20 Annual
Report
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® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be
held on April 21, 2023.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2023 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
Fax:
1-888-453-0330
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
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,
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 978-2-921835-75-6
Legal deposit – Bibliothèque et Archives nationales du Québec, 2022
Legal deposit – Library and Archives Canada, 2022
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 this paper and is proud to help save the
environment by using EcoLogo and Forest Stewardship Council® (FSC®)
certified paper.
At a Glance
Founded in 1859, National Bank of Canada
offers financial services to individuals, businesses,
institutional clients and governments across Canada.
We are one of Canada’s six systemically important
banks and among the most profitable banks on
a global basis by return on equity.
We operate through three business segments
in Canada—Personal and Commercial Banking,
Wealth Management and Financial Markets. 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 Senior Leadership Team
6 Message From the Chairman of the Board
8 Members of the Board of Directors
9 Our One Mission
10 How We Support Sustainable Development
13 Risk Disclosures
15 Management’s Discussion and Analysis
127 Audited Consolidated Financial Statements
232 Statistical Review
234 Information for Shareholders
2.7 million Clients(1)
29,509 Employees(2)
$9.7 B Total Revenues
$3.4 B Net Income
$404 B Total Assets
$31.2 B Market Capitalization
11%
2022 Total Revenues — Adjusted
by Business Segment (3)
25%
40%
Personal and Commercial
Wealth Management
Financial Markets
24%
U.S. Specialty Finance and International
16%
19 %
31%
53%
2022 Total Revenues — Adjusted
by Geographic Distribution(3)
Province of Quebec
Other Canadian provinces
Outside of Canada
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) Excluding the Other heading. See the Financial Reporting Method section
on pages 16 to 21 for additional information on non-GAAP financial measures.
Investing in National Bank
OUR PILLARS
Our Culture
Our Strategic
Positioning
Our Discipline
› Entrepreneurial culture
› Canadian bank with leading
› Strong risk management culture
› Proven agility
› Collaboration
› Diversity and inclusion
franchise in Quebec
› Differentiated positioning
in Financial Markets and
Wealth Management
› Focused strategy outside
of Canada
› Disciplined cost management
› Solid capital levels
› Sound ESG governance
OUR PERFORMANCE IN 2022
Superior ROE (1)
18.8%
2022 Return on Common
Shareholders’ Equity(2) (ROE)
Strong Earnings Growth
9.9%
11.4%
(3)
Growth of Income Before Provisions for
Credit Losses and Income Taxes (2021–2022)
Solid Capital Position
12.7%
Common Equity Tier 1 (CET1) Ratio(4)
as at October 31, 2022
Solid Credit Performance
7 bps
(2)
PCL on Impaired Loans (excl. POCI) Ratio(5)
Sustainable Dividend Growth
($ per share)
$2.44
$2.66
$2.84
$2.84(6)
$3.58
9.4%
5-year CAGR
2018
2019
2020
2021
2022
Premium Total Shareholder Returns(2)
CAGR for the periods ended October 31, 2022 (2) (7)
Ranking(8)
National
Bank
Canadian
Peers(8)
3 years
5 years
10 years
# 1
# 1
# 1
15%
13%
14%
9%
7%
11%
TSX
9%
7%
8%
(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 122 to 125 for details on the composition of these measures.
(3) Growth of adjusted income before provisions for credit losses and income taxes. See the Financial Reporting Method section on pages 16 to 21 for additional information
on non-GAAP financial measures.
(4) See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
(5) Represents provisions for credit losses on impaired loans excluding purchased or originated credit impaired (POCI) loans as a percentage of average loans and acceptances.
See the Glossary section on pages 122 to 125 for details of this measure.
(6) Interruption of any dividend increases, as prescribed by the Office of the Superintendent of Financial Institutions (OSFI) between March 13, 2020 and November 4, 2021.
(7) Compound annual growth rate. Source: Nasdaq IR Insight via Factset.
(8) Among Canadian peers, as defined above.
1
National Bank of Canada2022 Annual Report
Financial
Overview
Medium-Term Objectives and Results
Growth in diluted earnings per share – Adjusted (1)
ROE – Adjusted (2)
Dividend payout ratio – Adjusted (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)
Operating results – Adjusted (1)
Total revenues – Adjusted
Income before provisions for credit losses and income taxes – Adjusted
Net income – Adjusted
Diluted earnings per share – Adjusted
Efficiency ratio – Adjusted(2)
Dividends declared
Total assets
Medium-Term Objectives
2022 Results
5–10%
15–20%
40–50%
Strong level
Strong level
8.3%
18.8%
36.8%
12.7%
4.5%
2022
2021
9,652
4,422
3,383
$ 9.61
18.8 %
36.8 %
9,934
4,704
3,383
$ 9.61
52.6 %
$ 3.58
8,927
4,024
3,140
$ 8.85
20.7 %
31.7 %
9,1 1 6
4,222
3,147
$ 8.87
53.7 %
$ 2.84
403,740
355,621
(1) See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 16 to 21 for additional information on capital measures.
(4) See the Glossary section on pages 122 to 125 for details on the composition of these measures.
2
National Bank of Canada2022 Annual Report
MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt
aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr
As I look back on my first year, I am proud of all that has
been accomplished in a year marked by an uncertain and
challenging economic and operating environment. Our
strong performance in this context was made possible by
the dedication of our talented team, the relationships we
have built with our clients and our constant focus on value
creation.
Early in the year, we saw significant improvements globally
from both health and economic perspectives. As the year
progressed, inflation accelerated, interest rates rose and
geopolitical risks intensified, contributing to persistent
volatility and heightened economic uncertainty. We
successfully navigated this complex environment, remained
focused on the execution of our strategic priorities and
delivered strong financial results.
Our consistent performance is supported by our three key
pillars. First, our culture encourages us to be agile,
entrepreneurial and to work as a team, enabling us to
adapt and seize opportunities. Second, our unique strategic
positioning with a domestic focus, a leading franchise in
Quebec and a targeted strategy outside Canada provides
diversification to our earnings streams and resiliency
through market cycles. Finally, our disciplined approach
towards capital allocation, risk management and cost
management is the cornerstone of our robust balance
sheet. This solid foundation will continue to support future
performance.
DDiisscciipplliinnee,, CCoonnssiisstteennccyy,, PPeerrffoorrmmaannccee
In fiscal 2022, we generated superior organic growth across
all our business segments. Operating leverage, a key
performance indicator, was positive for the year.
The Bank also generated an industry-leading return on
equity. This reflects our ability to strike the right balance
between growth, capital deployment discipline and credit
quality. It also speaks to the diversification of our activities,
which include highly accretive businesses.
In a context of heightened macroeconomic uncertainty, we
maintained robust capital levels.
We ended 2022 with strong capital ratios and prudent
levels of allowances for credit losses. We continued to
prioritize deploying capital to support organic growth,
investing in efficiency improvements and returning capital
to shareholders.
In 2022, we increased our dividend by 26%. This included a
23% increase paid in February 2022, following the lifting of
OSFI restrictions on dividend increases and share buybacks
set at the beginning of the pandemic. The objective of this
substantial increase was to reset the dividend level towards
our medium-term payout target range of 40% to 50% of net
income. During the year, we also returned $245 million of
capital to shareholders through share repurchases. Total
shareholder returns over three-, five-, and 10-year periods
remained among the best in our peer group, demonstrating
our ability to drive consistent returns over time.
SSttrroonngg OOrrggaanniicc GGrroowwtthh AAccrroossss AAllll BBuussiinneessss
SSeeggmmeennttss
In 2022, our Personal and Commercial Banking business
generated solid growth, as we continued to balance
volumes, margins and credit quality. We are pleased with
our client satisfaction scores, which continued to improve,
reflecting our sustained focus on enhancing the end-to-end
client experience. We also capitalized on our targeted
approach across Canada that is focused on specialized
industries. This segment is well-positioned to capture
additional market share in Quebec and seize opportunities
in other Canadian markets.
Our differentiated Wealth Management segment delivered
a strong performance in 2022 despite challenging market
conditions. This was supported by a well-diversified revenue
mix that includes a strong deposit base, above-market
asset growth and enhanced cross-segment opportunities
with our other domestic businesses. A key long-term growth
lever for the Bank, our Wealth Management business is
poised to deliver solid earnings growth and superior return
on equity through the cycle.
3
National Bank of Canada2022 Annual Report
MMeessssaaggee FFrroomm tthhee PPrreessiiddeenntt aanndd CChhiieeff EExxeeccuuttiivvee OOffffiicceerr (cont.)
In 2022, our Financial Markets business demonstrated its
resilience and ability to quickly adapt to changing market
conditions. Over the years, by investing in people and
technology and developing new targeted revenue sources,
we have diversified and expanded the earnings power of
this segment. The expertise, discipline, strategic focus and
sound risk profile of our Financial Markets segment have
solidified our leadership in select activities across Canada.
This positions the franchise to consistently deliver profitable
growth through market cycles.
Beyond Canada, our U.S. Specialty Finance and
International segment provides accretive geographic and
business diversification. In 2022, Credigy pursued a
disciplined investment approach, generating a solid
underlying performance. ABA Bank continued to deliver
notable growth and is now a leading bank in Cambodia.
Our focused international strategy is well-positioned to
deliver superior growth and returns over the long term.
CCoonnttrriibbuuttiinngg ttoo aa SSuussttaaiinnaabbllee EEccoonnoommyy ffoorr AAllll
As a bank, we play a key role in supporting a just energy
transition that considers financial and social imperatives, as
well as related dependencies of the Canadian economy.
On the environment, our strategy is based on two core
principles: managing the impact of our activities on climate
change and creating opportunities for our clients to
contribute to a sustainable economy with us. This includes
progressing in our journey to achieve net-zero greenhouse
gas (GHG) emissions from operating and financing activities
by 2050 and bolstering our support to clients in the
transition.
As we continue to grow our renewable energy loan portfolio
at a faster pace than non-renewable, decarbonization
criteria and data related to our limits on high-emitting
sector activities are now embedded in our lending and
underwriting practices. We are also deploying capital to
pursue business opportunities in renewable energy and to
expand our adapted offering of sustainable products and
services across our business lines.
More broadly, we remain committed to our mission of
Putting People First, to generate a positive impact for
clients, employees and the communities we have the
privilege of serving, while governing ourselves according to
the highest standards. From aiming to have over 25% of our
workforce comprised of talent from diverse backgrounds, to
being the top affordable housing lender in Quebec, we will
continue to actively advance our ESG priorities in 2023.
BBuuiillddiinngg oonn OOuurr SSoolliidd FFoouunnddaattiioonn
As we head into 2023, we are confident that our solid
foundation will enable us to navigate through economic
uncertainty and seize the right opportunities.
To support our long-term growth, we are committed to
continuing to invest in our people and our culture. We will
remain focused on deepening our client relationships, with
the objective of gaining market share both in our core
Quebec market and across Canada.
Digital innovation and automation are key to further
enhancing the client experience and operational
efficiencies, and we are capitalizing on our momentum in
these areas.
We also see tremendous opportunity for cross-segment
synergies, as illustrated by the integration of our commercial
and private banking teams in 2022. Working in close
collaboration is ingrained in our culture and further enabled
by our size and agility. We plan on building on these models
across business lines to drive further growth across Canada
in the years to come.
With a strong balance sheet and solid risk management
framework, we have the flexibility and resilience to face
uncertainty and generate continued profitable growth. Our
commitment to creating long-term value for our employees,
our clients, our shareholders and our communities remains
unwavering.
LLaauurreenntt FFeerrrreeiirraa
President and Chief
Executive Officer
4
National Bank of Canada2022 Annual Report
MMeemmbbeerrss ooff tthhee SSeenniioorr LLeeaaddeerrsshhiipp TTeeaamm
LLaauurreenntt FFeerrrreeiirraa
President and
Chief Executive Officer
WWiilllliiaamm BBoonnnneellll
Executive Vice-President,
Risk Management
MMaarrttiinn GGaaggnnoonn
Executive Vice-President,
Wealth Management;
Co-President and Co-Chief
Executive Officer,
National Bank Financial
SSttéépphhaannee AAcchhaarrdd
Executive Vice-President
and Co-Head,
Commercial Banking and
Private Banking
ÉÉrriicc BBuujjoolldd
Executive Vice-President,
and Co-Head,
Commercial Banking and
Private Banking
MMaarriiee CChhaannttaall GGiinnggrraass
Chief Financial Officer and
Executive Vice-President,
Finance
LLuucciiee BBllaanncchheett
Executive Vice-President,
Personal Banking and
Client Experience
ÉÉttiieennnnee DDuubbuucc
Executive Vice-President
and Co-Head,
Financial Markets
DDeenniiss GGiirroouuaarrdd
Executive Vice-President
and Co-Head,
Financial Markets
BBrriiggiittttee HHéébbeerrtt
Executive Vice-President,
Employee Experience
JJuulliiee LLéévveessqquuee
Executive Vice-President,
Technology and Operations
GGhhiissllaaiinn PPaarreenntt
Executive Vice-President,
International
5
National Bank of Canada2022 Annual Report MMeessssaaggee FFrroomm tthhee CChhaaiirrmmaann
ooff tthhee BBooaarrdd
The Bank is continuing its digital transformation, but the
work is not complete. Technology, including cybersecurity
and data protection, continued to receive much attention
from the Board in 2022. The Technology Committee,
formerly a subcommittee, became a full committee this
year. Its mandate consists of overseeing the various
components of the Bank’s technology strategy and of
monitoring technology risks, particularly those related to
cybercrime.
SSuuppppoorrttiinngg tthhee TTrraannssiittiioonn aanndd BBuuiillddiinngg aa GGrreeeenn
EEccoonnoommyy
The Bank’s commitment to environmental, social and
governance matters is a key priority, and the Board remains
highly involved with the adoption of ESG principles and with
monitoring action plans and targets.
In this regard, the Bank achieved an important milestone in
2022 by announcing its first interim greenhouse gas (GHG)
emission reduction targets regarding the intensity of the
Canadian oil and gas producer portfolio.
By continuing to work with clients on the transition and by
developing sustainable products and services, we will truly
be able to achieve our targets.
AA PPoossiittiivvee IImmppaacctt oonn OOuurr EEmmppllooyyeeeess,, CClliieennttss aanndd
CCoommmmuunniittiieess
During the year, the Board continued to pay particular
attention to the Bank’s culture, which is paramount to its
long-term success. Based on a desire to provide a
stimulating work environment, the Bank is building a new
head office that will offer an optimal employee experience
as of 2023 while encouraging a culture of collaboration
among teams.
During a year marked by the integration of a new Chief
Executive Officer, the post-pandemic transition, and
economic and geopolitical uncertainty, the Bank
maintained its commitment to prioritizing the well-being of
its employees, clients, communities, and shareholders.
Backed by its talented team, the Bank posted good results
in 2022 thanks to a solid foundation on which it is building
sustainable growth. The Board is proud of this performance,
as it is testament to the Bank’s agility, adaptability, and
resolute focus on its mission.
In its deliberations, the Board prioritized its attention on the
objectives related to strategic planning, technology, talent,
sound and rigorous risk management, and environmental,
social and governance (ESG) factors, while reinforcing the
organizational foundation that will support the Bank’s
evolution and ability to create long-term value for all of its
stakeholders.
SSoolliidd PPeerrffoorrmmaannccee TThhaannkkss ttoo aa SSoolliidd TTeeaamm
Supported by the leadership team, Laurent Ferreira took on
the new challenges that arose during his first year heading
up the Bank. The Board supported him, particularly in the
development and implementation of a three-year strategic
plan and in the execution of the ongoing multiyear
transformation and cultural shift.
In this context, the Board supported several organizational
changes made by the leadership team, including the
amalgamation of Information Technology and Operations,
the merger of Commercial and Private Banking, and new
appointments in Finance and Financial Markets.
TThhee BBaannkk ooff tthhee FFuuttuurree:: TTeecchhnnoollooggyy--BBaasseedd aanndd
PPeeooppllee FFiirrsstt
The Bank of the future will continue to put people first while
relying on leading-edge technology that will help deliver a
unique client experience. The Bank establishes close
relationships with clients and has an entrepreneurial culture,
and the Board is actively monitoring these competitive
advantages for which the Bank is known as well as the
impacts of regulatory and technological changes in the
sectors where we operate.
6
National Bank of Canada2022 Annual Report
The publication of the Bank’s second Inclusion and Diversity
Booklet also shows the progress made and the challenges
surrounding this important social imperative as well as the
main initiatives deployed to maintain constructive dialogue.
Regarding social impact, the Board is proud of the Bank’s
substantial support for the many community organizations
that are working hard to respond to increased demand in
the context of the pandemic and high inflation.
FFooccuuss oonn GGoovveerrnnaannccee
During the year, the Board welcomed Lynn Loewen as a
new director. Her impressive professional experience and
expertise in auditing, financial controls, and finance have
already proven to be considerable assets to the Board.
We are proud of our entrepreneurial roots and believe it is
very important that the composition of the Board reflects
the business world. In accordance with the development of
the Bank’s strategy, we are continuing our reflections on
Board composition—a key element of sound governance.
BBuuiillddiinngg aa SSuussttaaiinnaabbllee FFuuttuurree
Although a climate of uncertainty will probably continue in
the year ahead, the Bank will be able to capitalize on its
strengths and its deeply rooted culture of agility to remain
on the road to success. The Board will maintain its
disciplined approach and consider the interests of our
employees, clients, communities, and shareholders.
On behalf of the Board of Directors, I would like to draw
attention to the leadership team’s substantial contributions.
We would also like to thank all of our employees for their
dedication and for embodying the Bank’s values every day.
It is with a steadfast pride that we serve the Bank, and we
are more committed than ever to building a sustainable
future for the benefit of all our stakeholders.
JJeeaann HHoouuddee
Chairman of the Board of Directors
For more information regarding the Bank’s governance,
please refer to the most recent Management Proxy Circular,
which is available on the Bank’s website at nbc.ca.
7
National Bank of Canada2022 Annual Report
MMeemmbbeerrss ooff tthhee BBooaarrdd ooff DDiirreeccttoorrss
JJeeaann HHoouuddee
Quebec, Canada
Chairman of the Board of
Directors,
National Bank of Canada
and Corporate Director
Director since March 2011
MMaarryyssee BBeerrttrraanndd
Quebec, Canada
Corporate Director
Director since April 2012
PPiieerrrree BBlloouuiinn
Quebec, Canada
Corporate Director
Director since September 2016
PPiieerrrree BBooiivviinn
Quebec, Canada
President and Chief Executive
Officer, Claridge Inc.
Director since April 2013
YYvvoonn CChhaarreesstt
Quebec, Canada
Corporate Director
Director since April 2020
PPaattrriicciiaa CCuurraaddeeaauu--GGrroouu
Quebec, Canada
Corporate Director
Director since April 2019
LLyynnnn LLooeewweenn
Quebec, Canada
Corporate Director
Director since April 2022
RReebbeeccccaa MMccKKiilllliiccaann
Ontario, Canada
Chief Executive Officer,
McKesson Corporation Canada
Director since October 2017
LLaauurreenntt FFeerrrreeiirraa
Quebec, Canada
President and Chief Executive
Officer,
National Bank of Canada
Director since February 2021
RRoobbeerrtt PPaarréé
Quebec, Canada
Strategic Advisor,
Fasken Martineau DuMoulin LLP
and Corporate Director
Director since April 2018
KKaarreenn KKiinnsslleeyy
Ontario, Canada
Corporate Director
Director since December 2014
LLiinnoo AA.. SSaappuuttoo
Quebec, Canada
President and Chief Executive
Officer and Chairman of the
Board of Directors,
Saputo Inc.
Director since April 2012
AAnnddrrééee SSaavvooiiee
New Brunswick, Canada
President and Chair of the
Board of Directors,
Acadian Properties Ltd.
Director since April 2015
MMaacckkyy TTaallll
Florida, United States
Partner and Chair of the Global
Infrastructure Group
The Carlyle Group Inc.
Director since April 2021
PPiieerrrree TThhaabbeett
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
Lynn Loewen
Andrée Savoie
Pierre Thabet
RRiisskk MMaannaaggeemmeenntt CCoommmmiitttteeee
Pierre Thabet (Chair)
Yvon Charest
Patricia Curadeau-Grou
Karen Kinsley
Lino A. Saputo
Macky Tall
TTeecchhnnoollooggyy CCoommmmiitttteeee
Pierre Blouin (Chair)
Patricia Curadeau-Grou
Rebecca McKillican
Robert Paré
8
National Bank of Canada2022 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.
How We Support
Sustainable Development
Our ESG Principles
Supporting sustainable development is an intrinsic part of our One Mission.
Environmental, social and governance considerations play a key role in our business
and operational decisions.
The ESG principles that our Board of Directors have adopted demonstrate our commitment to sustainable development
and to balancing the interests of different stakeholders in society.
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
10
National Bank of Canada2022 Annual Report Our Commitments
In accordance with our principles and to help the Bank achieve its ESG objectives, we have
made the following commitments:
ENVIRONMENT
Grow the portfolio of loans related to renewable energy at a faster pace than the portfolio
of loans related to non-renewable energy.
Not offer or grant new financing related to oil and gas exploration, exploitation or production
in the Arctic.
Not finance new thermal coal mining and processing activities.
SOCIAL
Facilitate access to banking services for underbanked people.
Promote the development and success of women, visible minorities, persons with disabilities,
Indigenous persons and members of LGBTQ+ communities.
Promote financial literacy to improve financial knowledge and help people achieve
financial security.
GOVERNANCE
Protect our clients’ personal information to build and maintain a trust-based relationship with them.
OUR TARGETS
Have more than
a quarter of our
workforce be made
up of people in
diversity segments
by the end of 2023
Reduce greenhouse
gas emissions
from our activities
by 25% by the
end of 2025
Reduce portfolio
intensity for the
Canadian Oil and
Gas Producers
sub-sector by
31% by 2030
Achieve net zero
emissions for our
operations and our
financing activities
by 2050
In 2022, the Bank also pursued its commitment to the following initiatives:
DISCLOSURE INSIGHT ACTION
Principles
11
National Bank of Canada2022 Annual Report Our Impact
ESG governance
Working group in charge of the
ESG strategy made up of leaders
from various sectors.
ESG and the Board
ESG responsibilities included in the mandates
of the Board of Directors and all its committees.
Accountability
ESG criteria integrated into executive compensation.
$10 B
in capital made available since 2019 for
renewable energy projects in North America
as at October 31, 2022.
98%
of National Bank Investments assets
under management managed by
PRI signatories as at October 31, 2022.
Sustainable finance
Dedicated team that supports clients during
their transition.
ERG
Employee resource groups representing different
diversity segments.
SME
Support for a dozen incubators and
accelerators to promote entrepreneurship
and advance business knowledge.
CCAB
The Bank has committed to the Progressive
Aboriginal Relations program rolled out by the
Canadian Council for Aboriginal Business.
64%
reduction in outstanding loans
to Oil and Gas producers
and services since 2015,
as at October 31, 2022.
FinLit 101
Launched a 3rd financial literacy program
in partnership with the Canadian Foundation
for Economic Education.
#1
in funding affordable housing
in Quebec.
81
With 81 branches in Cambodia, the Bank provides
access to basic banking services for underbanked,
unbanked and underserved people.
12
National Bank of Canada2022 Annual Report 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 derivative transactions
Credit risk mitigation
OOtthheerr rriisskkss
31
32
Other risks: Governance, measurement and management
Publicly known risk events
(1)
(2)
Fourth quarter 2022.
These pages are included in the document entitled Supplementary Financial Information – Fourth Quarter 2022.
13
55 to 105, 117, 119 to 121
Notes 1, 7, 16, 23 and 29
65 to 105
26 and 70 to 75
56 to 59, 91 and 95 to 98
65 to 85, 91 to 93 and 98
65 and 66
64 to 66 and 70
55, 66, 79, 89, 90 and 93
56 to 59
62
55 to 64
64
75 to 79
63
69, 76 to 79 and 84
91 to 98
94 and 95
222 to 226
98 to 100
86 and 87
84 to 90, 210 and 211
88
84 to 90
83 and 171 to 182
80, 81, 145 and 146
117, 120, 121 and 171 to 182
80 to 82 and 190 to 193
78 to 81 and 168
73 to 75 and 100 to 105
26, 100 and 101
19 to 29(2)
5 to 52
7 to 13, 16 and 17
6
6
6
6
35
18 to 44 and 19 to 27(2)
24 to 27(2)
37 to 44, 28(2) and 29(2)
20, 24 and 42 to 52
13
National Bank of Canada2022 Annual Report
Management’s Discussion
and Analysis
NNoovveemmbbeerr 2299,, 22002222
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, 2022 (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, 2022. 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. The information found in the various documents and reports published by the Bank or the information available on the Bank's
website and mentioned herein is not and should not be considered incorporated by reference into the 2022 Annual Report, the Management's Discussion and
Analysis, or the Consolidated Financial Statements, unless expressly stated otherwise.
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
2222
2233
2277
3300
3311
3355
3388
4422
4477
Quarterly Financial Information
Analysis of the Consolidated Balance Sheet
Securitization and Off-Balance-Sheet Arrangements
Capital Management
Risk Management
Critical Accounting Policies and Estimates
Accounting Policy Changes
Future Accounting Policy Changes
Additional Financial Information
Glossary
4488
4499
5533
5555
6655
110066
111111
111111
111122
112222
CCaauuttiioonn RReeggaarrddiinngg FFoorrwwaarrdd--LLooookkiinngg SSttaatteemmeennttss
Certain statements in this document are forward-looking statements. 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 2023 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 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. These forward-looking statements are based on current expectations, estimates, assumptions and intentions and are subject to uncertainty and inherent risks, many of which are beyond
the Bank’s control.
Assumptions about the performance of the Canadian and U.S. economies in 2023 and how that performance 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.
Statements about the economy, market changes, and the Bank's objectives, outlook and priorities for fiscal 2023 and thereafter are based on a number of assumptions and are subject to risk factors, many of which are beyond the
Bank's control and the impacts of which are difficult to predict. These risk factors 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; inflation; disruptions in global supply chains; 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 disruptions 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; the risk of fraudulent activity; 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 evolution of which is difficult to predict and could continue to
have repercussions on the Bank.
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 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 65 of the 2022 Annual Report.
The foregoing list of risk factors is not exhaustive. Additional information about these risk factors is provided in the Risk Management section of the 2022 Annual Report. Investors and others who rely on the Bank’s forward-looking
statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether
written or oral, that may be made from time to time, by it or on its behalf. The Bank cautions investors that these forward-looking statements are not guarantees of future performance and that actual events or results may differ
significantly from these statements due to a number of factors.
Management’s Discussion and Analysis
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 the Office of the Superintendent of Financial Institutions (Canada)
(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.
The presentation of segment disclosures is consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2021. This
presentation reflects the fact that the loan portfolio comprising borrowers in the “Oil and gas” and “Pipelines” sectors as well as related activities, which had
previously been reported in the Personal and Commercial segment, are now reported in the Financial Markets segment. The Bank made this change to better
align the monitoring of its activities with its management structure.
In addition, a change in accounting policy, as described in the Accounting Policy Changes section of Note 1 to the consolidated financial statements, was
applied retrospectively during the year ended October 31, 2022 after the International Financial Reporting Interpretations Committee (IFRIC) issued a final
agenda decision on accounting for the costs of configuring or customizing a supplier’s software in a cloud computing arrangement. The figures for the year
ended October 31, 2021 have been adjusted to reflect this change in accounting policy.
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.
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 better assess results without the specified items if they consider
such items not to be reflective of the underlying performance of the Bank’s operations. 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.
The key non-GAAP financial measures used by the Bank to analyze its results are described below, and a quantitative reconciliation of these measures is
presented in the tables in the Reconciliation of Non-GAAP Financial Measures section on pages 20 and 21 and in the Consolidated Results table on page 27. It
should be noted that, for the year ended October 31, 2022, no specified items have been excluded from results, whereas an amount of $9 million in intangible
asset impairment losses ($7 million net of income taxes) related to technology developments had been excluded as specified items for the year ended
October 31, 2021.
Adjusted Net Interest Income
This item represents net interest income on a taxable equivalent basis and excluding specified items, if any. A taxable equivalent is added to net interest
income so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that net
interest income can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's
operations.
Adjusted Non-Interest Income
This item represents non-interest income on a taxable equivalent basis and excluding specified items, if any. A taxable equivalent is added to non-interest
income so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are excluded so that
non-interest income can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's
operations.
Adjusted Total Revenues
This item represents total revenues on a taxable equivalent basis and excluding specified items, if any. It consists of adjusted net interest income and adjusted
non-interest income. A taxable equivalent is added to total revenues so that the performance of the various assets can be compared irrespective of their tax
treatment, and specified items, if any, are excluded so that total revenues can be better evaluated by excluding items that management believes do not reflect
the underlying financial performance of the Bank's operations.
16
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
Adjusted Non-Interest Expenses
This item represents non-interest expenses excluding specified items, if any. Specified items, if any, are excluded so that non-interest expenses can be better
evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.
Adjusted Income Before Provisions for Credit Losses and Income Taxes
This item represents income before provisions for credit losses and income taxes on a taxable equivalent basis and excluding specified items, if any. It also
represents the difference between adjusted total revenues and adjusted non-interest expenses. A taxable equivalent is added to income before provisions for
credit losses and income taxes so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any,
are excluded so that income before provisions for credit losses and income taxes can be better evaluated by excluding items that management believes do not
reflect the underlying financial performance of the Bank's operations.
Adjusted Income Taxes
This item represents income taxes on a taxable equivalent basis and excluding income taxes on specified items, if any.
Adjusted Net Income
This item represents net income excluding specified items, if any. Specified items, if any, are excluded so that net income can be better evaluated by excluding
items that management believes do not reflect the underlying financial performance of the Bank's operations.
Adjusted Net income Attributable to Common Shareholders
This item represents net income attributable to common shareholders excluding specified items, if any. Specified items, if any, are excluded so that net income
attributable to common shareholders can be better evaluated by excluding items that management believes do not reflect the underlying financial performance
of the Bank's operations.
Adjusted Basic Earnings Per Share
This item represents basic earnings per share excluding specified items, if any. Specified items, if any, are excluded so that basic earnings per share can be
better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.
Adjusted Diluted Earnings Per Share
This item represents diluted earnings per share excluding specified items, if any. Specified items, if any, are excluded so that diluted earnings per share can be
better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.
The Bank also uses the below-described measures to assess its results. A quantitative reconciliation of these non-GAAP financial measures is presented in the
tables of the Reconciliation of Non-GAAP Financial Measures section on pages 20 and 21 and in Table 5 on page 115.
Adjusted Non-Trading Net Interest Income
This item represents non-trading net interest income on a taxable equivalent basis. It includes revenues related to financial assets and financial liabilities
associated with non-trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities, and is used
to calculate adjusted non-trading net interest margin. A taxable equivalent is added to non-trading net interest income so that the performance of the various
assets can be compared irrespective of their tax treatment.
Net Interest Income From Trading Activities on a Taxable Equivalent Basis
This item represents net interest income from trading activities plus a taxable equivalent. It 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. A taxable
equivalent is added to net interest income from trading activities so that the performance of the various assets can be compared irrespective of their tax
treatment.
Non-Interest Income Related to Trading Activities on a Taxable Equivalent Basis
This item represents non-interest income related to trading activities to which a taxable equivalent amount is added. It 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. A taxable equivalent amount is added
to the non-interest income related to trading activities such that the returns of different assets can be compared regardless of their tax treatment.
17
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
Trading Activity Revenues on a Taxable Equivalent Basis
This item represents trading activity revenues plus a taxable equivalent. They comprise 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, realized and unrealized gains
and losses, and 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. A taxable equivalent is added to trading activity
revenues so that the performance of the various assets can be compared irrespective of their tax treatment.
NNoonn--GGAAAAPP RRaattiiooss
The Bank uses non-GAAP ratios that do not have standardized meanings under GAAP and that may therefore 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.
The key non-GAAP ratios used by the Bank are described below.
Adjusted Return on Common Shareholders’ Equity (ROE)
This item represents ROE excluding specified items, if any. It is adjusted net income attributable to common shareholders expressed as a percentage of
average equity attributable to common shareholders. It is a general measure of the Bank’s efficiency in using equity. Specified items, if any, are excluded so
that ROE can be better evaluated by excluding items that management believes do not reflect the underlying financial performance of the Bank's operations.
Adjusted Dividend Payout Ratio
This item represents the dividend payout ratio excluding specified items, if any. It is dividends on common shares (per share amount) expressed as a
percentage of adjusted basic earnings per share. This ratio is a measure of the proportion of earnings that is paid out to shareholders in the form of dividends.
Specified items, if any, are excluded so that the dividend payout ratio can be better evaluated by excluding items that management believes do not reflect the
underlying financial performance of the Bank's operations.
Adjusted Operating Leverage
This item represents operating leverage on a taxable equivalent basis and excluding specified items, if any. It is the difference between the growth rate of
adjusted total revenues and the growth rate of adjusted non-interest expenses, and it measures the sensitivity of the Bank's results to changes in its revenues.
Adjusted operating leverage is presented on a taxable equivalent basis so that the performance of the various assets can be compared irrespective of their tax
treatment, and specified items, if any, are excluded so that the efficiency ratio can be better evaluated by excluding items that management believes do not
reflect the underlying financial performance of the Bank's operations.
Adjusted Efficiency Ratio
This item represents the efficiency ratio on a taxable equivalent basis and excluding specified items, if any. The ratio represents adjusted non-interest
expenses expressed as a percentage of adjusted total revenues. It measures the efficiency of the Bank’s operations. The adjusted efficiency ratio is presented
on a taxable equivalent basis so that the performance of the various assets can be compared irrespective of their tax treatment, and specified items, if any, are
excluded so that the efficiency ratio can be better evaluated by excluding items that management believes do not reflect the underlying financial performance
of the Bank's operations.
Adjusted Net Interest Margin, Non-Trading
This item represents the non-trading net interest margin on a taxable equivalent basis. It is calculated by dividing net interest income related to adjusted non-
trading activities by average non-trading interest-bearing assets. This ratio is a measure of the profitability of non-trading activities. The adjusted non-trading
net interest margin includes adjusted non-trading net interest income, which includes a taxable equivalent amount so that the performance of the various
assets can be compared irrespective of their tax treatment.
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 table footnotes or in the Glossary section on pages 122 to 125 of this MD&A.
18
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
CCaappiittaall MMaannaaggeemmeenntt MMeeaassuurreess
The financial reporting framework used to prepare the financial statements requires disclosure that helps 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 guidelines and advisories issued by
OSFI, 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
Total Loss Absorbing Capacity (TLAC)
Liquidity Adequacy Requirements
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
Key indicators – TLAC requirements
Available TLAC
TLAC ratio
TLAC leverage ratio
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
G-SIB indicators
19
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
RReeccoonncciilliiaattiioonn ooff NNoonn--GGAAAAPP FFiinnaanncciiaall MMeeaassuurreess
PPrreesseennttaattiioonn ooff RReessuullttss –– AAddjjuusstteedd
Year ended October 31
(millions of Canadian dollars)
Net interest income
Taxable equivalent
NNeett iinntteerreesstt iinnccoommee –– AAddjjuusstteedd
Non-interest income
Taxable equivalent
NNoonn--iinntteerreesstt iinnccoommee –– AAddjjuusstteedd
TToottaall rreevveennuueess –– AAddjjuusstteedd
Non-interest expenses
Impairment losses on intangible assets(2)
NNoonn--iinntteerreesstt eexxppeennsseess –– AAddjjuusstteedd
IInnccoommee bbeeffoorree pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess aanndd iinnccoommee ttaaxxeess –– AAddjjuusstteedd
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
IInnccoommee bbeeffoorree iinnccoommee ttaaxxeess –– AAddjjuusstteedd
Income taxes
Taxable equivalent
Income taxes related to impairment losses on intangible assets(2)
IInnccoommee ttaaxxeess –– AAddjjuusstteedd
NNeett iinnccoommee –– AAddjjuusstteedd
SSppeecciiffiieedd iitteemmss aafftteerr iinnccoommee ttaaxxeess
NNeett iinnccoommee
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss
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 –– AAddjjuusstteedd
Dividends on preferred shares and distributions on
limited recourse capital notes
NNeett iinnccoommee aattttrriibbuuttaabbllee ttoo ccoommmmoonn sshhaarreehhoollddeerrss –– AAddjjuusstteedd
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss
22,,886655
−−
22,,886655
11,,116699
−−
11,,116699
44,,003344
22,,114499
−−
22,,114499
11,,888855
9977
11,,778888
447744
−−
−−
447744
11,,331144
−−
11,,331144
−−
11,,331144
11,,331144
559944
−−
559944
11,,778811
−−
11,,778811
22,,337755
11,,339911
−−
11,,339911
998844
33
998811
226600
−−
−−
226600
772211
−−
772211
−−
772211
772211
11,,002299
222299
11,,225588
11,,116622
4488
11,,221100
22,,446688
11,,002222
−−
11,,002222
11,,444466
((2233))
11,,446699
111122
227777
−−
338899
11,,008800
−−
11,,008800
−−
11,,008800
11,,008800
UUSSSSFF&&II
11,,009900
−−
11,,009900
2200
−−
2200
11,,111100
334444
−−
334444
776666
6666
770000
114433
−−
−−
114433
555577
−−
555577
−−
555577
555577
22002222
2021(1)
55,,227711
223344
55,,550055
44,,338811
4488
44,,442299
99,,993344
55,,223300
−−
55,,223300
44,,770044
114455
44,,555599
889944
228822
−−
11,,117766
33,,338833
−−
33,,338833
((11))
4,783
181
4,964
4,144
8
4,152
9,116
4,903
(9)
4,894
4,222
2
4,220
882
189
2
1,073
3,147
(7)
3,140
−
OOtthheerr
((330077))
55
((330022))
224499
−−
224499
((5533))
332244
−−
332244
((337777))
22
((337799))
((9955))
55
−−
((9900))
((228899))
−−
((228899))
((11))
((228888))
33,,338844
3,140
((228888))
33,,338844
3,147
110077
33,,227777
123
3,024
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
During the year ended October 31, 2021, the Bank recorded $9 million ($7 million net of income taxes) in intangible asset impairment losses related to technology developments, which
were considered a specified item.
20
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Reporting Method
PPrreesseennttaattiioonn ooff BBaassiicc aanndd DDiilluutteedd EEaarrnniinnggss ppeerr SShhaarree –– AAddjjuusstteedd
Year ended October 31
(Canadian dollars)
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree
Impairment losses on intangible assets(2)
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree –– AAddjjuusstteedd
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree
Impairment losses on intangible assets(2)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree –– AAddjjuusstteedd
22002222
99..7722
−−
99..7722
99..6611
−−
99..6611
$
$
$
$
2021(1)
8.95
0.02
8.97
8.85
0.02
8.87
$$
$$
$$
$$
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
During the year ended October 31, 2021, the Bank recorded $9 million ($7 million net of income taxes) in intangible asset impairment losses related to technology developments, which
were considered a specified item.
PPrreesseennttaattiioonn ooff NNoonn--TTrraaddiinngg NNeett IInntteerreesstt IInnccoommee –– AAddjjuusstteedd
Year ended October 31
(millions of Canadian dollars)
Net interest income − Adjusted
Net interest income related to trading activities on a taxable equivalent basis
NNeett iinntteerreesstt iinnccoommee,, nnoonn--ttrraaddiinngg −− AAddjjuusstteedd
22002222
55,,550055
991111
44,,559944
2021
4,964
948
4,016
21
National Bank of Canada2022 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, 2022, 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, 2022, 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 Bank’s Disclosure Committee, Audit Committee, and the Board of Directors (the Board), which approved it prior to
publication.
IInntteerrnnaall CCoonnttrrooll OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
The internal control over financial reporting (ICFR) is 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 16 to
21 of this MD&A. Due to inherent limitations of internal controls, 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. The ICFR
was 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, 2022, that there are no material weaknesses, that the ICFR is effective and
provides 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 CCoonnttrrooll OOvveerr FFiinnaanncciiaall RReeppoorrttiinngg
On February 1, 2022, the Bank deployed a new integrated accounting software package, and certain processes that affect ICFR were modified. The Bank has
assessed the impact of this deployment and has made sure that the key controls affected and the newly implemented controls are well designed and effective.
The CEO and CFO also undertook work that enabled them to conclude that, during the year ended October 31, 2022, aside from the above-described change,
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 Bank’s Disclosure Committee assists the CEO and CFO by ensuring the design, implementation, and operation of the DC&P and ICFR. 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 Canada2022 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(2)
Dividend payout ratio(2)
EEaarrnniinnggss ppeerr sshhaarree
Basic
Diluted
OOppeerraattiinngg rreessuullttss –– AAddjjuusstteedd(3)
Total revenues – Adjusted(3)
Income before provisions for credit losses and income taxes – Adjusted(3)
Net income – Adjusted(3)
Return on common shareholders’ equity – Adjusted(4)
Dividend payout ratio – Adjusted(4)
Operating leverage – Adjusted(4)
Efficiency ratio – Adjusted(4)
EEaarrnniinnggss ppeerr sshhaarree –– AAddjjuusstteedd(3)
Basic
Diluted
CCoommmmoonn sshhaarree iinnffoorrmmaattiioonn
Dividends declared
Book value(2)
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(2)
Assets under management(2)
RReegguullaattoorryy rraattiiooss uunnddeerr BBaasseell IIIIII(5)
Capital ratios
Common Equity Tier 1 (CET1) capital ratio
Tier 1
Total
Leverage ratio
TLAC ratio(5)
TLAC leverage ratio(5)
Liquidity coverage ratio (LCR)(5)
Net stable funding ratio (NSFR)(5)
OOtthheerr iinnffoorrmmaattiioonn
Number of employees – Worldwide
Number of branches in Canada
Number of banking machines in Canada
22002222
2021(1)
%% cchhaannggee
$$
$$
$$
99,,665522
44,,442222
33,,338833
33,,338844
1188..88 %%
3366..88 %%
$
99..7722
99..6611
99,,993344
44,,770044
33,,338833
1188..88 %%
3366..88 %%
22..11 %%
5522..66 %%
$
$
99..7722
99..6611
33..5588
5555..2244
110055..4444
8833..1122
9922..7766
333366,,558822
3311,,222211
440033,,774400
220066,,774444
226666,,339944
1188,,559944
661166,,116655
111122,,334466
8,927
4,024
3,140
3,140
20.7 %
31.7 %
8.95
8.85
9,116
4,222
3,147
20.7 %
31.7 %
1.9 %
53.7 %
8.97
8.87
2.84
47.44
104.32
65.54
102.46
337,912
34,622
355,621
182,689
240,938
16,029
651,530
117,186
1122..77 %%
1155..44 %%
1166..99 %%
44..55 %%
2277..77 %%
88..11 %%
114400 %%
111177 %%
12.4 %
15.0 %
15.9 %
4.4 %
26.3 %
7.8 %
154 %
117 %
2299,,550099
337788
993399
26,920
384
927
88
1100
88
88
99
99
99
1111
77
88
88
2266
1144
1133
1111
1166
((55))
((44))
1100
((22))
11
(1)
(2)
(3)
(4)
(5)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP ratios.
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
23
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Overview
AAbboouutt NNaattiioonnaall BBaannkk
The Bank carries out its activities in four business segments: Personal and Commercial, Wealth Management, Financial Markets as well as U.S. Specialty
Finance and International (USSF&I), which comprises the activities of the Credigy Ltd. (Credigy) and Advanced Bank of Asia Limited (ABA Bank) subsidiaries.
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. For additional
information, see the Business Segment Analysis section of this MD&A.
OObbjjeeccttiivveess aanndd 22002222 RReessuullttss
When setting its objectives, the Bank aims for a realistic challenge in the prevailing business environment by considering such factors as 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 into consideration
specified items, if any, which are not reflective of the underlying financial performance of the Bank’s operations. Management therefore excludes specified
items when assessing the Bank’s performance against its objectives.
In fiscal 2022, the Bank recorded $3,383 million in net income compared to $3,140 million in fiscal 2021, and its diluted earnings per share stood at $9.61
compared to $8.85 in fiscal 2021. The Bank’s fiscal 2022 return on common shareholders’ equity (ROE) was 18.8% versus 20.7% in fiscal 2021. Its diluted
earnings per share stood at $9.61 in fiscal 2022, an 8% increase from adjusted diluted earnings per share of $8.87 in fiscal 2021. Furthermore, the 18.8% ROE
in fiscal 2022 compares to an adjusted ROE of 20.7% in fiscal 2021.
The following table compares the Bank’s medium-term objectives with its fiscal 2022 results.
Growth in diluted earnings Adjusted(1)
ROE Adjusted(2)
Dividend payout ratio Adjusted(2)
CET1 capital ratio(3)
Leverage ratio(3)
MMeeddiiuumm--TTeerrmm
OObbjjeeccttiivveess ((%%))
22002222 RReessuullttss
55 –– 1100
1155 –– 2200
4400 –– 5500
SSttrroonngg lleevveell
SSttrroonngg lleevveell
88..33%%
1188..88%%
3366..88%%
1122..77%%
44..55%
The Bank’s financial results met all of its medium-term objectives, except for the dividend payout ratio. Year over year, adjusted diluted earnings per share
grew 8%, which is within the target range, and was driven by strong revenue growth in every business segment, growth that more than offset increases in non-
interest expenses and in provisions for credit losses. For fiscal 2022, adjusted ROE was in the upper range of the target objective. The CET1 capital ratio and
the leverage ratio, at 12.7% and 4.5%, respectively, also met the objectives. As for the adjusted dividend payout ratio, it was below the target distribution
range given strong growth in net income and the interruptions to dividend increases prescribed by OSFI between March 13, 2020 and November 4, 2021.
The Bank also examines its performance using the efficiency ratio and operating leverage. For fiscal 2022, the Bank’s efficiency ratio stood at 54.2% compared
to 54.9% in fiscal 2021. Its adjusted efficiency ratio for fiscal 2022 was 52.6%, a 1.1 percentage point improvement from 53.7% in fiscal 2021. These
improvements are reflective of disciplined cost management by all the Bank’s segments. Also for fiscal 2022, operating leverage and adjusted operating
leverage were positive, at 1.4% and 2.1%, respectively.
NNeett IInnccoommee
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
0
4
1
,
3
7
4
1
,
3
33
88
33
,,
33
33
88
33
,,
33
DDiilluutteedd EEaarrnniinnggss PPeerr SShhaarree
YYeeaarr eennddeedd OOccttoobbeerr 3311
(Canadian dollars)
11
66
..
99
11
66
..
99
5
8
8
.
7
8
8
.
EEffffiicciieennccyy RRaattiioo(4)
YYeeaarr eennddeedd OOccttoobbeerr 3311
(%)
58.9
58.2
57.2
55.3
55.5
54.9
5544..22
54.6
53.7
5522..66
2021
22002222
2021
22002222
2018
2019
2020
2021
22002222
Published
Adjusted(1)
Published
Adjusted(1)
Published
Adjusted(2)
(1) See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures.
(2) See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP ratios.
(3) See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
(4) See the Glossary section on pages 122 to 125 for details on the composition of these measures.
National Bank of Canada
24
National Bank of Canada2022 Annual Report Management’s Discussion and Analysis
Overview
DDiivviiddeennddss
For fiscal 2022, the Bank declared $1,206 million in dividends to common shareholders (2021: $958 million), representing 36.8% of net income attributable to
common shareholders (2021: 31.7%).
Solid Capital Levels(1)
As at October 31, 2022, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 12.7%, 15.4% and 16.9%, compared to ratios of, respectively,
12.4%, 15.0% and 15.9% as at October 31, 2021. All of the capital ratios have therefore increased since October 31, 2021, essentially due to net income net
of dividends and to common share issuances under the Stock Option Plan. These factors were partly offset by growth in RWA, common share repurchases, and
the impact of the transitional measures applicable to ECL provisioning, of which the scaling factor decreased from 50% to 25%. The increase in the Tier 1
capital ratio was also due to the $500 million issuance of limited recourse capital notes, i.e., Limited Recourse Capital Notes (LRCN) – Series 3, on
September 8, 2022. The increase in the Total capital ratio was also due to the $750 million issuance of medium-term notes on July 25, 2022. As at
October 31, 2022, the leverage ratio was 4.5% compared to 4.4% as at October 31, 2021. The growth in Tier 1 capital was partly offset by growth in total
exposure, which will continue to benefit, until April 1, 2023, from the temporary measure permitted by OSFI with respect to the exclusion of exposures from
central bank reserves.
HHiigghh--QQuuaalliittyy LLooaann PPoorrttffoolliioo
Loans and acceptances, net of allowances for credit losses, accounted for 51% of the Bank’s total assets and amounted to $206.7 billion as at
October 31, 2022. For fiscal 2022, the Bank recorded $145 million in provisions for credit losses compared to $2 million in fiscal 2021. This increase was due
to higher provisions for credit losses on non-impaired loans recorded to reflect a less favourable macroeconomic environment in fiscal 2022 and to a slight
deterioration in certain risk parameters, and was also due to an increase in provisions for credit losses on purchased or originated credit-impaired (POCI)
loans, as there had been higher reversals on certain portfolios recorded in fiscal 2021. These increases were tempered by lower provisions for credit losses on
impaired loans excluding POCI loans, particularly Commercial Banking loans and Financial Markets loans, partly offset by higher provisions for credit losses on
the impaired ABA Bank loans recorded to reflect the end of COVID-19 relief measures that had been granted to clients. Gross impaired loans totalled
$1,271 million as at October 31, 2022 compared to $1,126 million as at October 31, 2021 and represented 0.61% of total loans and acceptances.
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(2)
Provisions for credit losses on impaired loans excluding POCI loans as a % of average loans and acceptances(2)
Net write-offs as a % of average loans and acceptances(2)
Gross impaired loans as a % of total loans and acceptances(2)
Gross impaired loans
Net impaired loans
22002222
114455
00..0077 %%
00..0077 %%
00..1100 %%
00..6611 %%
11,,227711
11,,003300
2021
2
− %
0.11 %
0.09 %
0.61 %
1,126
836
AAnnnnuuaall DDiivviiddeenndd PPeerr
CCoommmmoonn SShhaarree
YYeeaarr eennddeedd OOccttoobbeerr 3311
(Canadian dollars)
EEvvoolluuttiioonn ooff RReegguullaattoorryy
RRaattiiooss UUnnddeerr BBaasseell IIIIII(1)
AAss aatt OOccttoobbeerr 3311
GGrroossss IImmppaaiirreedd LLooaannss
AAss aatt OOccttoobbeerr 3311
(millions of Canadian dollars)
33..5588
2.84
2.84
2.66
2.44
%
9
5
1
.
