identify that alleged fraud. Further to discussions between the Bank and the German prosecutors concerning the amounts deemed attributable to the alleged
tax fraud, the Bank paid 7.7 million euros to the German tax authorities on November 19, 2019.
The Bank has been engaging in discussions with the bankruptcy and insolvency administrators of relevant Maple entities regarding potential claims they may
assert against Maple’s former shareholders in relation to the insolvency of Maple and its subsidiaries. The Bank does not see a legal basis for any such liability
but is nevertheless continuing discussions at this time. If any payments are required, they are not expected to be material to the Bank’s financial position.
National Bank of Canada
197
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 26 – Guarantees, Commitments and Contingent Liabilities (cont.)
LLiittiiggaattiioonn
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 proceedings 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 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.
Defrance
On January 21, 2019, the Quebec Superior Court authorized a class action against the Bank and several other Canadian financial institutions. The originating
application was served to the Bank on April 23, 2019. The class action was initiated on behalf of consumers residing in Quebec. The plaintiffs allege that non-
sufficient funds charges, billed by all of the defendants when a payment order is refused due to non-sufficient funds, are illegal and prohibited by the Consumer
Protection Act. The plaintiffs are claiming, in the form of damages, the repayment of these charges as well as punitive damages.
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 results of operation for a particular period, it would not have a material adverse impact on the Bank’s consolidated
financial position.
198
198
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2277 –– SSttrruuccttuurreedd EEnnttiittiieess
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.
NNoonn--CCoonnssoolliiddaatteedd SSttrruuccttuurreedd EEnnttiittiieess
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 26. 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.
National Bank of Canada
199
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Structured Entities (cont.)
The following table presents the carrying amounts of the assets and liabilities relating to the Bank’s interests in non-consolidated structured entities, the Bank’s
maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada Housing Trust is not
presented. For additional information, see Note 8 to these consolidated financial statements.
AAsssseettss oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Securities at fair value through profit or loss
Securities at amortized cost
Derivative financial instruments
As at October 31, 2018
LLiiaabbiilliittiieess oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Derivative financial instruments
As at October 31, 2018
MMaaxxiimmuumm eexxppoossuurree ttoo lloossss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2018
TToottaall aasssseettss ooff tthhee ssttrruuccttuurreedd eennttiittiieess
As at October 31, 2018
MMuullttii--sseelllleerr
ccoonndduuiittss(1)
IInnvveessttmmeenntt
ffuunnddss(2)
PPrriivvaattee
iinnvveessttmmeennttss(3)
AAss aatt OOccttoobbeerr 3311,, 22001199
AAsssseett--bbaacckkeedd
ssttrruuccttuurreedd eennttiittiieess(4)
1133
−−
22
1155
7
−−
26
1155
22,,660088
22,,662233
2,557
22,,664477
2,589
554400
−−
−−
554400
139
−−
−
554400
−−
554400
139
11,,997700
1,054
8811
−−
−−
8811
86
−−
−
8811
−−
8811
86
448822
492
−−
22,,446622
33
22,,446655
1,450
−−
−
22,,446655
224422
22,,770077
1,552
66,,550066
3,612
(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, 2019, the notional
committed amount of the global-style liquidity facilities totalled $2.6 billion ($2.6 billion as at October 31, 2018), 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, 2018). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2019, the Bank held $13 million in commercial paper ($7 million as at October 31, 2018) and, consequently, the maximum
potential amount of future payments as at October 31, 2019 is limited to $2.6 billion ($2.6 billion as at October 31, 2018), 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.
CCoonnssoolliiddaatteedd SSttrruuccttuurreedd EEnnttiittiieess
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.
200
0
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold uninsured
residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. The Bank acts as manager of the partnership and has
decision-making authority over its relevant activities in accordance with the contractual terms governing the covered bond legislative program. In addition, the
Bank is able, in accordance with the contractual terms governing the covered bond legislative program, to affect the variable returns of the partnership, which
are directly related to the return on the mortgage loan portfolio and the interest on the loans from the Bank. Consequently, the Bank controls the partnership
and consolidates it.
