Annual
Report
20
20
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. 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).
2.7 million Clients(1)
26,517 Employees(2)
483 Branches(3)
1,573 Banking Machines(4)
$597 B Assets Under Administration
$332 B Total Assets
$7,927 M Total Revenues
$2,083 M Net Income
$21.5 B Market Capitalization
and Under Management
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
8 Members of the Board of Directors
9 Our One Mission
10 Environmental, Social and Governance (ESG)
13 Risk Disclosures
15 Management’s Discussion and Analysis
123 Audited Consolidated Financial Statements
226 Statistical Review
228 Glossary of Financial Terms
230 Information for Shareholders
10%
25%
42%
23%
15%
19 %
31%
54%
2020 Total Revenues by
Business Segment(5)
2020 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) 403 in Canada, 77 in Cambodia and 3 in the United States (Florida)
(4) 940 in Canada and 633 in Cambodia
(5) On a taxable equivalent basis and excluding the Other heading
Investing in
National Bank
> Canadian super-regional bank with leading franchise in Quebec
> Targeted growth strategy across Canada
> Focused international strategy delivering high returns
> Diversified business model and disciplined cost management
> Defensive credit positioning with sound geographic
and product diversification
Superior ROE (1)
2020
14.9%
15.8%(2)
Strong Growth in Income
Before Provisions for Credit
Losses and Income Taxes(3)
2019–2020
> Strong capital levels
> Superior ROE (1)
> Attractive dividend yield
+ 8.0%
Solid Capital Position(4)
As at October 31, 2020
11.8%
Industry-Leading Total Shareholder Returns
(CAGR(5) for the periods ended October 31, 2020)
Ranking(6)
National Bank
Canadian
Peers(6)
1 year
3 years
5 years
10 years
20 years
# 1
# 1
# 1
# 1
# 1
(2)%
5%
13%
11%
13%
(14)%
(2)%
6%
8%
9%
TSX
(2)%
2%
6%
5%
5%
(1 ) Based on Return on common shareholders’ equity (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 (together, the “Canadian Peers”)
(2) Excluding specified items. See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
(3) See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
(4) Common Equity Tier 1 (CET1) capital ratio
(5) Compound annual growth rate. Source: Nasdaq
(6) Among Canadian Peers, as defined above
National Bank of Canada
2020 Annual Report
1
Financial
Overview
Medium-Term Objectives and Results
Medium-term
objectives
2020
Results
2019
Results
Growth in diluted earnings per share excluding specified items(1)
5–10%
15–20%
40–50%
> 10.75%
> 3.75%
ROE excluding specified items(1)
Dividend payout ratio excluding specified items(1)
CET1 capital ratio
Leverage ratio
Financial Highlights
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Income before provisions for credit losses and income taxes(1)
Net income
Diluted earnings per share
Return on common shareholders’ equity
Dividend payout ratio
Operating results on a taxable equivalent basis and excluding specified items(1)
Total revenues on a taxable equivalent basis and excluding specified items
Income before provisions for credit losses and income taxes excluding specified items
Net income excluding specified items
Diluted earnings per share excluding specified items
Efficiency ratio on a taxable equivalent basis and excluding specified items
Dividends declared
Total assets
(1 ) See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
2
National Bank of Canada
2020 Annual Report
(4.7) %
7.1 %
15.8 %
18.0 %
46.6 %
41.6 %
11.8 %
11.7 %
4.4 %
4.0 %
2020
2019
7,927
3,382
2,083
$ 5.70
14.9 %
49.6 %
8,216
3,803
2,216
$ 6.06
53.7 %
$ 2.84
331,625
7,432
3,1 31
2,322
$ 6.34
18.0 %
41.6 %
7,666
3,488
2,328
$ 6.36
54.5 %
$ 2.66
281,458
Message From the President
and Chief Executive Officer
People First
The Right Strategic Choices
from a health and
Over the last year, the world went through extremely
financial
challenging times, both
perspective. From the onset of the COVID-19 pandemic, our
focus was on the well-being of our employees, our clients
and our communities. Our mission of putting People First
guided us in all our decisions. I am proud of the way we
adapted, which would not have been possible without the
strong engagement of our employees and the profound
transformation of the Bank over the past few years.
The evolution of our culture into a highly collaborative and
agile organization has proven to be a true competitive
advantage. This has played a key role in our ability to
adapt and perform well
through unprecedented
circumstances. I wish to sincerely thank our people and our
clients for navigating through this situation with us.
Well Positioned in a Challenging Environment
The Bank entered the crisis on a solid footing with a strong
balance sheet, strong credit quality and a defensive
positioning. Our businesses performed well
in an
unpredictable environment with revenue growth across all
segments and income before provisions for credit losses
and income taxes up 8% from last year. The Bank also
delivered an industry-leading return on equity of 15%. Our
performance in fiscal 2020 reflects the resilience of our
franchise and the sound diversification of our earnings
stream.
Over the course of the past year, we adopted a proactive
and prudent approach to provisioning, in the context of an
uncertain and evolving macroeconomic outlook. At the end
of the fiscal year, our allowances for credit losses totalled
over $1.3 billion, nearly double last year’s level. While the
economic recovery is underway, uncertainty remains. Based
on the information available today and considering our
defensive posture and the performance of our portfolios, we
are comfortable with our level of reserves and are well
positioned to continue supporting our clients.
Amidst all the market volatility in 2020, the Bank once again
delivered industry-leading total returns to its shareholders in
the one-, three-, five-, ten- and twenty-year periods.
Our performance during the pandemic has confirmed that
we made the right strategic choices in terms of capital
allocation, business mix and risk management. With four
strong pillars, we are well-positioned to pursue growth
across our businesses in 2021.
In Personal and Commercial Banking, our digital and
cultural transformation was key to our ability to offer our
clients extraordinary support. The commitment and agility
of our teams, the depth of our relationships and the quality
of our advice were key differentiators in how we supported
our customers. This translated into significant improvements
in both client satisfaction scores and market shares in key
product categories.
Our Wealth Management segment is the leading franchise
in Quebec and firmly established across Canada with a
differentiated positioning. Focused on distribution, our
open-architecture model responds well to client needs in
terms of choice and unbiased advice. Our business mix and
client-facing strategy proved successful in 2020, supported
by the strategic and technology choices we have made in
the past. Transaction volumes were high through the
beginning of the pandemic, more than offsetting market
declines, and through the second half of the year, assets
under administration and management returned to pre-
crisis levels.
Our Financial Markets segment delivered strong results in
2020. Our Global Markets franchise was well-positioned
going into the crisis and delivered particularly strong
growth. Our Corporate and Investment Banking franchise
also performed well, driven by solid momentum in M&A and
government debt underwriting. As an established leader in
selected niche markets, our Financial Markets business is an
important pillar, providing the Bank with a diversified
earnings stream. Looking forward, we will continue to place
client support front and centre while maintaining a prudent
risk profile.
National Bank of Canada
2020 Annual Report
3
Message From the President and Chief Executive Officer (cont.)
We are very satisfied with the performance and positioning
of our international activities. Credigy in the United States
and ABA Bank in Cambodia have consistently delivered
superior returns. In 2020, ABA Bank grew at a faster pace
than the market and surpassed the one million client
threshold. Looking forward, both Credigy and ABA Bank
continue to have strong momentum and are well positioned
to deliver attractive earnings growth.
Our Commitment to ESG
We are putting the full strength of our organization behind
social and governance guiding
our environmental,
principles, with the aim to develop a green economy, enrich
our communities, and uphold the highest standards in
corporate governance.
A year to the day after signing the UN Principles for
Responsible Banking, we announced an ambitious target to
reduce our own greenhouse gas emissions by 25% by 2025,
compared to 2019 levels. We were proud to become a
signatory of the UN Women’s Empowerment Principles in
2020, further strengthening the Bank’s commitment to
women’s equality. We also committed to the BlackNorth
Initiative as well as to partnering with the Government of
Canada
first-ever Black
Entrepreneurship Program. These are but a few initiatives
we are taking to build a better future for all our
stakeholders.
the country’s
launch
to
Our objective is for the Bank to further promote diversity
and inclusion to ensure that we reflect the diversity of our
clients and society. We have set measurable targets and
will be transparent regarding our progress.
Looking Ahead with Cautious Optimism
Looking back at 2020, I am proud of the results achieved,
and our proven ability to adapt in evolving circumstances.
Although we remained in the grip of the pandemic at year-
end, economic activity has recovered from its lows and we
expect gradual improvement in 2021 in the context of
continued public health measures and, eventually, the
availability of a vaccine.
In this environment, I am confident in our overall strategic
positioning. Our super-regional model with a
leading
franchise in Quebec, a pan-Canadian footprint in selected
activities, and a
international strategy has
demonstrated its resilience. With a robust balance sheet,
prudent approach to risk management, balanced capital
deployment strategy and culture of agility, we are well-
positioned to maintain a sustainable pace of growth in
2021.
focused
In closing, I must recognize the sound advice of our Board of
Directors, as well as each member of the Office of the
President for their incredible leadership and grace under
pressure over the past year. We have strong and
experienced leaders across the Bank, all of whom have
contributed to our digital and cultural transformation. In
2020, Julie Lévesque succeeded Dominique Fagnoule as
Executive Vice-President of Technology, and Nathalie
Généreux joined the Office of the President as Executive
Vice-President of Operations. Both bring solid experience
and deep expertise to these key roles within the Bank, and
we are pleased to be able to count on their leadership and
fresh perspectives.
On behalf of the members of the Office of the President,
I wish to once again sincerely thank all of our employees for
their everyday contributions and commitment to the
success of the Bank. Everyone across our organization
deserves recognition for their dedication and flexibility in
this difficult and demanding environment.
I would also like to thank our clients and shareholders for
their confidence in the Bank, as we continue to build an
agile bank that is well-positioned to grow and create
sustainable value, to the benefit of all our stakeholders.
Louis Vachon
President and Chief Executive Officer
National Bank of Canada
2020 Annual Report
4
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
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
Julie Lévesque
Executive Vice-President,
Information Technology
Ghislain Parent
Chief Financial Officer
and Executive
Vice-President, Finance
National Bank of Canada
2020 Annual Report
5
Message From the Chairman
of the Board
In 2020, the world faced an unprecedented public health
crisis with significant social and economic repercussions
directly impacting our employees, our clients and our
communities. In taking stock of the actions taken by the
Bank in this unusual context, my fellow directors and I feel
great pride in the Bank’s response, and the passion and
human touch shown by our people.
The Bank put the well-being of our stakeholders ahead of
all other priorities, and our people adapted with agility to
serve and support our clients and communities. We also
worked in close collaboration with all levels of government
and the broader financial industry, resulting in a meaningful
and coordinated response, and a show of true solidarity.
Driven by our four strong business segments, the Bank also
delivered solid earnings and shareholder returns while
maintaining strong capital levels and liquidity ratios. This
achievement during a time of great uncertainty is a
testament to the Bank’s diversified business mix, flexibility,
resilience and financial strength.
A Sustainable Approach
As a Canadian super-regional bank with a strong franchise
in Quebec built on a diversified revenue base, a culture of
agility, and a longstanding prudent approach to risk, the
Bank was well-positioned at the onset of the pandemic.
As stewards of the Bank, the primary responsibility of the
Board of Directors is to ensure the Bank’s sustainability and
ability to create long-term value for all stakeholders. To
achieve this, we maintain strategic oversight over the
Bank’s growth objectives and business plans, and
constantly balance the short-, medium- and long-term
impacts of the decisions taken today.
We are also
that senior
management has the support and tools at its disposal to
execute strategic objectives and operate efficiently.
for ensuring
responsible
The Board was very proactive in monitoring the impacts of
the pandemic on the Bank and its clients, and staying
abreast of a rapidly evolving situation. Our role in both
supporting and challenging management, and our more
frequent touchpoints in the circumstances, helped ensure a
timely and well-executed response. I sincerely thank my
fellow directors and the Bank’s leadership for their agility
and unwavering commitment throughout the crisis.
Clearly, the strategic decisions taken in the recent past
have proven well-founded, and we will maintain our
measured approach to managing risk and capturing
opportunities in the face of continuing uncertainty.
An Ongoing Cultural and Digital Transformation
The Board is committed to fostering and further stimulating
the Bank’s culture of agility and entrepreneurship that has
served us well during the current crisis. The skills and
dedication of teams at all levels of our organization
have demonstrated the Bank’s ability to adapt to
change -a key element of our strong corporate culture.
the Bank’s digital
In the last several years, the Board has focused particular
attention on
transformation and
technology investments, including cybersecurity and data
privacy, key issues for our stakeholders. We are pleased
with the tangible benefits of the major investments made
over the past several years and how they have facilitated
our adaptability and strengthened our technological
infrastructure.
-in
in
technology and culture- is ongoing to continuously
both
to meet evolving client needs
improve our ability
efficiently while sustaining a strong financial performance.
transformation
Investment
National Bank of Canada
2020 Annual Report
6
Message From the Chairman of the Board (cont.)
Our culture of agility is also deeply imbedded in our
leadership development and succession planning activities,
which remain an ongoing Board priority. We have strong
leadership across our business lines and strategic functions,
as well as a strong bench, ensuring that we have the right
talent in the right place as the Bank evolves.
An Unwavering Commitment to Good Governance
As a Board, we continuously adopt best governance
practices to further our ability to exercise our stewardship.
Board composition is an important element of governance
and in this respect, we have a strong team of directors, well
diversified in terms of gender, experience and geographical
representation.
In 2020, Gillian Denham completed her term after nine years
of loyal service; we sincerely thank her for her contributions
to the Bank’s success. We were pleased to welcome Manon
Brouillette, former president and chief executive officer of
Videotron, and Yvon Charest, former president and chief
executive officer of Industrial Alliance Financial Group, as
new directors. Both bring impressive credentials, relevant
work experience, strong governance skills and a diversity of
perspectives to the Board’s deliberations.
An increasingly important area of Board oversight pertains
(ESG) factors,
to environment, social and governance
highlighted by the adoption of our ESG principles in 2019,
followed by the publication of our first report on ESG
advances in 2020. In addition to enhanced ESG disclosure,
ESG responsibilities are now imbedded in the mandates of
all board committees and our board diversity policy was
further strengthened in 2020.
regarding members
In 2020, management set three-year diversity and inclusion
objectives at the executive and employee level, including
engagements
the black
communities. From an environmental perspective, the Bank
has also pledged to meet ambitious carbon footprint
reduction targets by 2025. These are just a few concrete
examples of our commitment to living our ESG principles,
which are fundamental to our long-term sustainability.
from
A Strong Bank to the Benefit of all
While uncertainty remains around the future course of the
pandemic, my fellow directors and I believe the Bank is well
positioned for long-term success. Our solid performance in
2020 and proven ability to adapt in a shifting environment
have given us conviction in our strategic direction and our
approach to governance. Our objective is to ensure that
in a post-pandemic
the Bank adapts and thrives
environment while balancing the needs of all stakeholders.
In closing, the Board recognizes the exceptional efforts of
the Bank’s senior leadership and employees, who continue
to work to create a positive impact for clients, employees
and the community while generating sustainable, long-term
value for shareholders. We are proud to serve an institution
that has been putting people first for over 160 years, a
mission we share with the Bank’s over 26,500 employees
around the world.
Jean Houde
Chairman of the Board of Directors
For more information regarding the Bank’s governance,
please refer to the Statement of Corporate Practices
available on the Bank’s website at nbc.ca.
National Bank of Canada
2020 Annual Report
7
Members of the Board of Directors
Jean Houde
Montreal, Quebec, Canada
Chairman of the Board of
Directors,
National Bank of Canada
and Corporate Director
Director since March 2011
Pierre Boivin
Montreal, Quebec, Canada
President and Chief Executive
Officer,
Claridge inc.
Director since April 2013
Karen Kinsley
Ottawa, Ontario, Canada
Corporate Director
Director since December 2014
Raymond Bachand
Montreal, Quebec, Canada
Strategic Advisor,
Norton Rose Fulbright Canada LLP
and Corporate Director
Director since October 2014
Maryse Bertrand
Westmount, Quebec, Canada
Corporate Director
Director since April 2012
Pierre Blouin
Montreal, Quebec, Canada
Corporate Director
Director since September 2016
Manon Brouillette
Montreal, Quebec, Canada
Corporate Director
Director since April 2020
Yvon Charest
Quebec, Quebec, Canada
Corporate Director
Director since April 2020
Patricia Curadeau-Grou
Montreal, Quebec, Canada
Corporate Director
Director since April 2019
Rebecca McKillican
Oakville, Ontario, Canada
Chief Executive Officer,
McKesson Canada
Director since October 2017
Robert Paré
Westmount, Quebec, Canada
Strategic Advisor,
Fasken Martineau DuMoulin LLP
and Corporate Director
Director since April 2018
Lino Saputo Jr.
Montreal, Quebec, Canada
Chief Executive Officer and
Chairman of the Board of Directors,
Saputo Inc.
Director since April 2012
Andrée Savoie
Dieppe, New Brunswick, Canada
President and Chair of the
Board of Directors,
Acadian Properties Ltd.
Director since April 2015
Pierre Thabet
St-Georges, Quebec, Canada
President, Boa-Franc inc.
Director since March 2011
Louis Vachon
Beaconsfield, Quebec, Canada
President and Chief Executive
Officer,
National Bank of Canada
Director since August 2006
Board Committees
Audit Committee
Karen Kinsley (Chair)
Maryse Bertrand
Pierre Blouin
Manon Brouillette
Andrée Savoie
Pierre Thabet
Risk Management Committee
Pierre Thabet (Chair)
Raymond Bachand
Yvon Charest
Patricia Curadeau-Grou
Karen Kinsley
Lino Saputo Jr.
Technology Subcommittee
Pierre Blouin (Chair)
Manon Brouillette
Rebecca McKillican
Human Resources Committee
Pierre Boivin (Chair)
Maryse Bertrand
Pierre Blouin
Manon Brouillette
Yvon Charest
Rebecca McKillican
Conduct Review and Corporate
Governance Committee
Lino Saputo Jr. (Chair)
Raymond Bachand
Patricia Curadeau-Grou
Jean Houde
Robert Paré
Andrée Savoie
National Bank of Canada
2020 Annual Report
8
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 Bank’s
Commitments
This past year, National Bank became a signatory to the United Nations (UN) Women’s
Empowerment Principles. It also continued its commitments to the following global initiatives:
> United Nations Principles for Responsible Banking
> United Nations Environment Programme Finance Initiative (UNEP FI)
> United Nations Principles for Responsible Investment (PRI)
> United Nations Global Standards of Conduct for Business on Tackling Discrimination Against Lesbian, Gay,
Bi, Trans and Intersex People (LGBTI)
National Bank supports the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
In 2020, it released an initial report outlining the various issues addressed by this group. The Bank is also working with
industry partners to develop a relevant disclosure approach.
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
National Bank of Canada
2020 Annual Report
11
Our Accomplishments
Environmental
We are working to develop a green economy
> Target set to reduce our greenhouse gas (GHG)
emissions by 25% by 2025 to contribute to the
most ambitious objective of the Paris Agreement
(reference year 2019)
> Partnership with Équiterre to support the
implementation of specific solutions to promote
energy transition and the adoption of daily
eco-responsible choices
> National Bank Investments launched three sustainable
exchanged-traded funds (ETFs)
> Renewable energy loan portfolio growing faster
than the non-renewable energy portfolio in support
of energy transition
> Adapting certain retail credit offers for clients who
shop sustainably
> Multi-award-winning energy efficiency program
> New head office designed to meet the highest
sustainable construction standards and occupant
health and well-being (LEED v4 Gold certification)
> Assets under management governed by
National Bank Investments’ OP4+ process: 96.5% (↑)
of our fund managers meet the UN Principles for
Responsible Investment
For more information: nbc.ca
Social
We enrich communities
Supporting our clients and employees in times
of uncertainty
> Temporary relief measures for our individual and
business clients during the COVID-19 pandemic
> Measures implemented to protect the health
of our employees
Promoting diversity and inclusion
> Participation in several initiatives to address
systemic racism and support the Black community,
including the BlackNorth Initiative, the Black
Entrepreneurship Loan Fund and the Being Black
in Canada incubator program
> Signing of the UN Women’s Empowerment Principles
> Active support for women, cultural communities,
the LGBTQ community and Indigenous communities
Supporting the community
> More than $2.5 million given to the most vulnerable
communities affected by the pandemic and mental
health organizations
> Millions of dollars given back to the community through
donations, sponsorships and fundraising events
> Hundreds of organizations supported across the country
Stimulating economic development
> New call centre opened in Sherbrooke: 200 jobs
created and economic spin-offs of at least $10 million
per year in the region
> National Bank SME Growth Fund created in
equal partnership with the Quebec government
to support economic recovery and the digital
transformation of SMEs
> $67 million invested in our facilities
> $1.2 billion spent on goods and services
Governance
We govern according to the highest standards
> Disclosure of an initial report on Environmental,
Social and Governance Advances
> Mandates of the Conduct Review and Corporate
Governance Committee, the Audit Committee
and the Risk Management Committee to include
ESG-related responsibilities
> Succession planning for directors based on the
Board’s diversity policy (gender, age, designated
groups, sexual orientation, ethno-cultural groups
and geography)
Risk Disclosures
In 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles for
enhancing the risk disclosures of major banks, to recommend improvements to current risk disclosures, and to identify risk disclosure best practices used by
major financial institutions. The EDTF published a report entitled Enhancing the Risk Disclosures of Banks, which contains 32 recommendations. The Bank
makes every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures to meet the best practices on
an ongoing basis. The risk disclosures required by the EDTF are provided in this Annual Report and in the document entitled Supplementary Regulatory Capital
and Pillar 3 Disclosure available on the Bank’s website at nbc.ca.
Annual
Report
Pages
Supplementary
Regulatory Capital
and Pillar 3 Disclosure(1)
General
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
Risk governance and risk management
5
6
7
8
Risk management organization, processes and key functions
Risk management culture
Key risks by business segment, risk management
and risk appetite
Stress testing
9
10
11
12
13
Capital adequacy and risk-weighted assets (RWA)
Minimum Pillar 1 capital requirements
Reconciliation of the accounting balance sheet to
the regulatory balance sheet
Movements in regulatory capital
Capital planning
RWA by business segment
and by risk type
Capital requirements by risk and RWA calculation method
Banking book credit risk
Movements in RWA by risk type
Assessment of credit risk model performance
14
15
16
17
Liquidity
18
Liquidity management and components of the liquidity buffer
Funding
19
20
21
Summary of encumbered and unencumbered assets
Residual contractual maturities of balance sheet items and
off-balance-sheet commitments
Funding strategy and funding sources
Market risk
22
23
24
25
Linkage of market risk measures to balance sheet
Market risk factors
VaR: Assumptions, limitations and validation procedures
Stress tests, stressed VaR and backtesting
Credit risk
26
27
28
29
30
Credit risk exposures
Policies for identifying impaired loans
Movements in impaired loans and allowances for credit losses
Counterparty credit risk relating to derivatives transactions
Credit risk mitigation
Other risks
31
32
Other risks: Governance, measurement and management
Publicly known risk events
(1)
(2)
Fourth quarter 2020.
These pages are included in the document entitled Supplementary Financial Information – Fourth Quarter 2020.
19 to 29(2)
5 to 52
7 to 13, 16 and 17
6
6
6
6
35
13
59 to 106, 119, 121 and 122
Notes 1, 7, 16, 23 and 29
68 to 106
16 to 21, 28, 73 to 77
60 to 63, 93 and 98
68 to 87, 93 to 95 and 99
68 and 69
67 to 69 and 73
59, 69, 81, 91, 92 and 95
60 to 63
65
59 to 67
67
77 to 81
66
72, 78 to 81 and 86
93 to 99
96 and 97
217 to 221
99 to 101
88 and 89
86 to 92, 205 and 206
89 and 90
86 to 92
85 and 167 to 178
82, 141 and 142
119, 121, 122 and 167 to 178
82 to 84 and 185 to 188
80 to 83 and 164
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
76, 77 and 102 to 106
16 to 21, 28 and 102
National Bank of Canada
2020 Annual Report
13
Management’s Discussion
and Analysis
The following Management’s Discussion and Analysis (MD&A) presents the financial condition and operating results of National Bank of Canada (the Bank).
This analysis was prepared in accordance with the requirements set out in National Instrument 51-102, Continuous Disclosure Obligations, released by the
Canadian Securities Administrators (CSA). It is based on the audited annual consolidated financial statements for the year ended October 31, 2020 (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, 2020. All amounts are presented in
Canadian dollars. Additional information about the Bank, including the Annual Information Form, can be obtained from the Bank’s website at nbc.ca and
SEDAR’s website at sedar.com.
December 1, 2020
COVID-19 Pandemic
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
16
22
24
25
29
32
33
38
42
47
52
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
53
54
57
59
68
107
113
114
Caution Regarding Forward-Looking Statements
From time to time, the Bank makes written forward-looking statements such as those contained in this document, in other filings with Canadian securities regulators, and in other communications. In addition,
representatives of the Bank may make forward-looking statements orally to analysts, investors, the media and others. All such statements are made in accordance with applicable securities legislation in Canada
and the United States. Forward-looking statements in this document may include, but are not limited to, statements with respect to the economy—particularly the Canadian and U.S. economies—market changes,
the Bank’s objectives, outlook and priorities for fiscal year 2021 and beyond, its strategies or future actions for achieving them, expectations for the Bank’s financial condition, the regulatory environment in which
it operates, the potential impacts of — and the Bank’s response to — the COVID-19 pandemic, and certain risks it faces. These forward-looking statements are typically identified by future or conditional verbs or
words such as “outlook”, “believe”, “foresee”, “forecast”, “anticipate”, “estimate”, “project”, “expect”, “intend”, “plan”, and similar expressions of future or conditional verbs such as “will”, “may”, “should”,
“could” or “would”. Such forward-looking statements are made for the purpose of assisting the holders of the Bank’s securities in understanding the Bank’s financial position and results of operations as at and
for the periods ended on the dates presented, as well as the Bank’s vision, strategic objectives and its financial performance targets, and may not be appropriate for other purposes.
By their very nature, these 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 2021, including in the context of the COVID-19 pandemic, and how that will affect the Bank’s business are among the main factors considered in setting the Bank’s strategic
priorities and objectives including provisions for credit losses. In determining its expectations for economic conditions, both broadly and in the financial services sector in particular, the Bank primarily considers
historical economic data provided by the governments of Canada, the United States and certain other countries in which the Bank conducts business, as well as their agencies.
There is a strong possibility that the Bank’s express or implied predictions, forecasts, projections, expectations or conclusions will not prove to be accurate, that its assumptions may not be confirmed and that its
vision, strategic objectives and financial performance targets will not be achieved. The Bank recommends that readers not place undue reliance on forward-looking statements, as a number of factors, many of
which are beyond the Bank’s control, including the impacts of the COVID-19 pandemic, could cause actual results to differ significantly from the expectations, estimates or intentions expressed in these
statements. These factors include credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk and environmental and social risk, all of which are
described in more detail in the Risk Management section beginning on page 68 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; regulatory changes affecting the Bank’s business; geopolitical and sociopolitical uncertainty; important changes in consumer behaviour;
the housing and household indebtedness situation and real estate market in Canada; changes in the Bank’s customers’ and counterparties’ performance and creditworthiness; 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; 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; potential disruption to key
suppliers of goods and services to the Bank; potential disruptions to the Bank’s information technology systems, including evolving cyberattack risk as well as identity theft and theft of personal information; and
possible impacts of catastrophic events affecting local and global economies, including natural disasters and public health emergencies such as the COVID-19 pandemic. Statements about the expected impacts
of the COVID-19 pandemic on the Bank’s business, results of operations, reputation, financial position and liquidity, and on the global economy may be inaccurate and differ, possibly materially, from what is
currently expected as they depend on future developments that are highly uncertain and cannot be predicted. The foregoing list of risk factors is not exhaustive. Additional information about these factors can be
found in the Risk Management section and the COVID-19 Pandemic 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.
Management’s Discussion and Analysis
COVID-19 Pandemic
COVID-19 emanates from an emerging infectious disease, namely, the coronavirus disease. The coronavirus strain was detected in November 2019 in the city
of Wuhan in central China, and then spread throughout the world. In early January 2020, the Chinese government implemented strict lockdown procedures and
forced several cities—and then an entire region—to remain under lockdown, closing many public sites and enforcing considerable sanitary measures. On
January 13, 2020, a first case was reported outside mainland China, and on January 30, 2020, the World Health Organization (WHO) declared that the outbreak
of the new coronavirus constituted an international public health emergency.
On March 11, 2020, the WHO declared that the COVID-19 outbreak constituted a pandemic, requiring important protective measures be taken to prevent
overcrowding at intensive care units and to strengthen preventive hygiene. The global pandemic prompted many countries, including Canada, to implement
lockdown and social distancing measures designed to slow the development of new contagion hotbeds. Those measures included the closing of borders in
many countries and the cancellation of sporting and cultural events around the world, triggering a sudden and widespread drop in market capitalizations on all
major stock exchanges around the world arising from the uncertainty and fears about the global economy.
In May 2020, after several weeks of lockdown, Canadian provinces and territories began loosening some of the restrictions imposed at the start of the
COVID-19 pandemic. The plans to re-open the economy differed from one location to the next, depending on the local situation with the epidemic. Although the
provinces and territories announced how the re-opening would work, authorities warned that the plans could be postponed or modified, depending how the
situation developed. Almost all restrictions in Canada were lifted in July 2020, while other countries were delaying their reopening or were simply returning to
lockdown. During the summer of 2020, there was a recovery in the stock markets and a decrease in the unemployment rate, but the later still remains high.
Since the early fall of 2020, a second wave of COVID-19 has forced authorities in several countries, including Canada, to reintroduce some lockdown measures,
effectively shutting down parts of the economy again.
In Canada, banking services are considered essential services and are therefore being maintained despite the lockdown and social distancing measures. Given
the current economic and social conditions, the Bank is committed to supporting its employees, clients, and communities. The Bank has ensured the
continuity of all its activities since the beginning of this unprecedented crisis. All of its experts have been mobilized to guide and support clients and answer
their questions during this ongoing period of uncertainty.
Impact of the COVID-19 risk factor
The COVID-19 pandemic has had disruptive and adverse impacts in the countries where the Bank conducts business and, more broadly, on the global
economy. Among other things, COVID-19 sent stock markets into sharp decline and rendered them more volatile, disrupted global supply chains, and
provoked a rapid and sudden rise in unemployment and an economic slowdown. Governments, monetary authorities and regulators have intervened to support
the economy and the financial system, including by adopting fiscal and monetary measures to increase liquidity and support incomes; they have also eased
the capital and liquidity requirements imposed on financial institutions.
Governments, monetary authorities and regulators around the world, including in Canada, continue to implement strong measures to provide financial
assistance to households and businesses, stabilize markets and support economic growth. No-one can be sure whether these measures will be sufficient to
fully mitigate the negative impacts of the COVID-19 pandemic or reverse the recessionary situation in the markets and countries where the Bank conducts
business. Because of the scale and severity of ongoing developments in the COVID-19 pandemic, if it continues, its impacts on the global economy could
become more serious, leading to greater volatility in the financial markets, heightened risks of corporate insolvency and even more negative impacts on
household wealth.
In addition to the impacts of the COVID-19 pandemic on the global economy and in the countries where the Bank conducts business, the pandemic has
affected and may continue to affect the Bank, the way it conducts business, and its clients.
There remains a possibility that the financial stress experienced by the Bank's clients as a result of the COVID-19 pandemic may become more intense, and
when this is combined with operational constraints caused by social distancing requirements, including continued closures of certain facilities or reduced
business hours, lower sales or increased operating costs, the Bank’s clients may be under even greater pressure. Since a significant portion of the Bank's
business involves granting loans or providing liquidity in multiple ways to its clients—which include individuals, businesses in various industries and
governments—the impacts of the COVID-19 pandemic on these clients could have a material adverse effect on the Bank's business, results of operations,
financial position and reputation by, for example, causing more credit losses than the Bank expects.
National Bank of Canada
2020 Annual Report
16
Management’s Discussion and Analysis
COVID-19 Pandemic
In the context of the COVID-19 pandemic, the Bank has also been forced, and may again be forced, to review the way it conducts business, including by closing
some branches or reducing their business hours, having employees continue to work from home for a long period of time, or implement the operational
changes required as a result of greater volumes of client requests and the problems they cause for the Bank’s main suppliers of products and services. These
factors have had an adverse effect and may continue to adversely affect the Bank's business and the quality and continuity of the services it provides to
clients. Until now, the Bank has taken proactive measures through business continuity plans, carefully planning for the return of certain employees to the
workplace, and its crisis management teams are working even harder to ensure the well-being of the Bank's employees and maintain its ability to serve clients.
In addition, in order to help clients experiencing financial difficulties, the Bank has implemented various assistance programs in addition to those offered by
governments. See the Relief Measures for Clients section on pages 18 and 19 for additional information on these assistance programs.
Lastly, as a result of the measures taken to enable employees to work from home and the increased use by clients of the digital tools that have been made
available to them, the Bank, its clients and its service providers may be exposed to an increased risk of cyber threats, attacks, breaches, fraudulent activities
and other compromises, as well as operational risks. The Bank is closely monitoring its operations for any indications of increased phishing, fraud, privacy
breaches and cyberattacks by raising awareness about information security threats among its clients, employees and service providers.
Given these circumstances, the COVID-19 pandemic has put into perspective and may continue to put into perspective many of the principal and emerging
risks to which the Bank is exposed, i.e., credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputational risk,
strategic risk, information security and cybersecurity risk, and the risk of reliance on technology and third parties. These risks are described in more detail in
the Risk Management section of this MD&A.
The Bank continues to closely monitor the effects and potential consequences of the COVID-19 pandemic. It is not possible to predict the full impacts that this
pandemic will have on the global economy, financial markets and the Bank, including its business, results of operations, financial position, regulatory capital
and liquidity ratios, reputation, and ability to satisfy regulatory requirements, as well as the full impact on clients. The actual impacts will depend on future
events that are highly uncertain and cannot be predicted with any certainty, including the extent, severity and duration of the COVID-19 pandemic, as well as
the effectiveness of actions and measures taken by governments, monetary authorities and regulators over the long term.
The Bank’s perception of the risks to which it is exposed continues to evolve. So in accordance with its risk management framework, which is more fully
described in the Risk Management section of this MD&A, the Bank continues to assess the risks associated with the COVID-19 pandemic in order to proactively
manage them and to implement appropriate mitigation strategies.
The Bank’s Financial Performance
In light of COVID-19 and its impact on global and local economies, Canadian banks are facing a difficult situation. This exceptional situation has led to
significant changes in the overall market, such as business closures and temporary layoffs, low interest rates, declining and volatile stock markets, declining
oil prices, and government measures implemented in response to COVID-19.
Macroeconomic Factors
Assumptions about the performance of the Canadian and U.S. economies in 2021, including in the context of the COVID-19 pandemic and how that will affect
the Bank, are among the main factors considered in setting the Bank’s strategic priorities and objectives, including provisions for credit losses. In determining
its expectations for economic conditions, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data
provided by the governments in Canada, the United States and certain other countries in which the Bank conducts business, as well as their agencies.
The main macroeconomic factors used when estimating allowances for credit losses on loans and other financial assets are as follows: gross domestic product
(GDP), the unemployment rate, the housing price index, the rate spread on BBB bonds, the stock market (S&P/TSX), and the West Texas Intermediate (WTI) oil
price. For each scenario, namely, the base scenario, upside scenario, and downside scenario, the average of the values over the next 12 months and the
average of the values over the remaining forecast period for each macroeconomic factor are used to estimate the expected credit losses for the personal credit
portfolio and for the business and government credit portfolio.
National Bank of Canada
2020 Annual Report
17
Management’s Discussion and Analysis
COVID-19 Pandemic
During the year ended October 31, 2020, certain macroeconomic factors were revised positively while others were revised negatively.
According to the base scenario, the Canadian economy will continue to recover next year, but the unemployment rate will be 8.6% at the end of 2021,
significantly above its pre-recession level (5.7%). Given a difficult labour market and reduced immigration, housing prices will decline. The S&P/TSX will end
2021 at 16,200 points and the price of oil at US$48.
According to the upside scenario, the economy will rebound more strongly thanks to medical breakthroughs that will help fight COVID-19. Fiscal and monetary
stimulus measures enabled limitation of the damage arising from destroyed production capacity. The unemployment rate at year-end 2021 will be more
favourable than the base scenario (5 tenths lower). Housing prices will only decline slightly, the S&P/TSX will end 2021 at 17,500 points and the price of oil at
US$58.
According to the downside scenario, delays in the discovery of an effective vaccine will cause increased stress in the financial markets. This will lead to an
economic meltdown and a more significant destruction of capacity. The unemployment rate will therefore trend upward, reaching 10.6% at the end of 2021.
Housing prices will decrease considerably. The S&P/TSX will end 2021 at 13,900 points and the price of oil at US$24.
Given uncertainty surrounding the key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.
For additional information, see the Economic Review and Outlook section of this MD&A and Note 7 to these consolidated financial statements.
Impact on Results
The Bank's results for the year ended October 31, 2020 were marked by the repercussions of this unprecedented crisis. During the second quarter of 2020,
major disruptions in the global environment in which the Bank operates affected its financial results, as there was a considerable increase in provisions for
credit losses to reflect a significant deterioration in the macroeconomic conditions caused by COVID-19 and the expected impacts on clients. Despite an upturn
in economic activity in the third quarter of 2020, several sectors are facing financial difficulties due to social distancing rules and fears among consumers,
which are causing significant downward pressure on sales or even the closure of some businesses, while others have experienced sales growth. However, the
net result for the fourth quarter of 2020 was relatively unchanged from the same quarter of 2019, as higher provisions for credit losses were offset by the
strong performance of most business segments.
For additional information, refer to the “Financial Analysis” and “Business Segment Analysis” sections of this MD&A.
Relief Measures for Clients
In response to the economic and financial environment resulting from COVID-19, at the start of the pandemic, the Bank announced a series of support
measures for the clients of its main business segments, and some of these measures have been extended. Some of the measures were introduced by the
Canadian government and regulatory authorities, together with the Canadian banks and were implemented quickly to come to the assistance of individuals
and businesses. These measures are designed to provide financial support to clients facing the economic consequences of COVID-19. The main relief
measures are described below.
Clients – Individuals
Mortgages
Personal loans
Credit cards
Transactions
Payment deferrals of up to six months on
mortgage loans (application date extended
from June 30 to September 30, 2020).
Deferral of minimum payment for up to
three months on home equity lines of
credit (All-In-OneTM) (application date
extended from June 30 to September 30,
2020).
Payment deferrals of up to three months
on personal loans (ended September 30,
2020).
Deferral of minimum monthly payment for
a period of up to 90 days (ended
September 30, 2020).
Annual interest rate reduced to 10.9% on
purchases and cash advances during the
deferral period, depending on an analysis
of the file (ended September 30, 2020).
Permanent or temporary increase to credit
card limit.
Temporary removal of certain transaction
fees:
o
Interac e-Transfer service charge
(ended September 30, 2020);
Charges for stop payment requests
by cheque or preauthorized debit
(ended September 30, 2020);
Interest charges on an overdraft
(ended September 30, 2020).
o
o
National Bank of Canada
2020 Annual Report
18
Management’s Discussion and Analysis
COVID-19 Pandemic
During the year ended October 31, 2020, the Bank approved payment deferrals for loans with a gross carrying value of $10.9 billion for approximately 125,000
Personal Banking clients. The number of loans and the gross carrying value of loans subject to these deferrals are presented in the table below. In addition,
through its insurance subsidiary, the Bank offered easing measures on home and auto insurance products, including discounts of 15% for a period of three
months. Approximately 31,800 clients elected to avail themselves of these easing measures during the year ended October 31, 2020.
Clients – Businesses
Loans
Credit cards
Transactions
Deferral of minimum monthly payment for a
period of up to 90 days on certain Business
cards (ended September 30, 2020).
Reduction of the annual interest rate to
10.9% on purchases and cash advances
during the deferral period, based on the file
analysis (ended September 30, 2020).
Contactless and mobile payments over
$100 at participating merchants.
Increase to the weekly limit of incoming
Interac e-transfers.
Temporary removal of charges for stop
payment requests.
Access to the 10% wage subsidy using
the Nethris platform.
Canada Emergency Business Account
(CEBA) for small- and medium-sized
enterprises and non-profit organizations: A
$40,000 interest-free loan up to
December 31, 2022 (with certain eligibility
conditions) supported by the Canadian
government.
Concerted Temporary Action Program for
Businesses (CTAPB): Working capital loan
of at least $71,500 supported by
Investissement Québec (Eligibility: History
of satisfactory profitability).
Business Credit Availability Program
(BCAP) for exporting or non-exporting
businesses, supported by Export
Development Canada: Operating credit and
cash flow term loans of up to $6.25 million
in Canadian dollars only.
Financing program for medium-sized
businesses with the Business
Development Bank of Canada (BDC):
subordinated loan in the amount of
$12.5 million to $60 million for medium-
sized businesses.
Co-lending program with the BDC: loan
amount varies based on sales, for a
maximum amount of $12.5 million for a
company or a group of borrowers and the
possibility of a repayment moratorium.
Principal payment deferrals of up to
six months.
As at October 31, 2020, the Bank had granted 30,722 loans under its CEBA program, 48 loans under CTAPB, 33 loans under BCAP and 1 co-loan with the BDC.
In addition, the Bank addressed the specific needs of its Commercial Banking clients and Financial Markets clients to support them during this unprecedented
crisis. During the year ended October 31, 2020, the Bank approved payment deferrals for loans with a gross carrying value of $5.4 billion for approximately
3,100 Commercial Banking and Financial Markets clients. The number of loans and gross carrying value of loans subject to these deferrals are presented in the
following table.
Payments Deferrals
(millions of Canadian dollars)
Residential mortgage
Personal
Credit card
Business and government
As at October 31, 2020
Gross carrying
value of loans
Number
of loans
Number
of loans
As at July 31, 2020
Gross carrying
value of loans
As at April 30, 2020
Gross carrying
value of loans
Number
of loans
2,865
−
−
780
3,645
695
−
−
1,182
1,877
14,405
40,820
2,700
2,739
60,664
3,651
319
15
4,479
8,464
38,682
65,935
9,316
3,148
117,081
8,624
756
67
4,482
13,929
National Bank of Canada
2020 Annual Report
19
Management’s Discussion and Analysis
COVID-19 Pandemic
Key Measures Introduced by the Regulatory Authorities
Like all Canadian financial institutions, the Bank is facing regulatory changes that are being implemented at an increasing rate. As described below, as part of
a coordinated effort by Government of Canada agencies, Office of the Superintendent of Financial Institutions (Canada) (OSFI) and other regulatory authorities
governing the Bank’s activities have taken a number of actions to reinforce the resilience of Canadian banks and improve the stability of the Canadian
financial system and economy in response to challenges posed by COVID-19 and current market conditions. Regulatory authorities are also stepping up their
oversight activities and focusing on the effects of the pandemic on the activities, capital strength, and liquidity of regulated entities.
OSFI, market participants, and financial institutions all recognize the critical need for strong capital and liquidity and effective risk management. OSFI has
strengthened its requirements and its supervisory efforts in all of these areas since the 2008 global financial crisis. These measures have improved the
resilience of Canadian banks in periods of stress.
OSFI continues to actively monitor the evolving COVID-19 situation and has been in frequent contact with banks to assess their operational capacity and
actions to address the current environment. As a result of these discussions and the measures announced at the start of the pandemic, OSFI announced a
continuance of the regulatory flexibility measures to support COVID-19-related efforts while promoting financial resilience and stability. The main key
measures are described on the following pages.
Capital Management
One of the requirements imposed by OSFI after the 2008 financial crisis was the creation of the Domestic Stability Buffer (the buffer) requirement applicable to
Canadian domestic systemically important banks (D-SIBs). The buffer's countercyclical design enables D-SIBs to use the capital they have built up during good
times when it may be needed most. On March 13, 2020, OSFI lowered the buffer from 2.25% of risk-weighted assets to 1.0%, effective immediately, and on
June 23, 2020, it confirmed that the buffer requirement would remain at 1.0% until December 2020. This action is being taken in order to support D-SIBs’
ability to supply credit to the economy during an expected period of disruption related to COVID-19 and market conditions. OSFI will continue to analyze the
buffer level and could reduce it more as needed. OSFI also stated its commitment that any increases to the buffer will not take effect for at least 18 months
from March 13, 2020 in addition to its expectation for all banks to interrupt any dividend increases and share buybacks for the time being.
On March 27, 2020, OSFI announced a series of additional measures for banks in response to the difficulties caused by the spread of COVID-19, including:
Treatment of regulatory capital for expected credit loss (ECL) accounting purposes: As other regulatory agencies are doing, OSFI has introduced
transitional arrangements applicable to the ECL provisioning method set out in the Basel framework. This will result in a portion of allowances that
would otherwise be included in Tier 2 capital to be included in CET1 capital. Although the Basel Committee on Banking Supervision (BCBS) is allowing
jurisdictions the option of applying a 100% add-back of allowances to CET1 capital, OSFI believes that a maximum add-back of 70% is appropriate. This
increased amount is adjusted for tax effects and multiplied by a scaling factor that decreases over time. The scaling factor will be set at 70% in
fiscal 2020, 50% in fiscal 2021, and 25% in fiscal 2022. The three-year transition will help banks to phase-in the impact of increased ECL allowances in
CET1 capital while also acknowledging that these provisions are being taken.
Deferral of loan payments: The bank loans subject to payment deferrals, such as mortgage loans, personal loans, and small business loans, continue to
be treated as performing loans under the Capital Adequacy Requirement guideline until the end of the deferral and for a maximum period of six months.
In this way, banks can help their clients deal with the problems created by the crisis. However, on July 31, 2020, OSFI announced that: (i) loans granted
payment deferrals before August 31, 2020 will continue to be treated as performing loans for the duration of the deferral, up to a maximum of
six months from the effective date of the deferral; (ii) loans granted new payment deferrals after August 30, 2020 and on or before September 30, 2020
will be treated as performing loans for the duration of the deferral, up to a maximum of three months from the approval date of the deferral; and
(iii) loans granted payment deferrals with approval dates after September 30, 2020 will not be eligible for the special treatment.
Reduction of stressed Value-at-Risk (VaR) multipliers under market risk: On a temporary basis, banks subject to market risk capital requirements and
using the AIRB approach may reduce the stressed VaR multiplier that was being applied at the end of first quarter of 2020 by two. This reduction can be
applied retrospectively to the beginning of the second quarter of 2020.
Removal of funding valuation adjustment (FVA) hedges in market risk: Banks must remove hedges of FVA from the calculation of market risk capital.
Doing so addresses an asymmetry in the current rule where these hedges of FVA are included in the calculation while the underlying exposures to FVA
are not. This treatment should be back-dated to the beginning of the second quarter of 2020.
National Bank of Canada
2020 Annual Report
20
Management’s Discussion and Analysis
COVID-19 Pandemic
Capital floor: OSFI is lowering the floor factor from 75% to 70%. The 70% floor factor is expected to stay in place until the domestic implementation of
the Basel III capital floor in the first quarter of 2023. The 70% factor ensures that the floor continues to protect against model risk while maintaining the
risk sensitivity of the capital framework for banks subject to the Advanced Internal Rating-Based approach.
Leverage ratio: Banks can temporarily exclude the following exposures from the leverage ratio exposure measure: (1) Central bank reserves;
(2) Sovereign-issued securities by borrowers that qualify as high-quality liquid assets (HQLA) under the Liquidity Adequacy Requirements guideline. On
November 5, 2020, OSFI announced that this treatment will remain in place until December 31, 2021. Capital freed up through this measure should not
be distributed (e.g., as dividends or bonus payments) and should rather be used to support lending and financial intermediation activities.
Margin required for non-centrally cleared derivatives: In line with a decision by the BCBS and International Organization of Securities Commissions, OSFI
is extending the deadline for the implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives outlined
in OSFI’s E-22 guideline by one year. With this extension, the final implementation phase will take place on September 1, 2022, at which point covered
entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than $12 billion will be subject to the
requirements. As an intermediate step, from September 1, 2021, covered entities with an AANA of non-centrally cleared derivatives greater than
$75 billion will be subject to the requirements.
Delaying implementation of the Basel III reforms: The Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the BCBS,
announced a postponement to the implementation of the reforms of the Basel III capital international standard published in December 2017. OSFI has
therefore postponed until the first quarter of 2023 the implementation dates applicable to the revisions to the Standardized Approach and AIRB
Approach to credit risk, the operational risk framework, and the leverage ratio framework, as well as the introduction of a more risk-sensitive capital
floor. Implementation of the Pillar 3 financial disclosure requirements finalized by the BCBS in December 2018 has also been delayed until at least the
first quarter of 2023. Lastly, implementation of the final set of revisions to the new market risk framework entitled Fundamental Review of the Trading
Book published in January 2019 as well as the revised credit valuation adjustment (CVA) risk framework is being delayed to the first quarter of 2024.
For additional information, refer to the Capital Management section of this MD&A.
Liquidity Management
To help Canadians through this difficult period caused by the COVID-19 crisis, the Bank of Canada has taken policy actions designed to restore financial
market functioning, to ensure that financial institutions have adequate liquidity, and to provide households and businesses with access to the credit they
need. To ensure banks have sufficient liquidity to support clients and to alleviate impaired market liquidity in Canada, the central bank has implemented
liquidity facilities and asset purchase programs. The liquidity facilities include the existing term repo facility where the terms of the loans have been extended
and the list of eligible collateral has been expanded. Also, a new standing term liquidity facility (STLF) has been introduced to complement the existing liquidity
tools and to further strengthen the resilience of the Canadian financial system. Asset purchase programs implemented by the Bank of Canada and the Canada
Mortgage and Housing Corporation (CMHC) cover a wide range of securities (treasury bills, bankers’ acceptances, bonds, and mortgage-backed securities) and
issuers (government and corporate). All of these programs have stabilized the funding markets and supported the flow of credit to households and businesses.
The Bank of Canada has also used monetary policy to respond to the COVID-19 crisis. It has lowered its target for the overnight rate by 150 basis points to
0.25%. Longer-term interest rates have also gone down significantly, and the interest rates of the Government of Canada curve are now mostly below 1%. Also,
the limit for covered bonds has been temporarily increased to provide better access to Bank of Canada facilities, and banks are allowed to draw on their HQLA
assets, thereby falling below the 100% threshold required by the Liquidity Adequacy Requirements guideline for the liquidity coverage ratio (LCR).
The Bank entered the crisis with a strong liquidity position, and it has maintained sound and prudent liquidity management throughout fiscal 2020. During the
quarter ended April 30, 2020, the Bank participated in certain Bank of Canada programs designed to provide credit to its clients and to substitute some short-
term funding. Given the sustained growth in deposits and improvements in capital markets, the Bank did not participate in the term repurchase program
during the quarters ended July 31, 2020 and October 31, 2020. In light of the government liquidity facilities and household and business needs, the Bank is
maintaining a liquidity buffer that will enable it to further support its clients.
For additional information, refer to the Risk Management – Liquidity and Funding Risk section of the MD&A.
National Bank of Canada
2020 Annual Report
21
Management’s Discussion and Analysis
Financial Reporting Method
As stated in Note 1 to the consolidated financial statements, the Bank adopted IFRS 16 on November 1, 2019. As permitted by the IFRS 16 transitional
provisions, the Bank elected to apply IFRS 16 using the modified retrospective basis, with no restatement of comparative periods. Note 1 to these consolidated
financial statements presents the impacts of IFRS 16 adoption on the Bank’s Consolidated Balance Sheet as at November 1, 2019 and additional information
about the adoption of IFRS 16.