%
0
5
1
.
%
4
2
1
.
%%
99
..
66
11
%%
44
55
11
..
%%
77
..
22
11
%
4
4
.
%%
55
..
44
150
120
43
45
6
7
5
,
1
0
3
6
6
6
1
,
1
4
8
6
101
49
5
5
8
7
1
8
61
36
4
6
4
2
6
6
6611
3399
99
55
44
22
11
88
2018
2019
2020
2021
22002222
2021
22002222
2018
2019
2020
2021
22002222
CET1
Tier 1
Total
Leverage ratio
Gross impaired loans – Stage 3
Gross impaired loans – POCI
Gross impaired loans as a % of total loans
and acceptances (bps)(2)
Gross impaired loans exlcuding POCI loans as
a % of total loans and acceptances (bps)(2)
(1) See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
(2) See the Glossary section on pages 122 to 125 for details on the composition of these measures.
25
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Overview
EEccoonnoommiicc RReevviieeww aanndd OOuuttllooookk
GGlloobbaall EEccoonnoommyy
After a somewhat late start, the cycle of tightening global monetary policy seems well under way, with more and more central banks now taking a more
restrictive approach to rein in inflation. While this trend reversal offers promise of greater price stability in the future, the economic impacts will still be
significant, especially if the reversal comes at a time when growth has already slowed considerably in several regions. In the eurozone, for example,
annualized GDP growth was only 0.7% in the third quarter of 2022, since soaring energy costs are being felt and resulting in a decrease in actual
compensation. While the energy situation improved slightly in the third quarter of 2022, several signs are pointing to a recession starting in the fourth quarter
of 2022. Elsewhere in the world, emerging markets continue to feel the brunt of a strong U.S. dollar, which is putting upward pressure on inflation and making
it more difficult to repay loans in U.S. dollars. All the while, China has continued to feel the economic impacts of its zero-COVID policy at a time when weak
consumer demand and sluggish real estate markets can no longer be offset by higher exports. Against this backdrop, the global economy is expected to grow
by only 2.2%(1) in 2023, on the heels of 3.1%(1) growth in 2022.
The last time that the U.S. Federal Reserve (the Fed) raised interest rates, bringing the target range between 3.75 and 4.00%, Jerome Powell, Chair of the Fed,
stated that data published since the last Fed meeting justified having a higher terminal rate than what had previously been presented. And yet, there are
increasing signs that an economic slowdown lies ahead. While GDP figures for the third quarter of 2022 showed that growth is rebounding, this is mainly due
to international trade since private domestic demand is weakening. More specifically, residential investment decreased for a sixth consecutive quarter—
something not seen since the Great Recession of 2008-2009. Inflation continues to hover at abnormally high levels, although there are now many signs
pointing to a turnaround, especially given the manufacturing sector slowdown, high inventory levels, a sharp decline in shipping costs, lower selling prices by
Chinese producers, and a strong U.S. dollar. Where services are concerned, it may take longer to return inflation to a reasonable level, although there is
evidence suggesting far fewer new hires in an environment characterized by anemic growth, which will help to reduce wage pressures. Given this context, the
central bank should be able to end its monetary tightening cycle no later than for the first monetary policy meeting in 2023. Otherwise, a recession is
practically unavoidable in 2023. Moreover, even if the Fed changes direction, this would not prevent a major slowdown in growth next year. We anticipate a
difficult first half next year and growth of only 0.2%(1) for 2023.
CCaannaaddiiaann EEccoonnoommyy
In Canada, efforts to soft-land the economy after a period of overheating are continuing. So far, indicators are moving in the right direction for the Bank of
Canada, which suggests that we are approaching the terminal rate in this extremely aggressive tightening cycle. In fact, the labour market is showing signs of
moderation: private-sector and full-time jobs have been at a standstill for several months, and hiring intentions are declining, suggesting that there will be no
rebound in the short term. Inflationary pressures are less acute and widespread than earlier this year. Nevertheless, given the rushed response and the
transmission lag for monetary policy, it is normal for observers to be nervous. Unfortunately, we will only know in hindsight if the response was too aggressive.
One thing is certain: we are already seeing a notable slowdown in the real estate market, which is leading to extremely rapid real estate deflation. In our view,
it will not be necessary to keep interest rates at current levels for long to cool down inflation; consequently, we expect that the central bank will have to lower
them in the second half of next year. In light of this monetary tightening, we anticipate an anemic growth rate of 0.7%(1) in 2023, as consumers will be hit
simultaneously by a loss of purchasing power, a negative wealth effect, and interest payment shock.
QQuueebbeecc EEccoonnoommyy
Quebec’s economy, which had experienced a spectacular post-pandemic recovery compared to the country as a whole, lost its lead in July 2022 after posting
the fourth monthly decline in a row. But that is not overly concerning for now, since this decline has not had a significant adverse effect on the labour market,
which is still one of the most stable in the country. The unemployment rate reached 4.1% in October 2022, which is the lowest in all of the provinces, while the
job vacancy rate is among the highest in the country. We also see some encouraging structural factors for the Quebec economy, such as a highly diversified
economy, fiscal support from the Quebec government, and low electricity costs. Moreover, Quebec households are in a better financial situation (lower
financial leverage and higher savings rate), mainly because housing accessibility is significantly better than in the rest of the country. They are therefore less
vulnerable to the recent interest rate increase. Our forecast for growth in 2023 is 0.7%(1), in line with Canada as a whole, despite less favourable demographic
factors.
(1)
GDP growth forecasts, National Bank Financial’s Economics and Strategy group
26
National Bank of Canada
National Bank of Canada2022 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
Diluted earnings per share (dollars)
TTaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
Net interest income
Non-interest income
Income taxes
Impact of taxable equivalent basis on net income
SSppeecciiffiieedd iitteemmss(2)
Impairment losses on intangible assets
Specified items before income taxes
Income taxes on specified items
Specified items after income taxes
OOppeerraattiinngg rreessuullttss –– AAddjjuusstteedd(2)
Net interest income – Adjusted
Non-interest income – Adjusted
Total revenues – Adjusted
Non-interest expenses – Adjusted
Income before provisions for credit losses and income taxes – Adjusted
Provisions for credit losses
Income before income taxes – Adjusted
Income taxes – Adjusted
Net income – Adjusted
Diluted earnings per share – Adjusted (dollars)
Average assets(3)
Average loans and acceptances(3)
Average deposits(3)
Operating leverage(4)
Operating leverage – Adjusted(5)
Efficiency ratio(4)
Efficiency ratio – Adjusted(5)
Net interest margin, non-trading - Adjusted(5)
22002222
2021(1)
%% cchhaannggee
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
44,,227777
889944
33,,338833
99..6611
223344
4488
228822
−−
−−
−−
−−
−−
55,,550055
44,,442299
99,,993344
55,,223300
44,,770044
114455
44,,555599
11,,117766
33,,338833
99..6611
339933,,884477
119944,,334400
225588,,992299
11..44 %%
22..11 %%
5544..22 %%
5522..66 %%
11..9966 %%
4,783
4,144
8,927
4,903
4,024
2
4,022
882
3,140
8.85
181
8
189
−
(9)
(9)
(2)
(7)
4,964
4,152
9,116
4,894
4,222
2
4,220
1,073
3,147
8.87
363,506
172,323
236,229
6.4 %
1.9 %
54.9 %
53.7 %
1.90 %
1100
66
88
77
1100
66
11
88
99
1111
77
99
77
1111
88
1100
77
88
88
1133
1100
(1)
(2)
(3)
(4)
(5)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures.
Represents an average of the daily balances for the period.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP ratios.
27
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Analysis
AAnnaallyyssiiss ooff CCoonnssoolliiddaatteedd RReessuullttss
FFiinnaanncciiaall RReessuullttss
For fiscal 2022, the Bank’s net income totalled $3,383 million, an 8% increase from $3,140 million in fiscal 2021. Excellent performance in all of the business
segments, driven by revenue growth, contributed to this increase in net income, which was partly offset by higher provisions for credit losses recorded in part
to reflect a deterioration in the macroeconomic outlook in fiscal 2022. Income before provisions for credit losses and income taxes totalled $4,422 million for
fiscal 2022, a 10% year-over-year increase that was due to the revenue growth in all of the business segments.
TToottaall RReevveennuueess
For fiscal 2022, the Bank’s total revenues amounted to $9,652 million versus $8,927 million in fiscal 2021, a $725 million or 8% increase that was driven by
the revenue growth across all of the Bank’s business segments. For additional information on total revenues, see Table 2 on page 114. The fiscal 2022
adjusted total revenues grew $818 million or 9% year over year.
Net Interest Income
For fiscal 2022, net interest income totalled $5,271 million, up $488 million or 10% from $4,783 million in fiscal 2021 (see Table 3, page 114). As for the
adjusted net interest income in fiscal 2022, it amounted to $5,505 million, up 11% from $4,964 million in fiscal 2021.
In the Personal and Commercial segment, net interest income totalled $2,865 million in fiscal 2022, a $318 million or 12% year-over-year increase owing
mainly to growth in loans and deposits, which rose 11% and 7%, respectively, year over year. The loan growth came mainly from mortgage credit and business
lending. The increase in net interest income was also due to a higher net interest margin, which rose to 2.14% in 2022 from 2.11% in 2021 as a result of
interest rate hikes, and that was primarily attributable to the deposit margin. In the Wealth Management segment, net interest income totalled $594 million in
fiscal 2022, a 33% year-over-year increase owing to higher interest rates, growth in loan and deposit volumes, and the deposit margin.
In the Financial Markets segment, net interest income on a taxable equivalent basis was down $4 million in fiscal 2022 compared to fiscal 2021, mainly due to
trading activities, and should be examined together with the other items of trading activity revenues. In the USSF&I segment, net interest income rose
$183 million or 20% year over year owing to loan and deposit growth at the ABA Bank subsidiary in fiscal 2022 as well as to an increase in the Credigy
subsidiary’s net interest income given growth in loan portfolios and solid performance in certain portfolios.
Non-Interest Income
The Bank’s non-interest income amounted to $4,381 million in fiscal 2022, up $237 million or 6% from $4,144 million in fiscal 2021. For additional
information on non-interest income, see Table 4 on page 115.
For fiscal 2022, revenues from underwriting and advisory fees were down 22% year over year, notably due to capital markets activities in the Financial Markets
segment. Revenues from securities brokerage commissions were down 14% year over year, essentially due to a decrease in commission-generating
transactions in the Wealth Management segment. Combined, mutual fund revenues and revenues from investment management and trust service fees totalled
$1,584 million, a $121 million year-over-year increase owing to growth in average assets under administration and under management as a result of net
inflows into various solutions and of stock market performance in the first half of 2022.
Credit fee revenues and revenues from acceptances and letters of credit and guarantee were down $16 million year over year, as greater business activity at
Commercial Banking was more than offset by a decrease in the activities of Financial Markets. Conversely, card revenues and revenues from deposits and
payment service charges rose 26% and 9%, respectively, as an upswing in economic activity led to greater transaction volume during fiscal 2022.
28
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Financial Analysis
Non-interest income related to trading activity on a taxable equivalent basis totalled $596 million, up from $290 million in fiscal 2021 (Table 5, page 115).
Including the portion recorded in net interest income, trading activity revenues on a taxable equivalent basis amounted to $1,507 million in fiscal 2022, a
$269 million year-over-year increase that was essentially driven by equity securities revenues from the Financial Markets segment. Conversely, trading activity
revenues on a taxable equivalent basis from the Bank’s other business segments decreased year over year.
For fiscal 2022, gains on non-trading securities were down $38 million year over year, in part due to Treasury activities, while insurance revenues were up
$27 million year over year, reflecting a revision to actuarial reserves. Also up year over year were foreign exchange revenues and the share in the net income of
associates and joint ventures, which rose $9 million and $5 million, respectively. Other revenues amounted to $242 million in fiscal 2022, an $83 million
decrease that was notably due to a gain realized on the disposal of certain loan portfolios and to a more favourable impact of the fair value remeasurements of
certain Credigy loan portfolios in fiscal 2021. In addition, in fiscal 2021, the Other revenues item had included a $33 million gain on the 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 Bank Limited
(AfrAsia).
NNoonn--IInntteerreesstt EExxppeennsseess
For fiscal 2022, non-interest expenses stood at $5,230 million, up $327 million or 7% from fiscal 2021 (Table 6, page 116). In fiscal 2021, non-interest
expenses had included $9 million in intangible asset impairment losses. The fiscal 2022 non-interest expenses, compared to $4,894 million in adjusted non-
interest expenses, were up $336 million or 7%.
Compensation and employee benefits totalled $3,284 million in fiscal 2022, an 8% year-over-year increase that was notably due to wage growth and a greater
number of employees as well as to the variable compensation associated with revenue growth. An increase in technology expenses, including amortization,
was attributable to significant investments made to support the Bank's technological evolution and the business development plan. In addition, fiscal 2022
travel and business development expenses increased year over year as activities with clients resumed. These higher expenses were tempered by decreases in
certain expenses; in particular, there was a $20 million reversal of the provision for the compensatory tax on salaries paid in Quebec during the first quarter of
2022 as well as a decrease in COVID-19 response expenses, which had been higher during fiscal 2021. Furthermore, a portion of the overall increase in non-
interest expenses was attributable to the Flinks acquisition at the end of fiscal 2021.
PPrroovviissiioonnss ffoorr CCrreeddiitt LLoosssseess
For fiscal 2022, the Bank recorded $145 million in provisions for credit losses compared to $2 million in fiscal 2021 (Table 7, page 117). This increase was
mainly attributable to $1 million in provisions for credit losses on non-impaired loans during fiscal 2022 compared to the $155 million in reversals of
allowances for credit losses recorded during fiscal 2021. The macroeconomic outlook deteriorated in the second half of fiscal 2022, notably due to high
inflationary pressure, geopolitical instability, and global supply chain disruptions, whereas in fiscal 2021, the macroeconomic outlook had been more
favourable. Provisions for credit losses on impaired loans excluding POCI(1) loans were down $45 million in fiscal 2022, mainly those in Commercial Banking
and Financial Markets, which decreased $13 million and $77 million, respectively. These decreases were partly offset by a $10 million increase in Personal
Banking’s provisions for credit losses (including credit card receivables) and a $35 million increase in USSF&I’s provisions for credit losses (excluding POCI
loans), essentially attributable to the ABA Bank subsidiary, where COVID-19 relief measures that had been granted to customers ended. The provisions for
credit losses on Credigy's POCI loans also increased, rising $32 million given the favourable remeasurements of certain portfolios during fiscal 2021. At
$138 million for fiscal 2022, the provisions for credit losses on impaired loans excluding POCI loans(1) decreased and represented 0.07% of average loans and
acceptances, down from 0.11% 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 2022, income taxes stood at
$894 million, representing an effective tax rate of 21%, which compares to income taxes of $882 million and a 22% effective tax rate in fiscal 2021. The
change in effective tax rates stems mainly from a higher level of tax-exempt dividend income during fiscal 2022.
(1)
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
29
National Bank of Canada2022 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
BBuussiinneessss
SSeeggmmeennttss
PPeerrssoonnaall aanndd
CCoommmmeerrcciiaall
WWeeaalltthh
MMaannaaggeemmeenntt
FFiinnaanncciiaall
MMaarrkkeettss
UU..SS.. SSppeecciiaallttyy
FFiinnaannccee aanndd
IInntteerrnnaattiioonnaall
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 (a fintech specialized in financial
data aggregation and distribution), and corporate units.
TToottaall RReevveennuueess bbyy
BBuussiinneessss SSeeggmmeenntt(1)
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
IInnccoommee BBeeffoorree PPrroovviissiioonnss ffoorr
CCrreeddiitt LLoosssseess aanndd IInnccoommee TTaaxxeess bbyy
BBuussiinneessss SSeeggmmeenntt((11))
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
NNeett IInnccoommee bbyy BBuussiinneessss SSeeggmmeenntt((11))
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
1111%%
1155%%
1155%%
2255%%
4400%%
3377%%
3366%%
2299%%
2299%%
2244%%
1199%%
2200%%
Personal and Commercial (2021: 40%)
Wealth Mangement (2021: 24%)
Financial Markets (2021: 25%)
USSF&I (2021: 11%)
Personal and Commercial (2021: 36%)
Wealth Mangement (2021: 20%)
Financial Markets (2021: 29%)
USSF&I (2021: 15%)
Personal and Commercial (2021: 35%)
Wealth Management (2021: 19%)
Financial Markets (2021: 29%)
USSF&I (2021: 17%)
(1)
Excluding the Other heading.
30
National Bank of Canada
National Bank of Canada2022 Annual Report Management’s Discussion and Analysis
Business Segment Analysis
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment meets the financial needs of close to 2.6 million individuals and over 145,000 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. Thanks to the Bank’s convenient self-banking channels, 378 branches, and
939 banking machines across Canada, clients can do their daily banking whenever and wherever they wish.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
4422%%
4422%%
55%%
1111%%
Retail (2021: 46%)
Payment Solutions (2021: 11%)
Insurance (2021: 5%)
Commercial Banking (2021: 38%)
$4,034 million
Total revenues
$1,885 million
Income before provisions
for credit losses and
income taxes
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc
DDiissttrriibbuuttiioonn
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
2244%%
7766%%
$1,314 million
Net income
Province of Quebec (2021: 75%)
Other provinces (2021: 25%)
PPeerrssoonnaall BBaannkkiinngg
Personal Banking provides a complete range of financing and investment
products and services 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 the leading bank in the Quebec market.
Key Success Factors
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.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Ability to meet all the needs facing businesses and entrepreneurs in
collaboration with other Bank segments.
In Canada, efforts continue to soft-land the economy after a period of
overheating. Interest rate hikes brought real estate activity to an abrupt halt,
after it had reached record levels since the start of the pandemic and was characterized by soaring house prices. With house hunters now having less buying
power, prices across Canada are undergoing a correction, generating more of an impact on household wealth already falling as a result of weak financial
market performance. However, many people seized opportunities that arose during the pandemic to get their financial house in order. In fact, some consumers
have amassed excess savings that can be used to cushion the blow of the rising cost of living and higher interest rates. Personal and corporate bankruptcies
are on the rise, even though they remain below pre-pandemic levels. The labour market is showing signs of moderation, with full-time private-sector
employment stagnating in recent months and hiring intentions slowing down—which does not point to a turnaround in the short-term. Corporate investment
remains strong for now, but activity may slow down due to higher funding costs and the uncertain economic outlook.
The economic environment in 2022 and the outlook for 2023 are discussed in more detail in the Economic Review and Outlook section on page 26.
31
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
OObbjjeeccttiivveess aanndd SSttrraatteeggiicc PPrriioorriittiieess
The Personal and Commercial segment is targeting growth by becoming a more simple, efficient bank focused on constantly improving the client experience.
2022 Achievements and Highlights
2023 Priorities
Delivered unparalleled performance in terms of total
Achieve greater coverage in promising markets
client acquisition.
Enhanced our visibility and proximity through targeted
campaigns.
Accelerate net client acquisition
Continued our client acquisition strategy by
intensifying coverage in promising markets and
among high-growth target clients such as newcomers,
professionals, Gen Z, millennials, and SMEs.
Strengthened the synergies between our business
units to achieve even greater acquisition success.
Strengthened ties between Private Banking (PB1859)
and Commercial Banking using a mixed approach and
a market presence that is delivering impressive results
in terms of the engagement of our commercial and
high net worth clients.
Enhanced our preferential offering to our strategic
client sectors, such as professionals.
Continued to expand financial literacy content in
response to common concerns arising in the current
economic environment.
Improved our digital approval processes for our
signature products (bank accounts and credit cards).
Implemented a new, more client-centric and
advisory-driven distribution approach.
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.
Improve client engagement
Personalized client interaction with the use of client
data, which helps us to proactively contact clients,
through both assisted and unassisted channels,
during key life moments.
Deployed an advisory and support strategy to clients
most affected by market fluctuations in the volatile
economic environment, particularly to help them
manage their liquidity.
Improved our digital investment platform, notably
though the Enhanced Investing Experience, by adding
several self-serve capabilities that promote client
autonomy.
and high-growth client segments.
Further develop a distinctive offering for clients
who are in both our PB1859 and Commercial
Banking sectors by adding differentiating
revenue-generating components such that they
can go to market together.
Continue our acquisition efforts by further
developing our digital acquisition capabilities
and client eligibility and by focusing branch
efforts on advisory service.
Simplify and modernize our product offering
such that it is better tailored to client needs.
Grow the Bank’s brand across Canada and
demonstrate our ESG impact.
Develop account and market strategies
designed to raise the penetration rate of both
Commercial Banking and PB1859 clients.
Increase the quality of our advice and our value
among clients by continuing to develop our
distribution network and personalize our
contacts.
Achieve greater synergy by improving the
penetration rate of banking services among our
investor clients.
Enhance our payment facilities offering.
Optimize client experience by modernizing the
most frequently used cash management
capabilities.
Further develop our key technological
capacities in the areas of account management
and client profile services.
32
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Improve efficiency
2022 Achievements and Highlights
2023 Priorities
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.
Simplified the customer journey, both for retail clients
(account opening and payments) and commercial
clients (account opening, financing, and cash
management).
Aligned our product offering to evolving market needs
(transactional, card, payment, and cash management
solutions).
Continue simplifying the customer journey for
priority clients as well as our business
processes.
Bolster our digital capabilities such that it
promotes client autonomy and simplifies our
processes.
Maximize the support structure provided to our
sales force by optimizing the operational
support offered to our client-facing employees.
Continue modernizing our range of cash
management offerings, adapting them to client
needs and helping business clients manage
their cash cycle.
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(3)
Average loans and acceptances(3)
Net impaired loans(2)
Net impaired loans as a % of total loans and acceptances(2)
Average deposits(3)
Efficiency ratio(2)
22002222
2021(1)
%% cchhaannggee
22,,886655
11,,116699
44,,003344
22,,114499
11,,888855
9977
11,,778888
447744
11,,331144
22..1144 %%
113333,,775544
114400,,551144
113399,,774499
119933
00..11 %%
8822,,000055
5533..33 %%
2,547
1,068
3,615
2,008
1,607
40
1,567
416
1,151
2.11 %
120,956
126,637
125,917
213
0.2 %
76,442
55.5 %
1122
99
1122
77
1177
1144
1144
1144
1111
1111
1111
((99))
77
(1)
(2)
(3)
For the year ended October 31, 2021, certain amounts have been reclassified, in particular amounts of the loan portfolio of borrowers in the “Oil and gas” and “Pipelines” sectors as well as
related activities, which were transferred from the Personal and Commercial segment to the Financial Markets segment. Moreover, certain amounts have been adjusted to reflect an
accounting policy change applicable to cloud computing arrangements (for additional information, see Note 1 to the consolidated financial statements).
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
Represents an average of the daily balances for the period.
33
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
FFiinnaanncciiaall RReessuullttss
In the Personal and Commercial segment, net income totalled $1,314 million in fiscal 2022 compared to $1,151 million in fiscal 2021, a 14% increase that was
due to $419 million in total revenue growth, partly offset by higher provisions for credit losses. The segment’s income before provisions for credit losses and
income taxes totalled $1,885 million in fiscal 2022, up 17% year over year. The growth in total revenues was driven by a $318 million increase in net interest
income and a $101 million increase in non-interest income. The increase in net interest income came mainly from growth in personal and commercial loans
and deposits. In addition, the successive interest rate increases that occurred in fiscal 2022 had a favourable impact on net interest margin, which rose to
2.14% from 2.11% in fiscal 2021, an increase attributable mainly to the deposit margin.
For fiscal 2022, the Personal and Commercial segment's non-interest expenses stood at $2,149 million, a 7% year-over-year increase that was mainly due to
higher compensation and employee benefits (given wage growth and a greater number of employees), to greater investments made as part of the segment's
technological evolution, and to higher operations support charges. Furthermore, travel and business development costs increased as activities with clients
resumed. At 53.3%, the segment’s 2022 efficiency ratio improved by 2.2 percentage points from 55.5% in 2021.
The segment recorded $97 million in provisions for credit losses in fiscal 2022, which is $57 million more than the $40 million recorded in fiscal 2021. This
increase came mainly from higher provisions for credit losses on non-impaired Personal Banking loans (including credit card receivables) recorded to reflect
less favourable macroeconomic conditions, whereas, in fiscal 2021, a more favourable macroeconomic environment had led to significant reversals of
allowances for credit losses on non-impaired loans. These increases were tempered by lower provisions for credit losses on impaired Commercial Banking
loans as well as by a decrease in provisions for credit losses on non-impaired Commercial Banking loans resulting from more favourable risk parameters in
fiscal 2022.
PPeerrssoonnaall BBaannkkiinngg
Personal Banking’s total revenues amounted to $2,359 million in fiscal 2022, a 6% increase from $2,234 million in fiscal 2021. Its net interest income
increased, as there was 8% growth in loan volumes, 4% growth in deposit volumes and a higher deposit margin, partly offset by a lower net interest margin on
loans. Non-interest income was also up, rising $53 million year over year, essentially due to higher credit card revenues given a notable increase in purchasing
volume, higher insurance revenues (reflecting a revision to actuarial reserves), and higher internal commission revenues related to the distribution of Wealth
Management products. For fiscal 2022, Personal Banking's non-interest expenses rose $105 million year over year, mainly due to higher compensation and
employee benefits (given wage growth and a greater number of employees), to greater investments made as part of the segment's technological evolution, and
to higher operations support charges.
CCoommmmeerrcciiaall BBaannkkiinngg
Commercial Banking’s total revenues amounted to $1,675 million in fiscal 2022, rising 21% from $1,381 million in fiscal 2021. Net interest income was up,
essentially due to 17% growth in loans and 11% growth in deposits as well as to a higher net interest margin as interest rates were raised successively during
fiscal 2022. Non-interest income was also up, rising $48 million compared to fiscal 2021, mainly due to increases in revenues from bankers’ acceptances, in
revenues from derivative financial instruments, and in revenues from foreign exchange activities. For fiscal 2022, Commercial Banking's non-interest expenses
rose $36 million year over year, mainly due to higher compensation and employee benefits (given wage growth and a greater number of employees), to higher
operations support charges, and to higher travel and business development costs as activities with clients resumed.
AAvveerraaggee LLooaannss aanndd AAcccceeppttaanncceess
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
++1111%%
99
44
77
,,
99
33
11
++88%%
99
44
33
,,
22
99
++1177%%
00
00
44
77
44
,,
,
7
1
9
5
2
1
7
1
5
5
8
,
0
0
4
0
4
,
AAvveerraaggee DDeeppoossiittss
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian Dollars)
++77%%
55
00
00
22
88
,,
2
4
4
6
7
,
4
8
7
9
3
,
8
5
6
6
3
,
++1111%%
44
77
99
,,
33
44
++44%%
11
33
00
88
33
,,
2021
22002222
2021
22002222
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
Total – Personal and Commercial Banking
Personal Banking
Commercial Banking
34
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
WWeeaalltthh MMaannaaggeemmeenntt
As a leader in Quebec and firmly established across Canada, the Wealth Management segment serves all market segments by emphasizing advisory-based
service 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. Wealth Management also provides services to independent advisors and institutional clients.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
Year ended October 31, 2022
1155%%
2255%%
6600%%
Net interest income (2021: 21%)
Fee-based services (2021: 61%)
Transaction-based and other revenues (2021: 18%)
$2,375 million
Total revenues
$984 million
Income before provisions
for credit losses and
income taxes
$721 million
Net income
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
Year ended October 31, 2022
3377%%
6633%%
Province of Quebec (2021: 63%)
Other provinces (2021: 37%)
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 is continuing to expand its
operations throughout Canada with its extensive range of financial solutions
and strategies for the protection, growth, and transition of wealth.
Key Success Factors
Leader in Quebec and firmly established across Canada in full-service
brokerage services with seasoned wealth management professionals.
Our team of advisors makes the difference by forging lasting
relationships and providing personalized solutions to clients at every
life stage.
NBI is the largest manager of managers in Canada (open architecture).
Given this positioning, our clients can access the industry’s best
advisors.
Leadership position in Canada in securities custody and brokerage
services for independent wealth management firms.
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 an online trading platform or by
speaking directly to a representative on the phone.
Markets segments, allowing a holistic service offering.
Strong synergies with the Personal and Commercial and Financial
IInnvveessttmmeenntt SSoolluuttiioonnss
National Bank Investments Inc. (NBI) manufactures and offers mutual funds, exchange-traded funds (ETF), 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 a vast array 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.
35
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
TTrruusstt aanndd EEssttaattee SSeerrvviicceess
Through National Bank Trust (NBT), Wealth Management 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 provides
integrated trustee and depository services as well as securities custody services.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Soaring inflation resulting from the war in Ukraine has led to the fastest tightening of monetary policies since the mid-1990s. The financial market corrections
were brutal, and rising interest rates caused bond and stock portfolios to post losses. A number of stock markets, including the S&P 500, entered bear market
territory (market decline of over 20%). Canada’s stock market also declined, although it was more resilient, primarily owing to the country’s raw materials
sectors, which are doing quite well in the current geopolitical context. While the market impacts of rising interest rates were felt very quicky, it will take some
time to assess the full economic impacts, which could create volatility in the months to come. Although the North American economy is holding up well, the
outlook for 2023 is less rosy. The real estate sector has been hit very hard—both in the U.S. and Canada—and house prices have already begun to slide despite
a resilient labour market. Business leaders’ confidence has been shaken by the growing risk of recession, and anemic economic growth is expected in 2023.
The economic environment in 2022 and the outlook for 2023 are discussed in more detail in the Economic Review and Outlook section on page 26.
OObbjjeeccttiivveess aanndd SSttrraatteeggiicc PPrriioorriittiieess
The Wealth Management segment will capitalize on the strength of the Bank's brand by generating sustained earnings growth, further improving client
satisfaction, and maintaining high employee engagement.
2022 Achievements and Highlights
2023 Priorities
Focused on our growth strategies by leveraging
intersegment synergies and by looking beyond
Quebec and also towards sectors with strong
potential.
Reconciled the activities of PB1859 and Commercial
Banking to better meet client needs.
Raised client satisfaction across all channels despite
an uncertain economic environment.
Create highly engaged clients
thanks to an exceptional
advisory-based experience
Have best-in-class investment
and digital solutions
Continually simplified and improved our digital
ecosystem to improve client and employee
experience.
Enhanced our responsible investment and non-
traditional investment product offerings through
teams of experts.
Further develop the quality of our advice and
our closeness to clients by leveraging client
relationship tools and accelerating synergies,
both in terms of our expertise as well as
geographically.
Continue developing a fully-integrated
solution that helps advisors become
independent.
Further develop a distinctive offering for clients
who are in both PB1859 and the Commercial
Banking sectors by adding differentiating
revenue-generating components such that
they can go to market together.
Continue developing new investment solutions
that are constantly aligning with client needs
(responsible investing, ETFs, private
investments, life goals, etc.).
Further simplify and improve digital solutions
according to client needs and on a continual
basis.
Continued developing our analytic foundations and
Maintain the pace of progress on
Target fast, expert and flawless
execution
the 360-degree holistic view of clients.
Made ongoing investments to automate and digitalize
key processes to improve both client and employee
experience.
transformation projects and continue
executing our automation and digitalization
plan.
Continue developing analytic foundations in
order to put data (360-degree holistic view) at
the service of clients.
Deployed multiple tools and programs to further
Continue delivering an engaging employee
Encourage entrepreneurial culture
and talent development
Created conditions that encourage employees to
return to work, notably a flexible hybrid work model.
improve diversity and inclusion and to support the
ongoing development of our employees.
experience by:
providing experiences tailored to
employee needs and that support
flexibility and quality of life;
having an inclusive culture that is
conducive to synergy, agility, and a client
focus.
National Bank of Canada
36
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
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(3)
Average deposits(2)
Efficiency ratio(3)
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn(3)
AAsssseettss uunnddeerr mmaannaaggeemmeenntt(3)
Individual
Mutual funds
22002222
559944
11,,442299
335522
22,,337755
11,,339911
998844
33
998811
226600
772211
88,,222266
77,,113322
1155
3355,,332255
5588..66 %%
2021(1)
446
1,322
398
2,166
1,293
873
1
872
231
641
7,146
5,998
16
33,934
59.7 %
661166,,116655
651,530
6655,,221144
4477,,113322
111122,,334466
64,941
52,245
117,186
%% cchhaannggee
3333
88
((1122))
1100
88
1133
1133
1133
1122
1155
1199
((66))
44
((55))
−−
((1100))
((44))
(1)
(2)
(3)
For the year ended October 31, 2021, certain amounts have been reclassified, notably certain amounts that have been adjusted to reflect an accounting policy change applicable to cloud
computing arrangements (for additional information, see Note 1 to the consolidated financial statements).
Represents an average of the daily balances for the period.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
FFiinnaanncciiaall RReessuullttss
In the Wealth Management segment, net income totalled $721 million in fiscal 2022, up 12% from
$641 million in fiscal 2021. The segment's total revenues amounted to $2,375 million in fiscal
2022, up 10% from $2,166 million in fiscal 2021. Its fiscal 2022 net interest income grew
$148 million or 33% year over year owing to higher interest rates, to growth in loan and deposit
volumes, and to the deposit margin. Fee-based revenues rose 8% year over year due to growth in
average assets under administration and assets under management as a result of net inflows into
various solutions and to stock market performance in the first half of fiscal 2022. As for transaction
and other revenues, they decreased 12% year over year as a result of lower commission-
generating trading volume during fiscal 2022.
For fiscal 2022, Wealth Management’s non-interest expenses stood at $1,391 million compared to
$1,293 million in fiscal 2021, an increase attributable to higher compensation and employee
benefits, notably the variable compensation associated with revenue growth, as well as to higher
operations support charges related to the segment’s business growth and initiatives. At 58.6%,
the segment’s 2022 efficiency ratio improved by 1.1 percentage points from 59.7% in 2021.
Wealth Management recorded $3 million in provisions for credit losses in fiscal 2022 to reflect a
less favourable macroeconomic environment, whereas $1 million had been recorded in fiscal
2021.
AAsssseettss UUnnddeerr AAddmmiinniissttrraattiioonn
aanndd AAsssseettss UUnnddeerr MMaannaaggeemmeenntt
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
0
3
5
,
1
5
6
55
66
11
,,
66
11
66
6
8
1
,
7
1
1
66
44
33
,,
22
11
11
2021
22002222
Assets under administration
Assets under management
37
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
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 900 professionals serve clients through its offices in North America, Europe, the UK, and Asia.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
TToottaall RReevveennuueess bbyy GGeeooggrraapphhiicc DDiissttrriibbuuttiioonn
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
3399%%
6611%%
$2,468 million
Total revenues
$1,446 million
Income before provisions
for credit losses and
income taxes
3311%%
1177%%
5522%%
Global Markets (2021: 53%)
Corporate and Investment Banking (2021: 47%)
$1,080 million
Net income
Province of Quebec (2021: 30%)
Other provinces (2021: 57%)
Outside of Canada (2021: 13%)
GGlloobbaall MMaarrkkeettss
Financial Markets is a Canadian leader in risk management solutions,
structured products, and market-making in exchange-traded funds (ETFs) by
volume. The segment offers solutions in the areas of 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.
Key Success Factors
Pan-Canadian franchise with established leadership in government
debt underwriting and ETF market-making in addition to securities
lending and recognized capabilities in risk management solutions,
structured products, and equity derivatives.
Client-centric business with a differentiated and diversified revenue mix.
Sound risk management.
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 merger and acquisition initiatives 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 mortgages insured by the Government of Canada and mortgage-backed securities.
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.
38
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
The impacts of tighter monetary policy announced several months ago by a number of central banks are clearly being felt the world over. In Europe, rising
interest rates (and soaring prices) have again stymied growth and shone a light on certain financial weaknesses, notably in the UK, where poor fiscal
management nearly derailed the bond market. U.S. growth remained stronger, even though cracks have begun to appear in sectors that are more sensitive to
interest rate fluctuations. The Bank of Canada followed the global trend, quickly raising its benchmark rate, which is weighing heavily on the housing market.
After skyrocketing increases during the pandemic, house prices have begun to cool, putting downward pressure on household wealth at a time when consumer
spending power has already been eroded by steep prices.
The economic environment in 2022 and the outlook for 2023 are discussed in more detail in the Economic Review and Outlook section on page 26.
OObbjjeeccttiivveess aanndd SSttrraatteeggiicc PPrriioorriittiieess
2022 Achievements and Highlights
2023 Priorities
Ensure continued growth by
recruiting, coaching, and retaining
a diversified workforce
Advanced our Inclusion and Diversity strategy
through scholarship and sponsorship programs.
Coached and retained our talent at all levels through
mentorship and executive development programs.
Implement innovative practices for employee
recruitment, coaching, and retention while
fostering inclusion.
Carry on international expansion
supported by an innovative offering
Enhanced U.S. coverage in key sectors and
Assist our clients in their growth ambitions
distribution of selected products.
and funding needs.
Maintain our leadership in
established businesses and
leverage our strengths onto other
businesses
Strengthen our leadership role in
sustainable financing solutions
Ranked number one in Canadian government debt
underwriting for an eighth consecutive year.
Maintained our ETF leadership position.
Ranked number one in International Securities
Finance’s (ISF) survey in the G2 Borrowers category
for the Americas.
Guided and advised our clients in their energy
transition.
Exclusive financial advisor to Tidewater
Renewables Ltd. on its $60 million renewable natural
gas (RNG) and feedstock partnership with Rimrock
RNG Inc., allowing each party to focus on their core
competencies to build and advance RNG projects;
lead lender to a wholly owned subsidiary of Tidewater
Renewables Ltd. on a $26 million credit facility used
to fund investment into the partnership.
Exclusive financial advisor to Whitecap
Resources Inc., a leader in driving forward best ESG
practices, on its $1.9 billion acquisition of XTO
Energy Canada; joint bookrunner and co-lead
arranger on a $1.4 billion four-year committed term
loan.
Supported several cleantech companies through
increased capacity.
Maintain our leadership through quality and
innovation.
Grow market shares in corporate debt
issuance.
Continue discussions with clients, employees,
and other stakeholders to achieve net-zero
greenhouse gas (GHG) emissions by 2050.
Ensure depth and quality of our coverage
regarding the global energy transition.
Make ESG principles a growth lever and
impact multiplier for Financial Markets.
39
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
Further strengthen information
technology to enhance and
accelerate our execution
Strengthen our ability to deliver
integrated advice and solutions to
clients
2022 Achievements and Highlights
2023 Priorities
Continue to create differentiated technology
across all Financial Markets’ business lines.
Deepen our relationships with corporations,
institutional clients, and public-sector entities
and help support their growth.
Invested in technology and talent to deploy
technology enhancements.
Leveraged and exported our technology expertise
to other segments of the Bank.
Used the latest advances in deep learning to
automate and scale our platform.
Exclusive financial advisor to Stantec Inc. on its
acquisition of select assets of Australian-listed
Cardno Limited for US$500 million.
Financial advisor to Cominar Real Estate
Investment Trust on its sale to a consortium led by
Canderel Management Inc. for $5.7 billion.
Sole bookrunner and lead underwriter on an
$86 million bought deal equity offering for Artemis
Gold Inc., following the Bank’s inaugural project
loan facility; co-lead arranger and underwriter of a
committed credit facility of up to $385 million,
plus an additional $40 million standby cost
overrun facility.
Exclusive financial advisor to Nomad Royalty
Company Ltd. (Nomad) on its sale to Sandstorm
Gold Ltd. (Sandstorm) for US$590 million,
including a fairness opinion provided to the
Special Committee of Nomad; co-manager on
bought deal equity offerings for Nomad
($42.5 million) and Sandstorm (US$90 million).
Exclusive financial advisor to the Credit Union
Central of Saskatchewan on the sale of its 84%
ownership stake in Concentra Bank to Equitable
Group Inc. (Equitable); co-manager on a
$230 million bought deal offering of subscription
receipts for Equitable.
Exclusive financial advisor to Vegpro
International Inc. on the sale of the majority of its
operations to Vision Ridge Partners, LLC; sole
bookrunner, administrative agent and arranger on
the acquisition financing.
Exclusive financial advisor to IBI Group Inc. on its
$873 million sale to Dutch-listed Arcadis N.V.
Received Consensus Economics’ Forecast Accuracy
Award (FAA) for Canada.
Sponsored the tenth annual Bloomberg Canadian
Finance Conference.
40
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
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(1)
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes(1)
NNeett iinnccoommee
Average assets(3)
Average loans and acceptances(3) (Corporate Banking only)
Net impaired loans(4)
Net impaired loans as a % of total loans and acceptances(4)
Average deposits(3)
Efficiency ratio(4)
22002222
997799
336677
115566
11,,550022
996666
22,,446688
11,,002222
11,,444466
((2233))
11,,446699
338899
11,,008800
115544,,334499
2222,,331111
9911
00..44 %%
4477,,224422
4411..44 %%
2021(2)
%% cchhaannggee
685
357
128
1,170
1,048
2,218
906
1,312
(24)
1,336
353
983
151,240
19,630
14
0.1 %
44,006
40.8 %
4433
33
2222
2288
((88))
1111
1133
1100
44
1100
1100
1100
22
1144
77
(1)
(2)
(3)
(4)
The Total revenues and Income taxes items of the Financial Markets segment 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 been otherwise payable. For the year ended October 31, 2022, Total revenues were grossed
up by $277 million ($183 million in 2021) and an equivalent amount was recognized in Income taxes. The effect of these adjustments is reversed under the Other heading in the segment
results.
For the year ended October 31, 2021, certain amounts have been reclassified, in particular amounts of the loan portfolio of borrowers in the “Oil and gas” and “Pipelines” sectors as well as
related activities, which were transferred from the Personal and Commercial segment to the Financial Markets segment. Moreover, certain amounts have been adjusted to reflect an
accounting policy change applicable to cloud computing arrangements (for additional information, see Note 1 to the consolidated financial statements).
Represents an average of the daily balances for the period.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
FFiinnaanncciiaall RReessuullttss
In the Financial Markets segment, net income totalled $1,080 million in fiscal 2022, a 10% year-
over-year increase driven by growth in total revenues. The segment’s income before provisions for
credit losses and income taxes totalled $1,446 million in fiscal 2022, up $134 million or 10% from
fiscal 2021. Its fiscal 2022 total revenues amounted to $2,468 million, up $250 million or 11%
year over year. Global markets revenues rose 28% year over year owing to growth across every
revenue category, notably revenues from equities as market conditions favoured greater client
activity. As for the fiscal 2022 corporate and investment banking revenues, they were down 8%
year over year, mainly due to a decrease in revenues related to capital markets activity, tempered
by revenues generated by favourable merger and acquisition activity and by growth in loan
volumes.
For fiscal 2022, the segment’s non-interest expenses rose 13% year over year, essentially
attributable to higher compensation and employee benefits, notably the variable compensation
associated with revenue growth, and to higher technology investment expenses and operations
support charges. The segment’s 2022 efficiency ratio was 41.4% versus 40.8% in 2021.
Financial Markets recorded $23 million in recoveries of credit losses during fiscal 2022 compared
to $24 million in recoveries of credit losses in fiscal 2021. A $78 million increase in provisions for
credit losses on non-impaired loans, resulting from a less favourable macroeconomic outlook than
in fiscal 2021, was offset by a $77 million decrease in provisions for credit losses on impaired
loans.
TToottaall RReevveennuueess bbyy CCaatteeggoorryy
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
11,,550022
996666
1,170
1,048
2021
22002222
Global markets – Equities
Global markets – Fixed income
Global markets – Commodities and
foreign exchange
Corporate and investment banking
41
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
UU..SS.. SSppeecciiaallttyy FFiinnaannccee aanndd IInntteerrnnaattiioonnaall
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 its Credigy subsidiary and on personal and commercial banking in Cambodia through its ABA Bank subsidiary. 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 2022, the U.S. Specialty Finance and International (USSF&I) segment generated 12% of the Bank’s
consolidated total revenue and 16% of its net income.
Credigy
$439 million
Total revenues
$308 million
Income before provisions
for credit losses and
income taxes
BBrreeaakkddoowwnn ooff TToottaall RReevveennuueess
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
4400%%
6600%%
$216 million
Net income
Credigy (2021: 49%)
ABA Bank (2021: 51%)
ABA Bank
$669 million
Total revenues
$457 million
Income before provisions
for credit losses and
income taxes
$340 million
Net income
UU..SS.. SSppeecciiaallttyy FFiinnaannccee —— CCrreeddiiggyy
Founded in 2001 and based in Atlanta, Georgia, Credigy is a specialty
finance company primarily active in financing and acquiring a diverse range
of performing assets. Its portfolio is mostly comprised of diversified secured
consumer receivables in the U.S. market. Through its landmark modelling
expertise, flexibility, and client-centric approach, Credigy is a partner of
choice for financial services institutions.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Key Success Factors
Proven investment strategy that is adaptable to rapidly changing market
conditions.
Diversification across several classes of performing assets.
Market credibility achieved through 350-plus transactions and over
US$23 billion in total investments life-to-date.
Rigorous underwriting approach with continuous refinement of modelling
and analytics capabilities.
The U.S. Federal Reserve (Fed) has already raised its policy rate by 375 basis
points since March 2022, and its most recent announcements show that it
believes that more work is needed to rein in inflation. Yet, the U.S. economy
has begun to grow again after a difficult first six months. While the labour
market remains solid, consumers are managing to cope with their reduced
buying power by digging into their savings amassed during the pandemic.
Americans are also maintaining their spending levels using credit. In fact,
credit card debt rose 15%, year over year in the third quarter of 2022, the
highest increase seen in 20 years. However, there are growing signs of an
economic slowdown on the horizon. Residential investment declined for a
sixth consecutive quarter—something not seen since the Great Recession of 2008-09. Moreover, the manufacturing sector growth outlook is less rosy. While
inflation is showing some encouraging signs that should soon enable the Fed to press the pause button, there has been so much monetary tightening that
growth is expected to slow substantially in 2023.
Resilience to unfavourable economic conditions owing to credit quality
and structural enhancements that provide downside protection.
Emphasis on recruiting and retaining exceptional talent.
The economic environment in 2022 and the outlook for 2023 are discussed in more detail in the Economic Review and Outlook section on page 26.
42
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
OObbjjeeccttiivveess aanndd SSttrraatteeggiicc PPrriioorriittiieess -- CCrreeddiiggyy
Credigy aims to provide customized solutions for the acquisition or financing of customer receivable assets in pursuit of the best risk-adjusted returns and a
pre-tax return on assets (ROA) of at least 2.5%.
Sustain deal flow by being a
partner of choice for institutions
facing complex challenges and
strategic changes
Maintain a diversified mix of
performing assets
2022 Achievements and Highlights
2023 Priorities
Conducted active monitoring of the economy and
opportunities.
Leverage relationships with current and
prospective partners.
Achieved a balance in transactions among new and
Remain prepared to seize opportunities in
existing partners.
rapidly evolving markets.
Maintained average assets of approximately
$8.2 billion.
Performing assets accounted for 99% of assets.
Continued asset class diversification focused on
secured high-quality consumer assets.
Leveraged flexibility to invest via financing and direct
acquisitions.
Favour asset diversification and a prudent
investment profile.
Maintain a stable risk-reward balance while
optimizing for capital efficiency.
Achieve best risk-adjusted returns
Maintained a disciplined approach to ensure a risk-
Deliver asset growth through a balanced mix of
Refined and monitored credit models to target the
Actively monitor macroeconomic conditions to
best risk-return investments.
implement risk mitigation strategies.
return balance and a pre-tax return on assets (ROA) of
at least 2.5%.
financing and direct acquisitions.
IInntteerrnnaattiioonnaall –– AABBAA BBaannkk
Established in 1996, ABA Bank provides financial services to individuals and
businesses in Cambodia. It is now the largest by assets and the fastest
growing commercial bank in Cambodia. ABA Bank offers a full spectrum of
financial services to micro, small and medium enterprises (MSMEs) as well as
to individuals through 81 branches, 30 self-banking units, 1,024 automated
teller machines (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 financial magazines The Banker, Global Finance (eighth
consecutive year), Euromoney (ninth consecutive year) and Asiamoney.
EEccoonnoommiicc aanndd MMaarrkkeett RReevviieeww
Key Success Factors
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.
Experienced leadership team and skilled workforce supported by robust
training programs.
Governance structure based on rigorous international standards while
providing local management with the autonomy to pursue strategic
priorities and business objectives.
The persistent impact of the pandemic, most notably in China, continues to
affect Cambodia’s tourism industry. The export sectors on the other hand are
growing with textile and agriculture benefitting from the economic recovery in
developed countries and the new Regional Comprehensive Trade Partnership
between the Association of Southeast Asian Nations (ASEAN), Australia, New
Zealand, Brunei Darussalam, China and Japan. The highly dollarized nature of
the Cambodian economy (more than 80%) helps to keep inflation under control. After peaking at 8% in mid-2022, it is expected to level off at year end and
return to historical averages of 3% by 2024.
Leveraging National Bank’s reputation as a world-class financial
institution.
International recognition of ABA Bank.
The economy grew by 3% in 2021 and is expected to grow by close to 5% in 2022. In 2023, growth rates should remain close to 5%, as tourism returns to more
normalized levels. Cambodia will also continue to benefit from increased regional economic integration under the 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 17 million is
under 35 years of age.
43
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
OObbjjeeccttiivveess aanndd SSttrraatteeggiicc PPrriioorriittiieess –– AABBAA BBaannkk
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.
Grow market share in MSME lending
2022 Achievements and Highlights
2023 Priorities
Achieved 39% growth in loan volumes.
Went from the third-largest bank in the market to
the largest by increasing market share.
Continued to adapt the MSME lending strategy to
support the growing needs of customers as their
businesses become more mature.
Opened two new branches, bringing the total to 81
throughout the country.
Open four branches and ten self-banking units in
2023 to extend its reach in Cambodia, continue
modernizing its branch network, and gain direct
access to a larger pool of MSME customers and
retail deposits.
Focus on MSME clients in industries that have
been minimally affected by the current economic
slowdown.
Continue to adapt the lending strategy in line
with the growing needs of MSME customers as
their businesses become more mature.
Maintained a well-diversified portfolio (99% of
loans are secured).
At 2.8% of the loan portfolio as at October 31,
2022, non-performing loans were below market
average.
