t
r
o
p
e
R
l
a
u
n
n
A
1
2
0
2
® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.
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).
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
127 Audited Consolidated Financial Statements
230 Statistical Review
232 Information for Shareholders
2.7 million Clients(1)
26,920 Employees(2)
$652 B Assets Under Administration
$356 B Total Assets
$8,927 M Total Revenues
$3,177 M Net Income
$34.6 B Market Capitalization
11%
24%
41%
2021 Total Revenues by
Business Segment (3)
Personal and Commercial
Wealth Management
Financial Markets
24%
U.S. Specialty Finance and International
15%
19 %
33%
2021 Total Revenues by
Geographic Distribution(3)
52%
Province of Quebec
Other Canadian provinces
Outside of Canada
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) On a taxable equivalent basis and excluding the Other heading.
See the Financial Reporting Method section on pages 18 to 21.
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be held on
April 22, 2022.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2022 on the Bank’s website at
nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the transfer agent at the following address:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
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
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
From time to time, National Bank of Canada makes written and oral
forward-looking statements, including in this Annual Report, in other filings
with Canadian regulators, in reports to shareholders, in press releases and in
other communications. All such statements are made pursuant to the
Canadian and American securities legislation and the provisions of the
United States Private Securities Litigation Reform Act of 1995.
Additional information about these statements can be found on page 15 of
this Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this report
include National Bank of Canada, National Bank, NBC, 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 Asset 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.
PPoouurr oobbtteenniirr uunnee vveerrssiioonn ffrraannççaaiissee dduu RRaappppoorrtt aannnnuueell,,
vveeuuiilllleezz vvoouuss aaddrreesssseerr àà ::
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
LLeeggaall DDeeppoossiitt
ISBN 978-2-921835-71-8
Legal deposit – Bibliothèque et Archives nationales du Québec, 2021
Legal deposit – Library and Archives Canada, 2021
PPrriinnttiinngg
L’Empreinte
National Bank of Canada proudly participates in a carbon neutral program
and purchased carbon credits to offset the greenhouse gases emitted to
produce the paper this calendar is printed on and is proud to help save the
environment by using EcoLogo and Forest Stewardship Council® (FSC®)
certified paper.
Investing in National Bank
Our Pillars
Our Culture
Our Strategic Positioning
Our Discipline
› Entrepreneurial culture
› Canadian bank with leading
› Strong risk management culture
› Proven agility
› Collaboration
› Diversity and inclusion
franchise in Quebec
› Differentiated positioning
in Financial Markets and
Wealth Management
› Focused strategy outside
of Canada
› Disciplined cost management
› Solid capital levels
› Strong ESG governance
Our Performance This Year
Superior ROE (1)
20.7%
2021 Return on Common
Shareholders’ Equity(2) (ROE)
Strong Earnings Growth
20.5% 12.3%(3)
Income Before Provisions for Credit Losses
and Income Taxes Growth (2020–2021)
Solid Capital Position
12.4%
Common Equity Tier 1 (CET1) Ratio(4)
as at October 31, 2021
Premium Total Shareholder Returns(2)
CAGR for the periods ended October 31, 2021(2) (5)
Ranking(6)
National Bank
Canadian
Peers(6)
TSX
1 year
# 2
3 years
5 years
10 years
# 1
# 1
# 1
66%
25%
21%
16%
58%
39%
14%
15%
12%
11%
13%
9%
(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) See the Glossary section on pages 123 to 126 for additional information on supplementary financial measures composition.
(3) On a taxable equivalent basis and excluding specified items. See the Financial Reporting Method section on pages 18 to 21 for additional information
on non-GAAP financial measures.
(4) See the Financial Reporting Method section on pages 18 to 21 for additional information on capital management measures.
(5) Compound annual growth rate. Source: Nasdaq IR Insight via Factset.
(6) Among Canadian Peers, as defined above.
National Bank of Canada
2021 Annual Report
1
Financial
Overview
Medium-Term Objectives and Results
Growth in diluted earnings per share excluding specified items(1)
ROE excluding specified items(2)
Dividend payout ratio excluding specified items(2)
CET1 capital ratio(3)
Leverage ratio(3)
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
Net income
Diluted earnings per share
Return on common shareholders’ equity(4)
Dividend payout ratio(4)
Medium-term
objectives
2021
Results
2020
Results
5–10%
15–20%
40–50%
> 11.00%
> 3.75%
48.2 %
(4.7) %
20.8 %
15.8 %
31.3 %
46.6 %
12.4 %
1 1.8 %
4.4 %
4.4 %
2021
2020
8,927
4,074
3,177
$ 8.96
20.7 %
31.4 %
7,927
3,382
2,083
$ 5.70
14.9 %
49.6 %
Operating results on a taxable equivalent basis and excluding specified items(1)
Total revenues on a taxable equivalent basis and excluding specified items
9,116
8,216
Income before provisions for credit losses and income taxes on a taxable equivalent basis and
excluding specified items
Net income excluding specified items
Diluted earnings per share excluding specified items(1)
Efficiency ratio on a taxable equivalent basis and excluding specified items(2)
Dividends declared
Total assets
4,272
3,184
$ 8.98
53.1 %
$ 2.84
355,795
3,803
2,216
$ 6.06
53.7 %
$ 2.84
331,625
(1) See the Financial Reporting Method section on pages 18 to 21 for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 18 to 21 and see the Glossary section on pages 123 to 126 for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 18 to 21 for additional information on capital management measures.
(4) See the Glossary section on pages 123 to 126 for additional information on supplementary financial measures composition.
2
National Bank of Canada
2021 Annual Report
MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt
aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr
saw encouraging
While the past year was marked by continued pandemic-
related uncertainty and market complexities, we
improvements across
nonetheless
Canada from both a health and economic perspective. In
this ever-evolving context, the Bank’s support of
its
employees, clients, and communities remains unwavering,
guided by our One Mission of Putting People First.
The Bank delivered outstanding financial performance in
2021, reflective of the strategic choices we have made, the
strength and adaptability of our franchise, and our earnings
diversification.
OOuurr ccuullttuurree ooff aaggiilliittyy aanndd ccoollllaabboorraattiioonn ccoonnttiinnuueedd
ttoo bbee aa ttrruuee ccoommppeettiittiivvee aaddvvaannttaaggee ffoorr tthhee
BBaannkk aanndd tthhee ccoorrnneerrssttoonnee ooff oouurr ccoonnssiisstteenntt
ppeerrffoorrmmaannccee ttrraacckk rreeccoorrdd..
In 2021, the Bank delivered superior growth in revenue and
income before provisions for credit losses and income taxes
compared to last year, driven by continued momentum in all
our businesses. The Bank generated strong organic growth
and industry-leading return on equity while maintaining
strong capital levels and prudent allowances for credit
losses. The Bank was also top of the class in total
shareholder returns for the three-, five-, ten-, and twenty-
year periods.
The Bank’s sustained performance since the beginning of
the pandemic demonstrates that we have pursued the right
strategies in terms of business mix, capital allocation, and
last several years. These
risk management over the
strategies will continue to guide the Bank’s approach and
decision-making well into the future.
SSttrroonngg PPiillllaarrss SSuuppppoorrttiinngg CCoonnttiinnuueedd GGrroowwtthh
As a Canadian bank with a leading franchise in Quebec, we
are anchored in one of North America’s most diversified and
structurally sound economies. As a result, we are a
longstanding personal and commercial banking partner of
choice in the province and well-positioned to continue
benefitting from Quebec’s economic strength.
Clients are—and must remain—at the core of everything we
do. Our digital transformation continues as we aim to
further optimize our processes and enhance client
experience. This commitment, supported by the depth of
our relationships and the quality of our advice, will remain
key as we seek to provide Canadian clients with a best-in-
class experience.
Our Wealth Management segment is an established leader
in
targeted niches, boasts a highly differentiated
positioning, and generates low-capital-intensity organic
growth and a superior return on equity. As such, our wealth
business represents an important long-term growth lever for
the Bank.
is a high performing,
Our Financial Markets segment
focused, and agile franchise. It is an important pillar,
providing
resilience and earnings
diversification. Our objective is to continue consolidating our
leadership positions and to grow in selected markets.
the Bank with
Across the Bank, we will continue to
leverage the
collaborative models already deployed to stimulate further
growth opportunities among our businesses. We expect
investments and savings to increasingly become anchor
products, as we generate synergies across the franchise,
with the client always at the centre of our decision-making.
Beyond Canada, our strategy has consistently delivered
strong organic growth and high returns. Credigy is a leader
in U.S. consumer finance in select niches, while ABA Bank is a
thriving bank in Cambodia. Both Credigy and ABA Bank are
well-positioned to continue to deliver attractive earnings
growth over the long term.
CCrreeaattiinngg PPoossiittiivvee EEccoonnoommiicc,, SSoocciiaall aanndd
EEnnvviirroonnmmeennttaall IImmppaaccttss
Throughout the pandemic, the Bank continued to move
forward to tackle risks and opportunities across the ESG
spectrum—from talent development, employee well-being,
and inclusion and diversity—to minimizing our environmental
impacts and developing our roadmap to carbon neutrality
by 2050. Our goals are to contribute to developing a
greener economy, to create an engaging employee
experience, and ultimately, to drive the sustainable growth
of the Bank.
OOuurr lleeaaddeerrsshhiipp tteeaamm aanndd oovveerr 2266,,000000 eemmppllooyyeeeess
ccrreeaatteedd ppoossiittiivvee eeccoonnoommiicc,, ssoocciiaall aanndd eennvviirroonnmmeennttaall
iimmppaaccttss iinn 22002211,, ccoonnttrriibbuuttiinngg nnoott oonnllyy ttoo tthhee BBaannkk’’ss
lloonngg--tteerrmm ssuucccceessss bbuutt aallssoo ttoo aa mmoorree ssuussttaaiinnaabbllee
ffuuttuurree ffoorr aallll oouurr ssttaakkeehhoollddeerrss..
National Bank of Canada
2021 Annual Report
3
MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr (cont.)
We face both opportunities and challenges as we pursue
our ESG commitments, which are integrated at every level
of our organization and overseen by a robust governance
framework. We are committed to setting concrete and
ambitious objectives—as demonstrated by additional
commitments made in 2021—while remaining transparent
and regularly communicating our progress.
In closing, we thank our Board of Directors for their
stewardship of the Bank as well as the members of the
Office of the President for their leadership and important
role as ambassadors of our culture, mission, and values. We
have a strong leadership team and bench strength at the
Bank, resulting in a seamless CEO transition at this fiscal
year-end.
LLooookkiinngg FFoorrwwaarrdd:: BBuuiillddiinngg oonn oouurr SSttrreennggtthhss
On the heels of strong performance in 2021, we look to the
future with cautious optimism and with confidence in our
solid foundations: Our culture; our strategic positioning; our
discipline when it comes to capital, risk, and cost, and our
commitment to driving performance.
TThhee BBaannkk iiss wweellll--ppoossiittiioonneedd ttoo ccoonnttiinnuuee ddeelliivveerriinngg
ssoolliidd rreettuurrnnss ttoo sshhaarreehhoollddeerrss oovveerr tthhee lloonngg tteerrmm
aass wwee eenntteerr aa nneeww eeccoonnoommiicc ccyyccllee.. WWee llooookk ttoo tthhee
ffuuttuurree ccooggnniizzaanntt aanndd rreeaaddyy ttoo aaddaapptt ttoo tthhee cchhaalllleennggeess
aanndd ooppppoorrttuunniittiieess aahheeaadd..
Our ability to succeed in the next chapter for the Bank will
be enabled by our culture of agility and collaboration, which
we must further cultivate as we seek to retain and attract
the best talent in a challenging labour market and to meet
the evolving needs of today’s workforce. As we grow, we
the
that we support and
must ensure
communities in which we are present, and we must also
continue to help the transition towards a net-zero carbon
economy.
represent
On behalf of the Office of the President, and with a special
thank you from our former CEO after nearly 15 years at the
helm, we wish to sincerely thank our dedicated employees
for their commitment to the Bank. We also thank our clients
for partnering with us and our shareholders for their
continued support.
LLaauurreenntt FFeerrrreeiirraa
President and Chief
Executive Officer
LLoouuiiss VVaacchhoonn
Former President and
Chief Executive Officer
Laurent
Ferreira
Louis
Vachon
4
National Bank of Canada
2021 Annual Report
MMeemmbbeerrss ooff tthhee OOffffiiccee ooff tthhee PPrreessiiddeenntt
LLaauurreenntt FFeerrrreeiirraa
President and
Chief Executive Officer
WWiilllliiaamm BBoonnnneellll
Executive Vice-President,
Risk Management
SSttéépphhaannee AAcchhaarrdd
Executive Vice-President,
Commercial Banking
and Insurance
MMaarrttiinn GGaaggnnoonn
Executive Vice-President,
Wealth Management;
Co-President and Co-Chief
Executive Officer,
National Bank Financial
LLuucciiee BBllaanncchheett
Executive Vice-President,
Personal Banking and
Client Experience
NNaatthhaalliiee GGéénnéérreeuuxx
Executive Vice-President,
Operations
DDeenniiss GGiirroouuaarrdd
Executive Vice-President and
Head, Financial Markets
BBrriiggiittttee HHéébbeerrtt
Executive Vice-President,
Employee Experience
JJuulliiee LLéévveessqquuee
Executive Vice-President,
Information Technology
GGhhiissllaaiinn PPaarreenntt
Chief Financial Officer
and Executive
Vice-President, Finance
National Bank of Canada
2021 Annual Report
5
MMeessssaaggee FFrroomm tthhee CChhaaiirrmmaann
ooff tthhee BBooaarrdd
CCuullttiivvaattiinngg OOuurr TTaalleenntt aanndd CCuullttuurree
The Board remains committed to talent development and
succession planning across all areas of the Bank. From our
corporate offices to our branches, we must attract and
retain increasingly mobile talent in a competitive labour
market. The Board continues
to work closely with
management to ensure that the Bank has the right
strategies and tools in place for a post-pandemic world.
We must also cultivate our culture of adaptability to
maintain a dynamic workplace where employees can grow
and thrive. In 2021, the Bank published its first inclusion and
diversity booklet outlining its three-year strategy, areas of
action, partnerships, and performance indicators. The Board
continues to actively monitor the Bank’s progress on these
fronts and to support management in its efforts to remain
an employer of choice while promoting our culture as a key
competitive advantage.
CClliimmaattee CCoommmmiittmmeennttss
The Bank’s ESG strategy, including its efforts to manage
climate-related risks and opportunities, is one of the
Board’s top priorities. In recent years, the Bank has adopted
several measures to strengthen its climate commitments,
notably by supporting the UN’s Principles for Responsible
the
our
Banking,
recommendations made by the Financial Stability Board’s
Task Force on Climate-related Financial Disclosures (TCFD),
through our responsible investments and, most recently, by
setting an ambitious greenhouse gas (GHG) emissions
reduction target by 2050 in line with the Paris Agreement.
disclosure with
aligning
by
Throughout 2021 and
in the context of the ongoing
pandemic, the Bank continued to prioritize the well-being of
its employees and clients. The Board is proud of the
compassion shown by the Bank, reflecting our commitment
to our One Mission of Putting People First.
The Board is equally proud of the exceptional performance
delivered across the franchise last year. The Bank’s results
confirm the sound strategic choices made over the years
and its strong culture of agility.
While continuing to provide counsel and support to senior
management in a complex environment, the Board forged
ahead with key long-term priorities in a fast-evolving
industry. Priority areas in 2021 included succession planning;
oversight of key risks; culture and talent development;
technology; environmental, social and governance (ESG)
matters; and strategic planning.
CCEEOO SSuucccceessssiioonn
In many ways, 2021 was a year of transition, as the Board
completed a rigorous multi-year succession process for the
Bank’s CEO. Louis Vachon, our CEO since 2007, announced
his intention to retire at the end of October 2021, and the
Board appointed Laurent Ferreira to succeed him.
During Louis’ nearly 15-year tenure as CEO, the Bank made
remarkable financial and cultural progress. Louis helped
build a strong, diversified, and agile Bank that has
experienced sustained growth in Canada and abroad. The
Board both recognizes and thanks him for his invaluable
contributions through the years and for the strong legacy
he leaves behind.
The Board is pleased to be able to count on Laurent
Ferreira to lead the Bank in its next chapter. Laurent has a
strong track record of strategic leadership as well as a
deep understanding of the Bank, the banking industry,
global markets, and risk management. Having been a key
player in the Bank’s multi-year transformation and cultural
shift, Laurent also led the development of our new three-
year strategic plan. The Board has full confidence in the
executive team’s ability to pursue the Bank’s continued
success with Laurent at the helm.
6
National Bank of Canada
2021 Annual Report
Message From the Chairman of the Board (cont.)
This past year, the Bank took additional meaningful steps
by publishing its second TCFD report and by joining the
Partnership for Carbon Accounting Financials, a global
partnership of financial institutions created to develop a
common approach to assess and disclose the GHG
emissions associated with client loans and investments. In
late 2021, the Bank joined the Net-Zero Banking Alliance, a
global
initiative to accelerate efforts to
address climate change.
industry-led
Achieving carbon neutrality by 2050 from a client lending
and investment perspective remains one of our industry’s
biggest commitments and challenges. We continue to
actively work to establish a science-based framework of
metrics and interim targets, a crucial step towards the
development of our roadmap to carbon neutrality.
BBooaarrdd RReenneewwaall
In 2021, Raymond Bachand completed a seven-year term
as a director, and we sincerely thank him for his many
contributions during his tenure. His extensive experience,
particularly in major public office positions, has been
instrumental to the Board’s work since 2014. We welcomed
Macky Tall to fill the vacancy and couldn’t be more pleased
to have him on board. A partner and chair of The Carlyle
Group’s Infrastructure group since September 2021, and
having previously served 16 years in executive positions at
the Caisse de dépôt et placement du Québec, Macky
brings extensive experience in finance, in business risk
management as well as in sustainable development. As
part of our CEO succession process, Laurent Ferreira also
joined the Board in 2021, in anticipation of Louis Vachon’s
retirement.
RReeaaddyy ffoorr tthhee FFuuttuurree
As Chair, I am incredibly proud of how the Bank has
adapted and navigated what has become a prolonged
and multi-year pandemic. We have not compromised on
our ability to show compassion while
leveraging our
strengths to deliver a stellar financial performance, and we
have forged ahead with key priorities to ensure our long-
term success.
None of this would have been possible without the great
dedication and passion of our employees and strong
leadership team, and for this I thank them. I also wish to
reiterate the Board’s commitment to our employees, clients,
communities and shareholders, and to delivering long-term
value for all stakeholders.
The Bank has a strong foundation and resilient businesses.
We look forward with confidence and optimism under new
leadership, and with a winning
team and culture.
Regardless of the challenges that may lie ahead, we are
ready for the future.
JJeeaann HHoouuddee
Chairman of the Board of Directors
For more information regarding the Bank’s governance,
please refer to the Statement of Corporate Practices
available on the Bank’s website at nbc.ca.
National Bank of Canada
2021 Annual Report
7
MMeemmbbeerrss ooff tthhee BBooaarrdd ooff DDiirreeccttoorrss
JJeeaann HHoouuddee
Quebec City, Quebec, Canada
Chairman of the Board of
Directors,
National Bank of Canada
and Corporate Director
Director since March 2011
MMaannoonn BBrroouuiilllleettttee
New York, New York,
United States
Chief Operating Officer and
Deputy Chief Executive Officer,
Verizon Consumer Group
Director since April 2020
KKaarreenn KKiinnsslleeyy
Ottawa, Ontario, Canada
Corporate Director
Director since December 2014
MMaarryyssee BBeerrttrraanndd
Westmount, Quebec, Canada
Corporate Director
Director since April 2012
PPiieerrrree BBlloouuiinn
Montreal, Quebec, Canada
Corporate Director
Director since September 2016
PPiieerrrree BBooiivviinn
Montreal, Quebec, Canada
President and Chief Executive
Officer, Claridge inc.
Director since April 2013
YYvvoonn CChhaarreesstt
Quebec City, Quebec, Canada
Corporate Director
Director since April 2020
PPaattrriicciiaa CCuurraaddeeaauu--GGrroouu
Montreal, Quebec, Canada
Corporate Director
Director since April 2019
LLaauurreenntt FFeerrrreeiirraa
Westmount, Quebec, Canada
President and Chief Executive
Officer,
National Bank of Canada
Director since February 2021
RReebbeeccccaa MMccKKiilllliiccaann
Oakville, Ontario, Canada
Chief Executive Officer,
McKesson Canada
Director since October 2017
RRoobbeerrtt PPaarréé
Westmount, Quebec, Canada
Strategic Advisor,
Fasken Martineau DuMoulin LLP
and Corporate Director
Director since April 2018
LLiinnoo AA.. SSaappuuttoo
Montreal, Quebec, Canada
Chief Executive Officer and
Chairman of the Board of Directors,
Saputo Inc.
Director since April 2012
AAnnddrrééee SSaavvooiiee
Dieppe, New Brunswick, Canada
President and Chair of the
Board of Directors,
Acadian Properties Ltd.
Director since April 2015
MMaacckkyy TTaallll
Indialantic, Florida,
United States
Chair of the Infrastructure Group
of The Carlyle Group Inc.
Director since April 2021
PPiieerrrree TThhaabbeett
St-Georges, Quebec, Canada
President, Boa-Franc inc.
Director since March 2011
HHuummaann RReessoouurrcceess CCoommmmiitttteeee
Pierre Boivin (Chair)
Maryse Bertrand
Pierre Blouin
Yvon Charest
Rebecca McKillican
Robert Paré
CCoonndduucctt RReevviieeww aanndd CCoorrppoorraattee
GGoovveerrnnaannccee CCoommmmiitttteeee
Yvon Charest (Chair)
Patricia Curadeau-Grou
Jean Houde
Robert Paré
Andrée Savoie
BBooaarrdd CCoommmmiitttteeeess
AAuuddiitt CCoommmmiitttteeee
Karen Kinsley (Chair)
Maryse Bertrand
Pierre Blouin
Andrée Savoie
Pierre Thabet
RRiisskk MMaannaaggeemmeenntt CCoommmmiitttteeee
Pierre Thabet (Chair)
Yvon Charest
Patricia Curadeau-Grou
Karen Kinsley
Lino A. Saputo
Macky Tall
TTeecchhnnoollooggyy SSuubbccoommmmiitttteeee
Pierre Blouin (Chair)
Patricia Curadeau-Grou
Rebecca McKillican
8
National Bank of Canada
2021 Annual Report
OUR ONE MISSION
We exist to have a POSITIVE IMPACT
in people’s lives.
By building long-term relationships
with our clients, employees and communities.
People first.
Why do we need a One Mission?
Our One Mission is aligned with our continued efforts to drive
social and economic development. In response to changing
trends in the banking industry, we’ve adopted a people-first
approach that will help us achieve our objectives and boost
our collaboration with stakeholders.
How is our One Mission put
into practice?
› Through the experiences we want to deliver
to our clients, our employees and the communities
we serve.
› Through behaviours that reflect our values:
partnership, empowerment and agility.
› Through the way employees work together to
boost client satisfaction, employee engagement
and community involvement.
› Through the initiatives we prioritize to have
a positive impact.
Integral to our One Mission
is support for sustainable
development.
We incorporate environmental,
social, and governance (ESG)
matters into our business
and operating decisions.
Our ESG Commitments
In 2021, the Bank announced its commitment to the
following initiatives:
The Bank also pursued its commitment to the following
global initiatives:
› Partnership for Carbon Accounting Financials (PCAF):
The Bank has joined a global partnership of financial
institutions that work together to develop an approach to
assess and disclose the greenhouse gas (GHG) emissions
resulting from their lending and investment activities.
› United Nations Net-Zero Banking Alliance (NZBA): The Bank
has joined this alliance that furthers banks’ efforts to help
address climate change by aligning financing activities
with net-zero emissions by 2050.
› United Nations (UN) Principles for Responsible Banking
› United Nations Environment Programme Finance Initiative
(UNEP FI)
› UN Principles for Responsible Investment (PRI)
› UN Women’s Empowerment Principles
› United Nations Global Business Standards of Conduct
for Tackling Discrimination Against Lesbian, Gay, Bi,
Trans and Intersex People (LGBTI)
The Bank supports the Task Force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board. In 2021,
it published a new report on the 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 in people’s lives.
Our ESG principles reflect our commitment to building a sustainable future while representing
the best interests of stakeholders.
ENVIRONMENT
SOCIAL
GOVERNANCE
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
2021 Annual Report
11
Our ESG Achievements
Environment
We are working to develop a green economy
› Adoption of a net-zero GHG emissions target with
interim targets for our operating and financing
activities by 2050. This target is in line with the most
ambitious goal of the Paris Agreement, limiting
global warming to 1.5 °C.
› Protecting the Arctic and position on coal:
We’ve formalized the Bank’s practice of not offering
or granting new services related to oil and gas
exploration, exploitation or production in the Arctic.
The Bank has also made an official commitment
not to finance new thermal coal mining and
processing activities.
› National Bank Investments’ OP4+ process:
98% of assets under management comply with
the UN Principles for Responsible Investment.
For more information: nbc.ca
Social
We enrich communities
The Bank has pursued a number of initiatives
launched in 2020 to support its employees and
provide assistance to clients and communities
across Canada affected by the COVID-19 pandemic.
Promoting Inclusion and Diversity
› Publication of a first booklet entirely dedicated
to inclusion and diversity, with the title Take action
for a more inclusive future today.
› For the third year in a row, the Bank was selected
for the Bloomberg Gender-Equality Index.
› The Bank has participated in a number of initiatives
intended to actively support women, cultural
communities, the LGBTQ+ community, persons
with disabilities and Indigenous peoples.
Supporting the Community
› Over $6 million in donations announced to support
health and community outreach programs.
› Over $3 million donated to enhance relationships
between the education sector and the business world.
› Like every year, we gave back millions of dollars
to the community through donations, sponsorships,
and fundraisers in addition to supporting hundreds
of organizations across Canada.
Governance
We govern according to the highest standards
› Publication of our second Report on Environmental,
Social and Governance Advances.
› The mandates of all the committees of the Board
of Directors include ESG-related responsibilities.
› Succession planning for directors takes into account
the Board’s diversity policy (gender, age, designated
groups, sexual orientation, ethno-cultural groups
and geographic origins).
› Succession planning for all senior management
positions, including the President and Chief
Executive Officer.
RRiisskk DDiisscclloossuurreess
In 2012, the Financial Stability Board (FSB) formed a working group, the Enhanced Disclosure Task Force (EDTF), that was mandated to develop principles for
enhancing the risk disclosures of major banks, to recommend improvements to current risk disclosures, and to identify risk disclosure best practices used by
major financial institutions. The EDTF published a report entitled Enhancing the Risk Disclosures of Banks, which contains 32 recommendations. The Bank
makes every effort to ensure overall compliance with those recommendations and is continuing to enhance its risk disclosures to meet the best practices on
an ongoing basis. The risk disclosures required by the EDTF are provided in this Annual Report and in the document entitled Supplementary Regulatory Capital
and Pillar 3 Disclosure available on the Bank’s website at nbc.ca.
AAnnnnuuaall
RReeppoorrtt
PPaaggeess
SSuupppplleemmeennttaarryy
RReegguullaattoorryy CCaappiittaall
aanndd PPiillllaarr 33 DDiisscclloossuurree(1)
GGeenneerraall
1
2
3
4
Location of risk disclosures
Management’s Discussion and Analysis
Consolidated Financial Statements
Supplementary Financial Information
Supplementary Regulatory Capital and Pillar 3 Disclosure
Risk terminology and risk measures
Top and emerging risks
New key regulatory ratios
RRiisskk ggoovveerrnnaannccee aanndd rriisskk mmaannaaggeemmeenntt
5
6
7
8
Risk management organization, processes and key functions
Risk management culture
Key risks by business segment, risk management
and risk appetite
Stress testing
9
10
11
12
13
CCaappiittaall aaddeeqquuaaccyy aanndd rriisskk--wweeiigghhtteedd aasssseettss ((RRWWAA))
Minimum Pillar 1 capital requirements
Reconciliation of the accounting balance sheet to
the regulatory balance sheet
Movements in regulatory capital
Capital planning
RWA by business segment
and by risk type
Capital requirements by risk and RWA calculation method
Banking book credit risk
Movements in RWA by risk type
Assessment of credit risk model performance
14
15
16
17
LLiiqquuiiddiittyy
18
Liquidity management and components of the liquidity buffer
FFuunnddiinngg
19
20
21
Summary of encumbered and unencumbered assets
Residual contractual maturities of balance sheet items and
off-balance-sheet commitments
Funding strategy and funding sources
MMaarrkkeett rriisskk
22
23
24
25
Linkage of market risk measures to balance sheet
Market risk factors
VaR: Assumptions, limitations and validation procedures
Stress tests, stressed VaR and backtesting
CCrreeddiitt rriisskk
26
27
28
29
30
Credit risk exposures
Policies for identifying impaired loans
Movements in impaired loans and allowances for credit losses
Counterparty credit risk relating to derivatives transactions
Credit risk mitigation
OOtthheerr rriisskkss
31
32
Other risks: Governance, measurement and management
Publicly known risk events
(1)
(2)
Fourth quarter 2021.
These pages are included in the document entitled Supplementary Financial Information – Fourth Quarter 2021.
13
59 to 107, 119, 121 and 122
Notes 1, 7, 16, 23 and 29
69 to 107
16 to 18, 26 and 73 to 78
60 to 63, 94 and 98 to 101
69 to 88, 94 to 96 and 101
69 and 70
68 to 70, 73 and 74
59, 70, 82, 92, 93 and 96
60 to 63
66
59 to 68
68
78 to 82
67
73, 79 to 82 and 87
94 to 101
97 and 98
221 to 225
101 to 103
89 and 90
87 to 93, 210 and 211
91
87 to 93
86 and 172 to 183
83, 84, 146 and 147
119, 121, 122 and 172 to 183
83 to 85 and 190 to 193
81 to 84 and 169
77, 78 and 103 to 107
16 to 18, 26, 103 and 104
20 to 30(2)
5 to 52
7 to 13, 16 and 17
6
6
6
6
35
18 to 44 and 20 to 28(2)
25 to 27(2)
37 to 44, 29(2) and 30(2)
20, 24 and 42 to 52
National Bank of Canada
13
National Bank of Canada2021 Annual Report
Management’s Discussion
and Analysis
NNoovveemmbbeerr 3300,, 22002211
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, 2021 (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, 2021. 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. Information on the Bank's website mentioned herein is not and should not be considered incorporated by reference into the
2021 Annual Report, the Management's Discussion and Analysis, or the Consolidated Financial Statements.
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
1166
1188
2222
2233
2277
3300
3311
3366
4411
4466
5511
Quarterly Financial Information
Analysis of the Consolidated Balance Sheet
Securitization and Off-Balance-Sheet Arrangements
Capital Management
Risk Management
Critical Accounting Policies and Estimates
Future Accounting Policy Changes
Additional Financial Information
Glossary
5522
5533
5577
5599
6699
110088
111133
111144
112233
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
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 2022 and beyond, the strategies or actions that will be taken to achieve 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 verbs or
words such as “outlook”, “believe”, “foresee”, “forecast”, “anticipate”, “estimate”, “project”, “expect”, “intend” and “plan”, in their future or conditional forms, notably verbs such as “will”, “may”, “should”,
“could” or “would” as well as similar terms and expressions. 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 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 2022, 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 forward-
looking statements. These risk factors include credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation risk, strategic risk, environmental and social risk, and
certain emerging risks or risks deemed significant, all of which are described in greater detail in the Risk Management section beginning on page 69 of this Annual Report. These risk factors also include, among
others, the general economic environment and financial market conditions in Canada, the United States, and other countries where the Bank operates; exchange rate and interest rate fluctuations; higher funding
costs and greater market volatility; changes made to fiscal, monetary and other public policies; changes made to regulations that affect the Bank’s business; geopolitical and sociopolitical uncertainty; the
transition to a low-carbon economy and the Bank’s ability to satisfy stakeholder expectations on environmental and social issues; significant changes in consumer behaviour; the housing situation, real estate
market, and household indebtedness in Canada; the Bank’s ability to achieve its long-term strategies and key short-term priorities; the timely development and launch of new products and services; the Bank’s
ability to recruit and retain key personnel; technological innovation and heightened competition from established companies and from competitors offering non-traditional services; changes in the performance
and creditworthiness of the Bank’s clients and counterparties; the Bank’s exposure to significant regulatory matters or litigation; changes made to the accounting policies used by the Bank to report financial
information, including the uncertainty inherent to assumptions and critical accounting estimates; changes to tax legislation in the countries where the Bank operates, i.e., primarily Canada and the United States;
changes made to capital and liquidity guidelines as well as to the presentation and interpretation thereof; 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
major events affecting the local and global economies, including international conflicts, natural disasters, and public health crises such as the COVID-19 pandemic. The foregoing list of risk factors is not
exhaustive. Additional information about these risk factors is provided in the Risk Management section and in the COVID-19 Pandemic section of this Annual Report and may be updated in the quarterly
shareholders’ report subsequently published. 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
CCOOVVIIDD--1199 PPaannddeemmiicc
On March 11, 2020, the World Health Organization (WHO) declared that the COVID-19 outbreak constituted a pandemic, requiring important protective
measures to be taken to prevent overcrowding of health services and to strengthen preventive hygiene. This global pandemic prompted many countries,
including Canada, to implement lockdown and social distancing measures designed to prevent new outbreaks. In many countries, those measures included
the closing of aerial, maritime, and land borders.
During the summer of 2020, some of the restrictions imposed at the start of the pandemic were eased, but subsequent waves of COVID-19 in autumn 2020
forced authorities in a number of countries, including Canada, to reintroduce lockdown measures, effectively shutting down parts of the economy again. During
the winter of 2021, a vaccination campaign began in Canada and picked up steam in the spring, leading to a reopening in early summer 2021. The authorities
in many countries, including Canada, actively worked to ensure that widespread vaccination coverage was achieved as quickly as possible. However,
uncertainty remains regarding the long-term effectiveness of the vaccines, the acceptance thereof by the public, and the anticipated reduction of infection
rates, especially given a rise in cases linked to COVID-19 variants, which appear to be more contagious. Certain measures by the public health authorities in
Canada are expected to remain in place to continue limiting the spread of COVID-19 and its variants.
In Canada, banking services are considered essential services and were therefore 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.
IImmppaacctt ooff tthhee CCOOVVIIDD--1199 RRiisskk FFaaccttoorr
At its onset, the COVID-19 pandemic had disruptive and adverse effects in the countries where the Bank operates and, more broadly, on the global economy.
Among other disruptions, COVID-19 sent stock markets into sharp decline and rendered them more volatile, disrupted global supply chains, triggered a rapid
and sudden rise in unemployment, and prompted an economic slowdown. In spring 2020, governments, monetary authorities, and regulators intervened to
support the economy and the financial system, notably by deploying fiscal and monetary measures designed to increase liquidity and support incomes. They
also eased the capital and liquidity requirements imposed on financial institutions. While a global economic rebound was seen during fiscal 2021, if the
COVID-19 pandemic persists, in particular through subsequent waves, its impacts on the global economy could worsen and the measures in place might not be
enough over the long term to completely avoid recessive conditions.
Aside from its impacts on the global economy and in the countries where the Bank operates, the COVID-19 pandemic has had, and may continue to have,
impacts on the Bank, on the way in which it operates, and on its clients. Since much of the Bank's business involves granting loans or providing liquidity to
clients (which include individuals, businesses, and governments), the impacts of the COVID-19 pandemic on these clients could have a significant adverse
effect on the Bank's business, results of operations, financial position, and reputation by, for example, causing higher credit losses. Given the measures taken
by the Bank to support telework, which could continue for some time, and given increased client use of digital tools, the Bank, its clients, and its service
providers are also exposed to a greater risk of cyberthreats, cyberattacks, breaches, and fraudulent activities as well as to operational risks. The Bank closely
monitors its operations to detect any indications of increased phishing, fraud, privacy breaches, and cyberattacks, and it raises awareness about information
security threats among its clients, employees, and service providers. The Bank is unaware of how the societal landscape (including changes in consumer
behaviour, in policies, and in regulations) will evolve or how it will have changed after the COVID-19 pandemic.
Given these circumstances, the COVID-19 pandemic has put into perspective and may continue to put into perspective many of the top and emerging risks to
which the Bank is exposed, i.e., credit risk, market risk, liquidity and funding risk, operational risk, regulatory compliance risk, reputation 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 is continuing to closely monitor the potential impacts of the COVID-19 pandemic. It is not possible to predict the full impacts that the pandemic will
have on the global economy, on the countries in which the Bank operates, on the Bank’s clients, and on the Bank itself, including its business activities,
results of operations, financial position, regulatory capital and liquidity ratios, reputation, and ability to satisfy regulatory requirements. The actual impacts
will depend on future events that are highly uncertain, including the extent, severity, and duration of the COVID-19 pandemic, and on the effectiveness of
actions and measures taken by governments, monetary authorities, and regulators over the long term.
RReelliieeff MMeeaassuurreess ffoorr CClliieennttss
In response to the economic and financial environment caused by COVID-19, the Bank announced, from the onset of the pandemic, a series of measures to
support the clients of its main business segments. Some of the measures were introduced by the Canadian government and regulatory authorities, together
with the Canadian banks, and were rolled out quickly to come to the assistance of individuals and businesses. These measures were designed to provide
financial support specifically to clients facing the economic consequences of COVID-19.
16
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
COVID-19 Pandemic
A number of the relief measures offered to the Bank’s clients at the start of the pandemic ended in 2020, although some measures were being offered as part
of various government programs in which the Bank is participating. These measures consist mainly of loans backed by government guarantees, particularly for
businesses operating in sectors hit hardest by the pandemic. In the normal course of business, the Bank is continuing to address the specific needs of its
clients to support them during this unprecedented crisis.
KKeeyy MMeeaassuurreess IInnttrroodduucceedd bbyy tthhee RReegguullaattoorryy AAuutthhoorriittiieess
Since the start of the pandemic, several Government of Canada agencies, the 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 to improve the stability
of the Canadian financial system and economy in response to the challenges posed by COVID-19 and economic conditions. Described in point form below are
the key measures introduced by OSFI and the Bank of Canada in March 2020 that continued to affect the Bank during the fiscal year ended October 31, 2021.
Capital Management
Domestic stability buffer (the buffer): On March 13, 2020, OSFI lowered the buffer from 2.25% of risk-weighted assets to 1.0%, effective on that date. The
purpose of this measure was to raise the capacity of domestic systemically important banks (D-SIBs) to supply credit to the economy during an expected
period of disruption related to COVID-19 and market conditions. OSFI also indicated that it was expecting all banks to cease any dividend increases or
share buybacks. On June 17, 2021, OSFI raised the buffer level such that it would be 2.5% starting October 31, 2021. On November 4, 2021, OSFI updated
its capital distribution expectations by permitting financial institutions to raise regular dividends and, subject to OSFI approval, buy back shares.
Treatment of regulatory capital for expected credit loss accounting purposes: On March 27, 2020, OSFI introduced transitional arrangements applicable to
the ECL provisioning method set out in the Basel framework. Under the arrangement, a portion of allowances that would otherwise have been included in
Tier 2 capital will be included in CET1 capital. While the Basel Committee on Banking Supervision (BCBS) is allowing jurisdictions to apply a 100% add-
back of allowances to CET1 capital, OSFI believed that a maximum add-back of 70% was appropriate. This increased amount is adjusted for tax effects and
multiplied by a scaling factor that decreases over time. The scaling factor has been set at 70% for fiscal 2020, at 50% for fiscal 2021, and at 25% for fiscal
2022. Given the three-year transition period, banks can phase-in the impact of increased ECL allowances in CET1 capital while also acknowledging that
these allowances have been recorded.
Reduction of stressed Value-at-Risk (VaR) multipliers under market risk: On March 27, 2020, OSFI announced that banks subject to market risk capital
requirements and using the AIRB approach could reduce by two the stressed VaR multiplier that was being applied at the end of the first quarter of 2020.
This reduction could be applied retrospectively to the beginning of the second quarter of 2020. On March 16, 2021, OSFI announced the unwinding of this
temporary reduction and returned the VaR multipliers back to the pre-pandemic level, with an implementation date of May 1, 2021.
Capital floor: On March 27, 2020, OSFI lowered 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 AIRB approach.
Leverage ratio: On March 27, 2020, OSFI announced that banks could temporarily exclude the following exposures for leverage ratio purposes: (1) central
bank reserves; (2) sovereign-issued securities that qualify as high-quality liquid assets (HQLA) under the Liquidity Adequacy Requirements guideline. On
November 5, 2020, OSFI announced that this treatment would remain in place until December 31, 2021. On August 12, 2021, OSFI confirmed that the
exclusion of sovereign-issued securities that qualify as HQLA would not be extended beyond December 31, 2021. Central bank reserves will, however,
continue to be excluded from the leverage ratio exposure measure.
Margin required for non-centrally cleared derivatives: In line with a decision by the BCBS and International Organization of Securities Commissions, on
March 27, 2020, OSFI extended by one year the deadline for implementing the final two phases of the initial margin requirements for non-centrally cleared
derivatives outlined in OSFI’s E-22 guideline. 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, as of September 1, 2021, entities with an AANA of non-centrally cleared derivatives greater than $75 billion are
being 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. On March 27,
2020, OSFI 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. On November 29, 2021, OSFI postponed the implementation of the above-mentioned Basel III reform items until the second 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 postponed to the first quarter of 2024.
For additional information, refer to the Capital Management section of this MD&A.
National Bank of Canada
17
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
COVID-19 Pandemic
Liquidity Management
Monetary policy: Since the start of the pandemic, the Bank of Canada has used monetary policy to respond to the COVID-19 crisis. For example, it lowered
the overnight rate target by 150 basis points to 0.25%. Longer-term interest rates have also declined significantly, and the interest rates of the
Government of Canada curve are now mostly below 1%.
Liquidity facilities and asset purchase program of the Bank of Canada: The liquidity facilities include the term repo facility for which, on April 3, 2020, the
Bank of Canada announced that the terms of the loans had been extended and the list of eligible collateral expanded. A new standing term liquidity
facility (STLF) was introduced to round out 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 stabilized
the funding markets and supported the flow of credit to households and businesses. On March 23, 2021, given continued operational improvement in the
Canadian financial markets in general, the Bank of Canada announced an end to the programs deployed in 2020.
Covered bond limit: The covered bond limit was temporarily increased in April 2020 to provide better access to Bank of Canada facilities, and the banks
were 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). On April 6, 2021, OSFI announced that the temporary increase to the covered bond limit was being unwound effective
immediately.
The Bank entered the crisis in a strong liquidity position. Throughout fiscal years 2021 and 2020, it has maintained sound and prudent management of
liquidity. 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.
FFiinnaanncciiaall RReeppoorrttiinngg MMeetthhoodd
The Bank’s consolidated financial statements are prepared in accordance with IFRS, as issued by the IASB. The financial statements also comply with
section 308(4) of the Bank Act (Canada), which states that, except as otherwise specified by OSFI, the consolidated financial statements are to be prepared in
accordance with IFRS, which represent Canadian GAAP. None of the OSFI accounting requirements are exceptions to IFRS.
On November 1, 2020, the Bank amended the classification of certain Consolidated Statement of Income amounts to better reflect the nature of the revenues
reported in the Wealth Management segment. The reclassifications were made retrospectively among the Non-interest income items. These reclassifications
had no impact on the totals of these income items or on Net income.
NNoonn--GGAAAAPP aanndd OOtthheerr FFiinnaanncciiaall MMeeaassuurreess
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. Regulation 52-112 respecting Non-GAAP and Other Financial Measures Disclosure (Regulation 52-112) prescribes
disclosure requirements that apply to the following measures used by the Bank:
non-GAAP financial measures;
non-GAAP ratios;
supplementary financial measures;
capital management measures;
segment measures.
NNoonn--GGAAAAPP FFiinnaanncciiaall MMeeaassuurreess
The Bank uses non-GAAP financial measures that do not have standardized meanings under GAAP and that therefore may not be comparable to similar
measures used by other companies. 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 excludes from its results certain specified items that are inherently
unpredictable. In addition, 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.
18
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
The non-GAAP financial measures used by the Bank are as follows: Net interest income on a taxable equivalent basis, Non-interest income on a taxable
equivalent basis and excluding specified items, Non-interest income on a taxable equivalent basis, Total revenues on a taxable equivalent basis and excluding
specified items, Total revenues on a taxable equivalent basis, Non-interest expenses excluding specified items, Income before provisions for credit losses and
income taxes on a taxable equivalent basis excluding specified items, Income before provisions for credit losses and income taxes on a taxable equivalent
basis, Income before income taxes on a taxable equivalent basis and excluding specified items, Income before income taxes on a taxable equivalent basis,
Income taxes on a taxable equivalent basis and excluding specified items, Income taxes on a taxable equivalent basis, 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, basic earnings per share excluding specified items and diluted earnings per share excluding specified items. The quantitative reconciliation of
these measures is presented in the tables in the Reconciliation on Non-GAAP Financial Measures section on pages 20 and 21 and in the Consolidated Results
table on page 27.
The Bank also uses Trading revenues (losses) on a taxable equivalent basis and Trading activity revenues on a taxable equivalent basis to assess its results,
and the quantitative reconciliations of these non-GAAP financial measures are presented in the Additional Financial Information section in Tables 4 and 5 on
page 117.
NNoonn--GGAAAAPP RRaattiiooss
The Bank uses non-GAAP ratios that do not have standardized meanings under GAAP and that therefore may not be comparable to similar measures used by
other companies. A non-GAAP ratio is a ratio in which at least one component is a non-GAAP financial measure. The Bank uses non-GAAP ratios to present
aspects of its financial performance or financial position, including efficiency ratio on a taxable equivalent basis and excluding specied items, efficiency ratio
on a taxable equivalent basis, operating leverage excluding specified items, return on common shareholders’ equity excluding specied items, and dividend
payout ratio excluding specified items. For additional information about the composition of these ratios, see the Glossary section on pages 123 to 126 of this
MD&A.
SSuupppplleemmeennttaarryy FFiinnaanncciiaall MMeeaassuurreess
A supplementary financial measure is a financial measure that: (a) is not reported in the Bank’s consolidated financial statements, and (b) is, or is intended to
be, reported periodically to represent historical or expected financial performance, financial position, or cash flows. The composition of these supplementary
financial measures is presented in the Glossary on pages 123 to 126 of this MD&A.
CCaappiittaall MMaannaaggeemmeenntt MMeeaassuurreess
The financial reporting framework used to prepare the financial statements requires disclosure that help readers assess the Bank’s capital management
objectives, policies, and processes, as set out in IFRS in IAS 1 – Presentation of Financial Statements. The Bank has its own methods for managing capital and
liquidity, and IFRS does not prescribe any particular calculation method. These measures are calculated using various OSFI guidelines and advisories, which
are based on the standards, recommendations, and best practices of the Basel Committee on Banking Supervision (BCBS) as presented in the following table.
OOSSFFII gguuiiddeelliinnee oorr aaddvviissoorryy
Capital Adequacy Requirements
Leverage Requirements
Liquidity Adequacy Requirements
Total Loss Absorbing Capacity (TLAC)
Global Systemically Important Banks (G-SIBs) –
Public Disclosure Requirements
MMeeaassuurree
Common Equity Tier 1 (CET1) capital ratio
Tier 1 capital ratio
Total capital ratio
CET1 capital
Tier 1 capital
Tier 2 capital
Total capital
Risk-weighted assets
Maximum credit risk exposure under the Basel asset classes
Leverage ratio
Total exposure
Liquid asset portfolio
Encumbered assets and unencumbered assets
Liquidity coverage ratio (LCR)
High-quality liquid assets (HQLA)
Cash inflows/outflows and net cash outflows
Net stable funding ratio (NSFR)
Available stable funding items
Required stable funding items
Key indicators – TLAC requirements
G-SIB indicators
National Bank of Canada
19
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
SSeeggmmeenntt MMeeaassuurreess
The Bank uses the sum of the total revenues and the net income of its business segments (namely, Personal and Commercial, Wealth Management, Financial
Markets, and USSF&I) to measure the materiality of each segment. Using this method to analyze results, that is, by excluding the Other heading, the Bank can
better evaluate the performance of each of its business segments.
RReeccoonncciilliiaattiioonn ooff NNoonn--GGAAAAPP FFiinnaanncciiaall MMeeaassuurreess
PPrreesseennttaattiioonn ooff RReessuullttss oonn aa TTaaxxaabbllee EEqquuiivvaalleenntt BBaassiiss aanndd EExxcclluuddiinngg SSppeecciiffiieedd IItteemmss
Year ended October 31
(millions of Canadian dollars)
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss
UUSSSSFF&&II
Net interest income
Taxable equivalent
NNeett iinntteerreesstt iinnccoommee oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
Non-interest income
Taxable equivalent
Foreign currency translation loss on disposal of subsidiaries(1)
NNoonn--iinntteerreesstt iinnccoommee oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
TToottaall rreevveennuueess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Non-interest expenses
Impairment losses on premises and equipment and on intangible assets(2)
Severance pay(3)
Charge related to Maple(4)
NNoonn--iinntteerreesstt eexxppeennsseess eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
IInnccoommee bbeeffoorree pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess aanndd iinnccoommee
ttaaxxeess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Provisions for credit losses
IInnccoommee bbeeffoorree iinnccoommee ttaaxxeess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Income taxes
Taxable equivalent
Income taxes on foreign currency translation loss on disposal of
subsidiaries(1)
Income taxes related to impairment losses on premises and equipment
and on intangible assets(2)
Income taxes on severance pay(3)
Income taxes on the charge related to Maple(4)
IInnccoommee ttaaxxeess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
NNeett iinnccoommee eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
SSppeecciiffiieedd iitteemmss aafftteerr iinnccoommee ttaaxxeess
NNeett iinnccoommee
Non-controlling interests
Non-controlling interests on the foreign currency translation loss on
disposal of subsidiaries(1)
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’ss sshhaarreehhoollddeerrss
aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’ss sshhaarreehhoollddeerrss
aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
Dividends on preferred shares and distributions on
limited recourse capital notes
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo ccoommmmoonn sshhaarreehhoollddeerrss
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
22,,558833
−−
22,,558833
11,,110033
−−
−−
11,,110033
33,,668866
11,,995588
−−
−−
−−
11,,995588
11,,772288
66
11,,772222
445566
−−
−−
−−
−−
−−
445566
11,,226666
−−
11,,226666
−−
−−
−−
11,,226666
11,,226666
444488
−−
444488
11,,772211
−−
−−
11,,772211
22,,116699
11,,227777
−−
−−
−−
11,,227777
889922
11
889911
223366
−−
−−
−−
−−
−−
223366
665555
−−
665555
−−
−−
−−
665555
665555
11,,005511
117755
11,,222266
991122
88
−−
992200
990077
−−
990077
9944
−−
−−
9944
22,,114466
11,,000011
888800
−−
−−
−−
888800
11,,226666
1100
11,,225566
115500
118833
−−
−−
−−
−−
333333
992233
−−
992233
−−
−−
−−
992233
992233
331155
−−
−−
−−
331155
668866
((1155))
770011
114466
−−
−−
−−
−−
−−
114466
555555
−−
555555
−−
−−
−−
555555
555555
22002211
2020
44,,778833
118811
44,,996644
44,,114444
88
−−
4,255
208
4,463
3,672
57
24
44,,115522
3,753
99,,111166
44,,885533
((99))
−−
−−
44,,884444
8,216
4,545
(71)
(48)
(13)
4,413
44,,227722
22
3,803
846
44,,227700
2,957
889955
118899
−−
22
−−
−−
11,,008866
33,,118844
((77))
33,,117777
−−
−−
−−
453
265
(12)
19
13
3
741
2,216
(133)
2,083
42
10
52
OOtthheerr
((220066))
66
((220000))
331144
−−
−−
331144
111144
442233
((99))
−−
−−
441144
((330000))
−−
((330000))
((9933))
66
−−
22
−−
−−
((8855))
((221155))
((77))
((222222))
−−
−−
−−
((222222))
33,,117777
2,041
((221155))
33,,118844
2,164
112233
118
33,,006611
2,046
During the year ended October 31, 2020, the Bank, through its subsidiary Credigy Ltd. (Credigy), had recorded a foreign currency translation loss on investments in foreign operations of
$24 million ($36 million taking into account income taxes and $26 million taking into account income taxes and non-controlling interests) following a disposal of two subsidiaries in Brazil.
During the year ended October 31, 2021, the Bank recorded $9 million ($7 million net of income taxes) in impairment losses on intangible assets related to technology developments.
During the year ended October 31, 2020, the Bank had 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.
During the year ended October 31, 2020, following an optimization of certain organizational structures, the Bank had recorded $48 million ($35 million net of income taxes) in severance
pay.
During the year ended October 31, 2020, the Bank had recorded a charge of $13 million ($10 million net of income taxes) related to Maple Financial Group Inc. (Maple).
National Bank of Canada
(1)
(2)
(3)
(4)
20
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
PPrreesseennttaattiioonn ooff DDiilluutteedd EEaarrnniinnggss ppeerr SShhaarree EExxcclluuddiinngg SSppeecciiffiieedd IItteemmss
Year ended October 31
(Canadian dollars)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
SSppeecciiffiieedd iitteemmss(1)
22002211
$$
88..9966
$
Foreign currency translation loss on disposal of subsidiaries
Impairment losses on premises and equipment and on intangible assets
Severance pay
Charge related to Maple
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
$$
−−
00..0022
−−
−−
88..9988
$
2020
5.70
0.08
0.15
0.10
0.03
6.06
%% cchhaannggee
5577
4488
(1)
For additional information on specified items, see the table on page 20 entitled Presentation of Results on a Taxable Equivalent Basis and Excluding Specified Items.
PPrreesseennttaattiioonn ooff RReessuullttss oonn aa TTaaxxaabbllee EEqquuiivvaalleenntt BBaassiiss
Year ended October 31
(millions of Canadian dollars)
OOppeerraattiinngg rreessuullttss
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 before income taxes
Income taxes
Net income
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
OOppeerraattiinngg rreessuullttss oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
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
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
Net income
22002211
2020
%% cchhaannggee
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
118811
88
118899
−−
44,,996644
44,,115522
99,,111166
44,,885533
44,,226633
22
44,,226611
11,,008844
33,,117777
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
208
57
265
−
4,463
3,729
8,192
4,545
3,647
846
2,801
718
2,083
1122
1133
1133
77
2200
6611
9988
5533
1111
1111
1111
77
1177
5522
5511
5533
National Bank of Canada
21
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
FFiinnaanncciiaall DDiisscclloossuurree
DDiisscclloossuurree CCoonnttrroollss aanndd PPrroocceedduurreess
The Bank’s financial information is prepared with the support of a set of disclosure controls and procedures (DC&P) that are implemented by the President and
Chief Executive Officer (CEO) and by the Chief Financial Officer and Executive Vice-President, Finance (CFO). During the year ended October 31, 2021, 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, 2021, the CEO and the CFO confirmed the effectiveness of the DC&P. These controls are designed to provide reasonable assurance that the
information disclosed in annual and interim filings and in other reports filed or submitted under securities legislation is recorded, processed, summarized and
reported within the time periods specified by that legislation. These controls and procedures are also designed to ensure that such information is accumulated
and communicated to the Bank’s management, including its signing officers, as appropriate, to allow for timely decisions regarding disclosure.
This Annual Report was reviewed by the Disclosure Committee, the Audit Committee, and the Bank’s Board of Directors (the Board), which approved it prior to
publication.
IInntteerrnnaall CCoonnttrroollss OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
The internal controls over financial reporting (ICFR) are designed to provide reasonable assurance that the financial information presented is reliable and that
the consolidated financial statements were prepared in accordance with GAAP, which are based on IFRS, unless indicated otherwise as explained on pages 18
to 21 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, 2021, that there are no material weaknesses, that the ICFR are effective and
provide reasonable assurance that the financial reporting is reliable, and that the Bank’s consolidated financial statements were prepared in accordance with
GAAP.
CChhaannggeess ttoo IInntteerrnnaall CCoonnttrroollss OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
The CEO and CFO also undertook work whereby they were able to conclude that, during the year ended October 31, 2021, no changes were made to the ICFR
that have materially affected, or are reasonably likely to materially affect, the design or operation of the ICFR.
DDiisscclloossuurree CCoommmmiitttteeee
The Disclosure Committee assists the CEO and CFO by ensuring that disclosure controls and procedures and internal control procedures for financial reporting
are implemented and operational. In so doing, the committee ensures that the Bank is meeting its disclosure obligations under current regulations and that
the CEO and CFO are producing the requisite certifications.
22
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
OOvveerrvviieeww
HHiigghhlliigghhttss
As at October 31 or for the year ended October 31
(millions of Canadian dollars, except per share amounts)
OOppeerraattiinngg rreessuullttss
Total revenues
Income before provisions for credit losses and income taxes
Net income
Net income attributable to the Bank’s shareholders and holders of other equity instruments
Return on common shareholders’ equity(1)
Dividend payout ratio(1)
EEaarrnniinnggss ppeerr sshhaarree
Basic
Diluted
OOppeerraattiinngg rreessuullttss oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(2)
Total revenues on a taxable equivalent basis and excluding specified items(2)
Income before provisions for credit losses and income taxes
on a taxable equivalent basis and excluding specified items(2)
Net income excluding specified items(2)
Return on common shareholders’ equity excluding specified items(3)
Dividend payout ratio excluding specified items(3)
Efficiency ratio on a taxable equivalent basis and excluding specified items(3)
EEaarrnniinnggss ppeerr sshhaarree eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(2)
Basic
Diluted
CCoommmmoonn sshhaarree iinnffoorrmmaattiioonn
Dividends declared
Book value(1)
Share price
High
Low
Close
Number of common shares (thousands)
Market capitalization
BBaallaannccee sshheeeett aanndd ooffff--bbaallaannccee--sshheeeett
Total assets
Loans and acceptances, net of allowances
Deposits
Equity attributable to common shareholders
Assets under administration(1)
Assets under management(1)
RReegguullaattoorryy rraattiiooss uunnddeerr BBaasseell IIIIII(4)
Capital ratios
CET1
Tier 1
Total
Leverage ratio
Liquidity coverage ratio (LCR)(4)
Net stable funding ratio (NSFR)(4)
RReegguullaattoorryy rraattiiooss uunnddeerr BBaasseell IIIIII ((aaddjjuusstteedd))(4)(5)
Capital ratios
CET1
Tier 1
Total
Leverage ratio
OOtthheerr IInnffoorrmmaattiioonn
Number of employees – Worldwide
Number of branches in Canada
Number of banking machines in Canada
22002211
2020
%% cchhaannggee
1133
2200
5533
5566
5588
5577
1111
1122
4444
4499
4488
77
1111
1122
2211
2288
3344
$$
$$
$$
88,,992277
44,,007744
33,,117777
33,,117777
2200..77 %%
3311..44 %%
$
99..0066
88..9966
99,,111166
44,,227722
33,,118844
2200..88 %%
3311..33 %%
5533..11 %%
$
$
99..0088
88..9988
22..8844
4477..9955
110044..3322
6655..5544
110022..4466
333377,,991122
3344,,662222
335555,,779955
118822,,668899
224400,,993388
1166,,220033
665511,,553300
111177,,118866
1122..44 %%
1155..00 %%
1155..99 %%
44..44 %%
115544 %%
111177 %%
1122..33 %%
1144..99 %%
1155..99 %%
44..44 %%
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
509,071
87,585
11.8 %
14.9 %
16.0 %
4.4 %
161 %
11.5 %
14.6 %
16.0 %
4.3 %
2266,,992200
338844
992277
26,517
403
940
22
((55))
((11))
(1)
(2)
(3)
(4)
(5)
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For additional information on non-GAAP ratios, see the Financial Reporting Method section on pages 18 to 21 and see the Glossary section on pages 123 to 126.
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
The adjusted regulatory ratios 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 page 17 of this MD&A.
National Bank of Canada
23
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Overview
BBuussiinneessss MMiixx(1)
Year ended October 31, 2021
(taxable equivalent basis)(2)
%
0
.
1
4
%
2
.
7
3
%
5
.
5
3
%
5
.
1
4
%
2
.
7
2
%
8
.
3
2
%
3
.
6
1
%
0
.
3
1
%
1
.
1
1
%
1
.
4
2
%
3
.
9
1
%
0
.
0
1
Personal
and
Commercial
Wealth
Management
Financial
Markets
USSF&I
Total revenue
Net income
Economic capital(3)
NNeett IInnccoommee
Year ended October 31
(millions of Canadian dollars)
77
77
11
,,
33
44
88
11
,,
33
6
1
2
,
2
3
8
0
,
2
2020
22002211
Including specified items
Excluding specified items(2)
DDiilluutteedd EEaarrnniinnggss ppeerr SShhaarree
Year ended October 31
(Canadian dollars)
66
99
..
88
88
99
..
88
6
0
.
6
0
7
.
5
AAbboouutt NNaattiioonnaall BBaannkk
The Bank carries out its activities in four business segments: Personal and Commercial, Wealth
Management, Financial Markets, and U.S. Specialty Finance and International (USSF&I). Other
operating activities, certain specified items, Treasury activities, and the operations of the
Flinks Technology Inc. (Flinks) subsidiary 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.
OObbjjeeccttiivveess aanndd 22002211 RReessuullttss
When setting its objectives, the Bank aims for a realistic challenge in the prevailing business
environment, taking into account foreseeable changes 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 into consideration, as such items are inherently unpredictable.
Management therefore excludes specified items when assessing the Bank’s performance against its
objectives.
In fiscal 2021, the Bank recorded $3,177 million in net income compared to $2,083 million in fiscal
2020, and its diluted earnings per share stood at $8.96 compared to $5.70 in fiscal 2020. The
Bank’s fiscal 2021 return on common shareholders’ equity (ROE) was 20.7% versus 14.9% in fiscal
2020. Net income excluding specified items totalled $3,184 million in fiscal 2021, and diluted
earnings per share excluding specified items stood at $8.98, up 48% from $6.06 in fiscal 2020.
Furthermore, ROE excluding specified items was 20.8% in fiscal 2021 versus 15.8% in fiscal 2020.
The following table compares the Bank’s medium-term objectives with its fiscal 2021 results.
MMeeddiiuumm--TTeerrmm OObbjjeeccttiivveess aanndd 22002211 RReessuullttss
Growth in diluted earnings per share excluding specified items(1)
ROE excluding specified items(2)
Dividend payout ratio excluding specified items(2)
CET1 capital ratio(3)
Leverage ratio(3)
MMeeddiiuumm--
tteerrmm
oobbjjeeccttiivveess
((%%))
55--1100
1155--2200
4400--5500
>> 1111..0000
>> 33..7755
22002211
rreessuullttss ((%%))
4488..22
2200..88
3311..33
1122..44
44..44
The Bank’s financial results met all of its medium-term objectives, except for the dividend payout
ratio. Growth in diluted earnings per share excluding specified items stood at 48%, significantly
surpassing the objective and was due to the lower provisions for credit losses in fiscal 2021 arising
from improvements in the macroeconomic outlook and in credit conditions compared to fiscal 2020
as well as from revenue growth in all business segments. ROE excluding specified items was slightly
above target owing to a sharp rise in net income excluding specified items. The CET1 capital ratio
and the leverage ratio, at 12.4% and 4.4%, respectively, were also above target. As for the dividend
payout ratio excluding specified items, it was below the target distribution range given the OSFI-
prescribed interruption to dividend increases, in effect since March 13, 2020, and given strong
growth in net income.
(1) For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18
to 21.
(2) For additional information on non-GAAP ratios, see the Financial Reporting Method section on pages 18 to 21 and see
the Glossary section on pages 123 to 126.
(3) For additional information on capital management measures, see the Financial Reporting Method section on pages 18
2020
22002211
to 21.
Including specified items
Excluding specified items(2)
(1) Excluding the Other heading. For additional information on
segment measures, see the Financial Reporting Method
section on pages 18 to 21.
(2) For additional information on non-GAAP financial measures,
see the Financial Reporting Method section on pages 18 to
21.
(3) For additional information on supplementary financial
measures composition, see the Glossary section on pages
123 to 126.
24
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Overview
DDiivviiddeennddss
For fiscal 2021, the Bank declared $958 million in dividends to common shareholders
(2020: $953 million), representing 31% of net income attributable to common shareholders
(2020: 50%).
AAnnnnuuaall DDiivviiddeenndd ppeerr CCoommmmoonn SShhaarree
Year ended October 31
(Canadian dollars)
RReegguullaattoorryy CCaappiittaall RRaattiiooss(1)
As at October 31, 2021, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 12.4%,
15.0% and 15.9%, i.e., above the regulatory requirements, compared to ratios of, respectively,
11.8%, 14.9% and 16.0% as at October 31, 2020. The increase in the CET1 capital ratio since
October 31, 2020 was essentially due to net income net of dividends, common share issuances
under the Stock Option Plan, and remeasurements of pension plans and other post-employment
benefit plans. These factors were partly offset by the organic growth in RWA, by the impact of the
transitional measures applicable to ECL provisioning, of which the scaling factor decreased to 50%
from 70%, by the impact of unwinding the temporary reduction of stressed VaR multipliers, and by
the impact of the acquisition of Flinks. The stability seen in the Tier 1 capital ratio and in the Total
capital ratio is explained essentially by redemptions of the Series 34 and Series 36 preferred
shares, tempered by the above-mentioned factors and by the issuance of Limited Recourse Capital
Notes (LRCN) – Series 2. As at October 31, 2021, the leverage ratio was 4.4%, stable compared to
October 31, 2020. The growth in Tier 1 capital, explained by the above-mentioned factors, and
significant growth in total exposure were partly offset by 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.
(1)
For additional information on capital management measures, see the Financial Reporting Method section on pages
18 to 21.
HHiigghh--QQuuaalliittyy LLooaann PPoorrttffoolliioo
in fiscal 2021 compared to the significant deterioration
Loans and acceptances, net of allowances for credit losses, accounted for 51% of the Bank’s total
assets and amounted to $182.7 billion as at October 31, 2021. For fiscal 2021, the Bank recorded
$2 million in provisions for credit losses, $844 million less than those recorded in fiscal 2020. This
decrease was due to lower provisions for credit losses on non-impaired loans owing to an improved
macroeconomic outlook
in the
macroeconomic outlook caused by COVID-19 in fiscal 2020. This decrease was also due to
provisions for credit losses recorded on Personal Banking impaired loans (including credit card
receivables) that were below pre-pandemic levels, in particular due to a decrease in insolvencies, a
reduction in client spending in the context of the pandemic, and various assistance measures
implemented by governments. Provisions for credit losses on impaired loans in Commercial Banking
and in the USSF&I segment (essentially the Credigy subsidiary) were also down in fiscal 2021. The
fiscal 2021 provisions for credit losses on impaired loans represented 0.11% of average loans and
acceptances compared to 0.23% in fiscal 2020.
RRiisskk PPrrooffiillee
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(1)
Provisions for credit losses on impaired loans
as a % of average loans and acceptances(1)
Net write-offs as a % of average loans and acceptances(1)
Gross impaired loans(2)
Net impaired loans(3)
22002211
22
2020
846
−− %%
0.53 %
00..1111 %%
00..0099 %%
666622
228833
0.23 %
0.16 %
817
465
(1)
(2)
(3)
For additional information on supplementary financial measures composition, see the Glossary section on pages
123 to 126.
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 impaired
loans presented in this table exclude POCI loans.
2.84
22..8844
2.66
2.44
2.28
2017
2018
2019
2020
22002211
EEvvoolluuttiioonn ooff RReegguullaattoorryy RRaattiiooss UUnnddeerr
BBaasseell IIIIII
As at October 31
%
0
.
6
1
%
9
.
4
1
%
8
.
1
1
%%
99
..
55
11
%%
00
..
55
11
%%
44
..
22
11
%
4
.
4
%%
44
..
44
2020
22002211
CET1
Tier 1
Total
Leverage ratio
BBrreeaakkddoowwnn ooff tthhee AAvveerraaggee LLooaann aanndd
AAcccceeppttaannccee PPoorrttffoolliioo(1)
As at October 31, 2021
8%
11%
4%
25%
52%
Personal Banking (2020: 52%)
Commercial Banking (2020: 25%)
Wealth Management (2020: 3%)
Financial Markets – Corporate Banking (2020: 12%)
U.S. Specialty Finance and International
(2020: 8%)
(1) Excluding loans and acceptances in the Other heading
National Bank of Canada
25
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Overview
EEccoonnoommiicc RReevviieeww aanndd OOuuttllooookk
GGlloobbaall EEccoonnoommyy
After a strong rebound, the global economy appears to be losing steam. In Europe, a rise in the number of COVID-19 cases coupled with a spike in energy
prices could certainly dampen consumer spending and business profitability. The news coming out of China has also been mixed. Given soaring electricity
prices earlier this year, Beijing was forced to impose temporary power cuts, which obviously had repercussions on manufacturing operations. Now that the
energy situation is improving, COVID-19 is limiting plant operations. The woes of the real estate sector, which is currently engaged in a painful debt reduction
process, are also noteworthy. Despite these challenges, the global economy is still expected to grow by 4.0%(1) in 2022, after posting 5.5%(1) growth this year.
U.S. economic growth slowed abruptly in the third quarter. While consumption of services continues to recover, residential investment and consumption of
goods are pointing to more moderate trends after spectacular growth in the last few quarters. Weak consumer goods spending has been exacerbated by
increasingly acute supply problems, especially in the automotive sector. While it is hard to predict when the supply chain bottlenecks will disappear, it
appears likely that some production limitations will persist until some time in 2022. We nonetheless remain confident that economic growth will accelerate in
the final quarter of 2021 and that robust growth will continue in 2022. As we have often mentioned in the past, U.S. households are doing very well, after
accumulating huge amounts of excess savings since the onset of the pandemic. Their net worth has also risen significantly thanks to strong stock market
performance and rising house prices. We expect to see solid growth of 3.4%(1) in 2022, following 5.5%(1) growth in 2021.
CCaannaaddiiaann EEccoonnoommyy
Unlike the global economy, which appears to be slowing down, the Canadian economy is performing relatively well. Employment has returned to pre-pandemic
levels in just under 19 months. That’s not only the fastest recovery seen in the past four recessions but also an outstanding performance compared to the
U.S.—where employment levels remain at nearly 3% below the pre-recession peak. Canada’s private sector brought in 618,000 more workers between May
and October—the largest increase ever seen excluding the post-lockdown reopening period in 2020. While an upsurge in raw material prices will continue to
benefit the Canadian economy, supply chain disruptions and the resulting inflation are a risk in the current context. That said, the labour market recovery
suggests that Canadian households are ready to stand on their own with no extraordinary government assistance. Substantial surplus savings have already
been amassed (11.4% of GDP), helping to cushion the blow of the rising cost of living. We therefore anticipate 4.9%(1) and 3.8%(1) growth in 2021 and 2022,
respectively.
QQuueebbeecc EEccoonnoommyy
Due to high vaccination rates, the number of COVID-19 hospitalizations remains under control, making it possible to continue lifting some of the public health
measures. While GDP has returned to above pre-pandemic levels, employment numbers still point to a slight shortfall that is expected to reverse in the coming
months. In spite of all this, Quebec continues to post the lowest unemployment rate of the four largest provinces in a context of weak demographic growth.
Home sales and housing starts recently became more tempered although levels remain high, on a historical basis, in a context where the number of houses for
sale on the market remains limited. We remain optimistic that Quebec will continue its economic recovery in 2022 given its highly diverse economy, the
Quebec government’s fiscal leeway and the fact that Quebec households are in a stronger financial position than elsewhere in the country. More affordable
housing prices are less vulnerable to a correction in the event of an interest rate hike. After an expected 6.4%(1) growth in 2021, the Quebec economy should
grow at a more moderate rate of 3.0%(1) in 2022.