NBC Asset Trust
The Bank created NBC Asset Trust for its funding and capital management needs. The securities issued by this trust constitute innovative capital instruments
and are eligible as additional Tier 1 capital, but because these instruments do not satisfy the non-viability contingent capital requirements, they are to be phased
out at a rate of 10% per year between 2013 and 2022. For additional information, see Note 19 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 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
CCoonnssoolliiddaatteedd ssttrruuccttuurreedd eennttiittiieess
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)
IInnvveessttmmeennttss
aanndd ootthheerr aasssseettss
884499
228866
1166,,116677
−−
770000
223322
1188,,223344
22001199
TToottaall
aasssseettss(1)
11,,776655
331111
1166,,551155
−−
11,,006633
223322
1199,,888866
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
(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, 2019, the total amount of
transferred mortgage loans was $16.2 billion ($12.9 billion as at October 31, 2018), and the total amount of covered bonds of $9.5 billion was recognized in Deposits on the Consolidated
Balance Sheet ($8.3 billion as at October 31, 2018). For additional information, see Note 13 to these consolidated financial statements.
As at October 31, 2018, the underlying asset was the Bank’s head office building, which was sold on July 30, 2019. For additional information, see Note 10 to these consolidated financial
statements.
The underlying assets are insured and uninsured residential mortgage loans of the Bank. As at October 31, 2019, insured loans amounted to $12 million ($18 million as at October 31, 2018).
The average maturity of the underlying assets is one year. For additional information, see Note 19 to these consolidated financial statements.
The underlying assets consist of a loan portfolio.
National Bank of Canada
1
201
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2288 –– RReellaatteedd PPaarrttyy DDiisscclloossuurreess
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 23 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.
RReellaatteedd PPaarrttyy TTrraannssaaccttiioonnss
As at October 31
AAsssseettss
Mortgage loans and other loans
Other
LLiiaabbiilliittiieess
Deposits
Other
Key officers
and directors(1)
2018
36
−
59
−
22001199
33
−−
3399
−−
22001199
333399 (2)
−−
663322 (3)
33
Related entities
2018
(2)
298
8
(3)
511
16
(1)
(2)
(3)
As at October 31, 2019, key officers, directors and their immediate family members were holding $69 million of the Bank’s common and preferred shares ($67 million as at October 31, 2018).
As at October 31, 2019, mortgage loans and other loans consisted of: (i) no loans to the Bank’s associates and joint ventures (no loans as at October 31, 2018) and (ii) $339 million in loans
to entities over which the Bank’s key officers, directors or their immediate family members exercise control or significant influence through significant voting power ($298 million as at
October 31, 2018).
As at October 31, 2019, deposits consisted of: (i) $395 million in deposits from the Bank’s associates and joint ventures ($306 million as at October 31, 2018) and (ii) $237 million in deposits
from entities over which the Bank’s key officers, directors or their immediate family members exercise control or significant influence through significant voting power ($205 million as at
October 31, 2018).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions similar to
those offered to non-related third parties. These agreements did not have a significant impact on the Bank’s results. The Bank also offers a deferred stock unit
plan to directors who are not Bank employees. For additional information, see Notes 9, 22 and 27 to these consolidated financial statements.
CCoommppeennssaattiioonn ooff KKeeyy OOffffiicceerrss aanndd DDiirreeccttoorrss
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
22001199
2233
2255
2018
22
25
202
2
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
PPrriinncciippaall SSuubbssiiddiiaarriieess ooff tthhee BBaannkk(1)
Name
Business activity
Principal office address
CCaannaaddaa aanndd UUnniitteedd SSttaatteess
National Bank Acquisition Holding Inc.
National Bank Financial Inc.
NBF 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
OOtthheerr ccoouunnttrriieess
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
Investment dealer
Insurance
Trustee
Trustee
Real estate
Mutual funds dealer
Holding company
Commercial bank
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
AAss aatt OOccttoobbeerr 3311,, 22001199
Investment
at cost
Voting
shares(2)
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
1,464
238
195
80
585
31
22
5
377
3
(1)
(2)
Excluding consolidated structured entities. For additional information, see Note 27 to these consolidated financial statements.
The Bank’s percentage of voting rights in these subsidiaries.
NNoottee 2299 –– MMaannaaggeemmeenntt ooff tthhee RRiisskkss AAssssoocciiaatteedd WWiitthh FFiinnaanncciiaall IInnssttrruummeennttss
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, 2019. 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, 2019 are an integral part of these consolidated
financial statements.
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff BBaallaannccee SShheeeett IItteemmss aanndd
OOffff--BBaallaannccee--SShheeeett CCoommmmiittmmeennttss
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2019 and 2018. 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 commitments to purchase loans and contracts for
outsourced information technology services. Most of the lease commitments are related to operating leases.
National Bank of Canada
3
203
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 29 –– Management of the Risks Associated With Financial Instruments (cont.)