Maintain strong governance, disciplined risk
management, and sound business processes.
Ensure strong credit quality across the loan
portfolio to keep non-performing loan levels
below market averages.
Closely monitored clients as they exited the
Continue to focus on secured lending.
Maintain credit quality
payment deferral program established in 2020 to
offer relief to 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.
Sustain growth in deposits and
transactional services
Grew deposit volume by 28% from fiscal 2021.
Continued to enhance self-banking capabilities,
including the market-leading full-scale mobile
banking application in Cambodia.
Further develop the transactional banking model
to accelerate the migration of cash transactions,
payments, and money transfers to self-service
and digital banking channels.
Self-banking transactions made up 98% of total
Adapt the product offering to support the growth
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 30 locations throughout the
country.
and evolving needs of clients.
Increase the deposit base by providing
convenience to retail customers through an
advanced digital and self-banking infrastructure
and by expanding the network of self-service
locations.
44
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
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
Average assets(1)
Average loans and receivables(1)
Purchased or originated credit-impaired (POCI) loans
Net impaired loans excluding POCI loans(2)
Average deposits(1)
Efficiency ratio(2)
(1)
(2)
Represents an average of the daily balances for the period.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
22002222
2021
%% cchhaannggee
443399
666699
22
11,,111100
113311
221122
11
334444
776666
3355
3311
6666
770000
5577
8866
114433
221166
334400
11
555577
1188,,889900
1155,,228833
445599
118800
88,,557777
486
510
5
1,001
139
173
3
315
686
(41)
26
(15)
701
86
60
146
302
251
2
555
16,150
12,558
464
40
6,699
3311..00 %%
31.5 %
((1100))
3311
1111
((66))
2233
99
1122
1199
−−
((3344))
4433
((22))
((2288))
3355
−−
1177
2222
((11))
2288
45
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
FFiinnaanncciiaall RReessuullttss
In the USSF&I segment, net income totalled $557 million in fiscal 2022 compared to $555 million in fiscal 2021 as total revenue growth was offset by higher
provisions for credit losses. The segment's total revenues amounted to $1,110 million in fiscal 2022 versus $1,001 million in fiscal 2021, an 11% increase
resulting from a $159 million or 31% increase in the ABA Bank subsidiary's revenues driven by loan and deposit growth, partly offset by a $47 million decrease
in the Credigy subsidiary's revenues.
For fiscal 2022, the segment’s non-interest expenses stood at $344 million compared to $315 million in fiscal 2021, a $29 million increase attributable to
higher non-interest expenses at ABA Bank resulting from its business growth.
The segment’s provisions for credit losses increased by $81 million compared to fiscal 2021, resulting in part from the more favourable macroeconomic
outlook in fiscal 2021 as well as from more favourable remeasurements of Credigy’s POCI loan portfolios in fiscal 2021.
CCrreeddiiggyy
For fiscal 2022, the Credigy subsidiary's net income totalled $216 million, a 28% year-over-year decrease that was notably due to lower revenue and a
significant increase in provisions for credit losses. Its income before provisions for credit losses and income taxes totalled $308 million in fiscal 2022, down
11% year over year. Credigy’s fiscal 2022 total revenues amounted to $439 million, down from $486 million in fiscal 2021. While there was growth in net
interest income, it was more than offset by a decrease in non-interest income, that was due to a $26 million gain that had been realized in the first quarter of
2021 upon a disposal of loan portfolios, to a favourable impact of fair value remeasurements of certain portfolios during fiscal 2021, and to an unfavourable
impact upon remeasurements of certain portfolios in fiscal 2022. Credigy’s non-interest expenses were down $8 million year over year, mainly due to a
decrease in variable compensation. Provisions for credit losses rose $76 million year over year, whereas in fiscal 2021, reversals of allowances for credit
losses on non-impaired loans had been recorded to reflect more favourable macroeconomic conditions at that time and more favourable remeasurements of
POCI loan portfolios had also been carried out.
AABBAA BBaannkk
For fiscal 2022, ABA Bank’s net income totalled $340 million, up 35% from fiscal 2021. Growth in the subsidiary’s business activities, mainly in the form of
sustained loan and deposit growth, drove total revenues up 31% year over year. This increase was, however, partly offset by lower interest rates on loans given
a competitive environment in Cambodia. The subsidiary's fiscal 2022 non-interest expenses stood at $212 million, a 23% year-over-year increase resulting
from higher compensation and employee benefits (notably due to higher salaries given a greater number of employees and higher variable compensation
associated with revenue growth) and from higher occupancy expenses attributable to business growth. ABA Bank recorded $31 million in provisions for credit
losses in fiscal 2022, which is $5 million more than last year, as provisions for credit losses on impaired loans increased to reflect the end of COVID-19 relief
measures that had been granted to the subsidiary's clients.
AAvveerraaggee LLooaannss aanndd RReecceeiivvaabblleess -- CCrreeddiiggyy
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
AAvveerraaggee LLooaannss aanndd AAvveerraaggee DDeeppoossiittss –– AABBAA BBaannkk
YYeeaarr eennddeedd OOccttoobbeerr 3311
(millions of Canadian dollars)
77,,998888
7,303
77
77
55
,,
88
44
99
22
,,
77
9
9
6
6
,
5
5
2
5
,
2021
22002222
2021
22002222
Loans
POCI loans
Loans
Deposits
46
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Business Segment Analysis
OOtthheerr
The Other heading reports on Treasury operations; liquidity management; Bank funding; asset and liability management; the activities of the Flinks
subsidiary, a fintech company specialized in financial data aggregation and distribution; certain specified items; and the unallocated portion of corporate
units. Corporate units include Technology and Operations, Risk Management, Employee Experience, 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
(millions of Canadian dollars)
Net interest income(2)
Non-interest income(2)
Total revenues
Non-interest expenses
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes (recovery)(2)
NNeett lloossss
Non-controlling interests
Net loss attributable to the Bank’s shareholders and holders of other equity instruments
Specified items after income taxes(3)
NNeett lloossss −− AAddjjuusstteedd(3)
Average assets(4)
22002222
2021(1)
((553366))
220011
((333355))
332244
((665599))
22
((666611))
((337722))
((228899))
((11))
((228888))
(379)
306
(73)
381
(454)
−
(454)
(264)
(190)
−
(190)
−−
((228899))
7711,,886688
(7)
(183)
62,333
(1)
(2)
(3)
(4)
For the year ended October 31, 2021, certain amounts have been reclassified.
For the year ended October 31, 2022, Net interest income was reduced by $234 million ($181 million in 2021), Non-interest income was reduced by $48 million ($8 million in 2021), and an
equivalent amount was recorded in Income taxes. These adjustments include a reversal of the taxable equivalent of the Financial Markets segment and the Other heading. 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.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures.
Represents an average of the daily balances for the period.
FFiinnaanncciiaall RReessuullttss
For the Other heading of segment results, there was a net loss of $289 million in fiscal 2022 compared to a net loss of $190 million in fiscal 2021. This change
in net loss was due to a decrease in total revenues arising mainly from a lower contribution from Treasury activities and from lower gains on investments in
fiscal 2022. This decrease in revenues was tempered by a reduction in non-interest expenses, notably variable compensation, and in pension plan expense as
well as by a $20 million reversal of the provision for the compensatory tax on salaries paid in Quebec. In fiscal 2021, the net loss had included a $33 million
gain on a remeasurement of the previously held equity interest in Flinks and a $30 million loss ($26 million net of income taxes) related to the fair value
measurement of the Bank’s equity interest in AfrAsia.
The specified items, net of income taxes, recorded in fiscal 2021 had consisted of $7 million in intangible asset impairment losses. For fiscal 2022, net loss
stood at $289 million compared to a $183 million adjusted net loss in fiscal 2021.
47
National Bank of Canada2022 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,,220077
11,,112277
22,,333344
11,,334466
998888
8877
116633
773388
11,,441199
999944
22,,441133
11,,330055
11,,331133
11,,112266
22,,443399
11,,229999
11,,110088
11,,114400
5577
222255
882266
33
224488
888899
22002222((22))
QQ11
11,,333322
11,,113344
22,,446666
11,,228800
11,,118866
((22))
225588
993300
Q4
Q3
Q2
1,190
1,021
2,211
1,268
943
(41)
215
769
1,230
1,024
2,254
1,224
1,030
(43)
240
833
1,156
1,082
2,238
1,217
1,021
5
228
788
2021(2)
Q1
1,207
1,017
2,224
1,194
1,030
81
199
750
(1)
(2)
For additional information about the 2022 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 2022, published on November 30, 2022. Also, a summary of results for the past 12 quarters is provided in Table 1 on pages 112 and 113 of this MD&A.
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
The analysis of the past eight quarters reflects the sustained performance of all the business segments and helps readers identify the items that have
favourably or unfavourably affected results. In the third and fourth quarters of fiscal 2022, the Bank’s net income results decreased year over year; this was
due to higher provisions for credit losses, as more favourable macroeconomic conditions in these quarters of 2021 had led to reversals of allowances for credit
losses. Conversely, for the first two quarters of fiscal 2022, the net income results increased year over year. These increases came from the net income growth
generated in each business segment, notably due to higher revenues, and from lower provisions for credit losses recorded in these quarters of fiscal 2022.
Net interest income posted year-over-year increases in every quarter of fiscal 2022. These increases were driven by loan and deposit growth in both the
Personal and Commercial segment and the Wealth Management segment, by trading activity revenues in the Financial Markets segment (except for the fourth
quarter), by loan portfolio growth and the good performance of certain Credigy portfolios, and by an increase in ABA Bank’s net interest income owing to
sustained business growth. In addition, interest rates were increased successively during fiscal 2022, which had a favourable impact on net interest income in
the third and fourth quarters of fiscal 2022.
Non-interest income posted year-over-year increases in every quarter of fiscal 2022 except for the third quarter; the increases were driven partly by sustained
business growth in the Personal and Commercial segment, particularly in the area of card revenues, where there was a notable increase in purchasing volume.
In the Wealth Management segment, non-interest income grew substantially in the first and second quarters of fiscal 2022 given growth in average assets
under administration and under management as a result of net inflows into various solutions and also due to stock market performance. Conversely, in the
third quarter of fiscal 2022, non-interest income was down year over year, notably because higher gains on non-trading securities had been realized during the
third quarter of 2021. In the fourth quarter of fiscal 2022, non-interest income was favourably affected by trading activity revenues in the Financial Markets
segment. Some factors, however, had an unfavourable impact on non-interest income, including the more favourable fair value remeasurements of Credigy
loan portfolios during the quarters of 2021 and a gain realized in the first quarter of 2021 upon a disposal of certain Credigy loan portfolios.
In fiscal 2022, non-interest expenses posted year-over-year increases in every quarter. These increases came from compensation and employee benefits,
notably due to wage growth and a greater number of employees, as well as from investments made as part of the Bank’s technological evolution. Travel and
business development expenses were also up in every quarter of fiscal 2022, as activities with clients resumed during the year. However, certain expenses
decreased, in particular the compensatory tax on salaries for which a downward adjustment was recorded in the first quarter of 2022 as well as the expenses
incurred to implement client and employee health and safety measures in response to COVID-19, which had been higher during fiscal 2021.
For the first two quarters of fiscal 2022, provisions for credit losses decreased year over year; these decreases were due to reversals of allowances for credit
losses on non-impaired loans recorded in the first half of fiscal 2022 given improvements in both the macroeconomic outlook and credit conditions, as well as
to lower provisions for credit losses on impaired Commercial Banking and Financial Markets loans. Conversely, in the last two quarters of fiscal 2022, the
provisions for credit losses increased year over year given less favourable macroeconomic conditions and a slight deterioration in credit conditions during the
third and fourth quarters of fiscal 2022. For the third quarter of fiscal 2022, the year-over-year increase in the provisions for credit losses was also due to the
favourable remeasurements of Credigy’s POCI loan portfolios that had been recorded in the third quarter of 2021.
The change in the effective tax rates between the quarters of fiscal 2022 and fiscal 2021 came essentially from a higher level and proportion of tax-exempt
dividend income in every quarter of fiscal 2022, except for the first quarter of fiscal 2022.
48
National Bank of Canada
National Bank of Canada2022 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
22002222
2021(1)
%% cchhaannggee
3311,,887700
110099,,771199
2266,,448866
220066,,774444
2288,,992211
440033,,774400
226666,,339944
111144,,110011
11,,449999
2211,,774444
22
440033,,774400
33,879
106,304
7,516
182,689
25,233
355,621
240,938
95,233
768
18,679
3
355,621
((66))
33
225522
1133
1155
1144
1111
2200
9955
1166
((3333))
1144
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
As at October 31, 2022, the Bank had total assets of $403.7 billion, which rose $48.1 billion or 14% from $355.6 billion since the end of fiscal 2021.
CCaasshh aanndd DDeeppoossiittss WWiitthh FFiinnaanncciiaall IInnssttiittuuttiioonnss
At $31.9 billion as at October 31, 2022, cash and deposits with financial institutions were down $2.0 billion since October 31, 2021, mainly due to a decrease
in deposits with the Bank of Canada, partly offset by an increase in deposits with the U.S. Federal Reserve. The high level of cash and deposits with financial
institutions is explained in part by the excess liquidity related to the accommodative monetary policies that have been applied by central banks since 2020.
The Bank’s liquidity and funding risk management practices are described on pages 91 to 100 of this MD&A.
SSeeccuurriittiieess
Securities, totalling $109.7 billion as at October 31, 2022, rose $3.4 billion since October 31, 2021, due to a $2.6 billion or 3% increase in securities at fair
value through profit or loss, notably securities issued or guaranteed by the Canadian government and by U.S. Treasury, other U.S. agencies, and other foreign
governments, partly offset by a decrease in equity securities. Securities other than those measured at fair value through profit or loss were also up, rising $0.8
billion. Securities purchased under reverse repurchase agreements and securities borrowed rose $19.0 billion, an increase that is mainly related to the
activities of the Financial Markets segment and of Treasury. The Bank’s market risk management policies are described on pages 84 to 90 of this MD&A.
LLooaannss aanndd AAcccceeppttaanncceess
As at October 31, 2022, loans and acceptances, net of allowances for credit losses, accounted for 51% of total assets and totalled $206.7 billion, rising
$24.0 billion or 13% since October 31, 2021.
Residential mortgage loans outstanding amounted to $80.1 billion as at October 31, 2022, rising $7.6 billion or 10% since October 31, 2021. This growth was
mainly driven by sustained demand for mortgage credit in the Personal and Commercial segment as well as by the activities of the Financial Markets segment
and the ABA Bank and Credigy subsidiaries. Personal loans totalled $45.3 billion at year-end 2022, rising $4.2 billion from $41.1 billion since
October 31, 2021. This increase came mainly from business growth in Personal Banking and at ABA Bank. At $2.4 billion, credit card receivables rose
$0.2 billion since October 31, 2021, as the consumer spending habits of clients gradually resumed and resulted in a notable increase in purchasing volume.
As at October 31, 2022, loans and acceptances to business and government totalled $79.9 billion, a $12.0 billion or 18% increase since October 31, 2021 that
was mainly due to business growth in Commercial Banking, in the corporate financial services, and at ABA Bank.
Table 9 (page 119) shows, among other information, gross loans and acceptances by borrower category as at October 31, 2022. At $95.6 billion as at
October 31, 2022, residential mortgages (including home equity lines of credit) have posted strong growth since 2018 and accounted for 46% of total loans
and acceptances. The growth in residential mortgages was driven by sustained demand for mortgage credit in the Personal and Commercial segment and by
the business activity at Financial Markets, ABA Bank, and Credigy. As for personal loans (including credit card receivables), they totalled $18.7 billion as at
October 31, 2022, rising $2.2 billion since October 31, 2021. With respect to commercial loans, the key increases were recorded in the agriculture, utilities,
manufacturing, financial services, real estate and real-estate-construction, and other services categories. As at October 31, 2022, certain categories were
down compared to a year ago, notably the oil and gas category as well as the education and health care category. Furthermore, the Credigy subsidiary’s POCI
loans remained relatively stable since October 31, 2021.
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National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
IImmppaaiirreedd LLooaannss
Impaired loans include all loans classified in Stage 3 of the expected credit loss model and the Credigy subsidiary’s POCI loans.
As at October 31, 2022, gross impaired loans stood at $1,271 million compared to $1,126 million as at October 31, 2021 (Table 10, page 120). As for net
impaired loans, they totalled $1,030 million as at October 31, 2022 compared to $836 million as at October 31, 2021. Net impaired loans excluding POCI
loans amounted to $479 million, rising $196 million from $283 million as at October 31, 2021. This increase was essentially due to the loan portfolio of the
Financial Markets segment and to the loan portfolio of ABA Bank, as the COVID-19 relief measures that had been granted to this subsidiary’s clients ceased.
The increase was partly offset by decreases in the net impaired loans of the Commercial Banking loan portfolio and of the Credigy loan portfolio (excluding
POCI loans). Net POCI loans stood at $551 million as at October 31, 2022 compared to $553 million as at October 31, 2021.
A detailed description of the Bank’s credit risk management practices is provided on pages 75 to 83 of this MD&A as well as in Note 7 to the consolidated
financial statements.
OOtthheerr AAsssseettss
As at October 31, 2022, other assets totalled $28.9 billion versus $25.2 billion as at October 31, 2021, a $3.7 billion increase that came mainly from a
$2.0 billion increase in derivative financial instruments, related to the activities of the Financial Markets segment, and from a $1.4 billion increase in
receivables, prepaid expenses and other items.
DDeeppoossiittss
As at October 31, 2022, deposits stood at $266.4 billion, rising $25.5 billion or 11% since the end of fiscal 2021. At $78.8 billion, personal deposits, as
presented in Table 12 (page 121), accounted for 30% of all deposits, and had increased $8.7 billion since October 31, 2021. This increase was driven by
business growth in Personal Banking, in both the Wealth Management and Financial Markets segments, and at ABA Bank.
As shown in Table 12, business and government deposits totalled $184.2 billion as at October 31, 2022, rising $16.3 billion from $167.9 billion as at
October 31, 2021. This increase came from the funding activities of the Financial Markets segment and of Treasury, including $2.0 billion in deposits subject to
bank recapitalization (bail-in) conversion regulations, as well as from business and government deposits from the business activities of Commercial Banking
and Wealth Management. Deposits from deposit-taking institutions totalled $3.4 billion as at October 31, 2022, rising $0.4 billion since the end of fiscal 2021.
OOtthheerr LLiiaabbiilliittiieess
Other liabilities stood at $114.1 billion as at October 31, 2022, rising $18.9 billion since October 31, 2021, essentially due to a $16.2 billion increase in
obligations related to securities sold under repurchase agreements and securities loaned. Obligations related to securities sold short and liabilities related to
transferred receivables were also up, rising $1.5 billion and $1.1 billion, respectively.
SSuubboorrddiinnaatteedd DDeebbtt aanndd OOtthheerr CCoonnttrraaccttuuaall OObblliiggaattiioonnss
Subordinated debt increased since October 31, 2021 as a result of the issuance, on July 25, 2022, of $750 million medium-term notes, partly offset by the
US$7 million redemption, on August 31, 2022, of debentures denominated in foreign currency. The contractual obligations are presented in detail in Note 29
to the consolidated financial statements.
EEqquuiittyy
As at October 31, 2022, equity attributable to the Bank’s shareholders and holders of other equity instruments totalled $21.7 billion, rising $3.0 billion from
$18.7 billion since October 31, 2021. This increase was due to net income net of dividends, to the $500 million issuance of LRCN – Series 3, to the issuances
of common shares under the Stock Option Plan, to the net fair value change attributable to the credit risk on financial liabilities designated at fair value
through profit or loss, and to accumulated other comprehensive income, notably net unrealized foreign currency translation gains on investments in foreign
operations. These increases were partly offset by the repurchases of common shares for cancellation and by remeasurements of pension plans and other post-
employment benefit plans.
The Consolidated Statements of Changes in Equity on page 136 of this Annual Report present the items that make up equity. In addition, an analysis of the
Bank’s regulatory capital is presented in the Capital Management section of this MD&A.
50
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
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, 2022, total commitments for this type of loan
stood at $5,285 million ($4,048 million as at October 31, 2021). Details about other exposures are provided in the table concerning structured entities in
Note 27 to the consolidated financial statements.
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 about related parties is presented in Notes 9, 27 and 28 to the consolidated financial statements.
51
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Analysis of the Consolidated Balance Sheet
IInnccoommee TTaaxxeess
NNoottiiccee ooff AAsssseessssmmeenntt
In September 2022, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million
(including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2017 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $725 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2012-2016 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 2017 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, 2022.
PPrrooppoosseedd LLeeggiissllaattiioonn
On November 4, 2022, the Government of Canada introduced Bill C-32 – An Act to implement certain provisions of the fall economic statement table in
Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022 to implement tax measures applicable to certain
entities of banking and life insurer groups, as presented in its budget of April 7, 2022. These tax measures include the Canada Recovery Dividend (CRD), which
is a one-time 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, and also include a 1.5% increase in the statutory tax rate. The
amount of CRD for the Bank is estimated at $32 million. Since these tax measures were not substantively enacted at the reporting date, no amount has been
recognized in the Bank’s consolidated financial statements as at October 31, 2022.
EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
RReeppuurrcchhaassee ooff CCoommmmoonn SShhaarreess
On November 29, 2022, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 12, 2022, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2.08% of its outstanding common shares) over the 12-month period ending December 11, 2023. 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).
52
National Bank of Canada
National Bank of Canada2022 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 (MBS) 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, 2022, the outstanding
amount of NHA securities issued by the Bank and sold to CHT was $24.1 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, 2022, the credit card receivables portfolio held by CCCT II represented an amount outstanding of $2.1 billion. CCCT II issued notes to
investors, $0.1 billion of which is held by third parties and $1.3 billion is held by the Bank. CCCT II also issued a bank certificate held by the Bank that stood at
$0.7 billion as at October 31, 2022. 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 Morningstar (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.
53
National Bank of Canada2022 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.
54
National Bank of Canada
National Bank of Canada2022 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 the
risks inherent to the Bank’s business activities, supports its business segments, and protects its clients.
CCaappiittaall MMaannaaggeemmeenntt FFrraammeewwoorrkk
The Bank’s capital management policy defines the guiding principles as well as the roles and responsibilities of its internal capital adequacy assessment
process. This process aims to determine the capital level that the Bank needs to maintain 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 against 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 operating targets that include a discretionary cushion in
excess of the minimum 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, the 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 application thereof. 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 Senior Leadership Team 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.
55
National Bank of Canada2022 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
Ratings-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 Ratings-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, 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 Ratings-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 risk 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.
56
National Bank of Canada
National Bank of Canada2022 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 recognized regulatory capital instruments
other than common equity must 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. As at October 31, 2022, all of the Bank’s regulatory capital
instruments, other than common shares, have an NVCC clause. Furthermore, in the regulations of the Canada 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 Domestic Systemically Important Banks (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.
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.
The Bank and all other major Canadian banks have to maintain the following 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. 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, is to ensure that a D-SIB
has sufficient loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable. Available TLAC includes total capital as well as
certain senior unsecured debts that satisfy all of the eligibility criteria of OSFI’s TLAC guideline. Since November 1, 2021, OSFI has been requiring D-SIBs to
maintain a risk-based TLAC ratio of at least 24.0% (including the domestic stability buffer) of risk-weighted assets and a TLAC leverage ratio of at least 6.75%.
The TLAC ratio is calculated by dividing available TLAC by risk-weighted assets, and the TLAC leverage ratio is calculated by dividing available TLAC by total
exposure. As at October 31, 2022, outstanding liabilities of $13.9 billion ($11.9 billion as at October 31, 2021) were subject to conversion under the Bail-In
Regulations.
57
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Capital Management
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tthhee ddoommeessttiicc
ssttaabbiilliittyy bbuuffffeerr
DDoommeessttiicc
ssttaabbiilliittyy
bbuuffffeerr(2)
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
TTLLAACC rraattiioo
TTLLAACC lleevveerraaggee rraattiioo
44..55 %%
66..00 %%
88..00 %%
33..00 %%
2211..55 %%
66..7755 %%
22..55 %%
22..55 %%
22..55 %%
nn..aa..
nn..aa..
nn..aa..
77..00 %%
88..55 %%
1100..55 %%
33..00 %%
2211..55 %%
66..7755 %%
11..00 %%
11..00 %%
11..00 %%
nn..aa..
nn..aa..
nn..aa..
88..00 %%
99..55 %%
1111..55 %%
33..00 %%
2211..55 %%
66..7755 %%
22..55 %%
22..55 %%
22..55 %%
nn..aa..
22..55 %%
nn..aa..
1100..55 %%
1122..00 %%
1144..00 %%
33..00 %%
2244..00 %%
66..7755 %%
n.a. Not applicable
The capital ratios and the TLAC ratio include the capital conservation buffer and the D-SIB surcharge.
(1)
(2) On June 22, 2022, OSFI confirmed that the domestic stability buffer was being maintained at 2.5%.
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 had 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, 2022 are described below. Also presented
below are brief descriptions of ongoing regulatory projects.
COVID-19 relief measures still in effect as at October 31, 2022:
Treatment of regulatory capital for expected credit loss accounting purposes: OSFI introduced transitional arrangements applicable to the ECL
provisioning method set out in the Basel framework. Under the arrangements, a portion of allowances that would otherwise have been included in Tier 2
capital is included in CET1 capital. The increased amount is adjusted for tax effects and multiplied by a scaling factor that decreases over time. The
scaling factor was set at 70% for fiscal 2020, at 50% for fiscal 2021, and at 25% for fiscal 2022. These arrangements ceased to apply on November 1,
2022.
Capital floor: OSFI lowered the floor factor from 75% to 70%, which will stay in place until the domestic implementation of the Basel III capital floor comes
into effect in the second quarter of 2023.
Leverage ratio: OSFI is continuing to allow banks to temporarily exclude exposures from central bank reserves for leverage ratio purposes. On
September 13, 2022, OSFI announced that this temporary exclusion will cease to apply on April 1, 2023.
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 credit valuation adjustment (CVA) risk framework are being postponed to the first quarter of
2024.
On January 31, 2022, OSFI released its final capital and liquidity rules that incorporate the final Basel III reforms, and on February 7, 2022, OSFI published
corresponding changes to the regulatory returns, i.e., the Basel Capital Adequacy Return (BCAR) and the Leverage Requirements Return (LRR).
58
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Capital Management
Other Projects
On March 31, 2022, OSFI released, for consultation purposes, a draft guideline entitled Assurance on Capital, Leverage and Liquidity Returns. OSFI relies
largely on the regulatory returns produced by financial institutions when assessing their safety and soundness. The purpose of this draft guideline is to better
inform auditors and institutions on the work to be performed on regulatory returns in order to clarify and align OSFI’s assurance expectations across all
financial institutions. On November 7, 2022, OSFI released the final version of this guideline, which notably addresses the assurance that must be provided by
external auditors, senior management attestation, the assurance that must be provided by internal auditors, and the effective dates, which will range from
fiscal 2023 to fiscal 2025.
On June 30, 2022, the BCBS published its second public consultation on the prudential treatment of cryptoasset risk exposures faced by banks. This
consultation builds on preliminary proposals from the first consultation published in June 2021 and the responses received. The BCBS plans to finalize the
standards by the end of 2022. The Bank is actively participating in this consultation. On August 18, 2022, OSFI released an advisory on interim arrangements
for dealing with cryptoassets held by federally regulated financial institutions, which outlines its prudential expectations on cryptoasset holdings and sets
exposure limits. OSFI also provided guidance on the regulatory capital and liquidity treatment of cryptoasset exposures. These interim arrangements will take
effect in the second quarter of 2023.
CCaappiittaall MMaannaaggeemmeenntt iinn 22002222
MMaannaaggeemmeenntt AAccttiivviittiieess
On November 4, 2021, OSFI amended its capital distribution expectations, namely, by permitting financial institutions to increase regular dividends and,
subject to OSFI approval, to buy back shares.
On November 30, 2021, the Bank’s Board of Directors approved a normal course issuer bid, which began on December 10, 2021, to repurchase for cancellation
up to 7,000,000 common shares (representing approximately 2% of its common shares outstanding) over a 12-month period ending no later than
December 9, 2022. This normal course issuer bid was approved by OSFI and the Toronto Stock Exchange (TSX) on December 8, 2021. During the year ended
October 31, 2022, the Bank repurchased 2,500,000 common shares under this program for $245 million, which reduced Common share capital by $24 million
and Retained earnings by $221 million.
On July 25, 2022, the Bank issued medium-term notes for an amount of $750 million, bearing interest at 5.426% and maturing on August 16, 2032. As these
medium-term notes satisfy the NVCC requirements, they qualify for the purposes of calculating regulatory capital under Basel III.
On August 31, 2022, the Bank redeemed the US$7 million non-NVCC debentures denominated in foreign currency and maturing on February 28, 2087 at a
price equal to their nominal value plus accrued interest.
On September 8, 2022, the Bank issued $500 million of LRCN – Series 3 for which noteholder recourse 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 46 First Preferred Shares issued by the Bank in conjunction with
the LRCN – Series 3. The LRCN – Series 3 sell for $1,000 each and bear interest at a fixed rate of 7.50% per annum until November 16, 2027 exclusively and,
thereafter, at an annual rate equal to the yield on five-year Government of Canada bonds plus 4.281% until November 16, 2077. Since the LRCN – Series 3
satisfy the NVCC requirements, they qualify for the purposes of calculating regulatory capital under Basel III.
As at October 31, 2022, the Bank had 336,582,124 issued and outstanding common shares compared to 337,912,283 a year earlier. It also had 66,000,000
issued and outstanding preferred shares, unchanged from October 31, 2021. In addition, as at October 31, 2022, the Bank had 1,500,000 LRCN compared to
1,000,000 a year earlier. For additional information on capital instruments, see Notes 15 and 18 to the consolidated financial statements.
59
National Bank of Canada2022 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, taking into account such factors as financial position, cash needs, regulatory requirements, and any other factor deemed relevant by the Board.
For fiscal 2022, the Bank declared $1,206 million in dividends to common shareholders, which represents 36.8% of net income attributable to common
shareholders (2021: 31.7%). The declared dividends are below the target payout range given the interruption to dividend increases prescribed by OSFI at the
onset of the COVID-19 pandemic. OSFI has only been allowing Canadian banks to make capital distribution decisions, i.e., dividend increases and share
buybacks, since November 4, 2021. Given the economic conditions during fiscal 2022, 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
LRCN – Series 3
Common shares
Stock options
NNuummbbeerr ooff sshhaarreess oorr LLRRCCNN
$$ mmiilllliioonn
AAss aatt OOccttoobbeerr 3311,, 22002222
1144,,000000,,000000
1122,,000000,,000000
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
6666,,000000,,000000
550000,,000000
550000,,000000
550000,,000000
11,,550000,,000000
6677,,550000,,000000
333366,,558822,,112244
1111,,886611,,774499
335500
330000
440000
330000
330000
11,,665500
550000
550000
550000
11,,550000
33,,115500
33,,119966
As at November 25, 2022, there were 336,734,809 common shares and 11,714,314 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, LRCNs, and medium-
term notes maturing on February 1, 2028 and August 16, 2032, 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 1,093 million Bank common shares,
which would have a 76.5% dilutive effect based on the number of Bank common shares outstanding as at October 31, 2022.
60
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Capital Management
RReegguullaattoorryy CCaappiittaall RRaattiiooss,, LLeevveerraaggee RRaattiioo aanndd TTLLAACC RRaattiiooss
As at October 31, 2022, the Bank’s CET1, Tier 1, and Total capital ratios were, respectively, 12.7%, 15.4% and 16.9%, compared to ratios of, respectively,
12.4%, 15.0% and 15.9% as at October 31, 2021. All of the capital ratios have therefore increased since October 31, 2021, essentially due to net income net
of dividends and to common share issuances under the Stock Option Plan. These factors were partly offset by growth in RWA, common share repurchases, and
the impact of the transitional measures applicable to ECL provisioning, of which the scaling factor decreased from 50% to 25%. The increase in the Tier 1
capital ratio was also due to the $500 million issuance of limited recourse capital notes, i.e., Limited Recourse Capital Notes (LRCN) – Series 3, on
September 8, 2022. The increase in the Total capital ratio was also due to the $750 million issuance of medium-term notes on July 25, 2022. As at
October 31, 2022, the leverage ratio was 4.5% compared to 4.4% as at October 31, 2021. The growth in Tier 1 capital was partly offset by growth in total
exposure, which will continue to benefit, until April 1, 2023, from the temporary measure permitted by OSFI with respect to the exclusion of exposures from
central bank reserves.
As at October 31, 2022, the Bank’s TLAC ratio and TLAC leverage ratio were, respectively, 27.7% and 8.1%, compared with 26.3% and 7.8%, respectively, as at
October 31, 2021. The increase in the TLAC ratio was due to the same factors as those provided for the Total capital ratio and to the net TLAC instrument
issuances during the period. The increase in the TLAC leverage ratio was due to the same factors as those provided for the leverage ratio and to the net TLAC
instrument issuances.
During the year ended October 31, 2022, the Bank was in compliance with all of OSFI’s regulatory capital, leverage, and TLAC requirements.
RReegguullaattoorryy CCaappiittaall(1),, LLeevveerraaggee RRaattiioo(1) aanndd TTLLAACC(2)
As at October 31
(millions of Canadian dollars)
CCaappiittaall
CET1
Tier 1
Total
RRiisskk--wweeiigghhtteedd aasssseettss
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
AAvvaaiillaabbllee TTLLAACC(2)
TTLLAACC rraattiioo(2)
TTLLAACC lleevveerraaggee rraattiioo(2)
AAddjjuusstteedd(3)
Adjusted(3)
22002222
2021
1144,,776633
1177,,990066
1199,,772277
1144,,881188
1177,,996611
1199,,772277
12,866
15,515
16,643
111166,,884400
111166,,884400
104,358
440011,,778800
440011,,778800
351,160
1122..66 %%
1155..33 %%
1166..99 %%
44..55 %%
3322,,335511
2277..77 %%
88..11 %%
1122..77 %%
1155..44 %%
1166..99 %%
44..55 %%
3322,,335511
2277..77 %%
88..11 %%
12.3 %
14.9 %
15.9 %
4.4 %
27,492
26.3 %
7.8 %
12,973
15,622
16,643
104,358
351,160
12.4 %
15.0 %
15.9 %
4.4 %
27,492
26.3 %
7.8 %
(1)
(2)
(3)
Capital, risk-weighted assets, total exposure, the capital ratios, and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy
Requirements Guideline and Leverage Requirements Guideline.
Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
Adjusted amounts 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.
61
National Bank of Canada2022 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
22002222
2021
1122,,997733
5544
((11))
((224455))
1166
((11,,332255))
33,,338844
−−
((773333))
444488
333333
((110055))
((22))
((6677))
114455
−−
−−
((55))
((5522))
−−
1144,,881188
22,,664499
550000
−−
−−
((66))
33,,114433
11,167
93
(1)
−
11
(1,089)
3,140
−
(20)
496
(190)
(30)
−
(73)
(402)
−
−
7
(136)
−
12,973
2,945
500
(800)
−
4
2,649
TToottaall TTiieerr 11 ccaappiittaall
1177,,996611
15,622
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,,002211
775500
−−
−−
−−
2211
((2266))
11,,776666
1,055
−
−
−
−
20
(54)
1,021
TToottaall rreegguullaattoorryy ccaappiittaall
1199,,772277
16,643
(1)
(2)
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
This item includes the transitional measure applicable to expected credit loss provisioning implemented during the second quarter of 2020.
62
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Capital Management
RRWWAA bbyy KKeeyy RRiisskk DDrriivveerrss
Risk-weighted assets (RWA) amounted to $116.8 billion as at October 31, 2022 compared to $104.4 billion as at October 31, 2021, a $12.4 billion increase
resulting mainly from organic growth in RWA and from foreign exchange movements, partly offset by improvement in the credit quality of the loan portfolio and
of exposures to derivative financial instruments, and by model updates and methodology and policy changes. 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,, 22002222
JJuullyy 3311,, 22002222
AApprriill 3300,, 22002222
JJaannuuaarryy 3311,, 22002222 October 31, 2021
TToottaall
TToottaall
TToottaall
TToottaall
Total
9911,,222299
22,,440055
9933
330000
333399
−−
11,,777755
9966,,114411
55,,669966
332299
−−
−−
−−
66,,002255
1144,,445522
222222
−−
1144,,667744
8888,,887788
22,,550000
((5599))
1133
−−
−−
((110033))
9911,,222299
44,,445533
11,,224433
−−
−−
−−
55,,669966
1144,,114477
330055
−−
1144,,445522
8888,,888899
11,,778800
((11,,339977))
((666666))
−−
−−
227722
8888,,887788
33,,449988
554422
441133
−−
−−
44,,445533
1133,,778811
336666
−−
1144,,114477
8877,,221133
11,,000022
((2222))
2299
−−
−−
666677
8888,,888899
33,,777700
((227722))
−−
−−
−−
33,,449988
1133,,337755
440066
−−
1133,,778811
85,914
1,944
(430)
(7)
−
−
(208)
87,213
4,072
(302)
−
−
−
3,770
13,153
222
−
13,375
RRiisskk--wweeiigghhtteedd aasssseettss aatt eenndd
111166,,884400
111111,,337777
110077,,447788
110066,,116688
104,358
(1)
(2)
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
Also includes foreign exchange rate movements that are not considered material.
The table above provides the risk-weighted assets movements by key drivers underlying the different risk categories.
The Book size item reflects organic changes in book size and composition (including new loans and maturing loans). RWA movements attributable to book size
include increases or decreases in exposures, measured by exposure at default, assuming a stable risk profile.
The Book quality item is the Bank’s best estimate of changes in book quality related to experience, such as underlying customer behaviour or demographics,
including changes resulting from model recalibrations or realignments and also including risk mitigation factors.
The Model updates item is used to reflect implementations of new models, changes in model scope, and any other change applied to address model
malfunctions. During the year ended October 31, 2022, the Bank updated the models used for retail lines of credit, mortgages, home equity lines of credit,
and certain non-retail exposures. It also changed the SVaR period of the 2008 Global Financial Crisis (GFC) to the 2020 COVID-19 period at the start of the
second quarter of 2022 and then returned to the 2008 GFC period towards the end of the same quarter. Lastly, the Bank transitioned a retail loan portfolio
from the Standardized Approach to the Advanced Internal Ratings-Based (AIRB) Approach for measuring credit risk.
The Methodology and policy item presents the impact of changes in calculation methods resulting from changes in regulatory policies or from new regulations.
During the year ended October 31, 2022, the Bank decided to early adopt the Basel III reform requirements related to risk parameter floors for certain
exposures calculated using the Internal Ratings-Based Approach for credit risk.
63
National Bank of Canada2022 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, 2022
(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
Investment solutions
Insurance
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,
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
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
3,120
–
459
282
33,,886611
41,500
–
5,661
4477,,116611
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
74
–
299
475
884488
1,529
–
3,711
55,,224400
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
2,686
324
350
765
44,,112255
32,557
5,891
4,321
4422,,776699
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
1,177
–
134
72
11,,338833
14,199
–
1,677
1155,,887766
Credit
Market
Operational
Other risks
TToottaall
Credit
Market
Operational
TToottaall
134
(91)
(56)
(557)
((557700))
6,356
134
(696)
55,,779944
MMaajjoorr aaccttiivviittiieess
EEccoonnoommiicc ccaappiittaall
bbyy ttyyppee ooff rriisskk
RRiisskk--wweeiigghhtteedd
aasssseettss(1)
(1)
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
64
National Bank of Canada
National Bank of Canada2022 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,, iittss rriisskk mmaannaaggeemmeenntt ppoolliicciieess aanndd pprroocceedduurreess,, aanndd tthhee mmeetthhooddss iitt aapppplliieess 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 that is 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 also 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 returns obtained and risks assumed.
Decision-making is therefore guided by risk assessments that align with the Bank’s risk appetite and by prudent levels of capital and liquidity. Despite the
exercise of stringent risk management and existing mitigation measures, risk cannot be eliminated entirely, and residual risks may occasionally cause
significant losses.
The Bank has developed guidelines that support sound and effective risk management and that help preserve its reputation, brand, and long-term viability:
•
•
•
•
•
risk is everyone’s business: the business units, the risk management and oversight functions, and Internal Audit all play an important role in ensuring a
risk management framework is in place; operational transformations and simplifications are conducted without compromising rigorous risk management;
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; incentive-based compensation programs are designed to adhere to the
Bank’s risk tolerance;
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 reputation, brand 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.
65
National Bank of Canada2022 Annual Report Management’s Discussion and Analysis
Risk Management
The Bank’s management and business units are involved in the risk appetite setting process 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 between the Bank’s risk profile and its risk appetite, failing which appropriate actions might 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
An enterprise-wide stress testing program is in place at the Bank. It is part of a more extensive process aimed at ensuring that the Bank maintains adequate
capital levels commensurate with its business strategy and risk appetite. 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 and 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 section 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 appetite 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 business plans of the business segments, 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 on
anti-money laundering and anti-terrorist financing (AML/ATF) efforts as well as cybersecurity training. Risk management training is also offered across all
of the Bank’s business units.
In addition to these five pillars, Internal Audit carries out an evaluation of the corporate 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 of the three lines of defence.
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 and effective 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.
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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
Elect
Board of Directors
Appoint
Appoints and mandates
Independent
Auditor
Reports
to
Audit Committee
Risk Management
Committee
Human Resources
Committee
Conduct Review
and Corporate
Governance Committee
Technology
Committee
Report to
Report to
Advises
Reports to
Report to
Internal Audit
Oversight
Function
Finance
Oversight
Function
Risk
Management
Oversight
Function
Compliance
Oversight
Function
Global Risk
Committee
Compensation
Risk Oversight
Working Group
ESG Working
Group
IT Risk
Management
Strategic
Committee
Privacy
Office
President and
CEO
Appoints
Appoints
Senior
Leadership
Team
Report
to
Business Units
Report to
Operational Risk
Management
Committee
Financial
Markets Risk
Committee
Enterprise-Wide
Risk
Management
Committee
The Board of Directors (Board)(1)
The Board is responsible for approving and overseeing management of the Bank's internal and commercial affairs, and it establishes strategic directions
together with management. 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 carries out its mandate both directly and through its
committees: the Audit Committee, the Risk Management Committee, the Human Resources Committee, the Conduct Review and Corporate Governance
Committee, and the Technology 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, or audit.
The Risk Management Committee (RMC)(1)
The Risk Management Committee examines the risk appetite framework and recommends it to the Board for approval. It approves the main risk management
policies and risk tolerance limits. It ensures that appropriate resources, processes, and procedures are in place to properly and effectively manage risk on an
ongoing basis. Finally, it monitors the risk profile and risk trends of the Bank’s activities and ensures alignment with the risk appetite.
The Human Resources Committee(1)
The Human Resources Committee examines and approves the Bank’s total compensation policies and programs, taking into consideration the risk
management framework and ESG strategies, and recommends their approval to the Board. It recommends, for Board approval, the compensation of the
President and Chief Executive Officer, of the members of the Senior Leadership Team, and of the heads of the oversight functions. This committee oversees all
human resources practices, including employee health and well-being, talent management matters such as succession planning for management and
oversight functions, as well as inclusion and diversity.
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 they align with the Bank’s One Mission. It periodically reviews and approves professional conduct and
ethical behaviour standards, including the Code of Conduct. The committee oversees the application of complaint review mechanisms and implements
mechanisms that ensure compliance with consumer protection provisions, including the Whistleblower Protection Policy, and that prevent prohibited financial
transactions between the Bank and related parties. Lastly, 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 Technology Committee(1)
The Technology Committee oversees the various components of the Bank’s technology program. It reviews, among other things, the Bank's technology
strategy and monitors technology risks, including cyberrisks, cybercrime, and protection of personal information. The IT Risk Management Strategic Committee
and the Privacy Office report to the Technology Committee.
(1)
Additional information about the Bank’s governance architecture can be found in the Management Proxy Circular for the 2023 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 are available in their entirety at nbc.ca.
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National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
Senior Leadership Team of the Bank
Composed of the President and Chief Executive Officer and the officers responsible for the Bank’s main functions and business units, the Bank’s Senior
Leadership Team ensures that risk management is sound and effective and aligned with the Bank’s pursuit of its objectives and strategies. The Senior
Leadership Team 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 service 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 throughout the Bank. The Risk Management team helps the
Board and management understand and monitor the main risks. This service 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 conducts assessments of
the compliance of the Bank and its subsidiaries with regulatory compliance risk standards and policies.
The Global Risk Committee (GRC)
The Global Risk Committee is the overriding governing entity of all the Bank’s risk committees, and it oversees every aspect of the overall management of the
Bank’s risk. It sets 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 reports to the Board, and 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 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 made up
of at least three members, namely, 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 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 environmental, social and governance 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. 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 IT Risk Management Strategic Committee (ITRMSC)
The Bank’s management has entrusted the ITRMSC with responsibility for the governance of technology-related risk and cyberrisk. Under the leadership of the
Executive Vice-President, Risk Management and the Executive Vice-President, Technology and Operations, this committee approves the technology and
cyberrisk management policy as well as other policies related to technology risk management. Among other responsibilities, it reviews the technology risk and
cyberrisk posture as well as any matter requiring an alignment between the technology strategy and the associated risks.
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National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
The Privacy Office
The Privacy Office develops and implements the personal information privacy program and the Bank’s strategy for ensuring privacy and protecting personal
information. It oversees the development, updating, and application of appropriate documentation in support of the Bank’s personal information privacy
program, including policies, standards, and procedures. It also oversees the risk governance framework and the implementation of appropriate controls
designed to mitigate privacy risk. Lastly, it supports the business units in their execution of the Bank’s strategic directions and ensures adherence to privacy
best practices.
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.
RRiisskk MMaannaaggeemmeenntt PPoolliicciieess
The risk management policies and related standards and procedures set out responsibilities, define and describe the main business-related risks, specify the
requirements that business units must fulfill when assessing and managing these risks, stipulate the authorization process for risk-taking, and set the risk
limits to be adhered to. They also establish the accountability reporting that must be provided to the various risk-related bodies, including the RMC. The
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 they 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 uses several models to guide enterprise-wide risk management, financial markets strategy, economic and regulatory capital allocation, global credit
risk management, wealth management, and profitability measures. The model risk management policies as well as a rigorous model management process
ensure that model usage is appropriate and effective.
The key components of the Bank’s model risk management governance framework are as follows: the model risk management policies and standards, the
model validation group, and the Models Oversight Committee. The policies and standards set the rules and principles applicable to the development and
independent validation 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 models, 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 validation. 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
has direct access to the RMC and to the President and Chief Executive Officer and can communicate directly with officers and directors of the Bank and of its
subsidiaries and foreign centres. The Senior Vice-President, Chief Compliance Officer and Chief Anti-Money Laundering Officer regularly meets with the Chair
of the RMC, 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 oversight function created by the Audit Committee. Its Senior Vice-President has direct access to the Chair of the Audit
Committee and to the Bank's 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, Internal Audit, regularly meets with the Chair of the Audit Committee, in the absence of management, to review
matters on the relationship between Internal Audit and the Bank’s management.
Internal Audit provides reasonable assurance that the main governance, risk management, and internal control processes and systems are ensuring that, in all
material respects, the Bank's key control procedures are effective and compliant. Internal Audit also provides recommendations and advice on how to
strengthen these key control procedures. Business unit managers and senior management must ensure the effectiveness of the main governance, risk
management, and internal control processes and systems, and they must implement corrective measures if needed.
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National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
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 applies a risk taxonomy that categorizes, into two groups, the top risks to which the Bank is exposed in the normal course of business:
Financial risks: Directly tied to the Bank’s key business activities and are generally more quantifiable or predictable;
Non-financial risks: Inherent to the Bank’s activities and to which it does not choose to expose itself.
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, whereas an “emerging risk” is a risk that, while it may also have an
impact on the Bank, is not yet well understood in terms of its likelihood, consequences, timing, or the magnitude of its potential impact.
In the normal course of business, the Bank is exposed to the following top risks.
Financial risks
Non-financial risks
Credit
risk
Market
risk
Liquidity and
funding risk
Operational
risk
Regulatory
compliance risk
Reputation
risk
Strategic
risk
Environmental
and social
risk
The Bank is also exposed to other new, so-called emerging or significant risks, which are defined as follows.
RRiisskk aanndd
TTrreenndd
DDeessccrriippttiioonn
Government decisions and international relations can have a significant impact on the environment in which the Bank operates.
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 repercussions on clients. The war in Ukraine, which has disrupted
energy and agricultural supply chains, is a good example. The economic sanctions taken against Russia for its invasion of Ukraine and
the steps taken by Russia to significantly reduce natural gas supply to Europe have led to soaring energy costs. This situation has
triggered the negative economic headwinds now facing Europe and heightened the risk of a political reaction in the form of new
governments taking power and social unrest. Even if the war was expected to end relatively quickly, the shattered trust suggests that
Europe and Russia will continue to take measures to become less dependant on one another, notably regarding energy matters. While
new risks could arise at any time, certain concerns are compelling us to monitor other situations at this time. The geopolitical power
struggle that for years has pitted the U.S. against China is one such concern. 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. A recent escalation
in tensions between China and the United States on the subject of Taiwan is a new source of disagreement between the two
superpowers. While we do not believe an invasion is imminent, China will continue to exert pressure on Taiwan through a combination
of unprecedented military exercises and economic sanctions. Taiwan’s importance is highlighted by the fact that it is by far the leading
global producer of advanced microchips (over 90% of the market share). But 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.
GGeeooppoolliittiiccaall
rriisskk
EEccoonnoommiicc rriisskk
Although the economy recovered quickly during the pandemic, a number of risks still remain and others are emerging. Most countries
are now dealing with variants, but we are not immune to the emergence of new, more infectious strains that could once again
destabilize the economy. For its part, China is going it alone with its zero-COVID policy. Given China’s importance to the global economy
and supply chain, such a policy, which involves repeated lockdowns, has repercussions not only on growth but also on inflationary
pressure. With this in mind, the inflationary outlook remains uncertain insofar as supply chain bottlenecks could stop improving or
worse, deteriorate once again.