(1)
GDP growth forecasts, Economy and Strategy group, National Bank Financial
26
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
FFiinnaanncciiaall AAnnaallyyssiiss
CCoonnssoolliiddaatteedd RReessuullttss
Year ended October 31
(millions of Canadian dollars)
OOppeerraattiinngg rreessuullttss
Net interest income
Non-interest income
Total revenues
Non-interest expenses
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
Diluted earnings per share (dollars)
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(1)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
SSppeecciiffiieedd iitteemmss(1)
Foreign currency translation loss on disposal of subsidiaries
Impairment losses on premises and equipment and on intangible assets
Severance pay
Charge related to Maple
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
OOppeerraattiinngg rreessuullttss oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd
eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
Net interest income on a taxable equivalent basis
Non-interest income on a taxable equivalent basis
and excluding specified items
Total revenues on a taxable equivalent basis and excluding specified items
Non-interest expenses excluding specified items
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) (1)
Average assets(2)
Average loans and acceptances(2)
Average deposits(2)
Efficiency ratio on a taxable equivalent basis and excluding specified items(3)
22002211
2020
%% cchhaannggee
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
−−
33,,117777
88..9966
118811
88
118899
−−
−−
((99))
−−
−−
((99))
((22))
((77))
−−
((77))
44,,996644
44,,115522
99,,111166
44,,884444
44,,227722
22
44,,227700
11,,008866
33,,118844
−−
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
33,,118844
88..9988
336633,,666622
117722,,332233
223366,,222299
2,164
6.06
318,199
159,275
207,381
5533..11 %%
53.7 %
1122
1133
1133
77
2200
6611
9988
5533
5566
5577
1111
1111
1111
1100
1122
4444
4477
4444
4477
4488
1144
88
1144
27
(1)
(2)
(3)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
For additional information on non-GAAP ratios, see the Financial Reporting Method section on pages 18 to 21 and see the Glossary section on pages 123 to 126.
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Financial Analysis
AAnnaallyyssiiss ooff CCoonnssoolliiddaatteedd RReessuullttss
FFiinnaanncciiaall RReessuullttss
For fiscal 2021, the Bank’s net income totalled $3,177 million compared to $2,083 million in fiscal 2020, a 53% year-over-year increase that was due to a
significant decrease in provisions for credit losses on non-impaired loans, as macroeconomic and credit conditions improved from fiscal 2020, and to a
significant reduction in provisions for credit losses on impaired loans. Also contributing to the net income growth was the excellent performance turned in by
all the Bank’s business segments, notably achieved through revenue growth. For fiscal 2021, specified items, net of income taxes, had a $7 million
unfavourable impact on net income compared to a $133 million unfavourable impact in fiscal 2020. The fiscal 2021 specified item, net of income taxes, was a
$7 million impairment loss on intangible assets. The fiscal 2020 specified items, net of income taxes, had consisted of a $36 million foreign currency
translation loss on a disposal 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. For fiscal 2021, the Bank’s net income excluding specified items totalled $3,184 million, up 44% from
$2,216 million in fiscal 2020.
TToottaall RReevveennuueess
For fiscal 2021, the Bank’s total revenues amounted to $8,927 million, up $1.0 billion or 13% from $7,927 million in fiscal 2020. This increase was driven by
revenue growth across all of the Bank’s business segments. In fiscal 2020, total revenues had included a $24 million foreign currency translation loss on a
disposal of subsidiaries. The fiscal 2021 total revenues on a taxable equivalent basis and excluding specified items grew $900 million or 11% year over year.
For additional information about total revenues on a taxable equivalent basis, see Table 2 on page 116.
Net Interest Income
For fiscal 2021, the Bank’s net interest income totalled $4,783 million, rising $528 million or 12% from $4,255 million in fiscal 2020. The fiscal 2021 net
interest income on a taxable equivalent basis totalled $4,964 million compared to $4,463 million in fiscal 2020 (Table 3, page 116).
In the Personal and Commercial segment, the fiscal 2021 net interest income totalled $2,583 million, a $138 million or 6% increase driven mainly by growth in
loans and deposits, which rose 9% and 14%, respectively, year over year. The growth in loans came mainly from mortgage credit and loans to businesses. The
increase in the Personal and Commercial segment's net interest income was tempered by a lower net interest margin, which was 2.12% in fiscal 2021 versus
2.19% in fiscal 2020, as lower interest rates notably affected deposit margins. In the Wealth Management segment, the fiscal 2021 net interest income
totalled $448 million, a 1% year-over-year increase owing to growth in loan volumes, tempered by a lower deposit margin.
In the Financial Markets segment, the fiscal 2021 net interest income on a taxable equivalent basis was up $280 million or 30% year over year, mainly due to
trading activities, and should be examined together with the other items of trading activity revenues. In the USSF&I segment, the fiscal 2021 net interest
income was up $100 million or 12% year over year, owing to growth in loan and deposit volumes at the Advanced Bank of Asia Limited (ABA Bank) subsidiary
and to higher net interest income at the Credigy subsidiary given growth in loan portfolios and good performance in certain portfolios.
Non-Interest Income
For fiscal 2021, the Bank’s non-interest income totalled $4,144 million versus $3,672 million in fiscal 2020. The fiscal 2020 non-interest income had included
a $24 million foreign currency translation loss on a disposal of subsidiaries. The Bank’s non-interest income on a taxable equivalent basis and excluding
specified items amounted to $4,152 million in fiscal 2021 compared to $3,753 million in fiscal 2020. For additional information on non-interest income on a
taxable equivalent basis, see Table 4 on page 117.
For fiscal 2021, revenues from underwriting and advisory fees rose 32% year over year, notably due to capital markets activities and merger and acquisition
activities in the Financial Markets segment. Revenues from securities brokerage commissions rose 17% year over year given growth in transaction volume
during fiscal 2021. Combined, mutual fund revenues and revenues from investment management and trust service fees totalled $1,463 million in fiscal 2021,
a $251 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 of stronger stock market performance in fiscal 2021.
Revenues from credit fees and revenues from acceptances and letters of credit and guarantee grew $39 million compared to fiscal 2020 due to greater credit
activity in Commercial Banking and the Financial Markets segment. Also during fiscal 2021, card revenues and revenues from deposits and payment service
charges rose 7% and 5%, respectively, as economic activity gradually rebounded and produced greater transaction volume in fiscal 2021, i.e., volume that had
fallen in 2020 given the impacts of the COVID-19 pandemic on certain sectors of the economy and on consumer spending habits.
28
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Financial Analysis
Trading revenues recorded in non-interest income amounted to $268 million in fiscal 2021 compared to $544 million in fiscal 2020. Trading revenues on a
taxable equivalent basis(1) recorded in non-interest income amounted to $276 million in fiscal 2021, down from $601 million in fiscal 2020. Including the
portion recorded in net interest income, trading activity revenues on a taxable equivalent basis(1) amounted to $1,238 million in fiscal 2021, a $168 million
year-over-year decrease (Table 5, page 117) attributable to decreases in revenues from equity securities and fixed-income securities as well as in revenues
from commodities and foreign exchange activities of the Financial Markets segment. The trading activity revenues on a taxable equivalent basis of the other
segments also decreased year over year.
In fiscal 2021, gains on non-trading securities rose $58 million year over year, mainly due to Treasury activities. The fiscal 2021 foreign exchange revenues
and insurance revenues rose $38 million and $3 million, respectively, year over year. The share in the net income of associates and joint ventures was down
$5 million. Other non-interest income amounted to $325 million in fiscal 2021, a $207 million increase that was mainly due to a gain realized on the disposal
of certain loan portfolios in fiscal 2021 as well as to favourable impacts of a fair value remeasurement of certain Credigy loan portfolios, of gains on
investments, and of a $33 million gain on a remeasurement of the previously held equity interest in Flinks. These favourable factors were tempered by a
$30 million loss related to a fair value measurement of the Bank’s equity interest in AfrAsia Bank Limited (AfrAsia). In fiscal 2020, other revenues had also
included a $24 million foreign currency translation loss on a disposal of subsidiaries.
NNoonn--IInntteerreesstt EExxppeennsseess
For fiscal 2021, non-interest expenses stood at $4,853 million, up $308 million from fiscal 2020 (Table 6, page 118). These 2021 non-interest expenses
included $9 million in impairment losses on intangible assets. In fiscal 2020, non-interest expenses had 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 fiscal 2021 non-interest
expenses excluding specified items stood at $4,844 million, up $431 million or 10% year over year.
For fiscal 2021, compensation and employee benefits stood at $3,027 million, a 12% year-over-year increase that was essentially attributable to higher
variable compensation associated with revenue growth. An increase in technology expenses, including amortization, came from significant technology
investments made by the Bank for its transformation plan and for business development purposes. These increases were tempered, however, by decreases in
certain variable expenses, in particular the compensatory tax on salaries, as well as in the expenses incurred by the Bank to take measures in response to
COVID-19.
PPrroovviissiioonnss ffoorr CCrreeddiitt LLoosssseess
For fiscal 2021, the Bank recorded $2 million in provisions for credit losses compared to $846 million in fiscal 2020 (Table 7, page 119). This $844 million
decrease was due to lower provisions for credit losses on non-impaired loans owing to improvements in the macroeconomic outlook and in credit conditions in
fiscal 2021, as opposed to the significant deterioration in the macroeconomic outlook caused by COVID-19 in fiscal 2020. This decrease was also due to
provisions for credit losses recorded on Personal Banking impaired loans (including credit card receivables) that were below pre-pandemic levels, in particular
due to fewer cases of insolvency, a reduction in client spending in the context of the pandemic, and various assistance measures implemented by
governments. Provisions for credit losses on impaired loans in Commercial Banking and in the USSF&I segment, essentially the Credigy subsidiary, were down
$78 million and $52 million, respectively, during fiscal 2021. In the Financial Markets segment, the fiscal 2021 provisions for credit losses on impaired loans
were up $7 million year over year. At $183 million, the fiscal 2021 provisions for credit losses on impaired loans (excluding POCI loans) represented 0.11% of
average loans and acceptances, down from 0.23% in fiscal 2020 given a sharp decline in credit loss provisions on impaired loans in fiscal 2021.
IInnccoommee TTaaxxeess
Detailed information about the Bank’s income taxes is provided in Note 24 to the consolidated financial statements. For fiscal 2021, income taxes stood at
$895 million, representing an effective tax rate of 22% compared to $453 million and an effective tax rate of 18% in fiscal 2020. This change in the effective
tax rate stems from a higher level and proportion of tax-exempt dividend income in fiscal 2020 as well as from a decrease in the income tax rate applicable to
the ABA Bank subsidiary in 2020 due to tax incentive measures granted by the Cambodian government.
(1)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
National Bank of Canada
29
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.
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
Core
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
securities, 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, Flinks subsidiary activities, and corporate units
RReessuullttss bbyy BBuussiinneessss SSeeggmmeenntt(1)
Year ended October 31(2)
(millions of Canadian dollars)
Personal and
Commercial
2020
22002211
Wealth
Management
2020
22002211
Financial
Markets
2020
22002211
22,,558833
11,,110033
33,,668866
11,,995588
11,,772288
66
2,445
1,012
3,457
1,892
1,565
517
11,,772222
445566
11,,226666
−−
1,048
278
770
−
444488
11,,772211
22,,116699
11,,227777
442
1,417
1,859
1,125
889922
11
889911
223366
665555
−−
734
7
727
192
535
−
11,,222266
992200
22,,114466
888800
11,,226666
1100
11,,225566
333333
992233
−−
946
1,108
2,054
812
1,242
239
1,003
265
738
−
22002211
990077
9944
11,,000011
331155
668866
((1155))
770011
114466
555555
−−
USSF&I
2020
807
13
820
319
501
80
421
69
352
34
22002211
((338811))
330066
((7755))
442233
((449988))
−−
((449988))
((227766))
((222222))
−−
Other
2020
(385)
122
(263)
397
(660)
3
(663)
(351)
(312)
8
22002211
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
−−
Total
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
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 before income taxes
(recovery)
Income taxes (recovery)
Net income
Non-controlling interests
Net income attributable to the
Bank’s shareholders and
holders of other equity
instruments
Average assets(3)
11,,226666
770
112277,,771166 117,338
665555
77,,114466
535
5,917
992233
115500,,114477
738
123,943
555555
1166,,115500
318
14,336
((222222))
6622,,550033
(320)
56,665
33,,117777
336633,,666622
2,041
318,199
(1)
(2)
(3)
For additional information on the presentation of results by business segment, see Note 30 to the consolidated financial statements.
For the year ended October 31, 2020, certain amounts have been reclassified.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
30
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and over 140,000 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, 384 branches and
927 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.
PPeerrssoonnaall BBaannkkiinngg
Personal Banking provides a complete range of financing and investment products and services, mainly in Quebec, to help clients reach their financial goals
throughout every stage in their lives. It offers everyday transaction solutions, mortgage loans and home equity lines of credit, consumer loans, payment
solutions, savings and investment solutions as well as a range of insurance products.
CCoommmmeerrcciiaall BBaannkkiinngg
Commercial Banking serves the financial needs of small- and medium-sized enterprises (SMEs) and large corporations, helping them to achieve growth. It
offers a full line of financial products and services, including credit, deposit, and investment solutions as well as international trade, foreign exchange
transaction, payroll, cash management, insurance, electronic transaction, 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.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
In Canada, the economic recovery is continuing, as health measures are being eased, and compares favourably to the worldwide recovery. Overall, the
Canadian labour market has bounced back well from the pandemic, although certain sectors hit particularly hard by the crisis are still lagging. A labour
shortage, resulting in higher employee wages, should spur businesses to intensify capital investments given their solid balance sheets. Bolstered by generous
government assistance programs, households and businesses have avoided the worst of the crisis, with insolvencies posting historically low levels. Some
households even managed to take advantage of the crisis to put their finances in order. They now find themselves with a considerable surplus of savings that
are ready to fuel the economy. Given a robust global economic recovery in 2021 combined with numerous global supply chain issues exacerbated by strong
demand, inflation has risen to levels not seen in many years. As a result, market interest rates are on the rise and a Bank of Canada response on the policy rate
is expected in the first half of 2022. A normalization of the monetary policy should cool the residential real estate market, which has seen sharp price growth
due to strong demand and limited supply.
The economic environment in 2021 and the outlook for 2022 are discussed in more detail in the Economic Review and Outlook section on page 26.
KKeeyy SSuucccceessss FFaaccttoorrss
Strong penetration in our core Quebec market thanks to a full range of personal and commercial banking 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.
Vast sales force in Quebec, consisting of both generalists and specialists, positioning the Bank to offer the best advice to clients.
Unmatched closeness to Quebec entrepreneurs, with leading expertise in business lending and risk management solutions.
Recognized expertise in specialized industries across Canada.
Ability to meet all the needs facing businesses and entrepreneurs in collaboration with other Bank segments.
National Bank of Canada
31
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.
Strategic Priorities
2021 Achievements and Highlights
Maintain volume growth and
accelerate net client acquisition
Improve the client experience
Accelerate the digital transformation
Maintained the client acquisition strategy by sustaining our presence in high-growth markets and among
target clients such as newcomers, professionals, Gen Z, millennials, and SMEs.
Improved accessibility to our solutions across all channels by enhancing our account opening and credit
card sign-up processes.
Continued to support Commercial Banking clients, notably through the government support measures
deployed in response to the COVID-19 pandemic.
Deployed targeted campaigns that showcase an advisory offering tailored to major life moments.
Enhanced financing programs for professional clientele by expanding eligible clientele and adding
complementary services.
Deployed the SME Growth Fund to support businesses in their digital transformation and growth projects.
For a second straight year, ranked first among credit card issuers in Canada for the quality of client
experience (Forrester CX index).
Gained market share in Quebec’s residential financing sector.
Achieved synergies among the business segments and initiated a common business development approach
in order to provide an integrated service offering to clients.
Enhanced the capabilities of the transactional platform and the mobile app to deliver a simpler, safer, and
more intuitive digital experience for all our clients.
Redefined our distribution network by strengthening our capacity to provide proactive advice (in addition to
transactional services) and by creating a clearer career development path for our advisory roles.
Improved our client-conversation ecosystem by permitting communication in the mobile channel and by
personalizing contacts.
Implemented a proactive, remote advisory service in investment in collaboration with the Wealth
Management segment to ensure a top quality management of our investor clientele.
Continued to transform the branch network experience to help clients switch to self-service and by being
proactive with the advisory offering.
Simplified the transactional banking capabilities most frequently used by Personal and Commercial clients
on our priority approaches by ensuring an integrated experience among the channels.
Finalized the automation of the financing process for all Commercial Banking segments, thereby providing a
simple and quick experience.
Rolled out a new, 100% online account opening experience for new retail clients on the Bank’s website at
nbc.ca site as well as automated registration to our digital transactional platform.
Enhanced our digital payment experience by adding several self-serve solutions such as new international
transfer solutions, instant credit card transfers as well as new national transfer options.
Added a Help Centre on the Bank’s website at nbc.ca, which centralizes the answers to user questions about
our digital solutions (frequently asked questions, chatbot, search engine).
Implemented mechanisms whereby clients can consult with their advisor remotely (virtual meetings,
document exchange, secure documents).
Improve efficiency
Simplified and automated client processes, whether they be retail clients (account opening, payments,
home purchase and savings) or business clients (account opening, financing, and cash management).
Simplified the product offering for priority segments.
32
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002222
MMaaiinnttaaiinn vvoolluummee ggrroowwtthh aanndd aacccceelleerraattee nneett cclliieenntt aaccqquuiissiittiioonn
Increase our visibility and proximity during targeted campaigns.
Enhance coverage in promising markets and among high-growth target clientele (newcomers, millennials, Gen Z, professionals, SMEs, and specialized
commercial services).
Enrich our digital acquisition capabilities in order to boost sales.
Continue modernizing our range of cash management products, adapting them to client needs and helping business clients manage their cash cycle.
Strengthen the ties between the private banking services and commercial sector activities.
OOppttiimmiizzee tthhee cclliieenntt eexxppeerriieennccee
Continue improving the capabilities on our mobile app and adding self-serve options to our digital channels.
Modernize our payment ecosystem and enhance our payment facilities offering.
Continue developing a distinctive, client-centric, and advisory-driven distribution approach.
Enhance our client-conversation platforms to ensure personalized contact across all our channels.
IImmpprroovvee eeffffiicciieennccyy
Continue simplifying client processes, whether they be retail clients (account opening and payments) or commercial clients (account opening, financing,
and cash management).
Adapt our product offering to evolving market needs (transactional solutions, cards, payments, cash management).
Optimize the sales force support structure by reducing administrative tasks, thereby maximizing time for advisory activities.
National Bank of Canada
33
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
SSeeggmmeenntt RReessuullttss –– PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
Year ended October 31
(millions of Canadian dollars)
Net interest income
Non-interest income
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
NNeett iinnccoommee
Net interest margin(2)
Average interest-bearing assets(2)
Average assets(2)
Average loans and acceptances(2)
Net impaired loans(2)
Net impaired loans as a % of loans and acceptances(2)
Average deposits(2)
Efficiency ratio(2)
22002211
2020(1)
%% cchhaannggee
22,,558833
11,,110033
33,,668866
11,,995588
11,,772288
66
11,,772222
445566
11,,226666
22..1122 %%
112211,,559933
112277,,771166
112277,,001133
221188
00..22 %%
7777,,005511
5533..11 %%
2,445
1,012
3,457
1,892
1,565
517
1,048
278
770
2.19 %
111,488
117,338
116,838
412
0.4 %
67,378
54.7 %
66
99
77
33
1100
((9999))
6644
6644
6644
99
99
99
((4477))
1144
(1)
(2)
For the year ended October 31, 2020, certain amounts have been reclassified.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
AAvveerraaggee LLooaannss aanndd AAcccceeppttaanncceess
Year ended October 31
(millions of Canadian dollars)
AAvveerraaggee DDeeppoossiittss
Year ended October 31
(millions of Canadian dollars)
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2021
8
3
8
,
6
1
1
9
3
0
,
9
7
33
11
00
,,
77
22
11
11
00
55
,,
55
88
9
9
7
,
7
3
22
11
55
,,
11
44
11
55
00
,,
77
77
8
7
3
,
7
6
3
5
6
,
3
3
5
2
7
,
3
3
33
99
33
,,
00
44
88
55
66
,,
66
33
26%
74%
2020
22002211
2020
22002211
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
Province of Quebec (2020: 75%)
Other provinces (2020: 25%)
34
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Personal and Commercial
FFiinnaanncciiaall RReessuullttss
In the Personal and Commercial segment, the fiscal 2021 net income totalled $1,266 million
compared to $770 million in fiscal 2020, a 64% increase that was essentially due to the impacts of
COVID-19 on macroeconomic factors, which had affected the provisions for credit losses recorded
by the Bank in fiscal 2021 and fiscal 2020, and to a $229 million increase in the segment’s total
revenues. The segment’s income before provisions for credit losses and income taxes totalled
$1,728 million in fiscal 2021, up 10% year over year. The growth in total revenues was driven by a
$138 million increase in net interest income and a $91 million increase in non-interest income. The
increase in net interest income came mainly from growth in personal and commercial loans and
deposits, tempered, however by a net interest margin that decreased to 2.12% in fiscal 2021 from
2.19% in fiscal 2020, mainly due to deposit margins and, to a lesser extent, loan margins.
For fiscal 2021, Personal and Commercial’s non-interest expenses stood at $1,958 million, a 3%
year-over-year increase that was mainly attributable to increases in operations support charges and
amortization expense as well as to higher compensation and employee benefits. These increases
were partly offset by a decrease in certain variable expenses. At 53.1%, the segment’s 2021
efficiency ratio improved by 1.6 percentage points from 54.7% in 2020.
For fiscal 2021, Personal and Commercial recorded $6 million in provisions for credit losses,
$511 million less than the $517 million recorded in fiscal 2020. This decrease stems from reversals
of allowances for credit losses on non-impaired loans given a more favourable macroeconomic
outlook and improved credit conditions in fiscal 2021, as substantially higher provisions for credit
losses had been recorded in fiscal 2020 to reflect a significant deterioration in the macroeconomic
outlook caused by COVID-19. In addition, the provisions for credit losses on Personal Banking
impaired loans and on Commercial Banking impaired loans as well as on impaired credit card
receivables were below pre-pandemic levels, in particular due to fewer cases of insolvency and to
the various assistance measures deployed by governments.
PPeerrssoonnaall BBaannkkiinngg
For fiscal 2021, Personal Banking’s total revenues amounted to $2,228 million, up 4% from
$2,148 million in fiscal 2020. An 8% increase in loan volumes and 9% growth in deposit volumes
were tempered by a lower net interest margin on loans and deposits. Non-interest income grew
$43 million, essentially due to insurance revenues, to internal commission revenues related to the
distribution of Wealth Management products, and to credit card revenues. Non-interest expenses
rose $44 million in fiscal 2021, mainly due to higher operations support charges and to an increase
in technology investment expenses.
CCoommmmeerrcciiaall BBaannkkiinngg
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2021
40%
45%
5%
10%
Retail (2020: 46%)
Payment Solutions (2020: 11%)
Insurance (2020: 5%)
Commercial Banking (2020: 38%)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(millions of Canadian dollars)
3,457
33,,668866
1,892
11,,995588
11,,226666
770
For fiscal 2021, Commercial Banking’s total revenues amounted to $1,458 million, rising 11% from
$1,309 million in fiscal 2020. Its net interest income was up year over year, essentially due to
growth in loans and deposits, which rose 10% and 20%, respectively, tempered by a narrowing of
the net interest margin on loans and deposits. Non-interest income was also up, rising $48 million
compared to fiscal 2020, mainly due to increases in bankers’ acceptance revenues, in revenues
from derivative financial instruments, as well as in credit fee revenues. Non-interest expenses rose
$22 million, mainly due to higher compensation and employee benefits as well as to higher
operations support charges.
Total
revenues
Non-
interest
expenses
Net
income
Total
revenues
Non-
interest
expenses
Net
income
2020
22002211
Personal Banking
Commercial Banking
National Bank of Canada
35
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || WWeeaalltthh MMaannaaggeemmeenntt
As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory services
and close client relationships. It delivers a full range of wealth management products and solutions through a multi-channel distribution network and a
differentiated business model. The Wealth Management segment also proposes services to independent advisors as well as to institutional clients.
BBuussiinneessss UUnniittss
FFuullll--SSeerrvviiccee BBrrookkeerraaggee
Drawing on the largest network of investment advisors in Quebec, National Bank Financial – Wealth Management (NBFWM) provides wealth management
advisory services through 800-plus advisors at close to 100 service points across Canada. Its advisors serve approximately 400,000 retail clients, proposing
portfolio management services, financial and succession planning services, and insurance services while working in close collaboration with other segments
of the Bank.
PPrriivvaattee BBaannkkiinngg
Private Banking 1859 (PB1859) offers highly personalized wealth management services and advice across Canada, helping affluent clients benefit from
comprehensive management of their personal and family fortunes. As a true market leader in Quebec, PB1859 continues to expand its operations across
Canada with its extensive range of financial solutions and strategies covering the protection, growth, and transition of wealth.
DDiirreecctt BBrrookkeerraaggee
National Bank Direct Brokerage (NBDB) offers a multitude of financial products and investment tools to self-directed investors across Canada through its online
investment solution. NBDB helps customers who want to manage their own investments to do so through a trading platform and an optimized mobile trading
platform or by speaking directly to a representative on the phone.
IInnvveessttmmeenntt SSoolluuttiioonnss
National Bank Investments Inc. (NBI) manufactures and offers mutual funds, investment solutions, and services to consumers and institutional investors
through the Bank’s extended network. With its open architecture model, NBI is Canada’s largest investment fund manager to entrust the management of its
investments exclusively to external portfolio managers.
AAddmmiinniissttrraattiivvee aanndd TTrraaddee EExxeeccuuttiioonn SSeerrvviicceess
National Bank Independent Network (NBIN) is a Canadian leader in providing administrative services such as trade execution, custodial services, and
brokerage solutions to many independent financial services firms across Canada, in particular to introducing brokers, portfolio managers, and investment fund
managers.
TTrraannssaaccttiioonn PPrroodduuccttss
The Wealth Management segment provides independent advisors across Canada with an extensive range of investment products, including guaranteed
investment certificates (GICs), mutual funds, notes, structured products, and monetization, helping to support their own business needs and client
relationships.
TTrruusstt aanndd EEssttaattee SSeerrvviicceess
Through National Bank Trust Inc. (NBT), the Wealth Management segment provides retail and institutional clients with turnkey services and solutions. Its team
of experts offers a full range of high value-added services designed to consolidate, protect, and transfer its customers’ wealth and give them peace of mind.
NBT also offers integrated trustee and depository services as well as securities custody services.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
In 2020 and 2021, political decision-makers took extraordinary measures to limit the negative impact of the COVID-19 health measures. Governments
vigorously supported households and businesses in difficulty. Central banks lowered interest rates to nearly zero and rolled out aggressive stimulus programs.
With these interventions—unprecedented in scope—a robust economic recovery has emerged and the stress on financial markets has swiftly eased and
remains in check. As a result, business profits have rebounded sharply and risk assets have benefitted from extremely accommodating interest rates.
Households have experienced an unprecedented wealth effect since the start of the pandemic, not only because of the strong financial market performance but
also because of the rise in housing prices. Overall, the current environment remains poised for relatively robust economic growth again in 2022. Still, a
normalization of interest rates in the high inflationary context could produce a resurgence in market volatility.
The economic environment in 2021 and the outlook for 2022 are discussed in more detail in the Economic Review and Outlook section on page 26.
36
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
KKeeyy SSuucccceessss FFaaccttoorrss
Leadership position in Quebec in terms of market share and brand recognition.
Largest manager of managers in Canada (open architecture); clients benefitting 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, and growing client relationships built on personalized advice and solutions provided at every life stage.
High level of client satisfaction with private management, full-service brokerage, and direct brokerage services.
Proven track record and excellent reputation as a business partner among non-bank financial institutions.
Strong synergies with the Personal and Commercial segment through which a holistic service offering is delivered.
New synergy-building program that emphasizes collaboration between Wealth Management employees and employees from other Bank segments.
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
The Wealth Management segment will capitalize on the strength of the Bank's brand by generating sustained earnings growth, improving client satisfaction,
and maintaining high employee engagement. It distinguishes itself from the competition by offering an exceptional experience in terms of advice, offering
innovative solutions and impeccable service thanks to agile and aligned multifunctional teams. The Wealth Management segment seeks to increase market
penetration across Canada through organic growth as well as targeted activities and partnerships.
Strategic Priorities
2021 Achievements and Highlights
Transform our partnership with clients
Invest in high-growth markets
Continue transforming our culture
Implemented a new $0 commission rate for investors using the online brokerage platform.
Upgraded accessibility standards for our clients on the online brokerage platform.
Implemented client feedback tools that return client comments and opinions much faster than before.
Deployed a new hybrid model with the Personal and Commercial segment for more modest portfolios.
Implemented a client relationship management (CRM) solution that helps investment advisors provide
clients with a highly personalized level of service.
Implemented a new registry for all the mutual funds and GICs of Personal and Commercial segment clients.
Experienced strong growth in the number of clients as well as in assets under administration and in assets
under management in Wealth Management’s various business units.
Constantly improved cross-selling in partnership with other Bank segments, notably the Personal and
Commercial segment.
Launched our first socially responsible exchange-traded fund (ETF) investments.
Actively recruited investment advisors to raise our market share.
Implemented a fully-paid securities lending program within all the wealth management business units
offering brokerage services. This new service is a partnership designed by NBIN and the Financial Markets
segment to meet the more specific needs of a large niche clientele.
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 the transformation.
Adapted ways of working and communicating through an accelerated deployment of the tools needed for
remote working.
National Bank of Canada
37
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002222
HHiigghhllyy eennggaaggeedd cclliieennttss tthhaannkkss ttoo aann eexxcceeppttiioonnaall aaddvviissoorryy--bbaasseedd eexxppeerriieennccee
Simplify and enhance our banking/credit experience for Wealth Management clients.
Leverage our growth strategies (intersegment synergies, looking beyond Quebec, segments with strong potential).
Migrate our traditional service institutional clientele from securities custody services to our asset management offering.
Improve our client satisfaction surveys and optimize our client engagement tools.
Develop a fully integrated solution to support advisors in becoming independent.
BBeesstt--iinn--ccllaassss iinnvveessttmmeenntt aanndd ddiiggiittaall ssoolluuttiioonnss
Capitalize on our internal capabilities to target strong growth segments (ETFs, private and non-traditional investments).
Develop our digital strategy to improve the client and employee experience (direct brokerage mobile application and single sign-on).
Expand the scope of advisory-based solutions (disbursement solution, lifecycle-based advice, reverse mortgages).
Establish our ESG investing strategy and deploy it across all business units and product lines.
Focus on our data strategy and the 360-degree view.
FFaasstt,, eexxppeerrtt aanndd ffllaawwlleessss
Continue to automate and digitalize our processes and operational services.
Finalize the implementation of our new institutional account platform.
Further improve and promote diversity at every level of the Wealth Management segment.
EEnnttrreepprreenneeuurriiaall ccuullttuurree aanndd ttaalleenntt ddeevveellooppmmeenntt
Continue to attract and retain top talent.
Implement a continuous development culture.
Implement and improve our flexible hybrid work model.
38
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
SSeeggmmeenntt RReessuullttss –– WWeeaalltthh MMaannaaggeemmeenntt
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
Provisions for credit losses
Income before income taxes
Income taxes
NNeett iinnccoommee
Average assets(2)
Average loans and acceptances(2)
Net impaired loans(2)
Average deposits(2)
Efficiency ratio(2)
22002211
2020(1)
%% cchhaannggee
444488
11,,331166
440055
22,,116699
11,,227777
889922
11
889911
223366
665555
77,,114466
55,,999988
1166
3333,,993344
5588..99 %%
442
1,087
330
1,859
1,125
734
7
727
192
535
5,917
4,776
2
34,507
60.5 %
11
2211
2233
1177
1144
2222
((8866))
2233
2233
2222
2211
2266
((22))
(1)
(2)
For the year ended October 31, 2020, certain amounts have been reclassified.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd AAsssseettss UUnnddeerr MMaannaaggeemmeenntt –– WWeeaalltthh MMaannaaggeemmeenntt
As at October 31
(millions of Canadian dollars)
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn(1)
AAsssseettss uunnddeerr mmaannaaggeemmeenntt(1)
Individual
Mutual funds
22002211
665511,,553300
6644,,994411
5522,,224455
111177,,118866
2020
%% cchhaannggee
509,071
48,140
39,445
87,585
2288
3355
3322
3344
(1)
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd AAsssseettss UUnnddeerr
MMaannaaggeemmeenntt
Year ended October 31
(millions of Canadian dollars)
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2021
00
33
55
,,
11
55
66
66
88
11
,,
77
11
11
1
7
0
,
9
0
5
5
8
5
,
7
8
2020
22002211
Assets under administration
Assets under management
37%
63%
Province of Quebec (2020: 64%)
Other provinces (2020: 36%)
National Bank of Canada
39
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Wealth Management
FFiinnaanncciiaall RReessuullttss
In the Wealth Management segment, net income totalled $655 million in fiscal 2021, up 22% from
$535 million in fiscal 2020. The segment’s total revenues amounted to $2,169 million in fiscal 2021
compared to $1,859 million in fiscal 2020, a 17% increase owing in part to a 21% increase in
fee-based revenues given growth in average assets under administration and average assets under
management generated by net inflows into various solutions and by stronger stock market
performance in fiscal 2021. Transaction-based and other revenues were also up, rising 23% due to
growth in transaction volume driven by stronger stock market performance in fiscal 2021. The
segment’s net interest income increased slightly, rising 1%, as growth in loan volume was tempered
by a lower deposit margin.
For fiscal 2021, Wealth Management’s non-interest expenses stood at $1,277 million compared to
$1,125 million in fiscal 2020, an increase attributable to higher compensation and employee
benefits, notably the variable compensation associated with revenue growth, as well as to higher
external management fees and operations support charges related to the segment’s business
growth and initiatives. At 58.9%, the segment’s 2021 efficiency ratio improved by 1.6 percentage
points from 60.5% in 2020.
Wealth Management recorded $1 million in provisions for credit losses for fiscal 2021, whereas
$7 million had been recorded in fiscal 2020 to reflect a deterioration in the macroeconomic outlook
caused by COVID-19.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2021
19%
20%
61%
Net interest income (2020: 24%)
Fee-based services (2020: 58%)
Transaction-based and other revenues (2020: 18%)
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn aanndd AAsssseettss UUnnddeerr MMaannaaggeemmeenntt
As at October 31, 2021, assets under administration totalled $651.5 billion, rising $142.5 billion
since October 31, 2020. This increase came from net inflows into various solutions and from
stronger stock market performance in fiscal 2021.
OOppeerraattiinngg RReessuullttss
Year ended October 31, 2021
(millions of Canadian dollars)
In the individual category, assets under management amounted to $64.9 billion as at October 31,
2021 compared to $48.1 billion as at October 31, 2020. In the mutual funds category, assets under
management totalled $52.2 billion as at October 31, 2021, rising 32% since October 31, 2020.
9
5
8
,
1
99
66
11
,,
22
77
77
22
,,
11
55
55
66
5
2
1
,
1
5
3
5
2020
22002211
Total revenues
Non-interest expenses
Net income
40
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || FFiinnaanncciiaall MMaarrkkeettss
The Financial Markets segment offers a complete suite of products and services to corporations, institutional clients, and public-sector entities. Whether
providing comprehensive advisory services and research or capital markets products and services, the segment focuses on relationships with clients and their
growth. Over 800 professionals serve client needs through offices in North America, Europe, the UK, and Asia.
BBuussiinneessss UUnniittss
The Financial Markets segment operates two main business units: Global Markets as well as Corporate and Investment Banking.
GGlloobbaall MMaarrkkeettss
Financial Markets is a Canadian leader in risk management solutions and structured products and is the largest market-maker in exchange-traded funds (ETFs)
in Canada by volume. The segment offers solutions covering fixed income securities, currencies, equities and commodities in order to mitigate the financial
and business risks of clients. It also provides new product development expertise to asset managers and fund companies and supports their success by
providing liquidity, research, and counterparty services. Financial Markets also provides tailored investment products across all asset classes to institutional
and retail distribution channels.
CCoorrppoorraattee aanndd IInnvveessttmmeenntt BBaannkkiinngg
Financial Markets provides corporate banking, advisory, and capital markets services. It offers loan origination and syndication to large 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 debt and corporate high-yield debt underwriting. Dominant in Quebec, the segment 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.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Thanks to aggressive intervention by political decision-makers, the economic recovery is in full swing as vaccination campaigns helped maintain the easing of
health measures. Households were supported during the various waves of infection and are well positioned to contribute to the economic recovery. The
rebound in Canada’s labour market is at a point where households are able to support growth even as government assistance programs end. This context
helped drive business profitability, which has been beneficial to hiring and investment growth. The stress on the financial markets was short-lived at the start
of the pandemic and has subsequently remained in check. Financial conditions have, therefore, been extremely accommodating thanks to the actions taken by
central banks and the solid performance posted by risk asset classes in recent months. However, a resurgence in volatility must not be discounted as the
central banks move forward with an interest rate normalization process in a context where the supply chain is strained. Moreover, the pandemic could still hold
some unwelcome surprises, as seen by the rise of the Delta variant, which resulted in strong outbreaks of COVID-19.
The economic environment in 2021 and the outlook for 2022 are discussed in more detail in the Economic Review and Outlook section on page 26.
KKeeyy SSuucccceessss FFaaccttoorrss
Pan-Canadian franchise with established leadership in government debt underwriting, ETF market-making, and securities lending and recognized
capabilities in risk management solutions, structured products, and equity derivatives.
Focused on client relationships and diversified client activity and revenue mix.
Flexible approach to capital allocation and proven ability to adapt to evolving capital market conditions and to deliver consistent financial performance.
Entrepreneurial culture: Integrated approach, teamwork, and alignment among all groups, including other segments of the Bank.
Sound risk management.
National Bank of Canada
41
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
Strategic Priorities
2021 Achievements and Highlights
Ranked number one in government debt underwriting once again, sustaining our first-place ranking for the last
seven years:
Inaugural joint lead on World Bank’s (International Bank for Reconstruction and Development) $1.5 billion
sustainable development bond due January 14, 2026.
Inaugural joint lead on the Province of Ontario’s $1.25 billion green bond due February 1, 2027.
Joint lead on CDP Financial Inc.’s $1.25 billion new issuance due October 19, 2026 (the issuer’s first deal in
Canadian dollars in over a decade).
Lead on First Nations Finance Authority’s $354 million re-opening due June 16, 2030 (FNFA’s largest
transaction ever).
Inaugural joint lead on the City of Ottawa’s $225 million green bond re-opening due May 11, 2051.
Led in corporate debt underwriting:
Supported Aéroports de Montréal during challenging times:
Maintain leadership in Canadian debt
underwriting
o
o
Sole financial advisor to Aéroports de Montréal in securing a milestone financing from multiple
government stakeholders for a total of $500 million for the Réseau express métropolitain (REM)
station, a key public transit infrastructure project in Montreal.
Joint solicitation agent on a consent solicitation process to obtain bondholder support to
temporarily waive certain provisions under its master trust indenture.
Joint bookrunner on a $400 million 30-year revenue bond offering.
o
Joint lead agent on a US$150 million private placement of senior notes for Capital Power Corporation.
Joint bookrunner on a dual-tranche offering for Enbridge Inc. of $1.1 billion sustainability-linked notes and
$400 million in senior unsecured notes.
Joint bookrunner on a $500 million 30-year senior unsecured notes offering for Ontario Power Generation
Inc.
Joint bookrunner on the inaugural $200 million SECURE Energy Services Inc. high-yield offering and sole
underwriter of the $140 million re-opening of the notes.
Joint global coordinator and joint bookrunner on a cross-border offering of high-yield notes for
Videotron Ltd., raising $750 million and US$500 million in June 2021, and joint bookrunner on a
$650 million offering of high-yield notes in January 2021.
Maintain leadership in investment
products
Led in quality and innovation in Canada:
Awarded, for a fifth consecutive year, 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.
Pioneered the launch of 4 Purpose Investments Inc. mutual funds that replicate strategies usually offered
via structured notes. With over $1.6 billion in assets under management, these funds are helping investors
gain access to both income and growth strategies while diversifying their portfolios away from more
traditional asset classes.
Continued to leverage its trading technology to help publicly listed corporations and investment funds to
better manage their float, resulting in close to $1.0 billion raised for such issuers.
Built momentum for our international issuances by expanding our network:
Established a solid international franchise, attracting a wide range of investors from both retail and
institutional channels.
Maintained our ETF leadership position by evergreening and improving our trading systems and infrastructure:
Implemented new technologies and state-of-the-art trading infrastructures and networks to support our
market making functions for over 1,100 ETFs in Canada.
Assigned as the lead market maker on close to one in three funds launched by independent asset
managers in 2021.
42
National Bank of Canada
National Bank of Canada2021 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
Strategic Priorities
2021 Achievements and Highlights
Involved in significant mandates, including:
Financial co-advisor to New Look Vision Group Inc. on the acquisition of the company by a consortium of
investors led by FFL Partners, LLC and Caisse de dépôt et placement du Québec for a total enterprise value
of $970 million.
Exclusive financial advisor to Savaria Corporation on its acquisition of Handicare Group AB for
$521 million. In connection with the transaction, the Bank was also sole underwriter of committed credit
facilities totalling $600 million; acted as co-bookrunner for a $122 million equity private placement and
was sole provider of F/X hedge solutions.
Expand our client coverage to increase
our presence in advisory services
Co-financial advisor to The Lion Electric Company in its US$1.9 billion merger with special purpose
acquisition company (SPAC) Northern Genesis Acquisition Corp., which resulted in net proceeds of
US$490 million and listing on the New York Stock Exchange and Toronto Stock Exchange.
Sole financial advisor to WSP Global Inc. on the US$1.14 billion acquisition of Golder Associates. In
connection with the transaction, the Bank also acted as joint bookrunner on a US$960 million fully
committed bank financing.
Exclusive financial advisor to Whitecap Resources Inc. (Whitecap) on the acquisition of TORC Oil & Gas Ltd.
for approximately $900 million in December 2020, and exclusive financial advisor to Whitecap on the sale
of a gross overriding royalty on its working interest in the Weyburn CO2 Sequestration Project (the Weyburn
Project) for cash proceeds of $188 million in October 2021. Driven by the Weyburn Project, Whitecap holds
a net negative-emitter status, permanently storing more CO2 than they emit through operations, which has
been maintained following the announced transactions.
Co-financial advisor to J.C. Flowers & Co. LLC and Värde Partners, Inc. on the sale of Fairstone Financial
Holdings Inc. to Duo Bank of Canada.
Leverage leadership in equity
distribution to increase lead and
co-lead positions
Joint bookrunner on Northland Power Inc.’s $990 million bought deal equity offering, the proceeds of which
were predominately used to finance the acquisition of a portfolio of operating onshore renewable assets in
Spain with a total combined net capacity of 551 megawatts, as well as address the funding of existing
development projects.
Joint bookrunner on Premium Brands Holdings Corporation’s $230 million bought deal public offering of
common shares. This was the largest public equity offering in the company’s history, and the eleventh
consecutive financing in which the Bank participated, raising aggregate gross proceeds of $1.3 billion.
Co-lead underwriter and joint bookrunner on a $161 million initial public offering of Tidewater
Renewables Ltd. (including the exercise of the underwriters’ over-allotment option). The transaction
represented the spin-out of a number of energy transition assets from Tidewater Midstream and
Infrastructure Ltd., including the first commercial renewable diesel and renewable hydrogen complex in
Canada, which is currently under construction.
Lead left bookrunner on Ballard Power Systems Inc.’s first bought deal offering in 20 years in
November 2020, raising over US$400 million. The Bank subsequently raised an additional US$550 million
for Ballard in February 2021, as joint bookrunner via a public bought deal of common shares. In aggregate,
the gross proceeds raised over US$950 million in full year 2021 to further strengthen the balance sheet,
thereby providing the additional flexibility to fund its growth strategy, including through activities such as
product innovation, investments in production capacity expansion and localization, future acquisitions and
strategic expansion and investments. In total, the Bank helped raise over US$1.2 billion in the past
two years.
Joint bookrunner on Nuvei Corporation’s US$500 million secondary offering of shares in June 2021. This
was the third consecutive Nuvei equity financing in which the Bank participated, raising aggregate gross
proceeds of US$1,837 million.
Joint bookrunner on Dialogue Health Technologies Inc.’s $115 million initial public offering. We were happy
to have led the execution of such a transaction, which garnered significant investor demand during the
midst of market uncertainty and COVID-19. We look forward to continuing our longstanding relationship
with the company.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002222
Increase market share among corporations for all fee-based products.
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.
Maintain our leadership in established businesses across Canada: Government issuances, structured products from ETF markets, and securities lending.
Continue to automate processes, use artificial intelligence, and increase data-sharing across the Financial Markets segment.
Continue to optimize our collaboration with other segments of the Bank.
Maintain tight cost control and an industry-leading efficiency ratio.
National Bank of Canada
43
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
SSeeggmmeenntt RReessuullttss –– FFiinnaanncciiaall MMaarrkkeettss
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
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis
NNeett iinnccoommee
Average assets(3)
Average loans and acceptances(3) (Corporate Banking only)
Net impaired loans(3)
Average deposits(3)
Efficiency ratio on a taxable equivalent basis(4)
22002211
2020(2)
%% cchhaannggee
668855
335577
112288
11,,117700
997766
22,,114466
888800
11,,226666
1100
11,,225566
333333
992233
115500,,114477
1188,,551188
99
4433,,339977
4411..00 %%
706
430
132
1,268
786
2,054
812
1,242
239
1,003
265
738
123,943
18,782
21
35,433
39.5 %
((33))
((1177))
((33))
((88))
2244
44
88
22
((9966))
2255
2266
2255
2211
((11))
((5577))
2222
(1)
(2)
(3)
(4)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For the year ended October 31, 2020, certain amounts have been reclassified.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
For additional information on non-GAAP ratios, see the Financial Reporting Method section on pages 18 to 21 and see the Glossary section on pages 123 to 126.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2021
(on a taxable equivalent basis)(1)
1,268
786
11,,117700
997766
13%
31%
56%
2020
22002211
Global markets – Equities
Global markets – Fixed-income
Global markets – Commodities and foreign exchange
Corporate and investment banking
Province of Quebec (2020: 33%)
Other provinces (2020: 48%)
Outside of Canada (2020: 19%)
(1)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
44
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | Financial Markets
FFiinnaanncciiaall RReessuullttss
In the Financial Markets segment, net income totalled $923 million for fiscal 2021, a 25% year-over-
year increase arising from a decrease in provisions for credit losses and from growth in total
revenues. The segment’s income before provisions for credit losses and income taxes on a taxable
equivalent basis totalled $1,266 million in fiscal 2021, up $24 million or 2% from fiscal 2020. Its
fiscal 2021 total revenues on a taxable equivalent basis amounted to $2,146 million, up $92 million
or 4% from $2,054 million in fiscal 2020. Global markets revenues declined 8% given decreases
across all types of revenues, which had benefitted from a favourable context in fiscal 2020. For
fiscal 2021, the segment’s corporate and investment banking revenues grew 24% year over year,
mainly due to increases in revenues from capital markets activities, in revenues from merger and
acquisition activities, and in banking service revenues.
The segment’s fiscal 2021 non-interest expenses posted a year-over-year increase of 8%,
essentially due to higher compensation and employee benefits, notably the variable compensation
associated with revenue growth, as well as to higher technology investment expenses and
operations support charges. The segment’s fiscal 2021 efficiency ratio on a taxable equivalent basis
was 41.0% versus 39.5% in fiscal 2020.
Financial Markets recorded $10 million in provisions for credit losses for fiscal 2021 compared to
$239 million in fiscal 2020. This decrease was due to reversals of credit loss provisions on
non-impaired loans in fiscal 2021 given improved macroeconomic outlook and credit conditions, as
opposed to the substantial credit loss provisions recorded in fiscal 2020 to reflect a significant
deterioration in the macroeconomic outlook caused by COVID-19. For fiscal 2021, the provisions for
credit losses on impaired loans were up $7 million year over year.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2021
(taxable equivalent basis)(1)
45%
55%
Global markets (2020: 62%)
Corporate and investment banking (2020: 38%)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
4
5
0
,
2
66
44
11
,,
22
2
1
8
8
3
7
33
22
99
00
88
88
2020
22002211
Total revenues
Non-interest expenses
Net income
(1)
For additional information on non-GAAP financial measures,
see the Financial Reporting Method section on pages 18 to
21.
National Bank of Canada
45
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
The Bank complements its Canadian growth with a targeted, disciplined international strategy that aims for superior returns. The Bank is currently focused on
specialty finance in the U.S. through Credigy and on personal and commercial banking in Cambodia through ABA Bank. The Bank also holds minority positions
in financial groups operating in French-speaking Africa and Africa-Asia. The Bank currently has a moratorium on any new significant investments in emerging
markets. During fiscal 2021, the U.S. Specialty Finance and International (USSF&I) segment generated 11% of the Bank’s consolidated total revenue and 17%
of its net income.
UU..SS.. SSppeecciiaallttyy FFiinnaannccee –– CCrreeddiiggyy
Founded in 2001, Credigy is a specialty finance company with flexibility across its capital structure to acquire or finance a diverse range of assets. Based in
Atlanta, Georgia, Credigy is primarily active in performing assets covering a broad range of asset classes, mostly secured consumer receivables in the U.S.
market.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
As was seen in Canada, the U.S. economic recovery was surprisingly robust. The consumer services sector continues to gradually recover while the consumer
goods sector is slowing after hitting record highs. However, this slowdown is partly due to the supply chain bottlenecks that are hobbling certain industries, in
particular the automotive sector. We expect these issues to fade in 2022 such that demand bounces back. The job market recovery has disappointed in recent
months given a resurgence of COVID-19 cases and the job market is still posting a labour shortage of almost 4 million workers compared with its pre-pandemic
level. We will, however, continue to anticipate additional progress in the coming months amid a backdrop where there are currently acute labour shortages in
light of numerous economic indicators. Such progress, combined with the improved financial position of households, suggests another year of robust growth
next year, driven mainly by consumption. In addition to having a considerable surplus of savings, households have experienced an unprecedented wealth
effect from the onset of the pandemic, not only because of the strong financial market performance but also because of the rise in housing prices. The real
estate market has cooled off after a very strong upsurge, with activity remaining strong on a historical basis. Despite an inflation level not seen in 30 years, the
U.S. Federal Reserve continues to favour a very accommodative policy, which should continue over several more quarters in anticipation of the labour market
returning to its pre-pandemic level.
The economic environment in 2021 and the outlook for 2022 are discussed in more detail in the Economic Review and Outlook section on page 26.
KKeeyy SSuucccceessss FFaaccttoorrss
Ability to seize opportunities in response to rapidly changing market conditions through a disciplined yet adaptable investment strategy.
Diversification across several classes of performing assets.
Market credibility achieved through over 330 transactions life-to-date, representing over US$19 billion in total investments.
Rigorous underwriting approach strengthened by a continuous refinement of modelling and analytics capabilities as well as 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, due to investments with high credit profiles and structural
enhancements that provide downside protection.
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
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
2021 Achievements and Highlights
Sustain deal flow by being a partner
of choice for bank and non-bank
institutions facing complex
challenges and strategic changes
Conducted active monitoring of the economy and opportunities.
Achieved a balance in transactions among new and existing partners.
Maintained average assets of approximately $7.5 billion.
Maintain a diversified mix of
performing assets
Performing assets accounted for 98% of assets.
Continued asset class diversification focused on secured high-quality consumer assets.
Leveraged flexibility to invest via financing and direct acquisition.
46
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
Strategic Priorities
2021 Achievements and Highlights
Achieve best risk-adjusted returns
Refined and monitored credit models to target the best risk-return investments.
Structured the majority of investments to provide downside protection.
Maintained a disciplined approach to ensure a risk-return balance and a return on assets (ROA) of at least
2.5%.
In 2021, Credigy relied on its flexible, disciplined investment approach to seize emerging opportunities and to manage pandemic-related risks.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002222
Favour asset diversification and a balanced risk-return investment profile.
Leverage relationships with current and prospective partners.
Actively monitor macroeconomic conditions in order to implement risk mitigation strategies.
Deliver asset growth by favouring investments with structural enhancements that provide protection against the risks of an economic slowdown.
Remain prepared to seize opportunities, particularly in response to rapidly evolving conditions in liquidity markets.
IInntteerrnnaattiioonnaall –– AABBAA BBaannkk
Established in 1996, ABA Bank provides financial services to individuals and businesses in Cambodia. It is the third largest and fastest-growing commercial
bank in Cambodia with a return on equity (ROE) of more than 20%. ABA Bank offers a full spectrum of financial services to micro, small and medium
enterprises (MSMEs) as well as to individuals through 79 branches, 786 ATMs and other self-service machines, and advanced online banking and mobile
banking platforms. It has been selected as the Best Bank in Cambodia by Global Finance (seventh consecutive year) and Euromoney (eighth consecutive year)
magazines.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
The pandemic continues to affect Cambodia’s economic growth, most notably in the tourism industry. An effective vaccination campaign (78% of the
population vaccinated as of October 2021) played a favourable role in removing the restrictions on foreign visitors announced since October 2021. After a 3%
contraction in 2020, the economy is expected to grow by 2% in 2021. In 2022, growth rates should progress further towards historical growth rates of 7%, as
global consumption and tourism return to more normalized levels. Cambodia will also continue to benefit from increased regional economic integration under
the Association of Southeast Asian Nations (ASEAN) trade association. The Cambodian market is underbanked; there is a high adoption and use of mobile
technology and social media in the country, and over 65% of the population of 16.7 million is under 35 years of age.
KKeeyy SSuucccceessss FFaaccttoorrss
Loan strategy targeting MSMEs with simple products.
Disciplined risk management that drives high credit quality.
Ability to fund loan growth through the deposit strategy.
Deposit strategy based on state-of-the art technology, leading to a self-sufficient and expanding transactional banking ecosystem.
Governance structure based on rigorous Canadian standards while providing local management with the autonomy to pursue strategic priorities and
Experienced leadership team and skilled workforce supported by robust training programs.
business objectives.
Leveraging National Bank’s reputation as a world-class financial institution.
National Bank of Canada
47
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
OObbjjeeccttiivveess aanndd SSttrraatteeggiieess
ABA Bank is pursuing an omnichannel banking strategy with the goal of becoming the lending partner of choice to MSMEs while increasing market penetration
in deposits and transactional services for retail and business clients.
Strategic Priorities
2021 Achievements and Highlights
Grow market share in MSME lending
Maintain credit quality
Sustain growth in deposits and
transactional services
Achieved 31% growth in loan volumes.
Opened two new branches, bringing the total to 79 throughout the country.
Secured its position as the third-largest bank in the market by increasing market share.
Adapted the MSME lending strategy to support the growing business needs of customers as they become
more mature.
Maintained a well-diversified portfolio (98% of loans are secured).
At 0.8% of the loan portfolio as at October 31, 2021, non-performing loans were below market average.
Prolonged the payment deferral policy established in 2020 to offer relief to ABA Bank clients affected by
the slowdown caused by the COVID-19 pandemic.
Standard & Poor’s maintained ABA Bank’s long-term credit rating at B+ with a stable outlook based on its
strengthening business franchise underpinned by a growing market share and above-average profitability.
Grew deposits 34% from fiscal 2020.
Continued to enhance self-banking capabilities, including the market-leading full-scale mobile banking
application in Cambodia.
Self-banking transactions made up 98% of total transactions.
Further expanded ABA 24/7, a network of standalone self-banking locations that provide customers with
round-the-clock access to their accounts and now has 16 locations throughout the country.
Maintain international recognition of
ABA Bank’s progress
Global Finance magazine named ABA Bank the “Best Bank in Cambodia” for the seventh consecutive year.
Euromoney magazine named ABA Bank the “Best Bank in Cambodia” for the eighth consecutive year.
Asian Banking and Finance magazine named ABA Bank the “Domestic Retail Bank of the Year” for 2021.
Throughout the ongoing pandemic situation, ABA Bank has stood out through its capacity to essentially remain open throughout the lockdown periods and by
leveraging its market-leading digital platform. ABA Bank also donated $1 million to support the country’s efforts to curb the spread of COVID-19.
PPrriioorriittiieess aanndd OOuuttllooookk ffoorr 22002222
MMaaiinnttaaiinn ddoouubbllee--ddiiggiitt ggrroowwtthh aanndd aa ssttrroonngg rreettuurrnn oonn eeqquuiittyy bbyy ccoonnttiinnuuiinngg ttoo ttaarrggeett tthhee MMSSMMEE mmaarrkkeett
Open two branches in 2022 to extend its reach in Cambodia, continue the modernization of its branch network, 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 locations.
Focus on MSME clients in industries that have been minimally affected by the current economic slowdown.
Adapt the product offering to support the growth and evolving needs of ABA Bank’s clients.
EEnnssuurree aa ssoolliidd ffoouunnddaattiioonn ffoorr ssuussttaaiinnaabbllee lloonngg--tteerrmm ggrroowwtthh
Maintain strong governance, disciplined risk management, and sound business processes.
Further develop its transactional banking model to accelerate the migration of cash transactions, payments, and money transfers to self-service and
digital banking channels.
Ensure strong credit quality across the loan portfolio to keep non-performing loan levels below market averages.
Continue to target fully collateralized loans to limit potential losses.
National Bank of Canada
48
National Bank of Canada2021 Annual Report Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
SSeeggmmeenntt RReessuullttss –– UUSSSSFF&&II
Year ended October 31
(millions of Canadian dollars)
TToottaall rreevveennuueess
Credigy
ABA Bank
International
NNoonn--iinntteerreesstt eexxppeennsseess
Credigy
ABA Bank
International
Income before provisions for credit losses and income taxes
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
Credigy
ABA Bank
Income before income taxes
IInnccoommee ttaaxxeess
Credigy
ABA Bank
NNeett iinnccoommee
Credigy
ABA Bank
International
Non-controlling interests
Net income attributable to the Bank's shareholders and holders of other
equity instruments
Average assets(1)
Average loans and receivables(1)
Net impaired loans – Stage 3(1)
Purchased or originated credit-impaired (POCI) loans
Average deposits(1)
Efficiency ratio(1)
22002211
2020
%% cchhaannggee
448866
551100
55
11,,000011
113399
117733
33
331155
668866
((4411))
2266
((1155))
770011
8866
6600
114466
330022
225511
22
555555
−−
406
410
4
820
144
171
4
319
501
59
21
80
421
43
26
69
160
192
−
352
34
555555
1166,,115500
1122,,555588
4400
446644
66,,669999
3311..55 %%
318
14,336
11,340
30
855
5,006
38.9 %
2200
2244
2222
((33))
11
((11))
3377
2244
6677
8899
3311
5588
7755
1133
1111
3333
((4466))
3344
(1)
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
AAvveerraaggee LLooaannss aanndd RReecceeiivvaabblleess –– CCrreeddiiggyy
Year ended October 31
(millions of Canadian dollars)
AAvveerraaggee LLooaannss aanndd AAvveerraaggee DDeeppoossiittss –– AABBAA BBaannkk
Year ended October 31
(millions of Canadian dollars)
7,340
77,,330033
99
99
66
,,
66
55
55
22
,,
55
6
0
0
,
5
0
0
0
,
4
2020
22002211
2020
22002211
Loans
POCI loans
Loans
Deposits
National Bank of Canada
49
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis | U.S. Specialty Finance and International
FFiinnaanncciiaall RReessuullttss
In the USSF&I segment, net income totalled $555 million in fiscal 2021, up 58% from $352 million
in fiscal 2020. The segment’s fiscal 2021 total revenues amounted to $1,001 million versus
$820 million in fiscal 2020, a 22% increase driven mainly by higher revenues at the ABA Bank
subsidiary, which rose $100 million owing to loan and deposit growth, as well as by higher
revenues at the Credigy subsidiary, which rose $80 million following a disposal of loan portfolios
and fair value remeasurements of certain loan portfolios.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2021
The segment’s non-interest expenses stood at $315 million in fiscal 2021 compared to $319 million
in fiscal 2020, a $4 million decrease attributable to a decline in Credigy’s non-interest expenses
given lower service charges.
51%
49%
Provisions for credit losses were down $95 million compared to fiscal 2020, resulting in part from a
more favourable macroeconomic outlook as well as from a remeasurement of POCI loan portfolios at
Credigy.
CCrreeddiiggyy
For fiscal 2021, the Credigy subsidiary’s net income, as reported in the USSF&I segment, totalled
$302 million, up 89% from fiscal 2020. The subsidiary’s fiscal 2021 total revenues amounted to
$486 million, up from $406 million in fiscal 2020. Growth in loan portfolios and strong performance
in certain portfolios led to higher net interest income, while an increase in non-interest income
came from a $26 million gain recorded in the first quarter of 2021 following a disposal of loan
portfolios, from a favourable impact of remeasuring certain loan portfolios at fair value, and from
sound performance by certain loan portfolios in fiscal 2021, whereas the impacts of the COVID-19
pandemic had had an unfavourable impact on the performance of these same portfolios in fiscal
2020. Credigy’s non-interest expenses were down $5 million year over year given a decrease in
service charges, partly offset by an increase in variable compensation. Credigy’s provisions for
credit losses were down $100 million year over year, resulting in part from a more favourable
macroeconomic outlook, a remeasurement of POCI loan portfolios, and a decrease in provisions for
credit losses on impaired loans.
During fiscal 2021, the Bank acquired the entire remaining non-controlling interest in the Credigy
subsidiary. For additional information, see Note 31 to the consolidated financial statements.
AABBAA BBaannkk
For fiscal 2021, ABA Bank’s net income totalled $251 million, up 31% from fiscal 2020. Growth in
the subsidiary’s business activities, mainly in the form of sustained loan and deposit growth, drove
total revenues up 24% year over year. However, this growth was tempered by lower interest rates
and by exchange rate movement. At $173 million, ABA Bank’s non-interest expenses remained
relatively stable compared with fiscal 2020, as higher variable compensation was offset by
exchange rate movement. The subsidiary recorded $26 million in provisions for credit losses in
fiscal 2021, up $5 million year over year, as provisions for credit losses on non-impaired loans rose,
essentially due to an anticipated impact on clients from an increase in COVID-19 cases in fiscal
2021.
The subsidiary's fiscal 2021 effective tax rate increased, mainly due to tax incentive measures
granted by the Cambodian government and recorded during the second quarter of fiscal 2020.
Credigy (2020: 50%)
ABA Bank (2020: 50%)
OOppeerraattiinngg RReessuullttss
Year ended October 31
(millions of Canadian dollars)
11,,000011
820
555555
319
352
331155
Total
revenues
Non-
interest
expenses
s
Net
income
Total
revenues
Non-
interest
expenses
s
Net
income
2020
22002211
Credigy
ABA Bank and International
50
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
BBuussiinneessss SSeeggmmeenntt AAnnaallyyssiiss || OOtthheerr
The Other heading reports on Treasury operations, liquidity management, Bank funding, asset and liability management, the activities of the Flinks subsidiary,
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.
SSeeggmmeenntt RReessuullttss –– OOtthheerr
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income on a taxable equivalent basis
Non-interest income on a taxable equivalent basis
Total revenues on a taxable equivalent basis
Non-interest expenses
Income before provisions for credit losses and income taxes on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes (recovery) on a taxable equivalent basis
NNeett lloossss
Non-controlling interests
Net loss attributable to the Bank’s shareholders and holders of other equity instruments
Specified items after income taxes(1)
NNeett lloossss eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss(1)
22002211
2020(2)
((220000))
331144
111144
442233
((330099))
−−
((330099))
((8877))
((222222))
−−
((222222))
((77))
((221155))
(177)
179
2
397
(395)
3
(398)
(86)
(312)
8
(320)
(133)
(179)
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(3)
((77))
((221155))
6622,,550033
(123)
(197)
56,665
(1)
(2)
(3)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For the year ended October 31, 2020, certain amounts have been reclassified.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
FFiinnaanncciiaall RReessuullttss
For the Other heading of segment results, there was a net loss of $222 million in fiscal 2021 compared to a net loss of $312 million in fiscal 2020. This change
in net loss was mainly due to gains on investments, a $33 million gain on remeasurement of the previously held equity interest in Flinks, and a decrease in the
expenses incurred by the Bank to protect the health and safety of employees and clients in response to COVID-19, which were higher in fiscal 2020. These
items were partly offset by a loss of $30 million ($26 million net of income taxes) on a fair value remeasurement of the Bank’s equity interest in AfrAsia, as well
as by an increase in variable compensation associated with revenue growth. In fiscal 2021, the specified items had an unfavourable impact of $7 million on the
Other heading’s net income compared with an unfavourable impact of $133 million in fiscal 2020. Revenues from Treasury activities were lower in fiscal 2021
compared to fiscal 2020, partly due to the market volatility experienced in fiscal 2020.
The specified items, net of income taxes, recorded in fiscal 2021 consisted of a $7 million impairment loss on intangible assets. The specified items, net of
income taxes, recorded in fiscal 2020 had included a $36 million foreign currency translation loss on a 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. For fiscal
2021, net loss excluding specified items stood at $215 million compared to a $179 million net loss in fiscal 2020.
National Bank of Canada
51
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
QQuuaarrtteerrllyy FFiinnaanncciiaall IInnffoorrmmaattiioonn
Several trends and factors have an impact on the Bank’s quarterly net income, revenues, non-interest expenses and provisions for credit losses. The following
table presents a summary of results for the past eight quarters.
QQuuaarrtteerrllyy RReessuullttss SSuummmmaarryy(1)
(millions of Canadian dollars)
SSttaatteemmeenntt ooff iinnccoommee ddaattaa
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
NNeett iinnccoommee
QQ44
QQ33
QQ22
11,,119900
11,,002211
22,,221111
11,,225588
995533
((4411))
221188
777766
11,,223300
11,,002244
22,,225544
11,,221166
11,,115566
11,,008822
22,,223388
11,,119999
11,,003388
11,,003399
((4433))
224422
883399
55
223333
880011
22002211
QQ11
11,,220077
11,,001177
22,,222244
11,,118800
11,,004444
8811
220022
776611
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
(1)
For additional information about the 2021 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 2021, published on December 1, 2021. A summary of results for the past 12 quarters is provided in Table 1 on pages 114 and 115 of this MD&A.
The above analysis of the past eight quarters shows the sustained performance of all the business segments and helps readers identify the items that have
favourably or unfavourably affected results. In fiscal 2021, net income posted year-over-year growth in every quarter. This significant growth came from the net
income increases generated in each business segment, notably driven by higher revenues and by lower provisions for credit losses given an improved
macroeconomic outlook in fiscal 2021. During the fourth quarter of fiscal 2021, the Bank recorded $7 million in impairment losses (net of income taxes) on
intangible assets, whereas, in the fourth quarter of fiscal 2020, the Bank had recorded a foreign currency translation loss on a disposal of subsidiaries,
impairment losses on premises and equipment and on intangible assets, and severance pay, all of which combined had a $133 million unfavourable impact on
net income.
Net interest income posted year-over-year increases for every quarter of fiscal 2021. These increases were mainly driven by personal and commercial loan and
deposit growth, by trading activity revenues in the Financial Markets segment, by loan portfolio growth at the Credigy subsidiary, and by increases in the net
interest income of the ABA Bank subsidiary owing to sustained business growth. In the Wealth Management segment, the fiscal 2021 net interest income
posted year-over-year growth in every quarter except the first quarter of fiscal 2021, as deposit margins narrowed due to lower interest rates, partly offset by
growth in loan volume.
In fiscal 2021, non-interest income posted year-over-year increases in every quarter. These increases were driven by sustained business growth across all the
business segments except for Financial Markets, which saw non-interest income decline due to trading activity revenues. In the Wealth Management segment,
non-interest income grew substantially in every quarter of fiscal 2021 given growth in average assets under administration and under management as a result
of net inflows into various solutions and of stronger stock market performance in fiscal 2021. In the USSF&I segment, non-interest income included a gain on
the disposal of loan portfolios in the first quarter of 2021. And in the fourth quarter of fiscal 2020, non-interest income had included a foreign currency
translation loss on a disposal of subsidiaries.
In fiscal 2021, non-interest expenses posted year-over-year increases in every quarter except the fourth quarter, wherein it remained stable. The increases
were attributable to compensation and employee benefits and to technology investment expenses incurred as part of the Bank’s transformation plan and for
business development. These increases were tempered, however, by decreases in certain expenses, in particular the compensatory tax on salaries and the
expenses incurred by the Bank to implement health and safety measures for employees and clients in response to COVID-19, which were higher in the
corresponding quarters of fiscal 2020. In the fourth quarter of fiscal 2021, non-interest expenses included $9 million in impairment losses on intangible
assets, whereas, in the fourth quarter of fiscal 2020, they had included $71 million in impairment losses on premises and equipment and on intangible assets
and $48 million in severance pay. And in the first quarter of fiscal 2020, non-interest expenses had included a $13 million charge related to Maple.
Year over year, the Bank’s provisions for credit losses decreased in every quarter of fiscal 2021. These decreases were attributable to reversals of allowances
for credit losses on non-impaired loans, recorded as of the second quarter of fiscal 2021, to reflect improvements in the macroeconomic outlook and in credit
conditions in fiscal 2021, as opposed to the substantial deterioration in the macroeconomic outlook caused by COVID-19 in fiscal 2020, especially in the
second quarter of fiscal 2020, when the Bank recorded very high credit loss provisions on non-impaired loans. The decreases in provisions for credit losses
were also due to lower credit loss provisions on impaired loans, essentially those in Personal and Commercial Banking and at the Credigy subsidiary. In
addition, significant remeasurements of POCI loan portfolios at the Credigy subsidiary contributed to a year-over-year decrease in provisions for credit losses
in the third quarter of fiscal 2021.
The change in the effective tax rates between the quarters of fiscal 2020 and fiscal 2021 came essentially from a higher level and proportion of tax-exempt
dividend income in every quarter of fiscal 2020. In addition, a lower effective tax rate in the second quarter of 2020 was attributable to a lower tax rate at the
ABA Bank subsidiary given tax incentives granted by the Cambodian government.
52
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
AAnnaallyyssiiss ooff tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett SSuummmmaarryy
As at October 31
(millions of Canadian dollars)
AAsssseettss
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase agreements and securities borrowed
Loans and acceptances, net of allowances
Other
LLiiaabbiilliittiieess aanndd eeqquuiittyy
Deposits
Other
Subordinated debt
Equity attributable to the Bank’s shareholders and holders of other equity instruments
Non-controlling interests
22002211
2020
%% cchhaannggee
3333,,887799
110066,,330044
77,,551166
118822,,668899
2255,,440077
335555,,779955
224400,,993388
9955,,223333
776688
1188,,885533
33
335555,,779955
29,142
102,131
14,512
164,740
21,100
331,625
215,878
98,589
775
16,380
3
331,625
1166
44
((4488))
1111
2200
77
1122
((33))
((11))
1155
−−
77
As at October 31, 2021, the Bank had total assets of $355.8 billion, rising $24.2 billion or 7% from $331.6 billion since year-end 2020.