AAsssseettss
CCaasshh aanndd ddeeppoossiittss
wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr
rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
OOtthheerr
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
11 mmoonntthh
oorr lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
99 mmoonntthhss
OOvveerr 99
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr 55
yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22001199
77,,330011
11,,663388
112211
111111
3333
−−
−−
−−
44,,449944
1133,,669988
11,,222288
3366
3333
11,,229977
664477
1144
8844
774455
665588
2266
226622
994466
225566
55
333311
559922
441111
11
110055
551177
44,,221155
77,,445511
66,,887722
4400,,008855
6611,,882233
33,,221133
11,,770044
99,,113322
44,,774499
55,,885533
1188,,005533
11,,998822
11,,338833
1100,,223377
662222
−−
4400,,770077
1100,,664488
99,,775555
8822,,222266
77,,224477
11,,336655
992222
449955
−−
11,,331177
−−
−−
66,,337777
1177,,772233
773344
225533
11,,116611
443300
11,,995599
880033
33,,009933
997722
22,,889933
884433
1100,,667744
33,,336677
3322,,660011
1111,,557766
33,,337755
33,,440077
88,,446699
22,,777711
22,,999955
33,,220033
22,,222222
66,,001166
1133,,444455
22,,777711
66,,113388
771100
4455
−−
−−
−−
−−
−−
1155,,559944
55,,007722
55,,880022
77,,226688
55,,995588
2200,,005577
5577,,662222
99,,555533
668811
1155,,229933
22,,332222
88,,770077
5577,,117711
3366,,994444
22,,332222
5500,,559999
−−
((667788))
2266,,332255
66,,889933
((667788))
115533,,225511
556644
661144
448833
226622
119944
884477
22,,003399
33,,112266
−−
88,,112299
11,,442255
11,,998899
3333,,442288
114422
775566
99,,557766
8877
557700
88,,336611
8888
335500
88,,881166
8888
228822
66,,779900
226666
11,,111133
3311,,661199
110077
22,,114466
7777,,882211
3388
33,,116644
2222,,995544
338855
449900
11,,441122
11,,440066
449977
44,,119900
8822,,009933
338855
449900
11,,441122
11,,440066
22,,773388
1144,,556600
228811,,445588
(1)
Amounts collectible on demand are considered to have no specified maturity.
204
4
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
11 mmoonntthh
oorr lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
99 mmoonntthhss
OOvveerr 99
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr 55
yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22001199
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss(1)(2)
Personal
Business and government
Deposit-taking institutions
OOtthheerr
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)
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments
Other contracts(9)
11,,771166
2200,,225522
771111
2222,,667799
66,,113388
550044
77,,449933
779933
−−
−−
11,,229988
1166,,222266
−−
11,,998833
66,,005500
6699
88,,110022
771100
117766
11,,228811
776633
11,,449911
−−
333300
44,,775511
−−
33,,004455
66,,663300
7799
99,,775544
4455
119955
22,,888811
555566
999955
887744
114411
55,,668877
−−
22,,669966
44,,777788
2299
77,,550033
−−
3344
22,,774433
229922
888811
−−
6633
44,,001133
−−
33,,004422
22,,772233
227755
66,,004400
−−
449955
−−
221144
337755
−−
3366
11,,112200
−−
66,,110055
66,,441111
−−
1122,,551166
77,,227766
1111,,770066
55
1188,,998877
22,,660066
66,,221133
4466
88,,886655
3311,,559966
6600,,550033
33,,002211
9955,,112200
6600,,006655
112255,,226666
44,,223355
118899,,556666
−−
−−
−−
−−
66,,889933
331155
22,,773388
55,,114477
33,,224455
1122,,884499
−−
771122
33,,664400
−−
5588
44,,772255
−−
−−
11,,995599
1100,,662233
3377
8844
1155,,444411
−−
−−
11,,556633
33,,330077
−−
229922
1100,,330099
777733
3388,,990055
1122,,885533
1155,,444411
1111,,551166
77,,116600
1177,,224411
3344,,442288
1199,,994477
333355
11,,443300
441111
11,,001199
888888
11,,225588
5533
−−
−−
11,,991166
1155
44,,555522
88
115588
1177
228899
33,,001177
44,,110033
2266
552233
1155
55,,006644
2277
442233
−−
44,,001199
2266
338800
−−
44,,225588
−−
1100,,332266
9999
119988
224499
225577
−−
778844
223399
−−
77,,550022
−−
2211,,990000
66,,885522
−−
−−
22,,996644
1133,,771111
2211,,331122
991111
55,,226666
7755,,998833
−−
777733
1155,,113366
112233,,996677
1155,,113366
228811,,445588
−−
77,,663300
55,,339944
77,,663300
22,,660088
2277,,110022
55,,665555
6622,,112244
−−
−−
669911
22,,222288
(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.