Reconciliation of Non-GAAP Financial Measures
Year ended October 31
(millions of Canadian dollars)
Personal and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Net interest income
Taxable equivalent
Net interest income on a taxable equivalent basis
Non-interest income
Taxable equivalent
Foreign currency translation loss on disposal of subsidiaries(2)
Gain on disposal of Fiera Capital shares(3)
Gain on disposal of premises and equipment(4)
Remeasurement at fair value of an investment(5)
Non-interest income on a taxable equivalent basis and
excluding specified items
Total revenues on a taxable equivalent basis and
excluding specified items
Non-interest expenses
Impairment losses on premises and equipment and on intangible assets(6)
Severance pay(7)
Charge related to Maple(8)
Provisions for onerous contracts(9)
Non-interest expenses excluding specified items
Income before provisions for credit losses and income
taxes on a taxable equivalent basis and excluding specified items
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
and excluding specified items
Income taxes
Taxable equivalent
Income taxes on foreign currency translation loss on disposal of
subsidiaries(2)
Income taxes on the gain on disposal of Fiera Capital shares(3)
Income taxes on the gain on disposal of premises and equipment(4)
Income taxes on the remeasurement at fair value of an investment(5)
Income taxes related to impairment losses on premises and equipment
and on intangible assets(6)
Income taxes on severance pay(7)
Income taxes on the charge related to Maple(8)
Income taxes on provisions for onerous contracts(9)
Income taxes on a taxable equivalent basis and excluding specified items
Net income excluding specified items
Specified items after income taxes
Net income
Non-controlling interests
Non-controlling interests on the foreign currency translation loss on
disposal of subsidiaries(2)
Non-controlling interests excluding specified items
Net income attributable to the Bank’s shareholders
and holders of other equity instruments
Net income attributable to the Bank’s shareholders
and holders of other equity instruments excluding specified items
2,445
−
2,445
1,018
−
−
−
−
−
1,018
3,463
1,849
−
−
−
−
1,849
1,614
517
1,097
290
−
−
−
−
−
−
−
−
−
290
807
−
807
−
−
−
807
807
442
−
442
1,413
−
−
−
−
−
744
202
946
1,051
57
−
−
−
−
1,413
1,108
1,855
1,115
−
−
−
−
1,115
740
7
733
194
−
−
−
−
−
−
−
−
−
194
539
−
539
−
−
−
539
539
2,054
809
−
−
−
−
809
1,245
239
1,006
7
259
−
−
−
−
−
−
−
−
266
740
−
740
−
−
−
740
740
2020
2019(1)
4,255
208
4,463
3,672
57
24
−
−
−
3,596
195
3,791
3,836
135
−
(79)
(50)
33
Other
(183)
6
(177)
177
−
24
−
−
−
201
3,753
3,875
24
453
(71)
(48)
(13)
−
321
(297)
3
(300)
(107)
6
(12)
−
−
−
19
13
3
−
(78)
(222)
(133)
(355)
8
10
18
8,216
4,545
(71)
(48)
(13)
−
4,413
7,666
4,301
(57)
(10)
(11)
(45)
4,178
3,803
846
3,488
347
2,957
3,141
453
265
(12)
−
−
−
19
13
3
−
741
2,216
(133)
2,083
42
10
52
462
330
−
(11)
(7)
6
15
3
3
12
813
2,328
(6)
2,322
66
−
66
807
−
807
13
−
−
−
−
−
13
820
319
−
−
−
−
319
501
80
421
69
−
−
−
−
−
−
−
−
−
69
352
−
352
34
−
34
318
(363)
2,041
2,256
318
(240)
2,164
2,262
National Bank of Canada
2020 Annual Report
22
Management’s Discussion and Analysis
Financial Reporting Method
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
For the year ended October 31, 2019, certain amounts have been reclassified.
During the year ended October 31, 2020, the Bank, through its subsidiary Credigy Ltd. (Credigy), recorded a foreign currency translation loss of $24 million ($36 million taking into account
income taxes and $26 million taking into account income taxes and non-controlling interests) in investments in foreign operations following the disposal of two subsidiaries in Brazil.
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, 2020, the Bank recorded $71 million ($52 million net of income taxes) in impairment losses on premises and equipment and on intangible assets related
to computer equipment and technology developments (2019: $57 million, $42 million net of income taxes).
During the year ended October 31, 2020, following an optimization of certain organizational structures, the Bank recorded $48 million ($35 million net of income taxes) in severance pay
(2019: $10 million, $7 million net of income taxes).
During the year ended October 31, 2020, the Bank recorded a charge of $13 million ($10 million net of income taxes) related to the company Maple Financial Group Inc. (Maple) following
the event that occurred in December 2019, as described in the Contingent Liabilities section on page 111 of this MD&A (2019: $11 million, $8 million net of income taxes).
During the year ended October 31, 2019, the Bank reviewed all of its corporate building leases and had recorded provisions for onerous contracts of $45 million ($33 million net of income
taxes).
Non-GAAP Financial Measures
The Bank uses a number of financial measures when assessing its results and measuring 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. The Bank cautions readers that it uses non-GAAP
financial measures that do not have standardized meanings 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.
Fiscal 2020 was marked by the effects of the COVID-19 pandemic on macroeconomic factors, which resulted in a significant increase in the Bank’s provisions
for credit losses. Given the materiality of the provisions for credit losses recorded in accordance with IFRS, the Bank believes it is useful to show income before
provisions for credit losses and income taxes, income before provisions for credit losses and income taxes on a taxable equivalent basis as well as income
before provisions for credit losses and income taxes on a taxable equivalent basis and excluding specified items (as presented in the Consolidated Results
table on page 29, in the Results by Segment tables on pages 32 to 52 and in the Quarterly Financial Information table on page 53 of this MD&A), thereby
providing readers with additional information to help them better understand the main components of the financial results of the Bank and its business
segments.
National Bank of Canada
2020 Annual Report
23
Management’s Discussion and Analysis
Financial Disclosure
Disclosure Controls and Procedures
The Bank’s financial information is prepared with the support of a set of disclosure controls and procedures (DC&P) that are implemented by the President and
Chief Executive Officer (CEO) and by the Chief Financial Officer and Executive Vice-President, Finance (CFO). During the year ended October 31, 2020, 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, 2020, the CEO and the CFO confirmed the effectiveness of the DC&P. These controls are designed to provide reasonable assurance that the
information disclosed in annual and interim filings and in other reports filed or submitted under securities legislation is recorded, processed, summarized and
reported within the time periods specified by that legislation. These controls and procedures are also designed to ensure that such information is accumulated
and communicated to the Bank’s management, including its signing officers, as appropriate, to allow for timely decisions regarding disclosure.
This Annual Report was reviewed by the Disclosure Committee, the Audit Committee, and the Bank’s Board of Directors (the Board), which approved it prior to
publication.
Internal Controls Over Financial Reporting
The internal controls over financial reporting (ICFR) are designed to provide reasonable assurance that the financial information presented is reliable and that
the consolidated financial statements were prepared in accordance with GAAP, which are based on IFRS, unless indicated otherwise as explained on pages 22
and 23 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, 2020, 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.
Changes to Internal Controls Over Financial Reporting
The CEO and CFO also undertook work whereby they were able to conclude that, during the year ended October 31, 2020, no changes were made to the ICFR
that have materially affected, or are reasonably likely to materially affect, the design or operation of the ICFR.
Disclosure Committee
The Disclosure Committee assists the CEO and CFO by ensuring that disclosure controls and procedures and internal control procedures for financial reporting
are implemented and operational. In so doing, the committee ensures that the Bank is meeting its disclosure obligations under current regulations and that
the CEO and CFO are producing the requisite certifications.
National Bank of Canada
2020 Annual Report
24
Management’s Discussion and Analysis
Overview
Highlights
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
Operating results
Total revenues
Income before provisions for credit losses and income taxes(1)
Net income
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Return on common shareholders’ equity
Dividend payout ratio
Earnings per share
Basic
Diluted
Operating results on a taxable equivalent basis and excluding specified items(1)
Total revenues on a taxable equivalent basis and excluding specified items
Income before provisions for credit losses and income taxes
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
Earnings per share excluding specified items(1)
Basic
Diluted
Common share information
Dividends declared
Book value
Share price
High
Low
Close
Number of common shares (thousands)
Market capitalization
Balance sheet and off-balance-sheet
Total assets
Loans and acceptances, net of allowances
Deposits
Equity attributable to common shareholders
Assets under administration and under management
Regulatory ratios under Basel III(2)
Capital ratios
Common Equity Tier 1 (CET1)
Tier 1
Total
Leverage ratio
Liquidity coverage ratio (LCR)
Regulatory ratios under Basel III (adjusted)(3)
Capital ratios
CET1
Tier 1
Total
Leverage ratio
Other Information
Number of employees – Worldwide
Number of branches in Canada
Number of banking machines in Canada
2020
2019
% change
7
8
(10)
(10)
(10)
(10)
7
9
(5)
(5)
(5)
7
18
7
14
9
6
$
$
$
7,432
3,131
2,322
2,256
18.0 %
41.6 %
6.39
6.34
7,666
3,488
2,328
18.0 %
41.6 %
54.5 %
6.40
6.36
2.66
36.89
68.02
54.97
68.02
334,172
22,730
281,458
153,251
189,566
12,328
565,396
11.7 %
15.0 %
16.1 %
4.0 %
146 %
7,927
3,382
2,083
2,041
14.9 %
49.6 %
$
5.73
5.70
8,216
3,803
2,216
15.8 %
46.6 %
53.7 %
$
$
6.10
6.06
2.84
39.97
74.79
38.73
63.94
335,998
21,484
331,625
164,740
215,878
13,430
596,656
11.8 %
14.9 %
16.0 %
4.4 %
161 %
11.5 %
14.6 %
16.0 %
4.3 %
26,517
403
940
25,487
422
939
4
(5)
–
(1)
(2)
(3)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
The ratios as at October 31, 2020 include the transitional measures granted by OSFI. For additional information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by
the Regulatory Authorities on pages 20 and 21 of this MD&A.
The adjusted ratios as at October 31, 2020 do not include the transitional measure applicable to expected credit loss provisioning. For additional information, see the section entitled
COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of this MD&A.
National Bank of Canada
2020 Annual Report
25
Management’s Discussion and Analysis
Overview
Business Mix(1)
Year ended October 31, 2020
(taxable equivalent basis)(2)
%
3
.
2
4
%
1
.
3
3
%
6
.
0
3
%
6
.
2
2
%
1
.
2
2
%
0
.
0
1
%
9
.
5
4
%
4
.
0
3
%
1
.
5
2
%
4
.
4
1
%
5
.
3
1
%
0
.
0
1
Personal
and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Total revenue
Net income
Economic capital
Net income
Year ended October 31
(millions of Canadian dollars)
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 specified 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.
Objectives and 2020 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. Management
therefore excludes specified items when assessing the Bank’s performance against its objectives.
In fiscal 2020, the Bank recorded $2,083 million in net income compared to $2,322 million in fiscal
2019. Its 2020 diluted earnings per share stood at $5.70 versus $6.34 in fiscal 2019, and its 2020
return on common shareholders’ equity (ROE) was 14.9% versus 18.0% in 2019. Net income
excluding specified items(1) totalled $2,216 million in fiscal 2020, and diluted earnings per share
excluding specified items(1) stood at $6.06, down 5% from $6.36 in 2019. Furthermore, ROE
excluding specified items(1) was 15.8% in 2020 versus 18.0% in 2019.
The following table compares the Bank’s medium-term objectives with its 2020 results.
2
2
3
,
2
8
2
3
,
2
6
1
2
,
2
3
8
0
,
2
Medium-Term Objectives and 2020 Results
2019
2020
Including specified items
Excluding specified items(2)
Diluted earnings per share
Year ended October 31
(Canadian dollars)
4
3
.
6
6
3
.
6
6
0
.
6
0
7
.
5
2019
2020
Including specified items
Excluding specified items(2)
(1) Excluding the Other heading.
(2) See the Financial Reporting Method section on
pages 22 and 23 for additional information on
non-GAAP financial measures.
Medium-
term
objectives
(%)
5-10
15-20
40-50
> 10.75
> 3.75
2020
results (%)
(5)
15.8
46.6
11.8
4.4
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
The Bank’s financial results met all of the medium-term objectives, except for growth in diluted
earnings per share. In fact, despite the growth in revenues from all operating segments, diluted
earnings per share excluding specified items(1) was down 5% compared to the previous year. This
target was not met primarily due to the significant increase in provision for credit losses during the
year following the significant deterioration in the macroeconomic outlook caused by COVID-19 and
the expected impact on clients. In addition, the ROE excluding specified items(1) is in line with the
target set and the dividend payment ratio excluding specified items(1) is in the middle of the target
range. The CET1 capital ratio and the leverage ratio, at 11.8% and 4.4% respectively, are also above
the set targets.
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial
measures.
National Bank of Canada
2020 Annual Report
26
Management’s Discussion and Analysis
Overview
Dividends
For fiscal 2020, the Bank declared $953 million in dividends to common shareholders (2019:
$892 million), representing 50% of net income attributable to common shareholders (2019: 42%).
Regulatory Capital Ratios
As at October 31, 2020, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 11.8%,
14.9% and 16.0%, i.e., above the regulatory requirements, compared to ratios of, respectively,
11.7%, 15.0% and 16.1% as at October 31, 2019. The increase in the CET1 capital ratio since
October 31, 2019 was essentially due to net income net of dividends, transitional measures
applicable to ECL provisioning, common share issuances under the Stock Option Plan, and
remeasurements of pension plans and other post-employment benefit plans. The growth in risk-
weighted assets, the expiry of transitional arrangements for specific wrong-way risk and for the
revised securitization framework as well as the adoption of IFRS 16 contributed to offset this
increase. The decreases in the Tier 1 capital ratio and the Total capital ratio were essentially due to
growth in risk-weighted assets as well as to a redemption of trust units issued by NBC Asset Trust;
however, the decrease was partly offset by the issuance of Limited Recourse Capital Notes (LRCN) –
Series 1. As at October 31, 2020, the leverage ratio was 4.4% compared to 4.0% as at
October 31, 2019. The increase in the leverage ratio is explained by the growth in Tier 1 capital, due
to the same factors as described above, and by modest growth in total exposure, mainly from
temporary measures announced by OSFI with respect to the exclusion of exposures from central
bank reserves and sovereign-issued securities that qualify as HQLA securities under the Liquidity
Adequacy Requirements guideline.
High-Quality Loan Portfolio
Loans and acceptances, net of allowances, account for 50% of the Bank’s total asset and amount to
$164.7 billion as at October 31, 2020. For fiscal 2020, the Bank recorded $846 million in provisions
for credit losses, $499 million more than those recorded in fiscal 2019. This considerable increase
mainly reflects a significant deterioration in the macroeconomic outlook (in particular GDP growth,
the unemployment rate, and oil prices) caused by COVID-19 in fiscal 2020 and the expected impacts
of the pandemic on the Bank's clients. The higher year-over-year provisions stem mainly from
impaired loans in the Commercial Banking and Financial Markets segment. These increases were
offset by lower provisions for credit losses on impaired loans from Personal Banking (including
credit card receivables) as well as from lower provisions for credit losses in the USSF&I segment,
related to the Credigy subsidiary. The 2020 provisions for credit losses represented 0.23% of
average loans and acceptances, compared to 0.21% from fiscal 2019.
Risk Profile
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)
2020
2019
846
0.53 %
0.23 %
0.16 %
817
465
347
0.23 %
0.21 %
0.20 %
684
450
(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.
Annual Dividend per Common Share
Year ended October 31
(Canadian dollars)
2.84
2.66
2.18
2.28
2.44
2016
2017
2018
2019
2020
Evolution of Regulatory Ratios under
Basel III
As at October 31
%
1
.
6
1
%
0
.
5
1
%
7
.
1
1
%
0
.
6
1
%
9
.
4
1
%
8
.
1
1
%
0
.
4
%
4
.
4
2019
2020
CET1
Tier 1
Total
Leverage ratio
Breakdown of the Average Loan and
Acceptance Portfolio(1)
As at October 31, 2020
8%
12%
3%
25%
52%
Personal Banking (2019: 53%)
Commercial Banking (2019: 25%)
Wealth Management (2019: 4%)
Financial Markets – Corporate Banking (2019: 12%)
U.S. Specialty Finance and International
(2019: 6%)
(1) Excluding loans and acceptances in the Other heading
National Bank of Canada
2020 Annual Report
27
Management’s Discussion and Analysis
Overview
Economic Review and Outlook
Global economy
As expected, the global economy bounced back vigorously in the third quarter as several countries managed to flatten the coronavirus contagion curve and
relax their social distancing rules. A strong rebound was expected as activities resumed in some sectors of the economy, especially since latent demand had
accumulated during the lockdown period. The recovery was also driven by considerable assistance from public administrations in support of businesses and
household income. But the situation is still far from normal. In the eurozone, GDP in the third quarter was still 4.3% below pre-crisis levels. In the United States
the gap was 3.7%, similar to the shortfall logged at the height of the 2008-2009 recession. There is strong demand for goods whereas services are suffering
due to physical distancing measures, and this is completely atypical in a recession that is benefiting manufacturing countries such as China, whose economy
is performing better. We still have a long road ahead, and the global economy is expected to grow at a slower pace over the next few months, with several
countries confronting a marked upsurge in the number of new COVID-19 infections. We expect the global economy to shrink 3.9%(1) in 2020, the sharpest
contraction since the International Monetary Fund (IMF) began compiling the data in 1981. A 5.2%(1) rebound is expected next year, but this assumes that an
effective vaccine will reach the general population in the second half of the year.
Two major factors will determine the performance of the U.S. economy over the next few months: developments in the pandemic and the size of Washington’s
next budget assistance program. In epidemiological terms, the situation has deteriorated rapidly in recent weeks. However, there does not appear to be any
plans at this time to reinstate the kind of strict lockdowns now being implemented in several European countries. This does not mean that a resurgence of the
coronavirus will have no impact on the economy. Looking ahead to next year, the strength of the economic recovery will depend largely on decisions taken in
Washington. A larger fiscal stimulus package may have been possible had the Democrats swept to power in the presidential election with a decisive victory,
since they have recently shown a greater willingness to loosen the purse strings. But it appears that the Republicans will likely maintain control of the Senate,
which limits the size of any potential stimulus package. We expect the economy to bounce back 3.2%(1) in 2021, on the heels of a 3.6%(1) contraction in 2020.
Canadian economy
In 2020, Canadian governments intervened in the economy with exceptional force, representing the strongest approach taken by an advanced country. As a
result of this extraordinary support for workers who had lost their jobs and for businesses in difficulty, the economy has staged a surprisingly strong rally. In
October, employment was only 3.3% short of its February highs, and the economy had recouped no less than 79% of the jobs that had been lost. But the
employment figures do not fully reflect the damage done to the labour market. A significant share of the labour force is being underutilized, as evidenced by
the 6.1% shortfall in hours worked compared to February’s peak figure. It is important to note that in September, no fewer than 2.1 million workers (11% of the
pre-pandemic workforce) were still indirectly receiving the emergency wage subsidy paid out by the federal government. This illustrates the large number of
jobs that are still dependent on government interventions. While the ongoing spread of coronavirus is much more encouraging in Canada than in the other
advanced countries, we are not immune to a sharp upturn. Despite the slump that is likely over the next few months due to physical distancing, we project the
economy to grow 4.3%(1) in 2021 following a 5.5%(1) contraction in 2020. The light at the end of the tunnel (an effective vaccine) should support both business
and consumer confidence.
Quebec economy
In order to limit the spread of COVID-19 infections, which has been accelerating, Quebec has kept bars, restaurants dining rooms, theatres and gyms closed in
several affected regions since the beginning of October. As a result, over 50,000 jobs were lost in October in the information/culture/leisure and
accommodations/food services sectors. A net total of 13,000 jobs were lost during the month as other sectors picked up some of the slack. Despite this
decline, employment was 2.9% below February levels, which compares favourably with the national average of 3.3%. We remain optimistic that the economy
will continue to recover, given the Quebec government’s fiscal flexibility and the fact that Quebec households are in better financial condition than those
elsewhere in the country. Following a 6.1%(1) contraction in 2020, the Quebec economy could stage a 4.5%(1) rebound next year. Even though the recovery is
expected to continue, the labour market is expected to have unused capacity for some time, while certain sectors where physical distancing remains an issue
may continue to stand idle, pending the deployment of an effective vaccine.
(1)
GDP growth forecasts, Economy and Strategy group, National Bank Financial
National Bank of Canada
2020 Annual Report
28
Management’s Discussion and Analysis
Financial Analysis
Consolidated Results
Year ended October 31
(millions of Canadian dollars)
Operating results
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes(1)
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank's shareholders and holders
of other equity instruments
Diluted earnings per share (dollars)
Taxable equivalent basis(1)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
Specified items(1)
Foreign currency translation loss on disposal of subsidiaries
Impairment losses on premises and equipment and on intangible assets
Severance pay
Charge related to Maple
Gain on disposal of Fiera Capital shares
Gain on disposal of premises and equipment
Provisions for onerous contracts
Remeasurement at fair value of an investment
Specified items before income taxes
Income taxes on specified items
Specified items after income taxes
Non-controlling interests on specified items
Specified items after income taxes and non-controlling interests
Operating results on a taxable equivalent basis and
excluding specified items(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
Income before provisions for credit losses and income taxes 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
Non-controlling interests excluding specified items
Net income attributable to the Bank's shareholders and holders
of other equity instruments excluding specified items
Diluted earnings per share excluding specified items (dollars)
2020
2019
% change
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
2,041
5.70
208
57
265
−
(24)
(71)
(48)
(13)
−
−
−
−
(156)
(23)
(133)
(10)
(123)
4,463
3,753
8,216
4,413
3,803
846
2,957
741
2,216
52
2,164
6.06
3,596
3,836
7,432
4,301
3,131
347
2,784
462
2,322
66
2,256
6.34
195
135
330
−
−
(57)
(10)
(11)
79
50
(45)
(33)
(27)
(21)
(6)
−
(6)
3,791
3,875
7,666
4,178
3,488
347
3,141
813
2,328
66
2,262
6.36
18
(4)
7
6
8
144
(9)
(2)
(10)
(36)
(10)
(10)
18
(3)
7
6
9
144
(6)
(9)
(5)
(21)
(4)
(5)
11
7
12
Average assets
Average loans and acceptances
Average deposits
Efficiency ratio on a taxable equivalent basis and excluding specified items(1)
318,199
159,275
207,381
286,162
148,765
184,460
53.7 %
54.5 %
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
29
Management’s Discussion and Analysis
Financial Analysis
Analysis of Consolidated Results
Financial Results
For fiscal 2020, the Bank’s net income totalled $2,083 million compared to $2,322 million in fiscal 2019, a 10% decline. This decline was due to the
considerable increase in provisions for credit losses during the fiscal year as a result of the significant deterioration in the macroeconomic outlook caused by
COVID-19 and its expected impact on our clients. Income before provisions for credit losses and income taxes(1) stood at $3,382 million for fiscal 2020, up 8%
year over year, driven by revenue growth across all the Bank’s business segments. Specified items, net of income taxes, had a $133 million unfavourable
impact on net income in 2020 compared to a $6 million unfavourable impact one year earlier. The fiscal 2020 specified items, net of income taxes, consist of a
$36 million foreign currency loss on disposals of subsidiaries, $52 million in impairment losses on premises and equipment and on intangible assets,
$35 million in severance pay and a $10 million charge related to Maple. Specified items in fiscal 2019, net of income taxes, consisted of 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, $7 million in severance pay, an $8 million charge
related to Maple and $33 million in provisions for onerous contracts. For fiscal 2020, the Bank’s net income excluding specified items(1) totalled
$2,216 million, down 5% from $2,328 million in fiscal 2019. Income before credit losses and income taxes on a taxable equivalent basis and excluding
specified items(1) was $3,803 million for fiscal 2020, up 9% year over year.
Total Revenues
For fiscal 2020, the Bank’s total revenues amounted to $7,927 million, up $495 million or 7% from $7,432 million in fiscal 2019. The increase in total
revenues was driven by revenue growth across all of the Bank’s business segments. The fiscal 2020 total revenues include a $24 million loss on disposals of
subsidiaries, while fiscal 2019 total revenues included 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 2020 total revenues on a taxable
equivalent basis and excluding specified items(1) were up $550 million or 7% year over year. For additional information about total revenues on a taxable
equivalent basis(1), see Table 2 on page 116.
Net Interest Income
For fiscal 2020, the Bank’s net interest income totalled $4,255 million, rising $659 million or 18% from $3,596 million in fiscal 2019. The 2020 net interest
income on a taxable equivalent basis(1) was $4,463 million compared to $3,791 million in fiscal 2019 (Table 3, page 116).
In the Personal and Commercial (P&C) segment, the fiscal 2020 net interest income totalled $2,445 million, a $61 million or 3% year-over-year increase driven
mainly by growth in loan volumes and in deposit volumes, which rose 4% and 8%, respectively, year over year. The growth in loans was primarily due to
mortgage and commercial lending activity, while the growth in deposits was partly due to support measures granted by governments in the context of the
COVID-19 pandemic. The increase in P&C’s net interest income was tempered by a narrowing of the net interest margin, which was 2.19% in fiscal 2020 versus
2.23% in fiscal 2019, largely due to the decrease in deposit margins. In the Wealth Management segment, net interest income for fiscal 2020 was
$442 million, a 3% year-over-year decrease owing to lower interest rates, which more than offset the increase in deposit volumes.
As for the Financial Markets segment, its fiscal 2020 net interest income on a taxable equivalent basis(1) was up $472 million 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, for fiscal 2020 net interest
income was up $151 million, or 23% year over year, owing to growth in loan and deposit volumes at the Advanced Bank of Asia Limited (ABA Bank) subsidiary
in fiscal 2020 and the increase in net interest income at the Credigy subsidiary related to the volume growth in loan portfolios.
Non-Interest Income
For fiscal 2020, non-interest income totalled $3,672 million versus $3,836 million in fiscal 2019. The 2020 non-interest income includes a $24 million foreign
currency translation loss on disposal of subsidiaries, while non-interest income in fiscal 2019 included 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 $3,753 million in fiscal 2020 compared to $3,875 million in
fiscal 2019. For additional information on non-interest income on a taxable equivalent basis(1), see Table 4 on page 117.
The fiscal 2020 revenues from underwriting and advisory fees were up 26% year over year, in particular due to merger and acquisition activities in the Financial
Markets segment. Revenues from securities brokerage commissions rose 10%. Mutual fund revenues and trust service revenues totalled $1,152 million in
fiscal 2020, a $94 million year-over-year increase owing to growth in assets under administration and under management as a result of net inflows into various
solutions and from stronger stock market performance in fiscal 2020.
Revenues from credit fees and revenues from acceptances and letters of credit and guarantee increased $50 million from fiscal 2019, due to higher volumes of
credit activity in Commercial Banking and the Financial Markets segment. In addition, card revenues and revenues from deposit and payment service charges
were down 21% and 3%, respectively, in fiscal 2020 due to a sharp drop in the number of transactions as a result of the impacts of the pandemic, including the
temporary closure of businesses and non-essential services and the lockdowns imposed by governments.
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
30
Management’s Discussion and Analysis
Financial Analysis
The trading revenues recorded in non-interest income amounted to $604 million in fiscal 2020 compared to $829 million in fiscal 2019. Trading revenues on a
taxable equivalent basis(1) recorded in non-interest income totalled $661 million, down from $964 million in 2019. Including the portion recorded in net
interest income, trading activity revenues on a taxable equivalent basis(1) amounted to $1,466 million in 2020, a $274 million year-over-year increase
(Table 5, page 117) attributable to revenues from equity securities and from fixed-income securities, as well as revenues from commodities and foreign
exchange activities of the Financial Markets segment. The trading revenues of other segments also increased.
In fiscal 2020, gains on non-trading securities and foreign exchange revenues were up $16 million and $8 million, respectively, compared to fiscal 2019.
Insurance revenues decreased $8 million year over year and the Bank’s share in the net income of associates and joint ventures was also down $6 million.
Lastly, other revenues amounted to $104 million in fiscal 2020, a $147 million year-over-year decrease owing mainly to specified items recorded in fiscal 2020
and 2019, i.e. a foreign currency translation loss on disposal of subsidiaries in fiscal 2020 and, in fiscal 2019, 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. These items had a
$120 million unfavourable impact on growth in other revenues.
Non-Interest Expenses
Non-interest expenses stood at $4,545 million in fiscal 2020, up $244 million from fiscal 2019 (Table 6, page 118). The 2020 non-interest expenses included
$71 million in impairment losses on premises and equipment and on intangible assets, $48 million in severance pay and a $13 million charge related to
Maple. The 2019 non-interest expenses include $57 million in impairment losses on premises and equipment and on intangible assets, $10 million in
severance pay, an $11 million charge related to Maple and $45 million in provisions for onerous contracts. Non-interest expenses excluding specified items(1)
stood at $4,413 million, up $235 million or 6% year over year.
Compensation and employee benefits stood at $2,713 million in fiscal 2020, a 7% year-over-year increase that was essentially due to the annual increase in
salaries, an increase in the number of employees, expenses incurred by the Bank to deploy pandemic-related measures, and higher severance pay in
fiscal 2020. The decrease in occupancy expenses is attributable to provisions for onerous contracts recorded in fiscal 2019, tempered somewhat by the
expansion of ABA Bank’s banking network on these expenses in 2020. The increase in the technology expenses, including amortization, were related to
technology investments made by the Bank for its transformation plan and for business development purposes, as well as higher impairment losses on
premises and equipment and on intangible assets in fiscal 2020. The decrease in travel and business development expenses in 2020 stems from the lockdown
and social distancing measures imposed by governments in the context of the pandemic.
Provisions for Credit Losses
For fiscal 2020, the Bank recorded $846 million in provisions for credit losses, compared to $347 million in provisions recorded in fiscal 2019 (Table 7,
page 119). This considerable increase came from provisions for credit losses on non-impaired loans mainly due to a significant deterioration in the
macroeconomic conditions caused by COVID-19 in fiscal 2020, including the GDP growth rate, the unemployment rate and oil prices, as well as the expected
impact of the pandemic on the Bank’s clients. This was also due to provisions for credit losses on impaired loans in Commercial Banking and in the Financial
Markets segment, which increased $75 million and $47 million, respectively, in fiscal 2020. These increases were offset by provisions for credit losses on
impaired loans that were $19 million lower in Personal Banking (including credit card receivables) and $48 million in the USSF&I segment, attributable to the
Credigy subsidiary related to repayments and maturities of certain loan portfolios. At $372 million, the fiscal 2020 provisions for credit losses on impaired
loans represent 0.23% of average loans and acceptances, up from 0.21% in fiscal 2019.
Income Taxes
Detailed information about the Bank’s income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2020, income taxes stood at
$453 million, representing an effective tax rate of 18% compared to $462 million and an effective tax rate of 17% in fiscal 2019. This change in effective tax
rate stems from the tax impact of the disposal of the subsidiaries in Brazil, from a decrease in the income tax rate applicable to the ABA subsidiary, as the
Cambodian government has granted tax incentive measures, as well as the realization of capital gains that were taxed at a lower rate in fiscal 2019.
(1) See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
31
Management’s Discussion and Analysis
Business Segment Analysis
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.
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
Results by Business Segment
Year ended October 31(1)
(millions of Canadian dollars)
Net interest income(2)
Non-interest income(2)
Total revenues
Non-interest expenses
Income before provisions for
credit losses and income taxes(3)
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 and
holders of other equity
instruments
Average assets
Personal and
Commercial
2019
2020
Wealth
Management
2019
2020
2,445
1,018
3,463
1,849
1,614
517
1,097
290
807
−
2,384
1,067
3,451
1,837
1,614
237
1,377
366
1,011
−
442
1,413
1,855
1,115
455
1,288
1,743
1,073
740
7
733
194
539
−
670
−
670
176
494
−
Financial
Markets
2019
474
1,277
1,751
756
995
30
965
257
708
−
2020
946
1,108
2,054
809
1,245
239
1,006
266
740
−
2020
USSF&I
2019
807
13
820
319
501
80
421
69
352
34
656
59
715
285
430
80
350
71
279
40
2020
(385)
120
(265)
453
(718)
3
(721)
(366)
(355)
8
Other
2019
(373)
145
(228)
350
(578)
−
(578)
(408)
(170)
26
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
Total
2019
3,596
3,836
7,432
4,301
3,131
347
2,784
462
2,322
66
807
1,011
117,338 112,798
539
5,917
494
6,219
740
123,943
708
112,493
318
14,336
239
10,985
(363)
56,665
(196)
43,667
2,041
318,199
2,256
286,162
(1)
(2)
(3)
For the year ended October 31, 2019, certain amounts have been reclassified.
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 22 and 23 for additional information on non-GAAP financial measures.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
32
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and over 138,000 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, 403 branches and
940 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.
Personal Banking
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 range of insurance products.
Commercial Banking
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 over 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.
Economic and Market Review
The closure of non-essential services in March and April 2020 in Canada to limit the spread of COVID-19 could have had disastrous consequences for
households and businesses. Fortunately, the federal government put in place generous programs to support them during the pandemic. Workers who have lost
their jobs are benefiting from new income support programs that are much more generous than usual. Among other things, the government has helped
businesses maintain an employment relationship with many employees despite their financial difficulties with the implementation of the wage subsidy. The
budget measures implemented led to an impressive rebound in retail sales and real estate activity, which have also been stimulated by lower interest rates.
Although Quebec was the epicentre of the pandemic and the government was forced to impose strict physical distancing measures, the most recent labour
market data shows that job recovery is proceeding well and compares favourably with the rest of the country. We remain optimistic that the recovery will
continue given the fiscal flexibility of the Quebec government and the fact that households are in a better financial position than elsewhere in the country
because real estate remains more affordable. As for business investments, they should continue to rebound, especially since there is now a light at the end of
the tunnel with the hope of an effective vaccine.
The economic environment in 2020 and the outlook for 2021 are discussed in more detail in the Economic Review and Outlook section on page 28.
Key Success Factors
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 the needs facing businesses and entrepreneurs in collaboration with other Bank segments.
National Bank of Canada
2020 Annual Report
33
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Objectives and Strategies
The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience. In
fact, the COVID-19 pandemic resulted in increased client satisfaction due to the mobilization of all employees to ensure that our advice and services would be
accessible. The Bank significantly increased external communications (Facebook Live with various Bank experts and economic news capsules) to answer
clients' questions during this period of uncertainty.
Strategic Priorities
2020 Achievements and Highlights
As a result of COVID-19, deployed relief measures and implemented a distinctive and proactive advisory
approach in order to offer solutions that could respond to each client’s personal situation.
As a result of COVID-19, deployed support measures for the elderly, including a dedicated telephone line in
our Customer Service Centres used to handle calls on a priority basis.
Continued efforts to grow our client base through expanded geographic coverage, the use of online
origination solutions, and our various campaigns that focus on advice tailored to each stage of life.
Personalized our advisory services to target strategic clients such as newcomers, millennials, professionals,
people aged 50 to 64, and small and medium-sized enterprises (SMEs).
Enhanced the product offering by improving our financial programs for our professional clients and
launched a US$ high yield account for businesses.
Created the National Bank SME Growth Fund, L.P. in partnership with the Quebec government, to support
businesses in their digital transformation and growth projects.
Performance superior to the previous fiscal year in residential financing supporting a very active real estate
market in this context of pandemic.
Enhanced the capabilities of the transactional platform and the mobile app to deliver a simpler, safer, and
more intuitive digital experience.
Improved the experience for personal banking clients by providing a consolidated view of all their
investments and allowing them to do their banking simply and independently.
Optimized the client onboarding process to enhance use levels of our banking solutions.
Transformed the experience in more than 40 branches in Quebec to assist clients in their switch to self-
service, by being proactive with the advisory offering.
Opened a new Customer Contact Centre in Sherbrooke to diversify our call intake pool and support client
accessibility.
As a result of COVID-19, quickly deployed new digital functionalities, including new forms for payment
deferral requests (mortgages, personal loans and credit cards) and online registration for Canada Revenue
Agency (CRA) direct deposit.
As a result of COVID-19, implemented processes that enable clients to conduct business remotely with their
advisor (electronic signature, virtual meeting).
Enhanced online origination processes (Personal and Commercial account opening and instant credit card
approvals).
Added self-service functionalities.
Launched a virtual assistant and online tutorials to help clients use our digital solutions.
Deployed an online international money transfer solution for personal banking clients that will allow them
to transfer money from Canada to foreign bank accounts (19 countries in the eurozone).
Deployed a digital financing platform for our sales forces, improving the speed of our offers of financing to
businesses.
Continued to simplify and automate client processes, both for retail clients (account openings, payments,
residential financing and investing) and for business clients (account openings, financing and cash
management).
Maintain volume growth and
accelerate net client acquisition
Improve the client experience
Accelerate the digital transformation
Improve efficiency
National Bank of Canada
2020 Annual Report
34
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Priorities and Outlook for 2021
Maintain volume growth and accelerate net client acquisition
Keep consulting at the core of our strategy by continuing to focus on client engagement and by:
o
o
equipping our employees to continuously improve the proactivity and relevance of their advice;
redefining our distribution network in order to foster proactive consulting, risk management and improved client accessibility.
Continue our efforts to acquire key clients with high growth potential, particularly among Gen Z, millennials, newcomers to Canada already in the country,
professionals, people aged 50 to 64 and SMEs, with our online origination capabilities and our competitive offer while enhancing the Bank's presence
among these clients.
Accelerate acquisitions and sales initiated on our digital channels.
Continue to tailor our offering to market particularities, the competition, geographic location and micromarkets.
Provide clients with a simple, unified experience characterized by an integrated approach across all products and distribution channels.
Enhance our mobile application and expand self-service options on our digital channels.
Optimize the client experience
Make the most of client data and place it at the heart of our transformation.
Help business clients grow by giving them access to the Bank’s network of entrepreneurs.
Improve efficiency
Continue simplifying and automating certain targeted processes (transactional solutions, investments, payments, and commercial financing).
Develop our product offering for our clients (transactional solutions, cards, payments, cash management).
National Bank of Canada
2020 Annual Report
35
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Segment Results – Personal and Commercial
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes(2)
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Net interest margin(3)
Average interest-bearing assets
Average assets
Average loans and acceptances
Net impaired loans(4)
Net impaired loans(4) as a % of average loans and acceptances
Average deposits
Efficiency ratio
2020
2019(1)
% change
2,445
1,018
3,463
1,849
1,614
517
1,097
290
807
2.19 %
111,488
117,338
116,838
412
0.4 %
67,390
53.4 %
2,384
1,067
3,451
1,837
1,614
237
1,377
366
1,011
2.23 %
106,995
112,798
112,290
409
0.4 %
62,301
53.2 %
3
(5)
−
1
−
(20)
(21)
(20)
4
4
4
1
8
(1)
(2)
(3)
(4)
For the year ended October 31, 2019, certain amounts have been reclassified.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Average Loans and Acceptances and Deposits
Year ended October 31
(millions of Canadian dollars)
112,290
116,838
Total Revenues by Geographic Distribution
Year ended October 31, 2020
62,301
67,390
25%
75%
Loans and
acceptances
Deposits
Loans and
acceptances
Deposits
2019
2020
Personal Banking
Commercial Banking
Province of Quebec (2019: 76%)
Other provinces (2019: 24%)
National Bank of Canada
2020 Annual Report
36
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
Financial Results
In the Personal and Commercial segment, net income totalled $807 million in fiscal 2020, down
20% from $1,011 million in fiscal 2019, essentially due to the impacts of the COVID-19 pandemic,
including a large increase in provisions for credit losses. The segment’s total revenues rose
$12 million, as the $61 million growth in net interest income was offset by a $49 million decrease in
non-interest income. The increase in net interest income was driven mostly by higher personal and
commercial loan and deposit volumes. This growth was offset by a narrowing of the net interest
margin, which was 2.19% in fiscal 2020 versus 2.23% in fiscal 2019, a decrease resulting mainly
from deposit margins and, to a lesser extent, loan margins.
The segment’s non-interest expenses stood at $1,849 million in fiscal 2020, a 1% year-over-year
increase attributable mainly to increases in compensation and employee benefits related to the
annual increase in salaries and higher charges related to the segment’s strategic initiatives. These
increases were partly offset by the decline in certain variable expenses, including business
development expenses, due to social distancing and lockdown measures imposed by governments.
Given these results, the segment’s fiscal 2019 income before provisions for credit losses and
income taxes(1) was relatively unchanged year over year. And, at 53.4% for fiscal 2020, the
segment’s efficiency ratio was comparable to the ratio of 53.2% recorded in 2019.
For fiscal 2020, the segment recorded $517 million in provisions for credit losses, compared to
$237 million in fiscal 2019, an increase of $280 million. This increase came mainly from an increase
in the provisions for credit losses on non-impaired loans in Personal Banking and Commercial
Banking, as well as non-impaired credit card receivables, due to the significant deterioration in the
macroeconomic outlook caused by COVID-19 and the pandemic’s expected impact on the segment’s
clients. Provisions for credit losses on Commercial Banking’s impaired loans also rose sharply when
compared to fiscal 2019.
Personal Banking
For fiscal 2020, Personal Banking’s total revenues amounted to $2,154 million, compared to
$2,163 million in fiscal 2019. A 4% increase in loan volumes and 10% growth in deposit volumes
were tempered by a narrowing of the net interest margin on loans and deposits. In addition, the
$50 million decrease in non-interest income was essentially due to lower credit card revenues and
revenues from deposit and payment service charges, as the number of transactions dropped due to
the impacts of the pandemic, including the temporary closing of businesses and non-essential
services and the lockdowns imposed by governments. Non-interest expenses increased $6 million
in fiscal 2020, owing mainly to higher technology investment expenses as well as higher
compensation and employee benefits.
Commercial Banking
For fiscal 2020, Commercial Banking’s total revenues amounted to $1,309 million, rising 2% from
$1,288 million in fiscal 2019. Its net interest income was up, essentially due to growth in loan
volumes and deposit volumes, which rose 4% and 6%, respectively, tempered by a narrowing of the
net interest margin on loans and deposits. Non-interest income was relatively stable year over year.
The increase in revenues from bankers’ acceptances was offset by lower revenues from deposit and
payment service charges, a result of the context around the pandemic, as well as the decrease in
revenues from foreign exchange activities. Commercial Banking’s non-interest expenses rose
$6 million in fiscal 2020, mainly due to higher compensation and employee benefits.
Total Revenues by Category
Year ended October 31, 2020
38%
46%
5%
11%
Retail (2019: 45%)
Payment Solutions (2019: 13%)
Insurance (2019: 5%)
Commercial Banking (2019: 37%)
Operating Results
Year ended October 31
(millions of Canadian dollars)
3,451
3,463
1,837
1,849
1,011
807
Total
revenues
Non-
interest
expenses
Net
income
Total
revenues
Non-
interest
expenses
Net
income
2019
2020
Personal Banking
Commercial Banking
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial
measures.
National Bank of Canada
2020 Annual Report
37
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory services
and close client relationships. It delivers a full range of wealth management products and solutions through a multi-channel distribution network and a
differentiated business model. The Wealth Management segment also proposes investment solutions to independent advisors as well as solutions to
institutional clients.
Business Units
Full-Service Brokerage
Drawing on the largest network of investment advisors in Quebec, National Bank Financial – Wealth Management (NBFWM) provides wealth management
advisory services with more than 800 advisors at close to 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.
Private Banking
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.
Direct Brokerage
National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online
investment solution. NBDB helps customers who want to manage their own investments to do so through a trading platform and an optimized mobile trading
platform or by speaking directly to a representative on the phone.
Investment Solutions
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.
Administrative and Trade Execution Services
National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services such as trade execution, custodial services, and
brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund
managers.
Transaction Products
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.
Trust and Estate Services
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.
Economic and Market Review
Policymakers have taken extraordinary measures in 2020 to limit the negative impact of social distancing measures to counter COVID-19. Governments in
North America have aggressively supported households and businesses in difficulty. The central banks lowered interest rates to near zero and launched
quantitative easing programs to provide affordable financing to governments and other borrowers. As a result of these unprecedented interventions, the stress
in financial markets eased considerably after rising sharply in March 2020. The major financial asset classes have benefited, and at the time of this report,
households are no longer experiencing a negative wealth effect in 2020, an atypical situation in a recession. In short, policymakers have put in place
favourable conditions for an economic recovery that should continue in 2021.
The economic environment in 2020 and the outlook for 2021 are discussed in more detail in the Economic Review and Outlook section on page 28.
National Bank of Canada
2020 Annual Report
38
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
Key Success Factors
Leadership position in Quebec in terms of market share and brand recognition.
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 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 private management, full-brokerage and 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.
Objectives and Strategies
The Wealth Management segment will capitalize on the strength of the Bank's brand by generating sustained growth in income, improving client satisfaction
and maintaining high employee engagement. The Wealth Management segment distinguishes itself from its competition by offering an exceptional experience
in terms of advice, offering innovative solutions and impeccable service thanks to agile and aligned multifunctional teams. The segment seeks to increase
market penetration across Canada through organic growth as well as targeted actions and partnerships.
Strategic Priorities
2020 Achievements and Highlights
Transform the partnership with clients
Produced digital content to support clients during the COVID-19 crisis.
Deployed a strategy that centres on goals and life stages.
Provided best market pricing on online brokerage platform.
Launched the Philantra Foundation, which gives our clients easier access to philanthropic services.
Invest in high-growth markets
Continue transforming Wealth
Management’s culture
Launched NB exchange-traded funds (ETFs).
Improved cross-selling strategy in partnership with other Bank segments.
Opened a new private management location in downtown Toronto.
Actively recruited investment advisors to increase our market share.
Experienced strong growth in our services to independent firms.
Promoted a joint mission and an integrated client approach.
Focused on collaboration between employees of the Wealth Management segment and other segments of
the Bank.
Implemented concrete measures to promote innovation and accelerate transformation.
Exceptional adaptation of our ways of working and communicating during the pandemic due to accelerated
implementation and adoption of tools needed to work from home.
Priorities and Outlook for 2021
Transform the way we serve clients
Improve online brokerage services.
Increase use of data and full view of client information to provide better advice.
Increase the usability of the new Mutual Fund Dealers Association of Canada (MFDA) platform, which is designed to replace certain existing asset
management platforms.
Markedly increase our digital capabilities in full-service brokerage services.
Gradually implement tools allowing our advisors to apply the “Lifetime Advice” approach.
Concentrate on fast-growing markets
Launch new types of investment products.
Develop a new administrative services platform for institutional clients.
Continue to develop markets outside Quebec.
Increase in our market portfolio shares by focusing on synergies with the Personal and Commercial and Financial Markets segments.
Continue transforming Wealth Management’s culture
Deploy activities promoting collaboration between employees.
Focus on leadership and cross-cutting initiatives.
National Bank of Canada
2020 Annual Report
39
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
Segment Results – Wealth Management
Year ended October 31
(millions of Canadian dollars)
Net interest income
Fee-based revenues
Transaction and other revenues
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes(2)
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Average assets
Average loans and acceptances
Net impaired loans(3)
Average deposits
Efficiency ratio
2020
2019(1)
% change
442
1,087
326
1,855
1,115
740
7
733
194
539
5,917
4,776
2
34,507
455
1,013
275
1,743
1,073
670
−
670
176
494
6,219
4,855
3
32,321
60.1 %
61.6 %
(3)
7
19
6
4
10
9
10
9
(5)
(2)
(33)
7
(1)
(2)
(3)
For the year ended October 31, 2019, certain amounts have been reclassified.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Assets Under Administration and Under Management – Wealth Management
As at October 31
(millions of Canadian dollars)
Assets under administration
Assets under management
Individual
Mutual funds
Assets under administration and under management
Assets Under Administration and Under
Management
Year ended October 31
(millions of Canadian dollars)
6
3
6
,
4
8
4
1
7
0
,
9
0
5
0
6
7
,
0
8
5
8
5
,
7
8
2020
509,071
48,140
39,445
87,585
596,656
2019
% change
484,636
43,941
36,819
80,760
565,396
5
10
7
8
6
Total Revenues by Geographic Distribution
Year ended October 31, 2020
36%
64%
2019
2020
Assets under administration
Assets under management
Province of Quebec (2019: 64%)
Other provinces (2019: 36%)
National Bank of Canada
2020 Annual Report
40
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
Financial Results
In the Wealth Management segment, net income totalled $539 million in fiscal 2020, up 9% from
$494 million in fiscal 2019. The segment’s total revenues amounted to $1,855 million in
fiscal 2020, up 6% from $1,743 million in fiscal 2019. This increase stems partly from a 7%
increase in fee-based revenues, owing to growth in the segment’s assets under administration and
under management generated by net inflows into various solutions and due to stronger stock
market performance in fiscal 2020. Transaction-based and other revenues also rose 19% due to
higher transaction volumes in fiscal 2020 as a result of stock market volatility. In addition, the
decline in net interest income was attributable to a narrower margin on deposits, related to lower
interest rates and partly offset by the increase in deposit volumes.
The segment’s non-interest expenses stood at $1,115 million in fiscal 2020 compared to
$1,073 million for fiscal 2019, an increase attributable to higher compensation and employee
benefits, including variable compensation tied to higher revenues and higher operations support
charges related to the segment’s initiatives. The 2020 efficiency ratio was 60.1% in fiscal 2020, an
improvement from 61.6% in fiscal 2019.
The segment’s provisions for credit losses increased $7 million year over year, both as a result of
provisions for credit losses on non-impaired loans, in connection with the significant deterioration
in the macroeconomic outlook caused by COVID-19, and due to higher provisions on credit losses
on impaired loans.
Assets Under Administration and Under Management
As at October 31, 2020, assets under administration and under management totalled
$596.7 billion, rising $31.3 billion or 6% from October 31, 2019 due to net inflows into various
solutions and to stronger stock market performance in fiscal 2020.
Assets under administration totalled $509.1 billion as at October 31, 2020, up $24.4 billion
compared to October 31, 2019. This increase came from net inflows into various solutions and
stronger stock market performance in fiscal 2020.
In the individuals category, assets under management amounted to $48.1 billion as at
October 31, 2020 compared to $43.9 billion as at October 31, 2019. The mutual funds category
totalled $39.4 billion as at October 31, 2020 for a 7% increase year over year.
Total Revenues by Category
Year ended October 31, 2020
17%
24%
59%
Net interest income (2019: 26%)
Fee-based services (2019: 58%)
Transaction-based and other revenues (2019: 16%)
Operating Results
Year ended October 31, 2020
(millions of Canadian dollars)
3
4
7
,
1
3
7
0
,
1
4
9
4
5
5
8
,
1
5
1
1
,
1
9
3
5
2019
2020
Total revenues
Non-interest expenses
Net income
National Bank of Canada
2020 Annual Report
41
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
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.
Business Units
The Financial Markets segment operates two main business units: Global Markets and Corporate and Investment Banking.
Global Markets
Financial Markets is a Canadian leader in risk management solutions and structured products and is the largest market-maker in exchange-traded funds (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.
Corporate and Investment Banking
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 is the leader in debt underwriting for provincial and
municipal governments across Canada while growing its national position in infrastructure and project financing. Financial Markets is active in securitization
financing, mainly Government-of-Canada-insured mortgages and mortgage-backed securities.
Economic and Market Review
By declaring the closure of non-essential services to combat the pandemic, the government had to take strong measures to support households and
businesses. For its part, the central bank had to act quickly to reassure investors and improve financial conditions, which had deteriorated sharply in
March 2020. The result was an economic recovery that surprised many when the economy reopened. Although the road travelled since April has been positive,
the recovery is far from complete. The upsurge in cases in recent weeks indicates that until an effective vaccine is available to the general population, a return
to normalcy is difficult to imagine. The expectation of a vaccine in 2021 is welcome because companies now see a light at the end of the tunnel that could
positively influence workforce management and investment plans. In the meantime, the federal government has committed to continue supporting the
economy by extending enhanced support for the unemployed at least until March 2021 and the wage subsidy until June 2021. In such a context, conditions are
favourable for continued economic recovery in 2021.
The economic environment in 2020 and the outlook for 2021 are discussed in more detail in the Economic Review and Outlook section on page 28.
Key Success Factors
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.
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.
Entrepreneurial culture: Integrated approach, teamwork, and alignment among all groups.
National Bank of Canada
2020 Annual Report
42
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Objectives and Strategies
Strategic Priorities
2020 Achievements and Highlights
Maintain leadership in Canadian debt
underwriting
Ranked first in government debt underwriting, sustaining our first place ranking for the last six years:
Lead and joint lead on Canada Mortgage Bond issuances aggregating $30.5 billion
Joint lead on the Province of Quebec’s largest ever USD offering (US$3.25 billion 5-year offering)
Inaugural joint lead for NBF on a European Investment Bank’s $600 million 4-year offering
Joint lead on the City of Toronto’s first ever $100 million 10-year social bond offering
Inaugural joint lead on OMERS Finance Trust’s $1.25 billion 7-year offering
Inaugural joint lead on PSP Capital’s $750 million 10-year offering
Lead on First Nations Finance Authority’s $240 million 10-year offering
Lead in corporate debt underwriting:
Joint bookrunner on a $700 million hybrid note offering for Inter Pipeline Ltd.
Joint bookrunner on a $175 million limited recourse capital notes offering and sole advisor on a
$125 million private placement of non-viability contingent capital (NVCC) subordinated debentures for
Canadian Western Bank
Joint bookrunner on a cross-border offering of high yield notes for Cascades Inc., raising $175 million and
US$650 million
Joint bookrunner on a $200 million inaugural 30-year senior unsecured debenture offering for Liberty
Utilities (Canada) LP
Joint bookrunner on a $250 million inaugural 5-year senior unsecured debenture offering for Summit
Industrial Income REIT
Lead advisor to Bombardier on its 3-year $1.0 billion senior secured term loan facility with HPS Investment
Partners, LLC, Apollo Capital Management, LP and Special Opportunities and Direct Lending funds managed
by Ares Management LLC
Leading Canada in quality and innovation:
Awarded SRP’s “Best Product Performance in Canada” award for our notes and market-linked GICs. The SRP
Awards are based on an analysis of the largest structured product database and winners are selected based
on the measurable performance of their products
Launched, in partnership with an independent asset management client, the first 3 mutual funds in Canada
dedicated to strategies currently offered via structured notes, raising over $1 billion over the year
Bookrunner in the biggest closed-end fund initial public offering (IPO) of the past 5 years, raising
$370 million using an innovative structure that introduced a voluntary cash contribution by the manager
Maintain leadership in investment
products
Building our international issuance network:
Over $1.5 billion of notes were issued outside of Canada, with an increasingly diversified universe of
investors
Strengthening our ETF leadership position by deploying the next generation of trading systems:
Deployed the latest trading infrastructure and software to support our market making functions for over
900 ETFs in Canada
Close to 1 in 2 ETFs launched by independent asset managers in Canada in 2020 trusted NBF as the lead
market maker for their funds
National Bank of Canada
2020 Annual Report
43
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Strategic Priorities
2020 Achievements and Highlights
Expand our client coverage to increase
our presence in advisory services
Leverage leadership in equity
distribution to increase lead and co-
lead positions
Involved in significant mandates including:
Co-financial advisor on Cirque du Soleil Inc.’s (CDS) Companies’ Creditors Arrangement Act (CCAA)
restructuring process under which a group of its secured creditors acquired the business for a total
transaction value of US$1.6 billion. As part of its mandate, NBF conducted a comprehensive global
outreach as part of a court supervised Sale and Investment Solicitation Process. NBF also helped source
and negotiate interim financing for CDS to ensure the business could sustain itself from the shutdown of
its operations due to the COVID-19 pandemic through to the resolution of the CCAA process
Acted as exclusive financial advisor to SSR Mining Inc. on its $5.6 billion merger with Alacer Gold Corp.