CCaasshh aanndd DDeeppoossiittss WWiitthh FFiinnaanncciiaall IInnssttiittuuttiioonnss
At $33.9 billion as at October 31, 2021, cash and deposits with financial institutions rose $4.8 billion since October 31, 2020, mainly due to greater deposits
with the Bank of Canada and the U.S. Federal Reserve. The high level of cash and deposits with financial institutions came partly from the liquidity obtained as
part of financing initiatives deployed by the Canadian government in 2020, through the Bank of Canada, to support the Canadian financial system in response
to COVID-19. The Bank’s liquidity and funding risk management practices are described on pages 94 to 103 of this MD&A.
SSeeccuurriittiieess
Since October 31, 2020, securities rose $4.2 billion due to a $6.5 billion or 8% increase in securities at fair value through profit or loss, particularly equity
securities, tempered by a $2.3 billion decrease in securities other than those measured at fair value through profit or loss. Securities purchased under reverse
repurchase agreements and securities borrowed decreased by $7.0 billion, mainly related to activities in the Financial Markets segment and Treasury. The
Bank’s market risk management policies are described on pages 87 to 93 of this MD&A.
LLooaannss aanndd AAcccceeppttaanncceess
Totalling $182.7 billion as at October 31, 2021, and representing 51% of total assets, loans and acceptances, net of allowances for credit losses, rose
$18.0 billion or 11% since October 31, 2020.
Residential mortgage loans outstanding totalled $72.5 billion as at October 31, 2021, rising $7.5 billion or 12% since October 31, 2020. This growth was
driven mainly by sustained demand for mortgage credit in the Personal and Commercial segment. Personal loans totalled $41.1 billion at year-end 2021, rising
$3.5 billion from $37.6 billion at year-end 2020, due mainly to business growth at Personal Banking, in the Wealth Management segment, and at the ABA Bank
subsidiary, tempered by a decrease in outstanding loan portfolios of the Credigy subsidiary following repayments and a disposal of loan portfolios. As for
credit card receivables, they totalled $2.2 billion, rising $0.1 billion since October 31, 2020.
At $67.9 billion as at October 31, 2021, loans and acceptances to businesses and government increased $6.6 billion or 11% since October 31, 2020 owing
mainly to growth in the business activities of Commercial Banking and the Credigy subsidiary.
Table 9 (page 121) shows gross loans and acceptances by borrower category as at October 31, 2021. At $89.0 billion as at October 31, 2021, residential
mortgages (including home equity lines of credit) have posted strong growth since 2017 and account for 49% of total loans and acceptances. This growth in
residential mortgages was driven by sustained demand for mortgage credit. As for personal loans, they totalled $16.5 billion as at October 31, 2021. With
respect to commercial loans, there was year-over-year growth in the agriculture, utilities, finance and insurance, real estate and real-estate-construction, and
other services categories. As at October 31, 2021, certain categories posted year-over-year decreases, notably the oil and gas and pipelines category.
Furthermore, the Credigy subsidiary’s POCI loans decreased since October 31, 2020 as a result of repayments and maturities of certain portfolios.
National Bank of Canada
53
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
IImmppaaiirreedd LLooaannss
Impaired loans include loans classified in Stage 3 of the expected credit loss model and the purchased or originated credit-impaired (POCI) loans of the
Credigy subsidiary.
As at October 31, 2021, gross impaired loans excluding POCI loans stood at $662 million compared to $817 million as at October 31, 2020 (Table 10,
page 121). Net impaired loans excluding POCI loans stood at $283 million as at October 31, 2021 compared to $465 million as at October 31, 2020, a
$182 million decrease arising from decreases in the net impaired loans of the Personal Banking and Commercial Banking loan portfolios and in the Financial
Markets loan portfolios. This decrease was partly offset by an increase in the net impaired loans of the Wealth Management and ABA Bank loan portfolios.
Gross POCI loans stood at $464 million as at October 31, 2021, whereas they had stood at $855 million as at October 31, 2020 as a result of repayments and
maturities of certain loan portfolios.
A detailed description of the Bank’s credit risk management practices is provided on pages 78 to 86 of this MD&A as well as in Note 7 to the consolidated
financial statements.
OOtthheerr AAsssseettss
As at October 31, 2021, other assets totalled $25.4 billion compared with $21.1 billion as at October 31, 2020, a $4.3 billion increase that came mainly from a
$3.1 billion increase in derivative financial instruments related to the activities of the Financial Markets segment as well as from a $0.6 billion increase in
defined benefit pension plan assets.
DDeeppoossiitt LLiiaabbiilliittyy
At $240.9 billion as at October 31, 2021, deposits increased by $25.0 billion or 12% since year-end 2020. At $70.1 billion, personal deposits, as presented in
Table 12 (page 122), increased $2.6 billion since October 31, 2020 and accounted for 29% of all deposits. This increase was driven by business growth in
Personal Banking, in the Financial Markets segment, and at the ABA Bank subsidiary, tempered by lower deposits in the Wealth Management segment.
As shown in Table 12, business and government deposits totalled $167.9 billion, rising $24.1 billion from $143.8 billion since year-end 2020. This increase
came from the funding activities of the Financial Markets segment and of Treasury, including $3.5 billion in deposits subject to bank recapitalization (bail-in)
conversion regulations, as well as from Commercial Banking activities. Deposits from deposit-taking institutions decreased $1.6 billion since year-end 2020.
OOtthheerr LLiiaabbiilliittiieess
As at October 31, 2021, other liabilities stood at $95.2 billion, declining $3.4 billion since October 31, 2020, as a $3.9 billion increase in obligations related to
securities sold short and a $6.5 billion increase in derivative financial instruments were more than offset by a $16.6 billion decrease in obligations related to
securities sold under repurchase agreements and securities loaned.
SSuubboorrddiinnaatteedd DDeebbtt aanndd OOtthheerr CCoonnttrraaccttuuaall OObblliiggaattiioonnss
Subordinated debt has remained relatively stable since October 31, 2020. The contractual obligations are presented in detail in Note 29 to the consolidated
financial statements.
EEqquuiittyy
As at October 31, 2021, equity attributable to the Bank’s shareholders and holders of other equity instruments was $18.9 billion, rising $2.5 billion from
$16.4 billion since October 31, 2020. This increase was mainly due to net income net of dividends, by the $500 million issuance of LRCN – Series 2, by the
issuance of common shares under the Stock Option Plan, by remeasurements of pension plans and other post-employment benefit plans, and by gains on cash
flow hedges in accumulated other comprehensive income. These increases were partly offset by unrealized foreign currency translation losses on investments
in foreign operations and by the $800 million in redemptions of the Series 34 and Series 36 preferred shares.
The Consolidated Statements of Changes in Equity on page 136 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.
54
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
AAccqquuiissiittiioonnss
AAccqquuiissiittiioonn ooff FFlliinnkkss TTeecchhnnoollooggyy IInncc.
On September 8, 2021, the Bank finalized the acquisition of Flinks Technology Inc. (Flinks), a leading fintech company specialized in financial data aggregation
and distribution, in which the Bank had already been holding a 30.2% equity interest. Flinks provides services to a wide North American fintech ecosystem and
offers attractive data technology solutions. The acquisition strategically positions the Bank in a high-growth market to continue to enhance customer
experiences and benefit from future technology-driven innovations. At the time of acquisition, the amount of which was $73 million in cash for voting preferred
shares, the Bank was holding an 82.9% equity interest in Flinks, thereby giving it control thereover. Immediately after the acquisition, the Bank made an
additional $30 million investment in voting right preferred shares, giving the Bank an 85.9% equity interest in Flinks. The amount of the $73 million purchase
price, of the fair value of the previously held equity interest, and of the estimated value of the non-controlling interest established on the acquisition date,
exceeded the fair value of the net assets acquired by $101 million. This excess amount has been recorded on the Consolidated Balance Sheet as goodwill and
mainly represents the expected future profits of Flinks given its favourable position in this growth market. The goodwill is not deductible for tax purposes. The
previously held equity interest, accounted for as an associate, was remeasured at fair value, generating a $33 million non-taxable remeasurement gain that
was reported in the Non-interest income – Other item of the Consolidated Statement of Income.
AAccqquuiissiittiioonn ooff tthhee EEnnttiirree RReemmaaiinniinngg NNoonn--CCoonnttrroolllliinngg IInntteerreesstt iinn tthhee CCrreeddiiggyy LLttdd.. SSuubbssiiddiiaarryy
On December 15, 2020, the Bank acquired the entire remaining non-controlling interest in the Credigy Ltd. subsidiary following a decision by the non-
controlling shareholders to exercise their put options for an amount of $300 million according to an agreement reached in 2013. Following this transaction,
Credigy Ltd. became a wholly owned subsidiary of the Bank.
EExxppoossuurreess ttoo CCeerrttaaiinn AAccttiivviittiieess
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, 2021, total commitments for this type of loan
stood at $4,048 million ($3,681 million as at October 31, 2020). Details about other exposures are provided in the table concerning structured entities in
Note 27 to the consolidated financial statements.
National Bank of Canada
55
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
RReellaatteedd PPaarrttyy TTrraannssaaccttiioonnss
In the normal course of business, the Bank provides various banking services and enters into contractual agreements and other transactions with associates,
joint ventures, directors, key officers and other related parties. These agreements and transactions are entered into under conditions similar to those offered
to non-related third parties.
In accordance with the Bank Act (Canada), the aggregate of loans granted to key officers of the Bank, excluding mortgage loans granted on their principal
residence, cannot exceed twice the officer’s annual salary.
Loans to eligible key officers are granted under the same conditions as those granted to any other employee of the Bank. The main conditions are as follows:
the employee must meet the same credit requirements as a client;
mortgage loans are offered at the preferential employee rate;
home equity lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two;
personal loans bear interest at a risk-based regular client rate;
personal lines of credit bear interest at Canadian prime less 0.5%, but never lower than Canadian prime divided by two.
credit card advances bear interest at a prescribed fixed rate in accordance with Bank policy;
The Bank also offers a deferred stock unit plan to directors who are not Bank employees. For additional information, see Note 22 to the consolidated financial
statements. Additional information on related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.
IInnccoommee TTaaxxeess
In June 2021, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $115 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2016.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $610 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2015, 2014, 2013 and 2012 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a “dividend rental arrangement”.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2016 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, 2021.
EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
RReeppuurrcchhaassee ooff CCoommmmoonn SShhaarreess
On November 30, 2021, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 10, 2021, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2% of its outstanding common shares) over the 12-month period ending December 9, 2022. 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. This normal course
issuer bid is subject to the approval of OSFI and the Toronto Stock Exchange (TSX).
56
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
SSeeccuurriittiizzaattiioonn aanndd OOffff--BBaallaannccee--SShheeeett AArrrraannggeemmeennttss
In the normal course of business, the Bank is party to various financial arrangements that, under IFRS, are not required to be recorded on the Consolidated
Balance Sheet or are recorded under amounts other than their notional or contractual values. These arrangements include, among others, transactions with
structured entities, derivative financial instruments, the issuance of guarantees, credit instruments, and financial assets received as collateral.
SSttrruuccttuurreedd EEnnttiittiieess
The Bank uses structured entities, among other means, to diversify its funding sources and to offer services to clients, in particular to help them securitize their
financial assets or provide them with investment opportunities. Under IFRS, a structured entity must be consolidated if the Bank controls the entity. Note 1 to
the consolidated financial statements describes the accounting policy and criteria used for consolidating structured entities. Additional information on
consolidated and non-consolidated structured entities is provided in Note 27 to the consolidated financial statements.
SSeeccuurriittiizzaattiioonn ooff tthhee BBaannkk’’ss FFiinnaanncciiaall AAsssseettss
Mortgage Loans
The Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the Mortgage-Backed Securities Program under the
National Housing Act (Canada) (NHA) and the Canada Mortgage Bond (CMB) Program. Under the first program, the Bank issues NHA securities backed by
insured residential mortgage loans and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT), which finances the purchase through
the issuance of mortgage bonds insured by CMHC. Moreover, these mortgage bonds feature an interest rate swap agreement under which a CMHC-certified
counterparty pays CHT the interest due to investors and receives the interest on the NHA securities. As at October 31, 2021, the outstanding amount of NHA
securities issued by the Bank and sold to CHT was $22.4 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, 2021, the credit card receivables portfolio held by CCCT II (net of the Bank Certificate held by the Bank) represented an amount outstanding
of $1.9 billion. CCCT II issued notes to investors, $0.1 billion of which is held by third parties and $1.8 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 notes 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 notes subordinated to the senior notes, representing 5.8% of the total amount of the series issued. The Bank
controls CCCT II and thus consolidates it.
SSeeccuurriittiizzaattiioonn ooff TThhiirrdd--PPaarrttyy FFiinnaanncciiaall AAsssseettss
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
acquired assets. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs while continuing to service the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides administrative and transaction structuring services to these conduits. The Bank provides backstop liquidity and
credit enhancement facilities under the commercial paper program. These facilities are presented and described in Notes 26 and 27 to the consolidated
financial statements. The Bank has concluded derivative financial instrument contracts with these conduits, the fair value of which is presented on the Bank’s
Consolidated Balance Sheet. The Bank is not required to consolidate these conduits, as it does not control them.
National Bank of Canada
57
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Securitization and Off-Balance-Sheet Arrangements
DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
The Bank uses various types of derivative financial instruments to meet its clients’ needs, generate trading activity revenues, and manage its exposure to
interest rate, foreign exchange and credit risk as well as other market risks. All derivative financial instruments are accounted for at fair value on the
Consolidated Balance Sheet. Transactions in derivative financial instruments are expressed as notional amounts. These amounts are not presented as assets
or liabilities on the Consolidated Balance Sheet. They represent the face amount of the contract to which a rate or price is applied to determine the amount of
cash flows to be exchanged. Notes 1 and 16 to the consolidated financial statements provide additional information on the types of derivative financial
instruments used by the Bank and their accounting basis.
GGuuaarraanntteeeess
In the normal course of business, the Bank enters into various guarantee contracts. The principal types of guarantees are letters of guarantee, backstop
liquidity and credit enhancement facilities, certain securities lending activities, and certain indemnification agreements. Note 26 to the consolidated financial
statements provides detailed information on these guarantees.
CCrreeddiitt IInnssttrruummeennttss
In the normal course of business, the Bank enters into various off-balance-sheet credit commitments. The credit instruments used to meet the financing needs
of its clients represent the maximum amount of additional credit that the Bank could be required to extend if the commitments were fully drawn. For additional
information on these off-balance-sheet credit instruments and other items, see Note 26 to the consolidated financial statements.
FFiinnaanncciiaall AAsssseettss RReecceeiivveedd aass CCoollllaatteerraall
In the normal course of business, the Bank receives financial assets as collateral as a result of transactions involving securities purchased under reverse
repurchase agreements, securities borrowing and lending agreements, and derivative financial instrument transactions. For additional information on financial
assets received as collateral, see Note 26 to the consolidated financial statements.
58
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
CCaappiittaall MMaannaaggeemmeenntt
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers risks
inherent to the Bank’s business, supports its business segments, and protects its clients.
CCaappiittaall MMaannaaggeemmeenntt FFrraammeewwoorrkk
The Bank’s capital management policy defines guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment process.
This process aims to determine the capital that the Bank needs to pursue its business activities and accommodate unexpected losses arising from extremely
adverse economic and operational conditions. The Bank has implemented a rigorous internal capital adequacy assessment process that comprises the
following procedures:
conducting an overall risk assessment;
measuring significant risks and the capital requirements related to the Bank’s financial budget for the next fiscal year and current and prospective risk
profiles;
integrating stress tests across the organization and executing sensitivity analyses to determine the capital buffer above minimum regulatory levels (for
additional information on enterprise-wide stress testing, see the Risk Management section of this MD&A);
aggregating capital and monitoring the reasonableness of internal capital compared with regulatory capital;
comparing projected internal capital with regulatory capital levels, internal operating targets, and competing banks;
attesting to the adequacy of the Bank’s capital levels.
Assessing capital adequacy is an integral part of capital planning and strategy. The Bank sets internal capital ratio targets that include a discretionary cushion
in excess of the regulatory requirements, which provides a solid financial structure and sufficient capital to meet management’s business needs in accordance
with its risk appetite, along with competitive returns to shareholders, under both normal market conditions and a range of severe but plausible stress testing
scenarios. The internal capital adequacy assessment process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and
periodic amendments.
Risk-adjusted return on capital 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.
SSttrruuccttuurree aanndd GGoovveerrnnaannccee
Along with its partners from Risk Management, Global Funding and Treasury Group, and Finance, the Capital Management team is responsible for maintaining
integrated control methods and processes so that an overall assessment of capital adequacy may be performed.
The Board oversees the structure and development of the Bank’s capital management policy and ensures that the Bank maintains sufficient capital in
accordance with regulatory requirements and in consideration of market conditions. The Board delegates certain responsibilities to the Risk Management
Committee (RMC), which in turn recommends capital management policies and oversees their application. However, the Board, on the recommendation of the
RMC, assumes the following responsibilities:
reviewing and approving the capital management policy;
reviewing and approving the Bank’s risk appetite, including the main capital and risk targets and the corresponding limits;
reviewing and approving the capital plan and strategy on an annual basis, including the Bank’s internal capital adequacy assessment process;
reviewing and approving the implementation of significant measures respecting capital, including contingency measures;
reviewing significant capital disclosures, including Basel capital adequacy ratios;
ensuring the appropriateness of the regulatory capital adequacy assessment.
The Office of the President is responsible for defining the Bank’s strategy and plays a key role in guiding measures and decisions regarding capital. The
Enterprise-Wide Risk Management Committee oversees capital management, which consists of reviewing the capital plan and strategy and implementing
significant measures respecting capital, including contingency measures, and making recommendations with respect to these measures.
National Bank of Canada
59
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
BBaasseell AAccccoorrdd aanndd RReegguullaattoorryy EEnnvviirroonnmmeenntt
BBaasseell AAccccoorrdd
The Basel Accord proposes a range of approaches of varying complexity, the choice of which determines the sensitivity of capital to risks. A less complex
approach, such as the Standardized Approach, uses regulatory weightings, while a more complex approach uses the Bank’s internal estimates of risk
components to establish risk-weighted assets and calculate regulatory capital.
As required under Basel, risk-weighted assets (RWA) are calculated for each credit risk, market risk, and operational risk. The Bank uses the Advanced Internal
Rating-Based (AIRB) Approach for credit risk to determine minimum regulatory capital requirements for a majority of its portfolios. The credit risk of certain
portfolios considered to be less significant is weighted according to the Basel Standardized Approach. The simple risk-weighted method is used to calculate
the charge related to banking book equity securities. This method requires proactive management of the capital allocated to portfolios with banking book
equity securities, since, beyond a certain investment threshold, the cost of regulatory capital becomes prohibitive. As for operational risk, the Bank uses the
Standardized Approach. Market risk-weighted assets are primarily determined using the Internal Model-Based Approach, 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, Kroll Bond Rating Agency, or DBRS or a combination of these ratings. The Bank uses the Securitization: Internal Assessment
Approach (SEC-IAA) for unrated securitization exposures relating to the asset-backed commercial paper conduits it sponsors. The SEC-IAA rating
methodologies used are mainly based on criteria published by the above-mentioned credit rating agencies and consider risks factors that the Bank deems
relevant to assessing the credit quality of the exposures. The Bank’s SEC-IAA includes an assessment of the extent by which the credit enhancement available
for loss protection provides coverage of expected losses. The levels of stressed coverage the Bank requires for each internal risk rating are consistent with the
requirements published by the rating agencies for equivalent external ratings by asset class. If the Bank cannot apply the SEC-ERBA or the SEC-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.
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 CET1 capital deductions. Additional Tier 1 (AT1) capital consists of
eligible non-cumulative preferred shares, limited recourse capital notes (LRCN), and other AT1 capital adjustments. The sum of CET1 and AT1 capital forms
what is known as Tier 1 capital. Tier 2 capital consists of eligible subordinated debts and certain allowances for credit losses. Total regulatory capital is the
sum of Tier 1 and Tier 2 capital.
60
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
OSFI is responsible for applying the Basel Accord in Canada. As required under the Basel Accord, OSFI requires that regulatory capital instruments other than
common equity have a non-viability contingent capital (NVCC) clause to ensure that investors bear losses before taxpayers should the government determine
that it is in the public interest to rescue a non-viable financial institution. Instruments issued before January 1, 2013 that would be Basel III compliant if it were
not for the absence of the NVCC clause are grandfathered and will be phased out over a period of ten years. As at October 31, 2021, the Bank has one
remaining non-NVCC Tier 2 subordinated debt capital instrument, which it expects to phase out without resorting to any regulatory event redemption clause.
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 (collectively the Bail-In Regulations).
Pursuant to the CDIC Act, in circumstances where OSFI has determined that the Bank has ceased, or is about to cease, to be viable, the Governor in Council
may, upon a Minister of Finance recommendation indicating that he or she believes that it is in the public interest to do so, grant an order directing CDIC to
convert all or a portion of certain shares and liabilities of the Bank into common shares (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 came into force are not subject to a Bail-In Conversion, unless, in the case of a liability, the terms of said 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), an 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, 2021, outstanding liabilities of $11.9 billion ($8.4 billion as at October 31, 2020) were subject to conversion under the Bail-In Regulations.
The Bank and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 10.5%, a Tier 1
capital ratio of at least 12.0%, and a Total capital ratio of at least 14.0%. All of these ratios are to include a capital conservation buffer of 2.5% established by
the BCBS and OSFI, a 1.0% surcharge applicable solely to D-SIBs, and a 2.5% domestic stability buffer established by OSFI. On June 17, 2021, OSFI raised the
domestic stability buffer from 1.0% to 2.5% effective on October 31, 2021. The domestic stability buffer, which varies from 0% to 2.5% of risk-weighted
assets, consists exclusively of CET1 capital. A D-SIB that fails to meet this buffer requirement is not subject to automatic constraints to reduce capital
distributions but must 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 24.0% (including the domestic stability buffer) of
risk-weighted assets and a minimum TLAC leverage ratio of 6.75% as of November 1, 2021. During the year ended October 31, 2019, the Bank had started to
issue qualifying bail-in debt such that its TLAC ratios could improve through the normal refinancing of its maturing unsecured term debt. The Bank was in
compliance with the TLAC requirements as of November 1, 2021.
National Bank of Canada
61
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
RReeqquuiirreemmeennttss –– RReegguullaattoorryy RRaattiiooss UUnnddeerr BBaasseell IIIIII
MMiinniimmuumm
CCaappiittaall
ccoonnsseerrvvaattiioonn
bbuuffffeerr
MMiinniimmuumm
sseett bbyy
BBCCBBSS
DD--SSIIBB
ssuurrcchhaarrggee
MMiinniimmuumm
sseett bbyy
OOSSFFII(1)
AAss aatt OOccttoobbeerr 3311,, 22002211
MMiinniimmuumm sseett bbyy
OOSSFFII(1),, iinncclluuddiinngg
tthhee ddoommeessttiicc
ssttaabbiilliittyy bbuuffffeerr
DDoommeessttiicc
ssttaabbiilliittyy
bbuuffffeerr(2)
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
44..55 %%
66..00 %%
88..00 %%
33..00 %%
22..55 %%
22..55 %%
22..55 %%
nn..aa..
77..00 %%
88..55 %%
1100..55 %%
nn..aa..
11..00 %%
11..00 %%
11..00 %%
nn..aa..
88..00 %%
99..55 %%
1111..55 %%
33..00 %%
22..55 %%
22..55 %%
22..55 %%
nn..aa..
1100..55 %%
1122..00 %%
1144..00 %%
33..00 %%
n.a. Not applicable
(1)
(2) On June 17, 2021, OSFI raised the domestic stability buffer from 1.0% to 2.5%, effective October 31, 2021.
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 domestic stability 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.
RReegguullaattoorryy CCoonntteexxtt
The Bank closely monitors regulatory developments and participates actively in various consultative processes. In response to the impact of the COVID-19
pandemic, on March 27, 2020 OSFI announced a series of regulatory adjustments to support the financial and operational resilience of banks. The measures
announced by OSFI that have continued to have an impact on the Bank for the year ended October 31, 2021 are described in the section entitled COVID-19
Pandemic – Key Measures Introduced by the Regulatory Authorities, which is on page 17 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.
On March 27, 2020, in response to the impact of the COVID-19 pandemic, GHOS announced a postponement to the implementation of the Basel III
international capital standard reform. OSFI therefore postponed, until the first quarter of 2023, the implementation of the Standardized Approach and
Advanced IRB Approach to credit risk, the revision of the operational risk framework and of the leverage ratio framework, and the introduction of a more risk-
sensitive capital floor. Implementation of the Pillar 3 financial disclosure requirements finalized by the BCBS in December 2018 was also postponed until at
least the first quarter of 2023. On November 29, 2021, OSFI postponed the implementation of the above-mentioned Basel III reform items to the second
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, and implementation of the revised CVA risk framework are being postponed to the first quarter of 2024.
On March 11, 2021, OSFI launched an industry consultation on regulatory changes that introduce the latest and final series of Basel III reforms into the capital,
leverage, and disclosure guidelines applicable to Canadian banks. OSFI’s proposals align with the international standards set by the BCBS while also reflecting
the realities of the Canadian market. On May 4, 2021, OSFI launched an industry consultation on the corresponding changes to the regulatory returns, namely,
the Basel Capital Adequacy Reporting (BCAR) return and the Leverage Requirements (LR) return. Finally, on June 18, 2021, OSFI launched an industry
consultation on proposed regulatory changes to the treatment of credit valuation adjustments (CVA) and market risk hedges of other valuation adjustments of
over-the-counter derivatives referred to as XVA. The Bank is actively participating in these consultations.
62
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
Unwinding of Regulatory Adjustments and Other Projects
On March 16, 2021, OSFI announced the unwinding of the temporary reduction to stressed Value-at-Risk (VaR) multipliers under the market risk capital
requirements for banks, returning them to the pre-pandemic level, i.e., a two-notch increase to the stressed VaR multiplier. The implementation date for this
adjustment to the VaR multiplier was May 1, 2021.
On March 31, 2021, the BCBS issued two final sets of principles addressing operational risk and operational resilience: Principles for Operational Resilience
and Revisions to the Principles for the Sound Management of Operational Risk. These publications follow a consultation on both documents in August 2020. In
the first document, the BCBS provides a series of principles on the topic of operational resilience. Although these principles aim to make banks better able to
withstand, adapt to, and recover from severe adverse events, they are largely carried over from existing principles. In the second document, the BCBS updated
its existing set of principles for the sound management of operational risk. The Bank does not expect this guidance to have a significant impact on its activities
at this time. On June 18, 2021, OSFI released for consultation two documents on the proposed practices for managing operational risk capital data: Data
Maintenance Expectations for Institutions Using the Standardized Approach for Operational Risk Capital Data and Assessment Tool – Operational Risk Capital
Data. The consultation aims to ensure that financial institutions have an effective management framework for current and historical operational risk data. The
Bank is participating in the consultations.
On June 10, 2021, the BCBS issued a consultative document entitled Prudential Treatment of Crypto Asset Exposures. This document presents preliminary
proposals for the prudential treatment of the crypto asset exposures of banks. On July 5, 2021, OSFI started its own consultation on crypto asset exposures in
order to ensure that Canadian perspectives are well represented in international discussions. In addition to the BCBS questions listed in its consultative
document, OSFI is seeking feedback on some other questions. The Bank is participating in the consultations.
On August 12, 2021, OSFI confirmed that the exclusion of sovereign-issued securities that qualify as high-quality liquid assets (HQLA) from the leverage ratio
exposure measure, a mechanism that was introduced at the start of the COVID-19 pandemic, would not be extended beyond December 31, 2021. Central bank
reserves will, however, continue to be excluded from the leverage ratio exposure measure.
CCaappiittaall MMaannaaggeemmeenntt iinn 22002211
MMaannaaggeemmeenntt AAccttiivviittiieess
On March 13, 2020, OSFI indicated that it was expecting all banks to cease any dividend increases or share buybacks. Since that date, the Bank has not
increased dividends or bought back any of its common shares. On November 4, 2021, OSFI amended its capital distribution expectations, namely, by
permitting financial institutions to increase regular dividends and, subject to OSFI approval, buy back shares. On November 30, 2021, the Bank’s Board of
Directors approved a quarterly dividend increase on common shares of 16 cents for the first quarter of fiscal 2022 as well as a normal course issuer bid to
repurchase for cancellation, beginning on December 10, 2021, up to 7,000,000 common shares (representing approximately 2% of its common shares
outstanding) over a 12-month period ending December 9, 2022. This normal course issuer bid is subject to the approval of the OSFI and the Toronto Stock
Exchange (TSX).
On April 21, 2021, the Bank issued $500 million of Series 2 Limited Recourse Capital Notes (LRCN – Series 2) for which noteholder 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 45 First Preferred
Shares issued by the Bank, in parallel with the LRCN – Series 2. The LRCN – Series 2 sell for $1,000 each and bear interest at a fixed rate of 4.05% per annum
until August 15, 2026 exclusively and, thereafter, at an annual rate equal to the yield on five-year Government of Canada bonds plus 3.045% until August 15,
2076. Since the LRCN – Series 2 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating regulatory capital under
Basel III.
On May 17, 2021, i.e., the first business day after the May 15, 2021 redemption date, the Bank redeemed all the issued and outstanding Non-Cumulative
5-Year Rate-Reset Series 34 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 16,000,000 Series 34 preferred shares for $400 million.
On August 16, 2021, i.e., the first business day after the August 15, 2021 redemption date, the Bank redeemed all the issued and outstanding Non-Cumulative
5-Year Rate-Reset Series 36 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 16,000,000 Series 36 preferred shares for $400 million.
As at October 31, 2021, the Bank had 337,912,283 issued and outstanding common shares compared to 335,997,660 a year earlier as well as 66,000,000
issued and outstanding preferred shares compared to 98,000,000 as at October 31, 2020. Moreover, as at October 31, 2021, the Bank had 1,000,000 LRCN
compared to 500,000 a year earlier. For additional information on capital instruments, see Notes 15 and 18 to the consolidated financial statements.
National Bank of Canada
63
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
DDiivviiddeennddss
The Bank’s strategy for common share dividends is to aim for a dividend payout ratio of between 40% and 50% of net income attributable to common
shareholders excluding specified items, taking into account such factors as financial position, cash needs, regulatory requirements and any other factor
deemed relevant by the Board.
For fiscal 2021, the Bank declared $958 million in dividends to common shareholders, which represents 31% of net income attributable to common
shareholders (2020: 50%).The declared dividends are below the target payout range given the interruption to dividend increases prescribed by OSFI since
March 13, 2020. However, on November 4, 2021, OSFI amended its capital distribution expectations by permitting the boards of directors and the senior
management of Canadian banks to make capital distribution decisions, i.e., dividend increases and share buybacks. The Bank has taken a prudent approach
to managing regulatory capital and remains confident in its ability to increase earnings going forward.
SShhaarreess,, OOtthheerr EEqquuiittyy IInnssttrruummeennttss,, aanndd SSttoocckk OOppttiioonnss
First preferred shares
Series 30
Series 32
Series 38
Series 40
Series 42
Other equity instruments
LRCN – Series 1
LRCN – Series 2
Common shares
Stock options
NNuummbbeerr ooff sshhaarreess oorr LLRRCCNN
$$ mmiilllliioonn
AAss aatt OOccttoobbeerr 3311,, 22002211
1144,,000000,,000000
1122,,000000,,000000
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
6666,,000000,,000000
550000,,000000
550000,,000000
11,,000000,,000000
6677,,000000,,000000
333377,,991122,,228833
1111,,334488,,668800
335500
330000
440000
330000
330000
11,,665500
550000
550000
11,,000000
22,,665500
33,,116600
As at November 26, 2021, there were 337,918,444 common shares and 11,329,474 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 LRCNs 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 763 million Bank common shares, which would have a 69.3%
dilutive effect based on the number of Bank common shares outstanding as at October 31, 2021.
64
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
RReegguullaattoorryy CCaappiittaall RRaattiiooss
As at October 31, 2021, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 12.4%, 15.0% and 15.9%, i.e., above the regulatory requirements,
compared to ratios of, respectively, 11.8%, 14.9% and 16.0% as at October 31, 2020. The increase in the CET1 capital ratio since October 31, 2020 was
essentially due to net income net of dividends, common share issuances under the Stock Option Plan, and remeasurements of pension plans and other post-
employment benefit plans. These factors were partly offset by the organic growth in RWA, by the impact of the transitional measures applicable to ECL
provisioning, of which the scaling factor decreased to 50% from 70%, by the impact of unwinding the temporary reduction of stressed VaR multipliers, and by
the impact of the acquisition of Flinks. The stability seen in the Tier 1 capital ratio and in the Total capital ratio is explained essentially by redemptions of the
Series 34 and Series 36 preferred shares, tempered by the above-mentioned factors and by the issuance of Limited Recourse Capital Notes (LRCN) – Series 2.
As at October 31, 2021, the leverage ratio was 4.4%, stable compared to October 31, 2020. The growth in Tier 1 capital, explained by the above-mentioned
factors, and significant growth in total exposure were partly offset by 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.
RReegguullaattoorryy CCaappiittaall aanndd RRaattiiooss UUnnddeerr BBaasseell IIIIII(1)
As at October 31
CCaappiittaall
CET1
Tier 1
Total
AAddjjuusstteedd(2)
Adjusted(2)
22002211
2020
1122,,886666
1155,,551155
1166,,664433
1122,,997733
1155,,662222
1166,,664433
10,924
13,869
15,167
11,167
14,112
15,167
94,808
RRiisskk--wweeiigghhtteedd aasssseettss
110044,,335588
110044,,335588
94,808
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
335511,,116600
335511,,116600
321,038
321,038
1122..33 %%
1144..99 %%
1155..99 %%
44..44 %%
1122..44 %%
1155..00 %%
1155..99 %%
44..44 %%
11.5 %
14.6 %
16.0 %
4.3 %
11.8 %
14.9 %
16.0 %
4.4 %
(1)
(2)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
The adjusted capital and adjusted capital ratios do not take into account the transitional measure for provisioning of expected credit losses. For additional information, see the section
entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on page 17 of this MD&A.
National Bank of Canada
65
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
MMoovveemmeenntt iinn RReegguullaattoorryy CCaappiittaall(1)
Year ended October 31
(millions of Canadian dollars)
CCoommmmoonn EEqquuiittyy TTiieerr 11 ((CCEETT11)) ccaappiittaall
Balance at beginning
Issuance of common shares (including Stock Option Plan)
Impact of shares purchased or sold for trading
Repurchase of common shares
Other contributed surplus
Dividends on preferred and common shares 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
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(2)
Change in other regulatory adjustments
Balance at end
AAddddiittiioonnaall TTiieerr 11 ccaappiittaall
Balance at beginning
New Tier 1 eligible capital issuances
Redeemed capital
Change in non-qualifying Additional Tier 1 capital subject to phase-out
Other, including regulatory adjustments and transitional arrangements
Balance at end
22002211
2020
1111,,116677
9933
((11))
−−
1111
((11,,008899))
33,,117777
−−
((2200))
449966
((119900))
((3300))
−−
((111100))
((440022))
−−
−−
77
((113366))
−−
1122,,997733
22,,994455
550000
((880000))
−−
44
22,,664499
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
TToottaall TTiieerr 11 ccaappiittaall
1155,,662222
14,112
TTiieerr 22 ccaappiittaall
Balance at beginning
New Tier 2 eligible capital issuances
Redeemed capital
Change in non-qualifying Tier 2 subject to phase-out
Tier 2 instruments issued by subsidiaries and held by third parties
Change in certain allowances for credit losses
Other, including regulatory adjustments and transitional arrangements
Balance at end
11,,005555
−−
−−
−−
−−
2200
((5544))
11,,002211
874
−
−
−
−
128
53
1,055
TToottaall rreegguullaattoorryy ccaappiittaall
1166,,664433
15,167
(1)
(2)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
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 page 17 of this MD&A.
66
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
RRWWAA bbyy KKeeyy RRiisskk DDrriivveerrss
Risk-weighted assets (RWA) amounted to $104.4 billion as at October 31, 2021 compared to $94.8 billion as at October 31, 2020, a $9.6 billion increase
resulting mainly from organic growth in RWA and from an unwinding of the temporary reduction to stressed Value-at-Risk (VaR) multipliers for market risk,
partly offset by improvement in the credit quality of the loan portfolio and by foreign exchange movements. Changes in the Bank’s RWA by risk type are
presented in the following table.
RRiisskk--WWeeiigghhtteedd AAsssseettss MMoovveemmeenntt bbyy KKeeyy DDrriivveerrss(1)
Quarter ended
(millions of Canadian dollars)
CCrreeddiitt rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Book size
Book quality
Model updates
Methodology and policy
Acquisitions and disposals
Foreign exchange movements
CCrreeddiitt rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
MMaarrkkeett rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Movement in risk levels(2)
Model updates
Methodology and policy
Acquisitions and disposals
MMaarrkkeett rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
OOppeerraattiioonnaall rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt bbeeggiinnnniinngg
Movement in risk levels
Acquisitions and disposals
OOppeerraattiioonnaall rriisskk –– RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
OOccttoobbeerr 3311,, 22002211
JJuullyy 3311,, 22002211
AApprriill 3300,, 22002211
JJaannuuaarryy 3311,, 22002211 October 31, 2020
TToottaall
TToottaall
TToottaall
TToottaall
Total
8855,,991144
11,,994444
((443300))
((77))
−−
−−
((220088))
8877,,221133
44,,007722
((330022))
−−
−−
−−
33,,777700
1133,,115533
222222
−−
1133,,337755
8822,,551144
33,,774455
((772200))
−−
−−
−−
337755
8855,,991144
33,,330077
((119933))
−−
995588
−−
44,,007722
1122,,888844
226699
−−
1133,,115533
8811,,110000
22,,665566
((332266))
−−
−−
−−
((991166))
8822,,551144
33,,448899
((118822))
−−
−−
−−
33,,330077
1122,,559944
229900
−−
1122,,888844
9988,,770055
7788,,998855
33,,332233
((6644))
((221122))
−−
−−
((993322))
8811,,110000
33,,449977
((88))
−−
−−
−−
33,,448899
1122,,332266
226688
−−
1122,,559944
9977,,118833
77,944
812
801
(447)
−
−
(125)
78,985
4,724
(1,227)
−
−
−
3,497
12,146
180
−
12,326
94,808
RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
110044,,335588
110033,,113399
(1)
(2)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
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.
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. On March 16, 2021, OSFI announced the unwinding, effective May 1, 2021, of the temporary reduction to stressed Value-at-Risk (VaR)
multipliers under the market risk capital requirements applicable to banks. The impact of this measure is reflected in the market risk-weighted assets
calculation for the quarter ended July 31, 2021.
National Bank of Canada
67
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Capital Management
AAllllooccaattiioonn ooff EEccoonnoommiicc CCaappiittaall aanndd RReegguullaattoorryy RRWWAA
Economic capital is an internal measure that the Bank uses to determine the capital it needs to remain solvent and to pursue its business operations. Economic
capital takes into consideration the credit, market, operational, business and other risks to which the Bank is exposed as well as the risk diversification effect
among them and among the business segments. Economic capital thus helps the Bank to determine the capital required to protect itself against such risks and
ensure its long-term viability. The by-segment allocation of economic capital and regulatory RWA was 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.
AAllllooccaattiioonn ooff RRiisskkss bbyy BBuussiinneessss SSeeggmmeenntt
As at October 31, 2021
(millions of Canadian dollars)
NNaattiioonnaall BBaannkk ooff CCaannaaddaa
BBuussiinneessss
sseeggmmeennttss
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
WWeeaalltthh MMaannaaggeemmeenntt
FFiinnaanncciiaall MMaarrkkeettss
UU..SS.. SSppeecciiaallttyy FFiinnaannccee aanndd
IInntteerrnnaattiioonnaall
OOtthheerr
Banking services
Credit services
Financing
Full-service brokerage
Private banking
Direct brokerage
Investment solutions
Investment solutions
MMaajjoorr aaccttiivviittiieess
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
• Credigy
International
• ABA Bank (Cambodia)
• Minority interests in
emerging markets
Treasury activities
Liquidity management
Bank funding
Asset and liability
management
Corporate units
Fintech services
• Flinks
EEccoonnoommiicc ccaappiittaall
bbyy ttyyppee ooff rriisskk
RRiisskk--wweeiigghhtteedd
aasssseettss(1)
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
2,462
–
419
195
33,,007766
36,961
–
5,173
4422,,113344
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
153
–
272
442
886677
2,406
–
3,370
55,,777766
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
2,470
233
338
545
33,,558866
29,871
3,691
4,186
3377,,774488
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
942
32
112
39
Credit
Market
Operational
Other risks
11,,112255
TToottaall
11,541
–
1,404
1122,,994455
Credit
Market
Operational
TToottaall
201
159
(61)
(562)
((226633))
6,434
79
(758)
55,,775555
(1)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
68
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
RRiisskk MMaannaaggeemmeenntt
IInn tthhiiss sseeccttiioonn ooff tthhee MMDD&&AA,, ggrreeyy--sshhaaddeedd tteexxtt aanndd ttaabblleess mmaarrkkeedd wwiitthh aann aasstteerriisskk ((**)) aarree iinntteeggrraall ppaarrttss ooff tthhee ccoonnssoolliiddaatteedd ffiinnaanncciiaall ssttaatteemmeennttss.. TThheeyy
rreepprreesseenntt tthhee BBaannkk’’ss oobbjjeeccttiivveess,, tthhee rriisskk mmaannaaggeemmeenntt ppoolliicciieess aanndd pprroocceedduurreess,, aanndd tthhee mmeetthhooddss aapppplliieedd ttoo mmeeaassuurree ccrreeddiitt rriisskk,, mmaarrkkeett rriisskk aass wweellll aass
lliiqquuiiddiittyy aanndd ffuunnddiinngg rriisskk,, aass rreeqquuiirreedd bbyy IIFFRRSS 77 –– FFiinnaanncciiaall IInnssttrruummeennttss:: DDiisscclloossuurreess..
Risk-taking is intrinsic to a financial institution’s business. The Bank views risk as an integral part of its development and the diversification of its activities. It
advocates a risk management approach consistent with its business strategy. The Bank voluntarily exposes itself to certain risk categories, particularly credit
and market risk, in order to generate revenue. It assumes certain risks that are inherent to its activities—to which it does not choose to expose itself—and that
do not generate revenue, i.e., mainly operational risks. The purpose of sound and effective risk management is to provide reasonable assurance that incurred
risks do not exceed acceptable thresholds, to control the volatility in the Bank's results, and to ensure that risk-taking contributes to the creation of
shareholder value.
RRiisskk MMaannaaggeemmeenntt FFrraammeewwoorrkk
Risk is rigorously managed. Risks are identified, measured, and controlled to achieve an appropriate balance between the returns obtained and the risks
assumed. The Bank continues to closely monitor the impacts and potential consequences of the COVID-19 pandemic. It is impossible to predict all of the
impacts that the pandemic could have on the global economy, in the countries where the Bank operates, on the Bank’s clients, or on the Bank itself, in
particular on its business activities, operating results, financial position, regulatory capital and liquidity ratios, reputation, and ability to meet regulatory
requirements. From its onset, the pandemic has had disruptive and adverse effects in the countries where the Bank does business and, more broadly, on the
global economy. COVID-19 has also shed light, and could continue to shed light, on several top and emerging risks to which the Bank is exposed. Despite this
exceptional situation, risks are being rigorously managed. Decision-making is being guided by risk assessments aligned with the Bank’s risk appetite as well
as with prudent levels of capital and liquidity. Despite the exercise of stringent risk management and the mitigation measures in place, risk cannot be
suppressed entirely, and residual risks may occasionally cause significant losses.
The Bank has developed guidelines that support sound and effective risk management:
•
risk is everyone’s business: business units, risk management and oversight functions as well as Internal Audit play an important role in ensuring a risk
management framework is in place;
client-centric: having quality information is key to understanding clients, effectively managing risk, and delivering excellent client service;
•
• enterprise-wide: an integrated view of risk is the basis for sound and effective risk management and decision-making by management;
• human capital: the Bank’s employees are engaged, experienced and have a high level of expertise; their curiosity supports continuous development and
their rigour ensures that risk management is built into the corporate culture;
fact-based: good risk management relies heavily on common sense and good judgment and on advanced systems and models.
•
RRiisskk AAppppeettiittee
Risk appetite represents how much risk an organization is willing to assume to achieve its business strategy. The Bank defines its risk appetite by setting
tolerance thresholds, by aligning those thresholds with its business strategy, and by integrating risk management throughout its corporate culture. Risk
appetite is built into decision-making processes as well as into strategic, financial and capital planning.
The Bank’s risk appetite framework consists of principles, statements, metrics as well as targets and is reinforced by policies and limits. When setting its risk
appetite targets, the Bank considers regulatory constraints and the expectations of stakeholders, in particular customers, employees, the community,
shareholders, regulatory agencies, governments, and rating agencies. The risk appetite framework is defined by the following principles and statements:
The Bank’s brand, reputation and long-term viability are at the centre of our decisions, which demand:
• a strong credit rating to be maintained;
• a strong capital and cash position;
•
•
rigorous management of regulatory compliance risk, including sales practices;
zero tolerance for negligence in information security.
The Bank understands the risks taken; they are aligned with our business strategy and translate into:
• a risk-reward balance;
• a stable risk profile;
• a strategic level of concentration aligned with approved targets.
The Bank’s transformation and simplification plan is being carried out without compromising rigorous risk management, which is reflected in:
• a low tolerance to operational and reputation risk;
• operational and information systems stability, both under normal circumstances and in times of crisis.
National Bank of Canada
69
National Bank of Canada2021 Annual Report
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.
EEnntteerrpprriissee--WWiiddee SSttrreessss TTeessttiinngg
As part of a more extensive process aimed at ensuring that the Bank maintains adequate capital levels commensurate with its business strategy and risk
appetite, an enterprise-wide stress testing program is in place at the Bank. Stress testing can be defined as a risk management method that assesses the
potential effects—on the Bank’s financial position, capital and liquidity—of a series of specified changes in risk factors, corresponding to exceptional but
plausible events. The program supports management’s decision-making process by identifying potential vulnerabilities for the Bank as a whole that are
considered in setting limits as well as in longer term business planning. The scenarios and stress test results are approved by the Stress Testing Oversight
Committee and are reviewed by the Global Risk Committee (GRC) and the Risk Management Committee (RMC). For additional information, see the Stress
Testing and Crisis Scenarios sections of this MD&A applicable to credit risk, market risk, and liquidity risk.
IInnccoorrppoorraattiioonn ooff RRiisskk MMaannaaggeemmeenntt IInnttoo tthhee CCoorrppoorraattee CCuullttuurree
Risk management is supported by the Bank’s cultural evolution through, notably, the following pillars:
Tone set by management: The Bank’s management continually promotes risk management through internal communications. The Bank’s risk management
is therefore known to all.
Shared accountability: 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.
Transparency: A foundation of the business’s values, transparency lets us communicate our concerns quickly without fear of reprisal. We are a
learning-focused organization where employees are allowed to make mistakes.
Behaviour: The Bank’s risk management is strengthened by incentive compensation programs that are structured to reflect the Bank’s risk appetite.
Continuous development: 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.
In addition to these five pillars, Internal Audit carries out an evaluation of the culture as part of its mandate. Furthermore, to ensure the effectiveness of the
existing risk management framework, the Bank has defined clear roles and responsibilities by reinforcing the concept of the three lines of defence. The
Governance Structure section presented on the following pages defines this concept as well as the roles and responsibilities at all levels of the organization.
FFiirrsstt LLiinnee ooff DDeeffeennccee
Risk Owner
Business Units
SSeeccoonndd LLiinnee ooff DDeeffeennccee
Independent Oversight
Risk Management
and Oversight Functions
TThhiirrdd LLiinnee ooff DDeeffeennccee
Independent Assurance
Internal Audit
•
Identify, manage, assess and mitigate risks
in day-to-day activities.
policies and standards.
• Oversee risk management by setting
• Provide the Board and management with
• Ensure activities are in alignment with the
Bank’s risk appetite and risk management
policies.
• Provide independent oversight of
management practices and an independent
challenge of the first line of defence.
• Promote sound risk management at the
Bank.
• Monitor and report on risk.
independent assurance as to the
effectiveness 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.
70
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
GGoovveerrnnaannccee SSttrruuccttuurree **
The following chart shows the Bank’s overall governance architecture and the governance relationships established for risk management.
Shareholders
EElleecc tt
Board of Directors
AApppp ooiinnttss
President and
CEO
AApppp ooiinntt
AApppp ooiinnttss aa nndd mmaa nnddaa tteess
IInnddeeppeennddeenntt
AAuuddiittoorr
RReeppoorrttss
ttoo
AAuuddiitt CCoommmmiitttteeee
RRiisskk MMaannaaggeemmeenntt CCoommmmiitttteeee
AAss ssiiss ttss
TTeecchh nnoollooggyy
SSuubbcc oommmmiitttteeee
HHuu mmaann
RReessoouurrcceess
CCoommmmiitttteeee
CCoonndduucctt RReevviieeww
aanndd CCoorrppoorraattee
GGoovveerrnnaannccee
CCoommmmiitttteeee
RReeppoorrtt ttoo
RReeppoorrtt ttoo
AAddvvii sseess
RReeppoorrttss ttoo
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
AApppp ooiinnttss
Office of the
President
RReeppoorrtt
ttoo
Business Units
RReeppoorrtt ttoo
Operational Risk
Management
Committee
Financial
Markets Risk
Committee
Enterprise-Wide
Risk
Management
Committee
The Board of Directors (Board)(1)
The Board is responsible for approving and overseeing the management of the Bank's internal and commercial affairs and it establishes, together with
management, strategic directions. It also approves and oversees 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 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 Technology Subcommittee(1)
The Technology Subcommittee assists the Risk Management Committee and supports it on, among other things, the Bank's technology strategy and the
monitoring and management of 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, for Board approval, 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 makes sure that the Bank has effective human resources management programs and that the organizational culture is
aligned with the Bank’s ESG practices and strategies. This Committee oversees all human resource practices, in particular employee health and well-being,
talent management, inclusion, and diversity. 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, and that align with the Bank’s One Mission. It ensures 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 2022 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 of its committees and subcommittee are available in their entirety at nbc.ca.
National Bank of Canada
71
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The Office of the President and the Bank’s Management
Composed of the President and Chief Executive Officer and the officers responsible for the Bank’s main functions and business units, the Office of the
President ensures that risk management is effective and aligned with the Bank’s pursuit of its objectives and strategies. The Bank’s management promotes the
integration of risk management into its corporate culture and manages the primary risks facing the Bank.
The Internal Audit Oversight Function
The Internal Audit Oversight Function is the third line of defence in the risk management framework. It is responsible for providing the Bank’s Board and
management with objective, independent assurance on the effectiveness 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 and its subsidiaries are 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 chart 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 RMC also reviews the reports
presented by this working group.
The ESG Working Group
Under the leadership of the Chief Financial Officer and Executive Vice-President, Finance, and made up of several officers from different areas of the Bank, the
ESG Working Group’s main role is to develop and support the Bank’s ESG initiatives and strategies. Its members meet on a monthly basis. The ESG Working
Group is responsible for implementing the recommendations made by the Task Force on Climate-related Financial Disclosures (TCFD) and by the UN Principles
for Responsible Banking as well as for implementing the Bank’s climate commitments, including the net-zero GHG emissions target. At least twice a year, the
ESG Working Group reports to the Conduct Review and Governance Committee on the progress made and on ongoing and upcoming ESG projects. In addition,
and in a timely fashion, the ESG Working Group makes presentations on topics of particular interest, such as the TCFD report, to the Audit Committee and the
RMC.
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, managing, 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.
72
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk MMaannaaggeemmeenntt PPoolliicciieess
The risk management policies and related standards and procedures set out responsibilities, define and describe the main activity-related risks, specify the
requirements that the business units must meet in assessing and managing risk, stipulate the authorization process for risk-taking, and set the risk limits to
be adhered to. These policies cover the Bank’s main risks, are reviewed regularly to ensure they are still relevant given market changes, regulatory changes
and changes in the business plans of the Bank’s business units, and apply to the entire Bank and its subsidiaries, when applicable. Other policies, standards,
and procedures complement the main policies and cover more specific aspects of risk management such as business continuity; the launch of new products,
initiatives, or activities; or financial instrument measurement.
GGoovveerrnnaannccee ooff MMooddeell RRiisskk MMaannaaggeemmeenntt
The Bank makes increasing use of models to guide enterprise-wide risk management, financial markets strategy, economic and regulatory capital allocation,
global credit risk management, wealth management, and profitability measures. Models have in fact become a standard in risk management. This stresses the
growing importance of model risk for banks, which explains 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 the development and
independent vetting of 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, expected credit losses models, and financial-
crime models. The framework also includes more advanced artificial intelligence models.
One of the cornerstones of the Bank’s policies is the general principle that all models deemed important for the Bank or used for regulatory capital purposes
require heightened lifecycle monitoring and independent vetting. All models used by the Bank are therefore classified in terms of risk level (low, medium, or
high). Based on this classification, the Bank applies strict guidelines regarding the requirements for model development and documentation, independent
review thereof, performance monitoring thereof, and minimum review frequency. The Bank believes that the best defence against “model risk” is the
implementation of a robust development and validation framework.
IInnddeeppeennddeenntt OOvveerrssiigghhtt bbyy tthhee CCoommpplliiaannccee SSeerrvviiccee
Compliance is an independent oversight function within the Bank. Its Senior Vice-President, 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.
IInnddeeppeennddeenntt AAsssseessssmmeenntt bbyy IInntteerrnnaall AAuuddiitt
Internal Audit is an independent, objective function within the Bank. Through the Audit Committee, it provides assurance to management and the Board as to
the Bank’s level of command over its activities, advises on how to improve those activities, and contributes to the creation of added value. It helps the Bank to
achieve its objectives by assessing the effectiveness of its main governance, risk management, and internal control processes and systems and formulates
recommendations and advice to promote the Bank’s long-term financial strength.
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.
TToopp aanndd EEmmeerrggiinngg RRiisskkss
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. Identified top and
emerging risks are presented to senior management and communicated to the RMC.
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.
National Bank of Canada
73
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
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
RRiisskkss RReellaatteedd ttoo tthhee CCOOVVIIDD--1199 PPaannddeemmiicc
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 significant risks, which are defined as follows.
RRiisskk aanndd
TTrreenndd
DDeessccrriippttiioonn
IInnffoorrmmaattiioonn
sseeccuurriittyy aanndd
ccyybbeerrsseeccuurriittyy
Technology, which is now omnipresent in our daily lives, is at the heart of banking services and has become the main driver of
innovation in the financial sector. While this digital transformation meets the growing needs of customers by enhancing the operational
efficiency of institutions, it nevertheless comes with information security and cybersecurity risks. The personal information and financial
data of financial institution customers are prime targets for criminals. These criminals, who are increasingly well organized and
employing ever more sophisticated schemes, try to use technology to steal information.
Faced with a resurgence of cyberthreats and the sophistication of cybercriminals, the Bank is exposed to the risks associated with data
breaches, malicious software, unauthorized access, hacking, phishing, identity theft, intellectual property theft, asset theft, industrial
espionage, and possible denial of service due to activities causing network failures and service interruptions.
Cyberattacks, as with system breaches or interruptions that support the Bank and its customers, could cause client attrition; financial
loss; inability of clients to do their banking; non-compliance with privacy legislation or any other laws in effect; legal disputes; fines;
penalties or regulatory action; reputational damage; compliance costs, corrective measures, investigative, or restoration costs; cost
hikes to maintain and upgrade technological infrastructures and systems, all of which could affect the Bank’s operating results or
financial position, 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, the aim being to continue to reduce delays in detecting any anomalies or cybersecurity incidents and limiting the
impact thereof as much as possible. A governance and accountability structure has also been established to support decision-making
based on sound risk management. The 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.
The risks related to protecting personal information exist throughout the lifecycle of the data and arise, in particular, from inadequate
control measures and weak processes. Such risks can translate into financial risk, reputation risk, technology risk, and even legal risk,
among others. Innovations and proliferation in technologies that collect, use, and share personal information have led to substantial
legislative changes in recent years.
These changes have come about swiftly in several jurisdictions, including Canada and Quebec. In September 2021, the Quebec
government passed An Act to modernize legislative provisions as regards the protection of personal information, which will gradually
come into effect over the next three years. The tabling of a new federal bill is expected soon.
The Bank continues to monitor relevant legislative developments and has bolstered its governance structure by updating its policies and
deploying a personal information privacy program that reflects its determination to maintain the trust of its clients.
74
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk aanndd
TTrreenndd
GGeeooppoolliittiiccaall
rriisskk
EEccoonnoommiicc
rriisskk
RReelliiaannccee oonn
tteecchhnnoollooggyy
aanndd
tthhiirrdd--ppaarrttyy
pprroovviiddeerrss
DDeessccrriippttiioonn
Government decisions and international relations can have a significant impact on the Bank’s operating environment. Geopolitical
events can lead to volatility, have a negative impact on at-risk assets, and cause financial conditions to deteriorate. They could also
directly or indirectly affect banking activities by having an impact on clients. While new risks could arise at any time, we have some
concerns compelling us to monitor certain current events. For one, the geopolitical power struggle between the United States and China
has given cause for concern for a few years now, and these tensions could continue into the foreseeable future. Businesses, in particular
those operating in sectors deemed strategic, run an increasing risk of finding themselves in a maze of contradictory regulations, where
complying with U.S. regulations means violating Chinese law, and vice versa. These tensions could also partially undo some of the ties
forged between these two superpowers in the financial markets, and Canada might get caught in the crosshairs of the two countries.
The potential for confrontation is not limited to the China-U.S. relationship, as protectionism is gaining popularity and a growing number
of countries are implementing measures to both financially support domestic businesses in key sectors (high tech, health care, and
food) and to protect them against global competition through business restrictions. The combined effects of supply shortages and
geopolitical tensions have shifted the focus from efficiency to supply security. We will continue to monitor all of these developments,
analyze any new risks that arise, and assess the impacts that they may have on our organization.
Although the economy recovered quickly during the pandemic, a number of risks still remain. Despite high vaccination rates in Canada,
the evolution of the pandemic remains uncertain, and vaccines are not readily accessible in several emerging countries. Against this
backdrop, another wave of the pandemic or the emergence of a more aggressive variant could result in a return to stricter health
measures and slow the recovery of certain sectors of the economy. If this were to occur, consumer and business confidence could be
rattled and weaken economic activity. Moreover, uncertainty persists regarding inflation forecasts. While central banks believe the
current high level of inflation to be temporary, there is a risk that supply chain bottlenecks will not be resolved as swiftly as anticipated.
Conversely, if inflation proves to be more persistent, it could erode consumer buying power and lead to a less dynamic economic
recovery. However, workers seem to be in a good position to negotiate salaries in light of the current labour shortages, which presents
another risk, i.e., the risk of spiralling inflation created by higher wages. If this scenario of unchecked inflation were to occur (above
target), central banks could push for a tighter monetary policy by raising interest rates substantially. Due to extraordinary monetary
measures, interest rates have remained quite low worldwide. This environment may have led to excessive risk-taking strategies on the
part of market proponents seeking additional returns, which could create negative impacts if interest rates should suddenly spike. This
would serve as a major headwind for the real estate sector and Canadian households, which have seen their debt levels rise sharply
over the past few years. Lastly, climate issues are an added risk in the current context. If too few measures are adopted on the climate
front, severe weather events will intensify and result in economic woes over the long term. Conversely, a too-swift transition could result
in other risks, particularly short- and medium-term costs and rising pressure on production costs. In short, given the ongoing
uncertainties in this environment, the Bank remains vigilant in the face of numerous factors and continues to rely on its strong risk
management framework to identify, assess, and mitigate the negative impacts while also remaining within its risk appetite limits.
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 technology investments. 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 certain 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 that such events
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. A governance
and accountability structure has also been established to support decision-making based on sound risk management. Despite these
preventive measures and the efforts deployed by the Bank to manage third parties, there remains a possibility that certain risks will
materialize. In such cases, the Bank would rely on mitigation mechanisms developed in collaboration with the various agreement
owners and third parties concerned. Aware of the significance of third-party risk, the Bank makes sure that its practices evolve in
collaboration with its financial sector partners and with regulatory authorities.
National Bank of Canada
75
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk aanndd
TTrreenndd
DDeessccrriippttiioonn
CClliimmaattee
cchhaannggee
TTeecchhnnoollooggiiccaall
iinnnnoovvaattiioonn aanndd
ccoommppeettiittiioonn
In accordance with the TCFD’s recommendations, the Bank has identified two types of relevant climate change-related risks (climate
risk), i.e., physical risks and transition risks. Physical risks refer to the potential impacts of more frequent and more intense extreme
weather events or of chronic changes in weather conditions on physical assets, infrastructures, the value chain, and other physical
aspects. Transition risks refer to the potential impacts of moving toward a low-carbon economy (such as technological changes or
political or public policy shifts designed to reduce GHG emissions through taxes or incentives) as well as to regulatory changes made
to manage and support such an economy.
Managing climate risk has become increasingly important, as evidenced by the interest level in this risk, aligned over a societal,
political and regulatory landscape in constant flux, shown by the Bank’s stakeholders, in particular clients, shareholders,
governments, and regulators.
It is possible that the Bank’s or its clients’ business models fail to align with a low-carbon economy or that their responses to
government strategies and regulatory changes prove inadequate or fail to achieve the target objectives. As such, these risks could
result in financial losses for the Bank, affect its operations and the way it conducts business, harm its reputation and increase its
regulatory compliance risk, or even affect the activities and financial position of the clients to whom it offers financial services.
The actual impact of climate risk will depend on future events that are beyond the Bank’s control. The Bank must therefore devote
special attention to reducing its exposure to these negative outside factors and, at the same time, to seizing new growth
opportunities. While the Bank is committed to doing everything in its power to mitigate climate risk and to support the move to a low-
carbon economy, it cannot predict the effectiveness of government-led climate strategies or of regulatory changes enacted, nor can it
assume responsibility for achieving the objectives set out in these strategies and changes.
The Bank continues to closely monitor developments on this topic and to deploy its climate change risk management framework.
For additional information, see the Environmental and Social Risk section of this MD&A.
On one hand, 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.
The transition towards new digital channels and solutions has accelerated greatly following the COVID-19 pandemic, where demand
for digital banking services grew to the detriment of traditional banking services. The arrival of new, non-conventional players in the
market has intensified competitive pressure, as they offer new technologies that enhance the client experience due to the
development of new data analysis tools and customized solutions while meeting user expectations for simplicity, and doing so at a
lower cost. These new digital businesses, which are not necessarily subject to the same regulatory requirements, have the ability to
react quickly to new consumer trends through the deployment of new technologies. As such, to mitigate disintermediation risk and
help make innovative technologies accessible to its clients, the Bank continues to incorporate artificial intelligence into its business
processes and it remains highly committed to innovation by making strategic investments in emerging technologies through its
specialized venture capital arm NAventures.
AAbbiilliittyy ttoo
rreeccrruuiitt aanndd
rreettaaiinn kkeeyy
rreessoouurrcceess
The Bank’s future performance depends greatly on its ability to recruit, develop, and retain key resources. There is strong competition
in the financial services sector in terms of attracting and retaining the most qualified people, notably with the arrival of new players in
certain sectors and the emergence of the global workforce concept. As a result, reports are periodically presented to the Board through
the governance mechanisms of the Human Resources Committee, the aim being to deploy appropriate strategies to implement
conditions favourable to the Bank’s competitiveness as an employer. There is no assurance that the Bank or a business acquired by
the Bank will be able to continue recruiting or retaining talented people.
76
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
OOtthheerr FFaaccttoorrss TThhaatt CCaann AAffffeecctt tthhee BBaannkk’’ss BBuussiinneessss,, OOppeerraattiinngg RReessuullttss,, FFiinnaanncciiaall PPoossiittiioonn,, aanndd RReeppuuttaattiioonn
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 made 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.
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.
Tax Risk
The tax laws applicable to the Bank are numerous, complex, and subject to amendment. This complexity can result in differing legal interpretations between
the Bank and the respective tax authorities with which it deals. In addition, legislative changes and changes in tax policy, including their interpretation by tax
authorities and courts, can affect the Bank’s earnings. International and domestic initiatives may result in changes to tax laws and policies, including
international efforts by the G20 and the Organisation for Economic Co-operation and Development to broaden the tax base and potential domestic proposals to
increase the taxes payable by banks and insurance companies. For additional information on income taxes, see the Income Taxes section on page 56 of this
MD&A, the Critical Accounting Policies and Estimates section on page 112 of this MD&A, and Note 24 to the consolidated financial statements.
National Bank of Canada
77
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
Accounting Policies, Methods and Estimates Used by the Bank
The accounting policies and methods used by the Bank determine how the Bank reports its financial position and operating results and require management to
make estimates or rely on assumptions about matters that are inherently uncertain. Any changes to these estimates and assumptions may have a significant
impact on the Bank’s operating results and financial position.
Additional Factors
Factors that could affect the Bank’s business, operating results, and reputation include 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, and the Bank’s ability to foresee and effectively manage the risks associated with these factors through rigorous risk
management.
CCrreeddiitt RRiisskk
Credit risk is the risk of incurring a financial loss if an obligor does not fully honour its contractual commitments to the Bank. Obligors may be debtors, issuers,
counterparties, or guarantors. Credit risk is the most significant risk facing the Bank in the normal course of business. The Bank is exposed to credit risk not
only through its direct lending activities and transactions but also through commitments to extend credit, letters of guarantee, letters of credit, over-the-
counter derivatives trading, debt securities, securities purchased under reverse repurchase agreements, deposits with financial institutions, brokerage
activities, and transactions carrying a settlement risk for the Bank such as irrevocable fund transfers to third parties via electronic payment systems.
The COVID-19 pandemic has had, and could continue to have, impacts on the Bank’s clients. Since a large part of the Bank’s activities consist of granting loans
or providing various liquidity channels to clients, namely, to individuals, businesses in various sectors, and governments, the impacts of the pandemic on
these parties could have significant impacts on the provisions for credit losses recorded by the Bank.
GGoovveerrnnaannccee
A policy framework centralizes the governance of activities that generate credit risk for the Bank and its subsidiaries 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.
Risk Management’s leadership team 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.
Concentration Limit
The Bank sets credit concentration and settlement limits by obligor group (businesses, oil and gas producers, government sectors, banks), by industry sector,
by country and by region. These limits are subject to the approval of the RMC. Certain types of financing or financing programs are also subject to specific
limits. Breaches of concentration limits by obligor group or by region are reported to the RMC each quarter. Furthermore, every industry sector, country, and
region whose exposure equals a predetermined percentage of the corresponding authorized limit are reported to the Bank’s Risk Management leadership
team. At least once a year, the Bank revises these exposures by industry sector, by country, and by region in order to determine the appropriateness of the
corresponding concentration limits.
78
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
CCrreeddiitt RRiisskk RRaattiinngg aanndd AAsssseessssmmeenntt
Before a sound and prudent credit decision can be made, the obligor’s or counterparty’s credit risk must be accurately assessed. This is the first step in
processing credit applications. Each application is analyzed and assigned one of 19 grades on a scale of 1 to 10 using a credit rating system developed by the
Bank for all portfolios exposed to credit risk. As each grade corresponds to a debtor’s, counterparty’s or third party’s probability of default, the Bank can
estimate the credit risk. The credit risk assessment method varies according to portfolio type. There are two main methods for assessing credit risk, i.e., the
Advanced Internal Rating-Based (AIRB) Approach and the Standardized Approach, as defined by the Basel Accord to determine minimum regulatory capital
requirements for most of its portfolios.
The main parameters used to measure the credit risk of loans outstanding and undrawn amounts under the AIRB Approach are as follows:
• probability of default (PD), which is the probability of through-the-cycle 12-month default by the obligor, calibrated on a long-run average PD throughout a
•
full economic cycle;
loss given default (LGD), which represents the magnitude of the loss from the obligor’s default that would be expected in an economic downturn and
subject to certain regulatory floors, expressed as a percentage of exposure at default;
• exposure at default (EAD), which is an estimate of the amount drawn and of the expected use of any undrawn portion prior to default, and cannot be lower
than the current balance.
The methodology as well as the data and the downturn periods used to estimate LGD are described below.
AAIIRRBB AAPPPPRROOAACCHH
DDAATTAA(1)
DDOOWWNNTTUURRNN PPEERRIIOODD(1)
MMEETTHHOODDOOLLOOGGYY FFOORR CCAALLCCUULLAATTIINNGG LLGGDD
Retail
The Bank’s internal historical data from 1996 to 2019
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.
National Bank of Canada
79
National Bank of Canada2021 Annual Report
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.
New Regulatory Developments
On April 8, 2021, OSFI announced a resumption of its consultation on the minimum qualifying interest rate for uninsured mortgages and re-emphasized the
importance of sound mortgage underwriting. On May 20, 2021, OSFI announced that, effective June 1, 2021, the minimum qualifying interest rate for
uninsured mortgages (i.e., residential mortgages with a downpayment of at least 20%) will be the greater of the mortgage contractual rate plus 2% or a floor of
5.25%. In addition, OSFI is requiring that the qualifying interest rate be reviewed at least once a year, in December, to ensure it remains appropriate to market
risks.
OSFI is aware that Canada’s post-pandemic economic recovery hinges on a strong financial system that can support Canadians in today’s environment and that
conditions in the current Canadian real estate market could put lenders at increased financial risk. As such, at this time, OSFI is taking proactive action to
ensure the sustained resilience of banks. The minimum qualifying interest rate adds a margin of safety that ensures borrowers will have the ability to make
mortgage payments in the event of a change in circumstances, such as a reduction in income or a rise in mortgage interest rates.
80
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
The business and government default risk rating scale used by the Bank is similar to the systems used by major external rating agencies. The following table
presents a grouping of the ratings by major risk category and compares them with the ratings of two major rating agencies.
IInntteerrnnaall DDeeffaauulltt RRiisskk RRaattiinnggss**
Description(1)
Personal credit
portfolios
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 consolidated financial statements.
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 measures designed to assess the following criteria:
the model’s discriminatory power;
the proportion of overrides;
•
•
• model calibration;
•
the stability of the model’s inputs and outputs.
National Bank of Canada
81
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
The facility and default risk-rating systems, methods and models are also subject to periodic independent validation as often as required given the model’s
risk level. 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 risk factors allowing for accurate classification of default risk 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.
The Bank’s credit risk assessment and rating systems are overseen by the Models Oversight Committee, the GRC and the RMC, and are an integral part of a
comprehensive Bank-wide credit risk oversight framework. Along with the above-mentioned elements, the Bank documents and periodically reviews the
policies, definitions of responsibilities, resource allocation and existing processes.
AAsssseessssmmeenntt ooff EEccoonnoommiicc CCaappiittaall
The assessment of the Bank’s minimum required economic capital is based on the credit risk assessments of debtors. These two activities are therefore
interlinked. The different models used to assess the credit risk of a given portfolio type also enable the Bank to determine the default correlation among
debtors. This information is a critical component in the evaluation of potential losses for all portfolios carrying credit risk. Estimates of potential losses,
whether expected or not, are based on historical loss experience, portfolio monitoring, market data and statistical modelling. Expected and unexpected losses
are factors used in assessing the minimum required economic capital for all of the Bank’s credit portfolios. The assessment of economic capital also considers
the anticipated potential migrations of obligors’ default risk rating 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;
the obligor’s EAD;
the obligor’s LGD;
the default correlation among various obligors;
the residual term of credit commitments;
the impact of economic and sector-based cycles on asset quality.