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Management’s Discussion and Analysis
Risk Management
RRiisskk aanndd
TTrreenndd
DDeessccrriippttiioonn
The war in Ukraine and extreme weather events have proven just how vulnerable the global economy is to such shocks. The sharp rise in
inflation in 2022 is presenting another risk, i.e., the risk of spiralling inflation created by higher wages. In fact, the inflationary shock
has prompted employees to demand compensation for their lost buying power, which could subsequently compel businesses to raise
prices in order to maintain margins, thus creating a vicious cycle. If this scenario of unchecked inflation above central bank targets were
to occur, the central banks could move towards a much tighter monetary policy by hiking interest rates even higher. Given that interest
rates have remained quite low over the past few years, market participants seeking additional returns may have engaged in excessive
risk-taking strategies and would not be immune from negative repercussions should interest rates suddenly spike higher. 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 is continuing to rely on its strong risk management
framework to identify, assess, and mitigate the negative impacts while also remaining within its risk appetite limits.
In accordance with the TCFD’s recommendations, the Bank has identified two types of direct 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 and/or of chronic changes in weather conditions on physical assets, infrastructures, the value chain, productivity, and other
physical aspects. Transition risks refer to the potential impacts of moving toward a low-carbon economy (such as technological changes,
behavioural changes by consumers, 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. In addition to these two risks are indirect risks, such as
the risk of lawsuits, reputation risk, and regulatory compliance risk in an environment that is constantly changing due to ongoing and
upcoming initiatives enacted by governments and regulators. Climate risk could have an impact on the traditional risks that are inherent
to a financial institution’s operations, including credit risk, market risk, liquidity and funding risk, and operational risk, among others.
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. This past year, several initiatives and public consultations were announced, including OSFI’s guideline B-15, Climate
Risk Management, the International Sustainability Standards Board’s initiative to establish a financial disclosure framework addressing
sustainability and climate; and the CSA’s proposed National Instrument 51-107 Disclosure of Climate–related matters. Other
announcements include the Government of Canada’s 2030 Emissions Reduction Plan and the Government of Quebec’s Plan for a Green
Economy.
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. Another possibility is that
events caused by physical risks prove catastrophic (extreme episodes) or that there are adaptability issues (chronic episodes). As such,
these risks could result in financial losses for the Bank, affect its business activities and how they are conducted, 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.
Its strategies and policies have therefore been designed to consider climate risks while also supporting the transition to a low-carbon
economy. The Bank constantly strives to remain apprised of best practices and to support and advise its clients in their move to a low-
carbon economy. From this perspective, we will continue to deliver climate risk management training across the organization, in
particular among front-line employees who have direct contact with clients. To better understand and mitigate climate change risks, the
Bank also takes part in major national and international financial initiatives, including TCFD, the United Nations Principles for
Responsible Banking (UNPRB), the United Nations Principles for Responsible Investing (UNPRI), and others. However, 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.
CClliimmaattee
cchhaannggee
71
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk aanndd
TTrreenndd
DDeessccrriippttiioonn
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.
IInnffoorrmmaattiioonn
sseeccuurriittyy aanndd
ccyybbeerrsseeccuurriittyy
Cyberattacks, as with breaches or interruptions of systems that support the Bank and its customers, could cause client attrition;
financial loss; an inability of clients to do their banking; non-compliance with privacy legislation or any other current laws; 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 according 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 Committee is regularly informed of the cybersecurity posture, of cybersecurity trends
and developments, and of lessons learned from operational incidents that have occurred in other large organizations such that it can
gain a better understanding of risks, particularly risks related to cybersecurity and the protection of personal information.
Risks related to protecting personal information exist through the entire lifecycle of information and arise, in particular, from inadequate
control measures and weak processes. Such risks could also arise from information being improperly created, collected, used,
communicated, stored, or destroyed. Greater attention will be paid to the collection, use, and communication of personal information as
well as the management and governance applied to such information as the Bank continues to invest in technological solutions and
innovations and according to the evolution of its commercial activities.
PPrrootteeccttiioonn ooff
ppeerrssoonnaall
iinnffoorrmmaattiioonn
Risks related to the protection of personal information could cause client attrition; financial loss; non-compliance with legislation; legal
disputes; fines; penalties; punitive damages; regulatory action; reputational damage; compliance, remediation, 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.
In recent years, innovations and the proliferation of technological solutions that collect, use, and communicate personal information
such as cloud computing, artificial intelligence, automated learning and open banking, have given rise to significant legislative changes
in many jurisdictions, including Canada and Quebec. For example, 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. And on June 16, 2022, the federal government tabled Bill C-27 entitled Digital Charter Implementation Act, 2022, which
aims to enhance and modernize the personal information protection framework.
The Bank continues to monitor relevant legislative developments and has bolstered its governance structure by updating its policies,
standards and practices and by deploying a personal information privacy program that reflects its determination to maintain the trust of
its clients.
72
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
RRiisskk aanndd
TTrreenndd
RReelliiaannccee oonn
tteecchhnnoollooggyy
aanndd
tthhiirrdd--ppaarrttyy
pprroovviiddeerrss
TTeecchhnnoollooggiiccaall
iinnnnoovvaattiioonn aanndd
ccoommppeettiittiioonn
DDeessccrriippttiioonn
The Bank’s clients have high expectations regarding the accessibility to products and services that are offered on various platforms that
house substantial amounts of data. In response to those heightened client expectations, to the rapid pace of technological change, and
to the growing presence of new actors in the banking sector, the Bank diligently makes significant and ongoing investments in its
technology while maintaining the operational resilience and robustness of its controls. 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.
On the 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 product 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 toward 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 are proposing to enhance client experience with new technologies, data analysis tools,
and customized solutions in a simplified and more cost-effective manner. These businesses are not necessarily subject to the same
regulatory requirements as financial institutions and may sometimes be able to react more quickly to new consumer habits.
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 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,
partly supported by a relatively low unemployment rate, 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.
OOtthheerr FFaaccttoorrss TThhaatt CCaann AAffffeecctt tthhee BBaannkk’’ss BBuussiinneessss,, OOppeerraattiinngg RReessuullttss,, FFiinnaanncciiaall PPoossiittiioonn,, aanndd RReeppuuttaattiioonn
Risks Related to the COVID-19 Pandemic
The COVID-19 pandemic continues to have disruptive and adverse effects in the countries where the Bank operates and, more broadly, on the global economy,
supply chains, and financial markets. The pandemic has also had, and could continue to have, repercussions on the Bank, notably on the way in which it
carries out its business activities as well as on its operating results, financial position, regulatory capital and liquidity ratios, reputation, and ability to satisfy
regulatory requirements, as well as on its clients, which could exacerbate certain top and emerging risks to which the Bank is exposed. 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 also significantly influence the provisions for credit losses recorded by the Bank. As the
pandemic evolves, certain industries and geographic sectors have been facing more persistent consequences thereof. The Bank has therefore continued to
closely monitor the situation and, given the considerable degree of uncertainty surrounding the post-pandemic landscape, additional mitigation measures may
be needed. 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.
73
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
International Risks
Through the operations of some of the Bank’s 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. International risks can be particularly high in territories 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, the Bank’s ability to acquire
intellectual property rights may be more limited. In addition, 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. Still, 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 at any time. 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 the interpretation
thereof by tax authorities and courts, could affect the Bank’s earnings. International and domestic initiatives may also 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 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 52 of this MD&A, the Critical Accounting Policies and Estimates section on page 110 of this MD&A, and Note 24 to the consolidated financial statements.
74
National Bank of Canada
National Bank of Canada2022 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
Other 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 disasters or public health
emergencies such as COVID-19; and the Bank’s ability to foresee and effectively manage the risks resulting from 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 its business. The Bank is exposed to credit risk not
only through its direct lending activities and transactions but also through commitments to extend credit and through letters of guarantee, letters of credit,
over-the-counter derivatives trading, debt securities, securities purchased under reverse repurchase agreements, deposits with financial institutions,
brokerage activities, and transactions carrying a settlement risk for the Bank such as irrevocable fund transfers to third parties via electronic payment systems.
GGoovveerrnnaannccee
A policy framework centralizes the governance of activities that generate credit risk for the Bank and 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;
•
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 Limits
The Bank sets credit concentration and settlement limits by obligor group, 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.
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National Bank of Canada2022 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, an obligor’s or counterparty’s credit risk must be accurately assessed. This is the first step in
processing credit applications. Using a credit rating system developed by the Bank, each application is analyzed and assigned one of 19 grades on a scale of
1 to 10 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 Ratings-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 2021
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 2021
Benchmarking results using:
• Moody’s observed default price of bonds,
from 1983 to 2021
• Global Credit Data Consortium historical loss and
recovery database from 1998 to 2021
2000-2003, 2008-2009
and 2020
LGD based on the Bank’s historical
recoveries and losses internal data and
on Moody’s data
Moody’s observed default price of bonds, from
1983 to 2015
S&P rating history from 1975 to 2016
1999-2001 and 2008-2012
Based on implied market LGD using
observed bond price decreases
following the issuer’s default
Financial institutions
Global Credit Data Consortium historical loss and
recovery database from 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.
76
National Bank of Canada
National Bank of Canada2022 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:
•
•
•
•
•
Attributes from credit rating agencies (scoring) related to behaviour;
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 when assessing credit
risk.
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 an obligor’s demand characteristics and history
based on internal and external historical information to estimate the obligor’s future credit behaviour and assign a probability of default. The underlying data
include obligor 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 credit quality of the associated personal credit
portfolio.
Mortgage Loan Underwriting
To mitigate the impact of an economic slowdown and ensure the long-term quality of its portfolio, the Bank uses sound risk management when granting
residential mortgages to confirm: (i) the obligor’s intention to meet its financial obligations, (ii) the obligor’s ability to repay its debts, and (iii) the quality of the
collateral. In addition, in accordance with the applicable rules, the Bank takes a prudent approach to client qualification by using, for example, a higher
interest rate to mitigate the risk of short- or medium-term rate hikes.
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 December 17, 2021, OSFI confirmed the qualifying rate for uninsured mortgages (i.e., residential mortgages with a down payment of 20% or more) will
remain as the greater of the mortgage contract interest rate plus 2% and a minimum floor of 5.25%. OSFI is well aware that the country’s post-pandemic
economic recovery must be backed by a strong financial system capable of supporting the Canadian population in the current environment and that real estate
market conditions in Canada could heighten the financial risk weighing on lenders. The minimum qualifying interest rate provides an additional level of safety
to ensure that borrowers would have the ability to make mortgage payments should circumstances change, e.g., in the case of reduced income or a rise in
interest rates.
On June 28, 2022, OSFI published an Advisory entitled Clarification on the Treatment of Innovative Real Estate Secured Lending Products Under Guideline B-20.
The Advisory complements the existing expectations set out in Guideline B-20 – Residential Mortgage Underwriting Practices and Procedures. The Advisory
specifies OSFI’s expectations concerning underwriting practices and procedures for reverse residential mortgages, residential mortgages with shared equity
features, and combined loan plans (CLPs), notably for CLPs and the re-advanceability of credit above the 65% loan-to-value (LTV) limit. For loans that exceed
the 65% LTV limit, there will be a transition period where a portion of the principal payments will go towards repaying the overall mortgage amount until it is
below 65% of the original LTV ratio and not re-advanceable. The implementation date for this change is October 31, 2023.
77
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
On August 1, 2022, Quebec’s consumer protection organization, the Office de la protection du consommateur, increased the monthly minimum payment
percentage to 3.5% of the balance for credit cardholders in Quebec whose contract was issued before August 1, 2019. Annual increases of 0.5% until 2025 are
planned in order to raise the monthly minimum payment percentage to the 5% minimum currently applicable to contracts issued in Quebec after
August 1, 2019. The purpose of these measures is to help households avoid debt issues and to reduce the risk of loss among lenders.
The objective of Bill 53 is to tighten the regulatory framework governing credit assessment agents and ensure that Quebec consumers can access protection
measures, including security freezes of their credit files, which would limit access to lenders for credit authorization purposes. This measure is expected to
come into force on February 1, 2023.
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 that is 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 uses risk-rating tools and models 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
PD (%) –
Corporate and
financial institutions
PD (%) –
Sovereign
Standard
& Poor's
Excellent
Good
Satisfactory
Special mention
Substandard
Default
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
0.000–0.112
0.112–0.384
0.384–4.235
4.235–10.182
10.182–99.999
100
0.000–0.060
0.060–0.331
0.331–5.738
5.738–17.964
17.964–99.999
100
AAA to A-
BBB+ to BBB-
BB+ to B
B- to CCC+
CCC & CCC-
CC, C & D
(1)
Additional information is provided in Note 7 – Loans and Allowances for Credit Losses to the consolidated financial statements.
Moody's
Aaa to A3
Baa1 to Baa3
Ba1 to B2
B3 to Caa1
Caa2 & Caa3
Ca, C & D
The Bank also uses individual assessment models by industry to assign a risk rating to the credit facility based on the collateral that 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 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. The Bank also uses a watchlist 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.
78
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
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.
The credit risk quantification models are developed and tested by a team of specialists with model performance being 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, the frequency of which depends on 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 consider 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 these systems constitute
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 obligors. 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
obligors. 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 the default risk ratings of obligors 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
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 allowances for credit losses according to IFRS 9 – Financial Instruments (IFRS 9), to assess the level of regulatory capital
needed to absorb potential losses, and to determine the impact on its solvency. In addition, these tests contribute to portfolio management as they influence
the determination of concentration limits by obligor, product, or business sector.
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 and guarantees, 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.
79
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
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.
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 obtaining 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. The obtaining of collateral depends
on the level of risk presented by the obligor and the type of loan granted. The legal validity and enforceability of any collateral obtained and the Bank’s ability
to regularly and correctly measure the collateral’s value are critical for this mechanism to play its proper role in risk mitigation.
In its internal policies and standards, the Bank has established specific requirements regarding 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 credit
risk diversification 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, notably 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 counterparty 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.
80
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
FFoollllooww--UUpp ooff MMoonniittoorreedd AAccccoouunnttss aanndd RReeccoovveerryy
Credit granted and obligors are monitored on an ongoing basis and in a manner commensurate with the degree of 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, and they submit comments to credit risk
management groups about each identified borrower on the watchlist for whom they are responsible. 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.
Each quarter, the Work Out units submit a monitoring report (called a watchlist) to a monitoring committee that tracks the status of at-risk obligors and the
corrective measures undertaken. In addition, files in which the authorized amount is $5 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 2022 and 2021, 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 counterparty’s internal default risk
rating and 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 (CSA), 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 negotiating with the counterparty. When required by regulation, the Bank always uses this type of legal documentation in
transactions with financial institutions and governments. For business transactions, the Bank prefers to use internal mechanisms, notably involving collateral
and mortgages, set out in the credit agreements. The Bank’s internal policies set the conditions governing the implementation of such mitigation methods.
81
National Bank of Canada2022 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 (IIROC).
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 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 the 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
impacts 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 such 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 can 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. As well, to help the Bank
achieve its business objectives, the Risk Management Group created the position of Vice-President, Credit Analytics and Climate Risk, whose responsibilities
consist of increasing the Bank’s ability to extract business intelligence, to integrate climate risk into its decision-making processes, and to develop its climate
risk analysis capacities. Regarding this latter point, the Bank has begun climate risk impact analyses using the climate scenarios recommended by the
Network for Greening the Financial System (NGFS).
This year also saw the emergence of a new environmental risk issue, i.e., the potential financial repercussions of climate change on biodiversity. Financial
system participants were called upon by the PRB Biodiversity Community initiative of the United Nations Environment Programme Finance Initiative (UNEP-FI),
of which the Bank is a member. Similarly, as part of a Fondaction initiative the Bank took part in a one-day brainstorming exercise on biodiversity indicators for
investors. As this environmental risk issue begins to emerge, the Bank will continue to closely monitor the various initiatives and contribute to deliberations
about potentially incorporating this issue into both investment and credit-granting decisions. The Risk Management Group closely monitors changes in trends
and calculation methods and actively participates in various industry discussion groups.
82
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
MMaaxxiimmuumm CCrreeddiitt RRiisskk EExxppoossuurree
The amounts in the following tables represent the Bank’s maximum exposure to credit risk as at the financial reporting date without considering any collateral
held or any other credit enhancements. These amounts do not include 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,, 22002222
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
7733,,332244
22,,448833
1177,,552266
9933,,333333
8811,,776633
5566,,225533
77,,220000
114455,,221166
−−
44,,440099
224422,,995588
3300,,770044
221122,,225544
224422,,995588
88,,661166
66,,992200
22,,668888
1188,,222244
2299,,881111
55,,882211
116666
3355,,779988
−−
−−
5544,,002222
331111
5533,,771111
5544,,002222
−−
−−
−−
−−
3366,,119944
6688,,990066
7766,,885566
118811,,995566
−−
−−
118811,,995566
2244,,778833
115577,,117733
118811,,995566
−−
−−
−−
−−
332222
−−
11,,115500
11,,447722
1133,,666622
−−
1155,,113344
11,,330088
1133,,882266
1155,,113344
−−
−−
3355
3355
55,,553388
332266
775544
66,,661188
−−
44,,337733
1111,,002266
44,,661100
66,,441166
1111,,002266
8811,,994400
99,,440033
2200,,224499
111111,,559922
115533,,662288
113311,,330066
8866,,112266
337711,,006600
1133,,666622
88,,778822
550055,,009966
6611,,771166
444433,,338800
550055,,009966
1122 %%
−− %%
2255 %%
1133 %%
22 %%
1199 %%
22 %%
8800 %%
1122 %%
8888 %%
110000 %%
7755 %%
8877 %%
9988 %%
8811 %%
9988 %%
2200 %%
8888 %%
1122 %%
8888 %%
As at October 31, 2021
Drawn(2)
Undrawn
commitments
Repo-style
transactions(3)
Derivative
financial
instruments
Other
off-balance-
sheet items(4)
Total
Standardized
Approach(5)
AIRB
Approach
66,791
2,270
15,519
84,580
70,589
55,323
7,228
133,140
−
3,269
220,989
25,009
195,980
220,989
10,578
6,282
2,481
19,341
27,783
6,217
126
34,126
−
−
53,467
258
53,209
53,467
−
−
−
−
26,190
58,452
72,122
156,764
−
−
156,764
26,385
130,379
156,764
−
−
−
−
161
294
2,248
2,703
17,010
−
19,713
2,203
17,510
19,713
−
−
31
31
5,415
83
619
6,117
−
4,206
10,354
3,955
6,399
10,354
77,369
8,552
18,031
103,952
130,138
120,369
82,343
332,850
17,010
7,475
461,287
57,810
403,477
461,287
9 %
− %
29 %
11 %
2 %
28 %
− %
68 %
13 %
91 %
100 %
71 %
89 %
98 %
72 %
100 %
32 %
87 %
13 %
87 %
(1)
(2)
(3)
(4)
(5)
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
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).
83
National Bank of Canada2022 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.
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, the business units, and the 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 to the market risk limits established 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 a 99% confidence level, using a two-year history of daily time
series of risk factor changes. VaR is the maximum daily loss that the Bank could incur, in 99 out of 100 cases, 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 for 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.
84
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
VaR methodology techniques are well suited to measuring 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, and 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 validation
group.
CCoonnttrroolllliinngg MMaarrkkeett RRiisskk
A comprehensive set of limits is applied to market risk measures, 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 limit 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.
85
National Bank of Canada2022 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,, 22002222
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
3311,,887700
8877,,337755
88,,882288
1133,,551166
2266,,448866
220066,,774444
1188,,554477
449988
99,,887766
440033,,774400
226666,,339944
66,,554411
2211,,881177
3333,,447733
1199,,663322
2266,,227777
111111
66,,225500
11,,449999
338811,,999944
883377
2200,,226699
1100,,776644
IInntteerreesstt rraattee(3)
8855,,880055
−−
−−
−−
99,,991144
1166,,996688
−−
−−
111133,,552244
1155,,442222
−−
2211,,881177
−−
1188,,990099
99,,992277
−−
−−
−−
6666,,007755
11,,557700
88,,882288
1133,,551166
2266,,448866
119966,,883300
11,,557799
449988
−−
226699,,557766
225500,,997722
66,,554411
−−
3333,,447733
772233
1166,,335500
111111
7777
11,,449999
330099,,774466
−−
−−
−−
−−
−−
−−
−−
99,,887766
2200,,664400
−−
−−
−−
−−
−−
−−
−−
66,,117733
−−
66,,117733
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 in the pages ahead that shows the VaR distribution of the trading portfolios by
risk category, their diversification effect, and total trading SVaR.
Non-trading positions that use other risk measures.
For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and total
trading SVaR as well as the table that shows the interest rate sensitivity.
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.
86
National Bank of Canada
National Bank of Canada2022 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(9)
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, 2021
33,879
84,811
9,583
11,910
7,516
182,689
16,484
691
8,058
355,621
240,938
6,836
20,266
17,293
19,367
25,170
143
6,158
768
336,939
401
16,518
16,960
Interest rate(3)
82,995
−
−
−
7,827
16,033
−
−
107,256
14,215
−
20,266
−
18,999
9,058
−
−
−
62,538
1,816
9,583
11,910
7,516
174,862
451
691
−
223,347
226,723
6,836
−
17,293
368
16,112
143
113
768
268,356
−
−
−
−
−
−
−
8,058
25,018
−
−
−
−
−
−
−
6,045
−
6,045
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)
(9)
Trading positions whose risk measures are VaR as well as total SVaR. For additional information, see the table on the following page that shows the VaR distribution of the trading portfolios
by risk category, their diversification effect, and total trading SVaR.
Non-trading positions that use other risk measures.
For additional information, see the tables in the pages ahead, namely, the table that shows the VaR distribution of the trading portfolios by risk category, their diversification effect, and
total trading SVaR as well as the table that shows the interest rate sensitivity.
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.
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
87
National Bank of Canada2022 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 total trading 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)(2)**
Year ended October 31
(millions of Canadian dollars)
Interest rate
Foreign exchange
Equity
Commodity
Diversification effect(3)
TToottaall ttrraaddiinngg VVaaRR
TToottaall ttrraaddiinngg SSVVaaRR
LLooww
((33..99))
((00..44))
((44..00))
((00..55))
nn..mm..
((44..66))
((55..11))
HHiigghh
AAvveerraaggee
22002222
PPeerriioodd eenndd
((1111..33))
((66..99))
((1100..66))
((11..66))
nn..mm..
((1111..44))
((2266..22))
((55..88))
((22..11))
((77..22))
((00..99))
88..11
((77..99))
((1144..66))
((55..22))
((22..11))
((77..11))
((11..22))
77..33
((88..33))
((1188..88))
Low
(4.5)
(0.3)
(4.4)
(0.4)
n.m.
(4.8)
(6.5)
High
Average
2021
Period end
(11.0)
(2.3)
(10.2)
(1.9)
n.m.
(12.3)
(23.1)
(7.2)
(0.9)
(6.2)
(0.9)
7.8
(7.4)
(13.8)
(8.2)
(0.9)
(6.0)
(1.4)
11.3
(5.2)
(9.5)
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)
(3)
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
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 $7.9 million for fiscal 2022, up slightly from $7.4 million in fiscal 2021. The average total trading SVaR was also up
slightly, increasing from $13.8 million in fiscal 2021 to $14.6 million in fiscal 2022. These increases were mainly driven by higher equity risk, largely offset by
a lower interest rate 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 92% of the days for the year
ended October 31, 2022. Daily trading and underwriting losses in excess of $1 million were recorded on 17 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)
88
1
2
.
v
o
N
1
2
.
c
e
D
2
2
.
n
a
J
2
2
.
b
e
F
2
2
.
r
a
M
2
2
.
r
p
A
2
2
y
a
M
2
2
e
n
u
J
2
2
y
l
u
J
2
2
.
g
u
A
2
2
.
t
p
e
S
2
2
.
t
c
O
Trading and underwriting revenues
VaR
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
SSttrreessss TTeessttiinngg
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 scenarios.
These stress tests simulate the results that the portfolios would generate if the extreme scenarios in question were to occur. The Bank’s stress testing
framework, 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 the economic value of its 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 the economic value of its equity and its annual net interest income considering its risk appetite. This goal must be achieved within prescribed risk
limits and is accomplished primarily by implementing a policy framework, approved by the GRC and submitted for information purposes to the RMC, that sets 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 includes 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.
89
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
Stress Testing
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. Stress test 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 exposure to structural interest rate risk.
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
100 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.
IInntteerreesstt RRaattee SSeennssiittiivviittyy –– NNoonn--TTrraaddiinngg AAccttiivviittiieess ((BBeeffoorree TTaaxx))**
As at October 31
(millions of Canadian dollars)
IImmppaacctt oonn eeqquuiittyy
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
IImmppaacctt oonn nneett iinntteerreesstt iinnccoommee
100-basis-point increase in the interest rate
100-basis-point decrease in the interest rate
CCaannaaddiiaann
ddoollllaarr
OOtthheerr
ccuurrrreenncciieess
((119911))
117799
112288
((114411))
((2244))
2277
22
((22))
22002222
TToottaall
((221155))
220066
113300
((114433))
Canadian
dollar
Other
currencies
(277)
253
91
(67)
39
(34)
17
(17)
2021
Total
(238)
219
108
(84)
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 framework 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 framework, business units that are
active in managing these types of portfolios 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.
90
National Bank of Canada
National Bank of Canada2022 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.
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.
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 and NSFR on a quarterly basis, whereas NCCF is produced monthly and communicated to
OSFI.
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.
On January 31, 2022, OSFI published a final version of the liquidity rules, which reflects the most recent Basel III reforms and, on February 16, 2022, OSFI
published the corresponding changes to the regulatory return, i.e., the Net Cumulative Cash Flow (NCCF) return.
On March 31, 2022, OSFI published, for consultation purposes, a draft guideline entitled Assurance on Capital, Leverage and Liquidity Returns. OSFI relies
largely on the regulatory returns produced by financial institutions when assessing their safety and soundness. The purpose of this draft guideline is to better
inform auditors and institutions on the work to be performed on regulatory returns in order to clarify and align OSFI’s assurance expectations across all
financial institutions. In particular, the draft guideline addresses the assurance that must be provided by an external audit, attestation by senior management,
the assurance that must be provided by an internal audit, and the proposed effective dates. The Bank is actively participating in this consultation.
The Bank continues to closely monitor regulatory developments and actively participates in various consultation processes.
91
National Bank of Canada2022 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
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 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 and Pledging Governance 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 a general deterioration of liquidity
indicators, the Global Funding and Treasury Group takes remedial action. According to an 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 is submitted quarterly to the RMC; this
report 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.
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 financial centres whose size and/or strategic importance makes them more likely to contribute
to the Bank’s liquidity risk. Consequently, a liquidity and funding risk management structure exists at each financial centre. This structure imposes a set of
limits of varying levels, up to the limits approved by the RMC, on diverse liquidity parameters, including liquidity stress tests as well as simple concentration
measures.
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.
92
National Bank of Canada
National Bank of Canada2022 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 parameters, 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
various scenarios. 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 liquidity risk monitoring tools is the Bank’s survival
period, which is based on contractual maturity and behavioural assumptions applied to balance sheet items as well as off-balance-sheet commitments.
Stress Testing
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 the 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 emergency liquidity facilities of central banks. The
following tables provide information on the Bank’s encumbered and unencumbered assets.
93
National Bank of Canada2022 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,, 22002222
As at October 31, 2021
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,, 22002222
As at October 31, 2021
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(2)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(3)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(4)
22002222
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2021
Unencumbered
liquid assets
3311,,887700
−−
3311,,887700
77,,669900
2244,,118800
27,098
3388,,998833
3355,,999966
7744,,997799
1133,,005566
1100,,339999
4477,,228811
1111,,779955
115533,,338844
149,431
88,,886644
22,,334422
4455,,005555
−−
9922,,225577
74,070
2211,,992200
1122,,774411
9922,,333366
1111,,779955
224455,,664411
223,501
4499,,008855
1133,,449999
22,,993322
6655,,004455
66,,221133
114444,,446644
125,153
2255,,889944
29,002
88,,442211
99,,880099
2277,,229911
55,,558822
110011,,117777
4,678
7,201
26,824
3,545
98,348
22002222
2021
5522,,554444
1144,,557766
3344,,005577
110011,,117777
62,438
12,471
23,439
98,348
22002222
2021
4499,,446666
2244,,887711
2266,,884400
110011,,117777
47,293
40,999
10,056
98,348
BBaannkk--oowwnneedd
lliiqquuiidd aasssseettss(2)
LLiiqquuiidd aasssseettss
rreecceeiivveedd(3)
TToottaall
lliiqquuiidd aasssseettss
EEnnccuummbbeerreedd
lliiqquuiidd aasssseettss(4)
22002222
UUnneennccuummbbeerreedd
lliiqquuiidd aasssseettss
2021
Unencumbered
liquid assets
3399,,443311
−−
3399,,443311
88,,006622
3311,,336699
32,238
3333,,116677
3322,,554466
6655,,771133
1133,,009933
88,,777722
5555,,002200
1100,,998800
116600,,446633
161,650
77,,228833
22,,440088
4433,,661100
−−
8855,,884477
75,626
2200,,337766
1111,,118800
9988,,663300
1100,,998800
224466,,331100
237,276
4422,,001122
1144,,110000
22,,440099
7744,,220033
66,,776622
114477,,554488
134,337
2233,,770011
20,349
66,,227766
88,,777711
2244,,442277
44,,221188
9988,,776622
5,895
6,413
34,351
3,693
102,939
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
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
(1)
(2)
(3)
(4)
(5)
94
National Bank of Canada2022 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,, 22002222
EEnnccuummbbeerreedd
aasssseettss aass %%
ooff ttoottaall aasssseettss
TToottaall
OOtthheerr(3)
77,,339955
−−
2211,,881188
−−
−−
−−
−−
−−
−−
−−
2299,,221133
AAvvaaiillaabbllee aass
ccoollllaatteerraall
2244,,118800
6666,,774477
44,,666688
55,,558822
−−
−−
−−
−−
−−
−−
110011,,117777
OOtthheerr(4)
−−
−−
−−
116633,,773366
1188,,554477
114400
11,,339977
11,,551199
11,,336600
55,,995588
119922,,665577
3311,,887700
110099,,771199
2266,,448866
220066,,774444
1188,,554477
114400
11,,339977
11,,551199
11,,336600
55,,995588
440033,,774400
11..99
1100..66
55..44
99..33
−−
−−
−−
−−
−−
−−
2277..22
Encumbered
assets(2)
Unencumbered
assets
As at October 31, 2021(5)
Encumbered
assets as %
of total assets
Total
Other(3)
6,506
−
7,516
−
−
−
−
−
−
−
14,022
Available as
collateral
27,098
67,705
−
3,545
−
−
−
−
−
−
98,348
Other(4)
−
−
−
141,837
16,484
225
1,216
1,504
1,274
4,530
167,070
33,879
106,304
7,516
182,689
16,484
225
1,216
1,504
1,274
4,530
355,621
1.9
10.9
2.1
10.5
−
−
−
−
−
−
25.4
PPlleeddggeedd aass
ccoollllaatteerraall
229955
4422,,997722
−−
3377,,442266
−−
−−
−−
−−
−−
−−
8800,,669933
Pledged as
collateral
275
38,599
−
37,307
−
−
−
−
−
−
76,181
(1)
(2)
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
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)).
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
(5)
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, 2022, the Bank’s average
LCR was 140%, well above the 100% regulatory requirement and demonstrating the Bank’s solid liquidity position.
95
National Bank of Canada2022 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(5)
Unsecured wholesale funding, of which:
Operational deposits(5) (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 ((%%))(7)
TToottaall uunnwweeiigghhtteedd
vvaalluuee(3) ((aavveerraaggee))
OOccttoobbeerr 3311,, 22002222
TToottaall wweeiigghhtteedd
vvaalluuee(4) ((aavveerraaggee))
For the quarter ended
July 31, 2022
Total weighted
value(4) (average)
nn..aa..
7766,,446699
6677,,008866
2288,,770099
3388,,337777
110022,,002200
2277,,663355
6622,,331199
1122,,006666
nn..aa..
5533,,225599
1155,,887722
11,,558800
3355,,880077
11,,883300
112211,,555588
nn..aa..
110066,,771133
1100,,773377
1155,,996666
113333,,441166
66,,995533
886611
66,,009922
5555,,777700
66,,773388
3366,,996666
1122,,006666
2200,,446655
1144,,223311
77,,338811
11,,558800
55,,227700
11,,004400
11,,778888
110000,,224477
2222,,556622
66,,667733
1155,,996666
4455,,220011
71,388
5,281
876
4,405
56,563
5,715
39,620
11,228
15,955
12,559
5,718
1,864
4,977
758
1,771
92,887
20,976
5,910
17,496
44,382
TToottaall aaddjjuusstteedd
vvaalluuee(6)
Total adjusted
value(6)
7766,,446699
5555,,004466
114400 %%
71,388
48,505
148 %
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
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)
During the quarter ended October 31, 2022, the Bank refined its method for classifying less stable retail deposits and deposits from small business customers as well as unsecured
wholesale funding operational deposits.
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.
(6)
(7)
As at October 31, 2022, Level 1 liquid assets represented 84% 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 without such variation being
necessarily indicative of a trend. The variation between the quarter ended October 31, 2022 and the preceding quarter is 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 would 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%.
96
National Bank of Canada
National Bank of Canada2022 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, 2022, 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(4)
Wholesale funding:
Operational deposits(4)
Other wholesale funding
Liabilities with matching interdependent assets(5)
Other liabilities(6):
NSFR derivative liabilities(6)
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 public sector entities, 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(5)
Other assets(6):
Physical traded commodities, including gold
Assets posted as initial margin for derivative contracts and
contributions to default funds of central counterparties(5)
NSFR derivative assets(6)
NSFR derivative liabilities before deduction of the variation
margin posted(6)
All other assets not included in the above categories
Off-balance-sheet items(6)
TToottaall RRSSFF
NNeett SSttaabbllee FFuunnddiinngg RRaattiioo ((%%))
AAss aatt OOccttoobbeerr 3311,,
22002222
As at July 31,
2022
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)
2211,,774466
2211,,774466
−−
6633,,223322
2266,,550000
3366,,773322
6622,,882299
3311,,007766
3311,,775533
−−
2255,,444455
nn..aa..
2255,,444455
nn..aa..
nn..aa..
−−
5588,,779999
22,,559955
−−
−−
−−
1111,,008800
33,,110022
77,,997788
8855,,449922
−−
8855,,449922
33,,227711
11,,882200
nn..aa..
nn..aa..
−−
6611,,331166
33,,993322
−−
−−
−−
99,,002255
44,,006655
44,,996600
1100,,883322
−−
1100,,883322
33,,555533
2211,,771111
1199,,005555
225533
nn..aa..
nn..aa..
−−
2222,,118833
−−
11,,449999
11,,449999
−−
1177,,444477
55,,886666
1111,,558811
3377,,440055
−−
3377,,440055
1199,,445533
558833
nn..aa..
nn..aa..
−−
9988,,998800
99
2233,,224455
2233,,224455
−−
9900,,886666
3377,,885500
5533,,001166
9911,,995599
1155,,553388
7766,,442211
−−
771100
nn..aa..
771100
220066,,778800
88,,884455
−−
114455,,555555
334433
88,,332255
2222,,222222
11,,665500
336655
55,,442266
2255,,114499
2277,,004488
1133,,886688
3366,,447788
7700,,449944
881166
99,,662244
22,,886677
55,,116666
443311
55,,992288
227799
5577,,993333
22,,336600
5522,,774433
99,,662244
55,,116666
55,,992288
5577,,993333
5522,,774433
1133,,110066
−−
33,,881100
229944
nn..aa..
nn..aa..
nn..aa..
33,,551166
nn..aa..
nn..aa..
nn..aa..
22,,994488
33,,227711
nn..aa..
55,,773333
nn..aa..
nn..aa..
773377
33,,555533
5588,,113366
nn..aa..
88,,441133
1166,,998855
2255,,668866
664455
110011,,001100
nn..aa..
nn..aa..
44,,119955
1199,,445533
nn..aa..
667744
nn..aa..
nn..aa..
1166,,554499
−−
1188,,445555
229944
77,,115511
−−
11,,228844
99,,772266
33,,778877
117766,,664422
22,607
22,607
−
83,433
37,750
45,683
96,027
10,600
85,427
−
704
n.a.
704
202,771
7,235
−
140,975
83
5,383
67,324
1,965
52,236
52,236
15,949
−
18,428
292
7,581
−
949
9,606
3,677
170,315
111177 %%
119 %
See the Financial Reporting Method section on pages 16 to 21 for additional information on capital management measures.
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)
During the quarter ended October 31, 2022, the Bank refined its method for classifying less stable retail deposits and deposits from small business customers as well as wholesale funding
operational deposits.
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 maturity.
(5)
(6)
97
National Bank of Canada2022 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 ASF and RSF 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 without
such variation being necessarily 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.
Liquidity and funding 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 liquidity and funding 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, the 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 derivative transactions.
Liquidity and funding 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 April 29, 2022, DBRS Morningstar (DBRS) raised the ratings of the Bank and its related entities, including the rating for long-term deposits and for
long-term non-bail-inable senior debt to AA from AA(low), and it raised the rating for short-term senior debt to R-1(high) from R-1(mid). In addition, DBRS
changed the trends of all the ratings to “Stable” from “Positive”. This change reflects DBRS’s recognition of the Bank’s solid performance in recent years. For
Moody’s, S&P, and Fitch, the outlook remains unchanged at “Stable.” The following table presents the Bank’s credit ratings according to four rating agencies
as at October 31, 2022.
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,, 22002222
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 (high)
AA
AA
AA (low)
A (low)
BBB (high)
Pfd-2
AAA
Stable
F1+
AA-
AA-
A+
AA-
AAA
Stable
Includes senior debt issued before 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.
98
National Bank of Canada
National Bank of Canada2022 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. These additional collateral requirements are presented in the table below.
(millions of Canadian dollars)
Derivatives(1)
OOnnee--nnoottcchh
ddoowwnnggrraaddee
AAss aatt OOccttoobbeerr 3311,, 22002222
TThhrreeee--nnoottcchh
ddoowwnnggrraaddee
3300
9988
(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 sound liquidity risk management through centralized expertise and management of liquidity metrics within a 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 support of the Bank’s overall objectives of strengthening its franchise among market participants and reinforcing its
excellent reputation. The Bank continuously monitors and analyzes market trends as well as 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 diversifying 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.
99
National Bank of Canada2022 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,, 22002222
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, 2021
11 mmoonntthh oorr
lleessss
OOvveerr 11
mmoonntthh ttoo
33 mmoonntthhss
OOvveerr 33
mmoonntthhss ttoo
66 mmoonntthhss
OOvveerr 66
mmoonntthhss ttoo
1122 mmoonntthhss
448844
55,,556600
7788
−−
−−
−−
−−
−−
66,,112222
−−
66,,112222
66,,112222
2,643
−−
44,,223300
11,,334488
114400
22,,667722
−−
−−
−−
88,,339900
22,,667722
55,,771188
88,,339900
8,872
−−
44,,778888
33,,000000
118833
442222
−−
−−
−−
88,,339933
442222
77,,997711
88,,339933
9,802
−−
779933
558877
7700
33,,661177
22,,001177
2299
−−
77,,111133
55,,666633
11,,445500
77,,111133
7,390
SSuubbttoottaall
11 yyeeaarr
oorr lleessss
448844
1155,,337711
55,,001133
339933
66,,771111
22,,001177
2299
−−
3300,,001188
88,,775577
2211,,226611
3300,,001188
28,707
OOvveerr 11
yyeeaarr ttoo
22 yyeeaarrss
−−
−−
33,,777711
−−
44,,555588
11,,000099
−−
−−
99,,333388
55,,556677
33,,777711
99,,333388
10,400
OOvveerr 22
yyeeaarrss
−−
−−
66,,442233
22,,338877
1155,,000088
77,,338866
4499
11,,449999
3322,,775522
2222,,444433
1100,,330099
3322,,775522
29,331
TToottaall
448844
1155,,337711
1155,,220077
22,,778800
2266,,227777
1100,,441122
7788
11,,449999
7722,,110088
3366,,776677
3355,,334411
7722,,110088
68,438
(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 Operational Risk Management Committee (ORMC), a subcommittee of the GRC, is the main governance committee overseeing operational risk matters. Its
mission is to provide oversight of the operational risk level across the organization to ensure it aligns with the Bank’s risk appetite targets. It implements
effective frameworks for managing operational risk, including policies and standards, and monitors the application thereof.
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.
100
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Risk Management
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 helps determine the Bank's exposure to the operational risks and operational losses incurred and assess 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.
Analysis and Lessons Learned From Operational Incidents Observed in Other Large Businesses
By collecting and analyzing media-reported information about significant operational incidents, in particular incidents 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 the 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 helps in anticipating factors that could hinder performance or the achievement of objectives.
Key Risk Indicators
Key risk indicators are used to monitor the main operational risk exposure factors and track how risks are evolving in order to proactively manage them. The
business units and corporate units define the 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 an
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
To protect itself against any material losses arising from unforeseeable operational risk exposure, 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 tolerance thresholds or that have a significant regulatory or reputation impact are submitted to
appropriate decision-making levels. 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 ORMC, 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 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.
101
National Bank of Canada2022 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:
implement policies and standards that ensure compliance with current regulatory requirements, 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 monitoring of 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 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 (federal law)
Bill C-13, An Act to amend the Official Languages Act, to enact the Use of French in Federally Regulated Private Businesses Act and to make related
amendments to other Acts, proposes to modernize the Official Languages Act by granting new powers to the Commissioner of Official Languages (entering into
compliance agreements, issuing orders, and imposing penalties). The bill also proposes enactment of a new act, namely, the Use of French in Federally
Regulated Private Businesses Act, which addresses the language of service for consumers and the language of work in Quebec and in regions with a strong
francophone presence.
Bill 96: An Act respecting French, the official and common language of Quebec (Quebec law)
Bill 96 makes amendments to the Charter of the French Language and other laws. The objectives are 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 French is the only official language of Quebec. Key aspects of Bill 96
notably include francization committees, work and employment rights, contracts and consumer rights, litigation and the publication of rights, and public signs
and commercial advertising. Bill 96 was assented to on June 1, 2022.
Bill 18 – Protection of Vulnerable Persons
Bill 18, An Act to amend the Civil Code, the Code of Civil Procedure, the Public Curator Act and various provisions as regards the protection of persons, has
abolished curatorships and adviserships to persons of full age. Tutorships to persons of full age will remain in place, but it will be possible to modulate them
based on the incapacity level of the person of full age. The new law will create temporary representation of persons of full age and assistants to persons of full
age. The effective date, initially expected in June, was postponed to November 2022.
Consumer Protection (Bank Act)
A new Financial Consumer Protection Framework (C-86) took effect on June 30, 2022. It modernized certain provisions of the Bank Act and related regulations
in order to strengthen consumer protections, notably through additional communications to customers, assessments of product and service appropriateness,
employee training, reporting of wrongdoings (whistleblowing), and complaint handling processes.
Bill C-30 Addressing Unclaimed Bank Balances, Among Other Matters
Bill C-30 makes an amendment to the Bank Act. Unclaimed balances refer in particular to a deposit in an inactive bank account and will now include deposits
and instruments in foreign currencies. This plan requires financial institutions to send letters to clients to inform them of the existence of unclaimed balances.
An electronic notice must also be sent when the financial institution possesses the electronic contact information of the clients. Additional information
regarding clients who have an unclaimed balance will also have to be sent to the Bank of Canada. The effective date of the bill is anticipated to be
June 30, 2023.
Anti-Money Laundering and Anti-Terrorist Financing (AML/ATF) Activities
Amendments made to the regulations set out in the Proceeds of Crime (Money Laundering) and Terrorist Financing Act took effect on June 1, 2021. The new
reporting requirements are expected to take effect in 2023-2024 such that the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) can
prepare the new reporting forms.
102
National Bank of Canada
National Bank of Canada2022 Annual Report
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Risk Management
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 regarding the protection of personal information. Essentially, the Act promotes transparency, raises the confidentiality level of data, and provides a
framework for the collection, use, and sharing of personal information. At the federal level, Bill C-27, tabled in June 2022, enacts three new laws: the Consumer
Privacy Protection Act, the Personal Information and Data Protection Tribunal Act, the Artificial Intelligence and Data Act. The latter act is the first bill designed
to regulate artificial intelligence in Canada. Members of industry, regulatory agencies, and consumer advocates were consulted to help design and establish
the pillars of an open banking system, which enable consumers to transfer their financial data between financial institutions and accredited third parties in a
secure and user-friendly manner.
Canada Deposit Insurance Corporation (CDIC)
On April 30, 2022, separate coverage for registered education savings plans and registered disability savings plans was granted as part of changes to the
Canada Deposit Insurance Corporation Act. New requirements were 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 prepare 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 maintain a comprehensive settlement plan that would ensure
an 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 (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. However, the U.S. Internal Revenue
Service has informed market participants that it is working on a new notice that would again postpone these obligations beyond 2023.
Foreign Account Tax Compliance Act and the Common Reporting Standard
The U.S. law addressing foreign account tax compliance (Foreign Account Tax Compliance Act or FATCA), 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. On March 10, 2022, clarifications were provided on the application of
some of the guidelines in these regulations.
Client-Centred Reforms – Amendments to Regulation 31-103
Pursuant to Regulation 31-103 respecting Registration Requirements, Exemptions and Ongoing Registrant obligations, regulatory changes were made to the
process for declaring conflicts of interest and external activities and to the following topics: KYC (know-your-client) and KYP (know-your-product), suitability
determination, misleading communications, relationship disclosure, and training. The Bank is ensuring that it is compliant with these changes as they are
published.
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. On December 31, 2021, all LIBOR rates in European, British, Swiss, and Japanese currency as well as the one-week and two-month USD LIBOR rates
were discontinued, whereas the other USD LIBOR rates will be discontinued after June 30, 2023. In Canada, publication of the CDOR (Canadian Dollar Offered
Rate) will be discontinued on June 28, 2024 and be replaced by the risk-free rate CORRA (Canadian Overnight Repo Rate Average). For additional information,
see the Basis of Presentation section in Note 1 to the consolidated financial statements.
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Risk Management
One-Day Settlement Cycle
In February 2022, the CSA staff published a notice to inform Canadian securities stakeholders about an initiative to shorten the standard settlement cycle for
most trades in securities from two days to one day. This notice follows a report published in the U.S. securities sector indicating that it has set March 31, 2024
as the date for transitioning the standard settlement cycle in the U.S. to one day from the current settlement time of two days. Aligning the Canadian and U.S.
settlement cycles is critical so as to avoid inefficiencies and prevent any prejudicial impact on Canadian investors and capital markets. The move towards a
shortened settlement cycle will result in changes to systems, regulations, and procedures.
New Self-Regulatory Organization (SRO)
The CSA will create a new self-regulatory organization that will, among other things, combine the functions of the Investment Industry Regulatory Organization
of Canada and the Mutual Fund Dealers Association of Canada. This new organization is expected to be operational by the end of 2022. A working committee
was created to assess the potential impacts and benefits of this new structure for Wealth Management and the National Bank Investments subsidiary.
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 and 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’s corporate culture continually promotes the behaviours and values to be adopted by employees. It creates an awareness among all employees about
the potential consequences of their actions on the Bank’s reputation and brand. In addition to the above-mentioned operational risk management initiatives,
the Bank uses a variety of mechanisms to support sound management of reputation risk. Our Code of Conduct outlines what is expected from each employee in
terms of ethical behaviour and rules to be followed as they carry out their duties. Also supporting our corporate culture are policies specifically addressing
ethics and corporate governance as well as appropriate training programs. The Bank also has a crisis management framework featuring effective intervention,
communication, and behavioural parameters that help to minimize any impact on business 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.
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 Senior Leadership Team, 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. The Bank is directly exposed to such risk through its own activities and indirectly exposed through the activities of its clients. This risk encompasses
many topics, in particular pollution and waste; the use of energy, water, and other resources; climate change; biodiversity; human rights; inclusion, diversity
and equity; labour standards and human capital management practices; 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. As such, it is possible that the Bank’s
predictions, targets, projections, expectations or conclusions prove to be inaccurate, that its assumptions may not be confirmed, and that its strategic
objectives and performance targets will not be achieved.
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Risk Management
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 imperative to the Bank. Addressing such risk may even prove to be 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 been incorporated into the organization’s priorities, and ESG indicators have been
added to various monitoring dashboards and are gradually being integrated into the Bank’s risk appetite framework. Reports on these indicators and on the
Bank’s ESG commitments are being periodically presented to various internal committees and to Board committees. In addition, the Bank’s Code of Conduct
outlines what is expected from each employee in their professional, business, and community interactions. It also provides guidance on adhering to the Bank’s
values, on the day-to-day conduct of the Bank’s affairs, and on relationships with third parties, employees, and clients to create an environment conducive to
achieving the Bank’s One Mission, namely, to have a positive impact on people’s lives.
The Bank has also implemented an environmental policy that applies to all activities and decisions made across the Bank. This policy clearly sets out
principles for identifying and limiting environmental risk and climate risk as well as the impacts therefrom on the community and on the Bank’s business
segments. The Bank is pursuing its commitment to carbon neutrality by reducing the carbon footprint of its own activities and by offsetting its greenhouse gas
(GHG) emissions through various organizations. The Bank is also prioritizing energy efficiency and has demonstrated leadership in this regard by deploying an
innovative system that lets it regulate the energy consumption of 260 branches using building control systems and a web interface. In addition, responsible
procurement criteria have been incorporated into the purchasing and supplier selection practices for the construction of the Bank’s new head office building.
The new head office is, in fact, aiming to achieve LEED v4(1) Gold certification in addition to WELL(2) certification. Furthermore, we are continuing to work on the
implementation of a global responsible procurement strategy.
ESG factors continue to be integrated into the Bank’s processes, in line with its strategy and the guiding principles approved by the Board. This integration is
being conducted with due diligence, particularly in the area of credit-granting, and starting with the corporate credit portfolio. For this clientele, ESG risk is
being analyzed using a collection of carbon footprint information and 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 being considered, notably waste management, labour standards, corporate
governance, product liability, and human rights policies. The Bank plans to gradually extend the collection of such information to clients in other portfolios by
adapting the current process.