Acted as financial advisor to Public Sector Pension Investment Board and Alberta Teachers’ Retirement
Fund Board on their acquisition of Altagas Canada Inc. for a total consideration of $1.7 billion. Altagas
Canada Inc. (renamed TriSummit Utilities Inc.) is a TSX-listed entity owning a diversified portfolio of high-
quality regulated natural gas utilities and long-dated contracted renewable power assets
Joint Bookrunner on WSP Global Inc.’s $502 million bought deal public offering of common shares. This
was the fifth consecutive WSP equity financing in which NBF participated, raising aggregate gross process
of $1.7 billion
Joint Bookrunner on Lightspeed POS Inc.’s $288 million follow-on offering of subordinate voting shares.
This was the third consecutive deal for Lightspeed, including its IPO, where the Bank acted as a Joint
Bookrunner
Co-lead and joint bookrunner on Boyd Group Services Inc.’s $231.5 million bought deal equity financing.
This was the company’s largest equity offering in its history, and we were happy to have lead the
execution of such a successful transaction which garnered significant investor demand during the midst of
market uncertainty due to COVID-19. We look forward to continuing our longstanding relationship with
the company
Sole bookrunner on Boralex Inc.’s $201 million bought deal of common shares. Net proceeds were used to
repay amounts drawn under its revolving credit facility to provide financial flexibility for future working
capital and general corporate needs as well as funding its ongoing development pipeline and potential
future acquisitions
Priorities and Outlook for 2021
Continue to expand activities in our areas of expertise with a constant focus on Canadian clients and a targeted presence outside Canada.
Continue to be a strategic partner for our clients.
Increase market share among corporations for all fee-based products.
Maintain our leadership in established businesses across Canada: government issuances, structured products from ETF markets and securities lending.
Maintain tight cost control and an industry-leading efficiency ratio.
Continue to automate processes, use artificial intelligence, and increase data-sharing across the Financial Markets segment.
National Bank of Canada
2020 Annual Report
44
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
Total revenues on a taxable equivalent basis
Non-interest expenses
Income before provisions for credit losses and income taxes on a taxable equivalent basis(1)
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
Net income
Average assets
Average loans and acceptances (Corporate Banking only)
Net impaired loans(3)
Average deposits
Efficiency ratio on a taxable equivalent basis(1)
2020
2019(2)
% change
706
430
132
1,268
786
2,054
809
1,245
239
1,006
266
740
123,943
18,782
21
35,433
621
285
126
1,032
719
1,751
756
995
30
965
257
708
112,493
16,575
23
30,497
39.4 %
43.2 %
14
51
5
23
9
17
7
25
4
4
5
10
13
(9)
16
(1)
(2)
(3)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
For the year ended October 31, 2019, certain amounts have been reclassified.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Total Revenues by Category
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
1,268
1,032
719
786
Total Revenues by Geographic Distribution
Year ended October 31, 2020
(on a taxable equivalent basis)(1)
33%
19%
48%
2019
2020
Global markets - Equities
Global markets - Fixed-income
Global markets - Commodities and foreign exchange
Corporate and investment banking
Province of Quebec (2019: 29%)
Other provinces (2019: 50%)
Outside of Canada (2019: 21%)
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
45
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Financial Results
In the Financial Markets segment, net income totalled $740 million in fiscal 2020, up 5% year over
year. The increase in all types of revenues in the segment was partly offset by higher provisions for
credit losses during the year as a result of the significant deterioration in the macroeconomic
outlook caused by COVID-19 and the expected impacts on the segment’s clients. The Financial
Markets segment’s fiscal 2020 income before provisions for credit losses and income taxes on a
taxable equivalent basis(1) amounted to $1,245 million, up $250 million or 25% year over year, as
the segment benefited from an increase in the activities of all its business units. Total revenues on a
taxable equivalent basis(1) were $2,054 million, up $303 million from $1,751 million in fiscal 2019.
Revenues from the Global Markets category posted year-over-year growth of 23%, with revenues
from equity securities and from fixed-income securities rising 14% and 51%, respectively, and
revenues from commodities and foreign exchange activities up 5%. As for corporate and investment
banking revenues, they increased 9% year over year, mainly due to higher revenues from capital
markets activity, in particular issuances of government bonds, and revenues from merger and
acquisition activities.
Total Revenues by Category
Year ended October 31, 2020
(taxable equivalent basis)(1)
38%
62%
For the year ended October 31, 2020, the segment’s non-interest expenses rose 7% year over year
due to increases in compensation and employee benefits, in transaction fees related to growth in
the segment’s activities, and in technology investment expenses. The segment’s fiscal 2020
efficiency ratio on a taxable equivalent basis(1) was 39.4% in fiscal 2020 versus 43.2% in 2019.
Global markets (2019: 59%)
Corporate and investment banking (2019: 41%)
Financial Markets recorded $239 million in provisions for credit losses during fiscal 2020 compared
to $30 million in fiscal 2019, an increase that stems mainly from credit loss provisions on impaired
loans recorded in fiscal 2020 in connection with the economic context related to COVID-19. In
addition, provisions for credit losses on impaired loans were up $47 million year over year.
Operating Results
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
4
5
0
,
2
1
5
7
,
1
6
5
7
8
0
7
9
0
8
0
4
7
2019
2020
Total revenues
Non-interest expenses
Net income
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial
measures.
National Bank of Canada
2020 Annual Report
46
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 2020, the U.S. Specialty Finance and International (USSF&I) segment generated 10% of the Bank’s consolidated total revenue and 17%
of its net income.
U.S. Specialty Finance – Credigy
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 secured consumer receivables in the U.S.
market. The Bank holds an 80% ownership interest in Credigy.
Economic and Market Review
As in Canada, the U.S. economic recovery has been surprisingly strong. Retail sales have rebounded at an incredible pace and the real estate market is
experiencing an impressive recovery. However, on the epidemiological side, the situation has deteriorated rapidly in recent weeks, as evidenced by the marked
increase in new COVID-19 cases. Although political leaders seem more reluctant than Europeans to impose strict social distancing measures, this does not
mean that the resurgence of the coronavirus will not have an effect on the economy and the labour market. According to the most recent data on
unemployment claims, 21.5 million Americans are still dependent on government assistance. In this context, the strength of the economic recovery will largely
depend on decisions made in Washington. But in all likelihood, Republicans will retain control of the Senate, which will jeopardize the chances of a strong
recovery plan. In the current partisan climate, the Senate majority could make life difficult for the new president by approving only a modest stimulus package.
Despite some shortcomings, the upcoming budgetary envelope should help support household consumption in the first half of 2021. After that, the economy
could benefit from the arrival of an effective coronavirus vaccine.
The economic environment in 2020 and the outlook for 2021 are discussed in more detail in the Economic Review and Outlook section on page 28.
Key Success Factors
Ability to seize opportunities in rapidly changing market conditions through a disciplined yet adaptable investment strategy.
Diversification across several classes of performing assets.
Market credibility achieved through over 320 transactions life-to-date, representing over US$16 billion in total investments.
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.
Resilience to economic downturns achieved through limited exposure to unsecured assets, investments with high credit profiles, and structural
enhancements that provide downside protection.
Objectives and Strategies
Credigy aims to provide customized solutions for the acquisition or financing of assets related to consumer receivables in pursuit of the best risk-adjusted
returns and a return on assets (ROA) of at least 2.5%.
Strategic Priorities
2020 Achievements and Highlights
Sustain deal flow by being a partner
of choice for bank and non-bank
institutions facing complex
challenges and strategic changes
Active monitoring of the economy and opportunities.
Maintained average assets of approximately $7 billion.
Transactions with several new partners.
Maintain a diversified mix of
performing assets
Performing assets accounted for 98% of assets.
Continued to diversify asset classes focusing on both secured and unsecured high-quality consumer
assets.
Achieve best risk-adjusted returns
Credit model monitoring and refinement helped 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%.
National Bank of Canada
2020 Annual Report
47
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
Priorities and Outlook for 2021
Maintain emphasis on asset diversification and a balanced risk/return investment profile.
Leverage relationships with current and prospective partners.
Deliver asset growth by focusing on investments with structural enhancements that provide protection against the risks of an economic slowdown.
Active monitoring of the COVID-19 pandemic to implement risk-minimizing strategies and capitalize on changing market conditions that have potential for
new investment opportunities.
International – ABA Bank
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 more than 20%. It offers a full spectrum of financial services to micro, small and medium enterprises (MSMEs) as well as to
individuals through 77 branches, 633 ATMs and cash deposit machines, and advanced online banking and mobile banking platforms. ABA Bank has been
selected as the Best Bank in Cambodia by The Banker (2019), Global Finance (sixth consecutive year) and Euromoney (seventh consecutive year) magazines.
Economic and Market Review
Despite the low number of COVID-19 cases reported in the country, the pandemic has affected Cambodia’s economic growth, most notably in the garment and
tourism industries. After a decade of GDP growth approaching 7%, the economy is expected to contract 2% in 2020. The growth trajectory is expected to return
in 2021 as exports increase with the global economic recovery and as the border restrictions affecting tourism are lifted. Cambodia will also benefit from
increased regional economic integration under the Association of Southeast Asian Nations (ASEAN) trade association. The Cambodian market is highly
underbanked, with approximately 18% of the population over 15 years of age having an account in a financial institution. There is a high adoption and use of
mobile technology and social media in the country, and over 65% of the population of 16.5 million is under 35 years of age.
Key Success Factors
Loan strategy targeting MSMEs with simple products.
Disciplined 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 self-sufficient transactional banking ecosystem.
Experienced leadership team, and skilled 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.
National Bank of Canada
2020 Annual Report
48
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
Objectives and Strategies
ABA Bank wishes to pursue an 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
2020 Achievements and Highlights
Grow market share in MSME lending
Achieved 47% growth in loan volumes.
Opened 7 new branches, bringing the total to 77 throughout the country.
Secured its position as third-largest bank in the market by increasing market share.
Maintaining credit quality
Sustain growth in deposits and
transactional services
Retain international recognition of
ABA Bank’s progress
Well-diversified portfolio (98% of loans secured).
At 0.8% of the loan portfolio as at October 31, 2020, non-performing loans are below market average.
Implementation of a payment deferral policy to offer relief to ABA Bank clients affected by the slowdown
due to the COVID-19 pandemic.
Standard & Poor’s raised its long-term credit rating on ABA Bank from “B” to “B+” with a stable outlook
based on its material and growing market share of loans and deposits with above-average profitability.
Deposits increased 44% from fiscal 2019.
Continued to enhance to self-banking capabilities, including the first full-scale mobile banking application
in Cambodia.
Self-banking transactions made up 94% of total number of transactions and, for the first time in the ABA
Bank’s history, surpassed 50% of total value of transactions.
Launched ABA 24/7, the network of standalone self-banking locations that provide customers with round-
the-clock access to their accounts.
Global Finance magazine named ABA Bank the “Best Bank in Cambodia” for the sixth consecutive year.
Euromoney magazine named ABA Bank the “Best Bank in Cambodia” for the seventh consecutive year.
Asiamoney magazine (a regional arm of Euromoney) named ABA Bank the “Best Digital Bank in Cambodia”
The Banker magazine named ABA Bank the “Bank of the Year” in Cambodia for 2019.
for 2020.
Priorities and Outlook for 2021
Maintain double-digit growth and strong return on equity while staying focused on core target markets
Open two branches in 2021 to extend its reach in Cambodia and gain direct access to a larger pool of MSME customers and retail deposits.
Increase the deposit base by providing convenience to retail customers through an advanced digital and self-banking infrastructure and an expanding
network of self-service spots.
Focus on loan growth with MSME clients in industries that are minimally affected by the current economic downturn.
Ensure a solid foundation for sustainable long-term growth
Maintain strong governance, disciplined risk management and sound business processes.
Ensure strong credit quality across the loan portfolio to maintain non-performing loan levels below market averages.
Continue to target fully collateralized loans to limit potential losses.
National Bank of Canada
2020 Annual Report
49
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
Segment Results – USSF&I
Year ended October 31
(millions of Canadian dollars)
Total revenues
Credigy
ABA Bank
International
Non-interest expenses
Credigy
ABA Bank
International
Income before provisions for credit losses and income taxes(1)
Provisions for credit losses
Credigy
ABA Bank
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank's shareholders and holders of other
equity instruments
Average assets
Average loans and receivables
Net impaired loans – Stage 3(2)
Purchased or originated credit-impaired (POCI) loans
Average deposits
Efficiency ratio
2020
2019
% change
406
410
4
820
144
171
4
319
501
59
21
80
421
69
352
34
318
14,336
11,340
30
855
5,006
402
303
10
715
152
131
2
285
430
68
12
80
350
71
279
40
239
10,985
8,907
15
1,166
3,474
38.9 %
39.9 %
1
35
15
(5)
31
12
17
(13)
75
−
20
(3)
26
(15)
33
31
27
100
(27)
44
(1)
(2)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
Net impaired loans – Stage 3 exclude POCI loans and are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
Average Loans – Credigy
Year ended October 31
(millions of Canadian dollars)
Average Loans and Deposits – ABA Bank
Year ended October 31
(millions of Canadian dollars)
7,340
6,179
6
0
0
,
5
0
0
0
,
4
4
7
4
,
3
8
2
7
,
2
2019
2020
Loans
POCI loans
2019
Loans
Deposits
2020
National Bank of Canada
2020 Annual Report
50
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
Financial Results
In the USSF&I segment, net income totalled $352 million in fiscal 2020, up 26% from $279 million
in fiscal 2019. The segment’s fiscal 2020 total revenues amounted to $820 million versus
$715 million in fiscal 2019, representing growth of 15% that came mainly from a $107 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 up $4 million. Total revenues from international
investments were lower in fiscal 2020 than in fiscal 2019.
The segment’s non-interest expenses stood at $319 million in fiscal 2020, up $34 million from
$285 million in fiscal 2019, essentially attributable to all of ABA Bank’s non-interest expenses
related to its growing banking network. At the Credigy subsidiary, non-interest expenses were down
year over year, in particular due to a decrease in collection costs.
In fiscal 2020, the segment recorded $80 million in provisions for credit losses, unchanged from
fiscal 2019.
Credigy
Credigy's net income for fiscal 2020, presented in the USSF&I segment, totalled $160 million, up
11% from fiscal 2019. The subsidiary’s total revenues amounted to $406 million compared to
$402 million in fiscal 2019. The increase in net interest income due to loan portfolio growth was
offset by the decrease in non-interest income arising from changes in the loan portfolio mix and the
impacts of the COVID-19 pandemic on the fair value of some of the subsidiary’s loan portfolios.
Credigy’s fiscal 2019 non-interest expenses for the year ended October 31, 2020 were down
$8 million, mainly due to a decrease in collection costs. The subsidiary’s provisions for credit losses
for fiscal 2020 totalled $59 million, down $9 million year over year. Provisions for credit losses on
non-impaired loans increased as a result of the significant deterioration in the macroeconomic
outlook caused by the COVID-19 pandemic and the expected impacts on the subsidiary’s loan
portfolios, but this increase was more than offset by a decline in provisions for credit losses on
impaired loans following repayments and maturities of certain loan portfolios and revaluations of
certain POCI loan portfolios.
ABA Bank
For fiscal 2020, ABA Bank net income totalled $192 million, up 50% from fiscal 2019. Growth in the
subsidiary’s activities produced a 35% increase in its total revenues and the 31% increase in non-
interest expense. However, the increase in total revenues derived from sustained growth in loan and
deposit volumes was partially offset by lower interest rates. The subsidiary’s provisions for credit
losses totalled $21 million for fiscal 2020, up $9 million year over year, due to provisions for credit
losses on non-impaired loans recorded in fiscal 2020 to account for the expected impacts of the
COVID-19 pandemic on the subsidiary’s clients.
Total Revenues by Category
Year ended October 31, 2020
50%
50%
Credigy (2019: 56%)
ABA Bank (2019: 43%)
International (2019: 1%)
Operating Results
Year ended October 31
(millions of Canadian dollars)
820
715
285
279
319
352
Net Income
Total
revenues
Total
revenues
Non-
interest
expenses
2019
Net Income
Non-
interest
expenses
2020
The effective tax rate declined in fiscal 2020 due to tax incentives provided by the Cambodian
government and recorded in the second quarter of 2020.
Credigy
ABA Bank and International
National Bank of Canada
2020 Annual Report
51
Management’s Discussion and Analysis
Business Segment Analysis | Other
The Other heading reports on Treasury operations, liquidity management, Bank funding, asset and liability management, certain specified 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.
Segment Results – Other
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
Income before provisions for credit losses and income taxes on a taxable equivalent basis(1)
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes (recovery) on a taxable equivalent basis
Net loss
Non-controlling interests
Net loss attributable to the Bank’s shareholders and holders of other equity instruments
Specified items after income taxes(1)
Net loss excluding specified items(1)
Specified items after income taxes and non-controlling interests(1)
Net loss attributable to the Bank’s shareholders and holders of other equity instruments excluding specified items(1)
Average assets
(1)
(2)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
For the year ended October 31, 2019, certain amounts have been reclassified.
Financial Results
2020
2019(2)
(177)
177
−
453
(453)
3
(456)
(101)
(355)
8
(363)
(133)
(222)
(123)
(240)
56,665
(178)
280
102
350
(248)
−
(248)
(78)
(170)
26
(196)
(6)
(164)
(6)
(190)
43,667
For the Other heading of segment results, there was a net loss of $355 million in fiscal 2020 compared to a net loss of $170 million in fiscal 2019. This change
was essentially due to approximately $50 million in expenses related to measures deployed by the Bank to protect the health and safety of employees and
clients in the exceptional circumstances stemming from the COVID-19 pandemic, to increased technology investments related to the Bank’s transformation
plan and business development, as well as to the specified items recorded in fiscal 2020 that had a $133 million unfavourable impact on the net income
recorded in the Other heading. Revenues from treasury activities were higher in fiscal 2020 compared to the previous year, partly due to market volatility in
fiscal 2020.
The specified items net of income taxes recorded in fiscal 2020 include a $36 million foreign currency translation loss on disposal of Credigy subsidiaries in
Brazil, $52 million in impairment losses on premises and equipment and on intangible assets, $35 million in severance pay, and a $10 million charge related
to Maple. The specified items net of income taxes recorded in fiscal 2019 included a $68 million gain on disposal of Fiera Capital shares, a $43 million gain on
disposal of premises and equipment, a $27 million loss arising from the fair value remeasurement of the Bank’s investment in NSIA, $42 million in impairment
losses on premises and equipment and on intangible assets, $7 million in severance pay, an $8 million charge related to Maple, and $33 million in provisions
for onerous contracts. The net loss excluding specified items(1) for fiscal 2020 was $222 million, compared to a $164 million net loss recorded for fiscal 2019.
(1)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
52
Management’s Discussion and Analysis
Quarterly Financial Information
Several trends and factors have an impact on the Bank’s quarterly net income, revenues, non-interest expenses and provisions for credit losses. The following
table presents a summary of results for the past eight quarters.
Quarterly Results Summary(1)
(millions of Canadian dollars)
Statement of income data
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and
income taxes(2)
Provisions for credit losses
Income taxes
Net income
Q4
Q3
Q2
1,124
876
2,000
1,259
741
110
139
492
1,096
872
1,968
1,074
894
143
149
602
1,105
931
2,036
1,121
915
504
32
379
2020
Q1
930
993
1,923
1,091
832
89
133
610
Q4
Q3
Q2
936
979
1,915
1,095
820
89
127
604
855
1,093
1,948
1,154
794
86
100
608
942
828
1,770
1,026
744
84
102
558
2019
Q1
863
936
1,799
1,026
773
88
133
552
(1)
(2)
For additional information about the 2020 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 2020, published on December 2, 2020. 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 114 and 115.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
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. Net income for all the quarters of 2020, except the first quarter, was lower year over year. The growth in the
business segments’ net income was offset by higher non-interest expenses and the significant increase in provisions for credit losses related to the
deterioration in the macroeconomic outlook caused by the COVID-19 pandemic. Net income for the first quarter of fiscal 2020 rose year over year in particular
due to the Financial Markets segment. The year-over-year decline in the fourth quarter of 2020 was essentially due to the Bank recording a foreign currency
translation loss on disposals of subsidiaries, impairment losses on premises and equipment and intangible assets, and severance pay, all of which had an
unfavourable impact on net income.
Net interest income posted year-over-year growth in every quarter of fiscal 2020. These increases were mainly driven by growth in personal and commercial
loan and deposit volumes, activities related to trading income in the Financial Markets segment, loan portfolio growth at the Credigy subsidiary, and growth in
net interest income at the ABA Bank subsidiary, related to sustained business growth. The Wealth Management segment posted year-over-year declines in net
interest income in the third and fourth quarters of fiscal 2020 due to narrower margins on deposits caused by lower interest rates.
The non-interest income for the first and second quarters of 2020 was up year over year, as results in the same quarters of fiscal 2019 were affected by a
slowdown in business at the Financial Markets segment. The lower non-interest income in the third and fourth quarters of fiscal 2020 was generated in part by
card revenues and revenues from deposit and payment service charges as a result of the temporary closing of businesses and non-essential services and the
lockdowns imposed by governments related to the pandemic, which led to a drop in the number of transactions. Furthermore, non-interest income for the third
quarter of fiscal 2019 included a gain on disposal of Fiera Capital shares, a gain on disposal of premises and equipment, and a loss arising from the
remeasurement at fair value of the Bank’s investment in NSIA.
The non-interest expense for every quarter of 2020, except the third quarter, was up year over year. Explaining these increases were compensation and
employee benefits, technology investment expenses made as part of the Bank’s transformation plan and for business development activities, and expenses
related to the measures taken by the Bank to protect the health and guarantee the safety of employees and clients given the exceptional circumstances related
to COVID-19, recorded in the second quarter of fiscal 2020. In addition, non-interest expenses for the fourth quarter of 2020 include impairment losses on
premises and equipment and on intangible assets and severance pay, similar to the expenses recorded in the third quarter of fiscal 2019.
Provisions for credit losses were up on a year-over-year basis in each quarter of fiscal 2020. The sizeable increase in provisions for credit losses in the second
quarter was due to the significant deterioration in the macroeconomic outlook caused by the COVID-19 pandemic, and the expected impacts of the pandemic
on the Bank’s clients. In addition, the increase stemmed from a sharp rise in provisions for credit losses on impaired loans, essentially due to Commercial
Banking and the Financial Markets segment.
The change in the effective income tax rate between the 2020 and 2019 quarters was mainly due to the tax impact of the disposal of the subsidiaries in Brazil,
as well as the realization of capital gains that were taxed at a lower rate in fiscal 2019. In addition, the lower effective tax rate in the second quarter of 2020
was attributable to a drop in the tax rate of the ABA Bank subsidiary due to fiscal incentives granted by the government of Cambodia.
National Bank of Canada
2020 Annual Report
53
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Consolidated Balance Sheet Summary
As at October 31
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances, net of allowances
Other
Liabilities and equity
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Non-controlling interests
2020
2019
% change
29,142
102,131
14,512
164,740
21,100
331,625
215,878
98,589
775
16,380
3
331,625
13,698
82,226
17,723
153,251
14,560
281,458
189,566
75,983
773
14,778
358
281,458
113
24
(18)
7
45
18
14
30
−
11
(99)
18
As at October 31, 2020, the Bank’s total assets amounted to $331.6 billion compared to $281.5 billion at year-end 2019, a $50.1 billion or 18% increase.
Cash and Deposits With Financial Institutions
At $29.1 billion as at October 31, 2020, cash and deposits with financial institutions rose $15.4 billion since the same date last year, mainly due to increased
deposits with the Bank of Canada. This increase stems partly from the liquidity obtained as part of financing initiatives implemented by the Canadian
government through the Bank of Canada, the objective of which is to support the Canadian financial system during the COVID-19 pandemic. The Bank’s
liquidity and funding risk management practices are described on pages 93 to 101 of this MD&A.
Securities
Since October 31, 2019, securities rose $19.9 billion due to a $16.5 billion or 27% increase in securities at fair value through profit or loss, particularly
securities issued or guaranteed by Treasury, other U.S. agencies and other foreign governments, and equity securities, and due to a $3.4 billion increase in
securities other than those measured at fair value through profit or loss. Securities purchased under reverse repurchase agreements and securities borrowed
decreased by $3.2 billion mainly related to activities in the Financial Markets segment and Treasury. The Bank’s market risk management policies are
described on pages 86 to 92 of this MD&A.
Loans and Acceptances
Totalling $164.7 billion as at October 31, 2020, and representing 50% of total asset, loans and acceptances, net of allowances, rose $11.4 billion or 7% since
October 31, 2019.
Residential mortgage loans outstanding totalled $65.0 billion as at October 31, 2020, rising $7.8 billion or 14% since October 31, 2019. This growth was
driven by sustained demand for mortgage credit, residential mortgage portfolio acquisition as well as by business growth at the ABA Bank subsidiary. Personal
loans totalled $37.6 billion at year-end 2020, rising $0.7 billion from $36.9 billion at year-end 2019 due mainly to the business growth in Personal Banking,
tempered somewhat by repayments and maturities in certain loan portfolios of the Credigy subsidiary. As for credit card receivables, they totalled $2.0 billion,
down from $0.3 billion as at October 31, 2019, due to a slowdown in activities related to COVID-19.
At $61.3 billion as at October 31, 2020, loans and acceptances to businesses and government increased $3.8 billion or 7% since October 31, 2019 owing to
growth in corporate financial services activities and to growth at the Credigy subsidiary.
Table 9 (page 121) shows gross loans and acceptances by borrower category as at October 31, 2020. At $81.5 billion, residential mortgages (including home
equity lines of credit) have posted strong growth since 2016 and account for 49% of total loans and acceptances as at October 31, 2020. This growth in
residential mortgages was driven by sustained demand for mortgage credit, the acquisition of mortgage portfolios, as well as by growth in business activity at
the ABA Bank subsidiary. As for retail loans, they totalled $15.2 billion as at October 31, 2020. With respect to commercial loans, there was year-over-year
growth in the oil and gas and pipelines category, utilities category, and real estate and real estate construction category. As at October 31, 2020, certain
categories posted year-over-year decreases, notably manufacturing and communications. Furthermore, the Credigy subsidiary’s POCI loans were down from
October 31, 2019 as a result of repayments and maturities of certain loan portfolios.
National Bank of Canada
2020 Annual Report
54
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Impaired Loans
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, 2020, gross impaired loans excluding POCI loans stood at $817 million compared to $684 million as at October 31, 2019 (Table 10,
page 121). Net impaired loans excluding POCI loans totalled $465 million as at October 31, 2020 compared to $450 million as at October 31, 2019, a
$15 million increase related to net impaired loans of the personal loan portfolios and the ABA Bank subsidiary, tempered somewhat by a decrease in the net
impaired loans of the commercial loan portfolio. Gross POCI loans stood at $855 million as at October 31, 2020, down from $1,166 million as at
October 31, 2019 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 77 to 85 of this MD&A as well as in Note 7 to the consolidated
financial statements.
Other Assets
As at October 31, 2020, other assets totalled $21.1 billion compared to $14.6 billion as at October 31, 2019, a $6.5 billion increase arising mainly from an
increase in derivative financial instruments related to the activities of the Financial Markets segment.
Deposit Liability
At $215.9 billion as at October 31, 2020, deposits increased by $26.3 billion or 14% since year-end 2019. This increase is partly attributable to support
measures granted to clients by the Bank and government authorities in response to the economic and financial context caused by the COVID-19 pandemic. At
$67.5 billion, personal deposits, as presented in Table 12 (page 122), increased $7.4 billion since October 31, 2019 and accounted for 31% of all deposits.
This increase stems from Personal Banking activities, the Wealth Management segment's brokerage accounts, and business growth at the ABA Bank
subsidiary.
As shown in Table 12, business and government deposits totalled $143.8 billion, up $18.5 billion from $125.3 billion at year-end 2019. This increase came
from the funding activities of the Financial Markets segment and of Treasury, including $4.9 billion in deposits subject to bank recapitalization (Bail-In)
conversion regulations, from the Wealth Management segment's brokerage activities, as well as from Commercial Banking's activities. Deposits from deposit-
taking institutions were up $0.4 billion from the same date last year.
Other Liabilities
As at October 31, 2020, other liabilities stood at $98.6 billion, up $22.6 billion since October 31, 2019, essentially due to a $3.6 billion increase in obligations
related to securities sold short, a $12.0 billion increase in obligations related to securities sold under repurchase agreements and securities loaned, and a
$6.0 billion increase in derivative financial instruments.
Subordinated Debt and Other Contractual Obligations
Subordinated debt has remained relatively stable since October 31, 2019. The contractual obligations are presented in detail in Note 29 to the consolidated
financial statements.
Equity
As at October 31, 2020, the Bank’s equity totalled $16.4 million compared to $15.1 million as at October 31, 2019. Equity attributable to the Bank’s
shareholders and holders of other equity instruments was $16.4 billion, rising $1.6 billion from $14.8 billion since October 31, 2019. This increase came from
net income net of dividends, by issuances of LRCN – Series 1 in the amount of $500 million, and by remeasurements of pension plans and other post-
employment benefit plans. These increases were partly offset by accumulated other comprehensive income, in particular losses on cash flow hedges. Lastly,
non-controlling interests were down $355 million, essentially due to the redemption of trust units issued by NBC Asset Trust (NBC CapS – II) – Series 2, for
gross proceeds of $350 million.
The Consolidated Statements of Changes in Equity on page 131 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.
National Bank of Canada
2020 Annual Report
55
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Exposures to Certain Activities
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 13 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. 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, 2020, total commitments for this type of loan
stood at $3,681 million ($3,559 million as at October 31, 2019). Details about other exposures are provided in the table concerning structured entities in
Note 27 to the consolidated financial statements.
Related Party Transactions
In the normal course of business, the Bank provides various banking services and enters into contractual agreements and other transactions with associates,
joint ventures, directors, key officers and other related parties. These agreements and transactions are entered into under conditions similar to those offered
to non-related third parties.
In accordance with the Bank Act (Canada), the aggregate of loans granted to key officers of the Bank, excluding mortgage loans granted on their principal
residence, cannot exceed twice the officer’s annual salary.
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.
Income Taxes
In April 2020, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $240 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2015.
In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $370 million (including provincial tax and interest) in
respect of certain Canadian dividends received by the Bank during the 2014, 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 and 2018 Canadian federal budgets.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2015 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, 2020.
National Bank of Canada
2020 Annual Report
56
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
Event After the Consolidated Balance Sheet
Acquisition
In the first quarter of fiscal 2021, the Bank will acquire the remaining non-controlling interest in the Credigy Ltd. subsidiary following the decision of the non-
controlling shareholders to exercise their put options for an amount of approximately US$235 million according to an agreement reached in 2013. Subsequent
to this transaction, Credigy Ltd. will become a wholly owned subsidiary of the Bank.
Securitization and Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to be recorded on the Consolidated
Balance Sheet or are recorded under amounts other than their notional or contractual values. These arrangements include, among others, transactions with
structured entities, derivative financial instruments, the issuance of guarantees, credit instruments, and financial assets received as collateral.
Structured Entities
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.
Securitization of the Bank’s Financial Assets
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed Securities Program under the
National Housing Act (Canada) (NHA) and the Canada Mortgage Bond (CMB) Program. Under the first program, the Bank issues NHA securities backed by
insured residential mortgage loans and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT), which finances the purchase through
the issuance of mortgage bonds insured by CMHC. Moreover, these mortgage bonds feature an interest rate swap agreement under which a CMHC-certified
counterparty pays CHT the interest due to investors and receives the interest on the NHA securities. As at October 31, 2020, the outstanding amount of NHA
securities issued by the Bank and sold to CHT was $20.7 billion. The mortgage loans sold consist of fixed- or variable-rate residential loans that are insured
against potential losses by a loan insurer. In accordance with the NHA-MBS Program, the Bank advances the funds required to cover late payments and, if
necessary, obtains reimbursement from the insurer that insured the loan. The NHA-MBS and CMB programs do not use liquidity guarantee arrangements. The
Bank uses these securitization programs mainly to diversify its funding sources. In accordance with IFRS, because the Bank retains substantially all of the risks
and rewards of ownership of the mortgage loans transferred to CHT, the derecognition criteria are not met. Therefore, the insured mortgage loans securitized
under the CMB Program continue to be recognized in Loans on the Bank’s Consolidated Balance Sheet, and the 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, 2020, the credit card receivables portfolio held by CCCT II (net of the Bank Certificate held by the Bank) represented an amount outstanding
of $1.1 billion. CCCT II issued investors’ certificates, $0.1 billion of which is held by third parties and $1.0 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.
Securitization of Third-Party Financial Assets
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
acquired assets. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs while continuing to service the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides administrative and transaction structuring services to these conduits. The Bank provides backstop liquidity and
credit enhancement facilities under the commercial paper program. These facilities are presented and described in Notes 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.
National Bank of Canada
2020 Annual Report
57
Management’s Discussion and Analysis
Securitization and Off-Balance-Sheet Arrangements
Derivative Financial Instruments
The Bank uses various types of derivative financial instruments to meet its clients’ needs, generate trading activity revenues and manage its exposure to
interest rate, foreign exchange and credit risk as well as other market risks. All derivative financial instruments are accounted for at fair value on 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.
Guarantees
In the normal course of business, the Bank enters into various guarantee contracts. The principal types of guarantees are lette rs 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.
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet credit commitments. The credit instruments used to meet the financing needs
of its clients represent the maximum amount of additional credit that the Bank could be required to extend if the commitments were fully drawn. For additional
information on these off-balance-sheet credit instruments and other items, see Note 26 to the consolidated financial statements.
Financial Assets Received as Collateral
In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse
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
2020 Annual Report
58
Management’s Discussion and Analysis
Capital Management
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers risks
inherent to the Bank’s business, supports its business segments, and protects its clients.
Capital Management Framework
The Bank’s capital management policy defines guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment process.
This process aims to determine the capital that the Bank needs to pursue its business activities and accommodate unexpected losses arising from extremely
adverse economic and operational conditions. The Bank has implemented a rigorous internal capital adequacy assessment process that comprises the
following procedures:
conducting an overall risk assessment;
measuring significant risks and the capital requirements 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 various
business segments.
Structure and Governance
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.
National Bank of Canada
2020 Annual Report
59
Management’s Discussion and Analysis
Capital Management
Basel Accord and Regulatory Environment
Basel Accord
The Basel Accord proposes a range of approaches of varying complexity, the choice of which determines the sensitivity of capital to risks. A less complex
approach, such as the Standardized Approach, uses regulatory weightings, while a more complex approach uses the Bank’s internal estimates of risk
components to establish risk-weighted assets and calculate regulatory capital.
As required under Basel, risk-weighted assets (RWA) are calculated for each credit risk, market risk, and operational risk. The Bank uses the Advanced Internal
Rating-Based (AIRB) Approach for credit risk to determine minimum regulatory capital requirements for a majority of its portfolios. The credit risk of certain
portfolios considered to be less significant is weighted according to the Basel Standardized Approach. The simple risk-weighted method is used to calculate
the charge related to banking book equity securities. This method requires proactive management of the capital allocated to portfolios with banking book
equity securities since, beyond a certain investment threshold, the cost of regulatory capital becomes prohibitive. As for operational risk, the Bank uses the
Standardized Approach. Market risk-weighted assets are primarily determined using the Internal Model-Based Approach, while 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. The revised securitization framework
was in effect since November 1, 2018, and OSFI permitted grandfathering treatment that ended on November 1, 2019. OSFI 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 capital consists of eligible
non-cumulative preferred shares, limited recourse capital notes and the eligible amount of innovative instruments. During the year ended October 31, 2020,
the Bank redeemed all of its outstanding 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
2020 Annual Report
60
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 prescribe the types of shares and liabilities that are subject to a Bail-In Conversion. In general, any senior debt securities with an initial
or amended term-to-maturity greater than 400 days that are unsecured or partially secured and have been assigned a Committee on Uniform Securities
Identification Procedures (CUSIP), International Securities Identification Number (ISIN), or similar identification number are subject to a Bail-In Conversion.
Shares, other than common shares, and subordinated debt, that are not NVCC instruments, are also subject to a Bail-In Conversion. However, certain other
debt obligations of the Bank such as structured notes (as defined in the Bail-In Regulations), covered bonds, deposits and certain derivative financial
instruments are not subject to a Bail-In Conversion.
As at October 31, 2020, the notional value of issued and outstanding long-term debt subject to the bank Bail-In conversion regulations was $8.4 billion.
During the second quarter of 2020, OSFI adjusted regulatory ratio requirements in response to the impact of the COVID-19 pandemic. For additional
information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of this MD&A. The Bank
and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 9.0%, a Tier 1 capital ratio of
at least 10.5%, and a Total capital ratio of at least 12.5%. All of these ratios are to include a capital conservation buffer of 2.5% established by the BCBS and
OSFI as well as a 1.0% surcharge applicable solely to D-SIBs and a 1.0% domestic stability buffer established by OSFI. 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 70% of the capital
requirement 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 financial instruments 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 22.50% (including the domestic stability buffer)
of risk-weighted assets and a minimum TLAC leverage ratio of 6.75% by November 1, 2021. During the fiscal year ended October 31, 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.
National Bank of Canada
2020 Annual Report
61
Management’s Discussion and Analysis
Capital Management
Requirements – Regulatory Ratios Under Basel III
Minimum
Capital
conservation
buffer
Minimum
set by
BCBS
D-SIB
surcharge
Minimum
set by
OSFI(1)
Domestic
stability
buffer(2)
As at October 31, 2020
Minimum set by
OSFI(1), including
the buffer
Capital ratios
CET1
Tier 1
Total
Leverage ratio
4.5 %
6.0 %
8.0 %
3.0 %
2.5 %
2.5 %
2.5 %
n.a.
7.0 %
8.5 %
10.5 %
n.a.
1.0 %
1.0 %
1.0 %
n.a.
8.0 %
9.5 %
11.5 %
3.0 %
1.0 %
1.0 %
1.0 %
n.a.
9.0 %
10.5 %
12.5 %
3.0 %
n.a. Not applicable
(1)
(2) On December 10, 2019, OSFI raised the buffer to 2.25%, starting April 30, 2020. On March 13, 2020, OSFI lowered the buffer to 1% in response to the impact of the COVID-19 pandemic.
The capital ratios include the capital conservation buffer and the D-SIB surcharge.
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.
Regulatory Context
The Bank closely monitors regulatory developments and participates actively in various consultative processes. During the second quarter of 2020, in
response to the impact of the COVID-19 pandemic, OSFI announced a series of regulatory adjustments to support the financial and operational resilience of
banks. For additional information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of
this MD&A. Presented below are brief descriptions of ongoing regulatory projects.
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 cover 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. These requirements will form a single Pillar 3 disclosure framework.
In January 2019, the BCBS issued a newly revised version of the document entitled Revisions to the Minimum Capital Requirements for Market Risk (initially
issued in March 2018).
On November 14, 2019, the BCBS issued a consultative document entitled Revisions to Market Risk Disclosure Requirements. This document sets out
adjustments to the Pillar 3 templates for the revised market risk framework, i.e., adjustments made to reflect the changes made to the final version of
Revisions to the Minimum Capital Requirements for Market Risk published in January 2019.
On November 28, 2019, the BCBS issued a consultative document entitled Credit Valuation Adjustment Risk: Targeted Final Revisions. This document proposes
a set of targeted adjustments to the credit valuation adjustment (CVA) risk framework issued in December 2017. The adjustments are designed to align the
revised CVA risk framework with the standards set out in Minimum Capital Requirements for Market Risk and in Capital Requirements for Bank Exposures to
Central Counterparties. On July 8, 2020, the BCBS issued the final version of the document entitled Targeted Revisions to the Credit Valuation Adjustment Risk
Framework. This document reflects feedback received from the consultation in December 2019.
In response to the impact of the COVID-19 pandemic, the GHOS announced a postponement to the implementation of the reforms of the Basel III capital
international standard. OSFI has therefore postponed, until the first quarter of 2023, the implementation of the Standardized Approach and AIRB Approach to
credit risk, the revision of the operational risk framework, and of the leverage ratio framework, as well as the introduction of a more risk-sensitive capital floor.
Implementation of the Pillar 3 financial disclosure requirements finalized by the BCBS in December 2018 has also been delayed until at least the first quarter
of 2023. Lastly, implementation of the final set of revisions to the new market risk framework, entitled “Fundamental Review of the Trading Book” and
published in January 2019, as well as the revised CVA risk framework are being delayed to the first quarter of 2024.
National Bank of Canada
2020 Annual Report
62
Management’s Discussion and Analysis
Capital Management
Other Projects
On November 14, 2019, the BCBS issued Voluntary Disclosure of Sovereign Exposures, a consultative document seeking views on the potential disclosure of
three new templates. The document would require banks to disclose their sovereign exposures and risk-weighed assets according to jurisdiction, currency,
and accounting classification. Implementation is mandatory for banks only when so required by the national authority in its territory.
On August 6, 2020, the BCBS issued two consultative documents: Principles for Operational Risk and Revisions to the Principles for the Sound Management of
Operational Risk. In the first document, the BCBS is seeking views on a series of principles in helping improve the banks’ operational resilience. These
principles aim to strengthen the ability of banks to withstand operational risk related events which could cause significant operational failures or wide-scale
disruptions in financial markets, such as pandemics, cyber incidents, technology failures or natural disasters. In the second document, the BCBS is proposing
a limited number of updates to their existing set of principles for the sound management of operational risk.
Capital Management in 2020
Management Activities
On June 10, 2019, the Bank began a normal course issuer bid to repurchase for cancellation up to 6,000,000 common shares over the 12-month period ending
no later than June 9, 2020. During the year ended October 31, 2019, the Bank had repurchased 2,200,000 common shares under this program. During the year
ended October 31, 2020, the Bank repurchased 525,000 common shares for $30 million, which reduced Common share capital by $5 million and Retained
earnings by $25 million. These repurchases were carried out before March 13, 2020, which was the date on which OSFI lowered the domestic stability buffer
and indicated that it was expecting all banks to cease any dividend increases or share buybacks.
On June 30, 2020, NBC Asset Trust (the Trust), a closed-end trust established by the Bank, redeemed all of the outstanding 350,000 Trust units
(NBC CapS II -Series 2) at a per-unit price of $1,000 for gross proceeds of $350 million. On July 17, 2020, the Trust was dissolved.
On September 9, 2020, the Bank issued $500 million of Limited Recourse Capital Notes Series 1 (LRCN – Series 1) for which noteholders' recourse is limited to
the assets held by an independent trustee in a consolidated limited recourse trust. The assets of this trust consist of $500 million of Series 44 first preferred
shares issued by the Bank, in parallel with the LRCN – Series 1. The LRCN – Series 1 sell for $1,000 each and bear interest at a fixed rate of 4.3% per annum
until November 15, 2025 exclusively and, thereafter, at an annual rate equal to the yield on five-year Government of Canada bonds plus 3.943% until
November 15, 2075. Since the LRCN – Series 1 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory
capital under Basel III.
As at October 31, 2020, the Bank had 335,997,660 issued and outstanding common shares compared to 334,172,411 one year earlier. The Bank also had
98,000,000 issued and outstanding preferred shares, unchanged from October 31, 2019. Moreover, as at October 31, 2020, it had 500,000 LRCN – Series 1
that it did not have one year earlier. For additional information on capital instruments, see Notes 15, 18 and 19 to the consolidated financial statements.
Dividends
The Bank’s strategy for common share dividends is to aim for a dividend payout ratio of between 40% and 50% of net income 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.
For fiscal 2020, the Bank declared $953 million in dividends to common shareholders, which represents 50% of net income attributable to common
shareholders (2019: 42%). 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.
National Bank of Canada
2020 Annual Report
63
Management’s Discussion and Analysis
Capital Management
Shares, Other Capital Instruments and Stock Options
First preferred shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Other equity instruments
Limited Recourse Capital Notes, Series 1
Common shares
Stock options
Number of shares or capital
notes
As at October 31, 2020
$ million
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
500,000
335,997,660
11,425,403
350
300
400
400
400
300
300
2,450
500
3,057
As at November 27, 2020, there were 336,017,698 common shares and 11,375,920 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 other equity
instruments 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 823 million Bank common shares,
which would have a 71.0% dilutive effect based on the number of Bank common shares outstanding as at October 31, 2020.
Regulatory Capital Ratios
As at October 31, 2020, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 11.8%, 14.9% and 16.0%, i.e., above the regulatory requirements,
compared to ratios of, respectively, 11.7%, 15.0% and 16.1% as at October 31, 2019. The increase in the CET1 capital ratio since October 31, 2019 was
essentially due to net income net of dividends, transitional measures applicable to ECL provisioning, common share issuances under the Stock Option Plan,
and remeasurements of pension plans and other post-employment benefit plans. The growth in risk-weighted assets, the expiry of transitional arrangements
for specific wrong-way risk and for the revised securitization framework as well as the adoption of IFRS 16 contributed to offset this increase. The decreases in
the Tier 1 capital ratio and the Total capital ratio were essentially due to growth in risk-weighted assets as well as to a redemption of trust units issued by NBC
Asset Trust; however, the decrease was partly offset by the issuance of LRCN – Series 1. As at October 31, 2020, the leverage ratio was 4.4% compared to
4.0% as at October 31, 2019. The increase in the leverage ratio is explained by the growth in Tier 1 capital, due to the same factors as described above, and by
modest growth in total exposure, mainly from temporary measures announced by OSFI with respect to the exclusion of exposures from central bank reserves
and sovereign-issued securities that qualify as HQLA securities under the Liquidity Adequacy Requirements guideline.
Regulatory Capital and Ratios Under Basel III
As at October 31
Capital
CET1
Tier 1
Total
Risk-weighted assets
Total exposure
Capital ratios
CET1
Tier 1
Total
Leverage ratio
Adjusted(1)
10,924
13,869
15,167
94,808
2020
2019
11,167
14,112
15,167
94,808
9,692
12,492
13,366
83,039
321,038
321,038
308,902
11.5 %
14.6 %
16.0 %
4.3 %
11.8 %
14.9 %
16.0 %
4.4 %
11.7 %
15.0 %
16.1 %
4.0 %
(1)
The Basel III regulatory capital and ratios adjusted as at October 31, 2020 do not include the transitional measure applicable to expected credit loss provisioning. For additional
information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of the MD&A.
National Bank of Canada
2020 Annual Report
64
Management’s Discussion and Analysis
Capital Management
Movement in Regulatory Capital
Year ended October 31
(millions of Canadian dollars)
Common Equity Tier 1 (CET1) capital
Balance at beginning
Issuance of common shares (including Stock Option Plan)
Impact of shares purchased or sold for trading
Repurchase of common shares
Other contributed surplus
Dividends on preferred and common shares and distributions on other equity instruments
Net income attributable to the Bank’s shareholders and holders of other equity instruments
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
Other
Movements in accumulated other comprehensive income
Translation adjustments
Debt securities at fair value through other comprehensive income
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
Deferred tax assets, unless they result from temporary differences (net of related tax liability)
Other deductions of regulatory adjustments to CET1 implemented by OSFI(1)
Change in other regulatory adjustments(2)
Balance at end
Additional Tier 1 capital
Balance at beginning
New Tier 1 eligible capital issuances
Redeemed capital
Change in non-qualifying Additional Tier 1 capital subject to phase-out
Other, including regulatory adjustments and transitional arrangements
Balance at end
Total Tier 1 capital
Tier 2 capital
Balance at beginning
New Tier 2 eligible capital issuances
Redeemed capital
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
Total regulatory capital
2020
2019
9,692
98
2
(30)
9
(1,072)
2,041
−
35
−
188
53
87
3
(70)
(71)
−
−
(41)
243
−
11,167
2,800
500
(350)
−
(5)
2,945
8,608
107
45
(281)
9
(1,008)
2,256
(13)
(8)
(4)
(163)
(6)
1
3
134
3
−
−
−
−
9
9,692
2,802
−
−
−
(2)
2,800
14,112
12,492
874
−
−
−
−
128
53
1,055
942
−
−
−
(4)
10
(74)
874
15,167
13,366
(1)
(2)
This item includes the transitional measure applicable to expected credit loss provisioning implemented during the second quarter of 2020. For additional information, see the section
entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of this MD&A.
This item includes the change in investments in the Bank’s CET1 capital.
National Bank of Canada
2020 Annual Report
65
Management’s Discussion and Analysis
Capital Management
RWA by Key Risk Drivers
Risk-weighted assets increased by $11.8 billion and amounted to $94.8 billion as at October 31, 2020 compared to $83.0 billion as at October 31, 2019, an
increase resulting mainly from organic growth in RWA, from clients’ rating migration, from foreign exchange movements, and from changes to the calculation
method resulting from regulatory changes. For credit risk, these changes include the expiry of transitional arrangements for specific wrong-way risk and for the
revised securitization framework as well as the adoption of IFRS 16. For market risk, transitional measures were implemented to respond to the volatility
caused by the COVID-19 pandemic. The following table presents the changes in the Bank’s risk-weighted assets by risk type.
Risk-Weighted Assets Movement by Key Drivers
Quarter ended
(millions of Canadian dollars)
Credit risk – Risk-weighted assets at beginning
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
Credit risk – Risk-weighted assets at end
Market risk – Risk-weighted assets at beginning
Movement in risk levels(1)
Model updates
Methodology and policy
Acquisitions and disposals
Market risk – Risk-weighted assets at end
Operational risk – Risk-weighted assets at beginning
Movement in risk levels
Acquisitions and disposals
Operational risk – Risk-weighted assets at end
Risk-weighted assets at end
October 31, 2020
July 31, 2020
April 30, 2020
January 31, 2020 October 31, 2019
Total
Total
Total
Total
Total
77,944
812
801
(447)
−
−
(125)
78,985
4,724
(1,227)
−
−
−
3,497
12,146
180
−
12,326
94,808
76,657
1,943
157
−
−
−
(813)
77,944
4,121
385
218
−
−
4,724
11,977
169
−
12,146
94,814
70,145
5,324
50
112
−
−
1,026
76,657
4,397
1,441
−
(1,717)
−
4,121
11,664
313
−
11,977
67,254
1,650
(77)
(17)
1,246
−
89
70,145
4,276
121
−
−
−
4,397
11,509
155
−
11,664
65,693
1,979
11
(46)
(362)
−
(21)
67,254
3,972
304
−
−
−
4,276
11,319
190
−
11,509
92,755
86,206
83,039
(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, 2020, the Bank changed its SVaR period to encompass the COVID-19 crisis. During the quarter ended
October 31, 2020, the Bank updated one of its AIRB models: the SME-retail model.
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, 2020, the transitional arrangements for specific wrong-way risk and for the revised securitization
framework expired. On November 1, 2019, the Bank also adopted IFRS 16 and recognized right-of-use assets. During the quarter ended April 30, 2020, OSFI
introduced provisional measures for market risk in response to the volatility caused by the COVID-19 pandemic. These measures are still in effect.
National Bank of Canada
2020 Annual Report
66
Management’s Discussion and Analysis
Capital Management
Allocation of Economic Capital and Regulatory RWA
Economic capital is an internal measure that the Bank uses to determine the capital it needs to remain solvent and to pursue its business operations. Economic
capital takes into consideration the credit, market, operational, business and other risks to which the Bank is exposed as well as the risk diversification effect
among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and
ensure its long-term viability. The by-segment allocation of economic capital and regulatory RWA was carried out 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.
Allocation of Risks by Business Segment
As at October 31, 2020
(millions of Canadian dollars)
NATIONAL BANK OF CANADA
Business
segments
Personal and Commercial
Wealth Management
Financial Markets
Banking services
Credit services
Financing
Full-service brokerage
Private banking
Direct brokerage
Investment solutions
Investment solutions
Major activities
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
U.S. Specialty Finance and
International
Other
U.S. Specialty Finance
Treasury activities
• Credigy
International
• ABA Bank (Cambodia)
• Minority interests in
emerging markets
Liquidity management
Bank funding
Asset and liability
management
Corporate units
Economic capital
by type of risk
Risk-weighted
assets
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
1,772
–
394
184
2,350
33,782
–
4,863
38,645
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
110
–
249
405
764
1,795
–
3,091
4,886
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
2,398
322
333
472
3,525
27,310
3,364
4,111
34,785
Credit
Market
Operational
Other risks
Total
Credit
Market
Operational
Total
859
37
95
47
Credit
Market
Operational
Other risks
1,038
Total
10,426
–
1,190
11,616
Credit
Market
Operational
Total
281
(50)
(75)
5
161
5,672
133
(929)
4,876
National Bank of Canada
2020 Annual Report
67
Management’s Discussion and Analysis
Risk Management
In this section of the MD&A, grey-shaded text and tables marked with an asterisk (*) are integral parts of the consolidated financial statements. They
represent the Bank’s objectives, the risk management policies and procedures, and the methods applied to measure credit risk, market risk as well as
liquidity and funding risk, as required by IFRS 7 – Financial Instruments: Disclosures.