SSttrreessss TTeessttiinngg aanndd CCrriissiiss SScceennaarriiooss
The Bank carries out stress tests to evaluate its sensitivity to crisis situations in certain activity sectors and key portfolios. A global stress test methodology
covers most business, government, and personal credit portfolios to provide the Bank with an overview of the situation. By simulating specific scenarios, these
tests enable the Bank to measure allowance for credit losses according to IFRS 9 – Financial Instruments (IFRS 9) and the level of regulatory capital needed to
absorb potential losses and also 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.
CCrreeddiitt--GGrraannttiinngg PPrroocceessss
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.
RReevviieeww aanndd RReenneewwaall PPrroocceesssseess
The Bank periodically reviews credit files. The review process enables the Bank to update information on the quality of the facilities and covers, among other
things, risk ratings, compliance with credit conditions, and obligor behaviour. 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 on a continual basis.
82
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk MMiittiiggaattiioonn
The Bank also controls credit risk using various risk mitigation techniques. In addition to the standard practice of requiring collateral to guarantee repayment
of the credit it grants, the Bank also uses protection mechanisms such as credit derivative financial instruments, syndication and loan assignments as well as
an orderly reduction in the amount of credit granted.
The most common method used to mitigate credit risk is to obtain quality collateral from obligors. Obtaining collateral cannot replace a rigorous assessment of
an obligor’s ability to meet its financial obligations, but, beyond a certain risk threshold, it is an essential complement. In certain circumstances, it is not
necessary to take collateral. The need to take collateral depends on the level of risk presented by the obligor and the type of loan granted. However, if the level
of risk to the Bank is considered high, collateral will likely be required. The legal validity and enforceability of any collateral obtained and the Bank’s ability to
correctly and regularly measure the collateral’s value are critical for this mechanism to play its proper role in risk mitigation.
The Bank has established specific requirements in its internal policies with respect to the appropriate legal documentation and assessment for the kinds of
collateral that business units may require to guarantee the loans granted. The categories of eligible collateral and the lending value of the collateralized assets
have also been defined by the Bank. For the most part, they include the following asset categories as well as guarantees (whether secured by collateral or
unsecured) and government and bank guarantees:
inventories;
• accounts receivable;
•
• machinery and equipment and rolling stock;
•
•
residential and commercial real estate, office buildings and industrial facilities;
cash and marketable securities.
Portfolio Diversification and Management
The Bank is exposed to credit risk, not only through outstanding loans and undrawn amounts of commitments to a particular obligor but also through the
sectoral distribution of the outstanding loans and undrawn amounts and through the exposure of its various credit portfolios to geographical, concentration,
and settlement risks.
The Bank’s approach to controlling these diverse risks begins with a diversification of exposures. Measures designed to maintain a healthy degree of
diversification of credit risk in its portfolios are set out in the Bank’s policies, standards, and procedures. These instructions are mainly reflected in the
application of various exposure limits: credit concentration limits by counterparty and credit concentration limits by business sector, country, region, product,
and type of financial instrument. These limits are determined based on the Bank’s credit risk appetite framework and are reviewed periodically. Compliance
with these limits, particularly exceptions, is monitored through periodic reports submitted by the Risk Management Group’s officers to the Board.
Continuous analyses are performed in order to anticipate problems with a sector or obligor before they materialize as defaulted payments.
Other Risk Mitigation Methods
Credit risk mitigation measures for transactions in derivative financial instruments, which are regularly used by the Bank, are described in detail in the
Counterparty Risk section.
Credit Derivative Financial Instruments and Financial Guarantee Contracts
The Bank also reduces credit risk by using the protection provided by credit derivative financial instruments such as credit default swaps. When the Bank
acquires credit protection, it pays a premium on the swap to the counterparty in exchange for the counterparty’s commitment to pay if the underlying entity
defaults or another event involving the underlying entity and covered by the legal agreement occurs. Since, like obligors, providers of credit protection must
receive a default risk rating, the Bank’s standards set out all the criteria under which a counterparty may be judged eligible to mitigate the Bank’s credit risk.
The Bank may also reduce its credit risk by entering into financial guarantee contracts whereby a guarantor indemnifies the Bank for a loss resulting from an
obligor failing to make a payment when due in accordance with the contractual terms of a debt instrument.
Loan Syndication
The Bank has developed specific instructions on the appropriate objectives, responsibilities and documentation requirements for loan syndication.
FFoollllooww--UUpp ooff MMoonniittoorreedd AAccccoouunnttss aanndd RReeccoovveerryy
Credit granted and obligors are monitored on an ongoing basis and in a manner commensurate with the related risk. Loan portfolio managers use an array of
intervention methods to conduct a particularly rigorous follow-up on files that show a high risk of default. When loans continue to deteriorate and there is an
increase in risk to the point where monitoring has to be increased, a group specialized in managing problem accounts (Work Out units) steps in to maximize
collection of the disbursed amounts and tailor strategies to these accounts.
National Bank of Canada
83
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
Each quarter, the Work Out units submit a monitoring report (called a watchlist) to a monitoring committee to track the status of at-risk obligors and the
corrective measures undertaken. In addition, files in which the authorized amount is $4 million and up are presented to the Watchlist committee, which in turn
reviews the action plans and watchlist reports. The authority to approve allowances for credit losses is attributed using limits delegated on the basis of
hierarchical level presented in the Credit Risk Management Policy.
Information on the recognition of impaired loans and allowances for credit losses is presented in Notes 1 and 7 to the consolidated financial statements.
Forbearance and Restructuring
Situations where a business or retail obligor begins 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 2021 and 2020, the amount of distressed loan restructurings was not significant.
CCoouunntteerrppaarrttyy RRiisskk AAsssseessssmmeenntt
Counterparty risk is a credit risk that the Bank incurs on various types of transactions involving financial instruments. The most significant risks are those it
faces when it trades derivative financial instruments with counterparties on the over-the-counter market or when it purchases securities under reverse
repurchase agreements or sells securities under repurchase agreements. Securities lending transactions and securities brokerage activities involving
derivative financial instruments are also sources of counterparty risk. Note 16 to the consolidated financial statements provides a complete description of the
credit risk for derivative financial instruments by type of traded product.
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 limits 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 its 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.
84
National Bank of Canada
National Bank of Canada2021 Annual Report
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. There are two types of wrong-way risk: general wrong-way risk and
specific wrong-way risk. General wrong-way risk occurs when the probability of default of the counterparties is positively correlated to the general market risk
factors. Specific wrong-way risk occurs when the exposure to a specific counterparty is positively correlated to the probability of default of the counterparty
due to the nature of the transactions with this counterparty.
AAsssseessssmmeenntt ooff SSeettttlleemmeenntt RRiisskk
Settlement risk potentially arises from transactions that feature reciprocal delivery of cash or securities between the Bank and a counterparty. Foreign
exchange contracts are an example of transactions that can generate significant levels of settlement risk. However, the implementation of multilateral
settlement systems that allow settlement netting among participating institutions has contributed greatly to reducing the risks associated with the settlement
of foreign exchange transactions among banks. The Bank also uses financial intermediaries to gain access to established clearing houses in order to minimize
settlement risk for certain financial derivative transactions. In some cases, the Bank may have direct access to established clearing houses for settling
financial transactions such as repurchase agreements or reverse repurchase agreements. In addition, certain derivative financial instruments traded over the
counter are settled directly or indirectly by central counterparties. For additional information, see the table that presents notional amounts in Note 16 to the
consolidated financial statements.
There are several other types of transactions that may generate settlement risk, in particular the use of certain electronic fund transfer services. This risk refers
to the possibility that the Bank may make a payment or settlement on a transaction without receiving the amount owed by the counterparty, and with no
opportunity to recover the funds delivered (irrevocable settlement).
The ultimate means for completely eliminating such a risk is for the Bank to complete no payments or settlements before receiving the funds due from the
counterparty. Such an approach cannot, however, be used systematically. For several electronic payment services, the Bank is able to implement mechanisms
that allow it to make its transfers revocable or to debit the counterparty in the amount of the settlements before it makes its own transfer. On the other hand,
the nature of transactions in financial instruments makes it impossible for such practices to be widely used. For example, on foreign exchange transactions
involving a currency other than the U.S. dollar, time zone differentials impose strict payment schedules on the parties. The Bank cannot unduly postpone a
settlement without facing 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.
AAsssseessssmmeenntt ooff EEnnvviirroonnmmeennttaall RRiisskk
Environmental risk can affect credit risk in that the energy transition movement and extreme weather events could result in a decreased ability to make
repayments or in a decrease in the value of assets pledged as collateral. Ultimately, environmental risk can lead to both a higher probability of default and
higher loss given default among counterparties. In response, the risk management framework has been expanded to include new measures that identify,
assess, control, and monitor environmental risk. In addition, the Bank has developed and is gradually deploying a process used to assess and quantify the
impact of climate changes on its strategy and results. Furthermore, for clients in specific industries, the impacts of climate changes are discussed at least once
a year as part of the credit granting or renewal process.
The Bank also assesses its exposure to environment-related credit risk using a variety of control and monitoring mechanisms. For example, analyses are
performed on vulnerabilities to physical risks and on loan portfolio transition risks. These analyses are applied to all financing activities and provide greater
visibility of the Bank’s exposure to environmental risk. In addition, the Bank periodically assesses loan portfolio concentration risk to ensure that this risk is
not being significantly affected by environmental risk. Furthermore, an industry sector matrix has been developed to provide the Risk Management group with
a clearer vision of the loan portfolio sectors that are most affected by climate-related risks. Thanks to these initiatives, the Bank has been able to take concrete
steps in the process used to review sectoral limits, as each business sector or industry now has an ESG section describing its environmental risk.
The Risk Management group closely monitors changes in trends and calculation methods and participates actively in various industry discussion groups.
National Bank of Canada
85
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The amounts shown in the following tables represent the Bank’s maximum exposure to credit risk as at the financial reporting date without taking into account
any collateral held or any other credit enhancements. These amounts do not take into account allowances for credit losses nor amounts pledged as collateral.
The tables also exclude equity securities.
MMaaxxiimmuumm CCrreeddiitt RRiisskk EExxppoossuurree UUnnddeerr tthhee BBaasseell AAsssseett CCaatteeggoorriieess(1)**
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22002211
DDrraawwnn(2)
UUnnddrraawwnn
ccoommmmiittmmeennttss
RReeppoo--ssttyyllee
ttrraannssaaccttiioonnss(3)
DDeerriivvaattiivvee
ffiinnaanncciiaall
iinnssttrruummeennttss
OOtthheerr
ooffff--bbaallaannccee--
sshheeeett iitteemmss(4)
TToottaall
SSttaannddaarrddiizzeedd
AApppprrooaacchh(5)
AAIIRRBB
AApppprrooaacchh
RReettaaiill
Residential mortgage
Qualifying revolving retail
Other retail
NNoonn--rreettaaiill
Corporate
Sovereign
Financial institutions
TTrraaddiinngg ppoorrttffoolliioo
SSeeccuurriittiizzaattiioonn
TToottaall –– GGrroossss ccrreeddiitt rriisskk
SSttaannddaarrddiizzeedd AApppprrooaacchh(5)
AAIIRRBB AApppprrooaacchh
TToottaall –– GGrroossss ccrreeddiitt rriisskk
(millions of Canadian dollars)
RReettaaiill
Residential mortgage
Qualifying revolving retail
Other retail
NNoonn--rreettaaiill
Corporate
Sovereign
Financial institutions
TTrraaddiinngg ppoorrttffoolliioo
SSeeccuurriittiizzaattiioonn
TToottaall –– GGrroossss ccrreeddiitt rriisskk
SSttaannddaarrddiizzeedd AApppprrooaacchh(5)
AAIIRRBB AApppprrooaacchh
TToottaall –– GGrroossss ccrreeddiitt rriisskk
6666,,779911
22,,227700
1155,,551199
8844,,558800
7700,,558899
5555,,332233
77,,222288
113333,,114400
−−
33,,226699
222200,,998899
2255,,000099
119955,,998800
222200,,998899
1100,,557788
66,,228822
22,,448811
1199,,334411
2277,,778833
66,,221177
112266
3344,,112266
−−
−−
5533,,446677
225588
5533,,220099
5533,,446677
−−
−−
−−
−−
2266,,119900
5588,,445522
7722,,112222
115566,,776644
−−
−−
115566,,776644
2266,,338855
113300,,337799
115566,,776644
−−
−−
−−
−−
116611
229944
22,,224488
22,,770033
1177,,001100
−−
1199,,771133
22,,220033
1177,,551100
1199,,771133
−−
−−
3311
3311
55,,441155
8833
661199
66,,111177
−−
44,,220066
1100,,335544
33,,995555
66,,339999
1100,,335544
7777,,336699
88,,555522
1188,,003311
110033,,995522
113300,,113388
112200,,336699
8822,,334433
333322,,885500
1177,,001100
77,,447755
446611,,228877
5577,,881100
440033,,447777
446611,,228877
99 %%
−− %%
2299 %%
1111 %%
22 %%
2288 %%
−− %%
6688 %%
1133 %%
9911 %%
110000 %%
7711 %%
8899 %%
9988 %%
7722 %%
110000 %%
3322 %%
8877 %%
1133 %%
8877 %%
As at October 31, 2020(6)
Drawn(2)
Undrawn
commitments
Repo-style
transactions(3)
Derivative
financial
instruments
Other
off-balance-
sheet items(4)
Total
Standardized
Approach(5)
AIRB
Approach
57,062
2,488
14,394
73,944
62,569
58,054
3,534
124,157
−
2,247
200,348
21,840
178,508
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
3,906
5,321
9,227
66,813
8,774
16,740
92,327
115,402
119,167
72,917
307,486
14,011
6,054
419,878
42,469
377,409
419,878
10 %
− %
25 %
11 %
2 %
15 %
2 %
75 %
10 %
90 %
100 %
75 %
89 %
98 %
85 %
98 %
25 %
90 %
10 %
90 %
(1)
(2)
(3)
(4)
(5)
(6)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
Excludes equity securities and certain other assets such as investments in deconsolidated subsidiaries and joint ventures, right-of-use properties and assets, goodwill, deferred tax assets,
and intangible assets.
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.
Includes exposures to qualifying central counterparties (QCCP).
Certain amounts have been reclassified.
86
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
MMaarrkkeett RRiisskk
Market risk is the risk of losses arising from movements in market prices. Market risk comes from a number of factors, particularly changes to market variables
such as interest rates, 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.
At its onset, the COVID-19 pandemic sent stock markets into sharp decline and rendered them more volatile, pushed interest rates downwards, triggered a
rapid and sudden rise in unemployment, and prompted an economic slowdown. In spring 2020, governments, monetary authorities, and regulators intervened
to support the economy and the financial system, notably by deploying fiscal and monetary measures designed to increase liquidity and support incomes.
Although the global economy recovered during fiscal 2021, if the COVID-19 pandemic persists, in particular through subsequent waves, its impacts on the
global economy could worsen, and the measures in place might not be sufficient over the long term to completely avoid recessionary conditions.
The trading portfolios include positions in financial instruments and commodities held either with trading intent or to hedge other elements of the trading
book. Positions held with trading intent are those held for short-term resale and/or with the intent of taking advantage of actual or expected short-term price
movements or to lock in arbitrage profits. These portfolios target one of the following objectives: market making, liquidating positions for clients or selling
financial products to clients.
Non-trading portfolios include financial instruments intended to be held to maturity as well as those held for daily cash management or for the purpose of
maintaining targeted returns or ensuring asset and liability management.
GGoovveerrnnaannccee
A market risk management policy governs global market risk management across the Bank’s units and subsidiaries that are exposed to this type of risk. It is
approved by the GRC. The policy sets out the 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.
AAsssseessssmmeenntt ooff MMaarrkkeett RRiisskk
The Risk Management Group uses a variety of risk measures to estimate the size of potential losses under more or less severe scenarios, and using both short-
term and long-term time horizons. For short-term horizons, the Bank’s risk measures include Value-at-Risk (VaR), Stressed VaR (SVaR), and sensitivity metrics.
For long-term horizons or sudden significant market moves, including those due to a lack of market liquidity, the risk measures include stress testing across an
extensive range of scenarios.
VaR and SVaR Models
VaR is a statistical measure of risk that is used to quantify market risks by 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
87
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
VaR methodology techniques are well suited to measure risks under normal market conditions. VaR metrics are most appropriate as a risk measure for trading
positions in liquid financial markets. However, there are limitations in measuring risks with this method when extreme and sudden market risk events occur,
since they are likely to underestimate the Bank’s market risk. VaR methodology limitations include the following:
past changes in market risk factors may not always produce accurate predictions of the distribution and correlations of future market movements;
a VaR with a daily time horizon does not fully capture the market risk of positions that cannot be liquidated or hedged within one day;
the market risk factor historical database used for VaR calculation may not reflect potential losses that could occur under unusual market conditions (e.g.,
periods of extreme illiquidity) relative to the historical period used for VaR estimates;
the use of a 99% VaR confidence level does not reflect the extent of potential losses beyond that percentile.
Given the limitations of VaR, 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.
CCoonnttrroolllliinngg MMaarrkkeett RRiisskk
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 the Bank’s 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.
88
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The following tables provide a breakdown of the Bank’s Consolidated Balance Sheet into assets and liabilities by those that carry market risk and those that do
not carry market risk, distinguishing between trading positions whose main risk measures are VaR and SVaR and non-trading positions that use other risk
measures.
RReeccoonncciilliiaattiioonn ooff MMaarrkkeett RRiisskk WWiitthh CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett IItteemmss
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22002211
BBaallaannccee
sshheeeett
TTrraaddiinngg(1)
NNoonn--TTrraaddiinngg(2)
NNoott ssuubbjjeecctt ttoo
mmaarrkkeett rriisskk
NNoonn--ttrraaddeedd rriisskk
pprriimmaarryy rriisskk sseennssiittiivviittyy
MMaarrkkeett rriisskk mmeeaassuurreess
AAsssseettss
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
LLiiaabbiilliittiieess
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
3333,,887799
8844,,881111
99,,558833
1111,,991100
77,,551166
118822,,668899
1166,,448844
669911
88,,223322
335555,,779955
224400,,993388
66,,883366
2200,,226666
1177,,229933
1199,,336677
2255,,117700
114433
66,,115588
776688
333366,,993399
440011
1166,,551188
1166,,996600
IInntteerreesstt rraattee(3)
8822,,999955
−−
−−
−−
77,,882277
1166,,003333
−−
−−
110077,,225566
1144,,221155
−−
2200,,226666
−−
1188,,999999
99,,005588
−−
−−
−−
6622,,553388
11,,881166
99,,558833
1111,,991100
77,,551166
117744,,886622
445511
669911
−−
222233,,334477
222266,,772233
66,,883366
−−
1177,,229933
336688
1166,,111122
114433
111133
776688
226688,,335566
−−
−−
−−
−−
−−
−−
−−
88,,223322
2255,,119922
−−
−−
−−
−−
−−
−−
−−
66,,004455
−−
66,,004455
IInntteerreesstt rraattee(3) aanndd eeqquuiittyy(4)
IInntteerreesstt rraattee(3) aanndd eeqquuiittyy(5)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)(6)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(7) aanndd eexxcchhaannggee rraattee(7)
OOtthheerr(8)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)(6)
IInntteerreesstt rraattee(7) aanndd eexxcchhaannggee rraattee(7)
IInntteerreesstt rraattee(3)
OOtthheerr(8)
IInntteerreesstt rraattee(3)
IInntteerreesstt rraattee(3)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table on page 91 of this MD&A that shows the VaR distribution of the trading
portfolios by risk category and their diversification effect as well as total SVaR.
Non-trading positions that use other risk measures.
For additional information, see the tables on pages 91 and 93 of this MD&A that show the VaR distribution of the trading portfolios by risk category and their diversification effect as well as
total SVaR and the interest rate sensitivity table.
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
89
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
(millions of Canadian dollars)
AAsssseettss
Cash and deposits with financial institutions
Securities
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Defined benefit asset
Other
LLiiaabbiilliittiieess
Deposits
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase
agreements and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Defined benefit liability
Other
Subordinated debt
Balance
sheet
Trading(1)
Non-trading(2)
Not subject to
market risk
Non-traded risk primary
risk sensitivity
Market risk measures
As at October 31, 2020
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
156
5,562
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
156
64
775
264,943
−
−
−
−
−
−
−
7,552
23,278
−
−
−
−
−
−
−
5,498
−
5,498
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 as well as total SVaR. For additional information, see the table on page 91 of this MD&A that shows the VaR distribution of the trading
portfolios by risk category and their diversification effect as well as total SVaR.
Non-trading positions that use other risk measures.
For additional information, see the tables on pages 91 and 93 of this MD&A that show the VaR distribution of the trading portfolios by risk category and their diversification effect as well as
total SVaR and the interest rate sensitivity table.
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.
90
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
TTrraaddiinngg AAccttiivviittiieess
The table below shows the VaR distribution of trading portfolios by risk category and their diversification effect as well as the total SVaR, i.e., the VaR of the
Bank’s current portfolios obtained following the calibration of risk factors over a 12-month stress period.
VVaaRR aanndd SSVVaaRR ooff TTrraaddiinngg PPoorrttffoolliiooss(1)**
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Diversification effect(2)
TToottaall ttrraaddiinngg VVaaRR
TToottaall ttrraaddiinngg SSVVaaRR
LLooww
((44..55))
((00..33))
((44..44))
((00..44))
nn..mm..
((44..88))
((66..55))
HHiigghh
AAvveerraaggee
22002211
PPeerriioodd eenndd
((1111..00))
((22..33))
((1100..22))
((11..99))
nn..mm..
((1122..33))
((2233..11))
((77..22))
((00..99))
((66..22))
((00..99))
77..88
((77..44))
((1133..88))
((88..22))
((00..99))
((66..00))
((11..44))
1111..33
((55..22))
((99..55))
Low
(4.0)
(0.3)
(2.7)
(0.6)
n.m.
(4.6)
(6.9)
High
Average
2020
Period end
(15.6)
(2.7)
(17.5)
(2.1)
n.m.
(19.6)
(39.9)
(7.4)
(0.9)
(8.3)
(1.0)
8.0
(9.6)
(17.1)
(8.0)
(1.5)
(8.0)
(0.8)
9.1
(9.2)
(17.9)
n.m. Computation of a diversification 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 and SVaR using a 99% confidence level.
The total trading VaR is less than the sum of the individual risk factor VaR results due to the diversification effect.
The average total trading VaR stood at $7.4 million for fiscal 2021, down from $9.6 million in fiscal 2020. The average total trading SVaR was also down,
decreasing from $17.1 million in fiscal 2020 to $13.8 million in fiscal 2021. These decreases were mainly due to a decrease in equity risk.
The revenues generated by trading activities are compared with VaR as a backtesting assessment of the appropriateness of this risk measure as well as the
financial performance of trading activities relative to the risk undertaken.
The table below shows daily trading and underwriting revenues and VaR. Daily trading and underwriting revenues were positive on 95% of the days for the year
ended October 31, 2021. Daily trading and underwriting losses in excess of $1 million were recorded on nine days, and on one of those days, the losses
exceeded the VaR.
DDaaiillyy TTrraaddiinngg aanndd UUnnddeerrwwrriittiinngg RReevveennuueess
(millions of Canadian dollars)
32
28
24
20
16
12
8
4
0
(4)
(8)
(12)
(16)
(20)
(24)
(28)
0
2
.
v
o
N
0
2
.
c
e
D
1
2
.
n
a
J
1
2
.
b
e
F
1
2
.
r
a
M
1
2
.
r
p
A
1
2
y
a
M
1
2
e
n
u
J
1
2
y
l
u
J
1
2
.
g
u
A
1
2
.
t
p
e
S
1
2
.
t
c
O
Trading and underwriting revenues
VaR
National Bank of Canada
91
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
SSttrreessss TTeessttiinngg aanndd CCrriissiiss SScceennaarriiooss
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 events in question were to occur. The Bank’s stress testing
framework, which is applied to all positions generating market risk, currently comprises the following categories of 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 of interest rates (flattening and steepening) and increases/decreases
in credit spreads;
o sharp stock market crash coupled with a significant increase in volatility of the term structure; increase in stock prices combined with less volatility;
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.
SSttrruuccttuurraall IInntteerreesstt RRaattee RRiisskk
As part of its core banking activities, such as lending and deposit taking, the Bank is exposed to interest rate risk. Interest rate risk is the potential negative
impact of interest rate fluctuations on the Bank’s annual net interest income and economic value of equity. Activities related to hedging, investments and term
funding are also exposed to structural interest rate risk. The Bank’s main exposure to interest rate risk stems from a variety of sources:
yield curve risk, which refers to changes in the level, slope, and shape of the yield curve;
repricing risk, which arises from timing differences in the maturity and repricing of on- and off-balance-sheet items;
options risk, either implicit (e.g., prepayment of mortgage loans) or explicit (e.g., capped mortgages and rate guarantees) in balance sheet products;
basis risk that is caused by imperfect correlation between different yield curves.
The Bank’s exposure to structural interest rate risk is assessed and controlled mostly through the impact of stress scenarios and market shocks on the
economic value of the Bank’s equity and on 12-month net interest income projections. These metrics are based on cash flow projections prepared using a
number of assumptions. Specifically, the Bank has developed key assumptions on loan prepayment levels, deposit redemptions, and the behaviour of
customers that were granted rate guarantees. These specific assumptions were developed based on historical analyses and are reviewed frequently.
Funds transfer pricing is a process by which the Bank’s business units are charged or paid according to their use or supply of funding. Through this
mechanism, all funding activities as well as the interest rate risk and liquidity risk associated with those activities are centralized in the Global Funding and
Treasury Group.
Active management of structural interest rate risk can significantly enhance the Bank’s profitability and add to shareholder value. The Bank’s goal is to
maximize its economic value of equity and annual net interest income considering its risk appetite. This has to be accomplished within prescribed risk limits
and is done primarily by implementing a policy framework, approved by the GRC and submitted for information purposes to the RMC, 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 GRC 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 interest rate risk in the banking book 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.
92
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
Stress Testing and Crisis Scenarios
Stress tests are performed on a regular basis to assess the impact of various scenarios on annual net interest income and on the economic value of equity in
order to guide the management of structural interest rate risk. Crisis scenarios are performed where the yield curve level, slope and shape are shocked. Yield
curve basis and volatility scenarios are also performed. All risk factors mentioned above are covered by specific scenarios and have Board-approved or
GRC-approved risk limits.
Dynamic simulation is also used to project the Bank’s future net interest income, future economic value, and future structural interest rate risk exposure. These
simulations project cash flows of assets, liabilities and off-balance-sheet products over a given investment horizon. Given their dynamic nature, they
encompass assumptions pertaining to changes in volume, client term preference, prepayments of deposits and loans, and the yield curve.
The following table presents 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.
IInntteerreesstt RRaattee SSeennssiittiivviittyy –– NNoonn--TTrraaddiinngg AAccttiivviittiieess ((BBeeffoorree TTaaxx))**
As at October 31
(millions of Canadian dollars)
IImmppaacctt oonn eeqquuiittyy
100-basis-point increase in the interest rate
25-basis-point decrease in the interest rate
IImmppaacctt oonn nneett iinntteerreesstt iinnccoommee
100-basis-point increase in the interest rate
25-basis-point decrease in the interest rate
CCaannaaddiiaann
ddoollllaarr
OOtthheerr
ccuurrrreenncciieess
((227777))
6677
9911
((3322))
3399
((99))
1177
((44))
22002211
TToottaall
((223388))
5588
110088
((3366))
Canadian
dollar
Other
currencies
(239)
49
175
(56)
15
(4)
7
(2)
2020(1)
Total
(224)
45
182
(58)
(1)
After refining the method used to calculate interest rate movements, certain amounts have been modified from those previously reported as at October 31, 2020.
IInnvveessttmmeenntt GGoovveerrnnaannccee
The Bank has created securities portfolios in liquid and less liquid securities for strategic, long-term investment and liquidity management purposes. These
investments carry market risk, credit risk, liquidity risk and concentration risk.
The investment governance sets out the guiding principles and general management standards that must be followed by all those who manage portfolios of
these securities included in the portfolios of the Bank and its subsidiaries. Under this investment governance, business units that are active in managing these
types of portfolios must adopt internal investment policies that set, among other things, targets and limits for the allocation of assets in the portfolios
concerned and internal approval mechanisms. The primary objective is to reduce concentration risk by industry, issuer, country, type of financial instrument
and credit quality.
Overall limits in value and in proportion to the Bank’s equity are set on the outstanding amount of liquid preferred shares, liquid equity securities excluding
preferred shares, and instruments classified as illiquid securities in the securities portfolios. The overall exposure to common shares with respect to an
individual issuer and the total outstanding amount invested in private equity funds, for investment banking services, are also subject to limits. Restrictions are
also set on investments defined as special. Lastly, the Bank has a specific policy, approved by the RMC, applicable to investments in debt and equity
securities, including strategic investments. Strategic investments are defined as purchases of business assets or acquisitions of significant interests in an
entity for purposes of acquiring control or creating a long-term relationship.
SSttrruuccttuurraall FFoorreeiiggnn EExxcchhaannggee RRiisskk
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. This risk,
predominantly in U.S. dollars, is measured by assessing the impact of currency fluctuations on retained earnings. The Bank uses financial instruments
(derivative and non-derivative) to hedge 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, as well as the impact on hedging transactions, 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 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
93
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
LLiiqquuiiddiittyy aanndd FFuunnddiinngg RRiisskk
Liquidity and funding risk is the risk that the Bank will be unable to honour daily cash and financial obligations without resorting to costly and untimely
measures. Liquidity and funding risk arises when sources of funds become insufficient to meet scheduled payments under the Bank’s commitments. Liquidity
risk stems from mismatched cash flows related to assets and liabilities as well as the characteristics of certain products such as credit commitments and non-
fixed-term deposits.
The Bank’s primary objective as a financial institution is to manage liquidity such that it supports the Bank’s business strategy and allows it to honour its
commitments when they come due, even in extreme conditions. This is done primarily by implementing a policy framework approved by the RMC, which
establishes a risk appetite, monitoring structures controlled by various committees, risk indicators, reporting procedures, delegation of responsibilities and
segregation of duties. The Bank also prepares an annual funding plan that incorporates the expected growth of assets and liabilities.
Regulatory Environment
The Bank works closely with national and international regulators to implement regulatory liquidity standards. The Bank adapts its processes and policies to
reflect its liquidity risk appetite towards these new requirements.
In response to the COVID-19 impact and to support the financial and operational resilience of financial institutions, the Bank of Canada and OSFI took
exceptional measures in the second quarter of 2020. During fiscal 2021, given that the financial and economic risks caused by the pandemic were tempered
somewhat, most of the relief measures were lifted. For additional information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the
Regulatory Authorities on pages 17 and 18 of this MD&A.
The Liquidity Adequacy Requirements (LAR) 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 LCR on a quarterly basis. Since January 2021, the NSFR has also been published quarterly in
accordance with OSFI’s revised guideline, Net Stable Funding Ratio Disclosure Requirements, which took effect on January 1, 2021. This guideline sets out
NSFR ratio disclosure requirements for D-SIBs.
On March 11, 2021, OSFI released, for public consultation, revisions to its LAR guideline, which was to take effect in the first quarter of 2023. OSFI is making
changes that will improve the sensitivity to risk and that will ensure that financial institutions hold sufficient cash or other liquid investments to meet potential
liquidity needs and to support the continued lending of credit, in particular during periods of financial stress. On November 29, 2021, OSFI postponed the
implementation of the revisions to its LAR guideline to April 1, 2023.
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
94
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
GGoovveerrnnaannccee
The Global Funding and Treasury Group is responsible for managing liquidity and funding risk. Although the day-to-day and strategic management of risks
associated with liquidity, funding and pledging activities is assumed by the Global Funding and Treasury Group, the Risk Management Group is responsible for
assessing liquidity risk and overseeing compliance with the resulting policy. The Risk Management Group ensures that an appropriate risk management
framework is in place and ensures compliance with the risk appetite framework. This structure provides an independent oversight and effective challenge for
the liquidity, funding and pledging decisions, strategy, and exposure.
The Bank’s Liquidity, Funding and Pledging Governance Policy requires review and approval by the RMC, based on recommendations from the GRC. The Bank
has established three levels of limits. The first two levels of limits involve the Bank's overall cash position and are respectively approved by the Board and the
GRC, whereas the third level of limits focuses more on specific aspects of liquidity risk and is approved by the Financial Markets Risk Committee. 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 approving committee.
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 and the Risk Management Group.
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.
LLiiqquuiiddiittyy MMaannaaggeemmeenntt
The Bank performs liquidity management, funding and pledging operations not only from its head office and regional offices in Canada, but also through
certain foreign centres. Although the volume of such operations abroad represents a sizable portion of global liquidity management, the Bank’s liquidity
management is centralized. By organizing liquidity management, funding and pledging activities within the Global Funding and Treasury Group, the Bank can
better coordinate enterprise-wide funding and risk monitoring activities. All internal funding transactions between Bank entities are controlled by the Global
Funding and Treasury Group.
This centralized structure streamlines the allocation and control of liquidity management, funding and pledging limits. Nonetheless, the Liquidity, Funding and
Pledging Governance policy contains special provisions for the financial centres that are most active in terms of institutional funding and sets limits and
monitoring thresholds for secured and unsecured short-term funding, both in absolute value and materiality.
The Bank’s funds transfer pricing system prices liquidity by allocating the cost or income to the various business segments. Liquidity costs are allocated to
liquidity-intensive activities, mainly long-term loans, and commitments to extend credit and less liquid securities as well as strategic investments. The liquidity
compensation is credited to the suppliers of funds, primarily funding in the form of stable deposits from the Bank’s distribution network.
National Bank of Canada
95
National Bank of Canada2021 Annual Report
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.
96
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
LLiiqquuiidd AAsssseett PPoorrttffoolliioo(1)
As at October 31
(millions of Canadian dollars)
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
LLooaannss
Securities backed by insured residential mortgages
AAss aatt OOccttoobbeerr 3311,, 22002211
As at October 31, 2020
As at October 31
(millions of Canadian dollars)
UUnneennccuummbbeerreedd lliiqquuiidd aasssseettss bbyy eennttiittyy
National Bank (parent)
Domestic subsidiaries
Foreign subsidiaries and branches
As at October 31
(millions of Canadian dollars)
UUnneennccuummbbeerreedd lliiqquuiidd aasssseettss bbyy ccuurrrreennccyy
Canadian dollar
U.S. dollar
Other currencies
LLiiqquuiidd AAsssseett PPoorrttffoolliioo(1) –– AAvveerraaggee(5)
Year ended October 31
(millions of Canadian dollars)
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
Issued or guaranteed by the Canadian government,
U.S. Treasury, other U.S. agencies and
other foreign governments
Issued or guaranteed by Canadian provincial
and municipal governments
Other debt securities
Equity securities
LLooaannss
Securities backed by insured residential mortgages
AAss aatt OOccttoobbeerr 3311,, 22002211
As at October 31, 2020
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(2)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(3)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(4)
22002211
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2020
Unencumbered
liquid assets
3333,,887799
−−
3333,,887799
66,,778811
2277,,009988
23,271
2255,,448822
3300,,551155
5555,,999977
1133,,553366
77,,118899
6600,,009977
99,,224488
114499,,443311
140,783
44,,005588
22,,220033
3377,,229944
−−
7744,,007700
60,560
1177,,559944
99,,339922
9977,,339911
99,,224488
222233,,550011
201,343
2266,,999955
1122,,991166
22,,119911
7700,,556677
55,,770033
112255,,115533
106,970
2299,,000022
21,103
44,,667788
77,,220011
2266,,882244
33,,554455
9988,,334488
7,371
5,332
33,346
3,950
94,373
22002211
2020
6622,,443388
1122,,447711
2233,,443399
9988,,334488
47,135
21,928
25,310
94,373
22002211
2020
4477,,229933
4400,,999999
1100,,005566
9988,,334488
50,568
26,099
17,706
94,373
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(2)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(3)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(4)
22002211
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2020
Unencumbered
liquid assets
3388,,226677
−−
3388,,226677
66,,002299
3322,,223388
19,784
2288,,773344
2277,,334499
5566,,008833
1144,,001122
66,,773399
6644,,112200
99,,777788
116611,,665500
128,850
55,,771199
11,,773344
4400,,882244
−−
7755,,662266
64,855
1199,,773311
88,,447733
110044,,994444
99,,777788
223377,,227766
193,705
3355,,773344
1133,,883366
22,,006600
7700,,559933
66,,008855
113344,,333377
107,663
2200,,334499
19,590
55,,889955
66,,441133
3344,,335511
33,,669933
110022,,993399
5,962
5,970
31,155
3,581
86,042
(1)
(2)
(3)
(4)
(5)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
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
97
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
SSuummmmaarryy ooff EEnnccuummbbeerreedd aanndd UUnneennccuummbbeerreedd AAsssseettss(1)
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
(millions of Canadian dollars)
Cash and deposits with financial institutions
Securities
Securities purchased under reverse repurchase
agreements and securities borrowed
Loans and acceptances, net of allowances
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
EEnnccuummbbeerreedd
aasssseettss(2)
UUnneennccuummbbeerreedd
aasssseettss
AAss aatt OOccttoobbeerr 3311,, 22002211
EEnnccuummbbeerreedd
aasssseettss aass %%
ooff ttoottaall aasssseettss
TToottaall
OOtthheerr(3)
66,,550066
−−
77,,551166
−−
−−
−−
−−
−−
−−
−−
1144,,002222
AAvvaaiillaabbllee aass
ccoollllaatteerraall
2277,,009988
6677,,770055
−−
33,,554455
−−
−−
−−
−−
−−
−−
9988,,334488
OOtthheerr(4)
−−
−−
−−
114411,,883377
1166,,448844
222255
11,,221166
11,,550044
11,,551100
44,,446688
116677,,224444
3333,,887799
110066,,330044
77,,551166
118822,,668899
1166,,448844
222255
11,,221166
11,,550044
11,,551100
44,,446688
335555,,779955
11..99
1100..99
22..11
1100..55
−−
−−
−−
−−
−−
−−
2255..44
Encumbered
assets(2)
Unencumbered
assets
As at October 31, 2020
Encumbered
assets as %
of total assets
Total
Other(3)
5,527
−
14,512
−
−
−
−
−
−
−
20,039
Available as
collateral
23,271
67,152
−
3,950
−
−
−
−
−
−
94,373
Other(4)
−
−
−
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
PPlleeddggeedd aass
ccoollllaatteerraall
227755
3388,,559999
−−
3377,,330077
−−
−−
−−
−−
−−
−−
7766,,118811
Pledged as
collateral
344
34,979
−
37,556
−
−
−
−
−
−
72,879
(1)
(2)
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
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 the covered bond program.
(3) Other encumbered assets include assets for which there are restrictions and that cannot therefore be used for collateral or funding purposes as well as assets used to cover short sales.
(4) 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)).
Liquidity Coverage Ratio
The liquidity coverage ratio (LCR) was introduced primarily to ensure that banks could withstand periods of severe short-term stress. LCR is calculated by
dividing the total amount of high-quality liquid assets (HQLA) by the total amount of net cash outflows. 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 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’s Liquidity Adequacy Requirements guideline.
The following table provides average LCR data calculated using the daily figures in the quarter. For the quarter ended October 31, 2021, the Bank’s average
LCR was 154%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
98
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
LLCCRR DDiisscclloossuurree RReeqquuiirreemmeennttss(1)(2)
(millions of Canadian dollars)
HHiigghh--qquuaalliittyy lliiqquuiidd aasssseettss ((HHQQLLAA))
Total HQLA
CCaasshh oouuttfflloowwss
Retail deposits and deposits from small business customers, of which:
Stable deposits
Less stable deposits
Unsecured wholesale funding, of which:
Operational deposits (all counterparties) and deposits in networks of cooperative banks
Non-operational deposits (all counterparties)
Unsecured debt
Secured wholesale funding
Additional requirements, of which:
Outflows related to derivative exposures and other collateral requirements
Outflows related to loss of funding on secured debt securities
Backstop liquidity and credit enhancement facilities and commitments to extend credit
Other contractual commitments to extend credit
Other contingent commitments to extend credit
Total cash outflows
CCaasshh iinnfflloowwss
Secured lending (e.g., reverse repos)
Inflows from fully performing exposures
Other cash inflows
Total cash inflows
TToottaall HHQQLLAA
TToottaall nneett ccaasshh oouuttfflloowwss
LLiiqquuiiddiittyy ccoovveerraaggee rraattiioo ((%%))(6)
TToottaall uunnwweeiigghhtteedd
vvaalluuee(3) ((aavveerraaggee))
OOccttoobbeerr 3311,, 22002211
TToottaall wweeiigghhtteedd
vvaalluuee(4) ((aavveerraaggee))
For the quarter ended
July 31, 2021
Total weighted
value(4) (average)
nn..aa..
6600,,114400
2277,,117799
3322,,996611
110033,,330099
2255,,002244
6699,,334444
88,,994411
nn..aa..
4477,,220055
1111,,335577
11,,227788
3344,,557700
11,,777744
111111,,772233
nn..aa..
9955,,449977
1100,,664477
1199,,884466
112255,,999900
7711,,226622
44,,995555
881155
44,,114400
5533,,990033
66,,009977
3388,,886655
88,,994411
1188,,886644
1111,,446688
55,,008822
11,,227788
55,,110088
777755
11,,669911
9911,,665566
1177,,558855
66,,997788
1199,,884466
4444,,440099
68,127
4,847
808
4,039
52,125
5,581
37,208
9,336
22,184
11,276
4,869
1,318
5,089
807
1,659
92,898
19,901
7,160
20,842
47,903
TToottaall aaddjjuusstteedd
vvaalluuee(5)
Total adjusted
value(5)
7711,,226622
4477,,224477
115544 %%
68,127
44,995
154 %
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
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)
(4) Weighted values are calculated after the application of respective haircuts (for HQLA) or inflow and outflow rates.
(5)
(6)
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, 2021, Level 1 liquid assets represented 85% 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, 2021 and the preceding quarter are a result of normal business operations. 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.
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 thereof is presented monthly to the Financial Markets Risk Committee.
Net Stable Funding Ratio
The BCBS has developed the Net Stable Funding Ratio (NSFR) to promote a more resilient banking sector. The NSFR requires institutions to maintain a stable
funding profile in relation to the composition of their assets and off-balance-sheet activities. A viable funding structure is intended to reduce the likelihood that
disruptions to an institution’s regular sources of funding will erode its liquidity position in a way that would increase the risk of its failure and potentially lead
to broader systemic stress. NSFR is calculated by dividing available stable funding by required stable funding. OSFI has been requiring Canadian banks to
maintain a minimum NSFR of 100%.
National Bank of Canada
99
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The following table provides the available stable funding and the required stable funding in accordance with OSFI’s Liquidity Adequacy Requirements
guideline. As at October 31, 2021, the Bank’s NSFR was 117%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity in a
long-term position.
NNSSFFRR DDiisscclloossuurree RReeqquuiirreemmeennttss(1)(2)
(millions of Canadian dollars)
AAvvaaiillaabbllee SSttaabbllee FFuunnddiinngg ((AASSFF)) IItteemmss
Capital:
Regulatory capital
Other capital instruments
Retail deposits and deposits from small business customers:
Stable deposits
Less stable deposits
Wholesale funding:
Operational deposits
Other wholesale funding
Liabilities with matching interdependent assets(4)
Other liabilities(5):
NSFR derivative liabilities(5)
All other liabilities and equity not included in the above categories
TToottaall AASSFF
RReeqquuiirreedd SSttaabbllee FFuunnddiinngg ((RRSSFF)) IItteemmss
Total NSFR high-quality liquid assets (HQLA)
Deposits held at other financial institutions for operational purposes
Performing loans and securities:
Performing loans to financial institutions secured by Level 1 HQLA
Performing loans to financial institutions secured by non-Level 1
HQLA and unsecured performing loans to financial institutions
Performing loans to non-financial corporate clients, loans to retail
and small business customers, and loans to sovereigns, central
banks and PSEs, of which:
With a risk weight of less than or equal to 35% under the Basel II
Standardized Approach for credit risk
Performing residential mortgages, of which:
With a risk weight of less than or equal to 35% under the Basel II
Standardized Approach for credit risk
Securities that are not in default and do not qualify as HQLA, including
exchange-traded equities
Assets with matching interdependent liabilities(4)
Other assets(5):
Physical traded commodities, including gold
Assets posted as initial margin for derivative contracts and
contributions to default funds of CCPs(5)
NSFR derivative assets(5)
NSFR derivative liabilities before deduction of the variation
margin posted(5)
All other assets not included in the above categories
Off-balance-sheet items(5)
TToottaall RRSSFF
NNeett SSttaabbllee FFuunnddiinngg RRaattiioo ((%%))
AAss aatt OOccttoobbeerr 3311,,
22002211
As at July 31,
2021
UUnnwweeiigghhtteedd vvaalluuee bbyy rreessiidduuaall mmaattuurriittyy
NNoo
mmaattuurriittyy
66 mmoonntthhss
oorr lleessss
OOvveerr
66 mmoonntthhss
ttoo 11 yyeeaarr
OOvveerr
11 yyeeaarr
WWeeiigghhtteedd
vvaalluuee(3)
Weighted
value(3)
1188,,885566
1188,,885566
−−
5555,,223311
2255,,333355
2299,,889966
6699,,551166
2244,,000055
4455,,551111
−−
2233,,228888
nn..aa..
2233,,228888
nn..aa..
nn..aa..
−−
4422,,660066
228888
−−
−−
−−
1122,,555599
66,,222277
66,,333322
6677,,331188
−−
6677,,331188
33,,119933
22,,223333
nn..aa..
nn..aa..
−−
5588,,886644
8866
−−
−−
−−
33,,221188
11,,333322
11,,888866
88,,444455
−−
88,,444455
11,,446699
1144,,005511
1100,,224488
228877
nn..aa..
nn..aa..
−−
2211,,220044
−−
776688
776688
−−
1144,,665511
44,,883322
99,,881199
3311,,445566
−−
3311,,445566
2200,,550077
11,,228833
nn..aa..
nn..aa..
−−
9933,,774466
1144
1199,,662244
1199,,662244
−−
7799,,336622
3366,,008811
4433,,228811
8822,,889966
1122,,000033
7700,,889933
−−
779933
nn..aa..
779933
118822,,667755
77,,119988
−−
112288,,337788
3333
33,,887722
3355,,115500
11,,881177
881188
55,,772255
1177,,552277
1199,,662233
1133,,881133
3333,,995588
6600,,119911
115577
99,,117722
22,,229911
33,,992299
77
55,,552255
114411
5533,,669966
11,,334433
4477,,991111
99,,117722
33,,992299
55,,552255
5533,,669966
4477,,991111
1111,,774477
−−
33,,002222
227755
nn..aa..
nn..aa..
nn..aa..
22,,774477
nn..aa..
nn..aa..
nn..aa..
7766
33,,119933
nn..aa..
55,,445577
nn..aa..
nn..aa..
4499
11,,446699
4411,,887755
nn..aa..
88,,001133
1111,,000055
1166,,449988
117788
9955,,999922
nn..aa..
nn..aa..
55,,226600
2200,,550077
nn..aa..
772244
nn..aa..
nn..aa..
1144,,551188
−−
1166,,778844
227755
66,,881111
775577
882255
88,,111166
33,,661133
115555,,997733
19,349
19,349
−
79,326
36,289
43,037
81,862
12,148
69,714
−
805
n.a.
805
181,342
6,836
−
122,289
25
5,739
58,958
1,619
45,122
45,122
12,445
−
15,154
285
5,992
261
734
7,882
3,579
147,858
For additional information on capital management measures, see the Financial Reporting Method section on pages 18 to 21.
n.a. Not applicable
(1)
(2) OSFI prescribed a table format in order to standardize disclosure throughout the banking industry.
(3) Weighted values are calculated after application of the weightings set out in OSFI’s Liquidity Adequacy Requirements guideline.
(4)
As per OSFI’s specifications, liabilities arising from transactions involving the Canada Mortgage Bond program and their corresponding encumbered mortgages are given ASF and RSF
weights of 0%, respectively.
As per OSFI’s specifications, there is no need to differentiate by maturities.
111177 %%
123 %
National Bank of Canada
(5)
100
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The NSFR represents the amount of ASF relative to the amount of RSF. ASF is defined as the portion of capital and liabilities expected to be reliable over the
time horizon considered by the NSFR, which extends to one year. The amount of RSF of a specific institution is a function of the liquidity characteristics and
residual maturities of the various assets held by that institution as well as those of its off-balance-sheet exposures. The amounts of available and required
stable funding are calibrated to reflect the degree of stability of liabilities and liquidity of assets. The Bank expects some quarter-over-quarter variation
between reported NSFRs, and such variation may not be indicative of a trend.
The NSFR assumptions differ from the assumptions used for the liquidity disclosures provided in the tables on the preceding 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.
FFuunnddiinngg RRiisskk
Funding risk is defined as the risk to the Bank’s ongoing ability to raise sufficient funds to finance actual or proposed business activities on an unsecured or
secured basis at an acceptable price. The Bank maintains a good balance of its funding through appropriate diversification of its unsecured funding vehicles,
securitization programs and secured funding. The Bank also diversifies its funding by currency, geography, and maturity. The funding management priority is
to achieve an optimal balance between deposits, securitization, secured funding and unsecured funding. This brings optimal stability to the funding and
reduces vulnerability to unpredictable events.
Funding and liquidity levels remained sound and robust over the year and the Bank does not foresee any event, commitment or demand that might have a
significant impact on its funding and liquidity risk position. For additional information, see the table entitled Residual Contractual Maturities of Balance Sheet
Items and Off-Balance-Sheet Commitments in Note 29 to the consolidated financial statements.
Credit Ratings
The credit ratings assigned by ratings agencies represent their assessment of the Bank’s credit quality based on qualitative and quantitative information
provided to them. Credit ratings may be revised at any time based on various factors, including macroeconomic 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 remain 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 credit
ratings. On January 13, 2021, Fitch Ratings changed the trend on all the Bank’s ratings and its related entities from “Negative” to “Stable.” Fitch estimates that
the Bank is in a good position to withstand the disruptions caused by the COVID-19 pandemic, and on April 30, 2021, DBRS Limited (DBRS) also changed the
trend from “Stable” to “Positive.” DBRS has recognized the Bank’s solid performance of recent years. 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, 2021.
TThhee BBaannkk’’ss CCrreeddiitt RRaattiinnggss
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
MMooooddyy’’ss
SS&&PP
AAss aatt OOccttoobbeerr 3311,, 22002211
FFiittcchh
DDBBRRSS
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
Positive
F1+
AA-
AA-
A+
AA-
AAA
Stable
Includes senior debt issued prior to September 23, 2018 and senior debt issued on or after September 23, 2018 which is excluded from the Bank Recapitalization (Bail-In) Regime.
Subject to conversion under the Bank Recapitalization (Bail-In) Regime.
(1)
(2)
(3) Moody’s uses the term Counterparty Risk Rating while Fitch uses the term Derivative Counterparty Rating.
National Bank of Canada
101
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
Guarantees
As part of a comprehensive liquidity management framework, the Bank regularly reviews its contracts that stipulate that additional collateral could be required
in the event of a downgrade of the Bank’s credit rating. The Bank’s liquidity position management 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)
OOnnee--nnoottcchh
ddoowwnnggrraaddee
AAss aatt OOccttoobbeerr 3311,, 22002211
TThhrreeee--nnoottcchh
ddoowwnnggrraaddee
2255
3300
(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
reinforcing its excellent reputation. The Bank continuously monitors and analyzes market trends and the possibilities for accessing less expensive and more
flexible funding, considering both the risks and opportunities observed. 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.
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.
102
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
The table below presents the residual contractual maturities of the Bank’s wholesale funding. The information has been presented in accordance with the
categories recommended by the EDTF for comparison purposes with other banks.
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff WWhhoolleessaallee FFuunnddiinngg(1)
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22002211
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, 2020
11 mmoonntthh oorr
lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
1122 mmoonntthhss
447700
11,,669966
444411
−−
−−
−−
3366
−−
22,,664433
3366
22,,660077
22,,664433
2,192
−−
55,,775533
−−
−−
11,,668888
11,,443311
−−
−−
88,,887722
33,,111199
55,,775533
88,,887722
5,359
−−
77,,552233
775566
−−
11,,552233
−−
−−
−−
99,,880022
11,,552233
88,,227799
99,,880022
8,080
66
22,,000011
22,,668822
−−
11,,446655
11,,223366
−−
−−
77,,339900
22,,770011
44,,668899
77,,339900
5,770
SSuubbttoottaall
11 yyeeaarr
oorr lleessss
447766
1166,,997733
33,,887799
−−
44,,667766
22,,666677
3366
−−
2288,,770077
77,,337799
2211,,332288
2288,,770077
21,401
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
1144
−−
22,,335544
336622
55,,550011
22,,114411
2288
−−
1100,,440000
77,,667700
22,,773300
1100,,440000
9,312
OOvveerr 22
yyeeaarrss
4411
−−
66,,990099
22,,662288
1144,,999933
33,,994444
4488
776688
2299,,333311
1188,,998855
1100,,334466
2299,,333311
28,389
TToottaall
553311
1166,,997733
1133,,114422
22,,999900
2255,,117700
88,,775522
111122
776688
6688,,443388
3344,,003344
3344,,440044
6688,,443388
59,102
(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.
OOppeerraattiioonnaall RRiisskk
Operational risk is the risk of loss resulting from an inadequacy or a failure ascribable to human resources, equipment, processes, technology or external
events. Operational risk exists for every Bank activity. Theft, fraud, cyberattacks, unauthorized transactions, system errors, human error, amendments to or
misinterpretation of laws and regulations, litigation or disputes with clients, inappropriate sales practice behaviour or property damage are just a few
examples of events likely to cause financial loss, harm the Bank’s reputation, or lead to regulatory penalties or sanctions.
Although operational risk cannot be eliminated entirely, it can be managed in a thorough and transparent manner to keep it at an acceptable level. The Bank’s
operational risk management framework is built on the concept of three lines of defence and provides a clear allocation of responsibilities to all levels of the
organization, as mentioned below.
OOppeerraattiioonnaall RRiisskk MMaannaaggeemmeenntt FFrraammeewwoorrkk
The operational risk management framework is described in the Operational Risk Management Policy, which is derived from the Risk Management Policy. The
operational risk management framework is aligned with the Bank's risk appetite and is made up of policies, standards, and procedures specific to each
operational risk, which fall under the responsibility of specialized groups.
The segments use several operational risk management tools and methods to identify, assess, and manage 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.
OOppeerraattiioonnaall RRiisskk MMaannaaggeemmeenntt TToooollss aanndd MMeetthhooddss
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.
National Bank of Canada
103
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
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 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.
OOppeerraattiioonnaall RRiisskk RReeppoorrttss aanndd DDiisscclloossuurreess
Operational events for which the financial impact exceeds the tolerance thresholds or that have a significant regulatory or reputation impact are submitted to
the decision-making levels concerned. Management is obligated to report on its management process and to remain alert to current and future issues. Reports
on the Bank’s risk profile, highlights, and emerging risks are periodically submitted, on a timely basis, to the Operational Risk Management Committee, the
GRC and the RMC. This reporting enhances the transparency and proactive management of the main operational risk factors.
RReegguullaattoorryy CCoommpplliiaannccee RRiisskk
Regulatory compliance risk is the risk of the Bank or of one of its employees or business partners 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.
OOrrggaanniizzaattiioonnaall SSttrruuccttuurree ooff CCoommpplliiaannccee
Compliance is an independent oversight function within the Bank. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering
Officer serves as both chief compliance officer (CCO) and chief anti-money laundering officer (CAMLO) for the Bank and its subsidiaries and foreign centres.
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.
104
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
RReegguullaattoorryy CCoommpplliiaannccee FFrraammeewwoorrkk
The Bank operates in a highly regulated industry. To ensure sound management of regulatory compliance, the Bank favours proactive approaches and
incorporates regulatory requirements into its day-to-day operations.
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 management of the Bank, its subsidiaries, and its
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.
Reform of the Official Languages Act
Bill C-32, which amends the Official Languages Act, was tabled on June 15, 2021 and is designed to further protect the French language and foster substantive
equality between the two official languages of Canada (French and English). Federally regulated businesses, such as the Bank, will be required to comply with
this Act. The reform includes the right of Francophone employees to work in French as well as consumers to be served in French. The Act will apply in Quebec
and in regions with a strong Francophone presence (pending a definition). It will also protect the rights of English-speaking minorities.
Bill 96 (Quebec) (An Act respecting French, the official and common language of Quebec)
On May 13, 2021, the Quebec government tabled Bill 96 and published amendments to the Charter of the French Language, making it more exacting and
empowering it to apply stricter penalties. The objectives of the Act are, in particular, to strengthen the presence and use of the French language in Quebec, to
establish a new Charter of the French Language, and to affirm that the only official language of Quebec is French. The major themes addressed by the Act are
the Francization committee, labour and employment law, contracts and consumer rights, signs and posters, remedial measures, and penalties.
Bill 18 – Protection of Vulnerable Persons
The main purpose of Bill 18, An Act to Amend the Civil Code, Code of Civil Procedure, the Public Curator Act and various provisions as regards the protection of
persons, is to amend the legislative provisions in place to protect incapable persons and to put an end to curatorships and advisor mandates to persons of full
age. Tutorships to persons of full age shall remain in place, but it will be possible to modulate them based on the incapacity level of the person of full age.
Bill 18 has also introduced the concepts of temporary representation and of assistant to persons of full age.
Consumer Protection
Several regulatory changes came into effect this past year, such as the Code of Conduct for the Delivery of Banking Services to Seniors. Other changes will
soon come into force, including Bill C-86 and its regulations, which amend the Bank Act (Canada). The purpose of these regulatory changes is to ensure that
consumers are protected by way of enhanced disclosures, assessments of the appropriateness of products and services, employee training, and procedures
related to the processing of complaints.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
Amendments made to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act announced in the Canada Gazette in
July 2019 and June 2020 came into force on June 1, 2021, with the exception of certain requirements related to representations that are expected to take effect
in 2023-2024.
Protection of Personal Information
Given changing technologies and societal behaviours, privacy and the protection of personal information is a topical issue in Canada. Recent regulatory
measures (such as the General Data Protection Regulation (GDPR) in Europe in 2018 and the California Consumer Privacy Act in the United States in 2020)
reflect a desire to implement a stronger legislative framework in the areas of confidentiality and use of personal information. In Quebec, in September 2021,
the government adopted Bill 64, An Act to Modernize Legislative Provisions as Regards the Protection of Personal Information, which has introduced
substantial changes when it comes to the protection of personal information. Essentially, the Act promotes transparency, raises the level of confidentiality of
data, and provides a framework for the collection, use, and sharing of personal information. A new federal bill that will modernize the protection of personal
information is expected soon.
National Bank of Canada
105
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
Canada Deposit Insurance Corporation (CDIC)
On April 30, 2022, separate coverage for registered education savings plans and registered disability savings plans will take effect as part of changes to the
Canada Deposit Insurance Corporation Act. New requirements will also be established for the coverage of deposits in trust, particularly nominee-brokered
deposits and those of professional trustees.
Recovery and Resolution Planning
As part of the regulatory measures used to manage systemic risks, D-SIBs are required to have recovery and resolution plans. A recovery plan is essentially a
roadmap 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 agencies.
Section 871(m) – Dividend Equivalent Payments
Section 871(m) of the U.S. Internal Revenue Code (or IRC) 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 (including U.S.
exchange-traded funds) 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), a U.S. 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. The application of new penalties came into force on January 1, 2021.
Client-Centered Reforms – Amendments to Regulation 31-103
Pursuant to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant obligations, a new process for declaring conflicts of
interest and external activities has been in effect since June 30, 2021. Work is still ongoing with regards to the delivery, on December 31, 2021, of items
relating to KYC (know-your-client) and KYP (know-your-product), misleading communications, relationship disclosure, and training.
Reform of Interest Rate Benchmarks
The reform of interest rate benchmarks 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. LIBOR (London Interbank Offered Rates) in
particular is in the process of being discontinued, and risk-free rates, such as SOFR (Secured Overnight Financing Rate), ESTR (Euro Short-Term Rate), SONIA
(Sterling Over Night Index Average), SARON (Swiss Average Rate Overnight), and TONAR (Tokyo Overnight Average Rate), are recommended as replacements for
LIBOR. For additional information, see the Accounting Policy Changes section in Note 1 to the consolidated financial statements.
RReeppuuttaattiioonn RRiisskk
Reputation risk is the risk that the Bank’s operations or practices will be judged negatively by the public, whether that judgment is with or without basis,
thereby adversely affecting the perception, image or trademarks of the Bank, potentially resulting in costly litigation or loss of income. Reputation risk
generally arises from a deficiency in managing another risk. The Bank’s reputation may, for example, be adversely affected by non-compliance with laws and
regulations or by process failures. All risks must therefore be managed effectively in order to protect the Bank’s reputation.
The Bank seeks to ensure that its employees are constantly aware of the potential repercussions of their actions on the Bank’s reputation and image. In
addition to 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.
106
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Risk Management
SSttrraatteeggiicc RRiisskk
Strategic risk is the risk of a financial loss or of reputational harm arising from inappropriate strategic orientations, improper execution or ineffective response
to economic, financial, or regulatory changes. The corporate strategic plan is developed by the Office of the President, in alignment with the Bank’s overall risk
appetite, and approved by the Board. Once approved, the initiatives of the strategic plan are monitored regularly to ensure that they are progressing. If not,
strategies could be reviewed or adjusted if deemed appropriate.
In addition, the Bank has a specific Board-approved policy for strategic investments, which are defined as purchases of business assets or acquisitions of
significant interests in an entity for the purposes of acquiring control or creating a long-term relationship. As such, acquisition projects and other strategic
investments are analyzed through a due diligence process to ensure that these investments are aligned with the corporate strategic plan and the Bank’s risk
appetite.
EEnnvviirroonnmmeennttaall aanndd SSoocciiaall RRiisskk
Environmental and social risk is the possibility that environmental and social matters would result in a financial loss for the Bank or affect its business
activities. This risk encompasses many topics, in particular pollution and waste; the use of energy, water, and other resources; climate change; biodiversity;
human rights; inclusion and diversity; labour standards; community health; occupational health and safety; the rights of Indigenous Peoples and consultation
thereof; as well as cultural heritage. The impact of environmental and social risk could also increase exposure to strategic, reputation, and regulatory
compliance risks if the Bank’s response is deemed inadequate or non-compliant with commitments. The Bank is directly exposed to such risk through its own
activities and indirectly exposed through the activities of its clients.
Assessing and mitigating environmental and social risk are integral parts of the Bank’s risk management framework. Environmental and social issues are now
central to the Bank’s decision-making process and are becoming increasingly strategic matters for the Bank. Taking these risks into consideration could even
be viewed as a considerable asset in certain financing or investment transactions, and doing so also contributes to promoting exemplary practices to the
Bank’s stakeholders.
The Bank has adopted environmental, social and governance (ESG) principles that show the importance it attaches to sustainable development and to
balancing the interests of societal stakeholders. These ESG principles have already been incorporated into the organization’s priorities. ESG indicators have
also been added to various monitoring dashboards and are gradually being integrated into the risk appetite framework. Reports on these indicators and on the
Bank’s ESG commitments are periodically presented to several Board committees.
The Bank has also implemented an environmental policy that applies to all activities and decisions made across the Bank. This policy clearly sets out the
principles used to identify and limit environmental risk and climate risk as well as the impacts therefrom on the community and on the Bank’s business
segments. To proactively ensure the strategic positioning of its entire portfolio, the Bank continues to express its commitment to support the transition
towards a low-carbon economy while continuing to closely monitor related developments and implications.
Accordingly, the Bank supports a wide range of sustainable development initiatives and further demonstrates its commitment by deploying many initiatives
that incorporate environmental and social topics into its business and operational decisions. These efforts also entail a continuous and stronger adaptation, as
well as additional mitigation measures, in the event of an interruption or disruption of its activities due to major crises such as natural disasters or health
crises.
ESG factors continue to be integrated into the Bank’s processes as part of the implementation of its strategy and guiding principles approved by the Board.
This integration is being conducted with due diligence, specifically in the area of the credit-granting process, starting with the corporate credit portfolio. For
this clientele, the ESG risk analysis framework calls for the collection of information on carbon emissions and includes a climate risk classification (transition
and physical risks) based on industry as well as scores assigned by ESG rating agencies. Several other criteria are also taken into consideration, in particular
the management of waste, labour standards, corporate governance, product liability as well as human rights policies.
The Bank also works with various industry partners to identify and implement sound management practices that promote a transition to a low-carbon
economy. Aware that it has a mobilizing role to play, the Bank supports the recommendations of the Task Force on Climate-Related Financial Disclosures
(TCFD). Moreover, it has continued to demonstrate its commitment to mitigating climate risk by becoming a signatory to the Partnership for Carbon Accounting
Financials (PCAF) as well as by joining the United Nations’ Net-Zero Banking Alliance (NZBA) in addition to setting GHG emission reduction targets for its own
business activities. The Bank is working on a plan, for the upcoming year, to define the actions to be undertaken to meet the above-mentioned commitments;
at present time, it is impossible to determine the related amounts. The Bank is also committed to communicating, in full transparency, the information
recommended by these groups as well as to periodically publishing its own performance reports.
National Bank of Canada
107
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
CCrriittiiccaall AAccccoouunnttiinngg PPoolliicciieess aanndd EEssttiimmaatteess
A summary of the significant accounting policies used by the Bank is presented in Note 1 to the consolidated financial statements of this Annual Report. 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.
CCOOVVIIDD--1199 PPaannddeemmiicc CCoonnssiiddeerraattiioonnss
The COVID-19 pandemic continues to evolve, and, given the heightened uncertainty associated with the unprecedented nature of the pandemic, developing
reliable estimates and applying judgment has become even more challenging. Some of the Bank’s accounting policies, such as measurement of expected
credit losses (ECLs), require particularly complex judgments and estimates. See Note 1 to the consolidated financial statements for a summary of the most
significant estimation processes used to prepare the consolidated financial statements in accordance with IFRS and the valuation techniques used to
determine carrying values and fair values of assets and liabilities. The uncertainty regarding certain key inputs used in measuring ECLs is described in Note 7
to the consolidated financial statements.
CCllaassssiiffiiccaattiioonn ooff FFiinnaanncciiaall IInnssttrruummeennttss
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. 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 to the Bank 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.
108
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a
transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair
value reflects market conditions on the measurement 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 valuation 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 valuation model risk 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 measurement hierarchy that classifies the inputs used in financial instrument fair value measurement techniques according to
three levels. The fair value measurement 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 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 the following items: 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.
National Bank of Canada
109
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
IImmppaaiirrmmeenntt ooff FFiinnaanncciiaall AAsssseettss
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. ECLs are a probability-weighted estimate of credit losses over the remaining expected life of the financial instrument. The ECL model is forward
looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events, current conditions, and forecasts of
future events and economic conditions. Judgment is required in making assumptions and estimates, determining movements between the three stages, and
applying forward-looking information. Any changes in assumptions and estimates, as well as the use of different, but equally reasonable, estimates and
assumptions, could have an impact on the allowances for credit losses and the provisions for credit losses for the year. All business segments are affected by
this accounting estimate. For additional information, see Note 7 to the consolidated financial statements.
DDeetteerrmmiinniinngg tthhee SSttaaggee
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting date, the
credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1,
and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit losses is recorded. When there is
a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and an allowance for credit
losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses is recorded. In subsequent reporting periods, if the credit
risk of a 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 occurs, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance for credit losses equal to lifetime
expected credit losses continues to be recorded or the financial asset is written off. Interest income is calculated on the gross carrying amount for financial
assets in Stages 1 and 2 and on the net carrying amount for financial assets in Stage 3.
AAsssseessssmmeenntt ooff SSiiggnniiffiiccaanntt IInnccrreeaassee iinn CCrreeddiitt RRiisskk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and forward-looking
information to assess deterioration in the credit quality of a financial instrument. To assess whether or not the credit risk of a financial instrument has
increased significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting date with the PD occurring over its
expected life on the date of initial recognition and considers reasonable and supportable information indicative of a significant increase in credit risk since
initial recognition. The Bank includes relative and absolute thresholds in the definition of significant increase in credit risk and a backstop of 30 days past due.
All financial instruments that are 30 days past due are migrated to Stage 2 even if other metrics do not indicate that a significant increase in credit risk has
occurred. The assessment of a significant increase in credit risk requires significant judgment.
MMeeaassuurreemmeenntt ooff EExxppeecctteedd CCrreeddiitt LLoosssseess
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial instrument, and
reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions is considered. The
estimation and application of forward-looking information requires significant judgment. Cash shortfalls represent 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 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 assigned 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.
110
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
PPuurrcchhaasseedd oorr OOrriiggiinnaatteedd CCrreeddiitt--IImmppaaiirreedd FFiinnaanncciiaall AAsssseettss
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs in Provisions for
credit losses in the Consolidated Statement of Income, even if the lifetime ECLs are less than the ECLs that were included in the estimated cash flows on initial
recognition.
DDeeffiinniittiioonn ooff DDeeffaauulltt
The definition of default used by the Bank to measure ECLs and transfer financial instruments between stages is consistent with the definition of default used
for internal credit risk management purposes. The Bank considers a financial asset, other than a credit card receivable, to be credit-impaired when one or more
events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred or when contractual payments are 90 days past
due. Credit card receivables are considered credit-impaired and are fully written off at the earlier of the following dates: when a notice of bankruptcy is
received, a settlement proposal is made, or contractual payments are 180 days past due.
WWrriittee--OOffffss
A financial asset and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of recovery to be
non-existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or winding up and balances
owing are not likely to be recovered.
IImmppaaiirrmmeenntt ooff NNoonn--FFiinnaanncciiaall AAsssseettss
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not 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 impairment test compares the carrying amount of an asset 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.
National Bank of Canada
111
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
Pension plan and other post-employment benefit 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 are not subsequently reclassified to net income; these cumulative gains and losses are reclassified to Retained earnings.
The use of different assumptions could have a significant impact on the defined benefit asset (liability) presented in Other assets (Other liabilities) on the
Consolidated Balance Sheet, on the pension plan and other post-employment benefit plan expenses presented in Compensation and employee benefits in the
Consolidated Statement of Income, as well as on Remeasurements of pension plans and other post-employment benefit plans presented in Other
comprehensive income. All business segments are affected by this accounting estimate. For additional information, including the significant assumptions used
to determine the Bank’s pension plan and other post-employment benefit plan expenses and the sensitivity analysis for significant plan assumptions, see
Note 23 to the consolidated financial statements.
IInnccoommee TTaaxxeess
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process includes estimating the actual amount of
current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of the items reported for accounting
and for income tax purposes. Deferred tax assets and liabilities, presented 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 before they expire.
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.
LLiittiiggaattiioonn
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of
varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceedings involving the Bank
are as follows:
Watson
In 2011, a class action was filed in the Supreme Court of British Columbia against Visa Corporation Canada (Visa) and Mastercard International Incorporated
(Mastercard) (the Networks) as well as National Bank and a number of other Canadian financial institutions. A similar action was also initiated in Quebec,
Ontario, Alberta and Saskatchewan. In each of the actions, the Networks and financial institutions are alleged to have been involved in a price-fixing system to
maintain and increase the fees paid by merchants on transactions executed using the credit cards of the Networks. In so doing, they would notably be in
breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. In 2017, a settlement was reached with the
plaintiffs; in 2018 it was approved by the trial courts in each of the five jurisdictions where the action was initiated. The rulings approving the settlement were
the subject of appeal proceedings in all jurisdictions. These appeal proceedings were all rejected during the year ended October 31, 2021, thereby confirming
approval of the settlement reached in 2017 and ending the Bank’s involvement in the class action.