The Bank collaborates with various industry partners to identify and implement sound management practices to support the transition to a low-carbon
economy. Aware that it has a mobilizing role to play, the Bank supports the recommendations of the TCFD and continues to demonstrate its commitment to
mitigating climate risk. For example, it has become a signatory to the Partnership for Carbon Accounting Financials (PCAF) as well as the United Nations’ Net-
Zero Banking Alliance (NZBA). This year, the Bank also began quantifying financed GHG emissions. Specifically, it quantified the emissions of oil and gas
producers in its loan portfolio, and it has also set its first interim reduction targets under its PCAF and NZBA commitments. These targets consist of a 31%
reduction in the intensity of the portfolio respectively for direct and indirect energy-related emissions and for other indirect emissions. In the next two years,
the Bank plans to continue setting GHG emission reduction targets for other portfolios. The Bank has also started examining stress test scenarios to quantify
the anticipated losses in the loan portfolio. Also during the year, the Bank joined the UNEP-FI’s discussion group on biodiversity protection. This is an initiative
seeking to mobilize financial system stakeholders towards biodiversity protection efforts, as the financial risk arising from biodiversity loss may take the form
of both physical risk and transition risk. Given that this initiative is in its early stages, the Bank will continue to closely monitor the evolution thereof and take
part in discussions. The Bank has also started taking concrete action to meet its commitments and to move its plan forward, notably by quantifying the
financial impacts of environmental and social risk. Furthermore, the Bank is committed to transparently communicating information about its progress and its
signatory commitments by periodically publishing its own performance reports.
To proactively ensure the strategic positioning of its entire portfolio, the Bank continues to support the transition to a low-carbon economy while closely
monitoring the related developments and implications. Doing so involves ongoing and stronger adaptation efforts as well as additional mitigation measures
for instances of business interruptions or disruptions caused by major incidents such as natural disasters or health crises. Such measures include the
business continuity plan, the operational risk management program, and the disaster risk management program.
(1)
(2)
Criteria of the LEED (Leadership in Energy and Environmental Design) certification system. LEED certification involves satisfying climate criteria and adaptation characteristics that will help
limit potential physical climate risks.
The WELL Standard, administered by the International WELL Building Institute, recognizes environments that support the health and well-being of the occupants.
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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.
The impacts of COVID-19 and the geopolitical landscape, in particular supply chain disruptions and rising inflation, are persisting and creating uncertainty. As
a result, establishing reliable estimates and applying judgment continue to be substantially complex. 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.
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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 terminated 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, certain deposits (structured deposit notes), and certain
other assets.
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.
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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.
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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.
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiitt PPllaannss
The expense and obligation of the defined benefit component of the pension plans and other post-employment benefit plans 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.
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Remeasurements of these plans represent the 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 net 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 involves 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 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 proceeding involving the Bank are
as follows:
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.
110
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Critical Accounting Policies and Estimates
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.
AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
CClloouudd CCoommppuuttiinngg AArrrraannggeemmeennttss –– FFiinnaall AAggeennddaa DDeecciissiioonn bbyy IIFFRRIICC
In April 2021, IFRIC issued a final agenda decision on accounting for the costs of configuring or customizing a supplier’s software as part of a cloud computing
or SaaS (Software as a Service) arrangement. The main conclusion was that, if the incurred configuration or customization costs do not give rise to an
intangible asset that is separate from the software or if the services received are distinct from the software, those costs are expensed as incurred. IFRIC
decided that the relevant accounting standards (IAS 38 – Intangible Assets and IFRS 15 – Revenue From Contracts With Customers) contain sufficient guidance
and that the conclusions, as indicated in the final agenda decision, are part of the interpretation of IFRS. As such, any change arising from these
interpretations must be accounted for as a retrospectively applied accounting policy change in accordance with IAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors.
During fiscal 2022, the Bank completed an assessment of the impacts of this change in accounting policy. The change was applied retrospectively and had the
following impacts on the consolidated financial statements:
As at November 1, 2020: A $186 million decrease in Intangible assets, a $49 million increase in Other assets – Deferred tax assets, and a $137 million
decrease in Retained earnings;
As at October 31, 2021: A $50 million decrease in Intangible assets and a $13 million increase in Other assets – Deferred tax assets;
For the year ended October 31, 2021: A $50 million increase in Non-interest expenses – Technology, a $13 million decrease in Income taxes, a $37 million
decrease in Net income and Net income attributable to common shareholders, and a $0.11 decrease in Earnings per share – Basic and diluted.
For the year ended October 31, 2022, the impacts of this accounting policy change on the Consolidated Statement of Income consisted of a $10 million
increase in Non-interest expenses – Technology and a $3 million decrease in Income taxes.
FFuuttuurree AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
The Bank closely monitors both new accounting standards and amendments to existing accounting standards issued by the IASB. The following standard has
been issued but is not yet in effect. The Bank is currently assessing the impacts of applying this standard 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. IFRS 17 will affect how an entity accounts for its insurance contracts and
how it reports financial performance in the consolidated income statement, in particular the timing of revenue recognition for 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. If full retrospective application to a group of insurance contracts is impracticable, the modified retrospective
approach or the fair value approach may be used.
To prepare for the application of IFRS 17, the Bank developed a project, set up a specialized team, and established a formal governance structure. It also
started executing a detailed plan for the project that defines key activities and the timing of those activities. The project is progressing according to schedule.
The Bank is continuing to assess all of the impacts of applying IFRS 17 on its consolidated financial statements as well as on the financial statements of its
insurance subsidiary.
111
National Bank of Canada2022 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(2)
TToottaall rreevveennuueess
Non-interest expenses(3)
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
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
889944
33,,338833
((11))
11,,220077
11,,112277
22,,333344
11,,334466
998888
8877
116633
773388
−−
11,,441199
999944
22,,441133
11,,330055
11,,110088
5577
222255
882266
−−
11,,331133
11,,112266
22,,443399
11,,229999
11,,114400
33
224488
888899
((11))
33,,338844
773388
882266
889900
22002222(1)
QQ11
11,,333322
11,,113344
22,,446666
11,,228800
11,,118866
((22))
225588
993300
−−
993300
$$
$$
99..7722
99..6611
$$
22..1100
22..0088
22..3388 $$
22..3355
$$
22..5566
22..5533
22..6677
22..6644
$$
33..5588
$$
00..9922
$$
00..9922 $$
00..8877
$$
00..8877
11..00006633
00..99559988
−−
−−
11..11112255
11..11550000
11..22337755
00..22551166
00..22440000
−−
−−
00..22778811
00..22887755
00..33009944
00..22551166
00..22339999
−−
−−
00..22778811
00..22887755
00..33009933
00..22551155
00..22440000
−−
−−
00..22778822
00..22887755
00..33009944
00..22551166
00..22339999
−−
−−
00..22778811
00..22887755
00..33009944
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy(4)
1188..88 %%
1155..33 %%
1177..99 %%
2200..77 %%
2211..99 %%
TToottaall aasssseettss
SSuubboorrddiinnaatteedd ddeebbtt(5)
NNeett iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss(4)
NNuummbbeerr ooff ccoommmmoonn sshhaarreess oouuttssttaannddiinngg (thousands)
Average – Basic
Average – Diluted
End of period
PPeerr ccoommmmoonn sshhaarree
Book value(4)
Share price
High
Low
NNuummbbeerr ooff eemmppllooyyeeeess – WWoorrllddwwiiddee
NNuummbbeerr ooff bbrraanncchheess iinn CCaannaaddaa
440033,,774400
338866,,883333
336699,,557700
336666,,668800
11,,449999
447799
11,,551100
330011
776644
229933
776666
228877
333377,,009999
334400,,883377
333366,,553300
333399,,991100
333366,,558822
333366,,443377
333399,,887755
333366,,445566
333377,,338811
334411,,441188
333366,,551133
333388,,005566
334422,,331188
333388,,336677
$$
5555..2244
$$
5544..2299 $$
5522..2288
$$
4499..7711
$$
110055..4444
8833..1122
9944..3377
8833..1122
2299,,550099
337788
9977..8877
8833..3333
2288,,990033
338844
110044..5599
8899..3333
2288,,118899
338855
110055..4444
9944..3377
2277,,880044
338855
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
For fiscal 2020, the Non-interest income item had included a foreign currency translation loss on a disposal of subsidiaries of $24 million.
For fiscal 2021, the Non-interest expenses item had included $9 million in intangible asset impairment losses (2020: $71 million impairment loss on premises and equipment and intangible
assets). For fiscal 2020, the Non-interest expenses item had included $48 million in severance pay and a $13 million charge related to Maple Financial Group Inc. (Maple).
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
Long-term financial liabilities.
National Bank of Canada
(1)
(2)
(3)
(4)
(5)
112
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
Total
Q4
Q3
Q2
4,783
4,144
8,927
4,903
4,024
2
882
3,140
–
3,140
1,190
1,021
2,211
1,268
943
(41)
215
769
–
1,230
1,024
2,254
1,224
1,030
(43)
240
833
–
769
833
1,156
1,082
2,238
1,217
1,021
5
228
788
–
788
2021(1)
Q1
1,207
1,017
2,224
1,194
1,030
81
199
750
–
750
Total
Q4
Q3
Q2
4,255
3,672
7,927
4,616
3,311
846
434
2,031
42
1,989
1,124
876
2,000
1,267
733
110
136
487
2
485
1,096
872
1,968
1,096
872
143
144
585
13
572
1,105
931
2,036
1,144
892
504
25
363
11
352
2020(1)
Q1
930
993
1,923
1,109
814
89
129
596
16
580
$
8.95 $
8.85
2.20 $
2.17
2.38 $
2.35
$
2.24
2.21
2.13
2.12
$
2.84 $
0.71 $
0.71 $
0.71
$
0.71
$
$
$
5.57
5.54
$
1.35
1.34
1.62 $
1.61
$
0.96
0.96
1.65
1.63
2.84
$
0.71
$
0.71 $
0.71
$
0.71
1.0063
0.9598
0.7000
1.0125
1.1125
1.1500
1.2375
0.2516
0.2400
–
–
0.2781
0.2875
0.3094
0.2516
0.2399
–
0.3375
0.2781
0.2875
0.3093
0.2515
0.2400
0.3500
0.3375
0.2782
0.2875
0.3094
0.2516
0.2399
0.3500
0.3375
0.2781
0.2875
0.3094
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
20.7 %
18.7 %
21.4 %
21.8 %
21.1 %
14.6 %
13.7 %
16.7 %
10.3 %
17.7 %
355,621
353,873
350,581
343,489
331,488
322,321
316,835
289,092
768
283
769
312
771
349
773
400
775
465
777
453
779
479
774
436
337,212
340,861
337,779
342,400
337,912
337,517
341,818
337,587
337,142
340,614
337,372
336,408
338,617
336,770
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
$
47.44 $
45.51 $
43.11
$
41.04
$
39.56
$
38.51 $
38.40
$
37.29
$
104.32
65.54
104.32
95.00
26,920
384
96.97
89.47
26,428
389
89.42
72.30
26,211
401
73.81
65.54
26,231
402
$
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
113
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 22 –– OOvveerrvviieeww ooff RReessuullttss
Year ended October 31(1)
(millions of Canadian dollars)
Net interest income
Non-interest income(2)
Total revenues
Non-interest expenses(3)
Income before provisions for credit losses and income taxes
Provisions for credit losses
Income before income taxes
Income taxes
Net income
Non-controlling interests
Net income attributable to the Bank’s
shareholders and holders of other equity instruments
22002222
2021
2020
2019
2018
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
44,,227777
889944
33,,338833
((11))
4,783
4,144
8,927
4,903
4,024
2
4,022
882
3,140
−
33,,338844
3,140
4,255
3,672
7,927
4,616
3,311
846
2,465
434
2,031
42
1,989
3,596
3,836
7,432
4,375
3,057
347
2,710
443
2,267
66
2,201
3,382
3,784
7,166
4,100
3,066
327
2,739
534
2,205
87
2,118
(1)
(2)
(3)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
For fiscal 2021, Non-interest income had 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 had included $9 million in intangible asset impairment losses (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.
TTaabbllee 33 –– CChhaannggeess iinn NNeett IInntteerreesstt IInnccoommee
Year ended October 31
(millions of Canadian dollars)
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall(1)
Net interest income
Average assets(2)
Average interest-bearing assets(2)(3)
Net interest margin(3)
WWeeaalltthh MMaannaaggeemmeenntt
Net interest income on a taxable equivalent basis(4)
Average assets(2)
FFiinnaanncciiaall MMaarrkkeettss(1)
Net interest income on a taxable equivalent basis(4)
Average assets(2)
UUSSSSFF&&II
Net interest income
Average assets(2)
OOtthheerr
Net interest income(4)
Average assets(2)(5)
TToottaall
Net interest income
Average assets(2)(5)
22002222
2021
2020
2019
2018
22,,886655
114400,,551144
113333,,775544
2,547
126,637
120,956
2,420
115,716
110,544
2,360
111,140
106,995
2,256
105,460
101,446
22..1144 %%
2.11 %
2.19 %
2.21 %
2.22 %
559944
88,,222266
446
7,146
442
5,917
455
6,219
426
6,167
11,,225588
115544,,334499
11,,009900
1188,,889900
1,262
151,240
907
16,150
((553366))
7711,,886688
(379)
62,333
971
125,565
498
114,151
429
102,118
807
14,336
(385)
56,553
656
10,985
584
9,270
(373)
43,667
(313)
42,925
55,,227711
339933,,884477
4,783
363,506
4,255
318,087
3,596
286,162
3,382
265,940
(1)
(2)
(3)
(4)
(5)
For fiscal years prior to 2022, certain amounts have been reclassified, in particular amounts of the loan portfolio of borrowers in the “Oil and gas” and “Pipelines” sectors as well as related
activities, which were transferred from the Personal and Commercial segment to the Financial Markets segment.
Represents an average of the daily balances for the period.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
For fiscal 2022, the Net interest income of the Financial Markets segment was grossed up by $229 million (2021: $175 million; 2020: $202 million; 2019: $191 million; 2018: $141 million),
the Net interest income of the Other heading was grossed up by $5 million (2021: $6 million; 2020: $6 million; 2019: $3 million; 2018: $3 million), the Net interest income of the Wealth
Management segment was grossed up by $1 million in 2019. The effect of these adjustments is reversed under the Other heading.
The amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements (for additional information, see Note 1 to the consolidated financial
statements), except for the fiscal 2019 and 2018 figures.
114
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 44 –– NNoonn--IInntteerreesstt IInnccoommee
Year ended October 31
(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)
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(1)
Canada
United States
Other countries
Non-interest income as a % of total revenues
22002222
2021
2020
2019
2018
332244
220044
558877
999977
115555
333355
118866
229988
554433
111133
115588
221111
2288
224422
44,,338811
44,,229999
1188
6644
4455..44 %%
415
238
563
900
164
342
148
274
268
151
131
202
23
325
4,144
3,992
106
46
46.4 %
314
204
477
735
147
320
138
262
544
93
128
164
28
118
3,672
3,574
5
93
46.3 %
246
166
449
677
134
283
175
271
788
77
136
137
34
263
3,836
3,645
85
106
51.6 %
322
169
438
665
126
277
159
280
801
77
121
134
28
187
3,784
3,488
108
188
52.8 %
(1)
For fiscal 2021, Other revenues had 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
(millions of Canadian dollars)
Net interest income related to trading activity(1)
Taxable equivalent basis(2)
NNeett iinntteerreesstt iinnccoommee rreellaatteedd ttoo ttrraaddiinngg aaccttiivviittyy oonn
aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
Non-interest income related to trading activity(1)
Taxable equivalent basis(2)
NNoonn--iinntteerreesstt iinnccoommee rreellaatteedd ttoo ttrraaddiinngg aaccttiivviittyy oonn
aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
Trading activity revenues(1)
Taxable equivalent basis(2)
TTrraaddiinngg aaccttiivviittyy rreevveennuueess oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
TTrraaddiinngg aaccttiivviittyy rreevveennuueess bbyy sseeggmmeenntt
oonn aa ttaaxxaabbllee eeqquuiivvaalleenntt bbaassiiss(2)
FFiinnaanncciiaall MMaarrkkeettss
Equities
Fixed-income
Commodities and foreign exchange
OOtthheerr sseeggmmeennttss
22002222
668822
222299
991111
554488
4488
559966
11,,223300
227777
11,,550077
997799
336677
115566
11,,550022
55
11,,550077
2021
777
171
948
282
8
290
1,059
179
1,238
685
357
128
1,170
68
1,238
2020
522
202
724
625
57
682
1,147
259
1,406
706
430
132
1,268
138
1,406
2019
28
188
216
800
135
935
828
323
1,151
621
285
126
1,032
119
1,151
2018
44
138
182
822
101
923
866
239
1,105
575
263
130
968
137
1,105
(1)
(2)
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
See the Financial Reporting Method section on pages 16 to 21 for additional information on non-GAAP financial measures. The taxable equivalent basis presented in this table is related to
trading portfolios. The Bank also uses the taxable equivalent basis for certain investment portfolios, and the amounts stood at $5 million for fiscal 2022 (2021: $10 million; 2020:
$6 million; 2019: $7 million; 2018: $6 million).
115
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 66 –– NNoonn--IInntteerreesstt EExxppeennsseess
Year ended October 31(1)
(millions of Canadian dollars)
Compensation and employee benefits(2)
Occupancy(3)
Amortization – Premises and equipment
Technology
Amortization – Technology(4)
Communications
Professional fees
Travel and business development
Capital and payroll taxes
Other(5)
Total
Canada
United States
Other countries
Efficiency ratio(6)
22002222
33,,228844
115577
115555
558899
332266
5577
224499
114444
3322
223377
55,,223300
44,,776600
220099
226611
5544..22 %%
2021
3,027
147
152
557
314
53
246
109
52
246
4,903
4,478
203
222
54.9 %
2020
2,713
151
140
510
366
58
244
103
73
258
4,616
4,195
209
212
58.2 %
2019
2018
2,532
254
44
446
332
62
249
128
70
258
4,375
4,005
210
160
58.9 %
2,466
193
43
412
245
63
244
128
79
227
4,100
3,787
205
108
57.2 %
(1)
(2)
(3)
(4)
(5)
(6)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to the consolidated financial
statements.
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 had included $9 million in intangible asset impairment losses (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).
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
116
National Bank of Canada
National Bank of Canada2022 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(2)
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
CCoommmmeerrcciiaall BBaannkkiinngg(3)
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
WWeeaalltthh MMaannaaggeemmeenntt
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
FFiinnaanncciiaall MMaarrkkeettss(3)
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
UUSSSSFF&&II
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
POCI loans
OOtthheerr
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
TToottaall pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
Impaired loans – Stage 3
Non-impaired loans – Stages 1 and 2
POCI loans
22002222
2021
2020
2019
2018
7755
99
8844
1133
−−
1133
11
22
33
11
((2244))
((2233))
4488
1122
66
6666
−−
22
22
113388
11
66
114455
65
(77)
(12)
26
26
52
1
−
1
78
(102)
(24)
13
(2)
(26)
(15)
−
−
−
183
(155)
(26)
2
147
121
268
76
103
179
4
3
7
99
210
309
46
41
(7)
80
−
3
3
372
481
(7)
846
166
8
174
31
19
50
−
−
−
22
21
43
94
(24)
10
80
−
−
−
313
24
10
347
158
9
167
28
14
42
−
1
1
12
11
23
126
(3)
(29)
94
−
−
−
324
32
(29)
327
Average loans and acceptances
Provisions for credit losses on impaired loans
excluding POCI loans as a % of average loans and
acceptances(4)
Provisions for credit losses
as a % of average loans and acceptances(4)
119944,,334400
172,323
159,275
148,765
139,603
00..0077 %%
0.11 %
0.23 %
0.21 %
0.23 %
00..0077 %%
− %
0.53 %
0.23 %
0.23 %
(1)
(2)
(3)
(4)
The Impaired loans – Stage 3 category presented in this table reflects provisions for credit losses on loans classified in Stage 3 of the expected credit loss model and excludes POCI loans.
Includes credit card receivables.
For fiscal years prior to 2022, certain amounts have been reclassified to reflect a transfer of the loan portfolio of borrowers in the “Oil and gas” and “Pipelines” sectors from the Personal and
Commercial segment to the Financial Markets segment.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
117
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 88 –– CChhaannggee iinn AAvveerraaggee VVoolluummeess(1)
Year ended October 31
(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(2)
LLiiaabbiilliittiieess aanndd eeqquuiittyy
Personal deposits
Deposit-taking institutions
Other deposits
Subordinated debt
Obligations other than deposits(3)
Average interest-bearing liabilities(1)
Other liabilities
Equity(2)
Net interest margin(4)
AAvveerraaggee
vvoolluummee
$$
22002222
RRaattee
%%
Average
volume
$
2021
Rate
%
Average
volume
$
2020
Rate
%
Average
volume
$
2019
Rate
%
Average
volume
$
2018
Rate
%
4422,,004422
111111,,886633
11..5555
11..7777
40,294
116,023
0.31
1.25
24,966
97,025
0.44
1.63
13,172
85,772
1.64
1.74
16,322
75,923
1.27
1.45
1166,,225555
7755,,771122
4422,,772233
22,,113333
5588,,994477
449933
335500,,116688
4433,,667799
339933,,884477
7722,,992277
55,,669955
118800,,330077
225588,,992299
996600
8811,,665599
334411,,554488
3300,,220099
2222,,009900
339933,,884477
22..0088
22..9900
33..8822
1122..8811
33..6633
3322..6688
22..7755
22..4433
11,559
68,297
38,434
1,864
51,229
686
328,386
35,120
363,506
0.90
2.93
3.16
13.47
3.06
22.64
2.13
1.93
16,408
59,801
36,273
1,995
47,272
1,073
284,813
33,274
318,087
1.39
3.13
3.68
14.62
4.13
16.45
2.66
2.38
22,472
54,493
35,816
2,221
42,922
1,386
258,254
27,908
286,162
1.60
3.30
4.25
14.06
5.34
13.37
3.17
2.86
20,090
51,509
35,041
2,165
38,204
1,486
240,740
25,200
265,940
1.09
3.07
3.98
13.69
5.06
13.12
2.88
2.61
68,334
6,522
161,373
236,229
758
80,808
317,795
28,195
17,516
363,506
00..6677
00..8888
11..2288
11..1100
33..7700
11..1133
11..2255
11..0099
11..3344
63,634
6,494
137,253
207,381
759
70,973
279,113
23,400
15,574
318,087
0.42
0.09
0.68
0.58
3.22
0.67
0.69
0.61
1.32
58,680
5,987
119,793
184,460
758
67,638
252,856
18,593
14,713
286,162
0.87
0.63
1.26
1.12
3.25
1.12
1.19
1.04
1.34
53,179
5,985
108,012
167,176
564
67,220
234,960
17,034
13,946
265,940
1.22
1.80
2.06
1.79
3.25
1.67
1.81
1.60
1.26
1.08
1.45
1.66
1.47
3.20
1.57
1.57
1.34
1.27
(1)
(2)
(3)
(4)
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
The amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements (for additional information, see Note 1 to the consolidated financial
statements), except for the fiscal 2019 and 2018 figures.
Average obligations other than deposits represent the average of the daily balances for the fiscal year of obligations related to securities sold short, obligations related to securities sold
under repurchase agreements and securities loaned, and liabilities related to transferred receivables.
Calculated by dividing net interest income by average assets.
118
National Bank of Canada
National Bank of Canada2022 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(2)
Mining
Utilities(2)
Non-real-estate construction(3)
Manufacturing(2)
Wholesale
Retail
Transportation
Communications
Financial services(2)
Real estate and real-estate-construction(4)
Professional services
Education and health care
Other services
Government
Other(2)
POCI loans
22002222
%%
$$
2021
%
$
2020
%
$
2019
%
$
2018
%
$
9955,,557755
33,,880011
1144,,889999
88,,110099
11,,443355
11,,004499
99,,668822
11,,993355
77,,337744
33,,224411
33,,449944
22,,220099
11,,883300
1100,,777777
2222,,338822
22,,333388
33,,441122
66,,224477
11,,666611
55,,779900
445599
220077,,669999
4466..00
11..88
77..22
33..99
00..77
00..55
44..66
00..99
33..66
11..66
11..77
11..11
00..99
55..22
1100..88
11..11
11..66
33..00
00..88
22..88
00..22
110000..00
89,035
3,589
12,949
7,357
1,807
529
7,687
1,541
5,720
2,598
2,978
1,811
1,441
8,870
18,195
1,872
4,073
5,875
1,159
4,137
464
183,687
48.5
2.0
7.0
4.0
1.0
0.3
4.2
0.8
3.1
1.4
1.6
1.0
0.8
4.8
9.9
1.0
2.2
3.2
0.6
2.3
0.3
100.0
81,543
3,599
11,569
6,696
2,506
756
6,640
1,079
5,803
2,206
2,955
1,528
1,184
7,476
14,171
1,490
3,800
5,296
1,160
3,586
855
165,898
49.2
2.2
7.0
4.0
1.5
0.5
4.0
0.7
3.5
1.3
1.8
0.9
0.7
4.4
8.6
0.9
2.3
3.2
0.7
2.1
0.5
100.0
74,448
4,099
11,606
6,308
2,742
758
4,713
1,168
6,549
2,221
3,289
1,682
1,601
6,115
11,635
1,845
3,520
4,937
1,071
2,456
1,166
153,929
48.4
2.7
7.5
4.1
1.8
0.5
3.0
0.8
4.3
1.4
2.1
1.1
1.0
3.9
7.6
1.2
2.3
3.2
0.7
1.6
0.8
100.0
70,591
4,211
12,246
5,759
2,506
1,032
4,033
1,006
5,535
2,163
3,069
1,452
1,597
5,482
11,671
1,582
3,284
4,715
1,445
1,785
1,576
146,740
48.1
2.9
8.3
3.9
1.7
0.7
2.7
0.7
3.8
1.5
2.1
1.0
1.1
3.7
8.0
1.1
2.2
3.2
1.0
1.2
1.1
100.0
(1)
(2)
(3)
(4)
Includes residential mortgage loans on one- to four-unit dwellings (Basel definition) and home equity lines of credit.
In fiscal 2022, the presentation was changed to better align borrower categories with their definitions. Comparative figures have been reclassified.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
119
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 1100 –– IImmppaaiirreedd LLooaannss
As at October 31
(millions of Canadian dollars)
Gross impaired loans
Personal Banking
Commercial Banking(1)
Wealth Management
Financial Markets(1)
USSF&I
Gross impaired loans excluding POCI loans(2)
Gross POCI loans
Net impaired loans(3)
Personal Banking
Commercial Banking(1)
Wealth Management
Financial Markets(1)
USSF&I
Net impaired loans excluding POCI loans(2)
Net POCI loans
Allowances for credit losses on impaired loans
excluding POCI loans(2)
Allowances for credit losses on POCI loans
Allowances for credit losses on impaired loans
Provisioning rate excluding POCI loans(2)
Gross impaired loans excluding POCI loans as a %
of total loans and acceptances(2)
Net impaired loans excluding POCI loans as a %
of total loans and acceptances(2)
22002222
2021
2020
2019
2018
117766
220066
2211
116677
224422
881122
445599
11,,227711
110044
8899
1155
9911
118800
447799
555511
11,,003300
333333
((9922))
224411
4411..00 %%
00..3399 %%
00..2233 %%
169
244
23
162
64
662
464
1,126
106
107
16
14
40
283
553
836
379
(89)
290
57.3 %
0.36 %
0.15 %
287
333
8
134
55
817
855
1,672
206
184
2
43
30
465
921
1,386
352
(66)
286
43.1 %
0.49 %
0.28 %
256
294
5
93
36
684
1,166
1,850
187
192
3
53
15
450
1,223
1,673
234
(57)
177
34.2 %
0.45 %
0.29 %
266
231
5
92
36
630
1,576
2,206
199
139
3
48
15
404
1,642
2,046
226
(66)
160
35.9 %
0.43 %
0.28 %
(1)
(2)
(3)
For fiscal years prior to 2022, certain amounts have been reclassified to reflect a transfer of the loan portfolio of borrowers in the “Oil and gas” and “Pipelines” sectors from the Personal and
Commercial segment to the Financial Markets segment.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
Net impaired loans are presented net of allowances for credit losses on Stage 3 loan amounts drawn and on POCI loans.
120
National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Additional Financial Information
TTaabbllee 1111 –– AAlllloowwaanncceess ffoorr CCrreeddiitt LLoosssseess
Year ended October 31
(millions of Canadian dollars)
Balance at beginning
Provisions for credit losses
Write-offs
Disposals
Recoveries
Exchange and other movements
Balance at end
Composition of allowances:
Allowances for credit losses on impaired loans excluding
POCI loans(1)
Allowances for credit losses on POCI loans
Allowances for credit losses on non-impaired loans
Allowances for credit losses on off-balance-sheet
commitments and other assets
22002222
2021
2020
11,,116699
114455
((223333))
−−
4400
1100
11,,113311
333333
((9922))
771144
117766
1,343
2
(192)
(14)
44
(14)
1,169
379
(89)
708
171
755
846
(294)
−
44
(8)
1,343
352
(66)
872
185
2019
714
347
(351)
(1)
52
(6)
755
234
(57)
501
77
(1)
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
TTaabbllee 1122 –– DDeeppoossiittss
As at October 31
(millions of Canadian dollars)
22002222
%%
$$
2021
%
$
2020
%
$
2019
%
$
$
Personal
Business and government
Deposit-taking institutions
Total
Canada
United States
Other countries
Total
Personal deposits as a %
of total assets
7788,,881111
118844,,223300
33,,335533
226666,,339944
223388,,223399
99,,114477
1199,,000088
226666,,339944
2299..66
70,076
6699..11 167,870
2,992
11..33
110000..00 240,938
8899..55 216,906
9,234
33..44
14,798
77..11
110000..00 240,938
1199..55
67,499
143,787
4,592
215,878
195,730
8,126
12,022
215,878
29.1
69.7
1.2
100.0
90.0
3.8
6.2
100.0
19.7
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
31.7
55,688
66.1 110,321
4,821
2.2
100.0 170,830
91.1 156,054
6,048
3.7
8,728
5.2
100.0 170,830
21.3
2018
735
327
(367)
(24)
45
(2)
714
226
(66)
498
56
2018
%
32.6
64.6
2.8
100.0
91.4
3.5
5.1
100.0
21.2
121
National Bank of Canada2022 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 vvoolluummeess
Average volumes represent the average of the daily balances for the period of
the consolidated balance sheet items.
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
Allowances for credit losses represent management’s unbiased estimate of
expected credit losses as at the balance sheet date. These allowances are
primarily related to loans and off-balance-sheet items such as loan
commitments and financial guarantees.
AAsssseettss uunnddeerr aaddmmiinniissttrraattiioonn
Assets in respect of which a financial institution provides administrative
services on behalf of the clients who own the assets. Such services include
custodial services, collection of investment income, settlement of purchase
and sale transactions, and record-keeping. Assets under administration 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.
AAvvaaiillaabbllee TTLLAACC
Available TLAC includes total capital as well as certain senior unsecured debt
subject to the federal government’s bail-in regulations that satisfy all of the
eligibility criteria in OSFI’s Total Loss Absorbing Capacity (TLAC) Guideline.
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 customers’ liability under acceptances and other assets. The
average is calculated based on the daily balances for the period.
AAvveerraaggee iinntteerreesstt--bbeeaarriinngg aasssseettss,, nnoonn--ttrraaddiinngg
Average interest-bearing assets, non-trading, include interest-bearing
deposits with financial institutions and certain cash items, securities
purchased under reverse repurchase agreements and securities borrowed,
and loans, while excluding other assets and assets related to trading
activities. The average is calculated based on the daily balances for the
period.
BBaassiicc eeaarrnniinnggss ppeerr sshhaarree
Basic earnings per share is calculated by dividing net income attributable to
common shareholders by the weighted average basic number of common
shares outstanding.
BBaassiiss ppooiinntt ((bbppss))
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
Common Equity CET1 capital consists of common shareholders’ equity less
goodwill, intangible assets, and other capital deductions. The CET1 capital
ratio is calculated by dividing total CET1 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.
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.
DDiilluutteedd 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.
DDiivviiddeenndd ppaayyoouutt rraattiioo
The dividend payout ratio represents the dividends of common shares (per
share amount) expressed as a percentage of basic earnings per share.
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National Bank of Canada
National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Glossary
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.
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.
EEffffiicciieennccyy rraattiioo
The efficiency ratio represents non-interest expenses expressed as a
percentage of total revenues. It measures the efficiency of the Bank’s
operations.
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.
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).
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.
GGrroossss iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss
Gross impaired loans excluding POCI loans are all loans classified in Stage 3
of the expected credit loss model excluding POCI loans.
GGrroossss iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss aass aa ppeerrcceennttaaggee ooff ttoottaall llooaannss
aanndd aacccceeppttaanncceess
This measure represents gross impaired loans excluding POCI 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.
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 financial instruments exposures and securities financing
transaction exposures) and off-balance-sheet items.
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.
NNeett iimmppaaiirreedd llooaannss
Net impaired loans are gross impaired loans 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.
NNeett iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss
Net impaired loans excluding POCI loans are gross impaired loans excluding
POCI loans presented net of allowances for credit losses on amounts drawn
on Stage 3 loans granted by the Bank.
NNeett iinntteerreesstt iinnccoommee ffrroomm ttrraaddiinngg aaccttiivviittiieess
Net interest income from trading activities 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.
NNeett iinntteerreesstt iinnccoommee,, nnoonn--ttrraaddiinngg
Net interest income, non-trading, comprises revenues related to financial
assets and liabilities associated with non-trading activities, net of interest
expenses and interest income related to the financing of these financial
assets and liabilities.
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.
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National Bank of Canada2022 Annual Report
Management’s Discussion and Analysis
Glossary
NNoonn--iinntteerreesstt iinnccoommee rreellaatteedd ttoo ttrraaddiinngg aaccttiivviittiieess
Non-interest income related to trading activities 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.
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
Operating leverage is the difference between the growth rate for total
revenues and the growth rate for non-interest expenses.
PPrroovviissiioonniinngg rraattee
This measure represents the allowances for credit losses on impaired loans
expressed as a percentage of gross impaired loans.
PPrroovviissiioonniinngg rraattee eexxcclluuddiinngg PPOOCCII llooaannss
This measure represents the allowances for credit losses on impaired loans
excluding POCI loans expressed as a percentage of gross impaired loans
excluding POCI loans.
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.
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess aass aa ppeerrcceennttaaggee ooff aavveerraaggee llooaannss aanndd
aacccceeppttaanncceess
This measure represents the provisions for credit losses expressed as a
percentage of average loans and acceptances.
PPrroovviissiioonnss ffoorr ccrreeddiitt lloosssseess oonn iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss aass aa
ppeerrcceennttaaggee ooff aavveerraaggee llooaannss aanndd aacccceeppttaanncceess oorr pprroovviissiioonnss ffoorr ccrreeddiitt lloosssseess
oonn iimmppaaiirreedd llooaannss eexxcclluuddiinngg PPOOCCII llooaannss rraattiioo
This measure represents the provisions for credit losses on impaired loans
excluding POCI loans expressed as a percentage of average loans and
acceptances.
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.
RReettuurrnn oonn ccoommmmoonn sshhaarreehhoollddeerrss’’ eeqquuiittyy ((RROOEE))
ROE represents net income attributable to common shareholders expressed
as a percentage of average equity attributable to common shareholders. It is
a general measure of the Bank’s efficiency in using equity.
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 Ratings-Based (AIRB) Approach, risk-weighted assets are derived
from the Bank's internal models, which represent the Bank's own
assessment of the risks it incurs. Off-balance-sheet instruments are
converted to balance sheet (or credit) equivalents by adjusting the notional
values before applying the appropriate risk-weighting factors.
SSeeccuurriittiieess ppuurrcchhaasseedd uunnddeerr rreevveerrssee rreeppuurrcchhaassee aaggrreeeemmeennttss
Securities purchased by the Bank from a client pursuant to an agreement
under which the securities will be resold to the same client on a specified
date and at a specified price. Such an agreement is a form of short-term
collateralized lending.
SSeeccuurriittiieess ssoolldd uunnddeerr rreeppuurrcchhaassee aaggrreeeemmeennttss
Financial obligations related to securities sold pursuant to an agreement
under which the securities will be repurchased on a specified date and at a
specified price. Such an agreement is a form of short-term funding.
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
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.
124
National Bank of Canada
National Bank of Canada2022 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.
TTLLAACC lleevveerraaggee rraattiioo
The TLAC leverage ratio is an independent risk measure that is calculated by
dividing available TLAC by total exposure, as set out in OSFI’s Total Loss
Absorbing Capacity (TLAC) Guideline.
TTLLAACC rraattiioo
The TLAC ratio is a measure used to assess whether a non-viable Domestic
Systemically Important Bank (D-SIB) has sufficient loss-absorbing capacity to
support its recapitalization. It is calculated by dividing available TLAC by risk
weighted assets, as set out in OSFI’s Total Loss Absorbing Capacity (TLAC)
Guideline.
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 allowances for credit
losses. The 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
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.
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.
125
National Bank of Canada2022 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 control 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 control over financial reporting and the disclosure
controls and procedures were effective as at October 31, 2022 and that they provide reasonable assurance that the Bank’s financial information is reliable and
that its 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
MMaarriiee CChhaannttaall GGiinnggrraass
Chief Financial Officer and Executive Vice-President, Finance
Montreal, Canada, November 29, 2022
128
National Bank of Canada
National Bank of Canada2022 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, 2022 and 2021, 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, 2022 and
2021, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (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, 2022. 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 a possible recession 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 them against independently developed forecasts
and publicly available industry data, including the impact of a possible recession;
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.
129
National Bank of Canada2022 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 when 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 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
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National Bank of Canada2022 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 29, 2022
Montreal, Quebec
1 CPA auditor, public accountancy permit No. A121501
131
National Bank of Canada2022 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
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss
The accompanying notes are an integral part of these audited consolidated financial statements.
Notes 3, 4 and 6
Note 7
Note 16
Note 9
Note 10
Note 11
Notes 1 and 11
Notes 1 and 12
22002222
2021(1)
3311,,887700
33,879
8877,,337755
88,,882288
1133,,551166
110099,,771199
84,811
9,583
11,910
106,304
2266,,448866
7,516
8800,,112299
4455,,332233
22,,338899
7733,,331177
220011,,115588
66,,554411
((995555))
220066,,774444
1188,,554477
114400
11,,339977
11,,551199
11,,336600
55,,995588
2288,,992211
440033,,774400
72,542
41,053
2,150
61,106
176,851
6,836
(998)
182,689
16,484
225
1,216
1,504
1,274
4,530
25,233
355,621
Notes 4 and 13
226666,,339944
240,938
Note 8
Note 16
Notes 4 and 8
Note 14
Note 15
Notes 18 and 22
Note 1
Note 19
66,,554411
2211,,881177
3333,,447733
1199,,663322
2266,,227777
66,,336611
111144,,110011
11,,449999
33,,115500
33,,119966
5566
1155,,114400
220022
2211,,774444
22
2211,,774466
440033,,774400
6,836
20,266
17,293
19,367
25,170
6,301
95,233
768
2,650
3,160
47
12,854
(32)
18,679
3
18,682
355,621
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
LLaauurreenntt FFeerrrreeiirraa
President and Chief Executive Officer
KKaarreenn KKiinnsslleeyy
Director
132
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
(millions of Canadian dollars)
CCoonnssoolliiddaatteedd SSttaatteemmeennttss ooff IInnccoommee
Year ended October 31
22002222
2021(1)
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(2)
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.
77,,113366
11,,554488
116633
226633
443355
99,,554455
33,,229911
447722
2288
448833
44,,227744
55,,227711
332244
220044
558877
999977
449900
118866
229988
554433
111133
115588
221111
2288
224422
44,,338811
99,,665522
33,,228844
331122
991155
5577
224499
441133
55,,223300
44,,442222
114455
44,,227777
889944
33,,338833
110077
33,,227777
33,,338844
((11))
33,,338833
99..7722
99..6611
33..5588
Note 21
Note 9
Notes 1, 10 and 11
Note 7
Notes 1 and 24
Note 1
Note 1
Notes 1 and 25
Note 18
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
(2) Net interest income includes dividend income. For additional information, see Note 1 to these audited consolidated financial statements.
5,460
1,092
181
178
76
6,987
1,635
372
17
180
2,204
4,783
415
238
563
900
506
148
274
268
151
131
202
23
325
4,144
8,927
3,027
299
871
53
246
407
4,903
4,024
2
4,022
882
3,140
123
3,017
3,140
−
3,140
8.95
8.85
2.84
133
National Bank of Canada2022 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)
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,, nneett ooff iinnccoommee ttaaxxeess
CCoommpprreehheennssiivvee iinnccoommee
CCoommpprreehheennssiivvee iinnccoommee aattttrriibbuuttaabbllee ttoo
Bank shareholders and holders of other equity instruments
Non-controlling interests
22002222
33,,338833
2021(1)
3,140
447711
−−
((113388))
333333
((119977))
9911
11
((110055))
((2255))
3333
88
((22))
((112266))
((2277))
660011
444488
668822
44,,006655
44,,006666
((11))
44,,006655
(314)
16
95
(203)
6
(34)
(2)
(30)
280
26
306
−
475
64
(12)
527
600
3,740
3,753
(13)
3,740
The accompanying notes are an integral part of these audited consolidated financial statements.
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
134
National Bank of Canada
National Bank of Canada2022 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
22002222
2021
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)
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.
((1133))
−−
((2288))
((4411))
((7711))
3322
−−
((3399))
((99))
1122
33
−−
((4455))
((1100))
221166
116611
8844
10
2
24
36
2
(12)
−
(10)
100
9
109
−
170
24
(5)
189
324
135
National Bank of Canada2022 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
Other
CCoonnttrriibbuutteedd ssuurrpplluuss aatt eenndd
RReettaaiinneedd eeaarrnniinnggss aatt bbeeggiinnnniinngg
Impact of an accounting policy change as at November 1, 2020
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 1
Note 1
Note 18
Note 18
Note 18
Note 14
22002222
22,,665500
550000
−−
33,,115500
33,,116600
6611
((2244))
((11))
33,,119966
4477
1177
((77))
((11))
5566
1122,,885544
−−
33,,338844
((111199))
((11,,220066))
((222211))
((44))
((112266))
((2277))
660011
((88))
1122
1155,,114400
((3322))
333333
((110055))
88
((22))
220022
2021(1)
2,950
500
(800)
2,650
3,057
104
−
(1)
3,160
47
11
(11)
−
47
10,444
(137)
3,140
(131)
(958)
−
(4)
475
64
(12)
(25)
(2)
12,854
(118)
(190)
(30)
306
−
(32)
EEqquuiittyy aattttrriibbuuttaabbllee ttoo tthhee BBaannkk’’ss sshhaarreehhoollddeerrss aanndd hhoollddeerrss ooff ootthheerr eeqquuiittyy iinnssttrruummeennttss
2211,,774444
18,679
Note 19
Note 31
NNoonn--ccoonnttrroolllliinngg iinntteerreessttss aatt bbeeggiinnnniinngg
Non-controlling interest from the acquisition of Flinks Technology Inc.
Purchase of the non-controlling interest of the Credigy Ltd. subsidiary
Net income attributable to non-controlling interests
Other comprehensive income attributable 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.
33
−−
−−
((11))
−−
22
3
3
10
−
(13)
3
2211,,774466
18,682
22002222
220044
((3344))
3311
11
220022
2021
(129)
71
23
3
(32)
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
136
National Bank of Canada
National Bank of Canada2022 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
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
Issuance of subordinated debt
Purchase of the non-controlling interest of the Credigy Ltd. subsidiary
Investment in the Flinks Technology Inc. subsidiary
Issuance expenses for shares and other equity instruments
Repayments of lease liabilities
Dividends paid on shares and distributions on other equity instruments
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(2)
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.
22002222
2021(1)
Note 1
33,,338833
3,140
Note 1
Notes 10 and 11
Note 31
Note 6
Note 1
Note 31
Note 31
Note 1
114455
220022
227799
88
−−
−−
111100
((111133))
((2288))
1177
((22,,556644))
((1188,,997700))
((2233,,335544))
2255,,445566
11,,555511
1166,,118800
((11,,779988))
((3377))
115500
((443377))
((22,,110022))
((11,,992222))
550000
−−
5533
((224455))
773399
−−
−−
((44))
((9999))
((11,,332255))
((338811))
−−
220022
((99,,330077))
22,,005500
66,,226699
((229966))
((337744))
((11,,445566))
11,,775500
((22,,000099))
3333,,887799
3311,,887700
33,,776633
99,,118844
11,,111188
2
195
261
16
(33)
30
106
(151)
(23)
11
(6,485)
6,996
(15,661)
25,060
3,898
(16,566)
3,382
49
(186)
272
1,725
6,038
500
(800)
92
−
−
(300)
(30)
(4)
(96)
(1,101)
(1,739)
(73)
225
(7,348)
2,500
6,655
(217)
(275)
1,467
(1,029)
4,737
29,142
33,879
2,261
6,858
542
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
This item is the equivalent of Consolidated Balance Sheet item Cash and deposits with financial institutions. It includes an amount of $7.7 billion as at October 31, 2022 ($6.8 billion as at
October 31, 2021) for which there are restrictions and of which $5.3 billion ($4.9 billion as at October 31, 2021) represent the balances that the Bank must maintain with central banks,
other regulatory agencies, and certain counterparties.
137
National Bank of Canada2022 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
115555
115566
116677
116688
116699
117711
118833
118844
118855
118866
118888
118888
118899
118899
119900
119933
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 Benefit Plans
Income Taxes
Earnings Per Share
Guarantees, Commitments and Contingent Liabilities
Structured Entities
Related Party Disclosures
Management of the Risks Associated With Financial Instruments
Segment Disclosures
Acquisition
Event After the Consolidated Balance Sheet Date
119999
220022
220033
220044
220055
220088
221122
221155
221155
221188
222211
222222
222277
222299
222299
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). The Bank 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: 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 29, 2022, 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, 2022.
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 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 described in the Summary of
Significant Accounting Policies section have been applied consistently to all periods presented, except for the change described hereafter in the Accounting
Policy Changes section, which were applied retrospectively during the year ended October 31, 2022 as a result of a final agenda decision made by the
International Financial Reporting Interpretations Committee (IFRIC) regarding the costs of configuring or customizing a supplier’s software application as part
of a cloud computing arrangement. To reflect this change in accounting policy, figures from the year ended October 31, 2021 have been adjusted.
Unless otherwise indicated, all amounts are expressed in Canadian dollars, which is the Bank’s functional and presentation currency.
IInntteerreesstt RRaattee BBeenncchhmmaarrkk RReeffoorrmm
The reform of interbank offered rates (IBORs) and other interest rate benchmarks is a global initiative being coordinated and led by central banks and
governments around the world, including those in Canada. This reform has been unfolding for several years, with the IASB monitoring developments. To
minimize the financial statement impacts arising from replacing current interest rate benchmarks with alternative benchmarks, the IASB amended certain IFRS
standards and allowed for some temporary exemptions, notably in the area of hedge accounting.
During fiscal 2022, the Bank transitioned its LIBOR-related (London Interbank Offered Rates) contracts that involve pound sterling (GBP), the euro (EUR), the
Japanese yen (JPY), and the Swiss franc (CHF), for which the cessation or loss of representativeness was December 31, 2021. As for USD LIBOR, for which the
cessation or loss of representativeness is planned for June 30, 2023, the Bank included rate replacement clauses in contracts negotiated during 2021 and,
since January 1, 2022, the Bank has no longer been using USD LIBOR in new contracts except in circumstances compliant with regulatory guidance. On
December 16, 2021, the Bank of Canada announced that a white paper published by the Canadian Alternative Reference Rate (CARR) Working Group was
recommending that CDOR (Canadian Dollar Offered Rate) be declared unrepresentative by its administrator, namely, Refinitiv Benchmark Services (UK) Limited
(Refinitiv) and that CDOR cease to exist as of June 30, 2024 (including a recommendation to cease using CDOR on the derivative financial instrument market as
of June 30, 2023).
138
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
On January 31, 2022, Refinitiv launched a public consultation on the future of CDOR. The consultation ended on March 2, 2022, after which Refinitiv published
an update to the consultation on April 14, 2022. On May 16, 2022, Refinitiv published the consultation conclusions and announced that the publication of
CDOR would cease as of June 28, 2024. Following this announcement, the CARR Working Group welcomed Refinitiv’s decision and, at the same time, OSFI
published its prudential expectations regarding the cessation of CDOR. First, OSFI expects all new derivative contracts and securities to transition to alternative
reference rates by June 30, 2023, with no new CDOR exposure being recorded after that date, with limited exceptions for risk mitigation requirements.
Thereafter, by June 28, 2024, OSFI expects federally regulated financial institutions to have transitioned all loan agreements referencing CDOR to alternative
reference rates.
To prepare for the interest rate benchmark reform, the Bank developed an enterprise-wide project, put together a dedicated team of experts, established a
formal governance structure, and prepared a training plan, and several committees were created to ensure the success of the project. The project team is made
up of qualified resources from various fields of expertise to ensure a comprehensive 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 various working groups and participate in meetings with OSFI. The project team regularly reports on the project’s progress to the project steering
committee and the Financial Markets Risk Committee. As at October 31, 2022, the project was progressing according to schedule. 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 of the risks to ensure a smooth transition throughout 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, 2022 that have not yet transitioned to alternative benchmark rates.
Non-derivative financial assets(1)
Non-derivative financial liabilities(2)
Notional amount of derivative financial instruments
AAss aatt OOccttoobbeerr 3311,, 22002222
UUSSDD LLIIBBOORR
CCDDOORR
MMaattuurriinngg aafftteerr
JJuunnee 2288,, 22002244
MMaattuurriinngg aafftteerr
JJuunnee 3300,, 22002233
1133,,998899
1111,,110077
337799,,553399
55,,556655
3366
117755,,448899
(1)
(2)
Non-derivative financial assets include the carrying value of securities as well as the outstanding balances on loans and the customers’ liability under acceptances.
Non-derivative financial liabilities include the nominal amounts of deposits and subordinated debt as well as the carrying value of acceptances.
AAccccoouunnttiinngg PPoolliiccyy CChhaannggeess
CClloouudd CCoommppuuttiinngg AArrrraannggeemmeennttss –– FFiinnaall AAggeennddaa DDeecciissiioonn bbyy IIFFRRIICC
In April 2021, IFRIC issued a final agenda decision on accounting for the costs of configuring or customizing a supplier’s software as part of a cloud computing
or SaaS (Software as a Service) arrangement. The main conclusion was that, if the incurred configuration or customization costs do not give rise to an
intangible asset that is separate from the software or if the services received are distinct from the software, those costs are expensed as incurred. IFRIC
decided that the relevant accounting standards (IAS 38 – Intangible Assets and IFRS 15 – Revenue From Contracts With Customers) contain sufficient guidance
and that the conclusions, as indicated in the final agenda decision, are part of the interpretation of IFRS. As such, any change arising from these
interpretations must be accounted for as a retrospectively applied accounting policy change in accordance with IAS 8 – Accounting Policies, Changes in
Accounting Estimates and Errors.