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.
Risk Management Framework
Risk is rigorously managed. Risks are identified, measured and controlled to achieve an appropriate balance between the returns obtained and the risks
assumed. The COVID-19 pandemic has affected general economic conditions as well as capital market conditions in Canada, the United States, and other
countries where the Bank conducts business. COVID-19 has also put certain top and emerging risks into perspective. Despite this exceptional situation, risks
are being rigorously managed. 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.
Risk Appetite
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.
National Bank of Canada
2020 Annual Report
68
Management’s Discussion and Analysis
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.
Enterprise-Wide Stress Testing
As part of a more extensive process aimed at ensuring that the Bank maintains adequate capital levels commensurate with its business strategy and risk
appetite, an enterprise-wide stress testing program is in place at the Bank. Stress testing can be defined as a risk management method that assesses the
potential effects—on the Bank’s financial position, capital and liquidity—of a series of specified changes in risk factors, corresponding to exceptional but
plausible events. The program supports management’s decision-making process by identifying potential vulnerabilities for the Bank as a whole that are
considered in setting limits as well as in longer term business planning. The scenarios and stress test results are reviewed by a group of stress testing experts,
a stress testing oversight group and the Global Risk Committee (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.
Incorporation of Risk Management Into the Corporate Culture
The Bank’s management continually promotes risk management through internal communications. A balanced approach is advocated, whereby business
development initiatives are combined with a constant focus on sound 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 as well as cybersecurity training. 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.
First Line of Defence
Risk Owner
Business Units
Second Line of Defence
Independent Oversight
Risk Management
and Oversight Functions
Third Line of Defence
Independent Assurance
Internal Audit
•
•
Identify, manage, assess and mitigate risks
in day-to-day activities.
• Oversee risk management by setting
policies and standards.
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.
•
•
Provide the Board and management with
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
2020 Annual Report
69
Management’s Discussion and Analysis
Risk Management
Governance Structure *
The following diagram shows the Bank’s overall governance architecture and the governance relationships established for risk management.
Shareholders
Elec t
Board of directors
App oints
President and
CEO
App oint
App oints a nd Mandates
Independent
Auditor
Reports
to
Audit Committee
Risk Management Committee
Advi ses
Tech nology
Subc ommittee
Hu man
Resources
Committee
Conduct Review
and Corporate
Governance
Committee
Report to
Report to
Advi ses
Reports to
Internal Audit
Oversight
Function
Finance
Oversight
Function
Risk
Management
Oversight
Function
Compliance
Oversight
Function
Global Risk
Committee
Compensation
Risk Oversight
Working Group
ESG Working
Group
App oints
Office of the
President
Report
to
Business Units
Report to
Operational Risk
Management
Committee
Financial
Markets Risk
Committee
Enterprise-Wide
Risk
Management
Committee
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: the
Audit Committee, the Risk Management Committee (including the Information Technology Subcommittee), the Human Resources Committee, and the Conduct
Review and Corporate Governance Committee. In addition, the various oversight functions, the Global Risk Committee and the working groups report to the
Board and advise it.
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 Information Technology Subcommittee(1)
The Information Technology Subcommittee advises the Risk Management Committee and supports it on, among other things, the Bank's technology strategy
and the monitoring and management of information technology risks, including cyberrisks, cybercrime and protection of personal information.
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 2021 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.
National Bank of Canada
2020 Annual Report
70
Management’s Discussion and Analysis
Risk Management
The Office of the President and the Bank’s Management
Composed of the President and Chief Executive Officer and the officers responsible for the Bank’s main functions and business units, the Office of the
President ensures that risk management is effective and aligned with the Bank’s pursuit of its objectives and strategies. The Bank’s management promotes the
integration of risk management into its corporate culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk management framework. It is responsible for providing the Bank’s Board and
management with objective, independent assurance as well as advice on the effectiveness 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 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 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 ESG Working Group
The Working Group’s main function is to develop and support the environmental, social and governance (ESG) initiatives and strategy of the Bank. Its members
meet on a monthly basis. This committee is responsible for implementing the recommendations of the Task Force on Climate-Related Financial Disclosures
(TCFD). At least twice each year, the ESG Working Group reports to the Conduct Review and Governance Committee and the Audit Committee on the progress
made and ongoing and upcoming ESG projects.
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
2020 Annual Report
71
Management’s Discussion and Analysis
Risk Management
Risk Management Policies
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.
Governance of Model Risk Management
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.
Independent Oversight by the Compliance Service
Compliance is an independent oversight function within the Bank. Its Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer
have 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.
Independent Assessment by Internal Audit
Internal Audit is an independent, objective function within the Bank. Through the Audit Committee, it provides assurance to management and the Board as to
the Bank’s level of command over its activities, advises on how to improve those activities, and contributes to the creation of added value. It helps the Bank to
achieve its objectives by applying a systematic, methodical approach for assessing and improving the effectiveness of the design and operation of its main
governance, risk management and internal control processes and systems and formulates recommendations and advice 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.
National Bank of Canada
2020 Annual Report
72
Management’s Discussion and Analysis
Risk Management
Top and Emerging Risks
Managing risk requires a solid understanding of every type of risk found across the Bank, as they could have a material adverse effect on the Bank's business,
results of operations, financial position and reputation. As part of its approach to risk management, the Bank identifies, assesses, reviews and monitors the
range of top and emerging risks to which it is exposed in order to proactively manage them and implement appropriate mitigation strategies.
The Bank separately qualifies the risks to which it is exposed: a “top risk” is a risk that has been identified, is clearly defined, and could have a significant
impact on the Bank's business, results of operations, financial position, and reputation, while an “emerging risk” is a risk that, while it may also have an
impact on the Bank, is not well understood in terms of its likelihood, consequences, timing, or the extent of its potential impact.
In the normal course of business, the Bank is exposed to the following top risks.
Credit
risk
Market
risk
Funding and
liquidity risk
Operational
risk
Regulatory
compliance risk
Reputation
risk
Strategic
risk
Environmental
and social
risk
Risks related to the COVID-19 pandemic
The COVID-19 pandemic has had and may continue to have disruptive and adverse effects in the countries where the Bank operates and, more broadly, on the
global economy. It has also affected and may continue to affect the Bank and how it conducts business as well as its clients. This situation provides
perspective on some of the top and emerging risks to which the Bank is exposed. Additional information is provided in the COVID-19 Pandemic section of this
MD&A.
The Bank is also exposed to other so-called emerging or material risks, which are defined as follows.
Risk and
Trend
Description
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.
Information
security and
cybersecurity
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, in addition to having an impact on its reputation.
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 the information they contain. 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 Information Technology Subcommittee 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
2020 Annual Report
73
Management’s Discussion and Analysis
Risk Management
Risk and
Trend
Description
Economic
and
geopolitical
risk
The economic expansion in the United States, which was the longest since World War II, ended abruptly in the spring of 2020 as
measures put in place to limit the spread of COVID-19 forced large swaths of the global economy to close. The result was a collapse in
global output and unprecedented job losses. In June 2020, 32.4 million people in the U.S. were receiving unemployment insurance
benefits from various support programs, compared to 1.6 million at the same date 12 months earlier. The deteriorating economic
outlook, combined with lockdown measures on this side of the border, drove the unemployment rate up 8.1 percentage points to 13.7%
in May 2020, compared to just 5.6% in February 2020. Public policy-makers responded quickly, sparing no effort in terms of the extent
of the financial support provided to households and businesses. In both Canada and the United States, income support programs more
than offset labour market losses in the second quarter. In addition, the central banks also drew on their arsenals to provide liquidity and
ensure the smooth functioning of financial markets. Canadian households, which had become more indebted in recent years, have been
able to benefit from debt service accommodations that have cushioned the impact of an uncertain situation. A total of 755,000
homeowners took advantage of mortgage payment deferrals, while 477,000 individuals benefited from payment deferrals on credit card
debt. In the second quarter, Canadians' debt service (principal and interest) declined by an unprecedented 6.0%.
In this context, and due to the easing of lockdown measures, the U.S. economy recovered from the shock of COVID-19 with a vigour that
surprised many observers. Retail sales, new home sales, existing home sales, housing starts and durable goods orders have rallied
sharply and are now comparable to pre-crisis levels. Nevertheless, in addition to a potential acceleration of COVID-19 outbreaks, the
U.S. economy could suffer from a premature withdrawal of fiscal support measures. Several support programs expired on July 31, 2020,
and many Americans who lost their jobs could experience a sharp drop in income if new support measures are delayed. It is also
important to consider the risk of social unrest, as many countries have been shaken by social crises in recent years, creating economic
and political uncertainty.
In Canada, monthly indicators also point to a strong rally in economic activity following the abysmal low reached in April. However, due
to stricter lockdown measures, the contraction of the Canadian economy was more pronounced and, despite the lifting of most
restrictive measures, it is still lagging in terms of recovery. While the strong rebound in employment is impressive, the Canadian labour
market is still considerably weaker than it was in February 2020, and the job losses are not limited to those sectors where physical
distancing is an issue. The economy may face challenges in 2021 as mortgage payment deferrals come to an end and income assistance
programs gradually become less generous at a time when the labour market continues to recover. In addition, the current slower pace of
immigration in Canada may hobble the real estate sector. Until a vaccine or a drug that reduces the symptoms of the disease is
discovered, the economic recovery may not be complete. By encouraging employees to work from home, companies are jeopardizing
economic activity in large urban centres. Should working from home change the organization of work more permanently, this may also
pose a challenge to the commercial real estate sector. If the pandemic returns in another major wave of infection, the price outlook for
raw materials would be much less positive. Continued low energy prices would not bode well for the oil sector, which is struggling to
emerge from a long period of difficult adjustments.
While there may be a consensus that the pace of economic recovery in the coming months will depend heavily on developments in the
COVID-19 pandemic and the social distancing measures needed to contain the spread of the virus, the central banks remain committed
to supporting the recovery by maintaining accommodative monetary policies and programs involving large-scale purchases of financial
assets. For now, the likelihood of inflation taking an undesirable turn upwards in the short term remains low. However, should interest
rates remain low for the long term, there is a real risk that market participants will implement strategies involving excessive risk-taking.
This could have negative repercussions if it leads to economic problems or an unanticipated increase in interest rates.
In short, given the ongoing uncertainties in this environment, the Bank remains vigilant and continues to rely on its strong risk
management framework to identify, assess, and mitigate risk and to remain within the risk appetite limits.
National Bank of Canada
2020 Annual Report
74
Management’s Discussion and Analysis
Risk Management
Risk and
Trend
Reliance on
technology
and third
parties
Description
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. 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.
Since the COVID-19 pandemic could affect the financial health, performance and business continuity of the Bank’s third parties, it had
to increase the frequency of its controls on them in fiscal 2020. In this context, the widespread phenomenon of working from home
that is associated with lockdown measures has led to an increased use of digital channels as well as greater reliance on certain shared
technological infrastructures.
The risk associated with climate change represents the possibility that issues related to such events could result in a loss of financial
or operational value for the Bank, damage its reputation, or affect its stakeholders. As such, the physical risks arising from the impacts
of more frequent and more intense extreme weather events, as well as the transition risks resulting from a shift to a low-carbon
economy, require particular attention in order to reduce the Bank’s exposure to these negative externalities and, at the same time,
seize new growth opportunities.
Climate
change
The Bank, aware that it has a mobilizing role to play in environmental matters, announced in 2018 its support for the Financial
Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD). The Bank is committed to communicating, in addition to
its performance reports, the information recommended by the group.
In addition, the Bank of Canada noted in its annual report “Financial System Review – 2020” that it continues to analyze and conduct
research on key financial system vulnerabilities not directly related to COVID-19. This includes work on climate change. The regulators’
interest in the subject demonstrates the growing importance attached to this risk. Although no specific requirements have yet been
published, the Bank will continue to closely monitor developments and any resulting implications.
See the Environmental and Social Risk section of this MD&A for more information.
Technological
innovation
and
competition
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. On the other hand, 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 business, operating results, financial
position and reputation.
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2020 Annual Report
75
Management’s Discussion and Analysis
Risk Management
Other Factors That Can Affect the Bank’s business, operating results, financial position and reputation
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 of this MD&A.
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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2020 Annual Report
76
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.
Additional Factors
Factors that could affect the Bank’s business, operating results and reputation 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, natural
catastrophes or public health emergencies such as COVID-19 on the Bank’s activities, operating results and reputation and the Bank’s ability to foresee and
effectively manage the risks associated with these factors through rigorous risk management.
Credit Risk
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.
Obligors have been affected by the difficult economic environment resulting from COVID-19 and its impact on the global and local economies. This exceptional
situation has led to significant changes in the overall market environment, including business closures, temporary layoffs and lower oil prices. However,
certain government measures have been implemented to assist retail and business clients affected by COVID-19.
Governance
A policy framework centralizes the governance of activities that generate credit risk for the Bank and is supplemented by a series of subordinate internal
policies and standards. These policies and standards address specific management issues such as concentration limits by borrower group and sector, 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;
• environmental 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 provisions and allowances for credit losses;
changes in impaired loans;
follow-up of monitored accounts.
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2020 Annual Report
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Management’s Discussion and Analysis
Risk Management
Credit Risk Rating and Assessment
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.
AIRB APPROACH
DATA(1)
DOWNTURN PERIOD(1)
METHODOLOGY FOR CALCULATING LGD
Retail
The Bank’s internal historical data from 1996 to 2018
1996-1998 and 2008-2009
LGD based on the Bank’s historical
internal data on recoveries and losses
Corporate
Sovereign
The Bank’s internal historical data from 2000 to 2018
Benchmarking results using:
• Moody's observed default price of bonds, from
1983 to 2017
• Global Credit Data Consortium historical loss and
recovery database from 1998 to 2018
Moody’s observed default price of bonds, from
1983 to 2015
S&P rating history from 1975 to 2016
2000-2003, 2008-2009 and
2015-2016
LGD based on the Bank’s historical
internal data on recoveries and losses
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 1991 to 2013
1991-1992, 1994, 1997-1998,
2001-2002 and 2008-2009
Model for predicting LGD based on
different issue- and issuer-related risk
drivers
(1) The performance of the models resulting from the AIRB Approach is measured quarterly, and the methodologies are validated by an independent third party annually. A report on model
performance under the AIRB Approach is presented annually to the RMC. According to the most recent performance report, the models continue to perform well and do not require the addition
of new data.
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Management’s Discussion and Analysis
Risk Management
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, lines of credit and SME retail. 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.
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.
Credit scoring models are also used to grant credit. These models use proven statistical methods that measure debtors’ demand characteristics and history
based on internal and external historical information to estimate the debtors’ future credit behaviour and assign a probability of default. The underlying data
include debtor 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 on the following page presents the PD categories and the credit quality of the associated personal credit
portfolio.
Mortgage Loan Underwriting
In order 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.
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 management quality and number of years in business. 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 table below). 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.
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Management’s Discussion and Analysis
Risk Management
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.
Internal Default Risk Ratings*
Description(1)
Personal credit
portfolios
Business and government
credit portfolios
PD (%) – Retail
Ratings
0.000–0.144
0.145–0.506
0.507–2.681
2.682–9.348
9.349–9.999
1
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
PD (%) –
Sovereign
Standard
& Poor's
0.000–0.094
0.094–0.464
0.464–6.607
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
Excellent
Good
Satisfactory
Special mention
Substandard
Default
(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, 2020.
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.
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 as well as limits to decision-making power 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.
National Bank of Canada
2020 Annual Report
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Management’s Discussion and Analysis
Risk Management
The Bank’s credit risk assessment and rating systems are overseen by the Models Oversight Committee, the GRC and the RMC, and are an integral part of a
comprehensive Bank-wide credit risk oversight framework. Along with the above-mentioned elements, the Bank documents and periodically reviews the
policies, definitions of responsibilities, resource allocation and existing processes.
Assessment of Economic Capital
The assessment of the Bank’s minimum required economic capital is based on the credit risk assessments of debtors. These two activities are therefore
interlinked. The different models used to assess the credit risk of a given portfolio type also enable the Bank to determine the default correlation among
debtors. This information is a critical component in the evaluation of potential losses for all portfolios carrying credit risk. Estimates of potential losses,
whether expected or not, are based on historical loss experience, portfolio monitoring, market data and statistical modelling. Expected and unexpected losses
are factors used in assessing the minimum required economic capital for all of the Bank’s credit portfolios. The assessment of economic capital also considers
the anticipated potential migrations of obligors’ default risk during the remaining term of their credit commitments. The main risk factors that have an impact
on economic capital are as follows:
•
•
•
•
•
•
the obligor’s 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.
Stress Testing and Crisis Scenarios
The Bank carries out stress tests to evaluate its sensitivity to crisis situations in certain activity sectors and key portfolios. A global stress test methodology
covers most business, government, and personal credit portfolios to provide the Bank with an overview of the situation. By simulating specific scenarios, these
tests enable the Bank to measure the level of regulatory capital needed to absorb potential losses and to determine the impact on its solvency. In addition,
these tests contribute to portfolio management as they influence the determination of concentration limits by obligor, product or business sector.
Credit-Granting Process
Credit-granting decisions are based first and foremost on the results of the risk assessment. Aside from an obligor’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.
Review and Renewal Processes
The Bank periodically reviews credit files. The review process enables the Bank to update information on the quality of the facilities and covers, among other
things, risk ratings, compliance with credit conditions, and obligor behaviour. In the specific case of business credit portfolios, 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. For personal credit portfolios, the credit risk of all obligors is reviewed monthly.
Risk Mitigation
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment
of the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication and loan assignments as well as
an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is to obtain quality collateral from obligors. Obtaining collateral cannot replace a rigorous assessment of
an obligor’s ability to meet its financial obligations, but, beyond a certain risk threshold, it is an essential complement. In certain circumstances it is not
necessary to take guarantees. The need to take collateral 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.
National Bank of Canada
2020 Annual Report
81
Management’s Discussion and Analysis
Risk Management
The Bank has established specific requirements in its internal policies with respect to the appropriate legal documentation and assessment for the kinds of
collateral that business units may require to guarantee the loans granted. The categories of eligible collateral and the lending value of the collateralized assets
have also been defined by the Bank. For the most part, they include the following asset categories as well as guarantees (whether secured by collateral or
unsecured) and government and bank guarantees:
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.
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.
Follow-Up of Monitored Accounts and Recovery
Credit granted and obligors are monitored on an ongoing basis and in a manner commensurate with the related risk. Loan portfolio managers use an array of
intervention methods to conduct a particularly rigorous follow-up on files that show a high risk of default. When loans continue to deteriorate and there is an
increase in risk to the point where monitoring has to be increased, a group specialized in managing problem accounts steps in to maximize collection of the
disbursed amounts and tailor strategies to these accounts.
In these cases, loan portfolio managers prepare and submit, to the credit department, a detailed monitoring report (watchlist) each month to track the status of
at-risk obligors and the corrective measures undertaken. The management of each department concerned performs follow-ups on the reports, and each quarter
a credit monitoring committee meets to review the action plans and monitoring reports of obligors that have commitments of $3 million or more. The authority
to approve allowances for credit losses is attributed using limits delegated on the basis of hierarchical level under the Credit Risk Management Policy.
Information on the recognition of impaired loans and allowances for credit losses is presented in Notes 1 and 7 to the consolidated financial statements.
National Bank of Canada
2020 Annual Report
82
Management’s Discussion and Analysis
Risk Management
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 2020 and 2019, the amount of distressed loan restructurings was not significant.
Counterparty Risk Assessment
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those 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.
The Risk Management Group has developed models by type of counterparty 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
mandatory when financial institutions trade between each other in international financial markets since they limit credit risk while providing traders with
additional flexibility to continue trading with the counterparty. The Bank always, when required by regulation, 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.
National Bank of Canada
2020 Annual Report
83
Management’s Discussion and Analysis
Risk Management
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 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.
Assessment of Settlement Risk
Settlement risk potentially arises from transactions that feature reciprocal delivery of cash or securities between the Bank and a counterparty. Foreign
exchange contracts are an example of transactions that can generate significant levels of settlement risk. However, the implementation of multilateral
settlement systems that allow settlement netting among participating institutions has contributed greatly to reducing the risks associated with the settlement
of foreign exchange transactions among banks. The Bank also uses financial intermediaries to gain access to established clearing houses in order to minimize
settlement risk for certain financial derivative transactions. In some cases, the Bank may have direct access to established clearing houses for settling
financial transactions such as repurchase agreements or reverse repurchase agreements. In addition, certain derivative financial instruments traded over the
counter are settled directly or indirectly by central counterparties. For additional information, see the table that presents notional amounts in Note 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
2020 Annual Report
84
Management’s Discussion and Analysis
Risk Management
The amounts shown in the following tables represent the Bank’s maximum exposure to credit risk as at the financial reporting date without taking into account
any collateral held or any other credit enhancements. These amounts do not take into account allowances for credit losses nor amounts pledged as collateral.
The tables also exclude equity securities.
Maximum Credit Risk Exposure Under the Basel Asset Categories*
(millions of Canadian dollars)
As at October 31, 2020
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach
AIRB Approach
Total – Gross credit risk
(millions of Canadian dollars)
Retail
Residential mortgage
Qualifying revolving retail
Other retail
Non-retail
Corporate
Sovereign
Financial institutions
Trading portfolio
Securitization
Total – Gross credit risk
Standardized Approach
AIRB Approach
Total – Gross credit risk
Drawn
Undrawn
commitments
Repo-style
transactions(1)
Derivative
financial
instruments
Other
off-balance-
sheet items(2)
57,062
2,488
14,394
73,944
62,569
58,054
3,534
124,157
−
2,247
200,348
20,932
179,416
200,348
9,751
6,286
2,314
18,351
24,256
5,638
399
30,293
−
−
48,644
284
48,360
48,644
−
−
−
−
23,804
55,193
66,120
145,117
−
−
145,117
14,045
131,072
145,117
−
−
−
−
1
180
2,350
2,531
14,011
−
16,542
2,394
14,148
16,542
−
−
32
32
4,772
102
514
5,388
−
3,807
9,227
284
8,943
9,227
Total
66,813
8,774
16,740
92,327
115,402
119,167
72,917
307,486
14,011
6,054
419,878
37,939
381,939
419,878
As at October 31, 2019
Drawn
Undrawn
commitments
Repo-style
transactions(1)
Derivative
financial
instruments
Other
off-balance-
sheet items(2)
50,328
2,540
14,258
67,126
56,002
31,308
5,200
92,510
−
1,166
160,802
17,166
143,636
160,802
8,812
3,046
1,911
13,769
20,527
5,222
425
26,174
−
−
39,943
601
39,342
39,943
−
−
−
−
21,524
36,208
97,423
155,155
−
−
155,155
28,571
126,584
155,155
−
−
−
−
1
190
1,966
2,157
12,015
−
14,172
1,951
12,221
14,172
−
−
20
20
4,103
148
629
4,880
−
3,598
8,498
119
8,379
8,498
Total
59,140
5,586
16,189
80,915
102,157
73,076
105,643
280,876
12,015
4,764
378,570
48,408
330,162
378,570
(1)
(2)
Securities purchased under reverse repurchase agreements and sold under repurchase agreements as well as securities loaned and borrowed.
Letters of guarantee, documentary letters of credit and securitized assets that represent the Bank’s commitment to make payments in the event that an obligor cannot meet its financial
obligations to third parties.
National Bank of Canada
2020 Annual Report
85
Management’s Discussion and Analysis
Risk Management
Market Risk
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, credit spreads, 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, 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.
Because of COVID-19 and its impact on global and local economies, the Bank faces a volatile and challenging environment. This exceptional situation has led
to significant changes in the overall market environment, including low interest rates, declining stock markets, and falling oil prices.
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.
Governance
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 principles for managing market risk and the framework that defines risk measures, control and monitoring
activities; sets market risk 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.
Assessing Market Risk
The Risk Management Group uses a variety of risk measures to estimate the size of potential losses under more or less severe scenarios, and using both short-
term and long-term time horizons. For short-term horizons, the Bank’s risk measures include 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 activity and by risk type. 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
2020 Annual Report
86
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, this measure represents only one component of the Bank’s 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. All market risk models and their performance are subject to periodic independent validation by the model vetting group.
Controlling Market Risk
A comprehensive set of limits is applied to measures of market risk, and these limits are monitored and reported on a regular basis. Instances when limits are
exceeded are reported to the appropriate management level. The risk profiles of our operations remain consistent with its risk appetite and the resulting limits,
and are monitored and reported to traders, management of the applicable business unit, senior executives and Board committees.
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.
National Bank of Canada
2020 Annual Report
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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.
Reconciliation of Market Risk With Consolidated Balance Sheet Items
(millions of Canadian dollars)
As at October 31, 2020
Balance
sheet
Trading(1)
Non-Trading(2)
Not subject to
market risk
Non-traded risk
primary risk sensitivity
Market risk measures
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
Liabilities
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
29,142
78,326
12,726
11,079
14,512
164,740
13,422
126
7,552
331,625
215,878
6,866
16,368
33,859
12,923
22,855
201
5,517
775
315,242
617
12,799
15,726
Interest rate(3)
75,279
−
−
−
7,545
13,207
−
−
96,648
9,998
−
16,368
−
12,300
6,135
−
−
−
44,801
3,047
12,726
11,079
14,512
157,195
215
126
−
211,699
205,880
6,866
−
33,859
623
16,720
201
64
775
264,988
−
−
−
−
−
−
−
7,552
23,278
−
−
−
−
−
−
−
5,453
−
5,453
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)
(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
2020 Annual Report
88
Management’s Discussion and Analysis
Risk Management
(millions of Canadian dollars)
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
Liabilities
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
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, 2019
13,698
61,823
10,648
9,755
17,723
153,251
8,129
38
6,393
281,458
189,566
6,893
12,849
21,900
6,852
21,312
374
5,803
773
266,322
579
12,609
510
Interest rate(3)
58,170
−
−
−
6,060
7,134
−
−
71,943
9,869
−
12,849
−
6,123
5,165
−
24
−
34,030
3,653
10,648
9,755
17,723
147,191
995
38
−
202,612
179,697
6,893
−
21,900
729
16,147
374
911
773
227,424
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)
−
−
−
−
−
−
−
6,393
6,903
−
−
−
−
−
−
−
4,868
−
4,868
(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.
Trading Activities
The first table below shows the VaR distribution of trading portfolios by risk category as well as their correlation effect. The second table on the next page
shows the SVaR distribution, i.e., the VaR of the Bank’s current portfolios obtained following the calibration of risk factors over a 12-month stress period.
VaR of Trading Portfolios by Risk Category(1)*
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading VaR
Low
(4.0)
(0.3)
(2.7)
(0.6)
n.m.
(4.6)
High
Average
2020
Period end
(15.6)
(2.7)
(17.5)
(2.1)
n.m.
(19.6)
(7.4)
(0.9)
(8.3)
(1.0)
8.0
(9.6)
(8.0)
(1.5)
(8.0)
(0.8)
9.1
(9.2)
Low
(4.0)
(0.4)
(2.8)
(0.5)
n.m.
(3.8)
High
(7.1)
(1.8)
(6.0)
(1.5)
n.m.
(8.9)
Average
2019
Period end
(5.3)
(0.8)
(3.8)
(1.0)
4.8
(6.1)
(4.4)
(1.3)
(3.8)
(1.2)
4.4
(6.3)
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.
National Bank of Canada
2020 Annual Report
89
Management’s Discussion and Analysis
Risk Management
SVaR of Trading Portfolios by Risk Category(1)*
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Correlation effect(2)
Total trading SVaR
Low
(4.7)
(0.3)
(4.8)
(0.5)
n.m.
(6.9)
High
Average
2020
Period end
(23.2)
(9.1)
(36.1)
(2.7)
n.m.
(39.9)
(13.5)
(1.3)
(13.1)
(1.4)
12.2
(17.1)
(15.1)
(1.6)
(8.4)
(0.6)
7.8
(17.9)
Low
(11.8)
(0.6)
(4.5)
(1.1)
n.m.
(9.0)
High
Average
2019
Period end
(26.6)
(4.1)
(14.4)
(4.0)
n.m.
(17.8)
(16.4)
(1.4)
(7.3)
(2.1)
14.2
(13.0)
(15.1)
(2.0)
(8.9)
(2.7)
13.4
(15.3)
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 increased from $6.1 million for fiscal year 2019 to $9.6 million for fiscal 2020. The average total trading SVaR was also up, rising
to $17.1 million in fiscal 2020 from $13.0 million in fiscal 2019. These increases are mainly driven by an increase of equity risk caused by more pronounced
market volatility related to the COVID-19 crisis in the second quarter of 2020, which also resulted in new tail scenarios being added to the two-year VaR history
window. Moreover, in the third quarter of 2020, the Bank changed the SVaR simulation period to encompass the COVID-19 crisis.
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 90% of the days for the year
ended October 31, 2020. Daily trading and underwriting losses in excess of $1 million were recorded on 17 days, and on two of those days, the losses
exceeded the VaR. Those two days of losses occurred in March 2020 as a result of significant market volatility caused by the COVID-19 crisis.
Daily Trading and Underwriting Revenues
(millions of Canadian dollars)
32
28
24
20
16
12
8
4
0
(4)
(8)
(12)
(16)
(20)
(24)
(28)
9
1
.
v
o
N
9
1
.
c
e
D
0
2
.
n
a
J
0
2
.
b
e
F
0
2
.
r
a
M
0
2
.
r
p
A
0
2
y
a
M
0
2
e
n
u
J
0
2
y
l
u
J
0
2
.
g
u
A
0
2
.
t
p
e
S
0
2
.
t
c
O
Trading and underwriting revenues
VaR
National Bank of Canada
2020 Annual Report
90
Management’s Discussion and Analysis
Risk Management
Stress Testing and Crisis Scenarios
Stress testing is a risk management technique that consists of estimating potential losses under abnormal market conditions and risk factor movements. This
technique enhances transparency by exploring a range of severe 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 applied to all positions generating market risk currently comprises the following range of different stress test scenarios:
Historical scenarios based on past major disruption situations
Hypothetical scenarios designed to be forward-looking in the face of potential market stresses
Scenarios specific to asset classes, including:
o sharp parallel increases/decreases in interest rates; non-parallel movements (flattening and steepening) and increases/decreases in credit
spreads;
o 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;
o significant increases/decreases in commodity prices coupled with increases/decreases in volatility; short-term and long-term increases/decreases
in commodity prices;
o depreciation/appreciation of the U.S. dollar and of other currencies relative to the Canadian dollar.
Structural Interest Rate Risk
As part of its core banking activities, such as lending and deposit taking, the Bank is exposed to interest rate risk. Interest rate risk is the potential negative
impact of interest rate fluctuations on the Bank’s annual net interest income and economic value of equity. Activities related to hedging, investments and term
funding are also exposed to structural interest rate risk. The Bank’s main exposure to interest rate risk stems from a variety of sources:
yield curve risk, which refers to changes in the level, slope and shape of the yield curve;
repricing risk, which arises from timing differences in the maturity and repricing of on- and off-balance-sheet items;
options risk, either implicit (e.g., prepayment 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.
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.
National Bank of Canada
2020 Annual Report
91
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 of an immediate and sustained
25-basis-point decrease in interest rates on the economic value of equity and on the net interest income of the Bank’s non-trading portfolios for the next
12 months, assuming no further hedging is undertaken. In the current environment of very low interest rates, the Bank believes that a sensitivity analysis
reflecting an immediate and sustained 25-basis-point decrease in interest rates provides more relevant information.
Interest Rate Sensitivity – Non-Trading Activities (Before Tax)*
As at October 31
(millions of Canadian dollars)
Impact on equity
100-basis-point increase in the interest rate
25-basis-point decrease in the interest rate
Impact on net interest income
100-basis-point increase in the interest rate
25-basis-point decrease in the interest rate
Canadian
dollar
Other
currencies
(239)
49
(31)
5
15
(4)
21
(5)
2020
Total
(224)
45
(10)
−
Canadian
dollar
Other
currencies
(178)
54
(26)
19
40
(1)
42
(2)
2019
Total
(138)
53
16
17
Investment Governance
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.
Structural Foreign Exchange Risk
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. This risk,
predominantly in U.S. dollars, is measured by assessing the impact of currency fluctuations on net interest income and shareholders’ equity. The Bank uses
financial instruments (derivative and non-derivative) to hedge some of this risk. An adverse change in foreign exchange rates can also impact the Bank’s
capital ratios due to the amount of RWA denominated in a foreign currency. When the Canadian dollar depreciates relative to other currencies, unrealized
translation gains on the Bank’s net investments in foreign operations, net of 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
2020 Annual Report
92
Management’s Discussion and Analysis
Risk Management
Liquidity and Funding Risk
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.
COVID-19 has affected overall economic and market conditions. The Bank is facing a challenging and volatile environment, but its sound liquidity and funding
management is helping it maintain an optimal balance between its sources of cash and anticipated payments.
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. On April 11, 2019, OSFI published the final version of the Net Stable Funding Ratio Disclosure Requirements guideline, which sets out NSFR
ratio disclosure requirements for D-SIBs. These requirements are applicable since January 1, 2020, but since OSFI 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 came 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 March 27, 2020, OSFI took extraordinary measures in response to the operational difficulties caused by the spread of COVID-19. OSFI expects banks to
draw on the unencumbered HQLA assets they hold within the liquidity coverage ratio (LCR) as a defense both against the potential onset of liquidity stress and
during a period of liquidity stress. OSFI has also provided guidance on the treatment of new government facilities in the calculation of regulatory liquidity
ratios. In addition, the Bank of Canada has taken more comprehensive measures to ensure that the financial system continues to play its role of providing
credit where it is needed. For more information, see the section “COVID-19 Pandemic – Regulatory Flexibility Measures” of this MD&A on pages 20 and 21.
On April 9, 2020, OSFI issued a press release announcing regulatory flexibility measures related to COVID-19 efforts. The release refers to delaying the
implementation of changes to specific regulatory returns to limit the impact on institutions, while ensuring that important data continues to be collected.
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
National Bank of Canada
2020 Annual Report
93
Management’s Discussion and Analysis
Risk Management
Governance
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.
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.
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.
Liquidity Management
The Bank performs liquidity management, funding and pledging operations not only from its head office and regional offices in Canada, but also through
certain foreign centres. Although the volume of such operations abroad represents a sizable portion of global liquidity management, the Bank’s liquidity
management is centralized. By organizing liquidity 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.
National Bank of Canada
2020 Annual Report
94
Management’s Discussion and Analysis
Risk Management
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 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
three 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
2020 Annual Report
95
Management’s Discussion and Analysis
Risk Management
Liquid Asset Portfolio
As at October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2020
As at October 31, 2019
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by entity
National Bank (parent)
Domestic subsidiaries
Foreign subsidiaries and branches
As at October 31
(millions of Canadian dollars)
Unencumbered liquid assets by currency
Canadian dollar
U.S. dollar
Other currencies
Liquid Asset Portfolio – Average(4)
Year ended October 31
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
Loans
Securities backed by insured residential mortgages
As at October 31, 2020
As at October 31, 2019
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2020
Unencumbered
liquid assets
2019
Unencumbered
liquid assets
29,142
−
29,142
5,871
23,271
9,596
31,377
20,200
51,577
30,474
21,103
23,455
15,612
5,722
49,420
9,510
140,783
103,346
7,514
1,440
31,406
−
60,560
55,310
23,126
7,162
80,826
9,510
201,343
158,656
15,755
1,830
47,480
5,560
106,970
83,985
7,371
5,332
33,346
3,950
94,373
6,145
5,581
26,968
2,926
74,671
2020
2019
47,135
21,928
25,310
94,373
30,380
14,815
29,476
74,671
2020
2019
50,568
26,099
17,706
94,373
39,172
19,356
16,143
74,671
Bank-owned
liquid assets(1)
Liquid assets
received(2)
Total
liquid assets
Encumbered
liquid assets(3)
2020
Unencumbered
liquid assets
2019
Unencumbered
liquid assets
24,650
−
24,650
4,866
19,784
8,491
30,704
22,269
52,973
33,383
19,590
22,995
13,671
6,343
44,845
8,637
128,850
102,816
7,646
2,014
32,926
−
64,855
62,434
21,317
8,357
77,771
8,637
193,705
165,250
15,355
2,387
46,616
5,056
107,663
94,927
5,962
5,970
31,155
3,581
86,042
4,442
4,885
26,360
3,150
70,323
(1)
(2)
(3)
(4)
Bank-owned liquid assets include assets for which there are no legal or geographic restrictions.
Securities received as collateral with respect to securities financing and derivative transactions and securities purchased under reverse repurchase agreements and securities borrowed.
In the normal course of its funding activities, the Bank pledges assets as collateral in accordance with standard terms. Encumbered liquid assets include assets used to cover short sales,
obligations related to securities sold under repurchase agreements and securities loaned, guarantees related to security-backed loans and borrowings, collateral related to derivative
financial instrument transactions, asset-backed securities and liquid assets legally restricted from transfers.
The average is based on the sum of the end-of-period balances of the 12 months of the year divided by 12.
National Bank of Canada
2020 Annual Report
96
Management’s Discussion and Analysis
Risk Management
Summary of Encumbered and Unencumbered Assets
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Encumbered
assets(1)
Unencumbered
assets
As at October 31, 2020
Encumbered
assets as %
of total assets
Total
Other(2)
5,527
−
14,512
−
−
−
−
−
−
−
20,039
Available as
collateral
23,271
67,152
−
3,950
−
−
−
−
−
−
94,373
Other(3)
−
−
−
123,234
13,422
409
1,155
1,414
1,434
3,266
144,334
29,142
102,131
14,512
164,740
13,422
409
1,155
1,414
1,434
3,266
331,625
1.8
10.5
4.4
11.3
−
−
−
−
−
−
28.0
Encumbered
assets(1)
Unencumbered
assets
As at October 31, 2019
Encumbered
assets as %
of total assets
Total
Other(2)
3,959
−
12,850
−
−
−
−
−
−
−
16,809
Available as
collateral
9,596
57,276
4,873
2,926
−
−
−
−
−
−
74,671
Other(3)
−
−
−
118,490
8,129
385
490
1,412
1,406
2,738
133,050
13,698
82,226
17,723
153,251
8,129
385
490
1,412
1,406
2,738
281,458
1.4
8.9
4.6
11.3
−
−
−
−
−
−
26.2
Pledged as
collateral
344
34,979
−
37,556
−
−
−
−
−
−
72,879
Pledged as
collateral
143
24,950
−
31,835
−
−
−
−
−
−
56,928
(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., mortgages insured by the Canada Mortgage and Housing Corporation that can be securitized into mortgage-backed securities under the National Housing Act
(Canada)).
National Bank of Canada
2020 Annual Report
97
Management’s Discussion and Analysis
Risk Management
Liquidity Coverage Ratio (LCR)
The LCR was introduced primarily to ensure that banks could 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, 2020, the Bank’s average
LCR was 161%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
LCR Disclosure Requirements(1)
(millions of Canadian dollars)
High-quality liquid assets (HQLA)
1 Total HQLA
Cash outflows
2 Retail deposits and deposits from small business customers, of which:
3 Stable deposits
4 Less stable deposits
5 Unsecured wholesale funding, of which:
6 Operational deposits (all counterparties)
7 Non-operational deposits (all counterparties)
8 Unsecured debt
9 Secured wholesale funding
10 Additional requirements, of which:
11 Outflows related to derivative exposures and other collateral requirements
12 Outflows related to loss of funding on secured debt securities
13 Backstop liquidity and credit enhancement facilities and commitments to extend credit
14 Other contractual commitments to extend credit
15 Other contingent commitments to extend credit
16 Total cash outflows
Cash inflows
17 Secured lending (e.g., reverse repos)
18 Inflows from fully performing exposures
19 Other cash inflows
20 Total cash inflows
21 Total HQLA
22 Total net cash outflows
23 Liquidity coverage ratio (%)(5)
Total unweighted
value(2) (average)
October 31, 2020
Total weighted
value(3) (average)
For the quarter ended
July 31, 2020
Total weighted
value(3) (average)
n.a.
68,118
65,250
54,014
26,554
27,460
93,815
17,419
68,173
8,223
n.a.
43,352
12,462
1,464
29,426
3,081
93,133
n.a.
104,438
12,283
19,505
136,226
4,455
797
3,658
51,234
4,205
38,806
8,223
16,058
12,056
6,154
1,464
4,438
1,497
1,579
86,879
16,953
7,922
19,505
44,380
4,274
765
3,509
48,995
3,756
36,370
8,869
13,500
11,881
6,391
1,258
4,232
925
1,584
81,159
18,082
7,766
14,190
40,038
Total adjusted
value(4)
Total adjusted
value(4)
n.a.
n.a.
n.a.
68,118
42,499
161 %
65,250
41,121
161 %
OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
Unweighted values are calculated as outstanding balances maturing or callable within 30 days (for inflows and outflows).
n.a. Not applicable
(1)
(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, 2020, Level 1 liquid assets represented 83% 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, 2020 and the preceding quarter reflects exceptional measures taken by OSFI and the Bank of Canada in response to the operational issues caused
by the spread of COVID-19. 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 is prescribed by the EDTF, the Bank’s internal liquidity metrics use assumptions that are
calibrated according to its business model and experience.
National Bank of Canada
2020 Annual Report
98
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.
Funding Risk
Funding risk is defined as the risk to the Bank’s ongoing ability to raise sufficient funds to finance actual or proposed business activities on an unsecured or
secured basis at an acceptable price. The Bank maintains a good balance of its funding through appropriate diversification of its unsecured funding vehicles,
securitization programs and secured funding. The Bank also diversifies its funding by currency, geography and maturity. The funding management priority is to
achieve an optimal balance between deposits, securitization, secured funding and unsecured funding. This brings optimal stability to the funding and reduces
vulnerability to unpredictable events.
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 strong
ratings. On April 3, 2020, Fitch Ratings changed the trend on all the Bank’s ratings and its related entities from “Stable” to “Negative” to reflect disruption to
economic activity and financial markets from the COVID-19 pandemic and on April 30, 2020, DBRS Limited (DBRS) also changed the trend from “Positive” to
“Stable” due to uncertainties regarding the negative impact of COVID-19. For Moody’s and S&P, the outlook remains unchanged at “Stable.” The following
table presents the Bank’s credit ratings according to four rating agencies as at October 31, 2020.
The Bank’s Credit Ratings
Short-term senior debt
Canadian commercial paper
Long-term deposits
Long-term non-bail-inable senior debt(1)
Long-term senior debt(2)
NVCC subordinated debt
NVCC limited recourse capital notes
NVCC preferred shares
Counterparty risk(3)
Covered bonds program
Rating outlook
Moody’s
S&P
As at October 31, 2020
Fitch
DBRS
P-1
Aa3
Aa3
A3
Baa2 (hyb)
Ba1 (hyb)
Ba1 (hyb)
Aa3/P-1
Aaa
Stable
A-1
A-1 (mid)
A
BBB+
BBB
BB+
P-3 (high)
Stable
R-1 (mid)
AA (low)
AA (low)
A (high)
BBB (high)
BBB
Pfd-2 (low)
AAA
Stable
F1+
AA-
AA-
A+
AA-
AAA
Negative
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
2020 Annual Report
99
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 approach 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)
One-notch
downgrade
As at October 31, 2020
Three-notch
downgrade
25
37
(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;
maintain a sound liquidity risk management through centralized expertise and management of liquidity metrics within predefined risk appetite;
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.
National Bank of Canada
2020 Annual Report
100
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.
Residual Contractual Maturities of Wholesale Funding(1)
(millions of Canadian dollars)
As at October 31, 2020
Deposits from banks(2)
Certificates of deposit and commercial paper(3)
Senior unsecured medium-term notes(4)(5)
Senior unsecured structured notes
Covered bonds and asset-backed securities
Mortgage securitization
Covered bonds
Securitization of credit card receivables
Subordinated liabilities(6)
Secured funding
Unsecured funding
As at October 31, 2019
1 month or
less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
12 months
671
1,521
−
−
−
−
−
−
2,192
−
2,192
2,192
3,187
20
2,841
−
−
2,138
360
−
−
5,359
2,498
2,861
5,359
6,098
13
5,489
703
−
311
1,564
−
−
8,080
1,875
6,205
8,080
7,217
−
1,787
1,038
−
2,247
698
−
−
5,770
2,945
2,825
5,770
6,925
Subtotal
1 year
or less
704
11,638
1,741
−
4,696
2,622
−
−
21,401
7,318
14,083
21,401
23,427
Over 1
year to
2 years
−
−
2,966
−
3,430
2,880
36
−
9,312
6,346
2,966
9,312
9,362
Over 2
years
−
−
5,801
2,417
14,729
4,639
28
775
28,389
19,396
8,993
28,389
30,746
Total
704
11,638
10,508
2,417
22,855
10,141
64
775
59,102
33,060
26,042
59,102
63,535
(1)
(2)
(3)
(4)
(5)
(6)
Bankers’ acceptances are not included in this table.
Deposits from banks include all non-negotiable term deposits from banks.
Includes bearer deposit notes.
Certificates of deposit denominated in euros are included in senior unsecured medium-term notes.
Includes deposits subject to bank recapitalization (Bail-In) conversion regulations.
Subordinated debt is presented in this table but the Bank does not consider it as part of its wholesale funding.
National Bank of Canada
2020 Annual Report
101
Management’s Discussion and Analysis
Risk Management
Operational Risk
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 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.
Operational Risk Management Framework
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 manage and monitor the identified risks to keep them at an acceptable level;
proactively and continuously manage risks.
Operational Risk Management Tools and Methods
Collection and Analysis of Data on Operational Events
The Operational Risk Unit applies a process, across the Bank and its subsidiaries, for identifying, collecting and analyzing data on internal operational events.
This process includes determining the Bank's exposure to the operational risks and operational losses incurred and assessing the effectiveness of internal
controls. It also helps limit operational events, keep losses at an acceptable level and, as a result, reduce potential capital charges and lower the likelihood of
damage to the Bank's reputation. These data are processed and saved in a centralized database and are periodically the subject of a quality assurance
exercise. During fiscal years 2020 and 2019, 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 fraud, information security and
theft of personal information experienced by other organizations, 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.
As such, the program makes it possible to anticipate certain factors that could hinder performance or the achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the drivers of exposure to major operational risks and track changes in risks to proactively manage them. The business
units and corporate units define key indicators associated with their main operational risks and assign tolerance thresholds to them. These indicators are
monitored periodically, and when they show a significant increase in risk or when a tolerance threshold is exceeded, they are sent to the appropriate level in
the hierarchy and action plans are implemented as required.
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 related to
potentially serious events. It is used to define the risk appetite, set risk exposure limits, and engage in business planning. More specifically, scenario analysis
provides management with a better understanding of the risks faced by the Bank, and helps it make appropriate management decisions to mitigate potential
operational risks that are inconsistent with the Bank’s risk appetite.
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.
Operational Risk Reports and Disclosures
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.
National Bank of Canada
2020 Annual Report
102
Management’s Discussion and Analysis
Risk Management
Regulatory Compliance Risk
Regulatory compliance risk is the risk of the Bank failing to comply with the regulatory requirements in effect where it 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 and sanctions or increased oversight by regulators.
Organizational Structure of Compliance
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 officer (CAMLO). She is responsible for implementing and updating the
Bank’s programs for regulatory compliance management, regulatory requirements related to AML/ATF, international sanctions, and the fight against
corruption. The CCO and CAMLO has a direct reporting relationship with the Chair of the RMC and meets with him at least once every quarter. She can also
communicate directly with senior management, officers and directors of the Bank and of its subsidiaries and foreign centres.
Regulatory Compliance Framework
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.
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 regulatory requirements are in effect, including those related to AML/ATF, to
international sanctions, and to the fight against 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 significant 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
The past year was marked by several regulatory changes, including the Code of Conduct for the Delivery of Banking Services to Seniors, Bill C-86 amending the
Bank Act (Canada), Bill C-81 (Accessible Canada Act), the Canada Deposit Insurance Corporation Act and the Consumer Protection Act. The purpose of these
regulatory changes is to ensure that consumers are protected in terms of, among other things, disclosures, building access and employee training. The Bank
continuously monitors the regulatory environment to ensure that its practices comply with regulatory changes, as well as with those of the industry. For this
reason, it participates in various events that bring together actors in 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 two stages. Certain amendments, of which the methods of identification and the delay to submit a
suspicious transaction report with Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), came into force in June 2020, and others will come
into force in June 2021.
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, the state of California was the first to adopt its own stringent California Consumer Privacy Act in January 2020. The government of Quebec recently
tabled a bill aimed at fostering transparency, increasing the level of data confidentiality and better regulating the collection and use of personal information. A
federal bill aimed at modernizing privacy law was also tabled in November 2020 and aims, among other things, to reform the framework for the protection of
personal information held by the private sector.
Canada Deposit Insurance Corporation (CDIC)
Changes in the Government of Canada’s deposit insurance framework have been published concerning information on co-owned accounts and accounts held
in trust as well as on the insurability of certain deposits. Since April 30, 2020, coverage has been extended to insurable deposits in foreign currencies and to
term deposits with maturities exceeding five years. In addition, as of April 30, 2022, 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.
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Management’s Discussion and Analysis
Risk Management
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. 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. These plans are approved by the Board and submitted to the national regulatory bodies.
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 to January 1, 2023. Some of the obligations of a qualified derivatives dealer, established under section 871(m) of the IRC and the
qualified intermediary agreement have also been deferred to January 1, 2023.
Common Reporting Standard - Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA), an American law, and the Common Reporting Standard (CRS), an international standard, the principles of
which have been incorporated into the Income Tax Act (Canada), are intended to counter tax evasion by taxpayers through the international exchange of tax
information through financial institutions. In order to comply with these regulatory requirements, the Bank and its subsidiaries are required to establish the
classification and the status, as the case may be, of the entity that holds the account with the Bank. New Canada Revenue Agency (CRA) rules came into force
on January 1, 2020. CRA has published the final version of the guidelines, but the industry is planning to make suggestions to CRA, including deferring the
application of the new penalties scheduled for January 1, 2021.
Client-Centered Reforms - Amendments to National Instrument 31-103
On October 3, 2019, the CSA published the final version of amendments to National Instrument 31-103, Registration Requirements, Exemptions and Ongoing
Registrant Obligations. Changes related to the client-focused reforms will come into force on December 31, 2021, and they include requirements on the
relationship disclosure. Only the conflict-of-interest obligations will come into force on June 30, 2021.
Reform of Benchmark Interest Rates
The reform of benchmark interest rates is a global initiative that is being coordinated and led by central banks and governments around the world, including
Canada. The objective is to improve benchmarks by ensuring that they meet robust international standards. The initiative introduces other benchmarks as
recommended rates (risk-free rates, such as Secured Overnight Financing Rate (SOFR), Canadian Overnight Repo Rate Average (CORRA) and Europe Short-Term
Rate (ESTR)) to replace the Interbank Offered Rate (IBOR), which are the benchmark rates used by the world's major banks for short-term lending in the
interbank market. These rates, in particular LIBOR (London Interbank Offered Rates), are widely used around the world as benchmarks for derivative financial
instruments, bonds and other variable-rate instruments. To ensure an ordered transition to the risk-free rates recommended for derivatives, the industry has
proposed a solution through ISDA (International Swaps and Derivatives Association) via a protocol (2020 IBOR Fallbacks Protocol), as well as a supplement to
the 2006 definitions, which come into force on January 25, 2021. For certain other types of contracts, contractual amendments are expected by the end of
2021, at which time certain current rates (in this case, LIBOR rates) are expected to be withdrawn.
Reputation Risk
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 its operational risk management initiatives mentioned above, the Bank has a variety of mechanisms 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 crisis management framework including effective intervention, communication and behavioural parameters in order to minimize the
impact on its activities, clients and employees.
The Bank also has a reputation risk policy, approved by the RMC, that covers all of the Bank’s practices and activities. The policy sets the reputation risk
management principles and rules for clients, employees and communities, all of which are stakeholders of the Bank. 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, Communications and Corporate Social Responsibility Department and Investor Relations Department complete the reputation risk management
framework.
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Management’s Discussion and Analysis
Risk Management
Strategic Risk
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.
Environmental and Social Risk
Environmental and social risk represents the potential for environmental or social issues to provoke a financial or operational loss for the Bank and damage to
its reputation or impacts on its stakeholders. The Bank is exposed to these risks directly through its operations and indirectly through the activities of clients.
With this in mind, the Bank has adopted environmental, social and governance (ESG) principles that demonstrate the importance it attaches to sustainable
development and to maintaining the best balance of interests between societal stakeholders. The Bank has supported various sustainable development
initiatives, and continues to implement several initiatives aimed at integrating environmental and social issues into its business and operational decisions.
This also implies a continuous and stronger adaptation in the event of major crises, such as natural disasters or health crises such as the COVID-19 crisis, that
can considerably affect the global economy and society over an extended period of time. Our Report on Environmental, Social and Governance Advances for
2019, available on the Bank’s website at nbc.ca, provides more detailed information on how the Bank identifies and manages these risks.