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 $3.0 billion.
These amounts include $45.2 billion that is unconditionally revocable at the Bank’s discretion at any time.
These amounts include $0.3 billion in contractual commitments related to the head office building under construction.
National Bank of Canada
5
205
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 29 –– Management of the Risks Associated With Financial Instruments (cont.)
AAsssseettss
CCaasshh aanndd ddeeppoossiittss
wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr
rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
OOtthheerr
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
1,972
1,706
1,039
1,429
1,457
5,634
10,501
5,443
26,636
55,817
3
−
1,975
183
10
1,899
7
9
1,055
66
−
1,495
68
730
2,255
714
814
7,162
1,892
6,162
18,555
2,502
573
8,518
233
−
26,869
5,668
8,298
69,783
7,759
1,242
2,154
271
790
2,151
−
−
3,792
18,159
724
365
950
395
1,583
622
2,653
1,070
2,105
762
10,124
3,914
32,675
10,509
2,085
3,116
7,557
2,454
2,246
3,672
2,206
4,244
12,838
2,402
6,019
670
112
−
−
−
−
−
14,665
4,469
4,563
7,395
5,073
18,282
56,022
7,603
752
16,604
2,325
8,987
53,651
37,357
2,325
46,606
−
(658)
28,010
6,801
(658)
146,082
642
884
718
375
287
951
2,005
2,746
−
8,608
574
1,216
35,159
108
992
9,392
66
784
8,597
61
436
9,598
131
418
8,555
119
1,070
28,675
31
2,036
76,613
54
2,800
18,921
645
601
1,412
1,314
1,967
5,939
66,961
645
601
1,412
1,314
3,111
15,691
262,471
(1)
Amounts collectible on demand are considered to have no specified maturity.
206
6
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss(1)(2)
Personal
Business and government
Deposit-taking institutions
OOtthheerr
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)
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to(9):
Lease commitments
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
7
18
16
12
23
18
22
17
22
32
−
3,839
86
102
−
6,777
218
101
−
304
254
−
14,355
113,570
14,355
262,471
−
7,874
4,495
7,874
2,550
26,708
4,878
57,794
−
−
648
300
(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.
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 $42.9 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, 2018.
National Bank of Canada
7
207
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 3300 –– SSeeggmmeenntt DDiisscclloossuurreess
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the year beginning November 1, 2018. This presentation
reflects the fact that advisor banking service activities, which had previously been presented in the Wealth Management segment, are now presented in the
Personal and Commercial segment. The Bank made this change to better align the monitoring of its activities with its management structure.
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as
insurance operations.
WWeeaalltthh MMaannaaggeemmeenntt
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.
FFiinnaanncciiaall MMaarrkkeettss
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.
UU..SS.. SSppeecciiaallttyy FFiinnaannccee aanndd IInntteerrnnaattiioonnaall ((UUSSSSFF&&II))
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.
OOtthheerr
This heading encompasses treasury activities, liquidity management, Bank funding, asset/liability management activities, certain non-recurring items and the
unallocated portion of corporate units.
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.
RReessuullttss bbyy BBuussiinneessss SSeeggmmeenntt
Year ended October 31(1)
Net interest income(2)
Non-interest income(2)(3)
Total revenues
Non-interest expenses(4)
Contribution
Provisions for credit losses
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
2018
22001199
Wealth
Management
2018
22001199
22,,338833
11,,006699
33,,445522
11,,881166
11,,663366
223377
2,276
1,033
3,309
1,782
1,527
228
11,,339999
337722
11,,002277
−−
1,299
347
952
−
447700
11,,227733
11,,774433
11,,006677
667766
−−
667766
117777
449999
−−
446
1,243
1,689
1,058
631
1
630
166
464
−
22001199
447744
11,,227766
11,,775500
774433
11,,000077
3300
997777
226600
771177
−−
Financial
Markets
2018
22001199
USSF&I
2018
409
1,334
1,743
697
1,046
4
1,042
278
764
−
665566
5599
771155
228855
443300
8800
335500
7711
227799
4400
584
55
639
251
388
94
294
72
222
38
22001199
((338877))
115599
((222288))
339900
((661188))
−−
((661188))
((441188))
((220000))
2266
Other
2018
(333)
119
(214)
275
(489)
−
(489)
(319)
(170)
49
22001199
33,,559966
33,,883366
77,,443322
44,,330011
33,,113311
334477
22,,778844
446622
22,,332222
6666
Total
2018
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
87
11,,002277
952
111122,,779988 106,857
449999
66,,221199
464
6,167
771177
111122,,449933
764
100,721
223399
1100,,998855
184
9,270
((222266))
4433,,666677
(219)
42,925
22,,225566
228866,,116622
2,145
265,940
(1)
(2)
(3)
(4)
For the year ended October 31, 2018, certain amounts have been reclassified, mainly amounts related to advisor banking service activities, which have been transferred from the Wealth
Management segment to the Personal and Commercial segment.