During fiscal 2022, the Bank completed an assessment of the impacts of this change in accounting policy. The change was applied retrospectively and had the
following impacts on the consolidated financial statements:
As at November 1, 2020: A $186 million decrease in Intangible assets, a $49 million increase in Other assets – Deferred tax assets, and a $137 million
decrease in Retained earnings;
As at October 31, 2021: A $50 million decrease in Intangible assets and a $13 million increase in Other assets – Deferred tax assets;
For the year ended October 31, 2021: A $50 million increase in Non-interest expenses – Technology, a $13 million decrease in Income taxes, a $37 million
decrease in Net income and Net income attributable to common shareholders, and a $0.11 decrease in Earnings per share – Basic and diluted.
For the year ended October 31, 2022, the impacts of this accounting policy change on the Consolidated Statement of Income consisted of a $10 million
increase in Non-interest expenses – Technology and a $3 million decrease in Income taxes.
139
National Bank of Canada2022 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.)
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.
The effects of the COVID-19 pandemic, the geopolitical context, disrupted supply chains, and rising inflation are persisting and creating uncertainty. Therefore,
developing reliable estimates and applying judgment continue to be substantially complex. The uncertainty surrounding certain key inputs used in measuring
expected credit losses 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.
140
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 is 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 related to foreign operations, including 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 to the Bank at the date of determination.
141
National Bank of Canada2022 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.)
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 to interest income over the expected life of the instrument using the effective interest rate method.
142
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 to interest income over the expected life of the instrument 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 income 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.
143
National Bank of Canada2022 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.)
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 allowances 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 terminated before maturity.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
In certain cases, measurement adjustments are recognized to address factors that market participants would use at the measurement date to determine fair
value but that are not included in the measurement techniques due to system limitations or uncertainty surrounding the measure. These factors include, but
are not limited to, the unobservable nature of the 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 that is 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 future 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 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.
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 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.
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 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 subject to
management review. The Bank applies experienced credit judgment to adjust the modelled ECL results when it becomes evident that known or expected risk
factors and information were not considered in the credit risk rating and modelling process.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
ECLs for all financial instruments are recognized in Provisions for credit losses in the Consolidated Statement of Income. In the case of debt instruments
measured at fair value through other comprehensive income, ECLs are recognized in Provisions for credit losses in the Consolidated Statement of Income, and
a corresponding amount is recognized in Other comprehensive income with no reduction in the carrying amount of the asset on the Consolidated Balance
Sheet. As for debt instruments measured at amortized cost, they are presented net of the related 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.
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., the extent to which it is exposed
to changes in the value of the transferred asset.
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
and cash equivalents consist of cash, bank notes, deposits with the Bank of Canada and other financial institutions, including net receivables related to
cheques, and other items in the clearing process.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, whereas 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, depending on the circumstance.
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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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 be 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, whereas the ineffective portion is recognized 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, whereas the ineffective portion is recognized 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.
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Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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. 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
3-7 years
8 years
(1)
(1) The depreciation period is the lesser of the estimated useful life or the lease term.
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 contains 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies (cont.)
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 that is not part of a cloud computing arrangement 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.
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Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Goodwill is always tested for impairment at the level of a CGU or group of CGUs. For impairment testing purposes, from the acquisition date, goodwill resulting
from a business combination must be allocated to the CGU or group of CGUs expected to benefit from the synergies of the business combination. Each CGU or
group of CGUs to which goodwill is allocated must represent the lowest level for which the goodwill is monitored internally at the Bank and must not be larger
than an operating segment. The allocation of goodwill to a CGU or group of CGUs involves management’s judgment. If an impairment loss is to be recognized,
the Bank does so by first reducing the carrying amount of goodwill allocated to the CGU or group of CGUs and then reducing the carrying amounts of the other
assets of the CGU or group of CGUs in proportion to the carrying amount of each asset in the CGU or group of CGUs.
If the recoverable amount of an asset or a CGU is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment
loss is recognized in Non-interest expenses in the Consolidated Statement of Income. An impairment loss recognized in prior periods for an asset other than
goodwill must be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment
was recognized. If this is the case, the carrying amount of the asset is increased, given that the impairment loss was reversed, but shall not exceed the carrying
amount that would have been determined, net of amortization, had no impairment loss been recognized for this asset in previous years.
PPrroovviissiioonnss
Provisions are liabilities of uncertain timing and amount. A provision is recognized when the Bank has a present obligation (legal or constructive) arising from a
past event, when it is probable that an outflow of economic resources will be required to settle the obligation and when the amount of the obligation can be
reliably estimated. Provisions are based on the Bank’s best estimates of the economic resources required to settle the present obligation, given all relevant
risks and uncertainties, and, when it is significant, the effect of the time value of money. Provisions are reviewed at the end of each reporting period.
Provisions are presented in Other liabilities on the Consolidated Balance Sheet.
IInntteerreesstt IInnccoommee aanndd EExxppeennssee
Interest income and expense, except for the interest income on securities classified as at fair value through profit or loss, are recognized in Net interest income
and calculated using the effective interest rate method.
The effective interest rate is the rate that exactly discounts estimated future cash inflows and outflows through the expected life of a financial asset or financial
liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability. When calculating the effective interest rate, the Bank
estimates expected cash flows by considering all the contractual terms of the financial instrument but does not consider expected credit losses. The
calculation includes all fees and points paid or received between the parties to the contract that are an integral part of the effective interest rate, transaction
costs, and all other premiums or discounts. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset
except for purchased or originated credit-impaired financial assets and financial assets that were not impaired upon their purchase or origination but became
impaired thereafter. For purchased or originated credit-impaired financial assets, the Bank applies the credit-adjusted effective interest rate to the amortized
cost of the financial asset from initial recognition. The credit-adjusted effective interest rate reflects expected credit losses. As for loans that have
subsequently become credit-impaired, interest income is calculated by applying the effective interest rate to the net carrying amount (net of allowances for
credit losses) rather than to the carrying amount.
Loan origination fees, including commitment, restructuring, and renegotiation fees, are considered an integral part of the yield earned on the loan. They are
deferred and amortized using the effective interest rate method, and the amortization is recognized in Interest income over the term of the loan. Direct costs for
originating a loan are netted against the loan origination fees. If it is likely that a commitment will result in a loan, commitment fees receive the same
accounting treatment, i.e., they are deferred and amortized using the effective interest rate method and the amortization is recognized in Interest income over
the term of the loan. Otherwise, they are recorded in Non-interest income over the term of the commitment.
Loan syndication fees are recorded in Non-interest income unless the yield on the loan retained by the Bank is less than that of other comparable lenders
involved in the financing. In such cases, an appropriate portion of the fees is deferred and amortized using the effective interest rate method, and the
amortization is recognized in Interest income over the term of the loan. Certain mortgage loan prepayment fees are recognized in Interest income in the
Consolidated Statement of Income when earned.
DDiivviiddeenndd IInnccoommee
Dividends from an equity instrument are recognized in Net interest income in the Consolidated Statement of Income when the Bank’s right to receive payment
is established.
151
National Bank of Canada2022 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.)
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 include commissions earned by providing services for loan commitments, financial guarantee contracts, bankers’
acceptances, and letters of credit and guarantee, and they 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 values of the reinsurance asset and insurance liability are recognized on a net basis in
Non-interest income in the Consolidated Statement of Income.
152
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 involves 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 an 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.
153
National Bank of Canada2022 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.)
EEmmppllooyyeeee BBeenneeffiittss –– PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiitt PPllaannss
The Bank offers pension plans that have a defined benefit component and a defined contribution component. The Bank also offers other post-employment
benefit plans to eligible employees. The other post-employment benefit plans include post-employment medical, dental, and life insurance coverage. The
defined benefit component of the pension plans is funded, whereas the defined contribution component of the pension plans and of the other post-
employment benefit plans are not funded.
Defined Benefit Component of the Pension Plans and Other Post-Employment Benefit Plans
Plan expenses and obligations are actuarially determined based on 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.
The net asset or net liability related to these plans are calculated separately for each plan as the difference between the present value of the future benefits
earned by employees for 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 these 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 of defined benefit 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 plan asset or liability amount.
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.
Defined Contribution Component of the Pension Plans
The expense for these plans is equivalent to the Bank’s contributions during the period and is recognized in Compensation and employee benefits in the
Consolidated Statement of Income.
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.
154
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 changes 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 changes 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 share 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 standard has
been issued but is not yet in effect. The Bank is currently assessing the impacts of applying this standard 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. IFRS 17 will affect how an entity accounts for its insurance contracts and
how it reports financial performance in the consolidated income statement, in particular the timing of revenue recognition for 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. If full retrospective application to a group of insurance contracts is impracticable, the modified retrospective
approach or the fair value approach may be used.
To prepare for the application of IFRS 17, the Bank developed a project, set up a specialized team, and established a formal governance structure. It also
started executing a detailed plan for the project that defines key activities and the timing of those activities. The project is progressing according to schedule.
The Bank is continuing to assess all of the impacts of applying IFRS 17 on its consolidated financial statements as well as on the financial statements of its
insurance subsidiary.
155
National Bank of Canada2022 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,, 22002222
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.
−−
8866,,333388
−−
11,,003377
−−
88,,227722
−−
555566
3311,,887700
1133,,551166
3311,,887700
3311,,887700
3311,,887700
1133,,000077
110099,,771199
110099,,221100
−−
1100,,551166
1188,,554477
8877
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
2266,,448866
119966,,222288
−−
33,,222211
2266,,448866
2266,,448866
2266,,448866
119900,,995555
220066,,774444
220011,,447711
−−
33,,222211
1188,,554477
33,,330088
1188,,554477
33,,330088
−−
1155,,335555
225511,,003399
224499,,993377
226666,,339944
226655,,229922
−−
2211,,881177
−−
1199,,663322
−−
−−
−−
−−
−−
−−
−−
1111,,335522
−−
−−
66,,554411
−−
66,,554411
−−
66,,554411
2211,,881177
66,,554411
2211,,881177
3333,,447733
−−
1144,,992255
22,,663322
11,,449999
3333,,447733
−−
1144,,113377
22,,662277
3333,,447733
1199,,663322
2266,,227777
22,,663322
3333,,447733
1199,,663322
2255,,448899
22,,662277
11,,447788
11,,449999
11,,447788
156
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Financial
instruments
classified as
at fair value
through profit
or loss
Financial
instruments
designated
at fair value
through profit
or loss
Debt securities
classified as at
fair value
through other
comprehensive
income
Carrying value
and fair value
Equity securities
designated at
fair value
through other
comprehensive
income
As at October 31, 2021
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)
−
−
83,464
1,347
−
8,966
−
617
33,879
11,910
33,879
33,879
33,879
11,897 106,304
106,291
−
8,539
16,484
−
−
−
−
−
−
−
−
−
−
−
−
−
7,516
7,516
7,516
7,516
174,150
173,769 182,689
182,308
−
2,244
−
2,244
16,484
2,244
16,484
2,244
−
14,018
226,920
227,054 240,938
241,072
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.
EEssttaabblliisshhiinngg FFaaiirr VVaalluuee
−
20,266
−
19,367
−
−
−
−
−
−
−
11,398
−
−
6,836
−
6,836
−
6,836
20,266
6,836
20,266
17,293
−
13,772
2,101
768
17,293
−
13,724
2,101
17,293
19,367
25,170
2,101
17,293
19,367
25,122
2,101
773
768
773
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, 2022 and may change in the future. Furthermore, there may be measurement uncertainty resulting
from the choice of valuation model used.
157
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
VVaalluuaattiioonn GGoovveerrnnaannccee
Fair value is established in accordance with a rigorous control framework. The Bank has policies and procedures that govern the process for determining fair
value. These policies are documented and periodically reviewed by the Risk Management Group. All valuation models are validated, and controls have been
implemented to ensure that they are applied.
The fair value of existing or new products is determined and validated by functions independent of the risk-taking team. Complex fair value matters are
reviewed by valuation committees made up of experts from various specialized functions.
For financial instruments classified in Level 3 of the fair value hierarchy, the Bank has documented the hierarchy classification policies, and controls are in
place to ensure that fair value is measured appropriately, reliably, and consistently. Valuation methods and the underlying assumptions are regularly
reviewed.
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 are substantially the same. 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, a valuation technique 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, a valuation technique 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 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 limited partnerships.
Fair value can also be determined using internal valuation techniques adjusted to reflect financial instrument risk factors and economic conditions.
158
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Consolidated Balance Sheet. For exchange-traded derivative financial instruments, fair value
is based on quoted prices 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 using relevant factors such as current and
potential future market values, master netting agreements, collateral agreements, and expected recovery rates. The default probabilities are inferred using
credit default swap (CDS) spreads. When such information is 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.
159
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
Other Liabilities and Subordinated Debt
The fair value of these financial liabilities is based on quoted market prices in an active market. If there is no active market, fair value is determined by
discounting contractual cash flows using the current market interest rates offered for similar financial instruments that have the same term to maturity.
HHiieerraarrcchhyy ooff FFaaiirr VVaalluuee MMeeaassuurreemmeennttss
DDeetteerrmmiinniinngg tthhee LLeevveellss ooff tthhee FFaaiirr VVaalluuee MMeeaassuurreemmeenntt HHiieerraarrcchhyy
IFRS establishes a fair value 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;
certain other assets for which 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 2022, $41 million in securities classified as at fair value through profit or loss and $3 million in obligations related to securities sold short were
transferred from Level 2 to Level 1 as a result of changing market conditions ($31 million in securities classified as at fair value through profit or loss and
$2 million in obligations related to securities sold short in fiscal 2021). In addition, during fiscal 2022, $26 million in securities classified as at fair value
through profit or loss and $2 million in obligations related to securities sold short were transferred from Level 1 to Level 2 as a result of changing market
conditions (for fiscal 2021, $30 million in securities classified as at fair value through profit or loss).
During fiscal years 2022 and 2021, financial instruments were transferred to (or from) Level 3 due to changes in the availability of observable market inputs as
a result of changing market conditions.
160
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall IInnssttrruummeennttss RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
The following tables show financial instruments recorded at fair value on the Consolidated Balance Sheet according to the fair value hierarchy.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
LLooaannss
OOtthheerr
Derivative financial instruments
Other assets – Other items
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,, 22002222
TToottaall ffiinnaanncciiaall
aasssseettss//lliiaabbiilliittiieess
aatt ffaaiirr vvaalluuee
LLeevveell 33
44,,773366
−−
1100,,663399
−−
4455,,880055
6611,,118800
2211
−−
11,,668877
−−
−−
11,,770088
−−
334422
−−
6633,,223300
88,,118866
99,,226600
44,,444455
33,,332244
550044
2255,,771199
33,,119911
11,,997700
119911
11,,221122
223366
66,,880000
1100,,227722
1188,,220044
−−
6600,,999955
−−
1155,,442244
1155,,221133
662255
−−
1155,,883388
66,,660044
1188,,998899
1111,,335522
5522,,336699
−−
−−
−−
6600
441166
447766
−−
−−
−−
−−
332200
332200
224444
11
8877
11,,112288
88
−−
1188
−−
2266
1122,,992222
99,,226600
1155,,008844
33,,338844
4466,,772255
8877,,337755
33,,221122
11,,997700
11,,887788
11,,221122
555566
88,,882288
1100,,551166
1188,,554477
8877
112255,,335533
1155,,443322
2211,,881177
1199,,663322
1111,,335522
6688,,223333
161
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
AAtt ffaaiirr vvaalluuee tthhrroouugghh pprrooffiitt oorr lloossss
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
AAtt ffaaiirr vvaalluuee tthhrroouugghh ootthheerr ccoommpprreehheennssiivvee iinnccoommee
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
Equity securities
LLooaannss
OOtthheerr
Derivative financial instruments
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Obligations related to securities sold short
Derivative financial instruments
Liabilities related to transferred receivables
Level 1
Level 2
As at October 31, 2021
Total financial
assets/liabilities
at fair value
Level 3
2,661
−
2,547
−
58,539
63,747
19
−
1,384
−
−
1,403
−
203
65,353
6,716
8,998
1,878
2,484
517
20,593
4,214
2,313
252
784
311
7,874
8,242
16,278
52,987
−
14,215
15,546
693
−
16,239
4,720
18,673
11,398
49,006
−
−
−
47
424
471
−
−
−
−
306
306
297
9,377
8,998
4,425
2,531
59,480
84,811
4,233
2,313
1,636
784
617
9,583
8,539
3
1,077
16,484
119,417
−
−
1
−
1
14,215
20,266
19,367
11,398
65,246
162
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank classifies financial instruments in Level 3 when the valuation technique is based on at least one significant input that is not observable in the
markets. The valuation technique may also be based, in part, on observable market inputs. The following table shows the significant unobservable inputs
used for the fair value measurements of financial instruments classified in Level 3 of the hierarchy.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess
Equity securities and other debt securities
LLooaannss
Loans at fair value through profit or loss
OOtthheerr
Derivative financial instruments
Equity contracts
Other assets – Other items
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
Structured deposit notes(2)
OOtthheerr
Derivative financial instruments
Interest rate contracts
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
FFiinnaanncciiaall lliiaabbiilliittiieess
OOtthheerr
Derivative financial instruments
Equity contracts
FFaaiirr
vvaalluuee
Primary
valuation techniques
Significant
unobservable inputs
LLooww
AAss aatt OOccttoobbeerr 3311,, 22002222
RRaannggee ooff iinnppuutt vvaalluueess
HHiigghh
779966
224444
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Discounted cash flows
11
Option pricing model
8877
11,,112288
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Discount rate
Discount rate
Liquidity premium
Long-term volatility
Market correlation
Discount rate
110000 %%
1188 xx
44..5500 %%
77..0066 %%
22..6622 %%
2211 %%
3388 %%
99 %%
110000 %%
2211 xx
1199..0000 %%
1155..0099 %%
1100..4499 %%
5544 %%
9955 %%
99 %%
88
Option pricing model
Long-term volatility
Market correlation
1100 %%
((33)) %%
3355 %%
9944 %%
88
1100
2266
Fair
value
777
Discounted cash flows
Option pricing model
Discount rate
Long-term volatility
Market correlation
22..2200 %%
99 %%
11 %%
22..2200 %%
5511 %%
9955 %%
Primary
valuation techniques
Significant
unobservable inputs
Low
As at October 31, 2021
Range of input values
High
Net asset value
Market comparable
Discounted cash flows
Discounted cash flows
Net asset value
EV/EBITDA(1) multiple
Credit spread
Discount rate
100 %
18 x
560 Bps(3)
4.50 %
100 %
20 x
560 Bps(3)
19.00 %
297
Discounted cash flows
Discounted cash flows
Discount rate
Liquidity premium
3.25 %
1.98 %
7.09 %
6.27 %
3
1,077
1
1
Discounted cash flows
Discount rate
2.20 %
2.20 %
Option pricing model
Long-term volatility
Market correlation
6 %
(5) %
86 %
90 %
(1)
(2)
(3)
EV/EBITDA means Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization.
Includes embedded derivative financial instruments.
Bps or basis point is a unit of measure equal to 0.01%.
163
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
SSiiggnniiffiiccaanntt UUnnoobbsseerrvvaabbllee IInnppuuttss UUsseedd ffoorr FFaaiirr VVaalluuee MMeeaassuurreemmeennttss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
Net Asset Value
Net asset value is the estimated value of a security based on valuations received from the investment or fund managers, the administrators of the conduits, or
the general partners of limited partnerships. The net asset value of a fund is the total fair value of assets less liabilities.
EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation and Amortization) Multiple and Price Equivalent
Private equity valuation inputs include earnings multiples, which are determined based on comparable companies, and a higher multiple will translate into a
higher fair value. Price equivalent is a percentage of the market price based on the liquidity of the security.
Discount Rate
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.
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.
SSeennssiittiivviittyy AAnnaallyyssiiss ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank performs sensitivity analyses for the fair value measurements of Level 3 financial instruments, 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 $126 million increase or decrease in the fair value recorded as at
October 31, 2022 (a $115 million increase or decrease as at October 31, 2021).
For loans, the Bank varies unobservable inputs such as a liquidity premium and establishes a reasonable fair value range that could result in a $31 million
increase or decrease in the fair value recorded as at October 31, 2022 (a $28 million increase or decrease as at October 31, 2021).
For derivative financial instruments and embedded derivative financial instruments related to structured deposit notes, the Bank varies long-term volatility and
market correlation inputs and establishes a reasonable fair value range. As at October 31, 2022, for derivative financial instruments, the net fair value could
result in a $5 million increase or decrease (a $1 million increase or decrease as at October 31, 2021), whereas for structured deposit notes, the net fair value
could result in a $1 million increase or decrease (no sensitivity analysis as at October 31, 2021 since there were no structured deposit notes classified in
Level 3).
For other assets, the Bank varies unobservable inputs such as discount rates and establishes a reasonable fair value range that could result in a $10 million
increase or decrease in the fair value recorded as at October 31, 2022 (no sensitivity analysis as at October 31, 2021 since there were no other assets
classified in Level 3).
For all Level 3 financial instruments, the reasonable fair value ranges could result in a 5% increase or decrease in net income as at October 31, 2022 (a 5%
increase or decrease in net income as at October 31, 2021).
164
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
CChhaannggee iinn tthhee FFaaiirr VVaalluuee ooff FFiinnaanncciiaall IInnssttrruummeennttss CCllaassssiiffiieedd iinn LLeevveell 33
The Bank may hedge the fair value of financial instruments classified in the various levels through offsetting hedge positions. Gains and losses for financial
instruments classified in Level 3 presented in the following tables do not reflect the inverse gains and losses on financial instruments used for economic
hedging purposes that may have been classified in Level 1 or 2 by the Bank. In addition, the Bank may hedge the fair value of financial instruments classified
in Level 3 using other financial instruments classified in Level 3. The effect of these hedges is not included in the net amount presented in the following tables.
The gains and losses presented hereafter may comprise changes in fair value based on observable and unobservable inputs.
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt
oorr lloossss
SSeeccuurriittiieess
aatt ffaaiirr vvaalluuee
tthhrroouugghh ootthheerr
ccoommpprreehheennssiivvee
iinnccoommee
LLooaannss aanndd
ootthheerr aasssseettss
DDeerriivvaattiivvee
ffiinnaanncciiaall
iinnssttrruummeennttss(1)
DDeeppoossiittss(2)
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
Fair value as at October 31, 2021
Total realized and unrealized gains (losses) included in Net income
Total realized and unrealized gains (losses) included in
(3)
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other
Financial instruments transferred into Level 3
Financial instruments transferred out of Level 3
FFaaiirr vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002222
Change in unrealized gains and losses included in Net income with respect
to financial assets and financial liabilities held as at October 31, 2022(4)
447711
2211
−−
6600
((6644))
−−
−−
−−
((1122))
447766
33
330066
−−
77
77
−−
−−
−−
−−
−−
332200
−−
229977
((5500))
−−
7711
−−
2222
((99))
−−
−−
333311
((5500))
22
((1199))
−−
−−
−−
−−
((11))
11
−−
((1177))
((1199))
−−
33
−−
−−
−−
((33))
−−
((88))
−−
((88))
33
Securities
at fair value
through profit
or loss
Securities
at fair value
through other
comprehensive
income
Loans and
other assets
Derivative
financial
instruments(1)
Deposits(2)
Year ended October 31, 2021
Fair value as at October 31, 2020
Total realized and unrealized gains (losses) included in Net income (5)
Total realized and unrealized gains (losses) included in
Other comprehensive income
Purchases
Sales
Issuances
Settlements and other(6)
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(7)
457
13
−
43
(42)
−
−
−
−
471
14
373
−
(10)
−
(113)
−
56
−
−
306
−
372
24
−
−
−
12
(111)
−
−
297
24
29
(28)
−
−
−
−
(1)
(1)
3
2
(28)
The derivative financial instruments include assets and liabilities presented on a net basis.
The amounts include the fair value of embedded derivative financial instruments in deposits.
Total gains (losses) included in Non-interest income was a loss of $45 million.
Total unrealized gains (losses) included in Non-interest income was an unrealized loss of $63 million.
Total gains (losses) included in Non-interest income was a gain of $9 million.
(1)
(2)
(3)
(4)
(5)
(6) 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.
Total unrealized gains (losses) included in Non-interest income was an unrealized gain of $10 million.
(7)
2
−
−
−
−
−
−
−
(2)
−
−
165
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 3 –– Fair Value of Financial Instruments (cont.)
FFiinnaanncciiaall IInnssttrruummeennttss NNoott RReeccoorrddeedd aatt FFaaiirr VVaalluuee oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
The following tables show the financial instruments that have not been recorded at fair value on the Consolidated Balance Sheet according to the fair value
hierarchy, except for those whose carrying value is a reasonable approximation of fair value.
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
FFiinnaanncciiaall aasssseettss
SSeeccuurriittiieess aatt aammoorrttiizzeedd ccoosstt
Securities issued or guaranteed by
Canadian government
Canadian provincial and municipal governments
U.S. Treasury, other U.S. agencies and other foreign governments
Other debt securities
LLooaannss,, nneett ooff aalllloowwaanncceess
FFiinnaanncciiaall lliiaabbiilliittiieess
DDeeppoossiittss
OOtthheerr
Liabilities related to transferred receivables
Other liabilities
SSuubboorrddiinnaatteedd ddeebbtt
LLeevveell 11
LLeevveell 22
LLeevveell 33
TToottaall
AAss aatt OOccttoobbeerr 3311,, 22002222
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
55,,443399
11,,770088
114400
55,,772200
1133,,000077
8811,,882288
224499,,993377
1144,,113377
7733
11,,447788
226655,,662255
−−
−−
−−
−−
−−
55,,443399
11,,770088
114400
55,,772200
1133,,000077
110022,,664400
118844,,446688
−−
−−
−−
−−
−−
224499,,993377
1144,,113377
7733
11,,447788
226655,,662255
Level 1
Level 2
Level 3
Total
As at October 31, 2021
−
−
−
−
−
−
−
−
−
−
−
5,793
2,227
−
3,877
11,897
67,149
227,054
13,724
114
773
241,665
−
−
−
−
−
5,793
2,227
−
3,877
11,897
99,872
167,021
−
−
−
−
−
227,054
13,724
114
773
241,665
166
National Bank of Canada
National Bank of Canada2022 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 certain securities and certain liabilities related to transferred receivables at fair value
through profit or loss. 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, an observed discount rate for similar
securities that reflects the Bank’s credit spread and, then, 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,, 22002222
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ffoorr tthhee yyeeaarr eennddeedd
OOccttoobbeerr 3311,, 22002222
UUnnrreeaalliizzeedd
ggaaiinnss ((lloosssseess))
ssiinnccee tthhee iinniittiiaall
rreeccooggnniittiioonn ooff
tthhee iinnssttrruummeenntt
11,,003377
11,,003377
1155,,335555
1111,,335522
2266,,770077
((2211))
((2211))
22,,888888
551133
33,,440011
((77))
((77))
33,,006622
553333
33,,559955
Carrying
value as at
October 31, 2021
Unrealized
gains (losses)
for the year ended
October 31, 2021
Unrealized
gains (losses)
since the initial
recognition of
the instrument
1,347
1,347
14,018
11,398
25,416
(55)
(55)
(636)
253
(383)
27
27
(316)
27
(289)
(1)
(2)
For the year ended October 31, 2022, the change in the fair value of deposits designated at fair value through profit or loss attributable to credit risk, and recorded in Other comprehensive
income, resulted in a gain of $817 million ($17 million loss for the year ended October 31, 2021).
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.
167
National Bank of Canada2022 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 derivatives financial instruments subject to master netting agreements of the International Swaps & Derivatives Association, Inc. or
other similar agreements do not meet the offsetting 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 offsetting 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 offsetting criteria are
met, these transactions are netted on the Consolidated Balance Sheet. In addition, as part of these transactions, the Bank may pledge 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
offsetting criteria as well as information on those that are not netted and are subject to an enforceable master netting agreement 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,, 22002222
AAmmoouunnttss
sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
NNeett aammoouunnttss
rreeppoorrtteedd
oonn tthhee
CCoonnssoolliiddaatteedd
BBaallaannccee SShheeeett
AAssssoocciiaatteedd aammoouunnttss
nnoott sseett ooffff oonn tthhee
CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
FFiinnaanncciiaall aasssseettss
rreecceeiivveedd//pplleeddggeedd
aass ccoollllaatteerraall(2)
FFiinnaanncciiaall
iinnssttrruummeennttss(1)
GGrroossss aammoouunnttss
rreeccooggnniizzeedd
3322,,113344
3333,,111122
6655,,224466
3399,,112211
3344,,119977
7733,,331188
55,,664488
1144,,556655
2200,,221133
55,,664488
1144,,556655
2200,,221133
2266,,448866
1188,,554477
4455,,003333
3333,,447733
1199,,663322
5533,,110055
11,,888877
99,,558833
1111,,447700
11,,888877
99,,558833
1111,,447700
2244,,445599
66,,006622
3300,,552211
3311,,444400
44,,008899
3355,,552299
NNeett
aammoouunnttss
114400
22,,990022
33,,004422
114466
55,,996600
66,,110066
As at October 31, 2021
Amounts
set off on the
Consolidated
Balance Sheet
Net amounts
reported
on the
Consolidated
Balance Sheet
Associated amounts
not set off on the
Consolidated Balance Sheet
Financial assets
received/pledged
as collateral(2)(3)
Financial
instruments(1)
Gross amounts
recognized
15,216
20,936
36,152
24,993
23,819
48,812
7,700
4,452
12,152
7,700
4,452
12,152
7,516
16,484
24,000
17,293
19,367
36,660
1,413
9,398
10,811
1,413
9,398
10,811
6,042
2,475
8,517
15,759
4,015
19,774
Net
amounts
61
4,611
4,672
121
5,954
6,075
(1)
(2)
(3)
Carrying amount of financial instruments that are subject to an enforceable master netting agreement or similar agreement but that do not satisfy offsetting criteria.
Excludes collateral in the form of non-financial instruments.
The financial assets pledged as collateral to the Bank of Canada included covered bonds issued by the Bank.
168
National Bank of Canada
National Bank of Canada2022 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
22002222
2021
TToottaall
Total
22,,556633
11,,112266
1133,,992277
337700
−−
1177,,998866
110066
22
−−
66
−−
111144
667700
227799
22
22,,885500
33,,880011
77,,660099
11,,772255
884488
11,,882211
−−
1122,,000033
33,,007711
556699
11,,559977
662255
−−
55,,886622
55,,003377
664433
114488
22,,881144
88,,664422
22,,775500
66,,440099
330099
11,,119933
−−
1100,,666611
3355
11,,339999
228811
558811
−−
22,,229966
3300
990044
−−
113399
11,,007733
−−
−−
−−
−−
4466,,772255
4466,,772255
−−
−−
−−
−−
555566
555566
−−
−−
−−
−−
−−
1122,,992222
99,,226600
1155,,008844
33,,338844
4466,,772255
8877,,337755
33,,221122
11,,997700
11,,887788
11,,221122
555566
88,,882288
55,,773377
11,,882266
115500
55,,880033
1133,,551166
9,377
8,998
4,425
2,531
59,480
84,811
4,233
2,313
1,636
784
617
9,583
5,811
2,225
−
3,874
11,910
(1)
As at October 31, 2022, securities at amortized cost are presented net of $7 million in allowances for credit losses ($3 million as at October 31, 2021).
CCrreeddiitt QQuuaalliittyy
As at October 31, 2022 and 2021, securities at fair value through other comprehensive income and securities at amortized cost were mainly 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.
169
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 6 – Securities (cont.)
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,, 22002222
CCaarrrryyiinngg
vvaalluuee(1)
33,,338866
22,,112299
22,,002222
11,,335555
557700
99,,446622
11
11
−−
−−
2211
2233
((117755))
((116600))
((114444))
((114433))
((3355))
((665577))
33,,221122
11,,997700
11,,887788
11,,221122
555566
88,,882288
Amortized
cost
Gross unrealized
gains
Gross unrealized
losses
As at October 31, 2021
Carrying
value(1)
4,241
2,345
1,648
782
569
9,585
30
27
−
9
57
123
(38)
(59)
(12)
(7)
(9)
(125)
4,233
2,313
1,636
784
617
9,583
(1)
The allowances for credit losses on securities at fair value through other comprehensive income (excluding equity securities), representing $2 million as at October 31, 2022 ($1 million as at
October 31, 2021), 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, 2022, a dividend income amount of
$14 million was recognized for these investments ($34 million for the year ended October 31, 2021), including an amount of $4 million in dividend income for
investments that were sold during the year ended October 31, 2022 ($17 million for investments sold during the year ended October 31, 2021).
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,, 22002222
Year ended October 31, 2021
EEqquuiittyy sseeccuurriittiieess
ooff pprriivvaattee ccoommppaanniieess
EEqquuiittyy sseeccuurriittiieess
ooff ppuubblliicc ccoommppaanniieess
330066
77
77
−−
332200
331111
((4444))
114433
((117744))
223366
TToottaall
661177
((3377))
115500
((117744))
555566
Equity securities
of private companies
Equity securities
of public companies
373
(10)
56
(113)
306
246
98
71
(104)
311
Total
619
88
127
(217)
617
(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. 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.
(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, 2022 and 2021, the Bank sold certain debt securities measured at amortized cost. The carrying value of these securities
upon disposal was $337 million for the year ended October 31, 2022 ($179 million for the year ended October 31, 2021), and the Bank recognized gains of
$4 million for the year ended October 31, 2022 (negligible amount for the year ended October 31, 2021) in Non-interest income – Gains (losses) on
non-trading securities, net in the Consolidated Statement of Income.
170
National Bank of Canada
National Bank of Canada2022 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.
Non-impaired loans
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.
Impaired loans
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 regularly reviewed.
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.
171
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
Main Parameters
PD Estimates
Since the objective of the regulatory calibration of PD is to align historical data to the long-run default rate, adjustments are required to obtain a point-in-time,
forward-looking PD, as required by IFRS 9. The Bank performs the following: (1) A point-in-time calibration, where the PD of the portfolio is aligned with the
appropriate default rate. The resulting PD estimate generally equals the prior-year default rate. The prior-year default rate is selected for the calibration
performed at this stage, as it often reflects one of the most accurate and appropriate estimates of the current-year default rate; (2) Forward-looking
adjustments are incorporated through, among other measures, a calibration factor based on forecasts produced by the stress testing team's analyses. The
team considers three macroeconomic scenarios, and, for each scenario, produces a forward-looking assessment covering the three upcoming years.
LGD Estimates
The LGD estimation method consists of using, for each of the three macroeconomic scenarios, expected LGD based on the LGD values observed using
backtesting, the economic LGD estimated and used to calculate economic capital, and lastly, the estimated downturn LGD used to calculate regulatory capital.
EAD Estimates
For term loans, the Bank uses expected EAD, which is the outstanding balance anticipated at each point in time. Expected EAD decreases over time according
to contractual repayments and to prepayments. For revolving loans, the EAD percentage is based on the percentage estimated by the corresponding regulatory
model and, thereafter, is converted to dollars according to the authorized balance.
Expected Life
For most financial instruments, the expected life used when measuring expected credit losses is the remaining contractual life. For revolving financial
instruments where there is no contractual maturity, such as credit cards or lines of credit, the expected life is based on the behavioural life of clients who have
defaulted or closed their account.
Incorporation of Forward-Looking Information
The Bank’s Economy and Strategy Group is responsible for developing three macroeconomic scenarios and for recommending probability weights for each
scenario. Macroeconomic scenarios are not developed for specific portfolios, as the Economy and Strategy Group provides a set of variables for each of the
defined scenarios for the next three years. The PDs are also adjusted to incorporate economic assumptions (interest rates, unemployment rates, GDP forecasts,
oil prices, housing price indices, etc.) that can be statistically tied to PD changes that will have an impact beyond the next 12 months. These statistical
relationships are determined using the processes developed for stress testing. In addition, the group considers other relevant factors that may not be
adequately reflected in the information used to calculate the PDs (including late payments and whether the financial asset is subject to additional monitoring
within the watchlist process for business and government loan portfolios).
Determination of a Significant Increase in the Credit Risk of a Financial Instrument
At each reporting period, the Bank determines whether credit risk has increased significantly since initial recognition by examining the change in the risk of
default occurring over the remaining life of the financial instrument. First, the Bank compares the point-in-time forward-looking remaining lifetime PD at the
reporting date with the expected point-in-time forward-looking remaining lifetime PD established at initial recognition. Based on this comparison, the Bank
determines whether the loan has deteriorated when compared to the initial conditions. Because the comparison includes an adjustment based on
origination-date forward-looking information and reporting-date forward-looking information, the deterioration may be caused by the following factors:
(i) deterioration of the economic outlook used in the forward-looking assessment; (ii) deterioration of the borrower’s conditions (payment defaults, worsening
financial ratios, etc.); or (iii) a combination of both factors. The quantitative criteria used to determine a significant increase in credit risk are a series of relative
and absolute thresholds, and a backstop is also applied. All financial instruments that are over 30 days past due but below 90 days past due are migrated to
Stage 2, even if the other criteria do not indicate a significant increase in credit risk.
CCrreeddiitt QQuuaalliittyy ooff LLooaannss
The following tables present the gross carrying amounts of loans as at October 31, 2022 and 2021, 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 Ratings-Based (AIRB) categories, see the Internal Default Risk Ratings table on page 78 in the Credit Risk section of the
MD&A for the year ended October 31, 2022.
172
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
AAss aatt OOccttoobbeerr 3311,, 22002222
NNoonn--iimmppaaiirreedd llooaannss
SSttaaggee 22
SSttaaggee 11
SSttaaggee 33
IImmppaaiirreedd llooaannss
PPOOCCII
LLooaannss aatt ffaaiirr vvaalluuee
tthhrroouugghh pprrooffiitt oorr lloossss(1)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss aanndd aacccceeppttaanncceess
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
3300,,446655
1166,,335511
1100,,776655
660099
7766
−−
5588,,226666
77,,226666
6655,,553322
5533
6655,,447799
2222,,119900
88,,779922
66,,992288
335588
2266
−−
3388,,229944
33,,883377
4422,,113311
6677
4422,,006644
660000
335599
668899
228877
3377
−−
11,,997722
111177
22,,008899
3311
22,,005588
66,,114400
2277,,660077
2266,,556677
7755
4411
−−
6600,,443300
88,,009966
6688,,552266
111155
6688,,441111
117788,,227788
226666
117788,,001122
−−
1122
33,,226699
339944
114400
−−
33,,881155
117799
33,,999944
8800
33,,991144
2222
447799
11,,339944
777755
220033
−−
22,,887733
7788
22,,995511
111133
22,,883388
−−
−−
5511
117788
7711
−−
330000
−−
330000
9955
220055
22
111122
88,,880033
11,,117722
227722
−−
1100,,336611
2288
1100,,338899
116600
1100,,222299
1177,,663344
444488
1177,,118866
−−
−−
−−
−−
−−
4499
4499
221111
226600
6611
119999
−−
−−
−−
−−
−−
113300
113300
3366
116666
7755
9911
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
336677
336677
1199
338866
119977
118899
881122
333333
447799
−−
−−
−−
−−
−−
−−
−−
338844
338844
((7766))
446600
−−
−−
−−
−−
−−
−−
−−
7755
7755
((1166))
9911
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
99,,995599
99,,995599
−−
99,,995599
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
114477
5533
114455
−−
−−
−−
334455
221122
555577
−−
555577
TToottaall
3300,,446655
1166,,336633
1144,,003344
11,,000033
221166
4499
6622,,113300
1177,,999999
8800,,112299
111188
8800,,001111
2222,,221122
99,,227711
88,,332222
11,,113333
222299
113300
4411,,229977
44,,002266
4455,,332233
223399
4455,,008844
660000
335599
774400
446655
110088
−−
22,,227722
111177
22,,338899
112266
22,,226633
66,,228899
2277,,777722
3355,,551155
11,,224477
331133
336677
7711,,550033
88,,335555
7799,,885588
447722
7799,,338866
445599
((9922))
555511
1100,,551166
−−
1100,,551166
220077,,669999
995555
220066,,774444
(1)
(2)
(3)
Not subject to expected credit losses.
The allowances for credit losses do not include the amounts related to undrawn commitments reported in the Other liabilities item of the Consolidated Balance Sheet.
Includes customers’ liability under acceptances.
173
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
As at October 31, 2021
Non-impaired loans
Stage 2
Stage 1
Stage 3
Impaired loans
POCI
Loans at fair value
through profit or loss(1)
RReessiiddeennttiiaall mmoorrttggaaggee
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
PPeerrssoonnaall
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
CCrreeddiitt ccaarrdd
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
BBuussiinneessss aanndd ggoovveerrnnmmeenntt(3)
Excellent
Good
Satisfactory
Special mention
Substandard
Default
AIRB Approach
Standardized Approach
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
TToottaall llooaannss aanndd aacccceeppttaanncceess
Gross carrying amount
Allowances for credit losses(2)
CCaarrrryyiinngg aammoouunntt
28,911
17,083
9,165
314
83
−
55,556
5,803
61,359
50
61,309
16,211
11,439
4,665
336
121
−
32,772
4,692
37,464
70
37,394
559
322
623
294
38
−
1,836
65
1,901
33
1,868
5,086
24,395
22,808
128
45
−
52,462
6,179
58,641
111
58,530
159,365
264
159,101
1
53
2,318
266
128
−
2,766
129
2,895
52
2,843
57
1,041
1,580
483
129
−
3,290
51
3,341
98
3,243
−
−
38
149
62
−
249
−
249
89
160
−
131
6,254
1,509
194
−
8,088
84
8,172
205
7,967
14,657
444
14,213
−
−
−
−
−
82
82
57
139
29
110
−
−
−
−
−
101
101
15
116
63
53
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
326
326
81
407
287
120
662
379
283
−
−
−
−
−
−
−
332
332
(60)
392
−
−
−
−
−
−
−
132
132
(29)
161
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
7,817
7,817
−
7,817
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
269
53
140
−
−
−
462
260
722
−
722
Total
28,912
17,136
11,483
580
211
82
58,404
14,138
72,542
71
72,471
16,268
12,480
6,245
819
250
101
36,163
4,890
41,053
202
40,851
559
322
661
443
100
−
2,085
65
2,150
122
2,028
5,355
24,579
29,202
1,637
239
326
61,338
6,604
67,942
603
67,339
464
(89)
553
8,539
−
8,539
183,687
998
182,689
(1)
(2)
(3)
Not subject to expected credit losses.
The allowances for credit losses do not include the amounts related to undrawn commitments reported in the Other liabilities item of the Consolidated Balance Sheet.
Includes customers’ liability under acceptances.
174
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
The following table presents the credit risk exposures of off-balance-sheet commitments as at October 31, 2022 and 2021 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
1155,,229922
33,,331166
11,,117700
119933
1155
−−
1133,,113366
1188,,772233
77,,889944
1122
44
−−
5599,,775555
1155,,443322
7755,,118877
9999
7755,,008888
1133
116655
118800
6688
1155
−−
−−
2244
33,,448888
224466
2244
−−
44,,222233
−−
44,,222233
6633
44,,116600
−−
−−
−−
−−
−−
11
−−
−−
−−
−−
−−
1188
1199
−−
1199
−−
1199
22002222
TToottaall
1155,,330055
33,,448811
11,,335500
226611
3300
11
1133,,113366
1188,,774477
1111,,338822
225588
2288
1188
6633,,999977
1155,,443322
7799,,442299
116622
7799,,226677
Stage 1
Stage 2
Stage 3
17,053
3,750
1,085
197
16
−
14,097
17,497
7,575
14
5
−
61,289
14,872
76,161
104
76,057
72
323
229
57
13
−
−
2
2,377
336
38
−
3,447
−
3,447
58
3,389
−
−
−
−
−
3
−
−
−
−
−
3
6
1
7
−
7
2021
Total
17,125
4,073
1,314
254
29
3
14,097
17,499
9,952
350
43
3
64,742
14,873
79,615
162
79,453
(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
22002222
BBuussiinneessss aanndd
ggoovveerrnnmmeenntt(2)
Residential
mortgage
Personal
Credit card
2021
Business and
government(2)
Past due but not impaired
31 to 60 days
61 to 90 days
Over 90 days(3)
110066
3388
−−
114444
110055
3300
−−
113355
2233
1111
2222
5566
2233
99
−−
3322
48
18
−
66
71
21
−
92
20
9
21
50
24
13
−
37
(1)
(2)
(3)
Loans less than 31 days past due are not presented as they are not considered past due from an administrative standpoint.
Includes customers’ liability under acceptances.
All loans more than 90 days past due, except for credit card receivables, are considered impaired (Stage 3).
175
National Bank of Canada2022 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.)
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
22002222
226600
116666
−−
338866
881122
445599
11,,227711
6611
7755
−−
119977
333333
((9922))
224411
119999
9911
−−
118899
447799
555511
11,,003300
139
116
−
407
662
464
1,126
29
63
−
287
379
(89)
290
2021
Net
110
53
−
120
283
553
836
(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 ooff 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
22002222
GGrroossss
iimmppaaiirreedd llooaannss
PPeerrcceennttaaggee ccoovveerreedd
bbyy gguuaarraanntteeeess(1)
Gross
impaired loans
2021
Percentage covered
by guarantees(1)
Types of collateral
and guarantees
LLooaannss – SSttaaggee 33
Residential mortgage
Personal
Business and government(2)
LLooaannss – PPOOCCII
226600
116666
338866
445599
110000 %%
5566 %%
5599 %%
5522 %%
139
116
407
464
100 %
47 %
62 %
36 %
Residential buildings
Buildings, land and automobiles
Buildings, land, 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.
176
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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,, 22002211
PPrroovviissiioonnss ffoorr
ccrreeddiitt lloosssseess
WWrriittee--ooffffss(1)
DDiissppoossaallss
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
AAlllloowwaanncceess ffoorr
ccrreeddiitt lloosssseess aass
aatt OOccttoobbeerr 3311,, 22002222
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
11
33
−−
7711
220022
112222
551155
8888
999988
−−
1133
114433
66
116622
11,,116699
−−
11
44
−−
4466
6699
4499
1100
((3344))
114400
−−
−−
−−
−−
−−
114455
−−
−−
−−
−−
((33))
((5522))
((6622))
((111166))
−−
((223333))
−−
−−
−−
−−
−−
((223333))
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
44
2200
1177
99
−−
5500
−−
−−
−−
−−
−−
5500
55
22
77
−−
111188
223399
112266
441188
5544
995555
−−
1133
114433
66
116622
11,,113311
Allowances for
credit losses as at
October 31, 2020
Provisions for
credit losses
Write-offs(1)
Disposals
Year ended October 31, 2021
Allowances for
credit losses as
at October 31, 2021
Recoveries
and other
5
3
1
−
65
298
169
533
93
1,158
−
15
157
4
176
1,343
−
(2)
2
−
12
(29)
(5)
43
(5)
16
−
(2)
(14)
2
(14)
2
−
−
−
−
(6)
(69)
(59)
(58)
−
(192)
−
−
−
−
−
−
−
−
−
−
(14)
−
−
−
(14)
−
−
−
−
−
(192)
(14)
−
−
−
−
−
16
17
(3)
−
30
−
−
−
−
−
30
5
1
3
−
71
202
122
515
88
998
−
13
143
6
162
1,169
(1)
(2)
(3)
(4)
(5)
(6)
The contractual amount outstanding on financial assets that were written off during the year ended October 31, 2022 and that are still subject to enforcement activity was $91 million
($105 million for the year ended October 31, 2021).
These financial assets are presented net of the allowances for credit losses on the Consolidated Balance Sheet.
As at October 31, 2022 and 2021, 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.
177
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 7 – Loans and Allowances for Credit Losses (cont.)
The following tables present the reconciliation of allowances for credit losses for each loan category at amortized cost according to ECL impairment stage.
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
22002222
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)
5500
1199
1199
((1100))
((11))
((2244))
((33))
−−
−−
−−
−−
−−
33
5533
5533
−−
7733
4455
6611
((2211))
−−
((7722))
((99))
((1100))
((66))
−−
−−
−−
33
7700
6677
33
5522
−−
((1177))
1133
((77))
3399
((33))
11
2266
−−
−−
−−
22
8800
8800
−−
110033
−−
((5566))
2233
((3311))
8855
((1155))
66
1122
−−
−−
−−
22
111177
111133
44
2299
−−
((22))
((33))
88
2299
((33))
−−
2299
((33))
−−
33
33
6611
6611
−−
6633
−−
((55))
((22))
3311
2288
((55))
−−
4477
((5522))
−−
1177
−−
7755
7755
−−
((6600))
−−
−−
−−
−−
((99))
−−
−−
((99))
−−
−−
−−
((77))
((7766))
((7766))
−−
((2299))
−−
−−
−−
−−
1155
−−
−−
1155
−−
−−
−−
((22))
((1166))
((1166))
−−
7711
1199
−−
−−
−−
3355
((99))
11
4466
((33))
−−
33
11
111188
111188
−−
221100
4455
−−
−−
−−
5566
((2299))
((44))
6688
((5522))
−−
1177
33
224466
223399
77
63
12
18
(4)
−
(33)
(3)
−
(10)
−
−
−
(3)
50
50
−
89
41
73
(12)
−
(96)
(12)
−
(6)
−
(8)
−
(2)
73
70
3
23
−
(13)
5
(1)
39
(1)
−
29
−
−
−
−
52
52
−
148
−
(66)
14
(27)
58
(15)
−
(36)
−
(6)
−
(3)
103
98
5
35
−
(5)
(1)
1
6
(1)
−
−
(6)
−
2
(2)
29
29
−
76
−
(7)
(2)
27
19
(2)
−
35
(69)
−
21
−
63
63
−
(56)
−
−
−
−
(7)
−
−
(7)
−
−
−
3
(60)
(60)
−
(10)
−
−
−
−
(19)
−
−
(19)
−
−
−
−
(29)
(29)
−
2021
Total
65
12
−
−
−
5
(5)
−
12
(6)
−
2
(2)
71
71
−
303
41
−
−
−
(38)
(29)
−
(26)
(69)
(14)
21
(5)
210
202
8
(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, 2022 was $15 million ($11 million for the year ended
October 31, 2021). 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.