Disclosure related to the Task Force on Climate-Related Financial Disclosures (TCFD)
In recent years, environmental and climate issues have often been brought front and centre. Mindful of its mobilizing role on environmental issues, in 2018 the
Bank announced its support for the Financial Stability Board's TCFD and undertook to communicate the information recommended by this group. In connection
with these recommendations, the Bank has identified two types of relevant climate-related risks, i.e., physical risks and transition risks, which it has added to
its monitoring of the main risks. The Bank defines physical risks as the potential impacts of increased and intensified extreme weather events that could lead
to, among other things, food, energy and resource supply problems, and potentially depreciate the Bank’s physical and financial assets. The Bank defines
transition risks as the impacts from moving toward a low-emission economy, such as technological changes or public policy directions that could lead to
revaluations of the Bank's assets, resulting in new costs or opportunities. The Bank also includes market risk and reputational risk within transition risks.
The TCFD's recommendations are organized into four main pillars representing the operational foundations of an organization: governance, strategy, risk
management, and metrics and targets. These four broad categories of recommendations are intended to provide a framework for climate-related financial
reporting so that institutional investors can make informed choices about their exposure to climate-related risks and opportunities. The Bank has defined a
roadmap for implementing the TCFD’s recommendations and is enhancing disclosures related to climate risk management. The Bank is also working with
various industry partners to identify and implement sound management practices aimed at promoting the development of a low-carbon economy. The Bank
recently published its first report on advances for the Task Force on Climate-Related Financial Disclosure 2020 – TFCD Report, available on the Bank’s website
at nbc.ca. This report provides detailed information on how it is managing climate-related risks.
Given that climate risk is associated with credit risk and operational risk, the Bank recognizes the importance of integrating several additional control
measures into its existing risk management processes and implementing appropriate strategies to mitigate them. To this end, an environmental policy has
been implemented that applies to activities and decisions across the Bank. This policy clearly sets out the principles established to identify and limit
environmental and climate risks as well as impacts on the community and the Bank’s business lines. In the interests of proactively ensuring the strategic
positioning of its entire portfolio, the Bank continues to express its desire to support the energy transition toward a lower-carbon economy.
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Management’s Discussion and Analysis
Risk Management
In order to continue to foster economically and socially sustainable development, the Bank has emphasized various measures to combat climate change. The
Bank can point to a series of achievements over the past year in response to the four priorities identified in its 2019 Annual Report.
Priority
Achievements
Prospects for the Future
Grow the proportion of its renewable-energy-
related funding assets at a faster pace than
those related to non-renewable energy
Support clients in their energy transitions
Develop indicators for effectively monitoring
the Bank’s sustainable development
performance
Strengthen the Bank's partnerships with the
industry's main change agents in order to meet
its commitments
The renewable energy loan portfolio grew by
107% in the period from 2014 to 2020, while
the non-renewable energy loan portfolio
declined by 33%.
Expansion of the mandate of the renewable
energy business development team in 2019.
Financing granted with conditions related to
the achievement of climate objectives.
Adoption, in 2020, of a target for reducing the
Bank’s own greenhouse gas (GHG) emissions
by 25% from 2019 levels by 2025.
Annual calculation of the carbon footprint.
Optimization of energy consumption.
The Bank as well as the other major Canadian
banks are involved in the working committees
of various groups, such as the Canadian
Bankers Association, Finance Montréal and the
Canadian Standards Association.
The Bank is a member of the United Nations
Environment Programme Finance Initiative
(UNEP FI).
The Bank is a founding signatory of the UN
Principles for Responsible Banking and one of
the first financial institutions in North America
to adopt them.
Maintain our medium- and long-term
commitment.
Incorporate at least one climate-related
indicator into our risk appetite framework
for fiscal 2021.
Continue our dialogue with customers to
broaden the sustainable product offering.
Continue to support clients in their energy
transitions.
Achieve our reduction target by following
our action plan.
Maintain an open dialogue with all our
stakeholders to accelerate the transition
to a low-carbon economy.
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Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
A summary of the significant accounting policies used by the Bank is presented in Note 1 to the consolidated financial statements of this Annual Report. The
accounting policies discussed below 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.
COVID-19 Pandemic Considerations
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization. As a result of the heightened uncertainty associated with the
unprecedented nature of the COVID-19 pandemic, developing reliable estimates and applying judgment has become even more challenging. ECL accounting
has become particularly difficult in the current circumstances and requires significant judgment. The ECL model is forward-looking and is based on a
probability-weighted approach. 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. During this period of greater economic uncertainty, it is very difficult to forecast future
events and the macroeconomic inputs used in ECL modelling. Determining macroeconomic scenarios and assigning probabilities to these scenarios requires
significant judgment. Consideration is given both to the effects of COVID-19 and the significant government support measures. The Bank applies expert credit
judgment to adjust modelled ECL results when it becomes evident that known or expected risk factors and information were not considered in the credit rating
and modelling process. As a result of COVID-19 and the recent economic downturn, significant measurement uncertainty exists in determining ECLs, and
measurement is subject to significant judgment. The uncertainty regarding key inputs used in measuring ECLs is outlined in Note 7 to the consolidated
financial statements.
In response to the economic impact of COVID-19, the Canadian government has established, among other financial relief programs, the Canada Emergency
Business Account (CEBA) program to provide interest-free loans of up to $40,000 for small and medium-sized businesses and non-profit organizations. The
Bank and several other financial institutions are authorized to implement the CEBA program in cooperation with Export Development Canada. This program is
guaranteed by the Government of Canada and aims to help businesses cope with the economic challenges resulting from the COVID-19 crisis. Loans made by
the Bank to its business clients under CEBA are not recognized on the Bank’s Consolidated Balance Sheet, since the conditions of a qualifying pass-through
arrangement have been met and the Bank has determined that substantially all the risks and rewards of ownership of the loans have been transferred to the
Canadian government. The Bank receives an administration fee as reimbursement for the costs of administering this Canadian government program and this
fee is recognized in the Consolidated Statement of Income as a reduction of Non-interest expenses – Other. As at October 31, 2020, loans of $1.2 billion had
been granted to the Bank’s clients under the CEBA program.
Classification of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost, or at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely
payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period,
and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset
are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
When classifying financial assets, the Bank determines the business model used for each portfolio of financial assets that are managed together to achieve a
same business objective. The business model reflects how the Bank manages its financial assets and the extent to which the financial asset cash flows are
generated by the collection of the contractual cash flows, the sale of the financial assets, or both. The Bank determines the business model using scenarios
that it reasonably expects to occur. 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.
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Management’s Discussion and Analysis
Critical Accounting Estimates
Fair Value of Financial Instruments
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.
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.
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Management’s Discussion and Analysis
Critical Accounting Estimates
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. ECLs are a probability-weighted estimate of credit losses over the remaining expected life of the financial instrument. The ECL model is forward
looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events, current conditions, and forecasts of
future events and economic conditions. Judgment is required in making assumptions and estimates, determining movements between the three stages, and
applying forward-looking information. Any changes in assumptions and estimates, as well as the use of different, but equally reasonable, estimates and
assumptions, could have an impact on the allowances for credit losses and the provisions for credit losses for the year. All business segments are affected by
this accounting estimate. For additional information, see Note 7 to the consolidated financial statements.
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 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 allowances 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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Management’s Discussion and Analysis
Critical Accounting Estimates
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.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not yet available for use or that have indefinite useful lives
are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the individual
asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which
the asset belongs will be determined. Goodwill is always tested for impairment at the level of a CGU or a group of CGUs. A CGU is the smallest identifiable
group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Bank uses judgment to
identify CGUs.
An asset’s recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value of
expected future cash flows from the asset or CGU. The recoverable amount of the CGU is determined using valuation models that consider various factors such
as projected future cash flows, discount rates and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a
significant impact on income. If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable
amount and an impairment loss is recognized in Non-interest expenses in the Consolidated Statement of Income.
Management exercises judgment when determining whether there is objective evidence that premises and equipment or intangible assets with finite useful
lives may be impaired. It also uses judgment in determining to which CGU or group of CGUs an asset or goodwill is to be allocated. Moreover, for impairment
assessment purposes, management must make estimates and assumptions regarding the recoverable amount of non-financial assets, CGUs or a group of
CGUs. For additional information on the estimates and assumptions used to calculate the recoverable amount of an asset or CGU, see Note 11 to the
consolidated financial statements.
Any changes to these estimates and assumptions may have an impact on the recoverable amount of a non-financial asset and, consequently, on impairment
testing results. These accounting estimates have an impact on Premises and equipment, Intangible assets and Goodwill reported on the Consolidated Balance
Sheet. The aggregate impairment loss, if any, is recognized as a non-interest expense for the corresponding segment and presented in the Other item.
Employee Benefits – Pension Plans and Other Post-Employment Benefits
Pension plan and other post-employment plan expenses and obligations are actuarially determined using the projected benefit method prorated on service.
The calculations incorporate management’s best estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health
care cost trend rates, mortality rates and retirement age.
Remeasurements of these plans result in actuarial gains and losses related to the defined benefit obligation and the actual return on plan assets, excluding the
net interest determined by applying a discount rate to the net asset or liability of the plans. Remeasurements are immediately recognized in Other
comprehensive income and will not be subsequently reclassified to net income; these cumulative gains and losses are reclassified to Retained earnings.
National Bank of Canada
2020 Annual Report
110
Management’s Discussion and Analysis
Critical Accounting Estimates
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.
Income Taxes
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process includes estimating the actual amount of
income taxes payable and evaluating tax loss carryforwards and temporary differences arising from differences between the values of the items reported for
accounting and for income tax purposes. Deferred tax assets and liabilities, presented in Other assets and Other liabilities on the Consolidated Balance Sheet,
are calculated according to the tax rates to be applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date
of the future event is revised based on current information. The Bank periodically evaluates deferred tax assets to assess recoverability. In the Bank’s opinion,
based on the information at its disposal, it is probable that all deferred tax assets will be realized prior to their expiration.
This accounting estimate affects Income taxes in the Consolidated Statement of Income for all business segments. For additional information on income taxes,
see Notes 1 and 24 to the consolidated financial statements.
Contingent Liabilities
Maple Financial Group Inc.
The Bank has a 24.9% equity interest in Maple Financial Group Inc. (Maple), a privately owned Canadian company that operated through direct and indirect
wholly owned subsidiaries in Canada, Germany, the United Kingdom and the United States.
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 the investigation was 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 protection 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. As at October 31, 2019, an $11 million provision was recorded
to reflect this adjusting event after the Consolidated Balance Sheet date.
In December 2019, the Bank, together with the other principal Maple shareholders, reached an agreement with the bankruptcy and insolvency administrator of
Maple GmbH to settle any potential claims that might be asserted against them by or on behalf of Maple GmbH. In connection with the settlement, the Bank
agreed to pay 8.7 million euros for the benefit of Maple GmbH’s creditors and, during the first quarter of 2020, recorded a $13 million charge in the Non-
interest expenses – Other item presented in the Other heading of segment results. During the third quarter of 2020, by virtue of the finalization of this
agreement, all material liabilities associated with the Bank’s ownership of Maple have been resolved.
National Bank of Canada
2020 Annual Report
111
Management’s Discussion and Analysis
Critical Accounting Estimates
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of varied
natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal 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 National 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.
Structured Entities
In the normal course of business, the Bank enters into arrangements and transactions with structured entities. Structured entities are entities designed so that
voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the
relevant activities are directed by means of contractual arrangements. A structured entity is consolidated when the Bank concludes, after evaluating the
substance of the relationship and its right or exposure to variable returns, that it controls that entity. Management must exercise judgment in determining
whether the Bank controls an entity. Additional information is provided in the Securitization and Off-Balance-Sheet Arrangements section of this MD&A and in
Note 27 to the consolidated financial statements.
National Bank of Canada
2020 Annual Report
112
Management’s Discussion and Analysis
Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following standards
have been issued but are not yet effective. The Bank is currently assessing the impact of the application of these standards on the consolidated financial
statements.
Effective Date – November 1, 2020
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.
Effective Date – November 1, 2021
Interest Rate Benchmark Reform – Phase 2
In August 2020, the IASB finalized its response to the ongoing reform of interbank offered rates (IBOR) and other interest rate benchmarks by issuing
amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 – Insurance Contracts and IFRS 16. The amendments complement those issued in 2019 and focus on the effects
on financial statements once existing benchmark rates are replaced with alternative benchmark rates. The amendments in this final phase relate to changes to
contractual cash flows, hedge accounting, and disclosures. The effective date for the amendments will be annual periods beginning on or after
January 1, 2021, with early application permitted.
To prepare for the interest rate benchmark reform, the Bank developed an enterprise-wide project, put together a dedicated team and established a formal
governance structure. Several committees were created to ensure the success of the project and to prepare for the benchmark interest rate reform. The project
team is made up of qualified resources from different fields of expertise to ensure an in-depth analysis of all aspects of the changes as well as the financial,
operational and technological impacts. Many of these experts, who have in-depth knowledge of accounting standards and reform-related activities, are
involved in the Canadian Bankers Association’s working group where representatives of the major Canadian banks discuss the issues and interpretations of
the reform. The Bank also participates in meetings with the OSFI to discuss these same issues and interpretations. Furthermore, workshops are held to analyze
the impact of the reform’s implementation, ensuring that information is disseminated to stakeholders affected by this reform; information-sharing meetings
are held with all stakeholders affected by the reform, and participants in various industry committees share the latest developments. The project team
regularly reports on the project’s progress to the project steering committee and the Financial Markets Risk Committee, committees made up of members of
management and experts from all departments involved. Finally, a training plan for staff, management and board members has been created.
Effective Date – November 1, 2023
IFRS 17 – Insurance Contracts
In May 2017, the IASB issued IFRS 17 – Insurance Contracts (IFRS 17), 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. IFRS 17 provides guidance
on the recognition, measurement, presentation and disclosure of insurance contracts. In June 2020, amendments to IFRS 17 were issued and included a two-
year deferral of the effective date along with other changes aimed at addressing concerns and implementation challenges identified after IFRS 17 was
published in 2017. IFRS 17, as amended, is effective retrospectively for annual periods beginning on or after January 1, 2023, with earlier application
permitted. If full retrospective application to a group of insurance contracts is impractical, the modified retrospective approach or the fair value approach may
be used.
National Bank of Canada
2020 Annual Report
113
Management’s Discussion and Analysis
Additional Financial Information
Table 1 – Quarterly Results
(millions of Canadian dollars, except per share amounts)
Statement of income data
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders and
holders of other equity instruments
Earnings per common share
Basic
Diluted
Dividends (per share)
Common
Preferred
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Total
Q4
Q3
Q2
4,255
3,672
7,927
4,545
3,382
846
453
2,083
42
1,124
876
2,000
1,259
741
110
139
492
2
1,096
872
1,968
1,074
894
143
149
602
13
1,105
931
2,036
1,121
915
504
32
379
11
2020
Q1
930
993
1,923
1,091
832
89
133
610
16
2,041
490
589
368
594
$
$
5.73
5.70
$
1.37
1.36
1.67 $
1.66
$
1.01
1.01
1.69
1.67
$
2.84
$
0.71
$
0.71 $
0.71
$
0.71
1.0063
0.9636
1.4000
1.3500
1.1125
1.1500
1.2375
0.2516
0.2400
0.3500
0.3375
0.2781
0.2875
0.3094
0.2516
0.2399
0.3500
0.3375
0.2781
0.2875
0.3093
0.2515
0.2399
0.3500
0.3375
0.2782
0.2875
0.3094
0.2516
0.2438
0.3500
0.3375
0.2781
0.2875
0.3094
Return on common shareholders’ equity
14.9 %
13.7 %
17.0 %
10.7 %
18.0 %
Total assets
Long-term financial liabilities(3)
Net impaired loans(4)
Number of common shares outstanding (thousands)
Average – Basic
Average – Diluted
End of period
Per common share
Book value
Share price
High
Low
Number of employees – Worldwide
Number of branches in Canada
331,625
322,453
316,950
289,191
775
465
777
453
779
479
774
436
335,508
337,580
335,859
338,264
335,998
335,552
337,231
335,666
335,603
337,317
335,400
335,020
338,113
335,818
$
39.97
$
38.91 $
38.74
$
37.58
$
74.79
38.73
72.85
62.99
26,517
403
65.54
51.38
26,544
409
74.79
38.73
26,589
413
74.22
68.25
26,314
416
(1)
(2)
(3)
(4)
For fiscal 2020, the Non-interest income item includes a foreign currency loss on disposal of subsidiaries of $24 million (2019: $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 2020, the Non-interest expenses item includes $71 million in impairment losses on premises and equipment and on intangible assets (2019: $57 million), $48 million in severance
pay (2019: $10 million), a $13 million charge related to Maple (2019: $11 million). An amount of $45 million in provisions for onerous contracts was also recorded in 2019.
Subordinated debt.
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.
National Bank of Canada
2020 Annual Report
114
Management’s Discussion and Analysis
Additional Financial Information
Total
Q4
Q3
Q2
3,596
3,836
7,432
4,301
3,131
347
462
2,322
66
936
979
1,915
1,095
820
89
127
604
14
855
1,093
1,948
1,154
794
86
100
608
17
942
828
1,770
1,026
744
84
102
558
19
2,256
590
591
539
2019
Q1
863
936
1,799
1,026
773
88
133
552
16
536
Total
Q4
Q3
Q2
3,382
3,784
7,166
4,063
3,103
327
544
2,232
87
2,145
826
988
1,814
1,036
778
73
139
566
16
550
837
955
1,792
1,011
781
76
136
569
23
885
869
1,754
992
762
91
124
547
25
2018
Q1
834
972
1,806
1,024
782
87
145
550
23
546
522
527
$
6.39 $
6.34
1.68 $
1.67
1.68 $
1.66
1.52
1.51
$
1.51
1.50
$
2.66 $
0.68 $
0.68 $
0.65
$
0.65
$
$
$
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
1.0156
0.9750
1.4000
1.3500
1.1125
1.1500
1.2375
0.2515
0.2437
0.3500
0.3375
0.2781
0.2875
0.3094
0.2516
0.2438
0.3500
0.3375
0.2781
0.2875
0.3093
0.2562
0.2437
0.3500
0.3375
0.2782
0.2875
0.3094
0.2563
0.2438
0.3500
0.3375
0.2781
0.2875
0.3094
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
–
–
18.0 %
18.2 %
18.7 %
17.8 %
17.2 %
18.4 %
17.8 %
18.4 %
18.6 %
18.7 %
281,458
276,312
269,106
263,355
262,471
257,637
256,259
251,065
773
450
773
420
772
379
764
373
747
404
753
413
755
382
8
371
335,104
337,630
334,393
336,900
334,172
334,843
337,768
334,210
335,478
338,515
335,116
335,716
338,585
335,500
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
$
36.89 $
36.12 $
35.49
$
34.85
$
34.40
$
33.91 $
32.64
$
31.75
$
68.02
54.97
68.02
60.38
25,487
422
64.16
60.71
24,881
429
63.82
60.31
24,137
428
61.80
54.97
23,960
428
$
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
National Bank of Canada
2020 Annual Report
115
Management’s Discussion and Analysis
Additional Financial Information
Table 2 – Overview of Results
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income 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)
Income before provisions for credit losses and income taxes
on a taxable equivalent basis(1)
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 and holders of other equity instruments
Average assets
2020
2019
2018
2017
2016
4,463
3,729
8,192
4,545
3,647
846
2,801
718
2,083
3,791
3,971
7,762
4,301
3,461
347
3,114
792
2,322
42
66
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
2,041
318,199
2,256
286,162
2,145
265,940
1,940
248,351
1,181
235,913
(1)
(2)
(3)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
For fiscal 2020, the Non-interest income item includes a foreign currency translation loss on disposal of subsidiaries of $24 million (2019: $79 million gain on disposal of Fiera Capital
Corporation shares, $50 million gain on disposal of premises and equipment, and $33 million loss resulting from the fair value measurement of an investment).
For fiscal 2020, the Non-interest expenses item includes $71 million in impairment losses on premises and equipment and on intangible assets (2019: $57 million), $48 million in severance
pay (2019: $10 million), $13 million charge related to Maple (2019: $11 million). An amount of $45 million in provisions for onerous contracts was also recorded in 2019.
Table 3 – Changes in Net Interest Income
Year ended October 31(1)
(taxable equivalent basis)(2)
(millions of Canadian dollars)
Personal and Commercial
Net interest income
Average assets
Average interest-bearing assets
Net interest margin(3)
Wealth Management
Net interest income on a taxable equivalent basis
Average assets
Financial Markets
Net interest income on a taxable equivalent basis
Average assets
USSF&I
Net interest income
Average assets
Other
Net interest income on a taxable equivalent basis
Average assets
Total
Net interest income on a taxable equivalent basis
Average assets
2020
2019
2018
2017
2016
2,445
117,338
111,488
2,384
112,798
106,995
2,276
106,857
101,446
2,127
102,139
97,339
2,011
97,741
92,660
2.19 %
2.23 %
2.24 %
2.19 %
2.17 %
442
5,917
455
6,219
426
6,167
351
5,947
291
5,612
946
123,943
807
14,336
474
112,493
656
10,985
409
100,721
772
94,991
938
87,491
584
9,270
466
7,519
284
5,319
(177)
56,665
(178)
43,667
(169)
42,925
(71)
37,755
(88)
39,750
4,463
318,199
3,791
286,162
3,526
265,940
3,645
248,351
3,436
235,913
(1)
(2)
(3)
For fiscal years prior to 2020, certain amounts have been reclassified.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
Net interest margin is calculated by dividing net interest income by average interest-bearing assets.
National Bank of Canada
2020 Annual Report
116
Management’s Discussion and Analysis
Additional Financial Information
Table 4 – Non-Interest Income
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Trust service revenues
Credit fees
Revenues from acceptances, letters of
credit and guarantee
Card revenues
Deposit and payment service charges
Trading revenues (losses) 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)
2020
397
195
477
675
147
320
138
262
661
93
128
104
28
104
3,729
3,631
5
93
2019
314
178
449
609
134
283
175
271
964
77
136
96
34
251
3,971
3,780
85
106
2018
388
195
438
587
126
277
159
280
941
77
121
95
28
173
3,885
3,589
108
188
2017
349
216
412
518
130
231
132
279
409
140
117
81
35
159
3,208
3,027
136
45
2016
376
235
364
453
110
236
119
258
154
70
114
81
15
54
2,639
2,434
124
81
45.5 %
51.2 %
52.4 %
46.8 %
43.4 %
45.7 %
50.5 %
52.4 %
46.8 %
45.0 %
(1)
(2)
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
For fiscal 2020, other revenues include a foreign currency translation loss on disposal of subsidiaries of $24 million (2019: $79 million gain on disposal of Fiera Capital Corporation shares,
$50 million gain on disposal of premises and equipment, and $33 million loss resulting from the fair value measurement of an investment).
Table 5 – Trading Activity Revenues(1)
Year ended October 31(2)
(taxable equivalent basis)(3)
(millions of Canadian dollars)
Financial markets
Equities
Fixed-income
Commodities and foreign exchange
Other segments
2020
2019
2018
2017
2016
706
430
132
1,268
198
1,466
621
285
126
1,032
160
1,192
575
263
130
968
176
1,144
506
290
107
903
97
1,000
450
256
121
827
80
907
(1)
(2)
(3)
Includes net interest income on a taxable equivalent basis and non-interest income on a taxable equivalent basis.
For fiscal years prior to 2020, certain amounts have been reclassified.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
117
Management’s Discussion and Analysis
Additional Financial Information
Table 6 – Non-Interest Expenses
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)
2020
2,713
151
433
140
372
58
244
−
103
73
258
4,545
4,124
209
212
2019
2,532
254
372
44
332
62
249
−
128
70
258
4,301
3,931
210
160
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
55.5 %
55.4 %
54.8 %
56.3 %
63.8 %
53.7 %
54.5 %
54.8 %
56.3 %
58.6 %
(1)
(2)
(3)
(4)
(5)
(6)
For fiscal 2020, compensation and employee benefits include $48 million in severance pay (2019: $10 million).
For fiscal 2019, occupancy expense had included $45 million in provisions for onerous contracts.
For fiscal 2020, the Amortization – Technology expense includes $71 million in impairment losses on premises and equipment and on intangible assets (2019: $57 million;
2016: $44 million).
The fiscal 2016 restructuring charge had included $129 million in compensation and employee benefits and $2 million in occupancy expenses.
For fiscal 2020, other expenses include a $13 million charge related to Maple (2019: $11 million); the fiscal 2016 other expenses had included $25 million in litigation charges.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
118
Management’s Discussion and Analysis
Additional Financial Information
Table 7 – Provisions for Credit Losses(1)
Year ended October 31
(millions of Canadian dollars)
Personal Banking(3)
Stage 3
Stages 1 and 2
Commercial Banking
Stage 3
Stages 1 and 2(4)
Wealth Management
Stage 3
Stages 1 and 2
Financial Markets
Stage 3
Stages 1 and 2
USSF&I
Stage 3
Stages 1 and 2
POCI loans
Other
Stage 3
Stages 1 and 2(5)
Total provisions for credit losses
Average loans and acceptances
Provisions for credit losses on impaired loans(1)
as a % of average loans and acceptances
Provisions for credit losses
as a % of average loans and acceptances
2020
2019
2018
2017(2)
2016(2)
147
121
268
110
139
249
4
3
7
65
174
239
46
41
(7)
80
−
3
3
846
166
8
174
35
28
63
−
−
−
18
12
30
94
(24)
10
80
−
−
−
347
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
−
−
−
244
484
159,275
148,765
139,603
130,882
122,559
0.23 %
0.21 %
0.23 %
0.19 %
0.19 %
0.53 %
0.23 %
0.23 %
0.19 %
0.39 %
(1)
(2)
(3)
(4)
(5)
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.
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
2020 Annual Report
119
Management’s Discussion and Analysis
Additional Financial Information
Table 8 – Change in Average Volumes
Year ended October 31(1)
(taxable equivalent basis)(2)
(millions of Canadian dollars)
Assets
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
Liabilities and equity
Personal deposits
Deposit-taking institutions
Other deposits
Subordinated debt
Obligations other than deposits
Interest-bearing liabilities
Other liabilities
Equity
Liabilities and equity
Net interest margin
Average
volume
$
2020
Rate
%
Average
volume
$
2019
Rate
%
Average
volume
$
2018
Rate
%
Average
volume
$
2017
Rate
%
Average
volume
$
2016
Rate
%
16,083
97,025
0.55
1.84
13,149
85,772
1.64
1.97
16,282
75,923
1.27
1.64
15,802
66,591
0.72
1.75
14,079
60,784
0.46
1.98
16,408
59,801
36,273
1,995
53,325
1,073
281,983
36,216
1.39
3.13
3.68
14.62
3.37
16.45
2.69
318,199
2.39
63,634
6,494
137,253
207,381
759
49,671
257,811
44,702
15,686
318,199
0.87
0.63
1.26
1.12
3.25
0.65
1.23
1.00
1.39
22,472
54,493
35,816
2,221
47,986
1,386
263,295
22,867
286,162
58,680
5,987
119,793
184,460
758
47,404
232,622
38,827
14,713
286,162
1.60
3.30
4.25
14.06
4.42
13.37
3.12
2.87
1.22
1.80
2.06
1.79
3.25
1.35
1.90
1.55
1.32
20,090
51,509
35,041
2,165
42,803
1,486
245,299
20,641
265,940
53,179
5,985
108,012
167,176
564
47,762
215,502
36,492
13,946
265,940
1.09
3.07
3.98
13.69
4.09
13.12
2.81
2.60
1.08
1.45
1.66
1.47
3.20
1.20
1.57
1.27
1.33
19,878
50,218
33,298
2,209
37,794
1,238
227,028
21,323
248,351
50,878
7,567
95,809
154,254
423
44,204
198,881
36,722
12,748
248,351
1.03
2.82
3.65
13.09
3.33
15.18
2.58
19,038
44,908
31,781
2,107
34,227
1,545
208,469
27,444
0.75
2.78
3.30
12.88
2.98
14.01
2.50
2.36
235,913
2.12
46,815
12,469
83,568
142,852
1,047
38,804
182,703
41,627
11,583
235,913
0.99
0.69
1.21
1.11
3.81
0.74
1.11
0.89
1.47
1.09
0.39
1.12
1.04
3.16
0.31
0.98
0.76
1.36
(1)
(2)
For fiscal years prior to 2020, certain amounts have been reclassified.
See the Financial Reporting Method section on pages 22 and 23 for additional information on non-GAAP financial measures.
National Bank of Canada
2020 Annual Report
120
Management’s Discussion and Analysis
Additional Financial Information
Table 9 – Distribution of Gross Loans and Acceptances by Borrower Category Under
Basel Asset Classes
As at October 31
(millions of Canadian dollars)
Residential mortgage(1)(2)
Qualifying revolving retail
Other retail
Agriculture
Oil and gas, and pipelines
Mining
Utilities
Non-real-estate construction(3)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate and real-estate-construction(4)
Professional services
Education and health care
Other services
Government
Other(2)
POCI loans
2020
%
$
2019
%
$
2018
%
$
2017
%
$
2016
%
$
81,543
3,599
11,569
6,696
5,052
756
4,352
1,079
5,545
2,206
2,955
1,528
1,184
4,347
14,171
1,490
3,800
5,296
1,160
6,715
855
165,898
49.2
2.2
7.0
4.0
3.0
0.5
2.6
0.7
3.3
1.3
1.8
0.9
0.7
2.6
8.6
0.9
2.3
3.2
0.7
4.0
0.5
100.0
74,448
4,099
11,606
6,308
4,329
758
3,372
1,168
6,303
2,221
3,289
1,682
1,614
4,335
11,635
1,846
3,520
4,937
1,071
4,222
1,166
153,929
48.4
2.7
7.5
4.1
2.8
0.5
2.2
0.8
4.1
1.4
2.1
1.1
1.0
2.8
7.6
1.2
2.3
3.2
0.7
2.7
0.8
100.0
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
(1)
(2)
(3)
(4)
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 were not adjusted to reflect those modifications.
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.
Table 10 – Impaired Loans(1)
As at October 31
(millions of Canadian dollars)
Net impaired loans(3)
Personal Banking
Commercial Banking
Wealth Management
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
2020
2019
2018
2017(2)
2016(2)
206
206
2
21
30
−
465
817
352
465
43.1 %
0.3 %
187
222
3
23
15
−
450
684
234
450
34.2 %
0.3 %
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
45.8 %
0.2 %
42.9 %
0.2 %
(1)
(2)
(3)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. 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.
National Bank of Canada
2020 Annual Report
121
Management’s Discussion and Analysis
Additional Financial Information
Table 11 – Allowances for Credit Losses
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)
2020
755
846
(294)
−
44
(8)
1,343
352
872
185
(66)
2019
714
347
(351)
(1)
52
(6)
755
234
501
77
(57)
2018
735
327
(367)
(24)
45
(2)
714
226
498
56
(66)
2017(1)
2016(1)
769
244
(320)
−
13
(11)
695
174
(24)
139
406
555
484
(282)
−
13
(1)
769
211
(12)
204
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.
Table 12 – Deposits
As at October 31
(millions of Canadian dollars)
2020
%
$
2019
%
$
2018
%
$
2017
%
$
$
Personal
Business and government
Deposit-taking institutions
Total
Canada
United States
Other countries
Total
Personal deposits as a %
of total assets
67,499
143,787
4,592
215,878
195,730
8,126
12,022
215,878
2.1
31.3
60,065
66.6 125,266
4,235
100.0 189,566
90.7 172,764
6,907
9,895
100.0 189,566
3.7
5.6
20.4
55,688
110,321
4,821
170,830
156,054
6,048
8,728
170,830
31.7
66.1
2.2
100.0
91.1
3.7
5.2
100.0
21.3
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
33.3
63.3
3.4
51,163
85,263
5,640
100.0 142,066
92.8 131,869
4,442
5,755
100.0 142,066
3.7
3.5
21.2
2016
%
36.0
60.0
4.0
100.0
92.8
3.1
4.1
100.0
22.0
National Bank of Canada
2020 Annual Report
122
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
124
125
127
128
129
131
132
133
Management’s Responsibility for Financial Reporting
The consolidated financial statements of National Bank of Canada (the Bank) have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS
represent Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems needed to discharge its responsibility, which is to provide reasonable assurance that the
financial accounts are accurate and complete and that the Bank’s assets are adequately safeguarded. Controls that are currently in place include quality
standards on staff hiring and training; the implementation of organizational structures with clear divisions of responsibility and accountability for
performance; the Code of Professional Conduct; and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen the evaluation of the design and operation of the Bank’s internal controls over
financial reporting in accordance with National Instrument 52-109 Certification of Disclosure 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 and the disclosure
controls and procedures were effective as at October 31, 2020 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.
Louis Vachon
President and Chief Executive Officer
Ghislain Parent
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, December 1, 2020
National Bank of Canada
2020 Annual Report
124
Independent Auditor’s Report
To the Shareholders of National Bank of Canada,
Opinion
We have audited the consolidated financial statements of National Bank of Canada (the Bank), which comprise the consolidated balance sheets as at
October 31, 2020 and 2019, 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, 2020 and
2019, 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).
Basis for Opinion
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.
Other Information
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.
Responsibilities of Management and Those Charged With Governance for the Financial Statements
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.
Auditor’s Responsibilities for the Audit of the Financial Statements
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
2020 Annual Report
125
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 Carl Magnan.
/s/ Deloitte LLP1
December 1, 2020
Montreal, Quebec
1 CPA auditor, CA, public accountancy permit No. A121501
National Bank of Canada
2020 Annual Report
126
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Balance Sheets
As at October 31
Assets
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase agreements
and securities borrowed
Loans
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
Liabilities and equity
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities loaned(1)
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Equity
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Notes 3, 4 and 6
Note 7
Note 16
Note 9
Note 10
Note 11
Note 11
Note 12
2020
2019
29,142
13,698
78,326
12,726
11,079
102,131
61,823
10,648
9,755
82,226
14,512
17,723
64,959
37,613
2,038
54,422
159,032
6,866
(1,158)
164,740
13,422
409
1,155
1,414
1,434
3,266
21,100
331,625
57,171
36,944
2,322
50,599
147,036
6,893
(678)
153,251
8,129
385
490
1,412
1,406
2,738
14,560
281,458
Notes 4 and 13
215,878
189,566
Note 8
Note 16
Notes 4 and 8
Note 14
Note 15
Notes 18 and 22
6,866
16,368
33,859
12,923
22,855
5,718
98,589
775
2,950
3,057
47
10,444
(118)
16,380
3
16,383
331,625
6,893
12,849
21,900
6,852
21,312
6,177
75,983
773
2,450
2,949
51
9,312
16
14,778
358
15,136
281,458
Non-controlling interests
Note 19
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
As at October 31, 2020, Obligations related to securities sold under repurchase agreements and securities loaned include term repurchase transactions with the Bank of Canada, for which
the underlying asset is a Bank issued security such as bearer deposit notes and covered bonds.
Louis Vachon
President and Chief Executive Officer
Karen Kinsley
Director
National Bank of Canada
2020 Annual Report
127
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Income
Year ended October 31
2020
2019
Interest income
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
Interest expense
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
Net interest income(1)
Non-interest income
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Trust service revenues
Credit fees
Card revenues
Deposit and payment service charges
Trading revenues (losses)
Gains (losses) on non-trading securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and joint ventures
Other
Total revenues
Non-interest expenses
Compensation and employee benefits
Occupancy
Technology
Communications
Professional fees
Other
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Net income attributable to
Preferred shareholders and holders of other equity instruments
Common shareholders
Bank shareholders and holders of other equity instruments
Non-controlling interests
Earnings per share (dollars)
Basic
Diluted
Dividends per common share (dollars)
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 21
Note 9
Note 10
Note 14
Notes 10 and 11
Note 7
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.
5,915
1,140
224
211
88
7,578
2,552
392
19
360
3,323
4,255
397
195
477
675
467
138
262
604
93
128
104
28
104
3,672
7,927
2,713
291
805
58
244
434
4,545
3,382
846
2,536
453
2,083
118
1,923
2,041
42
2,083
5.73
5.70
2.84
6,468
1,086
195
210
215
8,174
3,468
444
25
641
4,578
3,596
314
178
449
609
417
175
271
829
77
136
96
34
251
3,836
7,432
2,532
298
704
62
249
456
4,301
3,131
347
2,784
462
2,322
116
2,140
2,256
66
2,322
6.39
6.34
2.66
National Bank of Canada
2020 Annual Report
128
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Comprehensive Income
Year ended October 31
Net income
Other comprehensive income, net of income taxes
Items that may be subsequently reclassified to net income
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Items that will not be subsequently reclassified to net income
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
Total other comprehensive income (loss), net of income taxes
Comprehensive income
Comprehensive income attributable to
Bank shareholders and holders of other equity instruments
Non-controlling interests
The accompanying notes are an integral part of these audited consolidated financial statements.
2020
2,083
2019
2,322
43
56
(14)
(20)
65
240
(155)
2
87
(271)
(6)
(277)
3
238
(2)
(44)
192
70
2,153
2,099
54
2,153
(9)
(2)
4
−
(7)
54
(53)
−
1
(137)
(20)
(157)
3
(135)
(21)
5
(151)
(311)
2,011
1,946
65
2,011
National Bank of Canada
2020 Annual Report
129
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Comprehensive Income (cont.)
Income Taxes – Other Comprehensive Income
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
2020
2019
Net foreign currency translation adjustments
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
Net change in debt securities at fair value through other comprehensive income
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
Net change in cash flow hedges
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
Share in the other comprehensive income of associates and joint ventures
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other
comprehensive income
Net fair value change attributable to credit risk on financial liabilities designated at
fair value through profit or loss
The accompanying notes are an integral part of these audited consolidated financial statements.
(13)
6
(4)
(18)
(29)
86
(56)
1
31
(97)
(2)
(99)
1
86
−
(16)
(26)
3
(1)
2
2
6
19
(19)
−
−
(50)
(7)
(57)
−
(48)
(6)
2
(103)
National Bank of Canada
2020 Annual Report
130
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
Preferred shares and other equity instruments at beginning
Issuances of preferred shares and other equity instruments
Preferred shares and other equity instruments at end
Common shares at beginning
Issuances of common shares pursuant to the Stock Option Plan
Repurchases of common shares for cancellation
Impact of shares purchased or sold for trading
Common shares at end
Contributed surplus at beginning
Stock option expense
Stock options exercised
Other
Contributed surplus at end
Retained earnings at beginning
Impact of adopting IFRS 15 on November 1, 2018
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Dividends on preferred shares and distributions on other equity instruments
Dividends on common shares
Premium paid on common shares repurchased for cancellation
Issuance expenses for shares and other equity instruments, net of income taxes
Remeasurements of pension plans and other post-employment benefit plans
Net gains (losses) on equity securities designated at fair value through other comprehensive income
Net fair value change attributable to the credit risk on financial liabilities designated at fair value
through profit or loss
Impact of a financial liability resulting from put options written to non-controlling interests
Other
Retained earnings at end
Accumulated other comprehensive income at beginning
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
Accumulated other comprehensive income at end
2020
2,450
500
2,950
2,949
111
(5)
2
3,057
51
9
(13)
−
47
9,312
−
2,041
(119)
(953)
(25)
(5)
238
(2)
(44)
−
1
10,444
16
53
87
(277)
3
(118)
2019
2,450
−
2,450
2,822
122
(40)
45
2,949
57
11
(15)
(2)
51
8,472
(4)
2,256
(116)
(892)
(241)
−
(135)
(21)
5
(12)
−
9,312
175
(6)
1
(157)
3
16
Equity attributable to the Bank’s shareholders and holders of other equity instruments
16,380
14,778
Non-controlling interests at beginning
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
Non-controlling interests at end
Note 19
358
−
(350)
42
12
(59)
3
379
(30)
−
66
(1)
(56)
358
Equity
16,383
15,136
Accumulated Other Comprehensive Income
As at October 31
Accumulated other comprehensive income
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.
2020
61
101
(283)
3
(118)
2019
8
14
(6)
−
16
National Bank of Canada
2020 Annual Report
131
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Consolidated Statements of Cash Flows
Year ended October 31
Cash flows from operating activities
Net income
Adjustments for
Provisions for credit losses
Depreciation of premises and equipment, including right-of-use assets
Amortization of intangible assets
Gain on disposal of shares of Fiera Capital Corporation
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
Foreign currency translation loss on disposal of subsidiaries
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
Securitization – Credit cards
Interest and dividends receivable and interest payable
Current tax assets and liabilities
Other items
Cash flows from financing activities
Issuances of preferred shares and other equity instruments
Issuances of common shares (including the impact of shares purchased for trading)
Repurchases of common shares for cancellation
Purchase of the non-controlling interest of the Advanced Bank of Asia Limited subsidiary
Redemption of trust units issued by NBC Asset Trust
Repayments of lease liabilities
Issuance expenses for shares and other equity instruments
Dividends paid on shares and distributions on other equity instruments
Distributions to non-controlling interests
Cash flows from investing activities
Disposal of shares of Fiera Capital Corporation
Disposal of premises and equipment, excluding right-of-use assets
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 premises and equipment, excluding right-of-use assets
Net change in intangible assets
Impact of currency rate movements on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning
Cash and cash equivalents at end(1)
Supplementary information about cash flows from operating activities
Interest paid
Interest and dividends received
Income taxes paid
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 6
Note 6
Note 14
Note 10
Notes 10 and 11
Note 30
Note 19
Note 6
Note 10
2020
2019
2,083
2,322
846
196
252
−
−
−
−
71
24
(158)
(93)
(28)
9
(16,503)
3,211
(10,883)
26,312
3,519
11,959
778
(846)
(156)
(167)
(445)
19,981
500
100
(30)
−
(350)
(88)
(5)
(1,300)
(59)
(1,232)
−
−
(4)
(16,247)
1,873
11,543
(182)
(332)
(3,349)
44
15,444
13,698
29,142
3,535
7,634
536
347
104
224
(79)
33
45
(50)
57
−
(207)
(77)
(34)
11
(6,006)
436
(6,221)
18,736
(4,931)
1,902
1,295
1
(41)
(7)
420
8,280
−
152
(281)
(84)
−
−
−
(992)
(56)
(1,261)
128
187
(16)
(16,355)
1,893
8,413
(144)
(359)
(6,253)
176
942
12,756
13,698
4,545
8,100
520
(1)
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $5.9 billion as at October 31, 2020 ($4.1 billion as at
October 31, 2019) for which there are restrictions.
National Bank of Canada
2020 Annual Report
132
Audited Consolidated Financial Statements
(millions of Canadian dollars)
Notes to the Audited Consolidated Financial Statements
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
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
133
151
152
163
164
165
167
179
180
181
182
183
184
184
185
185
Note 17
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
Hedging Activities
Share Capital and Other Equity Instruments
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
Event After the Consolidated Balance Sheet Date
188
194
197
198
199
200
203
207
209
209
213
216
217
222
223
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
National Bank of Canada (the Bank) is a financial institution incorporated and domiciled in Canada and whose shares are listed on the Toronto Stock Exchange.
Its head office is located at 600 De La Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a chartered bank under Schedule 1 of the Bank Act
(Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI).
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 1, 2020, 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, 2020.
Basis of Presentation
The Bank’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the
International Accounting Standards Board (IASB). The financial statements also comply 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 consolidated financial statements are to be prepared in
accordance with IFRS. 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 except for
the changes described hereafter in the Accounting Policy Changes section, which have been applied since November 1, 2019 following adoption of IFRS 16 –
Leases (IFRS 16) as well as its early adoption of amendments to IFRS 7 – Financial Instruments: Disclosures (IFRS 7) and IAS 39 – Financial Instruments:
Recognition and Measurement (IAS 39) arising from the first phase of the interest benchmark reform project. As permitted by IFRS 16, the Bank did not restate
comparative consolidated financial statements.
During the year ended October 31, 2020, the Bank modified the presentation of the Consolidated Statement of Income by adding the subtotal Income before
provisions for credit losses and income taxes. Following this change, the Provisions for credit losses item was moved below this new subtotal and the
comparative figures for the year ended October 31, 2019 were adjusted accordingly.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
National Bank of Canada
2020 Annual Report
133
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.)
Accounting Policy Changes
The Bank adopted the following new and amended standards on November 1, 2019.
IFRS 16 – Leases
Effective November 1, 2019, the Bank adopted IFRS 16, which replaces IAS 17 – Leases (IAS 17) and related interpretations. The standard prescribes new
guidance for identifying a lease as well as the recognition, measurement, presentation and disclosure of leases. IFRS 16 introduces a single on-balance-sheet
accounting model for lessees. The distinction between operating and financing leases no longer applies. As for lessors, IFRS 16 substantially carries forward
the lessor accounting in the previous accounting standard, with the distinction between operating leases and finance leases being retained. IFRS 16 requires a
lessee to recognize a right-of-use asset representing its right to use the leased asset and a corresponding lease liability representing its obligation to make
lease payments for all leases.
The Bank elected to adopt IFRS 16 using a modified retrospective approach and, accordingly, the information presented for 2019 remains as previously
reported under IAS 17.
Impact of Transition to IFRS 16
On November 1, 2019, the Bank recognized right-of-use assets of $648 million ($668 million reduced by provisions for onerous lease contracts of $20 million
previously recorded in Other liabilities – Other items as at October 31, 2019) and lease liabilities of $668 million.
The Bank used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases. The Bank:
excluded initial direct costs from the measurement of the right-of-use assets at the date of initial application;
relied on previous assessments of whether or not a lease is an onerous contract;
did not separate lease components and non-lease components and treated them as a single lease component;
applied the recognition exemption to leases for which the lease term ends within 12 months of the transition date and to leases for which the underlying
asset is of low value; and
elected not to apply IFRS 16 to leases of intangible assets.
The following table presents a reconciliation of the Bank’s operating lease commitments as at October 31, 2019 to the lease liabilities recognized as at
November 1, 2019.
Operating lease commitments as at October 31, 2019
Extension and termination options reasonably certain to be exercised
Impact of discounting using the Bank's incremental borrowing rate as at November 1, 2019
Lease liabilities recognized as at November 1, 2019
691
70
(93)
668
For additional information regarding leases, refer to the Summary of Significant Accounting Policies section and to Note 10 to the consolidated financial
statements.
National Bank of Canada
2020 Annual Report
134
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Interest Rate Benchmark Reform
Phase 1
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 (IFRS 9) and IAS 39 as well as to the related standard
on disclosures, IFRS 7. On November 1, 2019, the Bank early adopted the amendments to IFRS 7 and IAS 39. When the Bank had adopted IFRS 9 on
November 1, 2017, it had made an accounting policy choice to continue applying the IAS 39 hedge accounting requirements.
The amendments to IAS 39 provide temporary relief from applying specific hedge accounting requirements to all hedging relationships directly affected by
interest rate benchmark reform. A hedging relationship is directly affected by interest rate benchmark reform only if the reform gives rise to uncertainties about
(a) the interest rate benchmark (contractually or non-contractually specified) designated as a hedged risk; and/or (b) the timing or the amount of interest rate
benchmark-based cash flows of the hedged item or of the hedging instrument. The amendments modify specific hedge accounting requirements so that
entities would apply those hedge accounting requirements assuming that the interest rate benchmark is not altered as a result of the interest rate benchmark
reform, thereby allowing hedge accounting to continue during the period of uncertainty prior to the transition to alternative benchmark rates. Mandatory
application of the amendments ends at the earlier of the following: when the uncertainty arising from interest rate benchmark reform is no longer present and
when the hedging relationship is discontinued. For additional information, refer to the Summary of Significant Accounting Policies section – Derivative
Financial Instruments Designated as Hedging Instruments and to Note 17 to the consolidated financial statements.
For the Bank, the effective date of these amendments is November 1, 2020. However, early adoption is permitted. For additional information on Interest Rate
Benchmark Reform – Phase 2, refer to Note 2 to the consolidated financial statements.
Summary of Significant Accounting Policies
Judgments, Estimates and Assumptions
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make estimates and assumptions that affect
the reporting date carrying amounts of assets and liabilities, net income, and related information. Furthermore, certain accounting policies require complex
judgments and estimates because they apply to matters that are inherently uncertain, in particular accounting policies applicable to the 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.
COVID-19 Pandemic Considerations
On March 11, 2020, COVID-19 was declared a global pandemic by the World Health Organization. As a result of the heightened uncertainty associated with the
unprecedented nature of the COVID-19 pandemic, developing reliable estimates and applying judgment has become even more challenging. Accounting for
expected credit losses (ECL) has become particularly difficult in the current circumstances and requires significant judgment. The ECL model is forward-looking
and is based on a probability-weighted approach. 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. During this period of greater economic uncertainty, it is very difficult to
forecast future events and the macroeconomic inputs used in ECL modelling. Determining macroeconomic scenarios and assigning probabilities to these
scenarios requires significant judgment. Consideration is given both to the effects of COVID-19 and the significant government support measures. The Bank
applies expert credit judgment to adjust modelled ECL results when it becomes evident that known or expected risk factors and information were not
considered in the credit rating and modelling process. As a result of COVID-19 and the recent economic downturn, significant measurement uncertainty exists
in determining ECLs, and measurement is subject to significant judgment. The uncertainty regarding key inputs used in measuring ECLs is outlined in Note 7 to
the consolidated financial statements.
In response to the economic impact of COVID-19, the Canadian government has established, among other financial relief programs, the Canada Emergency
Business Account (CEBA) program to provide interest-free loans of up to $40,000 for small and medium-sized businesses and non-profit organizations. The
Bank and several other financial institutions are authorized to implement the CEBA program in cooperation with Export Development Canada. This program is
guaranteed by the Government of Canada and aims to help businesses cope with the economic challenges resulting from the COVID-19 crisis. Loans made by
the Bank to its business clients under CEBA are not recognized on the Bank’s Consolidated Balance Sheet, since the conditions of a qualifying pass-through
arrangement have been met and the Bank has determined that substantially all the risks and rewards of ownership of the loans have been transferred to the
Canadian government. The Bank receives an administration fee as reimbursement for the costs of administering this Canadian government program and this
fee is recognized in the Consolidated Statement of Income as a reduction of Non-interest expenses – Other. As at October 31, 2020, loans of $1.2 billion had
been provided to the Bank’s clients under the CEBA program.
National Bank of Canada
2020 Annual Report
135
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.)
Basis of Consolidation
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.
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 and holders of other equity instruments. 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 and holders of other equity instruments.
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.
National Bank of Canada
2020 Annual Report
136
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Translation of Foreign Currencies
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.
Classification and Measurement of Financial Instruments
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. 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.
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.
National Bank of Canada
2020 Annual Report
137
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.)
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.
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.
National Bank of Canada
2020 Annual Report
138
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities for which the contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal amount outstanding and that fall within a “hold to collect” business model.
The Bank recognizes these securities transactions at fair value on the trade date, and the transaction costs are capitalized. After initial recognition, debt
securities in this category are recorded at amortized cost. Interest income is recognized in Interest income in the Consolidated Statement of Income.
Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to interest income using the effective interest rate
method. Securities measured at amortized cost are presented net of allowances for credit losses on the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair value through other comprehensive income or at amortized cost are classified as measured at fair
value through profit or loss.
Securities measured at fair value through profit or loss include (i) securities held for trading, (ii) securities designated at fair value through profit or loss, (iii) all
equity securities other than those designated as measured at fair value through other comprehensive income with no subsequent reclassifications of gains
and losses to net income, and (iv) debt securities for which the contractual cash flows are not solely payments of principal and any interest on the principal
amount outstanding.
The Bank recognizes securities transactions at fair value through profit or loss on the settlement date on the Consolidated Balance Sheet. Changes in fair value
between the trade date and the settlement date are recognized in Non-interest income in the Consolidated Statement of Income.
Securities at fair value through profit or loss are recognized at fair value. 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.
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.
National Bank of Canada
2020 Annual Report
139
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.)
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.
Establishing Fair Value
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would 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
2020 Annual Report
140
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
Impairment of Financial Assets
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. 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 the 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.
National Bank of Canada
2020 Annual Report
141
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.)
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.
Derecognition of Financial Assets and Securitization
A financial asset is considered for derecognition when the Bank has transferred contractual rights to receive the cash flows or assumed an obligation to
transfer these cash flows to a third party. The Bank derecognizes a financial asset when it considers that substantially all 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.
Derecognition of Financial Liabilities
A financial liability is derecognized when the obligation is discharged, cancelled or expires. The difference between the carrying value of the financial liability
transferred and the consideration paid is recognized in the Consolidated Statement of Income.
Cash and Deposits With Financial Institutions
Cash and deposits with financial institutions consist of cash and cash equivalents, amounts pledged as collateral as well as amounts placed in escrow. Cash
comprises cash and bank notes. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions, including net receivables
related to cheques and other items in the clearing process as well as the net amount of cheques and other items in transit.
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2020 Annual Report
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Acceptances and Customers’ Liability Under Acceptances
The potential liability of the Bank under acceptances is recorded as a customer commitment liability on the Consolidated Balance Sheet. The Bank’s potential
recourse vis à vis clients is recorded as an equivalent offsetting asset. Fees are recorded in Non-interest income in the Consolidated Statement of Income.