112
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
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 operations for a particular period, it would not have a material adverse impact on the Bank’s
consolidated financial position.
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money.
The recognition of a litigation provision requires the Bank’s management to assess the probability of loss and estimate any potential monetary impact. The
Bank examines each litigation provision individually by considering the development of each case, its past experience in similar transactions and the opinion
of its legal counsel. Each new piece of information can alter the Bank’s assessment as to the probability and estimated amount of the loss and the extent to
which it adjusts the recorded provision. Moreover, the actual settlement cost of these litigations can be significantly higher or lower than the amounts
recognized.
SSttrruuccttuurreedd EEnnttiittiieess
In the normal course of business, the Bank enters into arrangements and transactions with structured entities. Structured entities are entities designed so that
voting or similar rights are not the dominant factor in deciding who controls the entity, such as when voting rights relate solely to administrative tasks and the
relevant activities are directed by means of contractual arrangements. A structured entity is consolidated when the Bank concludes, after evaluating the
substance of the relationship and its right or exposure to variable returns, that it controls that entity. Management must exercise judgment in determining
whether the Bank controls an entity. Additional information is provided in the Securitization and Off-Balance-Sheet Arrangements section of this MD&A and in
Note 27 to the consolidated financial statements.
FFuuttuurree AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
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 in effect. The Bank is currently assessing the impact of the application of these standards on the consolidated financial
statements.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002233
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, the IASB issued amendments to IFRS 17 that 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 to be applied 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
113
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 11 –– QQuuaarrtteerrllyy RReessuullttss
(millions of Canadian dollars, except per share amounts)
SSttaatteemmeenntt ooff iinnccoommee ddaattaa
Net interest income
Non-interest income(1)
TToottaall rreevveennuueess
Non-interest expenses(2)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income taxes
NNeett iinnccoommee
Non-controlling interests
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss aanndd
hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss
EEaarrnniinnggss ppeerr ccoommmmoonn sshhaarree
Basic
Diluted
DDiivviiddeennddss (per share)
Common
Preferred
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
TToottaall
QQ44
QQ33
QQ22
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
889955
33,,117777
−−
11,,119900
11,,002211
22,,221111
11,,225588
995533
((4411))
221188
777766
−−
11,,223300
11,,002244
22,,225544
11,,221166
11,,003388
((4433))
224422
883399
−−
11,,115566
11,,008822
22,,223388
11,,119999
11,,003399
55
223333
880011
−−
33,,117777
777766
883399
880011
22002211
QQ11
11,,220077
11,,001177
22,,222244
11,,118800
11,,004444
8811
220022
776611
−−
776611
$$
$$
99..0066
88..9966
$$
22..2222
22..1199
22..3399 $$
22..3366
$$
22..2288
22..2255
22..1166
22..1155
$$
22..8844
$$
00..7711
$$
00..7711 $$
00..7711
$$
00..7711
11..00006633
00..99559988
00..77000000
11..00112255
11..11112255
11..11550000
11..22337755
00..22551166
00..22440000
−−
−−
00..22778811
00..22887755
00..33009944
00..22551166
00..22339999
−−
00..33337755
00..22778811
00..22887755
00..33009933
00..22551155
00..22440000
00..33550000
00..33337755
00..22778822
00..22887755
00..33009944
00..22551166
00..22339999
00..33550000
00..33337755
00..22778811
00..22887755
00..33009944
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy(3)
2200..77 %%
1188..77 %%
2211..33 %%
2222..00 %%
2211..22 %%
TToottaall aasssseettss
LLoonngg--tteerrmm ffiinnaanncciiaall lliiaabbiilliittiieess(4)
NNeett iimmppaaiirreedd llooaannss(5)
NNuummbbeerr ooff ccoommmmoonn sshhaarreess oouuttssttaannddiinngg (thousands)
Average – Basic
Average – Diluted
End of period
PPeerr ccoommmmoonn sshhaarree
Book value(3)
Share price
High
Low
NNuummbbeerr ooff eemmppllooyyeeeess – WWoorrllddwwiiddee
NNuummbbeerr ooff bbrraanncchheess iinn CCaannaaddaa
335555,,779955
335544,,004400
335500,,774422
334433,,663377
776688
228833
776699
331122
777711
334499
777733
440000
333377,,221122
334400,,886611
333377,,777799
334422,,440000
333377,,991122
333377,,551177
334411,,881188
333377,,558877
333377,,114422
334400,,661144
333377,,337722
333366,,440088
333388,,661177
333366,,777700
$$
4477..9955
$$
4466..0000 $$
4433..5599
$$
4411..4488
$$
110044..3322
6655..5544
110044..3322
9955..0000
2266,,992200
338844
9966..9977
8899..4477
2266,,442288
338899
8899..4422
7722..3300
2266,,221111
440011
7733..8811
6655..5544
2266,,223311
440022
For fiscal 2020, the Non-interest income item had included a foreign currency translation loss on a disposal of subsidiaries of $24 million (2019: $79 million gain on disposal of Fiera Capital
Corporation shares, $50 million gain on a disposal of premises and equipment, and $33 million loss resulting from the fair value measurement of an investment).
For fiscal 2021, the Non-interest expenses item included $9 million in impairment losses on intangible assets (2020: $71 million impairment loss on premises and equipment and intangible
assets; 2019: $57 million). For fiscal 2020, the Non-interest expenses item had included $48 million in severance pay (2019: $10 million) and a $13 million charge related to Maple
(2019: $11 million). An amount of $45 million in provisions for onerous contracts had been recorded in 2019.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
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
(1)
(2)
(3)
(4)
(5)
114
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Total
Q4
Q3
Q2
4,255
3,672
7,927
4,545
3,382
846
453
2,083
42
2,041
1,124
876
2,000
1,259
741
110
139
492
2
1,096
872
1,968
1,074
894
143
149
602
13
490
589
1,105
931
2,036
1,121
915
504
32
379
11
368
2020
Q1
930
993
1,923
1,091
832
89
133
610
16
594
Total
Q4
Q3
Q2
3,596
3,836
7,432
4,301
3,131
347
462
2,322
66
2,256
936
979
1,915
1,095
820
89
127
604
14
590
855
1,093
1,948
1,154
794
86
100
608
17
591
942
828
1,770
1,026
744
84
102
558
19
539
2019
Q1
863
936
1,799
1,026
773
88
133
552
16
536
$
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
$
$
$
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
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
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
14.9 %
13.7 %
17.0 %
10.7 %
18.0 %
18.0 %
18.2 %
18.7 %
17.8 %
17.2 %
331,625
322,453
316,950
289,191
281,458
276,312
269,106
263,355
775
465
777
453
779
479
774
436
773
450
773
420
772
379
764
373
335,508
337,580
335,859
338,264
335,998
335,552
337,231
335,666
335,603
337,317
335,400
335,020
338,111
335,818
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
$
39.97 $
38.91 $
38.74
$
37.58
$
36.89
$
36.12 $
35.49
$
34.85
$
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
$
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
National Bank of Canada
115
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 22 –– OOvveerrvviieeww ooff RReessuullttss
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
Net interest income on a taxable equivalent basis(2)
Non-interest income on a taxable equivalent basis(2)(3)
Total revenues on a taxable equivalent basis
Non-interest expenses(4)
Income before provisions for credit losses and income taxes
on a taxable equivalent basis
Provisions for credit losses
Income before income taxes on a taxable equivalent basis
Income taxes on a taxable equivalent basis(2)
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders and holders of other equity instruments
Average assets(5)
22002211
2020
2019
2018
2017
44,,996644
44,,115522
99,,111166
44,,885533
44,,226633
22
44,,226611
11,,008844
33,,117777
4,463
3,729
8,192
4,545
3,647
846
2,801
718
2,083
−−
42
3,791
3,971
7,762
4,301
3,461
347
3,114
792
2,322
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
33,,117777
336633,,666622
2,041
318,199
2,256
286,162
2,145
265,940
1,940
248,351
(1)
(2)
(3)
(4)
(5)
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For fiscal 2021, Net interest income was grossed up by $181 million (2020: $208 million; 2019: $195 million; 2018: $144 million; 2017: $209 million), Non-interest income was grossed up
by $8 million (2020: $57 million; 2019: $135 million; 2018: $101 million; 2017: $35 million), and an equivalent amount was recognized in Income taxes.
For fiscal 2021, Non-interest income included a $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value
measurement of the Bank’s equity interest in AfrAsia (2020: $24 million foreign currency translation loss on a disposal of subsidiaries; 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 2021, Non-interest expenses included $9 million in impairment losses on intangible assets (2020: $71 million in impairment losses on premises and equipment and intangible
assets; 2019: $57 million). For fiscal 2020, Non-interest expenses had included $48 million in severance pay (2019: $10 million) and a $13 million charge related to Maple
(2019: $11 million). An amount of $45 million in provisions for onerous contracts had been recorded in 2019.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
TTaabbllee 33 –– CChhaannggeess iinn NNeett IInntteerreesstt IInnccoommee
Year ended October 31
(taxable equivalent basis)(1)
(millions of Canadian dollars)
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
Net interest income
Average assets(2)
Average interest-bearing assets(2)
Net interest margin(2)
WWeeaalltthh MMaannaaggeemmeenntt
Net interest income on a taxable equivalent basis(3)
Average assets(2)
FFiinnaanncciiaall MMaarrkkeettss
Net interest income on a taxable equivalent basis(3)
Average assets(2)
UUSSSSFF&&II
Net interest income
Average assets(2)
OOtthheerr
Net interest income on a taxable equivalent basis(3)
Average assets(2)
TToottaall
Net interest income on a taxable equivalent basis(3)
Average assets(2)
22002211
2020
2019
2018
2017
22,,558833
112277,,771166
112211,,559933
22..1122 %%
2,445
117,338
111,488
2.19 %
2,384
112,798
106,995
2,276
106,857
101,446
2,127
102,139
97,339
2.23 %
2.24 %
2.19 %
444488
77,,114466
11,,222266
115500,,114477
990077
1166,,115500
442
5,917
946
123,943
807
14,336
((220000))
6622,,550033
(177)
56,665
455
6,219
426
6,167
351
5,947
474
112,493
409
100,721
772
94,991
656
10,985
(178)
43,667
584
9,270
466
7,519
(169)
42,925
(71)
37,755
44,,996644
336633,,666622
4,463
318,199
3,791
286,162
3,526
265,940
3,645
248,351
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
For fiscal 2021, the Net interest income of the Financial Markets segment was grossed up by $175 million (2020: $202 million; 2019: $191 million; 2018: $141 million; 2017: $207 million,
the Net interest income of the Other heading was grossed up by $6 million (2020: $6 million; 2019: $3 million; 2018: $3 million; 2017: $2 million), the Net interest income of the Wealth
Management segment was grossed up by $1 million in 2019, and the total Net interest income of the Bank was grossed up by $181 million (2020: $208 million; 2019: $195 million;
2018: $144 million; 2017: $209 million).
National Bank of Canada
(1)
(2)
(3)
116
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 44 –– NNoonn--IInntteerreesstt IInnccoommee
Year ended October 31(1)
(taxable equivalent basis)(2)
(millions of Canadian dollars)
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Investment management and trust service fees
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(2)(3)
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(4)
Canada
United States
Other countries
Non-interest income on a taxable equivalent
basis as a % of total revenues on a
taxable equivalent basis(2)
22002211
441155
223388
556633
990000
116644
334422
114488
227744
227766
115511
113311
220022
2233
332255
44,,115522
44,,000000
110066
4466
2020
314
204
477
735
147
320
138
262
601
93
128
164
28
118
3,729
3,631
5
93
2019
246
166
449
677
134
283
175
271
923
77
136
137
34
263
3,971
3,780
85
106
2018
322
169
438
665
126
277
159
280
902
77
121
134
28
187
3,885
3,589
108
188
2017
291
174
412
604
130
231
132
279
375
140
117
115
35
173
3,208
3,027
136
45
4455..55 %%
45.5 %
51.2 %
52.4 %
46.8 %
(1)
(2)
(3)
(4)
Data from fiscal years prior to 2021 has been adjusted to reflect a reclassification of certain amounts between the Non-interest income items to better reflect the nature of the income
reported in the Wealth Management segment.
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
For fiscal 2021, Trading revenues (losses) was grossed up by $8 million (2020: $57 million; 2019: $135 million; 2018: $101 million; 2017: $35 million).
For fiscal 2021, Other revenues included a $33 million gain following a remeasurement of the previously held equity interest in Flinks and a $30 million loss related to the fair value
measurement of the Bank’s equity interest in AfrAsia (2020: $24 million foreign currency translation loss on a disposal of subsidiaries; 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).
TTaabbllee 55 –– TTrraaddiinngg AAccttiivviittyy RReevveennuueess
Year ended October 31(1)
(millions of Canadian dollars)
TTrraaddiinngg aaccttiivviittyy rreevveennuueess
Taxable equivalent basis(2)
TTrraaddiinngg aaccttiivviittyy rreevveennuueess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
FFiinnaanncciiaall MMaarrkkeettss
Equities
Fixed-income
Commodities and foreign exchange
OOtthheerr sseeggmmeennttss
22002211
2020
2019
11,,005599
117799
11,,223388
668855
335577
112288
11,,117700
6688
11,,223388
1,147
259
1,406
706
430
132
1,268
138
1,406
828
323
1,151
621
285
126
1,032
119
1,151
2018
866
239
1,105
575
263
130
968
137
1,105
2017
726
240
966
506
290
107
903
63
966
(1)
(2)
For fiscal years prior to 2021, certain amounts have been reclassified.
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21. The taxable equivalent basis presented in this table is related to
trading portfolios. The Bank also uses taxable equivalent basis for certain investment portfolios, and the amounts stood at $10 million for fiscal 2021 (2020: $6 million; 2019: $7 million;
2018: $6 million; 2017: $4 million).
National Bank of Canada
117
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 66 –– NNoonn--IInntteerreesstt EExxppeennsseess
Year ended October 31
(millions of Canadian dollars)
Compensation and employee benefits(1)
Occupancy(2)
Technology
Amortization – Premises and equipment
Amortization – Technology(3)
Communications
Professional fees
Travel and business development
Capital and payroll taxes
Other(4)
Total
Canada
United States
Other countries
Non-interest expenses as a % of total
revenues on a taxable equivalent basis(5)
Non-interest expenses excluding specified items
as a % of total revenues on a taxable equivalent
basis and excluding specified items(5)
22002211
33,,002277
114477
448822
115522
333399
5533
224466
110099
5522
224466
44,,885533
44,,442288
220033
222222
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
5533..22 %%
55.5 %
55.4 %
54.8 %
56.3 %
5533..11 %%
53.7 %
54.5 %
54.8 %
56.3 %
(1)
(2)
(3)
(4)
(5)
For fiscal 2020, compensation and employee benefits had included $48 million in severance pay (2019: $10 million).
For fiscal 2019, occupancy expense had included $45 million in provisions for onerous contracts.
For fiscal 2021, the Amortization – Technology expense included $9 million in impairment losses on intangible assets (2020: $71 million in impairment losses on premises and equipment
and intangible assets; 2019: $57 million).
For fiscal 2020, other expenses had included a $13 million charge related to Maple (2019: $11 million).
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
118
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 77 –– PPrroovviissiioonnss ffoorr CCrreeddiitt LLoosssseess(1)
Year ended October 31
(millions of Canadian dollars)
PPeerrssoonnaall BBaannkkiinngg(3)
Stage 3
Stages 1 and 2
CCoommmmeerrcciiaall BBaannkkiinngg
Stage 3
Stages 1 and 2(4)
WWeeaalltthh MMaannaaggeemmeenntt
Stage 3
Stages 1 and 2
FFiinnaanncciiaall MMaarrkkeettss
Stage 3
Stages 1 and 2
UUSSSSFF&&II
Stage 3
Stages 1 and 2
POCI loans
OOtthheerr
Stage 3
Stages 1 and 2(5)
TToottaall pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
Stage 3
Stages 1 and 2
POCI loans
22002211
2020
2019
2018
2017(2)
6655
((7777))
((1122))
3322
((1144))
1188
11
−−
11
7722
((6622))
1100
1133
((22))
((2266))
((1155))
−−
−−
−−
118833
((115555))
((2266))
22
147
121
268
110
139
249
4
3
7
65
174
239
46
41
(7)
80
−
3
3
372
481
(7)
846
166
8
174
35
28
63
−
−
−
18
12
30
94
(24)
10
80
−
−
−
313
24
10
347
158
9
167
40
21
61
−
1
1
−
4
4
126
(3)
(29)
94
−
−
−
324
32
(29)
327
153
−
153
43
(40)
3
−
−
−
−
−
−
48
−
−
48
−
40
40
244
−
−
244
Average loans and acceptances
Provisions for credit losses on impaired loans(1)
as a % of average loans and acceptances(6)
Provisions for credit losses
as a % of average loans and acceptances(6)
117722,,332233
159,275
148,765
139,603
130,882
00..1111 %%
0.23 %
0.21 %
0.23 %
0.19 %
−− %%
0.53 %
0.23 %
0.23 %
0.19 %
(1)
(2)
(3)
(4)
(5)
(6)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. Provisions for credit losses on impaired loans presented in this table exclude provisions for credit losses on POCI loans.
These figures are presented in accordance with IAS 39.
Includes credit card receivables.
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.
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.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
National Bank of Canada
119
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 88 –– CChhaannggee iinn AAvveerraaggee VVoolluummeess(1)
Year ended October 31
(taxable equivalent basis)(2)
(millions of Canadian dollars)
AAsssseettss
Deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Residential mortgage loans
Personal loans
Credit card receivables
Business and government loans
POCI loans
Average interest-bearing assets(1)
Other assets
LLiiaabbiilliittiieess aanndd eeqquuiittyy
Personal deposits
Deposit-taking institutions
Other deposits
Subordinated debt
Obligations other than deposits(1)
Average interest-bearing liabilities(1)
Other liabilities
Equity
Net interest margin(1)
AAvveerraaggee
vvoolluummee
$$
22002211
RRaattee
%%
Average
volume
$
2020
Rate
%
Average
volume
$
2019
Rate
%
Average
volume
$
2018
Rate
%
Average
volume
$
2017
Rate
%
2211,,334499
111166,,002233
00..3366
11..4411
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
1111,,555599
6688,,229977
3388,,443344
11,,886644
5566,,119922
668866
331144,,440044
4499,,225588
336633,,666622
6688,,333344
66,,552222
116611,,337733
223366,,222299
775588
5577,,669988
229944,,668855
5511,,229988
1177,,667799
336633,,666622
00..9900
22..9933
33..1166
1133..4477
22..7733
2222..6644
22..2222
11..9922
00..4422
00..0099
00..6688
00..5588
33..2222
00..2211
00..6688
00..5555
11..3377
16,408
59,801
36,273
1,995
53,325
1,073
281,983
36,216
318,199
63,634
6,494
137,253
207,381
759
49,671
257,811
44,702
15,686
318,199
1.39
3.13
3.68
14.62
3.37
16.45
2.69
2.39
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
19,878
50,218
33,298
2,209
37,794
1,238
227,028
21,323
1.03
2.82
3.65
13.09
3.33
15.18
2.58
2.60
248,351
2.36
50,878
7,567
95,809
154,254
423
44,204
198,881
36,722
12,748
248,351
1.08
1.45
1.66
1.47
3.20
1.20
1.57
1.27
1.33
0.99
0.69
1.21
1.11
3.81
0.74
1.11
0.89
1.47
(1)
(2)
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
For additional information on non-GAAP financial measures, see the Financial Reporting Method section on pages 18 to 21.
120
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 99 –– DDiissttrriibbuuttiioonn ooff GGrroossss LLooaannss aanndd AAcccceeppttaanncceess bbyy BBoorrrroowweerr CCaatteeggoorryy UUnnddeerr
BBaasseell AAsssseett CCllaasssseess
As at October 31
(millions of Canadian dollars)
Residential mortgage(1)
Qualifying revolving retail
Other retail
Agriculture
Oil and gas, and pipelines
Mining
Utilities
Non-real-estate construction(2)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate and real-estate-construction(3)
Professional services
Education and health care
Other services
Government
Other
POCI loans
22002211
%%
$$
2020
%
$
2019
%
$
2018
%
$
2017
%
$
8899,,003355
33,,558899
1122,,994499
77,,335577
44,,332255
552299
55,,338877
11,,554411
55,,550022
22,,559988
22,,997788
11,,881111
11,,444411
44,,996600
1188,,119955
11,,887722
44,,007733
55,,887755
11,,115599
88,,004477
446644
118833,,668877
4488..55
22..00
77..00
44..00
22..44
00..33
22..99
00..88
33..00
11..44
11..66
11..00
00..88
22..77
99..99
11..00
22..22
33..22
00..66
44..44
00..33
110000..00
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
(1)
(2)
(3)
Includes residential mortgage loans on one- to four-unit dwellings (Basel definition) and home equity lines of credit.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
TTaabbllee 1100 –– IImmppaaiirreedd LLooaannss(1)
As at October 31
(millions of Canadian dollars)
Net impaired loans(3)
Personal Banking
Commercial Banking
Wealth Management
Financial Markets
USSF&I
Other
Gross impaired loans
Allowances for credit losses on impaired loans
Individual and collective allowances
on impaired loans
Net impaired loans(3)
Provisioning rate(4)
Net impaired loans as a % of loans and acceptances(4)
22002211
2020
2019
2018
2017(2)
110066
111122
1166
99
4400
−−
228833
666622
337799
228833
5577..33 %%
00..22 %%
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
45.8 %
0.2 %
(1)
(2)
(3)
(4)
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. The impaired loans presented in this table exclude POCI loans.
These figures are presented in accordance with IAS 39.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126.
National Bank of Canada
121
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 1111 –– AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
Year ended October 31
(millions of Canadian dollars)
22002211
2020
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)
11,,334433
22
((119922))
((1144))
4444
((1144))
11,,116699
337799
770088
117711
((8899))
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)
769
244
(320)
−
13
(11)
695
174
(24)
139
406
(1)
(2)
(3)
(4)
These figures are presented in accordance with IAS 39.
Given the adoption of IFRS 9, all loans classified in Stage 3 of the expected credit loss model are impaired loans. Under IAS 39, loans were considered impaired according to different
criteria. Allowances for credit losses on impaired loans presented in this table exclude allowances for credit losses on POCI loans.
The sectoral allowance on non-impaired loans – oil and gas was established collectively for the portfolio of loans to producers and service companies in the oil and gas sector.
The collective allowance for credit risk on non-impaired loans was established taking into account the Bank’s overall credit portfolio, except for loans covered by the sectoral allowance and
POCI loans.
TTaabbllee 1122 –– DDeeppoossiittss
As at October 31
(millions of Canadian dollars)
22002211
%%
$$
2020
%
$
2019
%
$
2018
%
$
$
Personal
Business and government
Deposit-taking institutions
Total
Canada
United States
Other countries
Total
Personal deposits as a %
of total assets
7700,,007766
116677,,887700
22,,999922
224400,,993388
221166,,990066
99,,223344
1144,,779988
224400,,993388
2299..11
67,499
6699..77 143,787
4,592
11..22
110000..00 215,878
9900..00 195,730
33..88
8,126
12,022
66..22
110000..00 215,878
1199..77
60,065
125,266
4,235
189,566
172,764
6,907
9,895
189,566
31.3
66.6
2.1
100.0
90.7
3.7
5.6
100.0
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
32.6
64.6
2.8
52,175
99,115
5,381
100.0 156,671
91.4 145,288
5,825
3.5
5,558
5.1
100.0 156,671
21.2
2017
%
33.3
63.3
3.4
100.0
92.8
3.7
3.5
100.0
21.2
122
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
GGlloossssaarryy
AAcccceeppttaanncceess
Acceptances and the customers’ liability under 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.
AAvveerraaggee llooaannss aanndd aacccceeppttaanncceess
Average loans and acceptances represent the average of the daily balances
for the fiscal year of loans and the customers’ liability under acceptances.
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn
Assets in respect of which a financial institution provides administrative
services such as custodial services, collection of investment income,
settlement of purchase and sale transactions and record-keeping. Assets
under administration, which are beneficially owned by clients, are not
reported on the balance sheet of the institution offering such services.
AAsssseettss uunnddeerr mmaannaaggeemmeenntt
Assets managed by a financial institution and 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 balance sheet of the institution offering
such services.
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
Allowances for credit losses represent management’s unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance-sheet items such as loan
commitments and financial guarantees.
AAvveerraaggee aasssseettss
Average assets represent the average of the daily balances for the fiscal year.
AAvveerraaggee ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy
Average common shareholders’ equity represents the average of the daily
balances for the fiscal year.
AAvveerraaggee ddeeppoossiittss
Average deposits represent the average of the daily balances for the fiscal
year.
AAvveerraaggee iinntteerreesstt--bbeeaarriinngg aasssseettss
Average interest-bearing assets include interest-bearing deposits with
financial institutions and certain cash items, securities, securities purchased
under reverse repurchase agreements and securities borrowed, and loans,
while excluding other assets. The average is calculated based on the daily
balances for the fiscal year.
AAvveerraaggee iinntteerreesstt--bbeeaarriinngg lliiaabbiilliittiieess
Average interest-bearing liabilities include deposits, obligations related to
securities sold short, obligations related to securities sold under repurchase
agreements and securities loaned, and subordinated debt, while excluding
other liabilities. The average is calculated based on the daily balances for the
fiscal year.
AAvveerraaggee llooaannss
Average loans represent the average of the daily balances for the fiscal year.
AAvveerraaggee llooaannss aanndd rreecceeiivvaabblleess
Average loans and receivables represent the average of the daily balances for
the fiscal year.
AAvveerraaggee oobblliiggaattiioonnss ootthheerr tthhaann ddeeppoossiittss
Average obligations other than deposits represent the average of the daily
balances for the fiscal year of obligations related to securities sold short and
obligations related to securities sold under repurchase agreements and
securities loaned.
AAvveerraaggee sseeccuurriittiieess
Average securities represent the average of the daily balances for the fiscal
year.
AAvveerraaggee sseeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
Average securities purchased under reverse repurchase agreements and
securities borrowed represent the average of the daily balances for the fiscal
year.
AAvveerraaggee vvoolluummeess
Average volumes represent the average of the daily balances for the fiscal
year of the consolidated balance sheet items.
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss ((oorr aaddjjuusstteedd))
Basic earnings per share is calculated by dividing net income attributable to
common shareholders by the weighted average basic number of common
shares outstanding. Basic earnings per share excluding specified items (or
adjusted) is calculated by dividing net income attributable to common
shareholders excluding specified items (or adjusted) by the weighted
average basic number of common shares outstanding.
BBaassiiss ppooiinntt
Unit of measure equal to one one-hundredth of a percentage point (0.01%).
BBooookk vvaalluuee ooff aa ccoommmmoonn sshhaarree
The book value of a common share is calculated by dividing common
shareholders’ equity by the number of common shares on a given date.
CCoommmmoonn EEqquuiittyy TTiieerr 11 ((CCEETT11)) ccaappiittaall rraattiioo
CET1 capital consists of common shareholders’ equity less goodwill,
intangible assets and other capital deductions. The CET1 capital ratio is
calculated by dividing Common Equity Tier 1 capital by the corresponding
risk-weighted assets.
CCoommppoouunndd aannnnuuaall ggrroowwtthh rraattee ((CCAAGGRR))
CAGR is a rate of growth that shows, for a period exceeding one year, the
annual change as though the growth had been constant throughout the
period.
National Bank of Canada
123
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Glossary
DDeerriivvaattiivvee ffiinnaanncciiaall iinnssttrruummeennttss
Derivative financial instruments are financial contracts whose value is
derived from an underlying interest rate, exchange rate or equity, commodity
or credit instrument or index. Examples of derivatives include swaps,
options, forward rate agreements and futures. The notional amount of the
derivative is the contract amount used as a reference point to calculate the
payments to be exchanged between the two parties, and the notional amount
itself is generally not exchanged by the parties.
GGrroossss iimmppaaiirreedd llooaannss aass aa ppeerrcceennttaaggee ooff ttoottaall llooaannss aanndd aacccceeppttaanncceess
This measure represents gross impaired loans expressed as a percentage of
the balance of loans and acceptances.
HHeeddggiinngg
The purpose of a hedging transaction is to modify the Bank’s exposure to one
or more risks by creating an offset between changes in the fair value of, or
the cash flows attributable to, the hedged item and the hedging instrument.
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss ((oorr aaddjjuusstteedd))
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. Diluted earnings per share excluding specified items (or
adjusted) is calculated by dividing net income attributable to common
shareholders excluding specified items (or adjusted) 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.
DDiivviiddeenndd ppaayyoouutt rraattiioo
DDiivviiddeenndd ppaayyoouutt rraattiioo eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss ((oorr aaddjjuusstteedd))
The dividend payout ratio represents the dividends of common shares (per
share amount) expressed as a percentage of basic earnings per share. The
dividend payout ratio excluding specified items (or adjusted) represents the
dividends on common shares (per share amount) expressed as a percentage
of basic earnings per share excluding specified items (or adjusted).
EEccoonnoommiicc ccaappiittaall
Economic capital is the internal measure used by the Bank to determine the
capital required for its solvency and to pursue its business operations.
Economic capital takes into consideration the credit, market, operational,
business and other risks to which the Bank is exposed as well as the risk
diversification effect among them and among the business segments.
Economic capital thus helps the Bank to determine the capital required to
protect itself against such risks and ensure its long-term viability.
EEffffiicciieennccyy rraattiioo
EEffffiicciieennccyy rraattiioo oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
EEffffiicciieennccyy rraattiioo oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss
((oorr aaddjjuusstteedd))
The efficiency ratio represents non-interest expenses expressed as a
percentage of total revenues. It measures the efficiency of the Bank’s
operations. The efficiency ratio on a taxable equivalent basis represents non-
interest expenses expressed as a percentage of total revenues on a taxable
equivalent basis. The efficiency ratio on a taxable equivalent basis and
excluding specified items (or adjusted) represents non-interest expenses
excluding specified items (or adjusted) expressed as a percentage of total
revenues on a taxable equivalent basis and excluding specified items (or
adjusted).
FFaaiirr vvaalluuee
The fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction in the
principal market at the measurement date under current market conditions
(i.e., an exit price).
IImmppaaiirreedd llooaannss
The Bank considers a financial asset, other than a credit card receivable, to
be credit-impaired when one or more events that have a detrimental impact
on the estimated future cash flows of the financial asset have occurred or
when contractual payments are 90 days past due. Credit card receivables are
considered credit-impaired and are fully written off at the earlier of the
following dates: when a notice of bankruptcy is received, a settlement
proposal is made, or contractual payments are 180 days past due.
LLeevveerraaggee rraattiioo
The leverage ratio is calculated by dividing Tier 1 capital by total exposure.
Total exposure is defined as the sum of on-balance-sheet assets (including
derivative
financing
transaction exposures) and off-balance-sheet items.
instruments exposures and securities
financial
LLiiqquuiiddiittyy ccoovveerraaggee rraattiioo ((LLCCRR))
The LCR 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.
LLooaannss aanndd aacccceeppttaanncceess
Loans and acceptances represent the sum of loans and of the customers’
liability under acceptances.
LLooaann--ttoo--vvaalluuee rraattiioo
The loan-to-value ratio is calculated according to the total facility amount for
residential mortgages and home equity lines of credit divided by the value of
the related residential property.
MMaasstteerr nneettttiinngg aaggrreeeemmeenntt
Legal agreement between two parties that have multiple derivative contracts
with each other that provides for the net settlement of all contracts through a
single payment, in the event of default, insolvency or bankruptcy.
NNeett iimmppaaiirreedd llooaannss
Net impaired loans are presented net of allowances for credit losses on
Stage 3 loan amounts drawn.
NNeett iimmppaaiirreedd llooaannss aass aa ppeerrcceennttaaggee ooff ttoottaall llooaannss aanndd aacccceeppttaanncceess
This measure represents net impaired loans as a percentage of the balance
of loans and acceptances.
124
National Bank of Canada
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Glossary
NNeett iinntteerreesstt mmaarrggiinn
Net interest margin is calculated by dividing net interest income by average
interest-bearing assets.
NNeett ssttaabbllee ffuunnddiinngg rraattiioo ((NNSSFFRR))
The NSFR ratio is a measure that helps guarantee that a bank is maintaining
a stable funding profile to reduce the risk of funding stress.
NNeett wwrriittee--ooffffss aass aa ppeerrcceennttaaggee ooff aavveerraaggee llooaannss aanndd aacccceeppttaanncceess
This measure represents the net write-offs (net of recoveries) expressed as a
percentage of average loans and acceptances.
OOffffiiccee ooff tthhee SSuuppeerriinntteennddeenntt ooff FFiinnaanncciiaall IInnssttiittuuttiioonnss ((CCaannaaddaa)) ((OOSSFFII))
The mandate of 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.
OOppeerraattiinngg lleevveerraaggee
OOppeerraattiinngg lleevveerraaggee oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss aanndd eexxcclluuddiinngg ssppeecciiffiieedd
iitteemmss ((oorr aaddjjuusstteedd))
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses. Operating leverage
on a taxable equivalent basis and excluding specified items (or adjusted) is
the difference between the growth rate for total revenues on a taxable
equivalent basis and excluding specified items (or adjusted) and the growth
rate for non-interest expenses excluding specified items (or adjusted).
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy ((RROOEE))
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy ((RROOEE)) eexxcclluuddiinngg ssppeecciiffiieedd iitteemmss ((oorr
aaddjjuusstteedd))
ROE represents net income attributable to common shareholders expressed
as a percentage of average equity attributable to common shareholders. It’s
a general measure of the Bank’s efficiency in using equity. ROE excluding
specified items (or adjusted) represents net income attributable to common
shareholders excluding specified items (or adjusted) as a percentage of
average equity attributable to common shareholders excluding specified
items (or adjusted).
RRiisskk--wweeiigghhtteedd aasssseettss
Assets are risk weighted according to the guidelines established by the
Office of the Superintendent of Financial Institutions (Canada). In the
Standardized calculation approach, risk factors are applied to the face value
of certain assets in order to reflect comparable risk levels. In the Advanced
Internal Rating-Based (AIRB) approach, risk-weighted assets are derived from
the Bank's internal models, which represent the Bank's own assessment of
the risks it incurs. Off-balance-sheet instruments are converted to balance
sheet (or credit) equivalents by adjusting the notional values before applying
the appropriate risk-weighting factors.
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss
Securities purchased by the Bank from a client pursuant to an agreement
under which the securities will be resold to the same client on a specified
date and at a specified price. Such an agreement is a form of short-term
collateralized lending.
PPrroovviissiioonniinngg rraattee
This measure represents the allowances for credit losses on impaired loans
expressed as a percentage of gross impaired loans.
SSeeccuurriittiieess ssoolldd uunnddeerr rreeppuurrcchhaassee aaggrreeeemmeennttss
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
Amount charged to income necessary to bring the allowances for credit
losses to a level deemed appropriate by management and is comprised of
provisions for credit losses on impaired and non-impaired financial assets.
lloosssseess aass aa ppeerrcceennttaaggee ooff aavveerraaggee
PPrroovviissiioonnss ffoorr ccrreeddiitt
aacccceeppttaanncceess
This measure represents the provisions for credit losses expressed as a
percentage of average loans and acceptances.
llooaannss aanndd
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess oonn iimmppaaiirreedd llooaannss aass aa ppeerrcceennttaaggee ooff aavveerraaggee
llooaannss aanndd aacccceeppttaanncceess
This measure represents the provisions for credit losses on impaired loans
expressed as a percentage of average loans and acceptances.
RReettuurrnn oonn aavveerraaggee aasssseettss
Return on average assets represents net income expressed as a percentage
of average assets.
SSttrreesssseedd VVaaRR ((SSVVaaRR))
SVaR 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.
SSttrruuccttuurreedd eennttiittyy
A structured entity is an entity created to accomplish a narrow and well-
defined objective and is designed so that voting or similar rights are not the
dominant factor in deciding who controls the entity, such as when any voting
rights relate solely to administrative tasks and the relevant activities are
directed by means of contractual arrangements.
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss
Taxable equivalent basis is a calculation method that consists in grossing up
certain tax-exempt income (particularly dividends) by the amount of income
tax that would have otherwise been payable. The Bank uses the taxable
equivalent basis to calculate net interest income, non-interest income and
income taxes.
National Bank of Canada
125
National Bank of Canada2021 Annual Report
Management’s Discussion and Analysis
Glossary
TTiieerr 11 ccaappiittaall rraattiioo
Tier 1 capital ratio consists of Common Equity Tier 1 capital and Additional
Tier 1 instruments, namely, qualifying non-cumulative preferred shares and
the eligible amount of innovative instruments. Tier 1 capital ratio is
calculated by dividing Tier 1 capital, less regulatory adjustments, by the
corresponding risk-weighted assets.
TToottaall ccaappiittaall rraattiioo
Total capital is the sum of Tier 1 and Tier 2 capital. Tier 2 capital consists of
the eligible portion of subordinated debt and certain credit loss allowances.
Total capital ratio is calculated by dividing total capital, less regulatory
adjustments, by the corresponding risk-weighted assets.
TToottaall sshhaarreehhoollddeerr rreettuurrnn ((TTSSRR))
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.
TTrraaddiinngg aaccttiivviittyy rreevveennuueess
TTrraaddiinngg aaccttiivviittyy rreevveennuueess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss ((oorr aaddjjuusstteedd))
Trading activity revenues consist of the net interest income and the non-
interest income related to trading activities. 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, certain
commission income, other trading activity revenues, and any applicable
transaction costs. Trading activity revenues on a taxable equivalent basis
includes net interest income on a taxable equivalent basis (or adjusted) and
non-interest income on a taxable equivalent basis (or adjusted) related to
trading activities.
VVaalluuee--aatt--RRiisskk ((VVaaRR))
VaR is a statistical measure of risk that is used to quantify market risks
across products, per types of risks and aggregate risk on a portfolio basis.
VaR is defined as the maximum loss at a specific confidence level over a
certain horizon under normal market conditions. The VaR method has the
advantage of providing a uniform measurement of financial instrument-
related market risks based on a single statistical confidence level and time
horizon.
126
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated
Financial Statements
Management’s Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Audited Consolidated Financial Statements
112288
112299
113322
113333
113344
113366
113377
113388
MMaannaaggeemmeenntt’’ss RReessppoonnssiibbiilliittyy ffoorr FFiinnaanncciiaall RReeppoorrttiinngg
The consolidated financial statements of National Bank of Canada (the Bank) have been prepared in accordance with section 308(4) of the Bank Act (Canada),
which states that, except as otherwise specified by the Office of the Superintendent of Financial Institutions (Canada) (OSFI), the financial statements are to be
prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). IFRS
represent Canadian generally accepted accounting principles (GAAP). None of the OSFI accounting requirements are exceptions to IFRS.
Management maintains the accounting and internal control systems needed to discharge its responsibility, which is to provide reasonable assurance that the
financial accounts are accurate and complete and that the Bank’s assets are adequately safeguarded. Controls that are currently in place include quality
standards on staff hiring and training; the implementation of organizational structures with clear divisions of responsibility and accountability for
performance; the Code of Professional Conduct; and the communication of operating policies and procedures.
As Chief Executive Officer and as Chief Financial Officer, we have overseen the evaluation of the design and operation of the Bank’s internal controls over
financial reporting in accordance with 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, 2021 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 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 at the recommendation of the Board. The auditor has full and
unrestricted access to the Audit Committee to discuss audit and financial reporting matters.
LLaauurreenntt FFeerrrreeiirraa
President and Chief Executive Officer
GGhhiissllaaiinn PPaarreenntt
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, November 30, 2021
128
National Bank of Canada
National Bank of Canada2021 Annual Report
IInnddeeppeennddeenntt AAuuddiittoorr’’ss RReeppoorrtt
To the Shareholders of National Bank of Canada
OOppiinniioonn
We have audited the consolidated financial statements of National Bank of Canada (the Bank), which comprise the consolidated balance sheets as at
October 31, 2021 and 2020, 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, 2021 and
2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by
the International Accounting Standards Board (IFRS).
BBaassiiss ffoorr OOppiinniioonn
We conducted our audit in accordance with Canadian generally accepted auditing standards (Canadian GAAS). Our responsibilities under those standards are
further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance
with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
KKeeyy AAuuddiitt MMaatttteerrss
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended
October 31, 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess —— RReeffeerr ttoo NNootteess 11 aanndd 77 ttoo tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Key Audit Matter Description
The allowances for credit losses represent management’s estimate of expected credit losses (ECL) on financial assets calculated under the IFRS 9 – Financial
Instruments ECL framework. The calculation of ECL is based on the probability of default (PD), loss given default (LGD), and exposure at default (EAD) of the
underlying assets and represents an unbiased and probability-weighted estimate of losses expected to occur in the future based on forecasts of
macroeconomic variables for three scenarios. Lifetime ECL is recorded for financial assets that have experienced significant increases in credit risk (SICR) since
initial recognition or that are impaired; otherwise, 12-month ECL is recorded. Given uncertainty surrounding the key inputs used to measure credit losses, the
Bank has applied expert credit judgment to adjust the modelled ECL results.
We have identified the allowances for credit losses as a key audit matter due to the inherent complexity of the ECL models used and the significant judgment
required by management in relation to the forward-looking nature of some key assumptions, including the impact of the COVID-19 pandemic on the economy.
Significant auditor judgment was required in evaluating: (i) the models and methodologies used to measure ECL; (ii) the forecasts of macroeconomic scenarios
and their probability weighting; (iii) the determination of SICR; and (iv) the adjustments to the modelled ECL results representing management’s expert credit
judgment. Auditing the ECL models and the key judgments and assumptions required a high degree of auditor judgment and an increased extent of audit
effort, including the involvement of professionals with specialized skills in credit risk and economics.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and the key judgments and assumptions used by management to estimate the ECL included the following, among
others:
With the assistance of professionals with specialized skills in credit risk or economics:
o
o
o
o
For a selection of ECL models, evaluated the appropriateness of the models used to estimate ECL;
Evaluated the forecasts of macroeconomic scenarios and their probability weighting by comparing against independently developed forecasts and
publicly available industry data, including the impact of the COVID-19 pandemic;
Assessed management’s determination of SICR and the appropriateness of the related model’s programming;
Assessed the adjustments to the modelled ECL results by evaluating management’s expert credit judgment.
National Bank of Canada
129
National Bank of Canada2021 Annual Report
Independent Auditor’s Report (cont.)
IInnccoommee TTaaxxeess –– UUnncceerrttaaiinn TTaaxx PPoossiittiioonnss —— RReeffeerr ttoo NNootteess 11 aanndd 2244 ttoo tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Key Audit Matter Description
In the normal course of its business, the Bank is involved in a number of transactions for which the tax impacts are uncertain. The Bank accounts for provisions
for uncertain tax positions that adequately represent the risk stemming from tax matters under discussion or being audited by tax authorities or from other
matters involving uncertainty. These provisions reflect management’s best possible estimate of the amounts that may have to be paid based on qualitative
assessments of all relevant factors. As disclosed in Note 24, the Bank was reassessed by the tax authorities for additional income taxes and interest in respect
of certain Canadian dividends received by the Bank for certain taxation years and may be reassessed for subsequent taxation years in regard to similar
activities. The Bank has not recognized any tax liability related to these uncertain tax positions.
We have identified the assessment of the accounting of the uncertain tax positions related to certain Canadian dividends as a key audit matter given the
significant judgment made by management when evaluating the probability of acceptance of the Bank’s tax positions and interpreting relevant tax and case
law and administrative positions. Auditing these judgments required a high degree of auditor judgment and resulted in an increased extent of audit effort,
including the involvement of tax specialists.
How the Key Audit Matter Was Addressed in the Audit
Our audit procedures pertaining to the assessment of the accounting of the uncertain tax positions related to certain Canadian dividends included the
following, among others:
With the assistance of tax specialists, evaluated management’s assessment of the probability of acceptance of the Bank’s tax positions by assessing:
o
o
o
The Bank’s interpretations of relevant tax and case law and administrative positions;
The correspondence with the relevant tax authorities; and
The advice and legal opinions obtained by the Bank’s external tax advisors.
OOtthheerr IInnffoorrmmaattiioonn
Management is responsible for the other information. The other information comprises:
Management’s Discussion and Analysis; and
The information, other than the financial statements and our auditor’s report thereon, in the Annual Report.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In
connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially
misstated.
We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have performed
on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s
report. We have nothing to report in this regard.
RReessppoonnssiibbiilliittiieess ooff MMaannaaggeemmeenntt aanndd TThhoossee CChhaarrggeedd wwiitthh GGoovveerrnnaannccee ffoorr tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Bank’s ability to continue as a going concern, disclosing, as applicable,
matters related to 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.
130
National Bank of Canada
National Bank of Canada2021 Annual Report
AAuuddiittoorr’’ss RReessppoonnssiibbiilliittiieess ffoorr tthhee AAuuddiitt ooff tthhee FFiinnaanncciiaall SSttaatteemmeennttss
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis
of these financial statements.
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 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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial
statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes
public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because
the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Carl Magnan.
//ss// DDeellooiittttee LLLLPP11
November 30, 2021
Montreal, Quebec
1 CPA auditor, CA, public accountancy permit No. A121501
National Bank of Canada
131
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeettss
As at October 31
AAsssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through profit or loss
At fair value through other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss
aanndd sseeccuurriittiieess bboorrrroowweedd
LLooaannss
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under acceptances
Allowances for credit losses
OOtthheerr
Derivative financial instruments
Investments in associates and joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss
OOtthheerr
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under repurchase agreements
and securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
EEqquuiittyy aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss
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
22002211
2020
3333,,887799
29,142
8844,,881111
99,,558833
1111,,991100
110066,,330044
78,326
12,726
11,079
102,131
77,,551166
14,512
7722,,554422
4411,,005533
22,,115500
6611,,110066
117766,,885511
66,,883366
((999988))
118822,,668899
1166,,448844
222255
11,,221166
11,,550044
11,,551100
44,,446688
2255,,440077
335555,,779955
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
Notes 4 and 13
224400,,993388
215,878
Note 8
Note 16
Notes 4 and 8
Note 14
Note 15
Notes 18 and 22
66,,883366
2200,,226666
1177,,229933
1199,,336677
2255,,117700
66,,330011
9955,,223333
776688
22,,665500
33,,116600
4477
1133,,002288
((3322))
1188,,885533
33
1188,,885566
335555,,779955
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
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss
Note 19
The accompanying notes are an integral part of these audited consolidated financial statements.
LLaauurreenntt FFeerrrreeiirraa
President and Chief Executive Officer
KKaarreenn KKiinnsslleeyy
Director
National Bank of Canada
132
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff IInnccoommee
Year ended October 31
22002211
2020
IInntteerreesstt iinnccoommee
Loans
Securities at fair value through profit or loss
Securities at fair value through other comprehensive income
Securities at amortized cost
Deposits with financial institutions
IInntteerreesstt eexxppeennssee
Deposits
Liabilities related to transferred receivables
Subordinated debt
Other
NNeett iinntteerreesstt iinnccoommee(1)
NNoonn--iinntteerreesstt iinnccoommee
Underwriting and advisory fees
Securities brokerage commissions
Mutual fund revenues
Investment management and trust service fees
Credit fees
Card revenues
Deposit and payment service charges
Trading revenues (losses)
Gains (losses) on non-trading securities, net
Insurance revenues, net
Foreign exchange revenues, other than trading
Share in the net income of associates and joint ventures
Other
TToottaall rreevveennuueess
NNoonn--iinntteerreesstt eexxppeennsseess
Compensation and employee benefits
Occupancy
Technology
Communications
Professional fees
Other
IInnccoommee bbeeffoorree pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess aanndd iinnccoommee ttaaxxeess
Provisions for credit losses
IInnccoommee bbeeffoorree iinnccoommee ttaaxxeess
Income taxes
NNeett iinnccoommee
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo
Preferred shareholders and holders of other equity instruments
Common shareholders
Bank shareholders and holders of other equity instruments
Non-controlling interests
EEaarrnniinnggss ppeerr sshhaarree (dollars)
Basic
Diluted
DDiivviiddeennddss ppeerr ccoommmmoonn sshhaarree (dollars)
The accompanying notes are an integral part of these audited consolidated financial statements.
Note 21
Note 9
Note 9
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.
55,,446600
11,,009922
118811
117788
7766
66,,998877
11,,663355
337722
1177
118800
22,,220044
44,,778833
441155
223388
556633
990000
550066
114488
227744
226688
115511
113311
220022
2233
332255
44,,114444
88,,992277
33,,002277
229999
882211
5533
224466
440077
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
112233
33,,005544
33,,117777
−−
33,,117777
99..0066
88..9966
22..8844
5,915
1,140
224
211
88
7,578
2,552
392
19
360
3,323
4,255
314
204
477
735
467
138
262
544
93
128
164
28
118
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
National Bank of Canada
133
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CCoommpprreehheennssiivvee IInnccoommee
Year ended October 31
NNeett iinnccoommee
OOtthheerr ccoommpprreehheennssiivvee iinnccoommee,, nneett ooff iinnccoommee ttaaxxeess
IItteemmss tthhaatt mmaayy bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
NNeett ffoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn aaddjjuussttmmeennttss
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
NNeett cchhaannggee iinn ddeebbtt sseeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
NNeett cchhaannggee iinn ccaasshh ffllooww hheeddggeess
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
SShhaarree iinn tthhee ootthheerr ccoommpprreehheennssiivvee iinnccoommee ooff aassssoocciiaatteess aanndd jjooiinntt vveennttuurreess
IItteemmss tthhaatt wwiillll nnoott bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
RReemmeeaassuurreemmeennttss ooff ppeennssiioonn ppllaannss aanndd ootthheerr ppoosstt--eemmppllooyymmeenntt bbeenneeffiitt ppllaannss
NNeett ggaaiinnss ((lloosssseess)) oonn eeqquuiittyy sseeccuurriittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
NNeett ffaaiirr vvaalluuee cchhaannggee aattttrriibbuuttaabbllee ttoo ccrreeddiitt rriisskk oonn ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
TToottaall ootthheerr ccoommpprreehheennssiivvee iinnccoommee ((lloossss)),, nneett ooff iinnccoommee ttaaxxeess
CCoommpprreehheennssiivvee iinnccoommee
CCoommpprreehheennssiivvee iinnccoommee aattttrriibbuuttaabbllee ttoo
Bank shareholders and holders of other equity instruments
Non-controlling interests
The accompanying notes are an integral part of these audited consolidated financial statements.
22002211
33,,117777
2020
2,083
((331144))
1166
9955
−−
((220033))
66
((3344))
((22))
((3300))
228800
2266
330066
−−
447755
6644
((1122))
552277
660000
33,,777777
33,,779900
((1133))
33,,777777
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
134
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CCoommpprreehheennssiivvee IInnccoommee (cont.)
IInnccoommee TTaaxxeess –– OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
The following table presents the income tax expense or recovery for each component of other comprehensive income.
Year ended October 31
22002211
2020
IItteemmss tthhaatt mmaayy bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
NNeett ffoorreeiiggnn ccuurrrreennccyy ttrraannssllaattiioonn aaddjjuussttmmeennttss
Net unrealized foreign currency translation gains (losses) on investments in foreign operations
Net foreign currency translation (gains) losses on investments in foreign operations reclassified to net income
Impact of hedging net foreign currency translation gains (losses)
Impact of hedging net foreign currency translation (gains) losses reclassified to net income
NNeett cchhaannggee iinn ddeebbtt sseeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net (gains) losses on debt securities at fair value through other comprehensive income
reclassified to net income
Change in allowances for credit losses on debt securities at fair value through
other comprehensive income reclassified to net income
NNeett cchhaannggee iinn ccaasshh ffllooww hheeddggeess
Net gains (losses) on derivative financial instruments designated as cash flow hedges
Net (gains) losses on designated derivative financial instruments reclassified to net income
SShhaarree iinn tthhee ootthheerr ccoommpprreehheennssiivvee iinnccoommee ooff aassssoocciiaatteess aanndd jjooiinntt vveennttuurreess
IItteemmss tthhaatt wwiillll nnoott bbee ssuubbsseeqquueennttllyy rreeccllaassssiiffiieedd ttoo nneett iinnccoommee
RReemmeeaassuurreemmeennttss ooff ppeennssiioonn ppllaannss aanndd ootthheerr ppoosstt--eemmppllooyymmeenntt bbeenneeffiitt ppllaannss
NNeett ggaaiinnss ((lloosssseess)) oonn eeqquuiittyy sseeccuurriittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee iinnccoommee
NNeett ffaaiirr vvaalluuee cchhaannggee aattttrriibbuuttaabbllee ttoo ccrreeddiitt rriisskk oonn ffiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
The accompanying notes are an integral part of these audited consolidated financial statements.
1144
((22))
2244
−−
3366
22
((1122))
−−
((1100))
110000
99
110099
−−
117700
2244
((55))
118899
332244
(13)
6
(4)
(18)
(29)
86
(56)
1
31
(97)
(2)
(99)
1
86
−
(16)
70
(26)
National Bank of Canada
135
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CChhaannggeess iinn EEqquuiittyy
Year ended October 31
PPrreeffeerrrreedd sshhaarreess aanndd ootthheerr eeqquuiittyy iinnssttrruummeennttss aatt bbeeggiinnnniinngg
Issuances of preferred shares and other equity instruments
Redemptions of preferred shares and other equity instruments for cancellation
PPrreeffeerrrreedd sshhaarreess aanndd ootthheerr eeqquuiittyy iinnssttrruummeennttss aatt eenndd
CCoommmmoonn sshhaarreess aatt bbeeggiinnnniinngg
Issuances of common shares pursuant to the Stock Option Plan
Repurchases of common shares for cancellation
Impact of shares purchased or sold for trading
CCoommmmoonn sshhaarreess aatt eenndd
CCoonnttrriibbuutteedd ssuurrpplluuss aatt bbeeggiinnnniinngg
Stock option expense
Stock options exercised
CCoonnttrriibbuutteedd ssuurrpplluuss aatt eenndd
RReettaaiinneedd eeaarrnniinnggss aatt bbeeggiinnnniinngg
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
RReettaaiinneedd eeaarrnniinnggss aatt eenndd
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee aatt bbeeggiinnnniinngg
Net foreign currency translation adjustments
Net change in unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net change in gains (losses) on cash flow hedges
Share in the other comprehensive income of associates and joint ventures
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee aatt eenndd
Note 18
Note 18
Note 22
Note 18
Note 18
Note 18
Note 14
22002211
22,,995500
550000
((880000))
22,,665500
33,,005577
110044
−−
((11))
33,,116600
4477
1111
((1111))
4477
1100,,444444
33,,117777
((113311))
((995588))
−−
((44))
447755
6644
((1122))
((2255))
((22))
1133,,002288
((111188))
((119900))
((3300))
330066
−−
((3322))
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)
EEqquuiittyy aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss
1188,,885533
16,380
Note 19
Note 31
Note 31
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss aatt bbeeggiinnnniinngg
Non-controlling interest from the Flinks Technology Inc. acquisition
Purchase of the non-controlling interest of the Credigy Ltd. subsidiary
Redemption of trust units issued by NBC Asset Trust
Net income attributable to non-controlling interests
Other comprehensive income attributable to non-controlling interests
Distributions to non-controlling interests
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss aatt eenndd
EEqquuiittyy
AAccccuummuullaatteedd OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
As at October 31
AAccccuummuullaatteedd ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Net foreign currency translation adjustments
Net unrealized gains (losses) on debt securities at fair value through other comprehensive income
Net gains (losses) on instruments designated as cash flow hedges
Share in the other comprehensive income of associates and joint ventures
The accompanying notes are an integral part of these audited consolidated financial statements.
136
33
33
1100
−−
−−
((1133))
−−
33
358
−
−
(350)
42
12
(59)
3
1188,,885566
16,383
22002211
((112299))
7711
2233
33
((3322))
2020
61
101
(283)
3
(118)
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff CCaasshh FFlloowwss
Year ended October 31
CCaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess
Net income
Adjustments for
Provisions for credit losses
Depreciation of premises and equipment, including right-of-use assets
Amortization of intangible assets
Impairment losses on premises and equipment and on intangible assets
Gain on remeasurement of the previously held equity interest in Flinks Technology Inc.
Remeasurement at fair value of an investment
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
CCaasshh fflloowwss ffrroomm ffiinnaanncciinngg aaccttiivviittiieess
Issuances of preferred shares and other equity instruments
Redemptions of preferred shares and other equity instruments for cancellation
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 Credigy Ltd. subsidiary
Investment in the Flinks Technology Inc. subsidiary
Redemption of trust units issued by NBC Asset Trust
Issuance expenses for shares and other equity instruments
Repayments of lease liabilities
Dividends paid on shares and distributions on other equity instruments
Distributions to non-controlling interests
CCaasshh fflloowwss ffrroomm iinnvveessttiinngg aaccttiivviittiieess
Acquisition of Flinks Technology Inc.
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
IImmppaacctt ooff ccuurrrreennccyy rraattee mmoovveemmeennttss oonn ccaasshh aanndd ccaasshh eeqquuiivvaalleennttss
IInnccrreeaassee ((ddeeccrreeaassee)) iinn ccaasshh aanndd ccaasshh eeqquuiivvaalleennttss
Cash and cash equivalents at beginning
CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss aatt eenndd(1)
SSuupppplleemmeennttaarryy iinnffoorrmmaattiioonn aabboouutt ccaasshh fflloowwss ffrroomm ooppeerraattiinngg aaccttiivviittiieess
Interest paid
Interest and dividends received
Income taxes paid
The accompanying notes are an integral part of these audited consolidated financial statements.
Notes 10 and 11
Note 31
Notes 6 and 9
Note 30
Note 31
Note 31
22002211
2020
33,,117777
2,083
22
119955
228866
1166
((3333))
3300
−−
111199
((115511))
((2233))
1111
((66,,448855))
66,,999966
((1155,,666611))
2255,,006600
33,,889988
((1166,,556666))
33,,338822
4499
((118866))
227722
11,,772255
66,,111133
550000
((880000))
9922
−−
((330000))
((3300))
−−
((44))
((9966))
((11,,110011))
−−
((11,,773399))
((7733))
222255
((77,,334488))
22,,550000
66,,665555
((221177))
((335500))
11,,339922
((11,,002299))
44,,773377
2299,,114422
3333,,887799
22,,226611
66,,885588
554422
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)
(5)
(88)
(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
(1)
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $6.8 billion as at October 31, 2021 ($5.9 billion as at
October 31, 2020) for which there are restrictions.
National Bank of Canada
137
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNootteess ttoo tthhee AAuuddiitteedd CCoonnssoolliiddaatteedd FFiinnaanncciiaall SSttaatteemmeennttss
Note 1
Note 2
Note 3
Note 4
Note 5
Note 6
Note 7
Note 8
Note 9
Note 10
Note 11
Note 12
Note 13
Note 14
Note 15
Note 16
Note 17
Basis of Presentation and Summary of Significant Accounting Policies
Future Accounting Policy Changes
Fair Value of Financial Instruments
Financial Instruments Designated at Fair Value Through Profit or Loss
Offsetting Financial Assets and Financial Liabilities
Securities
Loans and Allowances for Credit Losses
Financial Assets Transferred But Not Derecognized
Investments in Associates and Joint Ventures
Premises and Equipment
Goodwill and Intangible Assets
Other Assets
Deposits
Other Liabilities
Subordinated Debt
Derivative Financial Instruments
Hedging Activities
113388
115566
115577
116688
116699
117700
117722
118844
118855
118866
118877
118888
118899
118899
119900
119900
119944
Note 18
Note 19
Note 20
Note 21
Note 22
Note 23
Note 24
Note 25
Note 26
Note 27
Note 28
Note 29
Note 30
Note 31
Note 32
Share Capital 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
Acquisitions
Event After the Consolidated Balance Sheet Date
119999
220022
220033
220044
220055
220088
221122
221144
221144
221177
222200
222211
222266
222277
222288
NNoottee 11 –– BBaassiiss ooff PPrreesseennttaattiioonn aanndd SSuummmmaarryy ooff SSiiggnniiffiiccaanntt AAccccoouunnttiinngg PPoolliicciieess
National Bank of Canada (the Bank) is a financial institution incorporated and domiciled in Canada and whose shares are listed on the Toronto Stock Exchange.
Its head office is located at 600 De La Gauchetière Street West in Montreal, Quebec, Canada. The Bank is a chartered bank under Schedule 1 of the Bank Act
(Canada) and is regulated by the Office of the Superintendent of Financial Institutions Canada (OSFI).
National Bank of Canada offers financial services to individuals, businesses, institutional clients and governments throughout Canada as well as specialized
services at the international level. It operates four business segments, namely, the Personal and Commercial segment, the Wealth Management segment, the
Financial Markets segment, and the U.S. Specialty Finance and International (USSF&I) segment. Its full line of services includes banking and investing
solutions for individuals and businesses, corporate banking and investment banking services, securities brokerage, insurance, and wealth management.
On November 30, 2021, 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, 2021.
BBaassiiss ooff PPrreesseennttaattiioonn
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 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, 2020 following the Bank’s early
adoption of amendments to IFRS 9 – Financial Instruments (IFRS 9) and to IAS 39 – Financial Instruments: Recognition and Measurement (IAS 39) as well as to
the related standard IFRS 7 – Financial Instruments: Disclosures (IFRS 7), to IFRS 4 – Insurance Contracts (IFRS 4), and to IFRS 16 – Leases (IFRS 16) resulting
from interest rate benchmark reform.
On November 1, 2020, the Bank amended the classification of certain Consolidated Statement of Income amounts to better reflect the nature of the revenues
reported in the Wealth Management segment. The reclassifications were made retrospectively among the items presented in Non-Interest Income. These
reclassifications had no impact on the total amount of this income or on Net income.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
138
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
The Bank adopted the following new and amended standards on November 1, 2020.
IInntteerreesstt RRaattee BBeenncchhmmaarrkk RReeffoorrmm
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 its new and former financial instrument standards, IFRS 9 – Financial Instruments (IFRS 9) and IAS 39 – Financial Instruments: Recognition and
Measurement (IAS 39) as well as to related standard IFRS 7 – Financial Instruments: Disclosures (IFRS 7), to IFRS 4 – Insurance Contracts (IFRS 4), and to
IFRS 16 – Leases (IFRS 16). The amendments complement those issued in 2019 and focus on how financial statements will be affected 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. On November 1, 2020, the Bank early adopted the amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16.
The amendments introduce a practical expedient to account for a change in the basis for determining the contractual cash flows of non-derivative financial
instruments by prospectively revising the effective interest rate to reflect the change in the interest rate benchmark if the change is a direct consequence of the
interest rate benchmark reform and the new basis for determining the contractual cash flows is economically equivalent to the previous basis. If additional
changes are made and are not directly related to the reform, the IFRS 9 requirements are to be applied.
A temporary relief is also provided to hedge accounting requirements such that existing relationships that do not qualify under IAS 39 will be permitted if the
change is affected by the interest rate benchmark reform. The Bank will update the hedge documentation without discontinuing the hedging relationship. For
cash flow hedges, if the hedged item is modified due to the interest rate benchmark reform, the cumulative gain or loss in the cash flow hedge reserve for
designated IBOR cash flow hedges will be deemed to be based on the alternative benchmark rate. For the fair value hedges of a non-contractually specified
benchmark component of interest rate risk, if that risk rate is not separately identifiable upon transition to the alternative benchmark rate at the date of
designation, it will be deemed to have met the separately identifiable requirement at that date if the Bank reasonably expects the term-specific interest rate
component to be separately identifiable within a period of 24 months from the date the alternative benchmark rate is first designated, regardless of the term
for which the risk is designated in that hedge. The 24-month period will apply on a rate-by-rate basis.
The reform of interest rate benchmarks 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 Euro 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 orderly transition to the risk-free rates 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 came into force on January 25, 2021. The Bank adopted the 2020 IBOR Fallbacks Protocol on October 16, 2020 and is monitoring the
adherence by its derivatives counterparties to plan the transition of its legacy derivatives contracts accordingly. For certain other types of contracts,
contractual amendments are expected by the end of 2021, at which time certain LIBOR rates are expected to be withdrawn. On March 5, 2021, the Financial
Conduct Authority (FCA) in the United Kingdom announced the cessation or loss of representativeness of all LIBOR rates in two phases: pound sterling (GBP),
euro (EUR), Japanese yen (JPY), Swiss franc (CHF) rates as of December 31, 2021 and U.S. dollar (USD) rates as of June 30, 2023 (except for 1-week and
2-month USD LIBOR, which cease as of December 31, 2021). The risk-free rates Sterling OverNight Index Average (SONIA), ESTR, Tokyo OverNight Average Rate
(TONAR), and Swiss Average Rate OverNight (SARON) are being recommended to replace LIBOR as of December 31, 2021. This official announcement had the
effect of fixing spread adjustments between the LIBOR rates and the corresponding risk-free rates set out in the rate-replacement methodology proposed by
ISDA. At the same time, the FCA announced that in the months ahead it is launching consultations to assess the appropriateness of publishing certain
synthetic LIBOR rates for a given period; they would be calculated using the rate-replacement methodology and based on the corresponding risk-free rates
with spread adjustments. This measure would be adopted from a consumer protection and market integrity viewpoint to mitigate the difficulty of amending
certain types of contracts when replacing the applicable rate. On May 20, 2021 and June 24, 2021, the FCA issued two consultations on this topic. On
September 29, 2021, the FCA confirmed that 1-, 3-, and 6-month GBP and JPY LIBOR rates would continue being published for a period of one year following
the discontinuance thereof on December 31, 2021 using a “synthetic” methodology, i.e., to be calculated using the corresponding risk-free rates, namely, ICE
Term SONIA and the Tokyo Term Risk-Free Rate (TORF), with the respective ISDA fixed spread adjustment. This announcement was accompanied by a
consultation on the acceptable parameters for using these synthetic rates. On November 16, 2021, the FCA confirmed that the use of synthetic rates GBP and
JPY LIBOR would be permitted until the end of 2022 for all pre-existing contracts except for cleared derivative financial instruments. In addition, on
May 21, 2021, the group working on alternative reference rates in the United States, named the Alternative Reference Rates Committee (ARRC), announced that
CME Group had been selected as the administrator for a secured overnight financing rate (SOFR) term rates and that the ARRC will be able to officially
recommend these SOFR term rates once certain conditions are met; these rates are to be used in certain sectors of the market, in particular the commercial
loans market. On July 29, 2021, the ARRC announced that it was formally recommending the SOFR term rate administered by CME Group.
National Bank of Canada
139
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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 interest rate benchmark 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,
legal, 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 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 from 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, which are committees
made up of members of management and experts from all departments involved. As at October 31, 2021, the project was progressing according to schedule.
Lastly, a training plan for staff, management, and board members has been created.
The Bank is exposed to several risks, including interest rate risk and operational risk, which arise from non-derivative financial assets, non-derivative financial
liabilities, and derivative financial instruments. The project team ensures that risks are mitigated while ensuring a positive experience for its clients. The Bank
is taking all necessary steps to identify, measure, and control all risks to ensure a smooth transition to the interest rate benchmark reform.
The following table discloses the non-derivative financial assets, non-derivative financial liabilities, and derivative financial instruments subject to the interest
rate benchmark reform as at October 31, 2021 that have yet to transition to alternative benchmark rates and that will mature after December 31, 2021.
Non-derivative financial assets(2)
Non-derivative financial liabilities(3)
Derivative financial instruments(4)
UUSSDD LLIIBBOORR(1)
EEUURR LLIIBBOORR
GGBBPP LLIIBBOORR
AAss aatt OOccttoobbeerr 3311,, 22002211
CCHHFF LLIIBBOORR
JJPPYY LLIIBBOORR
88,,008844
1111
115566,,992299
4488
−−
−−
113311
−−
99,,001155
−−
−−
447788
−−
−−
3366
(1)
(2)
(3)
(4)
Includes only non-derivative financial assets, non-derivative financial liabilities, and derivative financial instruments indexed at USD LIBOR that will mature after June 30, 2023.
Non-derivative financial assets include the carrying values of securities and of securities purchased under reverse repurchase agreements and securities borrowed as well as the outstanding
balances on loans.
Non-derivative financial liabilities include the notional amounts of deposits and subordinated debt as well as the carrying values of obligations related to securities sold short and of
obligations related to securities sold under repurchase agreements and securities loaned.
Derivative financial instruments include the notional amounts of interest rate contracts and foreign exchange contracts.
CCoonncceeppttuuaall FFrraammeewwoorrkk ffoorr FFiinnaanncciiaall RReeppoorrttiinngg
The Revised Conceptual Framework for Financial Reporting stipulates that financial information must be relevant and achieve fair presentation to be useful. The
framework provides revised definitions and recognition criteria for assets and liabilities and confirms that different measurement bases are useful and
permitted. The adoption of the Revised Conceptual Framework for Financial Reporting did not have a significant impact on the Bank.
IInntteerrnnaattiioonnaall FFiinnaanncciiaall RReeppoorrttiinngg IInntteerrpprreettaattiioonnss CCoommmmiitttteeee ((IIFFRRIICC)) FFiinnaall AAggeennddaa DDeecciissiioonn
In April 2021, IFRIC issued a final agenda decision on accounting for configuration or customization costs on a supplier’s software in a cloud computing
arrangement, often referred to as a Software as a Service (SaaS) arrangement. In these types of arrangements, access to software is usually provided through
the Internet. The main conclusion is that, where the costs do not give rise to an intangible asset that is separate from the software, they are recognized as an
expense when the customer receives the configuration or customization services. IFRIC determined that sufficient guidance exists within the relevant
accounting standards and that the conclusions, as set out in the final agenda decision, form part of the interpretation of IFRS. As such, any changes from these
interpretations would be accounted for as a retrospectively applied accounting policy change in accordance with IAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors. The Bank is currently assessing the impact of these interpretations on its consolidated financial statements and expects to
finalize its assessment during the year ended October 31, 2022.
140
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
SSuummmmaarryy ooff SSiiggnniiffiiccaanntt AAccccoouunnttiinngg PPoolliicciieess
JJuuddggmmeennttss,, EEssttiimmaatteess aanndd AAssssuummppttiioonnss
In preparing consolidated financial statements in accordance with IFRS, management must exercise judgment and make estimates and assumptions that affect
the reporting date carrying amounts of assets and liabilities, net income, and related information. Furthermore, certain accounting policies require complex
judgments and estimates because they apply to matters that are inherently uncertain, in particular accounting policies applicable to the following: the fair
value determination of financial instruments, the impairment of financial assets, the impairment of non-financial assets, pension plans and other post-
employment benefits, income taxes, provisions, the consolidation of structured entities, and the classification of debt instruments. Descriptions of these
judgments and estimates are provided in each of the notes related thereto in the consolidated financial statements. Actual results could therefore differ from
these estimates, in which case the impacts are recognized in the consolidated financial statements of future fiscal periods. The accounting policies described
in this note provide greater detail about the use of estimates and assumptions and reliance on judgment.
CCOOVVIIDD--1199 PPaannddeemmiicc CCoonnssiiddeerraattiioonnss
The COVID-19 pandemic continues to evolve, and, given the heightened uncertainty associated with the unprecedented nature of the pandemic, developing
reliable estimates and applying judgment has become even more challenging. Some of the Bank’s accounting policies, such as measurement of expected
credit losses, require particularly complex judgments and estimates. The uncertainty regarding certain key inputs used in measuring expected credit losses
(ECLs) is described in Note 7 to these consolidated financial statements.