For the year ended October 31, 2019, Net interest income was grossed up by $195 million ($144 million in 2018), Non-interest income was grossed up by $135 million ($101 million in 2018),
and an equivalent amount was recognized in Income taxes (recovery). The effect of these adjustments is reversed under the Other heading.
For the Other heading of segment results, the Non-interest income item includes a $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises
and equipment, and a $33 million loss resulting from the fair value measurement of an investment.
For the Other heading of segment results, the Non-interest expenses item includes $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in
provisions for onerous contracts, an $11 million charge related to Maple, and $10 million in severance pay.
208
8
National Bank of Canada2019 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReessuullttss bbyy GGeeooggrraapphhiicc SSeeggmmeenntt
Year ended October 31
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)
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
22001199
22,,446666
33,,550022
55,,996688
33,,993311
22,,003377
226677
11,,777700
330033
11,,446677
3366
11,,443311
223311,,666677
Canada
2018
United States
2018
22001199
2,531
3,488
6,019
3,750
2,269
233
2,036
412
1,624
54
1,570
218,647
555511
8844
663355
221100
442255
6688
335577
5588
229999
3300
226699
2200,,441111
469
108
577
205
372
81
291
85
206
33
173
20,503
22001199
557799
225500
882299
116600
666699
1122
665577
110011
555566
−−
555566
3344,,008844
Other
2018
382
188
570
108
462
13
449
47
402
−
402
26,790
22001199
33,,559966
33,,883366
77,,443322
44,,330011
33,,113311
334477
22,,778844
446622
22,,332222
6666
22,,225566
228866,,116622
Total
2018
3,382
3,784
7,166
4,063
3,103
327
2,776
544
2,232
87
2,145
265,940
(1)
(2)
For Canada, the Non-interest income item includes a $79 million gain on disposal of Fiera Capital Corporation shares, a $50 million gain on disposal of premises and equipment, and a
$33 million loss resulting from the fair value measurement of an investment.
For Canada, the Non-interest expenses item includes $57 million in impairment losses on premises and equipment and on intangible assets, $45 million in provisions for onerous contracts,
an $11 million charge related to Maple and $10 million in severance pay.
NNoottee 3311 –– AAccqquuiissiittiioonn
On September 27, 2019, the Bank acquired the entire remaining non-controlling interest in the Cambodian subsidiary Advanced Bank of Asia Limited (ABA Bank)
for $84 million. Following this transaction, ABA Bank became a wholly owned subsidiary of the Bank.
NNoottee 3322 –– EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett DDaattee
On November 19, 2019, the Bank paid 7.7 million euros to the German tax authorities in relation to the Maple case. This payment was made upon a final tax
claim of the tax authorities against the insolvency administrator that was approved by the Maple GmbH creditor assembly. As at October 31, 2019, a provision
of $11 million was recorded to reflect this adjusting event after the Consolidated Balance Sheet date. For additional information, see Note 26 to these
consolidated financial statements.