Obligations Related to Securities Sold Short
This financial liability represents the Bank’s obligation to deliver the securities it sold but did not own at the time of sale. Obligations related to securities sold
short are recorded at fair value and presented as liabilities on the Consolidated Balance Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues, and to
manage its exposure to interest rate risk, foreign exchange risk, credit risk and other market risks.
All derivative financial instruments are 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.
Interest Rate Benchmark Reform
A hedging relationship is directly affected by interest rate benchmark reform such as Interbank Offered Rates (IBORs), only if the reform gives rise to
uncertainties about (a) the interest rate benchmark (contractually or non-contractually specified) designated as a hedged risk; and/or (b) the timing or the
amount of the interest-rate-benchmark-based cash flows of the hedged item or of the hedging instrument.
National Bank of Canada
2020 Annual Report
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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.)
For such hedging relationships, the following temporary exceptions apply during the period of uncertainty:
• when determining whether a forecast transaction is highly probable or expected to occur, it is assumed that the interest rate benchmark on which the
hedged cash flows (contractually or non-contractually specified) are based is not altered as a result of interest rate benchmark reform;
• when assessing whether a hedge is expected to be highly effective, it is assumed that the interest rate benchmark on which the hedged cash flows and/or
the hedged risk (contractually or non-contractually specified) are based, or the interest rate benchmark on which the cash flows of the hedging instrument
are based, is not altered as a result of interest rate benchmark reform;
a hedge is not required to be discontinued if the actual results of the hedge are outside an effectiveness range of 80–125 per cent as a result of interest
rate benchmark reform;
for a hedge of a non-contractually specified benchmark portion of interest rate risk, the requirement that the designated portion is separately identifiable
need only be met at the inception of the hedging relationship.
•
•
Fair Value Hedges
For fair value hedges, the Bank mainly uses interest rate swaps to hedge changes in the fair value of a hedged item. The carrying amount of the hedged item is
adjusted based on the effective portion of the gains or losses attributable to the hedged risk, which are recognized in the Consolidated Statement of Income,
as well as the change in the fair value of the hedging instrument. The resulting ineffective portion is recognized in Non-interest income in the Consolidated
Statement of Income.
The Bank prospectively discontinues hedge accounting if the hedging instrument is sold or expires or if the hedging relationship no longer qualifies for hedge
accounting or if the Bank revokes the designation. When the designation is revoked, the hedged item is no longer adjusted to reflect changes in fair value, and
the amounts previously recorded as cumulative adjustments with respect to the effective portion of gains and losses attributable to the hedged risk are
amortized using the effective interest rate method and recognized in the Consolidated Statement of Income over the remaining useful life of the hedged item. If
the hedged item is sold or terminated before maturity, the cumulative adjustments 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.
Offsetting of Financial Assets and Liabilities
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Premises and Equipment
Premises and equipment, except for land and the head office building under construction, are recognized at cost less accumulated depreciation and
accumulated impairment losses, if any. Land and the head office building under construction are recorded at cost less any accumulated impairment losses.
Right-of-use assets are presented in Premises and equipment on the Consolidated Balance Sheet. For the accounting policy regarding right-of-use assets, refer
to the section on Leases presented hereafter.
National Bank of Canada
2020 Annual Report
144
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Buildings, equipment and furniture are systematically depreciated over their estimated useful lives. The depreciation period for leasehold improvements is the
lesser of the estimated useful life of the leasehold improvements or the non-cancellable period of the lease plus the first renewal option. Depreciation methods
and estimated useful lives are reviewed on an annual basis. The depreciation expense is recorded in Non-interest expenses in the Consolidated Statement of
Income.
Buildings
Computer equipment
Equipment and furniture
Leasehold improvements
Method
Useful life
5% declining balance
Straight-line
Straight-line
Straight-line
3-4 years
1-8 years
(1)
(1) The depreciation period is the lesser of the estimated useful life or the non-cancellable period of the lease plus the first renewal option.
Leases for the year ended October 31, 2020
At the inception date of a contract, the Bank assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease if it conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. When the Bank is a lessee, it recognizes a right-of-use asset and a
corresponding lease liability at the lease commencement date except for short-term leases (defined as leases with terms of 12 months or less) other than real
estate leases and leases for which the underlying asset is of low value. For such leases, the Bank recognizes the lease payments as a non-interest expense on
a straight-line basis over the lease term. As a practical expedient, the Bank elected for real estate leases not to separate non-lease components from lease
components and instead account for them as a single lease component. When the Bank is the lessor, the leased 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.
Right-of-use assets are initially measured at cost, and subsequently measured at cost less accumulated depreciation and accumulated impairment losses, if
any, and adjusted for certain remeasurements of lease liabilities. The cost of a right-of-use asset comprises the amount of the initial measurement of the lease
liability, any lease payments made at or before the commencement date, any initial direct costs incurred when entering into the lease, and an estimate of costs
to dismantle the asset or restore the site, less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lesser of the
lease term and the estimated useful life of the asset. Right-of-use assets are presented in Premises and equipment on the Consolidated Balance Sheet. The
depreciation expense and impairment losses, if any, are recorded in Non-interest expenses in the Consolidated Statement of Income.
The lease liability is initially measured at the present value of future lease payments net of lease incentives not yet received. The present value of lease
payments is determined using the Bank’s incremental borrowing rate. The lease liability is subsequently measured at amortized cost using the effective
interest method. In determining the lease term, the Bank considers all the facts and circumstances that create an economic incentive to exercise an extension
option or not to exercise a termination option. The lease term determined by the Bank comprises the non-cancellable period of lease contracts, the periods
covered by an option to extend the lease if the Bank is reasonably certain to exercise that option, and the periods covered by an option to terminate the lease if
the Bank is reasonably certain not to exercise that option. The Bank reassesses the lease term if a significant event or change in circumstances occurs and that
is within its control. The Bank applies judgment to determine the lease term when the lease includes extension and termination options. Lease liabilities are
presented in Other liabilities on the Consolidated Balance Sheet, and the interest expense is presented in the Interest expense – Other item of the
Consolidated Statement of Income.
Leases for the year ended October 31, 2019
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.
National Bank of Canada
2020 Annual Report
145
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.)
Goodwill
The Bank uses the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at the
acquisition-date fair value, and the transaction costs related to the acquisition are expensed as incurred. When the Bank acquires control of a business, all of
the identifiable assets and liabilities of the acquiree, including intangible assets, are recorded at fair value. The interests previously held in the acquiree are
also measured at fair value. Goodwill represents the excess of the purchase consideration and all previously held interests over the fair value of 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.
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.
Intangible Assets
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.
Impairment of Non-Financial Assets
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not yet available for use or that have indefinite useful lives
are tested for impairment annually or more frequently if there is an indication that the asset might be impaired.
An asset is tested for impairment by comparing its carrying amount with its recoverable amount. The recoverable amount must be estimated for the individual
asset. Where it is not possible to estimate the recoverable amount of an individual asset, the recoverable amount of the cash-generating unit (CGU) to which
the asset belongs will be determined. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets. The Bank uses judgment to identify CGUs.
An asset’s recoverable amount is the higher of fair value less costs to sell and the value in use of the asset or CGU. Value in use is the present value of
expected future cash flows from the asset or CGU. The recoverable amount of the CGU is determined using valuation models that consider various factors such
as projected future cash flows, discount rates, and growth rates. The use of different estimates and assumptions in applying the impairment tests could have a
significant impact on income.
Corporate assets, such as the head office building and computer equipment, do not generate cash inflows that are largely independent of the cash inflows
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.
National Bank of Canada
2020 Annual Report
146
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
Provisions
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money. Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated Balance Sheet.
Interest Income and Expense
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest 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 method, and the amortization is recognized in Interest income over the term of the loan. Direct costs for
originating a loan are netted against the loan origination fees. If it is likely that a commitment will result in a loan, commitment fees receive the same
accounting treatment, i.e., they are deferred and amortized using the effective interest rate method and the amortization is recognized in Interest income over
the term of the loan. Otherwise, they are recorded in Non-interest income over the term of the commitment.
Loan syndication fees are recorded in Non-interest income unless the yield on the loan retained by the Bank is less than that of other comparable lenders
involved in the financing. In such cases, an appropriate portion of the fees is deferred and amortized using the effective interest rate method, and the
amortization is recognized in Interest income over the term of the loan. Certain mortgage loan prepayment fees are recognized in Interest income in the
Consolidated Statement of Income when earned.
Dividend Income
Dividends from an equity instrument are recognized in Net interest income in the Consolidated Statement of Income when the Bank’s right to receive payment
is established.
National Bank of Canada
2020 Annual Report
147
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.)
Fee and Commission Income
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.
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.
Insurance Revenues
Insurance contracts, including reinsurance contracts, are arrangements under which one party accepts significant insurance risk by agreeing to compensate
the policyholder if a specified uncertain future event 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.
National Bank of Canada
2020 Annual Report
148
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Income Taxes
Income taxes include current taxes and deferred taxes and are recorded in net income except for income taxes generated by items recognized in Other
comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a period. It is calculated using the enacted or substantively enacted tax rates
prevailing on the reporting date, and any adjustments recognized in the period for 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.
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.
Financial Guarantee Contracts
A financial guarantee contract is a contract or indemnification agreement that could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to reimburse 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.
Employee Benefits – Pension Plans and Other Post-Employment Benefits
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. 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.
National Bank of Canada
2020 Annual Report
149
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 net asset or net liability of pension plans and other post-employment benefit plans are calculated separately for each plan as the difference between the
present value of the future benefits earned by employees in respect of current- and prior-period service and the fair value of plan assets. The net asset or net
liability is included in either the Other assets or Other liabilities item of the Consolidated Balance Sheet.
The expense related to pension plans and other post-employment benefit plans consists of the following items: current service cost, net interest on the net
plan asset or liability, administration costs, and past service cost, if any, recognized when a plan is amended. This expense is recognized in Compensation and
employee benefits in the Consolidated Statement of Income. The net amount of interest income and expense is determined by applying a discount rate to the
net plan asset or liability amount.
Remeasurements resulting from pension plans and other post-employment benefit plans represent actuarial gains and losses related to the defined benefit
obligation and the actual return on plan assets, excluding net interest determined by applying a discount rate to the net asset or liability of the plans.
Remeasurements are immediately recognized in Other comprehensive income and will not be subsequently reclassified to net income; these cumulative gains
and losses are reclassified to Retained earnings.
Share-Based Payments
The Bank has several share-based compensation plans: the Stock Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan,
the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan (DCP) of National Bank Financial, and the
Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for employees to become fully entitled to the award. This period is generally the same as
the vesting period, except where the required service period begins before the award date. Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on the award date. Compensation expense related to awards granted to employees who will
become eligible to retire during the vesting period is recognized over the period from the award date to the date the employee becomes eligible to retire. For all
of these plans, as of the first year of recognition, the expense includes cancellation and forfeiture estimates. These estimates are subsequently revised as
necessary. The Bank uses derivative financial instruments to hedge the risks associated with some of these plans. The compensation expense for these plans,
net of related hedges, is recognized in the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account for stock options awarded. The options vest at 25% per year, and each tranche is
treated as though it was a separate award. The fair value of each of the tranches is measured on the award date using the Black-Scholes model, and this fair
value is recognized in Compensation and employee benefits and Contributed surplus. When the options are exercised, the Contributed surplus amount is
credited to Equity – Common shares on the Consolidated Balance Sheet. The proceeds received from the employees when these options are exercised are also
credited to Equity – Common shares on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded and their fair value is remeasured at the end of each reporting period until they are exercised. The cost is
recognized in Compensation and employee benefits in the Consolidated Statement of Income and in Other liabilities on the Consolidated Balance Sheet. The
obligation that results from the change in fair value at each period is recognized in net income gradually over the vesting period, and periodically thereafter,
until the SARs are exercised. When a SAR is exercised, the Bank makes a cash payment equal to the increase in the stock price since the date of the award.
The obligation that results from the award of a DSU, RSU, PSU and DCP unit is recognized in net income, and the corresponding amount is included in Other
liabilities on the Consolidated Balance Sheet. For the DSU, RSU and DCP plans, the change in the obligation attributable to variations in the share price and
dividends paid on common shares for these plans is recognized in Compensation and employee benefits in the Consolidated Statement of Income for the
period in which the variations occur. On the redemption date, the Bank makes a cash payment equal to the value of the common shares on that date. For the
PSU Plan, the change in the obligation attributable to changes in the stock price, adjusted upward or downward depending on the relative result of the
performance criteria, and the change in the obligation attributable to dividends paid on the shares awarded under the plan, are recognized in Compensation
and employee benefits in the Consolidated Statement of Income for the period in which the changes occur. On the redemption date, the Bank makes a cash
payment equal to the value of the common shares on that date, adjusted upward or downward according to the performance criteria.
The Bank’s contributions to the employee share ownership plan are expensed as incurred.
National Bank of Canada
2020 Annual Report
150
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 2 – Future Accounting Policy Changes
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following standards
have been issued but are not yet effective. The Bank is currently assessing the impact of the application of these standards on the consolidated financial
statements.
Effective Date – November 1, 2020
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.
Effective Date – November 1, 2021
Interest Rate Benchmark Reform – Phase 2
In August 2020, the IASB finalized its response to the ongoing reform of interbank offered rates (IBOR) and other interest rate benchmarks by issuing
amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 – Insurance Contracts and IFRS 16. The amendments complement those issued in 2019 and focus on the effects
on financial statements once existing benchmark rates are replaced with alternative benchmark rates. The amendments in this final phase relate to changes to
contractual cash flows, hedge accounting, and disclosures. The effective date for the amendments will be annual periods beginning on or after
January 1, 2021, with early application permitted.
Effective Date – November 1, 2023
IFRS 17 – Insurance Contracts
In May 2017, the IASB issued IFRS 17 – Insurance Contracts (IFRS 17), 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. IFRS 17 provides guidance
on the recognition, measurement, presentation and disclosure of insurance contracts. In June 2020, amendments to IFRS 17 were issued and included a
two-year deferral of the effective date along with other changes aimed at addressing concerns and implementation challenges identified after IFRS 17 was
published in 2017. IFRS 17, as amended, is effective retrospectively for annual periods beginning on or after January 1, 2023, with earlier application
permitted. If full retrospective application to a group of insurance contracts is impractical, the modified retrospective approach or the fair value approach may
be used.
National Bank of Canada
2020 Annual Report
151
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments
Fair Value and Carrying Value of Financial Instruments by Category
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories
set out in the accounting framework for financial instruments.
Financial
instruments
classified as
at fair value
through profit
or loss
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, 2020
Carrying
value
Fair
value
Financial
instruments
at amortized
cost, net
Financial
instruments
at amortized
cost, net
Total
carrying
value
Total
fair
value
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements
and securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Other assets
Financial liabilities
Deposits
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
(1)
Includes embedded derivative financial instruments.
−
−
−
75,647
2,679
12,107
−
619
29,142
11,079
29,142
29,142
29,142
11,290
102,131
102,342
−
8,109
13,422
−
−
−
−
−
−
−
−
−
−
−
−
−
14,512
14,512
14,512
14,512
156,631
159,473
164,740
167,582
−
1,153
−
1,153
13,422
1,153
13,422
1,153
−
11,418
204,460 (1)
205,337
215,878
216,755
−
16,368
−
12,923
−
−
−
−
−
−
−
8,762
−
−
6,866
−
6,866
−
6,866
16,368
6,866
16,368
33,859
−
14,093
1,892
775
33,859
−
14,432
1,894
33,859
12,923
22,855
1,892
33,859
12,923
23,194
1,894
787
775
787
National Bank of Canada
2020 Annual Report
152
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, 2019
Carrying
value
Fair
value
Financial
instruments
at amortized
cost, net
Financial
instruments
at amortized
cost, net
Total
carrying
value
Total
fair
value
Financial assets
Cash and deposits with financial
institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances, net of allowances
Other
Derivative financial instruments
Other assets
Financial liabilities
Deposits
−
−
−
58,556
3,267
10,026
−
6,798
8,129
−
87
−
−
−
−
−
−
−
−
622
−
−
−
−
13,698
13,698
13,698
13,698
9,755
9,824
82,226
82,295
17,636
17,636
17,723
17,723
146,453
147,051 153,251
153,849
−
1,193
−
1,193
8,129
1,193
8,129
1,193
−
11,203
178,363 (1)
178,861 189,566
190,064
Other
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
−
12,849
−
6,852
−
24
−
(1)
Includes embedded derivative financial instruments.
Establishing Fair Value
−
−
−
−
8,215
−
−
6,893
−
6,893
−
6,893
12,849
6,893
12,849
21,900
−
13,097
3,018
21,900
−
13,186
3,019
21,900
6,852
21,312
3,042
21,900
6,852
21,401
3,043
773
765
773
765
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, 2020 and may change in the future. Furthermore, there may be valuation uncertainty resulting from
the choice of valuation model used.
National Bank of Canada
2020 Annual Report
153
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Valuation Governance
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the classification policies to determine the hierarchy, and
there are controls in place to ensure that fair value is measured appropriately, reliably, and consistently. Valuation methods and the underlying assumptions
are reviewed on a regular basis.
Valuation Methods and Assumptions
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable approximation of fair value:
cash and deposits with financial institutions;
securities purchased under reverse repurchase agreements and securities borrowed;
obligations related to securities sold under repurchase agreements and securities loaned;
customers’ liability under acceptances;
acceptances;
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, are recognized at fair value on the Consolidated Balance Sheet. Their fair value is based on
quoted prices in active markets, i.e., bid prices for financial assets and offered prices for financial liabilities. If there are no quoted prices in an active market,
fair value is estimated 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.
National Bank of Canada
2020 Annual Report
154
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.
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
2020 Annual Report
155
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.
Hierarchy of Fair Value Measurements
Determining the Levels of the Fair Value Measurement Hierarchy
IFRS establishes a fair value measurement 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.
Transfers Between the Fair Value Hierarchy Levels
Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the quarter in
which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2020, $15 million in securities classified as at fair value through profit or loss were transferred from Level 2 to Level 1 resulting from changing
market conditions ($50 million in securities classified as at fair value through profit or loss and $1 million in obligations related to securities sold short in
fiscal 2019). In addition, during fiscal 2020, $10 million in securities classified as at fair value through profit or loss were transferred from Level 1 to Level 2
(for 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).
During fiscal years 2020 and 2019, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs
resulting from changing market conditions.
National Bank of Canada
2020 Annual Report
156
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Financial Instruments Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Loans
Other
Derivative financial instruments
Financial liabilities
Deposits(1)
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Level 1
Level 2
As at October 31, 2020
Total financial
assets/liabilities
at fair value
Level 3
1,852
−
7,852
−
47,941
57,645
877
−
2,165
−
−
3,042
−
7,632
9,105
996
2,048
443
20,224
3,535
4,154
284
1,092
246
9,311
7,737
−
−
−
40
417
457
−
−
−
−
373
373
372
9,484
9,105
8,848
2,088
48,801
78,326
4,412
4,154
2,449
1,092
619
12,726
8,109
343
61,030
13,049
50,321
30
1,232
13,422
112,583
−
11,575
11,575
242
−
11,817
4,793
12,680
8,762
37,810
(2)
−
1
−
(1)
11,573
16,368
12,923
8,762
49,626
(1)
The amount classified in Level 3 represents the fair value of embedded derivative financial instruments related to deposits.
National Bank of Canada
2020 Annual Report
157
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Financial assets
Securities
At fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
At fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities purchased under reverse repurchase agreements and
securities borrowed
Loans
Other
Derivative financial instruments
Financial liabilities
Deposits
Other
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
Level 1
Level 2
As at October 31, 2019
Total financial
assets/liabilities
at fair value
Level 3
2,102
−
1,770
−
38,836
42,708
196
−
3,471
−
53
3,720
−
−
8,321
6,762
90
2,666
818
18,657
4,236
1,674
75
374
207
6,566
87
6,438
−
−
−
27
431
458
−
−
−
−
362
362
−
360
179
46,607
7,924
39,672
26
1,206
−
11,383
8,352
156
−
−
8,508
4,497
6,674
8,215
24
30,793
−
−
22
−
−
22
10,423
6,762
1,860
2,693
40,085
61,823
4,432
1,674
3,546
374
622
10,648
87
6,798
8,129
87,485
11,383
12,849
6,852
8,215
24
39,323
National Bank of Canada
2020 Annual Report
158
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Financial Instruments Classified in Level 3
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the
markets. The valuation technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable inputs
used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
Financial assets
Securities
Equity securities and other debt securities
Loans
Loans at fair value through profit or loss
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Credit derivative contracts
Financial liabilities
Deposits
Structured deposit notes(3)
Other
Derivative financial instruments
Credit derivative contracts
Financial assets
Securities
Equity securities and other debt securities
Loans
Loans at fair value through profit or loss
Other
Derivative financial instruments
Interest rate contracts
Equity contracts
Financial liabilities
Other
Derivative financial instruments
Equity contracts
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2020
Range of input values
High
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
Discounted cash flows
Discounted cash flows
Option pricing model
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
Discount rate
100 %
18 x
460 Bps(2)
4.50 %
100 %
20 x
705 Bps(2)
19.00 %
Discount rate
Liquidity premium
3.54 %
3.11 %
9.84 %
9.56 %
Discount rate
Long-term volatility
Market correlation
Liquidity premium
2.20 %
7 %
29 %
(6) %
2.20 %
91 %
93 %
6 %
Fair
value
830
372
11
6
13
1,232
(2)
Option pricing model
Long-term volatility
Market correlation
8 %
(68) %
49 %
94 %
1
(1)
Fair
value
820
360
6
20
1,206
22
22
Discounted cash flows
Liquidity premium
(2) %
2 %
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2019
Range of input values
High
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
100 %
13 x
460 Bps(2)
4.50 %
100 %
16 x
705 Bps(2)
14.38 %
Discount rate
Liquidity premium
5.26 %
3.56 %
8.89 %
7.34 %
Discount rate
Long-term volatility
Market correlation
2.20 %
4 %
21 %
2.20 %
35 %
31 %
Option pricing model
Long-term volatility
Market correlation
5 %
(29) %
49 %
89 %
(1)
(2)
(3)
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%.
The amount represents the fair value of the embedded derivative financial instruments related to structured deposit notes.
National Bank of Canada
2020 Annual Report
159
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Significant Unobservable Inputs Used for Fair Value Measurements of Financial Instruments Classified in Level 3
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits or
the general partners of the limited partnerships. The net asset value of a fund is the total fair value of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples, which are determined based on comparable companies, and a higher multiple will translate into a
higher fair value. Price equivalent is a percentage of the market price based on the liquidity of the security.
Credit Spread
A credit spread (yield) is the difference between the instrument’s yield and a benchmark yield. Benchmark instruments have high credit quality ratings with
similar maturities. The credit spread therefore represents the discount rate used to determine the present value of future cash flows of an asset to reflect the
market return required for credit quality in the estimated cash flows. A higher credit spread will result in a lower value.
Discount Rate
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.
Liquidity Premium
A liquidity premium may be applied when few or no transactions exist to support the valuations. A higher liquidity premium will result in a lower value.
Long-Term Volatility
Volatility is a measure of the expected future variability of market prices. Volatility is generally observable in the market through options prices. However, the
long-term volatility of options with a longer maturity might not be observable. An increase (decrease) in long-term volatility is generally associated with an
increase (decrease) in long-term correlation. Higher long-term volatility may increase or decrease an instrument’s fair value depending on its terms.
Market Correlation
Correlation is a measure of the inter-relationship between two different variables. A positive correlation means that the variables tend to move in the same
direction; a negative correlation means that the variables tend to move in opposite directions. Correlation is used to measure financial instruments whose
future returns depend on several variables. Changes in correlation will either increase or decrease a financial instrument’s fair value depending on the terms of
its contractual payout.
Sensitivity Analysis of Financial Instruments Classified in Level 3
The Bank performs sensitivity analyses for the fair value measurements of financial instruments classified in Level 3, substituting unobservable inputs with
one or more reasonably possible alternative assumptions.
For equity securities and other debt securities, the Bank varies significant unobservable inputs such as net asset values, EV/EBITDA multiples, or price
equivalents and establishes a reasonable fair value range that could result in a $102 million increase or decrease in the fair value recorded as at
October 31, 2020 (a $121 million increase or decrease as at October 31, 2019).
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 $57 million
increase or decrease in the fair value recorded as at October 31, 2020 ($54 million increase or decrease as at October 31, 2019).
For derivative financial instruments and embedded derivative financial instruments related to structured deposit notes, the Bank varies long-term volatility,
market correlation inputs and the liquidity premium, and establishes a reasonable fair value range. As at October 31, 2020, for derivative financial
instruments, the net fair value could result in a $12 million increase or decrease ($1 million increase or decrease as at October 31, 2019), whereas for
structured deposit notes, the net fair value could result in a $1 million increase or decrease (no sensitivity analysis as at October 31, 2019 since no structured
deposit note was classified in Level 3).
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, 2020 (an 8%
increase or decrease in net income as at October 31, 2019).
National Bank of Canada
2020 Annual Report
160
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Change in the Fair Value of Financial Instruments Classified in Level 3
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial
instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.
Fair value as at October 31, 2019
Total realized and unrealized gains (losses) included in Net income
Total realized and unrealized gains (losses) included in
(3)
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2020
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2020(4)
Fair value as at October 31, 2018
Total realized and unrealized gains (losses) included in Net income (5)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases(6)
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
Fair value as at October 31, 2019
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2019(7)
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
458
8
−
26
(35)
−
−
−
−
457
21
362
−
7
4
−
−
−
−
−
373
−
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
313
(69)
−
253
(39)
−
−
−
−
458
(76)
233
−
(4)
133
−
−
−
−
−
362
−
Year ended October 31, 2020
Derivative
financial
instruments(1)
Deposits(2)
4
(10)
−
−
−
−
(1)
29
7
29
(10)
−
5
−
−
−
(18)
−
(9)
24
2
5
Year ended October 31, 2019
Derivative
financial
instruments(1)
Deposits
(7)
16
−
−
−
−
3
(10)
2
4
16
(11)
−
−
−
−
−
−
−
11
−
−
Loans
360
(17)
−
−
−
12
(160)
177
−
372
(17)
Loans
386
12
−
−
−
6
(44)
−
−
360
12
The derivative financial instruments include assets and liabilities presented on a net basis.
The amounts represent the fair value of embedded derivative financial instruments related to deposits.
Total gains (losses) included in Non-interest income was a loss of $14 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized loss of $1 million.
Total gains (losses) included in Non-interest income was a loss of $41 million.
(1)
(2)
(3)
(4)
(5)
(6) 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 the investment. The Bank designated its investment in NSIA as a financial asset (securities) measured at fair value through other comprehensive income in an
amount of $128 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized loss of $48 million.
(7)
National Bank of Canada
2020 Annual Report
161
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 – Fair Value of Financial Instruments (cont.)
Financial Instruments Not Recorded at Fair Value on the Consolidated Balance Sheet
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair value
hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Financial assets
Securities at amortized cost
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Loans, net of allowances
Financial liabilities
Deposits
Other
Liabilities related to transferred receivables
Other liabilities
Subordinated debt
Level 1
Level 2
Level 3
Total
As at October 31, 2020
−
−
−
−
−
−
−
−
−
−
−
6,298
2,416
21
2,555
11,290
62,486
205,337
14,432
67
787
220,623
−
−
−
−
−
6,298
2,416
21
2,555
11,290
90,214
152,700
−
−
−
−
−
205,337
14,432
67
787
220,623
Level 1
Level 2
Level 3
Total
As at October 31, 2019
−
−
−
−
−
−
−
−
−
−
−
5,292
1,805
138
2,589
9,824
−
−
−
−
−
5,292
1,805
138
2,589
9,824
59,857
80,301
140,158
178,861
13,186
912
765
193,724
−
−
−
−
−
178,861
13,186
912
765
193,724
National Bank of Canada
2020 Annual Report
162
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 4 – Financial Instruments Designated at Fair Value Through Profit or Loss
The Bank chose to designate certain financial instruments at fair value through profit or loss according to the criteria presented in Note 1 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.
Financial assets designated at fair value through profit or loss
Securities
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Liabilities related to transferred receivables
Financial assets designated at fair value through profit or loss
Securities
Securities purchased under reverse repurchase agreements
Financial liabilities designated at fair value through profit or loss
Deposits(1)(2)
Liabilities related to transferred receivables
Carrying
value as at
October 31, 2020
Unrealized
gains (losses)
for the year ended
October 31, 2020
Unrealized
gains (losses)
since the initial
recognition of
the instrument
2,679
2,679
11,418
8,762
20,180
68
68
628
(150)
478
93
93
592
(223)
369
Carrying
value as at
October 31, 2019
Unrealized
gains (losses)
for the year ended
October 31, 2019
Unrealized
gains (losses)
since the initial
recognition of
the instrument
3,267
87
3,354
11,203
8,215
19,418
86
−
86
(789)
(163)
(952)
26
−
26
(204)
(75)
(279)
(1)
(2)
For the year ended October 31, 2020, 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 loss of $60 million ($7 million gain for the year ended October 31, 2019).
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
2020 Annual Report
163
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 5 – Offsetting Financial Assets and Financial Liabilities
Financial assets and liabilities are offset and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter financial derivatives subject to master netting arrangements of the International Swaps & Derivatives Association, Inc. or other
similar agreements do not meet the netting criteria on the Consolidated Balance Sheet because the right of set-off is legally enforceable only in the event of
default, insolvency or bankruptcy.
Generally, securities purchased under reverse repurchase agreements and securities borrowed as well as obligations related to securities sold under
repurchase agreements and securities loaned, subject to master agreements, do not meet the netting criteria if they confer only a right of set-off that is
enforceable only in the event of default, insolvency or bankruptcy.
However, the above-mentioned transactions may be subject to contractual netting agreements concluded with clearing houses. If the netting criteria are met,
these transactions are netted on the Consolidated Balance Sheet. In addition, as part of these transactions, the Bank may give or receive cash or other
financial instruments used as collateral.
The following tables present information on financial assets and financial liabilities that are netted on the Consolidated Balance Sheet because they meet the
netting criteria and on those that are not netted and are subject to an enforceable master netting arrangement or similar agreement.
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
Financial assets
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
Financial liabilities
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
As at October 31, 2020
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)(3)
Financial
instruments(1)
Gross amounts
recognized
15,471
19,332
34,803
34,818
18,833
53,651
959
5,910
6,869
959
5,910
6,869
14,512
13,422
27,934
33,859
12,923
46,782
3,596
6,204
9,800
3,596
6,204
9,800
10,852
3,308
14,160
30,181
3,993
34,174
Net
amounts
64
3,910
3,974
82
2,726
2,808
As at October 31, 2019
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
20,889
10,947
31,836
25,066
9,670
34,736
3,166
2,818
5,984
3,166
2,818
5,984
17,723
8,129
25,852
21,900
6,852
28,752
4,493
3,415
7,908
4,493
3,415
7,908
13,192
2,529
15,721
17,327
2,051
19,378
Net
amounts
38
2,185
2,223
80
1,386
1,466
(1)
(2)
(3)
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.
As of October 31, 2020, the financial assets pledged as collateral to the Bank of Canada included bearer deposit notes and covered bonds issued by the Bank.
National Bank of Canada
2020 Annual Report
164
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities
Residual Contractual Maturities of Securities
As at October 31
1 year
or less
Over 1
year to
5 years
Over
5 years
No
specified
maturity
2020
2019
Total
Total
Securities at fair value through profit or loss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Securities at fair value through other comprehensive income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
Securities at amortized cost(1)
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
1,711
1,077
8,421
440
−
11,649
812
186
1,198
123
−
2,319
1,034
217
20
1,356
2,627
5,584
1,797
266
816
−
8,463
3,577
1,326
1,091
312
−
6,306
5,090
1,444
−
1,134
7,668
2,189
6,231
161
832
−
9,413
23
2,642
160
657
−
3,482
39
692
1
52
784
−
−
−
−
48,801
48,801
−
−
−
−
619
619
−
−
−
−
−
9,484
9,105
8,848
2,088
48,801
78,326
4,412
4,154
2,449
1,092
619
12,726
6,163
2,353
21
2,542
11,079
10,423
6,762
1,860
2,693
40,085
61,823
4,432
1,674
3,546
374
622
10,648
5,248
1,788
139
2,580
9,755
(1)
As at October 31, 2020, securities at amortized cost are presented net of $1 million in allowances for credit losses ($1 million as at October 31, 2019).
Credit Quality
As at October 31, 2020 and 2019, securities at fair value through other comprehensive income and securities at amortized cost are classified in Stage 1, with
their credit quality falling mostly 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
2020 Annual Report
165
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities (cont.)
Gross Gains (Losses) on Securities at Fair Value Through Other Comprehensive Income
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2020
Carrying
value(1)
4,302
4,013
2,430
1,051
633
12,429
110
142
19
42
13
326
−
(1)
−
(1)
(27)
(29)
4,412
4,154
2,449
1,092
619
12,726
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2019
Carrying
value(1)
4,411
1,614
3,521
364
649
10,559
26
60
25
11
2
124
(5)
−
−
(1)
(29)
(35)
4,432
1,674
3,546
374
622
10,648
(1)
The allowances for credit losses on securities at fair value through other comprehensive income, representing $3 million as at October 31, 2020 (a negligible amount as at
October 31, 2019), are reported in Other comprehensive income. For additional information, see Note 7 to these consolidated financial statements.
Equity Securities Designated at Fair Value Through Other Comprehensive Income
The Bank designated certain equity securities, the main business objective of which is to generate dividend income, at fair value through other comprehensive
income without subsequent reclassification of gains and losses to net income. During the year ended October 31, 2020, an amount of $21 million in dividend
income was recognized for these investments ($25 million for the year ended October 31, 2019), including an amount of $2 million for investments that were
sold during the year ended October 31, 2020 ($1 million for investments that were sold during the year ended October 31, 2019).
Fair value at beginning
Change in fair value
Designated at fair value through other
comprehensive income(1)(2)
Sales(3)
Fair value at end
Year ended October 31, 2020
Year ended October 31, 2019
Equity securities
of private companies
Equity securities
of public companies
362
7
4
−
373
260
(9)
91
(96)
246
Total
622
(2)
95
(96)
619
Equity securities
of private companies
Equity securities
of public companies
233
(4)
133
−
362
118
(23)
253
(88)
260
Total
351
(27)
386
(88)
622
(1) 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 had 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 for the year ended
October 31, 2019 and reported in the Other heading of segment results.
(2) On May 9, 2019, after disposing of a portion of its investment in Fiera Capital Corporation (Fiera Capital), the Bank designated the retained interest as a financial asset measured at fair value
through other comprehensive income. On the transaction date, 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.
(3) The Bank disposed of public company equity securities for economic reasons.
Gains (Losses) on Disposals of Securities at Amortized Cost
During the years ended October 31, 2020 and 2019, the Bank sold certain debt securities measured at amortized cost. The carrying value of these securities
upon disposal was $258 million for the year ended October 31, 2020 ($461 million for the year ended October 31, 2019), and the Bank recognized gains of
$6 million for the year ended October 31, 2020 ($9 million for the year ended October 31, 2019) in Non-interest income – Gains (losses) on non-trading
securities, net in the Consolidated Statement of Income.
National Bank of Canada
2020 Annual Report
166
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses
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.
Determining and Measuring Expected Credit Losses (ECL)
Determining Expected Credit Losses
Expected credit losses are determined using a three-stage impairment approach that is based on the change in the credit quality of financial assets since initial
recognition.
Stage 1
Financial assets that have experienced no significant increase in credit risk between initial recognition and the reporting date and for which 12-month
expected credit losses are recorded at the reporting date are classified in Stage 1.
Stage 2
Financial assets that have experienced a significant increase in credit risk between initial recognition and the reporting date, and for which lifetime expected
credit losses are recorded at the reporting date, are classified in Stage 2.
Stage 3
Financial assets for which there is objective evidence of impairment, for which one or more events have had a detrimental impact on the estimated future cash
flows of these financial assets at the reporting date, and for which lifetime expected credit losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or originated (POCI) are classified in the POCI category.
Impairment Governance
A rigorous control framework is applied to the determination of expected credit losses. The Bank has policies and procedures that govern impairments arising
from credit risk. These policies are documented and periodically reviewed by the Risk Management group. All models used to calculate expected credit losses
are validated, and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the team that prepares the calculations. Complex questions on measurement methodologies
and assumptions are reviewed by a group of experts from various functions. Furthermore, the inputs and assumptions used to determine expected credit
losses are reviewed on a regular basis.
Measurement of Expected Credit Losses (ECL)
Expected credit losses are estimated using three main variables: (1) probability of default (PD), (2) loss given default (LGD) and (3) exposure at default (EAD).
For accounting purposes, 12-month PD and lifetime PD are the probabilities of a default occurring over the next 12 months or over the life of a financial
instrument, respectively, based on conditions existing at the balance sheet date and on future economic conditions that have, or will have, an impact on credit
risk. LGD reflects the losses expected should default occur and considers such factors as the mitigating effects of collateral, the realizable value thereof, and
the time value of money. EAD is the expected balance owing at default and considers such factors as repayments of principal and interest between the balance
sheet date and the time of default as well as any amounts expected to be drawn on a committed facility. Twelve-month expected credit losses are estimated by
multiplying 12-month PD by LGD and by EAD. Lifetime expected credit losses are estimated using the lifetime PD.
For most financial instruments, expected credit losses are measured on an individual basis. Financial instruments that have credit losses measured on a
collective basis are grouped according to similar credit risk characteristics such as type of instrument, geographic location, comparable risk level, and
business sector or industry.
Inputs, Assumptions and Estimation Techniques
The Bank’s approach to calculating expected credit losses consists essentially of leveraging existing regulatory models and then adjusting their parameters for
IFRS 9 purposes. These models have the advantage of having been thoroughly tested and validated. In addition, using the same base models, regardless of the
purpose, provides consistency across risk assessments. These models use inputs, assumptions and estimation techniques that require a high degree of
management judgment. The main factors that contribute to changes in ECL that are subject to significant judgment include the following:
calibration of regulatory parameters in order to obtain point-in-time and forward-looking parameters;
forecasts of macroeconomic variables for multiple scenarios and the probability weighting of the scenarios;
determination of the significant increases in credit risk (SICR) of a loan.
National Bank of Canada
2020 Annual Report
167
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.
Credit Quality of Loans
The following tables present the gross carrying amounts of loans as at October 31, 2020 and 2019, 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 80 in the Credit Risk Management
section of the MD&A for the year ended October 31, 2020.
National Bank of Canada
2020 Annual Report
168
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
As at October 31, 2020
Non-impaired loans(1)
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(2)
Residential mortgage
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Personal
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Credit card
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Business and government(4)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
Total loans
Gross carrying amount
Allowances for credit losses(3)
Carrying amount
23,139
15,753
10,418
730
283
−
50,323
4,993
55,316
63
55,253
15,072
9,680
4,395
300
116
−
29,563
3,532
33,095
87
33,008
385
307
660
335
29
−
1,716
25
1,741
45
1,696
4,732
21,380
19,421
218
10
−
45,761
5,122
50,883
135
50,748
141,035
330
140,705
29
108
741
299
174
−
1,351
31
1,382
23
1,359
40
1,039
2,024
696
185
−
3,984
48
4,032
145
3,887
−
−
28
205
64
−
297
−
297
124
173
−
10
7,037
1,915
246
−
9,208
163
9,371
250
9,121
15,082
542
14,540
−
−
−
−
−
149
149
44
193
35
158
−
−
−
−
−
140
140
22
162
76
86
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
361
361
101
462
241
221
817
352
465
−
−
−
−
−
−
−
531
531
(56)
587
−
−
−
−
−
−
−
324
324
(10)
334
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
7,537
7,537
−
7,537
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
289
163
73
−
−
−
525
47
572
−
572
Total
23,168
15,861
11,159
1,029
457
149
51,823
13,136
64,959
65
64,894
15,112
10,719
6,419
996
301
140
33,687
3,926
37,613
298
37,315
385
307
688
540
93
−
2,013
25
2,038
169
1,869
5,021
21,553
26,531
2,133
256
361
55,855
5,433
61,288
626
60,662
855
(66)
921
8,109
−
8,109
165,898
1,158
164,740
(1)
(2)
(3)
(4)
In response to the COVID-19 pandemic, the Bank has approved certain payment deferrals for all types of loans. As at October 31, 2020, the gross carrying value of loans for which deferrals
have been approved totalled $695 million for residential mortgages and $1,182 million for business and government loans. These loans are presented in the stage in which they were
positioned immediately prior to application of the payment deferral.
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
2020 Annual Report
169
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, 2019
Non-impaired loans
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(1)
Residential mortgage
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Personal
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Credit card
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Business and government(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
Total loans
Gross carrying amount
Allowances for credit losses(2)
Carrying amount
21,840
14,375
8,178
413
101
−
44,907
3,686
48,593
37
48,556
14,331
10,119
4,973
416
109
−
29,948
3,545
33,493
64
33,429
370
316
786
421
22
−
1,915
34
1,949
26
1,923
4,783
22,951
22,367
87
45
−
50,233
3,779
54,012
58
53,954
138,047
185
137,862
−
11
674
497
248
−
1,430
19
1,449
12
1,437
−
206
1,477
711
199
−
2,593
83
2,676
103
2,573
−
−
20
241
112
−
373
−
373
102
271
−
4
1,346
1,131
255
−
2,736
−
2,736
99
2,637
7,234
316
6,918
−
−
−
−
−
117
117
27
144
25
119
−
−
−
−
−
139
139
23
162
69
93
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
306
306
72
378
140
238
684
234
450
−
−
−
−
−
−
−
553
553
(53)
606
−
−
−
−
−
−
−
613
613
(4)
617
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
6,432
6,432
−
6,432
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
112
53
72
−
−
−
237
129
366
−
366
Total
21,840
14,386
8,852
910
349
117
46,454
10,717
57,171
21
57,150
14,331
10,325
6,450
1,127
308
139
32,680
4,264
36,944
232
36,712
370
316
806
662
134
−
2,288
34
2,322
128
2,194
4,895
23,008
23,785
1,218
300
306
53,512
3,980
57,492
297
57,195
1,166
(57)
1,223
6,798
−
6,798
153,929
678
153,251
(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
2020 Annual Report
170
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, 2020 and 2019 according to credit quality and ECL
impairment stage.
As at October 31
Off-balance-sheet commitments(1)
Retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
Non-retail
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Total exposure
Allowances for credit losses
Total exposure, net of allowances
Stage 1
Stage 2
Stage 3
15,255
3,967
1,273
84
4
−
10,616
17,442
5,013
28
2
−
53,684
10,335
64,019
115
63,904
43
309
255
69
12
−
−
343
3,450
324
84
−
4,889
5
4,894
61
4,833
−
−
−
−
−
3
−
−
−
−
−
6
9
1
10
−
10
2020
Total
15,298
4,276
1,528
153
16
3
10,616
17,785
8,463
352
86
6
58,582
10,341
68,923
176
68,747
Stage 1
Stage 2
Stage 3
12,088
3,585
1,328
114
5
−
10,050
14,640
6,165
17
167
−
48,159
6,154
54,313
53
54,260
2
51
180
82
19
−
−
1
513
161
29
−
1,038
−
1,038
20
1,018
−
−
−
−
−
4
−
−
−
−
−
16
20
1
21
1
20
2019
Total
12,090
3,636
1,508
196
24
4
10,050
14,641
6,678
178
196
16
49,217
6,155
55,372
74
55,298
(1)
Represent letters of guarantee and documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities.
Loans Past Due But Not Impaired(1)
As at October 31
Residential
mortgage
Personal
Credit card
2020(2)
Business and
government(3)
Residential
mortgage
Personal
Credit card
2019
Business and
government(3)
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(4)
58
24
−
82
74
27
−
101
20
9
24
53
22
10
−
32
92
34
−
126
82
34
−
116
27
13
28
68
31
21
−
52
(1)
(2)
(3)
(4)
Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.
In response to the COVID-19 pandemic, the Bank has approved certain payment deferrals for all types of loans. These loans are presented in the loan category in which they were positioned
immediately prior to the application of the payment deferral.
Includes customers’ liability under acceptances.
All loans more than 90 days past due, except for credit card receivables, are considered impaired (Stage 3).
National Bank of Canada
2020 Annual Report
171
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Impaired Loans
As at October 31
Loans – Stage 3
Residential mortgage
Personal
Credit card(1)
Business and government(2)
Loans – POCI
Gross
Allowances for
credit losses
Net
Gross
Allowances for
credit losses
2020
193
162
−
462
817
855
1,672
35
76
−
241
352
(66)
286
158
86
−
221
465
921
1,386
144
162
−
378
684
1,166
1,850
25
69
−
140
234
(57)
177
2019
Net
119
93
−
238
450
1,223
1,673
(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.
Maximum Exposure to Credit Risk on Impaired Loans
The following table presents the maximum exposure to credit risk of impaired loans, the percentage of exposure covered by guarantees, and the main types of
collateral and guarantees held for each loan category.
As at October 31
2020
Gross
impaired loans
Percentage covered
by guarantees(1)
Gross
impaired loans
2019
Percentage covered
by guarantees(1)
Types of collateral
and guarantees
Loans – Stage 3
Residential mortgage
Personal
Business and government(2)
Loans – POCI
193
162
462
855
100 %
49 %
65 %
31 %
144
162
378
1,166
100 %
46 %
53 %
28 %
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.
National Bank of Canada
2020 Annual Report
172
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Allowances for Credit Losses
The following tables present a reconciliation of the allowances for credit losses by Consolidated Balance Sheet item and by type of off-balance-sheet
commitment.
Allowances for
credit losses as at
October 31, 2019
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2020
Allowances for
credit losses as
at October 31, 2020
Recoveries
and other
Balance sheet
Cash and deposits with financial institutions(2)(3)
Securities(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
Securities purchased under reverse repurchase
agreements and securities borrowed(2)(3)
Loans(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets(2)(3)
Off-balance-sheet commitments(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
Balance sheet
Cash and deposits with financial institutions(2)(3)
Securities(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
Securities purchased under reverse repurchase
agreements and securities borrowed(2)(3)
Loans(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
Other assets(2)(3)
Off-balance-sheet commitments(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
2
−
1
−
21
232
128
268
29
678
−
6
66
2
74
755
3
3
−
−
48
168
116
342
64
738
−
9
91
2
102
846
−
−
−
−
(6)
(121)
(90)
(77)
−
(294)
−
−
−
−
−
(294)
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
2
19
15
−
−
36
−
−
−
−
−
36
5
3
1
−
65
298
169
533
93
1,158
−
15
157
4
176
1,343
Allowances for
credit losses as at
October 31, 2018
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2019
Allowances for
credit losses as
at October 31, 2019
Recoveries
and other
1
−
1
−
1
259
129
249
20
658
−
3
49
2
54
714
1
−
−
−
26
137
88
66
9
326
−
3
17
−
20
347
−
−
−
−
(7)
(188)
(104)
(52)
−
(351)
−
−
−
−
−
(351)
−
−
−
−
−
−
−
(1)
−
(1)
−
−
−
−
−
(1)
−
−
−
−
1
24
15
6
−
46
−
−
−
−
−
46
2
−
1
−
21
232
128
268
29
678
−
6
66
2
74
755
(1)
(2)
(3)
(4)
(5)
(6)
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2020 and that are still subject to enforcement activity was $155 million
($166 million for the year ended October 31, 2019).
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
As at October 31, 2020 and 2019, these financial assets were mainly classified in Stage 1 and their credit quality fell mostly 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
2020 Annual Report
173
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.
Year ended October 31
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
2020
Total
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
Residential mortgage
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
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Personal
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
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
37
11
32
(3)
−
(12)
(2)
−
26
−
−
−
−
63
63
−
65
39
87
(19)
(4)
(69)
(10)
1
25
−
−
−
(1)
89
87
2
12
−
(23)
5
(4)
35
(2)
−
11
−
−
−
−
23
23
−
104
−
(79)
22
(53)
165
(12)
−
43
−
−
−
1
148
145
3
25
−
(9)
(2)
4
21
−
−
14
(6)
−
2
−
35
35
−
69
−
(8)
(3)
57
64
(3)
−
107
(121)
−
24
(3)
76
76
−
(53)
−
−
−
−
(3)
−
−
(3)
−
−
−
−
(56)
(56)
−
(4)
−
−
−
−
(4)
−
−
(4)
−
−
−
(2)
(10)
(10)
−
21
11
−
−
−
41
(4)
−
48
(6)
−
2
−
65
65
−
234
39
−
−
−
156
(25)
1
171
(121)
−
24
(5)
303
298
5
31
17
13
(1)
−
(22)
(1)
−
6
−
−
−
−
37
37
−
72
48
72
(19)
(7)
(91)
(11)
−
(8)
−
−
−
1
65
64
1
13
−
(10)
2
(4)
12
(1)
−
(1)
−
−
−
−
12
12
−
121
−
(64)
23
(91)
127
(11)
−
(16)
−
−
−
(1)
104
103
1
21
−
(3)
(1)
4
10
−
−
10
(7)
−
2
(1)
25
25
−
71
−
(8)
(4)
98
81
(5)
−
162
(188)
−
27
(3)
69
69
−
(64)
−
−
−
−
11
−
−
11
−
−
−
−
(53)
(53)
−
(3)
−
−
−
−
(1)
−
−
(1)
−
−
−
−
(4)
(4)
−
2019
Total
1
17
−
−
−
11
(2)
−
26
(7)
−
2
(1)
21
21
−
261
48
−
−
−
116
(27)
−
137
(188)
−
27
(3)
234
232
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, 2020 was $66 million ($92 million for the year ended
October 31, 2019). 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.
National Bank of Canada
2020 Annual Report
174
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
Credit card
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
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Business and government(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
Balance at end
Includes:
Amounts drawn
Undrawn commitments(5)
Total allowances for credit losses at end(7)
Includes:
Amounts drawn
Undrawn commitments(5)
47
10
111
(18)
(1)
(78)
(3)
−
21
−
−
−
−
68
45
23
83
93
28
(46)
−
77
(20)
−
132
−
−
−
(1)
214
135
79
434
330
104
113
−
(111)
18
(40)
159
(2)
−
24
−
−
−
−
137
124
13
105
−
(23)
51
(49)
235
(32)
−
182
−
−
−
−
287
250
37
595
542
53
−
−
−
−
41
34
−
−
75
(90)
−
15
−
−
−
−
141
−
(5)
(5)
49
142
(5)
−
176
(77)
−
3
(2)
241
241
−
352
352
−
2020
Total
160
10
−
−
−
115
(5)
−
120
(90)
−
15
−
205
169
36
329
93
−
−
−
454
(57)
−
490
(77)
−
3
(3)
742
626
116
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
40
8
97
(15)
(2)
(89)
(4)
12
7
−
−
−
−
47
26
21
65
29
27
(8)
(1)
(19)
(10)
−
18
−
−
−
−
83
58
25
232
185
47
115
−
(97)
15
(39)
128
(2)
(7)
(2)
−
−
−
−
113
102
11
89
−
(19)
18
(4)
26
(5)
−
16
−
−
−
−
105
99
6
334
316
18
−
−
−
−
41
48
−
−
89
(104)
−
15
−
−
−
−
135
−
(8)
(10)
5
75
(10)
−
52
(52)
−
8
(2)
141
140
1
235
234
1
2019
Total
155
8
−
−
−
87
(6)
5
94
(104)
−
15
−
160
128
32
290
29
−
−
−
82
(25)
−
86
(52)
(1)
8
(2)
329
297
32
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
1
−
−
−
−
−
−
−
−
−
(1)
−
−
−
−
−
(66)
1,315
(66)
−
1,158
157
(57)
744
(57)
−
678
66
(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, 2020 was $66 million ($92 million for the year ended
October 31, 2019). 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
2020 Annual Report
175
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
As at October 31
Allowances
for credit losses
on impaired
loans(1)(2)
Gross
loans(1)
Impaired
loans(1)
2020
Year ended October 31
Provisions
for
credit losses
Write-offs
Gross
loans(1)
Impaired
loans(1)
As at October 31
Allowances
for credit losses
on impaired
loans(1)(2)
2019
Year ended October 31
Provisions
for
credit losses Write-offs
Retail
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
Non-retail
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
Stages 1 and 2(8)
POCI
81,543
3,599
11,569
96,711
6,696
5,052
756
4,352
1,079
5,545
2,206
2,955
1,528
1,184
4,347
14,171
1,490
3,800
5,296
1,160
6,715
68,332
234
20
83
337
79
80
−
30
37
32
36
33
9
25
6
38
11
3
55
−
6
480
855
165,898
855
1,672
40
16
54
110
8
57
−
20
16
27
14
18
7
18
1
15
6
2
32
−
1
242
1,057
(66)
1,343
17
94
85
196
3
40
−
21
19
11
4
15
8
12
1
4
2
15
20
−
1
176
481
(7)
846
112
8 74,448
4,099
97 11,606
217 90,153
−
17
−
−
4
10
−
1
1
7
−
6,308
4,329
758
3,372
1,168
6,303
2,221
3,289
1,682
1,614
4,335
3 11,635
1,846
1
3,520
32
4,937
1
1,071
−
4,222
−
77 62,610
183
24
84
291
77
63
−
−
−
50
28
4
9
27
12
32
8
62
20
−
1
393
1,166
294 153,929
1,166
1,850
28
15
49
92
4
32
−
−
−
28
10
2
1
11
1
14
5
21
12
−
1
142
578
(57)
755
10
112
139
261
8
127
164
299
(3)
4
−
−
−
7
7
(1)
7
5
−
10
1
14
(1)
−
1
51
25
−
21
−
−
−
3
3
1
6
7
−
3
3
−
5
−
−
52
10
347
351
(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. As at October 31, 2019, the allowances for credit losses on off-balance-sheet commitments include an
amount of $1 million for undrawn Stage 3 commitments related to business and government loans.