BBaassiiss ooff CCoonnssoolliiddaattiioonn
Subsidiaries
These consolidated financial statements include all the assets, liabilities, operating results and cash flows of the Bank and its subsidiaries, after elimination of
intercompany transactions and balances. Subsidiaries are entities, including structured entities, controlled by the Bank. A structured entity is an entity created
to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant factor in deciding who controls the
entity, such as when voting rights relate solely to administrative tasks and the relevant activities are directed by means of contractual arrangements.
Management must exercise judgment in determining whether the Bank must consolidate an entity. The Bank controls an entity only if the following three
conditions are met:
it has decision-making authority regarding the entity’s relevant activities;
it has exposure or rights to variable returns from its involvement with the entity;
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
one or more of the three conditions of control have changed.
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.
National Bank of Canada
141
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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 entity, 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 proportionate shares in the net income and in the other comprehensive income are recognized,
respectively, in Non-interest income in the Consolidated Statement of Income and in Other comprehensive income in the Consolidated Statement of
Comprehensive Income. The carrying value of the investment is adjusted by an equivalent amount on the Consolidated Balance Sheet and reduced by
distributions received.
TTrraannssllaattiioonn ooff FFoorreeiiggnn CCuurrrreenncciieess
The consolidated financial statements are presented in Canadian dollars, which is the Bank’s functional and presentation currency. Each foreign operation
within the Bank’s scope of consolidation 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. Upon disposal of a foreign operation, any accumulated translation gains and losses, along with the related hedges, recorded in the
Accumulated other comprehensive income item of this foreign operation, are reclassified to Non-interest income in the Consolidated Statement of Income.
CCllaassssiiffiiccaattiioonn aanndd MMeeaassuurreemmeenntt ooff FFiinnaanncciiaall IInnssttrruummeennttss
At initial recognition, all financial instruments are recorded at fair value on the Consolidated Balance Sheet. At initial recognition, financial assets must be
classified as subsequently measured at fair value through other comprehensive income, at amortized cost, or at fair value through profit or loss. The Bank
determines the classification based on the contractual cash flow characteristics of the financial assets and on the business model it uses to manage these
financial assets. At initial recognition, financial liabilities are classified as subsequently measured at amortized cost or as at fair value through profit or loss.
For the purpose of classifying a financial asset, the Bank must determine whether the contractual cash flows associated with the financial asset are solely
payments of principal and interest on the principal amount outstanding. The principal is generally the fair value of the financial asset at initial recognition. The
interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period,
and for other basic lending risks and costs as well as of a profit margin. If the Bank determines that the contractual cash flows associated with a financial asset
are not solely payments of principal and interest, the financial assets must be classified as measured at fair value through profit or loss.
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.
142
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
A financial asset portfolio falls within a “hold to collect” business model when the Bank’s primary objective is to hold these financial assets in order to collect
contractual cash flows from them and not to sell them. When the Bank’s objective is achieved both by collecting contractual cash flows and by selling the
financial assets, the financial asset portfolio falls within a “hold to collect and sell” business model. In this type of business model, collecting contractual cash
flows and selling financial assets are both integral components to achieving the Bank’s objective for this financial asset portfolio. Financial assets are
mandatorily measured at fair value through profit or loss if they do not fall within either a “hold to collect” business model or a “hold to collect and sell”
business model.
Financial Instruments Designated at Fair Value Through Profit or Loss
A financial asset may be irrevocably designated at fair value through profit or loss at initial recognition if certain conditions are met. The Bank may apply this
option if, consistent with a documented risk management strategy, doing so eliminates or significantly reduces a measurement or recognition inconsistency
that would otherwise arise from measuring financial assets or liabilities or recognizing gains and losses on them on different bases and if the fair values are
reliable. Financial assets thus designated are recognized at fair value, and any change in fair value is recorded in Non-interest income in the Consolidated
Statement of Income. Interest income arising from these financial instruments designated at fair value through profit or loss is recorded in Net interest income
in the Consolidated Statement of Income.
A financial liability may be irrevocably designated at fair value through profit or loss when it is initially recognized. Financial liabilities thus designated are
recognized at fair value, and any changes in fair value attributable to changes in the Bank's own credit risk are recognized in Other comprehensive income
unless these changes create or enlarge an accounting mismatch 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.
National Bank of Canada
143
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
Equity Securities Designated at Fair Value Through Other Comprehensive Income
Equity securities designated at fair value through other comprehensive income are recognized at fair value. Unrealized gains and losses are presented, net of
income taxes, in Other comprehensive income with no subsequent reclassification of realized gains and losses to net income. Transaction costs incurred upon
the purchase of such equity securities are not reclassified to net income upon the sale of the securities.
Securities Measured at Amortized Cost
Securities measured at amortized cost include debt securities for which the contractual terms give rise, on specified dates, to cash flows that are solely
payments of principal and interest on the principal amount outstanding and that fall within a “hold to collect” business model.
The Bank recognizes these securities transactions at fair value on the trade date, and the transaction costs are capitalized. After initial recognition, debt
securities in this category are recorded at amortized cost. Interest income is recognized in Interest income in the Consolidated Statement of Income.
Premiums, discounts and related transaction costs are amortized over the expected life of the instrument to interest income using the effective interest rate
method. Securities measured at amortized cost are presented net of allowances for credit losses on the Consolidated Balance Sheet.
Securities Measured at Fair Value Through Profit or Loss
Securities not classified or designated as measured at fair value through other comprehensive income or at amortized cost are classified as measured at fair
value through profit or loss.
Securities measured at fair value through profit or loss include (i) securities held for trading, (ii) securities designated at fair value through profit or loss, (iii) all
equity securities other than those designated as measured at fair value through other comprehensive income with no subsequent reclassifications of gains
and losses to net income, and (iv) debt securities for which the contractual cash flows are not solely payments of principal and any interest on any 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.
144
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Loans
Loans Measured at Amortized Cost
Loans classified as measured at amortized cost include loans originated or purchased by the Bank that are not classified as measured at fair value through
profit or loss or designated at fair value through profit or loss. These loans are held within a business model whose objective is to collect contractual cash
flows, i.e., cash flows that are solely payments of principal and interest on the principal amount outstanding. All loans originated by the Bank are recognized
when cash is advanced to a borrower. Purchased loans are recognized when the cash consideration is paid by the Bank.
All loans are initially recognized at fair value plus directly attributable costs and are subsequently measured at amortized cost using the effective interest rate
method, net of an allowance for expected credit losses. For purchased performing loans, the acquisition date fair value adjustment on each loan is amortized
to interest income over the expected remaining life of the loan using the effective interest rate method. For purchased credit-impaired loans, the acquisition
date fair value adjustment on each loan consists of management’s estimate of the shortfall of principal and interest cash flows that the Bank expects to collect
and of the time value of money. The time value of money component of the fair value adjustment is amortized to interest income over the remaining life of the
loan using the effective interest rate method. Loans are presented net of allowances for credit losses on the Consolidated Balance Sheet.
Loans Measured at Fair Value Through Profit or Loss
Loans classified as measured at fair value through profit or loss, loans designated at fair value through profit or loss, and loans for which the contractual cash
flows are not solely payments of principal and interest on the principal amount outstanding are recognized at fair value on the Consolidated Balance Sheet.
The interest income on loans at fair value through profit or loss is recorded in Interest income in the Consolidated Statement of Income.
Changes in the fair value of loans classified as at fair value through profit or loss and loans designated at fair value through profit or loss are recognized in
Non-interest income – Trading revenues (losses) in the Consolidated Statement of Income. With respect to loans whose contractual cash flows are not solely
payments of principal and interest on the principal amount outstanding, changes in fair value are recognized in Non-interest income – Other in the
Consolidated Statement of Income.
Reclassification of Financial Assets
A financial asset, other than a derivative financial instrument or a financial asset that, at initial recognition, was designated as measured at fair value through
profit or loss, is reclassified only in rare situations, i.e., when there is a change in the business model used to manage the financial asset. The reclassification
is applied prospectively from the reclassification date.
EEssttaabblliisshhiinngg FFaaiirr VVaalluuee
The fair value of a financial instrument is the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction
in the principal market at the measurement date under current market conditions (i.e., an exit price).
Unadjusted quoted prices in active markets, based on bid prices for financial assets and offered prices for financial liabilities, provide the best evidence of fair
value. A financial instrument is considered quoted in an active market when prices in exchange, dealer, broker or principal-to-principal markets are accessible
at the measurement date. An active market is one where transactions occur with sufficient frequency and volume to provide quoted prices on an ongoing basis.
When there is no quoted price in an active market, the Bank uses another valuation technique that maximizes the use of relevant observable inputs and
minimizes the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would consider when pricing a
transaction. Judgment is required when applying a large number of acceptable valuation techniques and estimates to determine fair value. The estimated fair
value reflects market conditions on the valuation date and, consequently, may not be indicative of future fair value.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price, i.e., the fair value of the consideration received or
paid. If there is a difference between the fair value at initial recognition and the transaction price, and the fair value is determined using a valuation technique
based on observable market inputs or, in the case of a derivative, if the risks are fully offset by other contracts entered into with third parties, this difference is
recognized in the Consolidated Statement of Income. In other cases, the difference between the fair value at initial recognition and the transaction price is
deferred on the Consolidated Balance Sheet. The amount of the deferred gain or loss is recognized over the term of the financial instrument. The unamortized
balance is immediately recognized in net income when (i) observable market inputs can be obtained and support the fair value of the transaction, (ii) the risks
associated with the initial contract are substantially offset by other contracts entered into with third parties, (iii) the gain or loss is realized through a cash
receipt or payment, or (iv) the transaction matures or is cancelled before maturity.
National Bank of Canada
145
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
As permitted when certain criteria are met, the Bank has elected to determine fair value based on net exposure to credit risk or market risk for certain portfolios
of financial instruments, mainly derivative financial instruments.
IImmppaaiirrmmeenntt ooff FFiinnaanncciiaall AAsssseettss
At the end of each reporting period, the Bank applies a three-stage impairment approach to measure the expected credit losses (ECL) on all debt instruments
measured at amortized cost or at fair value through other comprehensive income and on loan commitments and financial guarantees that are not measured at
fair value. The ECL model is forward looking. Measurement of ECLs at each reporting period reflects reasonable and supportable information about past events,
current conditions, and forecasts of future events and economic conditions.
Determining the Stage
The ECL three-stage impairment approach is based on the change in the credit quality of financial assets since initial recognition. If, at the reporting date, the
credit risk of non-impaired financial instruments has not increased significantly since initial recognition, these financial instruments are classified in Stage 1,
and an allowance for credit losses that is measured, at each reporting date, in an amount equal to 12-month expected credit losses is recorded. When there is
a significant increase in credit risk since initial recognition, these non-impaired financial instruments are migrated to Stage 2, and an allowance for credit
losses that is measured, at each reporting date, in an amount equal to lifetime expected credit losses is recorded. In subsequent reporting periods, if the credit
risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, the ECL model requires
reverting to Stage 1, i.e., recognition of 12-month expected credit losses. When one or more events that have a detrimental impact on the estimated future
cash flows of a financial asset have occurred, the financial asset is considered credit-impaired and is migrated to Stage 3, and an allowance for credit losses
equal to lifetime expected losses continues to be recorded or the financial asset is written off. Interest income is calculated on the gross carrying amount for
financial assets in Stages 1 and 2 and on the net carrying amount for financial assets in Stage 3.
Assessment of Significant Increase in Credit Risk
In determining whether credit risk has increased significantly, the Bank uses an internal credit risk grading system, external risk ratings, and forward-looking
information to assess deterioration in credit quality of a financial instrument. To assess whether or not the credit risk of a financial instrument has increased
significantly, the Bank compares the probability of default (PD) occurring over its expected life as at the reporting date with the PD occurring over its expected
life on the date of initial recognition and considers reasonable and supportable information indicative of a significant increase in credit risk since initial
recognition. The Bank includes relative and absolute thresholds in the definition of significant increase in credit risk and a backstop of 30 days past due. All
financial instruments that are 30 days past due are migrated to Stage 2 even if other metrics do not indicate that a significant increase in credit risk has
occurred. The assessment of a significant increase in credit risk requires significant judgment.
Measurement of Expected Credit Losses
ECLs are measured as the probability-weighted present value of all expected cash shortfalls over the remaining expected life of the financial instrument, and
reasonable and supportable information about past events, current conditions, and forecasts of future events and economic conditions is considered. The
estimation and application of forward-looking information requires significant judgment. Cash shortfalls represent 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.
146
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
ECLs for all financial instruments are recognized in Provisions for credit losses in the Consolidated Statement of Income. In the case of debt instruments
measured at fair value through other comprehensive income, ECLs are recognized in Provisions for credit losses in the Consolidated Statement of Income, and
a corresponding amount is recognized in Other comprehensive income with no reduction in the carrying amount of the asset on the Consolidated Balance
Sheet. As for debt instruments measured at amortized cost, they are presented net of the related allowance for credit losses on the Consolidated Balance
Sheet. Allowances for credit losses for off-balance-sheet credit exposures that are not measured at fair value are included in Other liabilities on the
Consolidated Balance Sheet.
Purchased or Originated Credit-Impaired Financial Assets
On initial recognition of a financial asset, the Bank determines whether the asset is credit-impaired. For financial assets that are credit-impaired upon
purchase or origination, the lifetime expected credit losses are reflected in the initial fair value. In subsequent reporting periods, the Bank recognizes only the
cumulative changes in these lifetime ECLs since initial recognition as an allowance for credit losses. The Bank recognizes changes in ECLs in Provisions for
credit losses in the Consolidated Statement of Income, even if the lifetime ECLs are less than the 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 dates: when a notice of bankruptcy is
received, a settlement proposal is made, or contractual payments are 180 days past due.
Write-Offs
A financial asset and its related allowance for credit losses are normally written off in whole or in part when the Bank considers the probability of recovery to be
non-existent and when all guarantees and other remedies available to the Bank have been exhausted or if the borrower is bankrupt or winding up and balances
owing are not likely to be recovered.
DDeerreeccooggnniittiioonn ooff FFiinnaanncciiaall AAsssseettss aanndd SSeeccuurriittiizzaattiioonn
A financial asset is considered for derecognition when the Bank has transferred contractual rights to receive the cash flows or assumed an obligation to
transfer these cash flows to a third party. The Bank derecognizes a financial asset when it considers that substantially all the risks and rewards of ownership of
the asset have been transferred or when the contractual rights to the cash flows of the financial asset expire. When the Bank considers that it has retained
substantially all the risks and rewards of ownership of the transferred asset, it continues to recognize the financial asset and, if applicable, recognizes a
financial liability on the Consolidated Balance Sheet. If, due to a derivative financial instrument, the transfer of a financial asset does not result in
derecognition, the derivative financial instrument is not recognized on the Consolidated Balance Sheet.
When the Bank has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset, it derecognizes the financial
asset it no longer controls. Any rights and obligations retained following the asset transfer are recognized separately as an asset or liability. If the Bank retains
control of the financial asset, it continues to recognize the asset to the extent of its continuing involvement in that asset, i.e., to the extent to which it is
exposed to changes in the value of the transferred asset.
In order to diversify its funding sources, the Bank participates in two Canada Mortgage and Housing Corporation (CMHC) securitization programs: the
Mortgage-Backed Securities Program under the National Housing Act (Canada) (NHA) and Canada Mortgage Bond (CMB) program. Under the first program, the
Bank issues NHA securities backed by insured residential mortgages and, under the second, the Bank sells NHA securities to Canada Housing Trust (CHT). As
part of these transactions, the Bank retains substantially all the risks and rewards related to ownership of the mortgage loans sold. Therefore, the insured
mortgage loans securitized under the CMB program continue to be recognized in the Loans item of the Bank’s Consolidated Balance Sheet and the liabilities
for the considerations received from the transfer are recognized in Liabilities related to transferred receivables on the Consolidated Balance Sheet. Moreover,
insured mortgage loans securitized and retained by the Bank continue to be recognized in Loans on the Consolidated Balance Sheet.
DDeerreeccooggnniittiioonn ooff FFiinnaanncciiaall LLiiaabbiilliittiieess
A financial liability is derecognized when the obligation is discharged, cancelled, or expires. The difference between the carrying value of the financial liability
transferred and the consideration paid is recognized in the Consolidated Statement of Income.
CCaasshh aanndd DDeeppoossiittss WWiitthh FFiinnaanncciiaall IInnssttiittuuttiioonnss
Cash and deposits with financial institutions consist of cash and cash equivalents, amounts pledged as collateral as well as amounts placed in escrow. Cash
comprises cash and bank notes. Cash equivalents consist of deposits with the Bank of Canada, deposits with financial institutions, including net receivables
related to cheques and other items in the clearing process as well as the net amount of cheques and other items in transit.
National Bank of Canada
147
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
AAcccceeppttaanncceess aanndd CCuussttoommeerrss’’ LLiiaabbiilliittyy UUnnddeerr AAcccceeppttaanncceess
The potential liability of the Bank under acceptances is recorded as a customer commitment liability on the Consolidated Balance Sheet. The Bank’s potential
recourse vis à vis clients is recorded as an equivalent offsetting asset. Fees are recorded in Non-interest income in the Consolidated Statement of Income.
OObblliiggaattiioonnss RReellaatteedd ttoo SSeeccuurriittiieess SSoolldd SShhoorrtt
This financial liability represents the Bank’s obligation to deliver the securities it sold but did not own at the time of sale. Obligations related to securities sold
short are recorded at fair value and presented as liabilities on the Consolidated Balance Sheet. Realized and unrealized gains and losses are recognized in
Non-interest income in the Consolidated Statement of Income.
DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
In the normal course of business, the Bank uses derivative financial instruments to meet the needs of its clients, to generate trading activity revenues, and to
manage its exposure to interest rate risk, foreign exchange risk, credit risk, and other market risks.
All derivative financial instruments are measured at fair value on the Consolidated Balance Sheet. Derivative financial instruments with a positive fair value are
included in assets, and derivative financial instruments with a negative fair value are included in liabilities on the Consolidated Balance Sheet. Where there are
offsetting financial assets and financial liabilities, the net fair value of certain derivative financial instruments is reported either as an asset or as a liability.
Embedded Derivative Financial Instruments
An embedded derivative is a component of a hybrid contract that also includes a non-derivative host, the effect being that some of the cash flows of the
combined instrument vary in a way similar to a stand-alone derivative. An embedded derivative causes some or all of the cash flows that otherwise would be
required by the contract to be modified according to a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of
prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to one of the
parties to the contract.
A derivative embedded in a financial liability is separated from the host contract and treated as a separate derivative if, and only if, the following three
conditions are met: the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, the embedded
derivative is a separate instrument that meets the definition of a derivative financial instrument, and the hybrid contract is not measured at fair value through
profit or loss.
Embedded derivatives that are separately accounted for are measured at fair value on the Consolidated Balance Sheet, and subsequent changes in fair value
are recognized in Non-interest income in the Consolidated Statement of Income. In general, all embedded derivatives are presented on a combined basis with
the host contract. However, certain embedded derivatives that are separated from the host contract are presented in Derivative financial instruments on the
Consolidated Balance Sheet.
Held-for-Trading Derivative Financial Instruments
Derivative financial instruments are recognized at fair value, and the realized and unrealized gains and losses (including interest income and expense) are
recorded in Non-interest income in the Consolidated Statement of Income.
Derivative Financial Instruments Designated as Hedging Instruments
Policy
The purpose of a hedging transaction is to modify the Bank’s exposure to one or more risks by creating an offset between changes in the fair value of, or the
cash flows attributable to, the hedged item and the hedging instrument. Hedge accounting ensures that offsetting gains, losses, revenues and expenses are
recognized in the Consolidated Statement of Income in the same period or periods.
Documenting and Assessing Effectiveness
The Bank designates and formally documents each hedging relationship, at its inception, by detailing the risk management objective and the hedging strategy.
The documentation identifies the specific asset, liability, or cash flows being hedged, the related hedging instrument, the nature of the specific risk exposure
or exposures being hedged, the intended term of the hedging relationship, and the method for assessing the effectiveness or ineffectiveness of the hedging
relationship. At the inception of the hedging relationship, and for every financial reporting period for which the hedge has been designated, the Bank ensures
that the hedging relationship is highly effective and consistent with its originally documented risk management objective and strategy. When a hedging
relationship meets the hedge accounting requirements, it is designated as either a fair value hedge, a cash flow hedge or a foreign exchange hedge of a net
investment in a foreign operation.
148
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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.
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% to 125% 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.
OOffffsseettttiinngg ooff FFiinnaanncciiaall AAsssseettss aanndd LLiiaabbiilliittiieess
Financial assets and liabilities are offset, and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
National Bank of Canada
149
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
PPrreemmiisseess aanndd EEqquuiippmmeenntt
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 additional information about the accounting treatment of
right-of-use assets, see the Leases section presented below.
Buildings, computer equipment, and 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 lease term plus the first renewal period.
LLeeaasseess
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.
150
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
GGooooddwwiillll
The Bank uses the acquisition method to account for business combinations. The consideration transferred in a business combination is measured at the
acquisition-date fair value, and the transaction costs related to the acquisition are expensed as incurred. When the Bank acquires control of a business, all of
the identifiable assets and liabilities of the acquiree, including intangible assets, are recorded at fair value. The interests previously held in the acquiree are
also measured at fair value. Goodwill represents the excess of the purchase consideration and all previously held interests over the fair value of the
identifiable net assets of the acquiree. If the fair value of the identifiable net assets exceeds the purchase consideration and all previously held interests, the
difference is immediately recognized in income 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.
IInnttaannggiibbllee AAsssseettss
Intangible Assets With Finite Useful Lives
Software and certain other intangible assets are recognized at cost less accumulated amortization and accumulated impairment losses. These intangible
assets are systematically amortized on a straight-line basis over their useful lives, which vary between four and ten years. The amortization expense is
recorded in Non-interest expenses in the Consolidated Statement of Income.
Intangible Assets With Indefinite Useful Lives
The Bank’s intangible assets with indefinite useful lives come from the acquisition of subsidiaries or groups of assets and consist of management contracts
and a trademark. They are recognized at the acquisition-date fair value. The management contracts are for the management of open-ended funds. At the end of
each reporting period, the Bank reviews the useful lives to determine whether facts and circumstances continue to support an indefinite useful life
assessment. Intangible assets are deemed to have an indefinite useful life following an examination of all relevant factors, in particular: (a) the contracts do
not have contractual maturities; (b) the stability of the business segment to which the intangible assets belong; (c) the Bank’s capacity to control the future
economic benefits of the intangible assets; and (d) the continued economic benefits generated by the intangible assets.
IImmppaaiirrmmeenntt ooff NNoonn--FFiinnaanncciiaall AAsssseettss
Premises and equipment and intangible assets with finite useful lives are tested for impairment when events or changes in circumstances indicate that their
carrying value may not be recoverable. At the end of each reporting period, the Bank determines whether there is an indication that premises and equipment or
intangible assets with finite useful lives may be impaired. Goodwill and intangible assets that are not 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
151
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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.
PPrroovviissiioonnss
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money. Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated Balance Sheet.
IInntteerreesstt IInnccoommee aanndd EExxppeennssee
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest 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.
DDiivviiddeenndd IInnccoommee
Dividends from an equity instrument are recognized in Net interest income in the Consolidated Statement of Income when the Bank’s right to receive payment
is established.
152
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFeeee aanndd CCoommmmiissssiioonn IInnccoommee
Fee and commission income is recognized when, or as, a performance obligation is satisfied, i.e., when control of a promised service is transferred to a
customer and in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for the service. The revenue may
therefore be recognized at a point in time, upon completion of the service, or over time as services are provided.
The Bank must also determine whether its performance obligation is to provide the service itself or to arrange for another party to provide the service (in other
words, whether the Bank is acting as a principal or agent). A principal may itself satisfy its performance obligation to provide the specified good or service or it
may engage another party to satisfy some or all of the performance obligation on its behalf. A principal also has the primary responsibility for fulfilling the
promise to provide the good or service to the customer and has discretion in establishing the price for the service. If the Bank is acting as a principal, revenue
is recognized on a gross basis in an amount corresponding to the consideration to which the Bank expects to be entitled. If the Bank is acting as an agent, then
revenue is recognized net of the service fees and other costs incurred in relation to the commission and fees earned.
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 when the transaction is executed.
Mutual Fund Revenues
Mutual fund revenues include management fees earned in the Wealth Management segment. Management fees are primarily calculated based on a fund’s net
asset value and are recorded in the period the services are performed.
Investment management and trust service fees
Investment management and trust service fees include management fees, trust service fees, and fees for other investment services provided to clients and
earned in the Wealth Management segment. Generally, these fees are calculated using the balances of assets under administration and assets under
management. Such fees are recognized in the period the service is 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 in the
period the services are provided, whereas transaction-based service charges are recognized when the transaction is executed.
IInnssuurraannccee RReevveennuueess
Insurance contracts, including reinsurance contracts, are arrangements under which one party accepts significant insurance risk by agreeing to compensate
the policyholder if a specified uncertain future event was to occur. Gross premiums, net of premiums transferred under reinsurance contracts, are recognized
when they become due. Royalties received from reinsurers are recognized when earned. Claims are recognized when received and an amount is estimated as
they are being processed. All these amounts are recognized on a net basis in Non-interest income in the Consolidated Statement of Income.
Upon recognition of a premium, a reinsurance asset and insurance liability are recognized, respectively, in Other assets and in Other liabilities on the
Consolidated Balance Sheet. Subsequent changes in the carrying value of the reinsurance asset and insurance liability are recognized on a net basis in
Non-interest income in the Consolidated Statement of Income.
National Bank of Canada
153
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
IInnccoommee TTaaxxeess
Income taxes include current taxes and deferred taxes and are recorded in net income except for income taxes generated by items recognized in Other
comprehensive income or directly in equity.
Current tax is the amount of income tax payable on the taxable income for a period. It is calculated using the enacted or substantively enacted tax rates
prevailing on the reporting date, and any adjustments recognized in the period for the current tax of prior periods. Current tax assets and liabilities are offset,
and the net balance is presented in either Other assets or Other liabilities on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to simultaneously realize the asset and settle the liability.
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 reverse. Deferred tax is not recognized for temporary differences
related to the following:
the initial accounting of goodwill;
the initial accounting of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither
accounting income nor taxable income;
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable future and
that the Bank controls the timing of the reversal of the temporary difference;
investments in subsidiaries, associates and joint ventures when it is probable that the temporary difference will not reverse in the foreseeable future and
that there will not be taxable income to which the temporary difference can be recognized.
Deferred tax assets are tax benefits in the form of deductions that the Bank may claim to reduce its taxable income in future years. At the end of each reporting
period, the carrying amount of deferred tax assets is revised, and it is reduced to the extent that it is no longer probable that sufficient taxable income will be
available to allow the benefit of the deferred tax asset to be utilized.
Deferred tax assets and liabilities are offset, and the net balance is presented in either Other assets or Other liabilities on the Consolidated Balance Sheet
when the Bank has a legally enforceable right to set off the current tax assets and liabilities and if the deferred tax assets and liabilities relate to taxes levied
by the same taxation authority on the same taxable entity or on different taxable entities that intend to settle current tax assets and liabilities based on their
net amount.
The Bank makes assumptions to estimate income taxes as well as deferred tax assets and liabilities. This process includes estimating the actual amount of
current taxes and evaluating tax loss carryforwards and temporary differences arising from differences between the values of items reported for accounting
and for income tax purposes. Deferred tax assets and liabilities presented on the Consolidated Balance Sheet are calculated according to the tax rates to be
applied in future periods. Previously recorded deferred tax assets and liabilities must be adjusted when the date of the future event is revised based on current
information.
The Bank is subject to the jurisdictions of various tax authorities. In the normal course of its business, the Bank is involved in a number of transactions for
which the tax impacts are uncertain. As a result, the Bank accounts for provisions for uncertain tax positions that adequately represent the tax risk stemming
from tax matters under discussion or being audited by tax authorities or from other matters involving uncertainty. The amounts of these provisions reflect the
best possible estimates of the amounts that may have to be paid based on qualitative assessments of all relevant factors. The provisions are estimated at the
end of each reporting period. However, it is possible that, at a future date, a provision might need to be adjusted following an audit by the tax authorities.
When the final assessment differs from the initially provisioned amounts, the difference will impact the income taxes of the period in which the assessment
was made.
FFiinnaanncciiaall GGuuaarraanntteeee CCoonnttrraaccttss
A financial guarantee contract is a contract or indemnification agreement that could require the Bank to make specified payments (in cash, financial
instruments, other assets, Bank shares, or provisions of services) to reimburse a beneficiary in the event of a loss resulting from a debtor defaulting on the
original or amended terms of a debt instrument.
To reflect the fair value of the obligation assumed at the inception of a financial guarantee, a liability is recorded in Other liabilities on the Consolidated
Balance Sheet. After initial recognition, the Bank must measure financial guarantee contracts at the higher of the allowance for credit losses determined using
the ECL model and of the initially recognized amount less, where applicable, the cumulative amount of revenue recognized. This revenue is recognized in Credit
fees in the Consolidated Statement of Income.
154
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiitt PPllaannss
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. Other post-employment benefit plans include
post-employment medical, dental, and life insurance coverage. While pension plans are funded, the other plans are not.
Plan expenses and obligations are actuarially determined based on the projected benefit method prorated on service. The calculations use management’s best
estimates of various actuarial assumptions such as discount rates, rates of compensation increase, health care cost trend rates, mortality rates, and retirement
age.
The net asset or net liability of pension plans and other post-employment benefit plans are calculated separately for each plan as the difference between the
present value of the future benefits earned by employees in respect of current- and prior-period service and the fair value of plan assets. The net asset or net
liability is included in either the Other assets or Other liabilities item of the Consolidated Balance Sheet.
The expense related to pension plans and other post-employment benefit plans consists of the following items: current service cost, net interest on the net
plan asset or liability, administration costs, and past service cost, if any, recognized when a plan is amended. This expense is recognized in Compensation and
employee benefits in the Consolidated Statement of Income. The net amount of interest income and expense is determined by applying a discount rate to the
net plan asset or liability amount.
Remeasurements resulting from pension plans and other post-employment benefit plans represent actuarial gains and losses related to the defined benefit
obligation and the actual return on plan assets, excluding net interest determined by applying a discount rate to the net asset or liability of the plans.
Remeasurements are immediately recognized in Other comprehensive income and will not be subsequently reclassified to net income; these cumulative gains
and losses are reclassified to Retained earnings.
SShhaarree--BBaasseedd PPaayymmeennttss
The Bank has several share-based compensation plans: the Stock Option Plan, the Stock Appreciation Rights (SAR) Plan, the Deferred Stock Unit (DSU) Plan,
the Restricted Stock Unit (RSU) Plan, the Performance Stock Unit (PSU) Plan, the Deferred Compensation Plan (DCP) of National Bank Financial, and the
Employee Share Ownership Plan.
Compensation expense is recognized over the service period required for employees to become fully entitled to the award. This period is generally the same as
the vesting period, except where the required service period begins before the award date. Compensation expense related to awards granted to employees
eligible to retire on the award date is immediately recognized on the award date. Compensation expense related to awards granted to employees who will
become eligible to retire during the vesting period is recognized over the period from the award date to the date the employee becomes eligible to retire. For all
of these plans, as of the first year of recognition, the expense includes cancellation and forfeiture estimates. These estimates are subsequently revised as
necessary. The Bank uses derivative financial instruments to hedge the risks associated with some of these plans. The compensation expense for these plans,
net of related hedges, is recognized in the Consolidated Statement of Income.
Under the Stock Option Plan, the Bank uses the fair value method to account for stock options awarded. The options vest at 25% per year, and each tranche is
treated as though it was a separate award. The fair value of each of the tranches is measured on the award date using the Black-Scholes model, and this fair
value is recognized in Compensation and employee benefits and Contributed surplus. When the options are exercised, the Contributed surplus amount is
credited to Equity – Common shares on the Consolidated Balance Sheet. The proceeds received from the employees when these options are exercised are also
credited to Equity – Common shares on the Consolidated Balance Sheet.
SARs are recorded at fair value when awarded and their fair value is remeasured at the end of each reporting period until they are exercised. The cost is
recognized in Compensation and employee benefits in the Consolidated Statement of Income and in Other liabilities on the Consolidated Balance Sheet. The
obligation that results from the change in fair value at each period is recognized in net income gradually over the vesting period, and periodically thereafter,
until the SARs are exercised. When a SAR is exercised, the Bank makes a cash payment equal to the increase in the stock price since the date of the award.
National Bank of Canada
155
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
The 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 the common shares of 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.
NNoottee 22 –– FFuuttuurree AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
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 in effect. The Bank is currently assessing the impact of the application of these standards on the consolidated financial
statements.
EEffffeeccttiivvee DDaattee –– NNoovveemmbbeerr 11,, 22002233
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, the IASB issued amendments to IFRS 17 that 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 to be applied 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.
156
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 33 –– FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss
FFaaiirr VVaalluuee aanndd CCaarrrryyiinngg VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss bbyy CCaatteeggoorryy
Financial assets and financial liabilities are recognized on the Consolidated Balance Sheet at fair value or at amortized cost in accordance with the categories
set out in the accounting framework for financial instruments.
FFiinnaanncciiaall
iinnssttrruummeennttss
ccllaassssiiffiieedd aass
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
FFiinnaanncciiaall
iinnssttrruummeennttss
ddeessiiggnnaatteedd
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
DDeebbtt sseeccuurriittiieess
ccllaassssiiffiieedd aass aatt
ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
CCaarrrryyiinngg vvaalluuee
aanndd ffaaiirr vvaalluuee
EEqquuiittyy sseeccuurriittiieess
ddeessiiggnnaatteedd aatt
ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
AAss aatt OOccttoobbeerr 3311,, 22002211
CCaarrrryyiinngg
vvaalluuee
FFaaiirr
vvaalluuee
FFiinnaanncciiaall
iinnssttrruummeennttss
aatt aammoorrttiizzeedd
ccoosstt,, nneett
FFiinnaanncciiaall
iinnssttrruummeennttss
aatt aammoorrttiizzeedd
ccoosstt,, nneett
TToottaall
ccaarrrryyiinngg
vvaalluuee
TToottaall
ffaaiirr
vvaalluuee
FFiinnaanncciiaall aasssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall
iinnssttiittuuttiioonnss
SSeeccuurriittiieess
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee
rreeppuurrcchhaassee aaggrreeeemmeennttss
aanndd sseeccuurriittiieess bboorrrroowweedd
LLooaannss aanndd aacccceeppttaanncceess,, nneett ooff aalllloowwaanncceess
OOtthheerr
Derivative financial instruments
Other assets
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss(1)
OOtthheerr
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
(1)
Includes embedded derivative financial instruments.
−−
8833,,446644
−−
11,,334477
−−
88,,996666
−−
661177
3333,,887799
1111,,991100
3333,,887799
3333,,887799
3333,,887799
1111,,889977
110066,,330044
110066,,229911
−−
88,,553399
1166,,448844
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
77,,551166
117744,,115500
−−
11,,668844
77,,551166
77,,551166
77,,551166
117733,,776699
118822,,668899
118822,,330088
−−
11,,668844
1166,,448844
11,,668844
1166,,448844
11,,668844
−−
1144,,001188
222266,,992200
222277,,005544
224400,,993388
224411,,007722
−−
2200,,226666
−−
1199,,336677
−−
−−
−−
−−
−−
−−
−−
1111,,339988
−−
−−
66,,883366
−−
66,,883366
−−
66,,883366
2200,,226666
66,,883366
2200,,226666
1177,,229933
−−
1133,,777722
11,,770099
776688
1177,,229933
−−
1133,,772244
11,,770099
1177,,229933
1199,,336677
2255,,117700
11,,770099
1177,,229933
1199,,336677
2255,,112222
11,,770099
777733
776688
777733
National Bank of Canada
157
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
Financial
instruments
classified as
at fair value
through profit
or loss
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
FFiinnaanncciiaall aasssseettss
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall
iinnssttiittuuttiioonnss
SSeeccuurriittiieess
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee
rreeppuurrcchhaassee aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss aanndd aacccceeppttaanncceess,, nneett ooff aalllloowwaanncceess
OOtthheerr
Derivative financial instruments
Other assets
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss(1)
−
−
−
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
205,337 215,878
216,755
OOtthheerr
Acceptances
Obligations related to securities sold short
Obligations related to securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
−
16,368
−
12,923
−
−
−
(1)
Includes embedded derivative financial instruments.
EEssttaabblliisshhiinngg FFaaiirr VVaalluuee
−
−
−
−
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
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, 2021 and may change in the future. Furthermore, there may be valuation uncertainty resulting from
the choice of valuation model used.
158
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
VVaalluuaattiioonn GGoovveerrnnaannccee
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the hierarchy classification policies, and there are controls
in place to ensure that fair value is measured appropriately, reliably, and consistently. Valuation methods and the underlying assumptions are reviewed on a
regular basis.
VVaalluuaattiioonn MMeetthhooddss aanndd AAssssuummppttiioonnss
Financial Instruments Whose Fair Value Equals Carrying Value
The carrying value of the following financial instruments is a reasonable approximation of fair value:
cash and deposits with financial institutions;
securities purchased under reverse repurchase agreements and securities borrowed;
obligations related to securities sold under repurchase agreements and securities loaned;
customers’ liability under acceptances;
acceptances;
certain items of other assets and other liabilities.
Securities and Obligations Related to Securities Sold Short
These financial instruments, except for securities at amortized cost, are recognized at fair value on the Consolidated Balance Sheet. Their fair value is based on
quoted prices in active markets, i.e., bid prices for financial assets and offered prices for financial liabilities. If there are no quoted prices in an active market,
fair value is estimated using prices for securities that, in substance, are identical. If such prices are not available, fair value is determined using valuation
techniques that incorporate assumptions based primarily on observable market inputs such as current market prices, the contractual prices of the underlying
instruments, the time value of money, credit risk, interest rate yield curves and currency rates.
When one or more significant inputs are not observable in the markets, fair value is established primarily using internal estimates and data that consider the
valuation policies in effect at the Bank, economic conditions, the characteristics specific to 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
159
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
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 a 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.
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 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 characteristics specific to 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 Bank’s own credit risk. In calculating the Bank’s own credit risk, 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.
160
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates offered for similar financial instruments that have the same term to maturity.
HHiieerraarrcchhyy ooff FFaaiirr VVaalluuee MMeeaassuurreemmeennttss
DDeetteerrmmiinniinngg tthhee LLeevveellss ooff tthhee FFaaiirr VVaalluuee MMeeaassuurreemmeenntt HHiieerraarrcchhyy
IFRS establishes a fair value 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 measurement hierarchy has the following levels:
Level 1
Inputs corresponding to unadjusted quoted prices in active markets for identical assets and liabilities and accessible to the Bank at the measurement date.
These instruments consist primarily of equity securities, derivative financial instruments traded in active markets, and certain highly liquid debt securities
actively traded in over-the-counter markets.
Level 2
Valuation techniques based on inputs, other than the quoted prices included in Level 1 inputs, that are directly or indirectly observable in the market for the
asset or liability. These inputs are quoted prices of similar instruments in active markets; quoted prices for identical or similar instruments in markets that are
not active; inputs other than quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or
corroborated by observable market inputs by correlation or other means. These instruments consist primarily of certain loans, certain deposits, derivative
financial instruments traded in over-the-counter markets, certain debt securities, certain equity securities whose value is not directly observable in an active
market, liabilities related to transferred receivables, and certain other liabilities.
Level 3
Valuation techniques based on one or more significant inputs that are not observable in the market for the asset or liability. The Bank classifies financial
instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the markets. The valuation technique
may also be partly based on observable market inputs.
Financial instruments whose fair values are classified in Level 3 consist of the following:
financial instruments measured at fair value through profit or loss: investments in hedge funds for which there are certain restrictions on unit or security
redemptions, equity securities and debt securities of private companies, as well as certain derivative financial instruments whose fair value is established
using internal valuation models that are based on significant unobservable market inputs;
securities at fair value through other comprehensive income: equity and debt securities of private companies;
certain loans and certain deposits (structured deposit notes) whose fair value is established using internal valuation models that are based on significant
unobservable market inputs.
TTrraannssffeerrss BBeettwweeeenn tthhee FFaaiirr VVaalluuee HHiieerraarrcchhyy LLeevveellss
Transfers of financial instruments between Levels 1 and 2 and transfers to (or from) Level 3 are deemed to have taken place at the beginning of the quarter in
which the transfer occurred. Significant transfers can occur between the fair value hierarchy levels due to new information on inputs used to determine fair
value and the observable nature of those inputs.
During fiscal 2021, $31 million in securities classified as at fair value through profit or loss and $2 million in obligations related to securities sold short were
transferred from Level 2 to Level 1 resulting from changing market conditions ($15 million in securities classified as at fair value through profit or loss in fiscal
2020). In addition, during fiscal 2021, $30 million in securities classified as at fair value through profit or loss were transferred from Level 1 to Level 2
resulting from changing market conditions (for fiscal 2020, $10 million in securities classified as at fair value through profit or loss).
During fiscal years 2021 and 2020, 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
161
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall IInnssttrruummeennttss RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
LLooaannss
OOtthheerr
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
LLeevveell 11
LLeevveell 22
AAss aatt OOccttoobbeerr 3311,, 22002211
TToottaall ffiinnaanncciiaall
aasssseettss//lliiaabbiilliittiieess
aatt ffaaiirr vvaalluuee
LLeevveell 33
22,,666611
−−
22,,554477
−−
5588,,553399
6633,,774477
1199
−−
11,,338844
−−
−−
11,,440033
−−
220033
6655,,335533
66,,771166
88,,999988
11,,887788
22,,448844
551177
2200,,559933
44,,221144
22,,331133
225522
778844
331111
77,,887744
88,,224422
1166,,227788
5522,,998877
−−
1144,,221155
1155,,554466
669933
−−
1166,,223399
44,,772200
1188,,667733
1111,,339988
4499,,000066
−−
−−
−−
4477
442244
447711
−−
−−
−−
−−
330066
330066
229977
99,,337777
88,,999988
44,,442255
22,,553311
5599,,448800
8844,,881111
44,,223333
22,,331133
11,,663366
778844
661177
99,,558833
88,,553399
33
11,,007777
1166,,448844
111199,,441177
−−
−−
11
−−
11
1144,,221155
2200,,226666
1199,,336677
1111,,339988
6655,,224466
162
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
LLooaannss
OOtthheerr
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss(1)
OOtthheerr
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
−
343
61,030
7,632
9,105
996
2,048
443
20,224
3,535
4,154
284
1,092
246
9,311
7,737
13,049
50,321
−
11,575
11,575
242
−
11,817
4,793
12,680
8,762
37,810
−
−
−
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
30
1,232
13,422
112,583
(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 in deposits.
National Bank of Canada
163
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the
markets. The valuation technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable inputs
used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
Equity securities and other debt securities
LLooaannss
Loans at fair value through profit or loss
OOtthheerr
Derivative financial instruments
Interest rate contracts
FFiinnaanncciiaall lliiaabbiilliittiieess
OOtthheerr
Derivative financial instruments
Equity contracts
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
Equity securities and other debt securities
LLooaannss
Loans at fair value through profit or loss
OOtthheerr
Derivative financial instruments
Interest rate contracts
Equity contracts
Credit derivative contracts
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
Structured deposit notes(3)
OOtthheerr
Derivative financial instruments
Credit derivative contracts
Primary
valuation techniques
Significant
unobservable inputs
LLooww
AAss aatt OOccttoobbeerr 3311,, 22002211
RRaannggee ooff iinnppuutt vvaalluueess
HHiigghh
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
Discount rate
110000 %%
1188 xx
556600 BBppss(2)
44..5500 %%
110000 %%
2200 xx
556600 BBppss(2)
1199..0000 %%
Discount rate
Liquidity premium
33..2255 %%
11..9988 %%
77..0099 %%
66..2277 %%
Discounted cash flows
Discount rate
22..2200 %%
22..2200 %%
Option pricing model
Long-term volatility
Market correlation
66 %%
((55)) %%
8866 %%
9900 %%
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 %
FFaaiirr
vvaalluuee
777777
229977
33
11,,007777
11
11
Fair
value
830
372
11
6
13
1,232
(2)
Option pricing model
Long-term volatility
Market correlation
8 %
(68) %
49 %
94 %
1
(1)
Discounted cash flows
Liquidity premium
(2) %
2 %
(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.
164
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
SSiiggnniiffiiccaanntt UUnnoobbsseerrvvaabbllee IInnppuuttss UUsseedd ffoorr FFaaiirr VVaalluuee MMeeaassuurreemmeennttss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits, or
the general partners of 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.
SSeennssiittiivviittyy AAnnaallyyssiiss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank performs sensitivity analyses for the fair value measurements of financial instruments classified in Level 3, substituting unobservable inputs with
one or more reasonably possible alternative assumptions.
For equity securities and other debt securities, the Bank varies significant unobservable inputs such as net asset values, EV/EBITDA multiples, or price
equivalents and establishes a reasonable fair value range that could result in a $115 million increase or decrease in the fair value recorded as at
October 31, 2021 (a $102 million increase or decrease as at October 31, 2020).
For loans, the Bank varies unobservable inputs such as a liquidity premium and establishes a reasonable fair value range that could result in a $28 million
increase or decrease in the fair value recorded as at October 31, 2021 (a $57 million increase or decrease as at October 31, 2020).
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, 2021, for derivative financial
instruments, the net fair value could result in a $1 million increase or decrease (a $12 million increase or decrease as at October 31, 2020), whereas for
structured deposit notes, the net fair value could have resulted in a $1 million increase or decrease as at October 31, 2020.
For all Level 3 financial instruments, the reasonable fair value ranges could result in an 5% increase or decrease in net income as at October 31, 2021 (an 8%
increase or decrease in net income as at October 31, 2020).
National Bank of Canada
165
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
CChhaannggee iinn tthhee FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial
instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.
Fair value as at October 31, 2020
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(4)
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
FFaaiirr vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002211
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2021(5)
Fair value as at October 31, 2019
Total realized and unrealized gains (losses) included in Net income (6)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
FFaaiirr vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002200
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2020(7)
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
445577
1133
−−
4433
((4422))
−−
−−
−−
−−
447711
1144
337733
−−
((1100))
−−
((111133))
−−
5566
−−
−−
330066
−−
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
−
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
DDeerriivvaattiivvee
ffiinnaanncciiaall
iinnssttrruummeennttss(1)
DDeeppoossiittss(2)
2299
((2288))
−−
−−
−−
−−
((11))
((11))
33
22
((2288))
22
−−
−−
−−
−−
−−
−−
−−
((22))
−−
−−
Year ended October 31, 2020
Derivative
financial
instruments(1)
Deposits(2)
4
(10)
−
−
−
−
(1)
29
7
29
(10)
−
5
−
−
−
(18)
−
(9)
24
2
5
LLooaannss
337722
2244
−−
−−
−−
1122
((111111))
−−
−−
229977
2244
Loans
360
(17)
−
−
−
12
(160)
177
−
372
(17)
The derivative financial instruments include assets and liabilities presented on a net basis.
The amounts represent the fair value of embedded derivative financial instruments in deposits.
Total gains (losses) included in Non-interest income was a gain of $9 million.
(1)
(2)
(3)
(4) On October 31, 2021, the Bank concluded that it had lost significant influence over AfrAsia Bank Limited (AfrAsia) and therefore ceased using the equity method to account for this
investment. The Bank designated its investment in AfrAsia as a financial asset measured at fair value through other comprehensive income in an amount of $56 million. For additional
information, see Note 9 to these consolidated financial statements.
Total unrealized gains (losses) included in Non-interest income was an unrealized gain of $10 million.
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.
(5)
(6)
(7)
166
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall IInnssttrruummeennttss NNoott RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair value
hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
LLeevveell 11
LLeevveell 22
LLeevveell 33
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22002211
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
55,,779933
22,,222277
−−
33,,887777
1111,,889977
6677,,114499
222277,,005544
1133,,772244
111144
777733
224411,,666655
−−
−−
−−
−−
−−
55,,779933
22,,222277
−−
33,,887777
1111,,889977
9999,,887722
116677,,002211
−−
−−
−−
−−
−−
222277,,005544
1133,,772244
111144
777733
224411,,666655
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
National Bank of Canada
167
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 44 –– FFiinnaanncciiaall IInnssttrruummeennttss DDeessiiggnnaatteedd aatt FFaaiirr VVaalluuee TThhrroouugghh PPrrooffiitt oorr LLoossss
The Bank chose to designate certain financial instruments at fair value through profit or loss according to the criteria presented in Note 1 to these consolidated
financial statements. Consistent with its risk management strategy and in accordance with the fair value option, which permits the designation if it eliminates
or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring financial assets and liabilities or recognizing
the gains and losses thereon on different bases, the Bank designated at fair value through profit or loss certain securities, and certain liabilities related to
transferred receivables. The fair value of liabilities related to transferred receivables does not include credit risk, as the holders of these liabilities are not
exposed to the Bank’s credit risk. The Bank also designated certain deposits that include embedded derivative financial instruments at fair value through profit
or loss.
To determine a change in fair value arising from a change in the credit risk of deposits designated at fair value through profit or loss, the Bank calculates, at
the beginning of the period, the present value of the instrument’s contractual cash flows using the following rates: first, using an observed discount rate for
similar securities that reflects the Bank’s credit spread and, then, using a rate that excludes the Bank’s credit spread. The difference obtained between the two
values is then compared to the difference obtained using the same rates at the end of the period.
Information about the financial assets and financial liabilities designated at fair value through profit or loss is provided in the following tables.
FFiinnaanncciiaall aasssseettss ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities
FFiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Deposits(1)(2)
Liabilities related to transferred receivables
FFiinnaanncciiaall aasssseettss ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities
FFiinnaanncciiaall lliiaabbiilliittiieess ddeessiiggnnaatteedd aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Deposits(1)(2)
Liabilities related to transferred receivables
CCaarrrryyiinngg
vvaalluuee aass aatt
OOccttoobbeerr 3311,, 22002211
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ffoorr tthhee yyeeaarr eennddeedd
OOccttoobbeerr 3311,, 22002211
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ssiinnccee tthhee iinniittiiaall
rreeccooggnniittiioonn ooff
tthhee iinnssttrruummeenntt
11,,334477
11,,334477
1144,,001188
1111,,339988
2255,,441166
((5555))
((5555))
((663366))
225533
((338833))
2277
2277
((331166))
2277
((228899))
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
(1)
(2)
For the year ended October 31, 2021, 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 $17 million ($60 million loss for the year ended October 31, 2020).
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.
168
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 55 –– OOffffsseettttiinngg FFiinnaanncciiaall AAsssseettss aanndd FFiinnaanncciiaall LLiiaabbiilliittiieess
Financial assets and liabilities are offset and the net amount is presented on the Consolidated Balance Sheet when the Bank has a legally enforceable right to
set off the recognized amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously.
Generally, over-the-counter financial derivatives subject to master netting arrangements of the International Swaps & Derivatives Association, Inc. or other
similar agreements do not meet the netting criteria on the Consolidated Balance Sheet because the right of set-off is legally enforceable only in the event of
default, insolvency, or bankruptcy.
Generally, securities purchased under reverse repurchase agreements and securities borrowed as well as obligations related to securities sold under
repurchase agreements and securities loaned, subject to master agreements, do not meet the netting criteria 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.
FFiinnaanncciiaall aasssseettss
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
FFiinnaanncciiaall aasssseettss
Securities purchased under reverse repurchase
agreements and securities borrowed
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
Obligations related to securities sold under
repurchase agreements and securities loaned
Derivative financial instruments
AAss aatt OOccttoobbeerr 3311,, 22002211
AAmmoouunnttss
sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
NNeett aammoouunnttss
rreeppoorrtteedd
oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
AAssssoocciiaatteedd aammoouunnttss
nnoott sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
FFiinnaanncciiaall aasssseettss
rreecceeiivveedd//pplleeddggeedd
aass ccoollllaatteerraall(2)(3)
FFiinnaanncciiaall
iinnssttrruummeennttss(1)
GGrroossss aammoouunnttss
rreeccooggnniizzeedd
1155,,221166
2200,,993366
3366,,115522
2244,,999933
2233,,881199
4488,,881122
77,,770000
44,,445522
1122,,115522
77,,770000
44,,445522
1122,,115522
77,,551166
1166,,448844
2244,,000000
1177,,229933
1199,,336677
3366,,666600
11,,441133
99,,339988
1100,,881111
11,,441133
99,,339988
1100,,881111
66,,004422
22,,447755
88,,551177
1155,,775599
44,,001155
1199,,777744
NNeett
aammoouunnttss
6611
44,,661111
44,,667722
112211
55,,995544
66,,007755
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)(4)
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
(1)
(2)
(3)
(4)
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 at October 31, 2021, the financial assets pledged as collateral to the Bank of Canada included covered bonds issued by the Bank.
As at October 31, 2020, the financial assets pledged as collateral to the Bank of Canada had included bearer deposit notes and covered bonds issued by the Bank.
National Bank of Canada
169
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 66 –– SSeeccuurriittiieess
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff SSeeccuurriittiieess
As at October 31
SSeeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
SSeeccuurriittiieess aatt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
Equity securities
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt(1)
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies
and other foreign governments
Other debt securities
11 yyeeaarr
oorr lleessss
OOvveerr 11
yyeeaarr ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
22002211
2020
TToottaall
Total
11,,662288
889966
33,,556644
334422
−−
66,,443300
6655
11
661199
44
−−
668899
550000
552255
−−
559999
11,,662244
55,,446600
22,,777755
331111
994455
−−
99,,449911
44,,113344
552255
115533
228822
−−
55,,009944
55,,227766
994455
−−
33,,223333
99,,445544
22,,228899
55,,332277
555500
11,,224444
−−
99,,441100
3344
11,,778877
886644
449988
−−
33,,118833
3355
775555
−−
4422
883322
−−
−−
−−
−−
5599,,448800
5599,,448800
−−
−−
−−
−−
661177
661177
−−
−−
−−
−−
−−
99,,337777
88,,999988
44,,442255
22,,553311
5599,,448800
8844,,881111
44,,223333
22,,331133
11,,663366
778844
661177
99,,558833
55,,881111
22,,222255
−−
33,,887744
1111,,991100
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
(1)
As at October 31, 2021, securities at amortized cost are presented net of $3 million in allowances for credit losses ($1 million as at October 31, 2020).
CCrreeddiitt QQuuaalliittyy
As at October 31, 2021 and 2020, 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.
170
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
UUnnrreeaalliizzeedd GGrroossss GGaaiinnss ((LLoosssseess)) oonn SSeeccuurriittiieess aatt FFaaiirr VVaalluuee TThhrroouugghh
OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAmmoorrttiizzeedd
ccoosstt
GGrroossss uunnrreeaalliizzeedd
ggaaiinnss
GGrroossss uunnrreeaalliizzeedd
lloosssseess
AAss aatt OOccttoobbeerr 3311,, 22002211
CCaarrrryyiinngg
vvaalluuee(1)
44,,224411
22,,334455
11,,664488
778822
556699
99,,558855
3300
2277
−−
99
5577
112233
((3388))
((5599))
((1122))
((77))
((99))
((112255))
44,,223333
22,,331133
11,,663366
778844
661177
99,,558833
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
(1)
The allowances for credit losses on securities at fair value through other comprehensive income, representing $1 million as at October 31, 2021 ($3 million as at October 31, 2020), are
reported in Other comprehensive income. For additional information, see Note 7 to these consolidated financial statements.
EEqquuiittyy SSeeccuurriittiieess DDeessiiggnnaatteedd aatt FFaaiirr VVaalluuee TThhrroouugghh OOtthheerr CCoommpprreehheennssiivvee IInnccoommee
The Bank designated certain equity securities, the main business objective of which is to generate dividend income, at fair value through other comprehensive
income without subsequent reclassification of gains and losses to net income. During the year ended October 31, 2021, a dividend income amount of
$34 million was recognized for these investments ($21 million for the year ended October 31, 2020), including an amount of $17 million in dividend income for
investments that were sold during the year ended October 31, 2021 ($2 million for investments that were sold during the year ended October 31, 2020).
Fair value at beginning
Change in fair value
Designated at fair value through other
comprehensive income(1)
Sales(2)
FFaaiirr vvaalluuee aatt eenndd
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
Year ended October 31, 2020
EEqquuiittyy sseeccuurriittiieess
ooff pprriivvaattee ccoommppaanniieess
EEqquuiittyy sseeccuurriittiieess
ooff ppuubblliicc ccoommppaanniieess
337733
((1100))
5566
((111133))
330066
224466
9988
7711
((110044))
331111
TToottaall
661199
8888
112277
((221177))
661177
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
(1) On October 31, 2021, the Bank concluded that it had lost significant influence over AfrAsia Bank Limited (AfrAsia) and therefore ceased using the equity method to account for this
investment. The Bank designated its investment in AfrAsia as a financial asset measured at fair value through other comprehensive income in an amount of $56 million. For additional
information, see Note 9 to these consolidated financial statements.
(2) The Bank disposed of private and public company equity securities for economic reasons.
GGaaiinnss ((LLoosssseess)) oonn DDiissppoossaallss ooff SSeeccuurriittiieess aatt AAmmoorrttiizzeedd CCoosstt
During the years ended October 31, 2021 and 2020, the Bank sold certain debt securities measured at amortized cost. The carrying value of these securities
upon disposal was $179 million for the year ended October 31, 2021 ($258 million for the year ended October 31, 2020), and the Bank recognized negligible
gains for the year ended October 31, 2021 ($6 million for the year ended October 31, 2020) in Non-interest income – Gains (losses) on non-trading securities,
net in the Consolidated Statement of Income.
National Bank of Canada
171
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 77 –– LLooaannss aanndd AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
Loans are recognized either at fair value through profit or loss or at amortized cost using the financial asset classification criteria defined in IFRS 9.
DDeetteerrmmiinniinngg aanndd MMeeaassuurriinngg EExxppeecctteedd CCrreeddiitt LLoosssseess ((EECCLL))
DDeetteerrmmiinniinngg EExxppeecctteedd CCrreeddiitt LLoosssseess
Expected credit losses are determined using a three-stage impairment approach that is based on the change in the credit quality of financial assets since initial
recognition.
Stage 1
Financial assets that have experienced no significant increase in credit risk between initial recognition and the reporting date and for which 12-month
expected credit losses are recorded at the reporting date are classified in Stage 1.
Stage 2
Financial assets that have experienced a significant increase in credit risk between initial recognition and the reporting date, and for which lifetime expected
credit losses are recorded at the reporting date, are classified in Stage 2.
Stage 3
Financial assets for which there is objective evidence of impairment, for which one or more events have had a detrimental impact on the estimated future cash
flows of these financial assets at the reporting date, and for which lifetime expected credit losses are recorded, are classified in Stage 3.
POCI
Financial assets that are credit-impaired when purchased or originated (POCI) are classified in the POCI category.
IImmppaaiirrmmeenntt GGoovveerrnnaannccee
A rigorous control framework is applied to the determination of expected credit losses. The Bank has policies and procedures that govern impairments arising
from credit risk. These policies are documented and periodically reviewed by the Risk Management group. All models used to calculate expected credit losses
are validated, and controls are in place to ensure they are applied.
These models are validated by groups that are independent of the team that prepares the calculations. Complex questions on measurement methodologies
and assumptions are reviewed by a group of experts from various functions. Furthermore, the inputs and assumptions used to determine expected credit
losses are reviewed on a regular basis.
MMeeaassuurreemmeenntt ooff EExxppeecctteedd CCrreeddiitt LLoosssseess ((EECCLL))
Expected credit losses are estimated using three main variables: (1) probability of default (PD), (2) loss given default (LGD) and (3) exposure at default (EAD).
For accounting purposes, 12-month PD and lifetime PD are the probabilities of a default occurring over the next 12 months or over the life of a financial
instrument, respectively, based on conditions existing at the balance sheet date and on future economic conditions that have, or will have, an impact on credit
risk. LGD reflects the losses expected should default occur and considers such factors as the mitigating effects of collateral, the realizable value thereof, and
the time value of money. EAD is the expected balance owing at default and considers such factors as repayments of principal and interest between the balance
sheet date and the time of default as well as any amounts expected to be drawn on a committed facility. Twelve-month expected credit losses are estimated by
multiplying 12-month PD by LGD and by EAD. Lifetime expected credit losses are estimated using the lifetime PD.
For most financial instruments, expected credit losses are measured on an individual basis. Financial instruments that have credit losses measured on a
collective basis are grouped according to similar credit risk characteristics such as type of instrument, geographic location, comparable risk level, and
business sector or industry.
IInnppuuttss,, AAssssuummppttiioonnss aanndd EEssttiimmaattiioonn TTeecchhnniiqquueess
The Bank’s approach to calculating expected credit losses consists essentially of leveraging existing regulatory models and then adjusting their parameters for
IFRS 9 purposes. These models have the advantage of having been thoroughly tested and validated. In addition, using the same base models, regardless of the
purpose, provides consistency across risk assessments. These models use inputs, assumptions and estimation techniques that require a high degree of
management judgment. The main factors that contribute to changes in ECL that are subject to significant judgment include the following:
calibration of regulatory parameters in order to obtain point-in-time and forward-looking parameters;
forecasts of macroeconomic variables for multiple scenarios and the probability weighting of the scenarios;
determination of the significant increases in credit risk (SICR) of a loan.
172
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical data to the long-run default rate, adjustments are required to obtain a point-in-time,
forward-looking PD, as required by IFRS 9. The Bank performs the following: (1) A point-in-time calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally equals the prior-year default rate. The prior-year default rate is selected for the calibration
performed at this stage, as it often reflects one of the most accurate and appropriate estimates of the current-year default rate; (2) Forward-looking
adjustments are incorporated through, among other measures, a calibration factor based on forecasts produced by the stress testing team's analyses. The
team considers three macroeconomic scenarios, and, for each scenario, produces a forward-looking assessment covering the three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three macroeconomic scenarios, expected LGD based on the LGD values observed using
backtesting, the economic LGD estimated and used to calculate economic capital, and lastly, the estimated downturn LGD used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance anticipated at each point in time. Expected EAD decreases over time according
to contractual repayments and to prepayments. For revolving loans, the EAD percentage is based on the percentage estimated by the corresponding regulatory
model and, thereafter, is converted to dollars according to the authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or lines of credit, the expected life is based on the behavioural life of clients who have
defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank’s Economy and Strategy Group is responsible for developing three macroeconomic scenarios and for recommending probability weights for each
scenario. Macroeconomic scenarios are not developed for specific portfolios, as the Economy and Strategy Group provides a set of variables for each of the
defined scenarios for the next three years. The PDs are also adjusted to incorporate economic assumptions (interest rates, unemployment rates, GDP forecasts,
oil prices, housing price indices, etc.) that can be statistically tied to PD changes that will have an impact beyond the next 12 months. These statistical
relationships are determined using the processes developed for stress testing. In addition, the group considers other relevant factors that may not be
adequately reflected in the information used to calculate the PDs (including late payments and whether the financial asset is subject to additional monitoring
within the watchlist process for business and government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial Instrument
At each reporting period, the Bank determines whether credit risk has increased significantly since initial recognition by examining the change in the risk of
default occurring over the remaining life of the financial instrument. First, the Bank compares the point-in-time forward-looking remaining lifetime PD at the
reporting date with the expected point-in-time forward-looking remaining lifetime PD established at initial recognition. Based on this comparison, the Bank
determines whether the loan has deteriorated when compared to the initial conditions. Because the comparison includes an adjustment based on origination-
date forward-looking information and reporting-date forward-looking information, the deterioration may be caused by the following factors: (i) deterioration of
the economic outlook used in the forward-looking assessment; (ii) deterioration of the borrower’s conditions (payment defaults, worsening financial ratios,
etc.); or (iii) a combination of both factors. The quantitative criteria used to determine a significant increase in credit risk are a series of relative and absolute
thresholds, and a backstop is also applied. All financial instruments that are over 30 days past due but below 90 days past due are migrated to Stage 2, even if
the other criteria do not indicate a significant increase in credit risk.
CCrreeddiitt QQuuaalliittyy ooff LLooaannss
The following tables present the gross carrying amounts of loans as at October 31, 2021 and 2020, 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 81 in the Credit Risk section of the
MD&A for the year ended October 31, 2021.
National Bank of Canada
173
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
AAss aatt OOccttoobbeerr 3311,, 22002211
NNoonn--iimmppaaiirreedd llooaannss(1)
SSttaaggee 22
SSttaaggee 11
SSttaaggee 33
IImmppaaiirreedd llooaannss
PPOOCCII
LLooaannss aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt oorr lloossss(2)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(4)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss aanndd aacccceeppttaanncceess
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
2288,,991111
1177,,008833
99,,116655
331144
8833
−−
5555,,555566
55,,880033
6611,,335599
5500
6611,,330099
1166,,221111
1111,,443399
44,,666655
333366
112211
−−
3322,,777722
44,,669922
3377,,446644
7700
3377,,339944
555599
332222
662233
229944
3388
−−
11,,883366
6655
11,,990011
3333
11,,886688
55,,008866
2244,,339955
2222,,880088
112288
4455
−−
5522,,446622
66,,117799
5588,,664411
111111
5588,,553300
115599,,336655
226644
115599,,110011
11
5533
22,,331188
226666
112288
−−
22,,776666
112299
22,,889955
5522
22,,884433
5577
11,,004411
11,,558800
448833
112299
−−
33,,229900
5511
33,,334411
9988
33,,224433
−−
−−
3388
114499
6622
−−
224499
−−
224499
8899
116600
−−
113311
66,,225544
11,,550099
119944
−−
88,,008888
8844
88,,117722
220055
77,,996677
1144,,665577
444444
1144,,221133
−−
−−
−−
−−
−−
8822
8822
5577
113399
2299
111100
−−
−−
−−
−−
−−
110011
110011
1155
111166
6633
5533
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
332266
332266
8811
440077
228877
112200
666622
337799
228833
−−
−−
−−
−−
−−
−−
−−
333322
333322
((6600))
339922
−−
−−
−−
−−
−−
−−
−−
113322
113322
((2299))
116611
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
77,,881177
77,,881177
−−
77,,881177
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
226699
5533
114400
−−
−−
−−
446622
226600
772222
−−
772222
TToottaall
2288,,991122
1177,,113366
1111,,448833
558800
221111
8822
5588,,440044
1144,,113388
7722,,554422
7711
7722,,447711
1166,,226688
1122,,448800
66,,224455
881199
225500
110011
3366,,116633
44,,889900
4411,,005533
220022
4400,,885511
555599
332222
666611
444433
110000
−−
22,,008855
6655
22,,115500
112222
22,,002288
55,,335555
2244,,557799
2299,,220022
11,,663377
223399
332266
6611,,333388
66,,660044
6677,,994422
660033
6677,,333399
446644
((8899))
555533
88,,553399
−−
88,,553399
118833,,668877
999988
118822,,668899
In response to the COVID-19 pandemic, the Bank has approved certain payment deferrals for all types of loans. As at October 31, 2021, the gross carrying value of loans for which deferrals
have been approved totalled $181 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
(1)
(2)
(3)
(4)
174
National Bank of Canada2021 Annual Report
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)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(4)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss aanndd aacccceeppttaanncceess
Gross carrying amount
Allowances for credit losses(3)
CCaarrrryyiinngg aammoouunntt
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 approved certain payment deferrals for all types of loans. As at October 31, 2020, the gross carrying value of loans for which deferrals were
approved had 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 had been
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
175
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
The following table presents the credit risk exposures of off-balance-sheet commitments as at October 31, 2021 and 2020 according to credit quality and ECL
impairment stage.
As at October 31
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(1)
RReettaaiill
Excellent
Good
Satisfactory
Special mention
Substandard
Default
NNoonn--rreettaaiill
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB approach
Standardized approach
Total exposure
Allowances for credit losses
TToottaall eexxppoossuurree,, nneett ooff aalllloowwaanncceess
SSttaaggee 11
SSttaaggee 22
SSttaaggee 33
1177,,005533
33,,775500
11,,008855
119977
1166
−−
1144,,009977
1177,,449977
77,,557755
1144
55
−−
6611,,228899
1144,,887722
7766,,116611
110044
7766,,005577
7722
332233
222299
5577
1133
−−
−−
22
22,,337777
333366
3388
−−
33,,444477
−−
33,,444477
5588
33,,338899
−−
−−
−−
−−
−−
33
−−
−−
−−
−−
−−
33
66
11
77
−−
77
22002211
TToottaall
1177,,112255
44,,007733
11,,331144
225544
2299
33
1144,,009977
1177,,449999
99,,995522
335500
4433
33
6644,,774422
1144,,887733
7799,,661155
116622
7799,,445533
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
(1)
Represent letters of guarantee and documentary letters of credit, undrawn commitments, and backstop liquidity and credit enhancement facilities.
LLooaannss PPaasstt DDuuee BBuutt NNoott IImmppaaiirreedd(1)
As at October 31
RReessiiddeennttiiaall
mmoorrttggaaggee
PPeerrssoonnaall
CCrreeddiitt ccaarrdd
22002211(2)
BBuussiinneessss aanndd
ggoovveerrnnmmeenntt(3)
Residential
mortgage
Personal
Credit card
2020(2)
Business and
government(3)
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(4)
4488
1188
−−
6666
7711
2211
−−
9922
2200
99
2211
5500
2244
1133
−−
3377
58
24
−
82
74
27
−
101
20
9
24
53
22
10
−
32
(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 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).
176
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
IImmppaaiirreedd LLooaannss
As at October 31
LLooaannss – SSttaaggee 33
Residential mortgage
Personal
Credit card(1)
Business and government(2)
LLooaannss – PPOOCCII
GGrroossss
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess
NNeett
Gross
Allowances for
credit losses
22002211
113399
111166
−−
440077
666622
446644
11,,112266
2299
6633
−−
228877
337799
((8899))
229900
111100
5533
−−
112200
228833
555533
883366
193
162
−
462
817
855
1,672
35
76
−
241
352
(66)
286
2020
Net
158
86
−
221
465
921
1,386
(1)
(2)
Credit card receivables are considered impaired, at the latest, when payment is 180 days past due, and they are written off at that time.
Includes customers’ liability under acceptances.
MMaaxxiimmuumm EExxppoossuurree ttoo CCrreeddiitt RRiisskk oonn IImmppaaiirreedd LLooaannss
The following table presents the maximum exposure to credit risk of impaired loans, the percentage of exposure covered by guarantees, and the main types of
collateral and guarantees held for each loan category.
As at October 31
22002211
GGrroossss
iimmppaaiirreedd llooaannss
PPeerrcceennttaaggee ccoovveerreedd
bbyy gguuaarraanntteeeess(1)
Gross
impaired loans
2020
Percentage covered
by guarantees(1)
Types of collateral
and guarantees
LLooaannss – SSttaaggee 33
Residential mortgage
Personal
Business and government(2)
LLooaannss – PPOOCCII
113399
111166
440077
446644
110000 %%
4477 %%
6622 %%
3366 %%
193
162
462
855
100 %
49 %
65 %
31 %
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
177
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
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.