178
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Year ended October 31
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)
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
22002222
TToottaall
115588
1122
−−
−−
−−
4455
((33))
((22))
5522
((6622))
−−
1177
−−
116655
112266
3399
770022
8822
−−
−−
−−
((4488))
((6600))
−−
((2266))
((111166))
−−
33
66
556699
447722
9977
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
68
10
100
(15)
(1)
(100)
(2)
(3)
(11)
−
−
−
−
57
33
24
214
116
60
(43)
−
(131)
(38)
−
(36)
−
−
−
(1)
177
111
66
357
264
93
137
−
(100)
15
(29)
84
(2)
(4)
(36)
−
−
−
−
101
89
12
287
−
(58)
48
(21)
24
(42)
−
(49)
−
−
−
−
238
205
33
494
444
50
−
−
−
−
30
12
−
−
42
(59)
−
17
−
−
−
−
241
−
(2)
(5)
21
98
(6)
−
106
(58)
−
4
(6)
287
287
−
379
379
−
2021
Total
205
10
−
−
−
(4)
(4)
(7)
(5)
(59)
−
17
−
158
122
36
742
116
−
−
−
(9)
(86)
−
21
(58)
−
4
(7)
702
603
99
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
5577
1122
8844
((1166))
((11))
((8800))
((22))
((11))
((44))
−−
−−
−−
−−
5533
3311
2222
117777
8822
6677
((2277))
−−
((9933))
((2299))
−−
−−
−−
−−
−−
−−
117777
111155
6622
335533
226666
8877
110011
−−
((8844))
1166
((2233))
110044
((11))
((11))
1111
−−
−−
−−
−−
111122
9955
1177
223388
−−
((6655))
3311
((33))
2211
((2277))
−−
((4433))
−−
−−
−−
−−
119955
116600
3355
550044
444488
5566
−−
−−
−−
−−
2244
2211
−−
−−
4455
((6622))
−−
1177
−−
−−
−−
−−
228877
−−
((22))
((44))
33
2244
((44))
−−
1177
((111166))
−−
33
66
119977
119977
−−
333333
333333
−−
((9922))
11,,009988
((9922))
−−
995555
114433
(89)
1,141
(89)
−
998
143
(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, 2022 was $15 million ($11 million for the year ended
October 31, 2021). 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.
179
National Bank of Canada2022 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.)
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)
22002222
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)
2021
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(6)
Mining
Utilities(6)
Non-real-estate construction(7)
Manufacturing(6)
Wholesale
Retail
Transportation
Communications
Financial services(6)
Real estate services and
real estate construction(8)
Professional services
Education and health care
Other services
Government
Other(6)
EExxcclluuddiinngg PPOOCCII llooaannss
PPOOCCII
SSttaaggeess 11 aanndd 22(9)
9955,,557755
33,,880011
1144,,889999
111144,,227755
88,,110099
11,,443355
11,,004499
99,,668822
11,,993355
77,,337744
33,,224411
33,,449944
22,,220099
11,,883300
1100,,777777
2222,,338822
22,,333388
33,,441122
66,,224477
11,,666611
55,,779900
9922,,996655
220077,,224400
445599
220077,,669999
229999
1166
110022
441177
3311
66
1111
3355
3388
2211
3355
3300
88
1111
55
2266
99
110088
2200
−−
11
339955
881122
445599
11,,227711
6644
1122
5588
113344
22
66
44
3355
3322
1100
2266
1199
77
1100
33
66
44
2255
99
−−
11
119999
333333
((9922))
224411
3311
5544
3366
112211
((11))
((1199))
44
((22))
55
((44))
22
22
−−
22
−−
11
−−
2255
22
−−
−−
1177
113388
66
114444
11
114455
44
7722
4411
89,035
3,589
12,949
111177 105,573
−−
2266
−−
5599
−−
1144
−−
−−
−−
−−
−−
7,357
1,807
529
7,687
1,541
5,720
2,598
2,978
1,811
1,441
8,870
18,195
1122
1,872
11
4,073
22
5,875
22
1,159
−−
4,137
−−
111166
77,650
223333 183,223
464
223333 183,687
223333
153
12
67
232
30
55
−
102
37
40
29
27
8
19
7
36
8
5
26
−
1
430
662
464
1,126
31
10
49
90
4
49
−
93
27
25
23
18
7
8
2
16
4
3
9
−
1
289
379
(89)
290
(2)
48
32
78
(5)
3
−
73
11
3
10
2
−
2
1
1
−
5
(1)
−
−
105
183
(26)
157
(155)
2
6
77
51
134
1
9
−
−
−
2
3
1
−
10
−
2
5
4
21
−
−
58
192
192
192
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Includes customers’ liability under acceptances.
Allowances for credit losses on drawn amounts.
Includes residential mortgages on one-to-four-unit dwellings (Basel definition) and home equity lines of credit.
Includes lines of credit and credit card receivables.
Includes consumer loans and other retail loans but excludes SME loans.
In fiscal 2022, the presentation was changed to better align borrower categories with their definitions. Comparative figures have been reclassified.
Includes civil engineering loans, public-private partnership loans, and project finance loans.
Includes residential mortgages on dwellings of five or more units and SME loans.
Includes provisions for credit losses on other financial assets at amortized cost and on off-balance-sheet commitments.
180
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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,, 22002222
DDoowwnnssiiddee sscceennaarriioo
RReemmaaiinniinngg
ffoorreeccaasstt ppeerriioodd
00..66 %%
66..00 %%
((1111..22)) %%
22..44 %%
((44..33)) %%
7788
11..77 %%
66..11 %%
00..77 %%
22..11 %%
22..44 %%
7777
11..11 %%
55..44 %%
−− %%
22..00 %%
55..11 %%
110022
11..66 %%
55..44 %%
00..22 %%
11..99 %%
22..66 %%
9977
((55..22)) %%
77..44 %%
((1133..99)) %%
33..44 %%
((2255..66)) %%
4444
22..99 %%
66..44 %%
00..33 %%
22..66 %%
55..55 %%
5511
Next
12 months
Base scenario
Remaining
forecast period
Next
12 months
Upside scenario
Remaining
forecast period
Next
12 months
As at October 31, 2021
Downside scenario
Remaining
forecast period
4.2 %
6.6 %
2.0 %
1.7 %
4.8 %
70
1.6 %
6.3 %
0.2 %
1.9 %
2.1 %
65
4.7 %
6.3 %
4.0 %
1.6 %
8.6 %
77
1.9 %
5.6 %
1.9 %
1.7 %
3.1 %
77
(5.5) %
9.5 %
(11.5) %
3.1 %
(25.6) %
35
3.7 %
7.8 %
1.2 %
2.2 %
5.5 %
34
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 a 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 lead to 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 lead to lower allowances for credit losses.
181
National Bank of Canada2022 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.)
During the year ended October 31, 2022, the macroeconomic outlook generally deteriorated.
In the base scenario, the global economy faces a cycle of synchronized monetary tightening designed to curb inflation in a still uncertain geopolitical
environment. The Canadian economy is relatively well positioned thanks to a resource sector that is benefitting from higher commodity prices. However, as is
the case in other countries, higher interest rates slow the economy. The labour market already shows signs of cooling, and lower hiring intentions do not point
to a short-term turnaround. In the housing resale market, a noticeable downtrend persists and home prices continue to decline. In such a scenario, inflation
decelerates significantly, enabling the central bank to cease raising its policy rate. All in all, a significant economic slowdown occurs in the coming quarters,
as consumers simultaneously deal with a loss in purchasing power, a negative wealth effect, and interest payment shock. After 12 months, the unemployment
rate rises a full percentage point to 6.2%. Housing prices slide 11.2% year over year, the S&P/TSX is at 18,500 points after one year, and the price of oil
hovers around US$77.
In the upside scenario, the economy surprises slightly in a positive direction owing to a resilient labour market. Governments continue to support the
Canadian and U.S. economies. Consumer spending also surprises to the upside given the excess savings accumulated since the start of the pandemic. While
the economy remains solid, the central bank does not need to significantly tighten monetary policy as inflation stabilizes given a normalization of supply
chains and easing geopolitical tensions. After one year, the unemployment rate is more favourable than that of the base scenario (seven-tenths lower).
Housing prices remain unchanged, the S&P/TSX is at 20,300 points after one year, and the price of oil hovers around US$102.
In the downside scenario, supply chain issues persist and the geopolitical landscape remains highly uncertain. The global economy stagnates with several
countries seeing a drop in economic activity. In addition, central banks underestimated the impact of rising interest rates in a context of persistent supply
shock. Given budgetary constraints, governments have a limited capacity to support households and businesses. After 12 months, the economic contraction
pushes the unemployment rate to 8.2%. Housing prices decrease considerably, the S&P/TSX slides to 14,380 points after one year, and the price of oil falls to
US$36.
Given uncertainty surrounding the 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, 2022 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,, 22002222
SSiimmuullaattiioonnss
100% upside scenario
100% base scenario
100% downside scenario
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
885577
660033
669933
11,,112233
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, 2022 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,, 22002222
SSiimmuullaattiioonnss
Non-impaired loans if they were all in Stage 1
182
AAlllloowwaanncceess ffoorr ccrreeddiitt lloosssseess
oonn nnoonn--iimmppaaiirreedd llooaannss
885577
666644
National Bank of Canada
National Bank of Canada2022 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 the 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
22002222
2021
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)
7766,,555511
2244,,110022
110000,,665533
5566,,555555
7766,,555511
2222,,995544
9999,,550055
5555,,776677
68,296
22,413
90,709
40,779
68,296
22,249
90,545
40,731
(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 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
$3,606 million as at October 31, 2022 ($3,367 million as at October 31, 2021) excluding repurchase agreements guaranteed by 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
$8,843 million before the offsetting impact of $2,043 million as at October 31, 2022 ($7,993 million before the offsetting impact of $4,333 million as at October 31, 2021).
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
22002222
2021
2255,,446688
3333,,888800
4411,,330055
110000,,665533
24,034
17,553
49,122
90,709
183
National Bank of Canada2022 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
Business
segment
Other
22002222
CCaarrrryyiinngg
vvaalluuee
9966
4444
114400
2021
Carrying
value
184
41
225
(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, 2022,
the Bank’s ownership interest in TMX was 2.5% (5.2% as at October 31, 2021), and the fair value of this investment based on quoted prices in active markets was $178 million ($390 million
as at October 31, 2021).
As at October 31, 2022 and 2021, 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, 2022, TMX paid $7 million in dividends to the Bank ($12 million for the year ended
October 31, 2021). The following table provides summarized financial information on TMX.
As at October 31 or for the year ended October 31(1)
22002222
2021
BBaallaannccee sshheeeett
Current assets
Non-current assets
Current liabilities
Non-current liabilities
IInnccoommee ssttaatteemmeenntt
Total revenues
Net income
Other comprehensive income
Comprehensive income
5566,,881111
55,,667711
5566,,338822
11,,999922
11,,009955
555599
((4499))
551100
36,077
5,387
35,817
1,971
948
322
(1)
321
(1)
The balance sheet amounts are the balances reported in the unaudited financial statements as at September 30, 2022 and 2021, 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, 2022 and 2021.
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, 2022 and 2021.
22002222
2021
55
−−
55
1
−
1
184
National Bank of Canada
National Bank of Canada2022 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
71
−
−
−
−
71
33
−−
−−
7744
120
128
−
−
−
248
118833
−−
−−
443311
CCoosstt
As at October 31, 2020
Additions and modifications
Disposals
Impairment losses
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2021
Additions and modifications
Disposals
Fully depreciated assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002222
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2020
Depreciation for the year
Disposals
Impairment losses
Fully depreciated assets
Impact of foreign currency translation
As at October 31, 2021
Depreciation for the year
Disposals
Fully depreciated assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002222
Carrying value as at October 31, 2021
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002222
71
7744
248
443311
71
6
(3)
−
(6)
−
68
22
((77))
((77))
−−
5566
54
2
(3)
−
(6)
−
47
22
((44))
((77))
−−
3388
21
1188
340
44
(3)
−
(124)
(2)
255
5533
−−
((3388))
66
227766
230
48
(3)
−
(124)
(1)
150
4488
−−
((3388))
22
116622
105
111144
112
13
(2)
−
(10)
(3)
110
1144
((33))
((77))
33
111177
56
12
(2)
−
(10)
(1)
55
1155
((33))
((77))
11
6611
55
5566
331
32
(4)
−
(18)
(3)
338
4466
((22))
((1100))
55
337777
149
30
(4)
−
(18)
(1)
156
3322
((22))
((1100))
33
117799
182
119988
1,045
223
(12)
−
(158)
(8)
1,090
330011
((1122))
((6622))
1144
11,,333311
489
92
(12)
−
(158)
(3)
408
9977
((99))
((6622))
66
444400
682
889911
698
48
(5)
(3)
(6)
732
6699
((88))
1122
880055
99
103
(1)
(3)
−
198
110055
((88))
44
229999
534
550066
1,743
271
(12)
(5)
(161)
(14)
1,822
337700
((1122))
((7700))
2266
22,,113366
588
195
(12)
(1)
(161)
(3)
606
220022
((99))
((7700))
1100
773399
1,216
11,,339977
(1)
As at October 31, 2022, contractual commitments related to the head office building under construction stood at $197 million, covering a period up to 2023.
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 sublease revenues of
$6 million related to real estate right-of-use assets.
AAss aatt OOccttoobbeerr 3311,, 22002222
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
22
22
11
11
11
−−
77
185
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 10 – Premises and Equipment (cont.)
LLeeaasseess RReeccooggnniizzeedd iinn tthhee CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff IInnccoommee
Interest expense
Expense for leases of low-value assets(1)
Expense relating to variable lease payments
Income from leasing and subleasing(2)
(1) The expense relates to lease payments for low-value assets that are part of the exemptions permitted by the practical expedients of IFRS 16.
(2) This amount includes variable lease payments of $2 million.
For the year ended October 31, 2022, the cash outflows for leases amounted to $218 million (2021: $214 million).
NNoottee 1111 –– GGooooddwwiillll aanndd IInnttaannggiibbllee AAsssseettss
GGooooddwwiillll
AAss aatt OOccttoobbeerr 3311,, 22002222
1166
99
9944
44
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, 2022 and 2021.
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, 2020
Acquisition of Flinks(2)
Impact of foreign currency
translation
Balance as at October 31, 2021
Impact of foreign currency
translation
BBaallaannccee aass aatt OOccttoobbeerr 3311,, 22002222
54
256
434
269
959
235
33
133
166
−
54
−−
5544
−
256
−−
225566
−
434
−−
443344
−
269
−−
226699
−
959
−−
995599
−
235
−−
223355
(2)
31
33
3344
(9)
124
1122
113366
(11)
155
1155
117700
−
101
1,414
101
−
101
(11)
1,504
−−
110011
1155
11,,551199
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 a 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, 2022 and 2021, 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, 2022, for each CGU or CGU group, the discount rate used was 12.9% (13.2% as at October 31, 2021), and the
long-term growth rate varied between 2% and 5%, depending on the CGU, as at October 31, 2022 and 2021.
186
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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, 2020
Impact of an accounting policy change
as at November 1, 2020(3)
Acquisitions
Impact of an accounting policy change
for the fiscal year(3)
Impairment losses(4)
Fully amortized intangible assets
As at October 31, 2021
Acquisitions
Impairment losses(4)
Fully amortized intangible assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002222
AAccccuummuullaatteedd aammoorrttiizzaattiioonn
As at October 31, 2020
Impact of an accounting policy change
as at November 1, 2020(3)
Amortization for the fiscal year
Impact of an accounting policy change
for the fiscal year(3)
Fully amortized intangible assets
As at October 31, 2021
Amortization for the fiscal year
Impairment losses(4)
Fully amortized intangible assets
Impact of foreign currency translation
AAss aatt OOccttoobbeerr 3311,, 22002222
IInnddeeffiinniittee uusseeffuull lliiffee
FFiinniittee uusseeffuull lliiffee
TToottaall
MMaannaaggeemmeenntt
ccoonnttrraaccttss(1)
TTrraaddeemmaarrkk
TToottaall
IInntteerrnnaallllyy--
ggeenneerraatteedd
ssooffttwwaarree(2)
OOtthheerr
ssooffttwwaarree
OOtthheerr
iinnttaannggiibbllee
aasssseettss
TToottaall
172
1,922
169
69
2,160
2,332
161
−
(1)
160
−−
((11))
−−
115599
11
−
(2)
9
−−
((11))
−−
88
−
(3)
169
−−
((22))
−−
116677
(192)
354
(75)
(9)
(92)
1,908
334466
((77))
((113388))
−−
22,,110099
724
(6)
260
(25)
(92)
861
225533
((22))
((113388))
−−
997744
20
−
(69)
120
2288
−−
((2211))
11
112288
125
19
(69)
75
2200
−−
((2211))
22
7766
45
5522
−
−
(5)
64
−−
((22))
((22))
−−
6600
49
7
(5)
51
66
((11))
((22))
−−
5544
13
66
(192)
374
(75)
(9)
(166)
2,092
337744
((99))
((116611))
11
22,,229977
898
(6)
286
(25)
(166)
987
227799
((33))
((116611))
22
11,,110044
1,105
11,,119933
(192)
374
(75)
(12)
(166)
2,261
337744
((1111))
((116611))
11
22,,446644
898
(6)
286
(25)
(166)
987
227799
((33))
((116611))
22
11,,110044
1,274
11,,336600
Carrying value as at October 31, 2021
CCaarrrryyiinngg vvaalluuee aass aatt OOccttoobbeerr 3311,, 22002222
160
115599
9
88
169
116677
1,047
11,,113355
(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 four years.
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
During the year ended October 31, 2022, the Bank recorded $2 million in impairment losses resulting from the impairment test carried out on indefinite-life intangible assets ($3 million
during the year ended October 31, 2021) as well as an amount of $5 million related to internally-generated software for which the Bank has decided to cease its use or development
($9 million during the year ended October 31, 2021). These 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.
187
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 (Notes 1 and 24)
Current tax assets
Reinsurance assets
Insurance assets
22002222
2021(1)
22,,559911
11,,005577
884422
449988
338899
447711
66
110044
55,,995588
1,228
696
988
691
416
445
28
38
4,530
(1) Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
NNoottee 1133 –– DDeeppoossiittss
As at October 31
Personal
Business and government
Deposit-taking institutions
OOnn ddeemmaanndd(1)
AAfftteerr nnoottiiccee(2)
FFiixxeedd tteerrmm(3)
55,,553399
6600,,557799
11,,555577
6677,,667755
3366,,557766
3322,,006611
119999
6688,,883366
3366,,669966
9911,,559900
11,,559977
112299,,888833
22002222
TToottaall
7788,,881111
118844,,223300
33,,335533
226666,,339944
2021
Total
70,076
167,870
2,992
240,938
(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 other similar instruments.
The Deposits – Business and government item includes, among other items, covered bonds, as described below, and a $13.9 billion amount of deposits as at
October 31, 2022 ($11.9 billion as at October 31, 2021) 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, 2022, an
amount of 1.0 billion euros and US$1.0 billion in covered bonds reached maturity, and the Bank issued 1.3 billion euros, US$1.5 billion, and 750 million
pounds sterling in covered bonds (US$470 million, 1.0 billion euros, and 250 million pounds sterling in covered bonds reached maturity, and the Bank issued
1.25 billion euros in covered bonds during the year ended October 31, 2021). The covered bonds totalled $10.4 billion as at October 31, 2022 ($8.8 billion as
at October 31, 2021). 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 $18.2 billion as at October 31, 2022 ($16.0 billion as at October 31, 2021), of which $17.9 billion ($15.7 billion as at
October 31, 2021) is presented in Residential mortgage loans on the Bank’s Consolidated Balance Sheet.
188
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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)
22002222
22,,558822
115566
11,,006633
555522
773300
111111
116622
1144
6677
1100
991144
66,,336611
2021
2,469
437
552
575
735
143
162
10
478
11
729
6,301
(1)
(2)
(3)
As at October 31, 2022, Other items included $11 million in litigation provisions ($12 million as at October 31, 2021).
As at October 31, 2022, Other items included $33 million in provisions for onerous contracts ($33 million as at October 31, 2021).
As at October 31, 2022, Other items included the financial liability resulting from put options written to non-controlling interests of Flinks for an amount of $33 million ($25 million as at
October 31, 2021).
NNoottee 1155 –– SSuubboorrddiinnaatteedd DDeebbtt
The subordinated debt represents direct unsecured obligations, in the form of notes and debentures, to the Bank’s debt holders. The rights of the Bank’s note
and debenture holders are subordinate to the claims of depositors and certain other creditors. Approval from OSFI is required before the Bank can redeem its
subordinated notes and debentures in whole or in part.
On August 31, 2022, the Bank redeemed debentures denominated in a foreign currency and maturing on February 28, 2087 in an amount of US$7 million at
their nominal value plus accrued interest.
On July 25, 2022, the Bank issued medium-term notes for an amount of $750 million, bearing interest at 5.426% and maturing on August 16, 2032. The
interest on these notes will be payable semi-annually at 5.426% per annum until August 16, 2027 and, thereafter, at a floating rate equal to the Canadian
Overnight Repo Rate (CORRA) compounded daily plus 2.32% and payable quarterly. With the prior approval of OSFI, the Bank may, at its option, redeem these
notes as of August 16, 2027, in whole or in part, at their nominal value plus accrued and unpaid interest. Since the medium-term notes satisfy the non-viability
contingent capital requirements, they qualify for the purposes of calculating regulatory capital under Basel III.
As at October 31
MMaattuurriittyy ddaattee
February 2028(1)
August 2032(1)
February 2087
Fair value hedge adjustment(5)
Unamortized issuance costs(6)
TToottaall
IInntteerreesstt rraattee RReeddeemmppttiioonn ddaattee
3.183%(2) February 1, 2023(3)
5.426%(4) August 16, 2027(3)
Variable Redeemable at the Bank’s option since February 28, 1993
22002222
2021
775500
775500
−−
11,,550000
22
((33))
11,,449999
750
−
9
759
10
(1)
768
(1)
(2)
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.
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 three-month CDOR plus 0.72%, payable
quarterly.
(3) With the prior approval of OSFI, the Bank may, at its option, redeem these notes in whole or in part, at their nominal value plus accrued and unpaid interest.
(4)
Bearing interest at a rate of 5.426%, payable semi-annually until August 16, 2027, and thereafter bearing interest at a floating rate equal to CORRA compounded daily plus 2.32%, payable
quarterly.
The fair value hedge adjustment represents the impact of the hedging transactions applied to hedge changes in the fair value of subordinated debt caused by interest rate fluctuations.
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.
(5)
(6)
189
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 sell 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 Canada2022 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
22002222
2021
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
77,,887733
−−
44,,666655
331144,,887722
115500
665522
332288,,221122
1100,,775588
4422,,445555
33,,000000
11,,336622
5577,,557755
5588,,334444
330011,,882200
1122,,887755
1133,,335511
338866,,339900
7722
4422
111144
−−
2200,,333311
331100
554499
444433
2211,,663333
33,,665500
1100,,112211
66,,225555
66,,333322
2266,,335588
882200,,228822
−−
−−
88,,550055
−−
4499,,223344
112211,,885544
11,,229955
11,,338877
117733,,777700
112211,,338844
992211,,665577
55,,991199
99,,001100
11,,006666,,447755
88,,550055
−−
111199,,550044
886688,,339933
55,,882244
88,,111166
11,,001100,,334422
−−
−−
5566,,997722
331166,,224466
33,,996611
55,,116677
338822,,334466
55,,559999
44,,559900
−−
−−
1100,,118899
88,,441122
9988,,447722
44,,551155
33,,111133
111144,,551122
663322
−−
1100,,551133
116688,,668855
551133
11,,880044
118822,,114477
1122,,111155
1155,,116600
−−
−−
2277,,227755
1144,,882299
8822,,777722
1177,,444411
2233,,001133
113388,,005555
−−
1133
1133
−−
−−
−−
−−
−−
558877
3322,,662200
−−
−−
3333,,220077
2288,,447722
6622,,220055
33,,000000
11,,336622
9955,,003399
8822,,117722
551155,,668844
3344,,883311
3399,,447777
667722,,116644
−−
−−
−−
−−
−−
−−
7722
5555
112277
−−
−−
11,,888800
5533,,226644
9955
889944
5566,,113333
−−
−−
−−
−−
−−
−−
1133,,229922
−−
−−
1133,,229922
−−
−−
−−
−−
113366
−−
−−
−−
113366
6,058
495
119,380
690,197
4,833
6,471
827,434
56,893
49,631
15,974
8,882
131,380
78,401
447,547
17,295
18,924
562,167
54
83
137
4,288
80,067
3,713
1,625
1,966
91,659
2288,,447722
6622,,220055
33,,000000
11,,336622
9955,,003399
8822,,117722
550022,,339922
3344,,883311
3399,,447777
665588,,887722
7722
5555
112277
33,,773355
6655,,443333
44,,663333
11,,882222
22,,337711
7777,,999944
33
33,,447711
226611
33,,773355
88,,336688
881155
−−
226633
99,,770077
6655,,556699
44,,663333
11,,882222
22,,337711
7788,,113300
1199,,557722
225588
440044
224400
2200,,447777
669977
22,,668866
11,,990066
22,,886666
88,,115555
337766,,112222
1177,,229988
33,,225500
886699
11,,442255
2266,,331133
440033
664455
998811
22,,229922
44,,332211
553377,,668811
3399
−−
−−
−−
3399
221166,,772233
44,,778899
1133,,445522
99,,114422
1111,,449900
3388,,887733
11,,995500,,880088
44,,778899
1133,,445522
99,,114422
1111,,449900
3388,,887733
11,,888811,,224477
−−
−−
−−
−−
−−
6699,,556611
7,173
13,659
23,110
24,522
68,464
1,681,241
(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.
191
National Bank of Canada2022 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 on a net basis 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)
55,,449900
88,,777755
44,,228822
1188,,554477
((99,,558833))
88,,996644
22,,663399
55,,992266
66,,556699
1155,,113344
1155,,113344
22002222
RRiisskk--
wweeiigghhtteedd
aammoouunntt(1)
550088
11,,884477
11,,779977
44,,115522
44,,115522
Replacement
cost
Credit risk
equivalent(1)
1,975
6,453
8,056
16,484
(9,398)
7,086
3,239
4,361
12,113
19,713
19,713
(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
11,,334422
558899
77,,003333
88,,996644
22002222
CCrreeddiitt rriisskk
eeqquuiivvaalleenntt
22,,770000
33,,229922
99,,114422
1155,,113344
Replacement
cost
771
714
5,601
7,086
2021
Risk-
weighted
amount(1)
814
1,405
3,316
5,535
5,535
2021
Credit risk
equivalent
2,604
3,492
13,617
19,713
192
National Bank of Canada
National Bank of Canada2022 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
112255
33,,226677
116688
33,,556600
11,,442266
66,,446611
770077
88,,559944
991111
11,,992266
11,,444400
44,,227777
1166,,443311
11,,993300
−−
11,,993300
118822
−−
118822
44
−−
44
22,,111166
11,,118866
993300
8855
33,,662200
116666
33,,887711
991199
77,,114400
559977
88,,665566
331144
33,,771177
11,,779933
55,,882244
1188,,335511
11,,113377
3355
11,,117722
110099
−−
110099
−−
−−
−−
11,,228811
558866
669955
22002222
NNeett
4400
((335533))
22
((331111))
550077
((667799))
111100
((6622))
559977
((11,,779911))
((335533))
((11,,554477))
((11,,992200))
779933
((3355))
775588
7733
−−
7733
44
−−
44
883355
660000
223355
Positive
Negative
30
909
74
1,013
2,190
4,026
234
6,450
1,369
2,375
4,305
8,049
15,512
962
−
962
3
−
3
7
−
7
972
644
328
54
1,316
68
1,438
2,365
3,601
250
6,216
886
5,198
4,922
11,006
18,660
268
207
475
232
−
232
−
−
−
707
272
435
−−
1188,,554477
((99,,558833))
88,,996644
−−
1199,,663322
((99,,558833))
1100,,004499
−−
((11,,008855))
−−
((11,,008855))
−
16,484
(9,398)
7,086
−
19,367
(9,398)
9,969
2021
Net
(24)
(407)
6
(425)
(175)
425
(16)
234
483
(2,823)
(617)
(2,957)
(3,148)
694
(207)
487
(229)
−
(229)
7
−
7
265
372
(107)
−
(2,883)
−
(2,883)
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, 2022.
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), and the pound
sterling (GBP).
193
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
The following table shows the notional amounts and the weighted average rates by term to maturity of the designated derivative instruments and their fair
value by type of hedging relationship.
As at October 31
FFaaiirr vvaalluuee hheeddggeess
IInntteerreesstt rraattee rriisskk
Interest rate swaps
Notional amount – LIBOR reform(1)
Notional amount – CDOR reform(2)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – Other
Average USD-AUD exchange rate
Average CAD-HKD exchange rate
Average USD-EUR exchange rate
Options
Notional amount – LIBOR reform(1)
Notional amount – CDOR reform(2)
Notional amount – Other
Average fixed interest rate – Purchased
Average fixed interest rate – Written
CCaasshh ffllooww hheeddggeess
IInntteerreesstt rraattee rriisskk
Interest rate swaps
Notional amount – CDOR reform(2)
Notional amount – Other
Average fixed interest rate – Pay fixed
Average fixed interest rate – Receive fixed
Cross-currency swaps
Notional amount – LIBOR reform(1)
Notional amount – CDOR reform(2)
Notional amount – Other
Average CAD-USD exchange rate
Average USD-EUR exchange rate
Average USD-GBP exchange rate
EEqquuiittyy pprriiccee rriisskk
Equity swaps
Notional amount – CDOR reform(2)
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
22002222
FFaaiirr vvaalluuee
2021
Fair value
TToottaall
AAsssseettss LLiiaabbiilliittiieess
Total
Assets Liabilities
−−
−−
11,,005533
11..66 %%
00..99 %%
−−
881155
11,,886600
11..00 %%
33..33 %%
550099
88,,224466
55,,777700
11..77 %%
11..11 %%
990033
11,,666699
11,,446644
11,,441122
1100,,773300
1100,,114477
22..22 %%
22..77 %%
11..77 %%
22..00 %%
2,025
−
16,572
1.2 %
2.0 %
11,,117766
552277
642
63
1100
2244
2
2
−−
112200
−−
$ 00..11662211
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
3322
4400
$$ 00..77338811
−−
$$ 11..00551133
3322
116600
$$ 00..77338811
$$ 00..11662211
$$ 11..00551133
22
110
$ 0.7351
$ 0.1621
−
−−
−−
5522
((00..88)) %%
22..99 %%
11,,222255
−−
−−
−−
−−
−−
22,,667755
−−
−−
7744
((11..33)) %%
−−
1144,,559999
440099
3300
442244
−−
22..88 %%
440099
3300
555500
((11..22)) %%
22..88 %%
372
−
541
(0.8) %
2.8 %
44,,997711
2233,,447700
11,,118866
558866
19,642
644
272
−−
3355
−
207
−−
1133,,770022
552266
22,,990099
88,,441144
22,,779900
33,,446600
11,,005544
1122,,440000
2200,,445555
11..88 %%
22..11 %%
11..99 %%
00..77 %%
11..77 %%
11..55 %%
22..66 %%
22..22 %%
11..99 %%
11..99 %%
−
31,223
1.6 %
0.6 %
775544
661100
320
205
117722
8855
1
230
11,,001100
339999
11,,112200
22,,001144
−−
22,,223388
22,,002200
22,,335577
112277
$$ 11..33117799 $$ 11..33006699 $$ 11..22774499
$$ 11..11339977 $$ 11..11553344 $$ 11..11999955
−− $$ 11..22337755
−−
667733
11,,113322
−−
$$ 11..22990077
$$ 11..11888899
−−
55,,771177
33,,888888
33,,448855
$$ 11..22997722
$$ 11..11669911
$$ 11..22337755
13,324
−
3,512
$ 1.2945
$ 1.1587
−
113366
$$ 8866..3366
1188,,009900
−−
−−
55,,996644
−−
−−
1155,,770088
−−
−−
66,,331199
113366
44
−−
131
7
−
$$ 8866..3366
4466,,008811
993300
$ 97.54
669955 48,190
328
435
1100
$$ 11..33880022
$$ 00..11227755
1100
1199,,332255
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
−−
88,,663399
3300,,330077
1111,,229900
1100
$$ 11..33880022
$$ 00..11227755
1100
6699,,556611
−−
−−
22,,111166
−−
5
$ 1.2378
−
5
−−
11,,228811 67,837
−
−
−
972
−
707
(1)
(2)
(3)
Includes only contracts that reference USD LIBOR and that mature after June 30, 2023.
Includes only contracts that reference CDOR and that mature after June 28, 2024.
As at October 31, 2022, the Bank also designated $1,410 million in foreign currency deposits denominated in U.S. dollars as net investment hedging instruments ($1,313 million as at
October 31, 2021).
194
National Bank of Canada
National Bank of Canada2022 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 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
66,,880055
66,,448888
55,,880033
668822
22
Carrying value
of hedged
items
7,471
7,609
3,190
105
10
AAss aatt OOccttoobbeerr 3311,, 22002222
CCuummuullaattiivvee
aaddjjuussttmmeennttss
ffrroomm
ddiissccoonnttiinnuueedd
hheeddggeess
CCuummuullaattiivvee
hheeddggee
aaddjjuussttmmeennttss
ffrroomm aaccttiivvee
hheeddggeess
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggeedd
iitteemmss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
GGaaiinnss ((lloosssseess))
oonn tthhee hheeddggiinngg
iinnssttrruummeennttss ffoorr
iinneeffffeeccttiivveenneessss
mmeeaassuurreemmeenntt(1)
HHeeddggee
iinneeffffeeccttiivveenneessss(1)
((552299))
((333322))
((559955))
((33))
−−
((5533))
((223311))
99
6688
22
((558888))
((441155))
668822
33
−−
((331188))
558899
445533
((667777))
((33))
−−
336622
11
3388
55
−−
−−
4444
As at October 31, 2021
Cumulative
adjustments
from
discontinued
hedges
Cumulative
hedge
adjustments
from active
hedges
Year ended October 31, 2021
Gains (losses)
on the hedged
items for
ineffectiveness
measurement(1)
Gains (losses)
on the hedging
instruments for
ineffectiveness
measurement(1)
Hedge
ineffectiveness(1)
(183)
(192)
42
−
−
27
(17)
70
105
10
(309)
(222)
121
23
−
(387)
310
234
(123)
(23)
−
398
1
12
(2)
−
−
11
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.
195
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 17 – Hedging Activities (cont.)
CCaasshh FFllooww HHeeddggeess
Cash flow hedge transactions consist of using interest rate swaps to hedge the risk of changes in future cash flows caused by floating-rate assets or liabilities.
In addition, the Bank sometimes uses cross-currency swaps to hedge the foreign exchange risk caused by assets or liabilities denominated in foreign
currencies. In certain cases, given that interest rate risk and foreign exchange risk are hedged in a single hedging relationship, the information below does not
distinguish between interest rate risk and the combination of interest rate risk and foreign exchange risk as two separate risk categories. The Bank applies this
strategy mainly to its loan, personal credit line, acceptance, and deposit portfolios 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,, 22002222
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
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)
((116699))
2288
221100
6644
113333
−−
113333
((224411))
1100
111155
2277
((8899))
−−
((8899))
335577
225577
((225533))
((5544))
330077
4477
335544
((335566))
((225533))
225555
5555
((229999))
((4477))
((334466))
−−
−−
22
11
33
−−
33
((335566))
6622
225533
5544
1133
((4477))
((3344))
3333
−−
2233
((1111))
4455
−−
4455
As at October 31, 2021
Year ended October 31, 2021
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.
(76)
(15)
161
48
118
47
165
(10)
(8)
(113)
−
(131)
−
(131)
87
488
(208)
(54)
313
(35)
278
(85)
(487)
214
56
(302)
35
(267)
−
−
6
2
8
−
8
(84)
163
208
54
341
39
380
(2)
(5)
46
−
39
(4)
35
196
National Bank of Canada
National Bank of Canada2022 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
AAss aatt OOccttoobbeerr 3311,, 22002222
YYeeaarr eennddeedd OOccttoobbeerr 3311,, 22002222
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)
2266
((227766))
116666
((116666))
−−
((116666))
−−
As at October 31, 2021
Year ended October 31, 2021
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
(1)
Amounts are presented on a pre-tax basis.
35
(120)
(119)
119
−
119
−
197
National Bank of Canada2022 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
Net 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
2233
1133
((4477))
4455
−−
−−
((33))
3311
22002222
NNeett ffoorreeiiggnn ccuurrrreennccyy
ttrraannssllaattiioonn
aaddjjuussttmmeennttss
((112299))
((116666))
−−
445588
−−
4411
220044
Net gains (losses)
on cash flow hedges
(283)
341
39
39
(4)
−
(109)
23
2021
Net foreign currency
translation
adjustments
61
119
−
(286)
13
(36)
(129)
198
National Bank of Canada
National Bank of Canada2022 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, 2022
Reset premium of
the dividend rate or
interest rate
FFiirrsstt pprreeffeerrrreedd sshhaarreess
iissssuueedd aanndd oouuttssttaannddiinngg
Series 30(4)
Series 32(4)
Series 38(4)
Series 40(4)
Series 42(4)
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)
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)
Series 3 (LRCN – Series 3)(9)(10)
October 15, 2025 (5)
July 15, 2026 (5)
October 16, 2027 (5)
1,000.00
1,000.00
1,000.00
Series 44 (9)
Series 45 (9)
Series 46 (9)
4.30 %(11)
4.05 %(11)
7.50 %(11)
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 %
3.943 %
3.045 %
4.281 %
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 prices are 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, whereas 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 preferred shares issued by the Bank in conjunction with the LRCN and held in a limited recourse trust. The preferred shares issued and held in a limited recourse trust are
redeemable for a period of one month from the date fixed for redemption and on the same dates 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 and on 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.
199
National Bank of Canada2022 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)
The LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3 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, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3. 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, LRCN –
Series 2 and LRCN – Series 3 are redeemable at maturity or earlier to the extent that the Bank redeems the Series 44, Series 45 and Series 46 preferred shares from the date fixed for
redemption, and subject to OSFI’s consent and approval.
The Series 44, Series 45 and Series 46 preferred shares issued by the Bank in conjunction with the LRCN – Series 1, LRCN – Series 2 and LRCN – Series 3 are held by a consolidated limited
recourse trust on the Bank's balance sheet and are therefore eliminated for financial reporting purposes. 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, Series 45 and Series 46 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 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, until August 15, 2076 for
the LRCN – Series 2 and until November 16, 2077 for the LRCN – Series 3, 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 maximum aggregate consideration of $300 million. As at October 31, 2022, 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 38
Series 40
Series 42
Other equity instruments
LRCN – Series 1
LRCN – Series 2
LRCN – Series 3
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
$
22002222
2021
1144,,000000,,000000
1122,,000000,,000000
1166,,000000,,000000
1122,,000000,,000000
1122,,000000,,000000
6666,,000000,,000000
550000,,000000
550000,,000000
550000,,000000
11,,550000,,000000
6677,,550000,,000000
333377,,991122,,228833
11,,119933,,666633
((22,,550000,,000000))
((1188,,229955))
((55,,552277))
333366,,558822,,112244
335500
330000
440000
330000
330000
11,,665500
550000
550000
550000
11,,550000
33,,115500
33,,116600
6611
((2244))
((11))
−−
33,,119966
14,000,000
12,000,000
16,000,000
12,000,000
12,000,000
66,000,000
500,000
500,000
−
1,000,000
67,000,000
335,997,660
1,930,033
−
(14,432)
(978)
337,912,283
350
300
400
300
300
1,650
500
500
−
1,000
2,650
3,057
104
−
(1)
−
3,160
(1)
As at October 31, 2022, a total of 5,250 shares were held for trading, representing a negligible amount (as at October 31, 2021, a total of 13,045 shares were sold short for trading,
representing $1 million).
200
National Bank of Canada
National Bank of Canada2022 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
22002222
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)
LRCN – Series 3(3)
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.
(3) The LRCN – Series 3 bear interest at a fixed rate of 7.50% per annum.
1144
1122
−−
−−
1188
1144
1144
7722
2211
2200
66
4477
111199
11,,220066
11,,332255
11..00006633
00..99559988
−−
−−
11..11112255
11..11550000
11..22337755
33..55880000
14
12
11
16
18
14
14
99
21
11
−
32
131
958
1,089
2021
Dividends
per share
1.0063
0.9598
0.7000
1.0125
1.1125
1.1500
1.2375
2.8400
IIssssuuaanncceess ooff OOtthheerr EEqquuiittyy IInnssttrruummeennttss
On September 8, 2022, the Bank issued $500 million of LRCN – Series 3 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 46 first preferred shares issued by the Bank in conjunction
with the LRCN – Series 3. The LRCN – Series 3 sell for $1,000 each and bear interest at a fixed rate of 7.50% per annum until November 16, 2027 exclusively
and, thereafter, at an annual rate equal to the five-year Government of Canada bond yield plus 4.281% until November 16, 2077. The LRCN – Series 3 mature
on November 16, 2082.
On April 21, 2021, the Bank had 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 mature on
August 15, 2081.
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 trust’s
assets will eliminate all of the Bank’s obligations with respect to the LRCN. The LRCN – Series 2 and LRCN – Series 3 are redeemable at maturity or earlier to
the extent that the Bank redeems the Series 45 and Series 46 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 2 and LRCN – Series 3 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.
201
National Bank of Canada2022 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
On December 10, 2021, the Bank began a normal course issuer bid 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 no later than December 9, 2022. Any repurchase through the Toronto
Stock Exchange will be done at market price. The common shares may also be repurchased through other means authorized by the Toronto Stock Exchange
and applicable regulations, including private agreements or share repurchase programs under issuer bid exemption orders issued by the securities regulators.
A private purchase made under an exemption order issued by a securities regulator will be done at a discount to the prevailing market price. The amounts that
are paid above the average book value of the common shares are charged to Retained earnings. During the year ended October 31, 2022, the Bank
repurchased 2,500,000 common shares for $245 million, which reduced Common share capital by $24 million and Retained earnings by $221 million.
RReesseerrvveedd CCoommmmoonn SShhaarreess
As at October 31, 2022 and 2021, there were 15,507,568 common shares reserved under the Dividend Reinvestment and Share Purchase Plan. As at
October 31, 2022, there were 21,742,009 common shares (22,935,672 as at October 31, 2021) reserved under the Stock Option Plan.
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
The 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)
22002222
22
2021
3
(1)
As at October 31, 2022, the non-controlling interest in Flinks stood at 14.1% (14.1% as at October 31, 2021). For additional information, see Note 31 to these consolidated financial
statements.
202
National Bank of Canada
National Bank of Canada2022 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 the following 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 include a capital conservation buffer of 2.5% established by
the BCBS and OSFI as well as a 1.0% surcharge applicable solely to Domestic Systemically Important Banks (D-SIBs) and a 2.5% domestic stability buffer. The
domestic stability buffer, which can vary from 0% to 2.5% of risk-weighted assets, consists exclusively of CET1 capital. A D-SIB that fails to meet this buffer
requirement will not be subject to automatic constraints to reduce capital distributions but will have to provide a remediation plan to OSFI. On June 22, 2022,
OSFI confirmed that the domestic stability buffer was being maintained at 2.5%. 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 requirements as calculated under
Basel II, the difference is added to risk-weighted assets. Lastly, OSFI requires Canadian banks to meet a Basel III leverage ratio of at least 3.0%. The leverage
ratio is a measure independent of risk that is calculated by dividing the amount of Tier 1 capital by total exposure. Total exposure is defined as the sum of on-
balance-sheet assets (including derivative exposures and securities financing transaction exposures) and off-balance-sheet items. The assets deducted from
Tier 1 capital are also deducted from total exposure.
Since November 1, 2021, OSFI has also been requiring D-SIBs to maintain a risk-based total loss-absorbing capacity (TLAC) ratio of at least 24.0% (including
the domestic stability buffer) of risk-weighted assets and a TLAC leverage ratio of at least 6.75%. The purpose of TLAC is to ensure that a D-SIB has sufficient
loss-absorbing capacity to support its recapitalization in the unlikely event it becomes non-viable.
During the years ended October 31, 2022 and 2021, the Bank was in compliance with all of OSFI’s regulatory capital, leverage, and TLAC requirements.
203
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 20 – Capital Disclosure (cont.)
RReegguullaattoorryy CCaappiittaall(1), LLeevveerraaggee RRaattiioo(1) aanndd TTLLAACC(2)
As at October 31
CCaappiittaall
CET1
Tier 1
Total
RRiisskk--wweeiigghhtteedd aasssseettss
TToottaall eexxppoossuurree
CCaappiittaall rraattiiooss
CET1
Tier 1
Total
LLeevveerraaggee rraattiioo
AAvvaaiillaabbllee TTLLAACC(2)
TTLLAACC rraattiioo(2)
TTLLAACC lleevveerraaggee rraattiioo(2)
AAddjjuusstteedd(3)
Adjusted(3)
22002222
2021
1144,,776633
1177,,990066
1199,,772277
1144,,881188
1177,,996611
1199,,772277
12,866
15,515
16,643
111166,,884400
111166,,884400
104,358
440011,,778800
440011,,778800
351,160
1122..66 %%
1155..33 %%
1166..99 %%
44..55 %%
3322,,335511
2277..77 %%
88..11 %%
1122..77 %%
1155..44 %%
1166..99 %%
44..55 %%
3322,,335511
2277..77 %%
88..11 %%
12.3 %
14.9 %
15.9 %
4.4 %
27,492
26.3 %
7.8 %
12,973
15,622
16,643
104,358
351,160
12.4 %
15.0 %
15.9 %
4.4 %
27,492
26.3 %
7.8 %
(1)
(2)
(3)
Capital, risk-weighted assets, total exposure, the capital ratios, and the leverage ratio are calculated in accordance with the Basel III rules, as set out in OSFI's Capital Adequacy
Requirements Guideline and Leverage Requirements Guideline.
Available TLAC, the TLAC ratio, and the TLAC leverage ratio are calculated in accordance with OSFI's Total Loss Absorbing Capacity Guideline.
Adjusted amounts 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 Relief Measures Still in Effect as at October 31, 2022 on page 58 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
NNeett iinntteerreesstt iinnccoommee
NNoonn--iinntteerreesstt iinnccoommee
Trading revenues (losses)
Other revenues
204
22002222
668822
554433
55
554488
11,,223300
2021
777
268
14
282
1,059
National Bank of Canada
National Bank of Canada2022 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 award agreement. The maximum number of common shares that may be issued under the
Stock Option Plan was 21,742,009 as at October 31, 2022 (22,935,672 as at October 31, 2021). 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,,334488,,668800
11,,777711,,558888
((11,,119933,,666633))
((6644,,885566))
1111,,886611,,774499
77,,334444,,553366
22002222
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
$$
5577..9933
9966..3355
4455..7733
7766..1100
6644..8800
5555..5500
Number of
options
11,425,403
2,043,196
(1,930,033)
(189,886)
11,348,680
6,737,850
(1)
Includes 27,714 expired options during the year ended October 31, 2022 (35,342 expired options during the year ended October 31, 2021).
Exercise price
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
$96.35
Options
outstanding
470,324
697,207
963,282
790,312
868,437
1,240,493
1,577,166
1,566,934
1,933,226
1,754,368
11,861,749
Options
exercisable
470,324
697,207
963,282
790,312
868,437
1,240,493
1,108,204
746,474
459,803
−
7,344,536
2021
Weighted
average
exercise price
$
$
$
$
$
$
53.96
71.55
47.96
67.02
57.93
50.81
Expiry date
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
December 2031
During the year ended October 31, 2022, the Bank awarded 1,771,588 stock options (2,043,196 stock options during the year ended October 31, 2021) with
an average fair value of $13.24 per option ($8.24 for the year ended October 31, 2021).
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
22002222
2021
11..7799%%
77 yyeeaarrss
2222..6688%%
33..8888%%
1.02%
7 years
22.59%
4.24%
205
National Bank of Canada2022 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 the 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.
For the year ended October 31, 2022, a $17 million compensation expense related to this plan was recognized in the Consolidated Statement of Income
($11 million for the year ended October 31, 2021).
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 ten 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 award agreement. For the year ended October 31, 2022, a compensation expense in a negligible
amount related to this plan was recognized in the Consolidated Statement of Income ($7 million for the year ended October 31, 2021).
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, 2022 and 2021.
Exercise price
$38.36
$44.96
$47.93
$42.17
$54.69
$64.14
$58.79
$71.86
$71.55
$96.35
NNuummbbeerr
ooff SSAARRss
226666,,007755
2211,,446644
((7799,,669988))
220077,,884411
113300,,331199
22002222
WWeeiigghhtteedd
aavveerraaggee
eexxeerrcciissee pprriiccee
$$
$$
$$
$$
$$
5577..6611
9966..3355
5599..8899
6600..7733
5511..3311
Number
of SARs
292,896
30,504
(57,325)
266,075
164,225
SARs
outstanding
SARs
exercisable
7,904
21,136
28,824
19,748
16,320
16,236
24,195
29,136
22,878
21,464
207,841
7,904
21,136
28,824
19,748
16,320
16,236
12,453
7,698
−
−
130,319
2021
Weighted
average
exercise price
$
$
$
$
$
53.66
71.55
44.88
57.61
51.43
Expiry date
December 2022
December 2023
December 2024
December 2025
December 2026
December 2027
December 2028
December 2029
December 2030
December 2031
DDeeffeerrrreedd SSttoocckk UUnniitt ((DDSSUU)) PPllaannss
The DSU Plans are for officers and other designated persons of the Bank and its subsidiaries as well as for 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, 2022, the Bank awarded 39,227 DSUs at a weighted average price of $97.10 (55,545 DSUs at a weighted average price of
$75.55 for the year ended October 31, 2021). A total of 551,539 DSUs were outstanding as at October 31, 2022 (514,841 DSUs as at October 31, 2021). For
the year ended October 31, 2022, a $1 million compensation expense related to these plans was recognized in the Consolidated Statement of Income
($23 million for the year ended October 31, 2021).
206
National Bank of Canada
National Bank of Canada2022 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 award date, i.e., 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’s 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, 2022, the Bank awarded 1,895,489 RSUs at a weighted average price of $99.59 (1,960,326 RSUs at a weighted average
price of $72.76 for the year ended October 31, 2021). As at October 31, 2022, a total of 4,203,383 RSUs were outstanding (4,398,019 RSUs as at
October 31, 2021). For the year ended October 31, 2022, a $172 million compensation expense related to this plan was recognized in the Consolidated
Statement of Income ($256 million for the year ended October 31, 2021).