National Bank of Canada
2020 Annual Report
176
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Main Macroeconomic Factors
The following tables show the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the base
case, upside scenario and downside scenario, the average values of the factors over the next 12 months (used for Stage 1 credit loss calculations) and over the
remaining forecast period (used for Stage 2 credit loss calculations) are presented.
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
Macroeconomic factors(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2020
Downside scenario
Remaining
forecast period
3.0 %
8.9 %
(5.2) %
2.0 %
(1.1) %
41
2.6 %
8.0 %
2.4 %
1.9 %
3.3 %
54
3.7 %
8.4 %
(1.5) %
1.8 %
6.9 %
51
2.8 %
7.3 %
2.9 %
1.8 %
3.2 %
64
0.4 %
10.4 %
(9.9) %
2.9 %
(15.6) %
26
2.7 %
9.8 %
(0.1) %
2.4 %
5.1 %
32
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2019
Downside scenario
Remaining
forecast period
1.5 %
5.8 %
3.1 %
1.6 %
4.9 %
61
1.6 %
5.7 %
3.1 %
1.6 %
2.4 %
60
2.0 %
5.6 %
6.1 %
1.5 %
8.5 %
71
2.1 %
5.3 %
2.3 %
1.4 %
2.9 %
69
(2.0) %
6.8 %
(10.9) %
2.7 %
(14.1) %
39
1.6 %
7.5 %
(0.3) %
2.6 %
6.6 %
39
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) index is commonly used as a benchmark for the price of oil.
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 spread on corporate BBB bonds will generally correlate with higher allowances for credit losses, whereas an increase in
the other macroeconomic factors (GDP, S&P/TSX, housing price index and WTI oil price) will generally correlate with lower allowances for credit losses.
National Bank of Canada
2020 Annual Report
177
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
During the year ended October 31, 2020, certain macroeconomic factors were revised positively while others were revised negatively.
According to the base scenario, the Canadian economy will continue to recover next year, but the unemployment rate will be 8.6% at the end of 2021,
significantly above its pre-recession level (5.7%). Given a difficult labour market and reduced immigration, housing prices will decline. The S&P/TSX will end
2021 at 16,200 points and the price of oil at US$48.
According to the upside scenario, the economy will rebound more strongly thanks to medical breakthroughs that help fight COVID-19. Fiscal and monetary
stimulus measures will limit the damage arising from destroyed production capacity. The unemployment rate at year-end 2021 will be more favourable than
the base scenario (5 tenths lower). Housing prices will only decline slightly, the S&P/TSX will end 2021 at 17,500 points and the price of oil at US$58.
According to the downside scenario, delays in the discovery of an effective vaccine will cause increased stress in the financial markets. This will lead to an
economic meltdown and a more significant destruction of capacity. The unemployment rate will therefore trend upward, reaching 10.6% at the end of 2021.
Housing prices will decrease considerably. The S&P/TSX will end 2021 at 13,900 points and the price of oil at US$24.
Given uncertainty surrounding the key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.
Sensitivity Analysis of Allowances for Credit Losses on Non-Impaired Loans
Scenarios
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2020 based on
the probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
Balance as at October 31, 2020
Simulations
100% upside scenario
100% base scenario
100% downside scenario
Allowances for credit losses
on non-impaired loans
1,029
919
958
1,279
Migration
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, 2020 with the
estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
Balance as at October 31, 2020
Simulations
Non-impaired loans if they were all in Stage 1
Allowances for credit losses
on non-impaired loans
1,029
866
National Bank of Canada
2020 Annual Report
178
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 8 – Financial Assets Transferred But Not Derecognized
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties,
in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and rewards related to
those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk and other price risks, whereas the rewards
include income streams associated with the financial assets. As such, those financial assets are not derecognized and the transactions are treated as
collateralized or secured borrowings. The nature of those transactions is described below.
Securities Sold Under Repurchase Agreements and Securities Loaned
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial assets to third
parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or repledge the financial assets
received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is included in Obligations related to
securities sold under repurchase agreements and securities loaned on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank
does not record the collateral on the Consolidated Balance Sheet.
Financial Assets Transferred to Structured Entities
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing
Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the
transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities
related to transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated
liabilities.
As at October 31
2020
2019
Carrying value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Carrying value of associated liabilities(2)
Fair value of financial assets transferred but not derecognized
Securities(1)
Residential mortgages
Fair value of associated liabilities(2)
61,599
20,731
82,330
45,781
61,599
21,252
82,851
46,120
47,297
20,142
67,439
36,625
47,297
20,308
67,605
36,714
(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 and excludes bearer deposit notes issued by the Bank and covered bonds issued by the Bank.
Associated liabilities include liabilities related to transferred receivables and obligations related to securities sold under repurchase agreements before the offsetting impact of $959 million
as at October 31, 2020 ($3,166 million as at October 31, 2019) excluding repurchased agreements guaranteed by bearer deposit notes issued by the Bank and covered bonds issued by the
Bank. 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 $6,327 million as at October 31, 2020 ($9,753 million as at October 31, 2019).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
Carrying value of financial assets transferred but not derecognized
Securities backed by insured residential mortgages and other securities sold to CHT
Securities sold under repurchase agreements
Securities loaned
2020
2019
21,211
25,442
35,677
82,330
21,035
16,294
30,110
67,439
National Bank of Canada
2020 Annual Report
179
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 9 – Investments in Associates and Joint Ventures
As at October 31
Listed associate
TMX Group Limited(1)
Unlisted associates
Business
segment
Other
2020
Carrying
value
278
131
409
2019
Carrying
value
273
112
385
(1)
The Bank exercises significant influence over TMX Group Limited (TMX) mainly through its equity interest, debt financing, and presence on TMX’s board of directors. As at October 31, 2020,
the Bank’s ownership interest in TMX was 8.2% and the fair value of this investment based on quoted prices in active markets was $596 million ($544 million as at October 31, 2019).
As at October 31, 2020 and 2019, there were no significant restrictions limiting the ability of associates 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.
TMX Group Limited
TMX 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, 2020, TMX paid $13 million in dividends to the Bank ($12 million for the year ended
October 31, 2019). The following table provides summarized financial information on TMX.
As at October 31(1)
Balance sheet
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Income statement
Total revenues
Net income
Other comprehensive income (loss)
Comprehensive income
2020
2019
34,496
5,248
34,415
1,720
848
255
48
303
31,099
5,215
31,164
1,711
812
270
(38)
232
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2020 and 2019, 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, 2020 and 2019.
Unlisted associates
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(1)
Net income
Other comprehensive income
Comprehensive income
(1)
The amounts are based on the cumulative balances for the 12-month periods ended September 30, 2020 and 2019.
2020
7
−
7
2019
12
1
13
National Bank of Canada
2020 Annual Report
180
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Premises and Equipment
Owned assets held
Right-of-use
assets
Total
Head office
building under
construction(1) Buildings
Land
Computer
equipment
Equipment
and furniture
Leasehold
improvements
Total
Real estate
79
1
(10)
−
70
1
−
−
−
71
−
48
−
−
48
72
−
−
−
120
Cost
As at October 31, 2018
Additions
Disposals(2)
Impairment losses(3)
As at October 31, 2019
Impact of adopting IFRS 16(4)
Additions and modifications
Disposals
Impairment losses(3)
Fully amortized assets
As at October 31, 2020
Accumulated amortization
As at October 31, 2018
Depreciation for the year
Disposals(2)
Impairment losses(3)
As at October 31, 2019
Depreciation for the year
Disposals
Impairment losses(3)
Fully amortized assets
As at October 31, 2020
Carrying value as at October 31, 2019
Carrying value as at October 31, 2020
70
71
48
120
256
4
(185)
−
75
3
(7)
−
−
71
155
6
(103)
−
58
3
(7)
−
−
54
17
17
320
39
−
(36)
323
55
−
(38)
−
340
160
57
−
(23)
194
55
−
(19)
−
230
129
110
118
18
(26)
−
110
14
−
−
(12)
112
55
15
(13)
−
57
11
−
−
(12)
56
53
56
340
34
(52)
−
322
37
(4)
−
(24)
331
142
27
(20)
−
149
28
(4)
−
(24)
149
173
182
1,113
144
(273)
(36)
948
182
(11)
(38)
(36)
1,045
512
105
(136)
(23)
458
97
(11)
(19)
(36)
489
490
556
1,113
144
(273)
(36)
948
648
232
(11)
(38)
(36)
1,743
512
105
(136)
(23)
458
196
(11)
(19)
(36)
588
648
50
−
−
698
99
−
−
99
599
490
1,155
As at October 31, 2020, contractual commitments related to the head office building under construction stood at $312 million, covering 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, 2020, the Bank decided to stop using certain computer equipment. Consequently, an amount of $19 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
(2019: $13 million).
(3)
(4) On November 1, 2019, the Bank adopted IFRS 16. The Bank recognized right-of-use assets totalling $648 million ($668 million reduced by provisions for onerous lease contracts of
$20 million). For additional information on the adoption of IFRS 16, refer to Note 1 to these consolidated financial statements.
Assets Leased Under Operating Leases
The Bank is a lessor under operating lease agreements for certain buildings. These leases have terms varying from one year to five years and do not contain
any bargain purchase options or contingent rent.
The following table breaks down the future minimum payments receivable under these operating leases. These amounts include sub-lease revenues of
$8 million related to real estate right-of-use assets.
1 year or less
Over 1 year to 2 years
Over 2 years to 3 years
Over 3 years to 4 years
Over 4 years to 5 years
Over 5 years
As at October 31, 2020
2
2
2
1
1
2
10
National Bank of Canada
2020 Annual Report
181
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Premises and Equipment (cont.)
Leases Recognized in the Consolidated Statement of Income
Interest expense
Expense relating to leases of low-value assets(1)
Expense relating to variable lease payments
Income from leasing and sub-leasing(2)
As at October 31, 2020
18
8
100
4
(1) The expense relates to payments for leases for which the underlying asset is of low value that are part of the exemptions permitted by the practical expedients of IFRS 16.
(2) These amounts include variable lease payments of $2 million.
For the year ended October 31, 2020, the cash outflows for leases amount to $213 million.
Note 11 – Goodwill and Intangible Assets
Goodwill
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, 2020 and 2019.
Personal and
Commercial(1)
Wealth
Management
Financial
Markets(1)
Third-Party
Solutions(1)
Securities
Brokerage(1)
Managed
Solutions(1)
54
−
54
−
54
256
−
256
−
256
434
−
434
−
434
269
−
269
−
269
Total
959
−
959
−
959
Credigy
Ltd.(1)
Advanced
Bank of Asia
Limited(1)
235
−
235
−
235
33
−
33
−
33
131
−
131
2
133
USSF&I
Total
Total
164
−
164
2
166
1,412
−
1,412
2
1,414
Balance as at October 31, 2018
Impact of foreign currency translation
Balance as at October 31, 2019
Impact of foreign currency translation
Balance as at October 31, 2020
(1)
Constitutes a CGU.
Goodwill Impairment Testing and Significant Assumptions
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, 2020 and 2019, 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, 2020, for each CGU or CGU group, the discount rate used was 13.2% (12.9% as at October 31, 2019) and the
long-term growth rate was between 2% and 5%, depending on the CGU, as at October 31, 2020 and 2019.
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.
National Bank of Canada
2020 Annual Report
182
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Intangible Assets
Indefinite useful life
Finite useful life
Total
Management
contracts(1)
Trademark
Total
Internally-
generated
software(2)
Other
software
Other
intangible
assets
Cost
As at October 31, 2018
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2019
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2020
Accumulated amortization
As at October 31, 2018
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2019
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2020
161
−
−
161
−
−
161
11
−
−
11
−
−
11
172
−
−
172
−
−
172
1,509
329
(85)
(50)
1,703
317
(95)
(3)
1,922
444
194
(41)
(50)
547
223
(43)
(3)
724
Carrying value as at October 31, 2019
Carrying value as at October 31, 2020
161
161
11
11
172
172
1,156
1,198
126
30
−
−
156
15
−
(2)
169
82
23
−
−
105
22
−
(2)
125
51
44
103
−
−
−
103
−
−
(34)
69
70
6
−
−
76
7
−
(34)
49
27
20
Total
1,738
359
(85)
(50)
1,962
332
(95)
(39)
2,160
596
223
(41)
(50)
728
252
(43)
(39)
898
1,910
359
(85)
(50)
2,134
332
(95)
(39)
2,332
596
223
(41)
(50)
728
252
(43)
(39)
898
1,234
1,262
1,406
1,434
(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, 2020, an amount of $52 million ($44 million for the year ended October 31, 2019) 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.
Note 12 – Other Assets
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers
Defined benefit asset (Note 23)
Deferred tax assets (Note 24)
Current tax assets
Reinsurance assets
Insurance assets
2020
2019
946
567
586
126
643
360
30
8
3,266
696
623
570
38
562
216
33
−
2,738
National Bank of Canada
2020 Annual Report
183
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 13 – Deposits
As at October 31
Personal
Business and government
Deposit-taking institutions
On demand(1)
After notice(2)
Fixed term(3)
5,582
55,394
2,119
63,095
33,322
24,058
768
58,148
28,595
64,335
1,705
94,635
2020
Total
67,499
143,787
4,592
215,878
2019
Total
60,065
125,266
4,235
189,566
(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 a $8.4 billion amount of deposits as at
October 31, 2020 ($3.5 billion 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.
Covered Bonds
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold
uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During the year ended October 31, 2020,
the Bank issued covered bonds in amounts of US$200 million (1.0 billion of euros in covered bonds matured, and the Bank issued covered bonds in an amount
of US$1.3 billion and 750 million euros during the year ended October 31, 2019). The covered bonds totalled $10.1 billion as at October 31, 2020 ($9.5 billion
as at October 31, 2019). 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 $17.2 billion as at October 31, 2020 ($16.5 billion as at October 31, 2019), of which $16.8 billion ($16.2 billion as at
October 31, 2019) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
Note 14 – Other Liabilities
As at October 31
Accounts payable and accrued expenses
Subsidiaries’ debts to third parties
Interest and dividends payable
Lease liabilities(1)
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(2)(3)(4)
2020
1,993
386
621
628
652
201
176
−
121
−
940
5,718
2019
1,883
1,225
1,061
−
548
374
74
5
144
24
839
6,177
(1)
(2)
(3)
(4)
As at November 1, 2019, upon IFRS 16 adoption, the Bank recognized lease liabilities totalling $668 million.
As at October 31, 2020, Other items included $1 million in restructuring provisions ($6 million as at October 31, 2019).
As at October 31, 2020, Other items included $7 million in litigation provisions ($19 million as at October 31, 2019).
As at November 1, 2019, upon IFRS 16 adoption, provisions for onerous contracts totalling $20 million were applied against the right-of-use assets reported in the Premises and equipment
item. 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, 2020, other items included $33 million in
provisions for onerous contracts ($48 million as at October 31, 2019).
National Bank of Canada
2020 Annual Report
184
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 15 – Subordinated Debt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the Bank’s note
and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its
subordinated notes and debentures in whole or in part.
As at October 31
2020
2019
Maturity date
Interest rate Characteristics
February
February
2028
2087
3.183%(1) Redeemable(2)
Variable(3) Redeemable at the Bank’s option since February 28, 1993
Fair value hedge adjustment
Unamortized issuance costs(4)
Total
750
9
759
17
(1)
775
750
9
759
15
(1)
773
(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, 2020 (2019: US$7 million) and bearing interest at a rate of 1/8% above six-month LIBOR.
The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization, calculated using the effective interest rate method.
(3)
(4)
Note 16 – Derivative Financial Instruments
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.
Forwards and Futures
Forwards and futures are contractual obligations to buy or deliver a specified amount of currency, interest rate, commodity, or financial instrument on a
specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on organized
exchanges and are subject to cash margining calculated daily by clearing houses.
Swaps
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.
Interest rate swaps are transactions in which counterparties exchange fixed and floating rate interest payments based on the notional principal value in
the same currency.
Commodity swaps are transactions in which counterparties exchange fixed and floating rate payments based on the notional principal value of a
commodity.
Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on a
benchmark interest rate.
Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if a credit
event occurs.
Options
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a
specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an agreed-
upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.
National Bank of Canada
2020 Annual Report
185
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 – Derivative Financial Instruments (cont.)
Notional Amounts(1)
As at October 31
Interest rate contracts
OTC contracts
Forward rate agreements
Not settled by central counterparties
Settled by central counterparties
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
Foreign exchange contracts
OTC contracts
Forwards
Swaps
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Equity, commodity and
credit derivative contracts(2)
OTC contracts
Forwards
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
Exchange-traded contracts
Futures
Long positions
Short positions
Options purchased
Options written
3 months
or less
Over 3
months to
12 months
Over 1
year to
5 years
Over
5 years
Total
contracts
Contracts held
for trading
purposes
Contracts
designated
as hedges
Total
contracts
Term to maturity
2020
2019
4,500
−
6,189
83,466
2,504
1,672
98,331
17,110
12,695
14,594
14,578
58,977
41,129
187,208
4,772
5,343
238,452
68
67
135
546
586
14,986
104,852
433
243
121,646
4,170
15,243
996
996
21,405
11,080
62,707
6,121
6,658
86,566
−
6
6
−
−
54,873
231,766
3,328
3,064
293,031
590
9,545
−
−
10,135
4,210
91,420
1,835
1,616
99,081
−
−
−
−
−
45,465
75,356
970
699
122,490
−
−
−
−
−
1,172
22,203
−
−
23,375
5,046
586
121,513
495,440
7,235
5,678
635,498
21,870
37,483
15,590
15,574
90,517
57,591
363,538
12,728
13,617
447,474
−
−
−
68
73
141
5,046
586
120,467
455,739
7,210
4,686
593,734
21,870
37,483
15,590
15,574
90,517
57,591
348,482
12,728
13,617
432,418
68
73
141
−
51
2,364
194
2,609
2,609
−
−
1,046
39,701
25
992
41,764
−
−
−
−
−
−
15,056
−
−
15,056
−
−
−
−
89
−
−
−
89
5,269
754
127,373
589,827
8,462
5,595
737,280
34,540
21,249
18,098
1,863
75,750
28,948
312,884
13,651
13,566
369,049
80
35
115
1,833
74,406
6,454
1,108
1,358
85,159
48,992
273
318
377
49,960
4,133
9,788
14,437
10,752
39,110
484,965
20,583
217
110
196
21,157
234
1,601
2,495
3,099
7,429
258,209
3,416
8,516
488
794
15,578
391
561
137
1,043
2,132
419,957
6,353
1,132
−
193
7,872
79,344
10,138
916
1,560
94,567
79,255
10,138
916
1,560
94,478
115
−
−
−
115
153,852
4,873
11,950
17,069
14,894
48,786
1,316,983
4,873
11,950
17,069
14,894
48,786
1,260,074
−
−
−
−
−
56,909
6,015
14,247
3,427
3,873
27,562
1,294,915
(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.
National Bank of Canada
2020 Annual Report
186
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Credit Risk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual
obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit and 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.
Terms Used
Replacement Cost
Replacement cost is the Bank’s maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount
is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI’s
Capital Adequacy Requirements Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio
As at October 31
Interest rate contracts
Foreign exchange contracts
Equity, commodity and credit derivative contracts
Impact of master netting agreements
Replacement
cost
Credit risk
equivalent(1)
3,534
4,391
5,497
13,422
(6,204)
7,218
3,839
4,829
7,874
16,542
16,542
2020
Risk-
weighted
amount(1)
1,383
1,542
1,820
4,745
4,745
Replacement
cost
Credit risk
equivalent(1)
2,603
3,103
2,423
8,129
(3,415)
4,714
6,685
4,570
2,917
14,172
14,172
(1)
The amounts are presented net of the Impact of master netting agreements.
Credit Risk Exposure of the Derivative Financial Instrument Portfolio by Counterparty
As at October 31
OECD(1) governments
Banks of OECD member countries
Other
(1) Organisation for Economic Co-operation and Development.
Replacement
cost
1,265
837
5,116
7,218
2020
Credit risk
equivalent
2,280
3,399
10,863
16,542
Replacement
cost
1,048
670
2,996
4,714
2019
Risk-
weighted
amount(1)
968
1,515
1,119
3,602
3,602
2019
Credit risk
equivalent
2,077
3,720
8,375
14,172
National Bank of Canada
2020 Annual Report
187
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 – Derivative Financial Instruments (cont.)
Fair Value of Derivative Financial Instruments
As at October 31
Contracts held for trading purposes
Interest rate contracts
Forwards
Swaps
Options
Foreign exchange contracts
Forwards
Swaps
Options
Equity, commodity and credit derivative contracts
Forwards
Swaps
Options
Total – Contracts held for trading purposes
Contracts designated as hedges
Interest rate contracts
Forwards
Swaps
Options
Foreign exchange contracts
Forwards
Swaps
Options
Equity, commodity and credit derivative contracts
Forwards
Swaps
Options
Total – Contracts designated as hedges
Designated as fair value hedges
Designated as cash flow hedges
Designated as a hedge of a net investment in a
foreign operation
Total fair value
Impact of master netting agreements
Note 17 – Hedging Activities
Positive
Negative
41
2,622
131
2,794
1,292
2,816
221
4,329
850
2,502
2,145
5,497
12,620
−
740
−
740
−
62
−
62
−
−
−
−
802
549
253
20
2,599
73
2,692
1,318
2,477
201
3,996
278
3,430
1,334
5,042
11,730
−
765
289
1,054
−
136
−
136
−
3
−
3
1,193
578
615
−
13,422
(6,204)
7,218
−
12,923
(6,204)
6,719
2020
Net
21
23
58
102
(26)
339
20
333
572
(928)
811
455
890
−
(25)
(289)
(314)
−
(74)
−
(74)
−
(3)
−
(3)
(391)
(29)
(362)
−
499
−
499
Positive
Negative
36
1,808
97
1,941
298
2,618
127
3,043
1,050
1,030
343
2,423
7,407
−
662
−
662
−
60
−
60
−
−
−
−
722
461
261
59
1,742
70
1,871
180
2,263
109
2,552
72
1,439
405
1,916
6,339
−
252
206
458
−
55
−
55
−
−
−
−
513
320
193
−
8,129
(3,415)
4,714
−
6,852
(3,415)
3,437
2019
Net
(23)
66
27
70
118
355
18
491
978
(409)
(62)
507
1,068
−
410
(206)
204
−
5
−
5
−
−
−
−
209
141
68
−
1,277
−
1,277
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, 2020.
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).
The table on the following page 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.
National Bank of Canada
2020 Annual Report
188
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
As at October 31
Over
1 year
to 2
years
1 year
or less
Term to maturity
Over 2
years to
5 years
Over
5 years
2020
Fair value
2019
Fair value
Total
Assets Liabilities
Total
Assets Liabilities
Fair value hedges
Interest rate risk
Interest rate swaps
Notional amount – LIBOR reform(1)
Notional amount – Other(2)
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – Other(2)
Average CAD-CNH exchange rate
Average CAD-HKD exchange rate
Options
Notional amount – LIBOR reform(1)
Notional amount – Other(2)
Average fixed interest rate – Purchased
Average fixed interest rate – Written
Cash flow hedges
Interest rate risk
Interest rate swaps
Notional amount – LIBOR reform(1)
Notional amount – Other(2)
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – Other(2)
Average CAD-USD exchange rate
Average USD-EUR exchange rate
Average USD-GBP exchange rate
Equity price risk
Equity swaps
Notional amount
Average price
Hedges of net investments
in foreign operations(3)
Foreign exchange risk
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-HKD exchange rate
−
1,836
0.4 %
−
839
810
1.1 %
1.6 %
580
9,152
916
3,834
2,335
15,632
1.3 %
1.8 %
1.0 %
2.0 %
1.1 %
1.9 %
2,322
14,583
1.9 %
2.1 %
536
288
451
114
13
−
10
−
−
−
−
−
−
−
−
−
−
118
−
$ 0.1621
−
−
−
−
−
118
$ 0.1621
−
228
$ 0.1864
$ 0.1621
−
36
0.1 %
2.4 %
−
12
−
2.0 %
40
10
(0.8) %
2.9 %
400
519
−
2.8 %
440
577
(0.6) %
2.7 %
435
864
0.1 %
2.7 %
1,872
1,661
9,900
5,669
19,102
549
578
18,432
461
320
−
290
−
206
−
717
2.1 %
−
1,199
4,585
−
15,524
1.9 %
0.9 %
1.6 %
0.3 %
−
755
1.4 %
1.3 %
1,199
21,581
1.7 %
0.5 %
1,185
21,504
2.0 %
0.8 %
204
477
211
138
3,662
−
−
1,461
9,805
−
$ 1.3242 $ 1.2907 $ 1.3119
$ 1.1131 $ 1.1145 $ 1.1656
−
$ 1.2921
−
49
135
50
55
−
−
−
−
−
13,467
1,461
$ 1.3074
$ 1.1510
$ 1.2921
13,067
4,469
$ 1.3074
$ 1.1626
$ 1.2921
89
$ 65.71
2,267
−
−
9,446
−
−
25,329
−
−
755
89
−
$ 65.71
37,797
253
3
−
−
615 40,225
−
−
261
193
10
$ 1.3177
$ 0.1290
10
4,149
−
−
−
−
−
−
−
−
−
−
−
−
10
$ 1.3177
$ 0.1290
10
11,107
35,229
6,424
56,909
−
−
802
−
10
$ 1.3286
$ 0.1277
10
−
1,193 58,667
−
−
−
722
−
513
(1)
(2)
(3)
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
established an enterprise-wide program and is conducting an impact analysis for the Bank. The Bank continues to inventory all of the Bank’s contractual arrangements linked to interest
rates subject to the reform, in order to evaluate the Bank’s exposure to these rates, and to identify 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 continues to monitor industry progress.
Includes contracts which reference the Canadian Dollar Offered Rate (CDOR), a benchmark rate in Canada, a multi-rate jurisdiction.
As at October 31, 2020, the Bank also designated $1,279 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($958 million as at
October 31, 2019).
National Bank of Canada
2020 Annual Report
189
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
Fair Value Hedges
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a
financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of the derivative financial instruments used as hedging
instruments offset changes in the fair value of the hedged items. The Bank applies this strategy mainly to portfolios of securities measured at fair value
through other comprehensive income, fixed-rate mortgage loans, fixed-rate deposits, liabilities related to transferred receivables, and subordinated debt.
In addition, when a fixed-rate asset or liability is denominated in a foreign currency, the Bank sometimes uses cross-currency swaps to hedge the associated
foreign exchange risk. The Bank may designate a cross-currency swap to exchange the fixed-rate foreign currency for the functional currency at a floating rate
in a single hedging relationship addressing both interest rate risk and foreign exchange risk. In certain cases, given that interest rate risk and foreign
exchange risk are hedged in a single hedging relationship, the information below does not distinguish between interest rate risk and the combination of
interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this strategy mainly to foreign currency fixed-rate deposits.
Regression analysis is used to test hedge effectiveness and determine the hedge ratio. For fair value hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show amounts related to hedged items as well as the results of the fair value hedges.
Carrying value
of hedged
items
9,883
5,124
3,371
1,041
17
Carrying value
of hedged
items
8,344
4,667
3,663
752
As at October 31, 2020
Cumulative
adjustments
from
discontinued
hedges
Cumulative
hedge
adjustments
from active
hedges
Year ended October 31, 2020
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
141
10
172
13
−
26
2
83
162
17
229
12
(83)
(71)
(7)
80
(229)
(12)
84
72
7
(78)
−
−
1
1
−
2
As at October 31, 2019
Cumulative
adjustments
from
discontinued
hedges
Cumulative
hedge
adjustments
from active
hedges
Year ended October 31, 2019
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
78
112
59
15
9
48
79
−
210
(396)
(198)
(25)
(409)
(208)
395
197
26
410
2
(1)
(1)
1
1
Securities at fair value through other comprehensive income
Mortgages
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.
National Bank of Canada
2020 Annual Report
190
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities.
In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not
distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this
strategy mainly to its loan, personal credit line, acceptance, deposit portfolios, as well as liabilities related to transferred receivables.
The Bank also uses total return swaps to hedge the risk of changes in future cash flows related to the Restricted Stock Unit (RSU) Plan. Some of these swaps
are designated as part of a cash flow hedge against a portion of the unrecognized obligation of the RSU Plan. In cash flow hedges, the derivative financial
instruments used as hedging instruments reduce the variability of the future cash flows related to the hedged items.
Regression analysis is used to assess hedge effectiveness and to determine the hedge ratio. For cash flow hedges, the main source of potential hedge
ineffectiveness is a circumstance where the critical terms of the hedging instrument and the hedged item are not closely aligned.
The following tables show the amounts related to hedged items as well as the results of the cash flow hedges.
As at October 31, 2020
Year ended October 31, 2020
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
Net interest
income(1)
Interest rate risk
Loans
Deposits
Acceptances
Liabilities related to transferred
receivables
Equity price risk
Other liabilities
2
(178)
(71)
(6)
(253)
9
(244)
(1)
(2)
(136)
−
(139)
4
(135)
(31)
23
193
7
192
(13)
179
31
(21)
(199)
(6)
(195)
13
(182)
−
−
(7)
−
(7)
−
(7)
30
(208)
(193)
(6)
(377)
9
(368)
(17)
(11)
26
−
(2)
(6)
(8)
As at October 31, 2019
Year ended October 31, 2019
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to
Net interest
income(1)
Interest rate risk
Loans
Deposits
Acceptances
Equity price risk
Other liabilities
(1)
Amounts are presented on a pre-tax basis.
−
30
4
34
−
34
(14)
9
(44)
(49)
10
(39)
(45)
154
133
242
(6)
236
45
(154)
(135)
(244)
6
(238)
−
−
(2)
(2)
−
(2)
45
(108)
(133)
(196)
9
(187)
(16)
(10)
2
(24)
(3)
(27)
National Bank of Canada
2020 Annual Report
191
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
Hedges of Net Investments in Foreign Operations
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank
measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial instruments (cross-
currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the foreign
exchange gains and losses on the investments. When non-derivative financial instruments are designated as foreign exchange risk hedges, only the changes
in fair value that are attributable to foreign exchange risk are taken into account when assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative
attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the
notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items as well as the results of the net investment hedges.
Net investments in foreign
operations denominated in:
USD
EUR
BRL
Other currencies
As at October 31, 2020
Year ended October 31, 2020
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)
(1)
−
−
−
(1)
(202)
−
−
−
(202)
18
−
−
−
18
(18)
−
−
−
(18)
−
−
−
−
−
(18)
−
−
−
(18)
−
−
(38)
−
(38)
As at October 31, 2019
Year ended October 31, 2019
Accumulated
other
comprehensive
income from
active hedges
Accumulated
other
comprehensive
income from
discontinued
hedges
Gains (losses) on
hedged items for
ineffectiveness
measurement(1)
Gains (losses) on
hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
Unrealized gains
(losses) included
in Other
comprehensive
income as the
effective portion
of the hedging
instrument(1)
Losses (gains)
reclassified to the
Non-interest
income item(1)
Net investments in foreign
operations denominated in:
USD
EUR
BRL
Other currencies
(1)
Amounts are presented on a pre-tax basis.
7
−
−
−
7
(191)
−
36
−
(155)
(5)
−
−
(1)
(6)
5
−
−
1
6
−
−
−
−
−
5
−
−
1
6
−
3
−
(1)
2
National Bank of Canada
2020 Annual Report
192
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Reconciliation of Equity Components
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31
Balance at beginning
Hedges of net investments in foreign operations(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
Cash flow hedges(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
Balance at end
(1)
Amounts are presented on a pre-tax basis.
Net gains (losses) on
cash flow hedges
(6)
(377)
9
(2)
(6)
−
99
(283)
2020
Net foreign currency
translation
adjustments
8
(18)
(38)
92
(12)
29
61
Net gains (losses)
on cash flow hedges
151
(196)
9
(24)
(3)
−
57
(6)
2019
Net foreign currency
translation
adjustments
14
6
2
(9)
1
(6)
8
National Bank of Canada
2020 Annual Report
193
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Share Capital and Other Equity Instruments
Authorized
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
First Preferred Shares and Other Equity Instruments
Redemption and
conversion date(1)(2)
Redemption
price per
share or LRCN ($)(1)
Convertible into
preferred shares(2)
Dividend per
share ($) or
interest rate per
LRCN(3)
As at October 31, 2020
Reset premium of
the dividend rate or
interest rate
May 15, 2024 (5)(6)
February 15, 2025 (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)
October 15, 2025 (5)
25.00
25.00
25.00
25.00
25.00
25.00
25.00
1000.00
Series 31
Series 33
Series 35
Series 37
Series 39
Series 41
Series 43
n.a.
0.25156 (7)
0.23994 (7)
0.35000 (8)
0.33750 (8)
0.27813 (8)
0.28750 (8)
0.30938 (8)
Floating rate (9)
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
2.58 %
2.77 %
3.943 %
October 15, 2025 (5)
1,000.00
Series 44 (10)
4.3 %(11)
3.943 %
May 15, 2024 (5)
February 15, 2025 (5)
May 15, 2021 (5)
August 15, 2021 (5)
November 15, 2022 (5)
May 15, 2023 (5)
November 15, 2023 (5)
25.00 (12)
25.00 (12)
25.50 (14)
25.50 (14)
25.50 (14)
25.50 (14)
25.50 (14)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Floating rate (13)
Floating rate (13)
Floating rate (13)
Floating rate (13)
Floating rate (13)
Floating rate (13)
Floating rate (13)
2.40 %
2.25 %
4.90 %
4.66 %
3.43 %
2.58 %
2.77 %
First preferred shares
issued and outstanding
Series 30(4)
Series 32(4)
Series 34(4)
Series 36(4)
Series 38(4)
Series 40(4)
Series 42(4)
Series 44(9)
Other equity instruments
issued
Limited Recourse Capital Notes –
Series 1 (LRCN – Series 1)(4)(10)
First preferred shares
authorized but not issued
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)
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. For the preferred shares, the redemption prices are
increased by all the declared and unpaid dividends on the preferred shares to the date fixed for redemption. In the case of LRCN – Series 1, the redemption price is increased by interest
accrued and unpaid up to the redemption date.
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 44, for which the dividends are paid semi-annually. Interest on the LRCN – Series 1 is 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 Bank common shares determined pursuant to an automatic conversion formula. This conversion will be calculated by dividing the value of the
preferred shares, i.e., $25.00 per share, plus all declared and unpaid dividends as at the date of the trigger event, by the value of the common shares. The value of the common shares will
be the greater of a $5.00 floor price or the current market price of the common shares. Current market price means the volume weighted average trading price of common shares for the ten
consecutive trading days ending on the trading day preceding the date of the trigger event. If the common shares are not listed on an exchange when this price is being established, the
price will be the fair value reasonably determined by the Bank’s Board.
For the preferred shares, redeemable at the date fixed for redemption and on the same date every five years thereafter. In the case of LRCN – Series 1, the redemption occurs automatically
upon the redemption of the Series 44 preferred shares held in the limited recourse trust. The Series 44 preferred shares are redeemable at 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 for Series 30 as well as February 16, 2020 for Series 32 and ending on the redemption date. 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 five-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 five-year Government of Canada bond yield on the applicable fixed-rate calculation date by $25.00, plus the reset
premium.
National Bank of Canada
2020 Annual Report
194
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
(9)
(10)
(11)
(12)
(13)
(14)
Series 44 Preferred Shares are held by a consolidated limited recourse trust on the Bank's balance sheet and are therefore eliminated for financial reporting purposes. Dividends are
payable semi-annually and the dividend rate is the Government of Canada bond yield on the calculation date plus the reset premium; however, no dividend will be payable before the date
on which all Series 44 First Preferred Shares are issued to the holders of LRCN – Series 1. Upon the occurrence of a trigger event, as defined by OSFI, 1) each LRCN – Series 1 will be
automatically redeemed and the redemption price will be covered by delivery of the trust’s assets that consist of Series 44 preferred shares; 2) each Series 44 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 Bank common shares determined pursuant to an
automatic conversion formula. This conversion will be calculated by dividing the value of the preferred shares, i.e., $1,000 per share, plus all accrued and unpaid interest 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.
The LRCN – Series 1 for which recourse is limited to the assets held by an independent trustee in a consolidated limited recourse trust. The trust assets consist of Series 44 Preferred
Shares issued in conjunction with the LRCN – Series 1. In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon
redemption of the LRCN – Series 1, (iii) non-payment of the principal amount upon maturity of the LRCN – Series 1, or (iv) an event of default in respect of the LRCN – Series 1, the
noteholders will have recourse only to the assets of the trust, and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances, delivery of the
assets of the trust will eliminate all of the Bank's obligations with respect to the LRCN – Series 1. The LRCN – Series 1 are redeemable at maturity or earlier to the extent that the Bank
redeems the Series 44 preferred shares on certain redemption dates specified in the terms and conditions of the Series 44 preferred shares, and subject to OSFI’s consent and approval.
The interest rate is set for the initial period ending on the date fixed for redemption. Every five years thereafter until November 15, 2075, the interest rate on the notes will be adjusted and
will be an annual interest rate equal to the five-year Government of Canada bond yield on the applicable interest rate calculation date, plus the interest rate reset premium.
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 by $25.00 the rate of interest
equal to the sum of the 90-day Government of Canada treasury bill yield on the floating rate calculation date, 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, 2020, no shares had been issued or traded.
Shares and Other Equity Instruments Outstanding
As at October 31
2020
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Other equity instruments
LRCN – Series 1
Preferred shares and other equity instruments
Common shares at beginning of year
Issued pursuant to the Stock Option Plan
Repurchase of common shares for cancellation
Impact of shares purchased or sold for trading(1)
Other
Common shares at end of year
Number
of shares or LRCN
Shares or LRCN
$
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
500,000
98,500,000
334,172,411
2,318,926
(525,000)
31,323
−
335,997,660
350
300
400
400
400
300
300
2,450
500
2,950
2,949
111
(5)
2
−
3,057
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
−
98,000,000
335,070,642
2,950,922
(4,547,200)
699,564
(1,517)
334,172,411
2019
Shares
$
350
300
400
400
400
300
300
2,450
−
2,450
2,822
122
(40)
45
−
2,949
(1)
As at October 31, 2020, a total of 27,477 shares were sold short for trading, representing $2 million (3,846 shares held for trading representing a negligible amount as at October 31, 2019).
National Bank of Canada
2020 Annual Report
195
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 – Share Capital and Other Equity Instruments (cont.)
Dividends Declared and Distributions on Other Equity Instruments Capital Note
Year ended October 31
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Other equity instruments
LRCN – Series 1
Common shares
Dividends or interest
$
14
12
22
22
18
14
14
116
3
119
953
1,072
2020
Dividends
per share
1.0063
0.9636
1.4000
1.3500
1.1125
1.1500
1.2375
2.8400
2019
Dividends
per share
1.0156
0.9750
1.4000
1.3500
1.1125
1.1500
1.2375
Dividends
$
14
12
22
22
18
14
14
116
−
116
892
1,008
2.6600
Issuance of Equity Instruments
On September 9, 2020, the Bank issued $500 million of Series 1 Limited Recourse Capital Notes (LRCN – Series 1) for which recourse of the noteholders is
limited to the assets held by an independent trustee in a limited recourse consolidated trust. The trust's assets consist of $500 million of Series 44 First
Preferred Shares issued by the Bank in conjunction with the LRCN – Series 1. The LRCN – Series 1 are sold for $1,000 each and bear interest at a fixed rate of
4.3% per annum until November 15, 2025 exclusively and, thereafter, at an annual rate equal to the five-year Government of Canada bond yield plus 3.943%
until November 15, 2075.
In the event of (i) non-payment of interest on any of the interest payment dates, (ii) non-payment of the redemption amount upon redemption of the
LRCN - Series 1, (iii) non-payment of the principal amount upon maturity of the LRCN – Series 1, or (iv) an event of default in respect of the notes, the noteholders
will have recourse only to the assets of the trust, and each noteholder will be entitled to its pro rata share of the assets of the trust. In such circumstances,
delivery of the assets of the trust will eliminate all of the Bank’s obligations with respect to the LRCN – Series 1. The LRCN – Series 1 are redeemable at maturity
or earlier to the extent that the Bank redeems the Series 44 preferred shares on certain redemption dates specified in the terms and conditions of the Series 44
preferred shares, and subject to OSFI’s consent and approval.
Given that the LRCN – Series 1 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under
Basel III.
Repurchases of Common Shares
On June 10, 2019, the Bank had begun 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 ended June 9, 2020. 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, 2020, the Bank repurchased 525,000 common
shares for $30 million, which reduced Common share capital by $5 million and Retained earnings by $25 million. During the year ended October 31, 2019, the
Bank had repurchased 4,547,200 common shares for $281 million, which had reduced Common share capital by $40 million and Retained earnings by
$241 million. These repurchases were carried out before March 13, 2020, which was the date on which OSFI lowered the domestic stability buffer and
indicated that it was expecting all banks to cease any dividend increases or share buybacks.
National Bank of Canada
2020 Annual Report
196
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Reserved Common Shares
As at October 31, 2020 and 2019, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2020, there were 18,058,352 common shares (20,377,278 as at October 31, 2019) reserved under the Stock Option Plan.
Common Shares Held in Escrow
As part of the acquisition of Wellington West Holdings Inc. in 2011, the Bank had issued common shares held in escrow. As at October 31, 2020, the number of
common shares held in escrow was 21,510 (21,510 as at October 31, 2019). The Bank expects that the remaining shares in escrow will be settled by the end of
calendar year 2021.
Restriction on the Payment of Dividends
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so
doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI’s capital adequacy and liquidity guidelines. In addition, the ability to pay
common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common
shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside
for payment.
Dividend Reinvestment and Share Purchase Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for holders of its common and preferred shares under which they can acquire common
shares of the Bank without paying commissions or administration fees. 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. 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 three business days immediately following the dividend payment date.
Note 19 – Non-Controlling Interests
As at October 31
Trust units issued by NBC Asset Trust (NBC CapS II) – Series 2(1)
Other(2)
2020
−
3
3
2019
359
(1)
358
(1)
(2)
As at October 31, 2019, includes $9 million in accrued interest.
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.
Trust Units Issued by NBC Asset Trust
Through structured entity NBC Asset Trust (the Trust), a closed-end trust established under the laws of the Province of Ontario, the Bank issued transferable
non-voting trust units called “Trust Capital Securities” or “NBC CapS II.” These securities are not redeemable or exchangeable for Bank preferred shares at the
option of the holder. The gross proceeds from the issuance were used by the Trust to finance the acquisition of mortgage loans from the Bank. For additional
information, see Note 27 to these consolidated financial statements.
On June 30, 2020, the Trust redeemed all of the outstanding 350,000 Trust units – Series 2 (NBC CapS II – Series 2) at a per-unit price of $1,000 for gross
proceeds of $350 million. The redemption was approved by OSFI. On July 17, 2020, the Trust was dissolved.
National Bank of Canada
2020 Annual Report
197
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 20 – Capital Disclosure
Capital Management Objectives, Policies and Procedures
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers the
risks inherent to the Bank’s business, supports its business segments and protects its clients.
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy
assessment process. This process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and periodic amendments.
Capital Management
Capital ratios are obtained by dividing regulatory capital by risk-weighted assets and are expressed as a percentage. Risk-weighted assets are calculated in
accordance with the rules established by OSFI for on- and off-balance-sheet risks. Credit, market and operational risks are factored into the risk-weighted
assets calculation for regulatory purposes. The definition adopted by the Basel Committee on Banking Supervision (BCBS) distinguishes between three types
of capital. Common Equity Tier 1 (CET1) capital consists of common shareholders’ equity less goodwill, intangible assets and other capital deductions.
Additional Tier 1 instruments comprise eligible non-cumulative preferred shares, limited recourse capital notes, and the eligible amount of innovative
instruments. During the year ended October 31, 2020, the Bank redeemed all of its outstanding 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.
During the second quarter of 2020, OSFI adjusted regulatory ratio requirements in response to the impact of the COVID-19 pandemic. For additional
information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of this MD&A. The Bank
and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 9.0%, a Tier 1 capital ratio of
at least 10.5%, and a Total capital ratio of at least 12.5%. All of these ratios are to include a capital conservation buffer of 2.5% established by the BCBS and
OSFI as well as a 1.0% surcharge applicable solely to D-SIBs and a 1.0% domestic stability buffer established by OSFI. 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 70% of the capital
requirement 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, 2020 and 2019, the Bank was in compliance with all of OSFI’s regulatory capital requirements.
National Bank of Canada
2020 Annual Report
198
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Regulatory Capital and Ratios Under Basel III
As at October 31
Capital
CET1
Tier 1
Total
Risk-weighted assets
Total exposure
Capital ratios
CET1
Tier 1
Total
Leverage ratio
2020
2019
Adjusted(1)
10,924
13,869
15,167
11,167
14,112
15,167
94,808
94,808
9,692
12,492
13,366
83,039
321,038
321,038
308,902
11.5 %
14.6 %
16.0 %
4.3 %
11.8 %
14.9 %
16.0 %
4.4 %
11.7 %
15.0 %
16.1 %
4.0 %
(1)
The Basel III regulatory capital and ratios adjusted as at October 31, 2020 do not include the transitional measure applicable to expected credit loss provisioning. For additional
information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on pages 20 and 21 of the MD&A.
Note 21 – Trading Activity Revenues
Trading activity revenues consist of the net interest income from trading activities and of trading revenues recognized in Non-interest income in the
Consolidated Statement of Income.
Net interest income comprises dividends related to financial assets and liabilities associated with trading activities, net of interest expenses and interest
income related to the financing of these financial assets and liabilities.
Non-interest income consists of realized and unrealized gains and losses as well as interest income on securities measured at fair value through profit or loss,
income from held-for-trading derivative financial instruments, changes in the fair value of loans at fair value through profit or loss, 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
2020
603
604
1,207
2019
40
829
869
National Bank of Canada
2020 Annual Report
199
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 22 – Share-Based Payments
The compensation expense information provided below excludes the impact of hedging.
Stock Option Plan
The Bank’s Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and
provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank’s common share on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain
circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant’s
rights to continue vesting in accordance with the stated terms of the grant agreement. The maximum number of common shares that may be issued under the
Stock Option Plan was 18,058,352 as at October 31, 2020 (20,377,278 as at October 31, 2019). The number of common shares reserved for a participant may
not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31
Stock Option Plan
Outstanding at beginning
Awarded
Exercised
Cancelled(1)
Outstanding at end
Exercisable at end
Number of
options
12,103,626
1,789,280
(2,318,926)
(148,577)
11,425,403
6,908,779
2020
Weighted
average
exercise price
$
$
$
$
$
$
49.15
71.86
42.18
60.99
53.96
47.05
Number of
options
13,064,746
2,116,892
(2,950,922)
(127,090)
12,103,626
7,421,662
(1)
Includes 1,800 expired options during the year ended October 31, 2020 (13,662 expired options during the year ended October 31, 2019).
Exercise price
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
Options
outstanding
399,530
625,356
696,308
941,939
1,213,908
953,611
1,275,263
1,595,263
1,960,809
1,763,416
11,425,403
Options
exercisable
399,530
625,356
696,308
941,939
1,213,908
953,611
878,169
753,795
446,163
−
6,908,779
2019
Weighted
average
exercise price
$
$
$
$
$
$
44.78
58.79
36.40
56.86
49.15
43.59
Expiry date
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
During the year ended October 31, 2020, the Bank awarded 1,789,280 stock options (2,116,892 stock options during the year ended October 31, 2019) with
an average fair value of $5.11 per option ($6.14 for the year ended October 31, 2019).
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
2020
2019
1.94%
7 years
14.97%
4.29%
2.50%
7 years
18.40%
4.37%
National Bank of Canada
2020 Annual Report
200
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.
A $9 million compensation expense was recorded for the year ended October 31, 2020 with respect to this plan ($11 million for the year ended October 31,
2019).
Stock Appreciation Rights (SAR) Plan
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a
cash amount equal to the difference between the closing price of the Bank’s common share on the Toronto Stock Exchange on the day preceding the exercise
date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire 10 years after the award date or, in certain
circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring employees that allow the participant’s rights to
continue vesting in accordance with the stated terms of the grant agreement. A compensation expense in a negligible amount was recognized for the year
ended October 31, 2020 with respect to this plan ($2 million for the year ended October 31, 2019).
As at October 31
SAR Plan(1)
Outstanding at beginning
Awarded
Exercised
Outstanding at end
Exercisable at end
(1)
No SARs cancelled or expired during the years ended October 31, 2020 and 2019.
Exercise price
$34.34
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
Number
of SARs
334,997
42,876
(84,977)
292,896
167,545
2020
Weighted
average
exercise price
$
$
$
$
$
49.61
71.86
46.88
53.66
45.87
Number
of SARs
332,211
46,968
(44,182)
334,997
190,691
SARs
outstanding
SARs
exercisable
1,620
24,608
24,216
29,480
31,572
19,748
28,079
51,320
39,377
42,876
292,896
1,620
24,608
24,216
29,480
31,572
19,748
12,240
19,910
4,151
−
167,545
2019
Weighted
average
exercise price
$
$
$
$
$
46.86
58.79
38.69
49.61
43.65
Expiry date
December 2020
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
Deferred Stock Unit (DSU) Plans
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as directors. These plans allow the Bank to tie a portion of
the value of the compensation of participants to the future value of the Bank’s common shares. A DSU is a right that has a value equal to the closing price of a
common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four years. Additional DSUs are
credited to the 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, 2020, the Bank awarded 44,292 DSUs at a weighted average price of $67.35 (51,839 DSUs at a weighted average price of
$60.33 for the year ended October 31, 2019). A total of 483,009 DSUs were outstanding as at October 31, 2020 (569,402 DSUs as at October 31, 2019). A
compensation expense of $3 million was recognized for the year ended October 31, 2020 with respect to these plans ($9 million for the year ended
October 31, 2019).
National Bank of Canada
2020 Annual Report
201
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 22 – Share-Based Payments (cont.)
Restricted Stock Unit (RSU) Plan
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation
of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December. RSUs
generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the date of the award, the
date on which all RSUs expire. Additional RSUs are credited to the 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, 2020, the Bank awarded 1,868,580 RSUs at a weighted average price of $71.36 (2,396,501 RSUs at a weighted average
price of $60.07 for the year ended October 31, 2019). As at October 31, 2020, a total of 4,606,456 RSUs were outstanding (4,977,984 RSUs as at
October 31, 2019). A compensation expense of $135 million was recognized for the year ended October 31, 2020 with respect to this plan ($175 million for the
year ended October 31, 2019).
Performance Stock Unit (PSU) Plan
The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of these
officers and other designated persons to the future value of the Bank’s common shares. A PSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December,
adjusted upward or downward according to performance criteria, which is based on the 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, 2020, the Bank awarded 235,987 PSUs at a weighted average price of $71.36 (351,956 PSUs at a weighted average price of
$60.07 for the year ended October 31, 2019). As at October 31, 2020, a total of 796,340 PSUs were outstanding (843,250 PSUs as at October 31, 2019). A
compensation expense of $25 million was recognized for the year ended October 31, 2020 with respect to this plan ($29 million for the year ended
October 31, 2019).
Deferred Compensation Plan of National Bank Financial (NBF)
This plan is exclusively for key employees of NBF Wealth Management. The purpose of this plan is to foster the retention of key employees and promote the
growth in income and the continuous improvement in profitability at Wealth Management. Under this plan, participants can defer a portion of their annual
compensation, and NBF may pay a contribution to key employees when certain financial objectives are met. Amounts awarded by NBF and the compensation
deferred by participants are invested in, among others, Bank common share units. These share units represent a right, the value of which corresponds to the
closing price of the Bank’s common share on the Toronto Stock Exchange on the award date. Additional units are paid to the 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, 2020, NBF awarded 137,465 share units at a weighted average price of $69.80 (147,927 share units at a weighted average
price of $59.94 for the year ended October 31, 2019). As at October 31, 2020, a total of 1,904,866 share units were outstanding (1,764,789 share units as at
October 31, 2019). During the year ended October 31, 2020, a $2 million compensation expense was recognized for this plan ($22 million for the year ended
October 31, 2019).
Employee Share Ownership Plan
Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of
payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after
one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to $13 million for the
year ended October 31, 2020 ($12 million for the year ended October 31, 2019), were charged to Compensation and employee benefits when paid. As at
October 31, 2020, a total of 6,167,265 common shares were held for this plan (5,813,172 common shares as at October 31, 2019).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank’s
common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
Plan Liabilities and Intrinsic Value
Total liabilities arising from the Bank’s share-based compensation plans amounted to $507 million as at October 31, 2020 ($549 million as at
October 31, 2019). The intrinsic value of these liabilities that had vested as at October 31, 2020 was $213 million ($217 million as at October 31, 2019).