National Bank of Canada
9
209
National Bank of Canada2019 Annual Report
Supplementary
Information
Statistical Review
Glossary of Financial Terms
Information for Shareholders
221122
221144
221166
Supplementary Information
Statistical Review
As at October 31(1)
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett ddaattaa
Cash and deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans
Other assets
TToottaall aasssseettss
Deposits
Other liabilities
Non-controlling interests
Subordinated debt
Share capital
Preferred
Common
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interests
TToottaall lliiaabbiilliittiieess aanndd eeqquuiittyy
22001199
2018
2017
2016
2015
2014
2013
2012
2011
2010
1133,,669988
8822,,222266
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
1177,,772233
115533,,225511
1144,,556600
228811,,445588
118899,,556666
7755,,998833
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
777733
747
9
1,012
1,522
1,881
2,426
2,470
2,000
22,,445500
22,,994499
5511
99,,331122
1166
335588
228811,,445588
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
145,302
Average assets
228866,,116622
265,940
248,351
235,913
222,929
206,680
193,509
181,344
165,942
140,360
Net impaired loans(2)(3) under IFRS 9
Net impaired loans(3) under IAS 39
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee ddaattaa
Net interest income
Non-interest income
TToottaall rreevveennuueess
Provisions for credit losses
Non-interest expenses
Income taxes
Non-controlling interests
NNeett iinnccoommee
Non-controlling interests
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’ss
sshhaarreehhoollddeerrss
445500
404
206
281
254
248
183
179
175
162
33,,559966
33,,883366
77,,443322
334477
44,,330011
446622
22,,332222
6666
22,,225566
3,382
3,784
7,166
327
4,063
544
2,232
87
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
2,145
1,940
1,181
1,549
1,469
1,449
1,536
1,194
(1)
(2)
(3)
The figures for 2010 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.
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.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and, in this table, the net impaired loans presented exclude POCI loans.
Includes customers’ liability under acceptances.
212
212
National Bank of Canada2019 Annual Report
Supplementary Information
Statistical Review
As at October 31(1)
22001199
2018
2017
2016
2015
2014
2013
2012
2011
2010
Number of common shares(2)
(thousands)
Number of common
shareholders on record
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
FFiinnaanncciiaall rraattiiooss
Return on common
shareholders’ equity
Return on average assets
RReegguullaattoorryy rraattiiooss uunnddeerr
BBaasseell IIIIII
Capital ratios(3)
CET1(4)
Tier 1(4)
Total(4)
Leverage ratio(4)
OOtthheerr iinnffoorrmmaattiioonn
Number of employees(9)(10)
Branches in Canada
Banking machines in Canada
333344,,117722
335,071
339,592
338,053
337,236
329,297
325,983
322,617
320,948
325,544
2200,,889944
21,325
21,542
21,966
22,152
22,394
22,737
23,180
23,588
23,598
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
66..3399
66..3344
22..6666
6688..0022
5544..9977
6688..0022
3366..8899
––
––
––
––
––
––
––
11..00115566
00..99775500
11..44000000
11..33550000
11..11112255
11..11550000
11..22337755
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6.01 $
5.44
5.94 $
2.44 $
5.38
2.28
65.63 $
58.69 $
59.76 $
34.40 $
62.74
46.83
62.61
31.51
–
–
–
–
–
–
– $
1.0250 $
0.9750 $
1.4000 $
1.3500 $
1.1125 $
0.9310
0.5323
–
–
–
–
–
–
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
–
–
– $
–
–
–
0.9500 $
1.0250 $
0.9750 $
1.1373
0.5733
–
–
–
–
–
1.5000
–
–
–
0.9500
1.0250
1.0760
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
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
4.31 $
1.70 $
4.58 $
1.54 $
3.37 $
1.37 $
2.97
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
0.2444 $
1.2125 $
1.5000 $
1.0078 $
1.6500 $
1.6500 $
0.9728
–
–
–
–
–
–
–
1.4625 $
1.2125 $
1.5000 $
1.3438 $
1.6500 $
1.6500 $
–
–
–
–
–
–
–
–
1.4625 $
1.2125 $
1.5000 $
1.3438 $
1.6500 $
1.6500 $
1.4625
1.2125
1.5000
1.3438
1.6500
1.6500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1188..00 %%
00..8811 %%
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 %
1111..77 %%
1155..00 %%
1166..11 %%
44..00 %%
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 %
2244,,555577
442222
993399
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
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
The figures for 2010 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.
Includes employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2019.
National Bank of Canada
213
National Bank of Canada2019 Annual Report
Supplementary Information
GGlloossssaarryy ooff FFiinnaanncciiaall TTeerrmmss
AAcccceeppttaanncceess
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.
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
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.
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn
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.
AAsssseettss uunnddeerr mmaannaaggeemmeenntt
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.
AAvveerraaggee iinntteerreesstt--bbeeaarriinngg aasssseettss
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.
BBaassiiss ppooiinntt
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
CCoommmmoonn EEqquuiittyy TTiieerr 11 ((CCEETT11)) ccaappiittaall rraattiioo
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.