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 award date, i.e., 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, 2022, the Bank awarded 238,082 PSUs at a weighted average price of $99.59 (235,949 PSUs at a weighted average price of
$72.76 for the year ended October 31, 2021). As at October 31, 2022, a total of 739,359 PSUs were outstanding (794,440 PSUs as at October 31, 2021). For
the year ended October 31, 2022, a $30 million compensation expense related to this plan was recognized in the Consolidated Statement of Income
($42 million for the year ended October 31, 2021).
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 revenue growth and continuous profitability improvement within 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 that has a
value equal to the closing price of the Bank’s common share on the Toronto Stock Exchange on the award date. Additional units are credited 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, 2022, the Bank awarded 129,464 share units at a weighted average price of $94.87 (124,981 share units at a weighted
average price of $80.23 for the year ended October 31, 2021). As at October 31, 2022, a total of 2,036,524 share units were outstanding (2,038,003 share
units as at October 31, 2021). For the year ended October 31, 2022, a $19 million reversal of the compensation expense related to this plan was recognized in
the Consolidated Statement of Income (compensation expense of $83 million for the year ended October 31, 2021).
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 $15 million for the
year ended October 31, 2022 ($14 million for the year ended October 31, 2021), were recognized when paid in the Compensation and employee benefits item
of the Consolidated Statement of Income. As at October 31, 2022, a total of 6,304,689 common shares were held for this plan (6,149,769 common shares as
at October 31, 2021).
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 $716 million as at October 31, 2022 ($816 million as at
October 31, 2021). The intrinsic value of these liabilities that had vested as at October 31, 2022 was $359 million ($364 million as at October 31, 2021).
207
National Bank of Canada2022 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 BBeenneeffiitt PPllaannss
The Bank offers pension plans that have a defined benefit component and a defined contribution component. The Bank also offers other post-employment
benefit plans to eligible employees. The defined benefit component of the pension plans provides benefits based on years of plan participation and average
earnings at retirement. The other post-employment benefits include post-employment medical, dental, and life insurance coverage. Since September 19,
2022, the Bank has been offering a new defined contribution component that is available to all new employees upon hiring as well as to current participants of
the defined benefit component. Therefore, as of that date, the defined benefit component is no longer offered to new employees. For the defined contribution
component, the Bank's base contribution equals a percentage of annual salary and the Bank’s additional contribution varies according to the employee’s
contributions, and the sum of the employee’s age and years of continuous service. The defined benefit component of the pension plans is funded, whereas the
defined contribution component and the other post-employment benefit plans are not funded. The fair value of the defined benefit component and the present
value of the defined benefit obligations were 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 component of the pension plans and the other post-employment benefit plans exposes the Bank to specific risks such as investment
performance, changes to the discount rate used to calculate the obligation, the longevity of plan participants, 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 component of the pension plans are overseen at
different levels by the pension committees, the Bank’s management, and the Board’s Human Resources Committee. The defined benefit component of the
pension 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 component of the 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,, AAsssseettss ooff tthhee PPllaannss,, aanndd FFuunnddeedd SSttaattuuss
As at October 31
Pension plans – Defined
benefit component
2021
22002222
Other post-employment
benefit plans
2021
22002222
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
44,,774455
112299
117711
5555
((11,,006633))
9955
6655
((222266))
33,,997711
55,,443366
119911
((33))
((11,,111133))
111199
6655
((222266))
44,,446699
449988
5,027
146
149
9
(538)
107
58
(213)
4,745
5,153
148
(4)
214
80
58
(213)
5,436
691
(1)
For fiscal 2023, the Bank expects to pay an employer contribution of $123 million to the defined benefit component of the pension plans.
208
114433
11
55
11
((2244))
((66))
((99))
111111
156
1
4
1
(14)
4
(9)
143
((111111))
(143)
National Bank of Canada
National Bank of Canada2022 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
Pension plans – Defined
benefit component
2021
22002222
Other post-employment
benefit plans
2021
22002222
449988
−−
449988
691
−
691
((111111))
((111111))
(143)
(143)
CCoosstt ffoorr PPeennssiioonn PPllaannss aanndd OOtthheerr PPoosstt--EEmmppllooyymmeenntt BBeenneeffiitt PPllaannss
Year ended October 31
Current service cost(1)
Interest expense (income), net
Administration costs
EExxppeennssee rreeccooggnniizzeedd iinn NNeett iinnccoommee
RReemmeeaassuurreemmeennttss(2)
Actuarial (gains) losses on the defined benefit obligation
Return on plan assets(3)
RReemmeeaassuurreemmeennttss rreeccooggnniizzeedd iinn OOtthheerr ccoommpprreehheennssiivvee iinnccoommee
22002222
112299
((2200))
33
111122
((991133))
11,,111133
220000
331122
Pension plans
2021
Other post-employment benefit plans
2021
22002222
146
1
4
151
(422)
(214)
(636)
(485)
11
55
66
((2299))
((2299))
((2233))
1
4
5
(9)
(9)
(4)
(1)
(2)
(3)
For the year ended October 31, 2022, the amount of the contributions made by the Bank to the defined contribution component of the pension plans was not significant.
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 tthhee AAsssseettss ooff tthhee DDeeffiinneedd
BBeenneeffiitt CCoommppoonneenntt ooff tthhee PPeennssiioonnss PPllaannss
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
−−
998888
111144
−−
−−
−−
11,,110022
227733
11,,115500
−−
11,,776699
226644
((8899))
33,,336677
22002222
TToottaall
227733
22,,113388
111144
11,,776699
226644
((8899))
44,,446699
Quoted
in an active
market(1)
Not quoted
in an active
market
−
1,290
175
−
−
−
1,465
171
935
−
1,593
1,248
24
3,971
2021
Total
171
2,225
175
1,593
1,248
24
5,436
(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 assets of the pension plans may include investment securities issued by the Bank. As at October 31, 2022 and 2021, the assets of the pension plans do
not include any securities issued by the Bank.
For fiscal 2022, the Bank and its related entities received $21 million ($15 million in fiscal 2021) in fees from the pension plans for related management,
administration and custodial services.
209
National Bank of Canada2022 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 Benefit Plans (cont.)
AAllllooccaattiioonn ooff tthhee DDeeffiinneedd BBeenneeffiitt OObblliiggaattiioonn bbyy tthhee SSttaattuuss ooff tthhee PPaarrttiicciippaannttss iinn tthhee DDeeffiinneedd
BBeenneeffiitt CCoommppoonneenntt ooff tthhee PPeennssiioonn PPllaannss
As at October 31
Active employees
Retirees
Participants with deferred vested benefits
WWeeiigghhtteedd aavveerraaggee dduurraattiioonn ooff tthhee
ddeeffiinneedd bbeenneeffiitt oobblliiggaattiioonn (in years)
Pension plans – Defined benefit component
2021
22002222
Other post-employment benefit plans
2021
22002222
4411 %%
5533 %%
66 %%
110000 %%
1144
42 %
51 %
7 %
100 %
16
77 %%
9933 %%
13 %
87 %
110000 %%
100 %
1100
12
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 actual data and extrapolated data.
To measure the obligation related to the defined benefit component of the pension plans and related to the other post-employment benefit plans, 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 4.77% as at October 31, 2022 (4.52% as at October 31, 2021). Based
on the assumption retained, this rate is expected to increase to 5.42% in 2025, then remain at 5.30% from 2026 to 2030, then decrease gradually to 4.05% in
2040 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
Pension plans – Defined benefit component
2021
22002222
Other post-employment benefit plans
2021
22002222
55..4455 %%
33..0000 %%
3.55 %
3.00 %
2222..44
2244..77
2233..44
2255..66
21.4
23.7
22.4
24.7
55..4455 %%
33..0000 %%
44..7777 %%
2222..44
2244..77
2233..44
2255..66
3.55 %
3.00 %
4.52 %
21.4
23.7
22.4
24.7
210
National Bank of Canada
National Bank of Canada2022 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
Pension plans – Defined benefit component
2021
22002222
Other post-employment benefit plans
2021
22002222
33..7700 %%
33..5555 %%
33..0000 %%
3.10 %
2.90 %
3.00 %
2211..44
2233..77
2222..44
2244..77
21.3
23.7
22.4
24.6
33..7700 %%
33..5555 %%
33..0000 %%
44..5522 %%
2211..44
2233..77
2222..44
2244..77
3.10 %
2.90 %
3.00 %
4.64 %
21.3
23.7
22.4
24.6
SSeennssiittiivviittyy ooff SSiiggnniiffiiccaanntt AAssssuummppttiioonnss ffoorr 22002222
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, 2022. These impacts are hypothetical and should be interpreted with caution, as changes in each significant
assumption may not be linear. The Bank has decided to adjust the table by varying the discount rate by 1.00% instead of the 0.25% used in the previous fiscal
year to reflect the current economic environment.
As at October 31, 2022
Impact of a 1.00% increase in the discount rate
Impact of a 1.00% 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
2023
2024
2025
2026
2027
2028 to 2032
Pension plans – Defined
benefit component
Change in the obligation
Other post-employment
benefit plans
Change in the obligation
(401)
513
23
(25)
(82)
76
(11)
13
5
(4)
(1)
1
Pension plans – Defined
benefit component
Other post-employment
benefit plans
235
244
254
264
272
1,489
9
8
8
8
7
36
211
National Bank of Canada2022 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
Impact of an accounting policy change(2)
CCoonnssoolliiddaatteedd SSttaatteemmeenntt ooff CCoommpprreehheennssiivvee IInnccoommee
Remeasurements of pension plans and other post-employment benefit plans
Net change in cash flow hedges
Net fair value change attributable to credit risk on financial liabilities designated at fair value through profit or loss
Other
IInnccoommee ttaaxxeess
22002222
2021(1)
880033
((1199))
778844
111100
−−
111100
889944
((1144))
((1144))
((4455))
33
221166
((9900))
8844
996644
779
(3)
776
96
10
106
882
(10)
(49)
(59)
170
109
(5)
50
324
1,147
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
As at October 31, 2021, a $49 million deferred tax liability arising from an accounting policy change was reversed to Retained earnings in the Consolidated Statement of Changes in Equity.
For additional information, see Note 1 to these consolidated financial statements.
The breakdown of the income tax expense is as follows.
Year ended October 31
Current taxes
Deferred taxes
22002222
993333
3311
996644
2021(1)
916
231
1,147
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
212
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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 – Other post-employment
benefit plans
Investments in associates
Leases liabilities
Deferred revenue
Tax loss carryforwards
Other items(2)
DDeeffeerrrreedd ttaaxx lliiaabbiilliittiieess
Premises and equipment and intangible assets(3)
Defined benefit asset – Pension plans
Investments in associates
Other items(4)
NNeett ddeeffeerrrreedd ttaaxx aasssseettss ((lliiaabbiilliittiieess))
As at October 31
Consolidated
Balance Sheet
2021(1)
22002222
Year ended October 31
Consolidated Statement
of Income
2021(1)
22002222
Year ended October 31
Consolidated Statement
of Comprehensive Income
2021
22002222
223355
331177
3388
2233
111188
6622
3355
3322
886600
((331122))
((112277))
((22))
((4444))
((448855))
337755
225
354
47
57
132
51
33
29
928
(299)
(178)
−
(45)
(522)
406
1100
((3377))
((11))
((3344))
((1144))
1111
22
11
((6622))
((1133))
((22))
((22))
((3311))
((4488))
((111100))
(101)
89
(3)
(41)
(13)
4
(7)
(31)
(103)
(16)
16
4
(7)
(3)
(106)
−−
−−
((88))
−−
−−
−−
−−
−−
((88))
−−
5533
−−
3322
8855
7777
−
−
(2)
−
−
−
−
−
(2)
−
(168)
−
(5)
(173)
(175)
(1)
(2)
(3)
(4)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
As at October 31, 2022, the Consolidated Balance Sheet included a $2 million deferred tax asset related to share issuance costs ($1 million as at October 31, 2021) reported in Retained
earnings on the Consolidated Statement of Changes in Equity.
As at October 31, 2021, a $62 million deferred tax liability arising from an accounting policy change was reversed, of which $49 million was to Retained earnings in the Consolidated
Statement of Changes in Equity and $13 million to Income taxes in the Consolidated Statement of Income. For additional information, see Note 1 to these consolidated financial statements.
As at October 31, 2021, the Consolidated Balance Sheet included a $6 million deferred tax liability 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.
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
22002222
338899
((1144))
337755
2021(1)
416
(10)
406
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
213
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 24 – Income Taxes (cont.)
According to forecasts, which are based on information available as at October 31, 2022, the Bank believes that the results of future operations will likely
generate sufficient taxable income to utilize all the deferred tax assets before they expire.
As at October 31, 2022, the total amount of temporary differences, unused tax loss carryforwards, and unused tax credits for which no deferred tax asset has
been recognized was $561 million ($424 million as at October 31, 2021).
As at October 31, 2022, 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 $5,636 million ($4,383 million as at October 31, 2021).
The following table provides a reconciliation of the Bank’s income tax rate.
Year ended October 31
Income before income taxes
Income taxes at Canadian statutory income tax rate
Reduction in income tax rate due to
Tax-exempt income from securities
Non-taxable portion of capital gains
Tax rates of subsidiaries, foreign entities and associates
Other items
Income taxes reported in the Consolidated Statement of Income and
effective income tax rate
$$
44,,227777
11,,113333
((119911))
((11))
((7711))
2244
((223399))
889944
22002222
%%
110000..00
2266..55
((44..55))
−−
((11..77))
00..66
((55..66))
2200..99
$
4,022
1,066
(151)
−
(51)
18
(184)
882
2021(1)
%
100.0
26.5
(3.8)
−
(1.3)
0.5
(4.6)
21.9
(1)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
NNoottiiccee ooff AAsssseessssmmeenntt
In September 2022, the Bank was reassessed by the Canada Revenue Agency (CRA) for additional income tax and interest of approximately $150 million
(including estimated provincial tax and interest) in respect of certain Canadian dividends received by the Bank during the 2017 taxation year.
In prior fiscal years, the Bank had been reassessed for additional income tax and interest of approximately $725 million (including provincial tax and interest)
in respect of certain Canadian dividends received by the Bank during the 2012-2016 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 2017 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, 2022.
PPrrooppoosseedd LLeeggiissllaattiioonn
On November 4, 2022, the Government of Canada introduced Bill C-32 – An Act to implement certain provisions of the fall economic statement table in
Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022 to implement tax measures applicable to certain
entities of banking and life insurer groups, as presented in its budget of April 7, 2022. These tax measures include the Canada Recovery Dividend (CRD), which
is a one-time 15% tax on the fiscal 2021 and 2020 average taxable income above $1 billion, and also include a 1.5% increase in the statutory tax rate. The
amount of CRD for the Bank is estimated at $32 million. Since these tax measures were not substantively enacted at the reporting date, no amount has been
recognized in the Bank’s consolidated financial statements as at October 31, 2022.
214
National Bank of Canada
National Bank of Canada2022 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
22002222
2021(1)
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 other equity instruments
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(2)
Weighted average diluted number of common shares outstanding (thousands)
DDiilluutteedd eeaarrnniinnggss ppeerr sshhaarree (dollars)
33,,338844
110077
33,,227777
333377,,009999
99..7722
33,,227777
333377,,009999
33,,773388
334400,,883377
99..6611
3,140
123
3,017
337,212
8.95
3,017
337,212
3,649
340,861
8.85
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these consolidated
financial statements.
For the year ended October 31, 2022, the calculation of diluted earnings per share excluded an average number of 1,575,093 options outstanding with a weighted average exercise price of
$96.35, given that the exercise price of these options was greater than the average price of the Bank’s common shares. For the year ended October 31, 2021, given that 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.
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 or insurance policies or from collateral held or pledged. The maximum potential amount of future
payments under 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
22002222
66,,661188
88,,770077
118800
2021
6,083
7,264
−
(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, 2022, the notional amount of the global-style backstop liquidity
facilities totalled $3.2 billion ($2.8 billion as at October 31, 2021), 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.
215
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 26 – Guarantees, Commitments and Contingent Liabilities (cont.)
The Bank also provides credit enhancement facilities to these multi-seller conduits. These facilities have terms of less than one year and are automatically
renewable unless the Bank sends a non-renewal notice. As at October 31, 2022 and 2021, the committed notional value for these facilities was $30 million. To
date, the credit enhancement facilities provided by the Bank have not been drawn.
The maximum risk of loss for the Bank cannot exceed the total amount of commercial paper outstanding, i.e., $3.2 billion as at October 31, 2022 ($2.8 billion
as at October 31, 2021). As at October 31, 2022, the Bank held $35 million ($22 million as at October 31, 2021) of this commercial paper and, consequently,
the maximum potential amount of future payments, taking into account the credit enhancement facilities, was $3.2 billion ($2.7 billion as at October 31,
2021).
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, 2022, the notional amount of the overnight uncommitted liquidity facility amounted to $5.6 billion
($4.5 billion as at October 31, 2021). As at October 31, 2022 and 2021, no amount had been drawn.
SSeeccuurriittiieess LLeennddiinngg
Under securities lending agreements that 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. 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, 2022 and 2021, 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 related to these agreements has been recognized on the Consolidated Balance Sheet.
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 that 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)
22002222
66,,661188
116611
99,,333377
8822,,111177
2021
6,083
160
9,081
77,983
(1)
(2)
(3)
See the Letters of Guarantee item on page 215.
Documentary letters of credit are documents issued by the Bank and used in international trade to enable a third party to present a payment request to the Bank for 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 unused portions of authorizations to extend credit, under certain conditions, in the form of loans or bankers’
acceptances.
FFiinnaanncciiaall AAsssseettss RReecceeiivveedd aass CCoollllaatteerraall
As at October 31, 2022, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge was $92.3 billion ($74.1 billion
as at October 31, 2021). 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.
216
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
OOtthheerr CCoommmmiittmmeennttss
The Bank acts as an investor in investment banking activities whereby 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 had commitments to invest up
to $102 million as at October 31, 2022 ($124 million as at October 31, 2021). 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, 2022, the Bank had commitments to purchase loans of up
to $60 million ($77 million as at October 31, 2021).
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.
As at October 31
22002222
2021
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
332255
11,,663344
55,,336688
6688,,445588
2266,,336611
1111,,559900
115599
111133,,889955
502
4,158
6,339
72,038
25,173
9,542
4
117,756
(1)
(2)
Includes assets pledged as collateral for activities in the systemically important payment system (designated as Lynx) as at October 31, 2022 and 2021.
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 proceeding involving the Bank are
as follows:
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.
217
National Bank of Canada2022 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 219.
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.
218
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
The following table presents the carrying amounts of the assets and liabilities relating to the Bank’s interests in non-consolidated structured entities, the
Bank’s maximum exposure to loss from these interests, as well as the total assets of these structured entities. The structured entity Canada Housing Trust is
not presented. For additional information, see Note 8 to these consolidated financial statements.
AAsssseettss oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Securities at fair value through profit or loss
Securities at amortized cost
Derivative financial instruments
As at October 31, 2021
LLiiaabbiilliittiieess oonn tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett
Derivative financial instruments
As at October 31, 2021
MMaaxxiimmuumm eexxppoossuurree ttoo lloossss
Securities
Liquidity, credit enhancement facilities and commitments
As at October 31, 2021
TToottaall aasssseettss ooff tthhee ssttrruuccttuurreedd eennttiittiieess
As at October 31, 2021
MMuullttii--sseelllleerr
ccoonndduuiittss(1)
IInnvveessttmmeenntt
ffuunnddss(2)
AAss aatt OOccttoobbeerr 3311,, 22002222
TThhiirrdd--ppaarrttyy
ssttrruuccttuurreedd
eennttiittiieess(4)
PPrriivvaattee
iinnvveessttmmeennttss(3)
3355
−−
−−
3355
22
((7711))
((7711))
(12)
3355
33,,115555
33,,119900
2,754
33,,118833
2,782
333355
−−
−−
333355
197
−−
−−
−
333355
−−
333355
197
11,,777722
1,791
7777
−−
−−
7777
54
−−
−−
−
7777
−−
7777
54
553355
400
−−
55,,116633
3388
55,,220011
2,942
((9911))
((9911))
(8)
55,,220011
446688
55,,666699
3,896
1111,,119977
16,883
(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, 2022, the notional
committed amount of the global-style liquidity facilities totalled $3.2 billion ($2.8 billion as at October 31, 2021), 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, 2021). The maximum exposure to loss cannot exceed
the amount of commercial paper outstanding. As at October 31, 2022, the Bank held $35 million in commercial paper ($22 million as at October 31, 2021) and, consequently, the maximum
potential amount of future payments as at October 31, 2022 was limited to $3.2 billion ($2.7 billion as at October 31, 2021), 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.
219
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 27 – Structured Entities (cont.)
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
11,,991166
880022
5566
1177,,990000
116666
2200,,884400
22002222
TToottaall
aasssseettss(1)
22,,007733
880022
5566
1188,,223377
116666
2211,,333344
Investments
and other assets
2,410
256
121
15,663
169
18,619
2021
Total
assets(1)
2,544
256
121
16,048
169
19,138
(1)
(2)
(3)
(4)
(5)
(6)
(7)
There are restrictions, arising essentially from regulatory requirements, corporate or securities laws, and contractual arrangements, that limit the ability of some of the Bank’s 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, 2022, the total amount of
transferred mortgage loans was $17.9 billion ($15.7 billion as at October 31, 2021), and the total amount of covered bonds of $10.4 billion was recognized in Deposits on the Consolidated
Balance Sheet ($8.8 billion as at October 31, 2021). For additional information, see Note 13 to these consolidated financial statements.
The underlying assets consist of a loan portfolio.
220
National Bank of Canada
National Bank of Canada2022 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)
2021
21
115
−
22002222
2222
5588
−−
22002222
444499 (2)
8800 (3)
66
Related entities
2021
143
(2)
(3)
126
38
(1)
(2)
(3)
As at October 31, 2022, key officers and directors and their immediate family members were holding $68 million of the Bank’s common and preferred shares ($95 million as at
October 31, 2021).
As at October 31, 2022, mortgage loans and other loans consisted of: (i) $1 million in loans to the Bank’s associates ($1 million as at October 31, 2021) and (ii) $448 million in loans to
entities over which the Bank’s key officers or directors or their immediate family members exercise control or significant influence through significant voting power ($142 million as at
October 31, 2021).
As at October 31, 2022, deposits consisted of: (i) no amount in deposits from the Bank’s associates ($1 million as at October 31, 2021) and (ii) $80 million in deposits from entities over
which the Bank’s key officers or directors and their immediate family members exercise control or significant influence through significant voting power ($125 million as at
October 31, 2021).
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
22002222
2244
2211
2021
23
22
221
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 28 – Related Party Disclosures (cont.)
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,, 22002222
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, 2022. 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, 2022 are integral parts 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, 2022 and 2021. 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 that 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.
222
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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,, 22002222
1133,,008844
114422
331111
1188
668855
−−
−−
−−
1177,,663300
3311,,887700
11,,552277
66,,445500
55,,440055
22,,226677
22,,333377
33,,336699
88,,663344
1100,,666611
4466,,772255
8877,,337755
55
660022
22,,113344
3300
119966
66,,667766
1133
11,,887766
77,,229944
2200
11,,003322
33,,331199
4466
9955
22,,447788
995522
22,,884400
77,,116611
44,,991100
55,,880022
1199,,334466
22,,229966
11,,007733
1144,,003300
555566
−−
4477,,228811
88,,882288
1133,,551166
110099,,771199
1122,,448899
11,,223311
889900
−−
440099
11,,004444
−−
−−
1100,,442233
2266,,448866
11,,115555
442233
11,,112244
444499
11,,889999
887788
22,,771166
11,,220088
22,,336644
11,,003366
88,,991100
33,,770011
5533,,333355
1177,,779922
88,,005599
55,,008855
1199,,998800
33,,449911
33,,997711
33,,558866
22,,660044
66,,116677
1111,,445522
22,,998855
55,,996677
555544
2200
−−
−−
−−
−−
−−
2277,,552255
55,,661188
66,,776688
77,,551100
66,,000044
1188,,777788
8822,,557799
1166,,112299
556677
1144,,775511
22,,338899
1199,,008811
8800,,112299
4455,,332233
22,,338899
7733,,331177
−−
((995555))
3355,,883333
66,,554411
((995555))
220066,,774444
22,,004466
22,,880044
11,,885533
11,,119900
669988
11,,774422
55,,118822
33,,003322
−−
1188,,554477
22,,663333
44,,667799
5599,,991111
552277
33,,333311
1166,,999988
447722
22,,332255
1177,,558888
116611
11,,335511
1122,,119988
9944
779922
1100,,336688
550022
22,,224444
2299,,222277
110077
55,,228899
110077,,221144
8866
33,,111188
3333,,227777
114400
11,,339977
11,,551199
11,,336600
11,,337766
55,,779922
111166,,995599
114400
11,,339977
11,,551199
11,,336600
55,,995588
2288,,992211
440033,,774400
(1)
Amounts collectible on demand are considered to have no specified maturity.
223
National Bank of Canada2022 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.)
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,, 22002222
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,,448822
3366,,886644
772244
3399,,007700
55,,996677
442288
1166,,223333
22,,558844
−−
−−
88
11,,007766
2266,,229966
−−
11,,449933
1111,,660055
662244
1133,,772222
22,,995555
1100,,664444
5544
1133,,665533
66,,001133
44,,887755
112222
1111,,001100
66,,114411
33,,772288
3300
99,,889999
66,,441188
55,,998888
−−
1122,,440066
77,,994422
1133,,665599
77
2211,,660088
44,,225522
44,,222277
3366
88,,551155
4422,,111155
9922,,664400
11,,775566
113366,,551111
7788,,881111
118844,,223300
33,,335533
226666,,339944
555544
339944
2200
663344
55,,444455
22,,330022
22,,667722
−−
1166
4466
1111,,442299
−−
11,,556677
11,,664400
442222
−−
2233
9999
44,,440055
−−
−−
7744
33,,440066
11,,000099
11,,332299
2299
2233
2233
55,,889933
−−
−−
−−
−−
−−
−−
66,,554411
992200
11,,449933
33,,994488
66,,338866
77,,554400
2211,,881177
−−
559955
22,,228888
−−
2244
3399
33,,886666
−−
2222
22,,004477
44,,555588
−−
8877
2277
88,,223344
−−
−−
33,,557700
99,,661122
4499
221199
4422
1177,,444400
−−
−−
55,,888855
55,,339966
−−
115522
9922
1177,,991111
11,,449999
66,,880000
−−
3333,,447733
1199,,663322
−−
−−
−−
44,,228877
1188,,662277
2266,,227777
7788
555522
55,,773311
111144,,110011
−−
11,,449999
2211,,774466
117766,,888844
2211,,774466
440033,,774400
6655,,336666
2255,,115511
1188,,005588
1166,,990033
1133,,776655
2200,,664400
3399,,004488
2277,,992255
118800
11,,445511
11,,333388
998822
11,,339988
11,,229922
113388
−−
33,,112266
1155
99,,220055
55,,555522
66,,117799
1155
66,,667788
−−
33,,227700
−−
44,,006666
11
3388
11
4422
22
4477
22
4466
22
4477
66
2211
−−
33,,118866
99
3344
−−
−−
3399
88
−−
−−
99,,333377
66,,777799
99,,333377
33,,112255
4466,,336688
88,,770077
8822,,111177
−−
110022
3311
337777
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 $5.6 billion.
These amounts include $44.8 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 $0.2 billion in contractual commitments related to the head office building under construction.
224
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
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(2)
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(2)
1 month
or less
Over 1
month to
3 months
Over 3
months to
6 months
Over 6
months to
9 months
Over 9
months to
12 months
Over 1
year to
2 years
Over 2
years to
5 years
Over 5
years
No
specified
maturity
Total
As at October 31, 2021(1)
7,510
334
374
146
368
−
−
−
25,147
33,879
1,946
1,929
1,061
702
792
3,037
6,454
9,410
59,480
84,811
1
1
1,948
−
181
2,110
1
213
1,275
624
425
1,751
63
804
1,659
227
3,589
6,853
4,867
5,865
17,186
3,183
832
13,425
617
−
60,097
9,583
11,910
106,304
1,113
1,199
59
−
371
619
−
−
4,155
7,516
702
214
965
315
1,581
512
2,587
877
2,320
843
8,850
3,527
48,455
16,056
6,504
4,308
16,842
3,986
2,614
3,508
3,253
6,290
10,180
3,605
6,200
618
18
−
−
−
−
−
23,958
5,884
4,725
6,972
6,416
18,667
74,691
14,417
578
14,401
2,150
10,828
72,542
41,053
2,150
61,106
−
(998)
26,959
6,836
(998)
182,689
1,868
3,678
1,019
2,190
823
1,865
2,491
2,550
−
16,484
1,829
3,697
38,226
137
3,815
13,342
148
1,167
7,600
129
2,319
11,188
56
879
9,693
727
2,592
28,731
88
2,579
94,456
17
2,567
30,409
225
1,216
1,504
1,274
1,399
5,618
121,976
225
1,216
1,504
1,274
4,530
25,233
355,621
(1)
(2)
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
Amounts collectible on demand are considered to have no specified maturity.
225
National Bank of Canada2022 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.)
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(6)
OOffff--bbaallaannccee--sshheeeett ccoommmmiittmmeennttss
Letters of guarantee and
documentary letters of credit
Credit card receivables(7)
Backstop liquidity and credit
enhancement facilities(8)
Commitments to extend credit(9)
Obligations related to:
Lease commitments(10)
Other contracts(11)
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, 2021
1,396
24,814
1,011
27,221
6,200
186
7,330
3,048
−
36
7
640
17,447
−
3,433
12,796
128
16,357
4,596
10,782
38
15,416
618
123
18
182
2,668
3,061
1,688
−
15
477
8,650
−
3,633
1,171
1,523
−
21
117
6,665
−
2,194
5,785
66
8,045
−
175
246
1,921
1,054
−
22
125
3,543
−
1,945
2,691
23
4,659
−
22
−
880
411
−
22
100
1,435
−
4,157
5,453
1
9,611
6,468
10,054
−
16,522
4,914
4,765
36
9,715
40,973
90,730
1,689
133,392
70,076
167,870
2,992
240,938
−
−
−
−
6,836
3,099
3,743
4,797
7,939
20,266
−
1,485
5,501
28
88
41
10,242
−
−
3,273
10,771
48
214
25
18,074
−
4,528
4,222
−
186
75
13,808
3,416
−
17,293
19,367
−
−
−
4,014
15,369
25,170
112
575
5,614
95,233
−
768
−
768
44,668
25,007
22,081
11,588
6,094
19,853
34,596
24,291
18,682
167,443
18,682
355,621
320
1,561
828
2,092
793
575
74
15
2,848
−
9,139
4,502
6,195
15
6,737
−
3,872
1
54
1
58
1
50
1
48
1
46
−
3,105
1
152
−
3,667
3
19
−
−
48
3
−
−
9,081
6,243
9,081
2,732
42,372
7,264
77,983
−
124
12
551
(1)
(2)
(3)
(4)
(5)
(6)
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.
Certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information, see Note 1 to these audited
consolidated financial statements.
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.
(7)
(8)
(9)
(10) 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.
(11) These amounts include $0.3 billion in contractual commitments related to the head office building under construction.
226
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 3300 –– SSeeggmmeenntt DDiisscclloossuurreess
The Bank carries out its activities in four business segments, which are defined below. For presentation purposes, other activities are grouped in the Other
heading. Each reportable segment is distinguished by services offered, type of clientele, and marketing strategy. The presentation of segment disclosures is
consistent with the presentation adopted by the Bank for the fiscal year beginning November 1, 2021. This presentation reflects the fact that the loan portfolio
of borrowers in the ʺOil and gasʺ and ʺPipelinesʺ sectors as well as related activities, which had previously been reported in the Personal and Commercial
segment, is now reported in the Financial Markets segment. The Bank made this change to better align the monitoring of its activities with its management
structure.
PPeerrssoonnaall aanndd CCoommmmeerrcciiaall
The Personal and Commercial segment encompasses the banking, financing, and investing services offered to individuals, advisors and businesses as well as
insurance operations.
WWeeaalltthh MMaannaaggeemmeenntt
The Wealth Management segment comprises investment solutions, trust services, banking services, lending services and other wealth management solutions
offered through internal and third-party distribution networks.
FFiinnaanncciiaall MMaarrkkeettss
The Financial Markets segment encompasses corporate banking and investment banking and financial solutions for large and mid-size corporations, public
sector organizations, and institutional investors.
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, a fintech company specialized in financial data aggregation and distribution; certain specified items; and the unallocated portion of corporate
units.
The segment disclosures are 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.
227
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
Note 30 – Segment Disclosures (cont.)
RReessuullttss bbyy BBuussiinneessss SSeeggmmeenntt
Year ended October 31(1)
Personal and
Commercial
2021
22002222
Wealth
Management
2021
22002222
Net interest income(2)
Non-interest income(2)(3)
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)(2)
Net income
Non-controlling interests
Net income attributable to the
Bank’s shareholders and
holders of other equity
instruments
Average assets(4)
Total assets
22,,886655
11,,116699
44,,003344
22,,114499
11,,888855
9977
2,547
1,068
3,615
2,008
1,607
40
11,,778888
447744
11,,331144
−−
1,567
416
1,151
−
559944
11,,778811
22,,337755
11,,339911
446
1,720
2,166
1,293
873
1
872
231
641
−
998844
33
998811
226600
772211
−−
772211
88,,222266
88,,336633
Financial
Markets
2021
1,262
956
2,218
906
22002222
11,,225588
11,,221100
22,,446688
11,,002222
11,,444466
((2233))
1,312
(24)
11,,446699
338899
11,,008800
−−
1,336
353
983
−
22002222
11,,009900
2200
11,,111100
334444
776666
6666
770000
114433
555577
−−
USSF&I
2021
907
94
1,001
315
686
(15)
701
146
555
−
22002222
((553366))
220011
((333355))
332244
((665599))
22
((666611))
((337722))
((228899))
((11))
Other
2021
(379)
306
(73)
381
(454)
−
(454)
(264)
(190)
−
22002222
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
44,,227777
889944
33,,338833
((11))
Total
2021
4,783
4,144
8,927
4,903
4,024
2
4,022
882
3,140
−
11,,331144
1,151
114400,,551144 126,637
114466,,991155 135,209
11,,008800
115544,,334499
3,140
641
7,146
363,506
7,914 115577,,880033 141,007 2211,,221177 17,393 6699,,444422 54,098 440033,,774400 355,621
((228888))
7711,,886688
33,,338844
339933,,884477
983
151,240
(190)
62,333
555577
1188,,889900
555
16,150
(1)
(2)
(3)
(4)
For the year ended October 31, 2021, certain amounts were reclassified, in particular amounts of the loan portfolio of borrowers in the ʺOil and gasʺ and ʺPipelinesʺ sectors as well as related
activities, which were transferred from the Personal and Commercial segment to the Financial Markets segment. Moreover, certain amounts have been adjusted to reflect an accounting
policy change applicable to cloud computing arrangements (for additional information, see Note 1 to these consolidated financial statements).
For the year ended October 31, 2022, Net interest income was grossed up by $234 million ($181 million in 2021), Non-interest income was grossed up by $48 million ($8 million in 2021),
and an equivalent amount was recognized in Income taxes (recovery). The effects of these adjustments have been reversed under the Other heading.
For the Other heading of segment results, for the year ended October 31, 2021, the Non-interest income item had 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.
Represents an average of the daily balances for the period, which is also the basis on which segment assets are reported in the business segments.
RReessuullttss bbyy GGeeooggrraapphhiicc SSeeggmmeenntt
Year ended October 31(1)
Net interest income
Non-interest income(2)
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
Average assets(3)
Total assets
22002222
33,,775588
44,,229999
88,,005577
44,,776600
33,,229977
7799
33,,221188
772233
22,,449955
((11))
Canada
2021
United States
2021
22002222
22002222
Other
2021
3,592
3,992
7,584
4,478
3,106
17
3,089
674
2,415
−
777733
1188
779911
220099
558822
3355
554477
6677
448800
−−
623
106
729
203
526
(41)
567
133
434
−
774400
6644
880044
226611
554433
3311
551122
110044
440088
−−
568
46
614
222
392
26
366
75
291
−
22002222
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
44,,227777
889944
33,,338833
((11))
Total
2021
4,783
4,144
8,927
4,903
4,024
2
4,022
882
3,140
−
22,,449966
332244,,441155
333366,,221155
2,415
300,964
300,833
448800
2299,,998888
2277,,998866
434
27,301
23,834
440088
3399,,444444
3399,,553399
291
33,,338844
35,241 339933,,884477
440033,,774400
30,954
3,140
363,506
355,621
(1)
(2)
(3)
For the year ended October 31, 2021, certain amounts have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements. For additional information,
see Note 1 to these consolidated financial statements.
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.
Represents an average of the daily balances for the period.
228
National Bank of Canada
National Bank of Canada2022 Annual Report
Audited Consolidated Financial Statements
Notes to the Audited Consolidated Financial Statements
(millions of Canadian dollars)
NNoottee 3311 –– AAccqquuiissiittiioonn
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 so that it can continue enhancing customer
experiences and benefitting 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 was recorded on the Consolidated Balance Sheet as goodwill and
mainly represents the future profits expected from 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. 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 measurement period ended September 8, 2022, the final measurement of Flinks’s net assets and the final calculation of working capital
adjustments had no significant impact on goodwill.
NNoottee 3322 –– EEvveenntt AAfftteerr tthhee CCoonnssoolliiddaatteedd BBaallaannccee SShheeeett DDaattee
RReeppuurrcchhaassee ooff CCoommmmoonn SShhaarreess
On November 29, 2022, the Bank’s Board of Directors approved a normal course issuer bid, beginning December 12, 2022, to repurchase for cancellation up to
7,000,000 common shares (representing approximately 2.08% of its outstanding common shares) over the 12-month period ending December 11, 2023. 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).
229
National Bank of Canada2022 Annual Report
Supplementary
Information
Statistical Review
Information for Shareholders
223322
223344
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
22002222
2021
2020
2019
2018
2017
2016
2015
2014
2013
3311,,887700
110099,,771199
33,879
106,304
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
2266,,448866
220066,,774444
2288,,992211
440033,,774400
226666,,339944
111144,,110011
11,,449999
33,,115500
33,,119966
5566
1155,,114400
220022
22
440033,,774400
7,516
182,689
25,233
355,621
240,938
95,233
768
2,650
3,160
47
12,854
(32)
3
355,621
14,512
164,740
20,963
331,488
215,878
98,589
775
2,950
3,057
47
10,307
(118)
3
331,488
17,723
153,251
14,475
281,373
189,566
75,983
773
2,450
2,949
51
9,227
16
358
281,373
18,159
146,082
15,661
262,441
170,830
76,539
747
2,450
2,822
57
8,442
175
379
262,441
20,789
136,457
14,433
245,824
156,671
75,589
9
2,050
2,768
58
7,703
168
808
245,824
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
Average assets(2)
339933,,884477
363,506
318,087
286,162
265,940
248,351
235,913
222,929
206,680
193,509
Net impaired loans excluding POCI loans(3)(4)
under IFRS 9
Net impaired loans excluding POCI loans(4)
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
447799
283
465
450
404
206
281
254
248
183
55,,227711
44,,338811
99,,665522
55,,223300
44,,442222
114455
889944
33,,338833
((11))
4,783
4,144
8,927
4,903
4,024
2
882
3,140
−
4,255
3,672
7,927
4,616
3,311
846
434
2,031
42
3,596
3,836
7,432
4,375
3,057
347
443
2,267
66
3,382
3,784
7,166
4,100
3,066
327
534
2,205
87
3,436
3,173
6,609
3,861
2,748
244
483
2,021
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
33,,338844
3,140
1,989
2,201
2,118
1,937
1,181
1,549
1,469
1,449
(1)
(2)
(3)
(4)
Certain amounts from fiscal years 2017 to 2021 have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements (for additional information, see
Note 1 to the consolidated financial statements), aside from the average assets figures for fiscal years 2017 to 2019. Certain amounts from fiscal 2013 have been adjusted to reflect
accounting standard changes in fiscal 2014.
Represents an average of the daily balances for the period.
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.
232
National Bank of Canada
National Bank of Canada2022 Annual Report
Supplementary Information
Statistical Review
As at October 31(1)
22002222
2021
2020
2019
2018
2017
2016
2015
2014
2013
Number of common shares(2)
(thousands)
Number of common
shareholders on record
Basic earnings per share(2)
Diluted earnings per share(2)
Dividend per share(2)
Share price(2)
High
Low
Close
Book value(2)(3)
Dividends on preferred
shares
$$
$$
$$
$$
$$
$$
$$
Series 15
Series 16
Series 20
Series 21
Series 24
Series 26
Series 28
Series 30
Series 32
Series 34
Series 36
Series 38
Series 40
Series 42
$$
$$
$$
$$
$$
FFiinnaanncciiaall rraattiiooss
Return on common
shareholders’ equity(3)
Return on average assets(3)
RReegguullaattoorryy rraattiiooss uunnddeerr
BBaasseell IIIIII(4)
Capital ratios(5)
CET1
Tier 1
Total
Leverage ratio
TLAC ratio(10)
TLAC leverage ratio(10)
Liquidity coverage ratio
(LCR)(11)
Net stable funding ratio
(NSFR)(11)
OOtthheerr iinnffoorrmmaattiioonn
Number of employees(12)(13)
Branches in Canada
Banking machines in Canada
333366,,558822
337,912
335,998
334,172
335,071
339,592
338,053
337,236
329,297
325,983
2200,,111133
99..7722
99..6611
33..5588
110055..4444
8833..1122
9922..7766
5555..2244
––
––
––
––
––
––
––
11..00006633
00..99559988
––
––
11..11112255
11..11550000
11..22337755
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,375
20,674
20,894
21,325
8.95 $
8.85 $
2.84 $
5.57 $
5.54 $
2.84 $
6.22 $
6.17 $
2.66 $
5.93 $
5.86 $
2.44 $
104.32 $
65.54 $
102.46 $
47.44 $
74.79 $
38.73 $
63.94 $
39.56 $
68.02 $
54.97 $
68.02 $
36.64 $
65.63 $
58.69 $
59.76 $
34.31 $
–
–
–
–
–
–
–
1.0063 $
0.9598 $
0.7000 $
1.0125 $
1.1125 $
1.1500 $
1.2375 $
–
–
–
–
–
–
–
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
21,542
5.43
5.37
2.28
62.74
46.83
62.61
31.50
–
–
–
–
–
–
0.9500
1.0250
0.9750
1.4000
1.3500
0.4724
–
–
$
$
$
$
$
$
$
$
$
$
$
$
21,966
3.31 $
3.29 $
2.18 $
22,152
4.56
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
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
22,394
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
–
–
–
–
–
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
22,737
4.34
4.31
1.70
45.24
36.18
45.24
22.97
0.2444
1.2125
1.5000
1.0078
1.6500
1.6500
0.9728
–
–
–
–
–
–
–
1188..88 %%
00..8866 %%
20.7 %
0.86 %
14.6 %
0.64 %
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 %
1122..77 %%
1155..44 %%
1166..99 %%
44..55 %%
2277..77 %%
88..11 %%
12.4 %
15.0 %
15.9 %
4.4 %
26.3 %
7.8 %
11.8 %
14.9 %
16.0 %
4.4 %
23.7 %
7.0 %
11.7 %
15.0 %
16.1 %
4.0 %
11.7 %
15.5 %
16.8 %
4.0 %
11.2 %
14.9 %(6)
15.1 %(6)
4.0 %
10.1 %
13.5 %
15.3 %
3.7 %
9.9 %
12.5 %(7)
14.0 %(9)
4.0 %
9.2 %
12.3 %(8)
15.1 %(8)
8.7 %
11.4 %
15.0 %
114400 %%
154 %
161 %
146 %
147 %
132 %
134 %
131 %
111177 %%
117 %
2288,,448822
337788
993399
25,966
384
927
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
(1)
(2)
(3)
(4)
Certain amounts from fiscal years 2017 to 2021 have been adjusted to reflect an accounting policy change applicable to cloud computing arrangements (for additional information, see
Note 1 to the consolidated financial statements), aside from the return on common shareholders’ equity and return on average assets figures for fiscal years 2017 to 2019. Certain amounts
from fiscal 2013 have been adjusted to reflect accounting standard changes in fiscal 2014.
The figures for 2014 and 2013 have been adjusted to reflect the stock dividend paid in 2014.
See the Glossary section on pages 122 to 125 for details on the composition of these measures.
Ratios as at October 31, 2022, 2021 and 2020 are calculated in accordance with the Basel III rules, as set out in OSFI’s Capital Adequacy Requirements Guideline and Leverage
Requirements Guideline, and reflect the transitional measures granted by OSFI.
The October 31, 2013 ratios have not been adjusted to reflect changes in accounting standards.
Taking into account the redemption of the Series 28 preferred shares on November 15, 2017.
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015.
Taking into account the redemption of the Series 16 preferred shares on November 15, 2014.
Taking into account the redemption of the Series 20 preferred shares on November 15, 2015 and the $500 million redemption of notes on November 2, 2015.
(5)
(6)
(7)
(8)
(9)
(10) The TLAC ratio and the TLAC leverage ratio are calculated in accordance with OSFI’s Total Loss Absorbing Capacity Guideline.
(11) The LCR ratio and the NSFR ratio are calculated in accordance with OSFI’s Liquidity Adequacy Requirements Guideline.
(12) Full-time equivalent.
(13)
Includes employees from Credigy Ltd. and Advanced Bank of Asia Limited for fiscal years 2014 to 2022.
233
National Bank of Canada2022 Annual Report
Supplementary Information
IInnffoorrmmaattiioonn ffoorr SShhaarreehhoollddeerrss
DDeessccrriippttiioonn ooff SShhaarree CCaappiittaall
DDiivviiddeennddss DDeeccllaarreedd oonn CCoommmmoonn SShhaarreess DDuurriinngg FFiissccaall 22002222
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 $300 million. As at
October 31, 2022, the Bank had a total of 336,582,124 common shares and
66,000,000 first preferred shares issued and outstanding.
Record date
Payment date
Dividend per share ($)
December 27, 2021
March 28, 2022
June 27, 2022
September 26, 2022
February 1, 2022
May 1, 2022
August 1, 2022
November 1, 2022
0.87
0.87
0.92
0.92
SSttoocckk EExxcchhaannggee LLiissttiinnggss
DDiivviiddeennddss DDeeccllaarreedd oonn PPrreeffeerrrreedd SShhaarreess DDuurriinngg FFiissccaall 22002222
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
38
Dividend per share ($)
Series
42
Series
40
Issue or class
Common shares
First Preferred Shares
Series 30
Series 32
Series 38
Series 40
Series 42
Ticker symbol
January 6, 2022
February 15, 2022
April 5, 2022
NA
July 6, 2022
May 15, 2022
August 15, 2022
October 6, 2022
November 15, 2022
0.2516
0.2515
0.2516
0.2516
0.2399
0.2400
0.2399
0.2400
0.2781
0.2782
0.2781
0.2781
0.2875
0.2875
0.2875
0.2875
0.3094
0.3094
0.3093
0.3094
NA.PR.S
NA.PR.W
NA.PR.C
NA.PR.E
NA.PR.G
NNuummbbeerr ooff RReeggiisstteerreedd SShhaarreehhoollddeerrss
As at October 31, 2022, there were 20,113 common shareholders recorded
in the Bank’s common share register.
DDiivviiddeennddss
DDiivviiddeenndd DDaatteess iinn FFiissccaall 22002233
(subject to approval by the Board of Directors of the Bank)
Payment date
February 1, 2023
May 1, 2023
August 1, 2023
November 1, 2023
February 15, 2023
May 15, 2023
August 15, 2023
November 15, 2023
Record date
Common shares
December 26, 2022
March 27, 2023
June 26, 2023
September 25, 2023
Preferred shares,
Series 30, 32, 38, 40 and 42
January 6, 2023
April 5, 2023
July 6, 2023
October 6, 2023
234
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 Canada2022 Annual Report
HHeeaadd OOffffiiccee
National Bank of Canada
600 De La Gauchetière Street West, 4th Floor
Montreal, Quebec H3B 4L2 Canada
Telephone: 514-394-5000
Website:
nbc.ca
AAnnnnuuaall MMeeeettiinngg
The Annual Meeting of Holders of Common Shares of the Bank will be
held on April 21, 2023.
CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy SSttaatteemmeenntt
The information will be available in March 2023 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
Fax:
1-888-453-0330
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
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,
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 978-2-921835-75-6
Legal deposit – Bibliothèque et Archives nationales du Québec, 2022
Legal deposit – Library and Archives Canada, 2022
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 this paper and is proud to help save the
environment by using EcoLogo and Forest Stewardship Council® (FSC®)
certified paper.
At a Glance
Founded in 1859, National Bank of Canada
offers financial services to individuals, businesses,
institutional clients and governments across Canada.
We are one of Canada’s six systemically important
banks and among the most profitable banks on
a global basis by return on equity.
We operate through three business segments
in Canada—Personal and Commercial Banking,
Wealth Management and Financial Markets. 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 Senior Leadership Team
6 Message From the Chairman of the Board
8 Members of the Board of Directors
9 Our One Mission
10 How We Support Sustainable Development
13 Risk Disclosures
15 Management’s Discussion and Analysis
127 Audited Consolidated Financial Statements
232 Statistical Review
234 Information for Shareholders
2.7 million Clients(1)
29,509 Employees(2)
$9.7 B Total Revenues
$3.4 B Net Income
$404 B Total Assets
$31.2 B Market Capitalization
11%
2022 Total Revenues — Adjusted
by Business Segment (3)
25%
40%
Personal and Commercial
Wealth Management
Financial Markets
24%
U.S. Specialty Finance and International
16%
19 %
31%
53%
2022 Total Revenues — Adjusted
by Geographic Distribution(3)
Province of Quebec
Other Canadian provinces
Outside of Canada
(1 ) Clients of the Personal and Commercial segment
(2) Worldwide
(3) Excluding the Other heading. See the Financial Reporting Method section
on pages 16 to 21 for additional information on non-GAAP financial measures.
20 Annual
Report
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2
0
2
® NATIONAL BANK and the NATIONAL BANK logo are registered trademarks of National Bank of Canada.