National Bank of Canada
2020 Annual Report
202
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
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. Other post-employment benefit plans include post-employment medical, dental, and life
insurance coverage. While pension plans are funded, the other plans are not. The fair value of plan assets and the present value of the defined benefit
obligation are measured as at October 31.
The Bank’s most significant pension plan is the Employee Pension Plan of the National Bank of Canada; it is registered with OSFI and the Canada Revenue
Agency and subject to the Pension Benefits Standards Act, 1985 and the Income Tax Act.
The defined benefit plans expose the Bank to specific risks such as investment performance, changes to the discount rate used to calculate the obligation, the
longevity of plan members and future inflation. While management believes that the assumptions used in the actuarial valuation process are reasonable, there
remains a degree of risk and uncertainty that may cause future results to differ significantly from these assumptions, which could give rise to gains or losses.
According to the Bank’s governance rules, the policies and risk management related to the defined benefit plans are overseen at different levels by the pension
committees, the Bank’s management and the Board’s Human Resources Committee. The defined benefit plans are examined on an ongoing basis in order to
monitor the funding and investment policies, the plans’ financial status and the Bank’s funding requirements.
The Bank’s funding policy for the defined benefit pension plans is to make at least the minimum annual contributions required by pension regulators.
For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of refunds
from the plan surplus, where permitted by applicable regulations and plan provisions.
Defined Benefit Obligation, Plan Assets and Funded Status
As at October 31
Defined benefit obligation
Balance at beginning
Current service cost
Interest cost
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions
Actuarial (gains) losses arising from changes in financial assumptions
Actuarial (gains) losses arising from experience adjustments
Employee contributions
Benefits paid
Balance at end
Plan assets
Fair value at beginning
Interest income
Administration cost
Remeasurements
Return on plan assets (excluding interest income)
Bank contributions(1)
Employee contributions
Benefits paid
Fair value at end
Defined benefit asset (liability) at end
2020
4,703
126
148
5
195
−
54
(204)
5,027
4,569
140
(3)
525
72
54
(204)
5,153
126
Pension plans
2019
Other post-employment benefit plans
2019
2020
3,864
93
158
(121)
712
141
53
(197)
4,703
3,918
157
(4)
575
67
53
(197)
4,569
(134)
202
2
5
1
1
(1)
(9)
201
176
3
6
8
18
−
(9)
202
(201)
(202)
(1)
For fiscal 2021, the Bank expects to pay an employer contribution of $72 million to the defined benefit pension plans.
National Bank of Canada
2020 Annual Report
203
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.)
Defined Benefit Asset (Liability)
As at October 31
Defined benefit asset included in Other assets
Defined benefit liability included in Other liabilities
2020
126
−
126
Pension plans
2019
Other post-employment benefit plans
2019
2020
38
(172)
(134)
(201)
(201)
(202)
(202)
Cost for Pension Plans and Other Post-Employment Benefits
Year ended October 31
Pension plans
2019
Other post-employment benefit plans
2019
2020
Current service cost
Interest expense (income), net
Administration costs
Expense recognized in Net income
Remeasurements(1)
Actuarial (gains) losses on defined benefit obligation
Return on plan assets(2)
Remeasurements recognized in Other comprehensive income
2020
126
8
3
137
200
(525)
(325)
(188)
93
1
4
98
732
(575)
157
255
2
5
7
1
1
8
(1)
(2)
Changes related to the discount rate and to the return on plan assets are reviewed and updated on a quarterly basis. All other assumptions are updated annually.
Excluding interest income.
Allocation of the Fair Value of Pension Plan Assets
As at October 31
Asset classes
Cash and cash equivalents
Equity securities
Debt securities
Canadian government
Canadian provincial and municipal governments
Other issuers
Other
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,432
48
−
−
−
1,480
135
613
−
1,656
1,125
144
3,673
2020
Total
135
2,045
48
1,656
1,125
144
5,153
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,458
306
−
−
−
1,764
63
478
−
1,491
571
202
2,805
3
6
9
26
26
35
2019
Total
63
1,936
306
1,491
571
202
4,569
(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, 2020 and 2019, the pension plan assets do not include any
securities issued by the Bank.
For fiscal 2020, the Bank and its related entities received $11 million ($3 million in fiscal 2019) in fees from the pension plans for related management,
administration and custodial services.
National Bank of Canada
2020 Annual Report
204
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Allocation of the Defined Benefit Obligation by the Status of
Defined Benefit Plan Participants
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
Weighted average duration of the
defined benefit obligation (in years)
2020
42 %
51 %
7 %
100 %
17
Pension plans
2019
Other post-employment benefit plans
2019
2020
42 %
52 %
6 %
100 %
17
14 %
86 %
22 %
78 %
100 %
100 %
13
13
Significant Actuarial Assumptions (Weighted Average)
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a
curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on observed data and extrapolated data.
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 4.64% as at October 31, 2020 (5.17% as at October 31, 2019). Based
on the assumption retained, this rate is expected to decrease gradually to 3.34% in 2041 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
Defined benefit obligation
Discount rate
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
2020
2.90 %
3.00 %
21.3
23.7
22.4
24.6
Pension plans
2019
Other post-employment benefit plans
2019
2020
3.10 %
3.00 %
21.3
23.6
22.3
24.6
2.90 %
3.00 %
4.64 %
21.3
23.7
22.4
24.6
3.10 %
3.00 %
5.17 %
21.3
23.6
22.3
24.6
National Bank of Canada
2020 Annual Report
205
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
Pension plan expense
Discount rate – Current service
Discount rate – Interest expense (income), net
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
2020
Pension plans
2019
Other post-employment benefit plans
2019
2020
3.20 %
3.10 %
3.00 %
4.15 %
4.05 %
3.00 %
21.2
23.6
22.3
24.5
21.2
23.6
22.3
24.5
3.20 %
3.10 %
3.00 %
5.17 %
21.2
23.6
22.3
24.5
4.15 %
4.05 %
3.00 %
5.23 %
21.2
23.6
22.3
24.5
Sensitivity of Significant Assumptions for 2020
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, 2020. These impacts are hypothetical and should be interpreted with caution as changes in each significant
assumption may not be linear.
As at October 31, 2020
Impact of a 0.25% increase in the discount rate
Impact of a 0.25% decrease in the discount rate
Impact of a 0.25% increase in the rate of compensation increase
Impact of a 0.25% decrease in the rate of compensation increase
Impact of a 1.00% increase in the health care cost trend rate
Impact of a 1.00% decrease in the health care cost trend rate
Impact of an increase in the age of participants by one year
Impact of a decrease in the age of participants by one year
Projected Benefit Payments
Year ended October 31
2021
2022
2023
2024
2025
2026 to 2030
Pension plans
Change in the obligation
Other post-employment
benefit plans
Change in the obligation
(209)
223
42
(41)
(138)
136
(5)
5
7
(6)
(3)
2
Pension plans
Other post-employment
benefit plans
210
217
223
230
237
1,294
10
9
9
9
8
37
National Bank of Canada
2020 Annual Report
206
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 24 – Income Taxes
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
Consolidated Statement of Income
Current taxes
Current year
Prior period adjustments
Deferred taxes
Origination and reversal of temporary differences
Prior period adjustments
Consolidated Statement of Changes in Equity
Share issuance expense and other
Consolidated Statement of Comprehensive Income
Remeasurements of pension plans and other post-employment benefit plans
Net change in cash flow hedges
Other
Income taxes
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
2020
2019
638
(27)
611
(193)
35
(158)
453
(2)
86
(99)
(13)
(26)
425
2020
511
(86)
425
647
22
669
(188)
(19)
(207)
462
−
(48)
(57)
2
(103)
359
2019
617
(258)
359
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
Deferred tax assets
Allowances for credit losses
Deferred charges
Defined benefit liability – Pension plans
Defined benefit liability – Other post-employment
benefit plans
Investments in associates
Leases liabilities
Deferred revenue
Tax loss carryforwards
Other items(2)
Deferred tax liabilities
Premises and equipment and intangible assets
Defined benefit asset – Pension plans
Investments in associates
Other items
Net deferred tax assets (liabilities)
As at October 31
Consolidated
Balance Sheet
2019(1)
2020
Year ended October 31
Consolidated Statement
of Income
2019(1)
2020
Year ended October 31
Consolidated Statement
of Comprehensive Income
2019
2020
326
265
−
52
98
145
47
40
59
1,032
(326)
(26)
(4)
(33)
(389)
643
150
264
78
50
82
41
95
71
831
(188)
(33)
(16)
(37)
(274)
557
176
1
−
1
15
145
6
(55)
(13)
276
(138)
16
12
(8)
(118)
158
7
31
−
(10)
21
−
3
69
17
138
67
8
15
(21)
69
207
−
−
(78)
1
1
−
−
−
−
(76)
−
(9)
−
12
3
(73)
−
−
42
6
−
−
−
−
48
−
−
−
2
2
50
(1)
(2)
For the year ended October 31, 2019, certain amounts have been reclassified.
As at October 31, 2020, the Consolidated Balance Sheet includes $1 million in deferred tax assets related to share issuance costs (negligible amount as at October 31, 2019) reported in
Retained earnings on the Consolidated Statement of Changes in Equity.
National Bank of Canada
2020 Annual Report
207
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
2020
643
−
643
2019
562
(5)
557
According to forecasts, which are based on information available on October 31, 2020, 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, 2020, the total amount of temporary differences, unused tax loss carryforwards and unused tax credits for which no deferred tax asset has
been recognized was $498 million ($508 million as at October 31, 2019).
As at October 31, 2020, 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 $4,139 million ($3,184 million as at October 31, 2019).
The following table provides a reconciliation of the Bank’s income tax rate.
Year ended October 31
Income before income taxes
Income taxes at Canadian statutory income tax rate
Reduction in income tax rate due to
Tax-exempt income from securities
Non-taxable portion of capital gains
Tax rates of subsidiaries, foreign entities and associates
Other items
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
Notice of Assessment
$
2,536
672
(190)
−
(58)
29
(219)
453
2020
%
100.0
26.5
(7.5)
−
(2.3)
1.2
(8.6)
17.9
$
2,784
741
(208)
(17)
(67)
13
(279)
462
2019
%
100.0
26.6
(7.5)
(0.6)
(2.4)
0.5
(10.0)
16.6
In April 2020, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $240 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2015.
In prior fiscal years, the Bank was reassessed for additional income tax and interest of approximately $370 million (including provincial tax and interest) in
respect of certain Canadian dividends received by the Bank during the 2014, 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 and 2018 Canadian federal budgets.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2015 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, 2020.
National Bank of Canada
2020 Annual Report
208
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 25 – Earnings Per Share
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred
shares.
Year ended October 31
2020
2019
Basic earnings per share
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Dividends on preferred shares and distributions on LRCNs
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Basic earnings per share (dollars)
Diluted earnings per share
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Adjustment to average number of common shares (thousands)
Stock options(1)
Weighted average diluted number of common shares outstanding (thousands)
Diluted earnings per share (dollars)
2,041
118
1,923
335,508
5.73
1,923
335,508
2,072
337,580
5.70
2,256
116
2,140
335,104
6.39
2,140
335,104
2,526
337,630
6.34
(1)
For the year ended October 31, 2020, the calculation of the diluted earnings per share excluded an average number of 1,585,629 options outstanding with a weighted average exercise price
of $71.86 (1,775,598 options outstanding with a weighted average exercise price of $64.14 for the year ended October 31, 2019), as the exercise price of these options was greater than the
average price of the Bank’s common shares.
Note 26 – Guarantees, Commitments and Contingent Liabilities
Guarantees
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties, without
consideration of recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum potential amount of future
payments for significant guarantees issued by the Bank is presented in the following table.
As at October 31
Letters of guarantee(1)
Backstop liquidity, credit enhancement facilities and other(1)
Securities lending
2020
5,802
7,658
92
2019
5,231
5,655
280
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, refer to Note 7 to these consolidated financial statements.
Letters of Guarantee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make
payments in the event that a client cannot meet its obligations to third parties. The Bank’s policy for requiring collateral security with respect to letters of
guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years.
Backstop Liquidity and Credit Enhancement Facilities
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed commercial paper.
The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2020, the notional amount of the global-style backstop liquidity
facilities totalled $3.2 billion ($2.6 billion as at October 31, 2019), 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
2020 Annual Report
209
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, 2020 and 2019, 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., $3.2 billion as at October 31, 2020 ($2.6 billion
as at October 31, 2019). As at October 31, 2020, the Bank held $123 million ($13 million as at October 31, 2019) of this commercial paper and, consequently,
the maximum potential amount of future payments was $3.1 billion ($2.6 billion as at October 31, 2019).
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, 2020, the notional amount of the overnight uncommitted liquidity facility amounted to $4.5 billion
($3.0 billion as at October 31, 2019). As at October 31, 2020 and 2019, no amount had been drawn.
Securities Lending
Under securities lending agreements the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities, the Bank
lends the securities to third parties and indemnifies its clients in the event of loss. In order to protect itself against any contingent loss, the Bank obtains, as
security from the borrower, a cash amount or extremely liquid marketable securities with a fair value greater than that of the securities loaned. No amount has
been recognized on the Consolidated Balance Sheet with respect to potential indemnities resulting from securities lending agreements.
Other Indemnification Agreements
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into numerous
contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations
(including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. The Bank
also undertakes to indemnify any person acting as a director or officer or performing a similar function within the Bank or one of its subsidiaries or another
entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations to which he or she is party in that capacity.
Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the
network, the Bank granted collateral in favour of the Bank of Canada to guarantee any obligation of the Bank towards the Bank of Canada that could result from
the Bank’s participation in the securities transfer network. The durations of the indemnification agreements vary according to circumstance; as at October 31,
2020 and 2019, given the nature of the agreements, the Bank is unable to make a reasonable estimate of the maximum potential liability it could be required
to pay to counterparties. No amount has been recorded on the Consolidated Balance Sheet with respect to these agreements.
Commitments
Credit Instruments
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing needs of its
clients represent the maximum amount of additional credit the Bank could be obligated to extend if the commitments were fully drawn.
As at October 31
Letters of guarantee(1)
Documentary letters of credit(2)
Credit card receivables(3)
Commitments to extend credit(3)
2020
5,802
171
7,999
70,329
2019
5,231
163
7,630
62,124
(1)
(2)
(3)
See the Letters of Guarantee heading on page 209.
Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to draw drafts on the Bank up to an amount established under specific
terms and conditions; these instruments are collateralized by the delivery of the goods to which they are related.
Credit card receivables and commitments to extend credit represent the undrawn portions of credit authorizations granted in the form of loans, acceptances, letters of guarantee and
documentary letters of credit. The Bank is required at all times to make the undrawn portion of the credit authorization available, subject to certain conditions.
Financial Assets Received as Collateral
As at October 31, 2020, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $60.6 billion ($55.3 billion
as at October 31, 2019). 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.
National Bank of Canada
2020 Annual Report
210
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Other Commitments
The Bank acts as an investor in investment banking activities where it enters into agreements to finance external private equity funds and investments in
equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank has commitments to invest up to
$78 million as at October 31, 2020 ($92 million as at October 31, 2019). 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, 2020, the Bank had no commitment to purchase loans
($1.6 billion as at October 31, 2019). As at October 31, 2020, the Bank also has a commitment to finance $200 million related to securitization transactions.
Pledged Assets
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as collateral is
provided in the following table. These transactions are concluded in accordance with standard terms and conditions for such transactions.
As at October 31
2020
2019
Assets pledged to
Bank of Canada
Direct clearing organizations(1)
Assets pledged in relation to
Derivative financial instrument transactions
Borrowing, securities lending and securities sold under reverse repurchase agreements
Securitization transactions
Covered bonds(2)
Other
Total
502
4,039
4,380
57,257
22,859
14,337
4
103,378
502
1,052
2,822
41,946
23,299
10,300
4
79,925
(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.
Contingent Liabilities
Maple Financial Group Inc.
The Bank has a 24.9% equity interest in Maple Financial Group Inc. (Maple), a privately owned Canadian company that operated through direct and indirect
wholly owned subsidiaries in Canada, Germany, the United Kingdom and the United States.
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 the investigation was 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 protection 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. As at October 31, 2019, an $11 million provision was recorded
to reflect this adjusting event after the Consolidated Balance Sheet date.
In December 2019, the Bank, together with the other principal Maple shareholders, reached an agreement with the bankruptcy and insolvency administrator of
Maple GmbH to settle any potential claims that might be asserted against them by or on behalf of Maple GmbH. In connection with the settlement, the Bank
agreed to pay 8.7 million euros for the benefit of Maple GmbH’s creditors and, during the first quarter of 2020, recorded a $13 million charge in the Non-
interest expenses – Other item presented in the Other heading of segment results. During the third quarter of 2020, by virtue of the finalization of this
agreement, all material liabilities associated with the Bank’s ownership of Maple have been resolved.
National Bank of Canada
2020 Annual Report
211
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 26 – Guarantees, Commitments and Contingent Liabilities (cont.)
Litigation
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of varied
natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal 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.
National Bank of Canada
2020 Annual Report
212
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Structured Entities
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means
of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note 1 to these
consolidated financial statements. 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 on page 214.
Non-Consolidated Structured Entities
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit
enhancement facilities under the commercial paper program. These facilities are presented and described in Note 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
2020 Annual Report
213
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.
Assets on the Consolidated Balance Sheet
Securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Securities at amortized cost
Derivative financial instruments
As at October 31, 2019
Maximum exposure to loss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2019
Total assets of the structured entities
As at October 31, 2019
Multi-seller
conduits(1)
Investment
funds(2)
Private
investments(3)
As at October 31, 2020
Asset-backed
structured entities(4)
23
100
−
17
140
15
140
3,226
3,366
2,623
3,304
2,647
255
−
−
−
255
540
255
−
255
540
1,900
1,970
68
−
−
−
68
81
68
−
68
81
431
482
−
−
2,268
19
2,287
2,465
2,287
425
2,712
2,707
8,139
6,506
(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, 2020, the notional
committed amount of the global-style liquidity facilities totalled $3.2 billion ($2.6 billion as at October 31, 2019), 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, 2019). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2020, the Bank held $123 million in commercial paper ($13 million as at October 31, 2019) and, consequently, the
maximum potential amount of future payments as at October 31, 2020 is limited to $3.1 billion ($2.6 billion as at October 31, 2019), which represents the undrawn liquidity and credit
enhancement facilities.
The underlying assets are various financial instruments and are presented on a net asset basis. Certain investment funds are in a trading portfolio.
The underlying assets are private investments. The amount of total assets of the structured entities corresponds to the amount for the most recent available period.
The underlying assets are residential mortgages, consumer loans, equipment loans and leases.
Consolidated Structured Entities
Securitization Entity for the Bank’s Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use the entity
for capital management and funding purposes.
The Bank provides first-loss protection against the losses since it retains the excess spread from the portfolio of sold receivables. The excess spread
represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss protection as it
holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is responsible for the daily
administration and management of CCCT II’s credit card receivables. The Bank therefore has the ability to direct the relevant activities of CCCT II and can
exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases financial assets from clients and finances those purchases by issuing debt securities (including
commercial paper) backed by the assets acquired. The clients use this multi-seller conduit to diversify their funding sources and reduce borrowing costs, while
continuing to manage the financial assets and providing some amount of first-loss protection. The Bank holds the sole note issued by the conduit and has
concluded a derivative financial instrument contract with the conduit. The Bank controls the relevant activities of this conduit through its involvement as a
financial agent, agent for administrative and transaction structuring services as well as investor in the conduit’s sole note. The Bank’s functions and
investment in the conduit confer to it decision-making power over the composition of assets acquired by the conduit and the selection of the seller as well as
some exposure to the conduit’s variable returns. Therefore, the Bank consolidates these funds.
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.
National Bank of Canada
2020 Annual Report
214
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 had created NBC Asset Trust (the Trust) for its funding and capital management needs. The securities issued by this trust constituted innovative
capital instruments and were eligible as additional Tier 1 capital. The issuance proceeds were used to acquire, from the Bank, residential mortgage loans. The
Bank continued to administer these loans and was committed to repurchase from the Trust the capital balance and unpaid accrued interest on any loan that
was more than 90 days past due. The Bank also managed day-to-day operations and held the special voting securities of the Trust. After the distribution had
been paid to the holders of the trust capital securities, the Bank, as the sole holder of the special trust securities, was entitled to receive the balance of net
residual funds. Therefore, the Bank had the ability to direct the relevant activities of the Trust and could use its power to affect the amount of returns it
obtained. Therefore, the Bank controlled this trust and consolidated it until June 2020.
On June 30, 2020, the Trust redeemed all of the outstanding Trust units (NBC Caps II) – Series 2 and on July 17, 2020, the Trust was dissolved. For additional
information, see Note 19 to these consolidated financial statements.
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
Consolidated structured entities
Securitization entity for the Bank’s credit card receivables(2)(3)
Multiseller conduit(4)
Investment funds(5)
Covered bonds(6)
NBC Asset Trust(7)
Third-party structured entities(8)
Investments
and other assets
1,417
172
174
16,771
−
191
18,725
2020
Total
assets(1)
1,478
172
174
17,197
−
191
19,212
Investments
and other assets
849
−
286
16,167
700
232
18,234
2019
Total
assets(1)
1,765
−
311
16,515
1,063
232
19,886
(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, located in Canada, are residential mortgages.
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, 2020, the total amount of
transferred mortgage loans was $16.8 billion ($16.2 billion as at October 31, 2019), and the total amount of covered bonds of $10.1 billion was recognized in Deposits on the Consolidated
Balance Sheet ($9.5 billion as at October 31, 2019). For additional information, see Note 13 to these consolidated financial statements.
The underlying assets were insured and uninsured residential mortgage loans of the Bank. As at October 31, 2019, insured loans had amounted to $12 million.
The underlying assets consist of a loan portfolio.
National Bank of Canada
2020 Annual Report
215
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 28 – Related Party Disclosures
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other operations
with related parties. The Bank considers the following to be related parties:
its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household;
entities over which its key officers and directors and their immediate family have control or significant influence through their significant voting power;
the Bank’s associates and joint ventures;
the Bank’s pension plans (for additional information, see Note 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.
Related Party Transactions
As at October 31
Assets
Mortgage loans and other loans
Liabilities
Deposits
Other
Key officers
and directors(1)
2019
42
39
−
2020
33
59
−
2020
347 (2)
517 (3)
1
Related entities
2019
339
(2)
(3)
632
3
(1)
(2)
(3)
As at October 31, 2020, key officers, directors and their immediate family members were holding $66 million of the Bank’s common and preferred shares ($69 million as at
October 31, 2019).
As at October 31, 2020, mortgage loans and other loans consisted of: (i) $1 million in loans to the Bank’s associates (no loans as at October 31, 2019) and (ii) $346 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 ($339 million as at
October 31, 2019).
As at October 31, 2020, deposits consisted of: (i) $210 million in deposits from the Bank’s associates ($395 million as at October 31, 2019) and (ii) $307 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 ($237 million as at
October 31, 2019).
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.
Compensation of Key Officers and Directors
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
2020
21
21
2019
23
25
National Bank of Canada
2020 Annual Report
216
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Principal Subsidiaries of the Bank(1)
Name
Business activity
Principal office address
Canada and United States
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 Investments Inc.
National Bank Life Insurance Company
Natcan Trust Company
National Bank Trust Inc.
National Bank Realty Inc.
NatBC Holding Corporation
Natbank, National Association
Other countries
Natcan Global Holdings Ltd.
NBC Global Finance Limited
NBC Financial Markets Asia Limited
Advanced Bank of Asia Limited
ATA IT Ltd.
Holding company
Investment dealer
Holding company
Holding company
Holding company
Investment dealer
Mutual funds dealer
Insurance
Trustee
Trustee
Real estate
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
As at October 31, 2020
Investment
at cost
Voting
shares(2)
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
1,785
441
238
195
80
31
22
5
532
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.
Note 29 – Management of the Risks Associated With Financial Instruments
The Bank is exposed to credit risk, market risk, liquidity risk and financing risk. The Bank’s objectives, policies and procedures for managing risk and the risk
measurement methods are presented in the Risk Management section of the MD&A for the year ended October 31, 2020. 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, 2020 are an integral part of these consolidated
financial statements.
Residual Contractual Maturities of Balance Sheet Items and
Off-Balance-Sheet Commitments
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2020 and 2019. 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
2020 Annual Report
217
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.)
Assets
Cash and deposits
with financial institutions
Securities
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2020
6,126
345
372
264
488
−
−
−
21,547
29,142
4,084
2,352
2,778
603
1,832
2,383
6,080
9,413
48,801
78,326
1
20
4,105
−
256
2,608
858
306
3,942
1,060
367
2,030
400
1,678
3,910
984
2,218
5,585
5,322
5,450
16,852
3,482
784
13,679
619
−
49,420
12,726
11,079
102,131
7,984
1,658
133
−
−
666
−
−
4,071
14,512
1,352
278
1,230
447
2,043
660
3,170
796
3,152
890
9,320
3,221
38,719
13,435
4,690
3,475
8,815
2,548
3,608
3,971
4,208
5,679
13,563
3,622
6,049
765
52
−
−
−
−
−
16,494
4,990
6,363
7,937
8,250
18,220
65,717
11,787
1,283
14,411
2,038
8,408
64,959
37,613
2,038
54,422
−
(1,158)
24,982
6,866
(1,158)
164,740
1,816
2,586
1,139
706
318
968
2,298
3,591
−
13,422
1,193
3,009
37,718
351
2,937
12,538
147
1,286
12,096
149
855
11,086
134
452
13,100
344
1,312
25,783
64
2,362
84,931
12
3,603
29,069
409
1,155
1,414
1,434
872
5,284
105,304
409
1,155
1,414
1,434
3,266
21,100
331,625
(1)
Amounts collectible on demand are considered to have no specified maturity.
National Bank of Canada
2020 Annual Report
218
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Liabilities and equity
Deposits(1)(2)
Personal
Business and government
Deposit-taking institutions
Other
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Lease liabilities(5)
Other liabilities – Other items(1)(5)
Subordinated debt
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments(9)
Other contracts(10)
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, 2020
1,845
21,801
1,435
25,081
6,049
618
14,084
1,738
−
−
8
1,087
23,584
−
2,728
7,168
111
10,007
3,462
9,916
14
13,392
765
620
52
952
3,335
2,070
2,138
−
14
192
9,134
−
8,803
877
311
−
21
200
11,216
−
1,647
2,185
80
3,912
−
69
136
603
1,850
−
22
87
2,767
−
2,084
2,462
17
4,563
6,909
6,860
5
13,774
6,958
10,341
1
17,300
2,962
3,602
42
6,606
38,904
79,452
2,887
121,243
67,499
143,787
4,592
215,878
−
92
−
266
397
−
21
76
852
−
−
−
−
−
6,866
1,516
2,361
4,321
5,819
16,368
1,487
875
3,430
36
85
85
7,514
−
−
3,116
−
3,378
6,014
−
33,859
12,923
11,059
28
224
37
16,825
3,670
−
233
281
11,883
−
−
−
2,981
14,814
22,855
64
628
5,026
98,589
−
775
−
775
48,665
19,141
24,608
6,679
5,415
21,288
34,125
19,264
200
1,579
603
948
1,187
1,322
134
−
16,383
152,440
16,383
331,625
−
7,999
5,973
7,999
−
2,846
15
4,143
4,502
4,504
15
6,429
−
5,688
−
5,651
−
10,690
−
1,165
3,126
29,213
7,658
70,329
1
15
1
28
2
41
2
41
1
39
4
145
2
114
1
−
−
278
14
701
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 $4.5 billion.
These amounts include $39.4 billion that is unconditionally revocable at the Bank’s discretion at any time.
These amounts include leases for which the underlying asset is of low value and leases other than for real estate of less than one year.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10) These amounts include $0.3 billion in contractual commitments related to the head office building under construction.
National Bank of Canada
2020 Annual Report
219
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.)
Assets
Cash and deposits
with financial institutions
Securities
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
Securities purchased under
reverse repurchase
agreements and
securities borrowed
Loans(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
Other
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2019
7,301
1,638
121
111
33
−
−
−
4,494
13,698
1,228
36
33
1,297
647
14
84
745
658
26
262
946
256
5
331
592
411
1
105
517
4,215
7,451
6,872
40,085
61,823
3,213
1,704
9,132
4,749
5,853
18,053
1,982
1,383
10,237
622
−
40,707
10,648
9,755
82,226
7,247
1,365
922
495
−
1,317
−
−
6,377
17,723
734
253
1,161
430
1,959
803
3,093
972
2,893
843
10,674
3,367
32,601
11,576
3,375
3,407
8,469
2,771
2,995
3,203
2,222
6,016
13,445
2,771
6,138
710
45
−
−
−
−
−
15,594
5,072
5,802
7,268
5,958
20,057
57,622
9,553
681
15,293
2,322
8,707
57,171
36,944
2,322
50,599
−
(678)
26,325
6,893
(678)
153,251
564
614
483
262
194
847
2,039
3,126
−
8,129
1,425
1,989
33,428
142
756
9,576
87
570
8,361
88
350
8,816
88
282
6,790
266
1,113
31,619
107
2,146
77,821
38
3,164
22,954
385
490
1,412
1,406
497
4,190
82,093
385
490
1,412
1,406
2,738
14,560
281,458
(1)
Amounts collectible on demand are considered to have no specified maturity.
National Bank of Canada
2020 Annual Report
220
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Liabilities and equity
Deposits(1)(2)
Personal
Business and government
Deposit-taking institutions
Other
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Other liabilities – Other items(1)(5)
Subordinated debt
Equity
Off-balance-sheet commitments
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments
Other contracts(9)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2019
1,716
20,252
711
22,679
6,138
504
7,493
793
−
−
1,298
16,226
−
1,983
6,050
69
8,102
710
176
1,281
763
1,491
−
330
4,751
−
3,045
6,630
79
9,754
45
195
2,881
556
995
874
141
5,687
−
2,696
4,778
29
7,503
−
34
2,743
292
881
−
63
4,013
−
3,042
2,723
275
6,040
6,105
6,411
−
12,516
7,276
11,706
5
18,987
2,606
6,213
46
8,865
31,596
60,503
3,021
95,120
60,065
125,266
4,235
189,566
−
−
−
−
−
6,893
495
315
2,738
5,147
3,245
12,849
−
214
375
−
36
1,120
−
−
712
3,640
−
58
4,725
−
−
1,959
−
1,563
7,502
−
21,900
6,852
10,623
37
84
15,441
3,307
−
292
10,309
−
−
2,964
13,711
21,312
911
5,266
75,983
−
773
−
773
38,905
12,853
15,441
11,516
7,160
17,241
34,428
19,947
335
1,430
411
1,019
888
1,258
53
−
−
1,916
15
4,552
8
158
17
289
3,017
4,103
26
523
15
5,064
27
423
−
4,019
26
380
−
4,258
−
10,326
99
198
249
257
−
784
239
−
15,136
123,967
15,136
281,458
−
7,630
5,394
7,630
2,608
27,102
5,655
62,124
−
−
691
2,228
(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 $3.0 billion.
These amounts include $35.7 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
2020 Annual Report
221
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Segment Disclosures
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele and marketing strategy.
Personal and Commercial
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as
insurance operations.
Wealth Management
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions
offered through internal and third-party distribution networks.
Financial Markets
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public
sector organizations, and institutional investors.
U.S. Specialty Finance and International (USSF&I)
The USSF&I segment encompasses the specialty finance expertise provided by subsidiary Credigy; the activities of subsidiary ABA Bank, which offers financial
products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging markets.
Other
This heading encompasses treasury activities, liquidity management, Bank funding, asset/liability management activities, certain specified 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 and
holders of other equity instruments. Intersegment revenues are recognized at the exchange amount. Segment assets correspond to average assets used in
segment operations.
Results by Business Segment
Year ended October 31(1)
Personal and
Commercial
2019
2020
Wealth
Management
2019
2020
Financial
Markets
2019
2020
2020
USSF&I
2019
2,445
1,018
3,463
1,849
1,614
517
2,384
1,067
3,451
1,837
1,614
237
1,097
290
807
−
1,377
366
1,011
−
442
1,413
1,855
1,115
455
1,288
1,743
1,073
740
7
733
194
539
−
670
−
670
176
494
−
946
1,108
2,054
809
1,245
239
1,006
266
740
−
474
1,277
1,751
756
995
30
965
257
708
−
807
13
820
319
501
80
421
69
352
34
656
59
715
285
430
80
350
71
279
40
2020
(385)
120
(265)
453
(718)
3
(721)
(366)
(355)
8
Other
2019
(373)
145
(228)
350
(578)
−
(578)
(408)
(170)
26
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
Total
2019
3,596
3,836
7,432
4,301
3,131
347
2,784
462
2,322
66
Net interest income(2)
Non-interest income(2)(3)
Total revenues
Non-interest expenses(4)
Income before provisions for
credit losses and income taxes
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 and
holders of other equity
instruments
Average assets
807
1,011
117,338 112,798
539
5,917
494
6,219
740
123,943
708
112,493
318
14,336
239
10,985
(363)
56,665
(196)
43,667
2,041
318,199
2,256
286,162
(1)
(2)
(3)
(4)
For the year ended October 31, 2019, certain amounts have been reclassified.
For the year ended October 31, 2020, Net interest income was grossed up by $208 million ($195 million in 2019), Non-interest income was grossed up by $57 million ($135 million in 2019),
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, for the year ended October 31, 2020, the Non-interest income item includes a foreign currency translation loss of $24 million following the sale,
through its subsidiary Credigy Ltd., of two subsidiaries in Brazil. For the Other heading of segment results, for the year ended October 31, 2019, the Non-interest income item had included 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 year ended October 31, 2020, for the Other heading of segment results, the Non-interest expenses item includes $71 million in impairment losses on premises and equipment and
on intangible assets related to computer equipment and technology developments, a $13 million charge related to Maple, and $48 million in severance pay. For the Other heading of
segment results, for the year ended October 31, 2019, the Non-interest expenses item had included $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.
National Bank of Canada
2020 Annual Report
222
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Results by Geographic Segment
Year ended October 31(1)
Net interest income
Non-interest income(2)
Total revenues
Non-interest expenses(3)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s shareholders and
holders of other equity instruments
Average assets
2020
3,239
3,574
6,813
4,124
2,689
766
1,923
343
1,580
18
Canada
2019
United States
2019
2020
2020
Other
2019
2,930
3,645
6,575
3,931
2,644
267
2,377
394
1,983
36
642
5
647
209
438
59
379
68
311
24
550
85
635
210
425
68
357
59
298
30
374
93
467
212
255
21
234
42
192
−
116
106
222
160
62
12
50
9
41
−
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
Total
2019
3,596
3,836
7,432
4,301
3,131
347
2,784
462
2,322
66
1,562
258,594
1,947
231,667
287
22,654
268
20,411
192
36,951
41
34,084
2,041
318,199
2,256
286,162
(1)
(2)
(3)
For the year ended October 31, 2019, certain amounts have been reclassified.
For the United States results, for the year ended October 31, 2020, the Non-interest income item includes a foreign currency translation loss of $24 million following the sale, through its
subsidiary Credigy Ltd., of two subsidiaries in Brazil. For Canada results, for the year ended October 31, 2019, the Non-interest income item had included 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 year ended October 31, 2020, for Canada results, the Non-interest expenses item includes $71 million in impairment losses on premises and equipment and on intangible assets
related to computer equipment and technology developments, a $13 million charge related to Maple, and $48 million in severance pay. For the Other heading of segment results, for the
year ended October 31, 2019, the Non-interest expenses item had included $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.
Note 31 – Event After the Consolidated Balance Sheet Date
Acquisition
In the first quarter of fiscal 2021, the Bank will acquire the remaining non-controlling interest in the Credigy Ltd. subsidiary following the decision of the non-
controlling shareholders to exercise their put options for an amount of approximately US$235 million according to an agreement reached in 2013. Subsequent
to this transaction, Credigy Ltd. will become a wholly-owned subsidiary of the Bank.
National Bank of Canada
2020 Annual Report
223
Supplementary
Information
Statistical Review
Glossary of Financial Terms
Information for Shareholders
226
228
230
Supplementary Information
Statistical Review
As at October 31(1)
(millions of Canadian dollars)
Consolidated Balance Sheet data
Cash and deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans
Other assets
Total assets
Deposits
Other liabilities
Subordinated debt
Share capital and other equity instruments
Preferred and other equity instruments
Common
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interests
Total liabilities and equity
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
29,142
102,131
13,698
82,226
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
14,512
164,740
21,100
331,625
215,878
98,589
775
2,950
3,057
47
10,444
(118)
3
331,625
17,723
153,251
14,560
281,458
189,566
75,983
773
2,450
2,949
51
9,312
16
358
281,458
18,159
146,082
15,691
262,471
170,830
76,539
747
2,450
2,822
57
8,472
175
379
262,471
20,789
136,457
14,436
245,827
156,671
75,589
9
2,050
2,768
58
7,706
168
808
245,827
13,948
128,036
17,498
232,206
142,066
77,026
1,012
1,650
2,645
73
6,706
218
810
232,206
17,702
116,676
18,105
216,090
130,458
72,755
1,522
1,023
2,614
67
6,705
145
801
216,090
24,525
106,959
12,906
205,429
119,883
73,163
1,881
1,223
2,293
52
5,850
289
795
205,429
21,449
97,338
12,092
188,219
102,111
74,729
2,426
677
2,160
58
5,055
214
789
188,219
15,529
90,922
13,305
177,903
93,474
73,948
2,470
762
2,054
58
4,091
255
791
177,903
12,507
80,758
14,146
166,854
85,787
71,791
2,000
762
1,970
46
3,366
337
795
166,854
Average assets
318,199
286,162
265,940
248,351
235,913
222,929
206,680
193,509
181,344
165,942
Net impaired loans(2)(3) under IFRS 9
Net impaired loans(3) under IAS 39
Consolidated Statement of Income data
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses
and income taxes
Provisions for credit losses
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders and holders of other equity
instruments
465
450
404
206
281
254
248
183
179
175
4,255
3,672
7,927
4,545
3,382
846
453
2,083
42
3,596
3,836
7,432
4,301
3,131
347
462
2,322
66
3,382
3,784
7,166
4,063
3,103
327
544
2,232
87
3,436
3,173
6,609
3,857
2,752
244
484
2,024
84
3,205
2,635
5,840
3,875
1,965
484
225
1,256
75
2,929
2,817
5,746
3,665
2,081
228
234
1,619
70
2,761
2,703
5,464
3,423
2,041
208
295
1,538
69
2,478
2,673
5,151
3,206
1,945
181
252
1,512
63
2,365
2,936
5,301
3,207
2,094
180
317
1,597
61
2,318
2,336
4,654
2,952
1,702
184
264
1,254
60
2,041
2,256
2,145
1,940
1,181
1,549
1,469
1,449
1,536
1,194
(1)
(2)
(3)
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.
National Bank of Canada
2020 Annual Report
226
Supplementary Information
Statistical Review
As at October 31(1)
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
Number of common shares(2)
(thousands)
Number of common
shareholders on record
335,998
334,172
335,071
339,592
338,053
337,236
329,297
325,983
322,617
320,948
20,674
20,894
21,325
21,542
21,966
22,152
22,394
22,737
23,180
23,588
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
$
$
$
$
$
$
$
5.73
5.70
2.84
74.79
38.73
63.94
39.97
–
–
–
–
–
–
–
$
$
$
$
$
$
$
1.0063
0.9636
1.4000
1.3500
1.1125
1.1500
1.2375
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6.39 $
6.01 $
5.44
6.34 $
2.66 $
5.94 $
2.44 $
5.38
2.28
68.02 $
65.63 $
54.97 $
58.69 $
68.02 $
59.76 $
36.89 $
34.40 $
62.74
46.83
62.61
31.51
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $
0.9500
1.0156 $
1.0250 $
1.0250
0.9750 $
0.9750 $
0.9750
1.4000 $
1.4000 $
1.4000
1.3500 $
1.3500 $
1.3500
1.1125 $
1.1125 $
0.4724
1.1500 $
0.9310
1.2375 $
0.5323
–
–
$
$
$
$
$
$
$
$
$
$
$
$
3.31 $
4.56
3.29 $
2.18 $
4.51
2.04
47.88 $
35.83 $
47.88 $
28.52 $
55.06
40.75
43.31
28.26
–
–
–
–
– $
1.5000
–
–
–
–
–
–
0.9500 $
0.9500
1.0250 $
1.0250
0.9750 $
1.0760
1.1373
0.5733
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
4.36
4.32
1.88
53.88
41.60
52.68
25.76
–
1.2125
1.5000
–
0.4125
0.4125
0.9500
0.7849
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4.34 $
4.63 $
3.41
4.31 $
1.70 $
4.58 $
1.54 $
3.37
1.37
45.24 $
40.64 $
36.18 $
31.64 $
45.24 $
38.59 $
22.97 $
20.02 $
40.72
32.43
35.57
17.82
0.2444 $
1.4625 $
1.4625
1.2125 $
1.2125 $
1.5000 $
1.5000 $
1.0078 $
1.3438 $
1.6500 $
1.6500 $
1.6500 $
1.6500 $
0.9728
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.2125
1.5000
1.3438
1.6500
1.6500
–
–
–
–
–
–
–
–
Financial ratios
Return on common
shareholders’ equity
Return on average assets
Regulatory ratios under
Basel III(3)
Capital ratios(4)
CET1(5)
Tier 1(5)
Total(5)
Leverage ratio(5)
Other information
Number of employees(10)(11)
Branches in Canada
Banking machines in Canada
14.9 %
0.65 %
18.0 %
0.81 %
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 %
11.8 %
14.9 %
16.0 %
4.4 %
11.7 %
15.0 %
16.1 %
4.0 %
11.7 %
15.5 %
16.8 %
4.0 %
11.2 %
14.9 %(6)
15.1 %(6)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(7)
14.0 %(9)
4.0 %
9.2 %
12.3 %(8)
15.1 %(8)
8.7 %
11.4 %
15.0 %
7.3 %
10.1 %
14.1 %
7.6 %
10.8 %
14.3 %
25,604
24,557
22,426
20,584
20,600
19,026
18,725
16,675
16,636
16,217
403
940
422
939
428
937
429
931
450
938
452
930
452
935
453
937
451
923
448
893
(1)
(2)
(3)
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 ratios as at October 31, 2020 include the transitional measures granted by OSFI. For additional information, see the COVID-19 Pandemic – Key Measures introduced by the Regulatory
Authorities on pages 20 and 21 of this MD&A.
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.
(4)
(5)
(6)
(7)
(8)
(9)
(10) Full-time equivalent.
(11)
Includes employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2020.
National Bank of Canada
2020 Annual Report
227
Supplementary Information
Glossary of Financial Terms
Acceptances
Acceptances constitute a guarantee of payment by a bank and can be traded
in the money market. The Bank earns a “stamping fee” for providing this
guarantee.
Allowances for credit losses
Allowances for credit losses represent management’s unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance-sheet items such as loan
commitments and financial guarantees.
Assets under administration
Assets in respect of which a financial institution provides administrative
services such as custodial services, collection of investment income,
settlement of purchase and sale transactions and record-keeping. Assets
under administration, which are beneficially owned by clients, are not
reported on the balance sheet of the institution offering such services.
Assets under management
Assets managed by a financial institution that are beneficially owned by
clients. Management services are more comprehensive than administrative
services, and include selecting investments or offering investment advice.
Assets under management, which may also be administered by the financial
institution, are not reported on the financial institution’s balance sheet.
Average interest-bearing assets
Average interest-bearing assets include deposits with financial institutions,
certain interest-bearing cash items, securities, securities purchased under
reverse repurchase agreements and securities borrowed, and loans but
excludes other assets. The average is calculated based on the daily averages
for the year.
Basis point
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
Common Equity Tier 1 (CET1) capital ratio
Common Equity Tier 1 capital consists of common shareholders’ equity less
goodwill, intangible assets and other capital deductions. Common Equity
Tier 1 capital ratio is calculated by dividing Common Equity Tier 1 capital by
the corresponding risk-weighted assets.
Derivative financial instruments
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, exchange rate or equity, commodity
or credit instrument or index. Examples of derivatives include swaps,
options, forward rate agreements and futures. The notional amount of the
derivative is the contract amount used as a reference point to calculate the
payments to be exchanged between the two parties, and the notional amount
itself is generally not exchanged by the parties.
Dividend payout ratio
Common dividends as a percentage of net income after preferred share
dividends.
Economic capital
Economic capital is the internal measure used by the Bank to determine the
capital required for its solvency and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed, as well as the risk
diversification effect among them and among the business segments.
Economic capital thus helps the Bank to determine the capital required to
protect itself against such risks and ensure its long-term viability.
Efficiency ratio
Non-interest expenses as a percentage of total revenue, the efficiency ratio
measures the efficiency of the Bank’s operations.
Fair value
The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction in the
principal market at the measurement date under current market conditions
(i.e., an exit price).
Hedging
The purpose of a hedging transaction is to modify the Bank’s exposure to one
or more risks by creating an offset between changes in the fair value of, or
the cash flows attributable to, the hedged item and the hedging instrument.
Impaired loans
The Bank considers a financial asset, other than a credit card receivable, to
be credit-impaired when one or more events that have a detrimental impact
on the estimated future cash flows of the financial asset have occurred or
when contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following: when a notice of bankruptcy is received, a settlement proposal is
made, or contractual payments are 180 days past due.
Leverage ratio
The leverage ratio is calculated by dividing Tier 1 capital by total exposure.
Total exposure is defined as the sum of on-balance-sheet assets (including
derivative exposures and securities financing transaction exposures) and off-
balance-sheet items.
Liquidity coverage ratio
The liquidity coverage ratio is a measure designed to ensure that the Bank
has sufficient high-quality liquid assets to cover net cash outflows given a
severe, 30-day liquidity crisis.
Master netting agreement
Legal agreement between two parties that have multiple derivative contracts
with each other that provides for the net settlement of all contracts through a
single payment, in the event of default, insolvency or bankruptcy.
Net interest margin
Net interest income as a percentage of average interest-bearing assets.
National Bank of Canada
2020 Annual Report
228
Supplementary Information
Glossary of Financial Terms
Office of the Superintendent of Financial Institutions (Canada) (OSFI)
The mandate of the Office of the Superintendent of Financial Institutions
(OSFI) is to regulate and supervise financial institutions and private pension
plans subject to federal oversight, to help minimize undue losses to
depositors and policyholders and, thereby, to contribute to public confidence
in the Canadian financial system.
Structured entity
A structured entity is an entity created to accomplish a narrow and well-
defined objective and is designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when voting
rights relate solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
Operating leverage
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses.
Taxable equivalent basis
Taxable equivalent basis is a calculation method that consists in grossing up
certain tax-exempt income by the amount of income tax that would have
otherwise been payable.
Provisions for credit losses
The amount charged to income necessary to bring the allowances for credit
losses to a level determined appropriate by management.
Return on common shareholders’ equity (ROE)
Net income, less dividends on preferred shares, expressed as a percentage
of the average value of common shareholders’ equity.
Risk-weighted assets
Assets are risk weighted according to the guidelines established by OSFI. In
the Standardized calculation approach, factors are applied to the face value
of certain assets in order to reflect comparable risk levels. In the Advanced
Internal Rating-Based (AIRB) approach, risk-weighted assets are derived from
the Bank's internal models, which represent the Bank's own assessment of
the risks it incurs. Off-balance-sheet instruments are converted to balance
sheet (or credit) equivalents by adjusting the notional values before applying
the appropriate risk-weighting factors.
Securities purchased under reverse repurchase agreements
Securities purchased by the Bank from a client pursuant to an agreement
under which the securities will be resold to the same client on a specified
date and at a specified price. Such an agreement is a form of short-term
collateralized lending.
Securities sold under repurchase agreements
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
Tier 1 capital ratio
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional
Tier 1 instruments, namely, eligible non-cumulative preferred shares and the
eligible amount of innovative instruments. Tier 1 capital ratio is calculated by
dividing Tier 1 capital, less regulatory adjustments, by the corresponding
risk-weighted assets.
Total capital ratio
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of
the eligible portion of subordinated debt and certain credit loss allowances.
Total capital ratio is calculated by dividing total capital, less regulatory
adjustments, by the corresponding risk-weighted assets.
Total shareholder return
The total shareholder return (TSR) represents the average total return on an
investment in the Bank’s common shares. The return includes changes in
share price and assumes that the dividends received were reinvested in
additional common shares of the Bank.
Value-at-Risk (VaR)
VaR is a statistical measure of risk that is used to quantify market risks
across products, per types of risks and aggregate risk on a portfolio basis.
VaR is defined as the maximum loss at a specific confidence level over a
certain horizon under normal market conditions. The VaR method has the
advantage of providing a uniform measurement of financial instrument-
related market risks based on a single statistical confidence level and time
horizon.
National Bank of Canada
2020 Annual Report
229
Supplementary Information
Information for Shareholders
Description of Share Capital
Dividends Declared on Common Shares During Fiscal 2020
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 $300 million. As at
October 31, 2020, the Bank had a total of 335,997,660 common shares and
98,000,000 first preferred shares issued and outstanding.
Record date
Payment date
Dividend per share ($)
December 30, 2019
March 30, 2020
June 29, 2020
September 28, 2020
February 1, 2020
May 1, 2020
August 1, 2020
November 1, 2020
0.71
0.71
0.71
0.71
Stock Exchange Listings
Dividends Declared on Preferred Shares During Fiscal 2020
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
Ticker symbol
Jan. 6, 2020
Feb. 15, 2020
0.2516 0.2438 0.3500 0.3375 0.2781 0.2875 0.3094
Apr. 6, 2020 May 15, 2020
0.2515 0.2399 0.3500 0.3375 0.2782 0.2875 0.3094
NA
Jul. 6, 2020
Aug. 15, 2020
0.2516 0.2399 0.3500 0.3375 0.2781 0.2875 0.3093
Oct. 6, 2020 Nov. 15, 2020
0.2516 0.2400 0.3500 0.3375 0.2781 0.2875 0.3094
Issue or class
Common shares
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
NA.PR.S
NA.PR.W
NA.PR.X
NA.PR.A
NA.PR.C
NA.PR.E
NA.PR.G
Number of Registered Shareholders
As at October 31, 2020, there were 20,674 common shareholders recorded
in the Bank’s common share register.
Dividends
Dividend Dates in Fiscal 2021
(subject to approval by the Board of Directors of the Bank)
Record date
Common shares
December 28, 2020
March 29, 2021
June 28, 2021
September 27, 2021
Preferred shares,
Series 30, 32, 34, 36, 38, 40 and 42
January 6, 2021
April 5, 2021
July 6, 2021
October 6, 2021
Payment date
February 1, 2021
May 1, 2021
August 1, 2021
November 1, 2021
February 15, 2021
May 15, 2021
August 15, 2021
November 15, 2021
Dividends paid are “eligible dividends” in accordance with the Income Tax
Act (Canada).
Dividend Reinvestment and Share Purchase
Plan
National Bank has a Dividend Reinvestment and Share Purchase Plan for
holders of its common and preferred shares under which they can acquire
common shares of the Bank without paying commissions or administration
fees. 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.
Direct Deposit
Shareholders may elect to have their dividend payments deposited directly
via electronic funds transfer to their bank account at any financial institution
that is a member of the Canadian Payments Association. To do so, they must
send a written request to the Transfer Agent, Computershare Trust Company
of Canada.
National Bank of Canada
2020 Annual Report
230
Head Office
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
Annual Meeting
The Annual Meeting of Holders of Common Shares of the Bank will be held on
April 23, 2021.
Corporate Social Responsibility Statement
The information will be available in March 2021 on the Bank’s website at
nbc.ca.
Communication with Shareholders
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the Transfer Agent at the following address:
Computershare Trust Company of Canada
Share Ownership Management
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:
Shareholders whose shares are held by a market intermediary are asked to
contact the market intermediary concerned.
Other shareholder inquiries can be addressed to:
Investor Relations
National Bank of Canada
National Bank Tower
600 De La Gauchetière Street West, 7th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 1-866-517-5455
E-mail:
Website:
investorrelations@nbc.ca
nbc.ca/investorrelations
Caution Regarding Forward-Looking Statements
From time to time, National Bank of Canada makes written and oral
forward-looking statements, including in this Annual Report, in other filings
with Canadian regulators, in reports to shareholders, in press releases and in
other communications. All such statements are made pursuant to the
Canadian and American securities legislation and the provisions of the
United States Private Securities Litigation Reform Act of 1995.
Additional information about these statements can be found on page 15 of
this Annual Report.
Trademarks
The trademarks belonging to National Bank of Canada and used in this report
include National Bank of Canada, National Bank, NBC, National Bank All-In-
One, National Bank Financial, National Bank Financial Wealth Management,
Private Banking 1859, National Bank Direct Brokerage, National Bank
Investments, National Bank Independent Network, National Bank Trust, NBC
CapS II, NBC Asset Trust, NBC Capital Trust, National Bank Life Insurance,
Natcan Trust Company, National Bank Realty, Natbank and their respective
logos. Certain trademarks owned by third parties are also mentioned in this
report.
Pour obtenir une version française du Rapport annuel,
veuillez vous adresser à :
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
Legal Deposit
ISBN 978-2-921835-67-1
Legal deposit – Bibliothèque et Archives nationales du Québec, 2020
Legal deposit – Library and Archives Canada, 2020
Printing
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