DDeerriivvaattiivvee ffiinnaanncciiaall iinnssttrruummeennttss
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.
DDiivviiddeenndd ppaayyoouutt rraattiioo
Common dividends as a percentage of net income after preferred share
dividends.
EEccoonnoommiicc ccaappiittaall
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.
EEffffiicciieennccyy rraattiioo
Non-interest expenses as a percentage of total revenue, the efficiency ratio
measures the efficiency of the Bank’s operations.
FFaaiirr vvaalluuee
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).
HHeeddggiinngg
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.
IImmppaaiirreedd llooaannss
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.
LLeevveerraaggee rraattiioo
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.
LLiiqquuiiddiittyy ccoovveerraaggee rraattiioo
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.
MMaasstteerr nneettttiinngg aaggrreeeemmeenntt
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.
NNeett iinntteerreesstt mmaarrggiinn
Net interest income as a percentage of average interest-bearing assets.
214
214
National Bank of Canada2019 Annual Report
Supplementary Information
Glossary of Financial Terms
OOffffiiccee ooff tthhee SSuuppeerriinntteennddeenntt ooff FFiinnaanncciiaall IInnssttiittuuttiioonnss ((CCaannaaddaa)) ((OOSSFFII))
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.
SSttrruuccttuurreedd eennttiittyy
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.
OOppeerraattiinngg lleevveerraaggee
Operating leverage is the difference between the growth rate for total revenues
and the growth rate for non-interest expenses.
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
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.
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
The amount charged to income necessary to bring the allowances for credit
losses to a level determined appropriate by management.
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy ((RROOEE))
Net income, less dividends on preferred shares, expressed as a percentage of
the average value of common shareholders’ equity.
RRiisskk--wweeiigghhtteedd aasssseettss
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.
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss
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.
SSeeccuurriittiieess ssoolldd uunnddeerr rreeppuurrcchhaassee aaggrreeeemmeennttss
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.
TTiieerr 11 ccaappiittaall rraattiioo
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.
TToottaall ccaappiittaall rraattiioo
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
less regulatory
adjustments, by the corresponding risk-weighted assets.
is calculated by dividing total capital,
TToottaall sshhaarreehhoollddeerr rreettuurrnn
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.
VVaalluuee--aatt--RRiisskk ((VVaaRR))
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.
National Bank of Canada
215
National Bank of Canada2019 Annual Report
Supplementary Information
IInnffoorrmmaattiioonn ffoorr SShhaarreehhoollddeerrss
DDeessccrriippttiioonn ooff SShhaarree CCaappiittaall
DDiivviiddeennddss DDeeccllaarreedd oonn CCoommmmoonn SShhaarreess DDuurriinngg FFiissccaall 22001199
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 $300 million. As at
October 31, 2019, the Bank had a total of 334,172,411 common shares and
98,000,000 first preferred shares issued and outstanding.
Record date
Payment date
Dividend per share ($)
December 31, 2018
March 25, 2019
June 25, 2019
September 30, 2019
February 1, 2019
May 1, 2019
August 1, 2019
November 1, 2019
0.65
0.65
0.68
0.68
SSttoocckk EExxcchhaannggee LLiissttiinnggss
DDiivviiddeennddss DDeeccllaarreedd oonn PPrreeffeerrrreedd SShhaarreess DDuurriinngg FFiissccaall 22001199
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
Common shares
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Ticker symbol
NA
NA.PR.S
NA.PR.W
NA.PR.X
NA.PR.A
NA.PR.C
NA.PR.E
NA.PR.G
NNuummbbeerr ooff RReeggiisstteerreedd SShhaarreehhoollddeerrss
As at October 31, 2019, there were 20,894 common shareholders recorded in
the Bank’s common share register.
DDiivviiddeennddss
DDiivviiddeenndd DDaatteess iinn FFiissccaall 22002200
(subject to approval by the Board of Directors of the Bank)
Record date
Common shares
December 30, 2019
March 30, 2020
June 29, 2020
September 28, 2020
Preferred shares,
Series 30, 32, 34, 36, 38, 40 and 42
January 6, 2020
April 6, 2020
July 6, 2020
October 6, 2020
Payment date
February 1, 2020
May 1, 2020
August 1, 2020
November 1, 2020
February 15, 2020
May 15, 2020
August 15, 2020
November 15, 2020
Jan. 7, 19
Apr. 5, 19
Jul. 8, 19
Oct. 7, 19
Feb. 15, 19
May 15, 19
Aug. 15, 19
Nov. 15, 19
0.2563 0.2438 0.3500 0.3375 0.2781 0.2875 0.3094
0.2562 0.2437 0.3500 0.3375 0.2782 0.2875 0.3094
0.2516 0.2438 0.3500 0.3375 0.2781 0.2875 0.3093
0.2515 0.2437 0.3500 0.3375 0.2781 0.2875 0.3094
Dividends paid are “eligible dividends” in accordance with the Income Tax Act
(Canada).