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess aass aatt
OOccttoobbeerr 3311,, 22002200
PPrroovviissiioonnss ffoorr
ccrreeddiitt lloosssseess
WWrriittee--ooffffss(1)
DDiissppoossaallss
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess aass
aatt OOccttoobbeerr 3311,, 22002211
RReeccoovveerriieess
aanndd ootthheerr
BBaallaannccee sshheeeett
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss(2)(3)
SSeeccuurriittiieess(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd sseeccuurriittiieess bboorrrroowweedd(2)(3)
LLooaannss(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
OOtthheerr aasssseettss(2)(3)
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
BBaallaannccee sshheeeett
CCaasshh aanndd ddeeppoossiittss wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss(2)(3)
SSeeccuurriittiieess(3)
At fair value through other comprehensive income(4)
At amortized cost(2)
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd sseeccuurriittiieess bboorrrroowweedd(2)(3)
LLooaannss(5)
Residential mortgage
Personal
Credit card
Business and government
Customers' liability under acceptances
OOtthheerr aasssseettss(2)(3)
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss(6)
Letters of guarantee and documentary letters of credit
Undrawn commitments
Backstop liquidity and credit enhancement facilities
55
33
11
−−
6655
229988
116699
553333
9933
11,,115588
−−
1155
115577
44
117766
11,,334433
−−
((22))
22
−−
1122
((2299))
((55))
4433
((55))
1166
−−
((22))
((1144))
22
((1144))
22
−−
−−
−−
−−
((66))
((6699))
((5599))
((5588))
−−
((119922))
−−
−−
−−
−−
−−
((119922))
−−
−−
−−
−−
−−
((1144))
−−
−−
−−
((1144))
−−
−−
−−
−−
−−
((1144))
−−
−−
−−
−−
−−
1166
1177
((33))
−−
3300
−−
−−
−−
−−
−−
3300
55
11
33
−−
7711
220022
112222
551155
8888
999988
−−
1133
114433
66
116622
11,,116699
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
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
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2021 and that are still subject to enforcement activity was $105 million
($155 million for the year ended October 31, 2020).
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
As at October 31, 2021 and 2020, 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
(1)
(2)
(3)
(4)
(5)
(6)
178
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
nnoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
iimmppaaiirreedd llooaannss
PPOOCCII(1)
SSttaaggee 33
22002211
TToottaall
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
RReessiiddeennttiiaall mmoorrttggaaggee
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
PPeerrssoonnaall
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
6633
1122
1188
((44))
−−
((3333))
((33))
−−
((1100))
−−
−−
−−
((33))
5500
5500
−−
8899
4411
7733
((1122))
−−
((9966))
((1122))
−−
((66))
−−
((88))
−−
((22))
7733
7700
33
2233
−−
((1133))
55
((11))
3399
((11))
−−
2299
−−
−−
−−
−−
5522
5522
−−
114488
−−
((6666))
1144
((2277))
5588
((1155))
−−
((3366))
−−
((66))
−−
((33))
110033
9988
55
3355
−−
((55))
((11))
11
66
((11))
−−
−−
((66))
−−
22
((22))
2299
2299
−−
7766
−−
((77))
((22))
2277
1199
((22))
−−
3355
((6699))
−−
2211
−−
6633
6633
−−
((5566))
−−
−−
−−
−−
((77))
−−
−−
((77))
−−
−−
−−
33
((6600))
((6600))
−−
((1100))
−−
−−
−−
−−
((1199))
−−
−−
((1199))
−−
−−
−−
−−
((2299))
((2299))
−−
6655
1122
−−
−−
−−
55
((55))
−−
1122
((66))
−−
22
((22))
7711
7711
−−
330033
4411
−−
−−
−−
((3388))
((2299))
−−
((2266))
((6699))
((1144))
2211
((55))
221100
220022
88
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)
−
2020
Total
21
11
−
−
−
41
(4)
−
48
(6)
−
2
−
65
65
−
234
39
−
−
−
156
(25)
1
171
(121)
−
24
(5)
303
298
5
(1)
(2)
(3)
(4)
(5)
The total amount of undiscounted initially expected credit losses on the POCI loans acquired during the year ended October 31, 2021 was $11 million ($66 million for the year ended
October 31, 2020). The expected credit losses reflected in the purchase price have been 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
179
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Year ended October 31
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
nnoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess oonn
iimmppaaiirreedd llooaannss
PPOOCCII(1)
SSttaaggee 33
Allowances for
credit losses on
non-impaired loans
Stage 2
Stage 1
Allowances for
credit losses on
impaired loans
POCI(1)
Stage 3
CCrreeddiitt ccaarrdd
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(6)
Balance at beginning
Originations or purchases
Transfers(2):
to Stage 1
to Stage 2
to Stage 3
Net remeasurement of loss allowances(3)
Derecognitions(4)
Changes to models
Provisions for credit losses
Write-offs
Disposals
Recoveries
Foreign exchange movements and other
BBaallaannccee aatt eenndd
Includes:
Amounts drawn
Undrawn commitments(5)
TToottaall aalllloowwaanncceess ffoorr ccrreeddiitt lloosssseess aatt eenndd(7)
Includes:
Amounts drawn
Undrawn commitments(5)
6688
1100
110000
((1155))
((11))
((110000))
((22))
((33))
((1111))
−−
−−
−−
−−
5577
3333
2244
221144
111166
6600
((4433))
−−
((113311))
((3388))
−−
((3366))
−−
−−
−−
((11))
117777
111111
6666
335577
226644
9933
113377
−−
((110000))
1155
((2299))
8844
((22))
((44))
((3366))
−−
−−
−−
−−
110011
8899
1122
228877
−−
((5588))
4488
((2211))
2244
((4422))
−−
((4499))
−−
−−
−−
−−
223388
220055
3333
449944
444444
5500
−−
−−
−−
−−
3300
1122
−−
−−
4422
((5599))
−−
1177
−−
−−
−−
−−
224411
−−
((22))
((55))
2211
9988
((66))
−−
110066
((5588))
−−
44
((66))
228877
228877
−−
337799
337799
−−
22002211
TToottaall
220055
1100
−−
−−
−−
((44))
((44))
((77))
((55))
((5599))
−−
1177
−−
115588
112222
3366
774422
111166
−−
−−
−−
((99))
((8866))
−−
2211
((5588))
−−
44
((77))
770022
660033
9999
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
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
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
((8899))
11,,114411
((8899))
−−
999988
114433
(66)
1,315
(66)
−
1,158
157
(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, 2021 was $11 million ($66 million for the year ended
October 31, 2020). The expected credit losses reflected in the purchase price have been 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.
180
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
DDiissttrriibbuuttiioonn ooff GGrroossss aanndd IImmppaaiirreedd LLooaannss bbyy BBoorrrroowweerr CCaatteeggoorryy
UUnnddeerr tthhee BBaasseell AAsssseett CCllaasssseess
AAss aatt OOccttoobbeerr 3311
AAlllloowwaanncceess
ffoorr ccrreeddiitt lloosssseess
oonn iimmppaaiirreedd
llooaannss(1)(2)
GGrroossss
llooaannss(1)
IImmppaaiirreedd
llooaannss(1)
22002211
YYeeaarr eennddeedd OOccttoobbeerr 3311
PPrroovviissiioonnss
ffoorr
ccrreeddiitt lloosssseess
WWrriittee--ooffffss
Gross
loans(1)
Impaired
loans(1)
As at October 31
Allowances
for credit losses
on impaired
loans(1)(2)
2020
Year ended October 31
Provisions
for
credit losses Write-offs
RReettaaiill
Residential mortgage(3)
Qualifying revolving retail(4)
Other retail(5)
NNoonn--rreettaaiill
Agriculture
Oil and gas and pipelines
Mining
Utilities
Non-real-estate construction(6)
Manufacturing
Wholesale
Retail
Transportation
Communications
Finance and insurance
Real estate services and
real estate construction(7)
Professional services
Education and health care
Other services
Government
Other
SSttaaggeess 11 aanndd 22(8)
PPOOCCII
8899,,003355
33,,558899
1122,,994499
110055,,557733
77,,335577
44,,332255
552299
55,,338877
11,,554411
55,,550022
22,,559988
22,,997788
11,,881111
11,,444411
44,,996600
1188,,119955
11,,887722
44,,007733
55,,887755
11,,115599
88,,004477
7777,,665500
115533
1122
6677
223322
3300
5555
−−
110022
3377
4400
2299
2277
88
1199
33
3366
88
55
2266
−−
55
443300
3311
1100
4499
9900
44
4499
−−
9933
2277
2255
2233
1188
77
88
11
1166
44
33
99
−−
22
228899
887799
446644
118833,,668877
446644
11,,112266
((8899))
11,,116699
((22))
4488
3322
7788
((55))
33
−−
7733
1111
33
1100
22
−−
22
−−
11
−−
55
((11))
−−
11
110055
((115555))
((2266))
22
66 81,543
7777
3,599
5511 11,569
113344 96,711
11
99
−−
−−
−−
22
33
11
−−
1100
−−
6,696
5,052
756
4,352
1,079
5,545
2,206
2,955
1,528
1,184
4,347
22 14,171
1,490
55
3,800
44
5,296
2211
1,160
−−
6,715
−−
5588 68,332
234
20
83
337
79
80
−
30
37
32
36
33
9
25
6
38
11
3
55
−
6
480
855
119922 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
8
112
97
217
−
17
−
−
4
10
−
1
1
7
−
3
1
32
1
−
−
77
294
(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.
National Bank of Canada
181
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
MMaaiinn MMaaccrrooeeccoonnoommiicc FFaaccttoorrss
The following tables show the main macroeconomic factors used to estimate the allowances for credit losses on loans. For each scenario, namely, the base
scenario, upside scenario, and downside scenario, the average values of the macroeconomic factors over the next 12 months (used for Stage 1 credit loss
calculations) and over the remaining forecast period (used for Stage 2 credit loss calculations) are presented.
MMaaccrrooeeccoonnoommiicc ffaaccttoorrss(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
MMaaccrrooeeccoonnoommiicc ffaaccttoorrss(1)
GDP growth(2)
Unemployment rate
Housing price index growth(2)
BBB spread(3)
S&P/TSX growth(2)(4)
WTI oil price(5) (US$ per barrel)
NNeexxtt
1122 mmoonntthhss
BBaassee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
NNeexxtt
1122 mmoonntthhss
UUppssiiddee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
NNeexxtt
1122 mmoonntthhss
AAss aatt OOccttoobbeerr 3311,, 22002211
DDoowwnnssiiddee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
44..22 %%
66..66 %%
22..00 %%
11..77 %%
44..88 %%
7700
11..66 %%
66..33 %%
00..22 %%
11..99 %%
22..11 %%
6655
44..77 %%
66..33 %%
44..00 %%
11..66 %%
88..66 %%
7777
11..99 %%
55..66 %%
11..99 %%
11..77 %%
33..11 %%
7777
((55..55)) %%
99..55 %%
((1111..55)) %%
33..11 %%
((2255..66)) %%
3355
33..77 %%
77..88 %%
11..22 %%
22..22 %%
55..55 %%
3344
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
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 growth in the housing price index, based on the economy of
Canada or Quebec. The main macroeconomic factors used for the business and government credit portfolio are unemployment rate, spread on corporate BBB
bonds, S&P/TSX growth, and WTI oil price.
An increase in unemployment rate or BBB spread will generally correlate with higher allowances for credit losses, whereas an increase in the other
macroeconomic factors (GDP, S&P/TSX, housing price index and WTI oil price) will generally correlate with lower allowances for credit losses.
182
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
During the year ended October 31, 2021, the macroeconomic outlook generally improved.
According to the base scenario, the Canadian economy will continue to recover as vaccines allow for a gradual easing of health measures. The labour market
will continue to bounce back, and the unemployment rate will stand at 6.4% after 12 months but remain slightly above its pre-recession level (5.7%). The
increase in housing prices will slow to 2.0% year over year. The S&P/TSX will stand at 21,370 points after one year, with the price of oil at US$66.
According to the upside scenario, the economy will rebound more strongly as a result of effective vaccination campaigns, particularly against variants, and as
a result of improvements in supply chains. Consumer spending will trend upward given the excess savings accumulated since the start of the pandemic. The
unemployment rate one year after the scenario will be more favourable than the base scenario (five-tenths lower). Housing prices will climb 4.0%, and the
S&P/TSX will stand at 22,160 points after one year, with the price of oil at US$80.
According to the downside scenario, vaccines will prove to be ineffective against certain variants, and the economy will be adversely affected by new lockdown
measures. Supply chain bottlenecks will hinder profitability. Governments will continue to support households and businesses, but, due to budgetary
constraints, will not be able to match the generosity of the programs adopted at the start of the pandemic. This will cause the economy to tumble and slip back
into recession. The unemployment rate will therefore trend upward to 10.3% after 12 months. Housing prices will decrease considerably. The S&P/TSX will
stand at 15,170 points after one year, with the price of oil at US$24.
Given uncertainty surrounding key inputs used to measure credit losses, the Bank has applied expert credit judgment to adjust the modelled ECL results.
SSeennssiittiivviittyy AAnnaallyyssiiss ooff AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess oonn NNoonn--IImmppaaiirreedd LLooaannss
SScceennaarriiooss
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2021 based on
the probability weightings of three scenarios with allowances for credit losses resulting from simulations of each scenario weighted at 100%.
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22002211
SSiimmuullaattiioonnss
100% upside scenario
100% base scenario
100% downside scenario
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
885511
558833
662266
11,,228811
MMiiggrraattiioonn
The following table shows a comparison of the Bank's allowances for credit losses on non-impaired loans (Stages 1 and 2) as at October 31, 2021 with the
estimated allowances for credit losses that would result if all these non-impaired loans were in Stage 1.
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22002211
SSiimmuullaattiioonnss
Non-impaired loans if they were all in Stage 1
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
885511
668888
National Bank of Canada
183
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 88 –– FFiinnaanncciiaall AAsssseettss TTrraannssffeerrrreedd BBuutt NNoott DDeerreeccooggnniizzeedd
In the normal course of its business, the Bank enters into transactions in which it transfers financial assets such as securities or loans directly to third parties,
in particular structured entities. According to the terms of some of those transactions, the Bank retains substantially all of the risks and rewards related to
those financial assets. The risks include credit risk, interest rate risk, foreign exchange risk, prepayment risk and other price risks, whereas the rewards
include income streams associated with the financial assets. As such, those financial assets are not derecognized and the transactions are treated as
collateralized or secured borrowings. The nature of those transactions is described below.
SSeeccuurriittiieess SSoolldd UUnnddeerr RReeppuurrcchhaassee AAggrreeeemmeennttss aanndd SSeeccuurriittiieess LLooaanneedd
When securities are sold under repurchase agreements and securities loaned under securities lending agreements, the Bank transfers financial assets to third
parties in accordance with the standard terms for such transactions. These third parties may have an unlimited right to resell or repledge the financial assets
received. If cash collateral is received, the Bank records the cash along with an obligation to return the cash, which is included in Obligations related to
securities sold under repurchase agreements and securities loaned on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank
does not record the collateral on the Consolidated Balance Sheet.
FFiinnaanncciiaall AAsssseettss TTrraannssffeerrrreedd ttoo SSttrruuccttuurreedd EEnnttiittiieess
Under the Canada Mortgage Bond (CMB) program, the Bank sells securities backed by insured residential mortgages and other securities to Canada Housing
Trust (CHT), which finances the purchase through the issuance of insured mortgage bonds. Third-party CMB investors have legal recourse only to the
transferred assets. The cash received for these transferred assets is treated as a secured borrowing, and a corresponding liability is recorded in Liabilities
related to transferred receivables on the Consolidated Balance Sheet.
The following table provides additional information about the nature of the transferred financial assets that do not qualify for derecognition and the associated
liabilities.
As at October 31
22002211
2020
CCaarrrryyiinngg vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities(1)
Residential mortgages
CCaarrrryyiinngg vvaalluuee ooff aassssoocciiaatteedd lliiaabbiilliittiieess(2)
FFaaiirr vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities(1)
Residential mortgages
FFaaiirr vvaalluuee ooff aassssoocciiaatteedd lliiaabbiilliittiieess(2)
6688,,229966
2222,,441133
9900,,770099
4400,,777799
6688,,229966
2222,,224499
9900,,554455
4400,,773311
61,599
20,731
82,330
45,781
61,599
21,252
82,851
46,120
(1)
(2)
The amount related to the securities loaned is the maximum amount of Bank securities that can be lent. For 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
$3,367 million as at October 31, 2021 ($959 million as at October 31, 2020) excluding repurchase 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 stood at $7,993 million before the offsetting impact of $4,333 million as at October 31, 2021 ($6,327 million before a negligible offsetting impact as at
October 31, 2020).
The following table specifies the nature of the transactions related to financial assets transferred but not derecognized.
As at October 31
CCaarrrryyiinngg vvaalluuee ooff ffiinnaanncciiaall aasssseettss ttrraannssffeerrrreedd bbuutt nnoott ddeerreeccooggnniizzeedd
Securities backed by insured residential mortgages and other securities sold to CHT
Securities sold under repurchase agreements
Securities loaned
184
22002211
2020
2244,,003344
1177,,555533
4499,,112222
9900,,770099
21,211
25,442
35,677
82,330
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 99 –– IInnvveessttmmeennttss iinn AAssssoocciiaatteess aanndd JJooiinntt VVeennttuurreess
As at October 31
LLiisstteedd aassssoocciiaattee
TMX Group Limited(1)
UUnnlliisstteedd aassssoocciiaatteess
AfrAsia Bank Limited(2)
Other(3)
Business
segment
Other
USSF&I
22002211
CCaarrrryyiinngg
vvaalluuee
118844
−−
4411
4411
222255
2020
Carrying
value
278
74
57
131
409
(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, 2021,
the Bank’s ownership interest in TMX was 5.2% (8.2% as at October 31, 2020), and the fair value of this investment based on quoted prices in active markets was $390 million ($596 million
as at October 31, 2020).
(2) On October 31, 2021, the Bank concluded that it had lost significant influence over AfrAsia Bank Limited (AfrAsia), an associate entity headquartered in Mauritius, and therefore ceased
using the equity method to account for this investment. The Bank designated its investment in AfrAsia as a financial asset measured at fair value through other comprehensive income in an
amount of $56 million. Following the fair value measurement, a $30 million loss was recorded in the Non-interest income – Other item of the Consolidated Statement of Income and reported
in the Other heading of segment results. As at October 31, 2021, the Bank’s ownership interest in AfrAsia was 20.5% (20.5% as at October 31, 2020).
(3) On September 8, 2021, the Bank finalized the acquisition of Flinks Technology Inc. (Flinks), an associate in which the Bank had been holding an equity interest of 30.2% for an amount of
$8 million (32.0% for an amount of $11 million as at October 31, 2020). At the time of acquisition, this interest was remeasured at fair value, resulting in a non-taxable gain on
remeasurement of $33 million, which was recorded in the Non-interest income – Other item of the Consolidated Statement of Income. For additional information, see Note 31 to these
consolidated financial statements.
As at October 31, 2021 and 2020, 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, 2021, TMX paid $12 million in dividends to the Bank ($13 million for the year ended
October 31, 2020). The following table provides summarized financial information on TMX.
As at October 31(1)
BBaallaannccee sshheeeett
Current assets
Non-current assets
Current liabilities
Non-current liabilities
IInnccoommee ssttaatteemmeenntt
Total revenues
Net income
Other comprehensive income
Comprehensive income
22002211
2020
3366,,007777
55,,338877
3355,,881177
11,,997711
994488
332222
((11))
332211
34,496
5,248
34,415
1,720
848
255
48
303
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2021 and 2020, i.e., the most recent available, and the income statement
amounts are based on the cumulative balances for the 12-month periods ended September 30, 2021 and 2020.
AfrAsia Bank Limited
AfrAsia is a financial group headquartered in Port Louis, Mauritius. During the year ended October 31, 2021, AfrAsia paid $2 million in dividends to the Bank
($3 million for the year ended October 31, 2020).
The table below provides summarized financial information related to the Bank’s proportionate share in all 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, 2021 and 2020.
22002211
2020
11
−−
11
National Bank of Canada
7
−
7
185
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1100 –– PPrreemmiisseess aanndd EEqquuiippmmeenntt
OOwwnneedd aasssseettss hheelldd
RRiigghhtt--ooff--uussee
aasssseettss
TToottaall
HHeeaadd ooffffiiccee
bbuuiillddiinngg uunnddeerr
ccoonnssttrruuccttiioonn(1) BBuuiillddiinnggss
LLaanndd
CCoommppuutteerr
eeqquuiippmmeenntt
EEqquuiippmmeenntt
aanndd ffuurrnniittuurree
LLeeaasseehhoolldd
iimmpprroovveemmeennttss
TToottaall
RReeaall eessttaattee
70
1
−
−
−
71
−−
−−
−−
−−
7711
48
72
−
−
−
120
112288
−−
−−
−−
224488
CCoosstt
As at October 31, 2019
Impact of adopting IFRS 16(2)
Additions and modifications
Disposals
Impairment losses(3)
Fully amortized assets
Impact of foreign currency translation
As at October 31, 2020
Additions and modifications
Disposals
Impairment losses
Fully amortized assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002211
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2019
Depreciation for the year
Disposals
Impairment losses(3)
Fully amortized assets
Impact of foreign currency translation
As at October 31, 2020
Depreciation for the year
Disposals
Impairment losses
Fully amortized assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002211
Carrying value as at October 31, 2020
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002211
71
7711
120
224488
75
3
(7)
−
−
−
71
66
((33))
−−
((2266))
−−
4488
58
3
(7)
−
−
−
54
22
((33))
−−
((2266))
−−
2277
17
2211
323
55
−
(38)
−
−
340
4444
((33))
−−
((112244))
((22))
225555
194
55
−
(19)
−
−
230
4488
((33))
−−
((112244))
((11))
115500
110
110055
110
14
−
−
(12)
−
112
1133
((22))
−−
((1100))
((33))
111100
57
11
−
−
(12)
−
56
1122
((22))
−−
((1100))
((11))
5555
56
5555
322
948
37
(5)
−
(24)
1
331
3322
((44))
−−
((1188))
((33))
333388
149
28
(4)
−
(24)
−
149
3300
((44))
−−
((1188))
((11))
115566
182
118822
182
(12)
(38)
(36)
1
1,045
222233
((1122))
−−
((117788))
((88))
11,,007700
458
97
(11)
(19)
(36)
−
489
9922
((1122))
−−
((117788))
((33))
338888
556
668822
648
50
−
−
−
698
4488
((55))
((33))
((66))
773322
99
−
−
−
99
110033
((11))
((33))
−−
119988
599
553344
948
648
232
(12)
(38)
(36)
1
1,743
227711
((1122))
((55))
((118811))
((1144))
11,,880022
458
196
(11)
(19)
(36)
−
588
119955
((1122))
((11))
((118811))
((33))
558866
1,155
11,,221166
As at October 31, 2021, contractual commitments related to the head office building under construction stood at $295 million, covering a period up to 2023.
(1)
(2) On November 1, 2019, the Bank adopted IFRS 16. It recognized right-of-use assets totalling $648 million ($668 million reduced by provisions for onerous lease contracts of $20 million).
(3)
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.
AAsssseettss LLeeaasseedd UUnnddeerr OOppeerraattiinngg LLeeaasseess
The Bank is a lessor under operating lease agreements for certain buildings. These leases have terms varying from one year to five years and do not contain
any bargain purchase options or contingent rent.
The following table breaks down the future minimum payments receivable under these operating leases. These amounts include sub-lease revenues of
$7 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
186
AAss aatt OOccttoobbeerr 3311,, 22002211
22
22
22
11
11
11
99
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
LLeeaasseess RReeccooggnniizzeedd iinn tthhee CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee
Interest expense
Expense relating to leases of low-value assets(1)
Expense relating to variable lease payments
Income from leasing and sub-leasing(2)
AAss aatt OOccttoobbeerr 3311,, 22002211
1166
55
9977
44
(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, 2021, the cash outflows for leases amounted to $214 million (2020: $213 million).
NNoottee 1111 –– GGooooddwwiillll aanndd IInnttaannggiibbllee AAsssseettss
GGooooddwwiillll
The following table presents changes in the carrying amounts of goodwill by cash-generating unit (CGU) and by business segment for the years ended
October 31, 2021 and 2020.
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall(1)
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss(1)
TThhiirrdd--PPaarrttyy
SSoolluuttiioonnss(1)
SSeeccuurriittiieess
BBrrookkeerraaggee(1)
MMaannaaggeedd
SSoolluuttiioonnss(1)
TToottaall
CCrreeddiiggyy
LLttdd..(1)
AAddvvaanncceedd
BBaannkk ooff AAssiiaa
LLiimmiitteedd(1)
TToottaall
UUSSSSFF&&II
TToottaall
OOtthheerr
FFlliinnkkss
TTeecchhnnoollooggyy
IInncc..(1)
Balance as at October 31, 2019
Impact of foreign currency
translation
Balance as at October 31, 2020
Acquisition of Flinks(2)
Impact of foreign currency
translation
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22002211
54
−
54
−−
5544
256
−
256
−−
225566
434
−
434
−−
443344
269
959
235
−
269
−
959
−
235
−−
226699
−−
995599
−−
223355
33
−
33
((22))
3311
131
164
2
133
2
166
1,412
2
1,414
110011
−
110011
((99))
112244
((1111))
115555
−−
110011
((1111))
11,,550044
Constitutes a CGU.
(1)
(2) On September 8, 2021, the Bank finalized the acquisition of Flinks. For additional information, see Note 31 to these consolidated financial statements.
GGooooddwwiillll IImmppaaiirrmmeenntt TTeessttiinngg aanndd SSiiggnniiffiiccaanntt AAssssuummppttiioonnss
For impairment testing purposes, goodwill resulting from a business combination must be allocated, as of the acquisition date, to the CGU or 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, 2021 and 2020, 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, 2021, for each CGU or CGU group, the discount rate used was 13.2% (13.2% as at October 31, 2020), and the
long-term growth rate varied between 2% and 5%, depending on the CGU, as at October 31, 2021 and 2020.
National Bank of Canada
187
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 11 – Goodwill and Intangible Assets (cont.)
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 downward 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.
IInnttaannggiibbllee AAsssseettss
CCoosstt
As at October 31, 2019
Acquisitions
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2020
Acquisitions
Impairment losses(4)
Fully amortized intangible assets
AAss aatt OOccttoobbeerr 3311,, 22002211
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2019
Amortization for the year
Impairment losses(3)
Fully amortized intangible assets
As at October 31, 2020
Amortization for the year
Impairment losses(4)
Fully amortized intangible assets
AAss aatt OOccttoobbeerr 3311,, 22002211
IInnddeeffiinniittee uusseeffuull lliiffee
FFiinniittee uusseeffuull lliiffee
TToottaall
MMaannaaggeemmeenntt
ccoonnttrraaccttss(1)
TTrraaddeemmaarrkk
TToottaall
IInntteerrnnaallllyy--
ggeenneerraatteedd
ssooffttwwaarree(2)
OOtthheerr
ssooffttwwaarree
OOtthheerr
iinnttaannggiibbllee
aasssseettss
161
−
−
161
−−
((11))
116600
11
−
−
11
−−
((22))
99
172
−
−
172
−−
((33))
116699
1,703
317
(95)
(3)
1,922
335544
((99))
((9922))
22,,117755
547
223
(43)
(3)
724
226600
−−
((9922))
889922
156
15
−
(2)
169
2200
−−
((6699))
112200
105
22
−
(2)
125
1199
−−
((6699))
7755
44
4455
103
−
−
(34)
69
−−
−−
((55))
6644
76
7
−
(34)
49
77
−−
((55))
5511
20
1133
TToottaall
1,962
332
(95)
(39)
2,160
337744
((99))
((116666))
22,,335599
728
252
(43)
(39)
898
228866
−−
((116666))
11,,001188
1,262
11,,334411
2,134
332
(95)
(39)
2,332
337744
((1122))
((116666))
22,,552288
728
252
(43)
(39)
898
228866
−−
((116666))
11,,001188
1,434
11,,551100
Carrying value as at October 31, 2020
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002211
161
116600
11
99
172
116699
1,198
11,,228833
(1)
(2)
(3)
(4)
For annual impairment testing purposes, management contracts are allocated to the Managed Solutions CGU.
The remaining amortization period for significant internally-generated software is five years.
During the year ended October 31, 2020, the Bank had written off certain technology developments due to obsolescence and decided to discontinue them. The recoverable amount of those
technology developments was estimated to be nil. An amount of $52 million in impairment losses was recognized in the Non-interest expenses – Technology item of the Consolidated
Statement of Income and reported in the Other heading of segment results.
During the year ended October 31, 2021, the Bank recorded $3 million in impairment losses resulting from the impairment test carried out on intangible assets with indefinite useful life as
well as an amount of $9 million related to software under development that will no longer be brought to completion. The impairment losses were recognized in the Non-interest expenses –
Technology item of the Consolidated Statement of Income and reported in the Other heading of segment results.
NNoottee 1122 –– OOtthheerr AAsssseettss
As at October 31
Receivables, prepaid expenses and other items
Interest and dividends receivable
Due from clients, dealers and brokers
Defined benefit asset (Note 23)
Deferred tax assets (Note 24)
Current tax assets
Reinsurance assets
Insurance assets
188
22002211
2020
11,,222288
669966
998888
669911
335544
444455
2288
3388
44,,446688
946
567
586
126
643
360
30
8
3,266
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1133 –– DDeeppoossiittss
As at October 31
Personal
Business and government
Deposit-taking institutions
OOnn ddeemmaanndd(1)
AAfftteerr nnoottiiccee(2)
FFiixxeedd tteerrmm(3)
66,,112288
5588,,886633
11,,220066
6666,,119977
3344,,884455
3311,,886677
448833
6677,,119955
2299,,110033
7777,,114400
11,,330033
110077,,554466
22002211
TToottaall
7700,,007766
116677,,887700
22,,999922
224400,,993388
2020
Total
67,499
143,787
4,592
215,878
(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 an $11.9 billion amount of deposits as at
October 31, 2021 ($8.4 billion as at October 31, 2020) that are subject to the bank bail-in conversion regulations issued by the Government of Canada. These
regulations provide certain powers to the Canada Deposit Insurance Corporation (CDIC), notably the power to convert certain eligible Bank shares and
liabilities into common shares should the Bank become non-viable.
CCoovveerreedd BBoonnddss
NBC Covered Bond Guarantor (Legislative) Limited Partnership
In December 2013, the Bank established the covered bond legislative program under which covered bonds are issued. It therefore created NBC Covered Bond
Guarantor (Legislative) Limited Partnership (the Guarantor) to guarantee payment of the principal and interest owed to the bondholders. The Bank sold
uninsured residential mortgages to the Guarantor and granted it loans to facilitate the acquisition of these assets. During the year ended October 31, 2021,
covered bonds in amounts of US$470 million, 250 million pounds sterling, and 1.0 billion euros came to maturity, and the Bank issued 1.25 billion euros in
covered bonds (US$200 million in covered bonds issued during the year ended October 31, 2020). The covered bonds totalled $8.8 billion as at October 31,
2021 ($10.1 billion as at October 31, 2020). For additional information, see Note 27 to these consolidated financial statements.
The Bank has limited access to the assets owned by this structured entity according to the terms of the agreements that apply to this transaction. The assets
owned by this entity totalled $16.0 billion as at October 31, 2021 ($17.2 billion as at October 31, 2020), of which $15.7 billion ($16.8 billion as at
October 31, 2020) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
NNoottee 1144 –– OOtthheerr LLiiaabbiilliittiieess
As at October 31
Accounts payable and accrued expenses
Subsidiaries’ debts to third parties
Interest and dividends payable
Lease liabilities
Due to clients, dealers and brokers
Defined benefit liability (Note 23)
Allowances for credit losses – Off-balance-sheet commitments (Note 7)
Deferred tax liabilities (Note 24)
Current tax liabilities
Insurance liabilities
Other items(1)(2)(3)
22002211
22,,446699
443377
555522
557755
773355
114433
116622
1100
447788
1111
772299
66,,330011
2020
1,993
386
621
628
652
156
176
−
121
−
985
5,718
(1)
(2)
(3)
As at October 31, 2021, Other items included $12 million in litigation provision ($7 million as at October 31, 2020).
As at October 31, 2021, Other items included $33 million in provisions for onerous contracts ($33 million as at October 31, 2020).
As at October 31, 2021, Other items included the financial liability resulting from put options written to non-controlling interests of Flinks in an amount of $25 million. For additional
information, see Note 31 to these consolidated financial statements.
National Bank of Canada
189
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1155 –– SSuubboorrddiinnaatteedd DDeebbtt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the Bank’s note
and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its
subordinated notes and debentures in whole or in part.
As at October 31
22002211
2020
MMaattuurriittyy ddaattee
IInntteerreesstt rraattee CChhaarraacctteerriissttiiccss
February
February
2028
2087
3.183%(1) Redeemable(2)
Variable(3) Redeemable at the Bank’s option since February 28, 1993
Fair value hedge adjustment
Unamortized issuance costs(4)
TToottaall
775500
99
775599
1100
((11))
776688
750
9
759
17
(1)
775
(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 three-month CDOR rate 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, 2021 (2020: US$7 million) and bearing interest at a rate of 1/8% above six-month LIBOR.
The unamortized costs related to the issuance of the subordinated debt represent the initial cost, net of accumulated amortization, calculated using the effective interest rate method.
(3)
(4)
NNoottee 1166 –– DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, exchange rate, equity price, commodity price,
credit spread, or index.
The main types of derivative financial instruments used are presented below.
FFoorrwwaarrddss aanndd FFuuttuurreess
Forwards and futures are contractual obligations to buy or deliver a specified amount of currency, interest rate, commodity, or financial instrument on a
specified future date at a specified price. Forwards are tailor-made agreements transacted in the over-the-counter market. Futures are traded on organized
exchanges and are subject to cash margining calculated daily by clearing houses.
SSwwaappss
Swaps are over-the-counter contracts in which two parties agree to exchange cash flows. The Bank uses the following types of swap contracts:
Cross-currency swaps are transactions in which counterparties exchange fixed-rate interest payments and principal payments in different currencies.
Interest rate swaps are transactions in which counterparties exchange fixed and floating rate interest payments based on the notional principal value in
the same currency.
Commodity swaps are transactions in which counterparties exchange fixed and floating rate payments based on the notional principal value of a
commodity.
Equity swaps are transactions in which counterparties agree to exchange the return on one equity or group of equities for a payment based on an interest
rate benchmark.
Credit default swaps are transactions in which one of the parties agrees to pay returns to the other party so that the latter can make a payment if a credit
event occurs.
OOppttiioonnss
Options are agreements between two parties in which the writer of the option grants the buyer the right, but not the obligation, to buy or sell, either at a
specified date or dates or at any time prior to a predetermined expiry date, a specific amount of currency, commodity, or financial instrument at an agreed-
upon price upon the sale of the option. The writer receives a premium for the sale of this instrument.
190
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottiioonnaall AAmmoouunnttss(1)
As at October 31
TTeerrmm ttoo mmaattuurriittyy
22002211
2020
33 mmoonntthhss
oorr lleessss
OOvveerr 33
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
TToottaall
ccoonnttrraaccttss
CCoonnttrraaccttss hheelldd
ffoorr ttrraaddiinngg
ppuurrppoosseess
CCoonnttrraaccttss
ddeessiiggnnaatteedd
aass hheeddggeess
Total
contracts
IInntteerreesstt rraattee ccoonnttrraaccttss
OOTTCC ccoonnttrraaccttss
Forward rate agreements
Not settled by central counterparties
Settled by central counterparties
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
Options purchased
Options written
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
OOTTCC ccoonnttrraaccttss
Forwards
Swaps
Options purchased
Options written
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
EEqquuiittyy,, ccoommmmooddiittyy aanndd
ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss(2)
OOTTCC ccoonnttrraaccttss
Forwards
Swaps
Not settled by central counterparties
Settled by central counterparties
Options purchased
Options written
EExxcchhaannggee--ttrraaddeedd ccoonnttrraaccttss
Futures
Long positions
Short positions
Options purchased
Options written
55,,009911
−−
55,,005522
111188,,881199
112244
446655
112299,,555511
3300,,778822
1133,,337722
55,,330088
33,,331111
5522,,777733
5533,,113322
224422,,118800
77,,555577
88,,334488
331111,,221177
5544
8833
113377
−−
2277,,998866
440022
777755
223333
2299,,339966
55,,998855
1100,,441177
2211,,112266
2200,,885577
5588,,338855
558811,,445599
996677
449955
1122,,775511
221155,,339944
442299
119966
223300,,223322
99,,448822
3300,,337777
55,,009955
−−
4444,,995544
1188,,339988
7788,,110088
77,,772233
99,,006655
111133,,229944
−−
−−
5544,,337799
226622,,112255
33,,225555
44,,551100
332244,,226699
1166,,662299
55,,888822
55,,557711
55,,557711
3333,,665533
55,,884499
9988,,553322
22,,001155
11,,551111
110077,,990077
−−
−−
4477,,119988
9933,,885599
11,,002255
11,,330000
114433,,338822
−−
−−
−−
−−
−−
11,,002222
2288,,772277
−−
−−
2299,,774499
66,,005588
449955
111199,,338800
669900,,119977
44,,883333
66,,447711
882277,,443344
5566,,889933
4499,,663311
1155,,997744
88,,888822
113311,,338800
7788,,440011
444477,,554477
1177,,229955
1188,,992244
556622,,116677
−−
−−
−−
−−
−−
−−
−−
−−
−−
5544
8833
113377
2277
44,,009977
116644
44,,228888
66,,444499
886644
−−
223322
77,,770099
8800,,006677
33,,771133
11,,662255
11,,996666
9911,,665599
2200,,226666
228800
229988
334400
2211,,221111
556699
22,,440022
11,,550033
22,,112233
66,,559977
441166,,228888
2255,,336666
22,,116677
555522
11,,116611
3333,,334433
556600
884400
448811
11,,554400
33,,442211
550022,,559933
66,,005588
449955
111188,,338888
664411,,336699
44,,881133
55,,557788
777766,,770011
5566,,889933
4499,,663311
1155,,997744
88,,888822
113311,,338800
7788,,440011
443300,,557744
1177,,229955
1188,,992244
554455,,119944
5544
8833
113377
44,,228888
7799,,993366
33,,771133
11,,662255
11,,996666
9911,,552288
−−
−−
999922
4488,,882288
2200
889933
5500,,773333
−−
−−
−−
−−
−−
−−
1166,,997733
−−
−−
1166,,997733
−−
−−
−−
−−
113311
−−
−−
−−
113311
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
2,609
79,344
10,138
916
1,560
94,567
5599
−−
−−
22
6611
118800,,990011
77,,117733
1133,,665599
2233,,111100
2244,,552222
6688,,446644
11,,668811,,224411
77,,117733
1133,,665599
2233,,111100
2244,,552222
6688,,446644
11,,661133,,440044
−−
−−
−−
−−
−−
6677,,883377
4,873
11,950
17,069
14,894
48,786
1,316,983
(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
191
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 16 –– Derivative Financial Instruments (cont.)
CCrreeddiitt RRiisskk
Credit risk on derivative financial instruments is the risk of financial loss that the Bank will have to assume if a counterparty fails to honour its contractual
obligations. Credit risk related to derivative financial instruments is subject to the same credit approval, credit limit, and credit monitoring standards as those
applied to the Bank’s other credit transactions. Consequently, the Bank evaluates the creditworthiness of counterparties and manages the size of the
portfolios as well as the diversification and maturity profiles of these financial instruments.
The Bank limits the credit risk of over-the-counter contracts by dealing with creditworthy counterparties and entering into contracts that provide for the
exchange of collateral between parties where the fair value of the outstanding transactions exceeds an agreed threshold. The Bank also negotiates master
netting agreements that provide for the simultaneous close-out and settling of all transactions with a given counterparty in the event of default, insolvency, or
bankruptcy. However, overall exposure to credit risk, reduced through master netting agreements, may change substantially after the balance sheet date
because it is affected by all transactions subject to a contract as well as by changes in the market rates of the underlying instruments.
The Bank also uses financial intermediaries to have access to established clearing houses in order to minimize the settlement risk arising from financial
derivative transactions. In some cases, the Bank has direct access to clearing houses for settling derivative financial instruments. In addition, certain
derivative financial instruments traded over the counter are settled directly or indirectly by central counterparties.
In the case of exchange-traded contracts, exposure to credit risk is limited because these transactions are standardized contracts executed on established
exchanges, each of which is associated with a well-capitalized clearing house that assumes the obligations of both counterparties and guarantees their
performance obligations. All exchange-traded contracts are subject to initial margins and daily settlement.
TTeerrmmss UUsseedd
Replacement Cost
Replacement cost is the Bank’s maximum credit risk associated with derivative financial instruments as at the Consolidated Balance Sheet date. This amount
is the positive fair value of all derivative financial instruments, before all master netting agreements and collateral held.
Credit Risk Equivalent
The credit risk equivalent amount is the total replacement cost plus an amount representing the potential future credit risk exposure, as outlined in OSFI’s
Capital Adequacy Requirements Guideline.
Risk-Weighted Amount
The risk-weighted amount is determined by applying the OSFI guidance to the credit risk equivalent.
CCrreeddiitt RRiisskk EExxppoossuurree ooff tthhee DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeenntt PPoorrttffoolliioo
As at October 31
Interest rate contracts
Foreign exchange contracts
Equity, commodity and credit derivative contracts
Impact of master netting agreements
RReeppllaacceemmeenntt
ccoosstt
CCrreeddiitt rriisskk
eeqquuiivvaalleenntt(1)
11,,997755
66,,445533
88,,005566
1166,,448844
((99,,339988))
77,,008866
33,,223399
44,,336611
1122,,111133
1199,,771133
1199,,771133
22002211
RRiisskk--
wweeiigghhtteedd
aammoouunntt(1)
881144
11,,440055
33,,331166
55,,553355
55,,553355
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
(1)
The amounts are presented net of the Impact of master netting agreements.
CCrreeddiitt RRiisskk EExxppoossuurree ooff tthhee DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeenntt PPoorrttffoolliioo bbyy CCoouunntteerrppaarrttyy
As at October 31
OECD(1) member-country governments
Banks of OECD member countries
Other
(1) Organisation for Economic Co-operation and Development.
RReeppllaacceemmeenntt
ccoosstt
777711
771144
55,,660011
77,,008866
22002211
CCrreeddiitt rriisskk
eeqquuiivvaalleenntt
22,,660044
33,,449922
1133,,661177
1199,,771133
Replacement
cost
1,265
837
5,116
7,218
2020
Risk-
weighted
amount(1)
1,383
1,542
1,820
4,745
4,745
2020
Credit risk
equivalent
2,280
3,399
10,863
16,542
192
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFaaiirr VVaalluuee ooff DDeerriivvaattiivvee FFiinnaanncciiaall IInnssttrruummeennttss
As at October 31
CCoonnttrraaccttss hheelldd ffoorr ttrraaddiinngg ppuurrppoosseess
IInntteerreesstt rraattee ccoonnttrraaccttss
Forwards
Swaps
Options
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
Forwards
Swaps
Options
EEqquuiittyy,, ccoommmmooddiittyy aanndd ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss
Forwards
Swaps
Options
Total – Contracts held for trading purposes
CCoonnttrraaccttss ddeessiiggnnaatteedd aass hheeddggeess
IInntteerreesstt rraattee ccoonnttrraaccttss
Swaps
Options
FFoorreeiiggnn eexxcchhaannggee ccoonnttrraaccttss
Swaps
Options
EEqquuiittyy,, ccoommmmooddiittyy aanndd ccrreeddiitt ddeerriivvaattiivvee ccoonnttrraaccttss
Swaps
Options
Total – Contracts designated as hedges
Designated as fair value hedges
Designated as cash flow hedges
Designated as a hedge of a net investment in a
foreign operation
TToottaall ffaaiirr vvaalluuee
Impact of master netting agreements
PPoossiittiivvee
NNeeggaattiivvee
3300
990099
7744
11,,001133
22,,119900
44,,002266
223344
66,,445500
11,,336699
22,,337755
44,,330055
88,,004499
1155,,551122
996622
−−
996622
33
−−
33
77
−−
77
997722
664444
332288
5544
11,,331166
6688
11,,443388
22,,336655
33,,660011
225500
66,,221166
888866
55,,119988
44,,992222
1111,,000066
1188,,666600
226688
220077
447755
223322
−−
223322
−−
−−
−−
770077
227722
443355
−−
1166,,448844
((99,,339988))
77,,008866
−−
1199,,336677
((99,,339988))
99,,996699
22002211
NNeett
((2244))
((440077))
66
((442255))
((117755))
442255
((1166))
223344
448833
((22,,882233))
((661177))
((22,,995577))
((33,,114488))
669944
((220077))
448877
((222299))
−−
((222299))
77
−−
77
226655
337722
((110077))
−−
((22,,888833))
−−
((22,,888833))
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
National Bank of Canada
193
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1177 –– HHeeddggiinngg AAccttiivviittiieess
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, 2021.
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 U.S. dollar (USD), the Australian dollar (AUD), the Canadian dollar (CAD), the Hong Kong dollar (HKD), 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.
As at October 31
FFaaiirr vvaalluuee hheeddggeess
IInntteerreesstt rraattee rriisskk
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 USD-AUD 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
CCaasshh ffllooww hheeddggeess
IInntteerreesstt rraattee rriisskk
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
EEqquuiittyy pprriiccee rriisskk
Equity swaps
Notional amount
Average price
HHeeddggeess ooff nneett iinnvveessttmmeennttss
iinn ffoorreeiiggnn ooppeerraattiioonnss(3)
FFoorreeiiggnn eexxcchhaannggee rriisskk
Cross-currency swaps
Notional amount
Average CAD-USD exchange rate
Average USD-HKD exchange rate
11 yyeeaarr
oorr lleessss
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr
55 yyeeaarrss
TTeerrmm ttoo mmaattuurriittyy
22002211
FFaaiirr vvaalluuee
2020
Fair value
TToottaall
AAsssseettss LLiiaabbiilliittiieess
Total
Assets Liabilities
−−
11,,220077
00..55 %%
00..99 %%
−−
551177
22,,221122
1100,,443377
11,,550088
22,,771166
22,,002255
1166,,557722
11..33 %%
22..00 %%
11..22 %%
11..88 %%
11..22 %%
22..22 %%
11..22 %%
22..00 %%
2,335
15,632
1.1 %
1.9 %
664422
6633
536
288
−−
−−
−−
−−
−−
111100
−−
$$ 00..11662211
−−
1122
−−
22..00 %%
−−
4488
((00..88)) %%
22..99 %%
−−
−−
−−
−−
−−
−−
−−
−−
2222
−−
$$ 00..77335511
−−
2222
111100
$$ 00..77335511
$$ 00..11662211
337722
448811
−−
22..88 %%
337722
554411
((00..88)) %%
22..88 %%
22
22
13
−
−
118
−
$
$ 0.1621
−−
220077
−
290
440
577
(0.6) %
2.7 %
11,,221199
22,,337700
1100,,995544
55,,009999
1199,,664422
664444
227722
19,102
549
578
−−
55,,770099
−−
1100,,226622
−−
1133,,113344
−−
22,,111188
−−
3311,,222233
11..99 %%
00..99 %%
11..77 %%
00..66 %%
11..44 %%
00..33 %%
11..77 %%
00..66 %%
11..66 %%
00..66 %%
1,199
21,581
1.7 %
0.5 %
332200
220055
204
477
44,,662277
−−
−−
33,,551122
11,,444400
−−
$$ 11..22990066 $$ 11..33118822 $$ 11..22889999 $$ 11..22550033
$$ 11..11114455 $$ 11..11339977 $$ 11..11884411 $$ 11..11888899
−−
77,,225577
−−
−−
−−
−−
11
223300
49
135
1133,,332244
33,,551122
$$ 11..22994455
$$ 11..11558877
−−
13,467
1,461
$ 1.3074
$ 1.1510
$ 1.2921
113311
$$ 9977..5544
99,,335522
−−
−−
1144,,888899
−−
−−
2200,,339911
−−
−−
33,,555588
113311
77
−−
89
−
3
$$ 9977..5544
4488,,119900
332288
$ 65.71
443355 37,797
253
615
55
$$ 11..22337788
−−
55
1100,,557766
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
1177,,225599
3311,,334455
88,,665577
55
$$ 11..22337788
−−
55
6677,,883377
−−
−−
997722
−−
10
$ 1.3177
$ 0.1290
10
−−
770077 56,909
−
−
−
802
−
1,193
(1)
(2)
(3)
Includes only contracts that reference USD LIBOR and that will mature after June 30, 2023.
Includes contracts that reference the Canadian Dollar Offered Rate (CDOR), a benchmark rate in Canada, a multi-rate jurisdiction.
As at October 31, 2021, the Bank also designated $1,313 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,279 million as at
October 31, 2020).
National Bank of Canada
194
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFaaiirr VVaalluuee HHeeddggeess
Fair value hedge transactions consist of using derivative financial instruments (interest rate swaps and options) to hedge changes in the fair value of a
financial asset or financial liability caused by interest rate fluctuations. Changes in the fair values of the derivative financial instruments used as hedging
instruments offset changes in the fair value of the hedged items. The Bank applies this strategy mainly to portfolios of securities measured at fair value
through other comprehensive income, fixed-rate 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.
CCaarrrryyiinngg vvaalluuee
ooff hheeddggeedd
iitteemmss
77,,447711
77,,660099
33,,119900
110055
1100
Carrying value
of hedged
items
9,883
5,124
3,371
1,041
17
AAss aatt OOccttoobbeerr 3311,, 22002211
CCuummuullaattiivvee
aaddjjuussttmmeennttss
ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
CCuummuullaattiivvee
hheeddggee
aaddjjuussttmmeennttss
ffrroomm aaccttiivvee
hheeddggeess
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggeedd
iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
((118833))
((119922))
4422
−−
−−
2277
((1177))
7700
110055
1100
((330099))
((222222))
112211
2233
−−
((338877))
331100
223344
((112233))
((2233))
−−
339988
11
1122
((22))
−−
−−
1111
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
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
Mortgages
Deposits
Liabilities related to transferred receivables
Subordinated debt
(1)
Amounts are presented on a pre-tax basis.
National Bank of Canada
195
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
Cash Flow Hedges
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities.
In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not
distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this
strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios 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.
IInntteerreesstt rraattee rriisskk
Loans
Deposits
Acceptances
Liabilities related to transferred
receivables
EEqquuiittyy pprriiccee rriisskk
Other liabilities
AAss aatt OOccttoobbeerr 3311,, 22002211
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
aaccttiivvee hheeddggeess
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
GGaaiinnss ((lloosssseess)) oonn
hheeddggeedd iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess)) oonn
hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
UUnnrreeaalliizzeedd ggaaiinnss
((lloosssseess)) iinncclluuddeedd
iinn OOtthheerr
ccoommpprreehheennssiivvee
iinnccoommee aass tthhee
eeffffeeccttiivvee ppoorrttiioonn
ooff tthhee hheeddggiinngg
iinnssttrruummeenntt(1)
LLoosssseess ((ggaaiinnss))
rreeccllaassssiiffiieedd ttoo
NNeett iinntteerreesstt
iinnccoommee(1)
((7766))
((1155))
116611
4488
111188
4477
116655
((1100))
((88))
((111133))
−−
((113311))
−−
((113311))
8877
448888
((220088))
((5544))
331133
((3355))
227788
((8855))
((448877))
221144
5566
((330022))
3355
((226677))
−−
−−
66
22
88
−−
88
((8844))
116633
220088
5544
334411
3399
338800
((22))
((55))
4466
−−
3399
((44))
3355
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)
IInntteerreesstt rraattee rriisskk
Loans
Deposits
Acceptances
Liabilities related to transferred
receivables
EEqquuiittyy pprriiccee rriisskk
Other liabilities
(1)
Amounts are presented on a pre-tax basis.
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)
196
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
HHeeddggeess ooff NNeett IInnvveessttmmeennttss iinn FFoorreeiiggnn OOppeerraattiioonnss
The Bank’s structural foreign exchange risk arises from investments in foreign operations denominated in currencies other than the Canadian dollar. The Bank
measures this risk by assessing the impact of foreign currency fluctuations and hedges it using derivative and non-derivative financial instruments (cross-
currency swaps and deposits). In a hedge of a net investment in a foreign operation (net investment hedge), the financial instruments used offset the foreign
exchange gains and losses on the investments. When non-derivative financial instruments are designated as foreign exchange risk hedges, only the changes
in fair value that are attributable to foreign exchange risk are taken into account when assessing and calculating the effectiveness of the hedge.
Assessing the effectiveness of net investment hedges consists of comparing changes in the carrying value of the deposits or the fair value of the derivative
attributable to exchange rate fluctuations with changes in the net investment in a foreign operation attributable to exchange rate fluctuations. Inasmuch as the
notional amount of the hedging instruments and the hedged net investments are aligned, no ineffectiveness is expected.
The following tables present the amounts related to hedged items as well as the results of the net investment hedges.
NNeett iinnvveessttmmeennttss iinn ffoorreeiiggnn
ooppeerraattiioonnss ddeennoommiinnaatteedd iinn::
USD
BRL
AAss aatt OOccttoobbeerr 3311,, 22002211
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002211
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
aaccttiivvee hheeddggeess
AAccccuummuullaatteedd
ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
GGaaiinnss ((lloosssseess)) oonn
hheeddggeedd iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess)) oonn
hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
UUnnrreeaalliizzeedd ggaaiinnss
((lloosssseess)) iinncclluuddeedd
iinn OOtthheerr
ccoommpprreehheennssiivvee
iinnccoommee aass tthhee
eeffffeeccttiivvee ppoorrttiioonn
ooff tthhee hheeddggiinngg
iinnssttrruummeenntt(1)
LLoosssseess ((ggaaiinnss))
rreeccllaassssiiffiieedd ttoo
tthhee NNoonn--iinntteerreesstt
iinnccoommee iitteemm(1)
3355
−−
3355
((112200))
−−
((112200))
((111199))
−−
((111199))
111199
−−
111199
−−
−−
−−
111199
−−
111199
−−
−−
−−
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)
NNeett iinnvveessttmmeennttss iinn ffoorreeiiggnn
ooppeerraattiioonnss ddeennoommiinnaatteedd iinn::
USD
BRL
(1)
Amounts are presented on a pre-tax basis.
(1)
−
(1)
(202)
−
(202)
18
−
18
(18)
−
(18)
−
−
−
(18)
−
(18)
−
(38)
(38)
National Bank of Canada
197
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
RReeccoonncciilliiaattiioonn ooff EEqquuiittyy CCoommppoonneennttss
The following table presents a reconciliation by risk category of Accumulated other comprehensive income attributable to hedge accounting.
As at October 31
Balance at beginning
HHeeddggeess ooff nneett iinnvveessttmmeennttss iinn ffoorreeiiggnn ooppeerraattiioonnss(1)
Gains (losses) included as the effective portion
Losses (gains) reclassified to Non-interest income
Foreign currency translation gains (losses) on investments in foreign operations
CCaasshh ffllooww hheeddggeess(1)
Gains (losses) included as the effective portion
Interest rate risk
Equity price risk
Losses (gains) reclassified to Net interest income
Interest rate risk
Equity price risk
Other comprehensive income attributable to non-controlling interests
Income taxes
BBaallaannccee aatt eenndd
(1)
Amounts are presented on a pre-tax basis.
NNeett ggaaiinnss ((lloosssseess)) oonn
ccaasshh ffllooww hheeddggeess
((228833))
334411
3399
3399
((44))
−−
((110099))
2233
22002211
NNeett ffoorreeiiggnn ccuurrrreennccyy
ttrraannssllaattiioonn
aaddjjuussttmmeennttss
6611
111199
−−
((228866))
1133
((3366))
((112299))
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
198
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 1188 –– SShhaarree CCaappiittaall aanndd OOtthheerr EEqquuiittyy IInnssttrruummeennttss
AAuutthhoorriizzeedd
Common Shares
An unlimited number of shares without par value.
First Preferred Shares
An unlimited number of shares, without par value, issuable for a maximum aggregate consideration of $5 billion.
FFiirrsstt PPrreeffeerrrreedd SShhaarreess aanndd OOtthheerr EEqquuiittyy IInnssttrruummeennttss
Redemption and
conversion date(1)(2)
Redemption
price per
share or LRCN ($)(1)
Convertible into
preferred shares(2)
Dividend per
share ($) or
interest rate per
LRCN(3)
As at October 31, 2021
Reset premium of
the dividend rate or
interest rate
May 15, 2024 (5)(6)
February 15, 2025 (5)(6)
November 15, 2022 (5)(6)
May 15, 2023 (5)(6)
November 15, 2023 (5)(6)
25.00
25.00
25.00
25.00
25.00
Series 31
Series 33
Series 39
Series 41
Series 43
0.25156 (7)
0.23994 (7)
0.27813 (8)
0.28750 (8)
0.30938 (8)
2.40 %
2.25 %
3.43 %
2.58 %
2.77 %
October 15, 2025 (5)
July 15, 2026 (5)
1,000.00
1,000.00
n.a.
n.a.
Floating rate (9)
Floating rate (9)
3.943 %
3.045 %
FFiirrsstt pprreeffeerrrreedd sshhaarreess
iissssuueedd aanndd oouuttssttaannddiinngg
Series 30(4)
Series 32(4)
Series 38(4)
Series 40(4)
Series 42(4)
FFiirrsstt pprreeffeerrrreedd sshhaarreess
iissssuueedd aanndd hheelldd iinn aa lliimmiitteedd
rreeccoouurrssee ttrruusstt
Series 44(9)
Series 45(9)
OOtthheerr eeqquuiittyy iinnssttrruummeennttss
iissssuueedd aanndd oouuttssttaannddiinngg
Limited Recourse Capital Notes (LRCN)
Series 1 (LRCN – Series 1)(9)(10)
Series 2 (LRCN – Series 2)(9)(10)
October 15, 2025 (5)
July 15, 2026 (5)
1,000.00
1,000.00
Series 44 (10)
Series 45 (10)
4.30 %(11)
4.05 %(11)
3.943 %
3.045 %
FFiirrsstt pprreeffeerrrreedd sshhaarreess
aauutthhoorriizzeedd bbuutt nnoott iissssuueedd
Series 31(4)
Series 33(4)
Series 39(4)
Series 41(4)
Series 43(4)
May 15, 2024 (5)
February 15, 2025 (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)
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)
2.40 %
2.25 %
3.43 %
2.58 %
2.77 %
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, 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 issued and outstanding, subject to certain conditions.
The dividends are non-cumulative and payable quarterly, except for Series 44 and 45, for which the dividends, when payable, are paid semi-annually. Interest on the LRCN 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, the redemption occurs automatically upon the
redemption of the Series 44 and the Series 45 preferred shares held in the limited recourse trust. The Series 44 and the Series 45 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
199
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 –– Share Capital and Other Equity Instruments (cont.)
(9)
(10)
(11)
(12)
(13)
(14)
Series 44 and Series 45 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 and Series 45 preferred shares are issued to the holders of LRCN – Series 1 and LRCN – Series 2. Upon the occurrence of a trigger event, as defined
by OSFI; (i) each LRCN will be automatically redeemed and the redemption price will be covered by delivery of the trust’s assets that consist of Series 44 and Series 45 preferred shares; (ii)
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., $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 and LRCN – Series 2 are notes 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 and Series 45 preferred shares issued by the Bank in conjunction with the LRCN – Series 1 and LRCN – Series 2. 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, (iii) non-payment of the principal amount upon maturity of the LRCN, or (iv) an event of
default in respect of the LRCN, 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. The LRCN – Series 1 and LRCN – Series 2 are redeemable at maturity or
earlier to the extent that the Bank redeems the Series 44 and Series 45 preferred shares on certain redemption dates specified in the terms and conditions of the 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 for the LRCN – Series 1 and until August 15, 2076
for the LRCN – Series 2, 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, 2021, no shares had been issued or traded.
SShhaarreess aanndd OOtthheerr EEqquuiittyy IInnssttrruummeennttss OOuuttssttaannddiinngg
As at 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
LRCN – Series 2
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
NNuummbbeerr
ooff sshhaarreess oorr LLRRCCNN
SShhaarreess oorr LLRRCCNN
$$
Number
of shares or LRCN
Shares or LRCN
$
22002211
2020
1144,,000000,,000000
1122,,000000,,000000
−−
−−
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
6666,,000000,,000000
550000,,000000
550000,,000000
11,,000000,,000000
6677,,000000,,000000
333355,,999977,,666600
11,,993300,,003333
−−
((1144,,443322))
((997788))
333377,,991122,,228833
335500
330000
−−
−−
440000
330000
330000
11,,665500
550000
550000
11,,000000
22,,665500
33,,005577
110044
−−
((11))
−−
33,,116600
14,000,000
12,000,000
16,000,000
16,000,000
16,000,000
12,000,000
12,000,000
98,000,000
500,000
−
500,000
98,500,000
334,172,411
2,318,926
(525,000)
31,323
−
335,997,660
350
300
400
400
400
300
300
2,450
500
−
500
2,950
2,949
111
(5)
2
−
3,057
(1)
As at October 31, 2021, a total of 13,045 shares were sold short for trading, representing $1 million (27,477 shares were sold short for trading representing $2 million as at
October 31, 2020).
200
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
DDiivviiddeennddss DDeeccllaarreedd aanndd DDiissttrriibbuuttiioonnss oonn OOtthheerr EEqquuiittyy IInnssttrruummeennttss
Year ended October 31
22002211
DDiivviiddeennddss oorr iinntteerreesstt
$$
DDiivviiddeennddss
ppeerr sshhaarree
Dividends or interest
$
First Preferred Shares
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
Other equity instruments
LRCN – Series 1(1)
LRCN – Series 2(2)
Preferred shares and other equity instruments
Common shares
(1) The LRCN – Series 1 bear interest at a fixed rate of 4.30% per annum.
(2) The LRCN – Series 2 bear interest at a fixed rate of 4.05% per annum.
11..00006633
00..99559988
00..77000000
11..00112255
11..11112255
11..11550000
11..22337755
1144
1122
1111
1166
1188
1144
1144
9999
2211
1111
3322
113311
995588
11,,008899
22..88440000
14
12
22
22
18
14
14
116
3
−
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
IIssssuuaanncceess ooff OOtthheerr EEqquuiittyy IInnssttrruummeennttss
On April 21, 2021, the Bank issued $500 million of LRCN – Series 2 for which recourse of the noteholders is limited to the assets held by an independent
trustee in a consolidated limited recourse trust. The trust's assets consist of $500 million of Series 45 first preferred shares issued by the Bank in conjunction
with the LRCN – Series 2. The LRCN – Series 2 sell for $1,000 each and bear interest at a fixed rate of 4.05% per annum until August 15, 2026 exclusively and,
thereafter, at an annual rate equal to the five-year Government of Canada bond yield plus 3.045% until August 15, 2076. The LRCN – Series 2 will mature on
August 15, 2081.
On September 9, 2020, the Bank had issued $500 million of LRCN – Series 1 for which recourse of the noteholders is limited to the assets held by an
independent trustee in a consolidated limited recourse 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 sell for $1,000 each and bear interest at a fixed rate of 4.30% 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. The LRCN –
Series 1 will mature on November 15, 2080.
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,
(iii) non-payment of the principal amount upon maturity of the LRCN, 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. The LRCN – Series 1 and LRCN – Series 2 are redeemable at maturity or earlier to the
extent that the Bank redeems the Series 44 and Series 45 preferred shares on certain redemption dates specified in the terms and conditions of said preferred
shares, and subject to OSFI’s consent and approval.
Given that the LRCN – Series 1 and LRCN – Series 2 satisfy the non-viability contingent capital requirements, they qualify for the purposes of calculating
regulatory capital under Basel III.
RReeddeemmppttiioonnss ooff PPrreeffeerrrreedd SShhaarreess
On August 16, 2021, i.e., the first business day after the August 15, 2021 redemption date, the Bank redeemed all the issued and outstanding Non-Cumulative
5-Year Rate-Reset Series 36 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 16,000,000 Series 36 preferred shares for a total amount of $400 million, which reduced Preferred share capital.
On May 17, 2021, i.e., the first business day after the May 15, 2021 redemption date, the Bank redeemed all the issued and outstanding Non-Cumulative
5-Year Rate-Reset Series 34 First Preferred Shares. Pursuant to the share conditions, the redemption price was $25.00 per share plus the periodic dividend
declared and unpaid. The Bank redeemed 16,000,000 Series 34 preferred shares for a total amount of $400 million, which reduced Preferred share capital.
National Bank of Canada
201
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 18 –– Share Capital and Other Equity Instruments (cont.)
RReeppuurrcchhaasseess ooff CCoommmmoonn SShhaarreess
During the year ended October 31, 2020, the Bank had repurchased 525,000 common shares for $30 million, which had reduced Common share capital by
$5 million and Retained earnings by $25 million. These repurchases had been carried out before March 13, 2020, which was the date on which OSFI had
lowered the domestic stability buffer and had indicated that it was expecting all banks to cease any dividend increases or share buybacks.
RReesseerrvveedd CCoommmmoonn SShhaarreess
As at October 31, 2021 and 2020, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2021, there were 22,935,672 common shares (17,365,705 as at October 31, 2020) reserved under the Stock Option Plan.
CCoommmmoonn SShhaarreess HHeelldd iinn EEssccrrooww
As part of the acquisition of Wellington West Holdings Inc. in 2011, the Bank had issued common shares held in escrow. During the year ended October 31,
2021, a total of 20,532 shares were released, and 978 shares were cancelled. As at October 31, 2021, the number of common shares held in escrow was nil
(21,510 as at October 31, 2020), ending the Bank’s settlement of the remaining shares in escrow.
RReessttrriiccttiioonn oonn tthhee PPaayymmeenntt ooff DDiivviiddeennddss
The Bank is prohibited from declaring dividends on its common or preferred shares if there are reasonable grounds for believing that the Bank would, by so
doing, be in contravention of the regulations of the Bank Act (Canada) or OSFI’s capital adequacy and liquidity guidelines. In addition, the ability to pay
common share dividends is restricted by the terms of the outstanding preferred shares pursuant to which the Bank may not pay dividends on its common
shares without the approval of the holders of the outstanding preferred shares, unless all preferred share dividends have been declared and paid or set aside
for payment.
DDiivviiddeenndd RReeiinnvveessttmmeenntt aanndd SShhaarree PPuurrcchhaassee PPllaann
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.
NNoottee 1199 –– NNoonn--CCoonnttrroolllliinngg IInntteerreessttss
As at October 31
Flinks Technology Inc.(1)
Credigy Ltd.(2)
22002211
2020
33
−−
33
−
3
3
(1)
(2)
As at October 31, 2021, the non-controlling interest in Flinks stood at 14.1%. For additional information, see Note 31 to these consolidated financial statements.
During the year ended October 31, 2021, the Bank acquired the entire remaining non-controlling interest in the Credigy Ltd. subsidiary. For additional information, see Note 31 to these
consolidated financial statements.
202
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2200 –– CCaappiittaall DDiisscclloossuurree
CCaappiittaall MMaannaaggeemmeenntt OObbjjeeccttiivveess,, PPoolliicciieess aanndd PPrroocceedduurreess
Capital management has a dual role of ensuring a competitive return to the Bank’s shareholders while maintaining a solid capital foundation that covers the
risks inherent to the Bank’s business, supports its business segments, and protects its clients.
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities regarding its internal capital adequacy
assessment process. This process is a key tool in establishing the Bank’s capital strategy and is subject to quarterly reviews and periodic amendments.
CCaappiittaall MMaannaaggeemmeenntt
Capital ratios are obtained by dividing capital (as defined by OSFI’s Capital Adequacy Requirements guideline) by risk-weighted assets and are expressed as
percentages. 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 CET1 capital deductions. Additional Tier 1 (AT1) capital consists of eligible non-cumulative preferred shares, limited recourse
capital notes, and other AT1 capital adjustments. The sum of CET1 and AT1 capital forms what is known as Tier 1 capital. Tier 2 capital consists of the eligible
portion of subordinated debt and certain allowances for credit losses. Total regulatory capital is the sum of Tier 1 and Tier 2 capital.
The Bank and all other major Canadian banks have to maintain minimum capital ratios established by OSFI: a CET1 capital ratio of at least 10.5%, a Tier 1
capital ratio of at least 12.0%, and a Total capital ratio of at least 14.0%. All of these ratios are to include a capital conservation buffer of 2.5% established by
the BCBS and OSFI, a 1.0% surcharge applicable solely to D-SIBs, and a 2.5% domestic stability buffer. On June 17, 2021, OSFI raised the domestic stability
buffer from 1.0% to 2.5% effective on October 31, 2021. The domestic stability buffer, which varies from 0% to 2.5% of risk-weighted assets, consists
exclusively of CET1 capital. A D-SIB that fails to meet this buffer requirement is not subject to automatic constraints to reduce capital distributions but must
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. Lastly, OSFI is requiring Canadian banks to meet a Basel III leverage ratio of at least 3.0%. The leverage ratio is a measure independent of risk
that is calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-balance-sheet assets (including
derivative exposures and securities financing transaction exposures) and off-balance-sheet items. The assets deducted from Tier 1 capital are also deducted
from total exposure.
During the years ended October 31, 2021 and 2020, the Bank was in compliance with all of OSFI’s regulatory capital requirements.
National Bank of Canada
203
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 20 – Capital Disclosure (cont.)
RReegguullaattoorryy CCaappiittaall aanndd RRaattiiooss UUnnddeerr BBaasseell IIIIII(1)
As at October 31
CCaappiittaall
CET1
Tier 1
Total
AAddjjuusstteedd(2)
Adjusted(2)
22002211
2020
1122,,886666
1155,,551155
1166,,664433
1122,,997733
1155,,662222
1166,,664433
10,924
13,869
15,167
11,167
14,112
15,167
94,808
RRiisskk--wweeiigghhtteedd aasssseettss
110044,,335588
110044,,335588
94,808
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
335511,,116600
335511,,116600
321,038
321,038
1122..33 %%
1144..99 %%
1155..99 %%
44..44 %%
1122..44 %%
1155..00 %%
1155..99 %%
44..44 %%
11.5 %
14.6 %
16.0 %
4.3 %
11.8 %
14.9 %
16.0 %
4.4 %
(1)
(2)
Regulatory capital and ratios are calculated in accordance with the Basel III rules, as set out in OSFI’s Capital Adequacy Requirements guideline.
Adjusted regulatory capital and ratios are calculated in accordance with the Basel III rules, as set out in OSFI’s Capital Adequacy Requirements guideline, and exclude the transitional
measure for provisioning expected credit losses. For additional information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on page
17 of the MD&A.
NNoottee 2211 –– TTrraaddiinngg AAccttiivviittyy RReevveennuueess
Trading activity revenues consist of the net interest income and the non-interest income related to trading activities.
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, certain commission income as well as other income related to trading activities, and any
applicable transaction costs.
Year ended October 31
Net interest income
Non-interest income
22002211
777777
228822
11,,005599
2020(1)
522
625
1,147
(1)
For the year ended October 31, 2020, certain amounts have been reclassified, notably to better reflect the nature of the revenues reported in the Wealth Management segment.
204
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2222 –– SShhaarree--BBaasseedd PPaayymmeennttss
The compensation expense information provided below excludes the impact of hedging.
SSttoocckk OOppttiioonn PPllaann
The Bank’s Stock Option Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, options are awarded annually and
provide participants with the right to purchase common shares at an exercise price equal to the closing price of the Bank’s common share on the Toronto Stock
Exchange on the day preceding the award. The options vest evenly over a four-year period and expire ten years from the award date or, in certain
circumstances set out in the plan, within specified time limits. The Stock Option Plan contains provisions for retiring employees that allow the participant’s
rights to continue vesting in accordance with the stated terms of the grant agreement. The maximum number of common shares that may be issued under the
Stock Option Plan was 22,935,672 as at October 31, 2021 (17,365,705 as at October 31, 2020). The number of common shares reserved for a participant may
not exceed 5% of the total number of Bank shares issued and outstanding.
As at October 31
SSttoocckk OOppttiioonn PPllaann
Outstanding at beginning
Awarded
Exercised
Cancelled(1)
Outstanding at end
Exercisable at end
NNuummbbeerr ooff
ooppttiioonnss
1111,,442255,,440033
22,,004433,,119966
((11,,993300,,003333))
((118899,,888866))
1111,,334488,,668800
66,,773377,,885500
22002211
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
$$
5533..9966
7711..5555
4477..9966
6677..0022
5577..9933
5500..8811
Number of
options
12,103,626
1,789,280
(2,318,926)
(148,577)
11,425,403
6,908,779
(1)
Includes 35,342 expired options during the year ended October 31, 2021 (1,800 expired options during the year ended October 31, 2020).
Exercise price
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
Options
outstanding
469,944
579,123
805,068
1,036,567
832,244
969,582
1,313,992
1,709,075
1,646,805
1,986,280
11,348,680
Options
exercisable
469,944
579,123
805,068
1,036,567
832,244
969,582
910,503
749,457
385,362
−
6,737,850
2020
Weighted
average
exercise price
$
$
$
$
$
$
49.15
71.86
42.18
60.99
53.96
47.05
Expiry date
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
During the year ended October 31, 2021, the Bank awarded 2,043,196 stock options (1,789,280 stock options during the year ended October 31, 2020) with
an average fair value of $8.24 per option ($5.11 for the year ended October 31, 2020).
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
22002211
2020
11..0022%%
77 yyeeaarrss
2222..5599%%
44..2244%%
1.94%
7 years
14.97%
4.29%
National Bank of Canada
205
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 22 – Share-Based Payments (cont.)
The expected life of the options is based on historical data and is not necessarily representative of how options will be exercised in the future. Expected
volatility is extrapolated from the implied volatility of the Bank’s share price and observable market inputs, which are not necessarily representative of actual
results. The expected dividend yield represents the annualized dividend divided by the Bank’s share price at the award date. The risk-free interest rate is based
on the Canadian dollar swap curve at the award date. The exercise price is equal to the Bank’s share price at the award date. No other market parameter has
been included in the fair value measurement of the options.
An $11 million compensation expense was recognized in the Consolidated Statement of Income for the year ended October 31, 2021 with respect to this plan
($9 million for the year ended October 31, 2020).
SSttoocckk AApppprreecciiaattiioonn RRiigghhttss ((SSAARR)) PPllaann
The SAR Plan is for officers and other designated persons of the Bank and its subsidiaries. Under this plan, participants receive, upon exercising the right, a
cash amount equal to the difference between the closing price of the Bank’s common share on the Toronto Stock Exchange on the day preceding the exercise
date and the closing price on the day preceding the award date. SARs vest evenly over a four-year period and expire 10 years after the award date or, in certain
circumstances set out in the plan, within specified time limits. The SAR Plan contains provisions for retiring employees that allow the participant’s rights to
continue vesting in accordance with the stated terms of the grant agreement. A $7 million compensation expense was recognized in the Consolidated
Statement of Income for the year ended October 31, 2021 with respect to this plan (a negligible amount for the year ended October 31, 2020).
As at October 31
SSAARR PPllaann(1)
Outstanding at beginning
Awarded
Exercised
Outstanding at end
Exercisable at end
(1)
No SARs cancelled or expired during the years ended October 31, 2021 and 2020.
Exercise price
$34.09
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
NNuummbbeerr
ooff SSAARRss
229922,,889966
3300,,550044
((5577,,332255))
226666,,007755
116644,,222255
22002211
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
5533..6666
7711..5555
4444..8888
5577..6611
5511..4433
Number
of SARs
334,997
42,876
(84,977)
292,896
167,545
SARs
outstanding
SARs
exercisable
4,150
14,904
21,136
31,572
19,748
28,079
41,320
31,786
42,876
30,504
266,075
4,150
14,904
21,136
31,572
19,748
28,079
25,615
8,302
10,719
−
164,225
2020
Weighted
average
exercise price
$
$
$
$
$
49.61
71.86
46.88
53.66
45.87
Expiry date
December 2021
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
DDeeffeerrrreedd SSttoocckk UUnniitt ((DDSSUU)) PPllaannss
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as directors. These plans allow the Bank to tie a portion of
the value of the compensation of participants to the future value of the Bank’s common shares. A DSU is a right that has a value equal to the closing price of a
common share of the Bank on the Toronto Stock Exchange on the day preceding the award. DSUs generally vest evenly over four years. Additional DSUs are
credited to the accounts of participants in an amount equal to the dividends declared on Bank common shares and vest evenly over the same period as the
reference DSUs. DSUs may be cashed only 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 award agreement.
During the year ended October 31, 2021, the Bank awarded 55,545 DSUs at a weighted average price of $75.55 (44,292 DSUs at a weighted average price of
$67.35 for the year ended October 31, 2020). A total of 514,841 DSUs were outstanding as at October 31, 2021 (483,009 DSUs as at October 31, 2020). A
$23 million compensation expense was recognized in the Consolidated Statement of Income for the year ended October 31, 2021 with respect to these plans
($3 million for the year ended October 31, 2020).
206
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReessttrriicctteedd SSttoocckk UUnniitt ((RRSSUU)) PPllaann
The RSU Plan is for certain officers and other designated persons of the Bank and its subsidiaries. The objective of this plan is to ensure that the compensation
of certain officers and other designated persons is competitive and to foster retention. An RSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December. RSUs
generally vest evenly over three years, although some RSUs vest on the sixth business day of December of the third year following the date of the award, the
date on which all RSUs expire. Additional RSUs are credited to the accounts of participants in an amount equal to the dividends declared on the Bank common
shares and vest 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, 2021, the Bank awarded 1,960,326 RSUs at a weighted average price of $72.76 (1,868,580 RSUs at a weighted average
price of $71.36 for the year ended October 31, 2020). As at October 31, 2021, a total of 4,398,019 RSUs were outstanding (4,606,456 RSUs as at
October 31, 2020). A $256 million compensation expense was recognized in the Consolidated Statement of Income for the year ended October 31, 2021 with
respect to this plan ($135 million for the year ended October 31, 2020).
PPeerrffoorrmmaannccee SSttoocckk UUnniitt ((PPSSUU)) PPllaann
The PSU Plan is for officers and other designated persons of the Bank. The objective of this plan is to tie a portion of the value of the compensation of these
officers and other designated persons to the future value of the Bank’s common shares. A PSU represents a right that has a value equal to the average closing
price of the Bank’s common share, as published by the Toronto Stock Exchange, over the ten trading days preceding the sixth business day in December,
adjusted upward or downward according to performance criteria, which is based on the Bank’s total shareholder return (TSR) growth index over three years
compared to the average TSR growth index of the comparator group composed of Canadian banks over three years. PSUs vest on the sixth business day of
December of the third year following the date of the award, the date on which all PSUs expire. Additional PSUs are credited to the accounts of participants in an
amount equal to the dividends declared on the Bank’s common shares and vest 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, 2021, the Bank awarded 235,949 PSUs at a weighted average price of $72.76 (235,987 PSUs at a weighted average price of
$71.36 for the year ended October 31, 2020). As at October 31, 2021, a total of 794,440 PSUs were outstanding (796,340 PSUs as at October 31, 2020). A
$42 million compensation expense was recognized in the Consolidated Statement of Income for the year ended October 31, 2021 with respect to this plan
($25 million for the year ended October 31, 2020).
DDeeffeerrrreedd CCoommppeennssaattiioonn PPllaann
This plan is exclusively for key employees of the Wealth Management segment. 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 the Wealth Management segment. Under this plan, participants can defer a
portion of their annual compensation, and the Bank may pay a contribution to key employees when certain financial objectives are met. Amounts awarded by
the Bank and the compensation deferred by participants are invested in, among other items, 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 the Bank’s common shares. Share units representing the amounts awarded by
the Bank vest evenly over four years. When a participant retires, or in certain cases when the participant’s employment ceases, the participant receives a cash
amount representing the value of the vested share units.
During the year ended October 31, 2021, the Bank awarded 124,981 share units at a weighted average price of $80.23 (137,465 share units at a weighted
average price of $69.80 for the year ended October 31, 2020). As at October 31, 2021, a total of 2,038,003 share units were outstanding (1,904,866 share
units as at October 31, 2020). During the year ended October 31, 2021, an $83 million compensation expense was recognized in the Consolidated Statement
of Income for this plan ($2 million for the year ended October 31, 2020).
EEmmppllooyyeeee SShhaarree OOwwnneerrsshhiipp PPllaann
Under the Bank’s Employee Share Ownership Plan, employees who meet the eligibility criteria can contribute up to 8% of their annual gross salary by way of
payroll deductions. The Bank matches 25% of the employee contribution up to a maximum of $1,500 per annum. Bank contributions vest to the employee after
one year of uninterrupted participation in the plan. Subsequent contributions vest immediately. The Bank’s contributions, amounting to $14 million for the
year ended October 31, 2021 ($13 million for the year ended October 31, 2020), were recognized when paid in the Compensation and employee benefits item
of the Consolidated Statement of Income. As at October 31, 2021, a total of 6,149,769 common shares were held for this plan (6,167,265 common shares as
at October 31, 2020).
Plan shares are purchased on the open market and are considered to be outstanding for earnings per share calculations. Dividends paid on the Bank’s
common shares held for the Employee Share Ownership Plan are used to purchase other common shares on the open market.
PPllaann LLiiaabbiilliittiieess aanndd IInnttrriinnssiicc VVaalluuee
Total liabilities arising from the Bank’s share-based compensation plans amounted to $816 million as at October 31, 2021 ($507 million as at
October 31, 2020). The intrinsic value of these liabilities that had vested as at October 31, 2021 was $364 million ($213 million as at October 31, 2020).
National Bank of Canada
207
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2233 –– EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
The Bank offers defined benefit pension plans and other post-employment benefit plans to eligible employees. The pension plans provide benefits based on
years of plan participation and average earnings at retirement. 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 defined benefit obligations
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 financial status of the plans, and the Bank’s funding requirements.
The Bank’s funding policy for the defined benefit pension plans is to make at least the minimum annual contributions required by pension regulators.
For funded plans, the Bank determines whether an economic benefit exists in the form of potential reductions in future contributions and in the form of refunds
from the plan surplus, where permitted by applicable regulations and plan provisions.
DDeeffiinneedd BBeenneeffiitt OObblliiggaattiioonn,, PPllaann AAsssseettss aanndd FFuunnddeedd SSttaattuuss
As at October 31
DDeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn
Balance at beginning
Current service cost
Interest cost
Remeasurements
Actuarial (gains) losses arising from changes in demographic assumptions
Actuarial (gains) losses arising from changes in financial assumptions
Actuarial (gains) losses arising from experience adjustments
Employee contributions
Benefits paid
Balance at end
PPllaann aasssseettss
Fair value at beginning
Interest income
Administration cost
Remeasurements
Return on plan assets (excluding interest income)
Bank contributions(1)
Employee contributions
Benefits paid
Fair value at end
DDeeffiinneedd bbeenneeffiitt aasssseett ((lliiaabbiilliittyy)) aatt eenndd
22002211
55,,002277
114466
114499
99
((553388))
110077
5588
((221133))
44,,774455
55,,115533
114488
((44))
221144
8800
5588
((221133))
55,,443366
669911
Pension plans
2020
Other post-employment benefit plans
2020
22002211
4,703
126
148
5
195
−
54
(204)
5,027
4,569
140
(3)
525
72
54
(204)
5,153
126
115566
11
44
11
((1144))
44
((99))
114433
157
2
5
1
1
(1)
(9)
156
((114433))
(156)
(1)
For fiscal 2022, the Bank expects to pay an employer contribution of $86 million to the defined benefit pension plans.
208
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
DDeeffiinneedd BBeenneeffiitt AAsssseett ((LLiiaabbiilliittyy))
As at October 31
Defined benefit asset included in Other assets
Defined benefit liability included in Other liabilities
22002211
669911
−−
669911
Pension plans
2020
Other post-employment benefit plans
2020
22002211
126
−
126
((114433))
((114433))
(156)
(156)
Pension plans
2020
Other post-employment benefit plans
2020
22002211
CCoosstt ffoorr PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiittss
Year ended October 31
Current service cost
Interest expense (income), net
Administration costs
EExxppeennssee rreeccooggnniizzeedd iinn NNeett iinnccoommee
RReemmeeaassuurreemmeennttss(1)
Actuarial (gains) losses on defined benefit obligation
Return on plan assets(2)
RReemmeeaassuurreemmeennttss rreeccooggnniizzeedd iinn OOtthheerr ccoommpprreehheennssiivvee iinnccoommee
22002211
114466
11
44
115511
((442222))
((221144))
((663366))
((448855))
126
8
3
137
200
(525)
(325)
(188)
11
44
55
((99))
((99))
((44))
(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.
Excludes interest income.
AAllllooccaattiioonn ooff tthhee FFaaiirr VVaalluuee ooff PPeennssiioonn PPllaann AAsssseettss
As at October 31
Asset classes
Cash and cash equivalents
Equity securities
Debt securities
Canadian government
Canadian provincial and municipal governments
Other issuers
Other
QQuuootteedd
iinn aann aaccttiivvee
mmaarrkkeett(1)
NNoott qquuootteedd
iinn aann aaccttiivvee
mmaarrkkeett
−−
11,,229900
117755
−−
−−
−−
11,,446655
117711
993355
−−
11,,559933
11,,224488
2244
33,,997711
22002211
TToottaall
117711
22,,222255
117755
11,,559933
11,,224488
2244
55,,443366
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
2
5
7
1
1
8
2020
Total
135
2,045
48
1,656
1,125
144
5,153
(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, 2021 and 2020, the pension plan assets do not include any
securities issued by the Bank.
For fiscal 2021, the Bank and its related entities received $15 million ($11 million in fiscal 2020) in fees from the pension plans for related management,
administration and custodial services.
National Bank of Canada
209
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 23 – Employee Benefits – Pension Plans and Other Post-Employment Benefits (cont.)
AAllllooccaattiioonn ooff tthhee DDeeffiinneedd BBeenneeffiitt OObblliiggaattiioonn bbyy tthhee SSttaattuuss ooff
DDeeffiinneedd BBeenneeffiitt PPllaann PPaarrttiicciippaannttss
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
WWeeiigghhtteedd aavveerraaggee dduurraattiioonn ooff tthhee
ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn (in years)
22002211
4422 %%
5511 %%
77 %%
110000 %%
1166
Pension plans
2020
Other post-employment benefit plans
2020
22002211
42 %
51 %
7 %
100 %
17
1133 %%
8877 %%
14 %
86 %
110000 %%
100 %
1122
13
SSiiggnniiffiiccaanntt AAccttuuaarriiaall AAssssuummppttiioonnss ((WWeeiigghhtteedd AAvveerraaggee))
Discount Rate
The discount rate assumption is based on an interest rate curve that represents the yields on corporate AA bonds. Short-term maturities are obtained using a
curve based on observed data from corporate AA bonds. Long-term maturities are obtained using a curve based on observed data and extrapolated data.
To measure the pension plan and other post-employment plan obligation, the vested benefits that the Bank expects to pay in each future period are discounted
to the measurement date using the spot rate associated with each of the respective periods based on the yield curve derived using the above methodology.
The sum of discounted benefit amounts represents the defined benefit obligation. An average discount rate that replicates this obligation is then computed.
To better reflect current service cost, a separate discount rate was determined to account for the timing of future benefit payments associated with the
additional year of service to be earned by the plan’s active participants. Since these benefits are, on average, being paid at a later date than the benefits
already earned by participants as a whole (i.e., longer duration), this method results in the use of a generally higher discount rate for calculating current
service cost than that used to measure obligations where the yield curve is positively sloped. The methodology used to determine this discount rate is the
same as the one used to establish the discount rate for measuring the obligation.
Other Assumptions
For measurement purposes, the estimated annual growth rate for health care costs was 4.52% as at October 31, 2021 (4.64% as at October 31, 2020). Based
on the assumption retained, this rate is expected to decrease gradually to 3.28% 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
DDeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn
Discount rate
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
22002211
33..5555 %%
33..0000 %%
2211..44
2233..77
2222..44
2244..77
Pension plans
2020
Other post-employment benefit plans
2020
22002211
2.90 %
3.00 %
21.3
23.7
22.4
24.6
33..5555 %%
33..0000 %%
44..5522 %%
2211..44
2233..77
2222..44
2244..77
2.90 %
3.00 %
4.64 %
21.3
23.7
22.4
24.6
210
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31
PPeennssiioonn ppllaann eexxppeennssee
Discount rate – Current service
Discount rate – Interest expense (income), net
Rate of compensation increase
Health care cost trend rate
Life expectancy (in years) at 65 for a participant currently at
Age 65
Men
Women
Age 45
Men
Women
22002211
Pension plans
2020
Other post-employment benefit plans
2020
22002211
33..1100 %%
22..9900 %%
33..0000 %%
3.20 %
3.10 %
3.00 %
2211..33
2233..77
2222..44
2244..66
21.2
23.6
22.3
24.5
33..1100 %%
22..9900 %%
33..0000 %%
44..6644 %%
2211..33
2233..77
2222..44
2244..66
3.20 %
3.10 %
3.00 %
5.17 %
21.2
23.6
22.3
24.5
SSeennssiittiivviittyy ooff SSiiggnniiffiiccaanntt AAssssuummppttiioonnss ffoorr 22002211
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, 2021. These impacts are hypothetical and should be interpreted with caution, as changes in each significant
assumption may not be linear.
As at October 31, 2021
Impact of a 0.25% increase in the discount rate
Impact of a 0.25% decrease in the discount rate
Impact of a 0.25% increase in the rate of compensation increase
Impact of a 0.25% decrease in the rate of compensation increase
Impact of a 1.00% increase in the health care cost trend rate
Impact of a 1.00% decrease in the health care cost trend rate
Impact of an increase in the age of participants by one year
Impact of a decrease in the age of participants by one year
PPrroojjeecctteedd BBeenneeffiitt PPaayymmeennttss
Year ended October 31
2022
2023
2024
2025
2026
2027 to 2031
Pension plans
Change in the obligation
Other post-employment
benefit plans
Change in the obligation
(185)
198
35
(34)
(121)
118
(4)
4
6
(5)
(2)
2
Pension plans
Other post-employment
benefit plans
221
228
235
242
249
1,362
10
9
9
9
8
37
National Bank of Canada
211
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2244 –– IInnccoommee TTaaxxeess
The Bank’s income tax expense reported in the consolidated financial statements is as follows.
Year ended October 31
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee
CCuurrrreenntt ttaaxxeess
Current year
Prior period adjustments
DDeeffeerrrreedd ttaaxxeess
Origination and reversal of temporary differences
Prior period adjustments
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff CChhaannggeess iinn EEqquuiittyy
Share issuance expenses, other equity instruments and other
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff CCoommpprreehheennssiivvee IInnccoommee
Remeasurements of pension plans and other post-employment benefit plans
Net change in cash flow hedges
Other
IInnccoommee ttaaxxeess
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
22002211
2020
777799
((33))
777766
110099
1100
111199
889955
((1100))
117700
110099
4455
332244
11,,220099
22002211
991166
229933
11,,220099
638
(27)
611
(193)
35
(158)
453
(2)
86
(99)
(13)
(26)
425
2020
511
(86)
425
The temporary differences and tax loss carryforwards resulting in deferred tax assets and liabilities are as follows.
DDeeffeerrrreedd ttaaxx aasssseettss
Allowances for credit losses
Deferred charges
Defined benefit liability – Pension plans
Defined benefit liability – Other post-employment
benefit plans
Investments in associates
Leases liabilities
Deferred revenue
Tax loss carryforwards
Other items(1)
DDeeffeerrrreedd ttaaxx lliiaabbiilliittiieess
Premises and equipment and intangible assets
Defined benefit asset – Pension plans
Investments in associates
Other items(2)
NNeett ddeeffeerrrreedd ttaaxx aasssseettss ((lliiaabbiilliittiieess))
As at October 31
Consolidated
Balance Sheet
2020
22002211
Year ended October 31
Consolidated Statement
of Income
2020
22002211
Year ended October 31
Consolidated Statement
of Comprehensive Income
2020
22002211
222255
335544
−−
4477
5577
113322
5511
3333
2299
992288
((336611))
((117788))
−−
((4455))
((558844))
334444
326
265
−
52
98
145
47
40
59
1,032
(326)
(26)
(4)
(33)
(389)
643
((110011))
8899
−−
((33))
((4411))
((1133))
44
((77))
((3311))
((110033))
((2299))
1166
44
((77))
((1166))
((111199))
176
1
−
1
15
145
6
(55)
(13)
276
(138)
16
12
(8)
(118)
158
−−
−−
−−
((22))
−−
−−
−−
−−
−−
((22))
−−
((116688))
−−
((55))
((117733))
((117755))
−
−
(78)
1
1
−
−
−
−
(76)
−
(9)
−
12
3
(73)
(1)
(2)
As at October 31, 2021, the Consolidated Balance Sheet included $1 million in deferred tax assets related to share issuance costs ($1 million as at October 31, 2020) reported in Retained
earnings on the Consolidated Statement of Changes in Equity.
As at October 31, 2021, the amount on the Consolidated Balance Sheet included $6 million in deferred tax liabilities related to intangible assets acquired during the Flinks acquisition that
had no impact on the Consolidated Statement of Comprehensive Income. For additional information, see Note 31 to these consolidated financial statements.
212
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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
22002211
335544
((1100))
334444
2020
643
−
643
According to forecasts, which are based on information available on October 31, 2021, 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, 2021, the total amount of temporary differences, unused tax loss carryforwards, and unused tax credits for which no deferred tax asset has
been recognized was $424 million ($498 million as at October 31, 2020).
As at October 31, 2021, 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 $4,383 million ($4,139 million as at October 31, 2020).
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
Tax rates of subsidiaries, foreign entities and associates
Other items
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
NNoottiiccee ooff AAsssseessssmmeenntt
$$
44,,007722
11,,007799
((115511))
((5511))
1188
((118844))
889955
22002211
%%
110000..00
2266..55
((33..77))
((11..33))
00..55
((44..55))
2222..00
$
2,536
672
(190)
(58)
29
(219)
453
2020
%
100.0
26.5
(7.5)
(2.3)
1.2
(8.6)
17.9
In June 2021, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $115 million (including
estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during 2016.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $610 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2015, 2014, 2013 and 2012 taxation years.
In the reassessments, the CRA alleges that the dividends were received as part of a “dividend rental arrangement”.
The CRA may issue reassessments to the Bank for taxation years subsequent to 2016 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, 2021.
National Bank of Canada
213
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2255 –– EEaarrnniinnggss PPeerr SShhaarree
Diluted earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares
outstanding after taking into account the dilution effect of stock options using the treasury stock method and any gain (loss) on the redemption of preferred
shares.
Year ended October 31
22002211
2020
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree
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)
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree (dollars)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
Net income attributable to common shareholders
Weighted average basic number of common shares outstanding (thousands)
Adjustment to average number of common shares (thousands)
Stock options(1)
Weighted average diluted number of common shares outstanding (thousands)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree (dollars)
33,,117777
112233
33,,005544
333377,,221122
99..0066
33,,005544
333377,,221122
33,,664499
334400,,886611
88..9966
2,041
118
1,923
335,508
5.73
1,923
335,508
2,072
337,580
5.70
(1)
For the year ended October 31, 2021, as the exercise price of the options was lower than the average price of the Bank’s common shares, no options were excluded from the diluted earnings
per share calculation. For the year ended October 31, 2020, the calculation of diluted earnings per share had excluded an average number of 1,585,629 options outstanding with a weighted
average exercise price of $71.86, as the exercise price of these options was greater than the average price of the Bank’s common shares.
NNoottee 2266 –– GGuuaarraanntteeeess,, CCoommmmiittmmeennttss aanndd CCoonnttiinnggeenntt LLiiaabbiilliittiieess
GGuuaarraanntteeeess
The maximum potential amount of future payments represents the maximum risk of loss if there were a total default by the guaranteed parties, without
consideration of recoveries under recourse provisions, insurance policies or from collateral held or pledged. The maximum potential amount of future
payments for significant guarantees issued by the Bank is presented in the following table.
As at October 31
Letters of guarantee(1)
Backstop liquidity, credit enhancement facilities and other(1)
Securities lending
22002211
66,,008833
77,,226644
−−
2020
5,802
7,658
92
(1)
For additional information on allowances for credit losses related to off-balance-sheet commitments, see Note 7 to these consolidated financial statements.
LLeetttteerrss ooff GGuuaarraanntteeee
In the normal course of business, the Bank issues letters of guarantee. These letters of guarantee represent irrevocable commitments that the Bank will make
payments in the event that a client cannot meet its obligations to third parties. The Bank’s policy for requiring collateral security with respect to letters of
guarantee is similar to that for loans. Generally, the term of these letters of guarantee is less than two years.
BBaacckkssttoopp LLiiqquuiiddiittyy aanndd CCrreeddiitt EEnnhhaanncceemmeenntt FFaacciilliittiieess
Facilities to Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing asset-backed commercial paper.
The Bank provides backstop liquidity facilities to these multi-seller conduits. As at October 31, 2021, the notional amount of the global-style backstop liquidity
facilities totalled $2.8 billion ($3.2 billion as at October 31, 2020), representing the total amount of 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.
214
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, 2021 and 2020, the committed notional value for these facilities was $30 million. To
date, the credit enhancement facilities provided by the Bank have not been drawn.
The maximum risk of loss for the Bank cannot exceed the total amount of commercial paper outstanding, i.e., $2.8 billion as at October 31, 2021 ($3.2 billion
as at October 31, 2020). As at October 31, 2021, the Bank held $22 million ($123 million as at October 31, 2020) of this commercial paper and, consequently,
the maximum potential amount of future payments was $2.7 billion ($3.1 billion as at October 31, 2020).
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, 2021, the notional amount of the overnight uncommitted liquidity facility amounted to $4.5 billion
($4.5 billion as at October 31, 2020). As at October 31, 2021 and 2020, no amount had been drawn.
SSeeccuurriittiieess LLeennddiinngg
Under securities lending agreements the Bank has entered into with certain clients who have entrusted it with the safekeeping of their securities, the Bank
lends the securities to third parties and indemnifies its clients in the event of loss. In order to protect itself against any contingent loss, the Bank obtains, as
security from the borrower, a cash amount or extremely liquid marketable securities with a fair value greater than that of the securities loaned. No amount has
been recognized on the Consolidated Balance Sheet with respect to potential indemnities resulting from securities lending agreements.
OOtthheerr IInnddeemmnniiffiiccaattiioonn AAggrreeeemmeennttss
In the normal course of business, including securitization transactions and discontinuances of businesses and operations, the Bank enters into numerous
contractual agreements under which it undertakes to compensate the counterparty for costs incurred as a result of litigation, changes in laws and regulations
(including tax legislation), claims with respect to past performance, incorrect representations or the non-performance of certain restrictive covenants. The Bank
also undertakes to indemnify any person acting as a director or officer or performing a similar function within the Bank or one of its subsidiaries or another
entity, at the request of the Bank, for all expenses incurred by that person in proceedings or investigations to which he or she is party in that capacity.
Moreover, as a member of a securities transfer network and pursuant to the membership agreement and the regulations governing the operation of the
network, the Bank granted collateral in favour of the Bank of Canada to guarantee any obligation of the Bank towards the Bank of Canada that could result from
the Bank’s participation in the securities transfer network. The durations of the indemnification agreements vary according to circumstance; as at
October 31, 2021 and 2020, 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 recognized on the Consolidated Balance Sheet with respect to these agreements.
CCoommmmiittmmeennttss
CCrreeddiitt IInnssttrruummeennttss
In the normal course of business, the Bank enters into various off-balance-sheet commitments. The credit instruments used to meet the financing needs of its
clients represent the maximum amount of additional credit the Bank could be obligated to extend if the commitments were fully drawn.
As at October 31
Letters of guarantee(1)
Documentary letters of credit(2)
Credit card receivables(3)
Commitments to extend credit(3)
22002211
66,,008833
116600
99,,008811
7777,,998833
2020
5,802
171
7,999
70,329
(1)
(2)
(3)
See the Letters of Guarantee item on page 214.
Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to draw drafts on the Bank up to an amount established under specific
terms and conditions; these instruments are collateralized by the delivery of the goods to which they are related.
Credit card receivables and commitments to extend credit represent the undrawn portions of credit authorizations granted in the form of loans, acceptances, letters of guarantee, and
documentary letters of credit. The Bank is required at all times to make the undrawn portion of the credit authorization available, subject to certain conditions.
FFiinnaanncciiaall AAsssseettss RReecceeiivveedd aass CCoollllaatteerraall
As at October 31, 2021, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $74.8 billion ($60.6 billion
as at October 31, 2020). 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
215
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 26 – Guarantees, Commitments and Contingent Liabilities (cont.)
OOtthheerr CCoommmmiittmmeennttss
The Bank acts as an investor in investment banking activities where it enters into agreements to finance external private equity funds and investments in
equity and debt securities at market value at the time the agreements are signed. In connection with these activities, the Bank has commitments to invest up to
$124 million as at October 31, 2021 ($78 million as at October 31, 2020). 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, 2021, the Bank had commitments to purchase loans of up
to $77 million (no commitments to purchase loans as at October 31, 2020). As at October 31, 2021, the Bank had no financing commitments related to
securitization transactions ($200 million as at October 31, 2020).
PPlleeddggeedd AAsssseettss
In the normal course of business, the Bank pledges securities and other assets as collateral. A breakdown of encumbered assets pledged as collateral is
provided in the following table. These transactions are concluded in accordance with standard terms and conditions for such transactions.
As at October 31
22002211
2020
Assets pledged to
Bank of Canada
Direct clearing organizations(1)
Assets pledged in relation to
Derivative financial instrument transactions
Borrowing, securities lending and securities sold under reverse repurchase agreements
Securitization transactions
Covered bonds(2)
Other
TToottaall
550022
44,,115588
66,,333399
7722,,003388
2255,,117733
99,,554422
44
111177,,775566
502
4,039
4,380
57,257
22,859
14,337
4
103,378
(1)
(2)
Includes assets pledged as collateral for activities in the systemically important payment system (designated as Lynx) as at October 31, 2021 (Large Value Transfer System (LVTS) as at
October 31, 2020).
The Bank has a covered bond program. For additional information, see Notes 13 and 27 to these consolidated financial statements.
CCoonnttiinnggeenntt LLiiaabbiilliittiieess
LLiittiiggaattiioonn
In the normal course of business, the Bank and its subsidiaries are involved in various claims relating, among other matters, to loan portfolios, investment
portfolios, and supplier agreements, including court proceedings, investigations or claims of a regulatory nature, class actions or other legal remedies of
varied natures.
More specifically, the Bank is involved as a defendant in class actions instituted by consumers contesting, inter alia, certain transaction fees or who wish to
avail themselves of certain legislative provisions relating to consumer protection. The recent developments in the main legal proceedings involving the Bank
are as follows:
Watson
In 2011, a class action was filed in the Supreme Court of British Columbia against Visa Corporation Canada (Visa) and Mastercard International Incorporated
(Mastercard) (the Networks) as well as National Bank and a number of other Canadian financial institutions. A similar action was also initiated in Quebec,
Ontario, Alberta and Saskatchewan. In each of the actions, the Networks and financial institutions are alleged to have been involved in a price-fixing system to
maintain and increase the fees paid by merchants on transactions executed using the credit cards of the Networks. In so doing, they would notably be in
breach of the Competition Act. An unspecified amount of compensatory and punitive damages is being claimed. In 2017, a settlement was reached with the
plaintiffs; in 2018 it was approved by the trial courts in each of the five jurisdictions where the action was initiated. The rulings approving the settlement were
the subject of appeal proceedings in all jurisdictions. These appeal proceedings were all rejected during the year ended October 31, 2021, thereby confirming
approval of the settlement reached in 2017 and ending the Bank’s involvement in the class action.
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 operations for a particular period, it would not have a material adverse impact on the Bank’s
consolidated financial position.
216
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2277 –– SSttrruuccttuurreedd EEnnttiittiieess
A structured entity is an entity created to accomplish a narrow and well-defined objective and is designed so that voting or similar rights are not the dominant
factor in deciding who controls the entity, such as when any voting rights relate solely to administrative tasks and the relevant activities are directed by means
of contractual arrangements. Structured entities are assessed for consolidation in accordance with the accounting treatment described in Note 1 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 218.
NNoonn--CCoonnssoolliiddaatteedd SSttrruuccttuurreedd EEnnttiittiieess
Multi-Seller Conduits
The Bank administers multi-seller conduits that purchase financial assets from clients and finance those purchases by issuing commercial paper backed by the
assets acquired. Clients use these multi-seller conduits to diversify their funding sources and reduce borrowing costs, while continuing to manage the financial
assets and providing some amount of first-loss protection. Notes issued by the conduits and held by third parties provide additional credit loss protection. The
Bank acts as a financial agent and provides these conduits with administrative and transaction structuring services as well as backstop liquidity and credit
enhancement facilities under the commercial paper program. These facilities are presented and described in Note 26. The Bank has concluded derivative
financial instrument contracts with these conduits, the fair value of which is presented on the Bank’s Consolidated Balance Sheet. Although the Bank has the
ability to direct the relevant activities of these conduits, it cannot use its power to affect the amount of the returns it obtains, as it acts as an agent.
Consequently, the Bank does not control these conduits and does not consolidate them.
Investment Funds
The Bank enters into derivative or other financial instrument contracts with third parties to provide them with the desired exposure to certain investment funds.
The Bank economically hedges the risks related to these derivatives by investing in those investment funds. The Bank can also hold economic interests in
certain investment funds as part of its investing activities. In addition, the Bank is sponsor and investment manager of mutual funds in which it has
insignificant or no interest. The Bank does not control the funds where its holdings are not significant given that, 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.
Third-Party Structured Entities
The Bank has invested in third-party structured entities, some of which are asset-backed. The underlying assets consist of residential mortgages, consumer
loans, equipment loans, leases, and securities. 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
217
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Structured Entities (cont.)
The following table presents the carrying amounts of the assets and liabilities relating to the Bank’s interests in non-consolidated structured entities, the
Bank’s maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada Housing Trust is
not presented. For additional information, see Note 8 to these consolidated financial statements.
AAsssseettss oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Securities at fair value through profit or loss
Securities at amortized cost
As at October 31, 2020
LLiiaabbiilliittiieess oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Derivative financial instruments
As at October 31, 2020
MMaaxxiimmuumm eexxppoossuurree ttoo lloossss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2020
TToottaall aasssseettss ooff tthhee ssttrruuccttuurreedd eennttiittiieess
As at October 31, 2020
MMuullttii--sseelllleerr
ccoonndduuiittss(1)
IInnvveessttmmeenntt
ffuunnddss(2)
AAss aatt OOccttoobbeerr 3311,, 22002211
TThhiirrdd--ppaarrttyy
ssttrruuccttuurreedd
eennttiittiieess(4)
PPrriivvaattee
iinnvveessttmmeennttss(3)
2222
−−
2222
140
((1122))
((1122))
−
2222
22,,773322
22,,775544
3,366
22,,778822
3,304
119977
−−
119977
255
−−
−−
−
119977
−−
119977
255
11,,779911
1,900
5544
−−
5544
68
−−
−−
−
5544
−−
5544
68
440000
431
−−
22,,994422
22,,994422
2,287
((88))
((88))
−
22,,993344
996622
33,,889966
2,712
1166,,888833
8,139
(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, 2021, the notional
committed amount of the global-style liquidity facilities totalled $2.8 billion ($3.2 billion as at October 31, 2020), 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, 2020). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2021, the Bank held $22 million in commercial paper ($123 million as at October 31, 2020) and, consequently, the
maximum potential amount of future payments as at October 31, 2021 was limited to $2.7 billion ($3.1 billion as at October 31, 2020), 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, leases, and securities.
CCoonnssoolliiddaatteedd SSttrruuccttuurreedd EEnnttiittiieess
Securitization Entity for the Bank’s Credit Card Receivables
In April 2015, the Bank set up Canadian Credit Card Trust II (CCCT II) to continue its credit card securitization program on a revolving basis and to use the entity
for capital management and funding purposes.
The Bank provides first-loss protection against the losses, since it retains the excess spread from the portfolio of sold receivables. The excess spread
represents the residual net interest income after all the expenses related to this structure have been paid. The Bank also provides second-loss protection as it
holds subordinated notes issued by CCCT II. In addition, the Bank acts as an administrative agent and servicer and as such is responsible for the daily
administration and management of CCCT II’s credit card receivables. The Bank therefore has the ability to direct the relevant activities of CCCT II and can
exercise its power to affect the amount of returns it obtains. Consequently, the Bank controls CCCT II and consolidates it.
Multi-Seller Conduit
The Bank administers a multi-seller conduit that purchases various 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 this conduit.
218
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 certain funds through its involvement as an investor and
its significant exposure to their variable returns. Therefore, the Bank consolidates these funds.
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.
Third-Party Structured Entities
In 2018, the Bank, through one of its subsidiaries, provided financing to a third-party structured entity in exchange for a 100% interest in a loan portfolio, the
sole asset held by that entity. The Bank controls and therefore consolidates the structured entity, as it has the ability to direct the entity’s relevant activities
through its involvement in the decision-making process. The Bank is also exposed to the entity’s variable returns.
The following table presents the Bank’s investments and other assets in the consolidated structured entities as well as the total assets of these entities.
As at October 31
CCoonnssoolliiddaatteedd ssttrruuccttuurreedd eennttiittiieess
Securitization entity for the Bank’s credit card receivables(2)(3)
Multiseller conduit(4)
Investment funds(5)
Covered bonds(6)
Third-party structured entities(7)
IInnvveessttmmeennttss
aanndd ootthheerr aasssseettss
22,,441100
225566
112211
1155,,666633
116699
1188,,661199
22002211
TToottaall
aasssseettss(1)
22,,554444
225566
112211
1166,,004488
116699
1199,,113388
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
(1)
(2)
(3)
(4)
(5)
(6)
(7)
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, 2021, the total amount of
transferred mortgage loans was $15.7 billion ($16.8 billion as at October 31, 2020), and the total amount of covered bonds of $8.8 billion was recognized in Deposits on the Consolidated
Balance Sheet ($10.1 billion as at October 31, 2020). For additional information, see Note 13 to these consolidated financial statements.
The underlying assets consist of a loan portfolio.
National Bank of Canada
219
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 2288 –– RReellaatteedd PPaarrttyy DDiisscclloossuurreess
In the normal course of business, the Bank provides various banking services to related parties and enters into contractual agreements and other operations
with related parties. The Bank considers the following to be related parties:
its key officers and directors and members of their immediate family, i.e., spouses and children under 18 living in the same household;
entities over which its key officers and directors and their immediate family have control or significant influence through their significant voting power;
the Bank’s associates and joint ventures;
the Bank’s pension plans (for additional information, see Note 23 to these consolidated financial statements).
According to the established definition, the Bank’s key officers are those persons having authority and responsibility for planning, directing and controlling the
Bank’s activities, directly or indirectly.
RReellaatteedd PPaarrttyy TTrraannssaaccttiioonnss
As at October 31
AAsssseettss
Mortgage loans and other loans
LLiiaabbiilliittiieess
Deposits
Other
Key officers
and directors(1)
2020
33
59
−
22002211
2211
111155
−−
22002211
114433 (2)
111133 (3)
3388
Related entities
2020
347
(2)
(3)
517
1
(1)
(2)
(3)
As at October 31, 2021, key officers, directors and their immediate family members were holding $95 million of the Bank’s common and preferred shares ($66 million as at
October 31, 2020).
As at October 31, 2021, mortgage loans and other loans consisted of: (i) $1 million in loans to the Bank’s associates ($1 million as at October 31, 2020) and (ii) $142 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 ($346 million as at
October 31, 2020).
As at October 31, 2021, deposits consisted of: (i) $1 million in deposits from the Bank’s associates ($210 million as at October 31, 2020) and (ii) $112 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 ($307 million as at October 31, 2020).
The contractual agreements and other transactions with related entities as well as with directors and key officers are entered into under conditions similar to
those offered to non-related third parties. These agreements did not have a significant impact on the Bank’s results. The Bank also offers a deferred stock unit
plan to directors who are not Bank employees. For additional information, see Notes 9, 22 and 27 to these consolidated financial statements.
CCoommppeennssaattiioonn ooff KKeeyy OOffffiicceerrss aanndd DDiirreeccttoorrss
Year ended October 31
Compensation and other short-term and long-term benefits
Share-based payments
22002211
2233
2222
2020
21
21
220
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
PPrriinncciippaall SSuubbssiiddiiaarriieess ooff tthhee BBaannkk(1)
Name
Business activity
Principal office address
CCaannaaddaa aanndd UUnniitteedd SSttaatteess
National Bank Acquisition Holding Inc.
National Bank Financial Inc.
NBF International Holdings Inc.
National Bank of Canada Financial Group Inc.
Credigy Ltd.
National Bank of Canada Financial Inc.
National Bank Investments Inc.
National Bank Life Insurance Company
Natcan Trust Company
National Bank Trust Inc.
National Bank Realty Inc.
NatBC Holding Corporation
Natbank, National Association
Flinks Technology Inc.
OOtthheerr ccoouunnttrriieess
Natcan Global Holdings Ltd.
NBC Global Finance Limited
NBC Financial Markets Asia Limited
Advanced Bank of Asia Limited
ATA IT Ltd.
Holding company
Investment dealer
Holding company
Holding company
Holding company
Investment dealer
Mutual funds dealer
Insurance
Trustee
Trustee
Real estate
Holding company
Commercial bank
Information technology
Holding company
Investment services
Investment dealer
Commercial bank
Information technology
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
Montreal, Canada
Sliema, Malta
Dublin, Ireland
Hong Kong, China
Phnom Penh, Cambodia
Bangkok, Thailand
AAss aatt OOccttoobbeerr 3311,, 22002211
Investment
at cost
Voting
shares(2)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
86%
100%
100%
100%
100%
100%
1,785
441
238
195
80
31
144
22
5
621
3
(1)
(2)
Excludes consolidated structured entities. For additional information, see Note 27 to these consolidated financial statements.
The Bank’s percentage of voting rights in these subsidiaries.
NNoottee 2299 –– MMaannaaggeemmeenntt ooff tthhee RRiisskkss AAssssoocciiaatteedd WWiitthh FFiinnaanncciiaall IInnssttrruummeennttss
The Bank is exposed to credit risk, market risk, and liquidity and funding 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, 2021. 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, 2021 are an integral part of these consolidated
financial statements.
RReessiidduuaall CCoonnttrraaccttuuaall MMaattuurriittiieess ooff BBaallaannccee SShheeeett IItteemmss aanndd
OOffff--BBaallaannccee--SShheeeett CCoommmmiittmmeennttss
The following tables present balance sheet items and off-balance-sheet commitments by residual contractual maturity as at October 31, 2021 and 2020. 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 when assessing
liquid assets or 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 as under 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
221
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 29 –– Management of the Risks Associated With Financial Instruments (cont.)
AAsssseettss
CCaasshh aanndd ddeeppoossiittss
wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr
rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
OOtthheerr
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
11 mmoonntthh
oorr lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
99 mmoonntthhss
OOvveerr 99
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr 55
yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22002211
77,,551100
333344
337744
114466
336688
−−
−−
−−
2255,,114477
3333,,887799
11,,994466
11,,992299
11,,006611
770022
779922
33,,003377
66,,445544
99,,441100
5599,,448800
8844,,881111
11
11
11,,994488
−−
118811
22,,111100
11
221133
11,,227755
662244
442255
11,,775511
6633
880044
11,,665599
222277
33,,558899
66,,885533
44,,886677
55,,886655
1177,,118866
33,,118833
883322
1133,,442255
661177
−−
6600,,009977
99,,558833
1111,,991100
110066,,330044
11,,111133
11,,119999
5599
−−
337711
661199
−−
−−
44,,115555
77,,551166
770022
221144
996655
331155
11,,558811
551122
22,,558877
887777
22,,332200
884433
88,,885500
33,,552277
4488,,445555
1166,,005566
66,,550044
44,,330088
1166,,884422
33,,998866
22,,661144
33,,550088
33,,225533
66,,229900
1100,,118800
33,,660055
66,,220000
661188
1188
−−
−−
−−
−−
−−
2233,,995588
55,,888844
44,,772255
66,,997722
66,,441166
1188,,666677
7744,,669911
1144,,441177
557788
1144,,440011
22,,115500
1100,,882288
7722,,554422
4411,,005533
22,,115500
6611,,110066
−−
((999988))
2266,,995599
66,,883366
((999988))
118822,,668899
11,,886688
33,,667788
11,,001199
22,,119900
882233
11,,886655
22,,449911
22,,555500
−−
1166,,448844
11,,882299
33,,669977
3388,,222266
113377
33,,881155
1133,,334422
114488
11,,116677
77,,660000
112299
22,,331199
1111,,118888
5566
887799
99,,669933
772277
22,,559922
2288,,773311
8888
22,,557799
9944,,445566
1177
22,,556677
3300,,440099
222255
11,,221166
11,,550044
11,,551100
11,,333377
55,,779922
112222,,115500
222255
11,,221166
11,,550044
11,,551100
44,,446688
2255,,440077
335555,,779955
(1)
Amounts collectible on demand are considered to have no specified maturity.
222
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
11 mmoonntthh
oorr lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
99 mmoonntthhss
OOvveerr 99
mmoonntthhss ttoo
1122 mmoonntthhss
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
OOvveerr 22
yyeeaarrss ttoo
55 yyeeaarrss
OOvveerr 55
yyeeaarrss
NNoo
ssppeecciiffiieedd
mmaattuurriittyy
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22002211
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss(1)(2)
Personal
Business and government
Deposit-taking institutions
OOtthheerr
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Lease liabilities(5)
Other liabilities – Other items(1)(5)
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments(9)
Other contracts(10)
11,,339966
2244,,881144
11,,001111
2277,,222211
66,,220000
118866
77,,333300
33,,004488
−−
3366
77
664400
1177,,444477
−−
33,,443333
1122,,779966
112288
1166,,335577
44,,559966
1100,,778822
3388
1155,,441166
661188
112233
1188
118822
22,,666688
33,,006611
11,,668888
−−
1155
447777
88,,665500
−−
33,,663333
11,,117711
11,,552233
−−
2211
111177
66,,666655
−−
22,,119944
55,,778855
6666
88,,004455
−−
117755
224466
11,,992211
11,,005544
−−
2222
112255
33,,554433
−−
11,,994455
22,,669911
2233
44,,665599
−−
2222
−−
888800
441111
−−
2222
110000
11,,443355
−−
44,,115577
55,,445533
11
99,,661111
66,,446688
1100,,005544
−−
1166,,552222
44,,991144
44,,776655
3366
99,,771155
4400,,997733
9900,,773300
11,,668899
113333,,339922
7700,,007766
116677,,887700
22,,999922
224400,,993388
−−
−−
−−
−−
66,,883366
33,,009999
33,,774433
44,,779977
77,,993399
2200,,226666
−−
11,,448855
55,,550011
2288
8888
4411
1100,,224422
−−
−−
33,,227733
1100,,777711
4488
221144
2255
1188,,007744
−−
−−
44,,552288
44,,222222
−−
118866
7755
1133,,880088
776688
33,,441166
−−
1177,,229933
1199,,336677
−−
−−
−−
44,,001144
1155,,336699
2255,,117700
111122
557755
55,,661144
9955,,223333
−−
776688
1188,,885566
116677,,661177
1188,,885566
335555,,779955
4444,,666688
2255,,000077
2222,,008811
1111,,558888
66,,009944
1199,,885533
3344,,559966
2244,,229911
332200
11,,556611
882288
22,,009922
779933
557755
7744
1155
22,,884488
−−
99,,113399
44,,550022
66,,119955
1155
66,,773377
−−
33,,887722
11
5544
11
5588
11
5500
11
4488
11
4466
−−
33,,110055
11
115522
−−
33,,666677
33
1199
−−
−−
4488
33
−−
−−
99,,008811
66,,224433
99,,008811
22,,773322
4422,,337722
77,,226644
7777,,998833
−−
112244
1122
555511
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 residual 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 $40.8 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
223
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 29 –– Management of the Risks Associated With Financial Instruments (cont.)
AAsssseettss
CCaasshh aanndd ddeeppoossiittss
wwiitthh ffiinnaanncciiaall iinnssttiittuuttiioonnss
SSeeccuurriittiieess
At fair value through
profit or loss
At fair value through
other comprehensive income
At amortized cost
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr
rreevveerrssee rreeppuurrcchhaassee
aaggrreeeemmeennttss aanndd
sseeccuurriittiieess bboorrrroowweedd
LLooaannss(1)
Residential mortgage
Personal
Credit card
Business and government
Customers’ liability under
acceptances
Allowances for credit losses
OOtthheerr
Derivative financial instruments
Investments in associates and
joint ventures
Premises and equipment
Goodwill
Intangible assets
Other assets(1)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 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
5,343
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
12,440
630
14,411
2,038
8,408
64,959
37,613
2,038
54,422
−
(1,158)
24,329
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
29,722
409
1,155
1,414
1,434
872
5,284
104,651
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.
224
National Bank of Canada
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
LLiiaabbiilliittiieess aanndd eeqquuiittyy
DDeeppoossiittss(1)(2)
Personal
Business and government
Deposit-taking institutions
OOtthheerr
Acceptances
Obligations related
to securities sold short(3)
Obligations related to
securities sold under
repurchase agreements and
securities loaned
Derivative financial instruments
Liabilities related to transferred
receivables(4)
Securitization – Credit card(5)
Lease liabilities(5)
Other liabilities – Other items(1)(5)
SSuubboorrddiinnaatteedd ddeebbtt
EEqquuiittyy
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss
Letters of guarantee and
documentary letters of credit
Credit card receivables(6)
Backstop liquidity and credit
enhancement facilities(7)
Commitments to extend credit(8)
Obligations related to:
Lease commitments(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
11,059
28
224
37
16,825
−
3,378
3,670
−
233
281
11,883
6,014
−
33,859
12,923
−
−
−
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
1
15
1
28
2
41
2
41
1
39
−
5,651
4
145
−
10,690
−
1,165
3,126
29,213
7,658
70,329
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 have been disclosed according to the residual 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
225
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 3300 –– SSeeggmmeenntt DDiisscclloossuurreess
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy.
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as
insurance operations.
WWeeaalltthh MMaannaaggeemmeenntt
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions
offered through internal and third-party distribution networks.
FFiinnaanncciiaall MMaarrkkeettss
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public
sector organizations, and institutional investors.
UU..SS.. SSppeecciiaallttyy FFiinnaannccee aanndd IInntteerrnnaattiioonnaall ((UUSSSSFF&&II))
The USSF&I segment encompasses the specialty finance expertise provided by the Credigy subsidiary; the activities of the ABA Bank subsidiary, which offers
financial products and services to individuals and businesses in Cambodia; and the activities of targeted investments in certain emerging markets.
OOtthheerr
This heading encompasses treasury activities; liquidity management; Bank funding; asset/liability management activities; the activities of the Flinks
subsidiary, which offers fintech services; 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.
RReessuullttss bbyy BBuussiinneessss SSeeggmmeenntt
Year ended October 31(1)
Personal and
Commercial
2020
22002211
Wealth
Management
2020
22002211
Financial
Markets
2020
22002211
22,,558833
11,,110033
33,,668866
11,,995588
11,,772288
66
2,445
1,012
3,457
1,892
1,565
517
11,,772222
445566
11,,226666
−−
1,048
278
770
−
444488
11,,772211
22,,116699
11,,227777
442
1,417
1,859
1,125
889922
11
889911
223366
665555
−−
734
7
727
192
535
−
11,,222266
992200
22,,114466
888800
11,,226666
1100
11,,225566
333333
992233
−−
946
1,108
2,054
812
1,242
239
1,003
265
738
−
22002211
990077
9944
11,,000011
331155
668866
((1155))
770011
114466
555555
−−
USSF&I
2020
807
13
820
319
501
80
421
69
352
34
22002211
((338811))
330066
((7755))
442233
((449988))
−−
((449988))
((227766))
((222222))
−−
Other
2020
(385)
122
(263)
397
(660)
3
(663)
(351)
(312)
8
22002211
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
−−
Total
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
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
11,,226666
770
112277,,771166 117,338
665555
77,,114466
535
5,917
992233
115500,,114477
738
123,943
555555
1166,,115500
318
14,336
((222222))
6622,,550033
(320)
56,665
33,,117777
336633,,666622
2,041
318,199
(1)
(2)
(3)
(4)
For the year ended October 31, 2020, certain amounts have been reclassified.
For the year ended October 31, 2021, Net interest income was grossed up by $181 million ($208 million in 2020), Non-interest income was grossed up by $8 million ($57 million in 2020),
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, 2021, the Non-interest income item included a $33 million gain following a remeasurement of the previously held
equity interest in Flinks and a $30 million loss related to the fair value measurement of the Bank’s equity interest in AfrAsia. For the Other heading of segment results, for the year ended
October 31, 2020, the Non-interest income item had included a foreign currency translation loss of $24 million following a disposal, through the Credigy Ltd. subsidiary, of two subsidiaries
in Brazil.
For the year ended October 31, 2021, for the Other heading of segment results, the Non-interest expenses item included impairment losses on intangible assets of $9 million related to
technology developments. For the year ended October 31, 2020, for the Other heading of segment results, the Non-interest expenses item had included impairment losses on premises and
equipment and on intangible assets of $71 million, related to computer equipment and technology developments, a $13 million charge related to Maple, and $48 million in severance pay.
National Bank of Canada
226
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
RReessuullttss bbyy GGeeooggrraapphhiicc SSeeggmmeenntt
Year ended October 31
Net interest income
Non-interest income(1)
Total revenues
Non-interest expenses(2)
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
22002211
33,,559922
33,,999922
77,,558844
44,,442288
33,,115566
1177
33,,113399
668877
22,,445522
−−
Canada
2020
United States
2020
22002211
22002211
Other
2020
3,239
3,574
6,813
4,124
2,689
766
1,923
343
1,580
18
662233
110066
772299
220033
552266
((4411))
556677
113333
443344
−−
642
5
647
209
438
59
379
68
311
24
556688
4466
661144
222222
339922
2266
336666
7755
229911
−−
374
93
467
212
255
21
234
42
192
−
22002211
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
44,,007722
889955
33,,117777
−−
Total
2020
4,255
3,672
7,927
4,545
3,382
846
2,536
453
2,083
42
22,,445522
330011,,112200
1,562
258,594
443344
2277,,330011
287
22,654
229911
3355,,224411
192
36,951
33,,117777
336633,,666622
2,041
318,199
(1)
(2)
For the year ended October 31, 2021, the Non-interest income item recorded in Canada included a $33 million gain following a remeasurement of the previously held equity interest in Flinks
and a $30 million loss related to the fair value measurement of the Bank’s equity interest in AfrAsia. For the year ended October 31, 2020, for the United States results, the Non-interest
income item had included a foreign currency translation loss of $24 million following the disposal, through the Credigy Ltd. subsidiary, of two subsidiaries in Brazil.
For the year ended October 31, 2021, for the Canada results, the Non-interest expenses item included $9 million in impairment losses on intangible assets related to technology
developments. For the year ended October 31, 2020, for the Canada results, the Non-interest expenses item had included $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.
NNoottee 3311 –– AAccqquuiissiittiioonnss
AAccqquuiissiittiioonn ooff FFlliinnkkss TTeecchhnnoollooggyy IInncc.
On September 8, 2021, the Bank finalized the acquisition of Flinks Technology Inc. (Flinks), a leading fintech company specialized in financial data aggregation
and distribution, in which the Bank had already been holding a 30.2% equity interest. Flinks provides services to a wide North American fintech ecosystem and
offers attractive data technology solutions. The acquisition strategically positions the Bank in a high-growth market to continue to enhance customer
experiences and benefit from future technology-driven innovations. At the time of acquisition, the amount of which was $73 million in cash for voting preferred
shares, the Bank was holding an 82.9% equity interest in Flinks, thereby giving it control thereover. Immediately after the acquisition, the Bank made an
additional $30 million investment in voting preferred shares, giving the Bank an 85.9% equity interest in Flinks. The amount of the $73 million purchase price,
of the fair value of the previously held equity interest, and of the estimated value of the non-controlling interest established on the acquisition date, exceeded
the fair value of the net assets acquired by $101 million. This excess amount has been recorded on the Consolidated Balance Sheet as goodwill and mainly
represents the expected future profits of Flinks given its favourable position in this growth market. The goodwill is not deductible for tax purposes. The
previously held equity interest, accounted for as an associate, was remeasured at fair value, generating a $33 million non-taxable remeasurement gain that
was reported in the Non-interest income – Other item of the Consolidated Statement of Income.
For the year ended October 31, 2021, the acquisition-related costs included in the Non-interest expenses item of the Consolidated Statement of Income were
negligible. With respect to the presentation of financial results according to business segment, the gain on remeasurement of the previously held equity
interest as well as the financial results of Flinks are being reported in the Other heading of segment results. The financial results of Flinks have been
consolidated into the Bank’s financial statements since September 8, 2021. During the year ended October 31, 2021, Flinks contributed approximately
$1 million to the Bank’s total revenues and a net loss of approximately $3 million to the Bank’s total net income. If the Bank had finalized the acquisition on
November 1, 2020, the Bank would have reported total revenues of approximately $8,936 million and net income of approximately $3,170 million for the year
ended October 31, 2021.
National Bank of Canada
227
National Bank of Canada2021 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 31 – Acquisitions (cont.)
As at October 31, 2021, the purchase price allocation process had not been finalized as certain closing adjustments were ongoing. The estimated fair values of
the assets acquired and liabilities assumed may be retrospectively adjusted to reflect new information obtained about facts and circumstances that existed as
of the acquisition date during the measurement period expected to end in fiscal 2022. The table below summarizes the estimated fair values of the assets
acquired and liabilities assumed as of the acquisition date.
Goodwill
Premises and equipment
Intangible assets
Other assets
Other liabilities
Purchase price
Previously held interest
Non-controlling interest
110011
11
2244
22
112288
1111
1111
7733
4411
33
111177
AAccqquuiissiittiioonn ooff tthhee EEnnttiirree RReemmaaiinniinngg NNoonn--CCoonnttrroolllliinngg IInntteerreesstt iinn tthhee CCrreeddiiggyy LLttdd.. SSuubbssiiddiiaarryy
On December 15, 2020, the Bank acquired the entire remaining non-controlling interest in the Credigy Ltd. subsidiary following a decision by the non-
controlling shareholders to exercise their put options for an amount of $300 million according to an agreement reached in 2013. Following this transaction,
Credigy Ltd. became a wholly owned subsidiary of the Bank.
NNoottee 3322 –– EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett DDaattee
RReeppuurrcchhaassee ooff CCoommmmoonn SShhaarreess
On November 30, 2021, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 10, 2021, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2% of its outstanding common shares) over the 12-month period ending December 9, 2022. 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. This normal course
issuer bid is subject to the approval of OSFI and the Toronto Stock Exchange (TSX).
228
National Bank of Canada
National Bank of Canada2021 Annual Report
Supplementary
Information
Statistical Review
Information for Shareholders
223300
223322
Supplementary Information
SSttaattiissttiiccaall RReevviieeww
As at October 31(1)
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett ddaattaa
Cash and deposits with financial institutions
Securities
Securities purchased under reverse
repurchase agreements and
securities borrowed
Loans and acceptances
Other assets
TToottaall aasssseettss
Deposits
Other liabilities
Subordinated debt
Share capital and other equity instruments
Preferred shares and other equity instruments
Common shares
Contributed surplus
Retained earnings
Accumulated other comprehensive income
Non-controlling interests
TToottaall lliiaabbiilliittiieess aanndd eeqquuiittyy
22002211
2020
2019
2018
2017
2016
2015
2014
2013
2012
3333,,887799
110066,,330044
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
77,,551166
118822,,668899
2255,,440077
335555,,779955
224400,,993388
9955,,223333
776688
22,,665500
33,,116600
4477
1133,,002288
((3322))
33
335555,,779955
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
Average assets
336633,,666622
318,199
286,162
265,940
248,351
235,913
222,929
206,680
193,509
181,344
Net impaired loans(2)(3) under IFRS 9
Net impaired loans(3) under IAS 39
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee ddaattaa
Net interest income
Non-interest income
TToottaall rreevveennuueess
Non-interest expenses
Income before provisions for credit losses
and income taxes
Provisions for credit losses
Income taxes
NNeett iinnccoommee
Non-controlling interests
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’ss
sshhaarreehhoollddeerrss aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy
iinnssttrruummeennttss
228833
465
450
404
206
281
254
248
183
179
44,,778833
44,,114444
88,,992277
44,,885533
44,,007744
22
889955
33,,117777
−−
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
33,,117777
2,041
2,256
2,145
1,940
1,181
1,549
1,469
1,449
1,536
(1)
(2)
(3)
Certain amounts from fiscal years 2013 and 2012 have been adjusted to reflect changes to 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.
230
National Bank of Canada
National Bank of Canada2021 Annual Report
Supplementary Information
Statistical Review
As at October 31(1)
22002211
2020
2019
2018
2017
2016
2015
2014
2013
2012
Number of common shares(2)
(thousands)
Number of common
shareholders on record
333377,,991122
335,998
334,172
335,071
339,592
338,053
337,236
329,297
325,983
322,617
2200,,337755
20,674
20,894
21,325
21,542
21,966
22,152
22,394
22,737
23,180
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
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
$$
99..0066
88..9966
22..8844
110044..3322
6655..5544
110022..4466
4477..9955
––
––
––
––
––
––
––
11..00006633
00..99559988
00..77000000
11..00112255
11..11112255
11..11550000
11..22337755
$
$
$
$
$
$
$
$
$
$
$
$
$
$
5.73 $
6.39 $
6.01 $
5.44
5.70 $
2.84 $
6.34 $
2.66 $
5.94 $
2.44 $
5.38
2.28
74.79 $
38.73 $
63.94 $
39.97 $
68.02 $
54.97 $
68.02 $
36.89 $
65.63 $
58.69 $
59.76 $
34.40 $
62.74
46.83
62.61
31.51
–
–
–
–
–
–
–
1.0063 $
0.9636 $
1.4000 $
1.3500 $
1.1125 $
1.1500 $
1.2375 $
–
–
–
–
–
–
–
1.0156 $
0.9750 $
1.4000 $
1.3500 $
1.1125 $
1.1500 $
1.2375 $
–
–
–
–
–
–
– $
1.0250 $
0.9750 $
1.4000 $
1.3500 $
1.1125 $
0.9310
0.5323
–
–
–
–
–
–
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
–
–
$
$
$
$
$
$
$
$
$
$
$
$
3.31 $
4.56
3.29 $
2.18 $
4.51
2.04
47.88 $
35.83 $
47.88 $
28.52 $
55.06
40.75
43.31
28.26
–
–
– $
–
–
–
0.9500 $
1.0250 $
0.9750 $
1.1373
0.5733
–
–
–
–
–
1.5000
–
–
–
0.9500
1.0250
1.0760
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
4.36
4.32
1.88
53.88
41.60
52.68
25.76
–
1.2125
1.5000
–
0.4125
0.4125
0.9500
0.7849
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4.34 $
4.63
4.31 $
1.70 $
4.58
1.54
45.24 $
36.18 $
45.24 $
22.97 $
40.64
31.64
38.59
20.02
0.2444 $
1.2125 $
1.5000 $
1.0078 $
1.6500 $
1.6500 $
0.9728
–
–
–
–
–
–
–
1.4625
1.2125
1.5000
1.3438
1.6500
1.6500
–
–
–
–
–
–
–
–
FFiinnaanncciiaall rraattiiooss
Return on common
shareholders’ equity(3)
Return on average assets(3)
RReegguullaattoorryy rraattiiooss uunnddeerr
BBaasseell IIIIII(4)
Capital ratios(5)
CET1(6)
Tier 1(6)
Total(6)
Leverage ratio(6)
OOtthheerr iinnffoorrmmaattiioonn
Number of employees(11)(12)
Branches in Canada
Banking machines in Canada
2200..77 %%
00..8877 %%
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 %
1122..44 %%
1155..00 %%
1155..99 %%
44..44 %%
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 %(7)
15.1 %(7)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(8)
14.0 %(10)
4.0 %
9.2 %
12.3 %(9)
15.1 %(9)
8.7 %
11.4 %
15.0 %
7.3 %
10.1 %
14.1 %
2255,,996666
338844
992277
25,604
403
940
24,557
422
939
22,426
428
937
20,584
429
931
20,600
450
938
19,026
452
930
18,725
452
935
16,675
453
937
16,636
451
923
(1)
(2)
(3)
(4)
Certain amounts from fiscal years 2013 and 2012 have been adjusted to reflect changes to accounting standards in 2014.
The figures for 2014 and prior years have been adjusted to reflect the stock dividend paid in 2014.
For additional information on supplementary financial measures composition, see the Glossary section on pages 123 to 126 of the MD&A.
Ratios as at October 31, 2021 and 2020 are calculated in accordance with the Basel III rules, as set out in OSFI’s Capital Adequacy Requirements guideline, and reflect the transitional
measures granted by OSFI. For additional information, see the section entitled COVID-19 Pandemic – Key Measures Introduced by the Regulatory Authorities on page17 of the MD&A.
The October 31, 2013 and 2012 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 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.
(5)
(6)
(7)
(8)
(9)
(10) 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.
(11) Full-time equivalent.
(12)
Includes employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2021.
National Bank of Canada
231
National Bank of Canada2021 Annual Report
Supplementary Information
IInnffoorrmmaattiioonn ffoorr SShhaarreehhoollddeerrss
DDeessccrriippttiioonn ooff SShhaarree CCaappiittaall
DDiivviiddeennddss DDeeccllaarreedd oonn CCoommmmoonn SShhaarreess DDuurriinngg FFiissccaall 22002211
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 $300 million. As at
October 31, 2021, the Bank had a total of 337,912,283 common shares and
66,000,000 first preferred shares issued and outstanding.
Record date
Payment date
Dividend per share ($)
December 28, 2020
March 29, 2021
June 28, 2021
September 27, 2021
February 1, 2021
May 1, 2021
August 1, 2021
November 1, 2021
0.71
0.71
0.71
0.71
SSttoocckk EExxcchhaannggee LLiissttiinnggss
DDiivviiddeennddss DDeeccllaarreedd oonn PPrreeffeerrrreedd SShhaarreess DDuurriinngg FFiissccaall 22002211
The Bank’s common shares and Series 30, 32, 38, 40 and 42 First Preferred
Shares are listed on the Toronto Stock Exchange in Canada.
Record
date
Payment
date
Series
30
Series
32
Series
34
Series
36
Dividend per share ($)
Series
42
Series
40
Series
38
Issue or class
Common shares
First Preferred Shares
Series 30
Series 32
Series 38
Series 40
Series 42
Ticker symbol
Jan. 6, 2021
Feb. 15, 2021
Apr. 5, 2021 May 15, 2021
NA
Jul. 6, 2021
Aug. 15, 2021
Oct. 6, 2021 Nov. 15, 2021
0.2516 0.2399 0.3500 0.3375 0.2781 0.2875 0.3094
0.2515 0.2400 0.3500 0.3375 0.2782 0.2875 0.3094
− 0.3375 0.2781 0.2875 0.3093
0.2516 0.2399
− 0.2781 0.2875 0.3094
−
0.2516 0.2400
NA.PR.S
NA.PR.W
NA.PR.C
NA.PR.E
NA.PR.G
NNuummbbeerr ooff RReeggiisstteerreedd SShhaarreehhoollddeerrss
As at October 31, 2021, there were 20,375 common shareholders recorded
in the Bank’s common share register.
DDiivviiddeennddss
DDiivviiddeenndd DDaatteess iinn FFiissccaall 22002222
(subject to approval by the Board of Directors of the Bank)
Payment date
February 1, 2022
May 1, 2022
August 1, 2022
November 1, 2022
February 15, 2022
May 15, 2022
August 15, 2022
November 15, 2022
Record date
Common shares
December 27, 2021
March 28, 2022
June 27, 2022
September 26, 2022
Preferred shares,
Series 30, 32, 38, 40 and 42
January 6, 2022
April 5, 2022
July 6, 2022
October 6, 2022
232
Dividends paid are “eligible dividends” in accordance with the Income Tax
Act (Canada).
DDiivviiddeenndd RReeiinnvveessttmmeenntt aanndd SShhaarree PPuurrcchhaassee
PPllaann
National Bank has a Dividend Reinvestment and Share Purchase Plan for
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.
DDiirreecctt DDeeppoossiitt
Shareholders may elect to have their dividend payments deposited directly
via electronic funds transfer to their bank account at any financial institution
that is a member of the Canadian Payments Association. To do so, they must
send a written request to the transfer agent, Computershare Trust Company
of Canada.
National Bank of Canada
National Bank of Canada2021 Annual Report
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).
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
127 Audited Consolidated Financial Statements
230 Statistical Review
232 Information for Shareholders
2.7 million Clients(1)
26,920 Employees(2)
$652 B Assets Under Administration
$356 B Total Assets
$8,927 M Total Revenues
$3,177 M Net Income
$34.6 B Market Capitalization
11%
24%
41%
2021 Total Revenues by
Business Segment (3)
Personal and Commercial
Wealth Management
Financial Markets
24%
U.S. Specialty Finance and International
15%
19 %
33%
2021 Total Revenues by
Geographic Distribution(3)
52%
Province of Quebec
Other Canadian provinces
Outside of Canada
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) On a taxable equivalent basis and excluding the Other heading.
See the Financial Reporting Method section on pages 18 to 21.
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be held on
April 22, 2022.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2022 on the Bank’s website at
nbc.ca.
CCoommmmuunniiccaattiioonn wwiitthh SShhaarreehhoollddeerrss
For information about stock transfers, address changes, dividends, lost
certificates, tax forms and estate transfers, shareholders of record may
contact the transfer agent at the following address:
CCoommppuutteerrsshhaarree TTrruusstt CCoommppaannyy ooff CCaannaaddaa
Share Ownership Management
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1 Canada
Telephone: 1-888-838-1407
1-888-453-0330
Fax:
service@computershare.com
E-mail:
computershare.com
Website:
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
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
From time to time, National Bank of Canada makes written and oral
forward-looking statements, including in this Annual Report, in other filings
with Canadian regulators, in reports to shareholders, in press releases and in
other communications. All such statements are made pursuant to the
Canadian and American securities legislation and the provisions of the
United States Private Securities Litigation Reform Act of 1995.
Additional information about these statements can be found on page 15 of
this Annual Report.
TTrraaddeemmaarrkkss
The trademarks belonging to National Bank of Canada and used in this report
include National Bank of Canada, National Bank, NBC, 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 Asset 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.
PPoouurr oobbtteenniirr uunnee vveerrssiioonn ffrraannççaaiissee dduu RRaappppoorrtt aannnnuueell,,
vveeuuiilllleezz vvoouuss aaddrreesssseerr àà ::
Relations avec les investisseurs
Banque Nationale du Canada
600, rue De La Gauchetière Ouest, 7e étage
Montréal (Québec) H3B 4L2 Canada
Téléphone :
Adresse électronique : relationsinvestisseurs@bnc.ca
1 866 517-5455
LLeeggaall DDeeppoossiitt
ISBN 978-2-921835-71-8
Legal deposit – Bibliothèque et Archives nationales du Québec, 2021
Legal deposit – Library and Archives Canada, 2021
PPrriinnttiinngg
L’Empreinte
National Bank of Canada proudly participates in a carbon neutral program
and purchased carbon credits to offset the greenhouse gases emitted to
produce the paper this calendar is printed on and is proud to help save the
environment by using EcoLogo and Forest Stewardship Council® (FSC®)
certified paper.
t
r
o
p
e
R
l
a
u
n
n
A
1
2
0
2
® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.