DDiivviiddeenndd RReeiinnvveessttmmeenntt aanndd SShhaarree PPuurrcchhaassee
PPllaann
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 $1 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.
DDiirreecctt DDeeppoossiitt
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.
216
216
National Bank of Canada2019 Annual Report
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be held on
April 24, 2020, at National Bank of Canada’s head Office in Montreal, Quebec,
Canada.
PPuubblliicc AAccccoouunnttaabbiilliittyy SSttaatteemmeenntt
The 2019 Social Responsibility Report will be available in March 2020 on the
Bank’s website at nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
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:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
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 13 of this
Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this report
include National Bank of Canada, Private Wealth 1859, CashPerformer, NBC
CapS II, NBC Asset Trust, NBC Capital Trust, and National Bank All-in-One and
their respective logos. Certain trademarks owned by third parties are also
mentioned in this report.
PPoouurr oobbtteenniirr uunnee vveerrssiioonn ffrraannççaaiissee dduu RRaappppoorrtt aannnnuueell,,
vveeuuiilllleezz vvoouuss aaddrreesssseerr àà ::
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
LLeeggaall DDeeppoossiitt
ISBN 978-2-921835-63-3
Legal deposit – Bibliothèque et Archives nationales du Québec, 2019
Legal deposit – Library and Archives Canada, 2019
Shareholders whose shares are held by a market intermediary are asked to
contact the market intermediary concerned.
PPrriinnttiinngg
L’Empreinte
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:
Website:
investorrelations@nbc.ca
nbc.ca/investorrelations
NNoorrmmaall CCoouurrssee IIssssuueerr BBiidd
The Bank began a normal course issuer bid (NCIB) to repurchase for
cancellation up to 6,000,000 common shares for the period starting June 10,
2019 and ending June 9, 2020. 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.
National Bank of Canada is proud to help save the environment by using
EcoLogo and Forest Stewardship Council® (FSC®) certified paper.
At a Glance
Founded in 1859, National Bank of Canada offers
financial services to individuals, businesses, institutional
clients and governments across Canada. We are one
of Canada’s six systemically important banks and
among the most profitable banks on a global basis by
return on equity.
We operate through three business segments in
Canada—Personal and Commercial Banking, Wealth
Management and Financial Markets—which represent
our main sources of revenue. A fourth segment—U.S.
Specialty Finance and International—complements the
growth of our domestic operations.
We are a leading bank in our core Quebec market and
also hold leadership positions across the country in
selected activities.
We strive to meet the highest standards of social
responsibility while creating value for our shareholders.
We are proud to be recognized as an employer of
choice and for promoting diversity and inclusion.
We are headquartered in Montreal, and our securities
are listed on the Toronto Stock Exchange (TSX: NA).
Table of Contents
3 Message From the President
and Chief Executive Officer
5 Members of the Office of the President
6 Message From the Chairman of the Board
7 Members of the Board of Directors
8 Our One Mission
9 Environmental, Social and Governance (ESG)
12 Risk Disclosures
13 Management’s Discussion and Analysis
111 Audited Consolidated Financial Statements
212 Statistical Review
214 Glossary of Financial Terms
216 Information for Shareholders
2.7 million Clients(1)
25,487 Employees(2)
495 Branches(3)
1,480 Banking Machines(4)
$565 B Assets Under Administration
$281 B Total Assets
$7,432 M Total Revenues
$2,322 M Net Income
$22.7 B Market Capitalization
and Under Management
9%
23%
45%
23%
19%
26%
55%
2019 Total Revenues by
Business Segment(5)
2019 Total Revenues by
Geographic Distribution(5)
Personal and Commercial
Province of Quebec
Wealth Management
Financial Markets
Other Canadian provinces
Outside of Canada
U.S. Specialty Finance and International
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) 422 in Canada, 70 in Cambodia and 3 in the United States (Florida)
(4) 939 in Canada and 541 in Cambodia
(5) Excluding the Other heading
ANNUAL REPORT
1920
t
r
o
p
e
R
l
a
u
n
n
A
9
1
0
2
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